CAE's defence business takes $700M hit as fixed-price contracts drag down earnings

Christopher Reynolds, The Canadian Press

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CAE Inc. expects to report a half-billion-dollar loss for its fourth quarter after massive one-time charges linked to its beleaguered defence business.

The flight simulator maker announced a $568-million "goodwill impairment" for the segment on Wednesday. It also reported a $36-million writedown of intangible assets and $90 million in unfavourable contract adjustments tied to fixed-price defence contracts.

"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 defence," said CEO Marc Parent in a release.

The financial hit prompted a drop of $1.74 or about six per cent in CAE's share price to $25.32 in early afternoon trading.

It also helped push the company to make further changes to its upper ranks after announcing in April the departure of defence president Daniel Gelston at the end of this month, to be replaced by Jason Goodfriend. On Tuesday evening, CAE said Nick Leontidis has stepped into the new position of chief operating officer overseeing CAE's defence-side and civil aviation business, which he previously headed, to "drive additional synergies" between the two segments.

"Because our defence 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," Parent said.

The impairment and contract writedowns led CAE to forecast a loss of $504.7 million when it reports its fourth-quarter financial results this coming Monday. The total stands in contrast to analysts' earlier expectations of a $134-million profit and to net income of $98.4 million from a year earlier.

"Although taking a massive impairment and acknowledging a large loss on these contracts is hard to spin as positive, ripping the proverbial Band-Aid off now will avoid CAE having to suffer from ongoing margin erosion from these legacy contracts, some of which are set to run for another two years," said National Bank analyst Cameron Doerksen in a note to investors.

The contract outcome effectively pulls forward losses that CAE expected to incur through 2026, after which the deals will have wound down.

“Where the surprise comes for me is that they’ve basically done it all at once,” Doerksen said in a phone interview.

In February, chief financial officer Sonya Branco said the fixed-price agreements faced "execution difficulties" stemming from inflation, supply chain disruptions and labour issues.

The eight legacy contracts — under which the firm must pay for expense overruns itself — date back to before the COVID-19 pandemic "with little to no provision for cost escalation," she said.

Doerksen described the goodwill impairment as the result of an accounting test on intangible assets. Such assets might range from brand value to a perceived advantage from proprietary technology.

"In this case, CAE built up a sizable amount of goodwill on its balance sheet related to various acquisitions that they made," he said. "And every year you have to basically do a test on what you think the future profitability is of that business.

"If it ends up being different than what your original estimates were ... then you have to take a goodwill impairment."

Despite legacy woes, CAE's defence business enjoys a "solid and growing backlog and a positive defence spending backdrop," Doerksen added.

More than four of every five dollars earned by the company comes from the civil aviation side. In turn, the majority of that revenue stems from flight training, while another third comes from flight simulator sales, he said.

This report by The Canadian Press was first published May 22, 2024.

'Geopolitical tensions' mean more business for Heroux-Devtek, as defence needs rise

Christopher Reynolds, The Canadian Press

Global strife has boosted demand for Héroux-Devtek Inc. wares, with the continued rebound in commercial travel adding to its record sales last quarter, said CEO Martin Brassard.

"The aerospace industry outlook remains very strong. Global passenger traffic is back to pre-pandemic levels," he told analysts on a conference call Wednesday. The International Air Transport Association predicts further growth, the head of the aircraft landing gear maker noted.

"On the defence side, geopolitical tensions have added urgency to the defense industry's effort to maintain, develop and launch new aircraft programs and we are very active on the number of defence platforms."

Defence sales rose slightly from last year to $108.2 million in the company's fourth quarter. The company carried out maintenance and deliveries on the Sikorsky CH-53K King Stallion helicopter — a heavy transport chopper used by the U.S. Marine Corps — and Lockheed Martin F-35 fighter jets, deployed by more than a half-dozen militaries.

On the civil aviation side, sales jumped 55 per cent year over year to $75.8 million in the quarter ended March 31, pushed up by deliveries of Boeing 777 jetliners and Embraer Praetor and E2 planes.

In an interview Tuesday, Brassard said he was unconcerned about delays in Boeing Co. production after a door plug blowout on a 737 Max 9 aircraft during an Alaska Airlines flight in January sparked an investigation by U.S. regulators.

"Right now we're ramping up. The 777 is going well," the chief executive said, adding that he hopes to see the Boeing's 777x wide-body jet enter into service next year or early 2026.

Héroux-Devtek reported a fourth-quarter profit of $20.7 million, up from $6.3 million a year earlier, as its sales rose 18 per cent.

Sales in the three-month period shot up 18 per cent year over year to a record $184.1 million, said the Montreal-area-based company.

On an adjusted basis, Héroux-Devtek earned 49 cents per share in its latest quarter, up more than 170 per cent from an adjusted profit of 18 cents per share in the same quarter last year and blowing past analysts' expectations of 31 cents per share, according to LSEG Data & Analytics.

This report by The Canadian Press was first published May 22, 2024.

 

Quebecor wants Ottawa to stop Loblaw from only offering Rogers, Bell phone products

Sammy Hudes, The Canadian Press

Quebecor chief executive Pierre-Karl Peladeau speaks to the media after the company's annual meeting in Montreal, Thursday, May 9, 2024. (The Canadian Press / Ryan Remiorz)

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The chief executive of Quebecor Inc. is urging Ottawa to intervene in what he calls an "anticompetitive" deal between Loblaw Cos. Ltd. and telecommunications services retailer Glentel that would end Freedom Mobile's presence at its supermarket kiosks.

In a May 9 letter to Industry Minister François-Philippe Champagne and seen by The Canadian Press, Quebecor CEO Pierre Karl Péladeau alleged Loblaw "decided to prematurely terminate" a supply contract between the chain's in-store kiosks, known as The Mobile Shop, and the telecom's Freedom Mobile subsidiary.

He said the grocer is instead partnering with Glentel, which is jointly owned by Rogers Communications Inc. and Bell Canada and operates stores such as Wireless Wave and Tbooth Wireless.

While Péladeau said Loblaw has described the move as a routine decision about its store suppliers, he called it "a stratagem designed to exclude some carriers in favour of Glentel."

"We therefore appeal to you to intervene directly and firmly with Loblaw, Glentel, Bell and Rogers to end their anticompetitive manoeuvres," the letter stated.

"It is imperative that action be taken to preserve a fair competitive environment in the telecommunications and grocery businesses, in the best interests of Canadians."

The Mobile Shop is available at 180 Loblaw-owned grocery stores across Canada and currently lists plans for sale from all four major Canadian carriers or their subsidiaries on its website.

In a statement, The Mobile Shop said it represents less than five per cent of mobile phone and plan sales in Canada and noted it does not operate in Quebec.

"Based on our limited market presence in mobile, our decision of which carriers to sell does absolutely nothing to competition," said Daksa Mody, senior vice-president and chief operating officer for PC Financial and Services.

Mody added that Loblaw does not currently have any agreement in place that requires The Mobile Shop to buy or offer any Quebecor product in its stores.

"We went through a competitive process with all carriers, asking them for various scenarios. Quebecor chose not to fully participate," she said.

When asked, Quebecor did not say when its contract was supposed to end or how soon it was told the contract would be terminated. The company also did not clarify whether it had received a response from the minister.

In a statement, Champagne's office said the minister cannot direct an investigation on the matter.

"The letter would’ve been best addressed to the Competition Bureau, as the commissioner holds the powers to launch investigations," said spokeswoman Audrey Milette.

Quebecor did not say whether it has reached out to the competition watchdog.

In 2015, the bureau reached an agreement with Rogers and Bell that it said satisfied concerns about their acquisition of Glentel. The bureau had earlier warned the acquisition "would likely result in a substantial lessening of competition in the wireless sector."

But Rogers, Bell and Glentel agreed to place "administrative firewalls" that prevented the sharing of subscriber information, pricing and promotional offers.

The watchdog said those conditions were necessary to ensure the transaction did not provide either carrier with the ability to share confidential information that could result in consumers paying higher prices for wireless products and services.

Péladeau has been on the offensive this month when it comes to concerns about phone and internet competition.

"The incumbents will do anything to protect their monopoly for as long as possible in defiance of government policy," he said at Quebecor's annual general meeting, which was held the same day his letter was sent to Champagne.

"We are willing to do what it takes to be a market disrupter, but for us to continue playing our role as a strong fourth player, the constant obstruction from the Big Three to all forms of competition must stop"

Loblaw, meanwhile, has recently made other moves in the telecom sector.

Last month, the grocer launched low-cost cellphone plans under its No Name brand, offering prepaid mobile sim cards for purchase at all No Frills locations across the country.

The new No Name Mobile cellphone plans are powered by its PC Mobile carrier, which has been around since 2005 and runs on Bell's network. 

BNN Bloomberg is owned by Bell Media, which is a division of BCE.

This report by The Canadian Press was first published May 22, 2024.

 

Mortgage lending among top risks facing financial system: OSFI

The Canadian Press

Office towers are shown in Toronto's financial district on Wednesday, June 27, 2018. (The Canadian Press/Tijana Martin)

Canada's banking regulator says real estate secured lending and mortgages are among the top risks facing the country's financial system as higher interest rates put pressure on borrowers.

In its annual risk outlook, the Office of the Superintendent of Financial Institutions says as homeowners renew their mortgages, they could potentially face a payment shock due to higher interest rates compared with when they last secured their loans.

The regulator says it expects the payment increases to lead to a higher incidence of residential mortgage loans falling into arrears or default.

Other top risks identified by OSFI include wholesale credit risk, including risk from commercial real estate lending as well as corporate and commercial debt, and funding and liquidity risks.

It also pointed to risks associated with social and political conflict.

OSFI says a major geopolitical event could disrupt markets and create instability for institutions, while the escalation of political tensions and the polarizing effect of geopolitical issues have the potential to make Canadian institutions a target for politically motivated attacks.

This report by The Canadian Press was first published May 22, 2024.

Remote work, aging tech targeted by Canada cybersecurity plan

Monique Mulima, Bloomberg News

Canada released its first-ever cybersecurity strategy for federal government departments and agencies on Wednesday, with the aim of addressing challenges posed by remote work, cloud computing, aging infrastructure and recruitment.

The strategy, announced by Treasury Board President Anita Anand and costing $11 million (US$8 million) over five years, concluded that government departments and agencies generally lacked “repeatable” processes to identify and respond to new and emerging cyber threats, as of the fiscal year ending in 2023.

So far in 2024, the Financial Transactions and Reports Analysis Centre of Canada, the Royal Canadian Mounted Police and Global Affairs Canada have all dealt with cyber incidents.

During the pandemic, many government employees switched to remote work, using their home networks rather than solely government systems. Now as many of those workers remain hybrid — and threaten disruptions over a three-days-in-office mandate — the strategy aims to make working from home more secure through expanding multifactor authentication and introducing always-on protections against malware and viruses.

The government is also using more mobile devices, cloud-based services and third-party software. Several of these systems are run at the departmental or agency level, which can lead to inconsistencies.

“The speed of technological change means that security measures that were once effective may quickly become obsolete, underscoring the need for a proactive and adaptive approach to cybersecurity,” the strategy says.

The government plans to create a security operations center that will monitor on-site, cloud and other network-connected devices across departments and agencies. Some will have specialized operation centers as well.

Aging infrastructure is also causing vulnerabilities. “There is inadequate protection of information due to outdated IT tools, which can result in an increase in cybersecurity incidents or privacy breaches,” the strategy says.

As well, the government is struggling to recruit cybersecurity professionals. The new strategy plans to create partnerships with colleges and universities, accelerate hiring through automation and train employees in other departments to work in the field.

The strategy sets a timeline for results of within two to five years. The government expects there will still be some cybersecurity incidents, but that it will be able to quickly respond to them and minimize the impacts.

 

Young people in Canada are trading Toronto for cheaper suburbs and cities

Randy Thanthong-Knight, Bloomberg News

Skyrocketing housing prices appear to be fuelling a growing Canadian migration pattern: Young families and early-career workers are abandoning expensive cities for affordable homes in cheaper regions.

Every major city in Ontario — Canada’s most populous province with some of its most expensive homes — recorded a net loss from interprovincial migration for the second year in a row over 12 months to July 1, 2023, according to Statistics Canada data published Wednesday.

Its biggest city, Toronto, lost some 93,000 people to satellite cities and other parts of the province during that period, driven by people under 40, data showed. More than 16,000 moved to other provinces, led by those between the ages of 20 to 39 as well as their preschool children. 

British Columbia’s largest city of Vancouver, which is among North America’s most expensive cities, also recorded a high level of net losses.

In contrast, the oil-rich prairie province of Alberta, which boasts some of the country’s cheapest homes, recorded the biggest gains from migration between provinces. Calgary, Edmonton and two other biggest cities in the province saw a net gain of nearly 46,000 people over the year.

“This report indicates that more affordable home prices and a stronger economic outlook in the prairies make them particularly attractive to homebuyers and job seekers at the expense of Ontario and British Columbia,” the statistics agency said. 

Toronto’s housing prices surged during the pandemic and also saw a rapid increase over the period the Statistics Canada data was collected. Currently, the benchmark price for a home in the city is $1.128 million.