First Quarter | Defense hurts CAE

(Montreal) CAE shares fell more than 17% on Wednesday as the specialist in pilot training and flight simulators surprised the market with its difficulties in the military segment.

Posted at 4:32pm

Stephane Rolland
The Canadian Press

The company announced Wednesday that it was taking a $28.9 million charge related to two separate military programs in the United States. “The results on defense are well below our own expectations,” President and CEO Marc Parent said at a news conference.

The Defense segment reported a loss of 30.3 million for the first quarter of its fiscal year 2023 (ended June), compared to a profit of 22.6 million for the corresponding period of the previous fiscal year.

In June, management was caught off guard and recognized issues that would force it to file charges against two military programs in the United States, Mr. Parent says. He assures that CAE reviewed its entire portfolio to ensure that the fees to be recognized were limited to these two contracts.

The first contract is for military training and the second is for a “very complex” flight simulator, the director said.

For the simulator program, absences related to COVID-19 have resulted in additional costs. “Several dozen employees with very high safety qualifications working in close proximity had COVID at the same time, significantly delaying the schedule. This resulted in costs that we cannot recoup in the time we have left. We’ve also had significant delays in the delivery of parts. »

For the training contract, CAE had planned ways to improve its profitability upon renewal, but the U.S. military has not yet indicated its intention to renew it, forcing CAE to register a charge even as it awaits renewal of the contract .

These headwinds forced CAE to downgrade its financial guidance. Management now expects operating income to grow 25% in fiscal 2023 (which ends in late March). It previously forecast growth of around 35%.

In a conference call with analysts, Parent said management anticipates supply chain challenges, a shortage of highly skilled workers and the accelerated spread of COVID-19.

Even without these two programs, profitability would have been low and still lower than we expected. If there hadn’t been so many, I think we could have lived up to our forecast.

Marc Parent, President and CEO of CAE

Wednesday’s announcement should encourage caution, says analyst Tim James of TD Securities. “We believe the change in guidance and what it means for earnings predictability warrants greater caution at this time. »

The difficulties in the defense sector surprised the market. CAE’s net income fell 92% to $3.7 million in the first quarter from $47.3 million at the same time last year.

Revenue, for its part, rose 24% from $752.7 million last year to $933.3 million this year.

The company reported adjusted earnings per share of 6 cents, compared to 19 cents for the same period last year. Prior to the earnings release, analysts had been expecting earnings per share of 23 cents, according to Refinitiv.

Despite the difficulties in the defense sector, Mr. Parent reiterated that defense demand remains strong while the Russian invasion of Ukraine and political tensions in Taiwan are reminders of the importance of the military sector.

CAE shares fell $5.86, or 17.62%, to close at $27.39 on the Toronto Stock Exchange.

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