Fixed-price defence contracts dragged down profits at CAE Inc. CAE-T as it reported its third-quarter profit fell nearly 30 per cent compared with a year ago even as its revenue rose.
In response to the results, shares in the company dropped $2.68 or about nine per cent to $25.70 in midafternoon trading Wednesday.
CAE said fixed-price contracts can face “execution difficulties and adverse changes to general economic conditions” linked to supply chains, inflation and the labour pool.
The company highlighted eight legacy contracts dating back to before the COVID-19 pandemic that were “more significantly impacted by these risks ... with little to no provision for cost escalation.”
“These contracts are only a small fraction of the current business, but they have disproportionately impacted overall defence (segment) profitability,” chief financial officer Sonya Branco told analysts on a conference call Wednesday. The low-margin deals won’t be wound down for up to two years, added CEO Marc Parent.
However, narrower profits in CAE’s defence business did not put the brakes on bookings in civil aviation.
CAE said its civil business racked up orders for 20 full-flight simulators, new training partnerships with Air France-KLM Group and other carriers, and over $300 million of business jet training deals.
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.
“We have considerable headroom for growth in the civil aviation market and our continued positive momentum underscores the strong demand for CAE’s highly differentiated training and flight services solutions and our ability to win share within this large secular growth market,” Parent said on the call.
Post-pandemic demand for commercial flights 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 a growing “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 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.
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.