Problematic contracts | CAE takes a nosedive because of its military division

CAE plunges into the red due to the setbacks of its military division, which force the specialist in flight simulators and training to record expenses that are close to 700 million. Everything indicates that his day will be turbulent on the stock market this Wednesday.

The unpleasant surprises, announced on Tuesday, after the financial markets closed, will result in an annual net loss of several hundred million. They are accompanied by a reshuffle of senior management with the creation of a position of president and chief operating officer. Nick Leontidis will have the mandate to find savings in the sectors of the Quebec multinational.

“Because our defense sector’s performance fell well short of our expectations, we took steps to [le] redefine,” underlined CAE President and CEO Marc Parent in a press release.

The company’s division which specializes in defense and security – which is expected to represent around 43% of its total turnover – specializes in particular in training and training for air forces (fighter planes), naval and land. In the civil sector, CAE builds flight simulators and carries out pilot training.

Skeletons in the closet

These are eight former fixed-price contracts from the military division which are partly at the origin of the misfortunes of the company established in the Montreal district of Saint-Laurent. These are agreements signed before the COVID-19 pandemic.

During a conference call with financial analysts last February, Mr. Parent gave an overview of what seemed to be going on by emphasizing that the margins of the contracts in question, which are not indexed, are being eaten away by the inflationary context. .

“Even if our costs increase, we will not have more [d’argent] for the contract, he said. So obviously, that involves profitability issues, even losses on some of the contracts. »

By issuing its warning on Tuesday, CAE quantified the financial impact of its problems. It recorded a non-cash impairment loss of 568 million in its defense sector in the fourth quarter, negative adjustments totaling 90 million for various contracts as well as other impairment charges of approximately 36 million.

The eight problematic contracts had a “disproportionate impact” on the division’s overall profitability.

Dark red

Result: the flight simulator and training specialist expects to post a net loss of 505 million, or $1.58 per share, in the fourth quarter. For the fiscal year, CAE expects a net loss of 325 million, or $1.02 per share. CAE’s fourth quarter results are due to be released on May 27, after the markets close.

Last year, the Quebec company had net profits of 221 million, or 69 cents per share.

On the civilian side, the picture is much less gloomy. CAE expects to post growth in revenues and profits. This increase will be insufficient to absorb the turbulence in the military division.

However, the lights are red for analyst James McGarragle, of RBC Capital Markets, who believes that the scale of the charges which will be recorded reflects “persistent problems” within the multinational.

The scale of the adjustments, which represent approximately 8% of CAE’s stock market value, is significant, he emphasizes, in a note sent to his clients. “We believe this fuels uncertainty and we do not expect the announcement to be well received. »

On the Toronto Stock Exchange, CAE shares fell 2.13%, or 59 cents, on Tuesday to close at $27.06. Since the start of the year, the stock has fallen 4.5%, or $1.28.

According to the financial data firm Refinitiv, the Caisse de dépôt et placement du Québec (CDPQ) is the second largest shareholder of the Quebec multinational. The nest egg of Quebecers held, as of December 31, a block of 24.6 million shares.