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cae.com
Financial
Report
Fiscal year ended
March 31, 2020
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 10,500 employees, 160 sites and training locations in
over 35 countries. Each year, we train more than 220,000 civil and
defence crewmembers, including more than 135,000 pilots, 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 2020 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/social-responsibility/
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 5,271 trees.
Contains FSC® certified post-consumer and 70% virgin fibre
Certified EcoLogo and FSC® Mix
Manufactured using biogas energy
Message from the Chair of the Board
During this fiscal year, the world and global economy have been disrupted in a way that no one had anticipated. I certainly did
not foresee a global pandemic as the lead to my second message to CAE shareholders. COVID-19 has created unprecedented
uncertainty and has had a significant impact on CAE’s business units, on our employees and on our customers.
COVID-19 measures and actions
Corporate Social Responsibility
CAE’s foremost priority – ensuring the health and safety of our
employees and customers – became even more crucial in the
COVID-19 pandemic. CAE’s leadership acted swiftly to implement the
highest recommended precautions and protocols, while also working
to minimize disruptions in service to customers and protecting
C(cid:36)E(cid:519)s financial position. (cid:55)he company took several immediate and
appropriate temporary measures to preserve li(cid:84)uidity and cash flow,
including strict cost containment measures, salary freezes, salary
reductions, reduced work weeks, layo(cid:909)s, and the suspension of C(cid:36)E(cid:519)s
common share dividend and share repurchase plan.
Making the world a safer place is at the core of CAE’s mission, and
the (cid:37)oard applauds C(cid:36)E(cid:519)s company-wide e(cid:909)orts to do its part in
the fight against C(cid:50)(cid:57)(cid:918)(cid:39)-(cid:20)(cid:28). (cid:918)n a very short time, C(cid:36)E designed a
ventilator prototype to provide life support to patients in intensive
care. (cid:55)he C(cid:36)E (cid:36)ir(cid:20) ventilator is in the final stages of certification, with
delivery of 10,000 units to the Canadian government expected to
follow. CAE Healthcare rose to the challenge of new training needed,
created complimentary COVID-19 training seminars for healthcare
professionals and also launched simulation-based training solutions.
(cid:55)he company recogni(cid:93)ed that its global supply chain was another
resource at its disposal in the fight against C(cid:50)(cid:57)(cid:918)(cid:39)-(cid:20)(cid:28), and used it
to secure some 600,000 N95 masks, which were delivered to the
Governments of Quebec and Manitoba to support health workers
battling the front lines of this pandemic.
CAE is committed to creating a positive societal impact everywhere
we operate. (cid:55)he company(cid:519)s mission to make civil aviation safer, help
defence forces return home safely and make healthcare safer is
rooted in the principles of corporate social responsibility (CSR). We
continuously deepen and strengthen our CSR commitments through
concrete actions on several fronts, notably with the commitment to
become carbon neutral in summer 2020.
In recognition of this strategic imperative, while it has always been
part of how CAE governs and operates, the Board has decided
to make this more e(cid:91)plicit by adding CS(cid:53) o(cid:605)cially to its charter.
Oversight has been delegated to the Governance Committee, which
recently received its first o(cid:605)cial report on CS(cid:53) from (cid:48)anagement.
(cid:36)s (cid:37)oard Chair, (cid:918) can confirm that having this visibility at the (cid:37)oard
level is significant.
CAE is also making major changes in its CSR reporting that
incorporate best practices and respond to stakeholder requests,
including the addition of (cid:55)ask Force on Climate-related Financial
(cid:39)isclosures (cid:11)(cid:55)CF(cid:39)(cid:12) recommendations. (cid:55)CF(cid:39) reporting focuses on the
environment and stakeholder visibility, and is highly regarded by the
financial community. (cid:55)he (cid:55)CF(cid:39) inde(cid:91) complements C(cid:36)E(cid:519)s disclosure
on environmental matters through the Carbon Disclosure Project.
Board renewal
At the Board level, gender diversity and renewal of the Board
composition remain key elements to CAE’s ability to sustain success.
Our prior goal of attracting experienced women from diverse
backgrounds to represent at least 30% of Board members by 2022
has been extended to include parallel representation in 30% of CAE’s
e(cid:91)ecutive o(cid:605)cers.
I would like to extend a warm welcome to General David G. Perkins,
USA (Ret.), who has joined CAE’s Board. David served over 40 years
in the U.S. Army, culminating as the Commander of the United States
(cid:36)rmy (cid:55)raining and (cid:39)octrine Command (cid:514) one of the largest and most
complex organizations in the world. He is an excellent addition to our
(cid:37)oard and will o(cid:909)er invaluable strategic counsel.
In closing, on behalf of myself and the entire Board, we would
like congratulate CAE’s leadership and employees for their
responsiveness, adaptability, compassion and resilience through
challenging times. It is an honour to chair an iconic company like
CAE, which has such great purpose and social impact. I have every
confidence in the Company(cid:519)s ability to navigate through the current
challenges and to continue to prosper over the long term.
The Honourable John Manley, P.C., O.C.
Chair of the Board
Message to shareholders
Average CAE stock price and revenues2
Unprecedented times underscore
our agility and culture of innovation
We were leading CAE on a course towards what would have been
yet another record year when the COVID-19 pandemic impacted us
during what is normally our strongest (cid:84)uarter of the year. (cid:50)ur first
response was to take decisive action to protect the health and safety
of our employees and customers — and this continues to be our
foremost priority.
certifying and shipping ventilators within the span of only three
months. Today, some 500 CAE employees are working together to
deliver on a contract with the Government of Canada to manufacture
(cid:20)0,000(cid:98)ventilators to help save lives and relieve the strain on hospitals
around Canada. Such an accomplishment speaks volumes about who
we are.
CAE performance vs TSX
We immediately assembled a daily COVID-19 pandemic taskforce
and set our business continuity plans into motion. I am exceptionally
proud of how our CAE employees responded worldwide. Throughout
the past few months of this pandemic, amid lockdown, closed borders
and many other complex challenges, our employees have taken
initiative and ownership finding ways to ensure the continuity of our
customers’ most critical operations, and thus ensure we continue to
earn the privilege of being our customers’ training partner of choice.
We could not stand idly by while fellow citizens of the world infected
by COVID-19 struggled even to breathe, while hospitals became
overwhelmed, confronted by dire shortages of critical medical
safety equipment, especially ventilators and personal protective
equipment. We felt it was our responsibility to expand the aperture
of our thinking and find ways to apply C(cid:36)E(cid:519)s strengths of innovation
and speed in a meaningful way to the hospitals and front line health
workers fighting to save lives.
Our employees challenged themselves to use their engineering
and scientific skills to design a critical care ventilator. (cid:918)t took a
team of (cid:20)2(cid:98) C(cid:36)E engineers and scientists from our civil, defence
and healthcare business units (cid:77)ust (cid:20)(cid:20)(cid:98) days to develop a working
prototype. (cid:58)e received (cid:43)ealth Canada certification in (cid:45)une, which
means from a cold start in mid-March, we were successful in creating,
Marc Parent
President and
Chief Executive O(cid:605)cer
As a world expert in the business of safety, applying speed-to-market,
teamwork and innovative capabilities for humanitarian needs outside
of our core expertise stands as testimony to what we are capable of
when presented with an urgent, novel requirement. I could not be
prouder of our employees’ response in this time of crisis – not only
for the engineers who worked tirelessly to produce a high quality,
certifiable design for the ventilator, for the resourcefulness of our
supply chain team finding scarce but crucial parts, but also for our
many employees who volunteered to help build ventilators so more
could be delivered to the hospitals sooner. Excellence, innovativeness,
customer delight, compassion, speed, teamwork – these are all qualities
evident in a company built for the long term. We demonstrated
these this year. So while we indeed fell short of this year(cid:519)s financial
potential due to COVID-19, the pandemic and the myriad of novel
business complexities that ensued taught us more about who we
are, what we are capable of and we look back on this past year with
a proud sense of achievement.
A company built for the long term
Every industry experiences rolls, pitches and yaws and the last several
months and most probably, the year ahead will not be steady. But
CAE is not only 73 years old, more crucially, its core high technology
capabilities become even more relevant in the future. The long-term
demand for air travel may be dented for the year or years ahead near
term, but the long-term propensity to travel – for leisure, business
and cargo – will be in an upward trajectory for decades ahead. World
air travel is at its best when it is a(cid:909)ordable, safe and ubi(cid:84)uitous (cid:514) as
of this writing, a new kind of safety, biological safety is foremost of
concern. (cid:43)owever this pandemic is solved, we are confident it will
be solved in time. We’ll make the case that when looking back to
this present period, this civil aviation downturn will not prove to be
lasting. Air travel has become an even stronger expectation of those
of us in the 21st century than even 20 years ago, it is an imperative for
many global businesses as well as cargo, which likely grows stronger
as e-commerce expands. Air travel will recover, it is just a question
of when. (cid:36)s a conse(cid:84)uence, you can remain confident that C(cid:36)E(cid:519)s
fundamentals are built on a solid foundation, that we remain steadily
trained on not only preserving our global leadership position but
expanding it. In addition, our revenues come from a high degree
of recurring business in highly regulated markets, and our balance
across several markets and geographies contributes to our long-
term health.
Notwithstanding the onset of the pandemic during our last quarter,
C(cid:36)E delivered a strong financial performance in fiscal 2020 with
10% revenue growth to $3.6 billion, 21% operating income1 growth
to (cid:7)(cid:24)(cid:28)0.(cid:23)(cid:98) million and earnings per share1 growing 7% to $1.34.
I am especially pleased with our 98% conversion of net income to
generate (cid:7)(cid:22)(cid:24)(cid:20).2 million in free cash flow1, which underscores the
cash-generative profile of C(cid:36)E(cid:519)s world-leading training solutions. (cid:36)
$3.8 billion annual order intake1 and $9.5 billion order backlog1 also
help bolster our position for the period ahead.
But perspective gets richer when one looks farther out; one year
does not convey the full story. We have been building revenue,
Earnings Per Share (EPS) and backlog steadily year upon year with
an expectation to deliver consistency, reliability and excellence. CAE
has outperformed the (cid:55)oronto Stock E(cid:91)change (cid:11)(cid:55)S(cid:59)(cid:12) in five of the last
si(cid:91) fiscal years, even with C(cid:50)(cid:57)(cid:918)(cid:39)-(cid:20)(cid:28) and in the last (cid:20)(cid:20) years, C(cid:36)E stock
is up 200% vs. the (cid:55)S(cid:59)(cid:519)s 70%(cid:98)move. So clearly, while some years will
have volatility, including managing through a global pandemic, when
you examine us over the long term, we have shown and will continue
to demonstrate a willingness to make the right decisions in support
of a broader long-term vision.
Capital allocation
We completed 12 acquisitions and joint venture transactions in the
last 24 months, including Bombardier’s Business Aircraft Training
(BAT) business, the largest acquisition in CAE’s history, which we
completed in March 2019. We have successfully integrated this
business and have realized greater revenue and cost synergies than
we had originally projected.
(cid:918)n the final month of our fiscal year, we suspended share repurchase
and dividends, and also moved to secure additional liquidity given
the near-term uncertainties. M&A activity these past several months
has also understandably been more restrained. We continue to be
reflective on the (cid:48)(cid:9)(cid:36) environment as we build on our solid balance
sheet and further bolster our financial position, and will remain alert
for potential opportunities ahead.
Civil Aviation Training Solutions
(cid:918)n Civil (cid:36)viation (cid:55)raining Solutions(cid:516)the largest of our three business
units(cid:516)we e(cid:91)ceeded our annual outlook, with (cid:22)7% higher operating
income1. Annual order intake1 totaled $2.5 billion, including
additional airline training outsourcings and (cid:23)(cid:28) full-flight simulator
sales. Civil finished the year with a record backlog1 of $5.3 billion.
Once again, we delivered more than one million hours of training this
year, underscoring CAE’s position as the largest Civil aviation training
company in the world.
Our performance would have been even better, but as the pandemic
set in, Civil e(cid:91)perienced a significant decrease in training services
demand following the sharp downdraft in airline and business
aircraft operations globally, and the resulting severe disruption to the
global air transportation environment. In addition to the downspike
in demand, travel restrictions and local self-isolation measures
worldwide resulted in several Civil aviation training location closures.
(cid:37)eyond significant disruptions to our global training network, we had
to suspend the installation and delivery of Civil simulator products,
and under local public directives, our Montreal manufacturing plant
paused manufacturing of Civil simulators during the last week of
March. Despite these challenges, we still delivered an otherwise
impressive (cid:24)(cid:25)(cid:98)Civil full-flight simulators for the year.
Defence and Security
In Defence and Security, we reported modest revenue growth as the
division, too, was impacted by the pandemic. We came up short on
our outlook for operating income growth, which was down 13%1,
mainly on lower than expected progress on program milestones, and
delays in securing new orders. A range of programs with defence and
OEM customers encountered project advancement delays principally
due to travel bans, client access restrictions and supply chain
disruptions. In addition, we experienced delays to contract awards,
as government acquisition authorities followed directives in their
respective countries to shelter-in-place and eliminate travel. In the
(cid:48)iddle East, combined e(cid:909)ects of the pandemic and lower oil prices
resulted in work on certain programs to be halted and new contract
awards to be materially delayed, as our customers confronted their
new fiscal realities and ways to mitigate the pandemic. (cid:39)espite these
headwinds, we booked $1.2 billion of order intake1 during the year,
for a $4.1 billion Defence backlog1, which gives CAE an additional
measure of diversification.
Healthcare
In Healthcare, we were tracking towards double-digit annual
revenue growth until the division was also negatively impacted
by the pandemic, as medical and nursing school customers came
under lockdown protocols, and hospital customers attention became
consumed by the healthcare crisis. CAE Healthcare did, however,
succeed in strengthening its position as the innovation leader in
simulation-based healthcare education and training. We won the
EMS World Innovation Award for CAE AresAR, the Microsoft HoloLens
application for Healthcare’s emergency care manikin.
Healthcare also launched innovative products including new
Anesthesia SimSTAT modules, screen-based simulation approved
by the American Board of Anesthesiology for maintenance of
certification credits(cid:30) and multiple custom simulators for (cid:50)E(cid:48)s and
leading medical device companies, including Edwards Lifesciences
and Baylis Medical.
CAE Healthcare was also at the forefront of the key humanitarian
contributions we made in the fight against C(cid:50)(cid:57)(cid:918)(cid:39)-(cid:20)(cid:28), which are
addressed in the context of the company’s actions overall.
(cid:20)(cid:581)(cid:37)efore specific items. (cid:55)hese terms are non-(cid:42)(cid:36)(cid:36)(cid:51) and other financial measures and do not have any standardi(cid:93)ed meaning under (cid:918)F(cid:53)S. (cid:55)herefore, they are unlikely to be comparable to similar
measures presented by other issuers. (cid:53)efer to the definitions in (cid:522)Section (cid:22).7 - (cid:49)on-(cid:42)(cid:36)(cid:36)(cid:51) and other financial measures(cid:523) in our (cid:48)anagement (cid:39)iscussion and (cid:36)nalysis for the fourth (cid:84)uarter and
year ended March 31, 2020.
2(cid:581)(cid:53)eflects the adoption of (cid:918)F(cid:53)S (cid:20) in 20(cid:20)(cid:20), (cid:918)F(cid:53)S (cid:20)(cid:20) in 20(cid:20)(cid:22), (cid:918)F(cid:53)S (cid:20)(cid:24) in 20(cid:20)(cid:27) and (cid:918)F(cid:53)S (cid:20)(cid:25) in 20(cid:20)(cid:28)
Message to shareholders
Average CAE stock price and revenues2
CAE performance vs TSX
$3.8 billion annual order intake1 and $9.5 billion order backlog1 also
help bolster our position for the period ahead.
But perspective gets richer when one looks farther out; one year
does not convey the full story. We have been building revenue,
Earnings Per Share (EPS) and backlog steadily year upon year with
an expectation to deliver consistency, reliability and excellence. CAE
has outperformed the (cid:55)oronto Stock E(cid:91)change (cid:11)(cid:55)S(cid:59)(cid:12) in five of the last
si(cid:91) fiscal years, even with C(cid:50)(cid:57)(cid:918)(cid:39)-(cid:20)(cid:28) and in the last (cid:20)(cid:20) years, C(cid:36)E stock
is up 200% vs. the (cid:55)S(cid:59)(cid:519)s 70%(cid:98)move. So clearly, while some years will
have volatility, including managing through a global pandemic, when
you examine us over the long term, we have shown and will continue
to demonstrate a willingness to make the right decisions in support
of a broader long-term vision.
Capital allocation
We completed 12 acquisitions and joint venture transactions in the
last 24 months, including Bombardier’s Business Aircraft Training
(BAT) business, the largest acquisition in CAE’s history, which we
completed in March 2019. We have successfully integrated this
business and have realized greater revenue and cost synergies than
we had originally projected.
(cid:918)n the final month of our fiscal year, we suspended share repurchase
and dividends, and also moved to secure additional liquidity given
the near-term uncertainties. M&A activity these past several months
has also understandably been more restrained. We continue to be
reflective on the (cid:48)(cid:9)(cid:36) environment as we build on our solid balance
sheet and further bolster our financial position, and will remain alert
for potential opportunities ahead.
Civil Aviation Training Solutions
(cid:918)n Civil (cid:36)viation (cid:55)raining Solutions(cid:516)the largest of our three business
units(cid:516)we e(cid:91)ceeded our annual outlook, with (cid:22)7% higher operating
income1. Annual order intake1 totaled $2.5 billion, including
additional airline training outsourcings and (cid:23)(cid:28) full-flight simulator
sales. Civil finished the year with a record backlog1 of $5.3 billion.
Once again, we delivered more than one million hours of training this
year, underscoring CAE’s position as the largest Civil aviation training
company in the world.
Our performance would have been even better, but as the pandemic
set in, Civil e(cid:91)perienced a significant decrease in training services
demand following the sharp downdraft in airline and business
aircraft operations globally, and the resulting severe disruption to the
global air transportation environment. In addition to the downspike
in demand, travel restrictions and local self-isolation measures
worldwide resulted in several Civil aviation training location closures.
(cid:37)eyond significant disruptions to our global training network, we had
to suspend the installation and delivery of Civil simulator products,
and under local public directives, our Montreal manufacturing plant
paused manufacturing of Civil simulators during the last week of
March. Despite these challenges, we still delivered an otherwise
impressive (cid:24)(cid:25)(cid:98)Civil full-flight simulators for the year.
Defence and Security
In Defence and Security, we reported modest revenue growth as the
division, too, was impacted by the pandemic. We came up short on
our outlook for operating income growth, which was down 13%1,
mainly on lower than expected progress on program milestones, and
delays in securing new orders. A range of programs with defence and
OEM customers encountered project advancement delays principally
due to travel bans, client access restrictions and supply chain
disruptions. In addition, we experienced delays to contract awards,
as government acquisition authorities followed directives in their
respective countries to shelter-in-place and eliminate travel. In the
(cid:48)iddle East, combined e(cid:909)ects of the pandemic and lower oil prices
resulted in work on certain programs to be halted and new contract
awards to be materially delayed, as our customers confronted their
new fiscal realities and ways to mitigate the pandemic. (cid:39)espite these
headwinds, we booked $1.2 billion of order intake1 during the year,
for a $4.1 billion Defence backlog1, which gives CAE an additional
measure of diversification.
Healthcare
In Healthcare, we were tracking towards double-digit annual
revenue growth until the division was also negatively impacted
by the pandemic, as medical and nursing school customers came
under lockdown protocols, and hospital customers attention became
consumed by the healthcare crisis. CAE Healthcare did, however,
succeed in strengthening its position as the innovation leader in
simulation-based healthcare education and training. We won the
EMS World Innovation Award for CAE AresAR, the Microsoft HoloLens
application for Healthcare’s emergency care manikin.
Healthcare also launched innovative products including new
Anesthesia SimSTAT modules, screen-based simulation approved
by the American Board of Anesthesiology for maintenance of
certification credits(cid:30) and multiple custom simulators for (cid:50)E(cid:48)s and
leading medical device companies, including Edwards Lifesciences
and Baylis Medical.
CAE Healthcare was also at the forefront of the key humanitarian
contributions we made in the fight against C(cid:50)(cid:57)(cid:918)(cid:39)-(cid:20)(cid:28), which are
addressed in the context of the company’s actions overall.
Marc Parent
President and
Chief Executive O(cid:605)cer
(cid:20)(cid:581)(cid:37)efore specific items. (cid:55)hese terms are non-(cid:42)(cid:36)(cid:36)(cid:51) and other financial measures and do not have any standardi(cid:93)ed meaning under (cid:918)F(cid:53)S. (cid:55)herefore, they are unlikely to be comparable to similar
measures presented by other issuers. (cid:53)efer to the definitions in (cid:522)Section (cid:22).7 - (cid:49)on-(cid:42)(cid:36)(cid:36)(cid:51) and other financial measures(cid:523) in our (cid:48)anagement (cid:39)iscussion and (cid:36)nalysis for the fourth (cid:84)uarter and
year ended March 31, 2020.
2(cid:581)(cid:53)eflects the adoption of (cid:918)F(cid:53)S (cid:20) in 20(cid:20)(cid:20), (cid:918)F(cid:53)S (cid:20)(cid:20) in 20(cid:20)(cid:22), (cid:918)F(cid:53)S (cid:20)(cid:24) in 20(cid:20)(cid:27) and (cid:918)F(cid:53)S (cid:20)(cid:25) in 20(cid:20)(cid:28)
Unprecedented times underscore
our agility and culture of innovation
We were leading CAE on a course towards what would have been
certifying and shipping ventilators within the span of only three
yet another record year when the COVID-19 pandemic impacted us
months. Today, some 500 CAE employees are working together to
during what is normally our strongest (cid:84)uarter of the year. (cid:50)ur first
deliver on a contract with the Government of Canada to manufacture
response was to take decisive action to protect the health and safety
(cid:20)0,000(cid:98)ventilators to help save lives and relieve the strain on hospitals
of our employees and customers — and this continues to be our
around Canada. Such an accomplishment speaks volumes about who
foremost priority.
we are.
We immediately assembled a daily COVID-19 pandemic taskforce
As a world expert in the business of safety, applying speed-to-market,
and set our business continuity plans into motion. I am exceptionally
teamwork and innovative capabilities for humanitarian needs outside
proud of how our CAE employees responded worldwide. Throughout
of our core expertise stands as testimony to what we are capable of
the past few months of this pandemic, amid lockdown, closed borders
when presented with an urgent, novel requirement. I could not be
and many other complex challenges, our employees have taken
prouder of our employees’ response in this time of crisis – not only
initiative and ownership finding ways to ensure the continuity of our
for the engineers who worked tirelessly to produce a high quality,
customers’ most critical operations, and thus ensure we continue to
certifiable design for the ventilator, for the resourcefulness of our
earn the privilege of being our customers’ training partner of choice.
supply chain team finding scarce but crucial parts, but also for our
We could not stand idly by while fellow citizens of the world infected
by COVID-19 struggled even to breathe, while hospitals became
overwhelmed, confronted by dire shortages of critical medical
safety equipment, especially ventilators and personal protective
equipment. We felt it was our responsibility to expand the aperture
of our thinking and find ways to apply C(cid:36)E(cid:519)s strengths of innovation
and speed in a meaningful way to the hospitals and front line health
workers fighting to save lives.
Our employees challenged themselves to use their engineering
and scientific skills to design a critical care ventilator. (cid:918)t took a
many employees who volunteered to help build ventilators so more
could be delivered to the hospitals sooner. Excellence, innovativeness,
customer delight, compassion, speed, teamwork – these are all qualities
evident in a company built for the long term. We demonstrated
these this year. So while we indeed fell short of this year(cid:519)s financial
potential due to COVID-19, the pandemic and the myriad of novel
business complexities that ensued taught us more about who we
are, what we are capable of and we look back on this past year with
a proud sense of achievement.
A company built for the long term
team of (cid:20)2(cid:98) C(cid:36)E engineers and scientists from our civil, defence
Every industry experiences rolls, pitches and yaws and the last several
and healthcare business units (cid:77)ust (cid:20)(cid:20)(cid:98) days to develop a working
months and most probably, the year ahead will not be steady. But
prototype. (cid:58)e received (cid:43)ealth Canada certification in (cid:45)une, which
CAE is not only 73 years old, more crucially, its core high technology
means from a cold start in mid-March, we were successful in creating,
capabilities become even more relevant in the future. The long-term
demand for air travel may be dented for the year or years ahead near
term, but the long-term propensity to travel – for leisure, business
and cargo – will be in an upward trajectory for decades ahead. World
air travel is at its best when it is a(cid:909)ordable, safe and ubi(cid:84)uitous (cid:514) as
of this writing, a new kind of safety, biological safety is foremost of
concern. (cid:43)owever this pandemic is solved, we are confident it will
be solved in time. We’ll make the case that when looking back to
this present period, this civil aviation downturn will not prove to be
lasting. Air travel has become an even stronger expectation of those
of us in the 21st century than even 20 years ago, it is an imperative for
many global businesses as well as cargo, which likely grows stronger
as e-commerce expands. Air travel will recover, it is just a question
of when. (cid:36)s a conse(cid:84)uence, you can remain confident that C(cid:36)E(cid:519)s
fundamentals are built on a solid foundation, that we remain steadily
trained on not only preserving our global leadership position but
expanding it. In addition, our revenues come from a high degree
of recurring business in highly regulated markets, and our balance
across several markets and geographies contributes to our long-
term health.
Notwithstanding the onset of the pandemic during our last quarter,
C(cid:36)E delivered a strong financial performance in fiscal 2020 with
10% revenue growth to $3.6 billion, 21% operating income1 growth
to (cid:7)(cid:24)(cid:28)0.(cid:23)(cid:98) million and earnings per share1 growing 7% to $1.34.
I am especially pleased with our 98% conversion of net income to
generate (cid:7)(cid:22)(cid:24)(cid:20).2 million in free cash flow1, which underscores the
cash-generative profile of C(cid:36)E(cid:519)s world-leading training solutions. (cid:36)
Our social impact throughout the COVID-19 crisis
Beyond the ventilator success discussed earlier, Healthcare made
additional significant contributions in response to C(cid:50)(cid:57)(cid:918)(cid:39)-(cid:20)(cid:28). (cid:55)he
team rapidly converged and created training seminars, free of charge,
on how to better prepare healthcare workers in the fight against
COVID-19. We also launched simulation-based solutions to train
personnel in the safe practice of ventilation and intubation, which is
key to saving lives. In addition, we leveraged our global supply chain
to deliver some 600,000 N95 masks to the Quebec and Manitoba
governments who were in urgent need to enhance the protection
of front-line healthcare workers. Once again, our resourcefulness,
creativity and agility were called upon and we delivered.
Carbon neutrality commitment
Last November, we announced CAE’s commitment to become carbon
neutral in Summer 2020. (cid:55)his represents a necessary and significant
direction for the company, one in which we can take pride. CAE and
its employees want to do their share to prevent climate change for
the well-being of future generations. We are taking interim measures,
while also looking into the new technologies and solutions being
developed to reduce emissions and talking with industry partners
on the progressive use of electric aircraft for live flight training at
our academies. CAE will continue to take other measures to reduce
overall emissions, continually investing to make our full-flight
simulators more energy e(cid:605)cient, allowing our customers worldwide
to reduce their own footprint.
(cid:918)n parallel, we also created a Climate Change Committee to specifically
address climate-related issues. The Committee’s purpose is to
oversee the integration of climate-related issues into CAE’s business
strategy, and to identify and manage risks and opportunities around
dedicated projects.
Diversity and Inclusion
Diversity and Inclusion (D&I) continue to be among our top strategic
priorities. This is not only the right thing to do, it is smart business.
The more diverse our people are and the more inclusive our culture,
the more innovatively and successfully we can leverage our talents
within to become an even greater company. Diversity and inclusion
help us attract and retain top talent as well as better connect with
customers worldwide. CAE is strongly committed to programs and
initiatives that foster a D&I culture throughout the company. Here
are some milestones that occurred over the past year.
We were named to the Bloomberg Gender-Equality Index for a
second year and recognized among The Globe and Mail’s Women
Lead Here honorees – a testament to CAE’s commitment to advancing
women in the workplace. (cid:37)ecoming (cid:37)ron(cid:93)e (cid:51)arity Certified by the
Women in Governance organization represents the progress we are
making to develop female talent and promote gender parity within
our organization. We also launched Dare, our extensive 12-month
program that aims to equip and inspire women to take ownership
of their careers.
(cid:58)e welcomed the winners of the first edition of C(cid:36)E(cid:519)s (cid:58)omen
in Flight scholarship program(cid:30) this program has grown from an
intention to a reality. This program encourages more women to
aspire to become professional pilots, tackling head-on the challenges
of gender diversity. (cid:58)e introduced another first at C(cid:36)E(cid:29) Employee
Resource Groups. Employees voted on the three themes they
thought would make the most di(cid:909)erence(cid:29) (cid:51)arents of children with
special needs, LGBTQ2+ and Women in Aviation and Technology. You
can read about these and other valuable D&I contributions that CAE,
our employees and our partners, are making in this report.
At CAE, diversity and inclusion are part of our values and there is no
place for racism or discrimination. CAE’s fundamental belief is that
every member of our team should feel valued, respected and safe
– without exception. While we are making progress, we see many
opportunities to move the needle. Our D&I program covers all types
of diversity and makes sure that all employees feel included and
valued for who they are.
Looking forward – Tough times require new thinking
The COVID-19 pandemic moved with unprecedented speed and
magnitude with respect to the disruption it has caused to our daily
lives across the world. The global air transportation environment
and air passenger travel have been especially hard hit, with IATA
forecasting commercial passenger tra(cid:605)c to be down (cid:24)0 to (cid:25)0%
this year. As of this writing, several airline bankruptcies have been
announced and it is possible there are more ahead with global air
travel reported down some 90% last month. When you step back
however and contemplate that the data shows global air tra(cid:605)c is now
some several standard deviations o(cid:909) the (cid:23)0-year mean(cid:30) that aircraft
retirements are also several standard deviations from historical
mean, it is logical to e(cid:91)pect this present time reflects a highly short-
term reality. Statisticians often point to the tyranny of the reversion
to the mean. Taking into consideration some broadly recognized
trends such as human population growth, ever-rising demand for
higher technology, the rise of the middle class in emerging markets
and the acceleration in e-commerce, expectations for a recovery in
air travel demand appear realistic.
In light of this abrupt and severe downturn, the management team
and (cid:918) have spent considerable e(cid:909)orts envisioning what the post-
COVID-19 era might be like. It’s our view that the global propensity
to travel will recover, however unevenly at first and resume a steady,
positive tra(cid:77)ectory within the ne(cid:91)t few years. (cid:55)he freedom to fly and
use air travel for leisure, business and cargo remains an inalienable
freedom and expectation of the 21st(cid:98)century and history will likely
demonstrate that demand recovers and shows resilience as air
travel’s contribution to global commerce is too vital to be suspended
to such an extent for long. Time has shown that neither wars, oil
crises, recessions, nor terrorism were able to restrain air travel
demand; likewise, while a near term challenge, we do not expect
COVID-19 will keep demand in check for more than a few years.
(cid:58)e e(cid:91)pect that leisure travel will be the first to recover and business
travel may trail longer. Business travel may perhaps see structural
post-COVID-19 change and take longer to recover based on more
universal acceptance and broader applications of web-based
meetings. The abrupt shift in the pros and cons may result in some
forms of business travel to shift towards greater business jet demand
and more common usage, both for business continuity and planning
purposes.
Looking ahead, we are planning CAE’s future from a position of
resilience and strength given our global leading market positions,
attractive end markets of civil aviation, defence and healthcare,
recurring revenue streams, and solid financial position. (cid:918)t may
take some time before things get back to normal; there may even
be a (cid:522)new normal(cid:523) and we are readying for it. (cid:918)n addition, we are
exceptionally focused on managing the things we can control,
including identifying opportunities for cost savings to challenge
ourselves to improve e(cid:605)ciency given the prospect for lower volumes
in the near term.
(cid:36)s our core end markets recover, the (cid:522)new normal(cid:522) that emerges
could present novel challenges for our customers, which could
translate into new opportunities for us. For e(cid:91)ample, global airlines
cite the return-to-service for pilots as one of their chief concerns.
Attentiveness to our customers positions us well to proactively
address this need. Certain trends may arise in greater force post-
COVID-19 such as the demand for high technology solutions, safety
Long-term traffic trends3
Long-term traffic growth3
be supported by a large addressable market but we are expecting
fiscal pressures as lower oil prices for many of our customers in
international markets, may present near-term choppiness.
In Healthcare, our purpose, mission and passion is to make
healthcare safer. (cid:58)e believe the significant changes wrought by this
pandemic will continue to result in new appreciation for the critical
role e-learning, healthcare simulation and training can provide. We
might have been too early in these markets but looking forward,
the secular shifts ahead appear promising. We continue to believe
CAE Healthcare is well positioned to capitalize on this change in the
appreciation of the importance, relevancy and benefits of healthcare
simulation and training to improve safety and to help save lives both
at a steady state and during a healthcare crisis. With its innovative
products and demonstrated agility, we expect Healthcare will become
a more material part of the company over the long term.
In summary, we are confronting a challenging period in CAE’s history
due to COVID-19 and we immediately took action to secure the safety
and well-being of our employees and customers. We drove ourselves
to innovate rapidly in response to an urgent need for ventilators,
safety masks and better medical training; we wasted no time in
heeding the call and discovered our own resourcefulness in the
process. We have taken the most appropriate measures to safeguard
the best interests of the company, employees, customers and all
other stakeholders. We have thoughtfully considered how the post-
C(cid:50)(cid:57)(cid:918)(cid:39)-(cid:20)(cid:28) world might be di(cid:909)erent and concluded that despite the
present opaque environment and continued near-term uncertainty,
air travel will recover and we will stand shoulder to shoulder with our
customers proactively to reimagine their needs before they ask and
as such, continue our promise to be their training partner of choice.
Present rockiness notwithstanding, CAE’s fundamentals remain solid
and the ability to respond to challenges with agility is at the very core
of why CAE excels as a global market leader and innovator. We will
forge ahead in applying leading edge technology to significantly
improve our customers’ experience. As the industry thought leader,
we are paving the way to modernize the very fundamentals of
training and operational support in Civil, Defence and Healthcare.
CAE is and will remain a highly innovative company with over seven
decades of industry firsts under its belt. (cid:36)s we manage through this
pandemic, we remain steadily focused on the future, and I am sure
we will ultimately be stronger for it.
In recognition of the Honourable John Manley
imperatives, and e-learning, which are all in our wheelhouse. We
are leaning forward to capture more organic growth by leveraging
our leading edge understanding of human-to-complex-machine
interfaces, continue to assert our leadership in three attractive
markets with long-term secular tailwinds of civil aviation, defence and
healthcare. For e(cid:91)ample, we(cid:519)ve e(cid:91)perienced positive feedback from
our customers on recent new technology developments in the areas
in artificial intelligence, machine learning-enabled data analytics,
remote delivery and virtual reality/augmented reality.
The global leadership team and I monitor the developments of the
pandemic daily to remain on the forefront of the best recommended
measures to ensure the safety of our customers and employees. We
continue to implement necessary contingency plans in real-time as
our understanding of COVID-19 grows. So far, the processes we have
put in place to manage through the pandemic are running smoothly
and they are proving e(cid:909)ective. (cid:58)e remain vigilant about protecting
our employees’ health and safety; supporting our customers’ critical
Finally, we would like to conclude by congratulating C(cid:36)E(cid:519)s (cid:37)oard
operations; and ensuring business continuity.
In Defence, we maintain our leading position as a non-OEM training
and mission support partner thanks to our leading-edge capabilities
in translating the physical world into the synthetic world. The U.S.
and other militaries will continue to seek out best-in-class support for
fighters, helicopters, trainer aircraft, maritime patrol, tanker/transport
Chair, the (cid:43)onourable (cid:45)ohn (cid:48)anley, (cid:51).C., (cid:50).C., who received the
Woodrow Wilson Award for Public Service from the Wilson Center’s
Canada Institute in recognition of his contribution to enhancing the
Canada-U.S. bilateral relationship following the terrorist attacks of
September(cid:98)(cid:20)(cid:20), 200(cid:20), through the development of the Smart (cid:37)order
Declaration.
and remotely piloted aircraft. We are leveraging our training systems
(cid:55)he (cid:58)ilson Center recogni(cid:93)es e(cid:91)emplary individuals who reflect the
integrator capabilities in the land, naval, space and cyber domains
values of Woodrow Wilson, the 28th U.S. President, a leader who
to provide multi-domain solutions, a market for which we expect
believed that (cid:522)(cid:55)here is no higher religion than human service. (cid:55)o
long-term healthy demand. We are expanding beyond training and
work for the common good is the greatest creed.(cid:523)
into mission support solutions, from systems engineering, decision
support and sta(cid:909) augmentation. (cid:50)ur e(cid:91)pertise in the integration of
live, virtual and constructive training is providing attractive inroads
towards leveraging our modelling and simulation expertise towards
the synthetic environments for planning, analysis and operational
decision support. We have a large backlog of contracts with
government customers to provide training solutions and operational
support services that are considered essential to national security.
Looking ahead, the long-term outlook for Defence continues to
(cid:22)(cid:581) (cid:53)eflects (cid:918)(cid:36)(cid:55)(cid:36) historical figures and estimates
(cid:45)ohn is certainly very deserving of this honour, which bestowed
in the spirit of service, is representative of a career in which his
thought leadership has served many, including C(cid:36)E. (cid:45)ohn became
an independent director of CAE in 2008 and in 2018 was appointed
Chair of CAE’s Board of Directors. He has served as Canada’s former
(cid:39)eputy (cid:51)rime (cid:48)inister, (cid:48)inister of Foreign (cid:36)(cid:909)airs, Finance (cid:48)inister
and Industry Minister.
Our social impact throughout the COVID-19 crisis
every member of our team should feel valued, respected and safe
Long-term traffic trends3
Beyond the ventilator success discussed earlier, Healthcare made
additional significant contributions in response to C(cid:50)(cid:57)(cid:918)(cid:39)-(cid:20)(cid:28). (cid:55)he
team rapidly converged and created training seminars, free of charge,
on how to better prepare healthcare workers in the fight against
– without exception. While we are making progress, we see many
opportunities to move the needle. Our D&I program covers all types
of diversity and makes sure that all employees feel included and
valued for who they are.
COVID-19. We also launched simulation-based solutions to train
Looking forward – Tough times require new thinking
personnel in the safe practice of ventilation and intubation, which is
key to saving lives. In addition, we leveraged our global supply chain
to deliver some 600,000 N95 masks to the Quebec and Manitoba
governments who were in urgent need to enhance the protection
of front-line healthcare workers. Once again, our resourcefulness,
creativity and agility were called upon and we delivered.
Carbon neutrality commitment
Last November, we announced CAE’s commitment to become carbon
neutral in Summer 2020. (cid:55)his represents a necessary and significant
direction for the company, one in which we can take pride. CAE and
its employees want to do their share to prevent climate change for
the well-being of future generations. We are taking interim measures,
while also looking into the new technologies and solutions being
developed to reduce emissions and talking with industry partners
on the progressive use of electric aircraft for live flight training at
our academies. CAE will continue to take other measures to reduce
overall emissions, continually investing to make our full-flight
simulators more energy e(cid:605)cient, allowing our customers worldwide
to reduce their own footprint.
(cid:918)n parallel, we also created a Climate Change Committee to specifically
address climate-related issues. The Committee’s purpose is to
oversee the integration of climate-related issues into CAE’s business
strategy, and to identify and manage risks and opportunities around
dedicated projects.
Diversity and Inclusion
Diversity and Inclusion (D&I) continue to be among our top strategic
priorities. This is not only the right thing to do, it is smart business.
The more diverse our people are and the more inclusive our culture,
the more innovatively and successfully we can leverage our talents
within to become an even greater company. Diversity and inclusion
The COVID-19 pandemic moved with unprecedented speed and
magnitude with respect to the disruption it has caused to our daily
lives across the world. The global air transportation environment
and air passenger travel have been especially hard hit, with IATA
forecasting commercial passenger tra(cid:605)c to be down (cid:24)0 to (cid:25)0%
this year. As of this writing, several airline bankruptcies have been
announced and it is possible there are more ahead with global air
travel reported down some 90% last month. When you step back
however and contemplate that the data shows global air tra(cid:605)c is now
some several standard deviations o(cid:909) the (cid:23)0-year mean(cid:30) that aircraft
retirements are also several standard deviations from historical
mean, it is logical to e(cid:91)pect this present time reflects a highly short-
term reality. Statisticians often point to the tyranny of the reversion
to the mean. Taking into consideration some broadly recognized
trends such as human population growth, ever-rising demand for
higher technology, the rise of the middle class in emerging markets
and the acceleration in e-commerce, expectations for a recovery in
air travel demand appear realistic.
In light of this abrupt and severe downturn, the management team
and (cid:918) have spent considerable e(cid:909)orts envisioning what the post-
COVID-19 era might be like. It’s our view that the global propensity
to travel will recover, however unevenly at first and resume a steady,
positive tra(cid:77)ectory within the ne(cid:91)t few years. (cid:55)he freedom to fly and
use air travel for leisure, business and cargo remains an inalienable
freedom and expectation of the 21st(cid:98)century and history will likely
demonstrate that demand recovers and shows resilience as air
travel’s contribution to global commerce is too vital to be suspended
to such an extent for long. Time has shown that neither wars, oil
crises, recessions, nor terrorism were able to restrain air travel
demand; likewise, while a near term challenge, we do not expect
COVID-19 will keep demand in check for more than a few years.
help us attract and retain top talent as well as better connect with
(cid:58)e e(cid:91)pect that leisure travel will be the first to recover and business
customers worldwide. CAE is strongly committed to programs and
travel may trail longer. Business travel may perhaps see structural
initiatives that foster a D&I culture throughout the company. Here
post-COVID-19 change and take longer to recover based on more
are some milestones that occurred over the past year.
We were named to the Bloomberg Gender-Equality Index for a
second year and recognized among The Globe and Mail’s Women
Lead Here honorees – a testament to CAE’s commitment to advancing
women in the workplace. (cid:37)ecoming (cid:37)ron(cid:93)e (cid:51)arity Certified by the
purposes.
universal acceptance and broader applications of web-based
meetings. The abrupt shift in the pros and cons may result in some
forms of business travel to shift towards greater business jet demand
and more common usage, both for business continuity and planning
Women in Governance organization represents the progress we are
Looking ahead, we are planning CAE’s future from a position of
making to develop female talent and promote gender parity within
resilience and strength given our global leading market positions,
our organization. We also launched Dare, our extensive 12-month
attractive end markets of civil aviation, defence and healthcare,
program that aims to equip and inspire women to take ownership
recurring revenue streams, and solid financial position. (cid:918)t may
of their careers.
(cid:58)e welcomed the winners of the first edition of C(cid:36)E(cid:519)s (cid:58)omen
in Flight scholarship program(cid:30) this program has grown from an
intention to a reality. This program encourages more women to
aspire to become professional pilots, tackling head-on the challenges
of gender diversity. (cid:58)e introduced another first at C(cid:36)E(cid:29) Employee
take some time before things get back to normal; there may even
be a (cid:522)new normal(cid:523) and we are readying for it. (cid:918)n addition, we are
exceptionally focused on managing the things we can control,
including identifying opportunities for cost savings to challenge
ourselves to improve e(cid:605)ciency given the prospect for lower volumes
in the near term.
Resource Groups. Employees voted on the three themes they
(cid:36)s our core end markets recover, the (cid:522)new normal(cid:522) that emerges
thought would make the most di(cid:909)erence(cid:29) (cid:51)arents of children with
could present novel challenges for our customers, which could
special needs, LGBTQ2+ and Women in Aviation and Technology. You
translate into new opportunities for us. For e(cid:91)ample, global airlines
can read about these and other valuable D&I contributions that CAE,
cite the return-to-service for pilots as one of their chief concerns.
our employees and our partners, are making in this report.
At CAE, diversity and inclusion are part of our values and there is no
place for racism or discrimination. CAE’s fundamental belief is that
Attentiveness to our customers positions us well to proactively
address this need. Certain trends may arise in greater force post-
COVID-19 such as the demand for high technology solutions, safety
Long-term traffic growth3
imperatives, and e-learning, which are all in our wheelhouse. We
are leaning forward to capture more organic growth by leveraging
our leading edge understanding of human-to-complex-machine
interfaces, continue to assert our leadership in three attractive
markets with long-term secular tailwinds of civil aviation, defence and
healthcare. For e(cid:91)ample, we(cid:519)ve e(cid:91)perienced positive feedback from
our customers on recent new technology developments in the areas
in artificial intelligence, machine learning-enabled data analytics,
remote delivery and virtual reality/augmented reality.
The global leadership team and I monitor the developments of the
pandemic daily to remain on the forefront of the best recommended
measures to ensure the safety of our customers and employees. We
continue to implement necessary contingency plans in real-time as
our understanding of COVID-19 grows. So far, the processes we have
put in place to manage through the pandemic are running smoothly
and they are proving e(cid:909)ective. (cid:58)e remain vigilant about protecting
our employees’ health and safety; supporting our customers’ critical
operations; and ensuring business continuity.
In Defence, we maintain our leading position as a non-OEM training
and mission support partner thanks to our leading-edge capabilities
in translating the physical world into the synthetic world. The U.S.
and other militaries will continue to seek out best-in-class support for
fighters, helicopters, trainer aircraft, maritime patrol, tanker/transport
and remotely piloted aircraft. We are leveraging our training systems
integrator capabilities in the land, naval, space and cyber domains
to provide multi-domain solutions, a market for which we expect
long-term healthy demand. We are expanding beyond training and
into mission support solutions, from systems engineering, decision
support and sta(cid:909) augmentation. (cid:50)ur e(cid:91)pertise in the integration of
live, virtual and constructive training is providing attractive inroads
towards leveraging our modelling and simulation expertise towards
the synthetic environments for planning, analysis and operational
decision support. We have a large backlog of contracts with
government customers to provide training solutions and operational
support services that are considered essential to national security.
Looking ahead, the long-term outlook for Defence continues to
(cid:22)(cid:581) (cid:53)eflects (cid:918)(cid:36)(cid:55)(cid:36) historical figures and estimates
be supported by a large addressable market but we are expecting
fiscal pressures as lower oil prices for many of our customers in
international markets, may present near-term choppiness.
In Healthcare, our purpose, mission and passion is to make
healthcare safer. (cid:58)e believe the significant changes wrought by this
pandemic will continue to result in new appreciation for the critical
role e-learning, healthcare simulation and training can provide. We
might have been too early in these markets but looking forward,
the secular shifts ahead appear promising. We continue to believe
CAE Healthcare is well positioned to capitalize on this change in the
appreciation of the importance, relevancy and benefits of healthcare
simulation and training to improve safety and to help save lives both
at a steady state and during a healthcare crisis. With its innovative
products and demonstrated agility, we expect Healthcare will become
a more material part of the company over the long term.
In summary, we are confronting a challenging period in CAE’s history
due to COVID-19 and we immediately took action to secure the safety
and well-being of our employees and customers. We drove ourselves
to innovate rapidly in response to an urgent need for ventilators,
safety masks and better medical training; we wasted no time in
heeding the call and discovered our own resourcefulness in the
process. We have taken the most appropriate measures to safeguard
the best interests of the company, employees, customers and all
other stakeholders. We have thoughtfully considered how the post-
C(cid:50)(cid:57)(cid:918)(cid:39)-(cid:20)(cid:28) world might be di(cid:909)erent and concluded that despite the
present opaque environment and continued near-term uncertainty,
air travel will recover and we will stand shoulder to shoulder with our
customers proactively to reimagine their needs before they ask and
as such, continue our promise to be their training partner of choice.
Present rockiness notwithstanding, CAE’s fundamentals remain solid
and the ability to respond to challenges with agility is at the very core
of why CAE excels as a global market leader and innovator. We will
forge ahead in applying leading edge technology to significantly
improve our customers’ experience. As the industry thought leader,
we are paving the way to modernize the very fundamentals of
training and operational support in Civil, Defence and Healthcare.
CAE is and will remain a highly innovative company with over seven
decades of industry firsts under its belt. (cid:36)s we manage through this
pandemic, we remain steadily focused on the future, and I am sure
we will ultimately be stronger for it.
In recognition of the Honourable John Manley
Finally, we would like to conclude by congratulating C(cid:36)E(cid:519)s (cid:37)oard
Chair, the (cid:43)onourable (cid:45)ohn (cid:48)anley, (cid:51).C., (cid:50).C., who received the
Woodrow Wilson Award for Public Service from the Wilson Center’s
Canada Institute in recognition of his contribution to enhancing the
Canada-U.S. bilateral relationship following the terrorist attacks of
September(cid:98)(cid:20)(cid:20), 200(cid:20), through the development of the Smart (cid:37)order
Declaration.
(cid:55)he (cid:58)ilson Center recogni(cid:93)es e(cid:91)emplary individuals who reflect the
values of Woodrow Wilson, the 28th U.S. President, a leader who
believed that (cid:522)(cid:55)here is no higher religion than human service. (cid:55)o
work for the common good is the greatest creed.(cid:523)
(cid:45)ohn is certainly very deserving of this honour, which bestowed
in the spirit of service, is representative of a career in which his
thought leadership has served many, including C(cid:36)E. (cid:45)ohn became
an independent director of CAE in 2008 and in 2018 was appointed
Chair of CAE’s Board of Directors. He has served as Canada’s former
(cid:39)eputy (cid:51)rime (cid:48)inister, (cid:48)inister of Foreign (cid:36)(cid:909)airs, Finance (cid:48)inister
and Industry Minister.
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 2020
4.2 Results from operations – fiscal 2020
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. EVENTS AFTER THE REPORTING PERIOD
10. BUSINESS RISK AND UNCERTAINTY
10.1 Risks relating to the COVID-19 pandemic
10.2 Risks relating to the industry
10.3 Risks relating to the Company
10.4 Risks relating to the market
11. RELATED PARTY TRANSACTIONS
12. CHANGES IN ACCOUNTING POLICIES
12.1 New and amended standards adopted
12.2 Use of judgements, estimates and assumptions
13. CONTROLS AND PROCEDURES
13.1 Evaluation of disclosure controls and procedures
13.2 Internal control over financial reporting
14. OVERSIGHT ROLE OF AUDIT COMMITTEE AND BOARD OF DIRECTORS
15. ADDITIONAL INFORMATION
16. SELECTED FINANCIAL INFORMATION
Consolidated Financial Statements
Board of Directors and Officers
Shareholder and Investor Information
Forward-Looking Statements
1
3
4
4
4
4
4
5
14
14
17
17
18
19
20
21
23
26
28
28
28
30
30
31
31
33
33
36
36
37
37
39
41
46
48
49
49
50
52
52
52
52
52
53
55
111
112
113
Management’s Discussion and Analysis
for the fourth quarter and year ended March 31, 2020
1. HIGHLIGHTS
FINANCIAL1
FOURTH QUARTER OF FISCAL 2020
(amounts in millions, except per share amounts, ROCE and book-to-sales)
Q4-2020
Q4-2019
Variance $
Variance %
Income Statement
Revenue
Segment operating income (SOI)1
SOI before specific items1
Net income attributable to equity holders of the Company
Basic and diluted earnings per share (EPS)
Net income before specific items1
EPS before specific items1
Cash Flows
Free cash flow1
Net cash provided by operating activities
Financial Position
Capital employed1
Non-cash working capital1
Net debt1
Return on capital employed (ROCE)1
ROCE before specific items
Backlog
Total backlog1
Order intake1
Book-to-sales ratio1
Book-to-sales ratio for the last 12 months
FISCAL 2020
(amounts in millions, except per share amounts)
Income Statement
Revenue
Segment operating income
SOI before specific items
Net income attributable to equity holders of the Company
Basic earnings per share
Diluted earnings per share
Net income before specific items
EPS before specific items
Cash Flows
Free cash flow
Net cash provided by operating activities
$
$
$
$
$
$
$
$
$
$
$
$
%
%
$
$
$
$
$
$
$
$
$
$
$
$
977.3
146.5
193.9
78.4
0.29
122.3
0.46
185.1
246.3
$
$
$
$
$
$
$
$
$
4,944.0
6.0
2,365.7
$
$
$
9.1 %
10.7 %
$
$
9,458.1
778.8
0.80
1.05
$
$
$
$
$
$
$
$
$
$
$
$
$
$
1,022.0
170.4
177.2
122.3
0.46
127.5
0.48
116.8
166.3
4,292.2
41.4
1,882.2
11.9
12.9
9,494.9
1,414.4
1.38
1.20
(44.7)
(23.9)
16.7
(43.9)
(0.17)
(5.2)
(0.02)
68.3
80.0
651.8
(35.4)
483.5
(4 %)
(14 %)
9 %
(36 %)
(37 %)
(4 %)
(4 %)
58 %
48 %
15 %
(86 %)
26 %
(36.8)
(635.6)
— %
(45 %)
FY2020
FY2019
Variance $
Variance %
3,623.2
537.1
590.4
311.4
1.17
1.16
359.7
1.34
351.2
545.1
$
$
$
$
$
$
$
$
$
$
3,304.1
480.6
487.4
330.0
1.24
1.23
335.2
1.25
323.8
530.4
$
$
$
$
$
$
$
$
$
$
319.1
56.5
103.0
(18.6)
(0.07)
(0.07)
24.5
0.09
27.4
14.7
10 %
12 %
21 %
(6 %)
(6 %)
(6 %)
7 %
7 %
8 %
3 %
Specific items include the impacts of the integration of Bombardier's Business Aviation Training Business (BBAT) in fiscal 2019. In fiscal 2020,
specific items also include the impacts of Defence and Security's reorganizational costs and the impact of the goodwill impairment charge
recognized in Healthcare.
1 Non-GAAP and other financial measures (see Section 3.7).
CAE Financial Report 2020 I 1
Management’s Discussion and Analysis
IMPACT OF THE COVID-19 PANDEMIC
The COVID-19 pandemic has created unprecedented uncertainty in the global economy, the global air transportation environment, air
passenger travel and to CAE's business. Several of our customers are facing significant challenges, with airlines and business jet operators
having to ground a majority of their aircraft in response to travel bans, border restrictions, and lower demand for air travel. We continue
to take measures to protect the health and safety of our employees, work with our customers to minimize potential disruptions and support
our community in addressing the challenges posed by this global pandemic. This outbreak has had an important and immediate impact
on all our businesses, especially in the Civil Aviation Training Solutions segment.
For the Civil Aviation Training Solutions segment, the impacts of the COVID-19 pandemic resulted in the closure of certain training centre
operations, lower utilization of our simulators in the network due to reduced demand from aviation customers and interruptions in the
execution of our backlog. For the Defence and Security segment, delays were experienced in the awarding of new contracts and in the
execution and advancement of certain programs. For the Healthcare segment, customers were primarily focused on managing the acute
operational demands of this healthcare crisis rather than focusing on their training needs, which resulted in less focus and budget for
normal operations and training projects.
To date, we have implemented several flexible measures to protect our financial position and preserve liquidity, including the reduction
of capital expenditures and R&D investments in fiscal 2021, strict cost containment measures, salary freezes, salary reductions, reduced
work weeks and temporary layoffs, as well as a suspension of our common share dividend and share repurchase plan in response to the
impact of the COVID-19 pandemic. Additionally, we have worked with defence customers to secure more favorable terms for milestone
payments as well as offer contract modifications to increase work scope and with suppliers for extended payment terms. We have recalled
1,500 employees as a result of government relief programs but there is uncertainty as to how long these programs could last.
You will find more details on the impacts of the COVID-19 pandemic on our business in About CAE, Results by segment, Business risk
and uncertainty and Use of judgements, estimates and assumptions.
ADOPTION OF IFRS 16 - LEASES
Effective April 1, 2019 we adopted IFRS 16 - Leases using the modified retrospective approach. The modified retrospective approach
applies the requirements of the standard retrospectively with the cumulative effects of initial application recorded in opening retained
earnings as at April 1, 2019, and with no restatement of the comparative periods. Comparative information continues to be reported under
IAS 17 - Leases and related interpretations. The impacts of adoption on our consolidated statement of financial position and consolidated
income statement are discussed further in Changes in accounting policies.
BUSINESS COMBINATIONS
– On April 26, 2019, we acquired the remaining equity interest in Pelesys Learning Systems Inc. (Pelesys), a global leader in the provision
of aviation training solutions and courseware;
– On June 26, 2019, we acquired the shares of Luftfartsskolen AS, an ab-initio flight school located in Oslo, Norway, expanding our
cadet training capabilities in Europe.
OTHER
– On November 4, 2019, we concluded a 15-year exclusive business aviation training services agreement with Directional Aviation
Capital affiliates and the acquisition of a 50% stake in SIMCOM Holdings, Inc. (SIMCOM), an operator of a wide range of jet, turboprop
and piston powered aircraft simulators and training devices;
In December 2019, we issued unsecured senior notes of US$100.0 million, maturing in December 2034, and repaid unsecured senior
notes amounting to $95.0 million, which matured during the month;
–
– After considering the general economic conditions and the deterioration in the global economic environment from the uncertainties
of the COVID-19 pandemic, we recorded an impairment charge of $37.5 million relating to goodwill acquired in previous business
acquisitions in Healthcare.
EVENTS AFTER THE REPORTING PERIOD
– On April 6, 2020, we announced a series of flexible measures to protect our financial position in response to the COVID-19 pandemic
and mitigate the impact on our employees. The measures include temporarily laying off 2,600 of our 10,500 employees and placing
another 900 employees on a reduced work week and the suspension of our common share dividend and normal course issuer bid
(NCIB);
– On April 9, 2020, we concluded a new two-year $500.0 million unsecured revolving credit facility which provides access to additional
liquidity and further strengthens our financial position;
– On April 10, 2020, we concluded an agreement with the Government of Canada to design and manufacture 10,000 CAE Air1 ventilators
to provide life support to patients in intensive care to support the COVID-19 pandemic;
– On April 20, 2020, we announced that we have recalled all remaining temporarily laid-off employees in Canada through the Canada
Emergency Wage Subsidy (CEWS) program, impacting approximately 1,500 employees. We have accessed and are working to access
government support programs in countries in which we operate;
– On May 19, 2020, we concluded an agreement to increase the limit of our receivable purchase program from US$300.0 million to
US$400.0 million.
2 I CAE Financial Report 2020
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 2020 mean the fiscal year ending March 31, 2020;
– Last year, prior year and a year ago mean the fiscal year ended March 31, 2019;
– Dollar amounts are in Canadian dollars.
This report was prepared as of May 22, 2020 and includes our management’s discussion and analysis (MD&A) for the year and the
three month period ended March 31, 2020 and the consolidated financial statements and notes for the year ended March 31, 2020. We
have prepared it to help you understand our business, performance and financial condition for fiscal 2020. 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 (IASB). 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, 2020. 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;
– Events after the reporting period;
– Business risk and uncertainty;
– Related party transactions;
– Changes in accounting policies;
– Controls and procedures;
– Oversight role of 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).
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.
CAE Financial Report 2020 I 3
Management’s Discussion and Analysis
Important risks that could cause such differences include, but are not limited to, risks relating to the COVID-19 pandemic such as health
and safety, reduction and suspension of operations, global economic conditions, diversions of management attention, heightened IT risks,
liquidity risks and credit risks, risks relating to the industry such as competition, business development and awarding of new contracts,
level and timing of defence spending, government-funded defence and security programs, constraints within the civil aviation industry,
regulatory matters, risks relating to CAE such as evolving standards and technology innovation, our ability to penetrate new markets,
R&D activities, fixed-price and long term supply contracts, strategic partnerships and long-term contracts, procurement and original
equipment manufacturer (OEM) leverage, product integration and program management, protection of our intellectual property and brand,
third-party intellectual property, loss of key personnel, labour relations, natural or other disasters, environmental laws and regulations,
climate change, liability risks that may not be covered by indemnity or insurance, warranty or other product-related claims, integration of
acquired businesses through mergers, acquisitions, joint ventures, strategic alliances or divestitures, reputational risk, U.S. foreign
ownership, control or influence mitigation measures, length of sales cycle, seasonality, continued returns to shareholders, information
technology and cybersecurity, our reliance on technology and third party providers, data privacy, and risks relating to the market such as
foreign exchange, availability of capital, credit risk, pension plan funding, doing business in foreign countries, geopolitical uncertainty,
anti-corruption laws and taxation matters. 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.
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 10,500 employees, 160 sites and training locations in over 35 countries. Each year, we train more than 220,000 civil and defence
crewmembers, including more than 135,000 pilots, 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 healthcare safer.
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 mixed 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 long-term secular tailwinds;
– Potential for superior returns;
– Culture of innovation.
High degree of recurring business
We operate in highly regulated industries with mandatory and recurring training requirements for maintaining professional certifications.
Over 60% of our business is derived from the provision of services, which is an important source of recurring business, and largely involves
long-term agreements with many airlines, business aircraft operators and defence forces.
4 I CAE Financial Report 2020
Management’s Discussion and Analysis
Strong competitive moat
Our global training network, unique end-to-end cadet to captain training solutions, digitally-enabled training systems, training systems
integrator expertise, unrivaled customer intimacy and strong, recognizable brand further strengthen our competitive moat.
Headroom in large markets
We provide innovative training solutions to customers in large addressable markets in civil aviation, defence and security and healthcare.
Significant untapped market opportunities exist in these three core businesses, with substantial headroom to grow our market share over
the long-term.
Underlying long-term secular tailwinds
The civil aviation sector is expected to grow over the long-term as passenger traffic recovers, and in defence and security, the market is
expected to continue to grow with an emphasis on the operational readiness of defence forces. Healthcare is expected to become
increasingly relevant in a world more acutely aware of the benefits of healthcare simulation and training to help save lives at a steady
state and in a healthcare crisis.
Potential for superior returns
In each of our businesses, we have the potential to grow at a rate superior to our underlying markets because of our potential to gain
share within the markets we serve. 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. In addition, we leverage our leading market position to
deepen and expand our customer relationships. We see opportunity to further utilize our training network and generate more revenue
from existing assets and to deploy new assets with accretive returns.
Culture of innovation
We derive significant competitive advantage as an innovative leader in simulation products and training solutions. In collaboration with
our customers, we design and deliver the industry's most sophisticated training systems, employing the latest in simulation, mixed reality
and digital technologies, which are shaping the future of training.
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, maintenance repair and overhaul organizations (MRO)
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.
IMPACT OF THE COVID-19 PANDEMIC
In late December 2019, a novel coronavirus (SARS-CoV-2/COVID-19) was identified with original cases in China and cases subsequently
confirmed in multiple countries throughout the world. The outbreak was declared a Public Health Emergency of International Concern on
January 30, 2020 and was subsequently categorized as a pandemic by the World Health Organization on March 11, 2020. The outbreak
of the COVID-19 pandemic has resulted in governments and businesses worldwide adopting emergency measures to combat the spread
of the virus while seeking to maintain essential services. These measures have included, without limitation, travel bans, border restrictions,
lockdown protocols and self-isolation measures.
COVID-19 has created unprecedented uncertainty in the global economy, the global air transportation environment and air passenger
travel, disrupted global supply chains, created significant economic downturn and disruption of financial markets. These adverse economic
conditions are expected to continue for as long as the measures taken to contain the spread of the COVID-19 virus persist and certain
conditions could continue even upon the gradual removal of such measures and thereafter, especially in the global air transportation
environment and air passenger travel. These measures and conditions have adversely affected, and are expected to continue to adversely
affect, our business and financial results, for as long as the measures adopted in response to the COVID-19 pandemic remain in place
or are re-introduced, and such adverse effects could be material.
The COVID-19 pandemic started impacting several operational locations and markets across the globe starting in January and February
in Asia, and through the rest of the world in March 2020. Several of our customers are facing significant challenges, with airlines and
business jet operators having to ground a majority of their aircraft in response to travel bans, border restrictions, and lower demand for
air travel. This outbreak has had an important and immediate impact on all our businesses, especially in Civil Aviation where commercial
airlines are experiencing significant financial challenges, as a result of an unprecedented shock to demand together with significant
disruptions to our own operations, including facility closures, supply chain disruptions, program execution delays, slower procurement
decisions and changes to our customer’s acquisition priorities. We continue to take measures to protect the health and safety of our
employees, work with our customers to minimize potential disruptions and support our community in addressing the challenges posed
by this global pandemic.
CAE Financial Report 2020 I 5
Management’s Discussion and Analysis
Impacts to CAE's operations
Civil Aviation
Pilot training is an essential service and critical to maintaining our customers' operations, however, with the global airline industry facing
a severe and abrupt drop in air passenger travel and with airlines and business jet operators having to ground a majority of their aircraft,
we have experienced a significant drop in demand for our training services. Reduction in demand combined with public directives resulted
in 19 of our civil aviation training locations, representing approximately one-third of our training network, suspending operations and
another 10 training centres operating at significantly reduced capacity as at March 31, 2020. By the beginning of May 2020, 13 training
centres were closed and 15 of the training centres that remained open were operating at reduced capacities. In addition to disruptions to
our civil training centre network, under public directives, we also had to suspend most manufacturing operations of civil simulator products
starting on March 25, 2020; with gradual recommencement of manufacturing operations in May 2020.
Reductions in domestic and international passenger demand have severely impacted the aviation industry. Our commercial airline
customers are deferring initial training for new pilots and in some cases, airlines have sought temporary deferrals of pilot recurrent training
requirements from local authorities. Business aviation activity has also reduced due to self-isolation measures, travel bans, border
restrictions and lockdown protocols. This has resulted in considerably lower training utilization than normal in the fourth quarter of fiscal
2020, which has been reflected in our results for the quarter. To preserve resources, airlines are also deferring new aircraft deliveries and
seeking financial help from local governments. This will likely result in lower simulator orders for the upcoming fiscal year than in recent
years and some delays in the execution of our backlog. CAE continues to work closely with our customers to monitor the situation and
support their needs.
The financial impact from the decreased training utilization, production slowdown, reduced orders and deliveries and other disruptions
is expected to significantly negatively impact the operations and financial performance of fiscal of the upcoming fiscal year. The current
view for fiscal year 2021 is for a material decrease in operational and financial performance in the first half, and for the second half of the
year to potentially begin to inflect positively, as markets are expected to begin to reopen, and travel restrictions are eased.
Defence and Security
While the COVID-19 pandemic has severely impacted all sectors of society, governments have reaffirmed the critical role played by the
military and are taking measures to minimize impacts to both defence forces and the defence industrial base. In countries where we have
significant operations, most of those governments have classified the defence market as an essential service and determined that some
level of training must continue to meet readiness requirements in support of national security. Consequently, only six defence operational
sites were closed, which means that over 90% of the sites where we provide services have remained open at full or reduced capacity.
Manufacturing operations for defence simulator products have continued during the pandemic, however, execution has been disrupted
by mobility limitations and client access restrictions.
Despite some of the mitigating initiatives taken by governments, there have been negative implications on CAE’s defence business
segment due to the pandemic. We have a range of programs with defence and OEM customers globally that have experienced project
advancement delays due to travel bans, border restrictions, client access restrictions and supply chain disruptions. Some of the required
progress and acceptance testing has continued with virtual meetings and remote work procedures, but delays have impacted some key
milestones negatively affecting revenue and operating profit. In addition, there have been delays in the awarding of new contracts as
government acquisition authorities follow directives in their respective countries to shelter-in-place and eliminate travel. These delays
impacted order intake during the fourth quarter, and we expect a continued delay in the awarding of new contracts during at least the first
half of fiscal year 2021.
Healthcare
In Healthcare, a large contingent of the market for simulation products are medical and nursing schools who have also come under
lockdown protocols, which has negatively affected our ability to conclude contracts and to deliver on existing orders. The pandemic began
to affect market demand in Asia early in the fourth quarter of fiscal 2020, as border restrictions were implemented, and in Europe and in
North America later in March. In the hospital market, our customers are primarily focused on managing the acute operational demands
of this healthcare crisis rather than focusing on their training needs, which could result in less focus and budget for normal operations
and training projects in the near term. Manufacturing operations for healthcare products also continued during the pandemic.
You will find more details on the financial impacts of COVID-19 on our businesses in Results by segment.
Social impact
To help in the fight against COVID-19, our CAE engineers and scientists have designed an easy-to-use, maintainable, easy-to-manufacture
ventilator prototype to provide life support to patients in intensive care. In April 2020, CAE was selected by the Canadian government to
design and manufacture 10,000 of these CAE Air1 ventilators to support the COVID-19 pandemic.
CAE has also provided complimentary training seminars on how to prepare healthcare workers in the fight against COVID-19. The CAE
team launched simulation-based training solutions, both web and hardware based, to train personnel in the safe practice of ventilation
and intubation, which is key to saving lives. Additionally, CAE is leveraging its global supply chain to source scarce N95 masks for
humanitarian purposes in support of front-line health workers. To date, CAE has secured some 600,000 N95 masks which have been
delivered to the Governments of Quebec and Manitoba, doing our part to help keep healthcare-workers safe.
6 I CAE Financial Report 2020
Management’s Discussion and Analysis
Measures to bolster liquidity and mitigate the impacts to our business
To address the negative impact of COVID-19, CAE has been closely monitoring and actively implementing and updating our response
to the evolving COVID-19 pandemic to attenuate the impact on our employees, to ensure CAE preserves the necessary liquidity through
this downturn and to ensure that we will be in a position of strength to serve our customers when the markets begin to recover from this
pandemic. We have formed a committee composed of the senior leadership team and key leaders in the organization to monitor, on a
daily basis, the evolution of the pandemic, to evaluate the measures being put in place by local and national governments and the resulting
impacts on CAE and to implement necessary contingency plans in real time as the current situation continues to unfold, with a focus on
three priorities: protecting employees’ health and safety, supporting customers’ critical operations and ensuring business continuity.
To date, CAE has implemented several flexible measures to protect our financial position and preserve liquidity and reduce operating
costs, including the reduction of capital expenditures and R&D investments in fiscal 2021, strict cost containment measures, salary
freezes, salary reductions, reduced work weeks and temporary layoffs, as well as a suspension of our common share dividend and share
repurchase plan in response to the impact of the COVID-19 pandemic. At the same time, we have taken initiatives to renegotiate contracts
with defence customers to secure more favorable terms for milestone payments as well as offer contract modifications to increase work
scope and with suppliers for extended payment terms. We have also successfully negotiated payment deferrals on certain lease liabilities
and government royalty and R&D obligations. Subsequent to the year-end, we concluded a new two-year $500.0 million senior unsecured
revolving credit facility and we increased our receivable purchase program from US$300.0 million to US$400.0 million. These transactions
provide access to additional liquidity and further strengthen our financial position.
As at March 31, 2020, we had a higher than normal cash and cash equivalents balance on hand to increase liquidity and preserve financial
flexibility in light of the COVID-19 pandemic. Total available liquidity at March 31, 2020 was $1.5 billion, including $946.5 million in cash
and cash equivalents, undrawn amounts on our revolving credit facility and the balance available under our receivable purchase program.
With the addition of our new revolving credit facility and increased limit on our receivable purchase program subsequent to the year-end,
we have available liquidity of $2.1 billion. We believe that our cash and cash equivalents, the availability under our committed revolving
credit facility and cash generated from our operations will be sufficient to provide liquidity for our operations over the foreseeable future.
To minimize the impact on employees through this difficult period, CAE has accessed government emergency relief measures and wage
subsidy programs available around the world. In April 2020, through the Canadian CEWS program, CAE was able to recall all temporarily
laid-off employees in Canada. We have accessed and are working to access government support programs in countries in which we
operate.
Resiliency of CAE's business
We entered this pandemic from a position of strength with a global leading market position, a balanced business with recurring revenue
streams, and a solid financial position. We have taken decisive yet flexible actions to help protect our people and operations over the
short-term and to give us the necessary agility to resume long-term growth when global air travel eventually returns.
In Civil aviation, training is highly regulated, and for pilots to remain active and to continue to hold their certifications, they must train
regularly to demonstrate proficiency, usually every six to nine months. While training activities related to growth of the global pilot population
and movements of pilots to new positions, have been curtailed significantly, recurrent training to maintain certification is non discretionary.
To adapt to these new circumstances, we have already introduced new virtual service offerings to support our customers such as obtaining
U.S. Federal Aviation Administration (FAA) and other Civil Aviation Authority approvals for virtual training in certain of our flight training
organizations. Our capacity to adapt and the increasing need for airlines to come up with cost containment measures as a result of this
pandemic could act as a catalyst for potential customers who may come to realize the benefits of outsourcing their training needs to CAE
as a means to reduce their in-house training costs. Another important contributor to our resiliency is the solid backlog of Civil full-flight
simulator orders, which have been pre-funded by customer deposits and progress payments. While we expect some requests for deferrals,
order cancellations are not common given the capital customers have deployed and since the orders are closely linked to airline operational
requirements.
For Defence, governments recognize the critical importance of national defence and have been proactive in implementing measures to
maintain and protect the defence industry and its suppliers, evidenced by many governments who are using defence programs as a
mechanism to maintain and stimulate the economy. For example, countries such as Canada, the United Kingdom and Australia have
implemented measures such as accelerated payments to support supplier cash flows. This, combined with our Defence backlog, provides
an additional layer of diversification for our business. We have also demonstrated our ability to adapt in these challenging circumstances
with, for example, the development of a range of offboard instructor operator station (IOS) solutions which are now being offered to global
defence customers. These offboard IOS solutions help address social distancing requirements by removing the instructor from the cockpit
of the simulator and still providing the required features and functionality to continue conducting training and mission rehearsal exercises.
We see future opportunities arising in the Healthcare business including our new CAE Air1 ventilator product line, COVID-19 related
training solutions, and increased recognition of the value of simulation-based preparedness for pandemics and other high-risk scenarios.
This is supported by professional organizations such as the International Nursing Association of Clinical Simulation and Learning (INACSL)
and the Society for Simulation in Healthcare (SSH) who are proposing that regulatory bodies and policymakers demonstrate flexibility by
allowing the replacement of clinical hours usually completed in a live healthcare setting with that of virtually simulated experiences as a
result of this pandemic.
CAE Financial Report 2020 I 7
Management’s Discussion and Analysis
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 and global scale 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 civil 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 35 countries and
through our broad global network of more than 60 training locations, 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 product and service
offerings for pilot, cabin crew and aircraft maintenance technician training, training centre operations, curriculum development, courseware
solutions and consulting services. We currently operate 306 full-flight simulators (FFSs)2, 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 improves training quality, objectivity and
efficiency through the integration of untapped flight and simulator data-driven insights into training. In the formation of new pilots, CAE
operates the largest ab initio flight training network in the world and has over 30 cadet training programs globally. In 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, business aircraft operators, 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 several decades of
continuous use. Our global reach enables us to provide best-in-class support services such as real-time, remote monitoring and 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 airlines and business aircraft operators;
– Expected long-term global growth in air travel;
– Expected long-term growth or renewal of the active fleet of commercial and business aircraft;
– Demand for trained aviation professionals.
Pilot training and certification regulations
Civil aviation training is a largely recurring business driven by a highly-regulated environment through global and domestic standards for
pilot licensing and certification, amongst other regulatory requirements. These recurring training requirements are mandatory and are
regulated by national and international aviation regulatory authorities such as the International Civil Aviation Organization, European
Aviation Safety Agency (EASA), and the FAA.
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
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 airlines 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.
2 Non-GAAP and other financial measures (see Section 3.7).
8 I CAE Financial Report 2020
Management’s Discussion and Analysis
Expected long-term global growth in air travel
The secular growth in air travel results in long-term demand for flight, cabin, maintenance and ground personnel, which in turn drives
demand for training solutions.
Temporary disruptions due to the COVID-19 pandemic are significantly adversely impacting air travel as governments worldwide attempt
to limit the spread of the virus. For the first three months of calendar 2020, passenger traffic decreased by 22% compared to the first three
months of calendar 2019 and the International Air Transport Association (IATA) forecasts that, for the year, domestic and international
passenger demand will experience a 48% decrease compared to calendar 2019.
In the short-term, as airlines adjust their fleets to accommodate demand for air travel, we anticipate some measure of pent up training
demand as pilots are reassigned to different aircraft types in accordance with their seniority.
Looking ahead, once travel restrictions and lockdown protocols are lifted and as worldwide demand for air travel regains strength, both
the commercial and business aviation industries are expected to level out and return to growth over the medium to long-term due to
demand recovery combined with the introduction of new aircraft models and technologies.
Expected long-term growth or renewal of the 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. Short
and medium-term growth in aircraft fleets will experience pressure as airlines realign fleet capacity to meet new demand levels and OEMs
reduced production.
Major business jet OEMs are continuing with plans to introduce a variety of new aircraft models in the upcoming years including Dassault's
Falcon 6X and Gulfstream’s G700.
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 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,
and 600XR Series Flight Training Devices 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.
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. As global
economies and airlines resume expansion following the COVID-19 pandemic disruption, we are well positioned in the training services
market to address the training requirements of airline customers.
DEFENCE AND SECURITY MARKET
We are a training and mission support solutions provider 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 training and mission support solutions for defence forces. While the COVID-19
pandemic has created uncertainty in all sectors of society, governments have reaffirmed the critical and essential role played by the
military and are taking measures to minimize impacts to both defence forces and the defence industrial base. Most militaries use a
combination of live training on actual platforms, virtual training in simulators, and constructive training using computer-generated
simulations. We are skilled and experienced as a training systems integrator capable of helping defence forces achieve an optimal balance
of integrated live-virtual-constructive training to achieve mission preparedness. 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 Navy with a comprehensive Naval Training Centre and our
role supporting the design phase of the Canadian Surface Combatant ship program. 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. Increasingly, we are engaged with defence customers to provide a range of mission support solutions,
including systems engineering, decision support and staff augmentation. For example, our CAE USA Mission Solutions Inc. (MSI), a
subsidiary of CAE USA Inc., that is eligible to pursue and execute higher-level security programs, provides a variety of operational support
solutions to the U.S. Department of Defense (DoD).
CAE Financial Report 2020 I 9
Management’s Discussion and Analysis
Defence forces continue to increasingly leverage virtual training and balance their training approach between live, virtual and constructive
domains to achieve maximum readiness and efficiency. We pursue programs requiring the integration of live, virtual and constructive
training which tend to be larger in size than programs involving only one of the three training domains. We are a first-tier training systems
integrator and can offer our customers a comprehensive range of innovative training solutions, ranging from digital learning environments
and mixed reality capabilities to integrated live, virtual and constructive training in a secure networked environment. Our solutions typically
include a combination of training services, products and software tools designed to cost-effectively maintain and enhance safety, efficiency,
and readiness. We have a wealth of experience delivering and operating outsourced training solutions with facilities that are
government owned government-operated; government-owned contractor-operated; or contractor-owned contractor operated. We offer
training needs analysis, training media analysis, courseware, instructional systems design, facilities, tactical control centres, synthetic
environments, mixed reality solutions, a range of simulators and training devices, live assets, digital media classrooms, distributed training,
scenario development, instructors, training centre operations, and a continuous training improvement process leveraging big data analytics.
In addition, we are increasingly leveraging our modeling and simulation expertise to enable defence forces to use synthetic environments
for planning, analysis, and operational decision support.
We have delivered simulation products and training services to approximately 50 defence forces in over 40 countries. We provide training
and operational support services such as contractor logistics support, maintenance services, systems engineering, staff augmentation,
classroom instruction and simulator training at over 100 sites around the world, including our joint ventures. We also support live flying
training, such as the live training delivered as part of the North Atlantic Treaty Organization (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.
Installed base of enduring defence platforms and new customers;
Market drivers
Demand for training and operational support solutions in the defence and security markets is driven by the following:
– Defence budgets;
–
– Attractiveness of outsourcing training, maintenance and operational support services;
– Pilot and aircrew recruitment, training and retention challenges faced by militaries globally;
– Desire to integrate training systems to achieve efficiencies and enhanced preparedness;
– Need for synthetic environments to conduct integrated, networked mission training, including joint and coalition forces exercises;
– Desire of governments and defence forces to increase the use of synthetic environments, including mixed reality solutions;
– Relationships with OEMs for simulation and training.
Defence budgets
The global defence market continued its modest growth in 2019 as security threats remain and recapitalization efforts continued, thus
requiring governments worldwide to continue increasing defence budgets. Prior to the COVID-19 pandemic, which has created uncertainty
as governments introduce fiscal stimulus measures, defence expenditures were expected to grow approximately three percent in 2020
to reach an estimated US$1.9 trillion, with the United States continuing to be the largest contributor to defence spending. The approved
DoD budget for fiscal 2020 was US$738 billion. In addition, the majority of the 29 members of NATO devised plans to increase defence
spending to two percent of their Gross Domestic Product. For example, Canada expects 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 security
threats 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. Many countries are also implementing economic stimulus packages related
to COVID-19 with defence and the defence industrial base identified as essential, for example the DoD received an additional budget of
US$10.5 billion as a COVID-19 emergency stimulus package. Training is fundamental for defence forces to achieve and maintain mission
preparedness and continued modest growth in defence spending is expected to result in corresponding opportunities for training and
operational support solutions. There is however some risk that defence spending may be negatively impacted because of spending on
COVID-19 stimulus measures and the impact of potentially recessionary environment.
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 are required 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. Given 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 C-130H Aircrew Training System, and our experience on key enduring platforms,
we are well-positioned for recurring product upgrades or 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, NH90 and MQ-9 in global defence markets, thus creating
opportunities to provide new training systems and services for platforms where CAE has significant experience.
10 I CAE Financial Report 2020
Management’s Discussion and Analysis
Attractiveness of outsourcing training, maintenance and operational support 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 maximize efficiency and enhance readiness, which includes 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 and operational support 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 and operational support solutions to
achieve faster delivery, lower capital investment requirements, and for 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.
Pilot and aircrew recruitment, training and retention challenges faced by militaries globally
The COVID-19 pandemic has introduced uncertainty across the commercial aviation landscape, but prior to the pandemic the expansion
of global economies and airline fleets had resulted in a shortage of qualified personnel needed to fulfill the growing demand for pilots, as
expressed in CAE’s Airline and Business Jet Pilot Demand Outlook. This demand from the civil and business aviation sector has a direct
impact on the recruitment, training and retention of military pilots. The USAF alone estimates it has a shortfall of approximately 2,100
pilots, which represents 10% of the entire force. The challenge has led to militaries looking at numerous initiatives designed to address
the pilot shortage, including initiatives specifically related to training such as the U.S. Air Force Pilot Training Transformation project.
Militaries are considering further outsourcing as well as adopting new technologies that help make pilot training more streamlined and
efficient. The military pilot and aircrew shortage and related training challenges will create opportunities for CAE’s products, services and
solutions.
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 industry partners to help design and manage a total training system.
Our approach has positioned us 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, we address the overall training enterprise to deliver comprehensive solutions, from undergraduate individual
training all the way through to operational, multi-service and joint mission training.
Need for synthetic environments to conduct integrated, networked mission training, including joint and coalition forces exercises
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 live-virtual-constructive
domains within a networked common synthetic environment. We are strong proponents of open, standard simulation architectures, such
as the Open Geospatial Consortium Common Database, to better enable integrated and networked mission training. For instance, we
are currently developing a Joint Multinational Simulation Centre for a Gulf Cooperation Council customer that will be used by commanders
and operators from the Army, Air Force, Navy and Staff Colleges to conduct military training and decision support across all level of
operations.
Desire of governments and defence forces to increase the use of synthetic environments, including mixed reality solutions
One of the underlying drivers for our expertise and capabilities is the increasing use of synthetic training throughout the defence community.
More defence forces and governments are increasingly adopting synthetic environments for a greater percentage of their overall approach
because it improves training effectiveness, reduces operational demands on aircraft, lowers risk compared to operating actual platforms
and significantly lowers costs. Synthetic environments offer defence forces a cost-effective way to provide a realistic environment for a
wide variety of scenarios while contributing to preparedness and readiness. The higher cost of live activities, the desire to save aircraft
for operational use, and the advanced simulation technologies delivering more realism are several factors prompting a greater adoption
of the use of synthetic environments.
The nature of mission-focused training demands at least some live training; however, the shift to more synthetic training is advancing. For
example, in fiscal 2019, we introduced the CAE Medallion MR e-Series visual system designed specifically for fighter and fast-jet training.
The CAE Medallion MR e-Series visual system is now being procured by BAE Systems to support synthetic training capabilities for
undisclosed customers operating next-generation fighter aircraft. In addition, digital innovations have led to the introduction of the CAE
Trax Academy, which integrates virtual-reality enhanced courseware, artificial intelligence virtual coaching, mixed reality capabilities and
big data analytics to deliver a comprehensive training continuum for military student pilots. Included as part of the CAE Trax Academy is
the CAE Sprint Virtual Reality (VR) trainer that leverages CAE Rise™ for virtual coaching and objective assessment.
CAE Financial Report 2020 I 11
Management’s Discussion and Analysis
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 us. Other examples of our relationships with OEMs on specific platforms creating opportunities for training systems
include Airbus Defence & Space on the C295, which will be delivered to the Royal Canadian Air Force 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
continues to be acquired by several branches of the USAF as well as 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 offer integrated education and training solutions including surgical and imaging simulations, curriculum, audiovisual and centre
management platforms and patient simulators to healthcare students and clinical professionals across the professional life cycle.
Simulation-based training is one of the most effective ways 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. As such, we have established three CAE
Healthcare Centres of Excellence to date to improve clinical education and develop new training technologies and curriculum for healthcare
professionals and students. The healthcare simulation market is expanding, with a shift in the U.S. from fee-for-service to value-based
care in hospitals, and with simulation centres becoming increasingly more prevalent in nursing and medical schools.
We offer the broadest and most innovative portfolio of medical training solutions, including patient, ultrasound and interventional (surgical)
simulators, audiovisual and centre management platforms, augmented reality applications, e-learning and curriculum for simulation based
healthcare education and training. We have provided training solutions to customers in more than 80 countries that are currently supported
by our global network. We are a leader in patient simulators which are based on advanced models of human physiology that 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. During the last two years, we
continued to invest in the development of new products to address growing demand in the healthcare simulation market. We launched
the CAE Juno clinical skills manikin which enables nursing programs to adapt to the decreased access to live patients due to the complex
conditions of hospital patients and the liability concerns in healthcare, the CAE Ares emergency care manikin designed for advanced life
support and American Heart Association (AHA) training and the CAE Luna neonatal simulator which is an innovative critical care simulation
for newborns and infants. With these solutions, we are providing some of the industry's most innovative learning tools to healthcare
academic institutes, which represent the largest segment of the healthcare simulation market. We continue to push the boundaries of
technology and we were the first to bring a commercial Microsoft HoloLens mixed reality application to the medical simulation market.
We continue to integrate augmented and virtual reality into our advanced software platforms to deliver custom training solutions and
ground-breaking products.
Through our Healthcare Academy, we deliver peer-to-peer training at customer sites as well as in our training centres in Canada, Germany,
the U.K. and U.S. Our Healthcare Academy includes more than 50 adjunct faculties consisting of nurses, physicians, paramedics and
sonographers who, in collaboration with leading healthcare institutions, have developed more than 500 Simulated Clinical Experience
(SCE) courseware packages for our customers.
We offer 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 collaboration with the American
Society of Anesthesiologists (ASA), we have released five online modules for 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 industry partnerships with medical device companies, we have developed a specialized interventional simulator to train physicians
to implant a new generation of pacemakers as well as a modular, portable catheterization laboratory interventional simulator, CAE
CathLabVR, which was introduced to the cardiac simulation community in September 2018. In January 2018, we announced a collaboration
with the AHA to establish a network of International Training Sites to deliver lifesaving AHA courses in countries that are currently
underserved.
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 and mixed reality technology revolution;
– Broader adoption of simulation, with a demand for innovative and custom training approaches;
– Growing emphasis on patient safety and outcomes.
12 I CAE Financial Report 2020
Management’s Discussion and Analysis
Limited access to live patients during training
Traditionally, medical education has been an apprenticeship model in which students care for patients under the supervision of more
experienced staff. In this model, students have limited 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 released a
ground-breaking study on the effectiveness of simulation training in pre-licensure nursing programs and published national simulation
guidelines that are still in use today. 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. In addition, during the COVID-19 pandemic, SSH and INACSL called
for more flexibility in replacing required clinical training hours for health science students with simulation hours, emphasizing that virtual
simulation is an effective teaching method that results in improved student learning outcomes. State boards of nursing have begun to
change requirements to help ensure that learners and new graduates can continue their education and would be ready to enter the
workforce.
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, inter-professional team training and major disaster response.
Medical and mixed reality 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 and, in January 2020, we released multiple HoloLens 2 applications which will integrate holographic, modeled physiology
into our emergency care, ultrasound and childbirth simulators that allow learners to envision human anatomy.
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 US$1.7 billion. North America is the largest market for healthcare simulation, followed by Europe and Asia.
Together with our global distribution network, 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, 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. Healthcare is expected to become increasingly relevant in a world more acutely aware of the benefits of
healthcare simulation and training to help save lives at a steady state and in a healthcare crisis.
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 and the World Health Organization reported in 2018 that there is a 1 in 300 chance
of being harmed during health care. 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 (value-based care), 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 2020 I 13
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 the three main currencies in which we operate.
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)
2020
1.41
1.55
1.75
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)
2020
1.33
1.48
1.69
2019
1.34
1.50
1.74
2019
1.31
1.52
1.72
Increase /
(decrease)
5%
3%
1%
Increase /
(decrease)
2%
(3%)
(2%)
For fiscal 2020, the effect of translating the results of our foreign operations into Canadian dollars resulted in a decrease in revenue of
$11.0 million and a decrease in net income of $2.3 million, when compared to fiscal 2019. 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 Risk and Uncertainty. A sensitivity
analysis for foreign currency risk is included in Note 30 of our consolidated financial statements.
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
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.
Return on capital employed (ROCE)
ROCE is used 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.
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.
14 I CAE Financial Report 2020
Management’s Discussion and Analysis
Earnings per share (EPS) before specific items
Earnings per share before specific items is a non-GAAP measure calculated by excluding restructuring costs, integration costs, acquisition
costs and other gains and losses arising from significant strategic transactions as well as significant 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
these restructuring costs, integration costs, acquisition costs, and other gains, net of tax, as well as 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 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 debt-to-EBITDA is calculated as net debt divided by the last twelve months EBITDA. EBITDA comprises earnings before income
taxes, finance expense – net, depreciation and amortization.
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 excluding restructuring costs, integration
costs, acquisition costs and other gains and losses arising from significant strategic transactions as well as significant one-time tax items.
We track it because we believe it provides a better indication of our operating performance and makes it easier to compare across reporting
periods.
Non-cash working capital
Non-cash working capital is a non-GAAP measure we use to monitor how much money we have committed in the day-to-day operation
of our business. We calculate it by taking current assets (not including cash and cash equivalents and assets held for sale) and subtracting
current liabilities (not including the current portion of long-term debt and liabilities held for sale).
Operating profit
Operating profit is 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.
Additionally, 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.
CAE Financial Report 2020 I 15
Management’s Discussion and Analysis
Backlog
Total backlog is a non-GAAP measure that represents expected future revenues and includes obligated backlog, joint venture backlog
and unfunded backlog and options:
– Obligated backlog 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 represents firm Defence and Security orders we have received but have not yet executed and for which funding
authorization has not yet been obtained. Options are included in backlog when there is a high probability of being exercised, but
indefinite-delivery/indefinite-quantity (ID/IQ) contracts are excluded. When an option is exercised, it is considered order intake in that
period and it is removed from unfunded backlog and options.
Remaining performance obligations
Remaining performance obligations is a GAAP measure, introduced under the application of IFRS 15, which represents the cumulative
balance of unsatisfied promises to transfer a distinct good or service to customers as part of a legally binding commercial agreement.
This measure is similar to our definition of backlog, however excludes joint venture balances, options and estimated contract values:
– Estimated contract values represent estimated future revenue from customers under exclusive short-term and long-term training
contracts when we expect the revenue to be generated, based on regulated customer training requirements but for which no training
sessions have yet been booked.
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.
Segment operating income (SOI)
Segment operating income is a non-GAAP measure and is the sum of our key indicators 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 segment operating income by taking the operating profit and excluding
restructuring costs of major programs that do not arise from significant strategic transactions.
Segment operating income before specific items further excludes restructuring costs, integration costs, acquisition costs and other gains
and losses arising from significant strategic transactions. We track it because we believe it provides a better indication of our operating
performance and makes it easier to compare across reporting periods.
Simulator equivalent unit (SEU)
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.
Full-flight simulators (FFSs) deployed in CAE's network
A FFS is a full size replica of a specific make, model and series of an aircraft cockpit, including a motion system. In our count of FFSs
deployed in the network, we generally only include FFSs that are of the highest fidelity and do not include any fixed based training devices,
or other lower-level devices, as these are typically used in addition to FFSs in the same approved training programs.
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 perfectly 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.
16 I CAE Financial Report 2020
4. CONSOLIDATED RESULTS
4.1 Results from operations – fourth quarter of fiscal 2020
Management’s Discussion and Analysis
(amounts in millions, except per share amounts)
Q4-2020
Q3-2020
Q2-2020
Q1-2020
Q4-2019
Revenue
Cost of sales
Gross profit3
As a % of revenue
Research and development expenses3
Selling, general and administrative expenses
Other losses (gains) – net
After tax share in loss (profit) of equity accounted investees
Operating profit3
As a % of revenue
Finance expense – net
Earnings before income taxes
Income tax expense
As a % of earnings before income taxes
(income tax rate)
Net income
Attributable to:
Equity holders of the Company
Non-controlling interests
EPS attributable to equity holders of the Company
Basic and diluted
EPS before specific items3
$
$
$
%
$
$
$
$
$
%
$
$
$
%
$
$
$
$
$
$
977.3
665.6
311.7
31.9
36.2
107.9
14.3
6.8
146.5
15.0
38.5
108.0
26.9
25
81.1
78.4
2.7
81.1
0.29
0.46
923.5
632.0
291.5
31.6
33.6
118.3
(3.5)
(11.8)
154.9
16.8
36.7
118.2
18.4
16
99.8
97.7
2.1
99.8
0.37
0.37
896.8
660.1
236.7
26.4
35.8
98.0
(11.5)
(10.4)
124.8
13.9
34.3
90.5
15.5
17
75.0
73.8
1.2
75.0
0.28
0.28
825.6
581.9
243.7
29.5
31.9
113.3
(0.3)
(12.1)
110.9
13.4
34.9
76.0
13.0
17
63.0
61.5
1.5
63.0
0.23
0.24
1,022.0
734.0
288.0
28.2
9.9
123.2
(5.2)
(10.3)
170.4
16.7
25.7
144.7
19.3
13
125.4
122.3
3.1
125.4
0.46
0.48
Revenue was 4% lower compared to the fourth quarter of fiscal 2019
Revenue was $44.7 million lower than the fourth quarter of fiscal 2019. Decreases in revenue were $46.1 million and $7.1 million for
Defence and Security and Healthcare respectively, partially offset by an increase of $8.5 million in Civil Aviation Training Solutions.
You will find more details in Results by segment.
Segment operating income3 was $23.9 million lower compared to the fourth quarter of fiscal 2019
Segment operating income was $146.5 million this quarter, or 15.0% of revenue, compared to $170.4 million, or 16.7% of revenue, in the
fourth quarter of fiscal 2019. Decreases in segment operating income were $41.6 million and $18.3 million in Healthcare and Defence
and Security respectively, partially offset by an increase of $36.0 million for Civil Aviation Training Solutions.
Segment operating income before specific items4 was $193.9 million this quarter, or 19.8% of revenue compared to $177.2 million, or
17.3% of revenue in the fourth quarter of fiscal 2019. On this basis, segment operating income before specific items was $16.7 million or
9% higher over the fourth quarter of fiscal 2019.
On April 1, 2019, we adopted IFRS 16 without restating comparative periods. In accordance with IFRS 16, operating lease expense
previously recognized under IAS 17 is no longer incurred but replaced with additional depreciation from the recognition of additional
right of-use assets, recorded evenly over the lease term, and higher interest from the recognition of lease obligations, accreted based on
the effective interest method.
You will find more details in Results by segment.
Net finance expense was $12.8 million higher than the fourth quarter of fiscal 2019
The increase compared to the fourth quarter of fiscal 2019 was mainly due to higher interest on long-term debt due to the issuance of
unsecured senior notes in March and December 2019, primarily to fund the acquisition of BBAT, and higher interest on lease liabilities
as a result of the adoption of IFRS 16.
3 Non-GAAP and other financial measures (see Section 3.7).
CAE Financial Report 2020 I 17
Management’s Discussion and Analysis
Income tax rate was 25% this quarter
Income taxes this quarter were $26.9 million, representing an effective tax rate of 25%, compared to 13% for the fourth quarter of fiscal 2019.
In the fourth quarter last year, the tax rate was lower due to the recognition of deferred tax asset not previously recognized in Canada
arising from the acquisition of BBAT and in Europe, partially offset by the negative impact of tax audits in Canada. Excluding these
elements, the income tax rate would have been 20% in the fourth quarter last year.
In the fourth quarter this year, the income tax rate was impacted by a goodwill impairment charge for the Healthcare segment. Excluding
the effect of the goodwill impairment, the income tax rate would have been 19% this quarter. On this basis, the decrease in the tax rate
from the fourth quarter of fiscal 2019 was mainly due to the change in the mix of income from various jurisdictions.
4.2 Results from operations – fiscal 2020
(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
Operating profit
As a % of revenue
Finance expense – net
Earnings before income taxes
Income tax expense
As a % of earnings before income taxes (income tax rate)
Net income
Attributable to:
Equity holders of the Company
Non-controlling interests
EPS attributable to equity holders of the Company
Basic
Diluted
EPS before specific items
$
$
$
%
$
$
$
$
$
%
$
$
$
%
$
$
$
$
$
$
$
FY2020
3,623.2
2,539.6
1,083.6
29.9
137.5
437.5
(1.0)
(27.5)
537.1
14.8
144.4
392.7
73.8
19
318.9
311.4
7.5
318.9
1.17
1.16
1.34
FY2019
3,304.1
2,362.6
941.5
28.5
101.4
415.2
(22.3)
(33.4)
480.6
14.5
80.9
399.7
59.6
15
340.1
330.0
10.1
340.1
1.24
1.23
1.25
Revenue was $319.1 million or 10% higher than last year
Increases in revenue were $291.7 million, $24.5 million and $2.9 million for Civil Aviation Training Solutions, Defence and Security and
Healthcare respectively.
You will find more details in Results by segment.
Gross profit was $142.1 million higher than last year
Gross profit was $1,083.6 million this year, or 29.9% of revenue compared to $941.5 million, or 28.5% of revenue last year.
Segment operating income was $56.5 million higher than last year
Segment operating income for the year was $537.1 million, or 14.8% of revenue, compared to $480.6 million, or 14.5% of revenue, last
year. The increase in segment operating income was $129.0 million for Civil Aviation Training, partially offset by decreases of $45.8 million
and $26.7 million for Healthcare and Defence and Security respectively.
Segment operating income before specific items was $590.4 million, or 16.3% of revenue, compared to $487.4 million, or 14.8% of revenue,
last year. On this basis, segment operating income before specific items was $103.0 million or 21% higher compared to last year.
You will find more details in Results by segment.
18 I CAE Financial Report 2020
Net finance expense was $63.5 million higher than last year
(amounts in millions)
Net finance expense, prior period
Change in finance expense from the prior period:
Increase in finance expense on long-term debt (other than lease liabilities)
Decrease in finance expense on royalty obligations
Increase in finance expense on lease liabilities
Increase in other finance expense
Decrease in borrowing costs capitalized
Increase in finance expense from the prior period
Change in finance income from the prior period:
Decrease in interest income on loans and finance lease contracts
Decrease in other finance income
Increase in finance income from the prior period
Net finance expense, current period
Management’s Discussion and Analysis
FY2019 to
FY2020
80.9
42.0
(1.9)
15.7
1.6
1.4
58.8
0.2
4.5
4.7
144.4
$
$
$
$
$
$
Net finance expense was $144.4 million this year, $63.5 million or 78% higher than last year. The increase was mainly due to higher
interest on long-term debt due to the issuance of unsecured senior notes in March and December 2019, primarily to fund the acquisition
of BBAT, higher interest on lease liabilities as a result of the adoption of IFRS 16 and lower finance income.
Income tax rate was 19% this year
This fiscal year, income taxes were $73.8 million, representing an effective tax rate of 19%, compared to 15% for the same period last year.
Last year, the tax rate was lower due to the recognition of deferred tax asset not previously recognized in Canada arising from the
acquisition of BBAT and in Europe, partially offset by the negative impact of tax audits in Canada. Excluding these elements, the income
tax rate would have been 19% last year.
This year, the income tax rate was impacted by a goodwill impairment charge for the Healthcare segment. Excluding the effect of the
goodwill impairment, the income tax rate would have been 17% this year. On this basis, the decrease in the tax rate compared to last
year was mainly due to the change in the mix of income from various jurisdictions.
4.3 Consolidated orders and total backlog
Total backlog4 stable compared to last year
(amounts in millions)
Obligated backlog4, beginning of period
+ order intake4
- revenue
+ / - adjustments
Obligated backlog, end of period
Joint venture backlog4 (all obligated)
Unfunded backlog and options4
Total backlog
Reconciliation of total backlog to remaining performance obligations
Total backlog
Less: Joint venture backlog
Less: Options
Less: Estimated contract value4
Remaining performance obligations
The book-to-sales ratio for the quarter was 0.80x. The ratio for the last 12 months was 1.05x.
You will find more details in Results by segment.
FY2020
7,461.4
3,821.6
(3,623.2)
(28.8)
7,631.0
441.4
1,385.7
9,458.1
9,458.1
(441.4)
(516.4)
(3,636.7)
4,863.6
$
$
$
$
$
FY2019
6,839.4
3,971.4
(3,304.1)
(45.3)
7,461.4
414.5
1,619.0
9,494.9
9,494.9
(414.5)
(494.5)
(3,172.2)
5,413.7
$
$
$
$
$
4 Non-GAAP and other financial measures (see Section 3.7).
CAE Financial Report 2020 I 19
Management’s Discussion and Analysis
5. RESULTS BY SEGMENT
We manage our business and report our results in three segments:
– Civil Aviation Training Solutions;
– Defence and Security;
– Healthcare.
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 (loss)
(amounts in millions, except operating margins)
FY2020
FY2019 Q4-2020 Q3-2020 Q2-2020 Q1-2020 Q4-2019
Civil Aviation Training Solutions
Defence and Security
Healthcare
Segment operating income
SOI before specific items
Capital employed5
(amounts in millions)
$
%
$
%
$
%
$
$
473.3
21.8
104.8
7.9
(41.0)
—
537.1
590.4
344.3
18.4
131.5
10.1
4.8
3.9
480.6
487.4
151.5
25.2
123.0
22.0
100.2
18.9
32.4
9.5
(37.4)
—
146.5
193.9
31.3
9.4
0.6
1.8
154.9
157.2
26.0
7.7
(1.4)
—
124.8
126.0
98.6
20.6
15.1
4.7
(2.8)
—
110.9
113.3
115.5
19.5
50.7
13.1
4.2
10.3
170.4
177.2
March 31
December 31
September 30
2020
2019
2019
June 30
2019
March 31
2019
Civil Aviation Training Solutions
Defence and Security
Healthcare
Capital employed
$
$
$
$
3,869.6
3,734.5
3,655.2
3,549.6
3,274.7
1,154.0
1,074.4
1,191.8
1,192.2
1,032.0
208.0
5,231.6
224.7
5,033.6
225.8
5,072.8
226.8
4,968.6
222.8
4,529.5
5 Non-GAAP and other financial measures (see Section 3.7).
20 I CAE Financial Report 2020
Management’s Discussion and Analysis
5.1 Civil Aviation Training Solutions
FISCAL 2020 EXPANSIONS AND NEW INITIATIVES
Acquisitions
– On April 26, 2019, we acquired the remaining equity interest in Pelesys, a global leader in the provision of aviation training solutions
and courseware;
– On June 26, 2019, we acquired the shares of Luftfartsskolen AS, an ab-initio flight school located in Oslo, Norway, expanding our
cadet training capabilities in Europe.
Expansions
– We announced the expansion of our training capacity in Asia with new training centres in Bangkok, Thailand and Gurugram, India;
– We announced the inauguration of new training centres in London Gatwick, Manchester, and Milan to support the start of our 10-year
pilot training agreement with easyJet, as well as the growing training needs of airlines in Europe;
– We announced the expansion of our business aviation network with a new Bombardier Global 7500 FFS and a Bombardier Learjet 75
flight-training device;
– On November 4, 2019, we concluded a 15-year exclusive business aviation training services agreement with Directional Aviation
Capital affiliates and the acquisition of a 50% stake in SIMCOM, an operator of a wide range of jet, turboprop and piston powered
aircraft simulators and training devices.
New programs and products
– We announced the launch of our new cutting-edge digital solution, the electronic training and checking authorization (eTCA) application,
to better manage booking requests for training centres dedicated to business aviation;
– We welcomed the first five CAE Women in Flight ambassadors and winners of the 2019 scholarships;
– We announced the launch of a new cadet pilot training program in which CAE will train more than 700 new professional pilots over
the next 10 years for Southwest Airlines Destination 225° program;
– We announced two new MPL programs in partnership with easyJet and Volotea;
– We announced, together with Jazz Aviation and Seneca School of Aviation, a new cadet pilot training program in Canada called Jazz
Approach;
– We have introduced new virtual service offerings to support our customers as a response to border restrictions arising from the
COVID 19 pandemic including offering remote support for the installation, acceptance and qualification of FFSs, obtaining FAA and
other Civil Aviation Authority approvals for virtual training in certain of our flight training organizations, and developing remote IOS
solutions for live instructor interactions during training sessions.
FISCAL 2020 ORDERS
Civil Aviation Training Solutions obtained contracts this quarter expected to generate future revenues of $468.6 million, including contracts
for 12 FFSs sold to customers in all regions. This brings the total civil order intake to $2,471.5 million and 49 FFSs for the year.
Notable FFS contract awards for the year included:
– Five FFSs including two Bombardier Challenger CL350s, one Gulfstream G650, one Embraer Legacy 500, and one Embraer Phenom
300 to SIMCOM International;
– Two Boeing 737MAX FFSs to Emirates - CAE Flight Training, a joint venture of Emirates Airline and CAE;
– One Embraer E190 FFS and one Embraer E190-E2 FFS to KLM Royal Airlines;
– Three Boeing 737MAX FFSs to Southwest Airlines;
– Two Boeing 777X FFSs to Emirates Airline;
– One Airbus A330 FFS to Korean Air;
– One Boeing 737MAX FFS to Alaska Airlines;
– 33 FFSs to undisclosed customers.
Notable contract awards for fiscal 2020 included:
– An extension for 6.5 years for pilot training with LATAM;
– An exclusive 5-year pilot and cabin crew training agreement with SAS;
– A 10-year pilot training agreement with JetSmart Airlines SpA;
– An extension for 5 years for pilot training with Sunwing Airlines;
– A 3-year business aviation pilot training renewal with TAG Aviation Holdings;
– A 3-year business aviation pilot training agreement with Western Air Charter.
CAE Financial Report 2020 I 21
Management’s Discussion and Analysis
FINANCIAL RESULTS6
(amounts in millions, except operating
margins, SEU, FFSs deployed,
utilization rate and FFS deliveries)
Revenue
Segment operating income
Operating margins
SOI before specific items
Operating margins
Depreciation and amortization
Property, plant and equipment
expenditures
Intangible assets and other
assets expenditures
Capital employed
Total backlog
SEU6
FFSs deployed in CAE's network6
Utilization rate6
FFS deliveries
$
$
%
$
%
$
$
$
$
$
%
FY2020
2,167.5
473.3
21.8
479.4
22.1
232.8
FY2019
Q4-2020
Q3-2020
Q2-2020
Q1-2020
Q4-2019
1,875.8
344.3
18.4
351.1
18.7
157.2
601.9
151.5
25.2
153.6
25.5
59.8
558.1
123.0
22.0
123.4
22.1
59.8
529.9
100.2
18.9
101.4
19.1
57.3
477.6
98.6
20.6
101.0
21.1
55.9
593.4
115.5
19.5
122.3
20.6
47.5
259.9
226.4
78.1
45.8
52.4
83.6
87.9
36.4
3,869.6
5,341.3
33.7
3,274.7
5,039.6
13.7
3,869.6
5,341.3
7.0
3,734.5
5,263.0
10.3
3,655.2
5,124.8
5.4
3,549.6
5,090.3
7.2
3,274.7
5,039.6
247
306
70
56
218
286
76
58
250
306
67
21
252
303
70
12
243
299
69
18
242
294
76
5
224
286
75
25
Revenue stable compared to the fourth quarter of fiscal 2019
Contributors of increased revenue include the integration into our results of BBAT following its acquisition in the fourth quarter of fiscal 2019,
higher revenue recognized from simulator sales due to the timing of production milestones on devices for which revenue was not recognized
upon delivery, and the contribution from recently deployed simulators in our network, prior to the negative COVID-19 impact. The increase
was offset by a lower number of deliveries compared to record deliveries in the fourth quarter of fiscal 2019, lower utilization in the Americas
and Europe, and the impact of COVID-19 as described below.
The COVID-19 pandemic has negatively affected our training revenues during the quarter due to a significant decrease in training services
demand as a result of the reduction in airlines global operations and disruption to the global air transportation environment and air
passenger travel. In addition, travel bans, border restrictions, lockdown protocols and world-wide self-isolation measures have resulted
in centre closures in the quarter. As at March 31, 2020, 19 of our civil aviation training centres suspended operations, and 10 training
centres that remained open began operating at significantly reduced capacity. We expect our training utilization to be even further impacted
in the first half of fiscal 2021 as a result of continued closures and decreased demand. The Montreal manufacturing plant also ceased
manufacturing operations for civil simulator products on March 25, 2020, under public directives, and while this did not have a significant
impact on our fiscal 2020 fourth quarter results, we expect it will have an impact during at least the first half of fiscal 2021, subject to the
timing of return of manufacturing operations and lifting of global travel restrictions.
Revenue was $2,167.5 million this year, 16% or $291.7 million higher than last year
The increase over last year was due to the integration into our results of BBAT, higher revenue recognized from simulator sales due to
the timing of production and other milestones on devices for which revenue was not recognized upon delivery, the contribution from
recently deployed simulators in our network prior to the negative COVID-19 impact, and a higher demand for our flight training organization.
The increase was partially offset by lower utilization in the Americas and in Europe, a lower number of simulator deliveries, and the impact
of COVID-19 as described above.
Segment operating income up 31% over the fourth quarter of fiscal 2019
Segment operating income was $151.5 million (25.2% of revenue) this quarter, compared to $115.5 million (19.5% of revenue) in the
fourth quarter of fiscal 2019.
Segment operating income increased by $36.0 million, or 31%, over the fourth quarter of fiscal 2019. The increase was mainly due to the
integration into our results of BBAT operations, a favourable program mix from our manufacturing facility, and the contribution from recently
deployed simulators in our network, prior to the negative COVID-19 impact. The increase was partially offset by lower utilization mainly
in Europe and the impact of COVID-19 as described above.
Excluding the costs arising from the acquisition and integration of BBAT, segment operating income before specific items was $153.6 million
(25.5% of revenue) this quarter, compared to $122.3 million (20.6% of revenue) in the fourth quarter of fiscal 2019. On this basis, the
current period's segment operating income before specific items was up 26% over the same quarter last year.
6 Non-GAAP and other financial measures (see Section 3.7).
22 I CAE Financial Report 2020
Management’s Discussion and Analysis
Segment operating income was $473.3 million, 37% or $129.0 million higher than last year
Segment operating income was $473.3 million (21.8% of revenue) this year, compared to $344.3 million (18.4% of revenue) last year.
The increase was mainly due to the integration into our results of BBAT operations, a favourable program mix from our manufacturing
facility, and the contribution from recently deployed simulators in our network, before the negative COVID-19 impact. The increase was
partially offset by lower utilization in the Americas and Europe and the impact of COVID-19 as described above.
Excluding the costs arising from the acquisition and integration of BBAT, segment operating income before specific items was $479.4 million
(22.1% of revenue) in fiscal 2020, compared to $351.1 million (18.7% of revenue) in fiscal 2019. On this basis, segment operating income
before specific items was up 37% over last year.
Property, plant and equipment expenditures at $78.1 million this quarter and $259.9 million for the year
Maintenance capital expenditures were $19.7 million for the quarter and $60.3 million for the year. Growth capital expenditures were
$58.4 million for the quarter and $199.6 million for the year.
Capital employed increased $135.1 million over last quarter and $594.9 million over last year
The increase in capital employed over last quarter was due to higher property, plant and equipment, intangible assets and investment in
equity accounted investees, primarily due to movements in foreign exchange rates. The increase was partially offset by lower non-cash
working capital, driven by higher accounts payable and accrued liabilities, higher contract liabilities, and higher derivative financial liabilities,
partially offset by higher accounts receivable and higher contract assets.
The increase in capital employed over last year was due to higher property, plant and equipment, higher investment in equity accounted
investees as a result of the acquisition of a 50% stake in SIMCOM, the recognition of right-of-use assets as a result of the adoption of
IFRS 16, and higher intangible assets.
Total backlog was up 6% compared to year
(amounts in millions)
Obligated backlog, beginning of period
+ order intake
- revenue
+ / - adjustments
Obligated backlog, end of period
Joint venture backlog (all obligated)
Total backlog
FY2020
$
4,679.2 $
2,471.5
FY2019
3,835.3
2,769.9
(2,167.5)
(1,875.8)
10.3
(50.2)
4,993.5 $
4,679.2
347.8
360.4
5,341.3 $
5,039.6
$
$
Fiscal 2020 adjustments include foreign exchange movements, partially offset by the revaluation of prior year contracts and the cancellation
of orders from a previous year.
Fiscal 2019 adjustments include the revaluation of prior year contracts and negative foreign exchange movements, partially offset by
backlog acquired from BBAT.
This quarter's book-to-sales ratio was 0.78x. The ratio for the last 12 months was 1.14x.
5.2 Defence and Security
FISCAL 2020 EXPANSIONS AND NEW INITIATIVES
Expansions
– CAE USA and Leonardo signed a memorandum of agreement to collaborate and offer integrated solutions for helicopter training
requirements for the U.S. government market;
– The Netherlands Ministry of Defence opened a new training facility at Maritime Air Base de Kooy in Den Helder, the Netherlands
where CAE will provide on-site maintenance and support services for the NH90 full-flight and mission trainer located at the facility;
– MSI was awarded a position on the U.S. Air Force Advisory & Assistance Services ID/IQ contract. MSI will now have opportunity to
compete on task orders issued under the ID/IQ contract, which provides for technical training and analytical services to support and
improve policy development, operational decision-making and management operations.
CAE Financial Report 2020 I 23
Management’s Discussion and Analysis
New programs and products
– We introduced several new courses at the CAE Dothan Training Center, including C-12/King Air B200 recurrent/refresher courses and
a new UPRT course;
– We launched the CAE TRAX Academy, an integrated and advanced training continuum designed to deliver faster and more efficient
throughput for military student pilot training. As an integral part of CAE TRAX Academy, we introduced the CAE Sprint Virtual Reality
(VR) trainer, which will enable self-paced learning in an immersive, high-fidelity virtual environment;
– A CAE-built Predator Mission Trainer was installed at General Atomics Flight Test and Training Center located near Grand Forks, North
Dakota and will be used to advance the quality and capability of remotely piloted aircraft synthetic training;
– We have introduced new virtual service offerings to support our customers to meet social distancing requirements arising from the
COVID-19 pandemic, including virtual acceptance testing and developing offboard IOS solutions that allow for the removal of the
instructor from the cockpit of the simulator while still providing the required functionality to continue conducting training exercises.
FISCAL 2020 ORDERS
Defence and Security was awarded $276.6 million in orders this quarter and $1,225.6 million in total for fiscal 2020, including notable
contract awards from:
– Lockheed Martin to support the design and manufacture of additional C-130J simulators and training devices as well as simulator
upgrades for the USAF and U.S. Marine Corps;
– The USAF to continue providing KC-135 aircrew training services as well as perform a range of simulator upgrades and modifications
on KC-135 training devices;
– The NATO Support and Procurement Agency to provide the German Navy with a comprehensive training solution for the NH90 Sea
Lion helicopter;
– The Federal Office of Bundeswehr Equipment, Information Technology and In-Service Support in Germany to upgrade and modify
German Army NH90 full-mission simulators as part of a five-year extension to 2027 of the NH90 contract delivered by the Helicopter
Flight Training Services joint venture;
– The U.S. Army to provide fixed-wing flight training and support services at the CAE Dothan Training Center;
– Leonardo to provide M346 training devices and upgrades;
– BAE Systems to provide the CAE Medallion MR e-Series visual system for undisclosed customers;
– Babcock France to provide an additional Pilatus PC-21 full-mission simulator to support pilot training for the French Air Force.
FINANCIAL RESULTS
(amounts in millions, except
operating margins)
Revenue
Segment operating income
Operating margins
SOI before specific items
Operating margins
$
$
%
$
%
Depreciation and amortization $
Property, plant and equipment
expenditures
Intangible assets and other
assets expenditures
Capital employed
Total backlog
$
$
$
$
FY2020
1,331.2
FY2019
1,306.7
Q4-2020
Q3-2020
Q2-2020
Q1-2020
Q4-2019
341.8
332.4
336.5
320.5
387.9
104.8
7.9
114.5
8.6
58.2
131.5
10.1
131.5
10.1
46.5
21.3
22.0
32.4
9.5
40.2
11.8
15.4
5.2
31.3
9.4
33.2
10.0
14.1
5.5
26.0
7.7
26.0
7.7
14.6
6.2
15.1
4.7
15.1
4.7
14.1
4.4
50.7
13.1
50.7
13.1
12.4
7.7
53.5
1,154.0
4,116.8
43.7
1,032.0
4,455.3
15.0
1,154.0
4,116.8
11.2
1,074.4
4,171.3
12.7
1,191.8
4,113.6
14.6
1,192.2
4,271.9
14.5
1,032.0
4,455.3
Revenue down 12% over the fourth quarter of fiscal 2019
The COVID-19 pandemic contributed to delays in the execution of programs from backlog and in order intake. A range of Defence programs
involving government and OEM customers globally experienced delays due to travel bans, border restrictions, client access restrictions
and supply chain disruptions. In addition, there have been delays in the awarding of new contracts as government acquisition authorities
follow directives in their respective countries to shelter-in-place and eliminate travel. The decrease in revenue from the fourth quarter of
fiscal 2019 was also due to a lower level of activity on North American programs, partially offset by an increased level of activity on
European programs this quarter.
Revenue was $1,331.2 million this year, 2% or $24.5 million higher than last year
The increase was mainly due to the integration into our results of AOCE following its acquisition in the second quarter of fiscal 2019, as
well as higher revenue from European programs and was partially offset by lower revenue due to COVID-19-related program delays, as
described above, and lower revenue from Middle Eastern programs.
24 I CAE Financial Report 2020
Management’s Discussion and Analysis
Segment operating income down 36% over the fourth quarter of fiscal 2019
Segment operating income was $32.4 million (9.5% of revenue) this quarter, compared to $50.7 million (13.1% of revenue) in the fourth
quarter of fiscal 2019.
The decrease from the fourth quarter of fiscal 2019 was due in part to COVID-19 related program delays and a lower level of activity on
North American programs, as mentioned above, in addition to reorganizational costs incurred this quarter. The decrease was partially
offset by lower selling, general and administrative expenses and increased activity on our European programs.
Following certain changes that we made in the segment focus, we have reviewed certain product offerings that resulted in a loss in value
of some assets. This loss has been included in the reorganization costs for the segment. Excluding these reorganizational costs, segment
operating income before specific items was $40.2 million (11.8% of revenue) this quarter, compared to $50.7 million (13.1% of revenue)
in the fourth quarter of fiscal 2019. On this basis, the current period's segment operating income before specific items was down 21%
from the same quarter last year.
Segment operating income was $104.8 million this year, 20% or $26.7 million lower than last year
Segment operating income was $104.8 million (7.9% of revenue) this year, compared to $131.5 million (10.1% of revenue) last year.
The decrease from last year was due in part to COVID-19-related program delays, as described above, lower contributions from North
American product programs, due to order delays and execution on program milestones for certain contracts in backlog, as well as
reorganizational costs incurred this year. The decrease was partially offset by increased activity on our European programs.
Excluding reorganizational costs, segment operating income before specific items was $114.5 million (8.6% of revenue) in fiscal 2020,
compared to $131.5 million (10.1% of revenue) in fiscal 2019. On this basis, the current period's segment operating income before specific
items was down 13% from last year.
Capital employed increased $79.6 million over last quarter and increased $122.0 million over last year
The increase over last quarter was mainly due to higher non-cash working capital, intangible assets and property, plant and equipment,
primarily due to movements in foreign exchange rates and lower deferred gains and other non-current liabilities.
The increase over last year was primarily due to the recognition of right-of-use assets as a result of the adoption of IFRS 16, movements
in foreign exchange rates, mainly on non cash working capital, intangible assets and property, plant and equipment, and lower deferred
gains and other non-current liabilities.
Total backlog down 8% compared to last year
(amounts in millions)
Obligated backlog, beginning of period
+ order intake
- revenue
+ / - adjustments
Obligated backlog, end of period
Joint venture backlog (all obligated)
Unfunded backlog and options
Total backlog
FY2020
$
2,782.2 $
1,225.6
FY2019
3,004.1
1,079.9
(1,331.2)
(1,306.7)
(39.1)
4.9
2,637.5 $
2,782.2
93.6
1,385.7
4,116.8 $
54.1
1,619.0
4,455.3
$
$
Fiscal 2020 adjustments include the revaluation of prior year contracts, partially offset by foreign exchange movements.
Fiscal 2019 adjustments include an addition to reflect the acquisition of AOCE, partially offset by the cancellation of an order and the
revaluation of prior year contracts.
This quarter's book-to-sales ratio was 0.81x. The ratio for the last 12 months was 0.92x.
In fiscal 2020, $413.2 million of unfunded backlog was transferred to obligated backlog and $134.5 million was added to the unfunded
backlog.
CAE Financial Report 2020 I 25
Management’s Discussion and Analysis
5.3 Healthcare
FISCAL 2020 EXPANSIONS AND NEW INITIATIVES
Expansions
– We added a new Training for LifeTM site at Inspira Health Network in New Jersey, U.S., expanding access for customers to personalized
product training opportunities from CAE Healthcare's expert educators;
– We expanded our reach in the hospital segment by entering into a group purchasing agreement with Premier, a leading healthcare
improvement company, uniting an alliance of approximately 4,000 U.S. hospitals and health systems and approximately 175,000 other
providers and organizations;
– We expanded our geographic reach in the Scandinavian market, with new distributors in Denmark, Finland, Norway and Sweden.
New programs and products
– We announced a new CAE Centre of Excellence for simulation-based education at ESPA-Montreal, the first healthcare education and
industry partnership devised to impact patient care in Quebec, Canada;
– We collaborated with the Canadian Association of Schools of Nursing to develop a module of ten recommended SCE courseware
packages for student nurses that can be practiced with the CAE Juno manikin;
– We, together with ASA, launched the Anesthesia SimSTAT - PACU and Labor & Delivery Unit modules, new modules in a series of
interactive screen-based anesthesia simulation modules, which have been approved by the American Board of Anesthesiology for
MOCA credits;
– We developed several custom solutions for OEMs including Baylis Medical for a simulator to support its cardiovascular transseptal
puncture systems, Edwards Lifesciences for new advanced critical care and cardiac care devices, and Cardinal Health (Cordis) for a
cardiovascular simulation mobile application, continuing to leverage our technologies and expertise to leading medical device
companies by developing risk-free training for physicians;
– We released Microsoft HoloLens 2 augmented reality training applications for our CAE Ares emergency care simulator, CAE Lucina
childbirth simulator and CAE Vimedix ultrasound simulator using 3D, interactive cardiac, respiratory and circulatory systems that allow
learners to envision human anatomy;
In response to the COVID-19 pandemic, we have offered several free training resources during March and April 2020 to support
front line healthcare providers with their most urgent training needs including a ventilator reskilling course, a point-of-care lung
ultrasound training, COVID-19 Simulated Clinical Experience, webinars, and an outreach toolkit;
–
– On April 10, 2020, we concluded an agreement with the Government of Canada to manufacture and supply 10,000 CAE Air1 ventilators
to provide life support to patients in intensive care to support the COVID-19 pandemic.
Other
– On November 12, 2019, we invested in a healthcare software company that enables increased efficiency of learning. The investment
is in the form of a controlling 50% equity interest, for cash consideration of $0.9 million;
– We are collaborating with the McGill University Healthcare Centre Foundation, whereby CAE Healthcare donated $500,000 in cash
and in kind, over 5 years to the Foundation, including state-of-the-art simulation training equipment and curriculum, to support its new
Interprofessional Skills and Simulation Network.
Innovation Awards
– We won an EMS World Innovation Award for CAE AresAR, the Microsoft HoloLens application for our emergency care manikin that
includes six augmented reality scenarios.
FINANCIAL RESULTS
(amounts in millions, except
operating margins)
Revenue
Segment operating (loss)
income
Operating margins
SOI before specific items
Operating margins
Depreciation and amortization
Property, plant and equipment
expenditures
Intangible assets and other
assets expenditures
Capital employed
$
$
%
$
%
$
$
$
$
26 I CAE Financial Report 2020
FY2020
FY2019
Q4-2020
Q3-2020
Q2-2020
Q1-2020
Q4-2019
124.5
121.6
33.6
33.0
30.4
27.5
(41.0)
—
(3.5)
—
14.4
2.2
10.7
208.0
4.8
3.9
4.8
3.9
13.5
3.4
(37.4)
—
0.1
0.3
3.3
0.7
0.6
1.8
0.6
1.8
3.8
0.3
(1.4)
—
(1.4)
—
3.5
(2.8)
—
(2.8)
—
3.8
0.2
1.0
9.2
222.8
2.2
208.0
3.1
224.7
2.7
225.8
2.7
226.8
2.8
222.8
40.7
4.2
10.3
4.2
10.3
3.6
0.6
Management’s Discussion and Analysis
Revenue down 17% over the fourth quarter of fiscal 2019
The decrease from the fourth quarter of fiscal 2019 was mainly due to decreased volume on patient simulators and lower revenue from
centre management solutions primarily driven by the impact of the COVID-19 pandemic as a large contingent of the market for simulation
products are medical and nursing schools have come under lockdown protocols, which has negatively affected our ability to conclude
contracts and to deliver on existing orders. In the hospital market, our customers are primarily focused on managing the acute operational
demands of this healthcare crisis rather than focusing on their training needs.
Revenue was $124.5 million this year, 2% or $2.9 million higher than last year
The increase was due to higher revenue from key partnerships with OEMs and centre management solutions earned primarily during
the first eleven months of the fiscal year. The increase was largely offset by decreased volume on patient and ultrasound simulators driven
mainly by the impact of the COVID-19 pandemic as described above.
Segment operating income lower over the fourth quarter of fiscal 2019
Segment operating loss was $37.4 million this quarter, compared to a segment operating income of $4.2 million (10.3% of revenue) in
the fourth quarter of fiscal 2019.
The decrease from the fourth quarter of fiscal 2019 was primarily due to the goodwill impairment charge recognized this quarter. The
decrease was also due to decreased revenues, as described above, the net benefit from a remeasurement of long-term royalty obligations
recognized last year and higher net research and development costs incurred for the development of recently launched programs and
products, partially offset by reduced selling, general and administrative expenses.
Excluding the goodwill impairment charge, segment operating income before specific items was $0.1 million (0.3% of revenue) this quarter,
compared to $4.2 million (10.3% of revenue) in the fourth quarter of fiscal 2019, which represents a decrease of $4.1 million over the
same quarter last year.
Segment operating loss was $41.0 million this year, a decrease of $45.8 million compared to last year
Segment operating loss was $41.0 million this year, compared to a segment operating income of $4.8 million (3.9% of revenue) last year.
The $45.8 million decrease over last year was primarily due to the goodwill impairment charge recognized in the fourth quarter of fiscal
2020. The decrease was also due to the negative impacts of the COVID-19 pandemic on revenue, as described above, higher investments
in selling, general and administrative expenses to support the expansion of our sales force, the net benefit from a remeasurement of
long term royalty obligations recognized last year and higher net research and development expenses incurred for the development of
recently launched programs and products. The decrease was partially offset by higher revenue earned during the first eleven months of
the fiscal year.
Excluding the goodwill impairment charge, segment operating loss before specific items was $3.5 million in fiscal 2020, compared to a
segment operating income of $4.8 million (3.9% of revenue) in fiscal 2019, which represent a decrease of $8.3 million over last year.
Capital employed decreased by $16.7 million over last quarter and decreased by $14.8 million from last year
The decrease over last quarter was mainly due to lower intangible assets because of the goodwill impairment charge. The decrease was
partially offset by higher non-cash working capital, resulting primarily from an increase in inventories and accounts receivable, partially
offset by an increase in accounts payable and accrued liabilities.
The decrease over last year was primarily due to lower intangible assets because of the goodwill impairment charge, partially offset by
the recognition of right-of-use assets as a result of the adoption of IFRS 16.
CAE Financial Report 2020 I 27
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)
Cash provided by operating activities*
Changes in non-cash working capital
Net cash provided by 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 flow7
Growth capital expenditures7
Capitalized development costs
Common shares repurchased
Other cash movements, net
Business combinations, net of cash and cash equivalents acquired
Acquisition of investment in equity accounted investees
Addition of assets through the monetization of royalties
Effect of foreign exchange rate changes on cash and cash equivalents
$
$
FY2020
FY2019
Q4-2020
Q4-2019
$
$
597.3
(52.2)
545.1
(80.3)
(15.9)
0.5
(9.9)
22.6
(110.9)
$
$
495.2
35.2
530.4
(79.2)
(14.5)
2.7
(37.7)
22.0
(99.9)
$
$
165.2
81.1
246.3
(25.0)
(8.0)
0.1
0.4
—
(28.7)
131.4
34.9
166.3
(24.4)
(3.9)
0.2
(10.7)
14.9
(25.6)
$
351.2
$
323.8
$
185.1
$
116.8
(203.1)
(172.6)
(86.2)
(49.6)
40.9
(10.1)
(113.5)
—
7.8
(69.4)
(94.4)
24.0
(827.8)
—
(202.7)
(6.9)
(59.0)
(25.2)
(16.8)
4.0
—
—
—
19.5
(71.8)
(20.8)
(1.6)
12.4
(794.3)
—
—
(7.5)
Net change in cash before proceeds and repayment of long-term debt
$
(62.6)
$ (1,026.0)
$
107.6
$
(766.8)
* before changes in non-cash working capital
Free cash flow of $185.1 million this quarter
Free cash flow was $68.3 million higher compared to the fourth quarter of fiscal 2019 mainly due to a lower investment in non-cash working
capital and an increase in cash provided by operating activities, partially offset by lower dividends received from equity accounted investees.
Free cash flow of $351.2 million this year
Free cash flow was $27.4 million higher compared to last year mainly due to an increase in cash provided by operating activities and lower
payments to equity accounted investees, partially offset by a higher investment in non-cash working capital and higher dividends paid.
Capital expenditures were $84.0 million this quarter and $283.4 million for the year
Growth capital expenditures were $59.0 million this quarter and $203.1 million for the year. Our growth capital allocation decisions are
market-driven in nature and are intended to keep pace with the demand of our existing and new customers. Maintenance capital
expenditures were $25.0 million this quarter and $80.3 million for the year.
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.
The total amount available through this revolving credit facility at March 31, 2020 was US$850.0 million (2019 – US$550.0 million). There
was an amount of US$505.5 million drawn under the facility as at March 31, 2020 (2019 – nil) and US$21.3 million was used for letters
of credit (2019 – US$32.9 million). Given the uncertainty of the economic environment, a portion of the revolving credit facility was drawn
down and the proceeds have been included in the cash on hand in short terms investments. 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 margin based on the private credit
rating. Subsequent to the year-end we concluded a new two-year $500.0 million senior unsecured revolving credit facility, subject to the
same financial covenants as the initial facility, to provide access to additional liquidity during the COVID-19 pandemic as a supplement
to our current committed line of credit.
7 Non-GAAP and other financial measures (see Section 3.7).
28 I CAE Financial Report 2020
Management’s Discussion and Analysis
We have an unsecured Export Development Canada (EDC) Performance Security Guarantee (PSG) account for US$225.0 million
(2019 – US$225.0 million). This is an uncommitted revolving facility strictly for the issuance of performance bonds, advance payment
guarantees or similar instruments. As at March 31, 2020 the total outstanding for these instruments was $159.5 million
(2019 – $160.9 million).
We manage a program in which we sell interests in certain of our accounts receivable (receivable purchase program) to a third party for
cash consideration for amounts up to US$300.0 million (2019 – US$300.0 million). As at March 31, 2020, the Canadian dollar equivalent
of $333.1 million (2019 – $266.2 million) of specific accounts receivable were sold to a financial institution. Subsequent to the year-end
we concluded an agreement to increase the limit of our receivable purchase program from US$300.0 million to US$400.0 million.
As at March 31, 2020, we are compliant with all our financial covenants.
At the end of the fiscal year, we had a higher than normal cash and cash equivalents balance on hand to increase liquidity and preserve
financial flexibility in light of the COVID-19 pandemic. Total available liquidity at March 31, 2020 was $1.5 billion, including $946.5 million
in cash and cash equivalents, undrawn amounts on our revolving credit facility and the balance available under our receivable purchase
program. With the addition of our new revolving credit facility and increased limit on our receivable purchase program subsequent to the
year-end, we have total available liquidity of $2.1 billion.
We expect COVID-19 to have an immediate and negative impact on the amount and timing of cash generated from operations. 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, to ensure adequacy and efficient use of cash resources. Liquidity adequacy is assessed in
view of seasonal needs, stress-test results, growth requirements and capital expenditures, and the maturity profile of indebtedness,
including availability of credit facilities, working capital requirements, compliance with financial covenants and the funding of financial
commitments. Based on our scenario analysis, we believe that our cash and cash equivalents, the availability under our committed
revolving credit facility and cash we expect to generate from our operations will be sufficient to meet financial requirements in the foreseeable
future. To preserve liquidity and reduce operating costs, we have enacted initiatives such as the reduction of capital expenditures and
R&D investments in fiscal 2021, strict cost containment measures, salary freezes, salary reductions, reduced work weeks and temporary
layoffs, as well as a suspension of our common share dividends and share repurchase plan.
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 lease liabilities
Long-term portion of long-term debt
As at March 31
As at March 31
2020
3,312.2 $
2019
2,328.3
93.5
112.7
201.3
62.8
3,106.0 $
2,064.2
$
$
In May 2019, we repurchased an asset previously financed under lease for $12.5 million [US $9.3 million] acquired as part of the BBAT
acquisition.
In June 2019, we repaid unsecured senior notes of $80.4 million [US $60.0 million] and a term loan of $14.9 million [US $11.0 million].
In June 2019, we entered into a term loan for the financing of several new aircraft for our operations in North America. This represents an
obligation of $5.5 million as at March 31, 2020.
In October 2019, we repurchased assets previously financed under lease for $9.8 million [US $7.5 million].
In December 2019, we repaid unsecured senior notes of $95.0 million, and issued notes for US $100.0 million, representing an obligation
of $141.1 million as at March 31, 2020. Additionally, we used $15.7 million [US $11.7 million] of restricted cash, previously held as collateral,
to repay part of an existing term loan.
CAE Financial Report 2020 I 29
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 (IQ), 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.
During fiscal 2019, we announced a plan to invest in R&D innovations over the next five years, including Project Digital Intelligence. The
aim is to develop the next generation training solutions for aviation, defence and security and healthcare to leverage digital technologies.
The Government of Canada, through the Strategic Innovation Fund (SIF), and the Government of Québec, through IQ, agreed to participate
in the project through interest free loans of up to $150.0 million and $47.5 million, respectively, in relation to eligible costs incurred from
fiscal 2019 to fiscal 2023.
You will find more details in Note 1, Note 18 and Note 25 of our consolidated financial statements.
As part of our mitigation measures and to minimize the impact on employees, CAE has accessed and is working to access government
emergency relief measures and wage subsidy programs available around the world, where we have operations.
On April 11, 2020, the Canada Emergency Wage Subsidy (CEWS) was brought into law in Canada. The CEWS covers employers who
have suffered a drop in gross revenues of at least 15% in March, and 30% in April and May and is effective until June 6, 2020, subject to
extensions to be determined by the government. CAE has qualified for the CEWS subsidy program which allowed us to recall previously
furloughed Canadian-based employees until June 6, 2020.
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)
2021
2022
2023
2024
2025 Thereafter
Total
Long-term debt (excluding interest)
$
93.5 $
360.7 $
412.0 $
266.0 $
232.6 $
1,459.6 $
2,824.4
Lease liabilities (excluding interest)
Purchase commitments
112.7
204.7
90.0
30.3
63.3
4.0
36.0
0.8
23.0
—
162.8
—
487.8
239.8
$
410.9 $
481.0 $
479.3 $
302.8 $
255.6 $
1,622.4 $
3,552.0
We also had total availability under the committed revolving credit facility of US$323.2 million as at March 31, 2020 compared to
US$517.1 million at March 31, 2019. Subsequent to the year-end we concluded a new two-year $500.0 million senior unsecured revolving
credit facility which further increased our total availability under our committed line of credit.
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, 2020, we had other long-term liabilities that are not included in the table above. These include some accrued pension
liabilities, deferred revenue 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.
30 I CAE Financial Report 2020
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
Right-of-use assets
Other long-term assets
Other long-term liabilities
Total capital employed
Source of capital8:
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
Management’s Discussion and Analysis
As at March 31
2020
As at April 1
2019(1)
As at March 31
2019
$
$
$
$
$
$
2,808.6
$
2,109.6
$
(946.5)
(2,062.3)
206.2
6.0
2,154.0
395.9
3,125.1
(737.0)
4,944.0
206.2
3,106.0
(946.5)
2,365.7
2,489.7
88.6
4,944.0
$
$
$
$
$
(446.1)
(1,917.0)
295.9
42.4
1,943.3
432.8
2,899.9
(787.9)
4,530.5
295.9
2,298.2
(446.1)
2,148.0
2,303.8
78.7
4,530.5
$
$
$
$
$
2,112.9
(446.1)
(1,889.5)
264.1
41.4
2,149.3
—
2,903.3
(801.8)
4,292.2
264.1
2,064.2
(446.1)
1,882.2
2,331.3
78.7
4,292.2
(1) On April 1, 2019, we adopted IFRS 16 without restating comparative periods. Accordingly, to allow for better comparability, capital employed
variances should be compared with figures as at April 1, 2019 instead of March 31, 2019.
Capital employed increased $413.5 million, or 9%, from last year (April 1, 2019)
The increase over last year was mainly due to higher other long-term assets and property, plant and equipment, partially offset by lower
right-of-use assets.
Return on capital employed (ROCE)8
Our ROCE was 9.1% this quarter. ROCE before specific items was 10.7% this quarter, which compares to 12.9% in the fourth quarter of
last year and 11.4% last quarter. Specific items include the impacts of the integration of BBAT in fiscal 2020 and in fiscal 2019. In fiscal
2020, specific items also include the impacts of Defence and Security reorganizational costs following the organization strategic changes
and the review of certain product offerings mainly in Asia.
Excluding the impacts of IFRS 16, ROCE would have been 9.2% and ROCE before specific items would have been 10.9% this quarter,
which compares to 12.9% in the fourth quarter of last year and 11.6% last quarter.
As we have adopted IFRS 16 without restating comparative periods, we have not restated the prior period calculations of ROCE to account
for the recognition of right-of-use assets. To enable comparability with prior periods, we have excluded the impacts of the adoption of
IFRS 16 from the fiscal 2020 ROCE calculation by removing the new right-of-use assets from capital employed and by adding back finance
expense, after tax, to net income.
Non-cash working capital decreased by $36.4 million from last year (April 1, 2019)
The decrease was mainly due to higher derivative financial liabilities and contract liabilities, partially offset by higher inventories and
accounts receivable.
Net property, plant and equipment increased by $210.7 million from last year (April 1, 2019)
The increase was mainly due to capital expenditures and movements in foreign exchange rates, partially offset by depreciation.
Right-of-use assets decreased by $36.9 million from last year (April 1, 2019)
The decrease was mainly due to depreciation, partially offset by movements in foreign exchange rates.
8 Non-GAAP and other financial measures (see Section 3.7).
CAE Financial Report 2020 I 31
Management’s Discussion and Analysis
Other long-term assets increased by $225.2 million from last year (April 1, 2019)
The increase was mainly due to a higher investment in equity accounted investees as a result of the acquisition of a 50% stake in SIMCOM,
a higher investment in finance leases, and higher intangible assets.
Net debt higher than last year
The increase was mainly due to the recognition of new lease liabilities of $265.8 million as a result of the adoption of IFRS 16, movements
in foreign exchange rates and the impact of cash movements during the year. Given the uncertainty of the economic environment, a
portion of the revolving credit facility was drawn down and the proceeds have been included in the cash on hand in short terms investments.
Change in net debt9
(amounts in millions, except net debt-to-capital and net debt-to-EBITDA)
Net debt, beginning of period
Lease liabilities added on April 1, 2019 as a result of the adoption of IFRS 16
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
Lease liability movements
Other
Change in net debt during the period
Net debt, end of period
Net debt-to-capital9
Net debt-to-capital excluding the impacts of IFRS 16
Net debt-to-EBITDA9
Net debt-to-EBITDA excluding the impacts of IFRS 16
$
$
$
$
%
%
FY2020
1,882.2
265.8
$
$
62.6
108.8
1.6
27.3
17.4
483.5
2,365.7
$
$
47.8 %
44.2
2.81
2.62
FY2019
649.4
—
1,026.0
29.3
152.8
—
24.7
1,232.8
1,882.2
43.9
2.70
As we have adopted IFRS 16 without restating comparative periods, we have not restated the prior period calculations of net debt to capital
or net debt-to-EBITDA. To enable comparability with prior periods, we have excluded the impacts of the adoption of IFRS 16 from the
fiscal 2020 net debt-to-capital and net debt-to-EBITDA calculations by removing the new lease liabilities from net debt, removing the new
right-of-use assets from capital employed and by adding back depreciation and finance expense to EBITDA.
Total equity increased by $168.3 million this year
The increase in equity was mainly due to net income of $318.9 million and stock options exercised of $26.5 million, partially offset by
cash dividends of $110.9 million, common shares repurchased and cancelled of $49.6 million and the impacts of adoption of IFRS 16 of
$27.5 million.
Outstanding share data
Our articles of incorporation authorize the issue of an unlimited number of common shares and an unlimited number of preferred shares
issued in series. We had a total of 265,619,627 common shares issued and outstanding as at March 31, 2020 with total share capital of
$679.5 million. In addition, we had 6,050,854 options outstanding under the Employee Stock Option Plan (ESOP).
As at April 30, 2020, we had a total of 265,621,627 common shares issued and outstanding and 6,042,104 options outstanding under
the ESOP.
Repurchase and cancellation of common shares
On February 7, 2020, we announced the renewal of the NCIB to purchase up to 5,321,474 of our common shares. The NCIB began on
February 25, 2020 and will end on February 24, 2021 or on such earlier date when we complete our purchases or elect 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. Share repurchases under our NCIB program were suspended as part of our COVID-19
pandemic mitigation measures.
In fiscal 2020, we repurchased and cancelled a total of 1,493,331 common shares under the previous and current NCIB (2019 – 3,671,900),
at a weighted average price of $33.22 per common share (2019 – $25.70), for a total consideration of $49.6 million (2019 – $94.4 million).
An excess of $45.8 million (2019 – $85.6 million) of the shares’ repurchase value over their carrying amount was charged to retained
earnings as share repurchase premiums.
9 Non-GAAP and other financial measures (see Section 3.7).
32 I CAE Financial Report 2020
Management’s Discussion and Analysis
Dividends
We paid a dividend of $0.10 per share in the first quarter and $0.11 per share in the second, third and fourth quarter of fiscal 2020. These
dividends were eligible under the Income Tax Act (Canada) and its provincial equivalents.
Our Board of Directors (the Board) 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. Dividend
payments to common shareholders were suspended as part of our COVID-19 pandemic mitigation measures.
Guarantees
As at March 31, 2020, we have a total of $189.6 million outstanding letters of credit which are not recognized in the consolidated statement
of financial position, compared to $205.1 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 $28.7 million in fiscal 2021.
7.2 Off balance sheet arrangements
In the normal course of business, we manage a program in which we sell interests in certain of our accounts receivable (receivable
purchase program) to a financial institution 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:
Financial assets:
– Cash and cash equivalents, restricted cash and derivative instruments not designated as hedging instrument in a hedge relationship,
are classified at fair value through profit and loss (FVTPL);
– Accounts receivable, non-current receivables, net investment in finance leases and advances are classified at amortized cost, except
for those that are acquired for the purpose of selling or repurchasing in the near term and classified as held for trading which are
measured at FVTPL;
– Equity investments are classified at fair value through OCI (FVOCI).
Financial liabilities:
– Accounts payable and accrued liabilities, long-term debt, including interest payable, as well as lease liabilities and royalty obligations
are classified at amortized cost;
– Contingent consideration arising on business combinations and derivative instruments not designated as hedging instrument in a
hedge relationship are is classified at FVTPL.
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 financial assets and
financial liabilities.
CAE Financial Report 2020 I 33
Management’s Discussion and Analysis
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, 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
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 we would receive or pay to settle the contracts at the reporting date;
– The fair value of the equity investments, 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, royalties obligations and other non-current liabilities are estimated based on discounted cash flows
using current interest rates for instruments with similar risks and remaining maturities. Upon adoption of IFRS 16 on April 1, 2019, fair
value disclosures are no longer required for lease liabilities;
– 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.
A description of the fair value hierarchy is discussed in Note 28 of our consolidated financial statements.
Financial risk management
Due to the nature of the activities that we carry out and as a result of holding financial instruments, we are 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 with 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
contracts with customers. 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 (receivable purchase 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 all the 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 9 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, stress-test results, growth
requirements and capital expenditures, and the maturity profile of indebtedness, including availability of credit facilities, working capital
requirements, compliance with financial covenants and the funding of financial commitments. We manage our liquidity risk to maintain
sufficient liquid financial resources to fund our operations and meet our commitments and obligations. In managing our liquidity risk, we
have access to revolving credit facilities and agreements to sell interests in certain of our accounts receivable. We also regularly monitor
any financing opportunities to optimize our capital structure and maintain appropriate financial flexibility.
34 I CAE Financial Report 2020
Management’s Discussion and Analysis
Market risk
Market risk is defined as our exposure to a gain or a loss in the value of our financial instruments as a result of changes in market prices,
whether those changes are caused by factors specific to the individual financial instruments or its issuer, or factors affecting all similar
financial instruments traded in the market. We are mainly exposed to foreign currency risk and interest rate risk.
We use derivative instruments to manage market risk against the volatility in foreign exchange rates, interest rates and share-based
payments in order to minimize their impact on our results and financial position. Our policy is not to utilize any derivative financial instruments
for trading or speculative purposes.
Foreign currency risk
Foreign currency risk is defined as our exposure to a gain or a loss in the value of our financial instruments as a result of fluctuations in
foreign exchange rates. We are exposed to foreign exchange rate variability primarily in relation to certain sale commitments, expected
purchase transactions and debt denominated in a foreign currency, as well as on our net investment from our foreign operations which
have functional currencies other than the Canadian dollar (in particular the U.S. dollar, Euro and British pound). In addition, these operations
have exposures 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
floating rate debts through our revolving credit facilities and other 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 74% fixed-rate and 26% floating-rate at the end of this year (2019 – 83% fixed rate and 17% 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 expense
We have entered into equity swap agreements with major Canadian financial institutions to reduce our income exposure to fluctuations
in our share price relating to the deferred share units (DSU) plans, restricted share units (RSU) plans and the performance share units
(PSU) plan. 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, RSU and PSU plans.
Hedge of net investments in foreign operations
As at March 31, 2020, we have designated a portion of our unsecured senior notes and term loans and a portion of our lease liabilities
as a hedge of our net investments in U.S. entities. Gains or losses on the translation of the designated portion of these USD long-term
debts are recognized in OCI to offset any foreign exchange gains or losses on translation of the financial statements of those U.S. entities.
A sensitivity analysis for foreign currency risk and interest rate risk is included in Note 30 of our consolidated financial statements.
CAE Financial Report 2020 I 35
Management’s Discussion and Analysis
8. BUSINESS COMBINATIONS
Pelesys Learning Systems Inc.
On April 26, 2019, we acquired the remaining 55% equity interest in Pelesys Learning Systems Inc. (Pelesys) for cash consideration (net
of cash acquired) of $4.0 million and a long-term payable of $5.7 million.
Pelesys is a global leader in the provision of aviation training solutions and courseware. The acquisition strengthens our courseware
offering and consolidate our cadet-to-captain training delivery across our global network. Prior to this transaction, our 45% ownership
interest in Pelesys was accounted for using the equity method.
Luftfartsskolen AS
On June 26, 2019, we acquired the shares of Luftfartsskolen AS, an ab-initio flight school located in Oslo, Norway, for cash consideration
(net of cash acquired) of $3.5 million. This acquisition strengthens our leadership and global reach in civil aviation training by growing
our flight academy network.
The purchase prices of Pelesys and Luftfartsskolen AS are mainly allocated to goodwill and intangible assets. The net assets, including
intangibles, arising from these acquisitions are included in Civil Aviation Training Solutions segment.
Other
On November 12, 2019, we invested in a healthcare software company that enables increased efficiency of learning. The investment is
in the form of a controlling 50% equity interest, for cash consideration of $0.9 million.
During the year ended March 31, 2020, we completed our final assessment of the fair value of assets acquired and liabilities assumed
of all acquisitions realized in fiscal 2020 and those of Avianca’s Training Business, Logitude, the Indian Training Centres and Bombardier's
Business Aircraft Training Business which were acquired in the year ended March 31, 2019. Adjustments to the determination of net
identifiable assets acquired and liabilities assumed for acquisitions realized in the year ended March 31, 2019 resulted in an increase of
intangible assets of $6.2 million, a decrease of deferred tax assets of $4.7 million and a decrease of other net assets of $1.5 million.
During the year ended March 31, 2020, an additional net cash consideration of $1.7 million was paid for acquisitions realized in the year
ended March 31, 2019.
You will find more details in Note 3 of our consolidated financial statements.
9. EVENTS AFTER THE REPORTING PERIOD
Impact of the COVID-19 pandemic
COVID-19 has created unprecedented uncertainty in the global economy, the global air transportation environment and air passenger
travel and to CAE’s business. Several of our customers are facing significant challenges, with airlines and business jet operators having
to ground a majority of their aircraft in response to travel bans, border restrictions, and lower demand for air travel. We continue to take
measures to protect the health and safety of our employees, work with our customers to minimize potential disruptions and support our
community in addressing the challenges posed by this global pandemic. This outbreak has had an important and immediate impact on
all our businesses, especially in the Civil Aviation Training Solutions segment, as a result of an unprecedented shock to demand together
with significant disruptions to our own operations, including facility closures, supply chain disruptions, program execution delays, slower
procurement decisions and changes to our customers’ acquisition priorities.
For the Civil Aviation Training Solutions segment, the impacts of the COVID-19 pandemic resulted in the closure of certain training centre
operations, lower utilization of our simulators in the network due to reduced demand from aviation customers and interruptions in the
execution of our backlog. For the Defence and Security segment, delays were experienced in the awarding of new contracts and in the
execution and advancement of certain programs. For the Healthcare segment, customers were primarily focused on managing the acute
operational demands of this healthcare crisis rather than focusing on their training needs, which resulted in less focus and budget for
normal operations and training projects.
To date, we have implemented several flexible measures to protect our financial position and preserve liquidity, including the reduction
of capital expenditures and R&D investments in fiscal 2021, strict cost containment measures, salary freezes, salary reductions, reduced
work weeks for 900 employees and 2,600 temporary layoffs, as well as a suspension of our common share dividends and share repurchase
plan announced on April 6, 2020 in response to the COVID-19 pandemic. Additionally, we have worked with defence customers to secure
more favorable terms for milestone payments as well as offer contract modifications to increase work scope and with suppliers for extended
payment terms.
CEWS and other government programs
On April 20, 2020, we announced that we have recalled all remaining temporarily laid-off employees in Canada through the CEWS
program, impacting approximately 1,500 employees. We have accessed and are working to access government support programs in
countries in which we operate.
36 I CAE Financial Report 2020
Cash and liquidity mitigation measures
On April 9, 2020, we concluded a new two-year $500.0 million senior unsecured revolving credit facility and on May 19, 2020, we increased
our receivable purchase program from US$300.0 million to US$400.0 million. These transactions provide access to additional liquidity
and further strengthen our financial position.
Contract with Government of Canada for CAE Air1 ventilators
On April 10, 2020, we concluded an agreement with the Government of Canada to design and manufacture 10,000 CAE Air1 ventilators
to provide life support to patients in intensive care to support the COVID-19 pandemic.
Management’s Discussion and Analysis
10. BUSINESS RISK AND UNCERTAINTY
We operate in several industry segments that have various risks and uncertainties. Management and the Board discuss the principal
risks facing our business quarterly and 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 risks arising from the COVID-19 pandemic, 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.
To mitigate the risks that may impact our future performance, management has established an enterprise risk management policy and
a framework that provides a structured approach to assess, identify and prioritize risks. This framework relies on a three lines of defence
(LoD) model where the business segments, the risk management function and our internal auditor function work together to manage
these risks and continuously improve the risk management process. Management develops and deploys risk mitigation strategies that
align with our strategic objectives and business processes. Management continuously reviews the evolution of the principal risks facing
our business 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 securities.
10.1 Risks relating to the COVID-19 pandemic
In conducting our activities, CAE is exposed to operational risk events, including biological events. Such external events have occurred
in the past such as the Ebola virus, Severe Acute Respiratory Syndrome, H1N1 influenza virus, Avian flu, or the Zika virus, and although
not frequent, can have high adverse impacts on our industry and our business. COVID-19 has created unprecedented uncertainty in the
global economy, the global air transportation environment and air passenger travel, disrupted global supply chains, created significant
economic downturn and disruption of financial markets. The pandemic began to affect market demand in Asia early in the fourth quarter
of fiscal 2020 as border restrictions were implemented and through the rest of the world in March 2020. Several of our customers are
facing significant challenges, with airlines and business jet operators having to ground a majority of their aircraft in response to travel
bans, border restrictions, and lower demand for air travel. This outbreak has had an important and immediate impact on all our businesses,
especially in Civil Aviation where certain commercial airlines are experiencing financial difficulties.
It is difficult to accurately predict the duration or severity of the pandemic and it is extremely challenging for CAE to accurately estimate
or quantify the magnitude of the pandemic’s impact on our operations, financial condition and strategic plan. Due to the unprecedented
and ongoing nature of COVID-19 and the fact that the response to the pandemic is evolving in real time and differs geographically from
one region to another, estimates of the economic impacts of the COVID-19 pandemic remain inherently highly uncertain and speculative.
Even after the COVID-19 pandemic is over, we may continue to experience material adverse effects to our business, financial condition
and strategic plans as a result of the continued disruption in the global economy and any resulting recession, the effects of which may
persist beyond that time.
CAE has been closely monitoring and actively implementing and updating our response to the evolving COVID-19 pandemic and its
impacts on employees, operations, the global economy and the demand for our products and services. We have formed a committee
composed of the senior leadership team and key leaders in the organization to monitor, on a daily basis, the evolution of the pandemic,
to evaluate the measures being put in place by local and national governments and the resulting impacts on CAE. As needed, the committee
implements necessary contingency plans in real time as the current situation continues to unfold, with a focus on three priorities: protecting
employees’ health and safety; supporting customers to the best of our abilities, and ensuring that we can successfully navigate through
this global pandemic.
Health and Safety
The spread of COVID-19 may impact the health of our personnel, partners and contractors, including members of our management team,
and may make it difficult to recruit, attract and retain skilled personnel, reducing the availability of our workforce and causing human
impacts that may, in turn, negatively impact our business. Prolonged illness of our senior executives could also have an adverse effect
on the management of our business and financial results. Since safety is one of our main priorities at CAE, we implemented mitigation
measures to reduce the risk of potential outbreaks, including compelling most employees to work from home, where possible, initiating
production shifts, creating protocols, policies and guidelines for employees, suppliers, customers and visitors, and closing certain areas
in our facilities to facilitate maintenance. We also have in place an emergency succession plan to deal with any situation which requires
the immediate replacement of our key senior executives.
CAE Financial Report 2020 I 37
Management’s Discussion and Analysis
Reduction and Suspension of Operations
The pandemic is causing a slowdown and temporary restrictions to our operations in certain geographic locations impacted by the
outbreak, including but not limited to the manufacturing plant in Montreal, since non-essential services have been closed by government
public directives. Several of our training centres worldwide have also closed, or are operating at significantly reduced capacities, as a
result of the severe and abrupt drop in air passenger travel and airlines and business jet operators having to ground a majority of their
aircraft. We cannot predict how long the restrictive measures will last or whether other measures will need to be implemented to contain
the outbreak in any jurisdiction where CAE operates or holds assets, however, these measures could have a material and adverse effect
on our financial and operating performance.
Delay in the production of goods and completion of CAE’s services may require us to incur additional non-compensable costs, including
overtime work, that are necessary to meet clients’ schedules. Due to various factors, a delay in the commencement or completion of a
project may also result in penalties or sanctions under contracts or even the cancellation of some contracts. Additionally, some of our
customers, including governments, airlines and hospitals around the world, could delay contract awards as they are dealing with the
pandemic and their own cash conservation measures.
Global Economy
As an emerging risk, the economic impact could be severe to global economies depending on the duration of the pandemic, the likelihood
and scope of any subsequent waves of COVID-19 and the continued measures put in place to contain the outbreak. Global financial
markets have experienced, and could continue to experience, significant volatility and weakness. Governments and central banks have
reacted with significant monetary and fiscal interventions designed to stabilize economic conditions and financial markets. However, the
efficacy of the government and central bank interventions is uncertain. This uncertainty has already materialized with falling global GDP
growth, causing a global financial market shock which has directly impacted our share price. Uncertainties related to, and perceived or
experienced negative effects from, COVID-19 may continue to cause significant volatility or decline in the trading price of our securities,
capital market conditions and general economic conditions. In addition, severe disruption and instability in the global financial markets
and continued deteriorations in credit and financing conditions may increase the likelihood of litigation, increase the cost of or limit or
restrict our ability to access debt and equity capital or other sources of funding on favourable terms, or at all, lead to consolidation that
negatively impacts our business, increased competition, result in reductions in our work force, cause us to further reduce our capital
spending or otherwise disrupt our business or make it more difficult to implement our strategic plans. Sustained adverse effects may also
prevent us from satisfying debt financial covenants or result in possible credit ratings watch or downgrades. Also the return on our pension
plan assets and/or the discount rate used for valuing our post-employment benefit obligations may both be negatively impacted in the
near to medium term. This could have an adverse effect on our post-employment benefit plan obligations and pension contributions in
future years.
Several governments have implemented temporary measures to help offset the negative economic impacts such as the CEWS program
in Canada and deferred tax filings for businesses and individuals worldwide. While these measures are beneficial for CAE and our
employees, should the negative economic impacts exceed the period for which these relief measures have been granted, it can lead to
increased cost containment policies such as job reductions and capital spending reductions in our own network.
Diversion of management attention
Preparing for and responding to the continuing pandemic has and may continue to divert management’s attention from our key strategic
priorities, increase costs as we prioritize health and safety matters for our personnel and the continuation of critical ongoing projects, and
cause us to reduce, delay, or alter initiatives that may otherwise increase our long-term value.
Heightened IT risks and inefficiencies
The immediate unanticipated rise in remote work arrangements implemented by CAE in response to the COVID-19 outbreak may cause
inefficiencies and increased pressure on our information technology infrastructure, and may increase CAE’s vulnerability to information
technology and cybersecurity related risks and disruption to our information systems.
Liquidity risk
The continuing pandemic has increased the risk that we may encounter difficulty in meeting our obligations associated with financial
liabilities. To preserve liquidity throughout the pandemic, subsequent to the year end, we enacted strict cost containment measures and
suspended dividend payments to common shareholders and share buybacks under the NCIB program. In addition, we concluded a new
two-year $500.0 million senior unsecured revolving credit facility and expanded our receivable purchase program from US$300.0 million
to US$400.0 million. These transactions provide us access to additional liquidity and further strengthen our financial position. We believe
that our cash and cash equivalents, the availability of cash under our committed revolving credit facility and the cash we expect to generate
from our operations, is sufficient to meet financial requirements in the foreseeable future.
Credit risk
There is uncertainty regarding the duration of the COVID-19 pandemic and how it will impact the sufficiency of our customers' liquidity
during the period where their operations are significantly impacted by a significant and abrupt reduction in air travel, self-isolation measures,
travel bans, border restrictions and lockdown protocols. There is an increased credit risk for our airline customers due to the reduction of
their operations and uncertainty relating to air travel recovery and the increased risk of airline bankruptcies. We are, however, a provider
of regulated training services which are critical to airline operations, and therefore if any of our customers engage in reorganization or
bankruptcy proceedings we are often designated as a critical supplier.
38 I CAE Financial Report 2020
Overall, adverse changes in a customer's financial condition, including those resulting from the COVID-19 pandemic, could cause us to
limit or discontinue business with that customer, require us to assume more credit risk relating to that customer's future business, or result
in uncollectible trade accounts receivable from that customer. Future credit losses relating to any one of our major customers could be
material and could result in a material charge to our financial results.
Management’s Discussion and Analysis
10.2 Risks relating to the industry
Competition
We sell our simulation products and training services in highly competitive international 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 through mergers and acquisitions and vertical integration strategies 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 and market share which could adversely affect CAE’s ability to compete
successfully. 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.
OEMs 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 permit any training on their respective simulators. However, CAE may
have some advantages, as an independent training provider and simulator manufacturer, having the ability to replicate certain aircraft
without data, parts and equipment packages from an OEM, as well as our global reach and diversified training network that includes joint
ventures with large airline operators, who are aircraft customers for OEMs. In addition, we work with some OEMs on business opportunities
related to equipment and training services.
Economic growth and pressure underlie 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 demand of our services
and products. 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.
Business development and awarding of new contracts
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 CAE. A significant portion of our revenue is dependent on obtaining
new orders and continued replenishment of 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, additionally, the impacts of the COVID-19 pandemic could cause a delay in
the awarding of orders. 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. We intend to continue to grow market share by leveraging a high
level of customer satisfaction and operational and organizational productivity.
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 Australian, Canadian, European, UAE, U.S., 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,
which can be very difficult to predict and may be impacted by numerous factors such as the political environment, foreign policy,
macroeconomic conditions and nature of the international threat environment. Significant reductions to defence spending by mature
markets such as in Australia, Canada, Europe, the UAE, and the U.S. or a significant delay in the timing of defence procurement could
have a material negative impact on our future revenue, earnings and operations. Particularly, with the increased focus on COVID-19 relief
measures around the globe, governments may be forced to reduce their defence spending. Additionally, the precipitous drop in oil prices
has further impacted opportunity flow in the Middle East. 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, government agencies routinely audit and investigate government
contractors. These agencies may review our performance under our contracts, business processes, cost structure, and compliance with
applicable laws, regulations and standards. Our incurred costs for each year are subject to audit by government agencies, which can
result in payment demands related to costs they believe should be disallowed. We work with governments to assess the merits of claims
and where appropriate reserve for amounts disputed. We could be required to provide repayments to governments and may have a
negative effect on our results of operations. Contrary to cost-reimbursable contracts, some costs may not be reimbursed or allowed under
fixed-price contracts, which may have a negative effect on our results of operations if we experience costs overruns.
CAE Financial Report 2020 I 39
Management’s Discussion and Analysis
Civil aviation industry
A significant portion of our revenue comes from supplying equipment and training services to the commercial and business airline
industries. The civil aviation market is predominantly driven by long-term trends in airline passenger and cargo traffic. The principal factors
underlying long-term traffic growth are sustained economic growth and political stability both in developed and emerging markets. Air
travel experienced a sharp deterioration in the first few months of calendar 2020. There is a risk that we may experience a delayed recovery
in air travel demand due to the unprecedented worldwide travel restrictions, expected higher unemployment rates, and a fall in consumer
spending. At this rate, IATA forecasts that domestic and international passenger demand will decrease 48% compared to calendar 2019,
and a decrease of 55% for airline passenger revenue. Decreased airline passenger and cargo traffic for an extended period of time could
have a material and adverse effect on our financial and operating performance. Specifically, as airlines struggle with reduced capacities
or bankruptcies, CAE could experience the cancellation of aircraft orders, reduction in FFS demand and lower demand for pilot recruitment,
placement, and training. Despite the temporary global shock caused by the COVID-19 pandemic, the business aviation industry is expected
to grow in the long term due to demand recovery combined with the introduction of new aircraft models and technologies.
Demand for training solutions in the civil aviation market is further influenced by airline profitability, availability of aircraft financing, OEMs
ability to supply aircraft, world trade policies, technological advances, government-to-government relations, national aviation authority
regulations (including the grounding order of the 737 MAX aircraft by global civil aviation authorities and the uncertainties surrounding
the implications of the U.K.’s departure from the EASA at the end of calendar 2020 as a result of Brexit), price and other competitive
factors, fuel prices and geopolitical environment. Potential impediments to steady growth in air travel include major disruptions such as
regional political instability, acts of terrorism, epidemics, pandemics, the prolonged continuation or future waves of the novel coronavirus,
natural disasters, prolonged economic recessions, the interruption of global mobility including travel bans and border restrictions, oil price
volatility, increased global environmental regulations or other major world events.
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. In addition, airline consolidations, fleet decisions or financial
challenges involving any of our major commercial airline customers could impact our revenues and limit our opportunity to generate profits
from those customers. Finally, prolonged reduction in operations as a result of COVID-19 could drive an increase of bankruptcies amongst
airlines.
Regulatory matters
Our businesses are heavily regulated. We deal with many government agencies and entities and are subject to laws and regulations such
as export controls, health, national security and aviation authority of each country. These regulations may change without notice, which
could impact 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, higher inventory levels or resulting in postponed or cancelled sales or changes to sales predictions.
The export of CAE’s technology and services is subject to export permit approvals and regulatory requirements, which can sometimes
take several months to go through the approval process. These can result in delays in obtaining export permits or even prevent us from
exporting to certain countries, entities or people in or from a country, and result in negative financial impacts.
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 and we cannot be certain that we
will be permitted to sell or licence certain products to customers or otherwise export CAE’s technology and services, which could cause
a potential loss of revenue for us. Any changes in governmental policy or government actions resulting form the COVID-19 pandemic
could disrupt our supply chain, prevent the sale or delivery of our products, or result in export license delays.
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.
Natural or other disasters
Extreme weather conditions or natural or other disasters, such as earthquakes, fires, floods, pandemics, epidemics (such as COVID-19)
and similar events could disrupt our operations, damage our infrastructure or properties, endanger our employee's health and safety,
impact the availability and cost of materials and resources, increase insurance and other operating costs and have a material adverse
effect on our operating results, financial position or liquidity. In addition, we cannot be certain that our insurance coverage will be sufficient
to cover all significant risk exposures. We are exposed to liabilities that are unique to the products and services that we provide. CAE
maintains insurance for certain risks and may be adequately covered for said risks, however, insurance may not be available, or limits
may not be adequate to cover all significant risk exposures. For example, CAE is not covered from the financial losses caused by
communicable disease, including viruses and other epidemics, as certain coverages are not available for commercially reasonable terms.
It is not certain whether there will be any insurance products in the future covering the risks of communicable disease.
40 I CAE Financial Report 2020
Management’s Discussion and Analysis
Environmental laws and regulations
CAE is exposed to various environmental risks and is subject to complying with environmental laws and regulations which vary from
country to country and are subject to change. CAE’s inability to comply with environmental laws and regulations could result in penalties,
lawsuits and potential harm to its reputation.
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 committed to may result in us having to incur substantial costs. This
could have a materially negative effect on our financial condition and results of operations.
Climate changes
Increased public awareness and growing concerns about climate change and the global transition to a low carbon economy result in a
broad range of impacts, including potential strategic, reputational and structural related risks for CAE and its business partners and the
emergence and evolvement additional environmental and climate change regulations, frameworks, and guidance. Increasing regulatory
expectations create a new set of compliance risks that need to be managed. Global climate change also results in regulatory risks which
vary according to the national and local requirements implemented by each jurisdiction where we are present.
In addition, concerns about the environmental impacts of air travel, the “anti-flying” movement and tendencies towards “green” travel
initiatives have contributed to higher levels of scrutiny with respect to emissions which could have the effect of reducing demand for air
travel and could materially adversely impact our aviation business and reputation. As a result of these increased concerns, we announced
that we have committed to become carbon neutral by summer 2020; should we not achieve this objective, it could be badly received or
result in further damage to our reputation.
10.3 Risks relating to the Company
Evolving standards and technology innovation
The civil aviation and defence and security markets in which we operate are characterized by changes in customer requirements, new
aircraft models, evolving industry standards, increased power to analyze data and evolving customer expectations influenced by global
trends such as climate change, pandemics, the growth of developing markets, population growth and demographic factors. If we do not
accurately predict the needs of our existing and prospective customers, develop new products, enhance existing products and services
and invest in and develop new technologies that address those evolving standards and technologies, we may lose current customers and
be unable to attract new customers. This could reduce our revenue and market share.
The evolution of technology could also have a negative impact on the value of our fleet of FFSs or require significant investments to our
fleet to update to the evolving technology. The adoption of new technologies, such as artificial intelligence, machine learning and unmanned
aerial systems or remotely piloted aircraft, presents opportunities for us, but may result in new and complex risks that would need to be
managed effectively.
Our ability to penetrate new markets
Penetration of the new markets represents both a risk and an opportunity for CAE. Success in these markets is by no means assured.
As we operate in new markets, unforeseen difficulties, major investments and additional expenditures could arise, which may have an
adverse effect on our operations, financial position, profitability and reputation. Penetrating a new market is inherently more difficult than
managing within our already established markets. New products and technologies introduced in new markets could also generate
unanticipated safety or other concerns resulting in expanded product liability risks, potential product recalls and other regulatory issues
that could have an adverse impact on us. In particular, we may be exposed to increased risks in the current year as a result of the
development of our CAE Air1 ventilator, as we attempt to enter the medical equipment market.
Research and development activities
We carry out some of our R&D initiatives with the financial participation of governments, including the Government of Quebec through
IQ and the SA2GE program, and the Government of Canada through its SADI and SIF. 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 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. and
the U.K. 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.
Furthermore, our R&D investments in new products or technologies may or may not be successful. Our results may be impacted if we
invest in products that are not accepted on the market, if customer demand or preferences change, if new products are not brought to
market in a timely manner, if we lack commercial or procurement experience, if we experience delays in obtaining regulatory approvals,
or if our products become obsolete. We may incur cost overruns in developing new products.
CAE Financial Report 2020 I 41
Management’s Discussion and Analysis
Fixed-price and long-term supply contracts
We provide our products and services mainly through fixed-price contracts that enable us, contrary to cost-reimbursable contracts, to
benefit from performance improvements, cost reductions and efficiencies, but also require us to absorb cost overruns reducing profit
margins or incurring losses if we are unable to achieve estimated costs and revenues. 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 25 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. 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.
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,
including Authorized Training Provider agreements. 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. We
cannot be certain that these partnerships and contracts will be renewed on similar terms, or at all, when they expire, and our financial
results could be adversely affected by our partners' level of operations and revenue, financial health, contribution and indemnifications.
We can make no assurance that customers will fulfill existing purchase commitments, exercise purchase options or purchase additional
products or services from CAE.
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 we use an internally produced simulation model for an aircraft or develop courseware without using OEM-sourced and licenced
data, parts and equipment, the OEM in question may attempt retaliatory or obstructive actions against us 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 us 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 we use 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 us to block the use of such software or freeware, claiming breach
of licence rights or other legal basis. Such actions may cause us 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.
Product integration and program management
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 which may impact
timing and profitability.
Protection of our intellectual property and brand
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.
As the training partner of choice to enhance safety, efficiency and readiness, our brand is a significant asset. From time to time, we may
authorize the use of our brand, under third party license agreements, such as our partnership with the Saudi National Company of Aviation
to create a CAE Authorized Training Centre in the Middle East. Additionally, in certain of our flight training organizations, we outsource
some flying to third-party providers, but ultimately remain accountable for their performance operating for our brand. We control and
manage the use of our brand and ensure that our partners and suppliers meet rigorous standards to ensure that our brand value is
preserved. Adverse publicity related to incidents or litigation involving us, our partners or suppliers may impact the value of our brand.
42 I CAE Financial Report 2020
Management’s Discussion and Analysis
Third-party intellectual property
Our products contain sophisticated software and computer systems that are supplied to us by third parties. These may not always be
available to us. Our production of simulators often depends on receiving confidential or proprietary data on the functions, design and
performance of a product or system that our simulators are intended to simulate. 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 attract, recruit and retain key personnel and management with relevant skills,
expertise and experience. Our compensation policy is designed to mitigate this risk, however, the temporary compensation measures
put in place during the COVID-19 pandemic could result in increased risks of losing talent to industries that have not been as severely
impacted. We also have succession plans in place to help identify and develop an internal pipeline of leadership talent pertaining to
engineers, technical and pilot instructors and general management domains. CAE is dependent on the industry experience, qualifications
and knowledge of a variety of employees, including our executive officers, managers and other key employees to execute our business
plan and operate our business. If we were to experience a shortfall, illness or a substantial turnover in our leadership or other key
employees, our business, results from operations and financial condition could be materially adversely affected. Failure to establish a
complete and effective succession plan, including preparation of internal talent and identification of potential external candidates, where
relevant, for key roles, could impair our business until qualified replacements are found.
Labour relations
Approximately 2,600 employees are represented by unions and are covered by 55 collective agreements as of March 31, 2020. These
differing collective bargaining agreements have various expiration dates. 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 location which could
adversely affect service to our customers and to our financial performance.
Liability risks that may not be covered by indemnity or insurance
We are exposed to liabilities that are unique to the products and services we provide, as our business is complex, international and
involves extensive coordination and integration with numerous suppliers, large numbers of highly-skilled employees and partners, advanced
technologies and stringent regulatory requirements and performance and reliability standards.
Accordingly, we may be exposed to claims and litigation, including claims for personal injury, illness, death, property damage or business
interruption, arising from:
– Deficiencies in our simulation products and services that directly or indirectly cause damage and/or injury;
– Deficiencies in training programs or our training services delivery that directly or indirectly cause damage or injury;
–
–
– Deficiencies in our live flight training equipment, personnel or operations that directly or indirectly cause damage or injury;
– Deficiencies in our mitigation and protective measures implemented to reduce the risk of a potential COVID-19 outbreak in one of our
Incidents occurring during the use of equipment that we have manufactured or operate;
Incidents involving products and services that we have provided, including claims for personal injuries or death;
facilities or failure to adequately protect our customers, employees, contractors, workers and visitors from the virus.
Substantial costs could adversely impact our financial condition, cash flows, or operating results. In some but not all circumstances, we
may be entitled to certain legal protections or indemnifications from our customers. Although we maintain insurance coverage from
established insurance carriers to cover these risks, our insurance coverage may be inadequate to cover all claims and liabilities, the
amount of such insurance coverage may not be sufficient, and we may be forced to bear substantial costs. Any accident, failure of, or
defect in our products or services, even if fully indemnified or insured, could result in significant investment and negatively affect our
reputation with our customers and the public. It also could affect the cost and availability of adequate insurance in the future.
Warranty or other product-related claims
We manufacture simulators that are highly complex and sophisticated. Additionally, we may purchase simulators or obtain simulators via
acquisitions. These simulators may contain defects that are difficult to detect and correct and if they fail to operate correctly, there could
be warranty claims or we may incur significant additional costs to modify or retrofit these products. Correcting these defects could require
significant additional costs. If a defective product is integrated into our customers' equipment, we could face product liability claims based
on damages to the customers' equipment. Any claims, errors or failures could have a negative effect on our operating results and business.
We may also be subject to product liability claims relating to equipment and services related to discontinued operations sold in the past.
CAE Financial Report 2020 I 43
Management’s Discussion and Analysis
Mergers, acquisitions, joint ventures, strategic alliances or divestitures
As part of our growth strategy, at times we engage in business acquisitions or form joint ventures and strategic alliances. The realization
of anticipated benefits from these acquisitions and related activities depends, in part, upon our ability to integrate the acquired business,
the realization of synergies both in terms of successfully marketing our broadened product and service portfolio, efficient consolidation
of the operations of the acquired businesses into our existing operations, cost management to avoid duplication, information systems
integration, staff reorganization, establishment of controls, procedures, and policies, performance of the management team and other
personnel of the acquired operations as well as cultural alignment. There can be no assurance that we will realize anticipated synergies,
or that we will meet any financial and performance targets provided. In addition, our inability to adequately integrate an acquired business
in a timely manner might result in departures of qualified personnel or lost business opportunities which would negatively impact operations
and financial results. There are also risks associated with the acquisition of a business where certain legacy liabilities could arise. We
also may make strategic divestitures from time to time. These transactions may result in continued involvement in the divested businesses,
such as through guarantees and transition services following the transaction.
Reputational risk
Reputational risk may arise under many situations including, among others, quality or performance issues on our products or services,
inability to penetrate new markets or to meet expectations or demand for newly developed products and technologies, failure to maintain
ethically and socially responsible operations, injuries or death arising from health and safety incidents during the operation process or
training activities, or alleged or proven non-compliance with laws or regulations by our employees, agents, subcontractors, suppliers
and/or business partners. Any negative publicity about, or significant damage to, our image and reputation could have an adverse impact
on customer perception and confidence and may cause the cancellation of current work or influence our ability to obtain future sales or
award of a contract. Furthermore, any unethical conduct by one of our suppliers or subcontractors or any allegations of unfair or illegal
business practices by a supplier or subcontractor could also negatively affect our image and reputation. An occurrence of any of these
situations could materially adversely affect our business and financial results.
Perceptions pertaining to social and governance approaches have changed in the recent years, and many customers and investors now
agree that these issues have become a current concern and could affect corporate profitability and reputation.
U.S. foreign ownership, control or influence mitigation measures
CAE and certain of our 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, we have 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 for CAE USA Inc. and a proxy agreement (Proxy Agreement) for CAE USA Inc.’s wholly owned subsidiary,
CAE USA Mission Solutions Inc. (MSI). If we fail to maintain compliance with either of these FOCI mitigation agreements, the facility
security clearances for each entity may be terminated. If this occurred, our 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 MSI. Under the Proxy Agreement, we,
and our board of directors, are restricted in our oversight over MSI’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 MSI’s
assets; corporate mergers, consolidations, or reorganizations relating to MSI; pledges, mortgages or other encumbrances on the capital
stock of MSI for purposes other than obtaining working capital; the dissolution of MSI; and the filing of a bankruptcy petition with respect
to MSI) MSI board of directors acts independently and has sole authority to make all decisions regarding the management of MSI and
its business. The actions taken or not taken by the management or MSI board of directors could have an impact on our 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 level of training delivered 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 2021.
44 I CAE Financial Report 2020
Management’s Discussion and Analysis
Returns to shareholders
Payment of dividends, the repurchase of shares under our NCIB program and other cash or capital returns to our shareholders are at the
discretion of the Board of Directors and 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 our dividend and other policies which
may be reviewed from time to time.
Given the impacts of the COVID-19 pandemic, CAE’s Board of Directors has approved a suspension of dividend payments to common
shareholders and share repurchases under our NCIB program to preserve liquidity. This position will be reviewed on a quarterly basis
and payments will resume as soon as it is appropriate.
Information technology and cybersecurity
We depend on information technology infrastructure and systems, hosted internally or outsourced, to conduct day-to-day operations and
for the effective operation of our business. Our business also requires the appropriate and secure utilization of sensitive and confidential
information belonging to third parties such as aircraft OEMs, national defence forces and customers. While we strive to leverage technology
to meet the growing needs of our customers and enhance the efficiency of our operations, it nevertheless comes with information security
and cybersecurity risks.
Due to the size, scale, and global nature of our operations, our heavy reliance on the internet to conduct day-to-day business activities,
our intricate technological infrastructure, our business relationships with aircraft OEMs and defence and security customers and our use
of third party service providers, we are subject to heightened risks. These risks include information technology system failures and
non availability, cyber-attacks, cyber extortion, breaches of systems security, malware, unauthorized attempts to gain access to our
proprietary and sensitive information, hacking, phishing, identity theft, theft of intellectual property and confidential information,
denial of service attacks aimed at causing network failures and services interruption and other cybersecurity threats to our information
technology infrastructure and systems.
These IT and cybersecurity risks 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 client attrition, non-compliance with privacy legislation or any
other laws in effect, litigation, fines, penalties or regulatory action, compliance costs, corrective measures, investigative or restoration
costs, cost hikes to maintain and upgrade technological infrastructures and systems or reputational harm, all of which could have a
negative effect on CAE’s operating results, reporting capabilities, profitability and reputation.
A series of governance processes are in place to mitigate these risks. To address the challenges of the evolving cyber threat landscape
and as the volume and sophistication of cyber-attacks continue to increase, we continuously review our security measures. We have
developed a three year cybersecurity program in order to cope with these increasing threats. We have implemented security controls,
policy enforcement mechanisms, management oversight and monitoring systems in order to prevent, detect and address potential threats.
However, we may find it necessary to make further investments to protect our data and infrastructure, as well as our customers data,
against cyber-attacks.
The increased volume of employees working remotely and using online video conferencing and collaborative platforms due to COVID-19
social distancing measures could result in increased cybersecurity threats. In order to manage these threats, we have increased our
monitoring of these threats, we have accelerated certain initiatives and we have been working with third parties to focus on our 24/7
monitoring of our activities.
The amount of cyber insurance coverage that we maintain may not be adequate nor sufficient to cover the claims or liabilities resulting
from cyber-attacks. 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. In addition, the digital transformation and the adoption of emerging technologies, such as artificial
intelligence and machine learning, call for continued focus and investment to manage our risks effectively.
Furthermore, we may experience similar security threats at customer sites that we operate or manage or to which we gain access to
deliver services. 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.
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, and can have a negative impact on our reputation. To cope with these risks we have implemented
a third party vendor cybersecurity risk process in order to ensure that our suppliers have the appropriate level of controls over the process
of CAE information assets outsourced to them.
CAE Financial Report 2020 I 45
Management’s Discussion and Analysis
Data privacy
The management, use and protection of data, including sensitive data, are becoming increasingly important, particularly given the high
value attributed to data and the potential exposure to operational risks, reputational risks, and regulatory compliance risks and the coming
into force of the General Data Protection Regulation by the European Union in May 2018, and the expected proliferation of similar regulatory
frameworks in other regions, such as the enactment of the California Consumer Privacy Act in January 2020. Further, as our collaboration
with third parties continues to grow and as we adopt new technologies and business models, our potential exposure to regulatory
compliance, operational and reputational risk increases.
If we fail to comply with applicable privacy laws, 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.
Furthermore, the adoption of emerging technologies, such as cloud computing, artificial intelligence, process automatization and robotics
could lead to both new and complex risks that require continued focus and investment to manage effectively. We identify, assess and
manage the operational risk associated with the implementation of new technologies prior to their adoption.
10.4 Risks relating to the market
Foreign exchange
Our operations are global with more than 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 (Germany, 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
generally hedge the milestone payments of sales contracts denominated in foreign currencies to mitigate some of the foreign exchange
exposure. 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.
Business conducted through our foreign operations are substantially based in local currencies. A natural hedge exists by virtue of revenues
and operating expenses being in like currencies. However, changes in the value of foreign currencies relative to the Canadian dollar
creates unhedged currency translation exposure since results are consolidated in Canadian dollars for financial reporting purposes.
Appreciation of foreign currencies against the Canadian dollar would have a positive translation impact and a devaluation of foreign
currencies against the Canadian dollar would have the opposite effect.
Availability of capital
We depend, in part, upon our debt funding. We have various debt facilities with maturities ranging between April 2020 and July 2043,
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. If we require additional debt funding, our market liquidity may not be sufficient considering multiple factors
including a decline in our financial performance, outlook or our credit ratings, which may adversely affect our ability to fund our operations
and contractual or financing commitments.
Our credit facilities have certain financial covenants that require us to maintain a minimum leverage ratio. In the event that we are unable
to maintain compliance with such covenants, we may have restricted access to capital and we would be required to obtain an amendment
or waiver from our lenders, refinance the indebtedness subject to covenants or take other mitigating actions prior to a potential breach.
Credit risk
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.
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, cash flow and shareholders' equity. We seek to mitigate this risk by implementing policies and procedures designed to control
investment risk and through ongoing monitoring of our funding position.
46 I CAE Financial Report 2020
Management’s Discussion and Analysis
During the last quarter of fiscal 2020, the markets experienced a high level of fluctuations due to the impacts of COVID-19. The decrease
in value of our plan assets was however offset by an increase in the pension discount rates. Depending how the markets fluctuate,
additional cash contributions may be required to fund our defined benefit and defined contribution pension plans. This may have a negative
effect on our operations and financial results.
Doing business in foreign countries
We have operations in over 35 countries including our joint venture operations. We also sell and deliver products and services to customers
around the world. Sales to customers outside Canada made up more than 90% of revenue in fiscal 2020. 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 attributable to international operations:
– Change in Canadian and foreign government policies, laws, regulations and regulatory requirements, or the interpretation, application,
and/or enforcement thereof;
– Adoption of new, and the expansion of existing tariffs, embargoes, controls, sanctions trade, work or travel restrictions and other
restrictions;
– Recessions and other economic crises in other regions, or specific foreign economies and the impact on our cost of doing business
in those countries;
– Acts of war, civil unrest, force majeure and terrorism;
– Social, economic and geopolitical instability;
– Risk that inter-governmental relationships may deteriorate such that CAE’s operations in a given country may be negatively impacted;
– Limitations on the CAE’s ability to repatriate cash, funds or capital invested or held in jurisdictions outside Canada;
– Difficulties, delays and expense that may be experienced or incurred in connection with the movement and clearance of personnel
and goods through the customs and immigration authorities of multiple jurisdictions;
– Complexity and corruption risks of using foreign representatives and consultants.
Also, changes to the regulatory environment in countries in which we do business may lead to higher custom tariffs, stricter trade policies,
changes in the sanctions regime, export restrictions and other restrictions, that may have a negative impact on our sales, financial results
and business model.
Geopolitical uncertainty
Global uncertainty continued to intensify throughout fiscal 2020 and, in some parts of the world, political instability has become more
pronounced, protracted and unpredictable.
Rising or persisting geopolitical tensions, policy changes and prolonged political instability in various countries where we have a presence
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. It is possible that in the markets we serve,
unanticipated political instability could impact our operating results and financial position.
The social, political and economic impacts of the changing political landscape in Europe pertaining to the exit of the United Kingdom from
the European Union (EU) as of January 31, 2020 may lead to increased complexity in terms of regulations and increased geopolitical
and economic risks and could cause disruptions to and create uncertainty surrounding our businesses, including affecting our relationships
with existing and future customers, suppliers and employees. The withdrawal transition period will last until December 31, 2020 during
which time the U.K. will remain part of the EU’s customs union and single market and will work towards negotiating a trade deal with the
EU before the transition period ends. Uncertainties pertaining to the political direction of the U.S. and the current Chinese-American trade
tension may continue to impact global economic growth prospects and market sentiment.
Anti-corruption laws
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.
Taxation matters
We collect and pay significant amounts of taxes to various tax authorities. As our operations are complex and the related tax interpretations,
regulations, legislation and jurisprudence that pertain to our activities are subject to continual change and evolving interpretation, the
final outcome of the taxation of many transactions is uncertain. Also, 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. Additionally,
many governments have introduced temporary tax relief measures as a result of the COVID-19 pandemic and there is a risk that we will
not qualify for them all.
CAE Financial Report 2020 I 47
Management’s Discussion and Analysis
11. 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.
Outstanding balances with our equity accounted investees are as follows:
(amounts in millions)
Accounts receivable
Contract assets
Other non-current assets
Accounts payable and accrued liabilities
Contract liabilities
Other non-current liabilities
Transactions with our equity accounted investees are as follows:
(amounts in millions)
Revenue
Purchases
Other income
$
$
$
2020
51.2
38.5
25.6
5.7
28.8
1.7
2020
166.0
$
2.5
1.5
2019
33.9
13.4
18.7
2.2
30.7
1.6
2019
65.5
2.4
1.4
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 are as follows:
(amounts in millions)
Salaries and other short-term employee benefits
Post-employment benefits – defined benefit plans
Share-based payments expense
$
$
$
2020
6.5
2.5
(8.8)
0.2
$
2019
6.4
1.9
18.9
27.2
48 I CAE Financial Report 2020
Management’s Discussion and Analysis
12. CHANGES IN ACCOUNTING POLICIES
12.1 New and amended standards adopted
IFRS 16 - Leases
In January 2016, the IASB released IFRS 16 - Leases, which replaced 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 liability for substantially all leases. Lessors continue to classify leases as operating
leases or finance leases as IFRS 16 substantially carries forward the current lessor accounting requirements.
We adopted IFRS 16 effective April 1, 2019. We elected to use the modified retrospective approach. Under this approach, the comparative
information was not restated and the cumulative effect of initially applying IFRS 16 was recognized in equity at the date of initial application,
on April 1, 2019.
We have elected to apply the following transitional practical expedients:
– Maintain previous assessment of whether a contract is, or contains, a lease at the date of initial application;
– Use of hindsight when evaluating the lease term if a contract contains options to extend or terminate the lease;
– Recognize short-term leases and leases of low-value assets as a lease expense on a straight-line basis, consistent with current
IAS 17 accounting;
– Account for leases for which the remaining lease term ends within 12 months of the effective date as short-term leases;
– Adjust the right-of-use asset by the amount of the previously assessed IAS 37 onerous contract provision as an alternative to an
impairment review;
– Exclude initial direct costs from the measurement of the right-of-use asset at the date of initial application;
– Measure the right-of-use asset as if IFRS 16 had been applied since the lease commencement date using the incremental borrowing
rate at the date of initial application.
Where we are a lessee, IFRS 16 resulted in on-balance sheet recognition of most of its leases that were previously considered operating
leases under IAS 17 unless they met the short-term or low-value exemption.
For the consolidated statement of financial position, this resulted in the recognition of new right-of-use assets of $226.8 million and new
lease liabilities of $265.8 million, presented as part of the long-term debt, discounted using the incremental borrowing rate as at April 1, 2019
(weighted average rate applied was 5.4%). In addition, we had existing finance lease assets of $206.0 million under IAS 17 that were
reclassified to right-of-use assets.
For the consolidated income statement, depreciation expense on the right-of-use assets and interest expense on the lease liabilities are
incurred, replacing the operating lease expense previously recognized under IAS 17 accounting.
For the consolidated statement of cash flows, the principal repayments of the lease liabilities are presented in financing activities, whereas
previously operating lease payments under IAS 17 accounting were presented in operating activities.
The cumulative effect of the impacts of adopting IFRS 16 on the consolidated statement of financial position as at April 1, 2019 are
presented in the table below:
(amounts in millions)
Assets
Total current assets
Property, plant and equipment
Right-of-use assets
Investment in equity accounted investees
Other non-current assets
Total assets
Liabilities and equity
Current portion of long-term debt
Other current liabilities
Total current liabilities
Long-term debt
Other non-current liabilities
Total liabilities
Total equity
Total liabilities and equity
March 31
2019
IFRS 16
Adjustments
$
$
$
$
$
$
$
2,112.9
2,149.3
—
312.1
2,591.2
7,165.5
264.1
1,625.4
1,889.5
2,064.2
801.8
4,755.5
2,410.0
7,165.5
$
$
$
$
$
$
$
(3.3)
(206.0)
432.8
(3.7)
0.3
220.1
31.8
(4.3)
27.5
234.0
(13.9)
247.6
(27.5)
220.1
$
$
$
$
$
$
$
April 1
2019
2,109.6
1,943.3
432.8
308.4
2,591.5
7,385.6
295.9
1,621.1
1,917.0
2,298.2
787.9
5,003.1
2,382.5
7,385.6
CAE Financial Report 2020 I 49
Management’s Discussion and Analysis
The difference between the amount of new lease liabilities recognized as at April 1, 2019 and our future aggregate minimum lease
payments under non-cancellable operating leases as at March 31, 2019, which amounted to $274.1 million, is mainly due to the discounting
factors applied to the lease payments, the inclusion of optional renewal period reasonably certain to be exercised, and the exclusion of
leases payments for short-term lease and low-value lease.
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 was adopted effective April 1, 2019 and resulted in no significant adjustment.
Amendment to IAS 19 - Employee benefits
In February 2018, the IASB released an amendment to IAS 19 - Employee Benefits, which clarifies how to account for plan amendments,
curtailments and settlements on defined benefits plans. The amendment requires the use of updated actuarial assumptions to determine
current service cost and net interest for the period after a plan amendment, curtailment or settlement.
This amendment to IAS 19 was adopted April 1, 2019 and will apply to any plan amendments, curtailments or settlements occurring
subsequent to April 1, 2019.
12.2 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 the recoverable amount of the cash generating unit (CGU) or group of
CGUs to which goodwill has been allocated and uses valuation models such as the discounted cash flows model (level 3). Key assumptions
on which management based its determination of the recoverable amount include expected growth rates and discount 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 26 of our consolidated financial statements for further details regarding assumptions used.
Revenue recognition
Transaction price allocated to performance obligations
In allocating the transaction price for contracts with multiple performance obligations, we estimate the stand-alone selling price using the
expected cost plus a margin approach if they are not directly observable.
50 I CAE Financial Report 2020
Management’s Discussion and Analysis
Timing of satisfaction of performance obligations
For contracts where revenue is recognized over time using the cost input method, we are required 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 as well as
its 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 19 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 consider 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 8.0% to 15.0%, over the
period of repayments. The estimated repayments are discounted using average rates ranging from 6.0% to 9.5% based on terms of similar
financial instruments. These estimates, along with the methodology used to derive the estimates, can have a material impact on the
respective values and ultimately any repayable obligation in relation to government participation. A 1% increase to the growth rates would
increase the royalty obligations at March 31, 2020 by approximately $2.8 million (2019 - $3.5 million). A 1% decrease to the growth rates
would have an opposite impact on the royalty obligations.
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 influence 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.
Impact of the COVID-19 pandemic
The COVID-19 pandemic and the resulting measures taken in response to its spread have resulted in significant temporary disruptions
to our business operations. The rapidly evolving situation has created a high level of uncertainty and risk that may result in significant
impacts on our business, financial performance and operations.
The uncertainties created by the COVID-19 pandemic required the use of judgements and estimates in the areas set out below. The future
impact of the COVID-19 pandemic increases the risk, in future reporting periods, of material adjustments to the carrying amount of our
net assets.
Goodwill impairment test
We performed our annual impairment test for goodwill during the fourth quarter of fiscal 2020. Goodwill is allocated to CGUs or a group
of CGUs, which generally corresponds to our operating segments or one level below. The value in use of each CGU is calculated using
estimated cash flows derived from our five-year strategic plan. Cash flows subsequent to the five-year period were extrapolated using a
constant growth rate of 2% to 3%. These projections are inherently uncertain due to the fluidly evolving impact of the COVID-19 pandemic.
Significant assumptions and estimates are used to determine the expected growth rates embedded in our cash flow projections and the
discount rate based on observable market data during the fourth quarter.
Based on the results of our impairment test, we recorded an impairment charge of goodwill of $37.5 million in relation to the Healthcare
CGU. See Note 26 of our consolidated financial statements for further details regarding assumptions used.
CAE Financial Report 2020 I 51
Management’s Discussion and Analysis
Impairment of non-financial assets
We have considered the impact of the COVID-19 pandemic on our assessment of impairment indicators, which required significant
judgement. We have reviewed our property, plant and equipment, right-of-use assets, amortizable intangible assets, investment in equity
accounted investees as well as other assets such as inventories and deferred tax assets. Where impairment indicators were identified in
the Civil Aviation Training Solutions segment, no significant impairment charge has been recorded. No impairment indicators were identified
in the Defence and Security and Healthcare segments.
Expected credit loss
We have considered the impact of the COVID-19 pandemic on the expected credit loss of our financial instruments (mainly trade receivable
and contract assets). The amount and timing of the expected credit losses, as well as the probability assigned thereto, has been based
on the available information as at March 31, 2020. As a result of this review, no significant credit loss allowances adjustments have been
recorded.
13. CONTROLS AND PROCEDURES
The internal auditor reports regularly to management on any weaknesses it finds in our internal controls and these reports are reviewed
by the Audit Committee.
In accordance with National Instrument 52-109 issued by the Canadian Securities Administrators, certificates signed by the President
and Chief Executive Officer (CEO) and the Chief Financial Officer (CFO) have been filed. These filings certify the appropriateness of our
disclosure controls and procedures and the design and effectiveness of the internal controls over financial reporting.
13.1 Evaluation of disclosure controls and procedures
Our disclosure controls and procedures are designed to provide reasonable assurance that information is accumulated and communicated
to our President and CEO and CFO and other members of management, so we can make timely decisions about required disclosure
and ensure that information is recorded, processed, summarized and reported within the time periods specified under Canadian and U.S.
securities laws.
Under the supervision of the President and CEO and the CFO, management evaluated the effectiveness of our disclosure controls and
procedures as of March 31, 2020. 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, 2020.
13.2 Internal control over financial reporting
Management is responsible for establishing and maintaining adequate internal controls over financial reporting. Internal control over
financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting, and the preparation
of consolidated financial statements for external purposes in accordance with IFRS. Management evaluated the design and operation of
our internal controls over financial reporting as of March 31, 2020, based on the framework and criteria established by the Committee of
Sponsoring Organizations of the Treadway Commission 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 2020 that have materially affected,
or are reasonably likely to materially affect, our internal controls over financial reporting.
14. OVERSIGHT ROLE OF AUDIT COMMITTEE AND BOARD OF DIRECTORS
The Audit Committee reviews our annual MD&A and related consolidated financial statements with management and the external auditor
and recommends them to the Board for their approval. Management and our internal auditor also provide the Audit Committee with regular
reports assessing our internal controls and procedures for financial reporting. The external auditor reports regularly to management on
any weaknesses it finds in our internal control, and these reports are reviewed by the Audit Committee.
15. ADDITIONAL INFORMATION
You will find additional information about CAE, including our most recent AIF, on our website at www.cae.com, or on SEDAR at
www.sedar.com or on EDGAR at www.sec.gov.
52 I CAE Financial Report 2020
16. SELECTED FINANCIAL INFORMATION
The following table provides selected quarterly financial information for the years 2018 through to 2020.
Management’s Discussion and Analysis
(amounts in millions, except per share amounts and exchange rates)
Fiscal 2020
Revenue
Net income
Equity holders of the Company
Non-controlling interests
Basic EPS attributable to equity holders of the Company
Diluted EPS attributable to equity holders of the Company
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 2019(1)
Revenue
Net income
Equity holders of the Company
Non-controlling interests
Basic EPS attributable to equity holders of the Company
Diluted EPS attributable to equity holders of the Company
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 2018(1)
Revenue
Net income
Equity holders of the Company
Non-controlling interests
Basic EPS attributable to equity holders of the Company
Diluted EPS attributable to equity holders of the Company
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
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
825.6
63.0
61.5
1.5
0.23
0.23
0.24
265.8
267.6
1.34
1.50
1.72
722.0
71.6
69.4
2.2
0.26
0.26
0.26
267.6
269.3
1.29
1.54
1.76
656.2
61.2
59.6
1.6
0.22
0.22
0.22
268.6
269.8
1.35
1.48
1.72
896.8
75.0
73.8
1.2
0.28
0.28
0.28
266.2
268.2
1.32
1.47
1.63
743.8
63.6
60.7
2.9
0.23
0.23
0.23
267.4
269.2
1.31
1.52
1.71
618.2
62.1
60.3
1.8
0.22
0.22
0.20
268.7
269.9
1.26
1.47
1.64
923.5
99.8
97.7
2.1
0.37
0.37
0.37
265.8
267.6
1.32
1.46
1.70
816.3
79.5
77.6
1.9
0.29
0.29
0.29
266.1
267.5
1.32
1.51
1.70
828.2
145.8
143.8
2.0
0.54
0.53
0.38
268.1
269.5
1.27
1.49
1.68
977.3
81.1
78.4
2.7
0.29
0.29
0.46
266.1
267.7
1.34
1.48
1.72
1,022.0
125.4
122.3
3.1
0.46
0.46
0.48
265.1
266.8
1.33
1.51
1.73
720.9
85.6
82.3
3.3
0.31
0.31
0.31
267.6
269.0
1.26
1.55
1.75
3,623.2
318.9
311.4
7.5
1.17
1.16
1.34
266.0
267.6
1.33
1.48
1.69
3,304.1
340.1
330.0
10.1
1.24
1.23
1.25
266.6
268.0
1.31
1.52
1.72
2,823.5
354.7
346.0
8.7
1.29
1.28
1.11
268.2
269.5
1.28
1.50
1.70
(1) Figures have not been restated to reflect the adoption of IFRS 16. Refer to Changes in accounting policies for further details.
CAE Financial Report 2020 I 53
Management’s Discussion and Analysis
Selected segment information
(amounts in millions, except operating margins)
Q4-2020
Q4-2019
FY2020
FY2019(1)
FY2018(1)
Civil Aviation Training Solutions
Revenue
Segment operating income
Operating margins (%)
Defence and Security
Revenue
Segment operating income
Operating margins (%)
Healthcare
Revenue
Segment operating (loss) income
Operating margins (%)
Total
Revenue
Segment operating income
Operating margins (%)
$
$
601.9
151.5
25.2
593.4
115.5
19.5
$ 2,167.5
$ 1,875.8
$ 1,625.3
473.3
21.8
344.3
18.4
330.1
20.3
$
341.8
$
387.9
$ 1,331.2
$ 1,306.7
$ 1,083.0
32.4
9.5
50.7
13.1
104.8
7.9
131.5
10.1
123.9
11.4
$
33.6
$
40.7
$
124.5
$
121.6
$
115.2
(37.4)
—
4.2
10.3
(41.0)
—
4.8
3.9
8.8
7.6
$
977.3
146.5
15.0
$ 1,022.0
$ 3,623.2
$ 3,304.1
$ 2,823.5
170.4
16.7
537.1
14.8
480.6
14.5
462.8
16.4
Selected annual information for the past five years
(amounts in millions, except per share amounts and exchange rates)
2020
2019(1)
2018(1)
2017(1)
2016(1)
Revenue
Net income
Equity holders of the Company
Continuing operations
Discontinued operations
Non-controlling interests
Average exchange rate, U.S. dollar to Canadian dollar
Average exchange rate, Euro to Canadian dollar
Average exchange rate, British pound to Canadian dollar
Financial position:
Total assets
Total non-current financial liabilities(2)
Total net debt
Per share:
Basic 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
$ 3,623.2
$ 3,304.1
$ 2,823.5
$ 2,704.5
$ 2,512.6
318.9
340.1
354.7
256.6
230.3
311.4
330.0
346.0
—
7.5
1.33
1.48
1.69
—
10.1
1.31
1.52
1.72
—
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
$ 8,483.6
$ 7,165.5
$ 5,780.2
$ 5,354.8
$ 4,996.7
3,301.9
2,365.7
2,242.8
1,882.2
1,380.6
649.4
1,370.8
750.7
1,318.6
787.3
$
1.17
$
1.24
$
1.29
$
0.94
$
—
1.16
—
1.34
0.43
—
1.23
—
1.25
0.39
—
1.28
—
1.11
0.35
—
0.93
—
1.03
0.315
0.89
(0.04)
0.89
(0.04)
0.86
0.295
(1) Figures have not been restated to reflect the adoption of IFRS 16. Refer to Changes in accounting policies for further details.
Figures in fiscal 2017 and 2016 have not been restated to reflect the adoption of IFRS 15 which was effective fiscal 2019.
(2) Includes long-term debt, long-term derivative liabilities and other long-term liabilities meeting the definition of a financial liability.
54 I CAE Financial Report 2020
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 Income Statement
Consolidated Statement of Comprehensive Income
Consolidated Statement of Financial Position
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 – Operating Segments and Geographic Information
Note 5 – Other Gains – Net
Note 6 – Finance Expense – Net
Note 7 – Income Taxes
Note 8 – Share Capital, Earnings per Share and Dividends
Note 9 – Accounts Receivable
Note 10 – Balance from Contracts with Customers
Note 11 – Inventories
Note 12 – Property, Plant and Equipment
Note 13 – Intangible Assets
Note 14 – Leases
Note 15 – Other Non-Current Assets
Note 16 – Accounts Payable and Accrued Liabilities
Note 17 – Provisions
Note 18 – Debt Facilities
Note 19 – Employee Benefits Obligations
Note 20 – Other Non-Current Liabilities
Note 21 – Supplementary Cash Flows Information
Note 22 – Accumulated Other Comprehensive Income
Note 23 – Share-Based Payments
Note 24 – Employee Compensation
Note 25 – Government Participation
Note 26 – Impairment of Non-Financial Assets
Note 27 – Contingencies and Commitments
Note 28 – Fair Value of Financial Instruments
Note 29 – Capital Risk Management
Note 30 – Financial Risk Management
Note 31 – Related Party Relationships
Note 32 – Related Party Transactions
Note 33 – Events After the Reporting Period
56
57
60
61
62
63
64
65
79
81
83
85
85
85
87
88
88
88
89
90
90
91
91
92
92
93
96
97
97
97
100
100
100
101
101
102
103
107
109
109
CAE Financial Report 2020 | 55
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, 2020, 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, 2020 was effective.
M. Parent S. Branco
President and Chief Executive Officer Vice-president, Finance and Chief Financial Officer
Montreal (Canada)
May 22, 2020
56 | CAE Financial Report 2020
Report of Independent Registered Public Accounting Firm
To the Board of
Directors and Shareholders of CAE Inc.
Opinions on the 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, 2020 and 2019, and the related consolidated statements of income, 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, 2020, 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 financial position of the
Company as of March 31, 2020 and 2019, and its financial performance and its cash flows for the years then ended in conformity with
International Financial Reporting Standards as issued by the International Accounting Standards Board. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial reporting as of March 31, 2020, based on criteria established
in Internal Control - Integrated Framework (2013) issued by the COSO.
Change in Accounting Principle
As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for leases on
April 1, 2019.
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.
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 financial statements for external purposes in accordance with generally accepted accounting
principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial
statements.
CAE Financial Report 2020 | 57
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.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements
that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are
material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The
communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole,
and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the
accounts or disclosures to which they relate.
Goodwill impairment assessment - Healthcare cash-generating unit
As described in Notes 1, 13 and 26 to the consolidated financial statements, the goodwill allocated to the Healthcare cash-generating
unit (CGU) was $117.3 million as of March 31, 2020, net of an impairment charge of $37.5 million for the year ended March 31, 2020.
Management tests goodwill for impairment annually or at any time if an indicator of impairment exists. 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. The Company’s
impairment test for goodwill is based on internal estimates of value in use calculations using a discounted cash flow model. Management
applied judgment in developing the cash flow projections for the Healthcare CGU, which included the use of significant assumptions
relating to expected growth rates and the discount rate.
The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment of the
Healthcare CGU is a critical audit matter are there was judgment applied by management in developing the cash flow projections for the
Healthcare CGU. This in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating
audit evidence related to management’s cash flow projections and significant assumptions, including expected growth rates and the
discount rate. In addition, the audit effort involved the use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on
the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill
impairment assessment. These procedures also included, among others, testing management’s process for developing the cash flow
projections for the Healthcare CGU; evaluating the appropriateness of the discounted cash flows model; testing the completeness, accuracy
and relevance of the underlying data used in the model; and evaluating the reasonableness of the significant assumptions used by
management. Evaluating the reasonableness of the significant assumptions used by management related to expected growth rates
involved considering the current and historical performance of the Healthcare CGU and the market’s response to new products launched
by the Company; the consistency with external market and healthcare industry data; and whether these assumptions were consistent
with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in the evaluation
of the Company’s discounted cash flows model and the discount rate assumption.
Revenue recognition - Estimated costs to complete certain contracts in the Defence and Security and Civil Aviation Training Solutions
segments
As described in Note 1 to the consolidated financial statements, the Company recognizes revenue from contracts with customers for the
design, engineering, and manufacturing of training devices over time using the cost input method when the Company determines that
these devices have a sufficient level of customization such that they have no alternative use and the Company has enforceable rights to
payment for work completed to date. For the year ended March 31, 2020, a portion of total consolidated revenue of $3,623.2 million related
to revenue recognized from contracts with customers over time using the cost input method in the Defence and Security and Civil Aviation
Training Solutions segments.
The measure of progress toward complete satisfaction of the performance obligation is determined by comparing the actual direct contract
costs incurred to date to the total estimated costs for the entire contract. Management applies judgment to estimate the work performed
to date as a proportion of the total work to be performed.
The principal considerations for our determination that performing procedures relating to revenue recognition for estimated costs to
complete certain contracts in the Defence and Security and Civil Aviation Training Solutions segments is a critical audit matter are there
was judgment applied by management in determining the estimated costs to complete the contracts. This in turn led to a high degree of
auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence related to the cost assumptions applied
by management in determining the estimated costs to complete the contracts.
58 | CAE Financial Report 2020
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on
the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the revenue recognition
process, including controls over the determination of estimated costs to complete the contracts. These procedures also included, among
others, testing management’s process for determining estimated costs to complete the contracts in the Defence and Security and Civil
Aviation Training Solutions segments for a sample of contracts; testing the completeness, accuracy and relevance of the data used in the
estimate of the work performed to date as a proportion of the total work to be performed; and evaluating the reasonableness of cost
assumptions used by management. Evaluating the reasonableness of cost assumptions used by management involved assessing
management’s ability to reasonably estimate costs to complete contracts by comparing changes in estimated costs with prior period
estimates; performing a look-back analysis to assess variances between actual and estimated costs for completed contracts; and
performing procedures to evaluate the timely identification of circumstances which may warrant a modification to a previous cost estimate.
/s/PricewaterhouseCoopers LLP1
Montréal, Quebec
May 22, 2020
We have served as the Company’s auditor since 1991.
_____________________________________________________________________________________________
1 CPA auditor, CA, public accountancy permit No. A119714
CAE Financial Report 2020 | 59
Consolidated Financial Statements
Consolidated Income Statement
Years ended March 31
(amounts in millions of Canadian dollars, except per share amounts)
Revenue
Cost of sales
Gross profit
Research and development expenses
Selling, general and administrative expenses
Other gains – net
Share of after tax profit of equity accounted investees
Operating profit
Finance expense – net
Earnings before income taxes
Income tax expense
Net income
Attributable to:
Equity holders of the Company
Non-controlling interests
Earnings per share attributable to equity holders of the Company
Basic
Diluted
(1) Refer to Note 2 - Changes in accounting policies for the impact of adopting IFRS16.
Notes
4
5
4
6
7
8
8
The accompanying notes form an integral part of these Consolidated Financial Statements.
2020 (1)
3,623.2
2,539.6
1,083.6
137.5
437.5
(1.0)
(27.5)
537.1
144.4
392.7
73.8
318.9
311.4
7.5
1.17
1.16
$
$
$
$
$
$
$
$
2019
3,304.1
2,362.6
941.5
101.4
415.2
(22.3)
(33.4)
480.6
80.9
399.7
59.6
340.1
330.0
10.1
1.24
1.23
$
$
$
$
$
$
$
$
60 | CAE Financial Report 2020
Consolidated Statement of Comprehensive Income
Years ended March 31
(amounts in millions of Canadian dollars)
Net income
Items that may be reclassified to net income
Foreign currency exchange differences on translation of foreign operations
Reclassification to income of foreign currency exchange differences
Net loss on cash flow hedges
Reclassification to income of (loss) gain on cash flow hedges
Net loss on hedges of net investment in foreign operations
Income taxes
Items that will never be reclassified to net income
Remeasurement of defined benefit pension plan obligations
Income taxes
Notes
7
19
7
Other comprehensive income (loss)
Total comprehensive income
Attributable to:
Equity holders of the Company
Non-controlling interests
The accompanying notes form an integral part of these Consolidated Financial Statements.
Consolidated Financial Statements
$
$
$
$
$
$
$
$
2020
318.9
118.3
(40.4)
(32.3)
(0.2)
(71.0)
23.0
(2.6)
13.4
(3.6)
9.8
7.2
326.1
315.4
10.7
$
$
$
$
$
$
$
$
2019
340.1
(12.6)
(23.2)
(6.9)
2.1
(20.0)
2.2
(58.4)
4.2
(1.1)
3.1
(55.3)
284.8
271.8
13.0
CAE Financial Report 2020 | 61
Consolidated Financial Statements
Consolidated Statement of Financial Position
As at March 31
(amounts in millions of Canadian dollars)
Assets
Cash and cash equivalents
Accounts receivable
Contract assets
Inventories
Prepayments
Income taxes recoverable
Derivative financial assets
Total current assets
Property, plant and equipment
Right-of-use assets
Intangible assets
Investment in equity accounted investees
Deferred tax assets
Derivative financial assets
Other non-current assets
Total assets
Liabilities and equity
Accounts payable and accrued liabilities
Provisions
Income taxes payable
Contract liabilities
Current portion of long-term debt
Derivative financial liabilities
Total current liabilities
Provisions
Long-term debt
Royalty obligations
Employee benefits obligations
Deferred tax liabilities
Derivative financial liabilities
Other non-current 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
Notes
2020 (1)
2019
9
10
11
28
12
14
13
31
7
28
15
16
17
10
18
28
17
18
19
7
28
20
8
22
$
$
$
$
$
$
$
$
$
$
946.5
566.1
569.3
616.2
55.1
30.4
25.0
2,808.6
2,154.0
395.9
2,056.5
460.6
84.5
13.1
510.4
8,483.6
934.4
29.2
26.4
746.2
206.2
119.9
2,062.3
28.6
3,106.0
141.1
212.8
150.6
12.8
191.1
5,905.3
679.5
26.9
193.2
1,590.1
2,489.7
88.6
2,578.3
8,483.6
$
$
$
$
$
$
$
$
$
$
446.1
496.0
523.5
537.0
57.4
33.6
19.3
2,112.9
2,149.3
—
2,027.9
312.1
71.0
12.8
479.5
7,165.5
883.8
28.7
25.7
670.2
264.1
17.0
1,889.5
36.3
2,064.2
136.2
212.6
147.0
2.7
267.0
4,755.5
649.6
24.8
199.0
1,457.9
2,331.3
78.7
2,410.0
7,165.5
(1) Refer to Note 2 - Changes in accounting policies for the impact of adopting IFRS16.
The accompanying notes form an integral part of these Consolidated Financial Statements.
62 | CAE Financial Report 2020
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CAE Financial Report 2020 | 63
Consolidated Financial Statements
Consolidated Statement of Cash Flows
Years ended March 31
(amounts in millions of Canadian dollars)
Operating activities
Net income
Adjustments for:
Depreciation and amortization
Share of after tax profit of equity accounted investees
Deferred income taxes
Investment tax credits
Impairment of goodwill
Share-based payments expense
Defined benefit pension plans
Other non-current liabilities
Derivative financial assets and liabilities – net
Other
Changes in non-cash working capital
Net cash provided by operating activities
Investing activities
Business combinations, net of cash acquired
Acquisition of investment in equity accounted investees
Addition of assets through the monetization of royalties
Additions to property, plant and equipment
Proceeds from disposal of property, plant and equipment
Additions to intangible assets
Net payments to equity accounted investees
Dividends received from equity accounted investees
Other
Net cash used in investing activities
Financing activities
Net proceeds from borrowing under revolving credit facilities
Proceeds from long-term debt
Repayment of long-term debt
Repayment of lease liabilities
Dividends paid
Issuance of common shares
Repurchase and cancellation of common shares
Changes in restricted cash
Other
Net cash provided by financing activities
Effect of foreign currency exchange differences on cash
and cash equivalents
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
Notes
2020 (1)
2019
$
318.9
$
340.1
7
26
23
19
21
3
32
4
12
13
18
18
18
18
8
305.4
(27.5)
2.9
9.0
37.5
14.5
15.1
(39.2)
15.3
(54.6)
(52.2)
545.1
(10.1)
(113.5)
—
(283.4)
0.5
(100.6)
(9.9)
22.6
(1.5)
(495.9)
708.2
167.6
(233.0)
(79.8)
(110.9)
26.6
(49.6)
15.7
(1.4)
443.4
7.8
500.4
446.1
946.5
217.2
(33.4)
(23.1)
8.2
—
9.3
14.8
(30.3)
(5.8)
(1.8)
35.2
530.4
(827.8)
—
(202.7)
(251.8)
2.7
(86.6)
(37.7)
22.0
2.7
(1,379.2)
—
955.3
(72.7)
(22.0)
(99.9)
18.3
(94.4)
—
5.7
690.3
(6.9)
(165.4)
611.5
446.1
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
(1) Refer to Note 2 - Changes in accounting policies for the impact of adopting IFRS16.
The accompanying notes form an integral part of these Consolidated Financial Statements.
64 | CAE Financial Report 2020
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 22, 2020.
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 common shares are traded on the Toronto Stock Exchange (TSX) and on the New York
Stock Exchange (NYSE).
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, financial
instruments at fair value through other comprehensive income 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 (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.
CAE Financial Report 2020 | 65
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 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
Recognition, classification and measurement
A financial instrument is any contract that gives rise to a financial asset in one entity and a financial liability or equity instrument in another
entity. Financial assets and financial liabilities, including derivatives, are recognized in 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.
Financial instruments are subsequently measured based on their classification, which are:
–
–
–
Financial instruments measured at amortized cost;
Financial instruments measured at fair value through profit or loss (FVTPL);
Financial instruments measured at fair value through other comprehensive income (FVOCI).
Financial assets
A financial asset is measured at amortized cost if it meets both of the following conditions:
– The asset is held within a business model whose objective is to hold assets to collect contractual cash flows; and
– The contractual terms of the financial asset give rise, on specific dates, to cash flows that are solely payments of principal and interest
(SPPI) on the principal amount outstanding.
Financial assets at amortized cost are subsequently measured using the effective interest rate (EIR) method and are subject to impairment.
Gains and losses are recognized in income when the asset is derecognized, modified or impaired. The Company’s financial assets at
amortized cost include accounts receivable and advances to a portfolio investment.
Financial assets at FVTPL include financial assets held for trading, financial assets designated upon initial recognition at fair value through
profit or loss, and financial assets mandatorily required to be measured at fair value. Financial assets are classified as held for trading if
they are acquired for the purpose of selling or repurchasing in the near term. Derivatives, including separated embedded derivatives, are
also classified as held for trading unless they are designated as effective hedging instruments. Financial assets with cash flows that are
not SPPI are classified and measured at FVTPL, irrespective of the business model. Financial assets at FVTPL are carried in the statement
of financial position at fair value with net changes in fair value recognized in the income statement. The Company’s financial assets at
FVTPL include cash and cash equivalents, and derivative instruments not designated as hedging instrument in a hedge relationship.
66 | CAE Financial Report 2020
Notes to the Consolidated Financial Statements
Financial assets at FVOCI are equity investments the Company has irrevocably elected to classify at FVOCI. This classification is
determined on an instrument-by-instrument basis. Gains and losses on these financial assets are never transferred to income. Dividends
are recognized in the income statement when the right of payment has been established, except when the Company benefits from such
proceeds as a recovery of part of the cost of the financial asset, in which case, such gains are recorded in OCI.
Financial assets are not reclassified subsequent to their initial recognition, unless the Company changes its business model for managing
financial assets.
Financial liabilities
Financial liabilities at FVTPL include financial liabilities held for trading and financial liabilities designated upon initial recognition as at
FVTPL. Financial liabilities are classified as held for trading if they are incurred for the purpose of repurchasing in the near term. This
category also includes derivatives financial instruments that are not designated as hedging instrument in a hedge relationship. Separated
embedded derivatives are also classified as held for trading unless they are designated as effective hedging instruments.
Financial liabilities at FVTPL are carried in the statement of financial position at fair value with net changes in fair value recognized in the
income statement. The Company’s financial liabilities measured at FVTPL include contingent liabilities arising on business combinations
and also derivative instruments not designated as hedging instrument in a hedge relationship.
Financial liabilities at amortized cost are subsequently measured using the EIR method. Gains and losses are recognized in income when
the liabilities are derecognized as well as through the EIR amortization process. The Company’s financial liabilities at amortized cost
include accounts payables, accrued liabilities, long-term debt, including interest payable, as well as royalty obligations.
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 and FVOCI) are included in the fair value initially recognized for those financial instruments. These costs are amortized
to income using the EIR 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 an unconditional and 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.
Hedge accounting
The Company uses derivative financial instruments, such as forward currency contracts, cross currency swaps and interest rate swaps
to hedge its foreign currency risks and interest rate risks, respectively. A hedging relationship qualifies for hedge accounting when it
meets all of the following effectiveness requirements:
–
–
–
There is ‘an economic relationship’ between the hedged item and the hedging instrument;
The effect of credit risk does not ‘dominate the value changes’ that result from that economic relationship;
The hedge ratio of the hedging relationship is the same as that resulting from the quantities of:
–
–
The hedged item that the Company actually hedges; and
The hedging instrument that the Company actually uses to hedge that quantity of hedged item.
For the purpose of hedge accounting, hedges are classified as:
– Cash flow hedges when hedging the exposure to variability in cash flows that is either attributable to a particular risk associated with
a recognized asset or liability or a highly probably forecast transaction or the foreign currency risk in an unrecognized firm commitment;
– Hedges of a net investment in a foreign operation;
–
Fair value hedges when hedging the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm
commitment.
Documentation
At the inception of a hedge relationship, 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 items, 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 items are
derecognized or amortized.
CAE Financial Report 2020 | 67
Notes to the Consolidated Financial Statements
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 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 in income immediately.
Hedge of net investments in foreign operations
The Company has designated certain long-term debts as a hedging item of the Company’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.
Fair value hedge
The Company currently does not enter into fair value hedge transactions.
Derecognition
Financial assets
A financial asset is derecognized when:
–
–
The rights to receive cash flows from the asset have expired; or
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.
Impairment of financial assets
The Company uses the expected credit loss (ECL) model for calculating impairment of financial assets and recognizes expected credit
losses as loss allowances for assets measured at amortized cost. ECLs are based on the difference between the contractual cash flows
due in accordance with the contract and all the cash flows that the Company expects to receive, discounted at the original or credit
adjusted effective interest rate. ECLs are recognized in two stages. For credit exposures for which there has not been a significant increase
in credit risk since initial recognition, ECLs are provided for credit losses that result from default events that are possible within the next
12-months (a 12-month ECL). For those credit exposures for which there has been a significant increase in credit risk since initial recognition,
a loss allowance is required for credit losses expected over the remaining life of the exposure, irrespective of the timing of the default (a
lifetime ECL).
For trade receivables and contract assets, the Company applies the simplified approach permitted by IFRS 9, which requires expected
lifetime losses to be recognized from initial recognition of the assets.
Financial liabilities
A financial liability is derecognized when the obligation under the liability is discharged, cancelled or expired.
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 the income statement.
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 CAE Inc. and its subsidiaries have 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.
68 | CAE Financial Report 2020
Notes to the Consolidated Financial Statements
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 credit loss allowances, based on
expected recoverability. The amount of the allowance is the difference between the asset’s carrying amount and the present value of the
estimated future cash flows, discounted at the original effective interest rate. The loss is recognized in income. Subsequent recoveries of
amounts previously provided for or written-off are recognized in income.
Inventories
Raw materials are valued at the lower of average cost and net realizable value. Spare parts to be used in the normal course of business
are valued at the lower of cost, determined on a specific identification basis, and net realizable value.
Work in progress is stated at the lower of cost, determined on a specific identification basis, and net realizable value. The cost of work in
progress includes material, labour and an allocation of manufacturing overhead, which is based on normal operating capacity.
Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated
costs necessary to generate revenue. In the case of raw materials and spare parts, the replacement cost is the best measure of net
realizable value.
Property, plant and equipment
Property, plant and equipment are recorded at cost less any accumulated depreciation and any accumulated net impairment losses. Costs
include expenditures that are directly attributable to the acquisition or manufacturing of the item. The cost of an item of property, plant
and equipment that is initially recognized includes, when applicable, the initial present value estimate of the costs required to dismantle
and remove the asset and restore the site on which it is located at the end of its useful life. Purchased software that is integral to the
functionality of the related equipment is capitalized as part of that equipment. Subsequent costs, such as updates on training devices,
are included in the asset’s carrying amount or recognized as a separate asset only when it is probable that future economic benefits will
flow to the Company and the cost of the item can be reliably measured; otherwise, they are expensed.
A loss on disposal is recognized in income when the carrying value of a replaced item is derecognized, unless the item is transferred to
inventories. If it is not practicable to determine the carrying value, the cost of the replacement and the accumulated depreciation calculated
by reference to that cost will be used to derecognize the replaced part. The costs of day-to-day servicing of property, plant and equipment
are recognized in income as incurred. Gains and losses on disposal of property, plant and equipment are determined by comparing the
proceeds from disposal with its carrying amount, and are recognized net within other gains and losses.
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.
Prior to the adoption of IFRS 16 on April 1, 2019, leased assets were depreciated over the shorter of the lease term and their useful lives.
If it was reasonably certain that the Company would obtain ownership by the end of the lease term, the leased asset was 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
Declining balance/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 15 years
Straight-line (residual not exceeding 15%)
Not exceeding 25 years
Based on utilization
Not exceeding 3,500 hours
As at March 31, 2020, the average remaining amortization period for full-flight simulators is 12.0 years (2019 – 11.1 years).
Depreciation methods, useful lives and residual values are reviewed and adjusted, if appropriate, on a prospective basis at each reporting
date.
CAE Financial Report 2020 | 69
Notes to the Consolidated Financial Statements
Leases – As a result of adopting IFRS 16 on April 1, 2019
At inception of a contract, the Company assesses whether a contract is, or contains, a lease. A contract is, or contains, a lease if the
contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.
The Company as a lessee
The Company recognizes a right-of-use asset and liability at the lease commencement date. The right-of-use asset is initially measured
at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement
date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset or to restore the underlying
asset or the site on which it is located, less any lease incentives received.
The right-of-use asset is subsequently depreciated from the commencement date to the earlier of the end of the useful life of the
right-of-use asset or the end of the lease term. If it is reasonably certain that the Company will obtain ownership by the end of the lease
term through a purchase option, the leased asset is depreciated over its useful life. The depreciation periods, residual values (only
applicable when it is reasonably certain that the Company will obtain ownership by the end of the lease term) and depreciation methods
are as follows:
Buildings and land
Simulators
Machinery and equipment
Method
Amortization period
Straight-line
Not exceeding 40 years
Straight-line (10% residual)
Not exceeding 25 years
Straight-line
Not exceeding 7 years
In addition, the right-of-use asset is periodically reduced by impairment losses, if any, and adjusted for certain remeasurements of the
lease liability.
The lease liability is initially measured at the present value of the lease payments at the commencement date, discounted using the
interest rate implicit in the lease or, if that rate cannot be readily determined, the lessee’s incremental borrowing rate. Lease payments
comprise of fixed payments, including in-substance fixed payments, variable lease payments that depend on an index or a rate, amounts
expected to be payable under a residual value guarantee, the exercise price under a purchase option that the Company is reasonably
certain to exercise, lease payments in an optional renewal period that the Company is reasonably certain to exercise and penalties for
early termination of a lease if the Company is reasonably certain to terminate.
The lease liability is subsequently measured at amortized cost using the effective interest method and is remeasured when there is a
change in future lease payments arising from a change in an index or rate, the estimate of the amount expected to be payable under a
residual value guarantee or the Company’s assessment of whether it will exercise a purchase, renewal or termination option. When the
lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the right-of-use asset, or is recorded
in profit or loss if the carrying amount of the right-of-use asset has been reduced to zero.
Lease modifications
A lease modification is a change in the scope of a lease, or the consideration for a lease, that was not part of its original terms and
conditions. A lease modification is accounted for as a separate lease if the modification increases the scope of the lease by adding the
right to use one or more underlying assets and the consideration for the lease increases by an amount commensurate with the
stand-alone price that reflects the circumstances of the contract. Any other modification is not accounted for as a separate lease.
For a lease modification resulting in a decrease in the scope of the lease, the lease liability is remeasured, using a revised discount rate,
to reflect the modified lease payments and the carrying amount of the right-of-use asset is reduced to reflect the partial or full termination
of the lease. The difference between the reduction in the lease liability and the reduction in the corresponding right-of-use asset’s carrying
value is recognized in profit or loss.
For all other lease modifications, the lease liability is remeasured, using a revised discount rate, to reflect the modified lease payments,
with a corresponding adjustment to the right-of-use asset.
Short-term leases and leases of low-value assets
The Company recognizes the payments associated with short-term leases and leases of low-value assets as an expense on a
straight-line basis over the lease term.
Sale and leaseback transaction
In a sale and leaseback transaction the transfer of an asset is recognized as a sale when the customer has obtained control of the
underlying asset which is aligned with the Company’s revenue recognition policy, otherwise the Company continues to recognize the
transferred asset on the balance sheet and record a financial liability equal to the proceeds transferred. When the transfer of an asset
satisfies the Company’s revenue recognition policy to be accounted for as revenue, a partial recognition of the profit from the sale is
recorded immediately after the sale, which is equivalent to the proportion of the asset not retained by the Company through the lease.
The proportion of the asset retained by the Company through the lease is recognized as a right-of-use asset and the lease liability is
measured as the present value of future lease payments.
70 | CAE Financial Report 2020
Notes to the Consolidated Financial Statements
The Company as a lessor
The Company determines, at lease commencement, whether each lease is a finance or an operating lease. 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.
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 values of leased assets are presented as investment in finance leases. Finance
income is recognized over the term of the lease based on the effective interest method. Revenue from operating leases is recognized on
a straight-line basis over the term of the corresponding lease.
When the Company subleases one of its leases it accounts for its interests in the head lease and the sub-lease separately. It assesses
the lease classification of a sub-lease with reference to the right-of-use asset arising from the head lease, not with reference to the
underlying asset.
Leases – Prior to adopting IFRS 16 on April 1, 2019
Leases in which substantially all the risks and rewards of ownership were transferred and were accounted for finance leases. All other
leases were accounted for as operating leases.
The Company as a lessee
Finance leases were 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 were added to the amount recognized as an asset. The corresponding
obligations were included in long-term debt. Finance expense was recognized over the term of the lease based on the effective interest
method. Payments made under operating leases was charged to income on a straight-line basis over the term of the lease. With regards
to certain aircraft used in the Company’s live training operations, management had concluded that, as at March 31, 2019, the undiscounted
lease rental payments in the amount of $46.6 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.
Sale and leaseback transactions
The Company engaged 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 resulted in a finance lease,
any excess of sales proceeds over the carrying amount was deferred and amortized over the lease term. Where a sale and leaseback
transaction results in an operating lease, and it was clear that the transaction was established at fair value, any profit or loss was recognized
in income. If the sales price was below fair value, the shortfall was recognized in income immediately except if the loss was compensated
for by future lease payments at below market price, it was deferred and amortized in proportion to the lease payments over the period
the asset was expected to be used. If the sale price was above fair value, the excess over fair value was deferred and amortized over the
period the asset was expected to be used.
The Company as a lessor
With regards to finance leases, the asset was derecognized at the commencement of the lease. The net present value of the minimum
lease payments and any discounted unguaranteed residual values of leased assets are presented as investment in finance leases. Finance
income was recognized over the term of the lease based on the effective interest method. Income from operating leases was recognized
on a straight-line basis over the term of the corresponding lease.
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.
CAE Financial Report 2020 | 71
Notes to the Consolidated Financial Statements
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
Licenses
ERP and other software
Other intangible assets
Amortization period
3 to 10 years
3 to 20 years
3 to 20 years
3 to 10 years
2 to 40 years
As at March 31, 2020, the average remaining amortization period for the capitalized development costs is 5.2 years (2019 – 5.2 years).
Amortization methods and useful lives are reviewed and adjusted, if appropriate, on a prospective basis at each reporting date.
Impairment of non-financial assets
The carrying amounts of the Company’s non-financial assets subject to amortization are tested for impairment whenever events or changes
in circumstances indicate that the carrying amount may not be recoverable. Goodwill and assets that are not yet available for use are
tested for impairment annually or at any time if an indicator of impairment exists.
The recoverable amount of an asset or a cash-generating unit (CGU) is the greater of its value in use and its fair value less costs of
disposal. The recoverable amount is determined for an individual asset; unless the asset does not generate cash inflows that are largely
independent of those from other assets or groups of assets. In such case, the CGU that the asset belongs to is used to determine the
recoverable amount.
For the purposes of impairment testing, the goodwill acquired in a business combination is allocated to CGUs or groups of CGUs, which
generally corresponds to its operating segments or one level below, that are expected to benefit from the synergies of the combination,
irrespective of whether other assets or liabilities of the acquiree are assigned to those units.
An impairment loss is recognized if the carrying amount of an asset or CGU exceeds its estimated recoverable amount. Where the
recoverable amount of a CGU to which goodwill has been allocated is lower than the CGU’s carrying amount, the related goodwill is
impaired. Any remaining amount of impairment exceeding the impaired goodwill is recognized on a pro rata basis of the carrying amount
of each asset in the respective CGU. Impairment losses are recognized in income.
The Company evaluates impairment losses, other than goodwill impairment, for potential reversals at each reporting date. An impairment
loss is reversed if there is any indication that the loss has decreased or no longer exists due to changes in the estimates used to determine
the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying
amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized. Such reversal
is recognized in income.
Borrowing costs
Borrowing costs that are directly attributable to the acquisition or construction of a qualifying asset are capitalized as part of the cost of
the asset. A qualifying asset is one that takes a substantial period of time to get ready for its intended use. Capitalization of borrowing
costs ceases when the asset is completed and ready for its intended use. All other borrowing costs are recognized as finance expense
in income, as incurred.
Other assets
Restricted cash
The Company is required to hold a defined amount of cash as collateral under the terms of certain subsidiaries’ external bank financing,
government-related sales contracts and business combination arrangements.
Deferred financing costs
Deferred financing costs related to the revolving 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.
72 | CAE Financial Report 2020
Notes to the Consolidated Financial Statements
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 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.
Provisions for estimated contract losses are recognized as an onerous contract provision 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 historical experience, current trends and other assumptions that
are believed to be reasonable under the circumstances.
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, 2020.
Warranties
A provision is recognized for expected warranty claims on products sold based on historical experience of the level of repairs and returns. It
is expected that most of these costs will be incurred between 1 to 7 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.
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 stock 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
The Company recognizes revenue when it transfers the control of the promised goods or services to the customer. The transaction price
is the amount of consideration to which the Company is expected to be entitled to in exchange for transferring promised goods or services.
Variable consideration is included in the transaction price when it is highly probable that there will be no significant reversal of revenue
in the future. Variable consideration is usually derived from sales incentives, in the form of discounts or volume rebates, and penalties.
The Company identifies the various performance obligations of the contract and allocates the transaction price based on the estimated
relative stand-alone selling prices of the promised goods or services underlying each performance obligation.
The Company’s performance obligations are satisfied over time or at a point in time depending on the transfer of control to the customer.
CAE Financial Report 2020 | 73
Notes to the Consolidated Financial Statements
Sales of goods and services
Customized training devices
Revenues from contracts with customers for the design, engineering, and manufacturing of training devices are recognized over time
using the cost input method when the Company determines that these devices have a sufficient level of customization such that they
have no alternative use and the Company has enforceable rights to payment for work completed to date. The measure of progress toward
complete satisfaction of the performance obligation is generally determined by comparing the actual direct contract costs incurred to date
to the total estimated costs for the entire contract. When the Company determines that there is an alternative use for these devices,
revenue is recognized at a point in time, when the customer obtains control of the device.
Standardized training devices
Revenue from contracts with customers for the construction of standardized training devices is recognized at a point in time, when the
customer obtains control of the device.
Training services
Revenues from the sale of training hours or training courses are recognized at a point in time, when services are rendered.
For flight schools, cadet training courses are offered mainly by way of ground school and live aircraft flight. For both phases, revenue is
recognized over time, using the time elapsed input method.
Product maintenance, support and updates
Revenues from the sale of product maintenance services and post-delivery customer support are recognized over time, using the time
elapsed output method or costs incurred method. Revenues from update services, to enhance a training device currently owned by a
customer, are recognized over time, using the cost input method.
Spare parts
Revenue from the sale of spare parts is recognized at a point in time, which is generally on delivery to the customer.
Software arrangements
Revenue from off-the-shelf software sales is recognized at a point in time, on delivery. Revenue from fixed-price software arrangements
and software customization contracts that require significant production, modification, or customization of software is recognized over
time using the cost input method.
Other
Significant financing component
The Company accounts for a significant financing component on contracts of more than 12 months where timing of cash receipts and
revenue recognition differ substantially. The transaction price for such contracts is adjusted for the time value of money, using the rate
that would be reflected in a separate financing transaction between the Company and its customers at contract inception, to take into
consideration the significant financing component.
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 most reliable measure of the fair value of the asset or service given up or fair value of the asset or service received.
Contract modifications
Contract modifications, which consist of an increase in the scope or price of a contract, are accounted for as a separate contract when
the additional goods or services to be delivered are distinct from those delivered prior to the contract modification and when the price
increases by an amount of consideration that reflects its stand-alone selling price. Contract modifications are treated prospectively when
the additional goods or services are distinct, but the price increase does not reflect the stand-alone selling price. When the remaining
goods or services are not distinct, the Company recognizes an adjustment to revenue of the initial contract on a cumulative catch-up
basis at the date of the contract modification.
Costs to obtain and to fulfill a contract
The Company recognizes incremental costs of obtaining a contract as an asset when they are expected to be recovered over a period
of more than one year. The Company recognizes costs directly related to fulfilling a contract with a customer as an asset when they
generate or enhance resources that will be used to satisfy the performance obligation in the future and they are expected to be recovered,
These assets are amortized on a systematic basis that is consistent with the Company’s transfer of the related goods or services to the
customer.
Right to invoice
If the Company has the right to invoice a customer in an amount that directly corresponds with the value of the Company’s performance
to date then revenue can be recognized at the invoice amount.
74 | CAE Financial Report 2020
Notes to the Consolidated Financial Statements
Contract balances
The timing of revenue recognition, billing and cash collections results in accounts receivable, contract assets and contract liabilities on
the consolidated financial position.
Contract assets are recognized when revenue is recognized in excess of billings or when the Company has a right to consideration and
that right is conditional to something other than the passage of time. Contract assets are subsequently transferred to accounts receivable
when the right to payment becomes unconditional.
Contract liabilities are recognized when payments received from customers are in excess of revenue recognized. Contract liabilities are
subsequently recognized in revenue when the Company satisfies its performance obligations.
Contract assets and contract liabilities are reported in a net position on a contract-by-contract basis at the end of each reporting period
and are classified as current based on our normal operating cycle.
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.
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
stock option plan; and cash-settled share-based payments plans that include the stock purchase plan, deferred share units (DSU) plans,
restricted share units (RSU) plans and the performance share units (PSU) plan.
For both categories, the fair value of the employee services received in exchange is recognized as an expense in income. Service and
non-market performance conditions attached to the transactions are not taken into account in determining fair value.
CAE Financial Report 2020 | 75
Notes to the Consolidated Financial Statements
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 stock options are exercised, the Company issues new common shares and the proceeds received
net of any directly attributable transaction costs are credited to share capital.
For cash-settled plans, a corresponding liability is recognized. The fair value of employee services received is calculated by multiplying
the number of units expected to vest with the fair value of one unit as of grant date based on the market price of the Company’s common
shares. The fair value of the stock purchase plan 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 in order to reduce its earnings exposure
related to the fluctuation in the Company’s share price relating to the DSU plans, RSU plans and PSU plan.
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 financial position liability method, providing for temporary differences between the tax bases of assets
or liabilities and their carrying amounts in the consolidated financial statements, except for temporary differences on the initial recognition
of assets and liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable income and
taxable.
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.
Earnings per share
Earnings per share is calculated by dividing the net income for the period attributable to the equity holders 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 stock 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.
76 | CAE Financial Report 2020
Notes to the Consolidated Financial Statements
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.
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
the amounts received and the discounted value of royalty obligations is accounted for as a government contribution 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 and the Government of
Canada's and the Government of Québec's in Project Digital Intelligence 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 related expenses or as a reduction of the cost of the related asset.
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
non-current assets. Investment tax credits are deemed to be equivalent to government contributions. These government contributions
are received for costs incurred in R&D projects.
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 the recoverable amount of the CGU or group of CGUs to
which goodwill has been allocated and uses valuation models such as the discounted cash flows model (level 3). Key assumptions on
which management based its determination of the recoverable amount include expected growth rates and discount 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 26 for further details regarding assumptions used.
CAE Financial Report 2020 | 77
Notes to the Consolidated Financial Statements
Revenue recognition
Transaction price allocated to performance obligations
In allocating the transaction price for contracts with multiple performance obligations, the Company estimates the stand-alone selling
price using the expected cost plus a margin approach if they are not directly observable.
Timing of satisfaction of performance obligations
For contracts where revenue is recognized over time using the cost input method, the Company is required 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 as
well as its 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 19 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 consider 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 8.0% to 15.0%, over the
period of repayments. The estimated repayments are discounted using average rates ranging from 6.0% to 9.5% based on terms of similar
financial instruments. These estimates, along with the methodology used to derive the estimates, can have a material impact on the
respective values and ultimately any repayable obligation in relation to government participation. A 1% increase to the growth rates would
increase the royalty obligations at March 31, 2020 by approximately $2.8 million (2019 – $3.5 million). A 1% decrease to the growth rates
would have an opposite impact on the royalty obligations.
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 influence 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.
Impact of the COVID-19 pandemic
The COVID-19 pandemic and the resulting measures taken in response to its spread have resulted in significant temporary disruptions
to the Company business operations. The rapidly evolving situation has created a high level of uncertainty and risk that may result in
significant impacts on the Company’s business, financial performance and operations.
The uncertainties created by the COVID-19 pandemic required the use of judgements and estimates in the areas set out below. The future
impact of the COVID-19 pandemic increases the risk, in future reporting periods, of material adjustments to the carrying amount of the
Company’s net assets.
78 | CAE Financial Report 2020
Goodwill impairment test
The Company performed its annual impairment test for goodwill during the fourth quarter of fiscal 2020. Goodwill is allocated to CGUs
or a group of CGUs, which generally corresponds to the Company’s operating segments or one level below. The value in use of each
CGU is calculated using estimated cash flows derived from the Company's five-year strategic plan. Cash flows subsequent to the
five-year period were extrapolated using a constant growth rate of 2% to 3%. These projections are inherently uncertain due to the fluidly
evolving impact of the COVID-19 pandemic. Significant assumptions and estimates are used to determine the expected growth rates
embedded in our cash flow projections and the discount rate based on observable market data during the fourth quarter.
Notes to the Consolidated Financial Statements
Based on the results of its impairment test, the Company recorded an impairment charge of goodwill of $37.5 million in relation to the
Healthcare CGU (see Note 26).
Impairment of non-financial assets
The Company has considered the impact of the COVID-19 pandemic on its assessment of impairment indicators, which required significant
judgement. The Company has reviewed its property, plant and equipment, right-of-use assets, amortizable intangible assets, investment
in equity accounted investees as well as other assets such as inventories and deferred tax assets. Where impairment indicators were
identified in the Civil Aviation Training Solutions segment, no significant impairment charge has been recorded. No impairment indicators
were identified in the Defence and Security and Healthcare segments.
Expected credit loss
The Company has considered the impact of the COVID-19 pandemic on the expected credit loss of its financial instruments (mainly trade
receivable and contract assets). The amount and timing of the expected credit losses, as well as the probability assigned thereto, has
been based on the available information as at March 31, 2020. As a result of this review, no significant credit loss allowances adjustments
have been recorded (see Note 9).
NOTE 2 – CHANGES IN ACCOUNTING POLICIES
New and amended standards adopted by the Company
IFRS 16 - Leases
In January 2016, the IASB released IFRS 16 - Leases, which replaced 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 liability for substantially all leases. Lessors continue to classify leases as operating
leases or finance leases as IFRS 16 substantially carries forward the current lessor accounting requirements.
IFRS 16 was adopted effective April 1, 2019. The Company elected to use the modified retrospective approach. Under this approach, the
comparative information was not restated and the cumulative effect of initially applying IFRS 16 was recognized in equity at the date of
initial application, on April 1, 2019.
The Company has elected to apply the following transitional practical expedients:
– Maintain previous assessment of whether a contract is, or contains, a lease at the date of initial application;
– Use of hindsight when evaluating the lease term if a contract contains options to extend or terminate the lease;
– Recognize short-term leases and leases of low-value assets as a lease expense on a straight-line basis, consistent with current
IAS 17 accounting;
– Account for leases for which the remaining lease term ends within 12 months of the effective date as short-term leases;
– Adjust the right-of-use asset by the amount of the previously assessed IAS 37 onerous contract provision as an alternative to
an impairment review;
– Exclude initial direct costs from the measurement of the right-of-use asset at the date of initial application;
– Measure the right-of-use asset as if IFRS 16 had been applied since the lease commencement date using the incremental
borrowing rate at the date of initial application.
Where the Company is a lessee, IFRS 16 resulted in on-balance sheet recognition of most of its leases that were previously considered
operating leases under IAS 17 unless they met the short-term or low-value exemption.
CAE Financial Report 2020 | 79
Notes to the Consolidated Financial Statements
For the consolidated statement of financial position, this resulted in the recognition of new right-of-use assets of $226.8 million and new
lease liabilities of $265.8 million, presented as part of the long-term debt, discounted using the incremental borrowing rate as at April 1, 2019
(weighted average rate applied was 5.4%). In addition, the Company had existing finance lease assets of $206.0 million under IAS 17
that were reclassified to right-of-use assets.
For the consolidated income statement, depreciation expense on the right-of-use assets and interest expense on the lease liabilities are
incurred, replacing the operating lease expense previously recognized under IAS 17 accounting.
For the consolidated statement of cash flows, the principal repayments of the lease liabilities are presented in financing activities, whereas
previously operating lease payments under IAS 17 accounting were presented in operating activities.
The cumulative effect of the impacts of adopting IFRS 16 on the consolidated statement of financial position as at April 1, 2019 are
presented in the table below:
(amounts in millions)
Assets
Total current assets
Property, plant and equipment
Right-of-use assets
Investment in equity accounted investees
Other non-current assets
Total assets
Liabilities and equity
Current portion of long-term debt
Other current liabilities
Total current liabilities
Long-term debt
Other non-current liabilities
Total liabilities
Total equity
Total liabilities and equity
March 31
2019
IFRS 16
Adjustments
$
$
$
$
$
$
$
2,112.9
2,149.3
—
312.1
2,591.2
7,165.5
264.1
1,625.4
1,889.5
2,064.2
801.8
4,755.5
2,410.0
7,165.5
$
$
$
$
$
$
$
(3.3)
(206.0)
432.8
(3.7)
0.3
220.1
31.8
(4.3)
27.5
234.0
(13.9)
247.6
(27.5)
220.1
$
$
$
$
$
$
$
April 1
2019
2,109.6
1,943.3
432.8
308.4
2,591.5
7,385.6
295.9
1,621.1
1,917.0
2,298.2
787.9
5,003.1
2,382.5
7,385.6
The difference between the amount of new lease liabilities recognized as at April 1, 2019 and the future aggregate minimum lease payments
under non-cancellable operating leases of the Company as at March 31, 2019, which amounted to $274.1 million, is mainly due to the
discounting factors applied to the lease payments, the inclusion of optional renewal period reasonably certain to be exercised, and the
exclusion of leases payments for short-term lease and low-value lease.
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 was adopted effective April 1, 2019 and resulted in no significant adjustment.
Amendment to IAS 19 - Employee benefits
In February 2018, the IASB released an amendment to IAS 19 - Employee Benefits, which clarifies how to account for plan amendments,
curtailments and settlements on defined benefits plans. The amendment requires the use of updated actuarial assumptions to determine
current service cost and net interest for the period after a plan amendment, curtailment or settlement.
This amendment to IAS 19 was adopted April 1, 2019 and will apply to any plan amendments, curtailments or settlements occurring
subsequent to April 1, 2019.
80 | CAE Financial Report 2020
Notes to the Consolidated Financial Statements
NOTE 3 – BUSINESS COMBINATIONS
Year ended March 31, 2020
Pelesys Learning Systems Inc.
On April 26, 2019, the Company acquired the remaining 55% equity interest in Pelesys Learning Systems Inc. (Pelesys) for cash
consideration (net of cash acquired) of $4.0 million and a long-term payable of $5.7 million.
Pelesys is a global leader in the provision of aviation training solutions and courseware. The acquisition strengthens the Company’s
courseware offering and consolidate its cadet-to-captain training delivery across its global network. Prior to this transaction, the Company's
45% ownership interest in Pelesys was accounted for using the equity method.
Luftfartsskolen AS
On June 26, 2019, the Company acquired the shares of Luftfartsskolen AS, an ab-initio flight school located in Oslo, Norway, for cash
consideration (net of cash acquired) of $3.5 million. This acquisition strengthens the Company’s leadership and global reach in civil
aviation training by growing its flight academy network.
The purchase prices of Pelesys and Luftfartsskolen AS are mainly allocated to goodwill and intangible assets. The net assets, including
intangibles, arising from these acquisitions are included in Civil Aviation Training Solutions segment.
Other
On November 12, 2019, the Company invested in a healthcare software company that enables increased efficiency of learning. The
investment is in the form of a controlling 50% equity interest, for cash consideration of $0.9 million.
During the year ended March 31, 2020, the Company completed its final assessment of the fair value of assets acquired and liabilities
assumed of all acquisitions realized in fiscal 2020 and those of Avianca’s Training Business, Logitude, the Indian Training Centres and
Bombardier’s Business Aircraft Training Business which were acquired during the year ended March 31, 2019. Adjustments to the
determination of net identifiable assets acquired and liabilities assumed for acquisitions realized in the year ended March 31, 2019 resulted
in an increase of intangible assets of $6.2 million, a decrease of deferred tax assets of $4.7 million and a decrease of other net assets
of $1.5 million.
During the year ended March 31, 2020, an additional net cash consideration of $1.7 million was paid for acquisitions realized during the
year ended March 31, 2019.
Year ended March 31, 2019
Alpha-Omega Change Engineering
On July 31, 2018, the Company acquired the shares of Alpha-Omega Change Engineering Inc. (AOCE) for cash consideration of
$34.4 million, subject to purchase price adjustments related to working capital. AOCE is a provider of aircrew training services, operational
test and evaluation, and engineering support services to the U.S. Department of Defense and U.S. intelligence service.
Avianca's Training Business
On January 30, 2019, as part of an exclusive 15-year training outsourcing agreement, the Company acquired the remaining 50% equity
interest in Avianca-CAE Flight Training (ACFT), a recently formed training joint venture, and training assets located in Colombia and
El Salvador from Avianca Holdings, for cash consideration of $50.1 million.
Prior to this transaction, the Company's 50% ownership interest in ACFT was accounted for using the equity method.
Logitude
On March 7, 2019, the Company acquired the shares of Logitude Oy for total consideration of $8.7 million. Logitude designs and develops
software solutions related to flight and cabin crew training management and training records management, including evidence-based
training.
Bombardier's Business Aircraft Training Business
On March 13, 2019, the Company acquired Bombardier’s Business Aircraft Training (BAT) Business for cash consideration of
$709.9 million, subject to purchase price adjustments primarily related to working capital.
The acquisition provides the Company with a specialized workforce, a portfolio of customers, and business jet full-flight simulators and
training devices to add to its training network.
Indian Training Centres
On March 27, 2019, the Company acquired the remaining 50% equity interest in the CAE Flight Training (India) Private Limited (CFTPL)
joint venture and an additional 25% equity interest in the CAE Simulation Training Private Limited (CSTPL) Indian joint venture for cash
consideration of $31.5 million.
CAE Financial Report 2020 | 81
Notes to the Consolidated Financial Statements
As a result, the Company acquired control over CFTPL's assets for the training centres located in India, including a portfolio of customers,
and now owns a 50% equity interest in CSTPL, a joint venture training centre between CAE and InterGlobe Enterprises located in India.
Prior to this acquisition, the Company's 50% ownership interest in CFTPL was accounted for using the equity method. The gain resulting
from the remeasurement to fair value of the previously held interest in CFTPL is included in Other gains - Net in the consolidated income
statement.
The determination of the fair value of the net assets acquired and liabilities assumed arising from the acquisitions are as follows:
Current assets, excluding cash on hand
Current liabilities
Property, plant and equipment
Investment in equity accounted investee
Intangible assets
Deferred tax
Other non-current assets
Long-term debt, including current portion
Other non-current liabilities
Fair value of net assets acquired, excluding cash acquired
Cash acquired
Total purchase consideration
Net short-term receivable (payable)
Settlement of pre-existing relationship
Fair value of previously held interest in equity accounted investees
Total cash consideration
Bombardier's BAT
Business
$
— $
(6.1)
134.6
—
695.8
13.1
9.3
(137.6)
(2.7)
706.4
—
706.4
2.9
0.6
—
709.9
$
$
$
$
$
$
Other
45.4
(39.8)
40.6
21.7
115.7
14.1
—
(15.2)
(49.0)
133.5
4.6
138.1
(4.1)
0.5
(12.0)
122.5
$
$
$
$
Total
45.4
(45.9)
175.2
21.7
811.5
27.2
9.3
(152.8)
(51.7)
839.9
4.6
844.5
(1.2)
1.1
(12.0)
832.4
The fair value of the acquired identifiable intangible assets amount to $811.5 million and consists of goodwill of $443.0 million
($334.5 million is deductible for tax purposes), licenses of $169.5 million, customer relationships of $191.4 million and other intangible
assets of $7.6 million.
The fair value and the gross contractual amount of the acquired accounts receivable were $23.6 million.
During the year ended March 31, 2019, total acquisition costs incurred relating to these acquisitions were included in Other gains - Net
in the consolidated income statement.
The net assets acquired, including intangibles, of AOCE are included in the Defence and Security segment. The goodwill arising from
the acquisition is attributable to the enhancement of the Company’s core capabilities as a training systems integrator, strengthening of
its position on enduring platforms such as fighter aircraft and expanded ability to pursue higher-level security programs in the United
States.
The net assets acquired, including intangibles, of Avianca's Training Business, Logitude, Bombardier’s BAT Business and the Indian
Training Business are included in the Civil Aviation Training Solutions segment. The goodwill arising from these acquisitions is mainly
attributable to the expansion of CAE’s customer installed base of business jet and commercial flight simulators, market capacity
consolidation and expected synergies from combining operations.
During the year ended March 31, 2019, the Company finalized the purchase price allocation of AOCE and the acquisitions realized in the
year ended March 31, 2018. As at March 31, 2019, the purchase price allocation for Avianca's Training Business, Logitude, Bombardier's
Business Aircraft Training Business and the Indian Training Centres were preliminary at that time.
82 | CAE Financial Report 2020
Notes to the Consolidated Financial Statements
NOTE 4 – 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.
The Company has decided to disaggregate revenue from contracts with customers by segment, by products and services and by geographic
regions as the Company believes it best depicts how the nature, amount, timing and uncertainty of its revenue and cash flows are affected
by economic factors.
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 and revenue.
External revenue
Depreciation and amortization
Impairment of non-financial assets – net
Write-downs of inventories – net
Write-downs of accounts receivable – net
Share of after tax profit of
equity accounted investees
Segment operating income (loss)
Civil Aviation
Training Solutions
2019
2020
$1,875.8
$ 2,167.5
157.2
232.8
4.9
1.8
0.7
1.3
4.4
5.4
Defence
and Security
2019
$ 1,306.7
46.5
—
0.9
0.2
2020
$ 1,331.2
58.2
3.2
4.9
—
2020
$ 124.5
14.4
37.5
0.2
0.1
Healthcare
2019
$ 121.6
13.5
—
0.1
—
2020
$ 3,623.2
305.4
42.5
6.4
5.5
Total
2019
$ 3,304.1
217.2
4.9
1.7
4.6
18.3
473.3
23.0
344.3
9.2
104.8
10.4
131.5
—
(41.0)
—
4.8
27.5
537.1
33.4
480.6
Capital expenditures by segment, which consist of additions to property, plant and equipment and intangible assets, are as follows:
Civil Aviation Training Solutions
Defence and Security
Healthcare
Total capital expenditures
2020
$ 296.3
74.8
12.9
$ 384.0
2019
$ 260.1
65.7
12.6
$ 338.4
Addition of assets through the monetization of royalties
During the year ended March 31, 2019, the Company agreed to monetize its future royalty obligations under an Authorized Training
Provider agreement with Bombardier and extend this agreement to 2038. In December 2018, the Company concluded the monetization
transaction which resulted in a cash outlay of $202.7 million. The monetization represents the discounted sum of expected royalties
payable by CAE over the next 20 years. As a result of this transaction, $156.7 million of intangible assets (Note 13) and $46.0 million of
property, plant and equipment (Note 12) were recognized in the Civil Aviation Training Solutions segment.
Assets and liabilities employed by segment
The Company uses assets employed and liabilities employed to assess resources allocated to each segment. Assets employed include
accounts receivable, contract assets, inventories, prepayments, property, plant and equipment, right-of-use assets, intangible assets,
investment in equity accounted investees, derivative financial assets and other non-current assets. Liabilities employed include accounts
payable and accrued liabilities, provisions, contract liabilities, derivative financial liabilities and other non-current liabilities.
CAE Financial Report 2020 | 83
Notes to the Consolidated Financial Statements
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:
Simulation products
Training and services
Total external revenue
2020
2019
$
$
$
$
$
$
5,089.5
1,767.5
253.9
1,372.7
8,483.6
1,219.9
613.5
45.9
4,026.0
5,905.3
2020
1,537.0
2,086.2
3,623.2
$
$
$
$
$
$
4,373.0
1,627.2
271.6
893.7
7,165.5
1,098.3
595.2
48.8
3,013.2
4,755.5
2019
1,473.8
1,830.3
3,304.1
Geographic information
The Company markets its products and services globally. Revenues are attributed to geographical regions based on the location of
customers. Non-current assets other than financial instruments and deferred tax assets are attributed to geographical regions based on
the location of the assets excluding goodwill. Goodwill is attributed to geographical regions based on the Company’s allocation of the
related purchase price. The Company has retrospectively revised the geographic information for the comparative period to conform to
the current presentation.
External revenue
Canada
United States
United Kingdom
Rest of Americas
Europe
Asia
Africa and Oceania
Non-current assets other than financial instruments and deferred tax assets
Canada
United States
United Kingdom
Rest of Americas
Europe
Asia
Africa and Oceania
84 | CAE Financial Report 2020
2020
2019
$
$
$
$
323.2
1,541.8
208.8
127.7
631.7
707.1
82.9
3,623.2
2020
1,449.4
1,845.5
403.4
250.4
801.0
586.9
35.1
5,371.7
$
$
$
$
253.3
1,285.0
210.4
76.2
682.6
699.7
96.9
3,304.1
2019
1,395.2
1,580.7
285.2
269.2
692.6
533.2
35.4
4,791.5
NOTE 5 – OTHER GAINS – NET
Disposal of property, plant and equipment
Net gain on foreign currency exchange differences
Remeasurement of royalty obligations
Impairment of goodwill (Note 26)
Other
Other gains – net
Notes to the Consolidated Financial Statements
2020
7.0
41.6
1.9
(37.5)
(12.0)
1.0
$
$
2019
1.2
24.8
7.9
—
(11.6)
22.3
$
$
Other
During the year ended March 31, 2020, reorganizational costs of $9.7 million, which includes write-downs of inventories of $3.8 million
and impairment of intangible assets of $3.2 million, were recognized in the Defence and Security segment following changes made in
the segment organization and the review of certain product offerings. Additionally, write-downs of assets of $9.4 million, which includes
impairment of property, plant and equipment of $1.8 million, and integration costs of Bombardier's BAT Business of $6.1 million were
recognized in the Civil Aviation Training Solutions segment. These costs were offset by a remeasurement gain of $13.4 million, due to the
decrease in fair value of a contingent consideration liability incurred in connection with a fiscal 2018 business combination.
During the year ended March 31, 2019, an impairment of $4.9 million on certain older assets in our network and acquisition and integration
costs of Bombardier's BAT Business of $6.8 million were recognized in the Civil Aviation Training Solutions segment. These costs were
offset by a gain of $3.7 million generated primarily from the remeasurement to fair value of the previously held interest in CFTPL.
NOTE 6 – FINANCE EXPENSE – NET
Finance expense:
Long-term debt (other than lease liabilities)
Lease liabilities
Royalty obligations
Employee benefits obligations (Note 19)
Other
Borrowing costs capitalized
Finance expense
Finance income:
Loans and investment in finance leases
Other
Finance income
Finance expense – net
NOTE 7 – 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
Effect of differences in tax rates in other jurisdictions
Unrecognized tax benefits and tax benefits not previously recognized
Non-taxable revenues
Tax impact on after tax profit of equity accounted investees
Other
Income tax expense
2020
2019
$
$
$
$
$
$
$
$
$
$
$
$
$
$
105.1
23.3
10.0
5.6
15.5
(3.6)
155.9
(8.3)
(3.2)
(11.5)
144.4
2020
392.7
26.64%
104.6
(19.9)
3.4
(6.2)
(6.1)
(2.0)
$
73.8
$
63.1
7.6
11.9
5.7
13.8
(5.0)
97.1
(8.5)
(7.7)
(16.2)
80.9
2019
399.7
26.72%
106.8
(13.4)
(33.0)
(5.5)
(8.0)
12.7
59.6
The Company's applicable tax rate corresponds to the combined Canadian tax rates applicable in the provinces where the Company
operates. The decrease is due to a change in the tax rates and the allocation of income in the jurisdictions it operates.
CAE Financial Report 2020 | 85
Notes to the Consolidated Financial Statements
Significant components of the provision for the income tax expense are as follows:
Current income tax expense :
Current year
Prior years' tax adjustments
Deferred income tax (recovery) expense:
Tax benefit not previously recognized used to reduce the deferred tax expense
Change in income tax rates
Origination and reversal of temporary differences
Income tax expense
Deferred tax assets and liabilities
During the year ended March 31, 2020, movements in temporary differences are as follows:
2020
65.1
5.8
(2.8)
(1.0)
6.7
73.8
$
$
2019
69.9
12.8
(36.1)
(1.3)
14.3
59.6
$
$
Non-capital loss carryforwards
Unclaimed research & development
expenditures
Capital loss carryforwards
Investment tax credits
Property, plant and equipment
and right-of-use of assets
Intangible assets
Deferred revenues, contract assets
and contract liabilities
Foreign currency exchange difference
Derivative financial assets and liabilities
Defined benefit obligation
Other
Net deferred income tax (liabilities) assets
Balance
beginning
of year
Impact of
adopting
Foreign
currency
IFRS 16
Recognized
Recognized
Business
exchange
Balance
(Note 2)
in income
in OCI
combinations
differences
end of year
$
35.2
$
— $
(1.2) $
— $
— $
(0.6) $
33.4
45.1
0.7
(74.1)
(73.2)
(87.4)
2.0
(13.9)
0.2
55.4
34.0
(76.0) $
$
—
—
—
5.8
—
—
—
—
—
—
5.8
$
19.3
0.7
4.1
(11.2)
(1.9)
(18.9)
(2.1)
15.6
0.1
(7.4)
(2.9) $
—
—
—
—
—
—
13.3
9.7
(3.6)
—
19.4
$
—
—
—
(3.1)
(2.9)
—
—
—
—
(0.6)
(6.6) $
—
—
—
(6.7)
(0.8)
1.0
0.4
—
1.2
(0.3)
(5.8) $
64.4
1.4
(70.0)
(88.4)
(93.0)
(15.9)
(2.3)
25.5
53.1
25.7
(66.1)
During the year ended March 31, 2019, movements in temporary differences are as follows:
Non-capital loss carryforwards
Unclaimed research & development expenditures
Capital loss carryforwards
Investment tax credits
Property, plant and equipment
and right-of-use of assets
Intangible assets
Deferred revenues, contract assets
and contract liabilities
Foreign currency exchange difference
Derivative financial assets and liabilities
Defined benefit obligation
Other
Net deferred income tax (liabilities) assets
Balance
beginning
of year
Recognized
Recognized
Business
exchange
Balance
in income
in OCI
combinations
differences
end of year
Foreign
currency
$
$
$
45.7
37.4
—
(64.6)
(104.6)
(87.8)
(8.6)
(13.9)
(0.3)
51.6
21.6
(123.5) $
(9.6) $
7.7
0.7
(9.5)
16.4
5.7
(2.8)
(1.3)
(0.7)
0.7
15.8
23.1
$
— $
—
—
—
—
—
—
1.0
1.2
(1.1)
—
1.1
$
0.8
—
—
—
18.3
(6.2)
14.3
—
—
0.7
(0.7)
27.2
$
(1.7) $
—
—
—
(3.3)
0.9
(0.9)
0.3
—
3.5
(2.7)
(3.9) $
$
35.2
45.1
0.7
(74.1)
(73.2)
(87.4)
2.0
(13.9)
0.2
55.4
34.0
(76.0)
As at March 31, 2020, a deferred income tax liability on taxable temporary differences of $2,544.3 million (2019 – $2,294.4 million) related
to investments in 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.
86 | CAE Financial Report 2020
The non-capital losses incurred in various jurisdictions expire as follows:
Notes to the Consolidated Financial Statements
Expiry date
2021 - 2025
2026 - 2039
No expiry date
Unrecognized
Recognized
$
$
18.2
$
116.0
41.0
1.2
50.5
84.5
175.2
$
136.2
As at March 31, 2020, the Company has $149.9 million (2019 – $125.4 million) of deductible temporary differences for which deferred
tax assets have not been recognized. These amounts will reverse during a period of up to 25 years.
NOTE 8 – SHARE CAPITAL, EARNINGS PER SHARE AND DIVIDENDS
Share capital
Authorized and issued 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.
As at March 31, 2020, the number of common shares issued and fully paid was 265,619,627 (2019 – 265,447,603).
Repurchase and cancellation of common shares
On February 7, 2020, the Company announced the renewal of the normal course issuer bid (NCIB) to purchase up to 5,321,474 of its
common shares. The NCIB began on February 25, 2020 and will end on February 24, 2021 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.
During the year ended March 31,2020, the Company repurchased and cancelled a total of 1,493,331 common shares under the previous
and current NCIB (2019 – 3,671,900), at a weighted average price of $33.22 per common share (2019 – $25.70), for a total consideration
of $49.6 million (2019 – $94.4 million). An excess of $45.8 million (2019 – $85.6 million) of the shares’ repurchase value over their carrying
amount was charged to retained earnings as share repurchase premiums. Subsequent to year end, the Company has temporary suspended
its NCIB (see Note 33).
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
2020
265,951,131
1,644,353
267,595,484
2019
266,580,019
1,394,135
267,974,154
As at March 31, 2020, stock options to acquire 1,293,200 common shares (2019 – 1,722,800) have been excluded from the above
calculation since their inclusion would have had an anti-dilutive effect.
Dividends
During the year ended March 31, 2020, the dividends declared were $114.3 million or $0.43 per share (2019 – $103.9 million or $0.39
per share). Subsequent to year end, the Company has temporary suspended its common share dividends (see Note 33).
CAE Financial Report 2020 | 87
Notes to the Consolidated Financial Statements
NOTE 9 – ACCOUNTS RECEIVABLE
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
Credit loss allowances
Total trade receivables
Investment in finance leases (Note 14)
Receivables from related parties (Note 32)
Other receivables
Total accounts receivable
Changes in credit loss allowances are as follows:
Credit loss allowances, beginning of year
Additions
Amounts charged off
Unused amounts reversed
Foreign currency exchange differences
Credit loss allowances, end of year
NOTE 10 – BALANCE FROM CONTRACTS WITH CUSTOMERS
Net contract liabilities are as follows:
Contract assets
Contract liabilities - current
Contract liabilities - non-current
Net contract liabilities
2020
215.1
95.7
27.8
34.1
105.3
(27.5)
450.5
16.8
45.8
53.0
566.1
2020
(22.0)
(7.4)
0.8
1.8
(0.7)
(27.5)
2020
569.3
(746.2)
(83.3)
(260.2)
$
$
$
$
$
$
$
2019
227.3
55.4
19.5
7.6
79.6
(22.0)
367.4
11.4
30.9
86.3
496.0
2019
(20.9)
(7.3)
5.0
0.7
0.5
(22.0)
2019
523.5
(670.2)
(102.5)
(249.2)
$
$
$
$
$
$
$
During the year ended March 31, 2020, the Company recognized revenue of $532.2 million (2019 - $599.4 million) that was included in
the contract liability balance at the beginning of the year.
During the year ended March 31, 2020, the Company recognized revenue of $29.8 million (2019 - $22.4 million) related to performance
obligations satisfied in previous years. This primarily relates to estimate at completion adjustments that impacted revenue and measures
of completion.
Remaining performance obligations
As at March 31, 2020, the amount of the revenues expected to be realized in future years from performance obligations that are unsatisfied,
or partially unsatisfied, was $4,863.5 million. The Company expects to recognize approximately 41% of these remaining performance
obligations as revenue by March 31, 2021, an additional 22% by March 31, 2022 and the balance thereafter.
NOTE 11 – INVENTORIES
Work in progress
Raw materials, supplies and manufactured products
2020
405.1
211.1
616.2
$
$
2019
342.4
194.6
537.0
$
$
During the year ended March 31, 2020, use of inventory recognized in cost of sales amounted to $500.3 million (2019 – $523.5 million).
88 | CAE Financial Report 2020
NOTE 12 – PROPERTY, PLANT AND EQUIPMENT
Notes to the Consolidated Financial Statements
(amounts in millions)
Net book value as at March 31, 2018
Additions
Additions – business combinations (Note 3)
Additions – monetization of royalties (Note 4)
Disposals
Depreciation
Impairment
Transfers and others
Foreign currency exchange differences
Net book value as at March 31, 2019
Impact of adopting IFRS 16 (Note 2)
Net book value as at April 1, 2019
Additions
Additions – business combinations (Note 3)
Disposals
Depreciation
Impairment
Transfers and others
Foreign currency exchange differences
Net book value as at March 31, 2020
(amounts in millions)
Cost
Accumulated depreciation and impairment
Net book value as at March 31, 2019
Impact of adopting IFRS 16 (Note 2)
Net book value as at April 1, 2019
Cost
Accumulated depreciation and impairment
Net book value as at March 31, 2020
Buildings
and land Simulators
Machinery
and
equipment
Aircraft
226.7 $
27.3
0.2
—
—
(16.8)
—
4.4
(0.1)
241.7 $
—
241.7 $
31.0
0.1
(0.1)
(17.7)
—
2.2
5.6
262.8 $
1,185.9 $
10.3
70.4
46.0
(1.3)
(83.1)
(4.9)
232.3
(5.3)
1,450.3 $
—
1,450.3 $
27.3
—
(0.5)
(105.0)
(1.8)
155.0
44.0
1,569.3 $
50.3 $
16.9
0.5
—
—
(17.3)
—
1.2
(0.1)
51.5 $
—
51.5 $
13.9
0.1
—
(17.9)
—
2.8
1.0
51.4 $
55.4 $
2.5
0.3
—
(0.2)
(4.5)
—
—
1.3
54.8 $
—
54.8 $
11.3
0.6
(0.1)
(5.0)
—
4.6
3.1
69.3 $
Buildings
and land Simulators
Machinery
and
equipment
455.4 $
(213.7)
241.7 $
—
241.7 $
490.0 $
(227.2)
262.8 $
2,005.0 $
(554.7)
1,450.3 $
—
1,450.3 $
2,191.1 $
(621.8)
1,569.3 $
221.1 $
(169.6)
51.5 $
—
51.5 $
203.1 $
(151.7)
51.4 $
Aircraft
67.0 $
(12.2)
54.8 $
—
54.8 $
82.2 $
(12.9)
69.3 $
$
$
$
$
$
$
$
$
$
Assets
under
finance
Assets
under
lease construction
121.2 $
—
103.4
—
—
(15.9)
—
(6.2)
3.5
206.0 $
(206.0)
164.4 $
194.8
0.4
—
—
—
—
(212.8)
(1.8)
145.0 $
—
145.0 $
207.1
—
—
—
—
(151.6)
0.7
201.2 $
— $
—
—
—
—
—
—
—
— $
Assets
under
finance
Assets
under
lease construction
345.7 $
(139.7)
206.0 $
(206.0)
145.0 $
—
145.0 $
—
145.0 $
201.2 $
—
201.2 $
— $
— $
—
— $
Total
1,803.9
251.8
175.2
46.0
(1.5)
(137.6)
(4.9)
18.9
(2.5)
2,149.3
(206.0)
1,943.3
290.6
0.8
(0.7)
(145.6)
(1.8)
13.0
54.4
2,154.0
Total
3,239.2
(1,089.9)
2,149.3
(206.0)
1,943.3
3,167.6
(1,013.6)
2,154.0
During the year ended March 31, 2020, depreciation of $142.8 million (2019 – $134.9 million) has been recorded in cost of sales, $0.8
million (2019 – $0.7 million) in research and development expenses and $2.0 million (2019 – $2.0 million) in selling, general and
administrative expenses.
CAE Financial Report 2020 | 89
Notes to the Consolidated Financial Statements
NOTE 13 – INTANGIBLE ASSETS
(amounts in millions)
Net book value as at March 31, 2018
Additions – internal development
Additions – business combinations (Note 3)
Additions – monetization of royalties (Note 4)
Amortization
Transfers and others
Foreign currency exchange differences
Net book value as at March 31, 2019
Additions – internal development
Additions – acquired separately
Additions – business combinations (Note 3)
Amortization
Impairment
Transfers and others
Foreign currency exchange differences
Net book value as at March 31, 2020
Cost
Accumulated amortization and impairment
Net book value as at March 31, 2019
Cost
Accumulated amortization and impairment
Net book value as at March 31, 2020
$
$
$
$
$
$
$
Capitalized
Goodwill development
(Note 26)
Customer
costs relationships
173.7 $
69.4
7.6
—
(30.5)
(10.0)
0.4
210.6 $
86.2
—
5.8
(39.6)
(3.2)
(11.1)
0.8
249.5 $
154.5 $
—
191.4
—
(22.4)
—
(0.7)
322.8 $
—
—
13.0
(34.7)
—
2.9
8.0
312.0 $
625.5 $
—
443.0
—
—
—
(0.8)
1,067.7 $
—
—
20.1
—
(37.5)
—
35.0
1,085.3 $
Capitalized
development
Goodwill
1,067.7 $
—
1,067.7 $
1,122.8 $
(37.5)
1,085.3 $
Customer
costs relationships
375.0 $
(164.4)
210.6 $
454.2 $
(204.7)
249.5 $
460.9 $
(138.1)
322.8 $
486.1 $
(174.1)
312.0 $
ERP and
other
software
Other
intangible
assets
Licenses
— $
—
169.5
156.7
(2.3)
—
0.5
324.4 $
—
1.8
(7.0)
(12.8)
—
(2.7)
5.0
308.7 $
64.9 $
17.2
—
—
(14.3)
2.7
0.2
70.7 $
12.0
—
—
(14.1)
—
4.1
0.3
73.0 $
37.0 $
—
—
—
(5.4)
0.5
(0.4)
31.7 $
—
0.6
—
(4.9)
—
—
0.6
28.0 $
ERP and
other
software
Licenses
326.7 $
(2.3)
324.4 $
326.2 $
(17.5)
308.7 $
208.8 $
(138.1)
70.7 $
213.3 $
(140.3)
73.0 $
Other
intangible
assets
104.1 $
(72.4)
31.7 $
98.3 $
(70.3)
28.0 $
Total
1,055.6
86.6
811.5
156.7
(74.9)
(6.8)
(0.8)
2,027.9
98.2
2.4
31.9
(106.1)
(40.7)
(6.8)
49.7
2,056.5
Total
2,543.2
(515.3)
2,027.9
2,700.9
(644.4)
2,056.5
During the year ended March 31, 2020, amortization of $65.8 million (2019 – $43.7 million) has been recorded in cost of sales, $38.5
million (2019 – $29.4 million) in research and development expenses and $1.8 million (2019 – $1.8 million) in selling, general and
administrative expenses.
NOTE 14 – LEASES
Leases as lessee
Right-of-use assets
Net book value as at March 31, 2019
Impact of adopting IFRS 16 (Note 2)
Net book value as at April 1, 2019
Additions and remeasurements
Additions – business combinations (Note 3)
Depreciation
Transfers and others
Foreign currency exchange differences
Net book value as at March 31, 2020
Buildings
and land Simulators
Machinery
and
equipment
Aircraft
$
$
$
— $
241.8
241.8 $
30.1
1.1
(25.3)
(1.0)
5.2
251.9 $
— $
183.7
183.7 $
(3.4)
—
(20.1)
(25.3)
3.9
138.8 $
— $
7.3
7.3 $
0.6
—
(3.1)
0.2
—
5.0 $
— $
—
— $
—
0.4
(0.2)
—
—
0.2 $
Total
—
432.8
432.8
27.3
1.5
(48.7)
(26.1)
9.1
395.9
During the year ended March 31, 2020, depreciation of $47.0 million has been recorded in cost of sales and $1.7 million in selling, general
and administrative expenses.
Short-term leases, leases of low-value assets and variable lease payments
During the year ended March 31, 2020, expenses of $16.3 million have been recognized in net income relating to short-term leases,
leases of low-value assets and variable lease payments not included in the measurement of lease liabilities.
90 | CAE Financial Report 2020
Leases as lessor
Operating Lease
As at March 31, 2020, the net book value of property, plant and equipment leased under operating lease to third parties was $72.8 million
(2019 - $91.7 million ).
Undiscounted lease payments to be received under operating leases are as follows:
Notes to the Consolidated Financial Statements
Less than 1 year
Between 1 and 2 years
Between 2 and 3 years
Between 3 and 4 years
Between 4 and 5 years
More than 5 years
Total undiscounted lease payments receivable
Finance Lease
Undiscounted lease payments to be received under finance leases are as follows:
Less than 1 year
Between 1 and 2 years
Between 2 and 3 years
Between 3 and 4 years
Between 4 and 5 years
More than 5 years
Total undiscounted lease payments receivable
Unearned finance income
Discounted unguaranteed residual values of leased assets
Total investment in finance leases
Current portion (Note 9)
Non-current portion (Note 15)
NOTE 15 – OTHER NON-CURRENT ASSETS
Restricted cash
Prepaid rent to a portfolio investment
Advances to a portfolio investment
Investment in finance leases (Note 14)
Non-current receivables
Investment tax credits
Other
NOTE 16 – ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable trade
Accrued liabilities
Deferred revenue
Amount due to related parties (Note 32)
Current portion of royalty obligations
2020
38.3
35.6
30.4
25.8
25.3
65.7
221.1
2020
19.5
19.8
27.4
10.3
11.6
146.8
235.4
(71.4)
(9.0)
155.0
16.8
138.2
2020
12.4
23.3
29.7
138.2
40.2
231.5
35.1
510.4
2020
539.7
370.9
15.2
5.7
2.9
934.4
$
$
$
$
$
$
$
$
$
$
2019
36.2
30.6
29.7
25.8
21.4
42.8
186.5
2019
13.4
13.7
11.4
10.1
13.3
113.3
175.2
(66.0)
(6.3)
102.9
11.4
91.5
2019
27.3
27.3
29.5
91.5
40.7
231.9
31.3
479.5
2019
458.9
400.2
11.6
2.2
10.9
883.8
$
$
$
$
$
$
$
$
$
$
CAE Financial Report 2020 | 91
Notes to the Consolidated Financial Statements
NOTE 17 – PROVISIONS
Changes in provisions are as follows:
Provisions, as at March 31, 2019
Impact of adopting IFRS 16 (Note 2)
Provisions, as at April 1, 2019
Additions
Business combinations (Note 3)
Amount used
Reversal of unused amounts
Foreign currency exchange differences
Provisions, as at March 31, 2020
Current portion
Non-current portion
$
$
Restoration
and simulator
removal
8.0
—
8.0
3.7
—
(0.1)
—
0.4
12.0
0.4
11.6
$
$
Restructuring
$
$
$
$
11.8 $
(10.2)
1.6 $
—
—
(0.3)
—
0.1
1.4 $
1.4
— $
Legal
3.4
—
3.4
0.1
—
(0.1)
—
0.2
3.6
2.8
0.8
Warranties
37.5
—
37.5
10.4
—
(15.4)
(0.2)
0.1
32.4
17.6
14.8
$
$
$
$
$
$
$
$
Other
4.3
—
4.3
9.3
0.2
(5.3)
(0.5)
0.4
8.4
7.0
1.4
$
$
$
$
Total
65.0
(10.2)
54.8
23.5
0.2
(21.2)
(0.7)
1.2
57.8
29.2
28.6
NOTE 18 – DEBT FACILITIES
Long-term debt, net of transaction costs is as follows:
Unsecured senior notes
U.S. dollar, fixed rate - 3.60% to 4.90%
Canadian dollar, fixed rate - 4.15%
Canadian dollar, variable rate
Term loans
U.S. dollar, variable rate
Canadian dollar, variable rate
Other
Lease liabilities
U.S. dollar
Other
R&D obligations
Canadian dollar
Revolving credit facilities
U.S. dollar, variable rate
Canadian dollar, variable rate
Total long-term debt
Notional amount
Maturity
Current
2020
Non-current
Current
US$975.0
$30.0
2024-2034
2024-2027
$
US$183.1
$46.5
2021-2025
2020-2028
2020-2041
2020-2043
2021-2039
—
—
—
79.7
5.6
8.2
91.7
21.0
—
$
$
1,370.4
30.0
—
177.1
40.7
7.9
214.4
160.7
391.5
80.1
45.0
50.0
8.0
5.6
8.4
61.4
1.4
4.2
2019
Non-current
$
1,163.1
30.0
—
259.2
46.3
24.8
179.3
17.2
344.3
2023
2023
—
—
206.2
423.3
290.0
3,106.0
$
$
—
—
264.1
—
—
2,064.2
$
$
Unsecured senior notes
In December 2019, the Company issued unsecured senior notes amounting to US$100.0 million maturing in 2034 and bearing interest
of 4.90%.
In June and December 2019, the Company repaid unsecured senior notes amounting to US$60.0 million and $95.0 million respectively.
R&D obligations
Represents obligations with the Government of Canada and the Government of Quebec relative to R&D programs whereby the government
entities provide funding through loans for a portion of eligible spending related to specified R&D projects, up to a predetermined maximum
funding amount. As at March 31, 2020, the remaining undrawn amount available under these programs was $86.3 million (2019 -
$149.7 million). In March 2020, as part of the governments economic response to the COVID-19 pandemic, the Company obtained
payment deferrals of nine months on amounts due in fiscal 2021.
Revolving credit facilities
In August 2019, the Company renegotiated its revolving credit facilities agreement, increasing the total amount available from US $550.0
million to US $850.0 million. The maturity date of September 2023 and the applicable interest rate of the revolving term credit facilities
remained unchanged.
92 | CAE Financial Report 2020
Notes to the Consolidated Financial Statements
The facilities bear interest at variable rates, plus a margin that is determined based on the Company’s private credit rating. The Company
has the ability to draw down amounts in U.S. dollar, Canadian dollar, Euro or British pound. The facilities have standard financial covenants
requiring a minimum fixed charge coverage and a maximum debt coverage.
Subsequent to year end, the Company concluded a new two-year $500.0 million unsecured revolving credit facility (see Note 33).
Information on the change in liabilities for which cash flows have been classified as financing activities in the statement of cash flows are
as follows:
Net book value as at March 31, 2018
Changes from financing cash flows
Proceeds from long-term debt
Repayment of long-term debt
Repayment of lease liabilities
Total changes from financing cash flows
Non-cash changes
Business combinations (Note 3)
Foreign currency exchange differences
Interests
Other
Total non-cash changes
Net book value as at March 31, 2019
Impact of adopting IFRS 16 (Note 2)
Net book value as at April 1, 2019
Changes from financing cash flows
Net proceeds from borrowing under
revolving credit facilities
Proceeds from long-term debt
Repayment of long-term debt
Repayment of lease liabilities
Total changes from financing cash flows
Non-cash changes
Business combinations (Note 3)
Foreign currency exchange differences
Additions and remeasurement
of lease liabilities
Interests
Other
Total non-cash changes
Net book value as at March 31, 2020
Unsecured
senior
notes
684.1
$
663.7
—
—
663.7
—
20.1
—
0.3
20.4
1,368.2
—
1,368.2
—
131.7
(175.4)
—
(43.7)
—
75.2
—
—
0.7
75.9
1,400.4
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
Term
loans
131.1
255.1
(70.6)
—
184.5
15.2
4.2
—
17.3
36.7
352.3
—
352.3
—
5.5
(53.4)
—
(47.9)
—
14.7
—
—
0.1
14.8
319.2
$
$
$
$
$
$
$
$
Lease
liabilities
145.4
R&D
obligations
300.3
$
—
—
(22.0)
(22.0)
137.6
5.0
0.8
(7.5)
135.9
259.3
265.8
525.1
—
—
—
(79.8)
(79.8)
1.6
13.8
27.3
—
(0.2)
42.5
487.8
$
$
$
$
$
$
$
36.5
(2.1)
—
34.4
—
—
13.8
—
13.8
348.5
—
348.5
—
30.4
(4.2)
—
26.2
—
—
—
16.8
—
16.8
391.5
Revolving
credit
facilities
—
—
—
—
—
—
—
—
—
—
—
—
708.2
—
—
—
708.2
—
5.1
—
—
—
5.1
713.3
$
$
$
$
$
$
$
Total
1,260.9
955.3
(72.7)
(22.0)
860.6
152.8
29.3
14.6
10.1
206.8
2,328.3
265.8
2,594.1
708.2
167.6
(233.0)
(79.8)
563.0
1.6
108.8
27.3
16.8
0.6
155.1
3,312.2
$
$
$
$
$
$
$
$
As at March 31, 2020, the Company is in compliance with all of its financial covenants.
NOTE 19 – EMPLOYEE BENEFITS OBLIGATIONS
Defined benefit pension 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, United States and Germany 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, 2020, the Company has issued
letters of credit totalling $60.6 million (2019 – $58.9 million) to collateralize the obligations under the Canadian plans.
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.
CAE Financial Report 2020 | 93
Notes to the Consolidated Financial Statements
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
Changes in funded defined benefit pension obligations and fair value of plan assets are as follows:
2020
Total
664.4
32.5
19.1
—
9.6
(63.8)
(0.4)
7.8
(22.3)
2.3
649.2
543.7
15.8
(40.2)
24.4
7.8
(22.3)
(1.1)
2.0
530.1
2020
Total
91.9
3.9
2.3
(0.1)
7.1
(6.1)
—
(3.5)
(2.3)
0.5
93.7
$
Canadian
546.8
27.2
17.4
1.7
1.4
13.3
—
6.9
(17.5)
—
597.2
440.9
14.3
21.3
20.3
6.9
(17.5)
(0.9)
—
485.3
Canadian
72.2
3.4
2.2
(1.7)
—
1.2
—
(2.8)
2.7
—
77.2
$
$
$
$
$
$
$
$
$
$
$
Pension obligations, beginning of year
Current service cost
Interest cost
Past service cost
Actuarial loss (gain) arising from:
Experience adjustments
Economic assumptions
Demographic assumptions
Employee contributions
Pension benefits paid
Foreign currency 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
Foreign currency exchange differences
Fair value of plan assets, end of year
$
Canadian
597.2
30.4
18.0
—
9.2
(64.3)
—
7.2
(20.8)
—
576.9
485.3
14.9
(40.0)
22.1
7.2
(20.8)
(0.9)
—
467.8
$
$
$
Foreign
67.2
2.1
1.1
—
0.4
0.5
(0.4)
0.6
(1.5)
2.3
72.3
58.4
0.9
(0.2)
2.3
0.6
(1.5)
(0.2)
2.0
62.3
$
$
$
$
Changes in unfunded defined benefit pension obligations are as follows:
$
Canadian
77.2
3.3
2.1
—
7.7
(7.2)
—
(2.8)
(2.3)
—
78.0
Foreign
14.7
0.6
0.2
(0.1)
(0.6)
1.1
—
(0.7)
—
0.5
15.7
$
$
Pension obligations, beginning of year
Current service cost
Interest cost
Past service cost
Actuarial loss (gain) arising from:
Experience adjustments
Economic assumptions
Demographic assumptions
Pension benefits paid
Business combinations (Note 3)
Foreign currency exchange differences
Pension obligations, end of year
$
94 | CAE Financial Report 2020
2020
649.2
530.1
119.1
93.7
212.8
Foreign
65.2
1.8
1.2
—
0.1
4.1
(0.8)
0.5
(1.3)
(3.6)
67.2
56.3
1.0
2.9
2.1
0.5
(1.3)
(0.1)
(3.0)
58.4
Foreign
13.6
0.1
0.2
1.7
0.1
0.5
0.1
(0.9)
—
(0.7)
14.7
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
2019
664.4
543.7
120.7
91.9
212.6
2019
Total
612.0
29.0
18.6
1.7
1.5
17.4
(0.8)
7.4
(18.8)
(3.6)
664.4
497.2
15.3
24.2
22.4
7.4
(18.8)
(1.0)
(3.0)
543.7
2019
Total
85.8
3.5
2.4
—
0.1
1.7
0.1
(3.7)
2.7
(0.7)
91.9
Net pension cost is as follows:
Funded plans
Current service cost
Interest cost
Interest income
Past service cost
Administrative cost
Net pension cost of funded plans
Unfunded plans
Current service cost
Interest cost
Past service cost
Net pension cost of unfunded plans
Total net pension cost
Notes to the Consolidated Financial Statements
Canadian
Foreign
$
$
$
$
$
30.4
18.0
(14.9)
—
0.9
34.4
3.3
2.1
—
5.4
39.8
$
$
$
$
$
2.1
1.1
(0.9)
—
0.2
2.5
0.6
0.2
(0.1)
0.7
3.2
$
$
$
$
$
2020
Total
32.5
19.1
(15.8)
—
1.1
36.9
3.9
2.3
(0.1)
6.1
43.0
$
$
$
$
$
Canadian
Foreign
27.2
17.4
(14.3)
1.7
0.9
32.9
3.4
2.2
(1.7)
3.9
36.8
$
$
$
$
$
1.8
1.2
(1.0)
—
0.1
2.1
0.1
0.2
1.7
2.0
4.1
$
$
$
$
$
2019
Total
29.0
18.6
(15.3)
1.7
1.0
35.0
3.5
2.4
—
5.9
40.9
During the year ended March 31, 2020, pension costs of $15.8 million (2019 – $15.4 million) have been charged in cost of sales,
$4.3 million (2019 – $5.5 million) in research and development expenses, $14.3 million (2019 – $11.8 million) in selling, general and
administrative expenses, $5.6 million (2019 – $5.7 million) in finance expense and $3.0 million (2019 – $2.5 million) were capitalized.
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
Total Foreign plans
Total plans
Quoted
Unquoted
$
$
$
$
$
— $
—
—
—
—
—
— $
— $
2.4
3.5
—
5.9
5.9
$
$
55.2
165.7
92.2
85.2
4.3
65.2
467.8
55.9
—
—
0.5
56.4
524.2
$
$
$
$
$
2020
Total
55.2
165.7
92.2
85.2
4.3
65.2
467.8
55.9
2.4
3.5
0.5
62.3
530.1
$
$
$
$
$
Quoted
Unquoted
— $
—
—
—
—
—
— $
— $
2.5
3.3
—
5.8
5.8
$
$
58.1
210.5
109.7
68.8
9.7
28.5
485.3
52.2
—
—
0.4
52.6
537.9
$
$
$
$
$
2019
Total
58.1
210.5
109.7
68.8
9.7
28.5
485.3
52.2
2.5
3.3
0.4
58.4
543.7
As at March 31, 2020 and March 31, 2019, there were no common shares of the Company in the pension plan assets.
Significant assumptions (weighted average) used are as follows:
Pension obligations as at March 31:
Discount rate
Compensation rate increases
Net pension cost for years ended March 31:
Discount rate
Compensation rate increases
2020
3.96%
3.66%
3.33%
3.66%
Canadian
2019
3.33%
3.65%
3.48%
3.65%
2020
1.46%
2.92%
1.64%
2.92%
Foreign
2019
1.64%
2.92%
1.88%
2.86%
CAE Financial Report 2020 | 95
Notes to the Consolidated Financial Statements
Assumptions regarding future mortality are based on actuarial advice in accordance with published statistics and mortality tables and
experience in each territory. The mortality tables and the average life expectancy in years for a member age 45 and 65 are as follows:
As at March 31, 2020
(in years)
Country
Canada
Netherlands
Germany
United Kingdom
United States
As at March 31, 2019
(in years)
Country
Canada
Netherlands
Germany
United Kingdom
United States
Mortality table
CPM private tables
AG2018
Heubeck RT2018G
S2PxA CMI 2018
CPM private tables
Mortality table
CPM private tables
AG2018
Heubeck RT2018G
S2PxA CMI 2018
CPM private tables
at age 45
23.5
23.9
23.0
23.1
24.7
at age 45
23.4
23.8
22.8
23.5
23.4
Life expectancy over 65 for a member
Female
Male
at age 65
24.3
23.7
23.7
22.0
24.9
at age 45
25.6
25.9
25.9
25.1
26.2
at age 65
22.0
21.8
20.2
22.0
23.3
Life expectancy over 65 for a member
Female
Male
at age 65
at age 65
24.2
21.9
23.6
21.7
23.6
20.0
24.2
22.4
24.4
21.9
at age 45
25.5
25.8
25.8
25.5
25.8
As at March 31, 2020, the weighted average duration of the defined benefit obligation is 18 years.
The impact on the defined benefit obligation as a result of a 0.25% change in the significant assumptions as at March 31, 2020 are as
follows:
Discount rate:
Increase
Decrease
Compensation rate:
Increase
Decrease
Funded plans
Canadian
Foreign
Canadian
Unfunded plans
Foreign
$
$
(24.4)
26.1
6.7
(6.4)
$
(3.6)
3.9
0.3
(0.3)
(2.5)
2.7
0.3
(0.3)
$
$
(0.5)
0.5
—
—
Total
(31.0)
33.2
7.3
(7.0)
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:
Expected employer contributions in funded plans
Expected benefits paid in unfunded plans
$
Canadian
21.7
3.3
$
Foreign
3.1
0.6
NOTE 20 – OTHER NON-CURRENT LIABILITIES
Deferred revenue and contract liabilities
Share-based payments liabilities (Note 23)
Contingent consideration arising on business combinations
Interest payable
Other
96 | CAE Financial Report 2020
2020
104.7
35.1
—
21.1
30.2
191.1
$
$
Total
24.8
3.9
2019
134.1
75.4
11.9
15.1
30.5
267.0
$
$
$
NOTE 21 – SUPPLEMENTARY CASH FLOWS INFORMATION
Changes in non-cash working capital are as follows:
Notes to the Consolidated Financial Statements
Cash (used in) provided by non cash working capital :
Accounts receivable
Contract assets
Inventories
Prepayments
Income taxes
Accounts payable and accrued liabilities
Provisions
Contract liabilities
Supplemental information:
Interest paid
Interest received
Income taxes paid
NOTE 22 – ACCUMULATED OTHER COMPREHENSIVE INCOME
Balances, beginning of year
Other comprehensive income (loss)
Balances, end of year
Foreign currency
exchange differences
on translation of
foreign operations
2020
$ 208.9
17.0
$ 225.9
2019
$ 266.6
(57.7)
$ 208.9
$
$
Net changes in
cash flow hedges
2020
(10.5) $
(22.8)
(33.3) $
2019
(6.9) $
(3.6)
(10.5) $
2020
2019
$
$
$
$
$
$
(39.9)
(29.9)
(87.5)
(0.9)
8.2
53.5
(6.5)
50.8
(52.2)
2020
108.7
11.4
34.2
(1.3)
(72.1)
(22.2)
(5.7)
6.5
154.5
(8.7)
(15.8)
35.2
2019
55.2
14.9
34.0
Net changes in
financial assets
carried at FVOCI
2019
2020
0.6
—
0.6
$
$
2020
0.6 $ 199.0
—
(5.8)
0.6 $ 193.2
Total
2019
$ 260.3
(61.3)
$ 199.0
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
stock option plan; and cash-settled share-based payments plans that include the stock purchase plan, deferred share units (DSU) plans,
restricted share units (RSU) plans and the performance share units (PSU) plan.
The expense and the carrying amount of liability arising from share-based arrangements are as follows:
Equity-settled plan
Stock option plan
Cash-settled plans
Stock purchase plan
Deferred share unit (DSU) plans
Restricted share unit (RSU) plans
Performance share unit (PSU) plan
Share-based
payments expense
2019
2020
Carrying
amount of share-based
payments liabilities
2019
2020
$
5.8
$
6.4
n.a.
n.a.
10.3
(2.4)
(10.9)
(2.9)
(0.1)
$
8.5
6.3
13.0
26.5
60.7
$
$
—
(8.4)
(24.7)
(16.2)
(49.3)
$
$
—
(15.5)
(43.2)
(47.0)
(105.7)
$
During the year ended March 31, 2020, share-based payments expense of $1.2 million (2019 – $0.8 million) was capitalized.
The Company holds equity swap agreements in order to mitigate the compensation expense related to the DSU plans, RSU plans and
PSU plan (see Note 30). During the year ended March 31, 2020, an expense of $44.0 million was recognized in income (2019 – recovery
of $13.2 million).
CAE Financial Report 2020 | 97
Notes to the Consolidated Financial Statements
Stock option plan
Stock options to purchase common shares of the Company are granted to certain employees, officers and executives of the Company.
The stock option exercise price is equal to the common shares weighted average price on the TSX of the five days of trading prior to the
grant date. Stock options vest over four years of continuous employment from the grant date. The stock options must be exercised within
a seven-year period, but are not exercisable during the first year after the grant date. As at March 31, 2020, a total of 11,892,268 common
shares (2019 – 13,446,114) remained authorized for issuance under the stock option plan.
Changes in outstanding stock options are as follows:
2020
Weighted
Stock options outstanding, beginning of year
Granted
Exercised
Forfeited
Expired
Stock options outstanding, end of year
Stock options exercisable, end of year
Number of
stock options
6,504,125
1,320,700
(1,553,846)
(196,825)
(23,300)
6,050,854
2,187,379
$
average exercise
price
20.41
34.50
17.06
24.17
10.06
24.25
19.05
$
$
Number of
stock options
6,155,525
1,733,100
(1,231,600)
(82,525)
(70,375)
6,504,125
2,082,325
$
2019
Weighted
average exercise
price
17.31
27.15
14.78
17.41
18.20
20.41
16.36
$
$
During the year ended March 31, 2020, the weighted average market share price for stock options exercised was $34.77 (2019 – $27.11).
As at March 31, 2020, summarized information about the stock options issued and outstanding is as follows:
Options Outstanding
Options Exercisable
Range of
exercise prices
$11.02 to $15.14
$15.34 to $22.26
$27.14 to $40.53
Total
Number of
stock options
outstanding
570,125
2,654,704
2,826,025
6,050,854
Weighted
average remaining
contractual life
(years)
1.73
3.77
5.66
4.46
Weighted
average exercise
price
14.56
19.68
30.51
24.25
$
$
Number of
stock options
exercisable
570,125
1,308,279
308,975
2,187,379
Weighted
average exercise
price
14.56
19.09
27.14
19.05
$
$
During the year ended March 31, 2020, the weighted average fair value of stock options granted was $4.98 (2019 – $4.23).
The assumptions used in the calculation of the fair value of the stock options on the grant date using the Black-Scholes option pricing
model are as follows:
Common share price
Exercise price
Dividend yield
Expected volatility
Risk-free interest rate
Expected stock option life
$
$
2020
33.94
34.50
1.18%
19.70%
1.48%
4 years
$
$
2019
27.42
27.15
1.31%
18.34%
2.07%
4 years
Expected volatility is estimated by considering historical average common share price volatility over the expected life of the stock options.
Stock purchase plan
Employees of the Company and its participating subsidiaries can acquire common shares through regular payroll deductions. The Company
contributes $1 for every $2 of employee contributions, up to a maximum of 3% of the employee’s base salary. The employee and Company’s
contributions are remitted to an independent plan administrator who purchases common shares on the market on behalf of the employee.
Deferred share unit (DSU) plans
Non-employee directors holding less than the minimum required holdings of common shares of the Company receive their Board retainer
compensation in the form of deferred share units (DSUs). A non-employee director holding no less than the minimum required holdings
of common shares may also elect to participate in the DSU plan in respect of part or all of his or her retainer. Such retainer amount is
converted to DSUs based on the common shares price on the TSX on the date such retainer becomes payable to the non-employee
director.
98 | CAE Financial Report 2020
Notes to the Consolidated Financial Statements
Certain executives can elect to defer a portion or entire short-term incentive payment to the DSU plan on an annual basis. Such deferred
short-term incentive amount is converted to DSUs based on the common shares weighted average price on the TSX of the five days of
trading prior to the date such incentive becomes payable to the executives.
DSUs entitle the holders to receive a cash payment equal to the common shares closing price on the TSX on the payment date, or, in
certain cases, the weighted average price of to the five days prior to the payment date. Holders are also entitled to dividend equivalents
payable in additional DSUs in an amount equal to the dividends paid on the common shares from the date of issuance to the payment
date.
DSUs vest immediately and are paid upon any termination of employment or when a non-employee director ceases to act as a director.
Changes in outstanding DSUs are as follows:
DSUs outstanding, beginning of year
Granted
Redeemed
Dividends paid in DSUs
DSUs vested and outstanding, end of year
2020
523,470
79,196
(140,251)
7,420
469,835
2019
675,097
92,211
(253,176)
9,338
523,470
Restricted share unit (RSU) plans
Restricted share units (RSUs) are granted to certain employees, officers and executives of the Company. RSUs entitle the holders to
receive a cash payment based on the average closing price on the TSX for the 20 trading days preceding the vesting date, if restriction
criteria are met. Restriction criteria include continuing employment for a period of up to three years. RSUs are paid three years after the
grant date.
Changes in outstanding RSUs are as follows:
RSUs outstanding, beginning of year
Granted
Cancelled
Redeemed
Dividends paid in RSUs
RSUs outstanding, end of year
RSUs vested, end of year
2020
1,570,063
149,477
(16,207)
(228,928)
16,198
1,490,603
1,391,195
2019
1,688,664
148,670
(11,010)
(268,836)
12,575
1,570,063
1,462,052
As at March 31, 2020, vested and outstanding RSUs includes 1,044,359 RSUs granted under the previous plan (2019 – 1,067,648), which
are paid upon any termination of employment of the holder. Under the previous plan, holders are also entitled to dividend equivalents
payable in additional RSUs in an amount equal to the dividends paid on the common shares from the date of issuance to the payment
date.
Performance share unit (PSU) plan
Performance share units (PSUs) are granted to certain employees, officers and executives of the Company. PSUs entitle the holders to
receive a cash payment equal to the average closing price on the TSX of the common shares for the 20 trading days preceding the vesting
date multiplied by a factor which ranges from 0% to 200% based on the attainment of performance criteria set out pursuant to the plan,
if restriction criteria are met. Restriction criteria include continuing employment for a period of up to three years. PSUs are paid three
years after the grant date.
Changes in outstanding PSUs are as follows:
PSUs outstanding, beginning of year
Granted
Cancelled
Redeemed
PSUs outstanding, end of year
PSUs vested, end of year
2020
1,141,200
730,352
(41,991)
(852,688)
976,873
758,209
2019
1,230,717
756,386
(25,491)
(820,412)
1,141,200
876,095
CAE Financial Report 2020 | 99
Notes to the Consolidated Financial Statements
NOTE 24 – EMPLOYEE COMPENSATION
Total employee compensation expense recognized in income is as follows:
(amounts in millions)
Salaries and other short-term employee benefits
Share-based payments expense, net of equity swap (Note 23)
Post-employment benefits – defined benefit plans (Note 19)
Post-employment benefits – defined contribution plans
Termination benefits
Total employee compensation
NOTE 25 – GOVERNMENT PARTICIPATION
Government contributions were recognized as follows:
Credited to property, plant and equipment and intangible assets
Credited to income
Total government contributions
2020
1,218.6
42.7
40.0
19.2
4.4
1,324.9
2020
15.6
18.0
33.6
$
$
$
$
NOTE 26 – 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 as at March 31, 2018
Business combinations (Note 3)
Foreign currency exchange differences
Net book value as at March 31, 2019
Business combinations (Note 3)
Impairment
Foreign currency exchange differences
Net book value as at March 31, 2020
$
Civil Aviation
Training Solutions
266.8
375.1
(11.3)
630.6
19.2
—
17.5
667.3
$
$
Defence
and Security
217.5
$
67.9
5.4
290.8
—
—
9.9
300.7
$
$
Healthcare
141.2
—
5.1
146.3
0.9
(37.5)
7.6
117.3
$
$
$
2019
1,071.2
46.7
38.4
17.2
4.3
1,177.8
2019
16.8
28.4
45.2
Total
625.5
443.0
(0.8)
1,067.7
20.1
(37.5)
35.0
1,085.3
$
$
$
$
$
$
$
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 its annual impairment test for goodwill during the fourth quarter of fiscal 2020. The Company determined the
recoverable amount of the Civil Aviation Training Solutions, Defense and Security and Healthcare CGUs based on value in use calculations.
The value in use of each CGU is calculated using estimated cash flows derived from the Company's five-year strategic plan as approved
by management. Cash flows subsequent to the five-year period were extrapolated using a constant growth rate of 2% to 3%. These
projections are inherently uncertain due to the fluidly evolving impact of the COVID-19 pandemic. The discount rates used to calculate
the recoverable amounts reflect each CGUs’ specific risks and market conditions and range from 7.0% to 15.0%.
Based on the results of its impairment test of the Healthcare CGU, the Company recorded an impairment charge of $37.5 million relating
to goodwill acquired in previous business acquisitions. The impairment charge is based on the general economic conditions at the time
of the test, which negatively affected the discount rate used and the Healthcare CGU’s cash flow projections. The determination of the
recoverable amount of the Healthcare CGU excluded the cash flows expected from the contract with the Government of Canada to design
and manufacture 10,000 CAE Air1 ventilators, which was concluded subsequent to year end (see Note 33). Variations in the Company
assumptions and estimates, particularly in the expected growth rates embedded in its cash flow projections and the discount rate could
have a significant impact on fair value. An increase of 1% in the discount rate would have resulted in an additional impairment charge of
approximately $17.0 million. A decrease of 1% in the growth rate would have resulted in an additional impairment charge of approximately
$10.0 million.
No impairment charge was identified for the CGUs included in the Civil Aviation Training Solutions and Defense and Security segments.
100 | CAE Financial Report 2020
Notes to the Consolidated Financial Statements
NOTE 27 – CONTINGENCIES AND COMMITMENTS
Contingencies
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 the year ended March 31, 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.
Commitments
Contractual purchase commitments that are not recognized as liabilities are as follows:
Less than 1 year
Between 1 and 5 years
Total contractual purchase commitments
2020
204.7
35.1
239.8
$
$
2019
240.2
51.5
291.7
$
$
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, 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 equity investments, 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, royalties obligations and other non-current liabilities are estimated based on discounted cash flows
using current interest rates for instruments with similar risks and remaining maturities. Upon adoption of IFRS 16 on April 1, 2019,
fair value disclosures are no longer required for lease liabilities;
(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.
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.
CAE Financial Report 2020 | 101
Notes to the Consolidated Financial Statements
The carrying values and fair values of financial instruments, by class, are as follows:
Financial assets (liabilities) measured at FVTPL
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
Financial assets (liabilities) measured at amortized cost
Accounts receivable(1)
Investment in finance leases
Advances to a portfolio investment
Other assets(2)
Accounts payable and accrued liabilities(3)
Total long-term debt(4)
Other non-current liabilities(5)
Financial assets measured at FVOCI
Equity investments
Level
Carrying Value
Total
2020
Fair value
Total
Carrying Value
Total
2019
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 2
Level 3
$
946.5
12.4
—
(55.5)
(7.2)
—
(0.3)
(31.6)
514.5
155.0
29.7
22.1
(709.1)
(2,830.6)
(182.0)
$
946.5
12.4
—
(55.5)
(7.2)
—
(0.3)
(31.6)
514.5
183.2
29.7
20.5
(709.1)
(2,960.4)
(167.9)
$
446.1
27.3
0.1
10.4
(2.5)
(11.9)
11.1
(6.5)
440.3
102.9
29.5
25.7
(770.8)
(2,335.4)
(164.0)
$
446.1
27.3
0.1
10.4
(2.5)
(11.9)
11.1
(6.5)
440.3
114.5
29.5
25.7
(770.8)
(2,470.7)
(184.6)
3.3
(2,132.8)
$
3.3
(2,221.9)
$
3.3
(2,194.4)
$
3.3
(2,338.7)
$
(1) Includes trade receivables and certain other receivables.
(2) Includes non-current receivables and certain other non-current assets.
(3) Includes trade accounts payable, accrued liabilities, interest payable, certain payroll-related liabilities and current royalty obligations.
(4) The carrying value excludes transaction costs.
(5) Includes non-current royalty obligations and other non-current liabilities.
Changes in level 3 financial instruments are as follows:
Balance as at March 31, 2019
Total realized and unrealized gains included in income
Balance as at March 31, 2020
$
$
(8.6)
11.9
3.3
NOTE 29 – 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.
102 | CAE Financial Report 2020
The level of debt versus equity in the capital structure is monitored, and the ratios are as follows:
Notes to the Consolidated Financial Statements
Total long-term debt (Note 18)
Less: cash and cash equivalents
Net debt
Equity
Total net debt plus equity
Net debt: equity
$
$
$
2020
3,312.2
(946.5)
2,365.7
2,578.3
4,944.0
48:52
$
$
$
2019
2,328.3
(446.1)
1,882.2
2,410.0
4,292.2
44:56
The Company has certain debt agreements which require the maintenance of a certain level of capital.
NOTE 30 – FINANCIAL RISK MANAGEMENT
Due to the nature of the activities that the Company carries out and as a result of holding financial instruments, the Company is exposed
to credit risk, liquidity risk and market risk, including foreign currency risk and interest rate risk. The Company’s exposure to credit risk,
liquidity risk and market risk is managed within risk management parameters documented in corporate policies. These risk management
parameters remain unchanged since the previous period, unless otherwise indicated.
Credit risk
Credit risk is defined as the Company’s exposure to a financial loss if a debtor fails to meet its obligations in accordance with the terms
and conditions of its arrangements with the Company. The Company is exposed to credit risk on its accounts receivable and certain other
assets through its normal commercial activities. The Company is also exposed to credit risk through its normal treasury activities on its
cash and cash equivalents and derivative financial assets. Credit risks arising from the Company’s normal commercial activities are
managed with 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 contracts with customers. 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 (receivable purchase
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 all the
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 9 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,
stress-test results, growth requirements and capital expenditures, and the maturity profile of indebtedness, including availability of credit
facilities, working capital requirements, compliance with financial covenants and the funding of financial commitments. The Company
manages its liquidity risk to maintain sufficient liquid financial resources to fund its operations and meet its commitments and obligations.
In managing its liquidity risk, the Company has access to revolving credit facilities of US$850.0 million (2019 – US$550.0 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 (2019 – US
$300.0 million) (receivable purchase program). As at March 31, 2020, the Canadian dollar equivalent of $333.1 million
(2019 – $266.2 million) of specific accounts receivable were sold to a financial institution pursuant to these agreements. Proceeds were
net of $4.2 million in fees (2019 – $4.4 million). Subsequent to the year end, the Company concluded an agreement to increase the limit
of its receivable purchase program from US$300.0 million to US$400.0 million (see Note 33). The Company also regularly monitors any
financing opportunities to optimize its capital structure and maintain appropriate financial flexibility.
CAE Financial Report 2020 | 103
Notes to the Consolidated Financial Statements
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:
As at March 31, 2020
Non-derivative financial liabilities
Accounts payable and
accrued liabilities (1)
Total long-term debt (2)
Other non-current liabilities (3)
Net derivative financial liabilities
Forward foreign
currency contracts (4)
Outflow
Inflow
Swap derivatives on total
long-term debt
Equity swap agreement
As at March 31, 2019
Non-derivative financial liabilities
Accounts payable and
accrued liabilities (1)
Total long-term debt (2)
Other non-current liabilities (3)
Net derivative financial
liabilities (assets)
Forward foreign
currency contracts (4)
Outflow
Inflow
Swap derivatives on total
long-term debt
Embedded foreign currency
derivatives
Equity swap agreement
Carrying Contractual Less than
1 year
cash flows
amount
Between
1 and
2 years
Between
2 and
3 years
Between
3 and
4 years
Between
4 and More than
5 years
5 years
$
$
$
$
$
709.1 $
709.1 $
3,305.2
182.0
4,196.3 $
4,319.8
397.8
5,426.7 $
709.1 $
296.5
0.7
1,006.3 $
— $
555.1
49.8
604.9 $
— $
564.8
31.2
596.0 $
— $
383.4
32.1
415.5 $
— $
340.1
32.4
372.5 $
—
2,179.9
251.6
2,431.5
38.8
$
1,862.5 $
(1,822.8)
1,636.1 $
(1,606.6)
171.0 $
(164.8)
42.4 $
(39.4)
9.2 $
(8.5)
3.8 $
(3.5)
—
—
0.3
55.5
94.6 $
4,290.9 $
(6.3)
55.5
88.9 $
5,515.6 $
7.8
55.5
92.8 $
1,099.1 $
(4.0)
—
2.2 $
607.1 $
(3.9)
—
(0.9) $
595.1 $
(3.0)
—
(2.3) $
413.2 $
(2.2)
—
(1.9) $
370.6 $
(1.0)
—
(1.0)
2,430.5
Carrying Contractual
cash flows
amount
Less than
1 year
Between
1 and
2 years
Between
2 and
3 years
Between
3 and
4 years
Between
4 and More than
5 years
5 years
$
770.8 $
770.8 $
2,335.4
175.9
3,282.1 $
3,393.0
413.0
4,576.8 $
$
770.8 $
359.8
0.3
1,130.9 $
— $
251.7
19.3
271.0 $
— $
200.3
44.2
244.5 $
— $
239.4
31.6
271.0 $
— $
228.6
32.6
261.2 $
—
2,113.2
285.0
2,398.2
$
9.0
$
1,708.0 $
(1,699.0)
1,448.0 $
(1,437.1)
186.4 $
(189.4)
55.0 $
(54.7)
16.3 $
(15.5)
1.0 $
(1.0)
1.3
(1.3)
(11.1)
(12.7)
(2.1)
(2.0)
(2.0)
(2.0)
(1.9)
(2.7)
(0.1)
(10.4)
(12.6) $
3,269.5 $
(0.1)
(10.4)
(14.2) $
4,562.6 $
(0.1)
(10.4)
(1.7) $
1,129.2 $
$
$
—
—
(5.0) $
266.0 $
—
—
(1.7) $
242.8 $
—
—
(1.2) $
269.8 $
—
—
(1.9) $
259.3 $
—
—
(2.7)
2,395.5
(1) Includes trade accounts payable, accrued liabilities, interest payable and certain payroll-related liabilities.
(2) Contractual cash flows include contractual interest and principal payments related to debt obligations and excludes transaction costs.
(3) Includes non-current royalty obligations and other non-current liabilities.
(4) Outflows and inflows are presented in CDN equivalent using the contractual forward foreign currency rate and include forward foreign currency contracts
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.
104 | CAE Financial Report 2020
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 (€ or EUR)
and British pound (GBP or £). In addition, these operations have exposures 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 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
More than 5 years
EUR/CDN
Less than 1 year
Between 1 and 3 years
GBP/CDN
Less than 1 year
Between 1 and 3 years
CDN/USD
Less than 1 year
Between 1 and 3 years
Other currencies
Less than 1 year
Between 1 and 3 years
Between 3 and 5 years
Total
Notional
Amount
2020
(1) Average
Rate
Notional
Amount
2019
(1) Average
Rate
$
833.7
176.4
13.0
—
180.5
12.3
71.5
0.2
289.7
23.7
247.5
0.8
13.2
1,862.5
$
0.74 $
0.76
0.77
—
0.64
0.60
0.59
0.60
1.36
1.32
n.a.
n.a.
n.a.
717.4
167.3
17.4
1.3
166.2
71.3
49.8
1.8
282.9
—
231.6
1.0
—
$
1,708.0
0.77
0.77
0.79
—
0.65
0.61
0.58
0.55
1.33
—
n.a.
n.a.
n.a.
(1) Exchange rates as at the end of the respective periods were used to translate amounts in foreign currencies.
During the year ended March 31, 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) (2019 – US$127.0 million ($130.5 million)) and US$98.0 million ($100.7 million) (2019 – 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.
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.
USD
€
GBP
OCI
2020
(0.4)
2019
(0.2)
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.
Net income
(0.5)
(0.4)
Net income
4.8
3.0
Net income
0.2
1.2
OCI
$ (19.6)
(17.2)
OCI
(3.1)
(4.0)
$
$
$
$
$
CAE Financial Report 2020 | 105
Notes to the Consolidated Financial Statements
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 floating rate debts through its revolving credit facilities and other-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, 2020, 74% (2019 – 83%) 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
During the year ended March 31, 2020, a 1% increase in interest rates would decrease the Company’s net income by $5.7 million
(2019 – $4.1 million) and would have no impact on the Company’s OCI (2019 – nil) assuming all other variables remained constant. A
1% decrease in interest rates would have an opposite impact on net income.
Hedge of share-based payments expense
The Company has entered into equity swap agreements with major Canadian financial institutions to reduce its income exposure to
fluctuations in its share price relating to the deferred share units (DSU) plans, restricted share units (RSU) plans and the performance
share units (PSU) plan. 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, RSU and PSU plans. As at
March 31, 2020, the equity swap agreements covered 2,800,000 common shares (2019 – 2,250,000) of the Company.
Hedge of net investments in foreign operations
As at March 31, 2020, the Company has designated a portion of its unsecured senior notes and term loans totalling US$862.8 million
(2019 – US$822.8 million) and a portion of its lease liabilities totaling US$48.1 million (2019 – US$64.0 million) as a hedge of its net
investments in U.S. entities. Gains or losses on the translation of the designated portion of these USD long-term debts 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, 2020, the Company had outstanding letters of credit and performance guarantees in the amount of $189.6 million
(2019 – $205.0 million) issued in the normal course of business. These guarantees are issued under the revolving credit facilities and the
Performance Securities Guarantee (PSG).
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.
Advance payments
Contract performance
Lease obligations
Financial obligations
Other
2020
36.0 $
44.0
37.1
63.0
9.5
189.6 $
2019
44.7
42.3
39.9
76.9
1.2
205.0
$
$
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.
106 | CAE Financial Report 2020
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:
Notes to the Consolidated Financial Statements
Name
AACE Vietnam Limited Liability Company
CAE Academia de Aviacion (Espana) S.L.
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 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.
CAE Civil Aviation Training Solutions Inc.
CAE Colombia Flight Training S.A.S.
CAE Crewing Services Limited
CAE El Salvador Flight Training S.A. de C.V.
CAE Electronik GmbH
CAE Engineering Korlatolt Felelossegu Tarsasag
CAE Entrenamiento de Vuelo Chile Limitada
CAE Flight & Simulator Services Sdn. Bhd.
CAE Flight Training (India) Private Limited
CAE Flight Training Center Mexico, S.A. de C.V.
CAE GAH Aviation Technology Services Co Ltd
CAE Global Academy Évora, SA
CAE Healthcare Canada Inc.
CAE Healthcare Inc.
CAE India Private Limited
CAE Integrated Enterprise Solutions Australia Pty Ltd.
CAE International Holdings Limited
CAE Kuala Lumpur Sdn Bhd
CAE Luxembourg Acquisition S.à r.l.
CAE Maritime Middle East L.L.C.
CAE Middle East L.L.C.
CAE Military Aviation Training Inc.
CAE New Zealand Pty Ltd.
CAE North East Training Inc.
CAE Oslo - Aviation Academy AS
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.
Country of incorporation
Vietnam
Spain
United Kingdom
United States
United Kingdom
Australia
Singapore
Netherlands
Peru
Brunei
Netherlands
Belgium
Denmark
Hong Kong
Norway
Sweden
Netherlands
United States
Colombia
Ireland
El Salvador
Germany
Hungary
Chile
Malaysia
India
Mexico
China
Portugal
Canada
United States
India
Australia
Canada
Malaysia
Luxembourg
United Arab Emirates
United Arab Emirates
Canada
New Zealand
United States
Norway
United States
Italy
Spain
China
United States
India
Canada
% equity
interest
2020
100.0%
100.0%
100.0%
100.0%
76.5%
100.0%
100.0%
100.0%
100.0%
60.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
99.5%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
80.0%
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%
% equity
interest
2019
100.0%
100.0%
100.0%
100.0%
76.5%
100.0%
100.0%
100.0%
100.0%
60.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
100.0%
99.5%
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%
CAE Financial Report 2020 | 107
Notes to the Consolidated Financial Statements
Investments in subsidiaries consolidated in the Company’s financial statements (continued):
Name
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 USA Mission Solutions Inc.
CAE Verwaltungsgesellschaft mbH
Flight Training Device (Mauritius) Ltd.
Logitude Oy
Oxford Aviation Academy (Oxford) Limited
Parc Aviation Engineering Services Ltd.
Parc Aviation Limited
Parc Aviation UK Ltd
Parc Interim Limited
Pelesys Aviation Maintenance Training Inc.
Pelesys Learning Systems Inc.
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.
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-LIDER Training do Brasil Ltda.
CAE Melbourne Flight Training Pty Ltd.
CAE Middle East Pilot Services LLC
CAE Simulation Training Private Limited
Embraer CAE Training Services LLC
Emirates-CAE Flight Training LLC
Flight Training Alliance GmbH
HATSOFF Helicopter Training Private Limited
Helicopter Training Media International GmbH
HFTS Helicopter Flight Training Services GmbH
JAL CAE Flight Training Co. Ltd.
National Flying Training Institute Private Limited
Pegasus Ucus Egitim Merkezi A.S.
Philippine Academy for Aviation Training Inc.
Rotorsim s.r.l.
Rotorsim USA LLC
SIMCOM Holdings, Inc
Singapore CAE Flight Training Pte Ltd.
Country of incorporation
Singapore
Brazil
United Kingdom
Belgium
United Kingdom
Norway
United States
United States
Germany
Mauritius
Finland
United Kingdom
Ireland
Ireland
United Kingdom
Ireland
Canada
Canada
Canada
France
United States
Spain
Brazil
Spain
Country of incorporation
Netherlands
Korea
Brazil
Australia
United Arab Emirates
India
United States
United Arab Emirates
Germany
India
Germany
Germany
Japan
India
Turkey
Philippines
Italy
United States
United States
Singapore
% equity
interest
2020
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
2020
50.0%
50.0%
50.0%
50.0%
49.0%
50.0%
49.0%
49.0%
50.0%
50.0%
50.0%
25.0%
50.0%
51.0%
49.9%
40.0%
50.0%
50.0%
50.0%
50.0%
% equity
interest
2019
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%
29.3%
45.0%
100.0%
100.0%
100.0%
80.0%
100.0%
80.0%
% equity
interest
2019
50.0%
50.0%
50.0%
50.0%
49.0%
50.0%
49.0%
49.0%
50.0%
50.0%
50.0%
25.0%
50.0%
51.0%
49.9%
40.0%
50.0%
50.0%
—%
50.0%
During the year ended March 31, 2020, the unrecognized share of losses of joint ventures for which the Company ceased to recognize
when applying the equity method was $3.3 million (2019 – $5.7 million). As at March 31, 2020, the cumulative unrecognized share of
losses for these entities was $16.0 million (2019 – $12.7 million) and the cumulative unrecognized share of comprehensive loss of joint
ventures was $16.1 million (2019 – $13.4 million).
108 | CAE Financial Report 2020
Notes to the Consolidated Financial Statements
Partnership with Directional Aviation Capital
On November 4, 2019, the Company concluded a strategic partnership with Directional Aviation Capital (DAC) including a 15-year exclusive
business aviation training services agreement with DAC affiliates and the acquisition of a 50% equity interest in SIMCOM Holdings, Inc.
for cash consideration of $113.5 million [US $86.3 million]. The Company obtained joint control over SIMCOM, therefore the joint venture
is accounted for using the equity method. SIMCOM operates simulators and training devices representative of a wide range of jet, turboprop
and piston powered aircraft and is headquartered in Orlando, Florida.
Over the course of the 15-year business aviation training services agreement, DAC's affiliated business aircraft operators, which include
Flexjet, Flight Options, Flairjet, Sirio, Nextant Aerospace and Corporate Wings, will train exclusively with SIMCOM and CAE.
NOTE 32 – RELATED PARTY TRANSACTIONS
The Company’s outstanding balances with its equity accounted investees are as follows:
Accounts receivable (Note 9)
Contract assets
Other non-current assets
Accounts payable and accrued liabilities (Note 16)
Contract liabilities
Other non-current liabilities
The Company’s transactions with its equity accounted investees are as follows:
Revenue
Purchases
Other income
$
$
2020
51.2
38.5
25.6
5.7
28.8
1.7
2020
166.0
2.5
1.5
$
$
2019
33.9
13.4
18.7
2.2
30.7
1.6
2019
65.5
2.4
1.4
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 are as follows:
Salaries and other short-term employee benefits
Post-employment benefits – defined benefit plans
Share-based payments expense
2020
6.5
2.5
(8.8)
0.2
$
$
2019
6.4
1.9
18.9
27.2
$
$
NOTE 33 – EVENTS AFTER THE REPORTING PERIOD
Impact of the COVID-19 pandemic
COVID-19 has created unprecedented uncertainty in the global economy, the global air transportation environment and air passenger
travel and to CAE’s business. Several of its customers are facing significant challenges, with airlines and business jet operators having
to ground a majority of their aircraft in response to travel bans, border restrictions, and lower demand for air travel. The Company continues
to take measures to protect the health and safety of its employees, work with its customers to minimize potential disruptions and support
its community in addressing the challenges posed by this global pandemic. This outbreak has had an important and immediate impact
on all of the Company's businesses, especially in the Civil Aviation Training Solutions segment, as a result of an unprecedented shock
to demand together with significant disruptions to its own operations, including facility closures, supply chain disruptions, program execution
delays, slower procurement decisions and changes to its customers’ acquisition priorities.
For the Civil Aviation Training Solutions segment, the impacts of the COVID-19 pandemic resulted in the closure of certain training centre
operations, lower utilization of its simulators in the network due to reduced demand from aviation customers and interruptions in the
execution of its products backlog. For the Defence and Security segment, delays were experienced in the awarding of new contracts and
in the execution and advancement of certain programs. For the Healthcare segment, customers were primarily focused on managing the
acute operational demands of this healthcare crisis rather than focusing on their training needs, which resulted in less focus and budget
for normal operations and training projects.
CAE Financial Report 2020 | 109
Notes to the Consolidated Financial Statements
To date, the Company has implemented several flexible measures to protect its financial position and preserve liquidity, including the
reduction of capital expenditures and R&D investments in fiscal 2021, strict cost containment measures, salary freezes, salary reductions,
reduced work weeks for 900 employees and 2,600 temporary layoffs, as well as a suspension of the Company’s common share dividends
and share repurchase plan announced on April 6, 2020 in response to the COVID-19 pandemic. Additionally, the Company has worked
with defence customers to secure more favorable terms for milestone payments as well as offer contract modifications to increase work
scope and with suppliers for extended payment terms.
CEWS and other government programs
On April 20, 2020, the Company announced that it has recalled all remaining temporarily laid-off employees in Canada through the Canada
Emergency Wage Subsidy (CEWS) program, impacting approximately 1,500 employees. The Company has also accessed and is working
to access government support programs in countries in which the Company operates.
Cash and liquidity mitigation measures
On April 9, 2020, the Company concluded a new two-year $500.0 million senior unsecured revolving credit facility and on May 19, 2020,
increased its receivable purchase program from US$300.0 million to US$400.0 million. These transactions provide access to additional
liquidity and further strengthen the Company’s financial position.
Contract with Government of Canada for CAE Air1 ventilators
On April 10, 2020, the Company concluded an agreement with the Government of Canada to design and manufacture 10,000 CAE Air1
ventilators to provide life support to patients in intensive care to support the COVID-19 pandemic.
110 | CAE Financial Report 2020
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 10,500 employees, 160 sites and training locations in
over 35 countries. Each year, we train more than 220,000 civil and
defence crewmembers, including more than 135,000 pilots, and
thousands of healthcare professionals worldwide.
cae.com
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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 2020 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/social-responsibility/
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 5,271 trees.
Contains FSC® certified post-consumer and 70% virgin fibre
Certified EcoLogo and FSC® Mix
Manufactured using biogas energy
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cae.com
Financial
Report
Fiscal year ended
March 31, 2020