CAE (NYSE:CAE) raised its fiscal 2027 earnings and margin outlook after reporting stronger defense profitability and free cash flow in its second quarter, even as revenue declined and its civil business faced lower simulator product sales.
The aviation training and defense simulation company now expects adjusted earnings per share of CAD 1.28 to CAD 1.35 for the fiscal year, up from its previous forecast of CAD 1.21 to CAD 1.28. It also raised its adjusted segment operating income margin outlook to 14.9% to 15.4%, from 14.6% to 15.1%.
Quarterly profit and cash flow rise
For the quarter ended Sept. 30, consolidated revenue fell 2.6% year over year to CAD 1.2 billion. Adjusted segment operating income rose 1.5% to CAD 179.3 million, while the corresponding margin increased to 14.9% from 14.3%.
Adjusted earnings per share climbed to CAD 0.33 from CAD 0.28 a year earlier. McLeod attributed the improvement in operating income and margin to stronger defense and business aviation training performance, partly offset by a softer civil product business.
Free cash flow rose to CAD 179.9 million from CAD 109.8 million. For the first half, free cash flow was CAD 283.9 million, compared with a use of CAD 24.9 million a year earlier. McLeod said the improvement reflected execution as well as the timing of working capital and capital expenditures.
CAE kept its fiscal 2027 cash conversion guidance at 85% to 95%. It ended the quarter with CAD 2.5 billion in net debt and a net debt-to-adjusted EBITDA ratio of 2.16 times. During the quarter, the company repurchased 1.9 million shares for CAD 67.1 million.
Defense margins improve as civil results soften
Defense revenue declined 2.5% to CAD 552.4 million, but adjusted segment operating income rose 43.3% to CAD 75.4 million. The segment’s adjusted margin increased to 13.6% from 9.3%.
The quarter included CAD 11 million in investment tax credits related to prior years. Excluding that benefit, the defense margin was 11.6%, Bromberg said. McLeod cautioned that the reported quarterly margin should not be treated as a new run rate because of the tax benefit and the timing of product deliveries.
Bromberg attributed the underlying improvement to stronger bidding discipline, cost reductions and program management. He said CAE intends to maintain low-double-digit defense margins, although quarterly results will vary. The company continues to expect mid-single-digit defense growth and improved profitability for the full year.
Civil revenue fell 2.6% to CAD 652.3 million, and adjusted segment operating income declined to CAD 103.9 million from CAD 124.1 million. The segment’s margin fell to 15.9% from 18.5%, primarily reflecting lower simulator product revenue and temporary inefficiencies from network changes and investment, McLeod said.
Civil training center utilization improved to 65% from 62% a year earlier. Bromberg said much of the increase was driven by removing simulators from the network, while demand was in line with expectations. CAE expects a stronger civil second half, supported by training activity and product delivery timing, but still expects full-year civil profitability below the prior year’s level.
Transformation and Flightscape sale
CAE said it was more than halfway through key transformation milestones and ahead of its original schedule. It expects to retire 16 to 18 civil simulators by fiscal year-end, up from its prior target of 13 to 15; it had retired 13 by the end of the second quarter.
Over time, the company plans to close four to six civil training centers and reduce its network footprint by approximately 500,000 square feet, or roughly 10%, while retaining more than 99% of civil revenue. Bromberg said some site closures would extend into fiscal 2028.
CAE remains on track for CAD 125 million to CAD 150 million in annual transformation run-rate savings by fiscal 2030. It expects total program costs of CAD 200 million to CAD 250 million, with most remaining costs incurred in fiscal 2027.
The company also expects its agreement to sell Flightscape to SITA for $500 million to close in the first half of calendar 2027. Subject to closing, CAE plans to use the proceeds to fund transformation activities, invest in its core businesses and return capital to shareholders.
McLeod said the sale would reduce capital intensity, although not by a material amount given Flightscape’s size. He said CAE would remain patient in allocating capital, even if leverage fell to around 1.5 times after the transaction.
Separately, CAE is evaluating a transition to U.S. generally accepted accounting principles. If pursued, the change would take effect in the fourth quarter of fiscal 2027, with additional details expected in coming quarters.
About CAE (NYSE:CAE)
CAE Inc. is a Canadian technology company that develops simulation and training solutions for the civil aviation and defense markets. Founded in 1947 and headquartered in Montreal, the company serves customers around the world. In civil aviation, CAE provides flight simulators, training devices, and pilot and crew training services to airlines, business aviation operators, aircraft manufacturers, and other aviation organizations. Its offerings support training across a range of aircraft types and operational needs.
