Mr. Marc Parent reports

CAE REPORTS THIRD QUARTER FISCAL 2024 RESULTS

CAE Inc. had revenue of $1,094.5-million for the third quarter of fiscal 2024, compared with $969.9-million in the third quarter last year. Third quarter EPS (earnings per share) from continuing operations was 18 cents compared with 24 cents last year. Adjusted EPS in the third quarter was 24 cents compared with 27 cents last year. Operating income this quarter was $121.6-million (11.1 per cent of revenue), compared with $142.1-million (14.7 per cent of revenue) last year. Third quarter adjusted segment operating income was $145.1-million (13.3 per cent of revenue) compared with $156.8-million (16.2 per cent of revenue) last year. All financial information is presented on a continuing operations basis, unless otherwise indicated.

"Our performance in the third quarter reflects strong underlying demand for our civil market solutions, and points to the ongoing progress to transform our defence business. We also generated strong free cash flow, enabling us to bolster our financial position in line with our leverage targets," said Marc Parent, CAE's president and chief executive officer. "Further securing CAE's future, we booked nearly $1.3-billion in total order intake during the quarter, for an $11.7-billion backlog. In civil, orders were $845-million, for a 1.36 times book-to-sales ratio, including 20 full-flight simulator orders, new training partnerships with marquee airlines such as Air France KLM Group and over $300-million of business jet training orders. 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. In defence, performance was consistent with our expectations at this point on the path toward being able to generate higher margins. We continued to replenish our backlog with more profitable work and sought to further accelerate the retirement of outstanding program risks, mainly associated with certain legacy defence contracts that we entered into pre-COVID and have been most-impacted by economic headwinds.

"As we look to the remainder of the fiscal year, we continue to expect annual civil adjusted segment operating income growth in the mid- to high-teens percentage range. In defence, our focus remains on completing the remaining work scope on legacy contracts and as much as possible, accelerating risk retirements in the fourth quarter and into fiscal 2025. We expect to close the sale of our health care business before the end of the fiscal year, subject to closing conditions, including customary regulatory approvals. This is a milestone toward the reinstatement of cash returns to shareholders, and the board is now actively evaluating options in terms of the form, quantum and timing of such returns."

Civil aviation (civil)

Third quarter civil revenue was $622.1-million versus $517.4-million in the third quarter last year. Operating income was $101-million (16.2 per cent of revenue) compared with $117.2-million (22.7 per cent of revenue) in the same quarter last year. Adjusted segment operating income was $124.2-million (20 per cent of revenue) compared with $131.4-million (25.4 per cent of revenue) in the third quarter last year. During the quarter, civil delivered 13 full-flight simulators (FFSs) to customers and third-quarter civil training centre utilization was 76 per cent.

During the quarter, civil signed training solutions contracts valued at $845.4-million, including a range of long-term commercial and business aviation training agreements, and 20 FFS sales, for a total of 57 as of the end of the third quarter of the fiscal year. Notable awards in the quarter included long-term training services contracts with marquee airlines, including Air France KLM Group, and it renewed a flight services agreement with Azul Linhas Aereas Brasileiras. Business aviation accounted for over $300-million of civil adjusted order intake in the third quarter, driven primarily by training services agreements with United States-based customers, including Solairus Aviation and Clay Lacy Aviation.

The civil book-to-sales ratio was a robust 1.36 times for the quarter and 1.27 times for the past 12 months. The civil adjusted backlog at the end of the quarter was a record $6.1-billion.

Defence and security (defence)

Third quarter defence revenue was $472.4-million versus $452.5-million in the third quarter last year. Operating income was $20.6-million (4.4 per cent of revenue) compared with $24.9-million (5.5 per cent of revenue) in the same quarter last year. Adjusted segment operating income was $20.9-million (4.4 per cent of revenue) compared with $25.4-million (5.6 per cent of revenue) in the third quarter last year.

Additional information pertaining to defence legacy contracts

Within defence, there are a number of fixed-price contracts which offer certain potential advantages and efficiencies, but can also be negatively impacted by execution difficulties and adverse changes to general economic conditions, including unforeseen supply chain disruptions, inflationary pressures and availability of labour. 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). Although they represent only a small fraction of the current business, these contracts have disproportionately impacted overall defence profitability.

For the third quarter of fiscal 2024, the continuing execution of legacy contracts had a negative impact of approximately two percentage points on the defence adjusted segment operating income margin.

Management is closely monitoring these legacy contracts as a separate group, and continues to be highly focused on the execution and the retirement of these legacy contracts, and mitigating the finite cost pressures associated with them. These legacy contracts have completion dates mainly within the company's next two fiscal years and the risks associated with them will be reduced as they are substantially retired over the next six to eight quarters, with variability in quarterly financial impacts resulting from the timing of program close outs, customer acceptance and the ability to mitigate associated risks and costs as the company continues to execute them.

Defence booked orders for $428.5-million this quarter involving simulation-based training, support services and mission solutions. Notable awards include a maintenance contract with the U.S. Air Force for its F-16 training devices, and the continuation of training services on the C-130H transport and KC-135 tanker platforms. Defence orders also include an option exercise for the U.S. Army for fixed-wing flight training and support services at the CAE Dothan Training Center.

The defence book-to-sales ratio was 0.91 times for the quarter and 0.90 times for the past 12 months. The defence adjusted backlog, including unfunded contract awards and CAE's interest in joint ventures, at the end of the quarter was $5.6-billion, up from $5.1-billion at the end of the third quarter of fiscal 2023. The defence pipeline remains strong with approximately $9.5-billion of bids and proposals pending.

Additional financial highlights

CAE incurred restructuring, integration and acquisition costs of $23.5-million during the third quarter of fiscal 2024, relating mainly to the acquisition of Sabre's AirCentre airline operations portfolio. These expenses related to the integration of AirCentre are expected to wind-down by the end of the first half of fiscal 2025.

Net finance expense this quarter amounted to $52.4-million, compared with $47.1-million in the preceding quarter and $47.7-million in the third quarter last year.

Income tax expense this quarter amounted to $8.2-million, representing an effective tax rate of 12 per cent, compared with 17 per cent for the third quarter last year. The adjusted effective tax rate, which is the income tax rate used to determine adjusted net income and adjusted EPS, was 15 per cent this quarter as compared with 18 per cent in the third quarter of last year. The decrease in the adjusted effective tax rate was mainly attributable to the mix of income from various jurisdictions.

Net loss from discontinued operations was $1.9-million this quarter, compared with a net income from discontinued operations of $2.1-million in the third quarter of fiscal 2023. The decrease compared with the third quarter of fiscal 2023 was mainly attributable to transaction costs of $2.2-million incurred in the third quarter of fiscal 2024 in relation to the expected sale of the health care business.

Net cash provided by operating activities was $220.8-million for the quarter, compared with $252.4-million in the third quarter last year. Free cash flow was $190-million for the quarter, compared with $239.8-million in the third quarter last year. The decrease was mainly due to a lower contribution from non-cash working capital and higher payments to equity accounted investees to invest in civil training network expansion in support of long-term customer agreements.

Growth and maintenance capital expenditures totalled $85.6-million this quarter.

Net debt at the end of the quarter was $3,085.4-million for a net debt-to-adjusted EBITDA (earnings before interest, taxes, depreciation and amortization) of 3.16 times. This compares with net debt of $3,184.5-million and a net debt-to-adjusted EBITDA of 3.25 times at the end of the preceding quarter. The impact of the reclassification of adjusted EBITDA from discontinued operations on the net debt-to-adjusted EBITDA ratio was an increase of 0.07 for Dec. 31, 2023, and 0.09 for Sept. 30, 2023.

Adjusted return on capital employed was 7 per cent this quarter, compared with 7.1 per cent last quarter and 5.5 per cent in the third quarter last year.

Environmental, social and governance (ESG)

During the quarter, CAE continued to demonstrate its commitment to sustainability, diversity and ethical business practices. The company was honoured to be selected as one of Canada's Top 100 employers and top employers for young people for the second and fourth consecutive years, respectively, reflecting its dedication to anticipating employees' needs, fostering an innovative and inclusive work environment, and promoting the aerospace industry as a career destination for the next generation of talent. CAE was also recognized with the government of Canada's 2023 Employment Equity Achievement Award sector distinction in November, 2023, underscoring its commitment to diversity and inclusion, and its efforts to inspire future generations of women pilots. In terms of sustainability, CAE achieved significant improvements in its S&P CSA (Corporate Sustainability Assessment) and CDP (Carbon Disclosure Project) scores, and was included in the S&P 2024 Global Sustainability index, placing it among the top 15 per cent of its industry. CAE also strengthened its governance framework by reviewing its business performance policies, and introducing a new business partner risk management policy and due diligence framework, further enhancing its ethical business practices.

For more information on how CAE supports the aviation industry's decarbonization journey and contributes to a more sustainable future for all, the report can be downloaded at the company's website.

Management outlook

CAE is pursuing a growth strategy to become a bigger, stronger and more profitable company. Through accretive growth capital deployments and strong execution, its civil segment, the largest within CAE, continues to experience strong growth momentum. Management has targeted a three-year (FY 2022 to FY 2025) EPS compound growth rate in the mid-20-per-cent range, expected to come from continuing strong performance in civil and the multiyear transformation under way in defence. The realization of CAE's strategic growth objectives is expected to result in a significantly larger base of business and a capital structure that affords flexibility to balance further investments in its future, alongside capital returns for shareholders.

Management has a highly positive view of its growth potential over a multiyear period, underpinned by favourable secular trends across business segments. It expects civil to continue growing at an above-market rate, driven by growth and recovery in air travel, increased penetration of the existing addressable market for training and flight services solutions, and a sustained high level of demand for pilots and pilot training across all segments of civil aviation. In fiscal 2024, driven in large part by an expected strong margin in the fourth quarter, management continues to expect mid- to high-teen percentage range growth in annual adjusted segment operating income. On an annual basis, management continues to expect the civil adjusted segment operating income margin to be in the range of fiscal 2023. In addition to growing its share of the aviation training market and expanding its position in digital flight services, civil expects to maintain its leading share of FFS sales and to deliver approximately 50 FFSs for the year to customers worldwide.

CAE's defence segment is in the process of a multiyear transformation, which is expected to yield a substantially bigger and more profitable business. Since transforming its scale and capabilities through acquisition in fiscal 2022, defence has become the world's leading pure-play, platform independent, training and simulation business, providing solutions across all five domains, and has grown its adjusted backlog by over 20 per cent. Defence's recent strategic program wins, $5.6-billion adjusted backlog, and $9.5-billion pipeline of bids and proposals outstanding demonstrate that its transformation strategy is bearing fruit. Over the long term, CAE continues to expect superior defence growth to be driven by the translation of its bid activity into higher margin adjusted order intake and execution of contracts with sustainably higher profits.

For the remainder of fiscal 2024, defence expects to continue replenishing its adjusted backlog with larger and more profitable contracts, and to accelerate the retirement of risks associated with the legacy contracts, which have been an acute drag on overall defence profitability. Management is closely monitoring these contracts as a separate group, with a dedicated team that continues to be highly focused on the execution and the substantial retirement of these legacy contract risks over the next six to eight quarters. Despite the company's efforts, management notes the potential risk of additional cost overruns, reduced profit margins or further losses arising from the legacy contracts, with variability in quarterly financial impacts resulting from the timing of program closeouts, customer acceptance, and defence's ability to mitigate associated risks and costs. Through backlog replenishment and the legacy contract closeouts, the anticipated positive inflection in defence performance is expected to begin to appear in the second half of the next fiscal year, and will also depend on the duration and magnitude of delays to new programs in the current environment.

Total capital expenditures in fiscal 2024 are expected to be approximately $50-million higher than last fiscal year, mainly in support of a higher amount of market-led, accretive organic investments involving civil aviation training network expansion, simulator deployments and customer training outsourcings. The company usually sees a higher investment in non-cash working capital accounts in the first half of the fiscal year and, as in previous years, management expects a portion of the non-cash working capital investment to reverse in the second half. The company continues to target a 100-per-cent conversion of adjusted net income to free cash flow for the year. The company intends to apply a significant portion of the net proceeds from the sale of its health care division, subject to closing conditions, including customary regulatory approvals, to reduce debt. Management remains focused on making organic investments in lockstep with customer demand, integrating and ramping up recent investments and continuing to deleverage its balance sheet. Management will continue to prioritize a balanced approach to capital allocation, including financing accretive growth, further strengthening its financial position and returning capital to shareholders. CAE expects its average adjusted effective income tax rate for the remainder of the fiscal year to be approximately 22 per cent.

Detailed information

Readers are strongly advised to view a more detailed discussion of the company's results by segment in the management's discussion and analysis (MD&A), and CAE's consolidated financial statements for the quarter ended Dec. 31, 2023, which are available on the company's website, SEDAR+ and EDGAR. Holders of CAE's securities may also request a printed copy of the company's consolidated financial statements and MD&A free of charge by contacting investor relations (investor.relations@cae.com).

Conference call Q3 FY 2024

Mr. Parent, CAE president and chief executive officer, Sonya Branco, executive vice-president, finance, and chief financial officer, and Andrew Arnovitz, senior vice-president, investor relations and enterprise risk management, will conduct an earnings conference call today at 2 p.m. ET. The call is intended for analysts, institutional investors and the media. Participants can listen to the conference by dialling 1-877-586-3392 or 1-416-981-9024. The conference call will also be audio webcast live the company's website.

About CAE Inc.

CAE equips people in critical roles with the expertise and solutions to create a safer world. As a technology company, it digitalizes the physical world, deploying software-based simulation training and critical operations support solutions. Above all else, it empowers pilots, cabin crew, airlines, defence and security forces, and health care practitioners to perform at their best every day and when the stakes are the highest. Around the globe, it is everywhere customers need it to be with more than 13,000 employees in approximately 250 sites and training locations in over 40 countries. CAE represents more than 75 years of industry firsts -- the highest-fidelity flight and mission simulators, as well as training programs powered by digital technologies. It embeds sustainability in everything it does. Today and tomorrow, CAE will make sure its customers are ready for the moments that matter.

We seek Safe Harbor.