Management’s Discussion and Analysis

For the Year Ended March 31, 2022

Management’s Discussion and Analysis (MD&A) outlines CATSA’s financial results and operational changes for the year ended March 31, 2022. This MD&A should be read in conjunction with CATSA’s audited annual financial statements and accompanying notes for the year ended March 31, 2022, 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 16, 2022, 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.

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 one-year incremental funding from the Government of Canada to supplement its base funding level in order to carry out its mandate. In 2021/22, CATSA was granted incremental funding of $291.7M, which allowed CATSA to continue to deliver its mandate.

CATSA developed its 2021/22 funding request early in the COVID-19 pandemic. The pandemic continues to have an impact on CATSA’s operating environment, as discussed below, and has delayed some capital projects at airports. As a result, $149.3M of the funding granted to CATSA for operating and capital expenditures in 2021/22 was unused and returned to the Government of Canada, including $60.3M of funding related to the temperature screening program which ended in August 2021.

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 will allow CATSA to continue to deliver its mandated activities.

Covid-19 pandemic

As a result of the COVID-19 pandemic, there has been a reduction in passenger volumes at Canadian airports. Statistics from CATSA’s Boarding Pass Security System indicated that screened traffic across Canada decreased by 62% and 89.2% for 2021/22 and 2020/21, respectively, compared to 2019/20. CATSA’s screening operations and screening equipment have been impacted, as some screening lines remain temporarily closed.

Given the impact on screening operations, CATSA entered into temporary arrangements with its third party screening contractors. These arrangements have resulted in a reduction in screening hours purchased that does not fully reflect the decline in passenger volumes, ensuring that CATSA maintains the certified screening officer workforce at a level deemed appropriate to contain costs while allowing CATSA some flexibility to respond as the aviation industry recovers. In April 2022, passenger volumes began to increase significantly, resulting in reductions in the utilization of these temporary arrangements.

In June 2020, TC instructed CATSA to commence temperature screening of passengers and non-passengers entering restricted areas at certain airports. In August 2021, Transport Canada removed the requirement for CATSA to perform temperature screening.

In October 2021, the Government of Canada announced a mandatory COVID-19 vaccination requirement for passengers and non-passengers entering restricted areas at airports. TC instructed CATSA to validate proof of vaccinations during the phase-in period, which ended in February 2022.

CATSA continued to perform increased biosecurity measures, including enhanced sanitization procedures at checkpoints and personal protective equipment for the organization’s airport personnel, including CATSA staff and screening officers.

In prior years, CATSA provided screening services on a cost recovery basis to certain airports. In light of the COVID-19 pandemic, no such services have been provided since April 1, 2020.

Foreign exchange

The Canadian dollar closed with a yearly Canada-U.S. exchange rate average of 0.80¹, compared to an average exchange rate of 0.76¹ in 2020/21.

CATSA is exposed to foreign exchange risk, as it purchases equipment and services denominated in U.S. dollars. A weakening of the Canadian dollar could result in the cost of U.S. denominated transactions exceeding budgeted amounts. CATSA has a hedging strategy in place to help mitigate its foreign exchange risk and minimize the impact of fluctuations in the Canada-U.S. exchange rate. CATSA will continue to monitor the fluctuations of the Canada-U.S. exchange rate and apply its hedging strategy accordingly.

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¹ Bank of Canada, Daily Exchange Rates Lookup.

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

The following section provides information on key variances within the Statement of Comprehensive Income for 2021/22 compared to 2020/21.

Key Financial Highlights – Statement of Comprehensive Income

¹ The 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 audited annual financial statements for the year ended March 31, 2022.

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 (refer to note 13 in CATSA’s audited annual financial statements) represent the most significant expenditures for CATSA at approximately 78.4% of total expenses (excluding depreciation and amortization) in 2021/22. 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, such as the performance of temperature screening, 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 $47.7M (9.5%) in 2021/22. The increase is primarily attributable to increased passenger volumes, which resulted in the purchase of additional screening hours totaling $34.4M, partially offset by the purchase of fewer hours associated with temperature screening totaling $13.4M. The increase is also attributable to annual screening contractor billing rate increases of $11.5M, and payments to screening contractors for training, management personnel, and to support screening officer retention and recruitment efforts, totaling $10.7M. Lastly, other screening related costs, consisting of screening officer uniforms, checkpoint sanitization services and trace and consumables, increased by $4.5M.

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 $0.7M (1.8%) in 2021/22. The increase is mainly attributable to higher maintenance and spare parts costs for EDS equipment totaling $2.0M, as the majority of CATSA’s screening equipment is back in service, and equipment training activity at the airports of $0.5M, as training on new equipment resumes. The increase was partially offset by lower spare parts write-downs in 2021/22, as compared to 2020/21, of approximately $2.0M.

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 decreased by $2.5M (2.8%) in 2021/22. The decrease is mainly attributable to lower employee-related costs, including costs associated with CATSA’s defined benefit pension plan.

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 increased by $4.5M (6.0%) in 2021/22. The increase is primarily attributable to depreciation relating to new HBS equipment deployments as part of the HBS recapitalization program of $5.7M, as well as new non-EDS assets of $1.6M. This increase was partially offset by a decrease of $3.2M related to assets becoming fully depreciated during the year.

Other Expenses (Income)

Other expenses (income) 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 expenses (income) decreased by $1.0M (31.4%) in 2021/22. The decrease is primarily due to net gains on the fair value of derivative financial instruments. The decrease is partially offset by impairment losses relating to temperature screening equipment and net foreign exchange losses.

Revenue

Revenue consists mainly of finance income earned on cash balances.

Revenue decreased by $0.5M (62.7%) in 2021/22. The decrease is attributable to lower 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, as opposed to operating expenditures.

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 $51.1M (8.2%) in 2021/22. 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 increased by $5.8M (7.9%) in 2021/22. The increase is primarily attributable to increased depreciation and amortization, as well as impairment losses relating to temperature screening equipment.

Parliamentary appropriations for lease payments

CATSA’s lease payments are typically made in the same month that appropriations are received, therefore there is no deferred funding related to these appropriations.

Parliamentary appropriations for lease payments are comparable to the prior year.

Other Comprehensive Income

Other comprehensive income consists of the net actuarial gains associated with CATSA’s defined benefit plans. The 2021/22 net gain of $21.3M is 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.

In 2020/21, the net gain of $41.3M was primarily attributable to an actuarial gain of $34.8M resulting from a higher actual rate of return on plan assets than the rate used in CATSA’s assumptions. The net gain was also due to an actuarial gain of $11.4M related to changes in demographic assumptions and experience adjustments, partially offset by a remeasurement loss of $4.9M related to changes in financial 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 TBS directives.

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

Liquidity and Capital Resources

Cash decreased by $6.5M primarily due to the timing of disbursements to suppliers for goods and services. Trade and other receivables decreased by $17.9M attributable to a decrease in parliamentary appropriations receivable. Trade and other payables decreased by $3.4M as a result of the timing of disbursements associated with obligations outstanding with suppliers. Current portion of holdbacks decreased by $20.7M attributable to the substantial completion of CATSA’s HBS recapitalization program. Non-current lease liabilities increased by $7.1M primarily due to CATSA’s amendments to its corporate headquarters and warehouse lease agreements.

Capital Expenditures

CATSA’s capital plan is comprised of 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 69.8% of total assets as at March 31, 2022. 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

• Upgrade of X-ray units to improve threat detection capabilities;
• Ongoing deployment of CATSA Plus in Class 1 airports; and
• Life cycle management of various EDS equipment including the purchase of training simulators.

Non-EDS

• Development of a solution to provide real-time analysis of cyber security threats and notifications; and
• Life cycle management of CATSA’s IT network infrastructure including RAIC equipment.

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, 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, 2022, 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 increase in the employee benefits asset is primarily attributable to a remeasurement gain of $22.3M on the defined benefit obligation of the RPP and SRP arising from changes to financial assumptions and experience adjustments. The increase is also due to required contributions made by CATSA exceeding non-cash defined benefit costs (based on IAS 19) by $3.6M for these plans. The increase is partially offset by a net remeasurement loss of $3.5M resulting from a lower actual rate of return on plan assets than the rate used in CATSA’s assumptions.

The decrease in the employee benefits liability is primarily attributable to a remeasurement gain of $2.5M on the defined benefit obligation of the ODBP arising from changes to financial assumptions. This is partially offset by non-cash defined benefit costs (based on IAS 19) exceeding CATSA required contributions by $1.6M for the ODBP.

Financial Performance Against Corporate Plan

CATSA’s operations are funded by parliamentary appropriations from the Government of Canada. CATSA’s funding, as reflected in the Summary of the 2021/22 to 2022/23 Corporate Plan, was developed early in the COVID-19 pandemic. 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 IFRS and operating appropriations used:

Reconciliation of Financial Performance to Operating Appropriations Used

¹ Employee benefits are accounted for in the 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.

² Spare parts expense funded from capital represents items that were funded through capital appropriations in prior years but were used as spare parts and expensed during the current year, creating a reconciling item.

³ Prepaid expenses and inventories 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 2021/22, presented by major expenditure category. The table also provides a comparison between operating appropriations used in 2021/22 and the operating budget as reported in CATSA’s Summary of the 2021/22 to 2022/23 Corporate Plan:

Operating Appropriations Used Compared to Corporate Plan

Operating appropriations used were $137.2M (16.9%) lower than the Corporate Plan budget, mainly as a result of the COVID-19 pandemic. The Analysis of Financial Results section discusses the impact of COVID-19 on financial performance.

Capital Expenditures

The table below serves to reconcile capital expenditures reported under IFRS and capital appropriations used.

Reconciliation of Financial Performance to Operating Appropriations Used

¹ Proceeds on disposal of property and equipment include non-cash proceeds received in the form of credit notes from suppliers.

The table below provides a comparison between capital appropriations used in 2021/22, the capital budget as reported in CATSA’s Summary of the 2021/22 to 2022/23 Corporate Plan, and adjustments resulting from the capital reprofile in progress:

Capital Appropriations Used Compared to Corporate Plan

¹ CATSA’s Corporate Plan budget includes $3,876 of lease payments in appropriations for Non- EDS.

Total capital appropriations used were $12.1M (54.5%) lower than the adjusted Corporate Plan budget, primarily due to delays in airport projects as a result of the COVID-19 pandemic.