Management’s Discussion and Analysis

for the year ended March 31, 2023

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Management’s Discussion and Analysis (MD&A) outlines CATSA’s financial results and operational changes for the year ended March 31, 2023. This MD&A should be read in conjunction with CATSA’s audited annual financial statements and accompanying notes for the year ended March 31, 2023, which have been prepared in accordance with International Financial Reporting Standards (IFRS). The information in this report is expressed in thousands of Canadian dollars and is current to June 15, 2023, unless otherwise stated.

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.

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Government Funding

CATSA, as an agent Crown corporation, is funded by parliamentary appropriations and accountable to the Parliament of Canada through the Minister of Transport. Consequently, CATSA’s financial plan is prepared in accordance with the resources it is assigned by the Government of Canada and as approved by Parliament.

Over the past several years, CATSA has received incremental funding from the Government of Canada to supplement its base funding level in order to carry out its mandate. In May 2022, CATSA was granted $329.7M of incremental funding for 2022/23, in addition to its base funding of $567.5M, for a total funding envelope of $897.2M. This funding allowed CATSA to deliver on its mandated activities.

Budget 2023 included incremental funding of $1,746 million (net) over three years to continue to protect the public by securing critical elements of the air transportation system. This funding also supports the introduction of 100% Non-Passenger Screening (NPS) and improvements to wait time service levels beginning in 2024/25.

Industry Recovery

In 2022/23, CATSA screened 57.6 million passengers, representing an increase of 134.7% compared to 2021/22. CATSA began preparing for this rebound in passenger traffic in spring 2021. Despite these efforts, the organization experienced some operational challenges during the early parts of the recovery period due primarily to the challenging labour market conditions being experienced by many front-line service industries as well as the sudden and rapid increase in traffic in spring and summer 2022. CATSA continues to work closely with its screening contractors, Transport Canada and external stakeholders to support the aviation industry’s recovery.

Internal Controls

Management is responsible for establishing and maintaining a system of internal controls over financial reporting. An integral part of this responsibility is CATSA’s internal controls certification program, which involves a periodic assessment of the design and effectiveness of key internal controls over financial reporting. The program is based on the Committee of Sponsoring Organizations of the Treadway Commission framework, and Treasury Board of Canada Secretariat’s (TBS) Certification and Internal Control Regime for Crown Corporations.

The assessment provides management with regular feedback regarding the state of internal controls. Following the assessment, management develops action plans for all opportunities for improvement. CATSA’s Board of Directors receives updates on management’s work with respect to enhancing internal controls and management action plans.

Analysis of Financial Results

Statement of Comprehensive Income (Loss)

The following section provides information on key variances within the Statement of Comprehensive Income (Loss) for 2022/23 compared to 2021/22.

Key Financial Highlights – Statement of Comprehensive Income (Loss)

¹ The Statement of Comprehensive Income (Loss) presents operating expenses by program activity, whereas operating expenses above are presented by major expense type, as disclosed in note 13 of the audited annual financial statements for the year ended March 31, 2023.

Screening Services and Other Related Costs

Screening services and other related costs consist of payments to screening contractors, uniforms and other screening-related costs, and trace and consumables.

Payments to screening contractors (as disclosed in note 13 of CATSA’s audited annual financial statements) represent the most significant expenditures for CATSA at approximately 81.6% of total expenses (excluding depreciation and amortization) in 2022/23. These expenses consist of payments to screening contractors for the delivery of services performed by screening officers, as well as for screening officer training and recurrent learning requirements. Key variables impacting these costs include the number of screening hours purchased and billing rates.

The number of screening hours purchased is mainly driven by passenger volumes and traffic patterns. New directives to CATSA, or new or modified security regulations arising from evolving threats and security incidents or alignment with other jurisdictions, can also drive screening hours.

Billing rates are based on all-inclusive rates paid to screening contractors as set forth under the terms of CATSA’s Airport Screening Services Agreements. These agreements also include a performance program that remunerates screening contractors for contractual compliance and achievement of specified performance targets.

Screening services and other related costs increased by $164.9M (30.1%) in 2022/23. The increase is primarily attributable to increased passenger volumes, which resulted in the purchase of additional screening hours totaling $141.3M, partially offset by the purchase of fewer hours associated with temperature screening totaling $16.0M. The increase is also attributable to annual screening contractor billing rate increases totaling $14.7M, and increased spending on screening officer training and related initiatives to support the recovery of the aviation industry of $24.9M.

Equipment Operating and Maintenance

Equipment operating and maintenance consist of costs associated with maintenance and support services for CATSA’s equipment and systems, including the usage and warehousing of Explosives Detection System (EDS) spare parts. It also includes the cost of biometric security cards and costs associated with the training and certification of CATSA’s equipment maintenance service provider for new technology deployed at airports across Canada.

Equipment operating and maintenance costs increased by $2.6M (6.5%) in 2022/23. The increase is mainly attributable to higher maintenance and spare parts costs for EDS equipment, driven by additional maintenance costs to support equipment after expiration of warranties, as well as CATSA’s transition to a new maintenance service provider.

Program Support and Corporate Services

Program support and corporate services represent the costs to support the delivery of CATSA’s mandated activities and its corporate infrastructure. These costs consist mainly of employee salaries and benefits, lease related costs at corporate headquarters and in the regions that are not capitalized under IFRS 16, office and computer costs, and professional services.

Program support and corporate services costs increased by $8.3M (9.6%) in 2022/23. The increase is mainly attributable to higher employee-related costs of $5.7M, and higher costs in support of corporate priorities totaling $4.7M. The increases were partially offset by lower costs associated with CATSA’s defined benefit pension plan totaling $2.1M.

Depreciation and Amortization

Depreciation of property and equipment, as well as amortization of intangible assets, is recognized on a straight-line basis over the estimated useful lives of the assets. Depreciation of right-of-use assets is recognized on a straight-line basis over the related lease term.

Depreciation and amortization decreased by $36.4M (45.1%) in 2022/23. The decrease is primarily attributable to the change in the estimated of 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 (Income) Expenses

Other (income) expenses consist of the gain or loss on disposal of property and equipment, write-off of property and equipment and intangible assets, finance costs, impairment of property and equipment, foreign exchange gain or loss, and net gain or loss on fair value of derivative financial instruments.

Other (income) expenses increased by $3.3M (145.8%) in 2022/23. The increase in other income is primarily due to net gains on the fair value of derivative financial instruments.

Revenue

Revenue consists mainly of finance income earned on cash balances and other screening services revenue.

Revenue increased by $2.2M (816.4%) in 2022/23. The increase is attributable to higher finance income earned on cash balances.

Government Funding

CATSA is funded by appropriations from the federal Consolidated Revenue Fund for operating and capital expenditures. Payments for CATSA’s leases that are capitalized under IFRS 16 are funded through capital appropriations.

Parliamentary Appropriations for Operating Expenses

Operating expenditures are funded on a near-cash accrual basis. Certain expenditures, including employee benefits, inventories and prepaid expenses, are funded when a cash outflow is required, as opposed to when the expense is recognized under IFRS.

Parliamentary appropriations for operating expenses increased by $170.5M (25.2%) in 2022/23. The increase is primarily attributable to increased spending for screening services and other related costs, as discussed above.

Amortization of Deferred Government Funding Related to Capital Expenditures

Capital expenditures are funded when assets are purchased. The appropriations are recorded as deferred government funding related to capital expenditures and are amortized on the same basis and over the same period as the related assets.

Amortization of deferred government funding related to capital expenditures decreased by $38.6M (48.8%) in 2022/23. The decrease is 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 (Loss) Income

Other comprehensive (loss) income consists of the net actuarial losses (gains) associated with CATSA’s defined benefit plans.

In 2022/23, the net loss of $3.1M is primarily attributable to an actuarial loss of $21.6M resulting from a lower actual rate of return on plan assets than the rate used in CATSA’s assumptions. The loss is also due to experience adjustments of $4.1M. This was partially offset by a net gain of $22.5M related to changes in financial and demographic assumptions.

In 2021/22, the net gain of $21.3M was attributable to an actuarial gain of $24.8M related to changes in financial assumptions and experience adjustments, partially offset by a remeasurement loss of $3.5M resulting from a lower actual rate of return on plan assets than the rate used in CATSA’s assumptions.

For further details, please refer to the Employee Benefits section.

Liquidity and Capital Resources

CATSA’s financial management framework relies on parliamentary appropriations to finance operating and capital requirements, and to settle financial obligations as they become due. In determining the amount of cash reserves to carry for operating requirements, the organization considers its short-term funding requirements in accordance with relevant Treasury Board of Canada Secretariat (TBS) directives.

The following table represents CATSA’s liquidity and capital resources:

Liquidity and Capital Resources

Cash increased by $6.2M primarily due to the timing of disbursements to suppliers for goods and services. Trade and other receivables increased by $28.8M attributable to an increase in parliamentary appropriations receivable. Trade and other payables increased by $35.1M as a result of the timing of disbursements associated with obligations outstanding with suppliers. Current lease liabilities decreased by $1.4M primarily due to reduced leased space at corporate headquarters and lease incentives. Non-current lease liabilities decreased by $1.4M primarily due to regional lease agreements approaching the end of their lease terms.

Capital Expenditures

CATSA’s capital plan is comprised of Explosives Detection System (EDS) and non-EDS expenditures and a portion of lease payments.

EDS capital expenditures consist of the acquisition of screening equipment for PBS, HBS and NPS and the associated installation and integration costs. Non-EDS capital expenditures consist of the acquisition of equipment and systems to support screening operations, the RAIC program, and CATSA’s network infrastructure and corporate management systems. Lease payments relate to leases capitalized under IFRS 16.

Property and equipment, intangible assets and right-of-use assets (refer to the Statement of Financial Position) represent 64.7% of total assets as at March 31, 2023. The section below provides a breakdown of the capital expenditures for EDS, non-EDS and lease payments.

Capital Expenditures

An overview of the key capital projects undertaken over the course of the fiscal year is as follows:

EDS

• Life cycle management of Full Body Scanners at PBS;
• Expansion of HBS systems at Montreal-Trudeau International Airport and Region of Waterloo International Airport; and
• Ongoing deployment of CATSA Plus in select Class 1 airports.

Non-EDS

• Leasehold improvements to support modernization of CATSA’s headquarters office space and the expansion of regional space to support screening officer training capacity; and
• Life cycle management of CATSA’s IT network infrastructure.

Employee Benefits

CATSA maintains two funded pension plans to provide retirement benefits to its employees. The first is a registered pension plan (RPP), which includes two components: a defined benefit component for employees hired before July 1, 2013, and a defined contribution component for employees hired on or after July 1, 2013. The second is a supplementary retirement plan (SRP), which supplements the defined benefit component of the RPP for benefits limited by the Income Tax Act (Canada). CATSA also sponsors an unfunded post-employment benefits plan, the other defined benefits plan (ODBP), which includes life insurance and eligible health and dental benefits. The employee benefits financial position is summarized below:

Employee Benefits

CATSA’s independent actuary determines each plan’s net position as at March 31 of each year. The net position fluctuates annually due to a combination of variables, including the discount rate, inflation rate, number of plan members and their demographics, expected average rate of salary increases, expected average remaining service lifetime of active employees, and returns on plan assets and contributions. Note 9 of the annual audited financial statements provides further details regarding the underlying assumptions used in determining the net position.

As at March 31, 2023, the employee benefits asset represents the net position of CATSA’s RPP and SRP. The employee benefits liability consists of the present value of the defined benefit liability of the ODBP.

The decrease in the employee benefits asset is primarily attributable to a remeasurement loss of $21.6M resulting from a lower actual rate of return on plan assets than the rate used in CATSA’s assumptions. The decrease is also due to a remeasurement loss of $4.3M on the defined benefit obligation of the RPP and SRP resulting from experience adjustments. The decrease is partially offset by a net remeasurement gain of $18.7M on the defined benefit obligation of the RPP and SRP arising from changes to financial assumptions. The decrease is also partially offset by required contributions made by CATSA exceeding the non-cash defined benefit costs (based on IAS 19) by $2.3M for these plans.

The decrease in the employee benefits liability is primarily attributable to a remeasurement gain of $4.0M on the defined benefit obligation of the ODBP arising from changes to financial and demographic assumptions and experience adjustments. This is partially offset by non-cash defined benefit costs (based on IAS 19) exceeding CATSA required contributions by $1.5M for the ODBP.

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. Actual operating and capital appropriations used are lower than the amounts reflected in the 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 before government funding reported under International Financial Reporting Standards (IFRS) and operating appropriations used:

Reconciliation of Financial Performance to Operating Appropriations Used

¹ Employee benefits expense is accounted for in the Statement of Comprehensive Income (Loss) in accordance with IFRS. The reconciling item above represents the difference between cash payments for employee benefits and the accounting expense under IFRS.

² 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.

The table below provides a reconciliation between financial performance before government funding reported under IFRS and operating appropriations used in 2022/23, presented by major expenditure category. The table also provides a comparison between operating appropriations used in 2022/23 and the operating budget as reported in CATSA’s Summary of the 2022/23 to 2026/27 Corporate Plan.

Operating Appropriations Used Compared to Corporate Plan

Operating appropriations used were $10.0M (1.2%) lower than the Corporate Plan budget. The variance is primarily due to the purchase of fewer screening hours than planned, partially offset by the costs of programs supporting industry recovery efforts and training requirements for new screening officers.

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

(Thousands of Canadian dollars)	2022/23	2021/22	$ Variance
EDS	$               10,746	$                4,968	$         5,778
Non-EDS	2,408	1,287	1,121
Lease payments	3,435	3,876	(441)
Total capital expenditures	$               16,589	$              10,131	$         6,458
Non-cash adjustment on foreign exchange related to capital expenditures	(138)	4	(142)
Total capital appropriations used	$               16,451	$              10,135	$         6,316

The table below provides a comparison between capital appropriations used in 2022/23, the capital budget as reported in CATSA’s Summary of the 2022/23 to 2026/27 Corporate Plan, and adjustments resulting from the capital reprofile in progress:

Capital Appropriations Used Compared to Corporate Plan

¹ CATSA’s Summary of the 2022/23 to 2026/27 Corporate Plan budget includes $3,413 of lease payments in appropriations for Non-EDS.

Capital appropriations used were $2.4M (12.9%) lower than the corporate plan budget. CATSA will work with Finance Canada to obtain approval for the capital re-profile of $44.8M. After taking into consideration the re-profile request, CATSA lapsed $2.4M due to under-spending across various capital projects.