engfullreport0525201517h.htm - Generated by SEC Publisher for SEC Filing

Table of Contents
Management’s Discussion and Analysis
1.	HIGHLIGHTS	1
2.	INTRODUCTION	3
3.	ABOUT CAE 3.1 Who we are 3.2 Our vision	5 5 5
	3.3 Our strategy 3.4 Our operations 3.5 Foreign exchange 3.6 Non-GAAP and other financial measures	5 5 10 12
4.	CONSOLIDATED RESULTS 4.1 Results from operations – fourth quarter of fiscal 2015 4.2 Results from operations – fiscal 2015	14 14 16
	4.3 Results from discontinued operations	17
	4.4 Consolidated orders and total backlog	18
5.	RESULTS BY SEGMENT 5.1 Civil Aviation Training Solutions 5.2 Defence and Security 5.3 Healthcare	19 20 22 24
6.	CONSOLIDATED CASH MOVEMENTS AND LIQUIDITY 6.1 Consolidated cash movements 6.2 Sources of liquidity 6.3 Government assistance 6.4 Contractual obligations	26 26 27 28 28
7.	CONSOLIDATED FINANCIAL POSITION 7.1 Consolidated capital employed 7.2 Off balance sheet arrangements 7.3 Financial instruments	29 29 31 31
8.	BUSINESS RISK AND UNCERTAINTY 8.1 Risks relating to the industry 8.2 Risks relating to the Company 8.3 Risks relating to the market	34 34 36 38
9.	RELATED PARTY TRANSACTIONS	39
10.	CHANGES IN ACCOUNTING POLICIES 10.1 Changes in accounting policies 10.2 New and amended standards adopted 10.3 New and amended standards not yet adopted 10.4 Use of judgements, estimates and assumptions	40 40 40 40 40
11.	CONTROLS AND PROCEDURES 11.1 Evaluation of disclosure controls and procedures 11.2 Internal control over financial reporting	42 42 42
12.	OVERSIGHT ROLE OF AUDIT COMMITTEE AND BOARD OF DIRECTORS	42
13.	ADDITIONAL INFORMATION	42
14.	SELECTED FINANCIAL INFORMATION	43
Consolidated Financial Statements		45

Management’s Discussion and Analysis

for the fourth quarter and year ended March 31, 2015

1. HIGHLIGHTS

FINANCIAL

FOURTH QUARTER OF FISCAL 2015

Revenue from continuing operations higher compared to last quarter and the fourth quarter of fiscal 2014

- Consolidated revenue from continuing operations was $631.6 million this quarter, $72.5 million or 13% higher than last quarter and $55.9 million or 10% higher than the fourth quarter of fiscal 2014.

Net income attributable to equity holders of the Company from continuing operations higher compared to last quarter and the fourth quarter of fiscal 2014

- Net income attributable to equity holders of the Company from continuing operations was $63.3 million (or $0.24 per share) this quarter, compared to $52.1 million (or $0.20 per share) last quarter, representing an increase of $11.2 million or 21%, and compared to $59.9 million (or $0.23 per share) in the fourth quarter of last year, representing an increase of $3.4 million or 6%;

- Net income attributable to equity holders of the Company included earnings from discontinued operations this quarter of
$0.8 million (or nil per share) compared to $0.9 million (or nil per share) last quarter and $0.1 million (or nil per share) in the fourth quarter of fiscal 2014.

Positive free cash flow^[1] from continuing operations at $142.2 million this quarter

- Net cash provided by continuing operating activities was $101.1 million this quarter, compared to $82.0 million last quarter and $98.4 million in the fourth quarter of last year;

- Maintenance capital expenditures¹ and other asset expenditures were $16.7 million this quarter, $9.9 million last quarter and $20.4 million in the fourth quarter of last year;

- Proceeds from the disposal of property, plant and equipment were $6.1 million this quarter, $0.6 million last quarter and
$8.5 million in the fourth quarter of last year;

- Cash dividends were $12.0 million this quarter, $12.0 million last quarter and $9.9 million in the fourth quarter of last year.

FISCAL 2015

Higher revenue from continuing operations compared to fiscal 2014

- Consolidated revenue from continuing operations was $2,246.3 million, $168.4 million or 8% higher than last year.

Higher net income attributable to equity holders of the Company from continuing operations

- Net income attributable to equity holders of the Company from continuing operations was $201.2 million (or $0.76 per share) compared to $188.3 million (or $0.72 per share) last year, representing a $12.9 million or 7% increase;

- Net income attributable to equity holders of the Company included earnings from discontinued operations of $0.6 million (or nil per share) compared to $1.7 million (or $0.01 per share) last year.

Positive free cash flow from continuing operations at $174.2 million

- Net cash provided by continuing operating activities was $337.8 million this year, compared to $296.3 million last year;

- Maintenance capital expenditures and other asset expenditures were $64.3 million this year, compared to $69.9 million last year;

- Dividends received from equity accounted investees were $8.9 million this year, compared to $15.0 million last year;

- Proceeds from the disposal of property, plant and equipment were $7.6 million this year, compared to $15.4 million last year;

- Cash dividends were $46.3 million this year, compared to $40.1 million last year.

Capital employed¹ ending at $2,613.5 million

- Capital employed increased by $275.1 million or 12% this year;

- Return on capital employed¹(ROCE) was 10.4% this year compared to 11.4% last year;

- Non-cash working capital¹ increased by $77.1 million in fiscal 2015, ending at $201.7 million;

- Net assets held for sale were $47.0 million this year;

- Property, plant and equipment increased by $120.0 million;

- Other long-term assets and other long-term liabilities increased by $88.5 million and $57.5 million respectively;

- Net debt¹increased by $93.4 million this year, ending at $949.6 million.

[1] Non-GAAP and other financial measures (see Section 3.6).

CAE Annual Report 2015 | 1

2 Non-GAAP and other financial measures (see Section 3.6).

Management’s Discussion and Analysis

ABOUT MATERIAL INFORMATION

This report includes the information we believe is material to investors after considering all circumstances, including potential market sensitivity. We consider something to be material if:

- It results in, or would reasonably be expected to result in, a significant change in the market price or value of our shares, or;

- It is quite likely that a reasonable investor would consider the information to be important in making an investment decision.

CAUTION REGARDING FORWARD-LOOKING STATEMENTS

This report includes forward-looking statements about our activities, events and developments that we expect to or anticipate may occur in the future including, for example, statements about our vision, strategies, market trends and outlook, future revenues, capital spending, expansions and new initiatives, financial obligations and expected sales. Forward-looking statements normally contain words like believe, expect, anticipate, plan, intend, continue, estimate, may, will, should, strategy, future and similar expressions. By their nature, forward-looking statements require us to make assumptions and are subject to inherent risks and uncertainties associated with our business which may cause actual results in future periods to differ materially from results indicated in
forward-looking statements. While these statements are based on management’s expectations and assumptions regarding historical trends, current conditions and expected future developments, as well as other factors that we believe are reasonable and appropriate in the circumstances, readers are cautioned not to place undue reliance on these forward-looking statements as there is a risk that they may not be accurate.

Important risks that could cause such differences include, but are not limited to, risks relating to the industry such as competition, level and timing of defence spending, government-funded defence and security programs, constraints within the civil aviation industry, regulatory rules and compliance, risks relating to CAE such as product evolution, R&D activities, fixed-price and long-term supply contracts, procurement and original equipment manufacturer (OEM) leverage, warranty or other product-related claims, product integration, protection of our intellectual property, third-party intellectual property, loss of key personnel, environmental liabilities, claims arising from casualty losses, integration of acquired businesses, our ability to penetrate new markets, information technology systems, length of sales cycle and our reliance on technology and third-party providers, and risks relating to the market such as foreign exchange, political instability, availability of capital, pension plan funding, doing business in foreign countries and income tax laws. Additionally, differences could arise because of events announced or completed after the date of this report. You will find more information in the Business risk and uncertainty section of the MD&A. We caution readers that the risks described above are not necessarily the only ones we face; additional risks and uncertainties that are presently unknown to us or that we may currently deem immaterial may adversely affect our business.

Except as required by law, we disclaim any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. The forward-looking information and statements contained in this report are expressly qualified by this cautionary statement.

4 | CAE Annual Report 2015

Management’s Discussion and Analysis

3. ABOUT CAE

3.1 Who we are

CAE is a global leader in delivery of training for the civil aviation, defence and security, and healthcare markets. We design and integrate the industry’s most comprehensive training solutions, anchored by the knowledge and expertise of our 8,000 employees, our world-leading simulation technologies and a record of service and technology innovation spanning nearly seven decades. Our global presence is the broadest in the industry, with 160 sites and training locations in 35 countries, including our joint venture operations, and the world’s largest installed base of flight simulators. Each year, we train more than 120,000 civil and defence crewmembers and thousands of healthcare professionals worldwide.

CAE’s common shares are listed on the Toronto and New York stock exchanges under the symbol CAE.

3.2 Our vision

Our vision is to be the recognized global training partner of choice to enhance safety, efficiency and readiness.

3.3 Our strategy

We address the imperatives of safety, efficiency and readiness for customers in our three markets: civil aviation, defence and security, and healthcare.

We want to sustain our leadership position by consistently delivering best-in-class customer experience and innovation supporting our position as the recognized global training partner of choice for our customers. Our key differentiators include our unique ability to provide comprehensive solutions, our established credibility as a training systems integrator, our technology leadership, our proven customer support, the strength of our brand and our vast global presence that we will continue to build on through continuous service and product innovation.

We prioritize the maintenance of a strong financial base and capital allocation discipline. Uses of capital include selective growth investments in support of our long-term customer relationships and our vision in training.

3.4 Our operations

We provide integrated training solutions to three markets globally:

- The civil aviation market includes aircraft manufacturers, major commercial airlines, regional airlines, business aircraft operators, civil helicopter operators, third-party training centres, flight training organizations (FTOs), maintenance repair and overhaul organizations (MROs) and aircraft finance leasing companies;

- The defence and security market includes defence forces, OEMs, government agencies and public safety organizations worldwide;

- The healthcare market includes hospital and university simulation centres, medical and nursing schools, paramedic organizations, defence forces, medical societies and OEMs.

CIVIL AVIATION MARKET

We provide comprehensive training solutions for flight, cabin, maintenance and ground personnel in commercial, business and helicopter aviation, a complete range of flight simulation training devices, as well as ab initio pilot training and crew sourcing services.

We are the largest provider of commercial and helicopter aviation training services in the world and the second largest provider of business aviation training services. We are well established in North America and Western Europe, and lead the market in the high-growth regions of China, Eastern Europe, India, the Middle East, South America and Southeast Asia. Through our broad global network of training centres, we serve all sectors of civil aviation including airlines and other commercial, business and helicopter aviation operators. Our comprehensive training solutions, deep industry expertise and credibility, installed base, strong relationships and reputation as a trusted partner enable us to access a broader share of the market than any company in our industry.

We provide aviation training and services in approximately 30 countries. Among our thousands of customers, we have long-term training centre operations and training services agreements and joint ventures with approximately 30 major airlines and aircraft operators around the world. Our range of training solutions includes products and services offerings for pilot, cabin crew and aircraft maintenance technician training, training centre operations, curriculum development, courseware solutions and consulting services. We currently operate 256 FFSs, including FFSs operating in our joint ventures. We offer industry-leading technology with a full solution capability to integrate flight data and simulator data to better understand the performance of trainees. CAE operates the largest ab initio flight training network in the world with 9 academies, a fleet of over 170 aircraft and the resources and expertise to train up to 2,000 cadets annually. CAE Parc Aviation is the global market leader in the provision of flight crew and technical personnel to airlines, aircraft leasing companies, manufacturers and MRO companies worldwide.

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Management’s Discussion and Analysis

We are the world leader in the development of civil flight simulation equipment, including FFSs and a comprehensive suite of integrated procedures trainers, flight training devices and training tools such as software, courses and training aids, using the same high-fidelity Level D software as the FFSs. We are the market leader in the design and manufacture of civil FFSs for major and regional commercial airlines, third-party training centres and OEMs. We have established a wealth of experience in developing first-to-market simulators for more than 35 types of aircraft models including the recent development of simulators for the Airbus A350 XWB, A320Neo, Cirrus SF50, Mitsubishi Regional Jet (MRJ), ATR42/72-600, Bombardier CSeries, Global 5000/6000 and Global 7000/8000, Dassault Falcon 5X and the Commercial Aircraft Corporation of China, Ltd (COMAC) ARJ21 and C919. Our flight simulation equipment, including FFSs, are designed to meet the rigorous demands of their intended long and active service lives, typically matching the in-service life of the underlying aircraft, which could span a number of decades. Quality, fidelity and reliability are hallmarks of the CAE brand in flight simulation. Leveraging our extensive worldwide network of spare parts and service teams, we also offer a full range of support services. This includes emergency support, simulator updates and upgrades, maintenance services and simulator relocations.

Market drivers

Demand for training solutions in the civil aviation market is driven by the following:

- Pilot certification regulations;

- Expected global growth in air travel;

- Demand for trained aviation professionals;

- Backlogs and delivery rates for new aircraft;

- Safety and efficiency imperatives of commercial airline operators.

Pilot certification regulations

Civil aviation is highly-regulated through global and national standards for pilot licensing and certification, amongst other regulatory requirements. Since training requirements are mandatory and recurring in nature, the primary demand for our training solutions is driven by the global active aircraft fleet which has grown by an average of 3.1% annually over the past 20 years and is widely expected to continue to grow in the range of 3.6% annually over the next two decades as a result of increasing emerging market and low-cost carrier demand and fleet replacement in established markets. From March 2014 to March 2015, the global commercial aircraft fleet increased by 4.3%, growing in Asia-Pacific, the Middle East, Latin America and Europe by 7.1%, 6.8%, 6.5% and 2.6% respectively and remaining fairly stable in North America.

New pilot certification processes and regulatory requirements drive more simulation-based training. Simulation-based pilot certification training is taking on a greater role internationally with the Multi-crew Pilot License (MPL), with stall and upset prevention and recovery training and with new Airline Transport Pilot (ATP) requirements in the U.S. Indeed, the International Civil Aviation Organization (ICAO) and various national and regional aviation regulatory agencies have published new regulatory requirements, standards and guidance on these specific topics.

The MPL is an alternative training and licensing methodology which we offer, in addition to the ATP licence. MPL places more emphasis on simulation-based training to develop ab initio students into First Officers of airliners in a specific airline environment. On average, current MPL programs in the industry consist of two thirds of the training in flight simulation training devices and the balance in actual aircraft, whereas traditional training for ab initio licences average 80% to 90% in actual trainer aircraft. Today, there are approximately 50 nations that have MPL regulations in place and over 15 of these nations already use these regulations with training providers and airlines. CAE delivers MPL programs in Asia and in Europe with various airlines. As the MPL methodology continues to gain momentum, it will result in increased use of simulation-based training.

In the U.S., the Federal Aviation Administration (FAA) enacted a final set of regulations in 2013 on new pilot certification and qualification requirements for air carrier operations, requiring pilots to obtain an ATP and aircraft specific Type Rating. Pilots applying for an ATP certificate must now complete practical requirements which call for more simulation-based training that includes adverse weather conditions, low energy states, stalls, upset prevention and recovery, and high altitude operations. We have received formal approval from the FAA to conduct the ATP Certification Training Program at our Dallas training centre and will expand as demand increases. The FAA has also announced new crew rest regulation requirements that will result in an increase of crew needs for airlines to sustain operations. We believe these new requirements will lead to an increase in demand for simulation-based training.

Expected global growth in air travel

Growth in air travel results in higher demand for flight, cabin, maintenance and ground personnel, which in turn drives demand for training solutions.

In commercial aviation, passenger traffic growth is primarily driven by gross domestic product (GDP). According to IHS Economics, global GDP is forecast to grow at 3.2% over the next 20 years, with emerging economies expected to grow at 5.2% per year, outpacing established economies like Europe and North America which will average 2.2% growth. Over the past 20 years, air travel has grown at an approximate average rate of 5% and the aerospace industry’s widely held expectation is that long-term average growth for air travel will continue at approximately 5% annually over the next two decades. In calendar 2014, global passenger traffic increased by 5.9% compared to calendar 2013. For the first three months of calendar 2015, passenger traffic increased by 6.1% compared to the first three months of calendar 2014. Emerging markets continued to outperform with passenger traffic in the Asia, the Middle East and Latin America growing at 9.0%, 8.6% and 6.2% respectively, while Europe and North America increased 5.0% and 3.0% respectively.

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Management’s Discussion and Analysis

According to the U.S. FAA, the total number of business jet flights, which includes all domestic and international flights, increased by 3.3% over the past 12 months. Further recovery and long-term growth in business aircraft travel will be driven by higher corporate profitability and economic growth. In helicopter aviation, market drivers are similar to those in business aviation, and in the case of offshore helicopter operators, demand is driven by the level of offshore activity in the oil and gas sector. A protracted downturn in petroleum prices could negatively impact offshore activity.

Potential impediments to steady growth in air travel include major disruptions such as regional political instability, acts of terrorism, pandemics, natural disasters, prolonged economic recessions or other major world events.

Demand for trained aviation professionals

Demand for aviation professionals is driven by air traffic growth, pilot retirements and by the number of aircraft deliveries. The expansion of global economies and airline fleets have resulted in a shortage of qualified personnel needed to fulfil this growing capacity. Pilot supply constraints include aging crew demographics and fewer military pilots transferring to civil airlines. The Professional Aviation Board of Certification (PABC) reports that according to industry market estimates, approximately 20,000 new pilots will be needed per year over the next 20 years globally to support the average 5% annual growth in passenger travel. In support of this growth, the aviation industry will require innovative solutions to match the learning requirements of a new generation, leading to an increase in demand for simulation-based training services and products.

Backlogs and delivery rates for new aircraft

Commercial aircraft OEMs continue to work through record backlog levels of over 14,000 aircraft. We expect the continued high rate of aircraft deliveries to translate into continued high demand for training products and incremental demand for services. Much of this backlog consists of technologically advanced aircraft platforms, which in turn drive demand for new types of training solutions and simulator training devices. These new platforms and programs allow us to leverage our technology leadership and expertise to deliver training solutions, including CAE 7000XR Series FFS, CAE Simfinity^TM procedures trainers, comprehensive training programs and expansion of our network to meet airlines’ training needs.

Business jet OEMs have announced plans to introduce a variety of new aircraft models incorporating the latest technologies to enhance performance and operator benefits such as range, speed, efficiency, comfort and the accessibility of business air travel. Examples include Bombardier’s Global 7000/8000, Embraer’s Legacy 450 and 500, Cessna’s Citation Latitude and Longitude, Dassault’s Falcon 5X, Gulfstream’s 500/600, Cirrus’ SF50, Pilatus’ PC-24 and Honda’s HondaJet.

Deliveries of new-model aircraft drive demand for training services and products; however, they may be subject to program delays, which in turn may affect the timing of FFS orders and deliveries.

Safety and efficiency imperatives of commercial airline operators

The commercial airline industry is competitive, requiring operators to continuously pursue operational excellence and efficiency initiatives in order to achieve adequate returns while continuing to maintain the highest safety standards and the confidence of air travelers. Airlines are finding it increasingly more effective to seek expertise in training from trusted partners such as CAE to address growing efficiency gaps around capability, capacity gaps of pilots, changing regulatory environment, the large number of new aircraft programs being executed and in addressing the rapid evolution of the training environment. Partnering with a training provider like CAE gives airlines immediate access to a world-wide fleet of simulators, courses, programs and instruction capabilities, and allows them flexibility in pursuing aircraft fleet options that suit their business.

DEFENCE AND SECURITY MARKET

We are a training systems integrator for defence forces across the air, land and sea domains, and for government and civil security organizations responsible for public safety.

We are a global leader in the development and delivery of integrated virtual flight training solutions for defence forces. Our expertise spans a broad variety of aircraft, including fighters, helicopters, trainer aircraft, maritime patrol, tanker/transport aircraft and unmanned aerial systems (UAS). We also offer virtual training solutions for land and naval forces, including a range of driver, gunnery and maintenance trainers for tanks and armoured fighting vehicles, constructive simulation for command and staff training, and naval warfare tactical training systems. We offer virtual training solutions for government and civil security organizations, including for emergency and disaster management.

We are uniquely positioned as a training systems integrator, capable of offering our customers a comprehensive range of innovative solutions, ranging from pilot training to immersive, networked mission rehearsal. Our solutions typically include a combination of training services, products and software tools designed to cost-effectively maintain and enhance safety, efficiency, mission readiness and decision-making capabilities. We have a wealth of experience delivering and operating training solutions across different business models, including government-owned, government-operated; government-owned, contractor-operated; or contractor-owned, contractor-operated facilities. Our offerings include training needs analysis, instructional systems design, learning management information systems, purpose-built facilities, state-of-the-art synthetic training equipment, curriculum and courseware development, classroom and simulator instruction, maintenance and logistics support, lifecycle support and technology insertion, and financing alternatives.

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Management’s Discussion and Analysis

We have delivered simulation products and training systems to more than 50 defence forces in approximately 35 countries. We provide training support services such as contractor logistics support, maintenance services, classroom instruction and simulator training at over 80 sites around the world, including our joint venture operations. Increasingly, we are offering our training systems integration expertise across air, land, sea and public safety to help our customers create an integrated, immersive training enterprise. We also offer a variety of modeling and simulation-based professional services, and a range of in-service support solutions such as systems engineering and lifecycle management.

Market drivers

Demand for training solutions in the defence and security markets is driven by the following:

- Installed base of enduring defence platforms and new customers;

- Explicit desire of governments and defence forces to increase the use of synthetic training to mitigate budget pressures;

- Attractiveness of outsourcing of training and maintenance services;

- Need for synthetic training to conduct mission rehearsal, including joint and coalition forces training;

- Relationships with OEMs for simulation and training;

- Use of modeling and simulation for analysis and decision support.

Installed base of enduring defence platforms and new customers

With defence budgets under pressure, particularly in mature markets such as the United States and Europe, military forces are being required to maximize use of their existing platforms. Upgrades, updates, and life extension programs allow defence forces to leverage existing assets while creating a range of opportunities for simulator upgrades and training support services. Enduring platforms, such as the C-130J Hercules transport aircraft that is operated by more than 60 nations, provide a solid installed base from which to generate business. Because of our extensive installed base of simulators worldwide, and our experience on key enduring platforms, CAE is well-positioned for recurring product upgrades/updates as well as maintenance and support services.

While the mature western markets face budget pressures, other regions of the world are taking advantage of the opportunity to acquire western technologies to modernize and re-equip their defence forces. There are increased opportunities originating from regions with growing defence and security budgets, such as Asia and the Middle East. Many of the opportunities originating from these regions relate to enduring platforms where CAE has significant experience, including the C-130J Hercules transport aircraft,
P-8A maritime patrol aircraft, and a range of helicopter platforms.

Explicit desire of governments and defence forces to increase the use of synthetic training to mitigate budget pressures

More defence forces and governments are adopting synthetic training because it improves training effectiveness, reduces operational demands on aircraft, lowers risk compared to operating actual weapon system platforms and significantly lowers costs. Synthetic training offers defence forces a cost-effective way to provide realistic training for a wide variety of scenarios while ensuring they maintain a high state of readiness. For example, the U.S. Air Force (USAF) is making more extensive use of simulation for
KC-135 tanker boom operator training, which costs approximately $20,000 for a three-hour training mission in the actual aircraft, but only $1,000 for that same three-hour training mission in simulators. The higher cost of live training and the desire to save aircraft for operational use are two factors prompting a greater adoption of synthetic training. Unlike civil aviation, where the use of simulators for training is common practice, there are no regulatory requirements for defence forces to use synthetic training. The nature of
mission-focused training demands at least some live training; however, the shift to more synthetic training is well underway. The U.S. Navy reports the share of simulation-based training on some of their aircraft platforms could increase to nearly 50% by 2020. Because of the high cost associated with conducting live training exercises, most defence forces are beginning to rebalance the mix of live, virtual and constructive (computer-based) training and shift more of the training curriculum to virtual and constructive simulation. The U.S. Army is planning to reduce the use of live training ranges and transfer some of this training to virtual and constructive simulation to reduce costs, creating opportunities for simulation-based training centres, services and products.

In the United States, continuing uncertainty in the government’s fiscal year budget and the threat of sequestration mean that the timing of contract awards will continue to be difficult to predict as the U.S. military services work to achieve the right balance in military capacity, capabilities and readiness. This may impact our ability to grow revenue and income in the short term; however, our active bids and proposals pipeline is robust and our view is that the impediment to growth is not the size of the market, but rather the timing of procurements. In Europe, force structure reductions and reduced future investment plans may have narrowed the pipeline of new opportunities, but the increased adoption of simulation-based training is helping offset smaller forces and fewer new platforms.

Attractiveness of outsourcing of training and maintenance services

Defence forces and governments continue to manage expenditures to find ways to reduce costs and allow active-duty personnel to focus on operational requirements, which has an impact on defence budgets and resources. There has been a growing trend among defence forces to consider outsourcing a variety of training services and we expect this trend to continue. We believe governments will increasingly look to industry for training solutions to achieve faster delivery and mission readiness more cost effectively and, in specific cases, at a lower capital investment. For example, in 2014 we delivered the first two of six new flight training devices that will support comprehensive T-44C aircrew training services for the U.S. Navy and Marine Corps. These deliveries are part of a long-term contract for CAE to provide T-44C aircrew training services under a contractor-owned, contractor-operated training services program, which is one of the first of its kind in the United States. We believe this type of training service delivery program will become increasingly attractive to defence forces globally.

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Management’s Discussion and Analysis

Need for synthetic training to conduct mission rehearsal, including joint and coalition forces training

There is a growing trend among defence forces to use synthetic training to meet more of their mission training requirements. Simulation technology solutions enable defence customers to plan sophisticated missions and carry out full-mission rehearsals in a synthetic environment as a complement to traditional live training or mission preparation. Allies are cooperating and creating joint and coalition forces, which are driving the demand for networked training and operations. Training devices that can be networked to train different crews and allow for networked training across a range of platforms are increasingly important as the desire to conduct mission rehearsal exercises in a synthetic environment increases. For example, the Royal Canadian Air Force (RCAF) recently released its Simulation Strategy 2025, which specifically calls for leveraging live, virtual, and constructive (LVC) domains within a networked common synthetic environment. The RCAF is transforming its training system from one that relies on aircraft to one that exploits new technologies to train aviators in a simulation-focused system that creates a virtual battlespace. We are actively promoting open, standard simulation architectures, such as the Common Database, as well as new capabilities such as the CAE Dynamic Synthetic Environment, to better enable mission rehearsal and joint, networked training.

Relationships with OEMs for simulation and training

We partner with manufacturers in the defence and security market to strengthen relationships and position for future opportunities. OEMs have introduced new platforms and continue to upgrade and extend the life of existing platforms, which drives worldwide demand for training systems. For example, Boeing has developed the new P-8A maritime patrol aircraft, Airbus Military has sold and continues to market both the A330 MRTT and C295 globally, Lockheed Martin is successfully marketing variants of the C-130J Hercules transport aircraft and F-35 fighter, Alenia Aermacchi and BAE Systems are selling the M-346 and Hawk lead-in fighter trainers, and AgustaWestland is continuing to develop a range of helicopters such as the AW139, AW169 and AW189. We have established relationships with each of the OEMs on these platforms. We also signed a memorandum of understanding with General Atomics Aeronautical Systems, the world’s leading UAS manufacturer, to offer training solutions for GA-ASI’s Predator family of remotely piloted aircraft.

Use of modeling and simulation for analysis and decision support

Traditionally, modeling and simulation have been used to support training, but is now increasingly applied across the program lifecycle, including support for analysis and decision-making operations. We see governments and defence forces looking to use simulation-based synthetic environments to support research and development programs, system design and testing, intelligence analysis, integration and exploitation, and to provide the decision support tools necessary to support mission planning in operations.

HEALTHCARE MARKET

We design, manufacture and market simulators, simulation centre management solutions and courseware for training of medical and allied healthcare students and clinicians in educational institutions, hospitals and defence organizations worldwide.

Simulation-based training is one of the most effective approaches to prepare healthcare practitioners to care for patients and respond to critical situations while reducing the overall risk to patients. We are leveraging our experience and best practices in simulation-based aviation training to deliver innovative solutions to improve the safety and efficiency of this industry. The healthcare simulation market is growing rapidly, with simulation centres becoming the standard in nursing and medical schools.

We offer the broadest range of medical simulation products and services in the market today, including patient, ultrasound and interventional (surgical) simulators, simulation centre management solutions and courseware for healthcare education and training. We have sold simulators to customers in more than 80 countries that are currently supported by our network in Australia, Brazil, Canada, Germany, Hungary, India, Singapore, U.K. and U.S. We lead the market in high-fidelity patient simulators that are uniquely powered by complex models of human physiology to mimic human responses to clinical interventions. Our newest innovation, a childbirth simulator for both normal labor and delivery and rare maternal emergencies, was designed to offer exceptional reliability and realism in the high-fidelity patient simulation market. Our offerings include ongoing service and support, such as simulation centre management solutions for healthcare training, where we are a market leader. Through our Healthcare Academy, we are the only company to deliver peer-to-peer training at customer sites and in our training centres in the U.S., U.K., Germany and Canada. Our Healthcare Academy includes more than 50 adjunct faculty consisting of nurses, physicians, paramedics and sonographers who, in collaboration with leading healthcare institutions, have developed more than 500 Simulated Clinical Experience (SCE) courseware packages for our customers. Our OEM team delivers custom training solutions for medical manufacturers, and most recently, developed a specialized interventional simulator to train physicians to place the new AbioMed Impella heart pump under ultrasound and fluoroscopy guidance.

Market drivers

Demand for our simulation products and services in the healthcare market is driven by the following:

- Increasing use of simulation in healthcare;

- Growing emphasis on patient safety and outcomes;

- Limited access to live patients during training;

- Medical technology revolution.

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Management’s Discussion and Analysis

Increasing use of simulation in healthcare

A recent study of the global healthcare simulation market, which includes products and services, valued the market at approximately $860 million in 2014 and reports that it is predicted to grow at a compound annual growth rate of 19.1% from 2014 to 2019. North America is the largest market for healthcare simulation, followed by Europe and Asia-Pacific. The healthcare simulation market includes both products and services, which are segmented by high-fidelity patient simulators, interventional simulators, mid/low fidelity task trainers, ultrasound simulators, simulation centre management solutions, simulated clinical environments and training services. In the U.S., significant demand for healthcare services is driven by, among other factors, longer life expectancy and the baby boomer generation, resulting in higher healthcare spending. The U.S. Centers for Medicare and Medicaid Services (CMS) projects that annual national health spending will grow 5.8% annually over the next decade. Increasingly, hospitals are given incentives to become safer and more efficient which will drive higher demand for training. There is a growing body of evidence demonstrating that medical simulation improves patient outcomes and reduces medical errors, which can help mitigate the rate of increase in healthcare costs.

Growing emphasis on patient safety and outcomes

According to a recently published study in the Journal of Patient Safety, up to 440,000 deaths occur annually in the U.S. due to preventable adverse events during patient treatment, which would make such events the third leading cause of death annually. In a study by the International Society for Pharmacoeconomics and Outcomes Research, measurable medical errors cost U.S. hospitals more than $1 billion in 2009. Training through the use of simulation can help clinicians gain confidence, knowledge and expertise for improving patient safety in a risk-free environment. Simulation is a required element in a growing movement towards High Stakes Assessment and Certification. Examples in the U.S. include the Maintenance of Certification in Anesthesia (MOCA), Fundamentals of Laparoscopic Surgery (FLS) and Advanced Trauma Life Support (ATLS). Moreover, the Accreditation Council for Graduate Medical Education (ACGME) is evolving towards outcome-based assessment with specific benchmarks to measure and compare performance which favours the adoption of simulation products and training.

Limited access to live patients during training

Traditionally, medical education has been an apprenticeship model in which the student cares for patients under the supervision of more experienced staff. In this model, students have a limited role and access to high-risk procedures, rare complications and critical decision-making skills. The use of simulation in professional education programs complements traditional learning and allows students exposure and practice to hone their clinical and critical thinking skills for high risk, low frequency events. As an example, our Lucina Fidelis Maternal Fetal Simulator is designed to allow healthcare teams to practice both normal deliveries and complex procedures in rare emergencies. The training and education model is evolving, as evidenced by military branches around the world and most recently the U.S. Pentagon, prohibiting the use of live tissue testing in most medical training. CAE Healthcare simulators provide a low-risk alternative for practicing life-saving procedures, major disaster response and anaesthesia administration.

Medical technology revolution

Advancements in medical technology are driving the use of simulation. New medical devices and advanced procedures, such as Intra-Cardiac Echocardiography (ICE), cardiac assist devices, and mechanical ventilation enhancements, require advanced training solutions, such as simulation, for internal product development and customer training. Regulatory and certification agencies are increasingly stringent in requesting that clinicians be trained before adopting new disruptive technologies, an undertaking for which simulation is well suited. As a Partner of Choice with leading OEMs, we continue to collaborate to deliver innovative and custom training for new technologies, such as the AbioMed Impella heart pump.

3.5 Foreign exchange

We report all dollar amounts in Canadian dollars. We value assets, liabilities and transactions that are measured in foreign currencies using various exchange rates as required by IFRS.

The tables below show the variations of the closing and average exchange rates for our three main operating currencies.

We used the closing foreign exchange rates below to value our assets, liabilities and backlog in Canadian dollars at the end of each of the following periods:

			Increase /
	2015	2014	(decrease)
U.S. dollar (US$ or USD)	1.27	1.11	14%
Euro (€ or EUR)	1.36	1.52	(11%)
British pound (£ or GBP)	1.88	1.84	2%

We used the average foreign exchange rates below to value our revenues and expenses:

	2015	2014	Increase
U.S. dollar (US$ or USD)	1.14	1.05	9%
Euro (€ or EUR)	1.44	1.41	2%
British pound (£ or GBP)	1.83	1.68	9%

10 | CAE Annual Report 2015

Management’s Discussion and Analysis

For fiscal 2015, the effect of translating the results of our foreign operations into Canadian dollars resulted in an increase in revenue of $77.4 million and an increase in net income of $4.4 million, when compared to fiscal 2014. We calculated this by translating the current year’s foreign currency revenue and net income using the average monthly exchange rates from the previous year and comparing these adjusted amounts to our current year reported results.

Three areas of our business are affected by changes in foreign exchange rates:

- Our network of foreign training and services operations

Most of our foreign training and services revenue and costs are denominated in local currency. Changes in the value of local currencies relative to the Canadian dollar therefore have an impact on these operations’ net profitability and net investment. Gains or losses in the net investment in a foreign operation that result from changes in foreign exchange rates are deferred in the foreign currency translation account (accumulated other comprehensive income), which is part of the equity section of the consolidated statement of financial position. Any effect of the fluctuation between currencies on the net profitability has an immediate translation impact on the consolidated income statement and an impact on year-to-year and quarter-to-quarter comparisons.

- Our production operations outside of Canada (Australia, Germany, India, U.K. and U.S.)

Most of the revenue and costs in these foreign operations are generated in their local currency except for some data and equipment bought in different currencies from time to time, as well as any work performed by our Canadian manufacturing operations. Changes in the value of the local currency relative to the Canadian dollar have a translation impact on the operation’s net profitability and net investment when expressed in Canadian dollars, as described above.

- Our production operations in Canada

Although the net assets of our Canadian operations are not exposed to changes in the value of foreign currencies (except for cash balances, receivables and payables in foreign currencies), a significant portion of our annual revenue generated in Canada is in foreign currencies (mostly U.S. dollar and Euro), while a significant portion of our expenses are in Canadian dollars.

We generally hedge the milestone payments of sales contracts denominated in foreign currencies to mitigate some of the foreign exchange exposure.

To this effect, we continue to hold a portfolio of currency hedging positions intended to mitigate the risk to a portion of future revenues presented by the volatility of the Canadian dollar versus foreign currencies. The hedges are intended to cover a portion of the revenue in order to allow the unhedged portion to match the foreign cost component of the contract. Since not all of our revenue is hedged, it is not possible to completely offset the effects of changing foreign currency values, which leaves some residual exposure that can affect the consolidated income statement. This residual exposure may be higher when currencies experience significant short term volatility. With respect to the remaining expected future revenues, our operations in Canada remain exposed to changes in the value of the Canadian dollar.

In order to reduce the variability of specific British pound and Euro-denominated costs, we also hedge some of the foreign currency costs incurred in our manufacturing process.

Sensitivity analysis

We conducted a sensitivity analysis to determine the current impact of variations in the value of foreign currencies. For the purposes of this sensitivity analysis, we evaluated the sources of foreign currency revenues and expenses and determined that our consolidated exposure to foreign currency mainly occurs in two areas:

- Foreign currency revenues and expenses in Canada for our manufacturing activities – we hedge a portion of these exposures;

- Translation of foreign currency of operations in foreign countries. Our exposure is mainly in our operating profit.

First we calculated the revenue and expenses per currency from our Canadian operations to determine the operating profit in each currency. Then we deducted the amount of hedged revenues to determine a net exposure by currency. Next we added the net exposure from foreign operations to determine the consolidated foreign exchange exposure in different currencies.

Finally, we conducted a sensitivity analysis to determine the impact of a weakening of one cent in the Canadian dollar against each of the other three currencies. The table below shows the expected impact of this change on our annual revenue and operating profit, after taxes, as well as our net exposure:

					Operating				Net
Exposure	(amounts in millions)		Revenue		Profit		Hedging		Exposure
U.S. dollar (US$ or USD)		$	11.5	$	3.1	$	(2.5)	$	0.6
Euro (€ or EUR)			3.4		0.4		(0.2)		0.2
British pound (£ or GBP)			1.5		0.1		(0.1)		0.0

A possible strengthening of one cent in the Canadian dollar would have the opposite impact.

CAE Annual Report 2015 | 11

Management’s Discussion and Analysis

3.6 Non-GAAP and other financial measures

This MD&A includes non-GAAP and other financial measures. Non-GAAP measures are useful supplemental information but may not have a standardized meaning according to GAAP. You should not confuse this information with, or use it as an alternative for, performance measures calculated according to GAAP. You should also not use them to compare with similar measures from other companies.

Backlog

Obligated backlog is a non-GAAP measure that represents the expected value of orders we have received but have not yet executed.

- For the Civil Aviation Training Solutions segment, we consider an item part of our obligated backlog when we have a legally binding commercial agreement with a client that includes enough detail about each party’s obligations to form the basis for a contract or an order and includes the value of expected future revenues. Revenues from customers with both long-term and short-term training contracts are included when these customers commit to pay us training fees, or when we reasonably expect the revenue to be generated;

- For the Defence and Security segment, we consider an item part of our obligated backlog when we have a legally binding commercial agreement with a client that includes enough detail about each party’s obligations to form the basis for a contract or an order. Defence and Security contracts are usually executed over a long-term period and some of them must be renewed each year. For this segment, we only include a contract item in obligated backlog when the customer has authorized the contract item and has received funding for it;

- For the Healthcare segment, order intake is typically converted into revenue within one year, therefore we assume that order intake is equal to revenue and consequently, backlog is nil.

Joint venture backlog is obligated backlog that represents the expected value of our share of orders that our joint ventures have received but have not yet executed. Joint venture backlog is determined on the same basis as obligated backlog described above.

Unfunded backlog is a non-GAAP measure that represents firm Defence and Security orders we have received but have not yet executed and for which funding authorization has not yet been obtained. We include unexercised negotiated options which we view as having a high probability of being exercised, but exclude indefinite-delivery/indefinite-quantity (IDIQ) contracts.

Total backlog includes obligated backlog, joint venture backlog and unfunded backlog.

The book-to-sales ratio is the total orders divided by total revenue in a given period.

Capital employed

Capital employed is a non-GAAP measure we use to evaluate and monitor how much we are investing in our business. We measure it from two perspectives:

Capital used:

- For the company as a whole, we take total assets (not including cash and cash equivalents), and subtract total liabilities (not including long-term debt and the current portion of long-term debt);

- For each segment, we take the total assets (not including cash and cash equivalents, tax accounts and other non-operating assets), and subtract total liabilities (not including tax accounts, long-term debt and the current portion of long-term debt, royalty obligations, employee benefits obligations and other non-operating liabilities).

Source of capital:

- In order to understand our source of capital, we add net debt to total equity.

Capital expenditures (maintenance and growth) from property, plant and equipment

Maintenance capital expenditure is a non-GAAP measure we use to calculate the investment needed to sustain the current level of economic activity.

Growth capital expenditure is a non-GAAP measure we use to calculate the investment needed to increase the current level of economic activity.

Free cash flow

Free cash flow is a non-GAAP measure that shows us how much cash we have available to invest in growth opportunities, repay debt and meet ongoing financial obligations. We use it as an indicator of our financial strength and liquidity. We calculate it by taking the net cash generated by our continuing operating activities, subtracting maintenance capital expenditures, investment in other assets not related to growth and dividends paid and adding proceeds from the disposal of property, plant and equipment, dividends received from equity accounted investees and proceeds, net of payments, from equity accounted investees.

Gross profit

Gross profit is a non-GAAP measure equivalent to the operating profit from continuing operations excluding research and development expenses, selling, general and administrative expenses, other (gains) losses – net and after tax share in profit of equity accounted investees.

12 | CAE Annual Report 2015

Management’s Discussion and Analysis

Net debt

Net debt is a non-GAAP measure we use to monitor how much debt we have after taking into account liquid assets such as cash and cash equivalents. We use it as an indicator of our overall financial position, and calculate it by taking our total long-term debt, including the current portion of long-term debt, and subtracting cash and cash equivalents.

Net debt-to-capital is calculated as net debt divided by the sum of total equity plus net debt.

Non-cash working capital

Non-cash working capital is a non-GAAP measure we use to monitor how much money we have committed in the day-to-day operation of our business. We calculate it by taking current assets (not including cash and cash equivalents and assets held for sale) and subtracting current liabilities (not including the current portion of long-term debt and liabilities related to assets held for sale).

Operating profit

Operating profit is a non-GAAP measure that shows us how we have performed before the effects of certain financing decisions and tax structures. We track operating profit because we believe it makes it easier to compare our performance with previous periods, and with companies and industries that do not have the same capital structure or tax laws.

Research and development expenses

Research and development expenses are a financial measure we use to measure the amount of expenditures directly attributable to research and development activities that we have expensed during the period, net of investment tax credits and government contributions.

Return on capital employed

Return on capital employed (ROCE) is a non-GAAP measure we use to evaluate the profitability of our invested capital. We calculate this ratio over a rolling four-quarter period by taking net income attributable to equity holders of the Company excluding net finance expense, after tax, divided by the average capital employed.

Segment operating income

Segment operating income (SOI) is a non-GAAP measure and our key indicator of each segment’s financial performance. This measure gives us a good indication of the profitability of each segment because it does not include the impact of any items not specifically related to the segment’s performance. We calculate it by using segment operating profit, including the after tax share in profit of equity accounted investees and excluding net finance expense, income taxes and other items not specifically related to the segment’s performance.

Simulator equivalent unit

Simulator equivalent unit (SEU) is an operating measure we use to show the total average number of FFSs available to generate earnings during the period. For example, in the case of a 50/50 flight training joint venture, we will report only 50% of the FFSs deployed under this joint venture as a SEU. If a FFS is being powered down and relocated, it will not be included as a SEU until the FFS is re-installed and available to generate earnings.

Utilization rate

Utilization rate is an operating measure we use to assess the performance of our simulator training network. We calculate it by taking the number of training hours sold on our simulators during the period divided by the practical training capacity available for the same period.

CAE Annual Report 2015 | 13

Management’s Discussion and Analysis

4. CONSOLIDATED RESULTS [3]

4.1 Results from operations – fourth quarter of fiscal 2015

(amounts in millions, except per share amounts)			Q4-2015	Q3-2015	Q2-2015	Q1-2015	Q4-2014
Revenue		$	631.6	559.1	529.4	526.2	575.7
Cost of sales		$	449.6	410.1	393.2	389.7	415.7
Gross profit³		$	182.0	149.0	136.2	136.5	160.0
	As a % of revenue	%	*28.8*	26.6	25.7	25.9	27.8
Research and development expenses³		$	19.5	13.6	16.6	14.4	19.5
Selling, general and administrative expenses		$	69.4	70.8	60.5	63.9	70.0
Other gains – net		$	(5.6)	(10.7)	(0.2)	(3.8)	(8.1)
After tax share in profit of equity accounted investees		$	(6.7)	(7.6)	(13.5)	(9.7)	(8.1)
Operating profit from continuing operations³		$	105.4	82.9	72.8	71.7	86.7
	As a % of revenue	%	*16.7*	14.8	13.8	13.6	15.1
Finance income		$	(2.3)	(3.3)	(2.1)	(2.1)	(2.3)
Finance expense		$	20.6	21.1	20.4	18.6	18.7
Finance expense – net		$	18.3	17.8	18.3	16.5	16.4
Earnings before income taxes and discontinued operations		$	87.1	65.1	54.5	55.2	70.3
Income tax expense		$	20.2	13.1	12.9	11.6	10.5
	As a % of earnings before income taxes and
	discontinued operations (income tax rate)	%	23	20	24	21	15
Earnings from continuing operations		$	66.9	52.0	41.6	43.6	59.8
Earnings (loss) from discontinued operations		$	0.8	0.9	0.9	(2.0)	0.1
Net income		$	67.7	52.9	42.5	41.6	59.9
Attributable to:
Equity holders of the Company
	Continuing operations	$	63.3	52.1	42.0	43.8	59.9
	Discontinued operations	$	0.8	0.9	0.9	(2.0)	0.1
			64.1	53.0	42.9	41.8	60.0
Non-controlling interests		$	3.6	(0.1)	(0.4)	(0.2)	(0.1)
		$	67.7	52.9	42.5	41.6	59.9
Earnings per share (EPS) attributable to equity holders
of the Company
Basic and diluted - continuing operations		$	0.24	0.20	0.16	0.17	0.23
Basic and diluted - discontinued operations		$	-	-	-	(0.01)	-
		$	0.24	0.20	0.16	0.16	0.23

Revenue from continuing operations was 13% higher than last quarter and 10% higher compared to the fourth quarter of fiscal 2014

Revenue from continuing operations was $72.5 million higher than last quarter mainly because:

- Civil Aviation Training Solutions revenue increased by $45.5 million, or 14%, mainly due to higher revenue generated in North America and Europe as a result of higher simulator utilization rates and higher production levels from our manufacturing facility driven by an increase in order intake. Revenue also benefited from a favourable foreign exchange impact resulting from a stronger U.S. dollar against the Canadian dollar;

- Defence and Security revenue increased by $19.0 million, or 9%, mainly due to a favourable foreign exchange impact on the translation of foreign operations and higher revenue resulting from the completion of certain North American programs and a higher level of activity on Australian programs, partially offset by lower revenue from Asian programs;

- Healthcare revenue increased by $8.0 million, or 38%, due to higher revenue from simulation centre management solutions as a result of an increase in the number of systems delivered this quarter and higher patient simulator revenue. The increase was also attributable to a favourable foreign exchange impact resulting from a stronger U.S. dollar against the Canadian dollar.

3 Non-GAAP and other financial measures (see Section 3.6).

14 | CAE Annual Report 2015

Management’s Discussion and Analysis

Revenue from continuing operations was $55.9 million higher than the same period last year largely because:

- Civil Aviation Training Solutions revenue increased by $44.1 million, or 14%, mainly due to higher production levels from our manufacturing facility, the contribution from additional simulators deployed in our network, higher revenue from our crew sourcing business and higher training demand in North America and Europe. Revenue also benefited from a favourable foreign exchange impact resulting from a stronger U.S. dollar, partially offset by a weaker Euro against the Canadian dollar;

- Healthcare revenue increased by $7.4 million, or 34%, mainly due to higher patient simulator revenue and higher revenue from simulation centre management solutions. The increase was also due to a favourable foreign exchange impact resulting from a stronger U.S. dollar against the Canadian dollar;

- Defence and Security revenue increased by $4.4 million, or 2%, mainly due to higher revenue from European programs and a favourable foreign exchange impact on the translation of foreign operations, partially offset by lower revenue from North American programs.

You will find more details in Results by segment.

Operating profit from continuing operations was $22.5 million higher than last quarter and $18.7 million higher compared to the fourth quarter of fiscal 2014

Operating profit from continuing operations for this quarter was $105.4 million or 16.7% of revenue, compared to $82.9 million or 14.8% of revenue last quarter and $86.7 million or 15.1% of revenue in the fourth quarter of fiscal 2014.

Operating profit increased by 27% compared to last quarter. Increases in segment operating income⁴ were $10.9 million, $8.0 million and $3.6 million for Defence and Security, Civil Aviation Training Solutions and Healthcare respectively.[4]

Operating profit increased by 22% over the fourth quarter of fiscal 2014. Increases in segment operating income were $11.5 million, $3.8 million and $3.4 million for Defence and Security, Civil Aviation Training Solutions and Healthcare respectively.

You will find more details in Results by segment.

Net finance expense was $0.5 million higher compared to last quarter and $1.9 million higher over the fourth quarter of fiscal 2014

The increase over last quarter was mainly due to lower interest income partially offset by lower finance expense on royalty obligations.

The increase over the fourth quarter of fiscal 2014 was mainly due to higher finance expense on royalty and R&D obligations.

Income tax rate was 23% this quarter

Income taxes this quarter were $20.2 million, representing an effective tax rate of 23%, compared to 20% last quarter and 15% for the fourth quarter of fiscal 2014.

The increase in the tax rate over last quarter was mainly due to changes in exchange rates that gave rise to deferred tax liabilities, tax adjustments and assessments, as well as the settlement of tax audits.

The increase in the tax rate over the fourth quarter of fiscal year 2014 was mainly due to changes in exchange rates that gave rise to deferred tax liabilities, tax adjustments and assessments, the settlement of tax audits, as well as the change in the mix of income from various jurisdictions.

4 Non-GAAP and other financial measures (see Section 3.6).

CAE Annual Report 2015 | 15

Management’s Discussion and Analysis

4.2 Results from operations – fiscal 2015

(amounts in millions, except per share amounts)			FY2015	FY2014
Revenue		$	2,246.3	2,077.9
Cost of sales		$	1,642.6	1,512.8
Gross profit		$	603.7	565.1
	As a % of revenue	%	*26.9*	27.2
Research and development expenses		$	64.1	67.7
Selling, general and administrative expenses		$	264.6	259.3
Other gains – net		$	(20.3)	(21.2)
After tax share in profit of equity accounted investees		$	(37.5)	(30.0)
Operating profit from continuing operations		$	332.8	289.3
	As a % of revenue	%	*14.8*	13.9
Finance income		$	(9.8)	(9.6)
Finance expense		$	80.7	80.5
Finance expense – net		$	70.9	70.9
Earnings before income taxes and discontinued operations		$	261.9	218.4
Income tax expense		$	57.8	29.0
	As a % of earnings before income taxes and
	discontinued operations (income tax rate)	%	22	13
Earnings from continuing operations		$	204.1	189.4
Earnings from discontinued operations		$	0.6	1.7
Net income		$	204.7	191.1
Attributable to:
Equity holders of the Company
	Continuing operations	$	201.2	188.3
	Discontinued operations	$	0.6	1.7
			201.8	190.0
Non-controlling interests		$	2.9	1.1
		$	204.7	191.1
EPS attributable to equity holders of the Company
Basic and diluted - continuing operations		$	0.76	0.72
Basic and diluted - discontinued operations		$	-	0.01

Revenue from continuing operations was 8% or $168.4 million higher than last year

Revenue from continuing operations was higher than last year mainly because:

- Civil Aviation Training Solutions revenue increased by $117.9 million, or 10%, mainly due to a favourable foreign exchange impact resulting from a stronger U.S. dollar, British pound and Euro against the Canadian dollar, the contribution from additional simulators deployed in our network, higher production levels from our manufacturing facility and higher revenue from our crew sourcing business;

- Defence and Security revenue increased by $35.4 million, or 4%, mainly due to a favourable foreign exchange impact on the translation of foreign operations and higher revenue from European programs. The increase was partially offset by lower revenue from North American programs due to a higher level of activity on programs nearing completion last year;

- Healthcare revenue increased by $15.1 million, or 19%, mainly due to higher patient simulator revenue resulting primarily from our maternal fetal simulator, higher revenue from simulation centre management solutions driven by an increase in the number of systems delivered and the launch of new products and a favourable foreign exchange impact resulting from a stronger U.S. dollar against the Canadian dollar.

You will find more details in Results by segment.

16 | CAE Annual Report 2015

Management’s Discussion and Analysis

Gross profit was $38.6 million higher than last year

The gross profit was $603.7 million this year, or 26.9% of revenue compared to $565.1 million or 27.2% of revenue last year. As a percentage of revenue, gross profit was stable when compared to last year.

Operating profit from continuing operations was $43.5 million higher than last year

Operating profit from continuing operations this year was $332.8 million, or 14.8% of revenue, compared to $289.3 million, or 13.9% of revenue last year.

Operating profit increased $43.5 million, or 15% compared to last year. Increases in segment operating income were $30.7 million, $7.8 million and $5.0 million for Civil Aviation Training Solutions, Defence and Security and Healthcare respectively.

You will find more details in Results by segment.

Net finance expense was $70.9 million, stable compared to last year

			FY2014 to
(amounts in millions)			FY2015
Net finance expense, prior period		$	70.9
Change in finance expense from the prior period:
	Increase in finance expense on long-term debt (other than finance leases)	$	2.6
	Increase in finance expense on finance leases		0.2
	Decrease in finance expense on royalty obligations		(0.2)
	Decrease in other finance expense		(1.7)
	Decrease in borrowing costs capitalized		(0.7)
Increase in finance expense from the prior period		$	0.2
Change in finance income from the prior period:
	Increase in interest income on loans and receivables	$	(0.4)
	Decrease in other finance income		0.2
Increase in finance income from the prior period		$	(0.2)
Net finance expense, current period		$	70.9

Income tax rate was 22% this year

This fiscal year, income taxes were $57.8 million, representing an effective tax rate of 22%, compared to 13% for the same period last year.

The increase in the tax rate compared to fiscal year 2014 is mainly attributable to changes in exchange rates that gave rise to deferred tax liabilities as well as a favourable decision by the Federal Court of Appeal, rendered last year, with respect to the tax treatment of the depreciation and sale of simulators in Canada.

4.3 Results from discontinued operations

During the first quarter of fiscal 2015, we decided to divest our mining business (CAE Mining) which was previously reported within the former New Core Markets segment in order to focus our resources and capital investment in targeted growth opportunities in our other three core markets: Civil Aviation Training Solutions, Defence and Security and Healthcare. CAE Mining delivers products and services across the mining value chain. In accordance with the requirements of IFRS 5, Non-current Assets Held for Sale and Discontinued Operations, income and expenses associated with CAE Mining have been classified and reported separately as discontinued operations in our consolidated financial statements and the results for the two prior years were restated accordingly.

For the year ended March 31, 2015, revenue for CAE Mining was $34.6 million, $2.4 million or 6% lower than last year. The decrease compared to last year was mainly due to lower consulting services revenue partially offset by higher mining equipment simulator revenue and an increase in software licence revenue.

Earnings from discontinued operations was $0.6 million this year, $1.1 million lower compared to the prior year. The decrease was mainly attributable to lower revenue and the measurement to fair value of certain assets held for sale partially offset by lower depreciation and amortization, as well as lower administrative expenses.

CAE Annual Report 2015 | 17

Management’s Discussion and Analysis

4.4 Consolidated orders and total backlog

Our total consolidated backlog was $5,357.2 million at the end of fiscal 2015, which is 7% higher than last year. New orders of $2,361.2 million were added this year, partially offset by $2,246.3 million in revenue generated from our obligated backlog. The adjustment of $33.6 million was mainly related to foreign exchange movements, partially offset by the termination of a contract in North America and the revaluation of certain contracts within our Defence and Security segment. Our joint venture backlog⁵ was $607.8 million and our unfunded backlog⁵ was $395.3 million.

Total backlog up 7% over last year

(amounts in millions)		FY2015		FY2014
Obligated backlog, beginning of period	$	4,205.6	$	3,717.8
+ orders		2,361.2		2,343.3
- revenue		(2,246.3)		(2,077.9)
+ / - adjustments		33.6		222.4
Obligated backlog, end of period	$	4,354.1	$	4,205.6
Joint venture backlog (all obligated)		607.8		392.5
Unfunded backlog		395.3		406.7
Total backlog	$	5,357.2	$	5,004.8

In fiscal 2014, adjustments were mainly due to a positive foreign exchange impact. [5]

The book-to-sales ratio for the quarter was 1.05x. The ratio for the last 12 months was 1.05x.

You will find more details in Results by segment.

5 Non-GAAP and other financial measures (see Section 3.6).

18 | CAE Annual Report 2015

Management’s Discussion and Analysis

5. RESULTS BY SEGMENT

During the first quarter of fiscal 2015, we modified our operating segments. This resulted from changes in the organizational structure undertaken to better reflect our operating segments with our integrated solutions approach to market. This change reflects the way management measures profitability and performance and how we allocate resources. As such, we believe the information presented to be more relevant as it is better aligned with the way our business is managed internally. [6]

We manage our business and report our results in three segments:

- Civil Aviation Training Solutions;

- Defence and Security;

- Healthcare.

The method used for the allocation of assets jointly used by the operating segments and costs and liabilities jointly incurred (mostly corporate costs) between operating segments is based on the level of utilization when determinable and measurable, otherwise the allocation is based on a proportion of each segment’s cost of sales.

Unless otherwise indicated, elements within our segment revenue and segment operating income analysis are presented in order of magnitude.

KEY PERFORMANCE INDICATORS

Segment operating income

(amounts in millions, except operating margins)

FY2015

FY2014

Q4-2015

Q3-2015

Q2-2015

Q1-2015

Q4-2014

Civil Aviation Training Solutions

210.5

179.8

61.8

53.8

45.4

49.5

58.0

16.3

15.3

16.8

16.7

15.3

16.0

17.9

Defence and Security

115.6

107.8

39.5

28.6

25.6

21.9

28.0

13.5

13.1

16.8

13.3

12.2

11.1

12.2

Healthcare

6.7

1.7

4.1

0.5

1.8

0.3

0.7

7.1

2.1

14.0

2.3

7.4

1.5

3.2

Total segment operating income (SOI)

332.8

289.3

105.4

82.9

72.8

71.7

86.7

Capital employed⁶

		March 31	December 31	September 30	June 30	March 31
(amounts in millions)		2015	2014	2014	2014	2014

Civil Aviation Training Solutions	$	1,984.2	1,887.7	1,879.4	1,795.8	1,776.3


Defence and Security	$	675.5	661.8	619.6	590.4	567.3


Healthcare*	$	206.5	191.4	188.7	181.1	181.6

	$	2,866.2	2,740.9	2,687.7	2,567.3	2,525.2

* Comparative periods exclude net assets related to the CAE Mining discontinued operations.

6 Non-GAAP and other financial measures (see Section 3.6).

CAE Annual Report 2015 | 19

Management’s Discussion and Analysis

5.1 Civil Aviation Training Solutions

FISCAL 2015 EXPANSIONS AND NEW INITIATIVES

Expansions

- We signed a joint venture agreement with Japan Airlines (JAL) to provide flight crew training services across Northeast Asia, where JAL’s training commenced in April 2015;

- We announced, with Lufthansa Flight Training, the creation of a joint venture operating under the name of Flight Training Alliance to provide pilot and cabin crew training for Bombardier’s CSeries aircraft. Flight Training Alliance was appointed by Bombardier as its exclusive Authorized Training Provider for CSeries aircraft worldwide;

- We signed a joint venture agreement with Shanghai Eastern Flight Training Co., Ltd, a subsidiary of China Eastern Airlines, where we will train more than 650 cadet pilots over the next five years;

- We announced the next phase of expansion of our training network in the Middle East, where we will deploy several FFSs, including, amongst others, the Dassault Falcon 5X, Boeing 747-8, Boeing 787 as well as FFSs for Bombardier, Gulfstream, Bell and Sikorsky platforms. As part of this expansion, our joint venture Emirates-CAE Flight Training will double its second Dubai training facility’s flight simulator training capacity for pilots;

- We opened a new business aviation training facility near Dallas Fort Worth, U.S. and added new pilot training programs to our existing Dallas facility. The combined training space includes 40 simulators, 114 classrooms and 80 briefing rooms, making it the largest training campus in the world;

- We announced the expansion of our Authorized Training Provider (ATP) network to include the Bombardier Challenger 350 business jet, offering flight and technical training through our own instructors, infrastructure and simulators and began offering Bombardier Global Express and Global Express XRS pilot and maintenance training programs in our New York training centre located in Morristown, U.S.;

- We announced the expansion of our network with the addition of a training centre in Bogota, Colombia where we will install an A320 CAE 7000 Series full-flight simulator in calendar 2015.

New programs and products

- We launched, with Líder Aviação, a new helicopter pilot training program in São Paulo, Brazil, for operators of the S-92 Sikorsky aircraft. The S-92 training program is an extension of the joint venture between CAE and Líder, and will support flight training for all of Líder's S-92 pilots;

- We were appointed by Bombardier Aerospace as the ATP for the CRJ family of regional aircraft that includes the CRJ100/200, CRJ700 NextGen, CRJ900 NextGen andCRJ1000 NextGen aircraft. Under this agreement, CAE instructors will deliver CRJ aircraft flight training courses globally;

- Our joint venture ECFT announced, with flydubai, that it will provide a training program for low-hour commercial pilots to accumulate the required number of flying hours and become type rated;

- We inaugurated the world’s first CAE 7000XR Series full-flight simulator at Middle East Aviation Academy in Beirut, Lebanon.

ORDERS

Civil Aviation Training Solutions obtained contracts this quarter expected to generate future revenues of $398.0 million, including contracts for 10 FFSs.

FFS contracts awarded for the quarter:

- One Bombardier Q400 simulator to WestJet Encore;

- One Aircraft Industries L410 turboprop simulator to the Czech Aviation Training Centre;

- One Airbus A350 FFS to China Airlines;

- Two Boeing 737-800 FFSs to Southwest Airlines;

- Five FFSs to undisclosed customers.

This brings the civil FFS order intake for the year to 41 FFSs.

Other notable contract awards for the quarter included:

- A new 10-year contract with Mesa Airlines, Inc. for pilot training services;

- A new long-term contract with low-cost carrier VivaColombia for pilot training services;

- A long-term renewal and a new contract with BA CityFlyer for pilot training services;

- A long-term renewal contract with Jet Time A/S for pilot training services;

- A new long-term contract with Blue1 Ltd for pilot training services;

- A new contract with Aeroméxico Connect for pilot training services.

20 | CAE Annual Report 2015

Management’s Discussion and Analysis

Financial results
(amounts in millions, except operating margins, SEU, FFSs deployed and utilization rate)			FY2015	FY2014	Q4-2015	Q3-2015	Q2-2015	Q1-2015	Q4-2014
Revenue		$	1,294.6	1,176.7	367.6	322.1	296.0	308.9	323.5
Segment operating income		$	210.5	179.8	61.8	53.8	45.4	49.5	58.0
Operating margins		%	*16.3*	15.3	*16.8*	16.7	15.3	16.0	17.9
Depreciation and amortization		$	120.1	110.5	30.8	31.0	29.5	28.8	29.3
Property, plant and equipment
	expenditures	$	111.3	128.3	29.4	25.1	28.5	28.3	57.0
Intangible assets and other
	assets expenditures	$	40.6	40.4	8.8	11.5	9.3	11.0	12.0
Capital employed		$	1,984.2	1,776.3	1,984.2	1,887.7	1,879.4	1,795.8	1,776.3
Total backlog		$	2,903.3	2,424.8	2,903.3	2,586.1	2,415.9	2,414.7	2,424.8
SEU⁷			197	191	201	200	196	192	194
FFSs deployed			256	239	256	246	245	241	239
Utilization rate⁷		%	68	68	70	68	62	72	71

Revenue up 14% over last quarter and up 14% over the fourth quarter of fiscal 2014[7]

The increase over last quarter was mainly due to higher revenue generated in North America and Europe as a result of higher simulator utilization rates and higher production levels from our manufacturing facility driven by an increase in order intake. Revenue also benefited from a favourable foreign exchange impact resulting from a stronger U.S. dollar against the Canadian dollar.

The increase over the fourth quarter of fiscal 2014 was mainly due to higher production levels from our manufacturing facility, the contribution from additional simulators deployed in our network, higher revenue from our crew sourcing business and higher training demand in North America and Europe. Revenue also benefited from a favourable foreign exchange impact resulting from a stronger U.S. dollar, partially offset by a weaker Euro against the Canadian dollar.

Revenue was $1,294.6 million this year, 10% or $117.9 million higher than last year

The increase was mainly due to a favourable foreign exchange impact resulting from a stronger U.S. dollar, British pound and Euro against the Canadian dollar, the contribution from additional simulators deployed in our network, higher production levels from our manufacturing facility and higher revenue from our crew sourcing business.

Segment operating income up 15% over last quarter and up 7% over the fourth quarter of fiscal 2014

Segment operating income was $61.8 million (16.8% of revenue) this quarter, compared to $53.8 million (16.7% of revenue) last quarter and $58.0 million (17.9% of revenue) in the fourth quarter of fiscal 2014.

Segment operating income increased by $8.0 million, or 15%, over last quarter. The increase was mainly due to higher simulator utilization rates in North America and Europe, a favourable foreign exchange impact from translation of operations and gains recognized on the partial disposal of certain interests in investments. The increase was partially offset by a less favourable program mix, higher income last quarter due to compensation for a terminated customer service agreement recognized during that period and an unfavourable foreign exchange impact from the revaluation of certain working capital accounts, driven mainly by the variation in the Brazilian real.

Segment operating income increased by $3.8 million, or 7%, over the fourth quarter of fiscal 2014. The increase was mainly due to the contribution from additional simulators deployed in our network, higher training demand in North America and Europe and gains recognized on the partial disposal of certain interests in investments. The increase was partially offset by a less favourable program mix, the realization of gains last year on disposal of assets and an unfavourable foreign exchange impact from the revaluation of certain working capital accounts.

Segment operating income was $210.5 million, 17% or $30.7 million higher than last year

Segment operating income was $210.5 million (16.3% of revenue) this year, compared to $179.8 million (15.3% of revenue) last year.

The increase was mainly attributable to the contribution from additional simulators deployed in our network and higher income in one of our joint ventures arising from the recognition of a deferred tax asset. The increase was also due to gains recognized on the partial disposal of certain interests in investments, compensation for a terminated customer service agreement and a favourable foreign exchange impact from translation of operations. The increase was partially offset by a less favourable program mix, by the realization of gains last year on disposal of assets and from a reversal recognized last year of an acquisition‑related provision, and an unfavourable foreign exchange impact from the revaluation of certain working capital accounts.

7 Non-GAAP and other financial measures (see Section 3.6).

CAE Annual Report 2015 | 21

Management’s Discussion and Analysis

Property, plant and equipment expenditures at $29.4 million this quarter and $111.3 million for the year

Maintenance capital expenditures were $9.5 million for the quarter and $37.9 million for the year. Growth capital expenditures were $19.9 million for the quarter and $73.4 million for the year.

Capital employed increased by $96.5 million over last quarter and by $207.9 million over last year

The increase in capital employed over the last quarter was mainly due to higher property, plant and equipment and a higher investment in equity accounted investees resulting primarily from movements in foreign exchange rates. Our investment in equity accounted investees was also higher as a result of the addition of a new joint venture during the quarter. The increase was partially offset by a lower investment in our non-cash working capital mainly as a result of higher accounts payable and accrued liabilities and lower inventories, partially offset by lower contracts in progress liabilities.

The increase in capital employed over last year was mainly due to higher property, plant and equipment resulting from capital expenditures and movements in foreign exchange rates, partially offset by depreciation. The increase was also attributable to a higher investment in equity accounted investees due to movements in foreign exchange rates, increased profitability and the addition of new joint ventures. Capital employed was also higher compared to last year due to a higher investment in our non-cash working capital mainly as a result of lower contracts in progress liabilities and higher accounts receivable and contracts in progress assets, partially offset by higher accounts payable and accrued liabilities.


Total backlog was at $2,903.3 million at the end of the year

(amounts in millions)	FY2015		FY2014
Obligated backlog, beginning of period	$	2,161.7	$	1,722.6
+ orders		1,512.3		1,507.3
- revenue		(1,294.6)		(1,176.7)
+ / - adjustments (mainly F/X)		18.3		108.5
Obligated backlog, end of period	$	2,397.7	$	2,161.7
Joint venture backlog (all obligated)		505.6		263.1
Total backlog	$	2,903.3	$	2,424.8

This quarter's book-to-sales ratio was 1.08x. The ratio for the last 12 months was 1.17x.

5.2 Defence and Security

FISCAL 2015 EXPANSIONS AND NEW INITIATIVES

Expansions

- We delivered two new T-44C flight training devices to support T-44C aircrew training services that CAE is providing to the U.S. Navy and Marine Corps as part of a contractor-owned, contractor-operated training services program at the Naval Air Station Corpus Christi;

- We are now providing comprehensive training support services at Royal Australian Air Force (RAAF) Base Townsville following the acceptance into service of a second MRH90 FMS by the Australian Defence Forces;

- We announced that we would acquire Bombardier’s Military Aviation Training business, which includes the NATO Flying Training in Canada program, to enhance our training systems integrator capabilities and expand our offering into support for live flying training of future military pilots;

- We are now providing training support services at HMAS Albatross in Australia following the start of MH-60R helicopter training by the Royal Australian Navy.

New programs and products

- We will develop and deliver a Naval Warfare Training System (NWTS) for the Swedish Navy. The NWTS will be a comprehensive, simulation based system including simulation software, hardware, wargaming consoles and instructor operator stations;

- We will deliver a comprehensive visual system to Korea Aerospace Industries for use on a T-50 full-mission simulator, marking CAE’’s first involvement on KAI’s T-50 jet trainer and light attack aircraft platform;

- We officially inaugurated training at the CAE Brunei MPTC where training programs for the S-92 helicopter and PC-7 trainer aircraft are now being offered;

- We announced that we will develop and deliver an Aeromedical Evacuation Training System for the USAF that includes a
high-fidelity C-130 fuselage trainer as well as CAE Healthcare human patient simulators;

- We launched the next-generation CAE Medallion-6000 visual system designed to help provide realistic, high-performance synthetic environments specifically for the defence and security market;

- We were selected by NAVMAR Applied Sciences Corporation, a leading supplier of unmanned aerial systems (UAS), as its preferred simulation and training provider for the NAVMAR TigerShark XP UAS.

22 | CAE Annual Report 2015

Management’s Discussion and Analysis

ORDERS

Defence and Security was awarded $237.8 million in orders this quarter, including notable contract awards from:

- Lockheed Martin to design and manufacture a C-130J weapon systems trainer for the USAF Air Mobility Command;

- Australia’s Defence Material Organisation to perform upgrades on the RAAF’s C-130J full-flight mission simulator as well as provide new CAE Simfinity desktop trainers and instructor tools;

- The United Kingdom Ministry of Defence to perform upgrades and enhance the training services for the Royal Air Force at CAE’s Medium Support Helicopter Aircrew Training Facility;

- Alenia Aermacchi to provide an M-346 full-mission simulator and M-346 part-task trainer to support the Italian Air Force;

- The United Kingdom Ministry of Defence to provide logistics support and maintenance services on the British Army's suite of Warrior infantry fighting vehicle direct and indirect fire trainers;

- The NATO Support and Procurement Agency to provide maintenance and support services on the Lynx full-mission flight trainer in Germany;

- The Government of Canada to perform a major visual system update on the RCAF’s CH-146 Griffon helicopter full-motion flight simulator located at the Canadian Forces Base in New Brunswick;

- AgustaWestland to design and manufacture a suite of AW101 Merlin synthetic training equipment to support the Royal Navy’s Merlin Life Sustainment Program;

- Boeing for two P-8A Poseidon operational flight trainers for the RAAF;

- AgustaWestland to design and manufacture an AW139 full-flight simulator for the Toll Group in Australia.

Financial results
(amounts in millions, except operating margins)			FY2015	FY2014	Q4-2015	Q3-2015	Q2-2015	Q1-2015	Q4-2014
Revenue		$	857.4	822.0	234.7	215.7	209.1	197.9	230.3
Segment operating income		$	115.6	107.8	39.5	28.6	25.6	21.9	28.0
Operating margins		%	*13.5*	13.1	*16.8*	13.3	12.2	11.1	12.2
Depreciation and amortization		$	55.7	42.4	15.2	14.2	14.1	12.2	12.2
Property, plant and equipment
	expenditures	$	30.2	26.0	10.8	2.4	6.5	10.5	8.0
Intangible assets and other
	assets expenditures	$	19.1	16.3	5.5	3.0	5.8	4.8	6.0
Capital employed		$	675.5	567.3	675.5	661.8	619.6	590.4	567.3
Total backlog		$	2,453.9	2,580.0	2,453.9	2,381.9	2,397.0	2,516.8	2,580.0

Revenue up 9% over last quarter and up 2% over the fourth quarter of fiscal 2014

The increase over last quarter was mainly due to a favourable foreign exchange impact on the translation of foreign operations, higher revenue resulting from the completion of certain North American programs and a higher level of activity on Australian programs, partially offset by lower revenue from Asian programs.

The increase over the fourth quarter of fiscal 2014 was mainly due to higher revenue from European programs and a favourable foreign exchange impact on the translation of foreign operations, partially offset by lower revenue from North American programs.

Revenue was $857.4 million this year, 4% or $35.4 million higher than last year

The increase was mainly due to a favourable foreign exchange impact on the translation of foreign operations and higher revenue from European programs. The increase was partially offset by lower revenue from North American programs due to a higher level of activity on programs nearing completion last year.

Segment operating income up 38% over last quarter and up 41% over the fourth quarter of fiscal 2014

Segment operating income was $39.5 million (16.8% of revenue) this quarter, compared to $28.6 million (13.3% of revenue) last quarter and $28.0 million (12.2% of revenue) in the fourth quarter of fiscal 2014.

The increase over last quarter was mainly due to an increase in investment tax credits claimed during the quarter, a favourable foreign exchange impact and higher volume on Australian programs, partially offset by higher research and development expenses net of government funding.

The increase over the fourth quarter of fiscal 2014 was mainly due to an increase in investment tax credits claimed during the quarter, higher margins on Asian and Australian programs and a favourable foreign exchange impact, partially offset by lower volume on North American programs.

CAE Annual Report 2015 | 23

Management’s Discussion and Analysis

Segment operating income was $115.6 million this year, 7% or $7.8 million higher than last year

Segment operating income was $115.6 million (13.5% of revenue) this year, compared to $107.8 million (13.1% of revenue) last year.

The increase was mainly due to an increase in investment tax credits claimed during the year, a favourable foreign exchange impact, lower research and development expenses net of government funding and higher volume on Australian and European programs, partially offset by lower volume from North American programs.

Capital employed increased by $13.7 million over last quarter and by $108.2 million over last year

The increase over last quarter was mainly due to higher intangible assets and property, plant and equipment resulting mainly from movements in foreign exchange rates. The increase was partially offset by lower non-cash working capital resulting mainly from higher accounts payable and accrued liabilities and lower accounts receivable, partially offset by an increase in contracts in progress assets.

The increase over last year was mainly due to higher property, plant and equipment resulting primarily from capital expenditures and the addition of a building under a new finance lease entered into during the year. Property, plant and equipment and intangible assets were also higher as a result of movements in foreign exchange rates. The increase was also due to lower other long-term liabilities.


Total backlog down 5% compared to last year

(amounts in millions)	FY2015		FY2014
Obligated backlog, beginning of period	$	2,043.9	$	1,995.2
+ orders		754.6		756.8
- revenue		(857.4)		(822.0)
+ / - adjustments		15.3		113.9
Obligated backlog, end of period	$	1,956.4	$	2,043.9
Joint venture backlog (all obligated)		102.2		129.4
Unfunded backlog		395.3		406.7
Total backlog	$	2,453.9	$	2,580.0

Fiscal 2015 adjustments are mainly due to foreign exchange movements, partially offset by the termination of a contract in North America and the revaluation of certain contracts during the year. Adjustments in fiscal 2014 were mainly due to foreign exchange movements.

This quarter's book-to-sales ratio was 1.01x. The ratio for the last 12 months was 0.88x.

In fiscal 2015, $143.2 million of unfunded backlog was transferred to obligated backlog and $116.0 million was added to the unfunded backlog.

5.3 Healthcare

FISCAL 2015 EXPANSIONS AND NEW INITIATIVES

Expansions

- We signed agreements with ten new product distributors representing 17 countries in Europe, Northern Africa and the Asia-Pacific region;

- We expanded our agreement with Tellyes Scientific, which is now the exclusive distributor for all CAE Healthcare products in China;

- We expanded our partnership agreement with Université de Montréal’s Clinical Attitudes and Skills learning centre for five years and will continue to operate the centre, deliver simulation-based instruction and develop innovative medical simulation solutions;

- We signed an agreement to become the North American distributor for VirtaMed surgical simulators with exclusive rights to distribute the VirtaMed ArthroS^TM complete training curriculum for knee and shoulder arthroscopy;

- We announced that we will provide a turnkey healthcare simulation training centre in Turkmenistan to advance medical education in medicine, nursing and paramedic education. The centre will be the first to offer multi-disciplinary medical simulation training in Turkmenistan.

New programs and products

- We introduced CAE Replay, a streamlined simulation centre management solution for debrief designed to capture both medical simulation scenarios and live clinical events at the Human Patient Simulation Network World conference held in Sarasota, U.S.;

- We launched and began production on our first Lucina Fidelis Maternal Fetal Simulators and introduced a female patient module that allows it to be used as both a pregnant and non-pregnant patient simulator;

- We developed a simulation-based training solution for physicians using the Impella® heart pump in partnership with device manufacturer Abiomed, a leading provider of breakthrough heart support technologies;

- We released an updated operating system for the VIMEDIX ultrasound simulator, new lung and pleural pathologies and the Vimedix Abdo ultrasound simulator for the point of care ultrasound market;

- We released an Airway Management Learning Module for patient simulators, developed in partnership with the American College of Chest Physicians.

24 | CAE Annual Report 2015

Management’s Discussion and Analysis

ORDERS

CAE Healthcare sales this quarter included:

- A turnkey healthcare simulation training centre with 17 patient, interventional, ultrasound and simulation centre management solutions, consulting, training and support for the Turkmenistan Ministry of Health;

- Seven patient simulators, a simulation centre management solution and curriculum to Southeastern University in the U.S;

- Nine patient simulators, a simulation centre management solution, curriculum and a multi-year warranty service to a community college in the U.S;

- Eight patient simulators, four simulation centre management solutions, curriculum and a multi-year warranty service to a simulation centre in Thailand;

- Four patient simulators and a simulation centre management solution to the Moscow City Clinical Hospital in Russia;

- A simulation centre management solution to St. Joseph’s Healthcare Hamilton in Canada;

- Two patient simulators, two ultrasound simulators, a simulation centre management solution and curriculum to Clinica Girassol in Angola;

- Five patient simulators and a multi-year warranty service to the Australian Defence Forces.

Financial results
(amounts in millions, except operating margins)			FY2015	FY2014	Q4-2015	Q3-2015	Q2-2015	Q1-2015	Q4-2014
Revenue		$	94.3	79.2	29.3	21.3	24.3	19.4	21.9
Segment operating income		$	6.7	1.7	4.1	0.5	1.8	0.3	0.7
Operating margins		%	*7.1*	2.1	*14.0*	2.3	7.4	1.5	3.2
Depreciation and amortization		$	13.3	11.7	3.6	3.3	3.2	3.2	3.1
Property, plant and equipment
	expenditures	$	2.7	2.7	0.5	0.5	0.8	0.9	0.5
Intangible assets and other
	assets expenditures	$	4.6	8.7	0.8	0.7	0.8	2.3	2.5
Capital employed		$	206.5	181.6	206.5	191.4	188.7	181.1	181.6

Revenue up 38% over last quarter and up 34% over the fourth quarter of fiscal 2014

The increase over last quarter was mainly due to higher revenue from simulation centre management solutions as a result of an increase in the number of systems delivered this quarter and higher patient simulator revenue. The increase was also driven in part by seasonality as well as a favourable foreign exchange impact resulting from a stronger U.S. dollar against the Canadian dollar.

The increase over the fourth quarter of fiscal 2014 was mainly due to higher patient simulator revenue and higher revenue from simulation centre management solutions. The increase was also due to a favourable foreign exchange impact resulting from a stronger U.S. dollar against the Canadian dollar.

Revenue was $94.3 million this year, 19% or $15.1 million higher than last year

The increase was mainly due to higher patient simulator revenue resulting primarily from our maternal fetal simulator, higher revenue from simulation centre management solutions driven by an increase in the number of systems delivered and the launch of new products and a favourable foreign exchange impact resulting from a stronger U.S. dollar against the Canadian dollar.

Segment operating income up over last quarter and the fourth quarter of fiscal 2014

Segment operating income was $4.1 million this quarter (14.0% of revenue), compared to $0.5 million (2.3% of revenue) last quarter and $0.7 million (3.2% of revenue) in the fourth quarter of fiscal 2014.

The increase over last quarter and over the fourth quarter of fiscal 2014 was mainly due to higher revenue and a favourable product mix.

Segment operating income was $6.7 million this year, $5.0 million higher than last year

Segment operating income was $6.7 million (7.1% of revenue) this year, compared to $1.7 million (2.1% of revenue) last year.

The increase over last year was mainly due to higher revenue and a favourable product mix.

Capital employed increased by $15.1 million over last quarter and by $24.9 million over last year

The increase over last quarter was mainly due to higher intangible assets mainly as a result of movements in foreign exchange rates.

The increase over last year was primarily due to higher intangible assets mainly as a result of movements in foreign exchange rates and an increase in non-cash working capital resulting mainly from higher accounts receivable, partially offset by an increase in accounts payable and accrued liabilities.

CAE Annual Report 2015 | 25

Management’s Discussion and Analysis

6. CONSOLIDATED CASH MOVEMENTS AND LIQUIDITY

We manage liquidity and regularly monitor the factors that could affect it, including:

- Cash generated from operations, including timing of milestone payments and management of working capital;

- Capital expenditure requirements;

- Scheduled repayments of long-term debt obligations, our credit capacity and expected future debt market conditions. [8]

6.1 Consolidated cash movements

(amounts in millions)			FY2015		FY2014		Q4-2015		Q3-2015		Q4-2014
Cash provided by continuing operating activities*		$	337.8	$	296.3	$	101.1	$	82.0	$	98.4
Changes in non-cash working capital			(69.2)		(20.4)		59.5		9.5		29.1
Net cash provided by continuing operating activities		$	268.6	$	275.9	$	160.6	$	91.5	$	127.5
Maintenance capital expenditures⁸			(48.5)		(46.1)		(11.5)		(6.1)		(15.1)
Other assets			(15.8)		(23.8)		(5.2)		(3.8)		(5.3)
Proceeds from the disposal of property, plant
	and equipment		7.6		15.4		6.1		0.6		8.5
Net (payments to) proceeds from equity accounted investees			(0.3)		4.2		3.0		(0.9)		1.8
Dividends received from equity accounted investees			8.9		15.0		1.2		0.7		0.8
Dividends paid			(46.3)		(40.1)		(12.0)		(12.0)		(9.9)
Free cash flow from continuing operations⁸		$	174.2	$	200.5	$	142.2	$	70.0	$	108.3
Growth capital expenditures⁸			(95.7)		(110.9)		(29.2)		(21.9)		(50.4)
Capitalized development costs			(41.5)		(43.4)		(9.9)		(9.5)		(12.8)
Other cash movements, net			12.7		3.6		0.8		5.9		14.0
Business combinations, net of cash and cash
	equivalents acquired		(2.0)		(3.7)		-		-		(0.4)
Proceeds from partial disposal of interests in investments,
	net of cash and cash equivalents disposed		8.5		-		(1.6)		10.1		-
Effect of foreign exchange rate changes on
	cash and cash equivalents		8.8		22.4		11.4		1.6		9.1
Net increase in cash before proceeds and
	repayment of long-term debt	$	65.0	$	68.5	$	113.7	$	56.2	$	67.8
* before changes in non-cash working capital

Free cash flow from continuing operations was $142.2 million for the quarter

Free cash flow was $72.2 million higher than last quarter and $33.9 million higher compared to the fourth quarter of fiscal 2014.

Free cash flow was higher compared to last quarter mainly due to favourable changes in non-cash working capital and an increase in cash provided by continuing operating activities.

Free cash flow was higher compared to the fourth quarter of fiscal 2014. The increase was mainly related to favourable changes in non-cash working capital.

Free cash flow from continuing operations was $174.2 million this year

Free cash flow decreased by $26.3 million, or 13%, compared to last year.

Free cash flow was lower compared to last year mainly due to a higher investment in non-cash working capital, lower proceeds from the disposal of property, plant and equipment, higher dividends paid and lower dividends received from equity accounted investees. The decrease was partially offset by an increase in cash provided by continuing operating activities.

Capital expenditures were $40.7 million this quarter and $144.2 million for the year

Growth capital expenditures were $29.2 million this quarter and $95.7 million for the year. Our growth capital allocation decisions are market-driven in nature and are intended to keep pace with the demands of our existing and new customers. Maintenance capital expenditures were $11.5 million this quarter and $48.5 million for the year.

8 Non-GAAP and other financial measures (see Section 3.6).

26 | CAE Annual Report 2015

Revenue from continuing operations higher compared to last quarter and the fourth quarter of fiscal 2014

Positive free cash flow[1] from continuing operations at $142.2 million this quarter

Higher revenue from continuing operations compared to fiscal 2014

Positive free cash flow from continuing operations at $174.2 million

Positive free cash flow^[1] from continuing operations at $142.2 million this quarter