The CAE headquarters in Montreal is seen in this file photo.Paul Chiasson/The Canadian Press
Canadian simulation company CAE Inc. said it won two military contracts worth more than $1-billion as it gears up for a potential increase in defence spending under incoming U.S. president Donald Trump.
Montreal-based CAE said Thursday it signed two separate long-term aircraft training service contracts with military forces in Canada and the United States.
One commitment will see CAE deliver classroom, simulator and live flying instructor support services for helicopter training with the U.S. Army. The one-year deal comes with eight one-year options until 2026. The other contract with the Royal Canadian Air Force is to instruct military pilots under NATO's Flying Training in Canada program. That deal is a modification and extension of an existing contract to 2023. The pilots will be trained in Moose Jaw and Cold Lake.
Financial details of the contracts beyond the $1-billion figure were not released.
CAE Chief Executive Marc Parent is trying to increase the company's share of business in global defence programs and win more recurring contracts, building on a military backlog worth $3.2-billion at the end of the second quarter. The company's customers include 50 defence forces in 35 countries.
"The contracts should propel the backlog to new record levels," Desjardins Capital Markets analyst Benoit Poirier said in a research note to clients. More broadly, he believes CAE and its rivals should "benefit from President-elect Trump's promise to lift the sequester on defence spending."
Mr. Trump in September called for an increase in military spending, saying he will ask Congress to reverse cuts to defence spending enacted under the 2013 budget sequestration. He has said the government needs to boost troop levels as well as the number of ships and aircraft because current defence capabilities are not enough to meet the threats the United States faces.
On CAE last earnings call in November, Mr. Parent said history suggests a U.S. Republican administration is typically positive for the defence industry. Like other countries, the United States is ramping up its use of simulation training instead of in-field instruction to save money and boost troop readiness.
The company expects modest growth this fiscal year in the defence business and a strong context for growth over five years. It says government defence budgets are stabilizing in the west and customers in the Middle East and Asia are modernizing and recapitalizing their defence systems.
"What we're seeing for defence overall is I guess a kind of climate that we haven't seen in a long time," Mr. Parent said. "Not only does what is still in some cases called the 'war on terror' continue with the fight against ISIS on the one hand, you see the pivot to Asia continuing because of the threats there. And now you have the threat of a resurgent Russia. All of that is leading to inevitable budget increases."
Mr. Poirier estimates that the two new contracts announced by CAE are worth more than $600-million in incremental revenue to the company. Assuming a pre-tax margin of 11.5 per cent on the deals and a tax rate of 23 per cent, he calculates a boost worth 2 cents on earnings per share.
The United States Army contract is being challenged by rivals who lost the contest, a "common occurence" in U.S. Department of defence procurements, CAE said. The company said it expects the contract decision to be upheld because protests are rarely successful.
CAE shares inched up 0.7 per cent in morning trading in Toronto, to $18.71. They hit a 52-week high of $19.93 in late November.
Nicolas Van Praet