CAE Reports Record Q4 and Full Fiscal Year 2019 Results

CAE reported revenue of $1.0 billion for the fourth quarter of fiscal year 2019, up 42% from the fourth quarter last year. Fourth quarter net income attributable to equity holders was $122.3 million ($0.46 per share) compared to $82.3 million ($0.31 per share) last year. Net income before specific items in the fourth quarter was $127.5 million ($0.48 per share), which represents a 55% EPS increase over the same period last year.

Annual fiscal 2019 revenue was $3.3 billion, up 17% from the prior year. Annual net income attributable to equity holders was $330.0 million ($1.23 per share) compared to $346.0 million ($1.28 per share) in fiscal year 2018. Before specific items, net income was $335.2 million ($1.25 per share) this year, compared to $297.9 million ($1.11 per share) last year, which represents a 13% EPS increase over the same period last year. All financial information is in Canadian dollars.

Specific items for fiscal 2019 include the costs arising from the acquisition and integration of Bombardier's Business Aircraft Training (BAT) Business.

Specific items for fiscal 2018 include the net gains on disposal of our equity interest in the joint venture Zhuhai Xiang Yi Aviation Technology Company Limited (ZFTC) and the remeasurement of the previously held Asian Aviation Centre of Excellence Sdn. Bhd. (AACE) investment upon acquisition and the impacts of the enactment of the U.S. tax reform.

“We had a strong finish to fiscal year 2019, with fourth quarter revenue up 42% and earnings per share up 55% compared to last year; and for the year as a whole, CAE delivered a record performance, meeting our annual outlook, and further establishing itself as the worldwide leader in aviation training,” said Marc Parent, CAE’s President and Chief Executive Officer. “Annual revenue grew 17% and earnings per share grew 13% compared to last year, and we generated strong free cash flow. I am especially pleased with our record $4 billion in annual orders and $9.5 billion order backlog. Our continued success winning our customers’ trust further validates our training strategy and adds to the highly recurring profile of CAE’s business. In Civil, we delivered over one million hours of aviation training during the year and grew operating income by 13%. We also greatly expanded CAE’s position in business aviation training with the company’s largest-ever acquisition, making CAE the world's leading provider of civil aviation training. Annual Civil orders totalled a record $2.8 billion, including additional airline training outsourcings and 78 full-flight simulator sales. In Defence, we grew annual operating income by 9% and booked $1.1 billion in orders, including training systems integration programs, for a record $4.5 billion Defence backlog. As well, we acquired AOCE, which together with our enhanced structure in the U.S., expands our market to include higher-level security programs. And in Healthcare, our new simulation products and expanded salesforce led to accelerated revenue growth toward the end of the fiscal year. We recently appointed a new Healthcare leader, with deep commercial experience in the healthcare field, to leverage our current progress and take the business to the next level of scale. As we look to the fiscal year ahead, we expect CAE to build on the positive momentum in training and to continue to deliver superior and profitable growth.”

Civil Aviation Training Solutions (Civil)

Fourth quarter Civil revenue was $593.4 million, up 50% compared to the same quarter last year, and segment operating income⁽⁸⁾ was $115.5 million (19.5% of revenue) compared to $74.5 million in the fourth quarter last year. Fourth quarter Civil segment operating income before specific items⁽⁹⁾ was $122.3 million (20.6% of revenue), up 64% compared to the fourth quarter last year. Fourth quarter Civil training centre utilization⁽¹⁰⁾ was 75%.

Annual Civil revenue was $1.9 billion, up 15% compared to last year, and segment operating income was $344.3 million (18.4% of revenue). Annual segment operating income before specific items was $351.1 million (18.7% of revenue) this year and $311.8 million (19.2% of revenue) last year, representing a 13% increase. Annual Civil training centre utilization was 76%, reflecting continued strong usage of existing simulators and the recent deployment of additional simulator capacity to meet new demand from customers.

During the quarter, Civil signed training solutions contracts valued at a record $1.1 billion, including a 15-year exclusive pilot training contract with Avianca, and the sale of 28 full-flight simulators (FFSs). For the year, Civil booked orders for a record $2.8 billion, demonstrating CAE’s increased momentum as training partner of choice. These included 78 FFS sales and comprehensive, long-term training agreements with airlines including easyJet, CityJet, Endeavor, Air Asia and Volaris. In business aviation, Civil won long-term training contracts with customers worldwide, including OJets, Icon Aviation and Windsor Jets.

The Civil book-to-sales⁽³⁾ ratio was 1.87x for the quarter and 1.48x for the last 12 months. The Civil backlog at the end of the year was a record $5.0 billion, which is up 22% from the prior year period.

Fourth quarter Defence revenue was $387.9 million, up 34% compared to the same quarter last year and segment operating income was $50.7 million (13.1% of revenue) compared to $36.3 million (12.5% of revenue) in the fourth quarter last year. Before expenses related to the acquisition and integration of Alpha-Omega Change Engineering (AOCE), Defence segment operating income for the quarter would have been $51.7 million (13.3% of revenue), up 42% compared to the fourth quarter last year. Annual Defence revenue was $1,306.7 million, up 21% over last year, and annual segment operating income was $131.5 million (10.1% of revenue). Before the AOCE-related expenses, annual Defence segment operating income would have been $134.8 million (10.3% of revenue), up 9% compared to last year.

During the quarter, Defence booked orders for $265.0 million. Notable wins include a contract with Boeing to provide a P-8A aircraft simulator for the Royal Air Force and simulator upgrade programs with the U.S. Navy as part of a U.S. foreign military sale on the Royal Australian Navy's MH-60R helicopter training systems, the Royal Canadian Air Force for their C-130J simulators, the German Air Force for their Eurofighter simulators, and with Lockheed Martin for C-130J full-mission simulators for the U.S. Air Force.

For the year, Defence booked $1.1 billion in orders including a contract for the U.S. Air Force C-130H Aircrew Training Services program and the U.S. Navy CNATRA CIS program involving instruction at five Naval Air Stations to support primary, intermediate and advanced pilot training. Defence also won a contract to provide a comprehensive training solution and long-term training services for the Royal New Zealand Air Force NH90 helicopter program, and a contract from General Atomics to develop the synthetic training system for the UK Protector remotely piloted aircraft system. In addition, through CAE USA Mission Solutions and the acquisition of AOCE during the year, Defence obtained several U.S. Defense contracts to provide training and engineering support services on higher-level security programs.

The Defence book-to-sales ratio was 0.68x for the quarter and 0.83x for the last 12 months. Defence contracts often include contract options that extend beyond the initial funded year of these contracts. The Defence book-to-sales ratio including options was 1.28x for the quarter and 1.03x for the last 12 months. The Defence backlog, including options and CAE’s interest in joint ventures, at the end of the year was a record $4.5 billion.

Fourth quarter Healthcare revenue was a record $40.7 million, up 16% compared to the same quarter last year, and fourth quarter segment operating income was $4.2 million (10.3% of revenue), compared to $6.7 million (19.1% of revenue) in the fourth quarter last year. Annual Healthcare revenue was $121.6 million compared to $115.2 million last year, and annual segment operating income was $4.8 million (3.9% of revenue), compared to $8.8 million (7.6% of revenue) last year.

CAE Healthcare reached several strategic milestones during the year, strengthening its position as the innovation leader in simulation-based healthcare education and training. Innovative product launches include, CAE Ares, an emergency care manikin; Anesthesia SimSTAT Appendectomy and Robotic Surgery modules, screen-based simulation approved by the American Board of Anesthesiology for maintenance of certification credits; two new Blue Phantom skills trainers for ultrasound simulation training; and CAE Luna, an innovative infant simulator. Healthcare broadened its market reach by expanding its sales force and entered into several new distributor agreements across the U.S. and internationally. On April 1, 2019, CAE appointed Rekha Ranganathan, an experienced healthcare industry executive, as the new CAE Healthcare group president, to achieve greater scale and return on investment.

Free cash flow from continuing operations was $116.8 million for the quarter compared to $117.3 million in the fourth quarter last year. Free cash flow for the year was $323.8 million, compared to $288.9 million in the same period last year. The cash conversion ratio for fiscal year 2019 was 98%.

Income taxes this quarter were $19.3 million, representing an effective tax rate of 13%, compared to 8% for the fourth quarter last year. The tax rate this quarter was higher due to the change in the mix of income from various jurisdictions and due to a lower recognition of deferred tax assets in Europe. Also this quarter, the company recognized deferred tax assets in Canada that were mostly offset by tax audits. Excluding the effect of the net deferred tax assets and the tax audits in Canada, the income tax rate would have been 20% this quarter. On the same basis, the income tax rate for the year would have been 19%.

Growth and maintenance capital expenditures⁽¹²⁾ totaled $96.2 million this quarter and $251.8 million for the year.

Net debt⁽¹³⁾ at the end of the year was $1,882.2 million for a net debt-to-capital ratio⁽¹⁴⁾ of 43.9%. This compares to net debt of $649.4 million and a net debt-to-total capital ratio of 22.0% at the end of the last year. CAE issued US$450 million of unsecured senior notes and US$150 million term loans to fund the acquisition of Bombardier's BAT Business and to monetize its existing future royalty obligations to the aircraft manufacturer.

Return on capital employed was 11.9% or 12.9% before the impacts of the recently acquired Bombardier BAT Business, compared to 14.7% last year or 12.7% before specific items.

CAE will pay a dividend of 10 cents per share effective June 28, 2019 to shareholders of record at the close of business on June 14, 2019. During fiscal year 2019, CAE paid $99.9 million in dividends to shareholders and repurchased and cancelled a total of 3,671,900 common shares at a weighted average price of $25.70 per common share for a total consideration of $94.4 million.

Management outlook for fiscal year 2020

CAE’s core markets benefit from secular growth and the Company expects to continue exceeding underlying market growth in fiscal year 2020. 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 expects operating income to grow in the upper 20 percent range on continued strong demand for its training solutions, including maintaining a leading share of FFS sales, and the integration of the recently acquired Bombardier BAT Business. In Defence, the Company expects mid to high single-digit percentage operating income growth as it delivers from backlog and continues to win opportunities from 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 currently expects total annual capital expenditures to increase modestly, by approximately 10 to 15 percent, 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.

IFRS 15 - Revenue from Contracts with Customers

Effective April 1, 2018, CAE adopted IFRS 15 - Revenue from Contracts with Customers, which changes the way the Company recognizes revenue for certain of its customer contracts. The main impact of IFRS 15 to CAE is the timing of revenue recognized for certain training devices that were previously accounted for using the percentage-of-completion method that no longer meet the requirements for revenue recognition over time. Revenue for these training devices are instead recognized upon completion. While this change impacts the timing of contract revenue and profit recognition, there are no changes to cash flows from the contract. The financial results reported in the press release for the fiscal year ended March 31, 2018 have been restated to reflect the accounting changes required by IFRS 15 as the Company adopted the standard retrospectively this fiscal year.  For more detailed information, including the impact on CAE’s fiscal 2018 results, refer to Note 2 of the annual consolidated financial statements for the year ended March 31, 2019.

IFRS 16 - Leases

Effective April 1, 2019, CAE adopted IFRS 16 - Leases, which introduces a single lessee accounting model and eliminates the classification of leases as either operating or finance leases. The main impact of IFRS 16 to CAE is the recognition of a right-of-use asset and a lease liability for substantially all leases. This will result in a decrease of our operating lease expense and an increase of our finance and depreciation expenses. The financial results reported in the press release for fiscal years ended March 31, 2018 and 2019 do not reflect the accounting changes required by IFRS 16 as the Company adopted the standard as of April 1, 2019. For more detailed information, including the expected impacts of the transition to IFRS 16, refer to Note 2 of the annual consolidated financial statements for the year ended March 31, 2019, and Supplemental Q4 FY2019 Presentation.

Detailed information

Readers are strongly advised to view a more detailed discussion of our results by segment in the Management’s Discussion and Analysis (MD&A) and CAE’s consolidated financial statements which are posted on our website at www.cae.com/investors.

CAE’s consolidated financial statements and MD&A for the year ended March 31, 2019 have been filed with the Canadian Securities Administrators on SEDAR (www.sedar.com) and are available on our website (www.cae.com). They have also been filed with the U.S. Securities and Exchange Commission and are available on their website (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 ([email protected]).

Conference call Q4 and full FY2019

Marc Parent, CAE President and CEO; Sonya Branco, Vice President, Finance, and CFO; and Andrew Arnovitz, Vice President, Strategy and Investor Relations will conduct an earnings conference call today at 1:00 p.m. ET. The call is intended for analysts, institutional investors and the media. Participants can listen to the conference by dialling + 1 877 586 3392 or +1 416 981 9024. The conference call will also be audio webcast live for the public at www.cae.com. The “Supplemental Q4 FY2019 Presentation” to accompany management’s discussion of CAE’s fourth quarter and full fiscal year 2019 results can be downloaded from our website at www.cae.com/investors.

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 10,000 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.