Canada's Leading Defence Magazine

Search

CAE’s Defence Performance Falls Short of Expectations

  • Defense records $568.0 million goodwill impairment, $90.3 million unfavourable contract adjustments, and $35.7 million impairment of related intangible assets
  • Preliminary unaudited fiscal fourth quarter and full fiscal 2024 results and initial fiscal 2025 outlook provided
  • Board approves NCIB for the repurchase of up to 5% of CAE’s common shares
  • Fourth quarter and full year fiscal 2024 results to be disclosed after market hours on May 27
  • Management to discuss financial results and outlook on May 28 earnings call

CAE Inc. announced a re-baselining of its Defense business along with Defense impairments and unfavourable contract adjustments related to eight previously identified fixed-price legacy contracts (the Legacy Contracts).

CAE also announced the appointment of Nick Leontidis to the new position of Chief Operating Officer (COO) as part of a senior leadership reorganization to further strengthen its execution capabilities and drive additional synergies between CAE’s Defense & Security business and its Civil Aviation business. Mr. Leontidis was previously CAE’s Group President, Civil Aviation. As COO, he will have overall responsibility for both of CAE’s Civil and Defense business segments.

In the fourth quarter of fiscal 2024, CAE has recorded a $568.0 million non-cash impairment of Defense goodwill and $90.3 million in unfavourable Defense contract profit adjustments as a result of accelerated risk recognition on the Legacy Contracts. It also recorded a $35.7 million impairment of related technology and other non-financial assets which are principally related to the Legacy Contracts.

“Because our Defense performance has fallen well short of our expectations, we have taken measures to re-baseline the business, including a leadership reorganization and further targeted operational changes at the segment and corporate executive management levels,” said Marc Parent, CAE’s President and Chief Executive Officer. “The impairments and the accelerated risk recognition on the Legacy Contracts are a disappointing but necessary step to account for the programmatic risks we previously identified and provide a clearer path to margin improvement amid compelling secular trends for Defense.”

To provide context for the impairments and accelerated risk recognition, CAE is disclosing preliminary summary tables of selected unaudited fiscal 2024 results for the fourth quarter and full year for Civil Aviation, for Defense & Security and on a consolidated basis, as well as a preliminary outlook for fiscal 2025. Civil, the larger of CAE’s two businesses, generated a record 27.3 percent adjusted segment operating income margin(1) in the fourth quarter and 13 percent adjusted segment operating income(1) growth for the year. CAE also had record Civil adjusted order intake(1) of $3.0 billion, including the sale of 64 full-flight simulators.

At the consolidated level, CAE generated over $400 million of free cash flow(1) for a 1.5 times cash conversion rate(1) of net income and further solidified its financial position. Net debt-to-adjusted EBITDA(1) was 3.17 times at the end of the quarter and net debt-to-adjusted EBITDA excluding Legacy Contracts(1) was 2.89 times at the end of the same period. CAE expects improved results going forward, supported by continued growth in Civil and from the structural and organizational improvements in Defense and a growing backlog of high-quality, profitable programs. CAE will provide more detail with its full results to be disclosed on May 27 after market hours, and on the earnings conference call on May 28.

Senior leadership reorganization
CAE’s senior leadership reorganization takes advantage of the strength of the talent pool within the Company’s senior leadership ranks. As COO, Nick Leontidis will have overall responsibility for both of CAE’s business segments and will work closely with all five CAE P&L leaders, namely:

  • Jason Goodfriend, Interim President and Chief Operating Officer, Defense and Security, USA,
  • Marc-Olivier Sabourin, Division President of Defense and Security, International,
  • Michel Azar-Hmouda, Division President, Commercial Aviation,
  • Alexandre Prévost, Division President, Business Aviation,
  • Pascal Grenier, Division President, Flight Solutions and Global Operations

Mr. Leontidis, a 36-year CAE veteran, has a proven track record of performance and headed both Civil and Defense programs during his career.  As Civil group president over the last decade, he has led CAE’s Civil Aviation Training Solutions business to record heights, nearly tripling adjusted segment operating income over the period, to become the world’s largest aviation training solutions provider. Under Mr. Leontidis’s tenure, Civil has achieved operational excellence across a broad global enterprise, and consistently delivered CAE’s highest returns on investment through disciplined capital deployment in lockstep with customer demand.

Defense transformation
CAE’s Defense segment is in the process of an ongoing multi-year transformation which is expected to yield a substantially bigger and more profitable business and to provide an additional source of stable and predictable free cash flows with which to fuel attractive growth investments in CAE’s aviation training network. The secular growth backdrop for Defense remains compelling and this has translated into an approximate 20% adjusted Defense backlog growth over the last two years, which portends well for the future.

Additional information pertaining to Defense Legacy Contracts
Within Defense, there are a number of fixed-price contracts which offer certain potential advantages and efficiencies but can also be negatively impacted by adverse changes to general economic conditions, including unforeseen supply chain disruptions, inflationary pressures, availability of labour; all contributing to execution difficulties. These risks can result in cost overruns and reduced profit margins or losses. While these risks can often be managed or mitigated, there are eight distinct legacy contracts entered into prior to the COVID-19 pandemic that are firm fixed price in structure, with little to no provision for cost escalation, and that have been more significantly impacted by these risks (the Legacy Contracts disclosed in the third quarter of fiscal 2024). Although only a small number of contracts, they have disproportionately impacted overall Defense profitability. The Legacy Contracts include one that was inherited with CAE’s 2021 acquisition of L3Harris Technologies’ Military Training business and have completion dates mainly within the Company’s next two fiscal years.

The impairments and accelerated risk recognition on Legacy Contracts resulting in unfavourable contract adjustments are expected to allow CAE to develop a new baseline for future profitability. In addition to the aforementioned senior leadership changes at the business unit and corporate levels, CAE has continued to implement measures to further enhance risk management and execution over the past few years, including an increasingly disciplined and rigorous approach to the selection of bids and proposals and an enhanced focus on higher quality program pursuits.

Summary of Civil Aviation preliminary unaudited results

(amounts in millions)

 

FY2024

 

FY2023

 

Q4-2024

 

Q4-2023

Revenue

$

2,435.8

 

2,166.4

 

700.8

 

661.4

Operating income

$

442.0

 

430.3

 

147.0

 

149.3

Adjusted segment operating income(1)

$

548.9

 

485.3

 

191.4

 

162.9

As a % of revenue(1)

%

22.5

 

22.4

 

27.3

 

24.6

Adjusted order intake(1)

$

3,025.5

 

2,827.1

 

832.1

 

841.5

Adjusted backlog(1)

$

6,440.4

 

5,730.8

 

6,440.4

 

5,730.8

(1) This press release includes non-IFRS financial measures, non-IFRS ratios, capital management measures and supplementary financial measures. These measures are not standardized financial measures prescribed under IFRS and therefore should not be confused with, or used as an alternative for, performance measures calculated according to IFRS. Furthermore, these measures should not be compared with similarly titled measures provided or used by other issuers. Refer to the Non-IFRS and other financial measures section of this press release for the definitions and a reconciliation of these measures to the most directly comparable measure under IFRS.

Summary of Defense and Security preliminary unaudited results

(amounts in millions)

 

FY2024

 

FY2023

 

Q4-2024

 

Q4-2023

Revenue

$

1,847.0

 

1,844.2

 

425.5

 

536.0

Operating (loss) income

$

(627.4)

 

35.7

 

(680.0)

 

29.0

Adjusted segment operating income (loss) 

$

0.8

 

53.1

 

(65.7)

 

30.5

As a % of revenue

%

 

2.9

 

 

5.7

Adjusted segment operating income excluding Legacy Contracts(1)*

$

91.1

 

53.1

 

24.6

 

30.5

As a % of revenue(1)*

%

4.8

 

2.9

 

5.1

 

5.7

Adjusted order intake

$

1,911.9

 

2,029.3

 

718.4

 

564.7

Adjusted backlog

$

5,743.5

 

5,065.6

 

5,743.5

 

5,065.6

(1) This press release includes non-IFRS financial measures, non-IFRS ratios, capital management measures and supplementary financial measures. These measures are not standardized financial measures prescribed under IFRS and therefore should not be confused with, or used as an alternative for, performance measures calculated according to IFRS. Furthermore, these measures should not be compared with similarly titled measures provided or used by other issuers. Refer to the Non-IFRS and other financial measures section of this press release for the definitions and a reconciliation of these measures to the most directly comparable measure under IFRS.

 

* The adjusted segment operating income excluding Legacy Contracts reflects the overall impact of the accelerated risk recognition on Legacy Contracts of $90.3 million, consisting of a reduction in revenue of $54.3 million and cost of sales of $36.0 million recorded in the fourth quarter of fiscal 2024. 

Summary of preliminary consolidated fourth quarter and full-year fiscal 2024 unaudited results

(amounts in millions, except per share amounts)

 

FY2024

 

FY2023

 

Q4-2024

 

Q4-2023

Revenue

$

4,282.8

 

4,010.6

 

1,126.3

 

1,197.4

Operating (loss) income

$

(185.4)

 

466.0

 

(533.0)

 

178.3

Adjusted segment operating income

$

549.7

 

538.4

 

125.7

 

193.4

As a % of revenue

%

12.8

 

13.4

 

11.2

 

16.2

Adjusted segment operating income excluding Legacy Contracts

$

640.0

 

538.4

 

216.0

 

193.4

As a % of revenue

%

14.9

 

13.4

 

19.2

 

16.2

Net (loss) income attributable to equity holders of the Company

$

(325.3)

 

220.6

 

(504.7)

 

93.6

(Loss) earnings per share (EPS)

$

(1.02)

 

0.69

 

(1.58)

 

0.29

Adjusted EPS(1)

$

0.87

 

0.87

 

0.12

 

0.33

Adjusted EPS excluding Legacy Contracts(1)

$

1.12

 

0.87

 

0.37

 

0.33

Free cash flow(1)

$

418.2

 

333.1

 

191.1

 

147.6

Cash conversion rate(1)

%

151

 

121

    

Adjusted order intake

$

4,937.4

 

4,856.4

 

1,550.5

 

1,406.2

Adjusted backlog

$

12,183.9

 

10,796.4

    

Net debt-to-adjusted EBITDA

 

3.17

 

3.49

    

Net debt-to-adjusted EBITDA excluding Legacy Contracts

 

2.89

 

3.49

    

(1) This press release includes non-IFRS financial measures, non-IFRS ratios, capital management measures and supplementary financial measures. These measures are not standardized financial measures prescribed under IFRS and therefore should not be confused with, or used as an alternative for, performance measures calculated according to IFRS. Furthermore, these measures should not be compared with similarly titled measures provided or used by other issuers. Refer to the Non-IFRS and other financial measures section of this press release for the definitions and a reconciliation of these measures to the most directly comparable measure under IFRS.

Comparative figures have been reclassified to reflect discontinued operations.

Preliminary management outlook highlights for fiscal year 2025

Civil
The secular demand picture for aviation training solutions remains compelling and management expects low double-digit percentage Civil annual adjusted segment operating income growth in fiscal 2025 and continued margin strengthening, with an annual adjusted segment operating income margin (aSOI) of approximately 23%. The expected increase in Civil margins reflects the ongoing ramp up of newer training centres and recently deployed full-flight simulators, partially offset by the SaaS conversion underway in its Flight Operations Solutions software business. As in previous years, management expects annual Civil performance to be more heavily weighted to the second half.

Defense
Having re-baselined the Defense business and substantially accounted for the previously identified programmatic risk, management expects Defense annual revenue growth in the low- to mid-single-digit percentage range and annual Defense aSOI margin to increase to the 6- to 7-percent range in fiscal 2025. Similarly, management expects annual Defense performance to be more heavily weighted to the second half. Management also expects significant Defense backlog growth in the fiscal year with the addition of large multiyear programs currently in negotiations.

Taking management’s current preliminary expectations for the fiscal year into account, the previously indicated three-year EPS growth target of mid-20% compound annual growth has been adjusted to the low- to mid-teens-percentage range.

Finance expense and tax expense
Management expects annual finance expense to be similar to fiscal 2024 on lower interest expense on debt, offset by higher lease expense related to recently deployed training centres in its global training network in support of growth. The annual effective income tax rate is expected to be approximately 25%, considering the income expected from various jurisdictions and the implementation of global minimum tax policies.

Balanced capital allocation priorities, accretive growth investments
Commensurate with CAE’s ongoing success to capture market opportunities in training, the Company expects total CAPEX in fiscal 2025 to be $50 to $100 million higher than fiscal 2024, which totaled $329.8 million. Approximately three-quarters of this relates to organic growth investments in simulator capacity to be deployed to CAE’s global network of primarily Civil Aviation training centres and backed by multiyear customer contracts.

Solid financial position
A tenet of CAE’s capital management priorities includes the maintenance of a solid financial position, and it expects to continue to bolster its balance sheet through ongoing deleveraging, commensurate with its investment grade profile.

Current returns to shareholders
Given CAE’s progress in strengthening its financial position, CAE today announced that its Board of Directors approved, subject to the approval of the Toronto Stock Exchange (TSX), the re-establishment of a normal course issuer bid (NCIB). The NCIB is expected to commence shortly after regulatory approvals are obtained. The common shares that may be repurchased under such program over a period of approximately one year will represent up to 5 percent of the issued and outstanding common shares of CAE. The establishment of the program and the timing and amount of any purchases under the program is subject to regulatory approvals. CAE will pay the market price for the common shares at the time of acquisition and all common shares purchased pursuant to the NCIB will be cancelled. The NCIB will be established as part of CAE’s capital management strategy and is currently intended to be used opportunistically over time with excess free cash flow. Given the current preliminary outlook and cash generative nature of CAE’s highly recurring business, CAE’s Board of Directors will also continue to evaluate the possibility of reintroducing a shareholder dividend.

Outlook for fiscal 2024
The Company has updated its fiscal 2024 outlook to reflect preliminary unaudited financial results, the timing of Civil FFS deliveries, and the re-baselining of its Defense business. The previous outlook for Civil included an expectation for mid- to high-teens percentage annual adjusted segment operating income growth, and management currently expects 13% growth, mainly because some of the planned full-flight simulator (FFS) deliveries moved into fiscal 2025. In fiscal 2024, Civil delivered 47 FFSs instead of the approximately 50 it had expected. This timing difference is due to customer requests to postpone deliveries because their facilities were not yet ready to receive the FFSs as originally planned. Management’s expectations for a record annual and fourth quarter Civil adjusted segment operating margin remains consistent with its previous outlook. For Defense, management previously expected that it would accelerate the retirement of risks associated with the Legacy Contracts and substantially retire them over a period of six to eight quarters. The expected Legacy Contract retirement period remains unchanged; however, the recognition of risks associated with them have been accelerated by virtue of the associated profit adjustments and asset impairments that have been recorded in the fourth quarter.

Caution concerning outlook
Management’s preliminary outlook for fiscal 2025 and the above targets and expectations constitute forward-looking statements within the meaning of applicable securities laws, and are based on a number of assumptions, including in relation to prevailing market conditions, macroeconomic and geopolitical factors, supply chains and labor markets. Expectations are also subject to a number of risks and uncertainties and based on assumptions about customer receptivity to CAE’s training solutions and operational support solutions as well as material assumptions contained in this press release, CAE’s MD&A for the fiscal year ended March 31, 2023 and MD&A for the three and nine months ended December 31, 2023, all available on our website (www.cae.com), SEDAR+ (www.SEDARplus.ca) and EDGAR (www.sec.gov). Please see the sections below entitled: “Caution concerning forward-looking statements”, “Material assumptions” and “Material risks”.

Fourth quarter and full year fiscal 2024 financial results and conference call
CAE will release its fiscal year 2024 fourth quarter and full fiscal year financial results after market hours on Monday, May 27, 2024. A conference call will be held on Tuesday, May 28 at 8 a.m. Eastern Time (ET) to provide analysts and institutional investors with a review of CAE’s performance and outlook. Marc Parent, CAE’s President and Chief Executive Officer, Nick Leontidis, CAE’s Chief Operating Officer, Sonya Branco, CAE’s Executive Vice President, Finance and Chief Financial Officer, and Andrew Arnovitz, CAE’s Senior Vice President, Investor Relations and Enterprise Risk Management, will participate in this call intended for financial analysts, institutional investors and the media. Please note that the media will have the opportunity to ask questions immediately following the analysts’ question period. The meeting will be webcast live on CAE’s site at www.cae.com. The webcast will be archived following the event.

Caution concerning limitations of preliminary summary earnings press release
This summary preliminary earnings press release contains limited information meant to assist the reader in assessing CAE’s performance, but it is not a suitable source of information for readers who are unfamiliar with CAE and is not in any way a substitute for the Company’s financial statements, notes to the financial statements, and MD&A reports.

The preliminary financial results and other measures for the fourth quarter and year ended March 31, 2024 are unaudited, reflect information available to the Company as of the date of this press release, and are subject to revision. Actual results may differ from these preliminary results due to the completion of year end accounting procedures and adjustments, and the completion of the preparation and audit of the Company’s financial statements for the fourth quarter and year ended March 31, 2024, which are anticipated to be finalized and released on May 27, 2024.

Worth noting: CAE was named Canada’s Top Defence Company by Canadian Defence Review in 2005 and again in 2014.

 

Leave a Comment

Your email address will not be published. Required fields are marked *

Scroll to Top
Please fill out the following information to be added to our newsletter distribution list.
Please enable JavaScript in your browser to complete this form.
Name
=