MONTREAL — Fixed-price defence contracts dragged down earnings at CAE Inc. as the flight simulator maker saw quarterly profits fall nearly 30 per cent year-over-year even while revenues rose.
Chief financial officer Sonya Branco said the fixed-price deals faced "execution difficulties" stemming from inflation, supply chain disruptions and labour issues.
She highlighted eight legacy contracts — under which the firm must pay for expense overruns itself — dating back to before the COVID-19 pandemic "with little to no provision for cost escalation."
"These contracts are only a small fraction of the current business, but have disproportionately impacted overall defence (segment) profitability," Branco told analysts on a conference call Wednesday.
CEO Marc Parent confirmed that the low-margin deals were a "drag" on earnings, and will not be wound down for up to two years.
In response to the results, shares in the company dropped by $2.78 or about 10 per cent to close at $25.60 on the Toronto Stock Exchange on Wednesday.
However, narrower profits in CAE's defence business as well as its civil aviation division did not put the brakes on bookings, particularly for civil, which accounts for three-quarters of operating income.
Parent said the civil segment racked up orders for 20 full-flight simulators, new training partnerships with Air France-KLM Group and other carriers, and over $300 million in business jet training deals — mainly with American plane management and charter firms.
Overall, the company booked nearly $1.3 billion in new orders last quarter, resulting in backlog growth of nine per cent year-over-year to $11.7 billion as of Dec. 31.
"I see no softening of demand," he said, pointing to rising use of its 50-plus training centres, which dot the globe from Abu Dhabi to Tokyo.
"I can look out my window here in the parking lot in Montreal, I can tell you it's full."
Post-pandemic demand for air travel continues to rebound and a wave of retiring pilots lies just over the horizon, both of which spell business opportunities for CAE, said analyst Jeff Windau of Edward Jones.
Meanwhile, escalating military activity and international tensions may increase the need for its services, from training to flight simulation.
"There's no shortage of geopolitical issues right now," Windau said, pointing to an expanding "combat environment that they can get involved in and help grow their training business."
The rising cost of the legacy fixed-price defence contracts remains a burden — and something of a surprise.
“Most investors felt that that was in the rearview mirror, but obviously it’s cropped up again," Windau said.
“We thought the quarter was disappointing."
In one example of fixed-price frustrations, he said more U.S. navy pilots likely drew on CAE's training services recently, costing the company more but yielding no additional revenue.
Parent said he might opt to break off a contract or two, despite the cost of walking away early.
"Better to take that pain now than take a lot more later," he said. "We're looking at this in at least one specific contract."
The decision will hinge on negotiations now underway with the customer, the chief executive added.
CAE said Wednesday it earned net income attributable to equity holders of $56.5 million for the quarter, down from $78.1 million a year earlier.
On an adjusted basis, it reported earnings of 24 cents per share in its latest quarter, down from 27 cents per share a year earlier.
Analysts on average had expected an adjusted profit of 26 cents per share, according to financial markets data firm Refinitiv.
Revenue totalled $1.09 billion, up 13 per cent from $969.9 million a year earlier.
This report by The Canadian Press was first published Feb. 14, 2024.
Companies in this story: (TSX:CAE)
Christopher Reynolds, The Canadian Press
