(Unaudited)
For the Three and Nine Months Ended December 31, 2022
(In thousands of Canadian dollars)
Forward-looking statements
Readers are cautioned that this report includes certain forward-looking information and statements. These forward-looking statements contain information that is generally stated to be anticipated, expected or projected by CATSA. They involve known and unknown risks, uncertainties and other factors which may cause the actual results and performance of the organization to be materially different from any future results and performance expressed or implied by such forward-looking information.
Materiality
In assessing what information is to be provided in this report, management applies the materiality principle as guidance for disclosure. Management considers information material if it is probable that its omission or misstatement, judged in the surrounding circumstances, would influence the economic decisions of CATSA’s stakeholders.
Corporate Overview
CATSA is an agent Crown corporation, funded by parliamentary appropriations and accountable to the Parliament of Canada through the Minister of Transport. CATSA’s mission is to protect the public by securing critical elements of the air transportation system.
CATSA delivers the mandate of security screening at 89 designated airports across the country through a third-party screening contractor model. CATSA is responsible for the delivery of the following four mandated activities:
- Pre-Board Screening (PBS): the screening of passengers, their carry-on baggage and their belongings prior to their entry to the secure area of an air terminal building;
- Hold Baggage Screening (HBS): the screening of passengers’ checked ( or hold) baggage for prohibited items such as explosives, prior to being loaded onto an aircraft;
- Non-Passenger Screening (NPS): the random screening of non-passengers such as flight personnel, ground crew and airport employees, and their belongings (including vehicles and their contents) entering restricted areas at the highest-risk airports; and
- Restricted Area Identity Card (RAIC) Program: the system which uses iris and fingerprint biometric identifiers to allow non-passengers access to the restricted areas of airports. The final authority that determines access to the restricted areas of an airport is the airport authority.
CATSA is also responsible for ensuring consistency in the delivery of screening across Canada and for air transport security functions that the Minister of Transport may assign to it, subject to any terms and conditions that the Minister of Transport may establish.
In addition to its mandated activities, CATSA has an agreement with Transport Canada (TC) to conduct screening of cargo at smaller airports where capacity exists. This program was designed to screen limited amounts of cargo during off-peak periods and involves using existing resources, technology and procedures.
In prior years, CATSA provided screening services on a cost recovery basis to certain designated and nondesignated airports. In light of the COVID-19 pandemic, no such services were provided from April 1, 2020, until June 24, 2022, when CATSA resumed screening services at the Muskoka Airport Authority. The agreement was in place for the summer travel season until September 6, 2022.
Operating Environment
Industry recovery
The COVID-19 pandemic had an unprecedented impact on the aviation industry. Passenger volumes reached a historic low in April 2020. Statistics from CATSA’s Boarding Pass Security System, and other data sources, indicate that screened traffic across Canada increased from 8.2 million passengers for the three months ended December 31, 2021, to 14.8 million passengers for the three months ended December 31, 2022. In spring 2022, CATSA faced challenges due to the resurgent demand in air travel at certain airports. Although CATSA Screening Contractors began recalling laid off screening officers and hiring new ones as of spring 2021, increased hiring efforts were required to respond to the wait time pressures being experienced at certain checkpoints. CATSA continues to work closely with Transport Canada and external stakeholders to support the aviation industry’s ongoing recovery.
Risks and Uncertainties
CATSA maintains effective corporate risk management to ensure that risks are identified, assessed and managed appropriately. A full assessment of CATSA’s corporate risks, potential impacts and risk mitigations is disclosed in CATSA’s 2022 Annual Report.
The overall level of CATSA’s corporate risks remains unchanged from CATSA’s Quarterly Financial Report for the three months ended June 30, 2022. CATSA is actively monitoring and mitigating the ongoing impacts of the recovery of the aviation industry on its corporate risks.
Analysis of Financial Results
Condensed Interim Statement of Comprehensive Income
The following section provides information on key variances within the Condensed Interim Statement of Comprehensive Income for the three and nine months ended December 31, 2022, and December 31, 2021.
Key Financial Highlights - Condensed Interim Statement of Comprehensive Income
(Unaudited)
| (Thousands of Canadian dollars) | Three Months Ended December 31 | Nine Months Ended December 31 | ||||||
|---|---|---|---|---|---|---|---|---|
| 2022 | 2021 | $ Change | % Change | 2022 | 2021 | $ Change | % Change | |
| Expenses1 | ||||||||
| Screening services and other related costs | $ 180,040 | $ 139,885 | $ 40,155 | 28.7% | $ 529,488 | $ 407,292 | $ 122,196 | 30.0% |
| Equipment operating and maintenance | 10,886 | 10,224 | 662 | 6.5% | 31,183 | 29,587 | 1,596 | 5.4% |
| Program support and corporate services | 22,298 | 21,037 | 1,261 | 6.0% | 67,973 | 63,398 | 4,575 | 7.2% |
| Depreciation and amortization | 11,120 | 20,143 | (9,023) | (44.8%) | 33,162 | 60,872 | (27,710) | (45.5%) |
| Total expenses | 224,344 | 191,289 | 33,055 | 17.3% | 661,806 | 561,149 | 100,657 | 17.9% |
| Other expenses (income) |
590 | (236) | 826 | 350.0% | (743) | 1,860 | (2,603) | (139.9%) |
| Financial performance before revenue and government funding | 224,934 | 191,053 | 33,881 | 17.7% | 661,063 | 563,009 | 98,054 | 17.4% |
| Revenue | 763 | 57 | 706 | 1238.6% | 1,573 | 184 | 1,389 | 754.9% |
| Government funding | ||||||||
| Parliamentary appropriations for operating expenses | 211,569 | 170,751 | 40,818 | 23.9% | 624,048 | 499,319 | 124,729 | 25.0% |
| Amortization of deferred government funding related to capital expenditures | 10,230 | 19,247 | (9,017) | (46.8%) | 30,421 | 60,050 | (29,629) | (49.3%) |
| Parliamentary appropriations for lease payments | 859 | 801 | 58 | 7.2% | 2,878 | 2,812 | 66 | 2.3% |
| Total government funding | 222,658 | 190,799 | 31,859 | 16.7% | 657,347 | 562,181 | 95,166 | 16.9% |
| Financial performance | $ (1,513) | $ (197) | $ (1,316) | (668.0%) | $ (2,143) | $ (644) | $ (1,499) | (232.8%) |
| Other comprehensive income (loss) | 4,999 | (14,002) | 19,001 | 135.7% | 9,383 | (7,238) | 16,621 | 229.6% |
| Total comprehensive income | $ 3,486 | $ (14,199) | $ 17,685 | 124.6% | $ 7,240 | $ (7,882) | $ 15,122 | 191.9% |
1 The Condensed Interim Statement of Comprehensive Income presents operating expenses by program activity, whereas operating expenses above are presented by major expense type, as disclosed in note 13 of the unaudited condensed interim financial statements for the three and nine months ended December 31, 2022.
Screening Services and Other Related Costs
Screening services and other related costs increased by $40,155 (28.7%) and by $122,196 (30.0%) for the three and nine months ended December 31, 2022, respectively, compared to the same periods in 2021. The increases are primarily attributable to increases in passenger volumes, which resulted in the purchase of additional screening hours totaling $34,069 and $99,783, respectively, partially offset by the purchase of fewer hours associated with temperature screening of $Nil and $15,997, respectively. The overall increases are also attributable to annual screening contractor billing rate increases totaling $5,725 and $11,625, respectively, and increased spending on screening officer training and related initiatives to support the recovery of the aviation industry of $25,758 for the nine months ended December 31, 2022.
Program Support and Corporate Services
Program support and corporate services increased by $1,261 (6.0%) and by $4,575 (7.2%) for the three and nine months ended December 31, 2022, respectively, compared to the same periods in 2021. The increases are mainly attributable to higher employee-related costs of $1 ,044 and $3,075, respectively, and higher costs in support of corporate priorities (industry recovery, Indigenous engagement, and modernization of office space) totaling $808 and $3,275, respectively. The increases were partially offset by lower costs associated with CATSA's defined benefit pension plan totaling $592 and $1,776, respectively.
Depreciation and Amortization
Depreciation and amortization decreased by $9,023 (44.8%) and by $27,710 (45.5%) for the three and nine months ended December 31, 2022, respectively, compared to the same periods in 2021. The decreases are primarily attributable to the change in estimated useful lives of some of CATSA’s screening equipment and its associated network software assets from 10 years to 15 years, as of April 1, 2022.
Other Expenses (Income)
Other expenses (income) increased by $826 (350.0%) and decreased by $2,603 (139.9%) for the three and nine months ended December 31, 2022, respectively, compared to the same periods in 2021. The decrease for the nine months ended December 31, 2022, is primarily due to lower impairment losses and net foreign exchange gains. The decrease is partially offset by lower net gains on the fair value of derivative financial instruments.
Government Funding
CATSA is funded by appropriations from the federal Consolidated Revenue Fund for operating expenses and capital expenditures. Payments for CATSA’s leases that are capitalized under IFRS 16 are funded through capital appropriations.
Parliamentary appropriations for operating expenses
Parliamentary appropriations for operating expenses increased by $40,818 (23.9%) and by $124,729 (25.0%) for the three and nine months ended December 31, 2022, respectively, compared to the same periods in 2021. The increases are primarily attributable to increased spending for screening services and other related costs, as discussed above.
Amortization of deferred government funding related to capital expenditures
Amortization of deferred government funding related to capital expenditures decreased by $9,017 (46.8%) and by $29,629 (49.3%) for the three and nine months ended December 31, 2022, respectively, compared to the same periods in 2021. The decreases are primarily attributable to reduced depreciation and amortization expenses, as discussed above.
Parliamentary appropriations for lease payments
CATSA’s lease payments are typically made in the same month that the appropriations are received, therefore there is no deferred funding associated with these appropriations.
Parliamentary appropriations for lease payments are comparable to the prior year.
Other Comprehensive Income (Loss)
Other comprehensive (loss) income is composed of quarterly non-cash remeasurements resulting from changes in actuarial assumptions and the return on pension plan assets.
Other comprehensive income of $4,999 for the three months ended December 31, 2022, was attributable to a remeasurement gain resulting from a higher actual rate of return on plan assets than the rate used in CATSA's assumptions. Other comprehensive loss of $14,002 for the three months ended December 31, 2021, was attributable to a remeasurement loss of $28,069 on the defined benefit liability arising from a 50 basis point decrease in the discount rate between September 30, 2021, and December 31, 2021. This was partially offset by a remeasurement gain of $14,067 resulting from a higher actual rate of return on plan assets than the rate used in CATSA's assumptions.
Other comprehensive income of $9,383 for the nine months ended December 31, 2022, was attributable to a remeasurement gain of $39,852 on the defined benefit liability arising from a 100 basis point increase in the discount rate between March 31, 2022 and December 31, 2022. This was partially offset by a remeasurement loss of $30,469 resulting from a lower actual rate of return on plan assets than the rate used in CATSA's assumptions. Other comprehensive loss of $7,238 for the nine months ended December 31, 2021, was attributable to a remeasurement loss of $28,069 on the defined benefit liability arising from a 50 basis point decrease in the discount rate between March 31, 2021, and December 31, 2021. This was partially offset by a remeasurement gain of $20,831 resulting from a higher actual rate of return on plan assets than the rate used in CATSA's assumptions.
For more information, refer to note 9 of the unaudited condensed interim financial statements.
Condensed Interim Statement of Financial Position
The following section provides information on key variances within the Condensed Interim Statement of Financial Position as at December 31, 2022, compared to March 31, 2022.
Key Financial Highlights - Condensed Interim Statement of Financial Position
(Unaudited)
| (Thousands of Canadian dollars) | December 31, 2022 | March 31, 2022 | $ Change | % Change |
|---|---|---|---|---|
| Current assets | $ 173,246 | $ 126,526 | $ 46,720 | 36.9% |
| Non-current assets | 465,134 | 480,996 | (15,862) | (3.3%) |
| Total assets | $ 638,380 | $ 607,522 | $ 30,858 | 5.1% |
| Current liabilities | $ 177,668 | $ 129,955 | $ 47,713 | 36.7% |
| Non-current liabilities | 415,698 | 439,793 | (24,095) | (5.5%) |
| Total liabilities | $ 593,366 | $ 569,748 | $ 23,618 | 4.1% |
Assets
Current assets increased by $46,720 (36.9%) primarily attributable to the following:
- Increase in cash of $30,113 primarily due to the timing of disbursements to suppliers for goods and services;
- Increase in trade and other receivables of $19,554 primarily due to an increase in parliamentary appropriations receivable; and
- Decrease in prepaid expenses of $2,691 due to the amortization of annual insurance premiums, and annual maintenance and support services.
Non-current assets decreased by $15,862 (3.3%) primarily attributable to the following:
- Decrease in property and equipment and intangible assets of $20,590 primarily due to depreciation and amortization totaling $30,508, partially offset by acquisitions totaling $9,934.
Liabilities
Current liabilities increased by $47,713 (36.7%) primarily attributable to the following:
- Increase in trade and other payables of $52,683 due to the timing of disbursements associated with obligations outstanding with suppliers; and
- Decrease in deferred government funding related to operating expenditures of $3,512 due to a reduction in inventories and prepaid expenses.
Non-current liabilities decreased by $24,095 (5.5%) primarily attributable to the following:
- Decrease in the deferred government funding related to capital expenditures of $20,635 due to amortization of deferred government funding related to capital expenditures of $30,421 exceeding parliamentary appropriations used to fund capital expenditures of $9,786; and
- Decrease in employee benefits liability of $2,382 relating to CATSA’s other defined benefits plan.
Financial Performance Against Corporate Plan
CATSA’s operations are funded by parliamentary appropriations from the Government of Canada and are reflected in CATSA’s Summary of the 2022/23 to 2026/27 Corporate Plan.
Parliamentary Appropriations Used
Appropriations used are reported on a near-cash accrual basis of accounting.
Operating Expenditures
The table below serves to reconcile financial performance reported under International Financial Reporting Standards (IFRS) and operating appropriations used.
Reconciliation of Financial Performance to Operating Appropriations Used
(Unaudited)
| (Thousands of Canadian dollars) | Three Months Ended December 31 | Nine Months Ended December 31 | ||
|---|---|---|---|---|
| 2022 | 2021 | 2022 | 2021 | |
| Financial performance before revenue and government funding | $ 224,934 | $ 191,053 | $ 661,063 | $ 563,009 |
| Revenue | (763) | (57) | (1,573) | (184) |
| Financial performance before government funding | 224,171 | 190,996 | 659,490 | 562,825 |
| Non-cash items | ||||
| Depreciation and amortization | (11,120) | (20,143) | (33,162) | (60,872) |
| Employee cost accruals1 | (877) | (881) | (2,829) | (2,880) |
| Non-cash finance costs related to leases | (65) | (49) | (202) | (123) |
| Non-cash gain (loss) on foreign exchange recognized in financial performance | 139 | 63 | 17 | (208) |
| Change in fair value of financial instruments at fair value through profit and loss | (970) | 498 | 503 | 1,194 |
| Employee benefits expense2 | 291 | 334 | 247 | 1,430 |
| Write-off of property and equipment and intangible assets | - | (67) | (16) | (107) |
| Loss on disposal of property and equipment | - | - | - | (1,940) |
| Appropriations used for operating expenses | $ 211,569 | $ 170,751 | $ 624,048 | $ 499,319 |
| Other items affecting funding | ||||
| Net change in prepaids and inventories3 | 446 | (1,433) | (3,512) | (6,233) |
| Total operating appropriations used | $ 212,015 | $ 169,318 | $ 620,536 | $ 493,086 |
1 Employee cost accruals are accounting adjustments to record variable pay and accrued vacation used and incurred to December 31, 2022. These costs are only recorded for near-cash accrual purposes at year-end, creating a reconciling item during interim periods.
2 Employee benefits expense is accounted for in the Condensed Interim Statement of Comprehensive Income in accordance with IFRS. The reconciling item above represents the difference between cash payments for employee benefits and the accounting expense under IFRS.
3 Prepaids and inventories funded through operating appropriations are expensed as the benefit is derived from the asset by CATSA. They are funded by appropriations when purchased, creating a reconciling item.
Capital Expenditures
The table below serves to reconcile capital expenditures reported under IFRS and capital appropriations used.
Reconciliation of Capital Expenditures to Capital Appropriations Used
(Unaudited)
| (Thousands of Canadian dollars) | Three Months Ended December 31 | Nine Months Ended December 31 | ||
|---|---|---|---|---|
| 2022 | 2021 | 2022 | 2021 | |
| Explosives Detection Systems (EDS) | $ 4,715 | $ 452 | $ 8,208 | $ 3,516 |
| Non-Explosives Detection Systems (Non-EDS) | 869 | 612 | 1,726 | 872 |
| Lease payments | 859 | 801 | 2,878 | 2,812 |
| Total capital expenditures | $ 6,443 | $ 1,865 | $ 12,812 | $ 7,200 |
| Non-cash adjustment on foreign exchange related to capital expenditures | (148) | - | (148) | 4 |
| Total capital appropriations used | $ 6,295 | $ 1,865 | $ 12,664 | $ 7,204 |
Appropriations Used Compared to Corporate Plan
Parliamentary appropriations used for operating expenditures are in line with the operating budget in
CATSA's approved Summary of the 2022/23 to 2026/27 Corporate Plan for the nine months ended December 31, 2022.
Parliamentary appropriations used for capital expenditures for the nine months ended December 31, 2022, are lower than planned. This is due to delays in capital spending associated with various EDS and Non-EDS projects, resulting mainly from vendor delays and changes in airport project plans.
CATSA is on track to meet the operating goals, objectives and financial results for the current year as outlined in CATSA’s approved Summary of the 2022/23 to 2026/27 Corporate Plan.