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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 6 11 13
4.	CONSOLIDATED RESULTS 4.1 Results from operations – fourth quarter of fiscal 2016 4.2 Results from operations – fiscal 2016	15 15 17
	4.3 Discontinued operations	18
	4.4 Restructuring costs	19
	4.5 Consolidated orders and total backlog	19
5.	RESULTS BY SEGMENT 5.1 Civil Aviation Training Solutions 5.2 Defence and Security 5.3 Healthcare	20 21 23 25
6.	CONSOLIDATED CASH MOVEMENTS AND LIQUIDITY 6.1 Consolidated cash movements 6.2 Sources of liquidity 6.3 Government assistance 6.4 Contractual obligations	27 27 28 29 29
7.	CONSOLIDATED FINANCIAL POSITION 7.1 Consolidated capital employed 7.2 Off balance sheet arrangements 7.3 Financial instruments	30 30 32 32
8.	BUSINESS COMBINATIONS	35
9.	EVENT AFTER THE REPORTING PERIOD	36
10.	BUSINESS RISK AND UNCERTAINTY 10.1 Risks relating to the industry 10.2 Risks relating to the Company 10.3 Risks relating to the market	36 36 38 40
11.	RELATED PARTY TRANSACTIONS	41
12.	CHANGES IN ACCOUNTING POLICIES 12.1 New and amended standards adopted 12.2 New and amended standards not yet adopted 12.3 Use of judgements, estimates and assumptions	42 42 42 43
13.	CONTROLS AND PROCEDURES 13.1 Evaluation of disclosure controls and procedures 13.2 Internal control over financial reporting	44 44 44
14.	OVERSIGHT ROLE OF AUDIT COMMITTEE AND BOARD OF DIRECTORS	45
15.	ADDITIONAL INFORMATION	45
16.	SELECTED FINANCIAL INFORMATION	46
Consolidated Financial Statements		48

Management’s Discussion and Analysis

for the fourth quarter and year ended March 31, 2016

1. HIGHLIGHTS

FINANCIAL

FOURTH QUARTER OF FISCAL 2016

Revenue from continuing operations higher compared to last quarter and the fourth quarter of fiscal 2015

- Consolidated revenue from continuing operations was $722.5 million this quarter, $106.2 million or 17% higher than last quarter and $90.9 million or 14% higher than the fourth quarter of fiscal 2015.

Net income attributable to equity holders of the Company from continuing operations higher compared to last quarter and lower compared to the fourth quarter of fiscal 2015

- Net income attributable to equity holders of the Company from continuing operations was $61.2 million (or $0.23 per share) this quarter compared to $57.9 million (or $0.21 per share) last quarter, representing an increase of $3.3 million or 6%, and compared to $63.3 million (or $0.24 per share) in the fourth quarter of last year, representing a decrease of $2.1 million or 3%;

- Specific items included in net income attributable to equity holders of the Company from continuing operations were restructuring costs of $16.8 million ($11.6 million after tax or $0.04 per share) this quarter compared to $2.0 million ($1.5 million after tax or $0.01 per share) recorded last quarter. Net income before specific items¹ was $72.8 million and earnings per share before specific items¹ was $0.27 for the quarter compared to $59.4 million (or $0.22 per share) last quarter;

- Net income attributable to equity holders of the Company included a loss from discontinued operations this quarter of
$2.4 million (or $0.01 per share) compared to $0.2 million (or nil per share) last quarter and earnings from discontinued operations of $0.8 million (or nil per share) in the fourth quarter of fiscal 2015.

Positive free cash flow¹ from continuing operations at $12.8 million this quarter

- Net cash provided by continuing operating activities was $51.0 million this quarter, compared to $214.9 million last quarter and $160.6 million in the fourth quarter of last year;

- Maintenance capital expenditures¹ and other asset expenditures were $18.8 million this quarter, $15.7 million last quarter and $16.7 million in the fourth quarter of last year;

- Proceeds from the disposal of property, plant and equipment were $0.3 million this quarter, nil last quarter and
$6.1 million in the fourth quarter of last year;

- Cash dividends were $19.3 million this quarter, $12.4 million last quarter and $12.0 million in the fourth quarter of last year.

FISCAL 2016

Higher revenue from continuing operations compared to fiscal 2015

- Consolidated revenue from continuing operations was $2,512.6 million, $266.3 million or 12% 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 $239.3 million (or $0.89 per share) compared to $201.2 million (or $0.76 per share) last year, representing a $38.1 million or 19% increase;

- Specific items included in net income attributable to equity holders of the Company from continuing operations were restructuring costs of $28.9 million ($20.6 million after tax or $0.08 per share) and a one-time tax item of $29.4 million (or $0.11 per share) this year. Net income before specific items was $230.5 million and earnings per share before specific items was $0.86 for the year;

- Net income attributable to equity holders of the Company included a loss from discontinued operations of $9.6 million (or $0.04 per share) compared to earnings from discontinued operations $0.6 million (or nil per share) last year.

Positive free cash flow from continuing operations at $247.7 million

- Net cash provided by continuing operating activities was $345.8 million this year, compared to $268.6 million last year;

- Maintenance capital expenditures and other asset expenditures were $65.1 million this year, compared to $64.3 million last year;

- Dividends received from equity accounted investees were $18.5 million this year, compared to $8.9 million last year;

- Proceeds from the disposal of property, plant and equipment were $1.8 million this year, compared to $7.6 million last year;

- Cash dividends were $56.7 million this year, compared to $46.3 million last year.

Capital employed¹ increased by $91.6 million or 3% this year, ending at $2,727.6 million

- Return on capital employed¹(ROCE) was 10.6% this year compared to 10.4% last year;

- Non-cash working capital¹ decreased by $12.8 million in fiscal 2016, ending at $188.9 million;

- Property, plant and equipment increased by $11.9 million;

- Net assets held for sale decreased by $45.5 million following the sale of our mining division during the year;

- Other long-term assets and other long-term liabilities increased by $140.8 million and $2.8 million respectively;

- Net debt¹decreased by $162.3 million this year, ending at $787.3 million.

CAE Annual Report 2016 | 1

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

Management’s Discussion and Analysis

ORDERS²¹

- The book-to-sales ratio² for the quarter was 1.23x (Civil Aviation Training Solutions was 1.33x, Defence and Security was 1.13x and Healthcare was 1.0x). The ratio for the last 12 months was 1.11x (Civil Aviation Training Solutions was 1.18x, Defence and Security was 1.02x and Healthcare was 1.0x);

- Total order intake this year was $2,782.0 million, up $420.8 million over last year;

- Total backlog², including obligated, joint venture and unfunded backlog was $6,372.6 million at March 31, 2016, $1,015.4 million higher than last year.

Civil Aviation Training Solutions

- Civil Aviation Training Solutions obtained contracts with an expected value of $1,683.0 million, including contracts for 53 full-flight simulators (FFSs).

Defence and Security

- Defence and Security won contracts valued at $985.6 million.

Healthcare

- Healthcare order intake was valued at $113.4 million.

BUSINESS COMBINATIONS

- On September 30, 2015, we acquired the assets of Bombardier’s Military Aviation Training business (BMAT), a defence training system integrator for live flying training;

- During the fourth quarter of this year, we concluded a conditional agreement with Lockheed Martin Corporation to acquire Lockheed Martin Commercial Flight Training (LMCFT), a provider of aviation simulation training equipment and services.
On May 2, 2016, we completed the acquisition of LMCFT. The transaction excludes debt and includes cash remaining in the company at closing.

OTHER

- On July 24, 2015, we completed the sale of our mining division known as Datamine. The results of our mining division were reported as discontinued operations during the year;

- During the first quarter of this year, we implemented a process improvement program to realize the benefits from the transformation of our production processes and product offering which has resulted in a reduction of our workforce;

- On February 19, 2016, we announced that we received approval from the Toronto Stock Exchange (TSX) to purchase, by way of a normal course issuer bid (NCIB), up to 5,398,643 of our issued and outstanding common shares over a one year period;

- We announced the appointment of Sonya Branco, replacing Stephane Lefebvre, as Vice President, Finance and Chief Financial Officer of CAE Inc., effective May 23, 2016.

2 | 2 CAE Annual Report 2016

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

Management’s Discussion and Analysis

2. INTRODUCTION

In this report, we, us, our, CAE and Company refer to CAE Inc. and its subsidiaries. Unless we have indicated otherwise:

- This year and 2016 mean the fiscal year ending March 31, 2016;

- Last year, prior year and a year ago mean the fiscal year ended March 31, 2015;

- Dollar amounts are in Canadian dollars.

This report was prepared as of May 19, 2016, and includes our management’s discussion and analysis (MD&A) for the year and the three-month period ended March 31, 2016 and the consolidated financial statements and notes for the year ended March 31, 2016. We have prepared it to help you understand our business, performance and financial condition for fiscal 2016. Except as otherwise indicated, all financial information has been reported in accordance with International Financial Reporting Standards (IFRS). All quarterly information disclosed in the MD&A is based on unaudited figures.

For additional information, please refer to our annual consolidated financial statements for this fiscal year, which you will find in the annual report for the year ended March 31, 2016. The MD&A provides you with a view of CAE as seen through the eyes of management and helps you understand the company from a variety of perspectives:

- Our vision;

- Our strategy;

- Our operations;

- Foreign exchange;

- Non-GAAP and other financial measures;

- Consolidated results;

- Results by segment;

- Consolidated cash movements and liquidity;

- Consolidated financial position;

- Business combinations;

- Event after the reporting period;

- Business risk and uncertainty;

- Related party transactions;

- Changes in accounting policies;

- Controls and procedures;

- Oversight role of the Audit Committee and Board of Directors.

You will find our most recent annual report and annual information form (AIF) on our website at www.cae.com, on SEDAR at www.sedar.com or on EDGAR at www.sec.gov.

CAE Annual Report 2016 | 3

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, research and development (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 including cybersecurity risk, length of sales cycle, continued returns to shareholders 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 including corruption risk 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 2016

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 seven decades. Our global presence is the broadest in the industry, with 160 sites and training locations in over 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 three core markets: civil aviation, defence and security, and healthcare.

Our capital and other resource allocation decisions are guided by three overarching strategic imperatives: focus on our three core markets; protect our leadership position through innovation; and grow by providing the most comprehensive solutions worldwide to enable us to be the recognized global training partner of choice for our customers.

We are a unique, pure-play simulation and training company with a proven record of commitment to our customers’ long-term training needs.

Six pillars of strength

We believe there are six fundamental strengths that underpin our strategy and position us well for sustainable long-term growth:

- High degree of recurring business;

- Strong competitive moat;

- Headroom in large markets;

- Underlying secular tailwinds;

- Potential for superior returns;

- Culture of innovation.

High degree of recurring business

Nearly 60% of our business is derived from the provision of services and largely involves long-term contracts and training demand from customers operating under regulation that require them to train on a recurrent basis.

Strong competitive moat

We pride ourselves in building strong customer and partner relationships, which in many cases span several decades, and we are a market leader across all of our market segments. We offer our customers unique comprehensive solutions with market-leading global reach and scale.

Headroom in large markets

We provide innovative training solutions to customers in large addressable markets in civil aviation, defence and security and healthcare with substantial headroom to grow our market share over the long term.

Underlying secular tailwinds

CAE Annual Report 2016 | 5

Management’s Discussion and Analysis

3.4 Our operations

We provide integrated training solutions to three markets globally:

- The civil aviation market includes major commercial airlines, regional airlines, business aircraft operators, civil helicopter operators, aircraft manufacturers, 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 address the total lifecycle needs of the professional pilot, from cadet to captain, with our comprehensive aviation training solutions. We are the world’s largest provider of commercial aviation training services and the second largest in business aviation training services. Our 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 other company in our industry. We provide aviation training services in
30 countries and 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.

Among our thousands of customers, we have long-term training centre operations and training services agreements and joint ventures with approximately 40 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 261 FFSs, including those 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. In the formation of new pilots, CAE operates the largest ab initio flight training network in the world with 9 academies and a fleet of over 165 aircraft. In the area of resource management, CAE is the global market leader in the provision of flight crew and technical personnel to airlines, aircraft leasing companies, manufacturers and MRO companies worldwide.

Quality, fidelity and reliability are hallmarks of the CAE brand in flight simulation and we are the world leader in the development of civil flight simulators. We continuously innovate our processes and lead the market in the design, manufacture and integration 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 and 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 long and active service lives, often spanning a number of decades of continuous use. We also provide best-in-class support with a full range of services and by leveraging our extensive worldwide network of spare parts and service teams.

Market drivers

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

- Pilot training and certification regulations;

- Safety and efficiency imperatives of commercial airline operators;

- Expected global growth in air travel;

- Growing active fleet of commercial aircraft;

- Demand for trained aviation professionals.

Pilot training and certification regulations

Civil aviation training has a high degree of recurring business driven by a highly-regulated environment through global and national standards for pilot licensing and certification, amongst other regulatory requirements. These mandatory and recurring training requirements are regulated by national and international aviation regulatory authorities such as the International Civil Aviation Organization (ICAO), European Aviation Safety Agency (EASA), and Federal Aviation Administration (FAA).

Recent 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 the Airline Transport Pilot (ATP) requirements in the U.S. Various national and regional aviation regulatory agencies have recently published regulatory requirements, standards and guidance on these specific topics.

CAE Annual Report 2016 | 7

Management’s Discussion and Analysis

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 ab initio 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 more than 15 of these nations already use these regulations with training providers and airlines. CAE delivers MPL programs in Asia, the Middle East and Europe with various airlines. As the MPL methodology continues to gain momentum, it will result in increased use of simulation-based training.

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, pilot capability gaps, evolving regulatory and training environment, and the large number of new aircraft programs being executed. 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.

Expected global growth in air travel

Secular growth trend 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, the aerospace industry’s widely held expectation is that long-term average growth for air travel will continue at 4.2% annually over the next decade. In calendar 2015, global passenger traffic increased by 6.5% compared to calendar 2014. For the first three months of calendar 2016, passenger traffic increased by 7.0% compared to the first three months of calendar 2015. Emerging markets continued to outperform with passenger traffic in the Middle East, Asia and Latin America growing at 10.8%, 8.6% and 5.3% respectively, while Europe and North America increased 5.4% and 4.7% respectively.

According to the FAA, the total number of business jet flights, which includes all domestic and international flights, remained active with 1.4% growth over the past 12 months. There is a strong relationship between the level of corporate profitability and economic growth and demand for business jet travel. In helicopter aviation, demand is driven mainly by the level of offshore activity in the oil and gas sector, as helicopter operators catering to this sector make up the majority of a relatively small training segment. The current protracted downturn in petroleum prices has negatively impacted offshore activity for helicopter operators.

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.

Growing active fleet of commercial aircraft

As an integrated training solutions provider, our long-term growth is closely tied to the active commercial aircraft fleet.

The global active commercial aircraft fleet has grown by an average of 3.2% annually over the past 20 years and is widely expected to continue to grow at an approximate average rate 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 2015 to March 2016, the global commercial aircraft fleet increased by 4.2%, growing by 8.3% in the Middle East and 7.6% in Asia and increasing moderately by 3.3%, 3.2% and 2.0% in Latin America, Europe and North America respectively.

Our strong competitive moat, as defined by our extensive global training network, best-in-class instructors, comprehensive training programs and strength in training partnerships with airlines allow us to effectively address training needs that arise from a growing active fleet of aircraft.

We are well positioned to leverage our technology leadership and expertise, including CAE 7000XR Series FFSs and CAE SimfinityTM procedures trainers, in delivering training equipment solutions that address the growing training needs of airlines that continue to operate their own training centers.

Major business jet OEMs are continuing with plans to introduce a variety of new aircraft models in the upcoming years. Examples include Bombardier’s Global 7000/8000, Cessna’s Citation Longitude and Hemisphere, Dassault’s Falcon 5X, Gulfstream’s 500/600, Cirrus’ SF50 and Pilatus’ PC-24.

Our business aviation training network, comprehensive suite of training programs, key long term OEM partnerships and ongoing network investments, position us well to effectively address the training demand arising from the entry-into-service of these new aircraft programs.

8 | 8 CAE Annual Report 2016

Management’s Discussion and Analysis

Demand for trained aviation professionals

We have large headroom in the training services market driven by a sustained secular demand for trained aviation professionals. Demand for trained 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. In a study released in 2011, ICAO reports that approximately 26,000 new pilots will be needed per year by 2030 globally to support 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.

DEFENCE AND SECURITY MARKET

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

We are a global leader in the development and delivery of integrated live, virtual and constructive (LVC) training solutions for defence forces. Our expertise spans a broad variety of aircraft, including fighters, helicopters, trainer aircraft, maritime patrol, tanker/transport aircraft and remotely piloted aircraft, also called unmanned aerial systems (UAS). We also offer 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 training solutions to government organizations for emergency and disaster management.

Defence forces seek to increasingly leverage virtual training and balance their training approach between live, virtual and constructive domains to achieve maximum readiness and efficiencies. As such, we have been increasingly pursuing programs requiring the integration of LVC training and these tend to be larger in size than programs involving only a single dimension of such a solution. CAE is a first-tier training systems integrator and uniquely positioned to offer our customers a comprehensive range of innovative LVC solutions, ranging from academic, virtual and live training to immersive, networked mission rehearsal in a synthetic environment. 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, simulator, and live flying instruction; maintenance and logistics support; lifecycle support and technology insertion; and financing alternatives.

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. Recently, we have increased our support for live flying training, such as the live training delivered as part of the NATO Flying Training in Canada (NFTC) program, as we help our customers achieve an optimal balance across their training enterprise.

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;

- Desire to integrate training systems to achieve efficiencies and enhanced preparedness;

- Attractiveness of outsourcing of training and maintenance services;

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

- Relationships with OEMs for simulation and training.

Installed base of enduring defence platforms and new customers

CAE generates a high degree of recurring business from its strong position on enduring platforms, including long-term services contracts. Most defence forces in mature markets such as the United States have slowed down production of new platforms and delayed new acquisition programs, which has required military forces 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-130 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, our prime contractor position on programs such as the U.S. Air Force KC-135 Aircrew Training System and MQ-1 Predator/MQ-9 Reaper aircrew training, and our experience on key enduring platforms, CAE is well-positioned for recurring product upgrades/updates as well as maintenance and support services. In addition, there is strong demand for enduring platforms such as the C-130, P-8A, MH-60R and MQ-1/MQ-9 in markets with growing defence budgets such as Asia and the Middle East, thus providing opportunities to provide new training systems and services for platforms where CAE has significant experience.

CAE Annual Report 2016 | 9

Management’s Discussion and Analysis

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

One of the underlying drivers for CAE’s expertise and capabilities is the increasing use of synthetic training throughout the defence community. More defence forces and governments are increasingly adopting synthetic training for a greater percentage of their overall training approach 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. 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. The nature of mission-focused training demands at least some live training; however, the shift to more synthetic training is advancing. The U.S. Navy reports the share of simulation-based training on some of their existing aircraft platforms could increase to nearly 50% by 2020, and for new aircraft such as the P-8A the training program has been designed for approximately 70% synthetic training. Because of the high cost associated with conducting live training exercises, most defence forces are beginning to rebalance the mix of LVC training and shift more of the training curriculum to virtual and constructive simulation. An example are the contracts that CAE won under the U.S. Air Force KC-135 program to upgrade a range of KC-135 aircrew training devices so that they can be used on the United States Air Force’s Distributed Training Center Network, thus providing them the ability to conduct distributed, virtual tanker training.

Desire to integrate training systems to achieve efficiencies and enhanced preparedness

Increased operational tempo combined with limited personnel and budget pressures have prompted defence forces around the world to seek reliable partners who can help develop, manage and deliver the training systems required to support today’s complex platforms and operations. Increasingly, defence forces are considering a more integrated and holistic approach to training. To help manage the complexities and challenges, many training programs are calling for an industry partner to help design and manage the total training system. CAE refers to this approach as training systems integration (TSI) and has positioned the Company globally as an independent, platform-agnostic training systems integrator. The overall intent for defence forces is to maximize commonality for increased efficiencies, cost savings, and most importantly, enhanced capability for mission preparedness. A training systems integrator can address the overall LVC domain to deliver comprehensive training – from undergraduate individual training all the way through to operational, multi-service and joint mission training.

Attractiveness of outsourcing of training and maintenance services

Another driver for CAE’s expertise and capabilities is the efficiency gained by our customers from outsourcing some training and support services. Defence forces and governments continue to manage expenditures to find ways to reduce costs while not impacting readiness levels, and allow active-duty personnel to focus on operational requirements. There has been a growing trend among defence forces to consider outsourcing a variety of training services and we expect this trend to continue, which aligns directly with CAE’s strategy to grow long-term, recurring services business. We believe governments will increasingly look to industry for training solutions to achieve faster delivery, lower capital investment requirements, and training support required to achieve desired readiness levels. For example, we are continuing deliveries of 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.

Need for synthetic training to conduct integrated, networked mission training, 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, and increasingly to integrate and network various training systems so military forces can train in a virtual world. 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) has released its Simulation Strategy 2025, which specifically calls for leveraging LVC domains within a networked common synthetic environment. The RCAF is transforming its training approach from one that relies on aircraft to one that exploits new technologies to train aircrews in a simulation-focused system that creates a virtual battlespace. The U.S., U.K. and Australian defence forces have published similar strategies. We are actively promoting open, standard simulation architectures, such as the Common Database, to better enable integrated and networked mission training.

Relationships with OEMs for simulation and training

We are a desirable partner to original equipment manufacturers because of our experience, global presence, and innovative technologies. 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 P-8A maritime patrol aircraft and has subcontracted CAE to design and develop P-8A operational flight trainers for the U.S. Navy and Royal Australian Air Force. Boeing continues to market the P-8A internationally and recently signed a contract to deliver the P-8A to the United Kingdom, which will create further opportunities for CAE. Other examples of CAE’s relationship with OEMs on specific platforms creating opportunities for training systems include Airbus Defence & Space on the C295, which is being offered in Canada on the Fixed-Wing Search and Rescue program, Finmeccanica on the M-346 lead-in fighter trainer, which is being offered in the United States as the T-100 on the U.S. Air Force’s T-X program and Lockheed Martin on the C-130J Super Hercules transport aircraft, which is being acquired by several additional international militaries.

CAE is also part of Team Seahawk in partnership with the U.S. Navy and companies such as Lockheed Martin/Sikorsky which is offering the MH-60R helicopter under the foreign military sales program to international customers. In addition, we have a global partnership with General Atomics to offer training solutions for the Predator/Reaper family of remotely piloted aircraft.

10 | 10 CAE Annual Report 2016

Management’s Discussion and Analysis

HEALTHCARE MARKET

We design, manufacture and market simulators and audiovisual and simulation centre management solutions and offer consulting and courseware for training of medical and allied healthcare students as well as 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, audiovisual and simulation centre management solutions and courseware for simulation-based 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. One of our recent innovations, 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, support and unlimited, exclusive access to training. We provide comprehensive simulation centre management solutions for healthcare, 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. We offer consulting, professional services and turnkey project management for healthcare simulation programs, and we recently announced a partnership with the American Society of Anesthesiologists to develop screen-based simulation training for practicing physicians. The new platform will deliver Maintenance of Certification in Anesthesiology (MOCA) education and allow us to expand access to simulation-based clinical training. 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.

Increasing use of simulation in healthcare

Third-party assessments of the global healthcare simulation market, which includes products and services, value 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. 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, audiovisual and 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 at an average rate of 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 new study by patient-safety researchers published in the British Medical Journal in May 2016, medical errors in hospitals and other health-care facilities are the third-leading cause of death in the U.S. 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 or recommended element in a growing movement towards High Stakes Assessment and Certification. Examples in the U.S. include 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.

CAE Annual Report 2016 | 11

Management’s Discussion and Analysis

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. Simulation provides consistent, repeatable training and exposure to a broader range of patients and scenarios than one may experience in normal clinical practice. As an example, our Lucina childbirth simulator is designed to allow healthcare teams to practice both normal deliveries and complex procedures. 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, interprofessional team training, 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 /
	2016	2015	(decrease)
U.S. dollar (US$ or USD)	1.30	1.27	2%
Euro (€ or EUR)	1.48	1.36	9%
British pound (£ or GBP)	1.87	1.88	(1%)

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

	2016	2015	Increase
U.S. dollar (US$ or USD)	1.31	1.14	15%
Euro (€ or EUR)	1.45	1.44	1%
British pound (£ or GBP)	1.98	1.83	8%

For fiscal 2016, the effect of translating the results of our foreign operations into Canadian dollars resulted in an increase in revenue of $126.1 million and an increase in net income of $11.1 million, when compared to fiscal 2015. 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.

12 | 12 CAE Annual Report 2016

Management’s Discussion and Analysis

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. We apply net investment hedge accounting to hedge our net investments in our U.S. entities. We have designated a portion of the principal amount of our U.S. dollar private placements as the hedging item of those investments.

- 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 operations’ 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 minimize the impact foreign exchange market fluctuations may have, 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)		$	12.0	$	3.4	$	(2.7)	$	0.7
Euro (€ or EUR)			3.5		0.3		(0.2)		0.1
British pound (£ or GBP)			1.4		0.1		(0.1)		-

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

CAE Annual Report 2016 | 13

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. These measures should not be confused with, or used as an alternative for, performance measures calculated according to GAAP. Furthermore, these non-GAAP measures should not be compared with similarly titled measures provided or used by 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 and includes the value of expected future revenues. Expected future revenues from customers under short-term and
long-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. Defence and Security contracts are usually executed over a long-term period but 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 benefit 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.

14 | 14 CAE Annual Report 2016

Management’s Discussion and Analysis

Gross profit

Gross profit is a non-GAAP measure equivalent to the operating profit excluding research and development expenses, selling, general and administrative expenses, other (gains) losses – net, after tax share in profit of equity accounted investees and restructuring costs. We believe it is useful to management and investors in evaluating our ongoing operational performance.

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.

Net income before specific items

Net income before specific items is a non-GAAP measure we use as an alternate view of our operating results. We calculate it by taking our net income attributable to equity holders of the Company from continuing operations and adding back restructuring costs, net of tax, and one-time tax items. We track it because we believe it provides a better indication of our operating performance and makes it easier to compare across reporting periods.

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 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, tax structures and discontinued operations. We track it 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 taking the operating profit and excluding the impact of restructuring costs.

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 Civil 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.

16 | 16 CAE Annual Report 2016

Management’s Discussion and Analysis

4. CONSOLIDATED RESULTS¹

4.1 Results from operations – fourth quarter of fiscal 2016

(amounts in millions, except per share amounts)			Q4-2016	Q3-2016	Q2-2016	Q1-2016	Q4-2015
Revenue		$	722.5	616.3	616.8	557.0	631.6
Cost of sales		$	511.9	447.8	457.6	399.4	449.6
Gross profit³		$	210.6	168.5	159.2	157.6	182.0
	As a % of revenue	%	*29.1*	27.3	25.8	28.3	28.8
Research and development expenses³		$	26.5	20.0	20.3	20.8	19.5
Selling, general and administrative expenses		$	88.9	81.5	69.3	71.8	69.4
Other gains – net		$	(10.8)	(6.7)	(2.0)	(4.7)	(5.6)
After tax share in profit of equity accounted investees		$	(10.6)	(12.9)	(8.4)	(11.5)	(6.7)
Restructuring costs		$	16.8	2.0	2.4	7.7	-
Operating profit ³		$	99.8	84.6	77.6	73.5	105.4
	As a % of revenue	%	*13.8*	13.7	12.6	13.2	16.7
Finance income		$	(2.8)	(2.4)	(2.3)	(2.0)	(2.3)
Finance expense		$	21.2	21.4	21.4	20.7	20.6
Finance expense – net		$	18.4	19.0	19.1	18.7	18.3
Earnings before income taxes and discontinued operations		$	81.4	65.6	58.5	54.8	87.1
Income tax expense (recovery)		$	19.3	8.5	(17.2)	9.8	20.2
	As a % of earnings before income taxes and
	discontinued operations (income tax rate)	%	24	13	(29)	18	23
Earnings from continuing operations		$	62.1	57.1	75.7	45.0	66.9
(Loss) earnings from discontinued operations		$	(2.4)	(0.2)	(6.5)	(0.5)	0.8
Net income		$	59.7	56.9	69.2	44.5	67.7
Attributable to:
Equity holders of the Company
	Continuing operations	$	61.2	57.9	75.3	44.9	63.3
	Discontinued operations	$	(2.4)	(0.2)	(6.5)	(0.5)	0.8
		$	58.8	57.7	68.8	44.4	64.1
Non-controlling interests		$	0.9	(0.8)	0.4	0.1	3.6
		$	59.7	56.9	69.2	44.5	67.7
Earnings per share (EPS) attributable to equity holders
of the Company
Basic and diluted - continuing operations		$	0.23	0.21	0.28	0.17	0.24
Basic and diluted - discontinued operations		$	(0.01)	-	(0.02)	-	-
		$	0.22	0.21	0.26	0.17	0.24

Revenue from continuing operations was 17% higher than last quarter and 14% higher compared to the fourth quarter of fiscal 2015

Revenue from continuing operations was $106.2 million higher than last quarter mainly because:

- Civil Aviation Training Solutions revenue increased by $58.3 million, or 17%, mainly due to higher revenue from our manufacturing facility due to higher production levels and the timing of sales of partially manufactured simulators. Revenue generated in the Americas and Europe as a result of higher FFS utilization further contributed to the increase along with a favourable foreign exchange impact on the translation of foreign operations;

- Defence and Security revenue increased by $40.4 million, or 16%, mainly due to higher revenue from North American programs and a higher level of activity from Australian programs;

- Healthcare revenue increased by $7.5 million, or 27%, due to higher revenue from simulation centre management solutions, higher patient simulator revenue as well as an increase in interventional simulator revenue driven mainly by key partnerships with OEMs.

CAE Annual Report 2016 | 17

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

Management’s Discussion and Analysis

Revenue from continuing operations was $90.9 million higher than the same period last year largely because:

- Defence and Security revenue increased by $59.0 million, or 25%, mainly due to the integration into our results of the revenues from BMAT acquired in the second quarter of this year, a favourable foreign exchange impact on the translation of foreign operations and higher revenue from North American programs;

- Civil Aviation Training Solutions revenue increased by $25.4 million, or 7%, mainly due to a favourable foreign exchange impact on the translation of foreign operations, higher FFS utilization primarily in Europe, higher revenue from our manufacturing facility as a result of higher production levels and an increased demand for our crew sourcing business;

- Healthcare revenue increased by $6.5 million, or 22%, mainly due to higher patient simulator revenue and a favourable foreign exchange impact on the translation of foreign operations.

You will find more details in Results by segment.

Segment operating income⁴ was $30.0 million higher than last quarter and $11.2 million higher compared to the fourth quarter of fiscal 2015

Operating profit this quarter was $99.8 million or 13.8% of revenue, compared to $84.6 million or 13.7% of revenue last quarter and $105.4 million or 16.7% of revenue in the fourth quarter of fiscal 2015. Restructuring costs of $16.8 million were recorded this quarter compared to $2.0 million last quarter and nil in the fourth quarter of last year. Segment operating income was $116.6 million this quarter compared to $86.6 million last quarter.

Segment operating income was $30.0 million or 35% higher compared to last quarter. Increases in segment operating income were $19.7 million, $8.4 million and $1.9 million for Civil Aviation Training Solutions, Defence and Security and Healthcare respectively.¹

Segment operating income increased by $11.2 million or 11% over the fourth quarter of fiscal 2015. The increase in segment operating income of $13.2 million for Civil Aviation Training Solutions was partially offset by decreases of $1.4 million and $0.6 million for Defence and Security and Healthcare respectively.

You will find more details in Restructuring costs and Results by segment.

Net finance expense was $0.6 million lower compared to last quarter and $0.1 million higher over the fourth quarter of fiscal 2015

Net finance expense was lower this quarter compared to last quarter. The decrease was mainly due to higher interest income and lower interest expense on accretion of other non-current liabilities.

Net finance expense this quarter was stable compared to the fourth quarter of fiscal 2015.

Income tax rate was 24% this quarter

Income taxes this quarter were $19.3 million, representing an effective tax rate of 24%, compared to 13% last quarter and 23% for the fourth quarter of fiscal 2015.

The increase in the tax rate over last quarter was mainly due to the change in the mix of income from various jurisdictions and U.S. tax incentives applicable to domestic manufacturers recognized last quarter.

The increase in the tax rate over the fourth quarter of fiscal year 2015 was mainly due the change in the mix of income from various jurisdictions.

18 | 18 CAE Annual Report 2016

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

Management’s Discussion and Analysis

4.2 Results from operations – fiscal 2016

(amounts in millions, except per share amounts)			FY2016	FY2015
Revenue		$	2,512.6	2,246.3
Cost of sales		$	1,816.7	1,642.6
Gross profit		$	695.9	603.7
	As a % of revenue	%	*27.7*	26.9
Research and development expenses		$	87.6	64.1
Selling, general and administrative expenses		$	311.5	264.6
Other gains – net		$	(24.2)	(20.3)
After tax share in profit of equity accounted investees		$	(43.4)	(37.5)
Restructuring costs		$	28.9	-
Operating profit		$	335.5	332.8
	As a % of revenue	%	*13.4*	14.8
Finance income		$	(9.5)	(9.8)
Finance expense		$	84.7	80.7
Finance expense – net		$	75.2	70.9
Earnings before income taxes and discontinued operations		$	260.3	261.9
Income tax expense		$	20.4	57.8
	As a % of earnings before income taxes and
	discontinued operations (income tax rate)	%	8	22
Earnings from continuing operations		$	239.9	204.1
(Loss) earnings from discontinued operations		$	(9.6)	0.6
Net income		$	230.3	204.7
Attributable to:
Equity holders of the Company
	Continuing operations	$	239.3	201.2
	Discontinued operations	$	(9.6)	0.6
		$	229.7	201.8
Non-controlling interests		$	0.6	2.9
		$	230.3	204.7
EPS attributable to equity holders of the Company
Basic and diluted - continuing operations		$	0.89	0.76
Basic and diluted - discontinued operations		$	(0.04)	-

Revenue from continuing operations was $266.3 million or 12% higher than last year

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

- Civil Aviation Training Solutions revenue increased by $134.5 million, or 10%, mainly due to a favourable foreign exchange impact on the translation of foreign operations, higher FFS utilization in Europe and the Americas, the contribution of newly deployed simulators in our network, higher revenue from our manufacturing facility as a result of higher production levels and increased demand for our crew sourcing business;

- Defence and Security revenue increased by $112.7 million, or 13%, mainly due to a favourable foreign exchange impact on the translation of foreign operations, the integration into our results of the revenues from BMAT acquired in the second quarter of this year and higher revenue from European programs. The increase was partially offset by lower revenue from North American programs;

- Healthcare revenue increased by $19.1 million, or 20%, mainly due to higher patient simulator revenue resulting primarily from the introduction of new products and a favourable foreign exchange impact on the translation of foreign operations.

CAE Annual Report 2016 | 19

Management’s Discussion and Analysis

Gross profit was $92.2 million higher than last year

Gross profit was $695.9 million this year, or 27.7% of revenue compared to $603.7 million this year, or 26.9% of revenue last year. As a percentage of revenue, gross profit was higher when compared to last year.

Segment operating income was $31.6 million higher than last year

Operating profit for the year was $335.5 million or 13.4% of revenue, compared to $332.8 million or 14.8% of revenue last year. Restructuring costs of $28.9 million were recorded this year and segment operating income was $364.4 million.

Segment operating income was $31.6 million or 9% higher compared to last year. Increases in segment operating income were
$26.9 million, $4.2 million and $0.5 million for Civil Aviation Training Solutions, Defence and Security and Healthcare respectively.

You will find more details in Restructuring costs and Results by segment.

Net finance expense was $4.3 million higher than last year

			FY2015 to
(amounts in millions)			FY2016
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)	$	0.3
	Increase in finance expense on finance leases		0.5
	Increase in finance expense on royalty obligations		0.1
	Increase in other finance expense		2.4
	Increase in borrowing costs capitalized		0.7
Increase in finance expense from the prior period		$	4.0
Change in finance income from the prior period:
	Increase in interest income on loans and finance lease contracts	$	(0.4)
	Decrease in other finance income		0.7
Decrease in finance income from the prior period		$	0.3
Net finance expense, current period		$	75.2

Net finance expense was $75.2 million this year, $4.3 million or 6% higher than last year. The increase was mainly due to higher interest expense resulting from letters of credit fees, lower borrowing costs capitalized to certain long-term assets and higher expense on employee obligations and finance lease obligations.

Income tax rate was 8% this year

This fiscal year, income taxes were $20.4 million, representing an effective tax rate of 8%, compared to 22% for the same period last year.

This year’s tax rate includes one-time items involving the favourable settlement of tax oppositions in Canada with respect to the tax treatment of the sale of certain simulators partially offset by the negative impact of certain tax audits. Excluding the effect of these one-time items and U.S. tax incentive applicable to domestic manufacturers, the income tax rate would have been 20% this year. The lower tax rate compared to fiscal year 2015 is mainly due to the change in the mix of income from various jurisdictions.

CAE Annual Report 2016 | 21

Management’s Discussion and Analysis

4.4 Restructuring costs

We implemented a process improvement program this year to realize the benefits from the transformation of our production processes and product offering to further strengthen our competitive position, which has resulted in a reduction of our workforce. Net restructuring costs, consisting mainly of severances and other related costs, of $20.6 million after-tax were recognized in net income in fiscal 2016.

You will find more details in Note 12 of our consolidated financial statements.

4.5 Consolidated orders and total backlog

Our total consolidated backlog was $6,372.6 million at the end of fiscal 2016, which is 19% higher than last year. New orders of $2,782.0 million were added this year, partially offset by $2,512.6 million in revenue generated from our obligated backlog. The acquisition of BMAT during the year resulted in an adjustment to obligated backlog of $463.3 million and to unfunded backlog⁵ of $86.0 million. In addition to the acquisition of BMAT, obligated backlog adjustments included the revaluation of certain contracts and the cancelation of two orders from previous years within our Civil Aviation Training Solutions segment as well as foreign exchange movements. Our joint venture backlog⁵ was $551.3 million and our unfunded backlog was $756.4 million.

Total backlog up 19% over last year

(amounts in millions)		FY2016		FY2015
Obligated backlog, beginning of period	$	4,354.1	$	4,205.6
+ orders		2,782.0		2,361.2
- revenue		(2,512.6)		(2,246.3)
+ / - adjustments		441.4		33.6
Obligated backlog, end of period	$	5,064.9	$	4,354.1
Joint venture backlog (all obligated)		551.3		607.8
Unfunded backlog		756.4		395.3
Total backlog	$	6,372.6	$	5,357.2

In fiscal 2015, adjustments were 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.¹

The book-to-sales ratio for the quarter was 1.23x. The ratio for the last 12 months was 1.11x.

You will find more details in Results by segment.

CAE Annual Report 2016 | 23

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

Management’s Discussion and Analysis

5. RESULTS BY SEGMENT

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

- Civil Aviation Training Solutions;

- Defence and Security;

- Healthcare.¹

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)		FY2016	FY2015	Q4-2016	Q3-2016	Q2-2016	Q1-2016	Q4-2015

Civil Aviation Training Solutions	$	237.4	210.5	75.0	55.3	50.1	57.0	61.8
	%	*16.6*	16.3	*19.1*	16.5	13.7	17.0	16.8

Defence and Security	$	119.8	115.6	38.1	29.7	28.4	23.6	39.5
	%	*12.3*	13.5	*13.0*	11.7	12.6	12.0	16.8

Healthcare	$	7.2	6.7	3.5	1.6	1.5	0.6	4.1
	%	*6.3*	7.1	*9.8*	5.7	5.9	2.5	14.0
Total segment operating income (SOI)	$	364.4	332.8	116.6	86.6	80.0	81.2	105.4
Restructuring costs	$	(28.9)	-	(16.8)	(2.0)	(2.4)	(7.7)	-
Operating profit	$	335.5	332.8	99.8	84.6	77.6	73.5	105.4

Capital employed⁶

		March 31	December 31	September 30	June 30	March 31
(amounts in millions)		2016	2015	2015	2015	2015

Civil Aviation Training Solutions	$	2,017.1	2,022.6	2,075.1	2,023.0	1,984.2


Defence and Security	$	720.3	745.7	746.3	749.4	675.5


Healthcare	$	206.0	218.2	210.4	197.8	206.5

	$	2,943.4	2,986.5	3,031.8	2,970.2	2,866.2

24 | 24 CAE Annual Report 2016

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

Management’s Discussion and Analysis

5.1 Civil Aviation Training Solutions

FISCAL 2016 EXPANSIONS AND NEW INITIATIVES

Acquisition

- We announced the conclusion of a conditional agreement with Lockheed Martin Corporation to acquire Lockheed Martin Commercial Flight Training (LMCFT). The acquisition was completed on May 2, 2016.

Expansions

- We announced five new aviation training programs that are, or will soon be, ready for training. The training programs are for Bombardier, Gulfstream and Dassault business jets and Sikorsky and Eurocopter helicopters;

- We achieved FAA Level D qualification for the Falcon 900/2000 EASy, located at the Dallas East Training Centre in the U.S.;

- We announced, with Líder Aviação, the expansion of our joint venture training program in Brazil to support initial and recurrent training for AW139 pilots and enable mission specific training for various operating profiles;

- We entered into a partnership with Gulf Aviation Academy (GAA) to offer additional Embraer 170/190 training services in Europe. We have relocated GAA’s CAE-built Embraer 170/190 FFS and flight training device to our training centre in Amsterdam to cater to the increased demand for such training in Europe;

- We inaugurated the second A320 FFS at our Barcelona training centre as part of our training services agreement with Vueling Airlines, S.A. We also announced that the centre will be extended to provide further classrooms and training facilities to meet Vueling’s growing training demand requirements.

New programs and products

- We achieved Level D qualification for world’s first A350 XWB full-flight simulator, located at the Airbus Training Centre in Toulouse, France. We also received qualifications for the A350 fixed based flight training device used for pilot Common Type Ratings;

- We qualified the world’s first simulators equipped with EASA-approved, FAA-approved and ICAO-compliant Upset Prevention and Recovery Training instructor stations;

- We achieved Level D qualification for the Airbus Helicopters H225 FFS located at our training centre in Oslo, Norway. Our training centre was also designated an Approved Simulation Centre by Airbus Helicopters making us the first independent simulation training provider to receive this distinction;

- We announced, together with Bombardier Commercial Aircraft, that we achieved Interim Level C qualification on the FFS for the new CS100 aircraft.

ORDERS

Civil Aviation Training Solutions obtained contracts this quarter expected to generate future revenues of $522.9 million, including contracts for 20 FFSs.

FFS contracts awarded for the quarter:

- Five FFSs, including three Boeing 737MAX, one Airbus A320 Neo and one ATR72-600 to Lion Air;

- Five Boeing 737NG FFSs to Southwest Airlines;

- One Boeing 767 FFS to Uzbekistan Airlines;

- One Boeing 737NG FFS to Avenger Flight Group;

- One Airbus A320 FFS to Sofia Flight Training;

- Seven FFSs, including three Airbus A320s, one Boeing 737NG, one Boeing 787, one MD11F and one ATR72-600 to undisclosed customers.

This brings the civil FFS order intake for the year to 53 FFSs.

Other notable contract awards for the quarter included:

- An agreement with Lion Air for CAE’s EASA compliant Airline Transport Pilot License (ATPL) ground-school training program for the airline’s three flight schools located in Indonesia;

- An exclusive long-term contract with JetBlue to provide a new competency-based training program for pilots that incorporates classroom learning, real-world flying experience and instruction in FSSs.

CAE Annual Report 2016 | 25

Management’s Discussion and Analysis

Financial results
(amounts in millions, except operating margins, SEU, FFSs deployed and utilization rate)			FY2016	FY2015	Q4-2016	Q3-2016	Q2-2016	Q1-2016	Q4-2015
Revenue		$	1,429.1	1,294.6	393.0	334.7	365.2	336.2	367.6
Segment operating income		$	237.4	210.5	75.0	55.3	50.1	57.0	61.8
Operating margins		%	*16.6*	16.3	*19.1*	16.5	13.7	17.0	16.8
Depreciation and amortization		$	133.8	120.1	34.8	34.5	33.4	31.1	30.8
Property, plant and equipment
	expenditures	$	92.9	111.3	29.6	21.3	20.6	21.4	29.4
Intangible assets and other
	assets expenditures	$	33.7	40.6	8.3	7.6	10.6	7.2	8.8
Capital employed		$	2,017.1	1,984.2	2,017.1	2,022.6	2,075.1	2,023.0	1,984.2
Total backlog		$	3,078.6	2,903.3	3,078.6	3,085.6	3,003.1	2,789.4	2,903.3
SEU⁷			204	197	205	205	202	203	201
FFSs deployed			261	256	261	258	259	258	256
Utilization rate⁷		%	71	68	76	73	64	73	70

Revenue up 17% over last quarter and up 7% over the fourth quarter of fiscal 2015¹

The increase over last quarter was mainly due to higher revenue from our manufacturing facility due to higher production levels and the timing of sales of partially manufactured simulators. Revenue generated in the Americas and Europe as a result of higher FFS utilization further contributed to the increase along with a favourable foreign exchange impact on the translation of foreign operations.

The increase over the fourth quarter of fiscal 2015 was mainly due to a favourable foreign exchange impact on the translation of foreign operations, higher FFS utilization primarily in Europe, higher revenue from our manufacturing facility as a result of higher production levels and an increased demand for our crew sourcing business.

Revenue was $1,429.1 million this year, 10% or $134.5 million higher than last year

The increase over last year was mainly due to a favourable foreign exchange impact on the translation of foreign operations, higher FFS utilization in Europe and the Americas, the contribution of newly deployed simulators in our network, higher revenue from our manufacturing facility as a result of higher production levels and increased demand for our crew sourcing business.

Segment operating income up 36% over last quarter and up 21% over the fourth quarter of fiscal 2015

Segment operating income was $75.0 million (19.1% of revenue) this quarter, compared to $55.3 million (16.5% of revenue) last quarter and $61.8 million (16.8% of revenue) in the fourth quarter of fiscal 2015.

Segment operating income increased by $19.7 million, or 36%, over last quarter. The increase was mainly due to higher FFS utilization in Europe and in the Americas and higher revenue from our manufacturing facility. The benefit recognized this quarter related to the renegotiation of long-term royalty obligations was fully offset by a loss on the termination of a client agreement, a loss on litigation, the impairment of an asset and by an unfavourable foreign exchange impact from the revaluation of our non-cash working capital accounts.

Segment operating income increased by $13.2 million, or 21%, over the fourth quarter of fiscal 2015. The increase was mainly due to higher profitability from our Asian joint ventures, higher FFS utilization in Europe and a favourable foreign exchange impact on the translation of foreign operations, partially offset by a lower utilization in the Americas and a less favourable program mix from our manufacturing facility.

Segment operating income was $237.4 million, 13% or $26.9 million higher than last year

Segment operating income was $237.4 million (16.6% of revenue) this year, compared to $210.5 million (16.3% of revenue) last year.

The increase was mainly attributable to higher FFS utilization in Europe, higher profitability from our Asian joint ventures and a favourable foreign exchange impact on the translation of foreign operations, partially offset by a less favourable program mix from our manufacturing facility, higher net research and development expenses, last year’s gains on the partial disposal of interests in investments and the recognition of a deferred tax asset in one of our joint ventures.

Property, plant and equipment expenditures at $29.6 million this quarter and $92.9 million for the year

Maintenance capital expenditures were $8.4 million for the quarter and $34.6 million for the year. Growth capital expenditures were $21.2 million for the quarter and $58.3 million for the year.

26 | 26 CAE Annual Report 2016

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

Management’s Discussion and Analysis

Capital employed decreased $5.5 million from last quarter and increased $32.9 million over last year

The decrease in capital employed from last quarter was mainly due to lower property, plant and equipment and lower intangible assets resulting primarily from movements in foreign exchange rates. The decrease was partially offset by a higher investment in
non-cash working capital mainly as a result of lower accounts payable and accrued liabilities and lower derivative financial liabilities.

The increase in capital employed over last year was mainly due to a higher investment in equity accounted investees due to increased profitability within our joint ventures, offset in part by dividends issued, higher intangible assets mainly as a result of movements in foreign exchange rates and lower derivative financial liabilities. The increase was partially offset by a lower investment in non-cash working capital.


Total backlog was at $3,078.6 million at the end of the year

(amounts in millions)	FY2016		FY2015
Obligated backlog, beginning of period	$	2,397.7	$	2,161.7
+ orders		1,683.0		1,512.3
- revenue		(1,429.1)		(1,294.6)
+ / - adjustments		(28.3)		18.3
Obligated backlog, end of period	$	2,623.3	$	2,397.7
Joint venture backlog (all obligated)		455.3		505.6
Total backlog	$	3,078.6	$	2,903.3

Fiscal 2016 adjustments are mainly due to the revaluation of certain contracts during the year, the cancelation of two orders from previous years and foreign exchange movements.

Fiscal 2015 adjustments are mainly due foreign exchange movements.

This quarter's book-to-sales ratio was 1.33x. The ratio for the last 12 months was 1.18x.

5.2 Defence and Security

FISCAL 2016 EXPANSIONS AND NEW INITIATIVES

Acquisition

- We finalized the acquisition of BMAT and are now the prime contractor responsible for the NATO Flying Training in Canada (NFTC) program, which delivers live flying training.

Expansions

- We delivered a comprehensive CH-147F Chinook training solution to Garrison Petawawa that was used to formally graduate the Royal Canadian Air Force’s first class of CH-147F aircrews;

- We expanded our collaboration agreement with Eurofighter Simulation Systems related to the provision of visual systems on the Eurofighter Typhoon Aircrew Synthetic Training Aids program;

- We announced that our CAE Brunei Multi-Purpose Training Centre (MPTC) was certified as an Approved Training Organization according to the guidelines and procedures established by EASA, which will allow the CAE Brunei MPTC to offer instructor-led training on the Sikorsky S-92 helicopter;

- We commenced the provision of maintenance and support services on the New Zealand Defence Force's SH-2G(I) helicopter synthetic training devices;

- We expanded our C-130 training center located in Florida, U.S. with the addition of a new C-130H/L-382 full-mission simulator featuring the Rockwell Collins Flight2 glass cockpit;

- We delivered a comprehensive T-6C ground-based training system to the Royal New Zealand Air Force and have now commenced the provision of maintenance and support services at RNZAF Base Ohakea;

- We delivered a new training centre facility and KC-130J weapon systems trainer to the Kuwait Air Force and have now commenced the provision of on-site training support services.

New programs and products

- We supported the Royal Australian Air Force's (RAAF) participation in Coalition Virtual Flag 15, one of the world's largest virtual air combat exercises, so that live-flying and simulated aircraft could participate in this joint, multi-national live-virtual-constructive training exercise;

CAE Annual Report 2016 | 27

Management’s Discussion and Analysis

ORDERS

Defence and Security was awarded $331.0 million in orders this quarter, including notable contract awards from:

- The U.S. Air Force (USAF) under the KC-135 Aircrew Training System program to upgrade a range of KC-135 aircrew training devices so that they can be used on the USAF's Distributed Training Center Network;

- Lockheed Martin to provide Phenom 100 synthetic training equipment in support of the U.K.'s Military Flying Training System program;

- Australia's Department of Defence Capability and Acquisition Sustainment Group to develop a C-130J Fuselage Cargo Compartment Trainer for the RAAF;

- The Government of Canada to provide the Canadian Forces with simulator maintenance and engineering support services;

- The Government of Canada to provide the Canadian Coast Guard with a CAE 3000 Series helicopter simulator that will feature cockpits for both the Bell 412EPI and Bell 429 helicopters;

- Boeing to provide a range of upgrades to previously-contracted P-8A operational flight trainers for the U.S. Navy;

- The NATO Support and Procurement Agency to perform a major upgrade on the German Navy's Sea King MK41 helicopter simulator;

- The U.K. Ministry of Defence to upgrade two of the CH-47 Chinook dynamic mission simulators at CAE's Medium Support Helicopter Aircrew Training Facility at Royal Air Force Benson in the U.K.

Financial results
(amounts in millions, except operating margins)			FY2016	FY2015	Q4-2016	Q3-2016	Q2-2016	Q1-2016	Q4-2015
Revenue		$	970.1	857.4	293.7	253.3	226.2	196.9	234.7
Segment operating income		$	119.8	115.6	38.1	29.7	28.4	23.6	39.5
Operating margins		%	*12.3*	13.5	*13.0*	11.7	12.6	12.0	16.8
Depreciation and amortization		$	69.8	55.7	20.7	17.0	16.6	15.5	15.2
Property, plant and equipment
	expenditures	$	22.9	30.2	9.4	7.4	4.3	1.8	10.8
Intangible assets and other
	assets expenditures	$	17.6	19.1	8.1	3.7	3.8	2.0	5.5
Capital employed		$	720.3	675.5	720.3	745.7	746.3	749.4	675.5
Total backlog		$	3,294.0	2,453.9	3,294.0	3,281.6	3,378.9	2,642.9	2,453.9

Revenue up 16% over last quarter and up 25% over the fourth quarter of fiscal 2015

The increase over last quarter was mainly due to higher revenue from North American programs and a higher level of activity from Australian programs.

The increase over the fourth quarter of fiscal 2015 was mainly due to the integration into our results of the revenues from BMAT acquired in the second quarter of this year, a favourable foreign exchange impact on the translation of foreign operations and higher revenue from North American programs.

Revenue was $970.1 million this year, 13% or $112.7 million higher than last year

The increase was mainly due to a favourable foreign exchange impact on the translation of foreign operations, the integration into our results of the revenues from BMAT acquired in the second quarter of this year and higher revenue from European programs. The increase was partially offset by lower revenue from North American programs.

Segment operating income up 28% over last quarter and down 4% from the fourth quarter of fiscal 2015

Segment operating income was $38.1 million (13.0% of revenue) this quarter, compared to $29.7 million (11.7% of revenue) last quarter and was $39.5 million (16.8% of revenue) in the fourth quarter of fiscal 2015.

The increase over last quarter was mainly due to higher volume on North American programs and higher margins on Asian programs, partially offset by higher net research and development expenses and higher selling, general and administrative expenses. Segment operating income was also higher as a result of the benefit recognized this quarter related to the renegotiation of long-term royalty obligations and partially offset by an unfavourable tax assessment in one of our joint ventures and a loss on disposal of assets related to our process improvement plan.

The decrease from the fourth quarter of fiscal 2015 was mainly due to higher investment tax credits claimed during the fourth quarter of last year, an unfavourable tax assessment in one of our joint ventures and a loss on disposal of assets related to our process improvement plan, partially offset by the benefit related to the renegotiation of long-term royalty obligations. The decrease was also partially offset by higher volume on North American programs, the integration into our results of BMAT and a favourable foreign exchange impact on the translation of foreign operations, partially offset by higher selling, general and administrative expenses and higher net research and development expenses.

CAE Annual Report 2016 | 29

Management’s Discussion and Analysis

Segment operating income was $119.8 million this year, 4% or $4.2 million higher than last year

Segment operating income was $119.8 million (12.3% of revenue) this year, compared to $115.6 million (13.5% of revenue) last year.

The increase over last year was mainly due to higher margins on North American programs, a favourable foreign exchange impact on the translation of foreign operations, the integration into our results of BMAT and higher volume on European programs, partially offset by higher net research and development expenses, higher selling, general and administrative expenses and lower income from our joint ventures. Segment operating income was also higher as a result of the benefit recognized this year related to the renegotiation of long-term royalty obligations and partially offset by an unfavourable tax assessment in one of our joint ventures, higher investment tax credits claimed last year and a loss on disposal of assets related to our process improvement plan.

Capital employed decreased $25.4 million from last quarter and increased $44.8 million over last year

The decrease from last quarter was mainly due to movements in foreign exchange rates on long-term assets, higher other long-term liabilities and a lower investment in non-cash working capital, partially offset by higher intangible assets.

The increase over last year was mainly due to a higher investment in non-cash working capital, lower other long-term liabilities and an increase in property, plant and equipment, partially offset by lower other long-term assets and lower capital employed as a result of the acquisition of BMAT during the year.


Total backlog up 34% compared to last year

(amounts in millions)	FY2016		FY2015
Obligated backlog, beginning of period	$	1,956.4	$	2,043.9
+ orders		985.6		754.6
- revenue		(970.1)		(857.4)
+ / - adjustments		469.7		15.3
Obligated backlog, end of period	$	2,441.6	$	1,956.4
Joint venture backlog (all obligated)		96.0		102.2
Unfunded backlog		756.4		395.3
Total backlog	$	3,294.0	$	2,453.9

Fiscal 2016 adjustments are mainly due to backlog added as a result of the acquisition of BMAT and foreign exchange movements.

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

This quarter's book-to-sales ratio was 1.13x. The ratio for the last 12 months was1.02x.

In fiscal 2016, $141.7 million of unfunded backlog was transferred to obligated backlog and $419.8 million was added to the unfunded backlog.

5.3 Healthcare

FISCAL 2016 EXPANSIONS AND NEW INITIATIVES

Expansions

- We partnered with MedAffinity to integrate their Electronic Health Records system into our LearningSpace simulation centre management solution, providing more realism in healthcare simulations;

- We signed an exclusive distribution rights agreement with Strategic Operations (STOPS) for Surgical Cut Suit and other simulation training products globally outside of the United States and further expanded our partnership to include distribution rights for U.S. civilian training centers and U.S. military customers.

New programs and products

- We announced the release of CAE Vïvo™, a tablet-operated, facilitator-driven software that allows full control over METIman’s physiology and responses;

- In partnership with the International Nursing Association for Clinical Simulation & Learning (INACSL), we introduced the
INACSL – CAE Healthcare Simulation Fellowship program for healthcare educators and professionals;

30 | 30 CAE Annual Report 2016

Management’s Discussion and Analysis

New programs and products (cont’d)

- We announced the release of Athena, the only high-fidelity female patient simulator with modeled physiology for healthcare;

- In partnership with the National Research Council of Canada, we announced the launch of NeuroVR, the world’s most advanced virtual reality neurosurgery simulator for cranial and endoscopic brain surgery procedures;

- In partnership with the American Society of Anesthesiologists, we announced a collaborative agreement to develop screen-based simulation education for practicing physicians.

ORDERS

CAE Healthcare sales this quarter included:

- Sixteen patient simulators and 29 audiovisual solutions to a public research university in the U.S.;

- Twelve patient simulators and six audiovisual solutions to a state department of health in the U.S.;

- A custom training solution for a global medical device company;

- Five patient simulators and two interventional simulators to a private university in Turkey;

- A turnkey mobile simulation center with a patient simulator and two audiovisual solutions to a public university in Costa Rica.

Financial results
(amounts in millions, except operating margins)			FY2016	FY2015	Q4-2016	Q3-2016	Q2-2016	Q1-2016	Q4-2015
Revenue		$	113.4	94.3	35.8	28.3	25.4	23.9	29.3
Segment operating income		$	7.2	6.7	3.5	1.6	1.5	0.6	4.1
Operating margins		%	*6.3*	7.1	*9.8*	5.7	5.9	2.5	14.0
Depreciation and amortization		$	14.2	13.3	3.6	3.7	3.4	3.5	3.6
Property, plant and equipment
	expenditures	$	2.0	2.7	0.8	0.5	0.3	0.4	0.5
Intangible assets and other
	assets expenditures	$	2.6	4.6	0.4	0.9	0.8	0.5	0.8
Capital employed		$	206.0	206.5	206.0	218.2	210.4	197.8	206.5

Revenue up 27% over last quarter and up 22% over the fourth quarter of fiscal 2015

The increase over last quarter was mainly due to higher revenue from simulation centre management solutions, higher patient simulator revenue as well as an increase in interventional simulator revenue driven mainly by key partnerships with OEMs.

The increase over the fourth quarter of fiscal 2015 was mainly due to higher patient simulator revenue and a favourable foreign exchange impact on the translation of foreign operations.

Revenue was $113.4 million this year, 20% or $19.1 million higher than last year

The increase was mainly due to higher patient simulator revenue resulting primarily from the introduction of new products and a favourable foreign exchange impact on the translation of foreign operations.

Segment operating income higher over last quarter and lower compared to the fourth quarter of fiscal 2015

Segment operating income was $3.5 million this quarter (9.8% of revenue), compared to $1.6 million (5.7% of revenue) last quarter and $4.1 million (14.0% of revenue) in the fourth quarter of fiscal 2015.

The increase over last quarter was mainly due to higher volume, partially offset by an increase in selling, general and administrative expenses driven mainly by a higher investment in marketing expenses.

The decrease from the fourth quarter of fiscal 2015 was mainly due to higher selling, general and administrative expenses as mentioned above, partially offset by higher volume.

Segment operating income was $7.2 million this year, $0.5 million higher than last year

Segment operating income was $7.2 million (6.3% of revenue) this year, compared to $6.7 million (7.1% of revenue) last year.

The increase over last year was mainly due to higher revenue, partially offset by higher selling, general and administrative expenses as mentioned above and a less favourable product mix.

Capital employed decreased by $12.2 million from last quarter and by $0.5 million from last year

The decrease from last quarter was mainly due to lower intangible assets mainly as a result of movements in foreign exchange rates.

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

32 | 32 CAE Annual Report 2016

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.¹

6.1 Consolidated cash movements

(amounts in millions)			FY2016		FY2015		Q4-2016		Q3-2016		Q4-2015
Cash provided by continuing operating activities*		$	348.9	$	337.8	$	100.3	$	108.2	$	101.1
Changes in non-cash working capital			(3.1)		(69.2)		(49.3)		106.7		59.5
Net cash provided by continuing operating activities		$	345.8	$	268.6	$	51.0	$	214.9	$	160.6
Maintenance capital expenditures⁸			(45.4)		(48.5)		(12.7)		(11.3)		(11.5)
Other assets			(19.7)		(15.8)		(6.1)		(4.4)		(5.2)
Proceeds from the disposal of property, plant
	and equipment		1.8		7.6		0.3		-		6.1
Net proceeds from (payments to) equity accounted investees			3.4		(0.3)		(1.3)		4.4

Revenue from continuing operations higher compared to last quarter and the fourth quarter of fiscal 2015

Positive free cash flow1 from continuing operations at $12.8 million this quarter

Higher revenue from continuing operations compared to fiscal 2015

Positive free cash flow from continuing operations at $247.7 million

Positive free cash flow¹ from continuing operations at $12.8 million this quarter