CAE plans for the future: increased synergies, improved efficiency,
clear accountability and announces third-quarter results Conference
call and Webcast to be held at 8:00 a.m. today MONTREAL, Feb. 11
/PRNewswire-FirstCall/ -- (NYSE: CGT; TSX: CAE) - CAE today
reported financial results for the third quarter ended December 31,
2004, and announced a comprehensive restructuring plan aimed at
restoring the Company's profitability, cash flow and return on
investment. CAE recorded a net loss for the quarter of $347.0
million, or $1.40 per share. This includes a non-cash charge of
$443.3 million ($354.5 million net after-tax) for impairment in the
value of goodwill, intangible and tangible assets. Excluding this
charge, earnings from continuing operations for the third quarter
were $8.8 million (or $0.04 per share) compared to $14.5 million
(or $0.05 per share) last year. It should be noted that
restructuring costs of approximately $3.8 million pre-tax ($0.01
per share) have already been charged to operating earnings in the
third quarter. During the fourth quarter ending March 31, 2005, the
Company will record a $30-million charge for workforce reduction
and related expenses. An additional restructuring cost in the range
of $25 to $35 million will be incurred over the course of fiscal
year 2006. The third-quarter financial results do not include the
estimated after-tax gain of $110 million from the sale of the
Marine Controls unit, which will be recorded in the quarter ending
March 31, 2005. All financial information is in Canadian dollars.
New Business Plan Immediately following his arrival as President
and Chief Executive Officer last August, Mr. Robert E. Brown
initiated an extensive six-month strategic review of CAE's markets,
customers and other external stakeholders as well as its internal
resources and capabilities. Following this review, the Company has
reconfirmed its strategic direction. In doing so, it has adopted a
plan that will protect its technological leadership while at the
same time fostering synergies between its various operating units
and implementing sound business practices. The plan maintains a
Civil Training Group and a Military Group, both of which will be
devoted to training, simulation, modeling and sales for their
specific markets. A new Simulation Products Group will consolidate
all manufacturing activities and include engineering, program
management and global procurement. These functions had previously
existed in the other two groups, resulting in duplication. The
reorganization, which will be effective April 1, 2005, is expected
to result in significant savings to the Company and will position
it well to face new market realities. "Our plan will change the way
we do business," said CAE President and Chief Executive Officer
Robert E. Brown. "CAE has sound fundamentals: talented people,
remarkable technical expertise and quality products. Based on these
core strengths, we have put in place a new structure that will
encourage a sharing of expertise between units and make us a more
efficient operation. In addition, it will clarify responsibilities
and accountability and improve our competitive position in the
marketplace. "Our team has the expertise and experience to make our
new structure work," Mr. Brown added. "The Civil Training Group
will continue to be led by Jeff Roberts while the Military Group
will remain under the leadership of Don Campbell. Marc Parent, who
joined us last week and who has 20 years' experience in aerospace,
will be the Group President of the new Simulation Products Group.
All three will have full accountability and P&L responsibility.
"In line with our commitment to be more transparent in both our
financial and operational information, we will, in the next fiscal
year, start providing a full segmentation of CAE's equipment and
training performance, enabling stakeholders to properly assess the
condition and prospects of all of our businesses. "Effective today,
we are also announcing the appointment of Mr. Alain Raquepas, C.A.,
LL.B., as Chief Financial Officer. After conducting an extensive
internal and external search for a new CFO, we came to realize that
the most qualified person for the job was already within our midst.
Alain's knowledge of CAE and the industry in general are
considerable. He had previously served as Vice-President, Finance,
of our military business and has been acting CFO for the past four
months. In that capacity, he has done an excellent job and has
guided us through this entire restructuring process. We offer our
congratulations to Alain and wish him all the best in his new
role." Other Organizational Changes and Restructuring "This has
been a challenging time, requiring difficult decisions," said Mr.
Brown. "To eliminate duplication and to achieve a more competitive
cost structure, we will be reducing our headcount by some 450
people. I feel deep regret at the hardship that I know this will
cause the employees who will be leaving, as well as their families,
but this is a measure we must take to assure the long-term
stability of the company." The Civil Training Group will
consolidate training centres where duplication exists and
reallocate a number of simulators to maximize yield. The Company
will also be implementing an enterprise resource planning system --
a business management system that integrates all facets of the
business, including planning, manufacturing, sales, and marketing
-- in order to improve accountability and information flow. In
addition, CAE's compensation structure will be reoriented,
effective April 1, 2005, with a specific emphasis on building
shareholder value. Balance Sheet CAE has determined that it is
necessary to record a pre-tax write-down of assets of $443.3
million. Of this amount, $205.2 million represents a reduction in
goodwill following CAE's annual goodwill impairment test, which is
conducted every year as at December 31. Due to the strengthening of
the Canadian dollar and continuing negative market conditions in
civil aviation, more tests were conducted. These resulted in an
additional write-down of $238.1 million: of this, $107.1 million is
a reduction of identifiable intangible assets (primarily related to
training acquisitions), and $131.0 million is a reduction for
non-performing simulators and other assets including deferred
research and development costs. CAE is recording a deferred tax
benefit of $88.8 million related to this impairment, which results
in a net after-tax charge to income in the third quarter of $354.5
million, or $1.43 per share. These non-cash adjustments have no
impact on previously reported revenues or operating income and will
not result in any future cash expenditures. The valuation
principles used by the Company for the goodwill impairment test
were consistent with those of prior years. The increased clarity of
current and expected weak market conditions -- including the
continued lack of profitability of the civil aviation market, a
decline in demand for 30-to- 50 seat passenger regional jets, and
the higher Canadian dollar -- triggered changes in assumptions that
led CAE to lower estimates of the future cash flows expected from
its investments in its civil business. The reduction in carrying
value of intangible and tangible assets will result in a decrease
in the amortization charge of approximately $14.0 million on an
annualized basis, commencing in the fourth quarter of fiscal 2005.
"The recent sale of our Marine Controls division and the impairment
charge will strengthen our balance sheet," said Mr. Brown. "The
full benefit of the sale of Marine Controls will be recorded in the
fourth quarter of this fiscal year. "Management and the Board
realize that a write-down of the magnitude announced represents a
substantial reduction in the retained earnings of the company.
However, the charge is non-cash, and as such, does not have a
consequential impact on our debt covenants. CAE has obtained an
amendment to certain financial covenants from its banking syndicate
and senior note holders to allow for a write-down of this nature
not to constitute an event of default. "The measures announced
today as well as the recently announced sale of the Marine Controls
business unit underscore our priorities of strengthening the
balance sheet and generating positive free cash flow. Consistent
with these priorities and after serious consideration, the Board
has made the decision to reduce the dividend to $0.04 per share on
an annualized basis, which more appropriately reflects the funding
requirements of a capital- intensive business. This more
conservative dividend will make available to the Company
approximately $20 million in additional cash annually. We also
intend to take a much more disciplined approach to new capital
expenditures in the future, recognizing that the majority of our
capital expenditure for the 2006 fiscal year has already been
committed." Mr. Brown concluded, "The next twelve months are going
to be challenging. Much of the immediate savings from the actions
being announced today are offset by low-margin contracts in our
civil equipment backlog, reflecting the new market reality in civil
aviation, and a stronger Canadian dollar. This reorganization
process is intended to fundamentally change the way we do business,
and should ensure that the company's financial position is
strengthened by the end of the next fiscal year. Most of the major
benefits of our plan will be realized in the medium to long-term."
Directors With deepest regret, CAE recognizes the passing of R.
Fraser Elliott, C.M., Q.C., and acknowledges his exceptional
leadership and contributions as a former Chairman of the Board and
as a Director of CAE for more than 50 years. Two new members have
joined CAE's Board of Directors: Brian Barents, former CEO of both
Learjet and Galaxy Aerospace, and former Chairman of the General
Aviation Manufacturers Association; and Paul Gagne, former CEO of
Avenor. Discontinued Operations On February 4, 2005, CAE announced
that it had completed the major portion of the sale of its Marine
Controls unit to L-3 Communications, for a payment of C$245
(US$200) million in cash. The remaining elements of the sale,
including L-3's assumption of C$52 (pnds stlg 23) million of
project finance debt, are expected to close in the coming months,
upon receipt of final approvals. CAE will record an estimated
after-tax gain of $110 million in its quarter ending March 31,
2005. Therefore, the financial results of Marine Controls continue
to be reported as Discontinued Operations, and the gain on sale is
not reflected in the third-quarter financial statements. Operating
Results Consolidated revenue from continuing operations for the
third quarter increased 1.0% to $257.5 million from the $255.2
million generated in the prior year. Civil's revenue increased by
14.0% as a result of higher average revenue per simulator in the
training centre network, while Military's revenue decreased by 9.4%
due to a lower level of activity during the quarter. Earnings
Before Interest and Taxes ("EBIT") from continuing operations,
before the impairment charge of $443.3 million, decreased 26.4% to
$17.3 million from the $23.5 million generated in the prior year.
The decrease from the prior year is due to lower earnings in both
Civil and Military. CS&T's overall operating margin was 4.7%.
In MS&T, the operating margin was 8.7%, the same level as last
year, but down from 12.3% last quarter. The net loss for the third
quarter was $347.0 million, or $1.40 per share. This includes a
non-cash charge of $443.3 million ($354.5 million net after-tax)
for impairment in the value of goodwill, intangible and tangible
assets. Excluding this charge, earnings from continuing operations
for the third quarter were $8.8 million (or $0.04 per share)
compared to $14.5 million (or $0.05 per share) last year. Also
excluding the impairment charge, net earnings were $7.5 million, or
$0.03 per share compared to earnings of $21.4 million (or $0.09 per
share), last year. A restructuring cost of approximately $3.8
million ($0.01 per share) associated with the Company's
restructuring exercise occurred during the third quarter.
Year-to-date, revenue from continuing operations increased by 6.8%
to $723.5 million, despite a cumulative negative foreign exchange
impact of approximately $15.1 million. The increase is attributable
primarily to the CS&T business. Cumulative EBIT from CAE's
continuing operations, excluding the asset impairment charge,
increased to $71.0 million from $63.3 million last year, with
Civil's EBIT up by 35.3% and Military's EBIT down by 5.3%. Year-to-
date EBIT in both business segments was affected positively by the
first- quarter recognition of investment tax credits (ITC)
totalling $14.2 million and negatively by adverse foreign exchange
impacts on operating earnings totalling approximately $2.6 million.
Year-to-date EBIT margins in the CS&T were 9.5%. The
year-to-date net loss was $308.7 million, or $1.25 per share.
Excluding the impact of the impairment write-down, net earnings for
the nine months were $45.8 million, or $0.19 per share, compared to
net earnings of $49.7 million, or $0.22 per share, in the same
period last year. The free cash flow position from continuing
operations for the quarter and year-to-date improved by $124.2
million and $58.6 million, respectively, compared to the prior
year, as a result of positive variances in non-cash working capital
offset by an increase in capital expenditures, which amounted to
$103.5 million year-to-date compared to $61.0 million in the prior
year. The majority of the latter expenditure was for the expansion
of the Civil training network. CAE defines free cash flow as net
cash provided by continuing operating activities less capital
expenditures and dividends paid, plus proceeds from sales and
leaseback. At December 31, 2004, CAE's balance sheet included cash
and cash equivalents of $63.2 million. CAE's net debt, defined as
long-term debt less cash and cash equivalents, was $549.6 million
as at December 31, 2004. Total shareholders' equity at December 31,
2004 of $555.3 million reflects the impairment charge but excludes
the gain on the sale of Marine, which will be included in the
fourth-quarter financial results. CAE's consolidated backlog from
continuing operations at December 31, 2004 was $2.5 billion,
compared to $2.2 billion last year. Outlook CAE foresees a slow
improvement in the civil aviation market and is preparing itself to
meet the growing needs of this market. At the same time, CAE will
aim at increasing revenue per simulator in its training centers
around the world and at containing fixed costs. The Company also
sees good opportunities in the military market, driven in large
part by military and Homeland Security opportunities in the USA and
elsewhere. In that context, CAE has outlined a number of
objectives. It intends to sustain double digit margins in its
Military business unit and to substantially reduce its
manufacturing costs for simulators sold by both civil and military
units. CAE has a well diversified, high-quality product portfolio
and intends to end the year with a restructured and solid earnings
base that can lead to meaningful earnings growth over the medium
and long term. A more detailed discussion of business unit
highlights can be found in the Management's Discussion &
Analysis posted at http://www.cae.com/financialsQ3 . Conference
Call CAE will host a conference call today at 8:00 a.m. E.T. for
analysts, institutional investors and the media. North American
participants can access the call by dialling 1-800-564-3880 or
1-514-397-8625. Overseas participants can dial +800-4990-5000 or
+1-514-397-8625. The conference call will also be audio Webcast
live for the public at http://www.cae.com/ . CAE is a leading
provider of simulation and modelling technologies as well as
integrated training services for commercial and business aviation,
and defence customers worldwide. The company has annual revenues of
approximately C$1 billion, with operations and training facilities
in 17 countries on five continents. This press release includes
forward-looking statements that are based on certain assumptions
and reflects CAE's current expectations. These forward- looking
statements are subject to a number of risks and uncertainties that
could cause actual results or events to differ materially from
current expectations. Additional factors are discussed in CAE's
materials filed with the securities regulatory authorities in
Canada and the United States from time to time. CAE disclaims any
intention or obligation to update or revise any forward-looking
statements. > DATASOURCE: CAE INC. CONTACT: On the Web:
http://www.cae.com/; Media contacts: Nathalie Bourque,
Vice-President, Corporate Communications, (514) 734-5788, ; Anne
von Finckenstein, Manager, Media Relations, (514) 341-6780, ext.
4889, ; Investor relations: Andrew Arnovitz, Director, Investor
Relations, (514) 734-5760,
Copyright