CAE Reports Second Quarter Fiscal 2020 Results

Nov. 13, 2019

CAE today reported revenue of $896.8 million for the second quarter of fiscal 2020, compared with $743.8 million in the second quarter last year. Second quarter net income attributable to equity holders was $73.8 million ($0.28 per share) compared to $60.7 million ($0.23 per share) last year. Net income before specific items(4) in the second quarter of fiscal 2020 was $74.7 million ($0.28 per share before specific items(5)).

Second quarter segment operating income was $124.8 million (13.9 percent of revenue) compared with $98.7 million (13.3 percent of revenue) in the second quarter of last year. Segment operating income before specific items in the second quarter of fiscal 2020 was $126.0 million (14.0 percent of revenue). All financial information is in Canadian dollars unless otherwise indicated.

"CAE had good growth in the second quarter, with 21 percent higher revenue and 28 percent higher operating income, and we secured nearly $1.0 billion of orders for a $9.2 billion backlog," said Marc Parent, CAE's President and Chief Executive Officer. "Performance was led by Civil with 60 percent operating income growth and higher margins, and continued good momentum signing long-term training agreements with our airline partners. In business aviation, we substantially concluded the integration of Bombardier Business Aircraft Training and I am very pleased with its performance to date. Further strengthening our position is our strategic partnership and exclusive 15-year training outsourcing with Directional Aviation Capital, one of the largest, fastest growing, and most innovative corporate aviation service companies globally. In Defence, modest top-line growth and lower operating income reflect order delays and the timing of program milestones on contracts in backlog. We continue to expect a stronger second half in Defence, a view supported by a healthy book-to-sales ratio in the quarter and a robust pipeline. In Healthcare, we received orders for new products that we plan to deliver in the coming quarters, and we enhanced our position in the large U.S. hospital market. As we look to the remainder of the fiscal year, our overall outlook for the Company remains largely unchanged, with a higher growth outlook in Civil offsetting lower expected growth in Defence."

Civil Aviation Training Solutions (Civil)

Second quarter Civil revenue was $529.9 million, up 35 percent compared to the same quarter last year. Segment operating income was $100.2 million (18.9 percent of revenue) compared to $63.3 million (16.1 percent of revenue) in the second quarter last year. Second quarter segment operating income before specific items was $101.4 million (19.1 percent of revenue), up 60 percent compared to the second quarter last year. During the quarter, Civil delivered 18 full-flight simulators (FFSs) to customers and second quarter Civil training centre utilization(6) was 69 percent.

During the quarter, Civil signed training solutions contracts valued at $602.9 million, including new long-term pilot training agreements with Sunwing Airlines, Loganair and Flightworks. Civil also sold 11 FFSs during the quarter, for 20 sales in the first half of the year. To address the growing global demand for new pilots, Civil launched a new cadet pilot training program to train more than 700 new professional pilots over the next 10 years for Southwest Airlines Destination 225° program. Following the end of the quarter, Civil signed a long-term exclusive training agreement with easyJet to train more than 1,000 new easyJet cadet pilots on a Multi-Crew Pilot License program. In business aviation, Civil entered a strategic partnership with Directional Aviation Capital and its affiliates as part of an exclusive 15-year training outsourcing agreement. As part of the agreement, CAE acquired a fifty-percent stake in SIMCOM Holdings, Inc., post quarter.

The Civil book-to-sales ratio was 1.14x for the quarter and 1.45x for the last 12 months. The Civil backlog at the end of the quarter was a record $5.1 billion.

Defence and Security (Defence)

Second quarter Defence revenue was $336.5 million, up 5 percent compared to the same quarter last year and segment operating income was $26.0 million (7.7 percent of revenue), down 24 percent compared to the second quarter last year, reflecting delays in the timing of orders and Defence's progress on programs in backlog, and an income growth profile more heavily weighted to the second-half of the year.

During the quarter, Defence booked orders for $362.1 million, including the U.S. Air Force for KC-135 aircrew training services and simulator upgrades and modifications on its KC-135 training devices. Additionally, CAE will continue to provide fixed-wing flight training and support services to the U.S. Army at the CAE Dothan Training Centre and upgrades on MH-60 Seahawk helicopter simulators and T-44C aircrew training services to the U.S. Navy. Other notable orders include a contract with Boeing for upgrades on P-8A simulators, a contract to upgrade the German Eurofighter and Tornado aircraft simulator, and a contract for Abrams M1A2 tank maintenance trainers for the U.S. Army. As well, Defence entered a collaboration with Leonardo to offer integrated helicopter training solutions in the U.S. government market.

The Defence book-to-sales ratio was 1.08x for the quarter and 0.81x for the last 12 months (excluding contract options). The Defence backlog, including options and CAE's interest in joint ventures, at the end of the quarter was $4.1 billion. The Defence pipeline remains strong with approximately $4.0 billion of bids and proposals pending customer decisions.

Healthcare

Second quarter Healthcare revenue was $30.4 million compared to $30.4 million in the same quarter last year, and second quarter segment operating loss was $1.4 million, compared to segment operating income of $1.3 million in the second quarter last year. Healthcare had higher expenses in the second quarter this year to support the pursuit of a larger business and the launch of new products.

Healthcare launched the Vimedix 3.0 ultrasound simulator with more realistic anatomy and modern user interface. As well, Healthcare, together with the American Society of Anesthesiologists, launched a new Anesthesia SimSTAT module, the latest in a series of interactive screen-based modules approved for Maintenance of Certification in Anesthesiology credits. In response to increased regulations in the U.S. involving hospitals and the growing imperative on patient safety, Healthcare further expanded its reach in the hospital segment by entering 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.

Additional financial highlights

Free cash flow(8) was negative $7.1 million for the quarter compared to positive $137.7 million in the second quarter last year. Cash provided by operating activities increased compared to the second quarter last year, while free cash flow decreased, mainly from a higher investment in non-cash working capital accounts. Notably, this reflects the timing of cash flows involving accounts payable and contract liabilities, and higher inventory from recent strategic investments in simulator advanced builds to pre-empt customer demand that CAE anticipates for certain simulator products. CAE usually sees a higher level of investment in non-cash working capital accounts during the first half of the fiscal year and it expects to see a significant portion of these investments reverse in the second half.

Income taxes this quarter were $15.5 million, representing an effective tax rate of 17 percent, compared to 19 percent for the second quarter last year. The tax rate was lower due to a change in the mix of income from various jurisdictions.

Net finance expense this quarter was $34.3 million, $14.4 million higher than the second quarter of fiscal 2019, mainly from higher interest on long-term debt due to the issuance of unsecured senior notes in the fourth quarter of fiscal 2019 to fund the acquisition of the Bombardier BAT business, and higher interest on lease liabilities because of the adoption of IFRS 16.

Growth and maintenance capital expenditures(9) totaled $58.8 million this quarter.

Net debt(10) at the end of the quarter was $2,442.8 million for a net debt-to-capital ratio(11) of 51.0 percent. This compares to net debt of $2,312.7 million and a net debt-to-capital ratio of 49.4 percent at the end of the preceding quarter. Excluding the impacts of the adoption of IFRS 16, net debt would have been $2,158.5 million this quarter for a net debt-to-capital ratio of 47.5 percent.

Return on capital employed (ROCE)(12) was 11.5 percent this quarter compared to 12.8 percent in the second quarter last year, before specific items. Excluding the impacts of the adoption of IFRS 16, ROCE before specific items would have been 11.7 percent this quarter.

CAE will pay a dividend of 11 cents per share effective December 31, 2019 to shareholders of record at the close of business on December 13, 2019.

During the three months ended September 30, 2019, CAE repurchased and cancelled a total of 533,600 common shares under the Normal Course Issuer Bid (NCIB), at a weighted average price of $34.06 per common share, for a total consideration of $18.2 million.

Management outlook for fiscal year 2020 revised

Management's outlook for CAE in fiscal year 2020 remains largely unchanged, with a higher growth outlook in Civil expected to offset lower expected growth in Defence. In Civil, the Company expects to continue building on its positive momentum in training, increasing market share and securing new customer partnerships with its innovative training solutions. Civil now expects operating income growth closer to 30 percent (previously upper 20 percent range) on the basis of a strong first-half performance and a further increase in demand for its training solutions, including maintaining its leading share of FFS sales, and the successful integration of its recently acquired Bombardier BAT business, which is substantially complete. In Defence, the Company now expects modest operating income growth for the year (vs. the previous outlook for mid to high single-digit percentage growth). This revised view considers the Defence group's performance in the first half of the fiscal year, current expectations for reaching profit milestones on programs in backlog, and the expected timing of new contract awards from what continues to be a large pipeline. CAE expects Healthcare to achieve double-digit growth under its new leadership, expanded salesforce, and the continued launch of innovative products. Funding growth opportunities remains CAE's top capital allocation priority and continues to be driven by and supportive of growing customer training outsourcings in its large core markets. The Company prioritizes market-led capital investments that offer sustainable and profitable growth and accretive returns and support its strategy to be the recognized worldwide training partner of choice. CAE continues to expect total annual capital expenditures to be approximately 10 to 15 percent higher, in fiscal 2020, primarily to keep pace with growing demand for training services from its existing customers and to secure new long-term customer contracts. Management's expectations are based on the prevailing positive market conditions and customer receptivity to CAE's training solutions as well as material assumptions contained in this press release, quarterly MD&A and in CAE's fiscal year 2019 MD&A.

Corporate Social Responsibility

CAE creates significant value for customers, shareholders, and its employees. CAE products and services contribute to improvements in aviation safety, ensure defence forces are mission-ready, and help medical professionals save lives-a noble purpose that is a source of pride for CAE's more than 10,000 employees worldwide. As the largest civil aviation training company in the world, and the only pure play aviation training company, it has an unwavering customer focus and commitment to innovation. Furthermore, CAE adopted this year, ethical principles for the responsible use of data analytics to better manage risks associated with the increasing use of emerging technologies. The adoption of these principles affirms our commitment to adhere to the highest standards of ethical conduct in our dealings with employees, customers and all other stakeholders in our ecosystem. The principles are also a commitment to go beyond what is legally required to protect CAE's and its stakeholders' data. CAE also plays an important role developing talent in its industry. With women accounting for less than 5 percent of the global pilot pool, CAE, as the aviation training leader worldwide, is a major advocate for gender diversity in aviation. The Company works to ensure the industry accesses the full available talent pool to help address the need for over 300,000 new pilots in civil aviation over the next decade. Among several exciting CAE initiatives, CAE developed the CAE Women in Flight scholarship, which together with its dynamic women ambassadors, help to encourage more women to consider the pilot profession.