CAE says booming civil aerospace offsets delays in military orders

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MONTREAL – Flight training and simulator firm CAE Inc. doesn’t see any threats to its military business even though orders are continuing to be bogged down by budgetary cutting, especially in the United States.

Chief executive Marc Parent said the outlook for orders is tied to military platforms and CAE’s are doing well so far in the process.

“We have yet to see any major cuts, even in the U.S. defence budget preview, that would materially affect our business,” he said Wednesday during a conference call to discuss third-quarter results.

The Montreal-based company saw profits grow by 18 per cent in its latest quarter as strong demand for civil aerospace training and simulators offset weaker military results than a year ago.

CAE (TSX:CAE) earned $45.6 million, or 18 cents per share in its third quarter, up from $38.5 million, or 15 cents per share in the same period of 2010. Adjusting for one-time items, profits were 17 cents per share.

Revenue grew 10 per cent to $453.1 million.

CAE was expected to earn 17 cents per share in adjusted profits on $468 million of revenues in the third quarter, according to analysts polled by Thomson Reuters.

Parent said he was pleased that margins increased in both civil and defence business units from the second quarter.

“We had continued strong order activity in civil, which helped to offset the delays in military and we generated a good level of free cash flow,” he told analysts.

Military budget cutting makes it difficult to predict when orders will be signed.

“Orders were lighter in the quarter than we expected, not because business opportunities went away or were lost but mainly because of slower contracting and procurement delays.”

Despite the challenges, Parent said he feels good about market opportunities because simulation training will help defence departments save money to prepare for military missions.

In its civil segment, revenue grew by 13 per cent to $203.7 million compared to $179.9 million last year. Operating profit was $42 million, compared to $32.1 million last year.

CAE said it sold 11 full-flight simulators during the quarter and also signed training services contracts expected to generate $122.2 million in future revenue, including an exclusive long term agreement with Flydubai in the United Arab Emirates.

“The market drivers in civil aerospace continue to support our positive outlook for growth and higher margins for our combines civil business,” added Parent, noting growing air travel and re-fleeting by legacy carriers.

Military revenue increased by one per cent to $222.3 million, compared to $219.8 million last year. Operating profit was $36.9 million, down slightly from $39.5 million last year.

The company has suggested that its military segment revenues will grow by low single digits this fiscal year.

Benoit Poirier of Desjardins Capital Markets said the military margins were higher than forecast and should provide some relief to investors.

“Our sense is that there was some uncertainty about military margins going into the quarter,” he wrote in a report.

CAE has a solid military backlog with a good pipeline of international opportunities but the numbers were down from the prior quarter.

“Delays in government funding for certain programs remain a concern,” added Michael Willemse of CIBC World Markets.

With the $100 million in orders announced in mid-January, CAE has generated about $440 million in new military order activity since the beginning of the fiscal year.

CAE’s health-care simulation segment remains small, but is expected to take advantage of attractive growth opportunities.

Segment revenues increased to $27.1 million from $11.1, but the loss increased by $100,000 to $1.4 million.

Health-care training gained credibility with the endorsement of a Canadian association and the mining sector made inroads selling its software to customers in Australia, Mexico and Peru.

Founded in 1947, it has 32 civil aviation, military and helicopter training centres around the world and trains more than 80,000 crew members.

On the Toronto Stock Exchange, CAE’s shares fell five cents at $10.90 in afternoon trading.