08/08/2013 07:16 EDT | Updated 10/08/2013 05:12 EDT

CAE not shying from controversial military contracts with U.S. drone training win

MONTREAL - CAE isn't shying away from controversial military contracts after being chosen to train crews of U.S. drones and Canadian F-35 fighter jets.

The Montreal-based company has been selected by the U.S. air force to train operators of Predator and Reaper remotely piloted aircraft. The initial one-year services contract is for US$20 million and could be worth up to US$100 million if extended to the maximum.

"We have an established capability on UAVs (unmanned aerial vehicles) and this is just a demonstration by the U.S. air force of them acknowledging that, that they would give to a Canadian company such a prestigious contract," CAE president and chief executive Marc Parent said Thursday following the company's annual meeting.

CAE (TSX:CAE) will provide training on equipment made by rival L-3. The Canadian firm previously provided training over 10 years for Predator crews from the United States, Britain and other countries that operated the planes out of Nevada.

President Barack Obama has extensively used the planes to attack al-Qaida and other enemy fighters without risking the lives of American pilots. However, critics have complained that many civilians are frequently killed in the attacks.

Parent said he's not concerned that the company's image will be tarnished by its association with the aircraft.

"We train on civil and military platforms around the world. Our mission is for people to be able to execute their mission. Our mission is to train them. We're not really involved in the controversy if there is one associated with that."

CAE also signed an agreement in June with Lockheed Martin (NYSE:LMT), the U.S. manufacturer of the F-35 fighter jet, to deliver training system support and services in Canada even though the federal government has yet to decide whether it's replacing the existing fleet of CF-18s.

Terms of the deal haven't been ironed out and the contract is conditional on Canada ultimately confirming its selection of the controversial plane. Basic training on the aircraft is completed in the United States, but Parent said Canada would likely want to provide some of its own training of pilots.

"At the moment we're on the F-35. If Canada selects another aircraft we'll do like we always do, we'll bid on training on any platform anywhere and that includes Canada," he told reporters.

CAE slightly missed analyst profit expectations even though its net profit more than doubled to $45.6 million in the first quarter of its fiscal year on a 15 per cent growth in revenues primarily due to the strength of its civil simulator and flight training business.

The company earned 18 cents per share attributable to shareholders for the three months ended June 30. That compared to eight cents per share or $21.5 million a year earlier.

Excluding one-time tax benefits and severance costs, its adjusted profit was $31.8 million or 15 cents per share, compared to $46.9 million or 18 cents per share in the prior year.

Revenues for the quarter were $530.4 million, up from $462.2 million last year

CAE's adjusted profits were expected to slip one cent to 17 cents per share on $525.4 million of revenue, according to analysts polled by Thomson Reuters.

Parent said he was disappointed that the civil margins slipped to 12.5 per cent during the quarter due to softness in Europe, the company's decision to move some simulators to Asia, the ramp up of new training centres and integration of its Oxford training acquisitions. But he expects the traditional 16 per cent margins will return in the second half of the year.

"We've kind of had a perfect storm of issues this quarter which affects our results," he said.

Cameron Doerksen of National Bank Financial said the results were "relatively weak as anticipated."

"The market will be disappointed with the margins in the training and services-civil segment, but this should be tempered somewhat by a strong outlook for full-flight simulator orders and the other contracts announced this morning," he wrote in a report.

Parent said the company has maintained its global leadership with a 70 per cent market share of simulator sales. It expects to sell a record 40 full-flight simulators this fiscal year after recording 23 units to date.

On Thursday, CAE announced a contract for eight simulators, flight training devices and a 15-year maintenance and service agreement with an undisclosed customer. The contract signed in CAE's second quarter is worth about $210 million at list prices.

CAE also said it has been awarded a contract worth an undisclosed amount to provide three mission training simulators for the Royal Australian Air Force.

Parent said the military orders received demonstrate "our resiliency in a challenging defence budget environment."

"This business is not falling off the cliff because of the fact that the programs we're on, any budget scenario you look at they're being funded and they're actually increasing the funding, so by luck or good strategy we're on the right programs," said Parent.

On the Toronto Stock Exchange, CAE's shares lost five cents at $11.73 in Thursday afternoon trading.