6-K

SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549

Form 6-K

Report of Foreign Issuer

Pursuant to Rule 13a-16 or 15d-16 of

the Securities Exchange Act of 1934

For the month of:  February 2020                                         Commission File Number: 1-31402

CAE INC.

(Name of Registrant)

8585 Cote de Liesse

Saint-Laurent, Quebec

Canada H4T 1G6

(Address of Principal Executive Offices)

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:

Form 20-F                         Form 40-F   X  

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):   X  

Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the SEC pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934:

Yes                                        No   X  

If “Yes” is marked, indicate the file number assigned to the registrant in connection with Rule 12g3-2(b): N/A

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. 

	CAE Inc.
Date: February 7, 2020	By:	/s/ Mark Hounsell
	Name:	Mark Hounsell
	Title:	General Counsel, Chief Compliance Officer and Corporate Secretary

EX-1

Press Release

CAE reports third quarter fiscal 2020 results

• Revenue of $923.5 million up 13% vs. $816.3 million in prior year

• Segment operating income⁽¹⁾ of $154.9 million ($155.3 million before specific items⁽²⁾) up 37% vs. $113.0 million in prior year

• EPS of $0.37 vs. $0.29 in prior year

• Free cash flow⁽³⁾ of $275.3 million up from $155.1 million in prior year

• Order intake⁽⁴⁾ of $1,106.6 million for 1.20x book-to-sales⁽⁴⁾ and $9.4 billion backlog⁽⁴⁾

• Company pledged to become carbon neutral by summer 2020

Montreal, Canada, February 7, 2020 - (NYSE: CAE; TSX: CAE) - CAE today reported revenue of $923.5 million for the third quarter of fiscal 2020, compared with $816.3 million in the third quarter last year. Third quarter net income attributable to equity holders was $97.7 million ($0.37 per share) compared to $77.6 million ($0.29 per share) last year. Net income before specific items⁽⁵⁾ in the third quarter of fiscal 2020 was $98.0 million ($0.37 per share before specific items⁽⁶⁾).

Third quarter segment operating income was $154.9 million (16.8% of revenue) compared with $113.0 million (13.8% of revenue) in the third quarter of last year. Segment operating income before specific items in the third quarter of fiscal 2020 was $155.3 million (16.8% of revenue). All financial information is in Canadian dollars unless otherwise indicated.

“CAE had strong growth in the third quarter, with 13 percent higher revenue and 37 percent higher operating income, and we generated over $275 million of free cash flow. Customers continued to put their trust in CAE as their training partner of choice, awarding us $1.1 billion of orders for a $9.4 billion backlog,” said Marc Parent, CAE’s President and Chief Executive Officer. “Our performance was led by Civil with 42 percent operating income growth and continued good momentum with our innovative and comprehensive training solutions. In Defence, we had 32 percent operating income growth and we secured orders in excess of revenue by 1.11 times. Todd Probert recently joined CAE as its new Group President, Defence & Security and I am very pleased to welcome a leader of his calibre to our executive team. In Healthcare, we had double-digit revenue growth and we continued to bring highly innovative solutions to market to help make healthcare safer. As we look to the remainder of the fiscal year, our positive annual growth outlook for the Company remains unchanged.”

Summary of consolidated results
(amounts in millions, except operating margins and per share amounts)		Q3-2020		Q3-2019	Variance %
Revenue	$	923.5	$	816.3	13	%
Segment operating income (SOI)	$	154.9	$	113.0	37	%
Operating margins	%	16.8	%	13.8
SOI before specific items	$	155.3	$	113.0	37	%
Operating margins before specific items	%	16.8	%	13.8
Net income	$	99.8	$	79.5	26	%
Net income attributable to equity holders of the Company	$	97.7	$	77.6	26	%
Earnings per share (EPS)	$	0.37	$	0.29	28	%
Net income before specific items	$	98.0	$	77.6	26	%
EPS before specific items	$	0.37	$	0.29	28	%
Order intake	$	1,106.6	$	882.1	25	%
Total backlog	$	9,434.3	$	8,964.6	5	%

Civil Aviation Training Solutions (Civil)

Third quarter Civil revenue was $558.1 million, up22% compared to the same quarter last year. Segment operating income was $123.0 million (22.0% of revenue) compared to $87.2 million (19.0% of revenue) in the third quarter last year. Third quarter segment operating income before specific items was $123.4 million (22.1% of revenue), up42% compared to the third quarter last year. During the quarter, Civil delivered 12 full-flight simulators (FFSs)⁽⁷⁾ to customers and third quarter Civil training centre utilization⁽⁸⁾ was 70%.

During the quarter, Civil signed training solutions contracts valued at $706.2 million, including a long-term pilot training agreement with JetSmart Airlines, and 17 FFSs, for 37 sales in the first nine months of the year. Since the beginning of January, Civil received orders for seven FFSs, including six for the Boeing B737MAX aircraft, bringing total current year-to-date FFS sales to 44.

To address the growing global demand for new pilots, during the quarter, Civil launched new Multi-Crew Pilot License programs with easyJet and Volotea and a new cadet pilot training program with Jazz Aviation and Seneca School of Aviation called Jazz Approach. In business aviation, Civil signed several business aviation pilot training contracts with business jet operators including JetSuite, Solairus Aviation, and TAG Aviation Holdings.

The Civil book-to-sales ratio was 1.27x for the quarter and 1.44x for the last 12 months. The Civil backlog at the end of the quarter was a record $5.3 billion.

Summary of Civil Aviation Training Solutions results
(amounts in millions, except operating margins, SEU, FFSs deployed and FFS deliveries)		Q3-2020		Q3-2019	Variance %
Revenue	$	558.1	$	458.4	22	%
Segment operating income	$	123.0	$	87.2	41	%
Operating margins	%	22.0	%	19.0
SOI before specific items	$	123.4	$	87.2	42	%
Operating margins before specific items	%	22.1	%	19.0
Order intake	$	706.2	$	586.6	20	%
Total backlog	$	5,263.0	$	4,566.1	15	%
Simulator equivalent unit (SEU)(9)		252		219	15	%
FFSs deployed(7)		303		266	14	%
FFS deliveries		12		16	(25	%)

Defence and Security (Defence)

Third quarter Defence revenue was $332.4 million, up1% compared to the same quarter last year and segment operating income was $31.3 million (9.4% of revenue). Before reorganizational costs incurred this quarter, Defence segment operating income for the quarter would have been $33.2 million (10.0% of revenue), up 32% compared to the third quarter last year.

During the quarter, Defence booked orders for $367.4 million, including contracts to provide the German Navy with a comprehensive training solution for the NH90 Sea Lion helicopter and to upgrade and modify the German Army's NH90 full-mission simulators. Other notable contracts include the next increment of a multi-year contract with the U.S. Air Force to provide comprehensive C-130H aircrew training services. Defence also received orders to continue providing long-term maintenance and support services for Rotorsim, a joint venture between CAE and Leonardo, and a contract for Abrams M1A2 tank maintenance trainers for the U.S. Army.

The Defence book-to-sales ratio was 1.11x for the quarter and 0.88x for the last 12 months (excluding contract options). The Defence backlog, including options and CAE’s interest in joint ventures, at the end of the quarter was $4.2 billion. The Defence pipeline remains strong with approximately $3.8 billion of bids and proposals pending customer decisions.

On January 20, 2020, CAE announced the appointment of Todd Probert as Group President, Defence & Security, effective January 27, 2020. He is based in Washington, DC and succeeds Gene Colabatistto, who retired from CAE in December 2019.

Summary of Defence and Security results
(amounts in millions, except operating margins)		Q3-2020		Q3-2019	Variance %
Revenue	$	332.4	$	330.2	1	%
Segment operating income	$	31.3	$	25.2	24	%
Operating margins	%	9.4	%	7.6
Order intake	$	367.4	$	267.8	37	%
Total backlog	$	4,171.3	$	4,398.5	(5	%)

Healthcare

Third quarter Healthcare revenue was $33.0 million, up19% compared to $27.7 million in the same quarter last year, and third quarter segment operating income was $0.6 million, stable compared to $0.6 million in the third quarter last year.

Healthcare, together with the American Society of Anesthesiologists, launched a new Anesthesia SimSTAT module, the final module in a series of interactive screen-based modules approved for Maintenance of Certification in Anesthesiology credits. As well, during the quarter, Healthcare developed custom training solutions for Edwards Lifesciences to enhance physician training, and it delivered a custom cardiovascular simulation application to Cardinal Health (Cordis). Healthcare was also awarded an EMS World Innovation Award for CAE AresAR, the Microsoft HoloLens application for our emergency care manikin that includes six augmented reality scenarios.

Summary of Healthcare results
(amounts in millions, except operating margins)		Q3-2020		Q3-2019	Variance %
Revenue	$	33.0	$	27.7	19	%
Segment operating income	$	0.6	$	0.6	—	%
Operating margins	%	1.8	%	2.2

Additional financial highlights

Free cash flow was $275.3 million for the quarter compared to $155.1 million in the third quarter last year. The increase in free cash flow results mainly from a lower investment in non-cash working capital and higher cash provided by operating activities. CAE usually sees a higher level of investment in non-cash working capital accounts during the first half of the fiscal year and it expects to see a significant portion of these investments reverse in the second half.

Income taxes this quarter were $18.4 million, representing an effective tax rate of 16%, compared to 15% for the third quarter last year. The tax rate was higher due to the impacts of tax audits in Canada last year, partially offset by a change in the mix of income from various jurisdictions.

Net finance expense this quarter was $36.7 million, $17.4 million higher than the third quarter of fiscal 2019, mainly from higher interest on long-term debt due to the issuance of unsecured senior notes since the fourth quarter of fiscal 2019 and higher interest on lease liabilities because of the adoption of IFRS 16.

Growth and maintenance capital expenditures⁽¹⁰⁾ totaled $51.6 million this quarter.

Net debt⁽¹¹⁾ at the end of the quarter was $2,306.6 million for a net debt-to-capital ratio⁽¹²⁾ of 48.5%. This compares to net debt of $2,442.8 million and a net debt-to-capital ratio of 51.0% at the end of the preceding quarter. Excluding the impacts of the adoption of IFRS 16, net debt would have been $2,021.2 million this quarter for a net debt-to-capital ratio of 44.9%.

Return on capital employed (ROCE)⁽¹³⁾ was 11.4% this quarter compared to 11.7% in the third quarter last year, before specific items. Excluding the impacts of the adoption of IFRS 16, ROCE before specific items would have been 11.6% this quarter.

CAE will pay a dividend of 11 cents per share effective March 31, 2020 to shareholders of record at the close of business on March 13, 2020.

During the three months ended December 31, 2019, CAE repurchased and cancelled a total of 386,700 common shares under the Normal Course Issuer Bid (NCIB), at a weighted average price of $32.69 per common share, for a total consideration of $12.6 million. On February 7, 2020, CAE received approval from its Board of Directors for the renewal of its NCIB to purchase up to 5,321,474 of its issued and outstanding common shares (approximately 2% of its outstanding shares) during the period from February 25, 2020 to no later than February 24, 2021.

Management outlook for fiscal year 2020

Management’s outlook for CAE in fiscal year 2020, as updated November 13, 2019, is unchanged. In Civil, the Company expects to continue building on its positive momentum in training, increasing market share and securing new customer partnerships with its innovative training solutions. Civil expects operating income growth closer to 30 percent based on year-to-date performance and a further increase in demand for its training solutions, including maintaining its leading share of FFS sales, and the successful integration of its recently acquired Bombardier BAT business, which is substantially complete. In Defence, the Company expects modest operating income growth for the year, reflecting the Defence group’s performance year-to-date, expected performance on programs in backlog, and the expected timing of new contract awards from a large pipeline. CAE continues to expect Healthcare to achieve double-digit growth for the year. Funding growth opportunities remains CAE’s top capital allocation priority and continues to be driven by and supportive of growing customer training outsourcings in its large core markets. The Company prioritizes market-led capital investments that offer sustainable and profitable growth and accretive returns and support its strategy to be the recognized worldwide training partner of choice. CAE continues to expect total annual capital expenditures to be approximately 10 to 15 percent higher, in fiscal 2020, primarily to keep pace with growing demand for training services from its existing customers and to secure new long-term customer contracts. Management’s expectations are based on the prevailing positive market conditions and customer receptivity to CAE’s training solutions as well as material assumptions contained in this press release, quarterly MD&A and in CAE’s fiscal year 2019 MD&A.

Corporate Social Responsibility

CAE creates significant value for customers, shareholders, and its employees. CAE products and services contribute to improvements in aviation safety, ensure defence forces are mission-ready, and help make healthcare safer-a noble purpose that is a source of pride for CAE’s more than 10,000 employees worldwide. As the largest civil aviation training company in the world, and the only pure‑play aviation training company, it has an unwavering customer focus and commitment to innovation. Furthermore, CAE is committed to doing its share in the fight against climate change for the well-being of future generations. In November 2019, CAE announced its plan to become carbon neutral in summer 2020. This goal will be achieved by offsetting carbon emissions from the fuel used for all the live training flights of its academies, from energy consumption in its locations worldwide and from the business travel by air of all its employees. CAE will also work with the industry to progressively use electric aircraft for the live flight training in our academies. CAE will continue to invest to make its full-flight simulators more energy efficient, therefore allowing its customers worldwide to reduce their own footprint.

In support of CAE’s local community of Greater Montreal, the Company raised more than one million dollars in its 2019 CAE-Centraide (United Way) fundraising campaign. This record amount was collected through employee donations and a corporate donation. Since 2000, CAE and its employees have donated $12.6 million to Centraide of Greater Montreal. In addition to Centraide, CAE supports the communities in which it operates around the world through donations and sponsorships that mainly support causes in education, civil aviation, defence, security and healthcare.

To learn more about CAE’s corporate sustainability roadmap and achievements, refer to CAE's FY19 Annual Activity and Corporate Social Responsibility Report.

IFRS 16 - Leases

Effective April 1, 2019, CAE adopted IFRS 16 - Leases, which introduces a single lessee accounting model and eliminates the classification of leases as either operating or finance leases. The main impact of IFRS 16 to CAE is the recognition of a right-of-use asset and a lease liability for substantially all leases. This change results in a decrease

of our operating lease expense and an increase of our finance and depreciation expenses. The financial results reported in the press release for the fiscal year ended March 31, 2019 do not reflect the accounting changes required by IFRS 16 as the Company adopted the standard using the modified retrospective application as of April 1, 2019. For more detailed information, including the expected impacts of the transition to IFRS 16, refer to Note 2 of the interim consolidated financial statements for the quarter ended December 31, 2019.

Detailed information

Readers are strongly advised to view a more detailed discussion of our results by segment in the Management’s Discussion and Analysis (MD&A) and CAE’s consolidated financial statements which are posted on our website at www.cae.com/investors.

CAE’s consolidated financial statements and MD&A for the quarter ended December 31, 2019 have been filed with the Canadian Securities Administrators on SEDAR (www.sedar.com) and are available on our website (www.cae.com). They have also been filed with the U.S. Securities and Exchange Commission and are available on their website (www.sec.gov). Holders of CAE’s securities may also request a printed copy of the Company's consolidated financial statements and MD&A free of charge by contacting Investor Relations (investor.relations@cae.com).

Conference call Q3 FY2020

Marc Parent, CAE President and CEO; Sonya Branco, Vice President, Finance, and CFO; and Andrew Arnovitz, Vice President, Strategy and Investor Relations will conduct an earnings conference call today at 1:00 p.m. ET. The call is intended for analysts, institutional investors and the media. Participants can listen to the conference by dialling + 1 877 586 3392 or +1 416 981 9024. The conference call will also be audio webcast live for the public at www.cae.com.

CAE is a global leader in training for the civil aviation, defence and security, and healthcare markets. Backed by a record of more than 70 years of industry firsts, we continue to help define global training standards with our innovative virtual-to-live training solutions to make flying safer, maintain defence force readiness and enhance patient safety. We have the broadest global presence in the industry, with over 10,000 employees, 160 sites and training locations in over 35 countries. Each year, we train more than 220,000 civil and defence crewmembers, including more than 135,000 pilots, and thousands of healthcare professionals worldwide.

Caution concerning limitations of summary earnings press release

This summary earnings press release contains limited information meant to assist the reader in assessing CAE’s performance but it is not a suitable source of information for readers who are unfamiliar with CAE and is not in any way a substitute for the Company’s financial statements, notes to the financial statements, and MD&A reports.

Caution concerning forward-looking statements

Certain statements made in this press release are forward-looking statements. These statements include, without limitation, statements relating to our fiscal 2020 financial guidance (including revenues, capital investment and margins) and other statements that are not historical facts. Forward-looking statements describe future expectations, plans, results or strategies and normally contain words like "believe", "expect", "anticipate", "plan", "intend", "continue", "estimate", "may", "will", "should", "strategy", "future" and similar expressions. All such forward-looking statements are made pursuant to the 'safe harbour' provisions of applicable Canadian securities laws and of the United States Private Securities Litigation Reform Act of 1995. 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. The forward-looking statements contained in this press release describe our expectations as of February 7, 2020 and, accordingly, are subject to change after such date. 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 press release are expressly qualified by this cautionary statement. Except as otherwise indicated by CAE, forward-looking statements do not reflect the potential impact of any special items or of any dispositions, monetizations,

mergers, acquisitions, other business combinations or other transactions that may occur after February 7, 2020. The financial impact of these transactions and special items can be complex and depends on the facts particular to each of them. We therefore cannot describe the expected impact in a meaningful way or in the same way we present known risks affecting our business. Forward-looking statements are presented in this press release for the purpose of assisting investors and others in understanding certain key elements of our expected fiscal 2020 financial results and in obtaining a better understanding of our anticipated operating environment. Readers are cautioned that such information may not be appropriate for other purposes. The value of capital investments expected to be made by CAE in fiscal 2020 assumes that capital investments will be made in accordance with our current annual plan. However, there can be no assurance that such investment levels will be maintained with the result that the value of actual capital investments made by CAE during such period could materially differ from current expectations.

Material assumptions

A number of economic, market, operational and financial assumptions were made by CAE in preparing its forward-looking statements for fiscal 2020 and beyond contained in this news release, including, but not limited to certain economic and market assumptions including: modest economic growth and stable interest rates in fiscal 2020; a sustained level of competition in civil, defence and healthcare markets; no material financial, operational or competitive consequences of changes in regulations affecting our business; and a continued positive defence market.

Assumptions concerning our businesses

A number of assumptions concerning CAE’s business were also made in the preparation of its forward-looking statements for fiscal 2020 and beyond contained in this news release, including, but not limited to factors including: maintenance of CAE’s leading market share in civil simulator sales, pricing, product deliveries to customers and CAE’s ability to increase market share in training.

The foregoing assumptions, although considered reasonable by CAE on February 7, 2020, may prove to be inaccurate. Accordingly, our actual results could differ materially from our expectations as set forth in this news release.

Material risks

Important risk factors that could cause our assumptions and estimates to be inaccurate and actual results or events to differ materially from those expressed in or implied by our forward-looking statements, including our fiscal 2020 financial guidance and management outlook, are set out in CAE’s MD&A for the year ended March 31, 2019 filed by CAE with the Canadian Securities Administrators (available at www.sedar.com) and with the U.S. Securities and Exchange Commission (available at www.sec.gov). The fiscal year 2019 MD&A is also available at www.cae.com. The realization of our forward-looking statements, including our ability to meet our fiscal 2020 financial outlook, essentially depends on our business performance which, in turn, is subject to many risks. Accordingly, readers are cautioned that any of the disclosed risks could have a material adverse effect on our forward-looking statements. We caution that the disclosed list of risk factors is not exhaustive and other factors could also adversely affect our results.

Non-GAAP and other financial measures

This press release 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. They should also not be used to compare with similar measures from other companies. Management believes that providing certain non-GAAP measures provides users with a better understanding of our results and trends and provides additional information on our financial and operating performance.

⁽¹⁾ Segment operating income (SOI) is a non-GAAP measure and is the sum of our key indicators of each segment’s financial performance. Segment operating income gives us an 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 total segment operating income by taking the operating profit and excluding restructuring costs of major programs that do not arise from significant strategic transactions.

⁽²⁾ Segment operating income before specific items further excludes restructuring costs, integration costs, acquisition costs and other gains and losses arising from significant strategic transactions. We track it because we believe it provides a better indication of our operating performance and makes it easier to compare across reporting periods.

⁽³⁾ Free cash flow is a non-GAAP measure that shows us how much cash we have available to invest in growth opportunities, repay debt and meet ongoing financial obligations. We use it as an indicator of our financial strength and liquidity. We calculate it by taking the net cash generated by our continuing operating activities, subtracting maintenance capital expenditures, investment in other assets not related to growth and dividends paid and adding proceeds from the disposal of property, plant and equipment, dividends received from equity accounted investees and proceeds, net of payments, from equity accounted investees.

⁽⁴⁾ Order Intake and Backlog

Order intake is a non-GAAP measure that represents the expected value of orders we have received:

– For the Civil Aviation Training Solutions segment, we consider an item part of our order intake 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. Additionally, 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 order intake 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 order intake 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.

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

Total backlog is a non-GAAP measure that represents expected future revenues and includes obligated backlog, joint venture backlog and unfunded backlog and options:

– Obligated backlog represents the value of our order intake not yet executed and is calculated by adding the order intake of the current period to the balance of the obligated backlog at the end of the previous fiscal year, subtracting the revenue recognized in the current period and adding or subtracting backlog adjustments. If the amount of an order already recognized in a previous fiscal year is modified, the backlog is revised through adjustments; 

– 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 represents firm Defence and Security orders we have received but have not yet executed and for which funding authorization has not yet been obtained. Options are included in backlog when there is a high probability of being exercised, but indefinite-delivery/indefinite-quantity contracts are excluded. When an option is exercised, it is considered order intake in that period and it is removed from unfunded backlog and options.

⁽⁵⁾ 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 excluding restructuring costs, integration costs, acquisition costs and other gains and losses arising from significant strategic transactions as well as significant 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.

⁽⁶⁾ Earnings per share (EPS) before specific items is a non-GAAP measure calculated by excluding restructuring costs, integration costs, acquisition costs and other gains and losses arising from significant strategic transactions as well as significant one-time tax items from the diluted earnings per share from continuing operations attributable to equity holders of the Company. The effect per share is obtained by dividing these restructuring costs, integration costs, acquisition costs and other gains, net of tax, as well as one-time tax items by the average number of diluted shares. We track it because we believe it provides a better indication of our operating performance on a per share basis and makes it easier to compare across reporting periods.

⁽⁷⁾ A full-flight simulator (FFS) is a full size replica of a specific make, model and series of an aircraft cockpit, including a motion system. In our count of FFSs deployed in the network, we generally only include FFSs that are of the highest fidelity and do not include any fixed based training devices, or other lower-level devices, as these are typically used in addition to FFSs in the same approved training programs.

⁽⁸⁾ Utilization rate is one of the operating measures we use to assess the performance of our Civil simulator training network. While utilization rate does not perfectly correlate to revenue recognized, we track it, together with other measures, because we believe it is an indicator of our operating performance. 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.

⁽⁹⁾ 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.

⁽¹⁰⁾ Maintenance capital expenditure is a non-GAAP measure we use to calculate the investment needed to sustain the current level of economic activity. Growth capital expenditure is a non-GAAP measure we use to calculate the investment needed to increase the current level of economic activity.

⁽¹¹⁾ Net debt is a non-GAAP measure we use to monitor how much debt we have after taking into account 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.

⁽¹²⁾ Net debt-to-capital is calculated as net debt divided by the sum of total equity plus net debt.

⁽¹³⁾ 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.

For non-GAAP and other financial measures monitored by CAE, please refer to CAE’s MD&A filed with the Canadian Securities Administrators available on our website (www.cae.com) and on SEDAR (www.sedar.com).

Contacts

Investor Relations:

Andrew Arnovitz, Vice President, Strategy and Investor Relations 1-514-734-5760, andrew.arnovitz@cae.com

Media:

Hélène V. Gagnon, Vice President, Public Affairs and Global Communications 1-514-340-5536, helene.v.gagnon@cae.com

Consolidated Statement of Financial Position

(Unaudited)	December 31			March 31
(amounts in millions of Canadian dollars)		2019		2019
Assets
Cash and cash equivalents		$	278.5		$	446.1
Accounts receivable		497.9			496.0
Contract assets		505.2			523.5
Inventories		607.4			537.0
Prepayments		54.1			57.4
Income taxes recoverable		55.6			33.6
Derivative financial assets		25.3			19.3
Total current assets		$	2,024.0		$	2,112.9
Property, plant and equipment		1,991.3			2,149.3
Right-of-use assets		388.6			—
Intangible assets		2,014.4			2,027.9
Investment in equity accounted investees		431.4			312.1
Deferred tax assets		82.3			71.0
Derivative financial assets		11.4			12.8
Other assets		501.2			479.5
Total assets		$	7,444.6		$	7,165.5
Liabilities and equity
Accounts payable and accrued liabilities		$	839.5		$	883.8
Provisions		24.8			28.7
Income taxes payable		23.9			25.7
Contract liabilities		715.3			670.2
Current portion of long-term debt		123.1			264.1
Derivative financial liabilities		7.9			17.0
Total current liabilities		$	1,734.5		$	1,889.5
Provisions		27.9			36.3
Long-term debt		2,462.0			2,064.2
Royalty obligations		132.8			136.2
Employee benefits obligations		251.3			212.6
Deferred gains and other liabilities		241.6			267.0
Deferred tax liabilities		147.1			147.0
Derivative financial liabilities		1.5			2.7
Total liabilities		$	4,998.7		$	4,755.5
Equity
Share capital		$	675.8		$	649.6
Contributed surplus		26.7			24.8
Accumulated other comprehensive income		135.1			199.0
Retained earnings		1,524.8			1,457.9
Equity attributable to equity holders of the Company		$	2,362.4		$	2,331.3
Non-controlling interests		83.5			78.7
Total equity		$	2,445.9		$	2,410.0
Total liabilities and equity		$	7,444.6		$	7,165.5

Consolidated Income Statement

(Unaudited)	Three months ended December 31						Nine months ended December 31
(amounts in millions of Canadian dollars, except per share amounts)	2019			2018			2019			2018
Revenue	$	923.5		$	816.3		$	2,645.9		$	2,282.1
Cost of sales	632.0			583.0			1,874.0			1,628.6
Gross profit	$	291.5		$	233.3		$	771.9		$	653.5
Research and development expenses	33.6			31.1			101.3			91.5
Selling, general and administrative expenses	118.3			101.4			329.6			292.0
Other gains – net	(3.5		)	(2.5		)	(15.3		)	(17.1		)
After tax share in profit of equity accounted investees	(11.8		)	(9.7		)	(34.3		)	(23.1		)
Operating profit	$	154.9		$	113.0		$	390.6		$	310.2
Finance expense – net	36.7			19.3			105.9			55.2
Earnings before income taxes	$	118.2		$	93.7		$	284.7		$	255.0
Income tax expense	18.4			14.2			46.9			40.3
Net income	$	99.8		$	79.5		$	237.8		$	214.7
Attributable to:
Equity holders of the Company	$	97.7		$	77.6		$	233.0		$	207.7
Non-controlling interests	2.1			1.9			4.8			7.0
Earnings per share attributable to equity holders of the Company
Basic	$	0.37		$	0.29		$	0.88		$	0.78
Diluted	$	0.37		$	0.29		$	0.87		$	0.77

Consolidated Statement of Comprehensive Income

(Unaudited)	Three months ended December 31						Nine months ended December 31
(amounts in millions of Canadian dollars)	2019			2018			2019			2018
Net income	$	99.8		$	79.5		$	237.8		$	214.7
Items that may be reclassified to net income
Foreign currency differences on translation of foreign operations	$	(10.2	)	$	137.9		$	(98.2	)	$	51.8
Reclassification to income of foreign currency differences	(8.0		)	(2.0		)	(19.9		)	(17.9		)
Net gain (loss) on cash flow hedges	5.9			(27.0		)	15.4			(22.7		)
Reclassification to income of (losses) gains on cash flow hedges	(0.1		)	0.1			(3.2		)	0.7
Net gain (loss) on hedges of net investment in foreign operations	22.7			(26.3		)	32.6			(27.7		)
Income taxes	(2.0		)	3.9			7.8			8.6
	$	8.3		$	86.6		$	(65.5	)	$	(7.2	)
Items that will never be reclassified to net income
Remeasurement of defined benefit pension plan obligations	$	30.9		$	(14.6	)	$	(29.5	)	$	18.5
Net gain on financial assets carried at fair value through OCI	0.1			0.1			—			—
Income taxes	(8.2		)	3.9			7.8			(4.9		)
	$	22.8		$	(10.6	)	$	(21.7	)	$	13.6
Other comprehensive income (loss)	$	31.1		$	76.0		$	(87.2	)	$	6.4
Total comprehensive income	$	130.9		$	155.5		$	150.6		$	221.1
Attributable to:
Equity holders of the Company	$	129.0		$	150.6		$	147.4		$	209.9
Non-controlling interests	1.9			4.9			3.2			11.2

Consolidated Statement of Changes in Equity

(Unaudited)	Attributable to equity holders of the Company
Nine months ended December 31, 2019	Common shares									Accumulated other
(amounts in millions of Canadian dollars,	Number of		Stated			Contributed				comprehensive				Retained							Non-controlling				Total
except number of shares)	shares		value				surplus			income					earnings			Total				interests			equity
Balances, beginning of period	265,447,603		$	649.6			$	24.8			$	199.0			$	1,457.9		$	2,331.3			$	78.7		$	2,410.0
Impact of adopting IFRS 16	—		—				—				—				(27.5		)	(27.5		)		—			(27.5		)
Balances, April 1, 2019	265,447,603		$	649.6			$	24.8			$	199.0			$	1,430.4		$	2,303.8			$	78.7		$	2,382.5
Net income	—		$	—			$	—			$	—			$	233.0		$	233.0			$	4.8		$	237.8
Other comprehensive loss	—		—				—				(63.9		)		(21.7		)	(85.6		)		(1.6		)	(87.2		)
Total comprehensive (loss) income	—		$	—			$	—			$	(63.9	)		$	211.3		$	147.4			$	3.2		$	150.6
Stock options exercised	1,317,280		25.7				(3.2		)		—				—			22.5				—			22.5
Optional cash purchase of shares	1,323		—				—				—				—			—				—			—
Common shares repurchased and cancelled	(978,431	)	(2.4		)		—				—				(30.4		)	(32.8		)		—			(32.8		)
Share-based compensation expense	—		—				5.1				—				—			5.1				—			5.1
Transactions with non-controlling interests	—		—				—				—				(1.4		)	(1.4		)		1.6			0.2
Stock dividends	85,887		2.9				—				—				(2.9		)	—				—			—
Cash dividends	—		—				—				—				(82.2		)	(82.2		)		—			(82.2		)
Balances, end of period	265,873,662		$	675.8			$	26.7			$	135.1			$	1,524.8		$	2,362.4			$	83.5		$	2,445.9
	Attributable to equity holders of the Company
Nine months ended December 31, 2018	Common shares									Accumulated other
(amounts in millions of Canadian dollars,	Number of		Stated			Contributed				comprehensive				Retained							Non-controlling				Total
except number of shares)	shares		value				surplus			income					earnings			Total				interests			equity
Balances, beginning of period	267,738,530		$	633.2			$	21.3			$	260.3			$	1,314.3		$	2,229.1			$	68.4		$	2,297.5
Net income	—		$	—			$	—			$	—			$	207.7		$	207.7			$	7.0		$	214.7
Other comprehensive (loss) income	—		—				—				(11.4		)		13.6			2.2				4.2			6.4
Total comprehensive (loss) income	—		$	—			$	—			$	(11.4	)		$	221.3		$	209.9			$	11.2		$	221.1
Stock options exercised	771,825		13.3				(1.8		)		—				—			11.5				—			11.5
Optional cash purchase of shares	1,873		0.1				—				—				—			0.1				—			0.1
Common shares repurchased and cancelled	(3,610,100	)	(8.7		)		—				—				(84.1		)	(92.8		)		—			(92.8		)
Share-based compensation expense	—		—				5.7				—				—			5.7				—			5.7
Stock dividends	113,600		3.0				—				—				(3.0		)	—				—			—
Cash dividends	—		—				—				—				(74.3		)	(74.3		)		—			(74.3		)
Balances, end of period	265,015,728		$	640.9			$	25.2			$	248.9			$	1,374.2		$	2,289.2			$	79.6		$	2,368.8

Consolidated Statement of Cash Flows

(Unaudited)
Nine months ended December 31
(amounts in millions of Canadian dollars)	2019			2018
Operating activities
Net income	$	237.8		$	214.7
Adjustments for:
Depreciation and amortization	226.9			153.7
After tax share in profit of equity accounted investees	(34.3		)	(23.1		)
Deferred income taxes	6.9			24.9
Investment tax credits	6.3			(8.0		)
Share-based compensation	13.3			3.4
Defined benefit pension plans	12.5			12.4
Other non-current liabilities	(32.0		)	(22.1		)
Derivative financial assets and liabilities – net	(7.4		)	4.4
Other	2.1			3.5
Changes in non-cash working capital	(133.3		)	0.3
Net cash provided by operating activities	$	298.8		$	364.1
Investing activities
Business combinations, net of cash acquired	$	(10.1	)	$	(33.5	)
Acquisition of investment in equity accounted investees	(113.5		)	—
Addition of assets through the monetization of royalties	—			(202.7		)
Additions to property, plant and equipment	(199.4		)	(155.6		)
Proceeds from disposal of property, plant and equipment	0.4			2.5
Additions to intangible assets	(69.7		)	(62.1		)
Net payments to equity accounted investees	(10.3		)	(27.0		)
Dividends received from equity accounted investees	22.6			7.1
Other	0.8			2.9
Net cash used in investing activities	$	(379.2	)	$	(468.4	)
Financing activities
Net proceeds from borrowing under revolving unsecured credit facilities	$	135.3		$	—
Proceeds from long-term debt	161.4			84.3
Repayment of long-term debt	(229.6		)	(66.6		)
Repayment of lease liabilities	(64.5		)	(8.3		)
Dividends paid	(82.2		)	(74.3		)
Issuance of common shares	22.5			11.6
Repurchase of common shares	(32.8		)	(92.8		)
Changes in restricted cash	15.7			—
Other	(1.3		)	—
Net cash used in financing activities	$	(75.5	)	$	(146.1	)
Effect of foreign exchange rate changes on cash
and cash equivalents	$	(11.7	)	$	0.6
Net decrease in cash and cash equivalents	$	(167.6	)	$	(249.8	)
Cash and cash equivalents, beginning of period	446.1			611.5
Cash and cash equivalents, end of period	$	278.5		$	361.7
Supplemental information:
Interest paid	$	75.5		$	38.0
Interest received	7.8			10.5
Income taxes paid	25.5			23.4

EX-2

Table of Contents
Management’s Discussion and Analysis
1.	Highlights	1
2.	Introduction	2
3.	About CAE	3
4.	Foreign exchange	7
5.	Non-GAAP and other financial measures	7
6.	Consolidated results	10
7.	Results by segment	12
8.	Consolidated cash movements and liquidity	17
9.	Consolidated financial position	18
10.	Business combinations	20
11.	Changes in accounting policies	21
12.	Controls and procedures	23
13.	Selected quarterly financial information	24
Consolidated Interim Financial Statements
Consolidated statement of financial position		25
Consolidated income statement		26
Consolidated statement of comprehensive income		27
Consolidated statement of changes in equity		28
Consolidated statement of cash flows		29
Notes to the Consolidated Interim Financial Statements
Note 1 – Nature of operations and summary of significant accounting policies		30
Note 2 – Changes in accounting policies		31
Note 3 – Business combinations		33
Note 4 – Investment in equity accounted investees		34
Note 5 – Operating segments and geographic information		34
Note 6 – Other gains – net		36
Note 7 – Debt facilities and finance expense – net		36
Note 8 – Government participation		37
Note 9 – Share capital, earnings per share and dividends		37
Note 10 – Supplementary cash flows information		38
Note 11 – Fair value of financial instruments		38
Note 12 – Related party transactions		39

Management’s Discussion and Analysis

for the three months ended December 31, 2019

1.    HIGHLIGHTS

ADOPTION OF IFRS 16 - LEASES

Effective April 1, 2019 we adopted IFRS 16 - Leases using the modified retrospective approach. The modified retrospective approach applies the requirements of the standard retrospectively with the cumulative effects of initial application recorded in opening retained earnings as at April 1, 2019, and with no restatement of the comparative periods. Comparative information continues to be reported under IAS 17 - Leases and related interpretations. The impacts of adoption on our consolidated statement of financial position and consolidated income statement are discussed further in Changes in accounting policies.

FINANCIAL

THIRD QUARTER OF FISCAL 2020¹

(amounts in millions, except per share amounts, ROCE and book-to-sales)		Q3-2020		Q3-2019	Variance $			Variance %
Income Statement
Revenue	$	923.5	$	816.3	$	107.2		13	%
Segment operating income (SOI)1	$	154.9	$	113.0	$	41.9		37	%
SOI before specific items1	$	155.3	$	113.0	$	42.3		37	%
Net income attributable to equity holders of the Company	$	97.7	$	77.6	$	20.1		26	%
Basic and diluted earnings per share (EPS)	$	0.37	$	0.29	$	0.08		28	%
EPS before specific items1	$	0.37	$	0.29	$	0.08		28	%
Cash Flows
Free cash flow1	$	275.3	$	155.1	$	120.2		77	%
Net cash provided by operating activities	$	322.1	$	217.6	$	104.5		48	%
Financial Position
Capital employed1	$	4,752.5	$	3,354.5	$	1,398.0		42	%
Non-cash working capital1	$	134.1	$	62.4	$	71.7		115	%
Net debt1	$	2,306.6	$	985.7	$	1,320.9		134	%
Return on capital employed (ROCE)1	%	10.7	%	11.7
ROCE before specific items	%	11.4	%	11.7
Backlog
Total backlog1	$	9,434.3	$	8,964.6	$	469.7		5	%
Order intake1	$	1,106.6	$	882.1	$	224.5		25	%
Book-to-sales ratio1		1.20		1.08
Book-to-sales ratio for the last 12 months		1.22		1.19
FISCAL 2020 YEAR TO DATE
(amounts in millions, except per share amounts)		Q3-2020		Q3-2019	Variance $			Variance %
Income Statement
Revenue	$	2,645.9	$	2,282.1	$	363.8		16	%
Segment operating income	$	390.6	$	310.2	$	80.4		26	%
SOI before specific items	$	394.6	$	310.2	$	84.4		27	%
Net income attributable to equity holders of the Company	$	233.0	$	207.7	$	25.3		12	%
Basic earnings per share	$	0.88	$	0.78	$	0.10		13	%
Diluted earnings per share	$	0.87	$	0.77	$	0.10		13	%
EPS before specific items	$	0.88	$	0.77	$	0.11		14	%
Cash Flows
Free cash flow	$	166.1	$	207.0	$	(40.9	)	(20	%)
Net cash provided by operating activities	$	298.8	$	364.1	$	(65.3	)	(18	%)

Specific items with respect to SOI, EPS and ROCE include the impacts of the integration of Bombardier's Business Aviation Training Business (BBAT) in fiscal 2020 and in fiscal 2019. For fiscal 2019, specific items with respect to ROCE also includes the income tax recovery resulting from the enactment of a lower U.S. federal income tax rate and the net gain on the remeasurement of the previously held Asian Aviation Centre of Excellence Sdn. Bhd. (AACE) investment.

¹Non-GAAP and other financial measures (see Section 5).

CAE Third Quarter Report 2020 I 1

Management’s Discussion and Analysis

OTHER

– On November 4, 2019, we concluded a 15-year exclusive business aviation training services agreement with Directional Aviation Capital affiliates and the acquisition of a 50% stake in SIMCOM Holdings, Inc. (SIMCOM), an operator of a wide range of jet, turboprop and piston powered aircraft simulators and training devices;

– In December 2019, we issued unsecured senior notes of US$100.0 million, maturing in December 2034, and repaid unsecured senior notes amounting to $95.0 million, which matured during the month.

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 2020 mean the fiscal year ending March 31, 2020;

– Last year, prior year and a year ago mean the fiscal year ended March 31, 2019;

– Dollar amounts are in Canadian dollars.

This report was prepared as of February 7, 2020 and includes our management’s discussion and analysis (MD&A), unaudited consolidated interim financial statements and notes for the third quarter ended December 31, 2019. We have prepared it to help you understand our business, performance and financial condition for the third quarter of fiscal 2020. Except as otherwise indicated, all financial information has been reported in accordance with International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board, and based on unaudited figures.

For additional information, please refer to our unaudited consolidated interim financial statements for the quarter ended December 31, 2019, and our annual audited consolidated financial statements, which you will find in our financial report for the year ended March 31, 2019. The MD&A section of our 2019 financial report also 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 mission;

– 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;

– 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 financial 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. Holders of CAE’s securities may also request a printed copy of the Company’s consolidated financial statements and MD&A free of charge by contacting Investor Relations (investor.relations@cae.com).

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. 

2 I CAE Third Quarter Report 2020

Management’s Discussion and Analysis

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 matters, risks relating to CAE such as evolving standards and technologies, R&D activities, fixed-price and long‑term supply contracts, strategic partnerships and long-term contracts, procurement and original equipment manufacturer (OEM) leverage, product integration and program management, protection of our intellectual property, third-party intellectual property, loss of key personnel, labour relations, environmental matters, liability risks that may not be covered by indemnity or insurance, warranty or other product-related claims, integration of acquired businesses through mergers, acquisitions, joint ventures, strategic alliances or divestitures, our ability to penetrate new markets, U.S. foreign ownership, control or influence mitigation measures, length of sales cycle, seasonality, continued returns to shareholders, information technology systems including cybersecurity risk, data privacy risk and our reliance on technology and third‑party providers, and risks relating to the market such as foreign exchange, availability of capital and credit risk, pension plan funding, doing business in foreign countries including political instability, anti-corruption laws and taxation matters. Additionally, differences could arise because of events announced or completed after the date of this report. You will find more information about the risks and uncertainties affecting our business in our 2019 financial report. 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.

3.    ABOUT CAE

3.1      Who we are

CAE is a global leader in training for the civil aviation, defence and security, and healthcare markets. Backed by a record of more than 70 years of industry firsts, we continue to help define global training standards with our innovative virtual-to-live training solutions to make flying safer, maintain defence force readiness and enhance patient safety. We have the broadest global presence in the industry, with over 10,000 employees, 160 sites and training locations in over 35 countries. Each year, we train more than 220,000 civil and defence crewmembers, including more than 135,000 pilots, 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 mission

Through the training we provide, our mission is to make air travel safer, defence forces mission ready and healthcare safer.

3.3      Our vision

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

3.4      Our strategy

We address safety, efficiency and readiness for customers in three core markets: civil aviation, defence and security, and healthcare.

We are a unique, pure-play training company with a proven record, of more than 70 years, of commitment to our customers’ long-term training needs.

We offer the most innovative and broadest range of comprehensive training solutions across a global network by incorporating a combination of live training on actual platforms, virtual training in simulators and extended reality applications, and constructive training using computer-generated simulations. Our strategic imperatives focus on the protection of our leadership position and growing at a superior rate than the underlying markets.

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.

CAE Third Quarter Report 2020 I 3

Management’s Discussion and Analysis

High degree of recurring business

We operate in highly regulated industries with mandatory and recurring training requirements for maintaining professional certifications. Over 60% of our business is derived from the provision of services, which is an important source of recurring business, and largely involves long-term agreements with many airlines, business aircraft operators and defence forces.

Strong competitive moat

Our global training network, unique end-to-end cadet to captain training solutions, digitally-enabled training systems, training systems integrator expertise, unrivaled customer intimacy and strong, recognizable brand further strengthen our competitive moat.

Headroom in large markets

We provide innovative training solutions to customers in large addressable markets in civil aviation, defence and security and healthcare. Significant untapped market opportunities exist in these three core businesses, with substantial headroom to grow our market share over the long-term.

Underlying secular tailwinds

The civil aviation and defence and security sectors are enjoying strong tailwinds. Air passenger traffic and defence budgets are expected to continue to increase globally over the next 10 years.

Potential for superior returns

In each of our businesses, we anticipate growing at a rate superior to our underlying markets. Our rising proportion of revenue from training services provides potential for lower amplitude cyclicality as training is largely driven by the training requirements of the installed fleet. In addition, we leverage our leading market position to deepen and expand our customer relationships. We see opportunity to further utilize our training network and generate more revenue from existing assets and to deploy new assets with accretive returns.

Culture of innovation

We derive significant competitive advantage as an innovative leader in simulation products and training solutions. In collaboration with our customers, we design and deliver the industry's most sophisticated training systems, employing the latest in simulation, extended reality and digital technologies, which are shaping the future of training.

3.5      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, maintenance repair and overhaul organizations (MRO) 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 have the unique capability and global scale to 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 civil aviation training services. Our deep industry experience and thought leadership, large 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 more than 35 countries and through our broad global network of more than 50 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 product and service offerings for pilot, cabin crew and aircraft maintenance technician training, training centre operations, curriculum development, courseware solutions and consulting services. We currently operate 303 full-flight simulators (FFSs)², including those operating in our joint ventures. We offer industry-leading technology, and we are shaping the future of training through innovations such as our next generation training systems, including CAE Real-time Insights and Standardized Evaluations (CAE Rise^TM), which improves training quality, objectivity and efficiency through the integration of untapped flight and simulator data-driven insights into training. In the formation of new pilots, CAE operates the largest ab initio flight training network in the world and has over 30 cadet training programs globally. In 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.

²Non-GAAP and other financial measures (see Section 5).

4 I CAE Third Quarter Report 2020

Management’s Discussion and Analysis

Quality, fidelity, reliability and innovation 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, business aircraft operators, 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. Our flight simulation equipment, including FFSs, are designed to meet the rigorous demands of their long and active service lives, often spanning several decades of continuous use. Our global reach enables us to provide best-in-class support services such as real-time, remote monitoring and enables us to leverage our extensive worldwide network of spare parts and service teams.

Demand for trained aviation professionals is driven by air traffic growth, global pilot retirements and the increase in active aircraft fleets. As the global economies and airline fleets continue to expand, so does the demand for qualified airline personnel and, in turn, demand for comprehensive training solutions:

– In commercial aviation, the aerospace industry’s widely held expectation is that long-term average growth for air travel will continue at 4.1% annually over the next decade. For calendar 2019, passenger traffic increased by 4.2% compared to calendar 2018. Passenger traffic in Asia Pacific grew by 4.8% while Europe, Latin America, North America and the Middle East increased by 4.2%, 4.2%, 4.1% and 2.4% respectively;

– In business aviation, training demand is closely aligned to business jet travel. According to the Federal Aviation Administration, the total number of business jet flights, which includes all domestic and international flights, was stable over the past 12 months;

– The global active commercial aircraft fleet is widely expected to grow at an approximate average rate of 3.4% annually over the next two decades. From December 2018 to December 2019, the global commercial aircraft fleet increased by 4.6%, growing by 6.3% in Asia Pacific, 4.2% in Europe, the Middle East and Africa and by 3.6% in the Americas.

Marketdrivers

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 airlines and business aircraft operators;

– Expected long-term global growth in air travel;

– Growing active fleet of commercial and business aircraft;

– Demand for trained aviation professionals.

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 (iLVC) training solutions for defence forces. Most militaries use a combination of live training on actual platforms, virtual training in simulators, and constructive training using computer-generated simulations. We are skilled and experienced as a training systems integrator capable of helping defence forces achieve an optimal balance of iLVC training to achieve mission readiness. Our expertise in training 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. Increasingly, we are leveraging our training systems integration capabilities in the naval domain to provide naval training solutions, as evidenced by the program to provide the United Arab Emirates Navy with a comprehensive Naval Training Centre and our role supporting the design phase of the Canadian Surface Combatant ship program. We offer training solutions for land forces, including a range of driver, gunnery and maintenance trainers for tanks and armoured fighting vehicles as well as constructive simulation for command and staff training. In fiscal 2019, we acquired and integrated Alpha-Omega Change Engineering Inc. (AOCE) with CAE USA Mission Solutions Inc. (MSI), a subsidiary of CAE USA Inc. eligible to pursue and execute higher-level security programs.

Defence forces seek to increasingly leverage virtual training and balance their training approach between live, virtual and constructive domains to achieve maximum readiness and efficiency. We pursue programs requiring the integration of live, virtual and constructive training which tend to be larger in size than programs involving only one of the three training domains. We are a first-tier training systems integrator and are uniquely positioned to offer our customers a comprehensive range of innovative iLVC solutions, ranging from digital learning environments and extended reality capabilities to integrated live, virtual and constructive training in a secure networked 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 outsourced training solutions with facilities that are government-owned government-operated; government-owned contractor-operated; or contractor-owned contractor‑operated. We offer training needs analysis, training media analysis, courseware, instructional systems design, facilities, tactical control centres, synthetic environments, extended reality solutions, a range of simulators and training devices, live assets, digital media classrooms, distributed training, scenario development, instructors, training centre operations, and a continuous training improvement process leveraging big data analytics.

We have delivered simulation products and training services to approximately 50 defence forces in over 40 countries. We provide training support services such as contractor logistics support, maintenance services, classroom instruction and simulator training at over 100 sites around the world, including our joint ventures. We also support live flying training, such as the live training delivered as part of the North Atlantic Treaty Organization (NATO) Flying Training in Canada and the U.S. Army Fixed-Wing Flight Training programs, as we help our customers achieve an optimal balance across their training enterprise.

CAE Third Quarter Report 2020 I 5

Management’s Discussion and Analysis

Market drivers

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

– Growing defence budgets;

– Installed base of enduring defence platforms and new customers;

– Attractiveness of outsourcing training and maintenance services;

– Pilot and aircrew recruitment, training and retention challenges faced by militaries globally;

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

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

– Explicit desire of governments and defence forces to increase the use of synthetic training, including the adoption of extended reality solutions;

– Relationships with OEMs for simulation and training. 

HEALTHCARE MARKET

We design and manufacture simulators, audiovisual and simulation centre management solutions, develop courseware and offer services for training of medical, nursing and allied healthcare students as well as healthcare providers worldwide.

Simulation-based training is one of the most effective ways to prepare healthcare practitioners to care for patients and respond to critical situations while reducing medical errors. We are leveraging our experience and best practices in simulation-based aviation training to deliver innovative solutions to improve the safety and efficiency in the delivery of patient care. As such, we have established three CAE Healthcare Centres of Excellence to date to improve clinical education and develop new training technologies and curriculum for healthcare professionals and students. The healthcare simulation market is expanding, with a shift in the U.S. from fee-for-service to value-based care in hospitals, and with simulation centres becoming increasingly more prevalent in nursing and medical schools.

We offer the broadest and most innovative portfolio of medical simulation products and services, including patient, ultrasound and interventional (surgical) simulators, audiovisual and simulation centre management solutions, augmented reality applications, e-learning and courseware for simulation-based healthcare education and training. We have provided training solutions to customers in more than 80 countries that are currently supported by our global network. We are a leader in patient simulators which are based on advanced models of human physiology that realistically mimic human responses to clinical interventions. For example, our high-fidelity childbirth simulator, Lucina, was designed to offer exceptional realism for simulated scenarios of both normal deliveries and rare maternal emergencies. During the last two years, we continued to invest in the development of new mid-fidelity products to address growing demand in the healthcare simulation market. We have launched the CAE Juno clinical skills manikin which enables nursing programs to adapt to the decreased access to live patients due to the complex conditions of hospital patients and the liability concerns in healthcare, the CAE Ares emergency care manikin which was designed for advanced life support and American Heart Association (AHA) training and the CAE Luna neonatal simulator which is an innovative critical care simulation for newborns and infants. With these solutions, we are providing some of the industry's most innovative learning tools to healthcare academic institutes, which represent the largest segment of the healthcare simulation market. We continue to push the boundaries of technology and we were the first to bring a commercial Microsoft HoloLens mixed reality application to the medical simulation market. We continue to integrate augmented and virtual reality into our advanced software platforms to deliver custom training solutions and ground-breaking products.

Through our Healthcare Academy, we deliver peer-to-peer training at customer sites as well as in our training centres in Canada, Germany, the U.K. and U.S. Our Healthcare Academy includes more than 50 adjunct faculties consisting of nurses, physicians, paramedics and sonographers who, in collaboration with leading healthcare institutions, have developed more than 500 Simulated Clinical Experience courseware packages for our customers.

We offer turnkey solutions, project management and professional services for healthcare simulation programs. We also collaborate with medical device companies and scientific societies to develop innovative and custom training solutions. Since September 2017, in collaboration with the American Society of Anesthesiologists (ASA), we have released five online modules for Anesthesia SimSTAT, a virtual healthcare training environment for practicing physicians. This new platform provides continuing medical education for Maintenance of Certification in Anesthesiology (MOCA) and has allowed us to expand access to simulation-based clinical training among the anesthesia community. Furthermore, through industry partnerships with medical device companies, we have developed a specialized interventional simulator to train physicians to implant a new generation of pacemakers as well as a modular, portable catheterization laboratory interventional simulator, CAE CathLabVR, which was introduced to the cardiac simulation community in September 2018. In January 2018, we announced a collaboration with the AHA to establish a network of International Training Sites to deliver lifesaving AHA courses in countries that are currently underserved.

Market drivers

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

– Limited access to live patients during training;

– Medical and mixed reality technology revolution;

– Broader adoption of simulation, with a demand for innovative and custom training approaches;

– Growing emphasis on patient safety and outcomes.

You will find more information about our operations in our fiscal 2019 financial report, AIF or our Annual Activity and Corporate Social Responsibility Report.

6 I CAE Third Quarter Report 2020

Management’s Discussion and Analysis

4.    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 the three main currencies in which we operate.

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:

	December 31	September 30	Increase /		March 31	Increase /
	2019	2019	(decrease)		2019	(decrease)
U.S. dollar (US$ or USD)	1.30	1.32	(2	%)	1.34	(3	%)
Euro (€ or EUR)	1.46	1.44	1	%	1.50	(3	%)
British pound (£ or GBP)	1.72	1.63	6	%	1.74	(1	%)

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

	December 31	September 30	Increase /		December 31	Increase /
	2019	2019	(decrease)		2018	(decrease)
U.S. dollar (US$ or USD)	1.32	1.32	—	%	1.32	—	%
Euro (€ or EUR)	1.46	1.47	(1	%)	1.51	(3	%)
British pound (£ or GBP)	1.70	1.63	4	%	1.70	—	%

The effect of translating the results of our foreign operations into Canadian dollars resulted in a decrease in this quarter’s revenue of $10.4 million and a decrease in net income of $2.2 million when compared to the third quarter of fiscal 2019. For the first nine months of fiscal 2020, the effect of translating the results of our foreign operations into Canadian dollars resulted in a decrease in revenue of $9.1 million and a decrease in net income of $1.3 million when compared to the first nine months of fiscal 2019. We calculated this by translating the current quarter foreign currency revenue and net income using the average monthly exchange rates from the prior year’s third quarter and comparing these adjusted amounts to our current quarter reported results.

5.    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.

Capital employed

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.

Return on capital employed (ROCE)

ROCE is used 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.

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

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

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

CAE Third Quarter Report 2020 I 7

Management’s Discussion and Analysis

Earnings per share (EPS) before specific items

Earnings per share before specific items is a non-GAAP measure calculated by excluding restructuring costs, integration costs, acquisition costs and other gains and losses arising from significant strategic transactions as well as significant one-time tax items from the diluted earnings per share from continuing operations attributable to equity holders of the Company. The effect per share is obtained by dividing these restructuring costs, integration costs, acquisition costs, and other gains, net of tax, as well as one-time tax items by the average number of diluted shares. We track it because we believe it provides a better indication of our operating performance on a per share basis and makes it easier to compare across reporting periods.

Free cash flow

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

Gross profit

Gross profit is a non-GAAP measure equivalent to the operating profit 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, integration and acquisition 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 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 debt-to-EBITDA is calculated as net debt divided by the last twelve months EBITDA. EBITDA comprises earnings before income taxes, finance expense - net, depreciation and amortization.

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 an additional 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.

Order intake and Backlog

Order intake

Order intake is a non-GAAP measure that represents the expected value of orders we have received:

– For the Civil Aviation Training Solutions segment, we consider an item part of our order intake 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. Additionally, 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 order intake 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 order intake 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.

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

8 I CAE Third Quarter Report 2020

Management’s Discussion and Analysis

Backlog

Total backlog is a non-GAAP measure that represents expected future revenues and includes obligated backlog, joint venture backlog and unfunded backlog and options:

– Obligated backlog represents the value of our order intake not yet executed and is calculated by adding the order intake of the current period to the balance of the obligated backlog at the end of the previous fiscal year, subtracting the revenue recognized in the current period and adding or subtracting backlog adjustments. If the amount of an order already recognized in a previous fiscal year is modified, the backlog is revised through adjustments; 

– 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 represents firm Defence and Security orders we have received but have not yet executed and for which funding authorization has not yet been obtained. Options are included in backlog when there is a high probability of being exercised, but indefinite-delivery/indefinite-quantity (ID/IQ) contracts are excluded. When an option is exercised, it is considered order intake in that period and it is removed from unfunded backlog and options.

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.

Segment operating income (SOI)

Segment operating income is a non-GAAP measure and is the sum of our key indicators of each segment’s financial performance. Segment operating income gives us an 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 segment operating income by taking the operating profit and excluding restructuring costs of major programs that do not arise from significant strategic transactions.

Segment operating income before specific items further excludes restructuring costs, integration costs, acquisition costs and other gains and losses arising from significant strategic transactions. We track it because we believe it provides a better indication of our operating performance and makes it easier to compare across reporting periods.

Simulator equivalent unit (SEU)

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.

Full-flight simulators (FFSs) deployed in CAE's network

A FFS is a full size replica of a specific make, model and series of an aircraft cockpit, including a motion system. In our count of FFSs deployed in the network, we generally only include FFSs that are of the highest fidelity and do not include any fixed based training devices, or other lower-level devices, as these are typically used in addition to FFSs in the same approved training programs.

Utilization rate

Utilization rate is one of the operating measures we use to assess the performance of our Civil simulator training network. While utilization rate does not perfectly correlate to revenue recognized, we track it, together with other measures, because we believe it is an indicator of our operating performance. We calculate it by taking the number of training hours sold on our simulators during the period divided by the practical training capacity available for the same period.

CAE Third Quarter Report 2020 I 9

Management’s Discussion and Analysis

6.    CONSOLIDATED RESULTS

6.1     Results from operations – third quarter of fiscal 2020

(amounts in millions, except per share amounts)		Q3-2020		Q2-2020		Q1-2020		Q4-2019		Q3-2019
Revenue	$	923.5		896.8		825.6		1,022.0		816.3
Cost of sales	$	632.0		660.1		581.9		734.0		583.0
Gross profit3	$	291.5		236.7		243.7		288.0		233.3
As a % of revenue	%	31.6		26.4		29.5		28.2		28.6
Research and development expenses3	$	33.6		35.8		31.9		9.9		31.1
Selling, general and administrative expenses	$	118.3		98.0		113.3		123.2		101.4
Other gains – net	$	(3.5	)	(11.5	)	(0.3	)	(5.2	)	(2.5	)
After tax share in profit of equity accounted investees	$	(11.8	)	(10.4	)	(12.1	)	(10.3	)	(9.7	)
Operating profit3	$	154.9		124.8		110.9		170.4		113.0
As a % of revenue	%	16.8		13.9		13.4		16.7		13.8
Finance expense – net	$	36.7		34.3		34.9		25.7		19.3
Earnings before income taxes	$	118.2		90.5		76.0		144.7		93.7
Income tax expense	$	18.4		15.5		13.0		19.3		14.2
As a % of earnings before income taxes
(income tax rate)	%	16		17		17		13		15
Net income	$	99.8		75.0		63.0		125.4		79.5
Attributable to:
Equity holders of the Company	$	97.7		73.8		61.5		122.3		77.6
Non-controlling interests	$	2.1		1.2		1.5		3.1		1.9
	$	99.8		75.0		63.0		125.4		79.5
EPS attributable to equity holders of the Company
Basic and diluted	$	0.37		0.28		0.23		0.46		0.29
EPS before specific items3	$	0.37		0.28		0.24		0.48		0.29

Revenue was 13%higher than the third quarter of fiscal 2019

Revenue was $107.2 million higher than the third quarter of fiscal 2019. Increases in revenue were $99.7 million, $5.3 million and $2.2 million for Civil Aviation Training Solutions, Healthcare and Defence and Security respectively.

For the first nine months of fiscal 2020, revenue was $363.8 million higher than the same period last year. Increases in revenue were $283.2 million, $70.6 million and $10.0 million for Civil Aviation Training Solutions, Defence and Security and Healthcare respectively.

You will find more details in Results by segment.

Segment operating income³ was $41.9 million higher compared to the third quarter of fiscal 2019

Segment operating income this quarter was $154.9 million, or 16.8% of revenue, compared to $113.0 million or 13.8% of revenue in the third quarter of fiscal 2019. The increase in segment operating income was $35.8 million and $6.1 million for Civil Aviation Training Solutions and Defence and Security respectively. Healthcare segment operating income was stable.

For the first nine months of fiscal 2020, segment operating income was $390.6 million, or 14.8% of revenue, compared to $310.2 million, or 13.6% of revenue for the same period last year, representing an increase of $80.4 million or 26%. The increase in segment operating income was $93.0 million for Civil Aviation Training Solutions, partially offset by decreases of $8.4 million and $4.2 million for Defence and Security and Healthcare respectively.

On April 1, 2019, we adopted IFRS 16 without restating comparative periods. In accordance with IFRS 16, operating lease expense previously recognized under IAS 17 is no longer incurred but replaced with additional depreciation from the recognition of additional right‑of-use assets, recorded evenly over the lease term, and higher interest from the recognition of lease obligations, accreted based on the effective interest method.

You will find more details in Results by segment.

³Non-GAAP and other financial measures (see Section 5).

10 I CAE Third Quarter Report 2020

Management’s Discussion and Analysis

Net finance expense was $17.4 million higher than the third quarter of fiscal 2019

The increase compared to the third quarter of fiscal 2019 was mainly due to higher interest on long-term debt due to the issuance of unsecured senior notes since the fourth quarter fiscal 2019 and higher interest on lease liabilities as a result of the adoption of IFRS 16.

For the first nine months of fiscal 2020 net finance expense was $105.9 million, $50.7 million higher compared to the same period last year. The increase was mainly due to higher interest on long-term debt due to the issuance of unsecured senior notes, higher interest on lease liabilities as a result of the adoption of IFRS 16 and lower finance income.

Income tax rate was 16% this quarter

Income taxes this quarter were $18.4 million, representing an effective tax rate of 16% compared to an effective tax rate of 15% for the third quarter of fiscal 2019.

The higher tax rate this quarter compared to the third quarter of fiscal 2019 was mainly due to the impacts of tax audits in Canada last year, partially offset by a change in the mix of income from various jurisdictions.

For the first nine months of fiscal 2020, income taxes were $46.9 million, representing an effective tax rate of 16% which is stable compared to the same period last year.

Last year, the tax rate was positively affected by the impact of tax audits in Canada and this year, the tax rate was positively affected by the change in the mix of income from various jurisdictions.

6.2     Consolidated orders and total backlog

Total backlog⁴up2% compared to last quarter

	Three months ended			Nine months ended
(amounts in millions)	December 31, 2019			December 31, 2019
Obligated backlog4, beginning of period	$	7,473.7		$	7,461.4
+ order intake4		1,106.6			3,042.8
- revenue		(923.5	)		(2,645.9	)
+ / - adjustments		(47.1	)		(248.6	)
Obligated backlog, end of period	$	7,609.7		$	7,609.7
Joint venture backlog4 (all obligated)		424.0			424.0
Unfunded backlog and options4		1,400.6			1,400.6
Total backlog	$	9,434.3		$	9,434.3

The book-to-sales ratio⁴ for the quarter was 1.20x. The ratio for the last 12 months was 1.22x. 

You will find more details in Results by segment.

⁴Non-GAAP and other financial measures (see Section 5).

CAE Third Quarter Report 2020 I 11

Management’s Discussion and Analysis

7.    RESULTS BY SEGMENT

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

– Civil Aviation Training Solutions;

– Defence and Security;

– Healthcare.

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

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

KEY PERFORMANCE INDICATORS

Segment operating income

(amounts in millions, except operating margins)		Q3-2020	Q2-2020		Q1-2020		Q4-2019	Q3-2019
Civil Aviation Training Solutions	$	123.0	100.2		98.6		115.5	87.2
	%	22.0	18.9		20.6		19.5	19.0
Defence and Security	$	31.3	26.0		15.1		50.7	25.2
	%	9.4	7.7		4.7		13.1	7.6
Healthcare	$	0.6	(1.4	)	(2.8	)	4.2	0.6
	%	1.8	—		—		10.3	2.2
Segment operating income	$	154.9	124.8		110.9		170.4	113.0

Capital employed⁵

(amounts in millions)		Q3-2020	Q2-2020	Q1-2020	Q4-2019	Q3-2019
Civil Aviation Training Solutions	$	3,734.5	3,655.2	3,549.6	3,274.7	2,333.7
Defence and Security	$	1,074.4	1,191.8	1,192.2	1,032.0	1,032.8
Healthcare	$	224.7	225.8	226.8	222.8	223.2
	$	5,033.6	5,072.8	4,968.6	4,529.5	3,589.7

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

12 I CAE Third Quarter Report 2020

Management’s Discussion and Analysis

7.1      Civil Aviation Training Solutions

THIRD QUARTER OF FISCAL 2020 EXPANSIONS AND NEW INITIATIVES 

Expansions

– On November 4, 2019, we concluded a 15-year exclusive business aviation training services agreement with Directional Aviation Capital affiliates and the acquisition of a 50% stake in SIMCOM, an operator of a wide range of jet, turboprop and piston powered aircraft simulators and training devices.

New programs and products

– We announced two new Multi-Crew Pilot License programs in partnership with easyJet and Volotea;

– We announced, together with Jazz Aviation and Seneca School of Aviation, a new cadet pilot training program in Canada called Jazz Approach.

ORDERS⁶

Civil Aviation Training Solutions obtained contracts this quarter expected to generate revenues of $706.2 million including contracts for 17 FFSs sold in the quarter, bringing the civil FFS order intake for the first nine months of the fiscal year to 37 FFSs, including:

– Two Boeing 737MAX FFSs to Emirates - CAE Flight Training, a joint venture of Emirates Airline and CAE;

– Two Boeing 777X FFSs to Emirates Airline;

– One Embraer E190 FFS and one Embraer E190-E2 FFS to KLM Royal Airlines;

– 11 FFSs to undisclosed customers.

Notable contract awards for the quarter included:

– A 10-year pilot training agreement with JetSmart Airlines SpA;

– A 3-year business aviation pilot training renewal with TAG Aviation Holdings;

– A 6-year exclusive business aviation pilot training renewal with JetSuite;

– A 4-year business aviation pilot training renewal with Solairus Aviation.

FINANCIAL RESULTS
(amounts in millions, except operating margins, SEU, FFSs deployed, utilization rate and FFS deliveries)		Q3-2020	Q2-2020	Q1-2020	Q4-2019	Q3-2019
Revenue	$	558.1	529.9	477.6	593.4	458.4
Segment operating income	$	123.0	100.2	98.6	115.5	87.2
Operating margins	%	22.0	18.9	20.6	19.5	19.0
SOI before specific items6	$	123.4	101.4	101.0	122.3	87.2
Operating margins before specific items	%	22.1	19.1	21.1	20.6	19.0
Depreciation and amortization	$	59.8	57.3	55.9	47.5	37.7
Property, plant and equipment expenditures	$	45.8	52.4	83.6	87.9	55.3
Intangible assets and other assets expenditures	$	7.0	10.3	5.4	7.2	10.3
Capital employed	$	3,734.5	3,655.2	3,549.6	3,274.7	2,333.7
Total backlog	$	5,263.0	5,124.8	5,090.3	5,039.6	4,566.1
SEU6		252	243	242	224	219
FFSs deployed in CAE's network6		303	299	294	286	266
Utilization rate6	%	70	69	76	75	75
FFS deliveries		12	18	5	25	16

Revenue up22% compared to the third quarter of fiscal 2019

The increase in revenue from the third quarter of fiscal 2019 was due to higher revenue recognized from simulator sales due to the timing of production and other milestones on devices for which revenue was not recognized upon delivery, the integration into our results of BBAT following its acquisition in the fourth quarter of fiscal 2019, and the contribution from recently deployed simulators in our network. The increase was partially offset by a lower number of deliveries.

Revenue year to date was $1.6 billion, $283.2 million or 22%higher than the same period last year. The increase in revenue from the same period of fiscal 2019 was due to higher revenue recognized from simulator sales due to a higher number of deliveries and the timing of production and other milestones on devices for which revenue was not recognized upon delivery, the integration into our results of BBAT, and the contribution from recently deployed simulators in our network.

Segment operating income up41% over the third quarter of fiscal 2019

Segment operating income was $123.0 million (22.0% of revenue) this quarter, compared to $87.2 million (19.0% of revenue) in the third quarter of fiscal 2019.

⁶Non-GAAP and other financial measures (see Section 5).

CAE Third Quarter Report 2020 I 13

Management’s Discussion and Analysis

Segment operating income increased by $35.8 million, or 41% over the third quarter of fiscal 2019. The increase was mainly due to the integration into our results of BBAT operations, higher revenue recognized from simulator sales, as described above, and a favourable program mix from our manufacturing facility. The increase was partially offset by lower utilization mainly in Europe.

Segment operating income for the first nine months of the year was $321.8 million (20.6% of revenue), $93.0 million or 41%higher than the same period last year. The increase was mainly due to the integration into our results of BBAT operations, a favourable program mix from our manufacturing facility, higher revenue recognized from simulator sales, as described above, and the contribution from recently deployed simulators in our network. The increase was partially offset by lower utilization mainly in the Americas.

Excluding the costs arising from the integration of BBAT, segment operating income before specific items was $123.4 million (22.1% of revenue) this quarter and $325.8 million (20.8% of revenue) for the first nine months of the year. On this basis, the current period's segment operating income before specific items was up42% over the same quarter last year and 42% on a year to date basis.

Property, plant and equipment expenditures at $45.8 million this quarter

Growth capital expenditures were $32.0 million for the quarter and maintenance capital expenditures were $13.8 million.

Capital employed increased by $79.3 million from last quarter

The increase over last quarter was due to a higher investment in equity accounted investees as a result of the acquisition of a 50% stake in SIMCOM. The increase was partially offset by a lower investment in non-cash working capital resulting from higher accounts payable and accrued liabilities, lower contract assets and higher contract liabilities.

Total backlog up3% compared to last quarter

	Three months ended			Nine months ended
(amounts in millions)	December 31, 2019			December 31, 2019
Obligated backlog, beginning of period	$	4,816.1		$	4,679.2
+ order intake		706.2			2,002.9
- revenue		(558.1	)		(1,565.6	)
+ / - adjustments		(40.9	)		(193.2	)
Obligated backlog, end of period	$	4,923.3		$	4,923.3
Joint venture backlog (all obligated)		339.7			339.7
Total backlog	$	5,263.0		$	5,263.0

Adjustments this quarter were mainly due to negative foreign exchange movements.

This quarter's book-to-sales ratio was 1.27x. The ratio for the last 12 months was 1.44x.

7.2     Defence and Security

THIRD QUARTER OF FISCAL 2020 EXPANSIONS AND NEW INITIATIVES

Expansions

– The Netherlands Ministry of Defence opened a new training facility at Maritime Air Base de Kooy in Den Helder, the Netherlands where CAE will provide on-site maintenance and support services for the NH90 full-flight and mission trainer located at the facility;

– MSI was awarded a position on the U.S. Air Force Advisory & Assistance Services ID/IQ contract. MSI will now have opportunity to compete on task orders issued under the ID/IQ contract, which provides for technical training and analytical services to support and improve policy development, operational decision-making and management operations.

New programs and products

– We launched the CAE TRAX Academy, an integrated and advanced training continuum designed to deliver faster and more efficient throughput for military student pilot training. As an integral part of CAE TRAX Academy, we introduced the CAE Sprint Virtual Reality (VR) trainer, which will enable self-paced learning in an immersive, high-fidelity virtual environment.

ORDERS

Defence and Security was awarded $367.4 million in orders this quarter, including notable contract awards from:

– The NATO Support and Procurement Agency to provide the German Navy with a comprehensive training solution for the NH90 Sea Lion helicopter;

– The Federal Office of Bundeswehr Equipment, Information Technology and In-Service Support in Germany to upgrade and modify German Army NH90 full-mission simulators as part of a five-year extension to 2027 of the NH90 contract delivered by the Helicopter Flight Training Services joint venture;

– The U.S. Air Force to continue providing C-130H aircrew training services;

– Rotorsim, a joint venture between CAE and Leonardo, to continue providing long-term maintenance and support services on a range of helicopter simulators;

– The U.S. Army to provide additional Abrams M1A2 engine maintenance trainers.

14 I CAE Third Quarter Report 2020

Management’s Discussion and Analysis

FINANCIAL RESULTS
(amounts in millions, except operating margins)		Q3-2020	Q2-2020	Q1-2020	Q4-2019	Q3-2019
Revenue	$	332.4	336.5	320.5	387.9	330.2
Segment operating income	$	31.3	26.0	15.1	50.7	25.2
Operating margins	%	9.4	7.7	4.7	13.1	7.6
Depreciation and amortization	$	14.1	14.6	14.1	12.4	11.8
Property, plant and equipment expenditures	$	5.5	6.2	4.4	7.7	4.7
Intangible assets and other assets expenditures	$	11.2	12.7	14.6	14.5	11.2
Capital employed	$	1,074.4	1,191.8	1,192.2	1,032.0	1,032.8
Total backlog	$	4,171.3	4,113.6	4,271.9	4,455.3	4,398.5

Revenue stable compared to the third quarter of fiscal 2019

Higher revenue from European programs was partially offset by lower revenue from North American product programs and Middle Eastern programs and an unfavourable impact on the translation of foreign operations.

Revenue year to date was $989.4 million, $70.6 million or 8%higher than the same period last year. The increase was mainly due to the integration into our results of AOCE following its acquisition in the second quarter of fiscal 2019, as well as higher revenue from North American and European programs, partially offset by lower revenue from Middle Eastern and Australasian programs.

Segment operating income up24% over the third quarter of fiscal 2019

Segment operating income was $31.3 million (9.4% of revenue) this quarter, compared to $25.2 million (7.6% of revenue) in the third quarter of fiscal 2019.

The increase over the third quarter of fiscal 2019 was mainly due to higher contributions from North American programs attributed to a more favourable program mix and higher profitability in our joint ventures, partially offset by higher selling, general and administrative expenses and reorganizational costs of $1.9 million incurred this quarter.

Segment operating income for the first nine months of the year was $72.4 million (7.3% of revenue), $8.4 million or 10%lower than the same period last year. The decrease was mainly due to lower contributions from North American product programs, higher selling, general and administrative expenses and higher net research and development expenses. The decrease was partially offset by the integration into our results of AOCE and higher profitability in our joint ventures.

Capital employed decreased by $117.4 million from last quarter

The decrease in capital employed was mainly due to lower investment in non-cash working capital, resulting primarily from an increase in accounts payable and accrued liabilities and contract liabilities and a decrease in contract assets.

Total backlog up1% compared to last quarter

	Three months ended			Nine months ended
(amounts in millions)	December 31, 2019			December 31, 2019
Obligated backlog, beginning of period	$	2,657.6		$	2,782.2
+ order intake		367.4			949.0
- revenue		(332.4	)		(989.4	)
+ / - adjustments		(6.2	)		(55.4	)
Obligated backlog, end of period	$	2,686.4		$	2,686.4
Joint venture backlog (all obligated)		84.3			84.3
Unfunded backlog and options		1,400.6			1,400.6
Total backlog	$	4,171.3		$	4,171.3

Adjustments this quarter were mainly due to negative foreign exchange movements.

This quarter's book-to-sales ratio was 1.11x. The ratio for the last 12 months was 0.88x.

This quarter, $50.6 million was added to the unfunded backlog and $53.7 million was transferred to obligated backlog.

CAE Third Quarter Report 2020 I 15

Management’s Discussion and Analysis

7.3     Healthcare

THIRD QUARTER OF FISCAL 2020 EXPANSIONS AND NEW INITIATIVES

New programs and products

– We expanded our relationship with Edwards Lifesciences to develop custom physician training solutions for new advanced critical care and cardiac care devices;

– We delivered a custom cardiovascular simulation mobile application to Cardinal Health (Cordis) which offers physicians procedural training and assessment;

– We, together with ASA, launched the Anesthesia SimSTAT - Labor & Delivery Unit module, the final module in a series of interactive screen-based anesthesia simulation modules, which has been approved by the American Board of Anesthesiology for MOCA credits.

Other

– On November 12, 2019, we invested in a healthcare software company that enables increased efficiency of learning, through a controlling 50% equity interest, for cash consideration of $0.9 million.

Innovation Awards

– We won an EMS World Innovation Award for CAE AresAR, the Microsoft HoloLens application for our emergency care manikin that includes six augmented reality scenarios.

FINANCIAL RESULTS
(amounts in millions, except operating margins)		Q3-2020	Q2-2020		Q1-2020		Q4-2019	Q3-2019
Revenue	$	33.0	30.4		27.5		40.7	27.7
Segment operating income (loss)	$	0.6	(1.4	)	(2.8	)	4.2	0.6
Operating margins	%	1.8	—		—		10.3	2.2
Depreciation and amortization	$	3.8	3.5		3.8		3.6	3.4
Property, plant and equipment expenditures	$	0.3	0.2		1.0		0.6	1.6
Intangible assets and other assets expenditures	$	3.1	2.7		2.7		2.8	3.0
Capital employed	$	224.7	225.8		226.8		222.8	223.2

Revenue up19% compared to the third quarter of fiscal 2019

The increase in revenue over the third quarter of fiscal 2019 was mainly due to increased volume on patient simulators and higher revenue from centre management solutions and services for key partnerships with OEMs.

Revenue year to date was $90.9 million, up 12% compared to the same period last year. Higher revenue from centre management solutions, services for key partnerships with OEMs, as well as increased volume on patient simulators, were partially offset by lower revenue from ultrasound simulators.

Segment operating income stable compared to the third quarter of fiscal 2019

Segment operating income was $0.6 million this quarter and in the third quarter of fiscal 2019.

Higher revenues, as described above, were offset by higher investments in selling, general and administrative expenses and higher net research and development expenses incurred for the development of recently launched programs and products.

Segment operating loss for the first nine months of the year was $3.6 million, compared to a segment operating income of $0.6 million for the first nine months of fiscal 2019. The $4.2 million decrease was mainly due to higher investments in selling, general and administrative expenses to support the expansion of our sales force, higher net research and development expenses and a less favourable product mix. The decrease was partially offset by higher revenues, as described above.

Capital employed decreased by $1.1 million from last quarter

The decrease from last quarter was due to movements in foreign exchange rates, partially offset by higher non-cash working capital.

16 I CAE Third Quarter Report 2020

Management’s Discussion and Analysis

8.    CONSOLIDATED CASH MOVEMENTS AND LIQUIDITY

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

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

– Capital expenditure requirements;

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

8.1    Consolidated cash movements⁷

		Three months ended							Nine months ended
	December 31							December 31
(amounts in millions)		2019			2018				2019			2018
Cash provided by operating activities*		$	141.7		$	123.6			$	432.1		$	363.8
Changes in non-cash working capital		180.4			94.0				(133.3		)	0.3
Net cash provided by operating activities		$	322.1		$	217.6			$	298.8		$	364.1
Maintenance capital expenditures7		(19.0		)	(14.2		)		(55.3		)	(54.8		)
Other assets		(3.2		)	(5.7		)		(7.9		)	(10.6		)
Proceeds from the disposal of property, plant and equipment		—			0.2				0.4			2.5
Net payments to equity accounted investees		(10.3		)	(17.3		)		(10.3		)	(27.0		)
Dividends received from equity accounted investees		14.0			—				22.6			7.1
Dividends paid		(28.3		)	(25.5		)		(82.2		)	(74.3		)
Free cash flow7		$	275.3		$	155.1			$	166.1		$	207.0
Growth capital expenditures7		(32.6		)	(47.4		)		(144.1		)	(100.8		)
Capitalized development costs		(18.8		)	(19.9		)		(61.0		)	(48.6		)
Common shares repurchased		(12.6		)	(49.1		)		(32.8		)	(92.8		)
Other cash movements, net		21.1			4.9				36.9			11.6
Business combinations, net of cash and cash equivalents acquired		(0.9		)	—				(10.1		)	(33.5		)
Acquisition of investment in equity accounted investees		(113.5		)	—				(113.5		)	—
Addition of assets through the monetization of royalties		—			(202.7		)		—			(202.7		)
Effect of foreign exchange rate changes on cash and cash equivalents		1.1			15.4				(11.7		)	0.6
Net change in cash before proceeds and repayment of long-term debt		$	119.1		$	(143.7	)		$	(170.2	)	$	(259.2	)
* before changes in non-cash working capital

Free cash flow of $275.3 million this quarter

The increase from the third quarter of fiscal 2019 was mainly due to a lower investment in non-cash working capital, an increase in cash provided by operating activities and higher dividends received from equity accounted investees.

Free cash flow year to date was $166.1 million, $40.9 million lower than the same period last year. The decrease was mainly attributable to a higher investment in non-cash working capital, partially offset by an increase in cash provided by operating activities and lower net payments to equity accounted investees.

Capital expenditures of $51.6 million this quarter

Growth capital expenditures were $32.6 million this quarter and $144.1 million for the first nine months of the year. Maintenance capital expenditures were $19.0 million this quarter and $55.3 million for the first nine months of the year.

⁷Non-GAAP and other financial measures (see Section 5).

CAE Third Quarter Report 2020 I 17

Management’s Discussion and Analysis

9.    CONSOLIDATED FINANCIAL POSITION

9.1      Consolidated capital employed

As at December 31				As at September 30			As at April 1			As at March 31
(amounts in millions)		2019			2019			2019(1)			2019
Use of capital:
Current assets	$	2,024.0		$	2,013.5		$	2,109.6		$	2,112.9
Less: cash and cash equivalents		(278.5	)		(222.5	)		(446.1	)		(446.1	)
Current liabilities		(1,734.5	)		(1,704.1	)		(1,917.0	)		(1,889.5	)
Less: current portion of long-term debt		123.1			231.3			295.9			264.1
Non-cash working capital8	$	134.1		$	318.2		$	42.4		$	41.4
Property, plant and equipment		1,991.3			1,976.0			1,943.3			2,149.3
Right-of-use assets		388.6			408.0			432.8			—
Other long-term assets		3,040.7			2,923.0			2,899.9			2,903.3
Other long-term liabilities		(802.2	)		(831.1	)		(787.9	)		(801.8	)
Total capital employed	$	4,752.5		$	4,794.1		$	4,530.5		$	4,292.2
Source of capital8:
Current portion of long-term debt	$	123.1		$	231.3		$	295.9		$	264.1
Long-term debt		2,462.0			2,434.0			2,298.2			2,064.2
Less: cash and cash equivalents		(278.5	)		(222.5	)		(446.1	)		(446.1	)
Net debt8	$	2,306.6		$	2,442.8		$	2,148.0		$	1,882.2
Equity attributable to equity holders of the Company		2,362.4			2,269.8			2,303.8			2,331.3
Non-controlling interests		83.5			81.5			78.7			78.7
Source of capital	$	4,752.5		$	4,794.1		$	4,530.5		$	4,292.2

⁽¹⁾ On April 1, 2019, we adopted IFRS 16 without restating comparative periods. Accordingly, to allow for better comparability, capital employed variances should be compared with figures as at April 1, 2019 instead of March 31, 2019.

Capital employed decreased by $41.6 million from last quarter

The decreasewas mainly due to lower non‑cash working capital, partially offset by higher other long-term assets and lower other long‑term liabilities.

Return on capital employed (ROCE)⁸

Our ROCE was 10.7% this quarter. ROCE before specific items was 11.4% this quarter, which compares to 11.7% in the third quarter of last year and 11.5% last quarter.

Specific items include the impacts of the integration of BBAT in fiscal 2020 and in fiscal 2019. For fiscal 2019, specific items also includes the income tax recovery resulting from the enactment of a lower U.S. federal income tax rate and the net gain on the remeasurement of the previously held AACE investment.

Excluding the impacts of IFRS 16, ROCE would have been 10.8% and ROCE before specific items would have been 11.6% this quarter, which compares to 11.7% in the third quarter of last year and 11.7% last quarter.

As we have adopted IFRS 16 without restating comparative periods, we have not restated the prior period calculations of ROCE to account for the recognition of right-of-use assets. To enable comparability with prior periods, we have excluded the impacts of the adoption of IFRS 16 from the fiscal 2020 ROCE calculation by removing the new right-of-use assets from capital employed and by adding back finance expense, after tax, to net income.

Non-cash working capital decreased by $184.1 million from last quarter

The decreasewas mainly due to higher accounts payable and accrued liabilities, lower contract assets and higher contract liabilities.

Other long-term assets up $117.7 million

The increase was mainly due to a higher investment in equity accounted investees as a result of the acquisition of a 50% stake in SIMCOM.

Other long-term liabilities down $28.9 million

The decrease was mainly due to lower employee benefit obligations, resulting primarily from an increase in the discount rate used to determine our defined benefit pension plan obligations.

⁸Non-GAAP and other financial measures (see Section 5).

18 I CAE Third Quarter Report 2020

Management’s Discussion and Analysis

Change in net debt
	Three months ended			Nine months ended
(amounts in millions, except net debt-to-capital and net debt-to-EBITDA)	December 31, 2019			December 31, 2019
Net debt, beginning of period	$	2,442.8		$	1,882.2
Lease liabilities added on April 1, 2019 as a result of the adoption of IFRS 16		—			265.8
Impact of cash movements on net debt
(see table in the consolidated cash movements section)		(119.1	)		170.2
Effect of foreign exchange rate changes on long-term debt		(28.8	)		(51.6	)
Impact from business combinations		(0.1	)		1.5
Lease liability movements		7.3			25.5
Other		4.5			13.0
Change in net debt during the period	$	(136.2	)	$	424.4
Net debt, end of period	$	2,306.6		$	2,306.6
Net debt-to-capital9	%	48.5
Net debt-to-capital excluding the impacts of IFRS 16	%	44.9
Net debt-to-EBITDA9		2.71
Net debt-to-EBITDA excluding the impacts of IFRS 16		2.49

As we have adopted IFRS 16 without restating comparative periods, we have not restated the prior period calculations of net debt‑to‑capital⁹ or net debt-to-EBITDA. To enable comparability with prior periods, we have excluded the impacts of the adoption of IFRS 16 from the fiscal 2020 net debt-to-capital and net debt-to-EBITDA calculations by removing the new lease liabilities from net debt, removing the new right-of-use assets from capital employed and by adding back depreciation and finance expense to EBITDA.

Net debt-to-EBITDA includes the debt balance outstanding as at December 31, 2019 which includes debt issued to fund recent acquisitions. EBITDA includes the results of the acquired businesses and equity accounted investees as of their respective acquisition dates. We have not included a pro-forma last twelve months EBITDA for these recently acquired businesses.

We have a committed line of credit at floating rates, provided by a syndicate of lenders. We and some of our subsidiaries can borrow funds directly from this credit facility to cover operating and general corporate expenses and to issue letters of credit. In August 2019, the total amount available under this facility increased from US $550.0 million to US $850.0 million.

We and some of our subsidiaries also have an agreement to sell certain of our accounts receivable for an amount up to US $300.0 million.

In May 2019, we repurchased an asset previously financed under lease for $12.5 million [US $9.3 million] acquired as part of the BBAT acquisition.

In June 2019, we repaid unsecured senior notes of $80.4 million [US $60.0 million] and a term loan of $14.9 million [US $11.0 million].

In June 2019, we entered into a term loan for the financing of several new aircraft for our operations in North America. This represents an obligation of $5.3 million as at December 31, 2019.

In October 2019, we repurchased assets previously financed under lease for $9.8 million [US $7.5 million].

In December 2019, we repaid unsecured senior notes of $95.0 million, and issued notes for US $100.0 million, representing an obligation of $129.9 million as at December 31, 2019. Additionally, we used $15.7 million [US $11.7 million] of restricted cash, previously held as collateral, to repay part of an existing term loan.

We have certain debt agreements which require the maintenance of standard financial covenants. As at December 31, 2019, we are compliant with all our financial covenants.

We believe that our cash and cash equivalents, access to credit facilities and expected free cash flow will provide sufficient flexibility for our business, the repurchase of common shares and the payment of dividends and will enable us to meet all other expected financial requirements in the near term.

⁹Non-GAAP and other financial measures (see Section 5).

CAE Third Quarter Report 2020 I 19

Management’s Discussion and Analysis

Total equity increased by $94.6 million this quarter

The increase in equity was mainly due to net income of $99.8 million and defined benefit plan remeasurements of $22.7 million, partially offset by dividends of $28.3 million.

Outstanding share data

Our articles of incorporation authorize the issue of an unlimited number of common shares and an unlimited number of preferred shares issued in series. We had a total of 265,873,662 common shares issued and outstanding as at December 31, 2019 with total share capital of $675.8 million. In addition, we had 6,202,770 options outstanding under the Employee Stock Option Plan (ESOP).

As at January 31, 2020, we had a total of 266,064,553 common shares issued and outstanding and 6,033,329 options outstanding under the ESOP. 

Repurchase and cancellation of shares

On February 8, 2019 we announced the renewal of the NCIB to purchase up to 5,300,613 of our common shares. The NCIB began on February 25, 2019 and will end on February 24, 2020 or on such earlier date when we complete our purchases or elect to terminate the NCIB. These purchases will be made on the open market plus brokerage fees through the facilities of the TSX and/or alternative trading systems at the prevailing market price at the time of the transaction, in accordance with the TSX’s applicable policies. All common shares purchased pursuant to the NCIB will be cancelled.

During the three months ended December 31, 2019, we repurchased and cancelled a total of 386,700 common shares (2018 – 1,923,400) under the NCIB, at a weighted average price of $32.69 per common share (2018 – $25.54), for a total consideration of $12.6 million (2018 ‑ $49.1 million). An excess of $11.7 million (2018 – $44.4 million) of the shares’ repurchase value over their carrying amount was charged to retained earnings as share repurchase premiums.

10.    BUSINESS COMBINATIONS

Pelesys Learning Systems Inc.

On April 26, 2019, we acquired the remaining 55% equity interest in Pelesys Learning Systems Inc. (Pelesys) for cash consideration (net of cash acquired) of $4.0 million and a long-term payable of $5.7 million.

Pelesys is a global leader in the provision of aviation training solutions and courseware. The acquisition will strengthen our courseware offering and consolidate our cadet-to-captain training delivery across our global network. Prior to this transaction, our 45% ownership interest in Pelesys was accounted for using the equity method.

Luftfartsskolen AS

On June 26, 2019, we acquired the shares of Luftfartsskolen AS, an ab-initio flight school located in Oslo, Norway, for cash consideration of $3.5 million. This acquisition will strengthen our leadership and global reach in civil aviation training by growing our flight academy network and extending our portfolio of aviation training solutions.

The purchase prices of Pelesys and Luftfartsskolen AS are mainly allocated to goodwill and intangible assets. The net assets, including intangibles, arising from the acquisitions of Pelesys and Luftfartsskolen AS are included in Civil Aviation Training Solutions segment. The purchase price allocations are preliminary as at December 31, 2019.

Other

On November 12, 2019, we invested in a healthcare software company that enables increased efficiency of learning, through a controlling 50% equity interest, for cash consideration of $0.9 million.

During the nine months ended December 31, 2019, we completed our final assessment of the fair value of assets acquired and liabilities assumed of Avianca’s Training Business, Logitude and Indian Training Centres acquired in fiscal 2019. Adjustments to the determination of net identifiable assets acquired and liabilities assumed for acquisitions realized in fiscal 2019 resulted in an increase in intangible assets of $6.2 million and a decrease in deferred tax assets of $4.7 millionand in other net assets of $1.5 million.

During the nine months ended December 31, 2019, a net cash consideration of $1.7 million was paid for acquisitions realized in fiscal2019.

20 I CAE Third Quarter Report 2020

Management’s Discussion and Analysis

11.  CHANGES IN ACCOUNTING POLICIES

New and amended standards adopted

IFRS 16 - Leases

In January 2016, the IASB released IFRS 16 - Leases, which replaced IAS 17 - Leases and related interpretations. The new standard introduces a single lessee accounting model and eliminates the classification of leases as either operating or finance leases. It requires the lessee to recognize a right-of-use asset and a lease liability for substantially all leases. Lessors continue to classify leases as operating leases or finance leases as IFRS 16 substantially carries forward the current lessor accounting requirements.

We adopted IFRS 16 effective April 1, 2019. We elected to use the modified retrospective approach. Under this approach, the comparative information was not restated and the cumulative effect of initially applying IFRS 16 was recognized in equity at the date of initial application, on April 1, 2019.

We have elected to apply the following transitional practical expedients:

– Maintain previous assessment of whether a contract is, or contains, a lease at the date of initial application;

– Use of hindsight when evaluating the lease term if a contract contains options to extend or terminate the lease;

– Recognize short-term leases and leases of low-value assets as a lease expense on a straight-line basis, consistent with current IAS 17 accounting;

– Account for leases for which the remaining lease term ends within 12 months of the effective date as short-term leases;

– Adjust the right-of-use asset by the amount of the previously assessed IAS 37 onerous contract provision as an alternative to an impairment review;

– Exclude initial direct costs from the measurement of the right-of-use asset at the date of initial application;

– Measure the right-of-use asset as if IFRS 16 had been applied since the lease commencement date using the incremental borrowing rate at the date of initial application.

Where we are a lessee, IFRS 16 resulted in on-balance sheet recognition of most of its leases that were previously considered operating leases under IAS 17 unless they met the short-term or low-value exemption.

For the consolidated statement of financial position, this resulted in the recognition of new right-of-use assets of $226.8 million and new lease liabilities of $265.8 million, presented as part of the long-term debt, discounted using the incremental borrowing rate as at April 1, 2019 (weighted average rate applied was 5.4%). In addition, we had existing finance lease assets of $206.0 million under IAS 17 that were reclassified to right-of-use assets.

For the consolidated income statement, depreciation expense on the right-of-use assets and interest expense on the lease liabilities are incurred, replacing the operating lease expense previously recognized under IAS 17 accounting.

For the consolidated statement of cash flows, the principal repayments of the lease liabilities are presented in financing activities, whereas previously operating lease payments under IAS 17 accounting were presented in operating activities.

The cumulative effect of the impacts of adopting IFRS 16 on the consolidated statement of financial position as at April 1, 2019 are presented in the table below:

	March 31				IFRS 16			April 1
(amounts in millions)	2019			Adjustments				2019
Assets
Total current assets		$	2,112.9		$	(3.3	)		$	2,109.6
Property, plant and equipment		2,149.3			(206.0		)		1,943.3
Right-of-use assets		—			432.8				432.8
Investment in equity accounted investees		312.1			(3.7		)		308.4
Other non-current assets		2,591.2			0.3				2,591.5
Total assets		$	7,165.5		$	220.1			$	7,385.6
Liabilities and equity
Current portion of long-term debt		$	264.1		$	31.8			$	295.9
Other current liabilities		1,625.4			(4.3		)		1,621.1
Total current liabilities		$	1,889.5		$	27.5			$	1,917.0
Long-term debt		2,064.2			234.0				2,298.2
Other non-current liabilities		801.8			(13.9		)		787.9
Total liabilities		$	4,755.5		$	247.6			$	5,003.1
Total equity		$	2,410.0		$	(27.5	)		$	2,382.5
Total liabilities and equity		$	7,165.5		$	220.1			$	7,385.6

CAE Third Quarter Report 2020 I 21

Management’s Discussion and Analysis

The difference between the amount of new lease liabilities recognized as at April 1, 2019 and our future aggregate minimum lease payments under non-cancellable operating leases as at March 31, 2019, which amounted to $274.1 million, is mainly due to the discounting factors applied to the lease payments, the inclusion of optional renewal period reasonably certain to be exercised, and the exclusion of leases payments for short-term lease and low-value lease.

The key changes to our accounting policies are summarized below:

Leases

At inception of a contract, we assess whether a contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.

The Company as a lessee

We recognize a right-of-use asset and liability at the lease commencement date. The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset or to restore the underlying asset or the site on which it is located, less any lease incentives received.

The right-of-use asset is subsequently depreciated from the commencement date to the earlier of the end of the useful life of the right‑of‑use asset or the end of the lease term through a purchase option. If it is reasonably certain that we will obtain ownership by the end of the lease term, the leased asset is depreciated over its useful life. The depreciation periods, residual values (only applicable when it is reasonably certain that we will obtain ownership by the end of the lease term) and depreciation methods are as follows:

	Method	Amortization rate/period
Buildings and land	Straight-line	1 to 40 years
Simulators	Straight-line (10% residual)	Not exceeding 25 years
Machinery and equipment	Declining balance/Straight-line	Not exceeding 7 years

In addition, the right-of-use asset is periodically reduced by impairment losses, if any, and adjusted for certain remeasurements of the lease liability.

The lease liability is initially measured at the present value of the lease payments at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the lessee’s incremental borrowing rate. Lease payments comprise of fixed payments, including in-substance fixed payments, variable lease payments that depend on an index or a rate, amounts expected to be payable under a residual value guarantee, the exercise price under a purchase option that we are reasonably certain to exercise, lease payments in an optional renewal period that we are reasonably certain to exercise and penalties for early termination of a lease if we are reasonably certain to terminate.

The lease liability is subsequently measured at amortized cost using the effective interest method and is remeasured when there is a change in future lease payments arising from a change in an index or rate, the estimate of the amount expected to be payable under a residual value guarantee or our assessment of whether it will exercise a purchase, renewal or termination option. When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the right-of-use asset, or is recorded in profit or loss if the carrying amount of the right-of-use asset has been reduced to zero.

Short-term leases and leases of low-value assets

We recognize the payments associated with short-term leases and leases of low-value assets as an expense on a straight-line basis over the lease term.

Sale and leaseback transaction

In a sale and leaseback transaction the transfer of an asset is recognized as a sale when the customer has obtained control of the underlying asset which is aligned with our revenue recognition policy, otherwise we continue to recognize the transferred asset on the balance sheet and record a financial liability equal to the proceeds transferred. When the transfer of an asset satisfies our revenue recognition policy to be accounted for as revenue, a partial recognition of the profit from the sale is recorded immediately after the sale, which is equivalent to the proportion of the asset not retained by CAE through the lease. The proportion of the asset retained by CAE through the lease is recognized as a right-of-use asset and the lease liability is measured as the present value of future lease payments.

The Company as a lessor

We determine, at lease commencement, whether each lease is a finance or an operating lease. Leases in which substantially all the risks and rewards of ownership are transferred are classified as finance leases. All other leases are accounted for as operating leases.

With regards to finance leases, the asset is derecognized at the commencement of the lease. The net present value of the minimum lease payments and any discounted unguaranteed residual value are recognized as non-current receivables. Finance income is recognized over the term of the lease based on the effective interest method. Revenue from operating leases is recognized on a straight-line basis over the term of the corresponding lease.

22 I CAE Third Quarter Report 2020

Management’s Discussion and Analysis

When we sublease one of our leases we account for our interest in the head lease and the sub-lease separately. We assess the lease classification of a sub-lease with reference to the right-of-use asset arising from the head lease, not with reference to the underlying asset.

Use of judgments, estimates and provisions

Leases, the Company as a lessee

The application of IFRS 16 requires us to make judgements and estimates that affect the value of the right-of-use assets and the lease liabilities which mainly relate to the implicit and incremental rates of borrowing and to whether purchase, renewal or termination options are reasonably certain of being exercised.

IFRIC 23 - Uncertainty over income tax treatments

In June 2017, the IASB released IFRIC 23 - Uncertainty over Income Tax Treatments, which addresses how to determine the taxable profit (loss), tax bases, unused tax losses, unused tax credits and tax rates, when there is uncertainty over income tax treatments under IAS 12 - Income Taxes. It specifically considers whether tax treatments should be considered independently or collectively and assumptions for taxation authorities’ examinations in regards to taxable profit (loss), tax bases, unused tax losses, unused tax credits or tax rates.

IFRIC 23 was adopted effective April 1, 2019 and resulted in no significant adjustment.

Amendment to IAS 19 - Employee benefits

In February 2018, the IASB released an amendment to IAS 19 - Employee Benefits, which clarifies how to account for plan amendments, curtailments and settlements on defined benefits plans. The amendment requires the use of updated actuarial assumptions to determine current service cost and net interest for the period after a plan amendment, curtailment or settlement.

This amendment to IAS 19 was adopted April 1, 2019 and will apply to plan amendments, curtailments or settlements occurring after April 1, 2019.

12.  CONTROLS AND PROCEDURES

In the third quarter ended December 31, 2019, we did not make any significant changes in, nor take any significant corrective actions regarding our internal controls or other factors that could significantly affect such internal controls. Our CEO and CFO periodically review our disclosure controls and procedures for effectiveness and conduct an evaluation each quarter. As of the end of the third quarter, our CEO and CFO were satisfied with the effectiveness of our disclosure controls and procedures.

CAE Third Quarter Report 2020 I 23

Management’s Discussion and Analysis

13.SELECTED QUARTERLY FINANCIAL INFORMATION

(amounts in millions, except per share amounts and exchange rates)	Q1		Q2	Q3	Q4	Year to date
Fiscal 2020
Revenue	$	825.6	896.8	923.5	(1)	2,645.9
Net income	$	63.0	75.0	99.8	(1)	237.8
Equity holders of the Company	$	61.5	73.8	97.7	(1)	233.0
Non-controlling interests	$	1.5	1.2	2.1	(1)	4.8
Basic EPS attributable to equity holders of the Company	$	0.23	0.28	0.37	(1)	0.88
Diluted EPS attributable to equity holders of the Company	$	0.23	0.28	0.37	(1)	0.87
Earnings per share before specific items	$	0.24	0.28	0.37	(1)	0.88
Average number of shares outstanding (basic)	265.8		266.2	265.8	(1)	265.9
Average number of shares outstanding (diluted)	267.6		268.2	267.6	(1)	267.7
Average exchange rate, U.S. dollar to Canadian dollar	1.34		1.32	1.32	(1)	1.33
Average exchange rate, Euro to Canadian dollar	1.50		1.47	1.46	(1)	1.48
Average exchange rate, British pound to Canadian dollar	1.72		1.63	1.70	(1)	1.68
Fiscal 2019(2)
Revenue	$	722.0	743.8	816.3	1,022.0	3,304.1
Net income	$	71.6	63.6	79.5	125.4	340.1
Equity holders of the Company	$	69.4	60.7	77.6	122.3	330.0
Non-controlling interests	$	2.2	2.9	1.9	3.1	10.1
Basic EPS attributable to equity holders of the Company	$	0.26	0.23	0.29	0.46	1.24
Diluted EPS attributable to equity holders of the Company	$	0.26	0.23	0.29	0.46	1.23
Earnings per share before specific items	$	0.26	0.23	0.29	0.48	1.25
Average number of shares outstanding (basic)	267.6		267.4	266.1	265.1	266.6
Average number of shares outstanding (diluted)	269.3		269.2	267.5	266.8	268.0
Average exchange rate, U.S. dollar to Canadian dollar	1.29		1.31	1.32	1.33	1.31
Average exchange rate, Euro to Canadian dollar	1.54		1.52	1.51	1.51	1.52
Average exchange rate, British pound to Canadian dollar	1.76		1.71	1.70	1.73	1.72
Fiscal 2018(2)
Revenue	$	656.2	618.2	828.2	720.9	2,823.5
Net income	$	61.2	62.1	145.8	85.6	354.7
Equity holders of the Company	$	59.6	60.3	143.8	82.3	346.0
Non-controlling interests	$	1.6	1.8	2.0	3.3	8.7
Basic EPS attributable to equity holders of the Company	$	0.22	0.22	0.54	0.31	1.29
Diluted EPS attributable to equity holders of the Company	$	0.22	0.22	0.53	0.31	1.28
Earnings per share before specific items	$	0.22	0.20	0.38	0.31	1.11
Average number of shares outstanding (basic)	268.6		268.7	268.1	267.6	268.2
Average number of shares outstanding (diluted)	269.8		269.9	269.5	269.0	269.5
Average exchange rate, U.S. dollar to Canadian dollar	1.35		1.26	1.27	1.26	1.28
Average exchange rate, Euro to Canadian dollar	1.48		1.47	1.49	1.55	1.50
Average exchange rate, British pound to Canadian dollar	1.72		1.64	1.68	1.75	1.70

⁽¹⁾ Not available.

⁽²⁾ Figures have not been restated to reflect the adoption of IFRS 16. Refer to Changes in accounting policies for further details.

24 I CAE Third Quarter Report 2020

Consolidated Interim Financial Statements

Consolidated Statement of Financial Position

(Unaudited)		December 31			March 31
(amounts in millions of Canadian dollars)	Notes			2019	(1)	2019
Assets
Cash and cash equivalents			$	278.5	$	446.1
Accounts receivable				497.9		496.0
Contract assets				505.2		523.5
Inventories				607.4		537.0
Prepayments				54.1		57.4
Income taxes recoverable				55.6		33.6
Derivative financial assets				25.3		19.3
Total current assets			$	2,024.0	$	2,112.9
Property, plant and equipment				1,991.3		2,149.3
Right-of-use assets				388.6		—
Intangible assets				2,014.4		2,027.9
Investment in equity accounted investees	4			431.4		312.1
Deferred tax assets				82.3		71.0
Derivative financial assets				11.4		12.8
Other assets				501.2		479.5
Total assets			$	7,444.6	$	7,165.5
Liabilities and equity
Accounts payable and accrued liabilities			$	839.5	$	883.8
Provisions				24.8		28.7
Income taxes payable				23.9		25.7
Contract liabilities				715.3		670.2
Current portion of long-term debt	7			123.1		264.1
Derivative financial liabilities				7.9		17.0
Total current liabilities			$	1,734.5	$	1,889.5
Provisions				27.9		36.3
Long-term debt	7			2,462.0		2,064.2
Royalty obligations				132.8		136.2
Employee benefits obligations				251.3		212.6
Deferred gains and other liabilities				241.6		267.0
Deferred tax liabilities				147.1		147.0
Derivative financial liabilities				1.5		2.7
Total liabilities			$	4,998.7	$	4,755.5
Equity
Share capital			$	675.8	$	649.6
Contributed surplus				26.7		24.8
Accumulated other comprehensive income				135.1		199.0
Retained earnings				1,524.8		1,457.9
Equity attributable to equity holders of the Company			$	2,362.4	$	2,331.3
Non-controlling interests				83.5		78.7
Total equity			$	2,445.9	$	2,410.0
Total liabilities and equity			$	7,444.6	$	7,165.5

⁽¹⁾Refer to Note 2 – Changes in accounting policies for the impact of adopting IFRS 16.

The accompanying notes form an integral part of these Consolidated Interim Financial Statements.

CAE Third Quarter Report 2020 I 25

Consolidated Interim Financial Statements

Consolidated Income Statement

Nine months ended December 31			Three months ended December 31						Nine months ended December 31
(Unaudited)
(amounts in millions of Canadian dollars, except per share amounts)	Notes		2019		(1)	2018			2019		(1)	2018
Revenue	5	$	923.5		$	816.3		$	2,645.9		$	2,282.1
Cost of sales			632.0			583.0			1,874.0			1,628.6
Gross profit		$	291.5		$	233.3		$	771.9		$	653.5
Research and development expenses			33.6			31.1			101.3			91.5
Selling, general and administrative expenses			118.3			101.4			329.6			292.0
Other gains – net	6		(3.5	)		(2.5	)		(15.3	)		(17.1	)
After tax share in profit of equity accounted investees	5		(11.8	)		(9.7	)		(34.3	)		(23.1	)
Operating profit		$	154.9		$	113.0		$	390.6		$	310.2
Finance expense – net	7		36.7			19.3			105.9			55.2
Earnings before income taxes		$	118.2		$	93.7		$	284.7		$	255.0
Income tax expense	10		18.4			14.2			46.9			40.3
Net income		$	99.8		$	79.5		$	237.8		$	214.7
Attributable to:
Equity holders of the Company		$	97.7		$	77.6		$	233.0		$	207.7
Non-controlling interests			2.1			1.9			4.8			7.0
Earnings per share attributable to equity holders of the Company
Basic	9	$	0.37		$	0.29		$	0.88		$	0.78
Diluted	9	$	0.37		$	0.29		$	0.87		$	0.77

⁽¹⁾ Refer to Note 2 – Changes in accounting policies for the impact of adopting IFRS 16.

The accompanying notes form an integral part of these Consolidated Interim Financial Statements.

26 I CAE Third Quarter Report 2020

Consolidated Interim Financial Statements

Consolidated Statement of Comprehensive Income

Nine months ended December 31		Three months ended December 31						Nine months ended December 31
(Unaudited)
(amounts in millions of Canadian dollars)		2019			2018			2019			2018
Net income	$	99.8		$	79.5		$	237.8		$	214.7
Items that may be reclassified to net income
Foreign currency differences on translation of foreign operations	$	(10.2	)	$	137.9		$	(98.2	)	$	51.8
Reclassification to income of foreign currency differences		(8.0	)		(2.0	)		(19.9	)		(17.9	)
Net gain (loss) on cash flow hedges		5.9			(27.0	)		15.4			(22.7	)
Reclassification to income of (losses) gains on cash flow hedges		(0.1	)		0.1			(3.2	)		0.7
Net gain (loss) on hedges of net investment in foreign operations		22.7			(26.3	)		32.6			(27.7	)
Income taxes		(2.0	)		3.9			7.8			8.6
	$	8.3		$	86.6		$	(65.5	)	$	(7.2	)
Items that will never be reclassified to net income
Remeasurement of defined benefit pension plan obligations	$	30.9		$	(14.6	)	$	(29.5	)	$	18.5
Net gain on financial assets carried at fair value through OCI		0.1			0.1			—			—
Income taxes		(8.2	)		3.9			7.8			(4.9	)
	$	22.8		$	(10.6	)	$	(21.7	)	$	13.6
Other comprehensive income (loss)	$	31.1		$	76.0		$	(87.2	)	$	6.4
Total comprehensive income	$	130.9		$	155.5		$	150.6		$	221.1
Attributable to:
Equity holders of the Company	$	129.0		$	150.6		$	147.4		$	209.9
Non-controlling interests		1.9			4.9			3.2			11.2

The accompanying notes form an integral part of these Consolidated Interim Financial Statements.

CAE Third Quarter Report 2020 I 27

Consolidated Interim Financial Statements

Consolidated Statement of Changes in Equity

(Unaudited)		Attributable to equity holders of the Company
Nine months ended December 31, 2019		Common shares								Accumulated other
(amounts in millions of Canadian dollars,		Number of			Stated		Contributed			comprehensive			Retained						Non-controlling				Total
except number of shares)	Notes	shares			value			surplus		income				earnings			Total		interests				equity
Balances, beginning of period		265,447,603		$	649.6		$	24.8		$	199.0		$	1,457.9		$	2,331.3		$	78.7		$	2,410.0
Impact of adopting IFRS 16	2	—			—			—			—			(27.5	)		(27.5	)		—			(27.5	)
Balances, April 1, 2019		265,447,603		$	649.6		$	24.8		$	199.0		$	1,430.4		$	2,303.8		$	78.7		$	2,382.5
Net income		—		$	—		$	—		$	—		$	233.0		$	233.0		$	4.8		$	237.8
Other comprehensive loss		—			—			—			(63.9	)		(21.7	)		(85.6	)		(1.6	)		(87.2	)
Total comprehensive (loss) income		—		$	—		$	—		$	(63.9	)	$	211.3		$	147.4		$	3.2		$	150.6
Stock options exercised		1,317,280			25.7			(3.2	)		—			—			22.5			—			22.5
Optional cash purchase of shares		1,323			—			—			—			—			—			—			—
Common shares repurchased and cancelled	9	(978,431	)		(2.4	)		—			—			(30.4	)		(32.8	)		—			(32.8	)
Share-based compensation expense		—			—			5.1			—			—			5.1			—			5.1
Transactions with non-controlling interests		—			—			—			—			(1.4	)		(1.4	)		1.6			0.2
Stock dividends	9	85,887			2.9			—			—			(2.9	)		—			—			—
Cash dividends	9	—			—			—			—			(82.2	)		(82.2	)		—			(82.2	)
Balances, end of period		265,873,662		$	675.8		$	26.7		$	135.1		$	1,524.8		$	2,362.4		$	83.5		$	2,445.9
		Attributable to equity holders of the Company
Nine months ended December 31, 2018		Common shares								Accumulated other									interest
(amounts in millions of Canadian dollars,		Number of			Stated		Contributed			comprehensive				Retained					Non-controlling				Total
except number of shares)	Notes	shares			value			surplus		income				earnings			Total			interests			equity
Balances, beginning of period		267,738,530		$	633.2		$	21.3		$	260.3		$	1,314.3		$	2,229.1		$	68.4		$	2,297.5
Net income		—		$	—		$	—		$	—		$	207.7		$	207.7		$	7.0		$	214.7
Other comprehensive (loss) income		—			—			—			(11.4	)		13.6			2.2			4.2			6.4
Total comprehensive (loss) income		—		$	—		$	—		$	(11.4	)	$	221.3		$	209.9		$	11.2		$	221.1
Stock options exercised		771,825			13.3			(1.8	)		—			—			11.5			—			11.5
Optional cash purchase of shares		1,873			0.1			—			—			—			0.1			—			0.1
Common shares repurchased and cancelled	9	(3,610,100	)		(8.7	)		—			—			(84.1	)		(92.8	)		—			(92.8	)
Share-based compensation expense		—			—			5.7			—			—			5.7			—			5.7
Stock dividends	9	113,600			3.0			—			—			(3.0	)		—			—			—
Cash dividends	9	—			—			—			—			(74.3	)		(74.3	)		—			(74.3	)
Balances, end of period		265,015,728		$	640.9		$	25.2		$	248.9		$	1,374.2		$	2,289.2		$	79.6		$	2,368.8

The accompanying notes form an integral part of these Consolidated Interim Financial Statements.

28 I CAE Third Quarter Report 2020

Consolidated Interim Financial Statements

Consolidated Statement of Cash Flows

(Unaudited)
Nine months ended December 31
(amounts in millions of Canadian dollars)	Notes		2019		(1)	2018
Operating activities
Net income		$	237.8		$	214.7
Adjustments for:
Depreciation and amortization	5		226.9			153.7
After tax share in profit of equity accounted investees			(34.3	)		(23.1	)
Deferred income taxes	10		6.9			24.9
Investment tax credits			6.3			(8.0	)
Share-based compensation			13.3			3.4
Defined benefit pension plans			12.5			12.4
Other non-current liabilities			(32.0	)		(22.1	)
Derivative financial assets and liabilities – net			(7.4	)		4.4
Other			2.1			3.5
Changes in non-cash working capital	10		(133.3	)		0.3
Net cash provided by operating activities		$	298.8		$	364.1
Investing activities
Business combinations, net of cash acquired	3	$	(10.1	)	$	(33.5	)
Acquisition of investment in equity accounted investees	4		(113.5	)		—
Addition of assets through the monetization of royalties			—			(202.7	)
Additions to property, plant and equipment	5		(199.4	)		(155.6	)
Proceeds from disposal of property, plant and equipment			0.4			2.5
Additions to intangible assets	5		(69.7	)		(62.1	)
Net payments to equity accounted investees			(10.3	)		(27.0	)
Dividends received from equity accounted investees			22.6			7.1
Other			0.8			2.9
Net cash used in investing activities		$	(379.2	)	$	(468.4	)
Financing activities
Net proceeds from borrowing under revolving unsecured credit facilities		$	135.3		$	—
Proceeds from long-term debt	7		161.4			84.3
Repayment of long-term debt	7		(229.6	)		(66.6	)
Repayment of lease liabilities	7		(64.5	)		(8.3	)
Dividends paid			(82.2	)		(74.3	)
Issuance of common shares			22.5			11.6
Repurchase of common shares	9		(32.8	)		(92.8	)
Changes in restricted cash	7		15.7			—
Other			(1.3	)		—
Net cash used in financing activities		$	(75.5	)	$	(146.1	)
Effect of foreign exchange rate changes on cash
and cash equivalents		$	(11.7	)	$	0.6
Net decrease in cash and cash equivalents		$	(167.6	)	$	(249.8	)
Cash and cash equivalents, beginning of period			446.1			611.5
Cash and cash equivalents, end of period		$	278.5		$	361.7
Supplemental information:
Interest paid		$	75.5		$	38.0
Interest received			7.8			10.5
Income taxes paid			25.5			23.4

⁽¹⁾ Refer to Note 2 – Changes in accounting policies for the impact of adopting IFRS 16.

The accompanying notes form an integral part of these Consolidated Interim Financial Statements.

CAE Third Quarter Report 2020 I 29

Notes to the Consolidated Interim Financial Statements

Notes to the Consolidated Interim Financial Statements

(Unaudited)

(Unless otherwise stated, all tabular amounts are in millions of Canadian dollars)

The consolidated interim financial statements were authorized for issue by the board of directors on February 7, 2020.

NOTE 1 – NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of operations 

CAE Inc. and its subsidiaries (or the Company) design, manufacture and supply simulation equipment, provide training, and develop integrated training solutions for defence and security markets, commercial airlines, business aircraft operators, helicopter operators, aircraft manufacturers and for healthcare education and service providers. CAE’s flight simulators replicate aircraft performance in normal and abnormal operations as well as a comprehensive set of environmental conditions utilizing visual systems that contain a database of airports, other landing areas, flying environments, mission-specific environments, and motion and sound cues. The Company offers a range of flight training devices based on the same software used on its simulators. The Company also operates a global network of training centres with locations around the world.

The Company’s operations are managed through three segments:

(i) Civil Aviation Training Solutions – Provides comprehensive training solutions for flight, cabin, maintenance and ground personnel in commercial, business and helicopter aviation, a range of flight simulation training devices, as well as ab initio pilot training and crew sourcing services;

(ii) Defence and Security – Is a training systems integrator for defence forces across the air, land and naval domains, and for government organizations responsible for public safety;

(iii) Healthcare – Designs and manufactures simulators, audiovisual and simulation centre management solutions, develops courseware and offers services for training of medical, nursing and allied healthcare students as well as medical practitioners worldwide.

CAE is a limited liability company incorporated and domiciled in Canada. The address of the main office is 8585 Côte-de-Liesse, Saint-Laurent, Québec, Canada, H4T 1G6. CAE shares are traded on the Toronto Stock Exchange and on the New York Stock Exchange.

Seasonality and cyclicality of the business

The Company’s business operating segments are affected in varying degrees by market cyclicality and/or seasonality. As such, operating performance over a given interim period should not necessarily be considered indicative of full fiscal year performance.

The Civil Aviation Training Solutions segment sells equipment directly to airlines and to the extent that the entire commercial airline industry is affected by cycles of expansion and contraction, the Company’s performance will also be affected. The segment activities are also affected by the seasonality of its industry – in times of peak travel (such as holidays), airline and business jet pilots are generally occupied flying aircraft rather than attending training sessions. The opposite also holds true – slower travel periods tend to be more active training periods for pilots. Therefore, the Company has historically experienced lower demand during the second quarter.

Basis of preparation

The key accounting policies applied in the preparation of these consolidated interim financial statements are consistent with those disclosed in Note 1 of the Company’s consolidated financial statements for the year ended March 31, 2019, except for the changes in accounting policies described in Note 2. These policies have been consistently applied to all periods presented. These condensed consolidated interim financial statements should be read in conjunction with the Company’s most recent annual consolidated financial statements for the year ended March 31, 2019.

The consolidated interim financial statements have been prepared in accordance with Part I of the CPA Canada Handbook – Accounting, International Financial Reporting Standards (IFRS), as issued by the International Accounting Standards Board (IASB) applicable to the preparation of interim financial statements, IAS 34, Interim Financial Reporting.

The functional and presentation currency of CAE Inc. is the Canadian dollar.

Use of judgements, estimates and assumptions

The preparation of consolidated interim financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, income and expenses. Actual results may differ from these estimates. In preparing these consolidated interim financial statements, the significant judgements made by management in applying the Company’s accounting policies and the key sources of estimation uncertainty were the same as those that applied to the consolidated financial statements of the year ended March 31, 2019, except for the changes presented in Note 2.

30 I CAE Third Quarter Report 2020

Notes to the Consolidated Interim Financial Statements

NOTE 2 – CHANGES IN ACCOUNTING POLICIES

New and amended standardsadopted by the Company

IFRS 16 - Leases

In January 2016, the IASB released IFRS16 - Leases, which replaced IAS 17 - Leases and related interpretations. The new standard introduces a single lessee accounting model and eliminates the classification of leases as either operating or finance leases. It requires the lessee to recognize a right-of-use asset and a lease liability for substantially all leases. Lessors continue to classify leases as operating leases or finance leases as IFRS 16 substantially carries forward the current lessor accounting requirements.

IFRS 16 was adopted effective April 1, 2019. The Company elected to use the modified retrospective approach. Under this approach, the comparative information was not restated and the cumulative effect of initially applying IFRS 16 was recognized in equity at the date of initial application, on April 1, 2019.

The Company has elected to apply the following transitional practical expedients:

– Maintain previous assessment of whether a contract is, or contains, a lease at the date of initial application;

– Use of hindsight when evaluating the lease term if a contract contains options to extend or terminate the lease;

– Recognize short-term leases and leases of low-value assets as a lease expense on a straight-line basis, consistent with current IAS 17 accounting;

– Account for leases for which the remaining lease term ends within 12 months of the effective date as short-term leases;

– Adjust the right-of-use asset by the amount of the previously assessed IAS 37 onerous contract provision as an alternative to an impairment review;

– Exclude initial direct costs from the measurement of the right-of-use asset at the date of initial application;

– Measure the right-of-use asset as if IFRS 16 had been applied since the lease commencement date using the incremental borrowing rate at the date of initial application.

Where the Company is a lessee, IFRS 16 resulted in on-balance sheet recognition of most of its leases that were previously considered operating leases under IAS 17 unless they met the short-term or low-value exemption.

For the consolidated statement of financial position, this resulted in the recognition of new right-of-use assets of $226.8 million and new lease liabilities of $265.8 million, presented as part of the long-term debt, discounted using the incremental borrowing rate as at April 1, 2019 (weighted average rate applied was 5.4%). In addition, the Company had existing finance lease assets of $206.0 million under IAS 17 that were reclassified to right-of-use assets.

For the consolidated income statement, depreciation expense on the right-of-use assets and interest expense on the lease liabilities are incurred, replacing the operating lease expense previously recognized under IAS 17 accounting.

For the consolidated statement of cash flows, the principal repayments of the lease liabilities are presented in financing activities, whereas previously operating lease payments under IAS 17 accounting were presented in operating activities.

The cumulative effect of the impacts of adopting IFRS 16 on the consolidated statement of financial position as at April 1, 2019 are presented in the table below:

	March 31				IFRS 16			April 1
(amounts in millions)	2019			Adjustments				2019
Assets
Total current assets		$	2,112.9		$	(3.3	)		$	2,109.6
Property, plant and equipment		2,149.3			(206.0		)		1,943.3
Right-of-use assets		—			432.8				432.8
Investment in equity accounted investees		312.1			(3.7		)		308.4
Other non-current assets		2,591.2			0.3				2,591.5
Total assets		$	7,165.5		$	220.1			$	7,385.6
Liabilities and equity
Current portion of long-term debt		$	264.1		$	31.8			$	295.9
Other current liabilities		1,625.4			(4.3		)		1,621.1
Total current liabilities		$	1,889.5		$	27.5			$	1,917.0
Long-term debt		2,064.2			234.0				2,298.2
Other non-current liabilities		801.8			(13.9		)		787.9
Total liabilities		$	4,755.5		$	247.6			$	5,003.1
Total equity		$	2,410.0		$	(27.5	)		$	2,382.5
Total liabilities and equity		$	7,165.5		$	220.1			$	7,385.6

CAE Third Quarter Report 2020 I 31

Notes to the Consolidated Interim Financial Statements

The difference between the amount of new lease liabilities recognized as at April 1, 2019 and the future aggregate minimum lease payments under non-cancellable operating leases of the Company as at March 31, 2019, which amounted to $274.1 million, is mainly due to the discounting factors applied to the lease payments, the inclusion of optional renewal period reasonably certain to be exercised, and the exclusion of leases payments for short-term lease and low-value lease.

The key changes to the Company’s accounting policies are summarized below:

Leases

At inception of a contract, the Company assesses whether a contract is, or contains, a lease. A contract is, or contains, a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.

The Company as a lessee

The Company recognizes a right-of-use asset and liability at the lease commencement date. The right-of-use asset is initially measured at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or before the commencement date, plus any initial direct costs incurred and an estimate of costs to dismantle and remove the underlying asset or to restore the underlying asset or the site on which it is located, less any lease incentives received.

The right-of-use asset is subsequently depreciated from the commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term through a purchase option. If it is reasonably certain that the Company will obtain ownership by the end of the lease term, the leased asset is depreciated over its useful life. The depreciation periods, residual values (only applicable when it is reasonably certain that the Company will obtain ownership by the end of the lease term) and depreciation methods are as follows:

	Method	Amortization rate/period
Buildings and land	Straight-line	1 to 40 years
Simulators	Straight-line (10% residual)	Not exceeding 25 years
Machinery and equipment	Declining balance/Straight-line	Not exceeding 7 years

In addition, the right-of-use asset is periodically reduced by impairment losses, if any, and adjusted for certain remeasurements of the lease liability.

The lease liability is initially measured at the present value of the lease payments at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the lessee’s incremental borrowing rate. Lease payments comprise of fixed payments, including in-substance fixed payments, variable lease payments that depend on an index or a rate, amounts expected to be payable under a residual value guarantee, the exercise price under a purchase option that the Company is reasonably certain to exercise, lease payments in an optional renewal period that the Company is reasonably certain to exercise and penalties for early termination of a lease if the Company is reasonably certain to terminate.

The lease liability is subsequently measured at amortized cost using the effective interest method and is remeasured when there is a change in future lease payments arising from a change in an index or rate, the estimate of the amount expected to be payable under a residual value guarantee or the Company’s assessment of whether it will exercise a purchase, renewal or termination option. When the lease liability is remeasured in this way, a corresponding adjustment is made to the carrying amount of the right-of-use asset, or is recorded in profit or loss if the carrying amount of the right-of-use asset has been reduced to zero.

Short-term leases and leases of low-value assets

The Company recognizes the payments associated with short-term leases and leases of low-value assets as an expense on a straight-line basis over the lease term.

Sale and leaseback transaction

In a sale and leaseback transaction the transfer of an asset is recognized as a sale when the customer has obtained control of the underlying asset which is aligned with the Company’s revenue recognition policy, otherwise the Company continues to recognize the transferred asset on the balance sheet and record a financial liability equal to the proceeds transferred. When the transfer of an asset satisfies the Company’s revenue recognition policy to be accounted for as revenue, a partial recognition of the profit from the sale is recorded immediately after the sale, which is equivalent to the proportion of the asset not retained by the Company through the lease. The proportion of the asset retained by the Company through the lease is recognized as a right-of-use asset and the lease liability is measured as the present value of future lease payments.

The Company as a lessor

The Company determines, at lease commencement, whether each lease is a finance or an operating lease. Leases in which substantially all the risks and rewards of ownership are transferred are classified as finance leases. All other leases are accounted for as operating leases.

32 I CAE Third Quarter Report 2020

Notes to the Consolidated Interim Financial Statements

With regards to finance leases, the asset is derecognized at the commencement of the lease. The net present value of the minimum lease payments and any discounted unguaranteed residual value are recognized as non-current receivables. Finance income is recognized over the term of the lease based on the effective interest method. Revenue from operating leases is recognized on a straight-line basis over the term of the corresponding lease.

When the Company subleases one of its leases it accounts for its interests in the head lease and the sub-lease separately. It assesses the lease classification of a sub-lease with reference to the right-of-use asset arising from the head lease, not with reference to the underlying asset.

Use of judgments, estimates and provisions

Leases, the Company as a lessee

The application of IFRS 16 requires the Company to make judgements and estimates that affect the value of the right-of-use assets and the lease liabilities which mainly relate to the implicit and incremental rates of borrowing and to whether purchase, renewal or termination options are reasonably certain of being exercised.

IFRIC 23 - Uncertainty over income tax treatments

In June 2017, the IASB released IFRIC 23 - Uncertainty over Income Tax Treatments, which addresses how to determine the taxable profit (loss), tax bases, unused tax losses, unused tax credits and tax rates, when there is uncertainty over income tax treatments under IAS 12 - Income Taxes. It specifically considers whether tax treatments should be considered independently or collectively and assumptions for taxation authorities’ examinations in regards to taxable profit (loss), tax bases, unused tax losses, unused tax credits or tax rates.

IFRIC 23 was adopted effective April 1, 2019 and resulted in no significant adjustment.

Amendment to IAS 19 - Employee benefits

In February 2018, the IASB released an amendment to IAS 19 - Employee Benefits, which clarifies how to account for plan amendments, curtailments and settlements on defined benefits plans. The amendment requires the use of updated actuarial assumptions to determine current service cost and net interest for the period after a plan amendment, curtailment or settlement.

This amendment to IAS 19 was adopted April 1, 2019 and will apply to plan amendments, curtailments or settlements occurring after April 1, 2019.

NOTE 3 – BUSINESS COMBINATIONS

Pelesys Learning Systems Inc.

On April 26, 2019, the Company acquired the remaining 55% equity interest in Pelesys Learning Systems Inc. (Pelesys) for cash consideration (net of cash acquired) of $4.0 million and a long-term payable of $5.7 million.

Pelesys is a global leader in the provision of aviation training solutions and courseware. The acquisition will strengthen the Company’s courseware offering and consolidate its cadet-to-captain training delivery across its global network. Prior to this transaction, the Company's 45% ownership interest in Pelesys was accounted for using the equity method.

Luftfartsskolen AS

On June 26, 2019, the Company acquired the shares of Luftfartsskolen AS, an ab-initio flight school located in Oslo, Norway, for cash consideration (net of cash acquired) of $3.5 million. This acquisition will strengthen the Company’s leadership and global reach in civil aviation training by growing its flight academy network and extending its portfolio of aviation training solutions.

The purchase prices of Pelesys and Luftfartsskolen AS are mainly allocated to goodwill and intangible assets. The net assets, including intangibles, arising from the acquisitions of Pelesys and Luftfartsskolen AS are included in Civil Aviation Training Solutions segment. The purchase price allocations are preliminary as at December 31, 2019.

Other

On November 12, 2019, the Company invested in a healthcare software company that enables increased efficiency of learning, through a controlling 50% equity interest, for cash consideration of $0.9 million.

During the nine months ended December 31, 2019, the Company completed its final assessment of the fair value of assets acquired and liabilities assumed of Avianca’s Training Business, Logitude, Indian Training Centres and Bombardier's Business Aircraft Training Business acquired in fiscal 2019. Adjustments to the determination of net identifiable assets acquired and liabilities assumed for acquisitions realized in fiscal 2019 resulted in an increase of intangible assets of $6.2 million, a decrease of deferred tax assets of $4.7 million and a decrease of other net assets of $1.5 million.

During the nine months ended December 31, 2019, an additional net cash consideration of $1.7 million was paid for acquisitions realized in fiscal 2019.

CAE Third Quarter Report 2020 I 33

Notes to the Consolidated Interim Financial Statements

NOTE 4 – INVESTMENT IN EQUITY ACCOUNTED INVESTEES

Partnership with Directional Aviation Capital

On November 4, 2019, the Company concluded a strategic partnership with Directional Aviation Capital (DAC) including a 15-year exclusive business aviation training services agreement with DAC affiliates and the acquisition of a 50% equity interest in SIMCOM Holdings, Inc. for cash consideration of $113.5 million [US $86.3 million]. The Company obtained joint control over SIMCOM, therefore the joint venture is accounted for using the equity method. SIMCOM operates simulators and training devices representative of a wide range of jet, turboprop and piston powered aircraft and is headquartered in Orlando, Florida.

Over the course of the 15-year business aviation training services agreement, DAC's affiliated business aircraft operators, which include Flexjet, Flight Options, Flairjet, Sirio, Nextant Aerospace and Corporate Wings, will train exclusively with SIMCOM and CAE.

NOTE 5 – OPERATING SEGMENTS AND GEOGRAPHIC INFORMATION

The Company elected to organize its operating segments principally on the basis of its customer markets. The Company manages its operations through its three segments. Operating segments are reported in a manner consistent with the internal reporting provided to the chief operating decision-maker.

The Company has decided to disaggregate revenue from contracts with customers by segment, by products and services and by geographic location as the Company believes it best depicts how the nature, amount, timing and uncertainty of its revenue and cash flows are affected by economic factors.

Results by segment

The profitability measure employed by the Company for making decisions about allocating resources to segments and assessing segment performance is operating profit (hereinafter referred to as segment operating income). The accounting principles used to prepare the information by operating segments are the same as those used to prepare the Company’s consolidated financial statements. The method used for the allocation of assets jointly used by 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 and revenue.

	Civil Aviation				Defence
	Training Solutions				and Security				Healthcare				Total
Three months ended December 31	2019		2018		2019		2018		2019		2018		2019		2018
External revenue	$	558.1	$	458.4	$	332.4	$	330.2	$	33.0	$	27.7	$	923.5	$	816.3
Depreciation and amortization	59.8		37.7		14.1		11.8		3.8		3.4		77.7		52.9
Write-downs of inventories – net	0.4		0.2		0.3		0.3		—		—		0.7		0.5
Write-downs of accounts receivable – net	0.5		0.1		—		—		—		—		0.5		0.1
After tax share in profit of equity
accounted investees	8.4		7.8		3.4		1.9		—		—		11.8		9.7
Segment operating income	123.0		87.2		31.3		25.2		0.6		0.6		154.9		113.0

	Civil Aviation				Defence
	Training Solutions				and Security				Healthcare					Total
Nine months ended December 31	2019		2018		2019		2018		2019			2018		2019		2018
External revenue	$	1,565.6	$	1,282.4	$	989.4	$	918.8	$	90.9		$	80.9	$	2,645.9	$	2,282.1
Depreciation and amortization	173.0		109.7		42.8		34.1		11.1			9.9		226.9		153.7
Write-downs of inventories – net	1.1		0.4		0.8		0.6		—			0.1		1.9		1.1
Write-downs of accounts receivable – net	2.3		0.4		—		0.4		0.1			—		2.4		0.8
After tax share in profit of equity
accounted investees	25.0		15.4		9.3		7.7		—			—		34.3		23.1
Segment operating income (loss)	321.8		228.8		72.4		80.8		(3.6		)	0.6		390.6		310.2

Capital expenditures by segment, which consist of additions to property, plant and equipment and intangible assets, are as follows:

	Three months ended December 31						Nine months ended December 31
Nine months ended December 31		2019			2018			2019			2018
Civil Aviation Training Solutions	$	$	52.8	$	$	65.6	$	$	204.5	$	$	165.0
Defence and Security		16.7			15.9			54.6			43.5
Healthcare		3.4			4.6			10.0			9.2
Total capital expenditures	$	$	72.9	$	$	86.1	$	$	269.1	$	$	217.7

34 I CAE Third Quarter Report 2020

Notes to the Consolidated Interim Financial Statements

Assets and liabilities employed by segment

The Company uses assets employed and liabilities employed to assess resources allocated to each segment. Assets employed include accounts receivable, contract assets, inventories, prepayments, property, plant and equipment, right-of-use assets, intangible assets, investment in equity accounted investees, derivative financial assets and other assets. Liabilities employed include accounts payable and accrued liabilities, provisions, contract liabilities, deferred gains and other liabilities and derivative financial liabilities.

Assets and liabilities employed by segment are reconciled to total assets and liabilities as follows: 

December 31			March 31
		2019		2019
Assets employed
Civil Aviation Training Solutions	$	4,797.0	$	4,373.0
Defence and Security		1,662.5		1,627.2
Healthcare		267.0		271.6
Assets not included in assets employed		718.1		893.7
Total assets	$	7,444.6	$	7,165.5
Liabilities employed
Civil Aviation Training Solutions	$	1,062.5	$	1,098.3
Defence and Security		588.1		595.2
Healthcare		42.3		48.8
Liabilities not included in liabilities employed		3,305.8		3,013.2
Total liabilities	$	4,998.7	$	4,755.5

Products and services information

The Company's external revenue for its products and services are as follows: 

	Three months ended December 31					Nine months ended December 31
Nine months ended December 31		2019		2018		2019		2018
Simulation products	$	362.6	$	348.2	$	1,064.0	$	962.7
Training and services		560.9		468.1		1,581.9	$	1,319.4
	$	923.5	$	816.3	$	2,645.9	$	2,282.1

Geographic information

The Company markets its products and services globally. Revenues are attributed to countries based on the location of customers. Non‑current assets other than financial instruments and deferred tax assets are attributed to countries based on the location of the assets.

		Three months ended December 31				Nine months ended December 31
Nine months ended December 31		2019		2018		2019		2018
External revenue
Canada	$	81.7	$	59.5	$	245.9	$	183.2
United States		365.6		315.6		1,102.3		840.2
United Kingdom		49.8		59.4		149.2		162.8
Germany		34.7		28.0		116.9		79.2
Netherlands		14.2		16.9		53.2		69.8
Spain		26.6		28.2		86.6		65.6
Other European countries		83.1		92.0		228.6		265.2
United Arab Emirates		41.0		27.4		60.6		88.9
China		40.5		74.9		143.5		179.7
Other Asian countries		94.4		65.8		289.7		209.0
Australia		12.7		10.4		35.2		38.4
Other countries		79.2		38.2		134.2		100.1
	$	923.5	$	816.3	$	2,645.9	$	2,282.1

CAE Third Quarter Report 2020 I 35

Notes to the Consolidated Interim Financial Statements

	December 31		March 31
		2019		2019
Non-current assets other than financial instruments and deferred tax assets
Canada	$	1,618.9	$	1,557.0
United States		1,710.9		1,580.7
Brazil		111.7		116.4
United Kingdom		387.3		285.2
Luxembourg		183.7		187.0
Netherlands		209.1		196.9
Other European countries		391.3		336.5
Malaysia		177.8		177.6
Other Asian countries		170.4		177.8
Other countries		171.3		176.4
	$	5,132.4	$	4,791.5

NOTE 6 – OTHER GAINS – NET

		Three months ended December 31						Nine months ended December 31
Nine months ended December 31		2019			2018			2019			2018
Disposal of property, plant and equipment	$	(0.3	)	$	0.1		$	(0.3	)	$	1.2
Net foreign exchange gains (losses)		7.7			(0.2	)		20.7			15.2
Remeasurement of investment – net		—			—			0.6			—
Other		(3.9	)		2.6			(5.7	)		0.7
Other gains – net	$	3.5		$	2.5		$	15.3		$	17.1

NOTE 7 – DEBT FACILITIES AND FINANCE EXPENSE – NET

Issuance of unsecured senior notes

In December 2019, the Company issued unsecured senior notes of $131.7 million [US $100.0 million], maturing in December 2034 and bearing interest of 4.9%.

Reimbursement of unsecured senior notes, term loans and repurchase of assets previously financed under lease

In May 2019, the Company repurchased an asset previously financed under lease for $12.5 million [US $9.3 million] acquired as part of the Bombardier Business Aircraft Training Business acquisition.

In June 2019, the Company repaid unsecured senior notes amounting to $80.4 million [US $60.0 million], which matured during the month and a term loan of $14.9 million [US $11.0 million].

In October 2019, the Company repurchased assets previously financed under lease for $9.8 million [US $7.5 million].

In December 2019, the Company repaid unsecured senior notes amounting to $95.0 million, which matured during the month and partially repaid a non-recourse term loan for an amount of $15.7 million [US $11.7 million] using restricted cash previously held as a collateral.

Amendment to the revolving credit facility

In August 2019, the Company renegotiated its revolving unsecured term credit facility agreement, increasing the total amount available from US $550.0 million to US $850.0 million. The maturity date and the applicable interest rate of the revolving unsecured term credit facility remained unchanged.

36 I CAE Third Quarter Report 2020

Notes to the Consolidated Interim Financial Statements

Finance expense – net

		Three months ended December 31						Nine months ended December 31
Nine months ended December 31		2019			2018			2019			2018
Finance expense:
Long-term debt (other than lease liabilities)	$	26.8		$	14.8		$	76.5		$	44.4
Lease liabilities		5.8			1.9			17.7			5.6
Royalty obligations		2.9			3.0			8.7			9.0
Employee benefits obligations		1.4			1.5			4.1			4.2
Other		3.6			3.5			10.6			9.4
Borrowing costs capitalized		(1.0	)		(1.4	)		(3.8	)		(3.5	)
Finance expense	$	39.5		$	23.3		$	113.8		$	69.1
Finance income:
Loans and finance lease contracts	$	(2.1	)	$	(2.0	)	$	(5.7	)	$	(6.7	)
Other		(0.7	)		(2.0	)		(2.2	)		(7.2	)
Finance income	$	(2.8	)	$	(4.0	)	$	(7.9	)	$	(13.9	)
Finance expense – net	$	36.7		$	19.3		$	105.9		$	55.2

NOTE 8 – GOVERNMENT PARTICIPATION

The aggregate information regarding contributions recognized and amounts not yet received for the projects New Core Markets, Innovate, SimÉco 4.0 and Project Digital Intelligence are as follows: 

		Three months ended December 31						Nine months ended December 31
Nine months ended December 31		2019			2018			2019			2018
Contribution receivable, beginning of period	$	11.1		$	16.3		$	13.4		$	6.2
Contributions		7.4			13.9			24.6			32.9
Payments received		(9.2	)		(10.8	)		(28.7	)		(19.7	)
Contribution receivable, end of period	$	9.3		$	19.4		$	9.3		$	19.4

NOTE 9 – SHARE CAPITAL, EARNINGS PER SHARE AND DIVIDENDS

Share capital

Repurchase and cancellation of common shares

On February 8, 2019, the Company announced the renewal of the normal course issuer bid (NCIB) to purchase up to 5,300,613 of its common shares. The NCIB began on February 25, 2019 and will end on February 24, 2020 or on such earlier date when the Company completes its purchases or elects to terminate the NCIB. These purchases will be made on the open market plus brokerage fees through the facilities of the TSX and/or alternative trading systems at the prevailing market price at the time of the transaction, in accordance with the TSX’s applicable policies. All common shares purchased pursuant to the NCIB will be cancelled.

During the nine months ended December 31, 2019, the Company repurchased and cancelled a total of 978,431 common shares (2018 – 3,610,100) under the NCIB, at a weighted average price of $33.54 per common share (2018 – $25.71), for a total consideration of $32.8 million (2018 – $92.8 million). An excess of $30.4 million (2018 – $84.1 million) of the shares’ repurchase value over their carrying amount was charged to retained earnings as share repurchase premiums.

Earnings per share computation

The denominators for the basic and diluted earnings per share computations are as follows:

	Three months ended December 31		Nine months ended December 31
Nine months ended December 31	2019	2018	2019	2018
Weighted average number of common shares outstanding	265,792,502	266,073,641	265,913,468	267,050,425
Effect of dilutive stock options	1,769,947	1,407,901	1,748,854	1,504,036
Weighted average number of common shares outstanding
for diluted earnings per share calculation	267,562,449	267,481,542	267,662,322	268,554,461

For the three months ended December 31, 2019, options to acquire 1,203,400 common shares (2018 – 1,722,800) have been excluded from the above calculation since their inclusion would have had an anti-dilutive effect. For the nine months ended December 31, 2019, options to acquire 1,203,400 common shares (2018 – 1,722,800) have been excluded from the above calculation since their inclusion would have had an anti-dilutive effect.

CAE Third Quarter Report 2020 I 37

Notes to the Consolidated Interim Financial Statements

Dividends

The dividends declared for the three months ended December 31, 2019 were $29.2 million or $0.11 per share (2018 – $26.5 million or $0.10 per share). For the nine months ended December 31, 2019, dividends declared were $85.1 million or $0.32 per share (2018 – $77.3 million or $0.29 per share).

NOTE 10 – SUPPLEMENTARY CASH FLOWS INFORMATION

Changes in non-cash working capital are as follows:

Nine months ended December 31		2019			2018
Cash (used in) provided by non-cash working capital:
Accounts receivable	$	(24.4	)	$	(74.5	)
Contract assets		8.3			(38.5	)
Inventories		(84.9	)		(77.6	)
Prepayments		(2.0	)		(11.3	)
Income taxes		(21.5	)		(23.1	)
Accounts payable and accrued liabilities		(50.7	)		175.9
Provisions		(5.0	)		(9.1	)
Contract liabilities		46.9			58.5
Changes in non-cash working capital	$	(133.3	)	$	0.3

NOTE 11 – FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value of a financial instrument is determined by reference to the available market information at the reporting date. When no active market exists for a financial instrument, the Company determines the fair value of that instrument based on valuation methodologies as discussed below. In determining assumptions required under a valuation model, the Company primarily uses external, readily observable market data inputs. Assumptions or inputs that are not based on observable market data incorporate the Company’s best estimates of market participant assumptions. Counterparty credit risk and the Company’s own credit risk are taken into account in estimating the fair value of financial assets and financial liabilities.

The following assumptions and valuation methodologies have been used to measure the fair value of financial instruments:

(i) The fair value of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their carrying values due to their short-term maturities;

(ii) The fair value of derivative instruments, which include forward contracts, swap agreements and embedded derivatives accounted for separately and is calculated as the present value of the estimated future cash flows using an appropriate interest rate yield curve and forward foreign exchange rate. Assumptions are based on market conditions prevailing at each reporting date. The fair value of derivative instruments reflect the estimated amounts that the Company would receive or pay to settle the contracts at the reporting date;

(iii) The fair value of the equity investments, which does not have a readily available market value, is estimated using a discounted cash flow model, which includes some assumptions that are not based on observable market prices or rates;

(iv) The fair value of non-current receivables is estimated based on discounted cash flows using current interest rates for instruments with similar risks and remaining maturities;

(v) The fair value of long-term debts, royalties obligations and other non-current liabilities are estimated based on discounted cash flows using current interest rates for instruments with similar risks and remaining maturities. Upon adoption of IFRS 16 on April 1, 2019, fair value disclosures are no longer required for lease liabilities;

(vi) The fair value of the contingent considerations arising on business combinations are based on the estimated amount and timing of projected cash flows, the probability of the achievement of the criteria on which the contingency is based and the risk-adjusted discount rate used to present value the probability-weighted cash flows.

Fair value hierarchy

The fair value hierarchy reflects the significance of the inputs used in making the measurements and has the following levels:

Level 1:   Quoted prices (unadjusted) in active markets for identical assets or liabilities;

Level 2:   Inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (i.e. as prices in markets that are not active) or indirectly (i.e. quoted prices for similar assets or liabilities);

Level 3:   Inputs for the asset or liability that are not based on observable market data (unobservable inputs).

Each type of fair value is categorized based on the lowest level input that is significant to the fair value measurement in its entirety.

38 I CAE Third Quarter Report 2020

Notes to the Consolidated Interim Financial Statements

The carrying values and fair values of financial instruments, by category, are as follows:

			December 31										March 31
						2019							2019
	Level	Carrying value				Fair value			Carrying value				Fair value
			Total			Total				Total			Total
Financial assets (liabilities) measured at FVTPL
Cash and cash equivalents	Level 1		$	278.5		$	278.5			$	446.1		$	446.1
Restricted cash	Level 1		11.4			11.4				27.3			27.3
Embedded foreign currency derivatives	Level 2		—			—				0.1			0.1
Equity swap agreements	Level 2		1.9			1.9				10.4			10.4
Forward foreign currency contracts	Level 2		1.5			1.5				(2.5		)	(2.5		)
Contingent consideration arising on business combinations	Level 3		(11.9		)	(11.9		)		(11.9		)	(11.9		)
Derivative assets (liabilities) designated in a hedge relationship
Foreign currency swap agreements	Level 2		9.8			9.8				11.1			11.1
Forward foreign currency contracts	Level 2		14.1			14.1				(6.5		)	(6.5		)
Financial assets (liabilities) measured at amortized cost
Accounts receivable(1)	Level 2		465.4			465.4				451.7			451.7
Investment in finance leases	Level 2		128.4			144.7				91.5			103.1
Advances to a portfolio investment	Level 2		29.1			29.1				29.5			29.5
Other assets(2)	Level 2		22.3			23.6				25.7			25.7
Accounts payable and accrued liabilities(3)	Level 2		(624.5		)	(624.5		)		(770.8		)	(770.8		)
Total long-term debt(4)	Level 2		(2,115.0		)	(2,335.6		)		(2,335.4		)	(2,470.7		)
Other non-current liabilities(5)	Level 2		(171.2		)	(199.4		)		(164.0		)	(184.6		)
Financial assets measured at FVOCI
Equity investments	Level 3		3.3			3.3				3.3			3.3
			$	(1,956.9	)	$	(2,188.1	)		$	(2,194.4	)	$	(2,338.7	)

⁽¹⁾Includes trade receivables, accrued receivables and certain other receivables.

⁽²⁾Includes non-current receivables and certain other non-current assets.

⁽³⁾Includes trade accounts payable, accrued liabilities, interest payable and current royalty obligations.

⁽⁴⁾The carrying value excludes transaction costs.

⁽⁵⁾Includes non-current royalty obligations and other non-current liabilities.

For the nine months ended December 31, 2019, the variance in level 3 financial instruments was nil.

NOTE 12 – RELATED PARTY TRANSACTIONS

The Company’s outstanding balances with its equity accounted investees are as follows:

	December 31			March 31
		2019			2019
Accounts receivable	$	$	40.3	$	$	33.9
Contract assets		17.3			13.4
Other assets		25.4			18.7
Accounts payable and accrued liabilities		1.7			2.2
Contract liabilities		32.4			30.7
Other non-current liabilities		1.5			1.6

The Company’s transactions with its equity accounted investees are as follows: 

		Three months ended December 31						Nine months ended December 31
Nine months ended December 31		2019			2018			2019			2018
Revenue	$	$	22.7	$	$	21.4	$	$	79.7	$	$	44.1
Purchases		0.2			0.6			0.9			1.8
Other income		0.2			0.4			0.7			1.1

CAE Third Quarter Report 2020 I 39