Executive Summary / Key Takeaways

• Dual-Engine Growth and Market Leadership: CAE Inc. stands as a global leader in civil aviation and defense training and simulation, leveraging its extensive network and proprietary technology to address critical talent shortages and modernization needs across both sectors. The company holds a significant 70% market share in flight simulation products and operates the world's largest aviation training network.
• Technological Edge and Innovation: CAE differentiates itself through advanced simulation platforms, including its Flightscape airline operations digital solutions and the immersive pilot training app for Apple (AAPL) Vision Pro. These innovations enhance operational efficiency, accelerate readiness, and provide real-time insights, solidifying CAE's competitive moat.
• Strategic Deleveraging and Cash Flow Focus: A key priority for CAE is deleveraging its balance sheet, targeting a net debt to adjusted EBITDA ratio of approximately 2.5x by fiscal year-end 2026. This objective is supported by a robust free cash flow conversion target of 150% of adjusted net income, reflecting disciplined capital allocation and operational excellence.
• Defense Upcycle and Civil Resilience: The Defense segment is experiencing a generational upcycle driven by rising geopolitical tensions and increased spending across NATO and Canada, contributing to strong order intake and margin expansion. While Civil Aviation faces temporary headwinds from pilot hiring pauses and OEM aircraft supply constraints, the long-term fundamentals remain strong, particularly in business aviation and the essential recurring training market.
• Leadership Transition and Renewed Focus: The recent leadership transition, with Matthew Bromberg as the new CEO and Calin Rovinescu as Executive Chairman, signals a sharpened focus on strategy, operational efficiency, and capital allocation to unlock the next level of performance and shareholder value.

Setting the Scene: A Global Leader in Critical Training

CAE Inc., established in 1947, has transformed from an industrial products company into a global powerhouse in simulation technologies and training services for civil aviation and defense. This evolution, significantly shaped by former CEO Marc Parent's leadership, has positioned CAE as a critical partner in ensuring safety and readiness worldwide. The company's core business revolves around delivering high-fidelity simulation and integrated training solutions, which are essential for pilots, air traffic controllers, maintenance technicians, and military personnel.

The industry landscape in which CAE operates is characterized by robust long-term demand drivers. In civil aviation, major aircraft OEMs project the global in-service fleet to nearly double over the next two decades, necessitating approximately 300,000 new pilots globally over the next decade. Similarly, the business aviation sector benefits from strong OEM backlogs and a growing trend towards fractional ownership models, with flight activity in the United States 15% above 2019 levels. The defense sector is in the early stages of a generational upcycle, fueled by rising geopolitical tensions and a surge in spending across NATO, the EU, and Canada. These structural tailwinds underscore the enduring need for CAE's specialized training and simulation capabilities.

CAE maintains a strong competitive position, holding a 70% market share in flight simulation products and operating the world's largest aviation training network. Its global presence, with approximately 13,000 employees across 240 sites in over 40 countries, allows it to serve a diverse client base and reduce dependence on any single market. This extensive network, coupled with its customer-centric culture and technical leadership, differentiates CAE from competitors.

Technological Differentiation and Innovation: CAE's Enduring Moat

CAE's competitive advantage is deeply rooted in its proprietary technology, which underpins its advanced simulation platforms and digital solutions. The company leverages cutting-edge digital simulation and gaming engine technologies to create high-fidelity training environments. These innovations reduce the cost and lead-time of new simulators while enhancing their operating efficiency. CAE's full-motion products, such as the CAE 3000, CAE 5000, and CAE 7000XR simulators, are critical for commercial use, providing realistic training experiences.

A significant technological differentiator is CAE's Flightscape platform, rebranded as "Flightscape powered by CAE." This data-driven, cloud-native SaaS platform provides real-time operational insights to airlines, empowering Operations Control Center (OCC) stakeholders to prevent disruptions, optimize operations, and reduce costs. Flightscape streamlines workflows, integrates disparate OCC data sources, and accelerates decision-making, leading to measurable cost savings and improved operational performance. For instance, French regional airline HOP! implemented Flightscape's Operations Control module, with Crew Manager and Crew Planner modules scheduled for late 2025, marking a significant digital transformation from legacy systems.

In pilot training, CAE became the first to develop an immersive pilot training app for Apple Vision Pro. This technology enables pilots to complete key training activities remotely, enhancing efficiency and scalability of training outcomes. Apple recognized CAE as a flagship use case for Vision Pro in aviation, highlighting how spatial computing improves pilot readiness and drives more productive simulator training.

In the defense sector, CAE's technological prowess is evident in programs like the Simulator Common Architecture Requirements and Standards (SCARS) program for the U.S. Air Force. CAE USA, as the prime contractor, is leading an industry team to develop a common open-systems architecture for USAF simulators. This initiative aims to integrate and standardize approximately 2,400 simulators across 300 locations, enabling remote software updates, enhanced cybersecurity, and a more realistic, multi-domain training environment. The F-16 platform is on track to be entirely virtualized by the end of calendar year 2024 under SCARS. Furthermore, CAE's Block 5 Predator Mission Trainer Plus (PMT Plus), developed with General Atomics for the Italian Air Force, offers a highly immersive training environment that accelerates readiness and reduces the need for live aircraft time during pilot and sensor operator training.

These technological advancements are not merely incremental improvements; they are foundational to CAE's competitive moat. They enable the company to offer superior, more efficient, and cost-effective training solutions, translating into stronger customer loyalty, recurring revenue from long-term contracts, and potentially higher margins. This technological leadership allows CAE to maintain its market share and capture new opportunities, driving sustained financial performance and long-term growth.

Civil Aviation: Navigating Short-Term Turbulence for Long-Term Ascent

CAE's Civil Aviation segment provides comprehensive training solutions for flight, cabin, maintenance, ground personnel, and air traffic controllers, alongside flight simulation training devices and airline operations digital solutions. This segment is characterized by the essential and recurring nature of its services, with approximately 70% of total training activity stemming from regulatory requirements for pilot certification, which occurs roughly every six months.

In the first quarter of fiscal year 2026, Civil Aviation revenue grew 3% year-over-year to $607.7 million, with adjusted segment operating income (aSOI) rising 1% to $107.6 million, resulting in a 17.7% margin. This modest margin decrease of approximately 40 basis points reflects lower utilization in commercial training and shifts in product solution mix. The quarter saw an "extension of the temporary pause in pilot hiring and a more cautious approach from commercial airlines, particularly in the U.S., where... hiring reach a trough" with only 55 pilots hired in June by the 13 largest airlines.

Despite these near-term headwinds, the long-term outlook for Civil Aviation remains highly compelling. The combined backlog of Boeing (BA) and Airbus (EADSY) exceeds 17,500 aircraft, and the global in-service fleet is projected to nearly double over the next 20 years. CAE estimates that 300,000 new pilots will be needed globally over the next decade to support this growth and offset retirements. Management anticipates a "positive inflection in the second half of the fiscal year" for commercial training demand, driven by expected ramp-up in airline hiring and more normalized aircraft deliveries from OEMs.

Business aviation, which accounts for about half of Civil's profit, continues to demonstrate strong performance. CAE's strategic expansion in this area includes the opening of its first dedicated business aviation training center in Vienna in April 2025, which will ultimately feature up to nine full-flight simulators. The increased stake in the SIMCOM joint venture, finalized in Q3 FY25, and the extended exclusive training agreement with FlexJet, a leading fractional jet operator, further solidify CAE's position in this growing market. This investment is expected to be accretive to both earnings and free cash flow in its first full year.

CAE's competitive positioning in civil aviation is robust. While Boeing offers OEM-integrated training programs, CAE's specialized, end-to-end training ecosystems, coupled with its global network of training centers, provide greater efficiency and accessibility. CAE's focus on being a pure-play training provider allows for agility and a customer-centric approach that differentiates it from aircraft manufacturers.

For fiscal year 2026, Civil's adjusted segment operating income is expected to grow in the mid-single-digit percentage range, at the lower end of the prior outlook, with annual aSOI margin remaining stable year-over-year. This measured outlook reflects ongoing market dynamics, but management foresees "ample room for margin expansion in future years on volume, efficiency, and mix" as market conditions improve.

Defense & Security: A Generational Upcycle and Expanding Margins

The Defense and Security segment provides advanced training and simulation solutions to military forces globally, enhancing mission readiness and operational effectiveness. This includes flight training, mission support, and specialized simulation capabilities.

In the first quarter of fiscal year 2026, Defense revenue remained stable at $490.9 million, but adjusted segment operating income surged 45% year-over-year to $40.2 million, delivering an 8.2% margin. This significant margin expansion was driven by "solid program execution across the board and improving product mix," including the successful completion of lower-margin contracts. Order intake for the quarter was strong at $611 million, resulting in a book-to-sales ratio of 1.25x and a trailing 12-month ratio of 2.08x. The adjusted backlog for Defense reached $11 billion, up 7% year-over-year, with approximately $6 billion in bids and proposals pending customer decisions.

The defense sector is experiencing a "generational upcycle" driven by rising geopolitical tensions and increased spending across NATO, the EU (e.g., ReARM strategy), and Canada. The Canadian federal government, for instance, plans to nearly double its annual defense spending from approximately $40 billion to over $80 billion by 2032. CAE is strategically positioned to capitalize on this, having been named a strategic partner to the Government of Canada for the Future Fighter Lead-in Training Program (FAcT Program), with subcontracts totaling approximately $2 billion. This initiative will design and co-develop next-generation training for Royal Canadian Air Force fighter pilots.

CAE's strategy in Defense involves actively replacing lower-margin "legacy contracts" with more accretive, long-term programs. This disciplined program management and focus on execution are yielding tangible results in profitability. The company has also secured significant contracts with the U.S. Air Force for KC-135 flight training and the SCARS program, and with the U.S. Army for rotary wing pilot instruction.

In the competitive defense landscape, CAE differentiates itself through its specialized focus on training and simulation, offering platform-independent solutions. While major defense primes like L3Harris Technologies (LHX), Lockheed Martin (LMT), and Northrop Grumman (NOC) often integrate training as part of broader hardware and system offerings, CAE's pure-play approach allows for greater flexibility and cost-effectiveness in dedicated training solutions. CAE's strengths in software-driven training and its global reach contrast with the larger scale and R&D depth of some defense contractors. However, CAE's deep customer relationships and technical capabilities position it as a trusted strategic partner.

For fiscal year 2026, Defense is expected to achieve low double-digit percentage annual segment operating income growth, with an annual segment operating margin in the 8% to 8.5% range. This trajectory reflects continued progress towards CAE's goal of becoming a low double-digit margin business in Defense.

Financial Health and Capital Allocation: Deleveraging for Enhanced Value

CAE delivered a solid first quarter of fiscal year 2026, with consolidated revenue of $1,098.6 million, a 2% increase year-over-year. Adjusted earnings per share remained stable at $0.21. Consolidated adjusted segment operating income rose 10% to $147.8 million, demonstrating margin expansion.

The company's financial health saw significant improvement in fiscal year 2025, culminating in a record $814 million in free cash flow for the full year, representing a robust cash conversion rate of 211%. This strong cash generation enabled CAE to meet its fiscal year 2025 leverage target.

A key priority for the current fiscal year (FY26) is deleveraging the balance sheet. CAE is targeting a net debt to adjusted EBITDA ratio of approximately 2.5x by fiscal year-end, down from 2.75x at the end of Q1 FY26. This is viewed as a "way point, not the final destination," with management aiming to further reinforce its financial position. This deleveraging is supported by an anticipated strong free cash flow generation in fiscal year 2026, with a conversion rate of adjusted net income targeted at approximately 150%. This represents a significant step change from the previous 100% target, underscoring the highly cash-generative nature of CAE's business.

Capital expenditures for fiscal year 2026 are expected to be modestly lower than fiscal year 2025's $356.2 million, concentrated mainly on organic growth investments in simulator capacity that are backed by multi-year customer contracts. CAE maintains a disciplined approach to capital deployment, ensuring investments are "in lockstep with the market" and not on speculation. These organic growth investments typically yield high returns, averaging 20% to 30% pre-tax incremental return on capital employed.

Regarding shareholder returns, CAE has a buyback program in place for opportunistic use and is "giving thoughtful consideration to the potential timing and form of shareholder returns, including dividends and share repurchases," with a potential reinstatement of a dividend at the "appropriate time."

Risks and Challenges

While CAE's long-term outlook is compelling, several risks and challenges warrant investor attention. Macroeconomic uncertainty and ongoing aircraft supply constraints continue to impact the Civil Aviation segment, particularly affecting pilot hiring and simulator deliveries. The ramp-up of commercial aircraft deliveries has taken longer than expected, creating near-term pressure on incremental training demand.

Competitive pressures are inherent in the aerospace and defense industries, with CAE facing competition from other simulation and training providers, as well as alternative training methods. Maintaining technological leadership requires continuous investment in research and development. Regulatory changes in heavily regulated industries like aerospace and defense could also impact CAE's business.

Operational and strategic risks include potential project delays or cost overruns, particularly in large defense contracts, and the successful integration of strategic initiatives. Fluctuations in foreign exchange rates can also impact earnings due to CAE's global operations. However, CAE's diversification across civil aviation and defense, along with its focus on technological innovation and strategic partnerships, serves as a mitigation strategy against these risks.

Conclusion

CAE Inc. is a compelling investment story, firmly positioned as a global leader in critical training and simulation. Its dual-engine business model, spanning civil aviation and defense, is underpinned by secular growth trends: the doubling of the global aircraft fleet, the persistent demand for new pilots, and a generational upcycle in global defense spending. The company's proprietary technology, exemplified by its advanced simulation platforms, Flightscape digital solutions, and innovative applications like the Apple Vision Pro app, provides a significant competitive moat, driving efficiency, accelerating readiness, and enhancing operational performance for its diverse customer base.

Despite facing temporary headwinds in civil aviation, primarily from OEM supply chain constraints and a pause in U.S. pilot hiring, CAE's long-term fundamentals remain robust, with a clear path to recovery in the second half of fiscal year 2026. The Defense segment, benefiting from a strategic shift to higher-margin contracts and strong global demand, is poised for continued growth and margin expansion. With a renewed leadership team focused on operational excellence, disciplined capital allocation, and an aggressive deleveraging target of 2.5x net debt to adjusted EBITDA by fiscal year-end 2026, CAE is strategically reinforcing its financial position. This commitment to robust free cash flow generation and capital efficiency, coupled with its technological leadership and strong competitive positioning, underscores CAE's potential for sustained value creation for shareholders.