CAE - CAE announces re-baselining of its Defense business Defense impairments accelerated risk recognition on Legacy Contracts and appointment of Nick Leontidis as COO | Benzinga

• 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

MONTREAL, May 21, 2024 /PRNewswire/ - (NYSE:CAE) (TSX:CAE) - CAE Inc. (CAE or the Company) today 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

Summary of Defense and Security preliminary unaudited results

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

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 ...

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