Table
  of ContentsManagement’s Discussion and Analysis1.
 HIGHLIGHTS
 12.
 INTRODUCTION
 33.
 ABOUT CAE
  3.1    Who we are
  3.2    Our vision
 5
  5
  53.3    Our strategy
  3.4    Our operations
  3.5    Foreign exchange
  3.6    Non-GAAP and other financial measures
 5
  5
  10
  124.
 CONSOLIDATED RESULTS
  4.1    Results from operations – fourth quarter of
  fiscal 2015
  4.2    Results from operations – fiscal 2015
 14
  14
  164.3    Results from discontinued operations
 174.4    Consolidated orders and total backlog
 185.
 RESULTS BY SEGMENT
  5.1    Civil Aviation Training Solutions
  5.2    Defence and Security
  5.3    Healthcare
 19
  20
  22
  246.
 CONSOLIDATED CASH MOVEMENTS AND LIQUIDITY
  6.1    Consolidated cash movements
  6.2    Sources of liquidity
  6.3    Government assistance
  6.4    Contractual obligations
 26
  26
  27
  28
  287.
 CONSOLIDATED FINANCIAL POSITION
  7.1    Consolidated capital employed
  7.2    Off balance sheet arrangements
  7.3    Financial instruments
 29
  29
  31
  318.
 BUSINESS RISK AND UNCERTAINTY
  8.1    Risks relating to the industry
  8.2    Risks relating to the Company
  8.3    Risks relating to the market
 34
  34
  36
  389.
 RELATED PARTY TRANSACTIONS
 3910.
 CHANGES IN ACCOUNTING POLICIES
  10.1  Changes in accounting policies
  10.2  New and amended standards adopted
  10.3  New and amended standards not yet adopted
  10.4  Use of judgements, estimates and assumptions
 40
  40
  40
  40
  4011.
 CONTROLS AND PROCEDURES
  11.1  Evaluation of disclosure controls
  and procedures
  11.2  Internal control over financial reporting
 42
  42
  4212.
 OVERSIGHT ROLE OF AUDIT COMMITTEE AND
  BOARD OF DIRECTORS
 4213.
 ADDITIONAL INFORMATION
 4214.
 SELECTED FINANCIAL INFORMATION
 43


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Management’s Discussion
and Analysis for
the fourth quarter and year ended March 31, 2015  1.HIGHLIGHTS FINANCIAL FOURTH
QUARTER OF FISCAL 2015 Revenue from
continuing operations higher compared to last quarter and the fourth quarter of
fiscal 2014 -Consolidated revenue from continuing operations was
$631.6 million this quarter, $72.5 million or 13% higher than last quarter and $55.9
million or 10% higher than the fourth quarter of fiscal 2014.  Net income
attributable to equity holders of the Company from continuing operations higher
compared to last quarter and the fourth quarter
of fiscal 2014 -Net income attributable to equity holders of the
Company from continuing operations was $63.3 million (or $0.24 per share) this
quarter, compared to $52.1 million (or $0.20 per share) last quarter,
representing an increase of $11.2 million or 21%, and compared to $59.9 million
(or $0.23 per share) in the fourth quarter of last year, representing an increase of $3.4 million or 6%; -Net
income attributable to equity holders of the Company included earnings from
discontinued operations this quarter of 
$0.8 million (or nil per share) compared to $0.9 million (or nil per share)
last quarter and $0.1 million (or nil per share) in the fourth quarter of
fiscal 2014.  Positive free cash
flow[1] from
continuing operations at $142.2 million this quarter -Net cash provided by continuing operating activities
was $101.1 million this quarter, compared to $82.0 million last quarter and
$98.4 million in the fourth quarter of last year; -Maintenance capital expenditures1 and
other asset expenditures were $16.7 million this quarter, $9.9 million last
quarter and $20.4 million in the fourth quarter of last year; -Proceeds from the disposal of property, plant
and equipment were $6.1 million this quarter, $0.6 million last quarter and 
$8.5 million in the fourth quarter
of last year; -Cash dividends were $12.0 million this quarter,
$12.0 million last quarter and $9.9 million in the fourth
quarter of last year.  FISCAL 2015 Higher revenue from
continuing operations compared to fiscal 2014 -Consolidated revenue from continuing operations
was $2,246.3 million, $168.4 million or 8% higher than last year.  Higher net income
attributable to equity holders of the Company from continuing operations -Net income attributable to equity holders of the
Company from continuing operations was $201.2 million (or $0.76 per share)
compared to $188.3 million (or $0.72 per share) last year, representing a $12.9
million or 7% increase; -Net
income attributable to equity holders of the Company included earnings from
discontinued operations of $0.6 million (or nil per share) compared to $1.7 million
(or $0.01 per share) last year.  Positive free cash
flow from continuing operations at $174.2 million -Net cash provided by continuing operating
activities was $337.8 million this year, compared to $296.3 million last year; -Maintenance capital expenditures and other asset
expenditures were $64.3 million this year, compared to $69.9 million last year; -Dividends received from equity accounted
investees were $8.9 million this year, compared to $15.0 million last year; -Proceeds from the disposal of property, plant
and equipment were $7.6 million this year, compared to $15.4 million last year; -Cash dividends were $46.3 million this year,
compared to $40.1 million last year.  Capital
employed1 ending at $2,613.5 million -Capital employed increased by $275.1 million or
12% this year; -Return on capital employed1(ROCE)
was 10.4% this year compared to 11.4% last year; -Non-cash working capital1 increased
by $77.1 million in fiscal 2015, ending at $201.7 million; -Net assets held for sale were $47.0 million this
year; -Property, plant and equipment increased by
$120.0 million; -Other long-term assets and other long-term
liabilities increased by $88.5 million and $57.5 million respectively; -Net debt1increased by $93.4 million
this year, ending at $949.6 million.  [1]Non-GAAP and other financial measures (see Section 3.6).
  CAE Year-End Financial Results 2015 |1


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Management’s Discussion and Analysis
  ORDERS2[2] -The book-to-sales ratio2 for the
quarter was 1.05x (Civil Aviation Training Solutions was 1.08x, Defence and
Security was 1.01x and Healthcare was 1.0x). The ratio for the last 12 months
was 1.05x (Civil Aviation Training Solutions was 1.17x, Defence and Security
was 0.88x and Healthcare was 1.0x); -Total order intake this year was $2,361.2 million, up $17.9
million over last year; -Total backlog, including obligated, joint
venture and unfunded backlog was $5,357.2 million at March 31, 2015, $352.4 million
higher than last year.  Civil
Aviation Training Solutions -Civil Aviation Training Solutions obtained
contracts with an expected value of $1,512.3 million, including contracts for
41 full-flight simulators (FFSs).  Defence and Security -Defence and Security won contracts valued at $754.6
million.  Healthcare -Healthcare order intake was valued at $94.3
million.  BUSINESS
COMBINATIONS AND JOINT VENTURES -We
signed an agreement for the acquisition of Bombardier’s Military Aviation
Training business for approximately $19.8 million in the fourth quarter of this
year. The closing of the transaction is conditional on usual conditions and
regulatory approvals, and closing is expected to occur during calendar 2015; -We
entered into three new 50% joint venture arrangements during fiscal 2015.
Flight Training Alliance with Lufthansa Flight Training, a joint venture with
Shanghai Eastern Flight Training Co., Ltd (SEFTC), a fully-owned subsidiary of
China Eastern Airlines, involving the sale of 50% of our flight academy in
Melbourne, Australia and we created a joint venture with Japan Airlines (JAL)
whereby we contributed our training center operations in Korea to the joint
venture and JAL contributed its training center operations in Japan.  OTHER -During
the first quarter of this year, we modified our operating segments. As a
result, operating segments’ disclosure has been restated to conform to the new
operating segments, as described in Changes in accounting policies and Note 30
of our consolidated financial statements. Additional information on the
divestiture of our mining business can be found in Results from discontinued
operations and in Note 3 of our consolidated financial statements; -During
the first quarter of fiscal 2015, we decided to divest our mining business (CAE
Mining) which was previously reported within the former New Core Markets
segment; -As at March 31, 2015, we renamed our Civil
Simulation and Training segment to Civil Aviation Training Solutions.  2Non-GAAPand other
financial measures(see Section 3.6).
  2| CAE Year-End Financial Results 2015


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Management’s Discussion and Analysis
  2.INTRODUCTION In this report,we,us,our,CAEandCompanyrefer to CAE Inc. and its
subsidiaries. Unless we have indicated otherwise: -This yearand2015mean the fiscal year ending March 31, 2015; -Last year, prior yearanda year agomean
the fiscal year ended March 31, 2014; -Dollar amounts are in Canadian dollars.  This report was prepared as of May 26, 2015, and includes
our management’s discussion and analysis (MD&A) for the year and the
three-month period ended March 31, 2015 and the consolidated
financial statements and notes for the year ended March 31, 2015. We
have prepared it to help you understand our business, performance and financial
condition for fiscal 2015. Except as otherwise indicated, all financial
information has been reported in accordance with International Financial
Reporting Standards (IFRS). All quarterly information disclosed in the MD&A
is based on unaudited figures.  For additional information,
please refer to our annual consolidated financial statements for this fiscal
year, which you will find in the annual report for the year ended
March 31, 2015. The MD&A provides you with a view of CAE as seen
through the eyes of management and helps you understand the company from a
variety of perspectives: -Our vision; -Our strategy; -Our operations; -Foreign exchange; -Non-GAAP and other financial measures; -Consolidated results; -Results by segment; -Consolidated cash movements and liquidity; -Consolidated financial position; -Business risk and uncertainty; -Related party transactions; -Changes in accounting policies; -Controls and procedures; -Oversight role of the Audit Committee and Board
of Directors.  You will find our most recent annual report and annual
information form (AIF) on our website at www.cae.com, on SEDAR at www.sedar.com
or on EDGAR at www.sec.gov.   CAE Year-End Financial Results 2015 |3


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Management’s Discussion and Analysis
 ABOUT MATERIAL INFORMATION This report includes the
information we believe is material to investors after considering all
circumstances, including potential market sensitivity. We consider something to
be material if: -It results in, or would reasonably be expected to result in, a
significant change in the market price or value of our shares, or; -It is quite likely that a reasonable investor would consider the
information to be important in making an investment decision.  CAUTION
REGARDING FORWARD-LOOKING STATEMENTS This report includes forward-looking
statements about our activities, events and developments that we expect to or
anticipate may occur in the future including, for example, statements about our
vision, strategies, market trends and outlook, future revenues, capital
spending, expansions and new initiatives, financial obligations and expected
sales. Forward-looking statements normally contain words likebelieve,expect,anticipate,plan,intend,continue,estimate,may,will,should, strategy, futureand similar
expressions. By their nature, forward-looking statements require us to make
assumptions and are subject to inherent risks and uncertainties associated with
our business which may cause actual results in future periods to differ
materially from results indicated in 
forward-looking statements. While these statements are based on management’s
expectations and assumptions regarding historical trends, current conditions
and expected future developments, as well as other factors that we believe are
reasonable and appropriate in the circumstances, readers are cautioned not to
place undue reliance on these forward-looking statements as there is a risk
that they may not be accurate.  Important risks that could cause
such differences include, but are not limited to, risks relating to the industry
such as competition, level and timing of defence spending, government-funded defence
and security programs, constraints within the civil aviation industry, regulatory
rules and compliance, risks relating to CAE such as product evolution, R&D
activities, fixed-price and long-term supply contracts, procurement and original
equipment manufacturer (OEM) leverage, warranty or other product-related
claims, product integration, protection of our intellectual property, third-party
intellectual property, loss of key personnel, environmental liabilities, claims
arising from casualty losses, integration of acquired businesses, our ability
to penetrate new markets, information technology systems, length of sales cycle
and our reliance on technology and third-party providers, and risks relating to
the market such as foreign exchange, political instability, availability of
capital, pension plan funding, doing business in foreign countries and income
tax laws. Additionally, differences could arise because of events announced or
completed after the date of this report. You will find more information in theBusiness
risk and uncertaintysection of the MD&A. We caution readers that the
risks described above are not necessarily the only ones we face; additional
risks and uncertainties that are presently unknown to us or that we may
currently deem immaterial may adversely affect our business.  Except as required by law, we
disclaim any intention or obligation to update or revise any forward-looking
statements whether as a result of new information, future events or otherwise.
The forward-looking information and statements contained in this report are
expressly qualified by this cautionary statement.  4| CAE Year-End Financial Results 2015


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Management’s Discussion and Analysis
 3.ABOUT CAE 3.1Who weare  CAE is a global
leader in delivery of training for the civil aviation, defence and security,
and healthcare markets. We design and integrate the industry’s most
comprehensive training solutions, anchored by the knowledge and expertise of
our 8,000 employees, our world-leading simulation technologies and a record of
service and technology innovation spanningnearlyseven decades. Our global
presence is the broadest in the industry, with 160 sites and training locations
in 35 countries,including our joint venture operations,and
the world’s largest installed base of flight simulators. Each year, we train
more than 120,000 civil and defence crewmembersandthousands of
healthcare professionalsworldwide.  CAE’s common
shares are listed on the Toronto and New York stock exchanges under the symbol
CAE.  3.2Our vision  Our vision is to be the recognized global training partner
of choiceto enhance safety, efficiency and readiness.  3.3Our strategy  We address the imperatives of safety, efficiency and
readiness for customers in our three markets: civil aviation, defence and
security, and healthcare.  We want to sustain our leadership position by consistently
delivering best-in-class customer experience and innovation supporting our
position as the recognized global training partner of choice for our customers.
Our key differentiators include our unique ability to provide comprehensive
solutions, our established credibility as a training systems integrator, our
technology leadership, our proven customer support, the strength of our brand and
our vast global presence that we will continue to build on through continuous
service and product innovation.  We prioritize the maintenance of a strong financial base
and capital allocation discipline. Uses of capital include selective growth
investments in support of our long-term customer relationships and our vision
in training.  3.4Our operations  Weprovide integrated
training solutions to threemarkets globally: -The
civil aviation market includes aircraft manufacturers, major commercial
airlines, regional airlines, business aircraft operators, civil helicopter
operators, third-party training centres, flight training organizations (FTOs),
maintenance repair and overhaul organizations (MROs) and aircraft finance
leasing companies; -The
defence and security market includes defence forces, OEMs, government agencies
and public safety organizations worldwide; -The
healthcare
market includes hospital and university simulation centres, medical and nursing
schools, paramedic organizations, defence forces, medical societies and OEMs.  CIVIL AVIATION
MARKET We provide
comprehensive training solutions for flight, cabin, maintenance and ground
personnel in commercial, business and helicopter aviation, a complete range of flight
simulation training devices, as well as ab initio pilot training and crew sourcing
services.  We are the largest
provider of commercialandhelicopter
aviation training services in the world and the second largest provider of business
aviation training services. Weare well established in North America and Western
Europe, andlead
the market in the high-growth regions of China, Eastern Europe, India, the
Middle East, South America and Southeast Asia. Through our broad global network
of training centres, we serve all sectors of civil aviation including airlines
and other commercial,
business and helicopter aviation operators.Our comprehensive
training solutions, deep industry expertise and credibility, installed base,
strong relationships and reputation as a trusted partner enable us to access a
broader share of the market than any company in our industry.  We provide
aviation training and services in approximately 30 countries. Among our
thousands of customers, we havelong-term training centre operations andtraining
services agreements and joint ventures withapproximately 30major airlines
and aircraft operators around the world.Ourrange of training
solutionsincludes
productsand
servicesofferings
forpilot,cabin
crewandaircraft
maintenance technician training,training centre operations,curriculum
development,
courseware
solutions and consulting services. We currently operate256FFSs,
including FFSs operating in our joint ventures. Weoffer
industry-leading technologywith a full solution capability to
integrate flight data and simulator datato better
understand the performance of trainees.CAEoperatesthe
largest ab initio flight training network in the world with 9 academies, a
fleet of over170aircraft and the resources and expertise to train up to 2,000 cadets annually.
CAE Parc Aviation is theglobal
market leader in the provision of flight crew and technical personnel to
airlines, aircraft leasing companies, manufacturers and MRO companies worldwide.   CAE Year-End Financial Results 2015 |5


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Management’s Discussion and Analysis
 We are
the world leader in thedevelopmentofcivilflight
simulation equipment, including FFSs and a comprehensive suite of integrated
procedures trainers, flight training devices andtraining tools
such as software, courses and training aids, using the same
high-fidelity Level D software as the FFSs. Weare the market leader in thedesign and manufacture ofcivil
FFSs for major and regional commercial airlines, third-party training centres
and OEMs. We haveestablisheda
wealth of experience in developing first-to-market simulators for more than 35
types of aircraft models includingtherecent development
of simulators for the Airbus A350 XWB, A320Neo, Cirrus SF50,Mitsubishi
Regional Jet (MRJ), ATR42/72-600, Bombardier CSeries, Global
5000/6000andGlobal 7000/8000,
Dassault Falcon 5Xand the Commercial Aircraft Corporation of China,
Ltd (COMAC) ARJ21 and C919. Our flight simulation equipment, including FFSs,
are designed to meet the rigorous demands of their intended long and active
service lives, typically matching the in-service life of the underlying
aircraft, which could span a number of decades. Quality, fidelity and
reliability are hallmarks of the CAE brand in flight simulation. Leveraging
our extensive worldwide network of spare parts and service teams, we also offer
a full range of support services. This includes emergency support, simulator
updates and upgrades, maintenance services and simulator relocations.  Marketdrivers Demand
for training solutions in the civil aviation market is driven by the following: -Pilot
certification regulations; -Expected
global growth in air travel; -Demand
for trained aviation professionals; -Backlogs
and delivery rates for new aircraft; -Safety
and efficiency imperatives of commercial airline operators.  Pilot
certification regulations Civil aviation is highly-regulated
through global and national standards for pilot licensing andcertification, amongst other
regulatory requirements.Since training requirements are
mandatory and recurring in nature, the primary demand for our training
solutions is driven by the global active aircraft fleet which
has grown by an average of 3.1% annuallyoverthe past20
years and is widely expected to continue to grow in the range of 3.6% annually
over the next two decades as a result ofincreasingemerging market
and low-cost carrier demand and fleet replacement in established markets.From March 2014
to March 2015, the global commercial aircraft fleet increased by 4.3%, growing in
Asia-Pacific, the Middle East, Latin America and Europe by 7.1%, 6.8%, 6.5% and
2.6% respectively and remaining fairly stable in North America.  New
pilot certification processesand regulatory requirements drivemore
simulation-based training. Simulation-based pilot certification training is
taking on a greater role internationally with theMulti-crew Pilot
License (MPL), with
stall and upset prevention and recovery trainingand with new Airline Transport
Pilot (ATP) requirements in the U.S.Indeed, the International
Civil Aviation Organization (ICAO)and various
national and regional aviation regulatory agencies have published new
regulatory requirements, standards and guidance on thesespecifictopics.  TheMPL is an
alternative training and licensing methodology whichweoffer,in
addition tothe
ATP licence. MPLplaces more emphasis on simulation-based
training to develop ab initio students into First Officers of airliners in a
specific airline environment.On average, current MPL programs in the industry
consist of two thirds of the training in flight simulation training devices and
the balance in actual aircraft, whereas traditional training for ab initio
licences average 80% to 90% in actual trainer aircraft.Today,
there are approximately 50 nations that have MPL regulations in place and over
15 of these nations already use these regulations with training providers and
airlines. CAEdeliversMPL
programs in Asia and in Europewith various airlines. As the MPL
methodology continues to gain momentum, it will result in increased use of
simulation-based training.  In the U.S., theFederal Aviation
Administration (FAA)enacteda final
set of regulations in 2013 on new pilot certification and qualification
requirements for air carrier operations, requiring pilots to obtain an ATP and aircraft
specific Type Rating. Pilots applying for an ATP certificate must now complete
practical requirements which call for more simulation-based training that
includes adverse weather conditions, low energy states, stalls, upset
prevention and recovery, and high altitude operations. Wehave receivedformal approval from the FAA to conduct theATPCertification
Training Programat
our Dallas trainingcentreandwill
expand asdemand increases. The FAA
has also announced new crew rest regulation requirements that will result in an
increase of crew needs for airlines to sustain operations. We believe these new
requirements will lead to an increase in demand for simulation-based training.  Expected
global growth in air travel Growth in air travel results in higher
demand forflight,
cabin, maintenance and ground personnel, which in turn drives demand for
training solutions.  In commercial aviation, passenger traffic
growth is primarily driven by gross domestic product (GDP). According to IHS
Economics, global GDP is forecast to grow at 3.2% over the next 20 years, with
emerging economies expected to grow at 5.2% per year, outpacing established
economies like Europe and North America which will average 2.2% growth. Over
the past 20 years, air travel has grown at an approximate average rate of 5%
and the aerospace industry’s widely held expectation is that long-term average
growth for air travel will continue at approximately 5% annually over the next
two decades. In calendar 2014, global passenger traffic increased by 5.9%
compared to calendar 2013. For the first three months of calendar 2015,
passenger traffic increased by 6.1% compared to the first three months of
calendar 2014. Emerging markets continued to outperform with passenger traffic
in the Asia, the Middle East and Latin America growing at 9.0%, 8.6% and 6.2%
respectively, while Europe and North America increased 5.0% and 3.0%
respectively.   6| CAE Year-End Financial Results 2015


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Management’s Discussion and Analysis
 According to the
U.S. FAA, the total number of business jet flights, which includes all domestic
and international flights, increased by 3.3% over the past 12 months. Further
recovery and long-term growth in business aircraft travel will be driven by higher
corporate profitability and economic growth.In helicopter
aviation, marketdrivers are similar to those in business aviation,
and in the case of offshore helicopter operators, demand is driven by the level
of offshore activity in the oil and gas sector.Aprotracted downturn in petroleum prices couldnegatively impact offshore
activity.  Potential impedimentsto steady growth
in air travel include major disruptions such as regional political instability,
acts of terrorism, pandemics, natural disasters, prolonged economic recessions
or other major world events.  Demand
for trained aviation professionals Demand
for aviation professionals is driven by air traffic growth, pilot retirements and
by the number of aircraft deliveries. The expansion of global economies and
airline fleets have resulted in a shortage of qualified personnel needed to
fulfil this growing capacity.Pilot supply constraints include aging
crew demographicsandfewer military pilots transferring to civil airlines.The Professional
Aviation Board of Certification (PABC) reports that according to industry
market estimates, approximately20,000 new pilots will be needed per
year over the next 20 years globally to supporttheaverage 5% annual
growth in passenger travel.
In support of this growth, the aviation industry will require innovative
solutions to match the learning requirements of a new generation, leading to an
increase in demand for simulation-based training services and products.  Backlogs
and delivery rates for new aircraft Commercial
aircraft OEMs continue to work through record backlog levels of over14,000aircraft. We expect the continued high rate of aircraftdeliveries totranslate
into continued high demand for training products and incremental demand for
services.Much
of this backlog consists of technologically advanced aircraft platforms, which
in turn drive demand for new types of training solutions and simulator training
devices. These new platforms and programs allow us to leverage our technology
leadership and expertise to deliver training solutions, including CAE 7000XR
Series FFS, CAE SimfinityTM procedures trainers, comprehensive
training programs and expansion of our network to meet airlines’ training
needs.  Business jet OEMs have announced
plans to introduce a variety of new aircraft models incorporating the latest
technologies to enhance performance and operator benefits such as range, speed,
efficiency, comfort and the accessibility of business air travel. Examples
include Bombardier’s Global 7000/8000, Embraer’s Legacy 450 and 500, Cessna’s
Citation Latitude and Longitude, Dassault’s Falcon 5X, Gulfstream’s 500/600,
Cirrus’ SF50, Pilatus’ PC-24 and Honda’s HondaJet.  Deliveries of new-model aircraft
drive demand for training services and products; however, they may be subject to
program delays, which in turn may affect the timing of FFS orders and
deliveries.  Safety
and efficiency imperatives of commercial airline operators The commercial airline industry is
competitive, requiring operators to continuously pursue operational excellence
and efficiency initiatives in order to achieve adequate returns while
continuing to maintain the highest safety standards and the confidence of air
travelers. Airlines are finding it increasingly more effective to seek
expertise in training from trusted partners such as CAE to address growing
efficiency gaps around capability, capacity gaps of pilots, changing regulatory
environment, the large number of new aircraft programs being executed and in
addressing the rapid evolution of the training environment. Partnering with a
training provider like CAE gives airlines immediate access to a world-wide
fleet of simulators, courses, programs and instruction capabilities, and allows
them flexibility in pursuing aircraft fleet options that suit their business.  DEFENCE AND
SECURITY MARKET We are a training systems integrator for defence forces
across the air, land and sea domains, and for government and civil security
organizations responsible for public safety.  We are
a global leader in the development and delivery of integrated virtual flight
training solutions for defence forces. Our expertise spans a broad variety of
aircraft, including fighters, helicopters, trainer aircraft, maritime patrol,
tanker/transport aircraft and unmanned aerial systems (UAS). We also offer
virtual training solutions for land and naval forces, including a range of
driver, gunnery and maintenance trainers for tanks and armoured fighting
vehicles, constructive simulation for command and staff training, and naval warfare
tactical training systems. We offer virtual training solutions for government
and civil security organizations, including for emergency and disaster
management.  We are
uniquely positioned as a training systems integrator, capable of offering our
customers a comprehensive range of innovative solutions, ranging from pilot
training to immersive, networked mission rehearsal. Our solutions typically
include a combination of training services, products and software tools
designed to cost-effectively maintain and enhance safety, efficiency, mission
readiness and decision-making capabilities. We have a wealth of experience
delivering and operating training solutions across different business models,
including government-owned, government-operated; government-owned,
contractor-operated; or contractor-owned, contractor-operated facilities. Our
offerings include training needs analysis, instructional systems design,
learning management information systems, purpose-built facilities,
state-of-the-art synthetic training equipment, curriculum and courseware
development, classroom and simulator instruction, maintenance and logistics
support, lifecycle support and technology insertion, and financing
alternatives.   CAE Year-End Financial Results 2015 |7


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Management’s Discussion and Analysis
 We have
delivered simulation products and training systems to more than 50 defence
forces in approximately 35 countries. We provide training support services such
as contractor logistics support, maintenance services, classroom instruction
and simulator training at over 80 sites around the world, including our joint
venture operations. Increasingly, we are offering our training systems
integration expertise across air, land, sea and public safety to help our
customers create an integrated, immersive training enterprise. We also offer a
variety of modeling and simulation-based professional services, and a range of
in-service support solutions such as systems engineering and lifecycle
management.  Market drivers Demand
for training solutions in the defence and security markets is driven by the
following: -Installed
base of enduring defence platforms and new customers; -Explicit
desire of governments and defence forces to increase the use of synthetic
training to mitigate budget pressures; -Attractiveness
of outsourcing of training and maintenance services; -Need
for synthetic training to conduct mission rehearsal, including joint and
coalition forces training; -Relationships
with OEMs for simulation and training; -Use
of modeling and simulation for analysis and decision support.  Installed base of
enduring defence platforms and new customers With defence budgets under
pressure, particularly in mature markets such as the United States and Europe,
military forces are being required to maximize use of their existing platforms.
Upgrades, updates, and life extension programs allow defence forces to leverage
existing assets while creating a range of opportunities for simulator upgrades
and training support services. Enduring platforms, such as the C-130J Hercules
transport aircraft that is operated by more than 60 nations, provide a solid
installed base from which to generate business. Because of our extensive
installed base of simulators worldwide, and our experience on key enduring
platforms, CAE is well-positioned for recurring product upgrades/updates as
well as maintenance and support services.  While the mature western markets face
budget pressures, other regions of the world are taking advantage of the
opportunity to acquire western technologies to modernize and re-equip their
defence forces. There areincreased opportunities originating from
regions with growing defenceand securitybudgets,such asAsia
and the Middle East.Many of the opportunities originating from these
regions relate to enduring platforms where CAE has significant experience,
including the C-130J Hercules transport aircraft, 
P-8A maritime patrol aircraft, and a range of helicopter platforms.  Explicit
desire of governments and defence forces to increase the use of synthetic
training to mitigate budget pressures More defence forces and
governments are adopting synthetic training because it improves training
effectiveness, reduces operational demands on aircraft, lowers risk compared to
operating actual weapon system platforms and significantly lowers costs.Synthetic training
offersdefence
forcesa cost-effective way to provide realistic training for a wide variety of
scenarios while ensuring they maintain a high state of readiness.For example, the U.S. Air Force (USAF) is making more extensive
use of simulation for 
KC-135 tanker boom operator training, which costs approximately $20,000 for a
three-hour training mission in the actual aircraft, but only $1,000 for that
same three-hour training mission in simulators. The higher cost of live
training and the desire to save aircraft for operational use are two factors
prompting a greater adoption of synthetic training. Unlike civil aviation,
where the use of simulators for training is common practice, there are no
regulatory requirements for defence forces to use synthetic training. The
nature of 
mission-focused training demands at least some live training; however, the
shift to more synthetic training is well underway. The U.S. Navy
reports the share of simulation-based training on someof their aircraftplatforms
couldincrease
to nearly50%
by 2020.Because
of thehighcost
associated with conducting live training exercises, mostdefence forces are beginningto
rebalance the mix of live, virtual and constructive (computer-based) training
and shift more of the training curriculum to virtual and constructive
simulation.TheU.S.
Army is planning to reduce the use of live training ranges and transfer some of
this training to virtual and constructive simulation to reduce costs,creatingopportunities forsimulation-based
training centres, services and products.  In the United States, continuing
uncertainty in the government’s fiscal year budget and the threat of
sequestration mean that the timing of contract awards will continue to be
difficult to predict as the U.S. military services work to achieve the right balance
in military capacity, capabilities and readiness. This may impact our abilityto
grow revenue and income in the short term; however, our
active bids and proposals pipeline is robust and our view isthatthe
impediment to growth is not the size of the market, but rather the timing of
procurements.In
Europe, force structure reductions and reduced future investment plansmayhave
narrowed the pipeline of new opportunities, but the
increased adoption of simulation-based training is helping offset smaller
forces and fewer new platforms.  Attractiveness
of outsourcing of training and maintenance services Defence forces and
governments continue tomanageexpenditures to find ways to reduce costs and allow active-duty personnel to
focus on operational requirements, which has an impact on defence budgets and
resources. There has been a growing trend among defence forces to consider
outsourcing a variety of training services and we expect this trend to
continue.We
believe governmentswill
increasinglylook
to industry for trainingsolutions to achieve faster
delivery and mission readiness morecost effectivelyand, in specific
cases, at a lower capital investment.For
example,in 2014 we delivered the first two of six new flight training
devices that will support comprehensive T-44C aircrew training services for the
U.S. Navy and Marine Corps.These
deliveries are part of a long-term contract for CAE to provide T-44C aircrew
training services under a contractor-owned, contractor-operated training
services program, which is one of the first of its kind in the United States.
We believe this type of training service delivery program will become
increasingly attractive to defence forces globally.   8| CAE Year-End Financial Results 2015


---



Management’s Discussion and Analysis
 Need for synthetic training to conduct mission
rehearsal, including joint and coalition forces training There is a growing
trend among defence forces to use synthetic training to meet more of theirmissiontraining
requirements. Simulation technology solutions enable defence customers to plan
sophisticated missions and carry out full-mission rehearsals in a synthetic
environment as a complement to traditional live training or mission
preparation.
Allies
are cooperating and creating joint and coalition forces, which are driving the
demand for networked training and operations. Training devices that can be
networked to train different crews and allow for networked training across a
range of platforms are increasingly important as the desire to conduct mission
rehearsal exercises in a synthetic environment increases.For
example, the
Royal Canadian Air Force (RCAF) recently released its Simulation Strategy 2025,
which specifically calls forleveraging live, virtual, and
constructive (LVC) domains within a networked common synthetic environment. The
RCAF is transforming its training system from one that relies on aircraft to
one that exploits new technologies to train aviators in a simulation-focused
system that creates a virtual battlespace.We areactively
promoting open, standard simulation architectures, such as theCommon Database,as well
as new capabilities such as the CAE Dynamic Synthetic Environment,to
better enable mission rehearsal and joint, networked training.  Relationships
with OEMs for simulation and training We
partner with manufacturers in the defence and security market to strengthen
relationships and position for future opportunities. OEMs have introduced new
platforms and continue to upgrade and extend the life of existing platforms,
which drives worldwide demand for training systems. For example, Boeing has
developed the new P-8A maritime patrol aircraft, Airbus Military has sold and
continues to marketboththe
A330 MRTTand
C295globally,
Lockheed Martin is successfully marketing variants of the C-130J Hercules
transport aircraft and F-35 fighter, Alenia Aermacchi and BAE Systems are
selling the M-346 and Hawk lead-in fighter trainers, and AgustaWestland is
continuing to develop a range of helicopters such as the AW139, AW169 and
AW189. We have established relationships with each of the OEMs on these platforms.
We
also signed a memorandum of understanding with General Atomics Aeronautical
Systems, the world’s leading UAS manufacturer, to offer training solutions for
GA-ASI’s Predator family of remotely piloted aircraft.  Use of
modeling and simulation for analysis and decision support Traditionally, modeling and
simulation have been used to support training, but is now increasingly applied
across the program lifecycle, including support for analysis and
decision-making operations. We see governments and defence forces looking to
use simulation-based synthetic environments to support research and development
programs, system design and testing, intelligence analysis, integration and
exploitation, and to provide the decision support tools necessary to support mission
planning in operations.  HEALTHCARE
MARKET We design,manufacture and
market simulators, simulation centre management solutions and courseware for
training of medical and allied healthcare students and clinicians in
educational institutions, hospitals and defence organizations worldwide.  Simulation-based
training is one of the most effectiveapproachesto prepare
healthcare practitioners to care for patients and respond to critical
situations while reducing the overall risk to patients. Weare
leveraging our experience and best practices in simulation-based
aviation training to deliver innovative solutions to improve the safety and
efficiency of this industry. The healthcare simulation market is growing
rapidly, with simulation centres becoming the standard in nursing and medical
schools.  We offer the
broadestrangeof
medical simulation products and services in the market today, including
patient,ultrasoundand
interventional(surgical)simulators,simulation
centre management solutionsandcoursewarefor healthcare
education and training. We have sold simulators to customers in more than 80
countries that are currently supported by ournetworkin Australia,
Brazil, Canada, Germany, Hungary, India,Singapore,U.K.and U.S. We
lead the market in high-fidelity patient simulators that are uniquely powered
by complex models of human physiology to mimic human responses to clinical
interventions. Our newest innovation, a childbirth simulator for both normal
labor and delivery and rare maternal emergencies, was designed to offer
exceptional reliability and realism in the high-fidelity patient simulation
market. Our offerings include ongoing service and support, such assimulation centre
managementsolutions for healthcare training, where we are a market leader. Through our
Healthcare Academy, we are the only company to deliver peer-to-peer training at
customer sites and in our training centres in the U.S., U.K.,
Germany and Canada. Our Healthcare Academy includes more than50adjunct faculty consisting of nurses, physicians, paramedics and sonographerswho, incollaboration with leading healthcare institutions, have developed more than
500 Simulated Clinical Experience (SCE)coursewarepackages for our
customers.Our OEM team delivers custom training solutions for medical manufacturers, and
most recently, developed a specialized interventional simulator to train
physicians to place the new AbioMed Impella heart pump under ultrasound and
fluoroscopy guidance.  Market drivers Demand
for our simulation products and services in the healthcare market is driven by
the following: -Increasing
use of simulation in healthcare; -Growing
emphasis on patient safety and outcomes; -Limited access to
live patients during training; -Medical technology
revolution.   CAE Year-End Financial Results 2015 |9


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Management’s Discussion and Analysis
 Increasing use of simulation in
healthcare Arecent
study of the global healthcare simulation market, which includes products and
services, valued the market atapproximately$860millionin 2014 and reports that it is predicted to grow at a compound annual growth
rate of 19.1% from 2014 to 2019. North America is the largest market for
healthcare simulation, followed by Europe and Asia-Pacific.The
healthcare simulation market includes both products and services, which are
segmented by high-fidelity patient simulators, interventional simulators,
mid/low fidelity task trainers,ultrasoundsimulators,simulation centre
management solutions, simulated clinical environments and training
services.In
the U.S., significant demand for healthcare services is driven by, among other
factors, longer life expectancy and the baby boomer generation, resulting in
higher healthcare spending. The U.S. Centers for Medicare and Medicaid Services
(CMS) projects that annual national health spending will grow 5.8% annually
over the next decade. Increasingly, hospitals are given incentives to become
safer and more efficient which will drive higher demand for training. There is
a growing body of evidence demonstrating that medical simulation improves
patient outcomes and reduces medical errors, which can help mitigate the rate
of increase in healthcare costs.  Growing
emphasis on patient safety and outcomes According to a recently published study
in the Journal of Patient Safety, up to 440,000 deaths occur annually in the
U.S. due to preventable adverse events during patient treatment, which would
make such events the third leading cause of death annually. In a study by the
International Society for Pharmacoeconomics and Outcomes Research, measurable
medical errors cost U.S. hospitals more than $1 billion in 2009. Training
through the use of simulation can help clinicians gain confidence, knowledge
and expertise for improving patient safety in a risk-free environment.
Simulation is a required element in a growing movement towards High Stakes
Assessment and Certification. Examples in the U.S. include the Maintenance of
Certification in Anesthesia (MOCA), Fundamentals of Laparoscopic Surgery (FLS)
and Advanced Trauma Life Support (ATLS). Moreover, the Accreditation Council
for Graduate Medical Education (ACGME) is evolving towards outcome-based
assessment with specific benchmarks to measure and compare performance which
favours the adoption of simulation products and training.  Limited
access to live patients during training Traditionally,
medical education has been an apprenticeship model in which the student cares
for patients under the supervision of more experienced staff. In this model,
students have a limited role and access to high-risk procedures, rare
complications and critical decision-making skills. The use of simulation in
professional education programs complements traditional learning and allows
students exposure and practice to hone their clinical and critical thinking
skills for high risk, low frequency events. As an example, our Lucina Fidelis
Maternal Fetal Simulator is designed to allow healthcare teams to practice both
normal deliveries and complex procedures in rare emergencies. The training and
education model is evolving, as evidenced by military branches around the world
and most recently the U.S. Pentagon, prohibiting the use of live tissue testing
in most medical training. CAE Healthcare simulators provide a low-risk
alternative for practicing life-saving procedures, major disaster response and
anaesthesia administration.  Medical
technology revolution Advancements in medical technology are
driving the use of simulation. New medical devices and advanced procedures,
such as Intra-Cardiac Echocardiography (ICE), cardiac assist devices, and
mechanical ventilation enhancements, require advanced training solutions, such
as simulation, for internal product development and customer training.
Regulatory and certification agencies are increasingly stringent in requesting
that clinicians be trained before adopting new disruptive technologies, an
undertaking for which simulation is well suited. As a Partner of Choice with
leading OEMs, we continue to collaborate to deliver innovative and custom
training for new technologies, such as the AbioMed Impella heart pump.  3.5Foreign exchange  We report all dollar amounts in Canadian
dollars. We value assets, liabilities and transactions that are measured in
foreign currencies using various exchange rates as required by IFRS.  The tables below show the variations of the
closing and average exchange rates for our three main operating currencies.  We used the closing foreign exchange rates
below to value our assets, liabilities and backlog in Canadian dollars at the
end of each of the following periods:  Increase
  /2015
 2014
 (decrease)U.S. dollar (US$ or
  USD)
 1.27
 1.11
 14%Euro (€ or EUR)
 1.36
 1.52
 (11%)British pound (£ or
  GBP)
 1.88
 1.84
 2%
  We used the average
  foreign exchange rates below to value our revenues and expenses:2015
 2014
 IncreaseU.S. dollar (US$ or
  USD)
 1.14
 1.05
 9%Euro (€ or EUR)
 1.44
 1.41
 2%British pound (£ or
  GBP)
 1.83
 1.68
 9%
  10| CAE Year-End Financial Results 2015


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Management’s Discussion and Analysis
  For fiscal 2015, the
effect of translating the results of our foreign operations into Canadian
dollars resulted in an increase in revenue of $77.4million and an
increase in net income of $4.4million, when compared to fiscal 2014. We
calculatedthis by
translatingthe current year’sforeign currency revenue and net income using the
average monthly exchange rates from the previous year and comparing these
adjusted amounts to our current year reported results.  Three areas of our
business are affected by changes in foreign exchange rates:  -Our
network of foreign training and services operations Most
of our foreign training and services revenue and costs aredenominatedin
local currency.
Changes in the value of local currencies relative to the Canadian dollar
therefore have an impact on these operations’ net profitability and net
investment. Gains or losses in the net investment in a foreign operation that result
from changes in foreign exchange rates are deferred in the foreign currency
translation account (accumulated other comprehensive income), which is part of
the equity section of the consolidated statement of financial position. Any
effect of the fluctuation between currencies on the net profitability has an
immediate translation impact on the consolidated income statement and an impact
on year-to-year and quarter-to-quarter comparisons.  -Our
production operations outside of Canada (Australia, Germany, India, U.K. and
U.S.) Most
of the revenue and costs in these foreign operations are generated in their
local currency except for some data and equipment bought in different
currencies from time to time, as well as any work performed by our Canadian
manufacturing operations. Changes in the value of the local currency relative
to the Canadian dollar have a translation impact on the operation’s net
profitability and net investment when expressed in Canadian dollars, as
described above.  -Our
production operations in Canada Although
the net assets of our Canadian operations are not exposed to changes in the
value of foreign currencies (except forcash balances,receivables and
payables in foreign currencies), a significant portion of our annual revenue
generated in Canada is in foreign currencies (mostly U.S. dollar and Euro),
while a significant portion of our expenses are in Canadian dollars.  We
generally hedge the milestone payments of sales contracts denominated in
foreign currencies to mitigate some of the foreign exchange exposure.  To
this effect, wecontinue to hold a portfolio of currency hedging positions intended to mitigate
the risk to a portion of future revenues presented by the volatility of the
Canadian dollar versus foreign currencies. The hedges are intended to cover a
portion of the revenue in order to allow the unhedged portion to match the
foreign cost component of the contract.Sincenot all of our
revenue is hedged, it is not possible to completely offset the effects of
changing foreign currency values, which leaves some residual exposure that can
affect the consolidated income statement. This residual exposure may be higher
when currencies experience significant short term volatility. With respect to
the remaining expected future revenues, our operations in Canada remain exposed
to changes in the value of the Canadian dollar.  In
order to reduce the variability of specificBritish pound andEuro-denominated
costs, wealsohedge
some of the foreign currency costs incurred in our manufacturing process.  Sensitivity analysis We conducted a
sensitivity analysis to determine the current impact of variations in the value
of foreign currencies. For the purposes of this sensitivity analysis, we
evaluated the sources of foreign currency revenues and expenses and determined
that our consolidated exposure to foreign currency mainly occurs in two areas: -Foreign currency revenues and expenses in Canada
for our manufacturing activities – we hedge a portion of these exposures; -Translation of foreign currency of operations in
foreign countries. Our exposure is mainly in our operating profit.  First we calculated the revenue and
expenses per currency from our Canadian operations to determine the operating
profit in each currency. Then we deducted the amount of hedged revenues to
determine a net exposure by currency. Next we added the net exposure from
foreign operations to determine the consolidated foreign exchange exposure in
different currencies.  Finally, we conducted a sensitivity
analysis to determine the impact of a weakening of one cent in the Canadian
dollar against each of the other three currencies. The table below shows the
expected impact of this change on our annual revenue and operating profit,
after taxes, as well as our net exposure:  Operating
 
 
 
 
 
 NetExposure
 (amounts in millions)
 
 Revenue
 
 
 Profit
 
 
 Hedging
 
 
 ExposureU.S. dollar (US$ or
  USD)
 $
 11.5
 $
 3.1
 $
 (2.5)
 $
 0.6Euro (€ or EUR)
 
 3.4
 
 0.4
 
 (0.2)
 
 0.2British pound (£ or
  GBP)
 
 1.5
 
 0.1
 
 (0.1)
 
 0.0A possible
  strengthening of one cent in the Canadian dollar would have the opposite
  impact.
  CAE Year-End Financial Results 2015 |11


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Management’s Discussion and Analysis
  3.6Non-GAAP and other financial measures  This MD&A
includes non-GAAP and other financial measures. Non-GAAP measures are useful
supplemental information but may not have a standardized meaning according to
GAAP. You should not confuse this information with, or use it as an alternative
for, performance measures calculated according to GAAP. You should also not use
them to compare with similar measures from other companies. Backlog Obligated
backlog is a non-GAAP measure that represents the expected value of orders we
have received but have not yet executed. -For
the Civil Aviation Training Solutions segment, we consider an item part of our
obligated backlog when we have a legally binding commercial agreement with a
client that includes enough detail about each party’s obligations to form the
basis for a contract or an order and includes the value of expected future revenues.
Revenues from customers with both long-term and short-term training contracts are
included when these customers commit to pay us training fees, or when we
reasonably expect the revenue to be generated; -For
the Defence and Security segment, we consider an item part of our obligated
backlog when we have a legally binding commercial agreement with a client that
includes enough detail about each party’s obligations to form the basis for a
contract or an order. Defence and Security contracts are usually executed over
a long-term period and some of them must be renewed each year. For this
segment, we only include a contract item in obligated backlog when the customer
has authorized the contract item and has received funding for it; -For
the Healthcare segment, order intake is typically converted into revenue within
one year, therefore we assume that order intake is equal to revenue and
consequently, backlog is nil.  Joint
venture backlog is obligated backlog that represents the expected value of our
share of orders that our joint ventures have received but have not yet
executed. Joint venture backlog is determined on the same basis as obligated
backlog described above.  Unfunded
backlog is a non-GAAP measure that represents firm Defence and Security orders
we have received but have not yet executed and for which funding authorization
has not yet been obtained. We include unexercised negotiated options which we
view as having a high probability of being exercised, but exclude
indefinite-delivery/indefinite-quantity (IDIQ) contracts.  Total backlog
includes obligated backlog, joint venture backlog and unfunded backlog.  The book-to-sales
ratio is the total orders divided by total revenue in a given period. Capital employed Capital
employed is a non-GAAP measure we use to evaluate and monitor how much we are
investing in our business. We measure it from two perspectives: Capital
used: -For
the company as a whole, we take total assets (not including cash and cash
equivalents), and subtract total liabilities (not including long-term debt and
the current portion of long-term debt); -For
each segment, we take the total assets (not including cash and cash
equivalents, tax accounts and other non-operating assets), and subtract total
liabilities (not including tax accounts, long-term debt and the current portion
of long-term debt, royalty obligations, employee benefits obligations and other
non-operating liabilities).  Source
of capital: -In
order to understand our source of capital, we add net debt to total equity. Capital expenditures (maintenance and
growth) from property, plant and equipment Maintenance
capital expenditure is a non-GAAP measure we use to calculate the investment
needed to sustain the current level of economic activity.  Growth
capital expenditure is a non-GAAP measure we use to calculate the investment
needed to increase the current level of economic activity. Free cash flow Free
cash flow is a non-GAAP measure that shows us how much cash we have available
toinvest
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 inother
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 profitfrom continuing
operationsexcluding
research and development expenses, selling, general and administrative
expenses, other (gains) losses – netand after tax share in profit of equity
accounted investees.  12| CAE Year-End Financial Results 2015


---



Management’s Discussion and Analysis
 Net
debt Net debt is a
non-GAAP measure we use to monitor how much debt we have after taking into
account liquid assets such as cash and cash equivalents. We use it as an
indicator of our overall financial position, and calculate it by taking our
total long-term debt, including the current portion of long-term debt, and
subtracting cash and cash equivalents.  Net
debt-to-capital is calculated as net debt divided by the sumof totalequity plus net debt.  Non-cash working
capital Non-cash working
capital is a non-GAAP measure we use to monitor how much money we have
committed in the day-to-day operation of our business. We calculate it by
taking current assets (not including cash and cash equivalentsandassets held
for sale)
and subtracting current liabilities (not including the current portion of
long-term debtandliabilities related to assets held for sale). Operating profit Operating
profit is a non-GAAP measure that shows us how we have performed before the
effects of certain financing decisions and tax structures. We track operating
profit because we believe it makes it easier to compare our performance with
previous periods, and with companies and industries that do not have the same
capital structure or tax laws. Research and development expenses Research and
development expenses are a financial measure we use to measure the amount of
expenditures directly attributable to research and development activities that
we have expensed during the period, net of investment tax credits and
government contributions. Return on capital employed Return on capital
employed (ROCE) is a non-GAAP measure we use to evaluate the profitability of
our invested capital. We calculate this ratio over a rolling four-quarter
period by takingnet
incomeattributable to equity holders of the Company excludingnet financeexpense, after tax, divided by the average capital employed. Segment operating income Segment operating
income (SOI) is a non-GAAP measure and our key indicator of each segment’s
financial performance. This measure gives us a good indication of the
profitability of each segment because it does not include the impact of any
items not specifically related to the segment’s performance. We calculate it by
using segment operating profit,including the after tax share in profit of equity
accounted investees andexcludingnet finance
expense, income taxes and other items
not specifically related to the segment’s performance. Simulator equivalent unit Simulatorequivalent unit
(SEU) isan
operatingmeasure we use to show the total average number of FFSs available to generateearningsduring 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 generateearnings. Utilization rate Utilization rateisan operatingmeasure we useto
assess the performance of our simulator training network. We calculate it by
taking the number of training hours sold on our simulators during the period
divided by the practical training capacity available for the same period.  CAE Year-End Financial Results 2015 |13


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Management’s Discussion and Analysis
 4.CONSOLIDATED RESULTS
[3] 4.1Results from operations – fourth quarter of fiscal 2015  (amounts in millions, except per share amounts)

   

   Q4-2015

   

   Q3-2015

   

   Q2-2015

   

   Q1-2015

   

   Q4-2014Revenue

   $

   631.6

   559.1

   529.4

   526.2

   575.7Cost of sales

   $

   449.6

   410.1

   393.2

   389.7

   415.7Gross profit3

   $

   182.0

   149.0

   136.2

   136.5

   160.0As a % of revenue

   %

   28.8

   26.6

   25.7

   25.9

   27.8Research and development expenses3

   $

   19.5

   13.6

   16.6

   14.4

   19.5Selling, general and administrative expenses

   $

   69.4

   70.8

   60.5

   63.9

   70.0Other gains – net

   $

   (5.6)

   (10.7)

   (0.2)

   (3.8)

   (8.1)After tax share in profit of equity accounted investees

   $

   (6.7)

   (7.6)

   (13.5)

   (9.7)

   (8.1)Operating profit from continuing operations3

   $

   105.4

   82.9

   72.8

   71.7

   86.7As a % of revenue

   %

   16.7

   14.8

   13.8

   13.6

   15.1Finance income

   $

   (2.3)

   (3.3)

   (2.1)

   (2.1)

   (2.3)Finance expense

   $

   20.6

   21.1

   20.4

   18.6

   18.7Finance expense – net

   $

   18.3

   17.8

   18.3

   16.5

   16.4Earnings before income taxes and discontinued operations

   $

   87.1

   65.1

   54.5

   55.2

   70.3Income tax expense

   $

   20.2

   13.1

   12.9

   11.6

   10.5As a % of earnings before income taxes anddiscontinued operations (income tax rate)

   %

   23

   20

   24

   21

   15Earnings from continuing operations

   $

   66.9

   52.0

   41.6

   43.6

   59.8Earnings (loss) from discontinued operations

   $

   0.8

   0.9

   0.9

   (2.0)

   0.1Net income

   $

   67.7

   52.9

   42.5

   41.6

   59.9Attributable to:Equity holders of the CompanyContinuing operations

   $

   63.3

   52.1

   42.0

   43.8

   59.9Discontinued operations

   $

   0.8

   0.9

   0.9

   (2.0)

   0.164.1

   53.0

   42.9

   41.8

   60.0Non-controlling interests

   $

   3.6

   (0.1)

   (0.4)

   (0.2)

   (0.1)$

   67.7

   52.9

   42.5

   41.6

   59.9Earnings per share (EPS) attributable to equity holdersof the CompanyBasic and diluted - continuing operations

   $

   0.24

   0.20

   0.16

   0.17

   0.23Basic and diluted - discontinued operations

   $

   -

   -

   -

   (0.01)

   -$

   0.24

   0.20

   0.16

   0.16

   0.23
  Revenue from continuing operations was 13% higher than last quarter and 10% higher compared to the fourth quarter of fiscal 2014 Revenue from continuing operations was $72.5 million higher than last quarter mainly because: -Civil Aviation Training Solutions revenue increased by $45.5 million, or 14%, mainly due to higher revenue generated in North America and Europe as a result of higher simulator utilization rates and higher production levels from our manufacturing facility driven by an increase in order intake. Revenue also benefited from a favourable foreign exchange impact resulting from a stronger U.S. dollar against the Canadian dollar; -Defence and Security revenue increased by $19.0 million, or 9%, mainly due to a favourable foreign exchange impact on the translation of foreign operations and higher revenue resulting from the completion of certain North American programs and a higher level of activity on Australian programs, partially offset by lower revenue from Asian programs; -Healthcare revenue increased by $8.0 million, or 38%, due to higher revenue from simulation centre management solutions as a result of an increase in the number of systems delivered this quarter and higher patient simulator revenue. The increase was also attributable to a favourable foreign exchange impact resulting from a stronger U.S. dollar against the Canadian dollar.  3Non-GAAP and other financial measures (see Section 3.6).
  14| CAE Year-End Financial Results 2015


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Management’s Discussion and Analysis
 Revenue from continuing operations was $55.9 million
higher than the same period last year largely because: -Civil Aviation Training Solutions revenue
increased by $44.1 million, or 14%, mainly due to higher production levels from
our manufacturing facility, the contribution from additional simulators
deployed in our network, higher revenue from our crew sourcing business and
higher training demand in North America and Europe. Revenue also benefited from
a favourable foreign exchange impact resulting from a stronger U.S. dollar,
partially offset by a weaker Euro against the Canadian dollar; -Healthcare revenue increased by $7.4 million, or
34%, mainly due to higher patient simulator revenue and higher revenue from
simulation centre management solutions. The increase was also due to a
favourable foreign exchange impact resulting from a stronger U.S. dollar
against the Canadian dollar; -Defence and Security revenue increased by $4.4
million, or 2%, mainly due to higher revenue from European programs and a
favourable foreign exchange impact on the translation of foreign operations,
partially offset by lower revenue from North American programs.  You will find more details inResults
by segment. Operating profit from continuing
operations was $22.5 million higher than last quarter and $18.7 million higher
compared to the fourth quarter of fiscal 2014 Operating profit from continuing
operations for this quarter was $105.4 million or 16.7% of revenue, compared to
$82.9 million or 14.8% of revenue last quarter and $86.7 million or 15.1% of
revenue in the fourth quarter of fiscal 2014.  Operating
profit increased by 27% compared to last quarter. Increases in segment
operating income4 were $10.9 million, $8.0 million and $3.6 million
for Defence and Security, Civil Aviation Training Solutions and Healthcare
respectively.[4] Operating
profit increased by 22% over the fourth quarter of fiscal 2014. Increases in
segment operating income were $11.5 million, $3.8 million and $3.4 million for
Defence and Security, Civil Aviation Training Solutions and Healthcare
respectively. You
will find more details inResults by segment. Net finance
expense was $0.5 million higher compared to last quarter and $1.9 million
higher over the fourth quarter of fiscal 2014 The increase over last quarter was mainly
due to lower interest income partially offset by lower finance expense on
royalty obligations.  The increase over the fourth
quarter of fiscal 2014 was mainly due to higher finance expense on royalty and
R&D obligations.  Income tax rate was 23% this quarter Income taxes this quarter were
$20.2 million, representing an effective tax rate of 23%, compared to 20% last
quarter and 15% for the fourth quarter of fiscal 2014.  The increase in the tax rate over last
quarter was mainly due to changes in exchange rates that gave rise to deferred
tax liabilities, tax adjustments and assessments, as well as the settlement of
tax audits.  The increase in the tax rate over the
fourth quarter of fiscal year 2014 was mainly due to changes in exchange rates
that gave rise to deferred tax liabilities, tax adjustments and assessments,
the settlement of tax audits, as well as the change in the mix of income from
various jurisdictions.  4Non-GAAP and other financial measures (see
Section 3.6).
  CAE Year-End Financial Results 2015 |15


---



Management’s Discussion and Analysis
  4.2Results from operations – fiscal 2015  (amounts in millions, except per share amounts)

   

   FY2015

   

   

   FY2014Revenue

   $

   2,246.3

   

   2,077.9Cost of sales

   $

   1,642.6

   

   1,512.8Gross profit

   $

   603.7

   

   565.1As a % of revenue

   %

   26.9

   

   27.2Research and development expenses

   $

   64.1

   

   67.7Selling, general and administrative expenses

   $

   264.6

   

   259.3Other gains – net

   $

   (20.3)

   

   (21.2)After tax share in profit of equity accounted investees

   $

   (37.5)

   

   (30.0)Operating profit from continuing operations

   $

   332.8

   

   289.3As a % of revenue

   %

   14.8

   

   13.9Finance income

   $

   (9.8)

   

   (9.6)Finance expense

   $

   80.7

   

   80.5Finance expense – net

   $

   70.9

   

   70.9Earnings before income taxes and discontinued operations

   $

   261.9

   

   218.4Income tax expense

   $

   57.8

   

   29.0As a % of earnings before income taxes anddiscontinued operations (income tax rate)

   %

   22

   

   13Earnings from continuing operations

   $

   204.1

   

   189.4Earnings from discontinued operations

   $

   0.6

   

   1.7Net income

   $

   204.7

   

   191.1Attributable to:Equity holders of the CompanyContinuing operations

   $

   201.2

   

   188.3Discontinued operations

   $

   0.6

   

   1.7201.8

   

   190.0Non-controlling interests

   $

   2.9

   

   1.1$

   204.7

   

   191.1EPS attributable to equity holders of the CompanyBasic and diluted - continuing operations

   $

   0.76

   

   0.72Basic and diluted - discontinued operations

   $

   -

   

   0.01
  Revenue from continuing operations was 8% or $168.4 million higher than last year Revenue from continuing operations was higher than last year mainly because: -Civil Aviation Training Solutions revenue increased by $117.9 million, or 10%, mainly due to a favourable foreign exchange impact resulting from a stronger U.S. dollar, British pound and Euro against the Canadian dollar, the contribution from additional simulators deployed in our network, higher production levels from our manufacturing facility and higher revenue from our crew sourcing business; -Defence and Security revenue increased by $35.4 million, or 4%, mainly due to a favourable foreign exchange impact on the translation of foreign operations and higher revenue from European programs. The increase was partially offset by lower revenue from North American programs due to a higher level of activity on programs nearing completion last year; -Healthcare revenue increased by $15.1 million, or 19%, mainly due to higher patient simulator revenue resulting primarily from our maternal fetal simulator, higher revenue from simulation centre management solutions driven by an increase in the number of systems delivered and the launch of new products and a favourable foreign exchange impact resulting from a stronger U.S. dollar against the Canadian dollar.  You will find more details inResults by segment.  16| CAE Year-End Financial Results 2015


---



Management’s Discussion and Analysis
 Gross profit was $38.6 million higher than last year The gross profit was $603.7 million this year, or 26.9% of revenue compared to $565.1 million or 27.2% of revenue last year. As a percentage of revenue, gross profit was stable when compared to last year.  Operating profit from continuing operations was $43.5 million higher than last year Operating profit from continuing operations this year was $332.8 million, or 14.8% of revenue, compared to $289.3 million, or 13.9% of revenue last year.  Operating profit increased $43.5 million, or 15% compared to last year. Increases in segment operating income were $30.7 million, $7.8 million and $5.0 million for Civil Aviation Training Solutions, Defence and Security and Healthcare respectively.  You will find more details inResults by segment.  Net finance expense was $70.9 million, stable compared to last year  FY2014 to(amounts in millions)

   

   FY2015Net finance expense, prior period

   $

   70.9Change in finance expense from the prior period:Increase in finance expense on long-term debt (other than finance leases)

   $

   2.6Increase in finance expense on finance leases

   

   0.2Decrease in finance expense on royalty obligations

   

   (0.2)Decrease in other finance expense

   

   (1.7)Decrease in borrowing costs capitalized

   

   (0.7)Increase in finance expense from the prior period

   $

   0.2Change in finance income from the prior period:Increase in interest income on loans and receivables

   $

   (0.4)Decrease in other finance income

   

   0.2Increase in finance income from the prior period

   $

   (0.2)Net finance expense, current period

   $

   70.9
  Income tax rate was 22% this year This fiscal year, income taxes were $57.8 million, representing an effective tax rate of 22%, compared to 13% for the same period last year.  The increase in the tax rate compared to fiscal year 2014 is mainly attributable to changes in exchange rates that gave rise to deferred tax liabilities as well as a favourable decision by the Federal Court of Appeal, rendered last year, with respect to the tax treatment of the depreciation and sale of simulators in Canada.  4.3Results from discontinued operations  During the first quarter of fiscal 2015, we decided to divest our mining business (CAE Mining) which was previously reported within the former New Core Markets segment in order to focus our resources and capital investment in targeted growth opportunities in our other three core markets: Civil Aviation Training Solutions, Defence and Security and Healthcare. CAE Mining delivers products and services across the mining value chain. In accordance with the requirements of IFRS 5,Non-current Assets Held for Sale and Discontinued Operations, income and expenses associated with CAE Mining have been classified and reported separately as discontinued operations in our consolidated financial statements and the results for the two prior years were restated accordingly. For the year ended March 31, 2015, revenue for CAE Mining was $34.6 million, $2.4 million or 6% lower than last year. The decrease compared to last year was mainly due to lower consulting services revenue partially offset by higher mining equipment simulator revenue and an increase in software licence revenue.  Earnings from discontinued operations was $0.6 million this year, $1.1 million lower compared to the prior year. The decrease was mainly attributable to lower revenue and the measurement to fair value of certain assets held for sale partially offset by lower depreciation and amortization, as well as lower administrative expenses.  CAE Year-End Financial Results 2015 |17


---



Management’s Discussion and Analysis
  4.4Consolidated orders and total backlog  Our total consolidated backlog was $5,357.2 million at the end of fiscal 2015, which is 7% higher than last year. New orders of $2,361.2 million were added this year, partially offset by $2,246.3 million in revenue generated from our obligated backlog. The adjustment of $33.6 million was mainly related to foreign exchange movements, partially offset by the termination of a contract in North America and the revaluation of certaincontracts within our Defence and Security segment. Our joint venture backlog5 was $607.8 million and our unfunded backlog5 was $395.3 million.  Total backlog up 7% over last year(amounts in millions)

   

   FY2015

   

   

   FY2014Obligated backlog, beginning of period

   $

   4,205.6

   $

   3,717.8+ orders

   

   2,361.2

   

   2,343.3- revenue

   

   (2,246.3)

   

   (2,077.9)+ / - adjustments

   

   33.6

   

   222.4Obligated backlog, end of period

   $

   4,354.1

   $

   4,205.6Joint venture backlog (all obligated)

   

   607.8

   

   392.5Unfunded backlog

   

   395.3

   

   406.7Total backlog

   $

   5,357.2

   $

   5,004.8
  In fiscal 2014, adjustments were mainly due to a positive foreign exchange impact.
[5]  The book-to-sales ratio for the quarter was 1.05x. The ratio for the last 12 months was 1.05x.  You will find more details inResults by segment.  5Non-GAAP and other financial measures (see Section 3.6).
  18| CAE Year-End Financial Results 2015


---



Management’s Discussion and Analysis
 5.RESULTS BY SEGMENT During the first quarter of fiscal 2015, we modified our operating segments. This resulted from changes in the organizational structure undertaken to better reflect our operating segments with our integrated solutions approach to market. This change reflects the way management measures profitability and performance and how we allocate resources. As such, we believe the information presented to be more relevant as it is better aligned with the way our business is managed internally.
[6]  We manage our business and report our results in three segments:  -Civil Aviation Training Solutions; -Defence and Security; -Healthcare.  The method used for the allocation of assets jointly used by the operating segments and costs and liabilities jointly incurred (mostly corporate costs) between operating segments is based on the level of utilization when determinable and measurable, otherwise the allocation is based on a proportion of each segment’s cost of sales.  Unless otherwise indicated, elements within our segment revenue and segment operating income analysis are presented in order of magnitude.  KEY PERFORMANCE INDICATORSSegment operating income(amounts in millions, except operating margins)

   FY2015

   

   FY2014

   

   

   Q4-2015

   

   Q3-2015

   

   Q2-2015

   

   Q1-2015

   

   Q4-2014Civil Aviation Training Solutions

   $

   210.5

   179.8

   

   61.8

   53.8

   45.4

   49.5

   58.0%

   16.3

   15.3

   

   16.8

   16.7

   15.3

   16.0

   17.9Defence and Security

   $

   115.6

   107.8

   

   39.5

   28.6

   25.6

   21.9

   28.0%

   13.5

   13.1

   

   16.8

   13.3

   12.2

   11.1

   12.2Healthcare

   $

   6.7

   1.7

   

   4.1

   0.5

   1.8

   0.3

   0.7%

   7.1

   2.1

   

   14.0

   2.3

   7.4

   1.5

   3.2Total segment operating income (SOI)

   $

   332.8

   289.3

   

   105.4

   82.9

   72.8

   71.7

   86.7
  Capital employed6  March 31

   

   December 31

   

   September 30

   

   June 30

   

   March 31(amounts in millions)

   

   2015

   2014

   2014

   2014

   2014Civil Aviation Training Solutions

   $

   1,984.2

   1,887.7

   1,879.4

   1,795.8

   1,776.3Defence and Security

   $

   675.5

   661.8

   619.6

   590.4

   567.3Healthcare*

   $

   206.5

   191.4

   188.7

   181.1

   181.6$

   2,866.2

   2,740.9

   2,687.7

   2,567.3

   2,525.2* Comparative periods exclude net assets related to the CAE Mining discontinued operations.
  6Non-GAAP and other financial measures (see Section 3.6).
  CAE Year-End Financial Results 2015 |19


---



Management’s Discussion and Analysis
  5.1    Civil Aviation Training Solutions FISCAL 2015 EXPANSIONS AND NEW INITIATIVES Expansions -We signed a joint venture agreement with Japan Airlines (JAL) to provide flight crew training services across Northeast Asia, where JAL’s training commenced in April 2015; -We announced, with Lufthansa Flight Training, the creation of a joint venture operating under the name of Flight Training Alliance to provide pilot and cabin crew training for Bombardier’s CSeries aircraft. Flight Training Alliance was appointed by Bombardier as its exclusive Authorized Training Provider for CSeries aircraft worldwide; -We signed a joint venture agreement with Shanghai Eastern Flight Training Co., Ltd, a subsidiary of China Eastern Airlines, where we will train more than 650 cadet pilots over the next five years; -We announced the next phase of expansion of our training network in the Middle East, where we will deploy several FFSs, including, amongst others, the Dassault Falcon 5X, Boeing 747-8, Boeing 787 as well as FFSs for Bombardier, Gulfstream, Bell and Sikorsky platforms. As part of this expansion, our joint venture Emirates-CAE Flight Training  will double its second Dubai training facility’s flight simulator training capacity for pilots; -We opened a new business aviation training facility near Dallas Fort Worth, U.S. and added new pilot training programs to our existing Dallas facility. The combined training space includes 40 simulators, 114 classrooms and 80 briefing rooms, making it the largest training campus in the world; -We announced the expansion of our Authorized Training Provider (ATP) network to include the Bombardier Challenger 350 business jet, offering flight and technical training through our own instructors, infrastructure and simulators and began offering Bombardier Global Express and Global Express XRS pilot and maintenance training programs in our New York training centre located in Morristown, U.S.; -We announced the expansion of our network with the addition of a training centre in Bogota, Colombia where we will install an A320 CAE 7000 Series full-flight simulator in calendar 2015. New programs and products -We launched, with Líder Aviação, a new helicopter pilot training program in São Paulo, Brazil, for operators of the S-92 Sikorsky aircraft. The S-92 training program is an extension of the joint venture between CAE and Líder, and will support flight training for all of Líder's S-92 pilots; -We were appointed by Bombardier Aerospace as the ATP for the CRJ family of regional aircraft that includes the CRJ100/200, CRJ700 NextGen, CRJ900 NextGen andCRJ1000 NextGen aircraft. Under this agreement, CAE instructors will deliver CRJ aircraft flight training courses globally; -Our joint venture ECFT announced, with flydubai, that it will provide a training program for low-hour commercial pilots to accumulate the required number of flying hours and become type rated; -We inaugurated the world’s first CAE 7000XR Series full-flight simulator at Middle East Aviation Academy in Beirut, Lebanon.  ORDERS Civil Aviation Training Solutionsobtained contracts this quarter expected to generate future revenues of$398.0million, includingcontracts for 10 FFSs.  FFS contracts awarded for the quarter: -One Bombardier Q400 simulator to WestJet Encore; -One Aircraft Industries L410 turboprop simulator to the Czech Aviation Training Centre; -One Airbus A350 FFS to China Airlines; -Two Boeing 737-800 FFSs to Southwest Airlines; -Five FFSs to undisclosed customers.  This brings the civil FFS order intake for the year to 41 FFSs.  Other notable contract awards for the quarter included: -A new 10-year contract with Mesa Airlines, Inc. for pilot training services; -A new long-term contract with low-cost carrier VivaColombia for pilot training services; -A long-term renewal and a new contract with BA CityFlyer for pilot training services; -A long-term renewal contract with Jet Time A/S for pilot training services; -A new long-term contract with Blue1 Ltd for pilot training services; -A new contract with Aeroméxico Connect for pilot training services.   20| CAE Year-End Financial Results 2015


---



Management’s Discussion and Analysis
 Financial results(amounts in millions, except operating margins, SEU, FFSs deployed and utilization rate)

   FY2015

   

   FY2014

   

   

   Q4-2015

   

   Q3-2015

   

   Q2-2015

   

   Q1-2015

   

   Q4-2014Revenue

   $

   1,294.6

   1,176.7

   

   367.6

   322.1

   296.0

   308.9

   323.5Segment operating income

   $

   210.5

   179.8

   

   61.8

   53.8

   45.4

   49.5

   58.0Operating margins

   %

   16.3

   15.3

   

   16.8

   16.7

   15.3

   16.0

   17.9Depreciation and amortization

   $

   120.1

   110.5

   

   30.8

   31.0

   29.5

   28.8

   29.3Property, plant and equipmentexpenditures

   $

   111.3

   128.3

   

   29.4

   25.1

   28.5

   28.3

   57.0Intangible assets and otherassets expenditures

   $

   40.6

   40.4

   

   8.8

   11.5

   9.3

   11.0

   12.0Capital employed

   $

   1,984.2

   1,776.3

   

   1,984.2

   1,887.7

   1,879.4

   1,795.8

   1,776.3Total backlog

   $

   2,903.3

   2,424.8

   

   2,903.3

   2,586.1

   2,415.9

   2,414.7

   2,424.8SEU7

   

   197

   191

   

   201

   200

   196

   192

   194FFSs deployed

   

   256

   239

   

   256

   246

   245

   241

   239Utilization rate7

   %

   68

   68

   

   70

   68

   62

   72

   71
  Revenue up 14% over last quarter and up 14% over the fourth quarter of fiscal 2014
[7] The increase over last quarter was mainly due to higher revenue generated in North America and Europe as a result of higher simulator utilization rates and higher production levels from our manufacturing facility driven by an increase in order intake. Revenue also benefited from a favourable foreign exchange impact resulting from a stronger U.S. dollar against the Canadian dollar.  The increase over the fourth quarter of fiscal 2014 was mainly due to higher production levels from our manufacturing facility, the contribution from additional simulators deployed in our network, higher revenue from our crew sourcing business and higher training demand in North America and Europe. Revenue also benefited from a favourable foreign exchange impact resulting from a stronger U.S. dollar, partially offset by a weaker Euro against the Canadian dollar.  Revenue was $1,294.6 million this year, 10% or $117.9 million higher than last year The increase was mainly due to a favourable foreign exchange impact resulting from a stronger U.S. dollar, British pound and Euro against the Canadian dollar, the contribution from additional simulators deployed in our network, higher production levels from our manufacturing facility and higher revenue from our crew sourcing business. Segment operating income up 15% over last quarter and up 7% over the fourth quarter of fiscal 2014 Segment operating income was $61.8 million (16.8% of revenue) this quarter, compared to $53.8 million (16.7% of revenue) last quarter and $58.0 million (17.9% of revenue) in the fourth quarter of fiscal 2014.  Segment operating income increased by $8.0 million, or 15%, over last quarter.The increase was mainly due to higher simulator utilization rates in North America and Europe, afavourable foreign exchange impact from translation of operations and gainsrecognized on the partial disposal of certain interests in investments. The increase was partially offset by a less favourable program mix, higher income last quarter due to compensation for a terminated customer service agreement recognized during that period and an unfavourable foreign exchange impact from the revaluation of certain working capital accounts, driven mainly by the variation in the Brazilian real.  Segment operating income increased by $3.8 million, or 7%, over the fourth quarter of fiscal 2014.The increase was mainly due tothe contribution from additional simulators deployed in our network, higher training demand in North America and Europe andgains recognized on the partial disposal of certain interests in investments. The increase was partially offset by a less favourable program mix, the realization of gains last year on disposal of assets and an unfavourable foreign exchange impact from the revaluation of certain working capital accounts.  Segment operating income was $210.5 million, 17% or $30.7 million higher than last year Segment operating income was $210.5 million (16.3% of revenue) this year, compared to $179.8 million (15.3% of revenue) last year.  The increase was mainly attributable to the contribution from additional simulators deployed in our network and higher income in one of our joint ventures arising from the recognition of a deferred tax asset. The increase was also due to gains recognized on the partial disposal of certain interests in investments, compensation for a terminated customer service agreement and a favourable foreign exchange impactfrom translation of operations. The increase was partially offsetby a less favourable program mix,by the realization of gains last year on disposal of assets and from a reversal recognized last year of an acquisition‐related provision, andan unfavourable foreign exchange impact from the revaluation of certain working capital accounts.  7Non-GAAP and other financial measures (see Section 3.6).
  CAE Year-End Financial Results 2015 |21


---



Management’s Discussion and Analysis
 Property, plant and equipment expenditures at $29.4 million this quarter and $111.3 million for the year Maintenance capital expenditures were $9.5 million for the quarter and $37.9 million for the year. Growth capital expenditures were $19.9 million for the quarter and $73.4 million for the year.  Capital employed increased by $96.5 million over last quarter and by $207.9 million over last year The increase in capital employed over the last quarter was mainly dueto higher property, plant and equipmentand a higher investmentin equity accounted investeesresulting primarily from movements in foreign exchange rates. Our investmentin equity accounted investeeswas also higher as a result of the addition of a new joint venture during the quarter. The increase was partially offset by a lower investment in our non-cash working capital mainly as a result of higher accounts payable and accrued liabilities and lower inventories, partially offset by lower contracts in progress liabilities.  The increase in capital employed over last year was mainly dueto higher property, plant and equipment resulting from capital expenditures and movements in foreign exchange rates, partially offset by depreciation. The increase was also attributable toa higher investmentin equity accounted investeesdue to movements in foreign exchange rates, increased profitability and the addition of new joint ventures. Capital employed was also higher compared to last year due to a higher investment in our non-cash working capital mainly as a result of lower contracts in progress liabilities and higher accounts receivable and contracts in progress assets, partially offset by higher accounts payable and accrued liabilities.  Total backlog was at $2,903.3 million at the end of the year(amounts in millions)

   FY2015

   

   FY2014Obligated backlog, beginning of period

   $

   2,161.7

   $

   1,722.6+ orders

   

   1,512.3

   

   1,507.3- revenue

   

   (1,294.6)

   

   (1,176.7)+ / - adjustments (mainly F/X)

   

   18.3

   

   108.5Obligated backlog, end of period

   $

   2,397.7

   $

   2,161.7Joint venture backlog (all obligated)

   

   505.6

   

   263.1Total backlog

   $

   2,903.3

   $

   2,424.8This quarter's book-to-sales ratio was 1.08x. The ratio for the last 12 months was 1.17x.
  5.2Defence and Security FISCAL 2015 EXPANSIONS AND NEW INITIATIVES Expansions -We delivered two new T-44C flight training devices to support T-44C aircrew training services that CAE is providing to the U.S. Navy and Marine Corps as part of a contractor-owned, contractor-operated training services program at the Naval Air Station Corpus Christi; -We are now providing comprehensive training support services at Royal Australian Air Force (RAAF) Base Townsville following the acceptance into service of a second MRH90 FMS by the Australian Defence Forces; -We announced that we would acquire Bombardier’s Military Aviation Training business, which includes the NATO Flying Training in Canada program, to enhance our training systems integrator capabilities and expand our offering into support for live flying training of future military pilots; -We are now providing training support services at HMAS Albatross in Australia following the start of MH-60R helicopter training by the Royal Australian Navy.  New programs and products -We will develop and deliver a Naval Warfare Training System (NWTS) for the Swedish Navy. The NWTS will be acomprehensive, simulation based system including simulation software, hardware, wargaming consoles and instructor operator stations; -We will deliver a comprehensive visual system to Korea Aerospace Industries for use on a T-50 full-mission simulator, marking CAE’’s first involvement on KAI’s T-50 jet trainer and light attack aircraft platform; -We officially inaugurated training at the CAE Brunei MPTC where training programs for the S-92 helicopter and PC-7 trainer aircraft are now being offered; -We announced that we will develop and deliver an Aeromedical Evacuation Training System for the USAF that includes a high-fidelity C-130 fuselage trainer as well as CAE Healthcare human patient simulators; -We launched the next-generation CAE Medallion-6000 visual system designed to help provide realistic, high-performance synthetic environments specifically for the defence and security market; -We were selected by NAVMAR Applied Sciences Corporation, a leading supplier of unmanned aerial systems (UAS), as its preferred simulation and training provider for the NAVMAR TigerShark XP UAS.  22| CAE Year-End Financial Results 2015


---



Management’s Discussion and Analysis
  ORDERS Defence and Security was awarded $237.8 million in orders this quarter, including notable contract awards from: -Lockheed Martin to design and manufacture a C-130J weapon systems trainer for the USAF Air Mobility Command; -Australia’s Defence Material Organisation to perform upgrades on the RAAF’s C-130J full-flight mission simulator as well as provide new CAE Simfinity desktop trainers and instructor tools; -The United Kingdom Ministry of Defence to perform upgrades and enhance the training services for the Royal Air Force at CAE’s Medium Support Helicopter Aircrew Training Facility; -Alenia Aermacchi to providean M-346 full-mission simulator andM-346 part-task trainer to support the Italian Air Force; -The United Kingdom Ministry of Defence to provide logistics support and maintenance services on the British Army's suite of Warrior infantry fighting vehicle direct and indirect fire trainers; -The NATO Support and Procurement Agency to provide maintenance and support services on the Lynx full-mission flight trainer in Germany; -The Government of Canada to perform a major visual system update on the RCAF’s CH-146 Griffon helicopter full-motion flight simulator located at the Canadian Forces Base in New Brunswick; -AgustaWestland to design and manufacture a suite of AW101 Merlin synthetic training equipment to support the Royal Navy’sMerlin Life Sustainment Program; -Boeing for two P-8A Poseidon operational flight trainers for the RAAF; -AgustaWestland to design and manufacture an AW139 full-flight simulator for the Toll Group in Australia.  Financial results(amounts in millions, except operating margins)

   FY2015

   

   FY2014

   

   

   Q4-2015

   

   Q3-2015

   

   Q2-2015

   

   Q1-2015

   

   Q4-2014Revenue

   $

   857.4

   822.0

   

   234.7

   215.7

   209.1

   197.9

   230.3Segment operating income

   $

   115.6

   107.8

   

   39.5

   28.6

   25.6

   21.9

   28.0Operating margins

   %

   13.5

   13.1

   

   16.8

   13.3

   12.2

   11.1

   12.2Depreciation and amortization

   $

   55.7

   42.4

   

   15.2

   14.2

   14.1

   12.2

   12.2Property, plant and equipmentexpenditures

   $

   30.2

   26.0

   

   10.8

   2.4

   6.5

   10.5

   8.0Intangible assets and otherassets expenditures

   $

   19.1

   16.3

   

   5.5

   3.0

   5.8

   4.8

   6.0Capital employed

   $

   675.5

   567.3

   

   675.5

   661.8

   619.6

   590.4

   567.3Total backlog

   $

   2,453.9

   2,580.0

   

   2,453.9

   2,381.9

   2,397.0

   2,516.8

   2,580.0
  Revenue up 9% over last quarter and up 2% over the fourth quarter of fiscal 2014 The increase over last quarter was mainly due to a favourable foreign exchange impact on the translation of foreign operations, higher revenue resulting from the completion of certain North American programs and a higher level of activity on Australian programs, partially offset by lower revenue from Asian programs.  The increase over the fourth quarter of fiscal 2014 was mainly due to higher revenue from European programs and a favourable foreign exchange impact on the translation of foreign operations, partially offset by lower revenue from North American programs.  Revenue was $857.4 million this year, 4% or $35.4 million higher than last year The increase was mainly due to a favourable foreign exchange impact on the translation of foreign operations and higher revenue from European programs. The increase was partially offset by lower revenue from North American programs due to a higher level of activity on programs nearing completion last year.  Segment operating income up 38% over last quarter and up 41% over the fourth quarter of fiscal 2014 Segment operating income was $39.5 million (16.8% of revenue) this quarter, compared to $28.6 million (13.3% of revenue) last quarter and $28.0 million (12.2% of revenue) in the fourth quarter of fiscal 2014.  The increase over last quarter was mainly due to an increase in investment tax credits claimed during the quarter, a favourable foreign exchange impact and higher volume on Australian programs, partially offset by higher research and development expenses net of government funding.  The increase over the fourth quarter of fiscal 2014 was mainly due to an increase in investment tax credits claimed during the quarter, higher margins on Asian and Australian programs and a favourable foreign exchange impact, partially offset by lower volume on North American programs.   CAE Year-End Financial Results 2015 |23


---



Management’s Discussion and Analysis
 Segment operating income was $115.6 million this year, 7% or $7.8 million higher than last year Segment operating income was $115.6 million (13.5% of revenue) this year, compared to $107.8 million (13.1% of revenue) last year.  The increase was mainly due to an increase in investment tax credits claimed during the year, a favourable foreign exchange impact, lower research and development expenses net of government funding and higher volume on Australian and European programs, partially offset by lower volume from North American programs.  Capital employed increased by $13.7 million over last quarter and by $108.2 million over last year The increase over last quarter was mainly due to higher intangible assets and property, plant and equipment resulting mainly from movements in foreign exchange rates. The increase was partially offset by lower non-cash working capital resulting mainly from higher accounts payable and accrued liabilities and lower accounts receivable, partially offset by an increase in contracts in progress assets.  The increase over last year was mainly due to higher property, plant and equipment resulting primarily from capital expenditures and the addition of a building under a new finance lease entered into during the year. Property, plant and equipment and intangible assets were also higher as a result of movements in foreign exchange rates. The increase was also due to lower other long-term liabilities.  Total backlog down 5% compared to last year(amounts in millions)

   FY2015

   

   FY2014Obligated backlog, beginning of period

   $

   2,043.9

   $

   1,995.2+ orders

   

   754.6

   

   756.8- revenue

   

   (857.4)

   

   (822.0)+ / - adjustments

   

   15.3

   

   113.9Obligated backlog, end of period

   $

   1,956.4

   $

   2,043.9Joint venture backlog (all obligated)

   

   102.2

   

   129.4Unfunded backlog

   

   395.3

   

   406.7Total backlog

   $

   2,453.9

   $

   2,580.0Fiscal 2015 adjustments are mainly due to foreign exchange movements, partially offset by the termination of a contract in North America and the revaluation of certain contracts during the year. Adjustments in fiscal 2014 were mainly due to foreign exchange movements.This quarter's book-to-sales ratio was 1.01x. The ratio for the last 12 months was 0.88x.In fiscal 2015, $143.2 million of unfunded backlog was transferred to obligated backlog and $116.0 million was added to the unfunded backlog.
  5.3Healthcare FISCAL 2015 EXPANSIONS AND NEW INITIATIVES Expansions -We signed agreements with ten new product distributors representing 17 countries in Europe, Northern Africa and the Asia-Pacific region; -We expanded our agreement with Tellyes Scientific, which is now the exclusive distributor for all CAE Healthcare products in China; -We expanded our partnership agreement with Université de Montréal’s Clinical Attitudes and Skills learning centrefor five years and will continue to operate the centre, deliver simulation-based instruction and develop innovative medical simulation solutions; -We signed an agreement to become the North American distributor for VirtaMed surgical simulators with exclusive rights to distribute the VirtaMed ArthroSTM complete training curriculum for knee and shoulder arthroscopy; -We announced that we will provide a turnkey healthcare simulation training centre in Turkmenistan to advance medical education in medicine, nursing and paramedic education. The centre will be the first to offer multi-disciplinary medical simulation training in Turkmenistan. New programs and products -We introduced CAE Replay, a streamlined simulation centre management solution for debrief designed to capture both medical simulation scenarios and live clinical events at the Human Patient Simulation Network World conference held in Sarasota, U.S.; -We launched and began production on our first Lucina Fidelis Maternal Fetal Simulators and introduced a female patient module that allows it to be used as both a pregnant and non-pregnant patient simulator; -We developed a simulation-based training solution for physicians using the Impella® heart pump in partnership with device manufacturer Abiomed, a leading provider of breakthrough heart support technologies; -We released an updated operating system for the VIMEDIX ultrasound simulator, new lung and pleural pathologies and the Vimedix Abdo ultrasound simulator for the point of care ultrasound market; -We released an Airway Management Learning Module for patient simulators, developed in partnership with the American College of Chest Physicians.   24| CAE Year-End Financial Results 2015


---



Management’s Discussion and Analysis
 ORDERS CAE Healthcare sales this quarter included: -A turnkey healthcare simulation training centre with 17 patient, interventional, ultrasound and simulation centre management solutions, consulting, training and support for the Turkmenistan Ministry of Health; -Seven patient simulators, a simulation centre management solution and curriculum to Southeastern University in the U.S; -Nine patient simulators, a simulation centre management solution, curriculum and a multi-year warranty service to a community college in the U.S; -Eight patient simulators, four simulation centre management solutions, curriculum and a multi-year warranty service to a simulation centre in Thailand; -Four patient simulators and a simulation centre management solution to the Moscow City Clinical Hospital in Russia; -A simulation centre management solution to St. Joseph’s Healthcare Hamilton in Canada; -Two patient simulators, two ultrasound simulators, a simulation centre management solution and curriculum to Clinica Girassol in Angola; -Five patient simulators and a multi-year warranty service to the Australian Defence Forces.  Financial results(amounts in millions, except operating margins)

   FY2015

   

   FY2014

   

   

   Q4-2015

   

   Q3-2015

   

   Q2-2015

   

   Q1-2015

   

   Q4-2014Revenue

   $

   94.3

   79.2

   

   29.3

   21.3

   24.3

   19.4

   21.9Segment operating income

   $

   6.7

   1.7

   

   4.1

   0.5

   1.8

   0.3

   0.7Operating margins

   %

   7.1

   2.1

   

   14.0

   2.3

   7.4

   1.5

   3.2Depreciation and amortization

   $

   13.3

   11.7

   

   3.6

   3.3

   3.2

   3.2

   3.1Property, plant and equipmentexpenditures

   $

   2.7

   2.7

   

   0.5

   0.5

   0.8

   0.9

   0.5Intangible assets and otherassets expenditures

   $

   4.6

   8.7

   

   0.8

   0.7

   0.8

   2.3

   2.5Capital employed

   $

   206.5

   181.6

   

   206.5

   191.4

   188.7

   181.1

   181.6
  Revenue up 38% over last quarter and up 34% over the fourth quarter of fiscal 2014 The increase over last quarter was mainly due to higher revenue from simulation centre management solutions as a result of an increase in the number of systems delivered this quarter and higher patient simulator revenue. The increase was also driven in part by seasonality as well as a favourable foreign exchange impact resulting from a stronger U.S. dollar against the Canadian dollar.  The increase over the fourth quarter of fiscal 2014 was mainly due to higher patient simulator revenue and higher revenue from simulation centre management solutions. The increase was also due to a favourable foreign exchange impact resulting from a stronger U.S. dollar against the Canadian dollar. Revenue was $94.3 million this year, 19% or $15.1 million higher than last year The increase was mainly due to higher patient simulator revenue resulting primarily from our maternal fetal simulator, higher revenue from simulation centre management solutions driven by an increase in the number of systems delivered and the launch of new products and a favourable foreign exchange impact resulting from a stronger U.S. dollar against the Canadian dollar. Segment operating income up over last quarter and the fourth quarter of fiscal 2014 Segment operating income was $4.1 million this quarter (14.0% of revenue), compared to $0.5 million (2.3% of revenue) last quarter and $0.7 million (3.2% of revenue) in the fourth quarter of fiscal 2014.  The increase over last quarter and over the fourth quarter of fiscal 2014 was mainly due to higher revenue and a favourable product mix. Segment operating income was $6.7 million this year, $5.0 million higher than last year Segment operatingincomewas $6.7million(7.1% of revenue)this year, compared to $1.7million(2.1% of revenue)last year.  The increase over last year was mainly due to higher revenue and a favourable product mix. Capital employed increased by $15.1 million over last quarter and by $24.9 million over last year The increase overlast quarter wasmainlydue tohigherintangible assets mainly as a result of movements in foreign exchange rates.  Theincrease overlast year wasprimarilydue tohigher intangible assets mainly as a result of movements in foreign exchange rates and an increase in non-cash working capital resulting mainly from higher accounts receivable, partially offset by an increase in accounts payable and accrued liabilities.  CAE Year-End Financial Results 2015 |25


---



Management’s Discussion and Analysis
 6.CONSOLIDATED CASH MOVEMENTS AND LIQUIDITY  We manage liquidity and regularly monitor the factors that could affect it, including: -Cash generated from operations, including timing of milestone payments and management of working capital; -Capital expenditure requirements; -Scheduled repayments of long-term debt obligations, our credit capacity and expected future debt market conditions.
[8]  6.1    Consolidated cash movements  (amounts in millions)

   

   FY2015

   

   

   FY2014

   

   

   

   Q4-2015

   

   

   Q3-2015

   

   

   

   Q4-2014Cash provided by continuing operating activities*

   $

   337.8

   $

   296.3

   

   $

   101.1

   $

   82.0

   

   $

   98.4Changes in non-cash working capital

   

   (69.2)

   

   (20.4)

   

   

   59.5

   

   9.5

   

   

   29.1Net cash provided by continuing operating activities

   $

   268.6

   $

   275.9

   

   $

   160.6

   $

   91.5

   

   $

   127.5Maintenance capital expenditures8

   

   (48.5)

   

   (46.1)

   

   

   (11.5)

   

   (6.1)

   

   

   (15.1)Other assets

   

   (15.8)

   

   (23.8)

   

   

   (5.2)

   

   (3.8)

   

   

   (5.3)Proceeds from the disposal of property, plantand equipment

   

   7.6

   

   15.4

   

   

   6.1

   

   0.6

   

   

   8.5Net (payments to) proceeds from equity accounted investees

   

   (0.3)

   

   4.2

   

   

   3.0

   

   (0.9)

   

   

   1.8Dividends received from equity accounted investees

   

   8.9

   

   15.0

   

   

   1.2

   

   0.7

   

   

   0.8Dividends paid

   

   (46.3)

   

   (40.1)

   

   

   (12.0)

   

   (12.0)

   

   

   (9.9)Free cash flow from continuing operations8

   $

   174.2

   $

   200.5

   

   $

   142.2

   $

   70.0

   

   $

   108.3Growth capital expenditures8

   

   (95.7)

   

   (110.9)

   

   

   (29.2)

   

   (21.9)

   

   

   (50.4)Capitalized development costs

   

   (41.5)

   

   (43.4)

   

   

   (9.9)

   

   (9.5)

   

   

   (12.8)Other cash movements, net

   

   12.7

   

   3.6

   

   

   0.8

   

   5.9

   

   

   14.0Business combinations, net of cash and cashequivalents acquired

   

   (2.0)

   

   (3.7)

   

   

   -

   

   -

   

   

   (0.4)Proceeds from partial disposal of interests in investments,net of cash and cash equivalents disposed

   

   8.5

   

   -

   

   

   (1.6)

   

   10.1

   

   

   -Effect of foreign exchange rate changes oncash and cash equivalents

   

   8.8

   

   22.4

   

   

   11.4

   

   1.6

   

   

   9.1Net increase in cash before proceeds andrepayment of long-term debt

   $

   65.0

   $

   68.5

   

   $

   113.7

   $

   56.2

   

   $

   67.8* before changes in non-cash working capital
  Free cash flow from continuing operations was $142.2 million for the quarter Free cash flow was $72.2millionhigherthan last quarter and $33.9millionhigher compared tothe fourth quarter of fiscal 2014.  Free cash flow was higher compared to last quartermainly due tofavourable changes in non-cash working capital andan increase incash provided bycontinuingoperating activities.  Free cash flow was higher compared to thefourth quarter of fiscal 2014. Theincrease was mainlyrelated to favourable changes in non-cash working capital. Free cash flow from continuing operations was $174.2 million this year Free cash flowdecreased by$26.3million, or13%, compared tolast year.  Free cash flow was lower compared to last yearmainly due toa higher investment in non-cash working capital, lower proceeds from the disposal of property, plant and equipment, higher dividends paid and lower dividends received from equity accounted investees. The decrease was partially offset by an increase in cash provided by continuing operating activities. Capital expenditures were $40.7 million this quarter and $144.2 million for the year Growth capital expenditures were $29.2 million this quarter and $95.7 million for the year. Our growth capital allocation decisions are market-driven in nature and are intended to keep pace with the demands of our existing and new customers. Maintenance capital expenditures were $11.5 million this quarter and $48.5 million for the year.  8Non-GAAP and other financial measures (see Section 3.6).
  26| CAE Year-End Financial Results 2015


---



Management’s Discussion and Analysis
  6.2Sources ofliquidity  We have committed lines of credit at floating rates, each provided by a syndicate of lenders. We and some of our subsidiaries can borrow funds directly from these credit facilities to cover operating and general corporate expenses and to issue letters of credit and bank guarantees.  The total amount available through these committed bank lines at March 31, 2015 was US$550.0 million (2014 – US$550.0 million) with an option, subject to lender’s consent, to increase to a total amount of US$850.0 million. There was an equivalent of US$18.0 million drawn under the facilities as at March 31, 2015 (2014 – US$49.1 million) and US$99.3 million was used for letters of credit (2014 – US$120.4 million). The applicable interest rate on this revolving term credit facility is at our option, based on the bank’s prime rate, bankers’ acceptance rates or LIBOR plus a spread which depends on the credit rating assigned by Standard & Poor’s Rating Services. The current maturity date of our revolving unsecured term credit facilities is October 2018.  We have an unsecured Export Development Canada (EDC) Performance Security Guarantee (PSG) account for US$150.0 million. This is an uncommitted revolving facility for performance bonds, advance payment guarantees or similar instruments. As at March 31, 2015, the total outstanding for all these instruments translated into Canadian dollars was $82.1million (2014 – $48.8 million).  We have a facility of €10.0 million with a European bank for the issuance of bank guarantees and letters of credit. The amount used principally in support of our European defence and security operations, translated into Canadian dollars, was $10.7million (2014 – $9.5 million).  We manage a program in which we sell undivided interests in certain of our accounts receivable and contracts in progress assets (current financial assets program) to third parties for cash consideration for amounts up to $150.0 million without recourse to CAE. As at March 31, 2015, $113.3 million (2014 – $79.5 million) and nil (2014 – $4.2 million) of specific accounts receivable and contracts in progress assets respectively were sold to financial institutions pursuant to these agreements.  In December 2014, we amended our financing facility for certain of our operations in India to extend the maturity date from January 2015 to January 2020, with no change to existing terms and conditions.  We entered into and renewed various finance leases for a building in Brunei and for simulators located in Europe. These represent finance lease obligations of $34.5 million as at March 31, 2015.  Some of our debt agreements require that we maintain a certain level of capital. As at March 31, 2015, 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 payment of dividends and will enable us to meet all other expected financial requirements in the near term.  The following table summarizes the long-term debt:As at March 31

   

   As at March 31(amounts in millions)

   2015

   2014Total long-term debt

   $

   1,279.8

   $

   1,168.5Less:Current portion of long-term debt

   

   33.7

   

   23.8Current portion of finance leases

   

   21.8

   

   26.8Long-term portion of long-term debt

   $

   1,224.3

   $

   1,117.9
  CAE Year-End Financial Results 2015 |27


---



Management’s Discussion and Analysis
   6.3Government assistance We have agreements with various governments whereby the latter funds a portion of the cost, based on expenditures incurred by CAE, of certain R&D programs for modeling, simulation and training services expertise.  During fiscal 2009, we announced Project Falcon, an R&D program that extended over five years. The goal of Project Falcon was to expand our modeling and simulation technologies, develop new ones and increase our capabilities beyond training into other areas of the aerospace and defence market, such as analysis and operations. Concurrently, the Government of Canada agreed to participate in Project Falcon through a repayable loan of up to $250 million made through the Strategic Aerospace and Defence Initiative (SADI), which supports strategic industrial research and pre-competitive development projects in the aerospace, defence, space and security industries. As at March 31, 2014, Project Falcon was completed.  During fiscal 2010, we announced Project New Core Markets, an R&D program extending over seven years. The aim is to leverage our modeling, simulation and training services expertise into new markets, such as healthcare and mining. The Québec government, through Investissement Québec, agreed to participate up to $100 million in contributions related to costs incurred before the end of fiscal 2016.  During fiscal 2014, we announced Project Innovate, an R&D program extending over five and a half years. The goal of Project Innovate is to expand our modeling and simulation technologies, develop new ones and continue to differentiate our service offering. Concurrently, the Government of Canada agreed to participate in Project Innovate through a repayable loan of up to $250 million made through the SADI.  You will find more details in Note 1 and Note 13 of our consolidated financial statements. ___ 6.4Contractual obligations We enter into contractual obligations and commercial commitments in the normal course of our business. These include debentures, notes and others. The table below represents our contractual obligations and commitments for the next five years and thereafter:  Contractual obligations(amounts in millions)

   

   2016

   

   

   2017

   

   

   2018

   

   

   2019

   

   

   2020

   

   Thereafter

   

   

   TotalLong-term debt (excluding interest)

   $

   34.3

   

   $

   108.5

   

   $

   38.2

   

   $

   46.8

   

   $

   194.6

   

   $

   680.4

   $

   1,102.8Finance leases (excluding interest)

   

   24.5

   

   

   31.9

   

   

   98.2

   

   

   34.4

   

   

   75.9

   

   

   749.1

   

   1,014.0Non-cancellable operating leases

   

   54.7

   

   

   43.0

   

   

   34.4

   

   

   27.4

   

   

   24.2

   

   

   90.3

   

   274.0Purchase commitments

   

   23.2

   

   

   22.8

   

   

   19.2

   

   

   3.3

   

   

   -

   

   

   -

   

   68.5$

   136.7

   

   $

   206.2

   

   $

   190.0

   

   $

   111.9

   

   $

   294.7

   

   $

   1,519.8

   $

   2,459.3
  We also had total availability under the committed credit facilities of US$432.7 million as at March 31, 2015 compared to US$380.5 million at March 31, 2014.  We have purchase commitments related to agreements that are enforceable and legally binding. Most are agreements with subcontractors to provide services for long-term contracts that we have with our clients. The terms of the agreements are significant because they set out obligations to buy goods or services in fixed or minimum amounts, at fixed, minimum or variable prices and at various points in time.  As at March 31, 2015, we had other long-term liabilities that are not included in the table above. These include some accrued pension liabilities, deferred revenue, deferred gains on assets and various other long-term liabilities. CAE’s cash obligation in respect of the accrued employee pension liability depends on various elements including market returns, actuarial gains and losses and interest rates.  We did not include deferred tax liabilities since future payments of income taxes depend on the amount of taxable earnings and on whether there are tax loss carry-forwards available.  28| CAE Year-End Financial Results 2015


---



Management’s Discussion and Analysis
 7.CONSOLIDATED FINANCIAL POSITION  7.1   Consolidated capital employed  As at March 31

   

   

   As at March 31(amounts in millions)

   2015

   2014Use of capital:Current assets

   $

   1,562.5

   $

   1,350.8Less: cash and cash equivalents

   

   (330.2)

   

   (312.3)Less: net assets held for sale

   

   (47.0)

   

   -Current liabilities

   

   (1,039.1)

   

   (964.5)Less: current portion of long-term debt

   

   55.5

   

   50.6Non-cash working capital9

   $

   201.7

   $

   124.6Net assets held for sale

   

   47.0

   

   -Property, plant and equipment

   

   1,461.2

   

   1,341.2Other long-term assets

   

   1,633.2

   

   1,544.7Other long-term liabilities

   

   (729.6)

   

   (672.1)Total capital employed

   $

   2,613.5

   $

   2,338.4Source of capital:Current portion of long-term debt

   $

   55.5

   $

   50.6Long-term debt

   

   1,224.3

   

   1,117.9Less: cash and cash equivalents

   

   (330.2)

   

   (312.3)Net debt9

   $

   949.6

   $

   856.2Equity attributable to equity holders of the Company

   

   1,612.7

   

   1,441.6Non-controlling interests

   

   51.2

   

   40.6Source of capital

   $

   2,613.5

   $

   2,338.4
  Capital employed increased $275.1 million, or 12%, over last year The increase over last year was mainly due to higher property, plant and equipment, higher other long-term assets and an increase in non-cash working capital. Of the total increase in capital employed, approximately half was due to movements in foreign exchange rates.  Our return on capital employed9 (ROCE) was 10.4% this year compared to 11.4% last year. Non-cash working capitalincreased by $77.1 million
[9] The increase was mainly due to higher contracts in progress assets, income taxes recoverable, inventory and accounts receivable and lower contracts in progress liabilities, partially offset by an increase in accounts payable and accrued liabilities. Net property, plant and equipment up $120.0 million The increase was mainly due to $144.2 million of capital expenditures and $74.0 million of movements in foreign exchange rates, partially offset by depreciation of $108.1 million. Other long-term assets up $88.5 million The increase was mainly due to a higher investment in equity accounted investees as a result of increased profitability, movements in foreign exchange rates and the addition of new joint ventures. Other long-term liabilities up $57.5 million The increase was mainly due to higher employee benefits obligations resulting primarily from a decrease in discount rates and partially offset by a favourable return on plan assets. Net debt higher than last year The increase was mainly due to the effect of foreign exchange rate movements during the year.   9Non-GAAP and other financial measures (see Section 3.6).
  CAE Year-End Financial Results 2015 |29


---



Management’s Discussion and Analysis
 Change in net debt(amounts in millions)

   FY2015

   

   FY2014Net debt, beginning of period

   $

   856.2

   $

   813.4Cash, beginning of period, related to discontinued operations

   $

   7.7

   $

   -Impact of cash movements on net debt(see table in the consolidated cash movements section)

   

   (65.0)

   

   (68.5)Effect of foreign exchange rate changes on long-term debt

   

   101.6

   

   64.6Net finance lease movement

   

   31.3

   

   31.3Other

   

   17.8

   

   15.4Increase in net debt during the period

   $

   93.4

   $

   42.8Net debt, end of period

   $

   949.6

   $

   856.2Net debt-to-capital10

   %

   36.3

   %

   36.6
  Total equity increased by $181.7 million this year
[10] The increase in equity was mainly due to net income of $204.7 million and a favourable foreign currency translation of $61.5 million partially offset by defined benefit plan remeasurements of $48.0 million and dividends of $46.3 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 266,903,070 common shares issued and outstanding as at March 31, 2015 with total share capital of $559.0 million.  As at April 30, 2015, we had a total of 267,180,516 common shares issued and outstanding.  Dividends We paid a dividend of $0.06 per share in the first quarter and $0.07 per share in the second, third and fourth quarter of fiscal 2015. These dividends were eligible under the Income Tax Act(Canada)and its provincial equivalents.  Our Board of Directors has the discretion to set the amount and timing of any dividend. The Board reviews the dividend policy once a year based on the cash requirements of our operating activities, liquidity requirements and projected financial position. We expect to declare dividends of approximately $74.7 million in fiscal 2016 based on our current dividend policy and the number of common shares outstanding as at March 31, 2015.  Guarantees As at March 31, 2015, we have a total of $218.8 million outstanding letters of credit and performance guarantees which are not recognized in the consolidated statement of financial position, compared to $191.4 million last fiscal year. The amount was higher this year due to an increase in advance payment obligations.  Pension obligations We maintain defined benefit and defined contribution pension plans. We expect to contribute approximately $6.7 million more than the annual required contribution for current services to satisfy a portion of the underfunded liability of the defined benefit pension plan. In fiscal 2016, contributions necessary to fund our pension obligations are expected to remain stable as a result of improved returns on plan assets.  10Non-GAAP and other financial measures (see Section 3.6).
  30| CAE Year-End Financial Results 2015


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Management’s Discussion and Analysis
  7.2Off balance sheet arrangements Although most of our sale and leaseback transactions entered into as part of our Civil Aviation Training Solutions operations are classified as finance leases and their obligations are included in the consolidated statement of financial position, certain sale and leaseback transactions are classified as operating leases and are off balance sheet obligations.  Most of our off balance sheet obligations are from obligations related to operating leases from: -Certain buildings that are leased throughout our training network and production facilities in the normal course of business; -Certain FFSs that are leased throughout our training network in the normal course of business; -The operation of a training centre for the MSH project with the U.K. Ministry of Defence to provide simulation training services. These leases are non-recourse to us.  You can find more details about operating lease commitments in Note 26 of our consolidated financial statements.  In the normal course of business, we manage a program in which we sell undivided interests in certain of our accounts receivable and contracts in progress assets (current financial assets program) to third parties for cash consideration for an amount up to $150.0 million without recourse to CAE. We continue to act as a collection agent. These transactions are accounted for when we have considered to have surrendered control over the transferred accounts receivable and contracts in progress assets. As at March 31, 2015, $113.3 million (2014 – $79.5 million) and nil (2014 – $4.2 million) of specific accounts receivable and contracts in progress assets respectively were sold to financial institutions pursuant to these agreements.  7.3Financial instruments We are exposed to various financial risks in the normal course of business. We enter into forward contracts and swap agreements to manage our exposure to fluctuations in foreign exchange rates, interest rates and share price which have an effect on our share-based payments costs. We formally assess, both at inception of the hedge relationship and on an ongoing basis, whether the derivatives we use in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items in relation to the hedged risk. We enter into these transactions to reduce our exposure to risk and volatility, and not for trading or speculative purposes. We only enter into contracts with counterparties that are of high credit quality.  Classification of financial instruments We have made the following classifications for our financial instruments: -Cash and cash equivalents, restricted cash and all derivative instruments, except for derivatives designated as effective hedging instruments, are classified as fair value through profit and loss (FVTPL); -Accounts receivable, contracts in progress, non-current receivables and advances are classified as loans and receivables, except for those that we intend to sell immediately or in the near term which are classified as FVTPL; -Portfolio investments are classified as available-for-sale; -Accounts payable and accrued liabilities and long-term debt, including interest payable, as well as finance lease obligations and royalty obligations are classified as other financial liabilities, all of which are measured at amortized cost using the effective interest rate method.  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, we determine the fair value of that instrument based on valuation methodologies as discussed below. In determining assumptions required under a valuation model, we primarily use external, readily observable market data inputs. Assumptions or inputs that are not based on observable market data incorporate our best estimates of market participant assumptions, and are used when external data is not available. Counterparty credit risk and our own credit risk are taken into account in estimating the fair value of all financial assets and financial liabilities.  The following assumptions and valuation methodologies have been used to measure the fair value of financial instruments: -The fair value of accounts receivable, contracts in progress, accounts payable and accrued liabilities approximate their carrying values due to their short-term maturities; -The fair value of derivative instruments, which include forward contracts, swap agreements and embedded derivatives accounted for separately is determined using valuation techniques and are calculated as the present value of the estimated future cash flows using an appropriate interest rate yield curve and foreign exchange rate. Assumptions are based on market conditions prevailing at each reporting date. Derivative instruments reflect the estimated amounts that we would receive or pay to settle the contracts at the reporting date; -The fair value of the available-for-sale investment 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; -The fair value of non-current receivables is estimated based on discounted cash flows using current interest rates for instruments with similar terms and remaining maturities; -The fair value of provisions, long-term debts and non-current liabilities, including finance lease obligations and royalty obligations, are estimated based on discounted cash flows using current interest rates for instruments with similar terms and remaining maturities.   CAE Year-End Financial Results 2015 |31


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Management’s Discussion and Analysis
 As part of our financing transactions, we pledged, through our subsidiaries, certain financial assets including cash and cash equivalents, accounts receivable and other assets. As at March 31, 2015, the aggregate carrying value of these pledged financial assets amounted to $169.8 million (2014–$149.2 million).  A description of the fair value hierarchy is discussed in Note 28 of our consolidated financial statements.  Financial risk management Due to the nature of the activities that we carry out and as a result of holding financial instruments, we are exposed to credit risk, liquidity risk and market risk, including foreign currency risk and interest rate risk. Our exposure to credit risk, liquidity risk and market risk is managed within risk management parameters documented in corporate policies and approved by the board of directors. These risk management parameters remain unchanged since the previous period, unless otherwise indicated.  Embedded derivatives are recorded at fair value separately from the host contract when their economic characteristics and risks are not clearly and closely related to those of the host contract. We may enter into freestanding derivative instruments which are not eligible for hedge accounting, to offset the foreign exchange exposure of embedded foreign currency derivatives. In such circumstances, both derivatives are carried at fair value at each statement of financial position date with the change in fair value recorded in consolidated net income.  Our policy is not to utilize any derivative financial instruments for trading or speculative purposes. We may choose to designate derivative instruments, either freestanding or embedded, as hedging items. This process consists of matching derivative hedging instruments to specific assets and liabilities or to specific firm commitments or forecasted transactions. To some extent, we use non‐derivative financial liabilities to hedge foreign currency exchange rate risk exposures.  Credit risk Credit risk is defined as our exposure to a financial loss if a debtor fails to meet its obligations in accordance with the terms and conditions of its arrangements with CAE. We are exposed to credit risk on our accounts receivable and certain other assets through our normal commercial activities. We are also exposed to credit risk through our normal treasury activities on our cash and cash equivalents and derivative financial assets.  Credit risks arising from our normal commercial activities are managed in regards to customer credit risk. An allowance for doubtful accounts is established when there is a reasonable expectation that we will not be able to collect all amounts due according to the original terms of the receivables (See Note 4 of the consolidated financial statements). When a trade receivable is uncollectible, it is written-off against the allowance for doubtful accounts. Subsequent recoveries of amounts previously written-off are recognized in income.  Our customers are mainly established companies with publicly available credit ratings and government agencies, which facilitates risk monitoring. In addition, we typically receive substantial non-refundable advance payments for construction contracts. We closely monitor our exposure to major airline companies in order to mitigate our risk to the extent possible. Furthermore, our trade receivables are not concentrated with specific customers but are held with a wide range of commercial and government organizations. As well, our credit exposure is further reduced by the sale of certain of our accounts receivable and contracts in progress assets to third-party financial institutions for cash consideration on a non-recourse basis (current financial assets program). We do not hold any collateral as security. The credit risk on cash and cash equivalents is mitigated by the fact that they are mainly in place with a diverse group of major North American and European financial institutions.  We are exposed to credit risk in the event of non-performance by counterparties to our derivative financial instruments. We use several measures to minimize this exposure. First, we enter into contracts with counterparties that are of high credit quality. We signedInternational Swaps & Derivatives Association, Inc.(ISDA)Master Agreements with the majority of counterparties with whom we trade derivative financial instruments. These agreements make it possible to offset when a contracting party defaults on the agreement, for each of the transactions covered by the agreement and in force at the time of default. Also, collateral or other security to support derivative financial instruments subject to credit risk can be requested by CAE or our counterparties (or both parties, if need be) when the net balance of gains and losses on each transaction exceeds a threshold defined in the ISDA Master Agreement. Finally, we monitor the credit standing of counterparties on a regular basis to help minimize credit risk exposure.  The carrying amounts presented in Note 4 and Note 28 of the consolidated financial statements represent the maximum exposure to credit risk for each respective financial asset as at the relevant dates. Liquidity risk Liquidity risk is defined as the potential that we cannot meet our cash obligations as they become due.  We manage this risk by establishing cash forecasts, as well as long-term operating and strategic plans. The management of consolidated liquidity requires a regular monitoring of expected cash inflows and outflows which is achieved through a forecast of our consolidated liquidity position, for efficient use of cash resources. Liquidity adequacy is assessed in view of seasonal needs, growth requirements and capital expenditures, and the maturity profile of indebtedness, including off-balance sheet obligations. We manage our liquidity risk to maintain sufficient liquid financial resources to fund our operations and meet our commitments and obligations. In managing our liquidity risk, we have access to a revolving unsecured credit facility of US$550.0 million, with an option, subject to the lender’s consent, to increase to a total amount of up to US$850.0 million. As well, we have agreements to sell certain of our accounts receivable and contracts in progress assets for an amount of up to $150.0 million (current financial assets program). We also regularly monitor any financing opportunities to optimize our capital structure and maintain appropriate financial flexibility.  32| CAE Year-End Financial Results 2015


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Management’s Discussion and Analysis
 Market risk Market risk is defined as our exposure to a gain or a loss in the value of our financial instruments as a result of changes in market prices, whether those changes are caused by factors specific to the individual financial instruments or its issuer, or factors affecting all similar financial instruments traded in the market. We are mainly exposed to foreign currency risk and interest rate risk.  We use derivative instruments to manage market risk against the volatility in foreign exchange rates, interest rates and share-based payments in order to minimize their impact on our results and financial position. Our policy is not to utilize any derivative financial instruments for trading or speculative purposes. Foreign currency risk Foreign currency risk is defined as our exposure to a gain or a loss in the value of our financial instruments as a result of fluctuations in foreign exchange rates. We are exposed to foreign exchange rate variability primarily in relation to certain sale commitments, expected purchase transactions and debt denominated in a foreign currency, as well as on our net investment from our foreign operations which have functional currencies other than the Canadian dollar (in particular the U.S. dollar, euro and British pound). In addition, these operations have exposure to foreign exchange rates primarily through cash and cash equivalents and other working capital accounts denominated in currencies other than their functional currencies.  We also mitigate foreign currency risks by having our foreign operations transact in their functional currency for material procurement, sale contracts and financing activities.  We use forward foreign currency contracts and foreign currency swap agreements to manage our exposure from transactions in foreign currencies. These transactions include forecasted transactions and firm commitments denominated in foreign currencies. Our foreign currency hedging programs are typically unaffected by changes in market conditions, as related derivative financial instruments are generally held until their maturity, consistent with the objective to fix currency rates on the hedged item.  Foreign currency risk sensitivity analysis Foreign currency risk arises on financial instruments that are denominated in a foreign currency. Assuming a reasonably possible strengthening of 5% in the U.S. dollar, euro and British pound currency against the Canadian dollar as at March 31, 2015, and assuming all other variables remained constant, the pre-tax effects on net income would have been a positive net adjustment of $1.2 million (2014 – negative net adjustment of $3.1 million) and a negative net adjustment of $25.4 million (2014 – negative net adjustment of $21.5 million) on other comprehensive income (OCI). A reasonably possible weakening of 5% in the relevant foreign currency against the Canadian dollar would have an opposite impact on pre-tax income and OCI.  Interest rate risk Interest rate risk is defined as our exposure to a gain or a loss to the value of our financial instruments as a result of fluctuations in interest rates. We bear some interest rate fluctuation risk on our floating rate long-term debt and some fair value risk on our fixed interest long-term debt. We mainly manage interest rate risk by fixing project-specific floating rate debt in order to reduce cash flow variability. We have a floating rate debt through our revolving unsecured credit facility and other asset-specific floating rate debts. A mix of fixed and floating interest rate debt is sought to reduce the net impact of fluctuating interest rates. Derivative financial instruments used to manage interest rate exposures are mainly interest rate swap agreements.  We use financial instruments to manage our exposure to changing interest rates and to adjust our mix of fixed and floating interest rate debt on long-term debt. The mix was 88% fixed-rate and 12% floating-rate at the end of this year (2014 – 84% fixed rate and 16% floating rate).  Our interest rate hedging programs are typically unaffected by changes in market conditions, as related derivative financial instruments are generally held until their maturity to establish asset and liability management matching, consistent with the objective to reduce risks arising from interest rate movements.  Interest rate risk sensitivity analysis In fiscal 2015, a 1% increase in interest rates would decrease our net income by $1.3 million (2014 – nil) and increase our OCI by $0.4 million (2014 – nil) assuming all other variables remained constant. A 1% decrease in interest rates would have an opposite impact on net income and OCI.  Hedge of share-based payments cost We have entered into equity swap agreements with three major Canadian financial institutions to reduce our income exposure to fluctuations in our share price relating to the Deferred Share Unit (DSU), Long-Term Incentive Deferred Share Unit (LTI-DSU) and Long-Term Incentive Time Based Restricted Share Unit (LTI-TB RSU) programs. Pursuant to the agreement, we receive the economic benefit of dividends and share price appreciation while providing payments to the financial institutions for the institution’s cost of funds and any share price depreciation. The net effect of the equity swaps partly offset movements in our share price impacting the cost of the DSU, LTI-DSU and LTI-TB RSU programs and is reset quarterly. As at March 31, 2015, the equity swap agreements covered 1,900,000 of our common shares (2014 – 2,400,000).   CAE Year-End Financial Results 2015 |33


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Management’s Discussion and Analysis
 Hedge of net investments in foreign operations As at March 31, 2015, we have designated a portion of our senior notes totalling US$417.8 million (2014 – US$417.8 million) and a portion of the obligations under finance lease totalling US$14.2 million (2014 – US$16.1 million) as a hedge of our net investments in foreign operations. Gains or losses on the translation of the designated portion of our senior notes are recognized in OCI to offset any foreign exchange gains or losses on translation of the financial statements of foreign operations.  We have determined that there is no concentration of risks arising from financial instruments and estimated that the information disclosed above is representative of our exposure to risk during the period.  Refer to the Consolidated Statement of Comprehensive Income for the total amount of the change in fair value of financial instruments designated as cash flow hedges recognized in income for the period and total amount of gains and losses recognized in OCI and to Note 28 of the consolidated financial statements for the classification of financial instruments.  8.BUSINESS RISK AND UNCERTAINTY  We operate in several industry segments that have various risks and uncertainties. Management and the Board discuss quarterly the principal risks facing our business, as well as annually during the strategic planning and budgeting processes. The risks and uncertainties described below are risks that could materially affect our business, financial condition and results of operation. These risks are categorized as industry-related risks, risks specific to CAE and risks related to the current market environment. These are not necessarily the only risks we face; additional risks and uncertainties that are presently unknown to us or that we may currently deem immaterial may adversely affect our business.  In order to mitigate the risks that may impact our future performance, management has established an enterprise risk management process to identify, assess and prioritize these risks. Management develops and deploys risk mitigation strategies that align with our strategic objectives and business processes. Management reviews the evolution of the principal risks facing our business on a quarterly basis and the Board oversees the risk management process and validates it through procedures performed by our internal auditors when it deems necessary. 8.1Risks relating to the industry Competition We sell our simulation equipment and training services in highly competitive markets. New participants have emerged in recent years and the competitive environment has intensified as aerospace and defence companies position themselves to try to take greater market share by consolidating existing commercial aircraft simulation companies and by developing their own internal capabilities. Predominantly defence companies such as Textron, Lockheed Martin and L-3 Communications have acquired commercial aircraft simulator competitors as a means to reduce their overall exposure to defence markets and seek growth in the civil aviation market. Most of our competitors in the simulation and training markets are also involved in other major segments of the aerospace and defence complex beyond simulation and training. As such, some of them are larger than we are, and may have greater financial, technical, marketing, manufacturing and distribution resources. In addition, our main competitors are either aircraft manufacturers, or have well-established relationships with, aircraft manufacturers, airlines and governments, which may give them an advantage when competing for projects for these organizations. In particular, we face competition from Boeing, which has pricing and other competitive advantages over us. Boeing has a licencing model for Boeing civil aircraft simulators which includes a requirement for simulator manufacturers and service training operators to pay Boeing a royalty to manufacture, update or upgrade a simulator, and to provide training services on Boeing simulators.  OEMs like Airbus and Boeing have certain advantages in competing with independent training service providers. An OEM controls the pricing for the data, parts and equipment packages that are often required to manufacture a simulator specific to that OEM’s aircraft, which in turn is a critical capital cost for any simulation-based training service provider. OEMs may be in a position to demand licence royalties to permit the manufacturing of simulators based on the OEM’s aircraft, and/or to permit any training on such simulators. CAE also has some advantages, including being a simulator manufacturer, having the ability to replicate certain aircraft without data, parts and equipment packages from an OEM, and owning a diversified training network that includes joint ventures with large airline operators which are aircraft customers for OEMs. We work with some OEMs on business opportunities related to equipment and training services.  Both Boeing and Airbus have introduced aircraft data simulation packages for the new B737 MAX and A350 aircraft that potentially reduce CAE’s content related to the simulation of aircraft systems.  We obtain most of our contracts through competitive bidding processes that subject us to the risk of spending a substantial amount of time and effort on proposals for contracts that may not be awarded to us. A significant portion of our revenue is dependent on obtaining new orders and continuously replenishing our backlog. We cannot be certain that we will continue to win contracts through competitive bidding processes at the same rate as we have in the past. The presence of new market participants as noted above, and their efforts to gain market share, creates heightened competition in bidding which may negatively impact pricing and margins.  Economic growth underlies the demand for all of our products and services. Periods of economic recession, constrained credit, government austerity and/or international commercial sanctions generally lead to heightened competition for each available order. This in turn typically leads to a reduction in profit on sales won during such a period. Should such conditions occur, we could experience price and margin erosion.  34| CAE Year-End Financial Results 2015


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Management’s Discussion and Analysis
 Level and timing of defence spending A significant portion of our revenues come from sales to defence and security customers around the world. We provide products and services for numerous programs to Canadian, U.S., European, and other foreign governments as both primary and/or subcontractors. As defence and security departments in our mature markets reduce and right size, contractors will experience the effects of program restructures, reductions and cancellations. These events could have a material negative impact on our future revenue,earnings and operations. The industry continues to experience delayed procurement processes, and potentially a smaller pipeline of opportunities across the globe. In order to minimize these impacts, we will continue to review our current and future programs, developing risk mitigation strategies to address any potential change to each program. Government-funded defence and security programs Like most companies that supply products and services to governments, we can be audited and reviewed from time to time. Any adjustments that result from government audits and reviews may have a negative effect on our results of operations. Some costs may not be reimbursed or allowed in negotiations of fixed-price contracts. As a result, we may also be subject to a higher risk of legal actions and liabilities than companies that cater only to the private sector, which could have a materially negative effect on our operations. Civil aviation industry A significant portion of our revenue comes from supplying equipment and training services to the commercial and business airline industry.  A decrease in jet fuel prices may have a positive impact on airlines’ profitability; however, the long-term ramifications on the commercial aviation industry remain uncertain. We will continue to monitor the impact on the industry and our operations. In helicopter aviation, which represents less than 5% of our Civil Aviation Training Solutions revenue,and in the case of offshore helicopter operators, demand is driven by the level of offshore activity in the oil and gas sector.Aprotracted downturn in petroleum prices couldnegatively impact offshore activity which may, in turn, affect our operating results.  If jet fuel prices attain high levels for a sustained period, there could be a greater impetus for airlines to replace older, less fuel-efficient aircraft. However, higher fuel costs could also limit the airlines’ available financial resources, and could potentially cause deliveries of new aircraft to be delayed or cancelled. Airlines may slow capacity growth or cut capacity should sustained high fuel costs make the availability of such capacity not economically viable. Such a reaction would negatively affect the demand for our training equipment and services.  Constraints in the credit market may reduce the ability of airlines and others to purchase new aircraft, negatively affecting the demand for our training equipment and services, and the purchase of our products.  We are also exposed to credit risk on accounts receivable from our customers. We have adopted policies to ensure we are not significantly exposed to any individual customer. Our policies include analyzing the financial position of certain customers and regularly reviewing their credit quality. We also subscribe from time to time to credit insurance and, in some instances, require a bank letter of credit to secure our customers’ payments to us. Regulatory rules imposed by aviation authorities We are required to comply with regulations imposed by aviation authorities. These regulations may change without notice, which could disrupt our sales and operations. Any changes imposed by a regulatory agency, including changes to safety standards imposed by aviation authorities such as the U.S. FAA, could mean that we have to make unplanned modifications to our products and services, causing delays or resulting in cancelled sales. We cannot predict the impact that changing laws or regulations might have on our operations. Any changes could present opportunities or, to the contrary, have a materially negative effect on our results of operations or financial condition. Sales or licences of certain CAE products require regulatory approvals and compliance The sale or licence of many of our products is subject to regulatory controls. These can prevent us from selling to certain countries, or to certain entities or people in a country, and require us to obtain from one or more governments an export licence or other approvals to sell certain technology such as defence and security simulators or other training equipment, including data or parts. These regulations change often and we cannot be certain that we will be permitted to sell or licence certain products to customers, which could cause a potential loss of revenue for us.  If we fail to comply with government laws and regulations related to export controls and national security requirements, we could be fined and/or suspended or barred from government contracts or subcontracts for a period of time, which would negatively affect our revenue from operations and profitability, and could have a negative effect on our reputation and ability to procure other government contracts in the future.   CAE Year-End Financial Results 2015 |35


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Management’s Discussion and Analysis
 8.2Risks relating to the Company Product evolution The civil aviation and defence and security markets in which we operate are characterized by changes in customer requirements, new aircraft models and evolving industry standards. If we do not accurately predict the needs of our existing and prospective customers or develop product enhancements that address evolving standards and technologies, we may lose current customers and be unable to attract newcustomers. This could reduce our revenue. The evolution of the technology could also have a negative impact on the value of our fleet of FFSs. Research and development activities We carry out some of our R&D initiatives with the financial support of governments, including the Government of Québec through Investissement Québec (IQ) and the Government of Canada through its Strategic Aerospace and Defence Initiative (SADI). The level of government financial support reflects government policy, fiscal policy and other political and economic factors. We may not, in the future, be able to replace these existing programs with other government funding and/or risk-sharing programs of comparable benefit to us, which could have a negative impact on our financial performance and research and development activities.  We receive investment tax credits from federal and provincial governments in Canada and from the federal government in the U.S. on eligible R&D activities that we undertake. The credits we receive are based on legislation currently enacted. The investment tax credits available to us can be reduced by changes to the respective governments’ legislation which could have a negative impact on our financial performance and research and development activities.  Fixed-price and long-term supply contracts We provide our products and services mainly through fixed-price contracts that require us to absorb cost overruns, even though it can be difficult to estimate all of the costs associated with these contracts or to accurately project the level of sales we may ultimately achieve. In addition, a number of contracts to supply equipment and services to commercial airlines and defence organizations are long-term agreements that run up to 20 years. While some of these contracts can be adjusted for increases in inflation and costs, the adjustments may not fully offset the increases, which could negatively affect the results of our operations.  Procurement and OEM leverage We secure data, parts, equipment and many other inputs from a wide variety of OEMs, sub-contractors and other sources. We are not always able to find two or more sources for inputs that we require and in the case of specific aircraft simulators and other training equipment, significant inputs can only be sole sourced. We may therefore be vulnerable to delivery schedule delays, the financial condition of the sole-source suppliers and their willingness to deal with us. Within their corporate groups, some sole-source suppliers include businesses that compete with parts of our business. This could lead to onerous licencing terms, high licence fees or even refusal to licence to us the data, parts and equipment packages that are often required to manufacture and operate a simulator based on an OEM’s aircraft.  Where CAE uses an internally produced simulation model for an aircraft without using OEM-sourced and licenced data, parts and equipment, the OEM in question may attempt retaliatory or obstructive actions against CAE to block the manufacturing, sale and/or deployment for training of a simulator for such aircraft. Such actions may cause CAE to incur material legal fees and/or may delay or prevent completion of the simulator development project, which may negatively impact our financial results. Warranty or other product-related claims We manufacture simulators that are highly complex and sophisticated. These may contain defects that are difficult to detect and correct. If our products fail to operate correctly or have errors, there could be warranty claims or we could lose customers. Correcting these defects could require significant capital investment. If a defective product is integrated into our customer’s equipment, we could face product liability claims based on damages to the customer’s equipment. Any claims, errors or failures could have a negative effect on our operating results and business. We cannot be certain that our insurance coverage will be sufficient to cover one or more substantial claims.  Product integration and program management risk Our business could be negatively affected if our products do not successfully integrate or operate with other sophisticated software, hardware, computing and communications systems that are also continually evolving. If we experience difficulties on a project or do not meet project milestones, we may have to devote more engineering and other resources than originally anticipated. While we believe we have recorded adequate provisions for risks of losses on fixed-price contracts, it is possible that fixed-price and long-term supply contracts could subject us to additional losses that exceed obligations under the terms of the contracts.  Protection of our intellectual property We rely in part on trade secrets and contractual restrictions, such as confidentiality agreements, patents and licences, to establish and protect our proprietary rights. These may not be effective in preventing a misuse of our technology or in deterring others from developing similar technologies. We may be limited in our ability to acquire or enforce our intellectual property rights in some countries. Litigation related to our intellectual property rights could be lengthy and costly and could negatively affect our operations or financial results, whether or not we are successful in defending a claim.  36| CAE Year-End Financial Results 2015


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Management’s Discussion and Analysis
 Third-party intellectual property Our products contain sophisticated software and computer systems that are supplied to us by third parties. These may not always be available to us. Our production of simulators often depends on receiving confidential or proprietary data on the functions, design and performance of a product or system that our simulators are intended to simulate. We may not be able to obtain this data on reasonable terms, or at all.  Infringement claims could be brought against us or against our customers. We may not be successful in defending these claims and we may not be able to develop processes that do not infringe on the rights of third parties, or obtain licences on terms that are commercially acceptable, if at all.  The markets in which we operate are subject to extensive patenting by third parties. Our ability to modify existing products or to develop new products may be constrained by third-party patents such that we incur incremental costs to licence the use of the patent or design around the claims made therein. Key personnel Our continued success will depend in part on our ability to retain and attract key personnel with the relevant skills, expertise and experience. Our compensation policy is designed to mitigate this risk.  Environmental liabilities We use, generate, store, handle and dispose of hazardous materials at our operations, and used to at some of our discontinued or sold operations. Past operators at some of our sites also carried out these activities.  New laws and regulations, stricter enforcement of existing laws and regulations, the discovery of previously unknown contamination, new clean-up requirements or claims on environmental indemnities we have given may result in us having to incur substantial costs. This could have a materially negative effect on our financial condition and results of operations.  In addition, the operations disposed of in the period prior to 2005 are largely uninsured against such claims, so an unexpectedly large environmental claim against one of them could reduce our profitability in the future.  Liability claims arising from casualty losses Because of the nature of our business, we may be subject to liability claims, including claims for serious personal injury or death, arising from: -Accidents or disasters involving training equipment that we have sold or aircraft for which we have provided training equipment or services; -Our pilot provisioning; -Our live flight training operations.  We may also be subject to product liability claims relating to equipment and services that our discontinued operations sold in the past. We cannot be certain that our insurance coverage will be sufficient to cover one or more substantial claims, though to date our insurance coverage has been adequate to meet any claim. Integration of acquired businesses The success of our acquisitions depends on our ability to crystallize synergies both in terms of successfully marketing our broadened product offering as well as efficiently consolidating the operations of the acquired businesses into our existing operations. Our ability to penetrate new markets We are leveraging our knowledge, experience and best practices in simulation-based aviation training and optimization to penetrate the simulation-based training market in healthcare.  As we operate in this market, unforeseen difficulties and expenditures could arise, which may have an adverse effect on our operations, profitability and reputation. Penetrating a new market is inherently more difficult than managing within our already established markets. Length of sales cycle The sales cycle for our products and services is long and unpredictable, ranging from 6 to 18 months for civil aviation applications and from 6 to 24 months or longer for defence and security applications. During the time when customers are evaluating our products and services, we may incur expenses and management time. Making these expenditures in a period that has no corresponding revenue will affect our operating results and could increase the volatility of our share price. We may pre-build certain products in anticipation of orders to come and to facilitate a faster delivery schedule to gain competitive advantage; if orders for those products do not materialize when expected, we have to carry the pre-built product in inventory for a period of time until a sale is realized. Information technology systems Following the implementation of the Canadian project management and financial portion of the ERP system in fiscal 2015, we continue to update and deploy information technology systems throughout the organization. If the systems do not operate as expected or when expected, we may not be able to realize the expected value of the systems and this may have a negative effect on our operations, reporting capabilities, profitability and reputation. A series of governance processes are in place to mitigate this risk.  CAE Year-End Financial Results 2015 |37


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Management’s Discussion and Analysis
 Security and information technology We depend on information technology networks and systems, hosted internally or outsourced, to process, transmit and store electronic data and financial information, to manage business operations and to comply with regulatory, legal, national security, contractual and tax requirements. In addition, our business requires the appropriate and secure utilization of sensitive and confidential information belonging to third parties such as aircraft OEMs and national defence forces. An information technology system failure, cyber-attack or breach of systems security could disrupt our operations, cause the loss of, or unauthorized access to, business information, compromise confidential information, expose us to regulatory investigation and litigation, require significant management attention and resources and could materially and adversely affect our operations, reputation and financial performance. We have implemented security controls, policy enforcement mechanisms and monitoring systems in order to prevent, detect and address potential threats. Reliance on third-party providers We have outsourced certain information technology maintenance and support services and infrastructure management functions, to third-party service providers. If these service providers do not perform effectively, we may not be able to achieve the expected cost savings and may have to incur additional costs to correct errors made by such service providers. Depending on the function involved, such errors may also lead to business disruption, processing inefficiencies and/or security vulnerability.  8.3Risks relating to the market Foreign exchange Our operations are global with approximately 90% of our revenue generated from worldwide exports and international activities generally denominated in foreign currencies, mainly the U.S. dollar, the Euro and the British pound. Our revenue is generated approximately one-third in each of the U.S, Europe and the rest of the world.  A significant portion of the revenue generated in Canada is in foreign currencies, while a large portion of our operating costs is in Canadian dollars. When the Canadian dollar increases in value, it negatively affects our foreign currency-denominated revenue and hence our financial results.We continue to hold a portfolio of currency hedging positions intended to mitigate the risk to a portion of future revenues presented by the volatility of the Canadian dollar versus foreign currencies. The hedges are intended to cover a portion of the revenue in order to allow the unhedged portion to match the foreign cost component of the contract.It is not possible to completely offset the effects of changing foreign currency values, which leaves some residual exposure that may impact our financial results. This residual exposure may be higher when currencies experience significant short term volatility.When the Canadian dollar decreases in value, it negatively affects our foreign currency-denominated costs.In order to reduce the variability of specific U.S. dollar and Euro-denominated manufacturing costs, wealsohedge some of the foreign currency costs incurred in our manufacturing process.  Business conducted through our foreign operations are substantially based in local currencies. A natural hedge exists by virtue of revenues and operating expenses being in like currencies. However, changes in the value of foreign currencies relative to the Canadian dollar creates unhedged currency translation exposure since results are consolidated in Canadian dollars for financial reporting purposes. Appreciation of foreign currencies against the Canadian dollar would have a positive translation impact and a devaluation of foreign currencies against the Canadian dollar would have the opposite effect. Political instability Political instability in certain regions of the world may be prolonged and unpredictable. A prolongation of political instability could lead to delays or cancellation of orders, deliveries or projects in which we have invested significant resources, particularly when the customers are state-owned or state-controlled entities.  The imposition of economic sanctions on persons and companies conducting business in the Russian Federation and the depreciationofthe Russian Federation currency have not significantly impacted our operations to datebut should this situation continue for a prolonged periodthere may be a negative impact on our Civil Aviation Training Solutions revenue.This and other geo-political risks will change over time and CAE must respect any applicable sanctions and controls applied in the countries in which we carry on business.It is possible that in the markets we serve,unanticipated political instability could impact our operating results and financial position. Availability of capital The current maturity date of our revolving unsecured term credit facilities is October 2018. We cannot determine at this time whether the credit facility will be renewed at the same cost, for the same duration and on similar terms as were previously available.  We also have various debt facilities with maturities until October 2036. We cannot determine at this time whether these facilities will be refinanced at the same cost, for the same durations and on similar terms as were previously available. Pension plans Pension funding is based on actuarial estimates and is subject to limitations under applicable income tax and other regulations.Actuarial estimatesprepared during the year were based on, amongst others, assumptions about discount rates, future salary increases and mortality rates.The actuarial funding valuation reports determine the amount of cash contributions that we are required to make into the registered retirement plans. Our latest pension funding reports show the pension plans to be in a solvency deficit position. Therefore, we are required to make cash contributions to fund the deficit. If this reduced level of pension fund assets persists to the date of the next funding valuations, we will be required to increase our cash funding contributions, reducing the availability of funds for other corporate purposes.  38| CAE Year-End Financial Results 2015


---



Management’s Discussion and Analysis
  Doing business in foreign countries We have operations in 35 countries including our joint venture operations and sell our products and services to customers around the world. Sales to customers outside Canada made up approximately 90% of revenue in fiscal 2015. We expect sales outside Canada to continue to represent a significant portion of revenue in the foreseeable future. As a result, we are subject to the risks of doing business internationally, including geopolitical instability.  These are the main risks we are facing: -Change in laws and regulations; -Tariffs, embargoes, controls, sanctions and other restrictions; -General changes in economic and geopolitical conditions; -Complexity and corruption risks of using foreign representatives and consultants.  Income tax laws A substantial portion of our business is conducted in foreign countries and is thereby subject to numerous countries’ tax laws and fiscal policies. A change in applicable tax laws, treaties or regulations or their interpretation could result in a higher effective tax rate on our earnings which could be significant to our financial results.  Currently, the Organisation for Economic Co-operation and Development (OECD)is reviewing Base Erosion and Profit Shifting, which will result in recommendations for international tax reforms. If adopted, these changes may negatively impact our financial results.  9.RELATED PARTY TRANSACTIONS  A list of principal investments which, in aggregate, significantly impact our results or assets is presented in Note 31 of our consolidated financial statements.  The following table presents our outstanding balances with joint ventures:  (amounts in millions)

   

   

   

   2015

   

   

   2014Accounts receivable

   

   

   $

   28.7

   

   $

   30.1Contracts in progress: assets

   

   

   

   28.1

   

   

   13.5Other assets

   

   

   

   29.2

   

   

   30.6Accounts payable and accrued liabilities

   

   

   

   13.9

   

   

   16.3Contracts in progress: liabilities

   

   

   

   3.9

   

   

   6.3
  Other assets include a finance lease receivable of $17.0 million (2014 – $16.9 million) maturing in October 2022 and carrying an interest rate of5.14% per annum, loans receivable of $5.7 million (2014 – $8.4 million) maturing in September 2016 and December 2017 and carrying respectively interest rates of LIBOR 6 month plus 1% and 11% per annum and a long-term receivable of $6.5 million (2014 – $5.3 million) with no repayment term. As at March 31, 2015 and 2014, there are no provisions held against any of the receivables from related parties.  The following table presents our transactions with joint ventures:  (amounts in millions)

   

   

   

   2015

   

   

   2014Revenue

   

   

   $

   120.6

   

   $

   101.0Purchases

   

   

   

   10.9

   

   

   11.3Other income

   

   

   

   2.9

   

   

   2.9
  In addition, during fiscal 2015, transactions amounting to $2.4 million (2014–$2.7 million) were made, at normal market prices, with an organization whose officer is one of our directors.  Compensation of key management personnel Key management personnel have the ability and responsibility to make major operational, financial and strategic decisions for the Company and include certain executive officers. The compensation of key management for employee services is shown below:  (amounts in millions)

   

   

   

   2015

   

   

   2014Salaries and other short-term employee benefits

   

   

   $

   4.6

   

   $

   3.8Post-employment benefits – defined benefit plans1

   

   

   

   1.5

   

   

   1.6Termination benefits

   

   

   

   -

   

   

   2.4Share-based payments

   

   

   

   4.6

   

   

   6.4$

   10.7

   

   $

   14.2(1)Includes net interest on employee benefits obligations.
  CAE Year-End Financial Results 2015 |39


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Management’s Discussion and Analysis
 10.CHANGES IN ACCOUNTING POLICIES  10.1Changes in accounting policies Operating segments As at April 1, 2014, we modified our operating segments. Our former segments, Training & Services/Civil and Simulation Products/Civil, have been combined to form Civil Simulation and Training and our former Training & Services/Military and Simulation Products/Military segments have been combined to form Defence and Security. This resulted from changes in the organizational structure undertaken to better reflect our operating segments with our integrated solutions approach to market. In addition, the former New Core Markets segment was renamed Healthcare following our decision to divest our mining business as described in Note 3 of our consolidated financial statements. This information reflects the way management measures profitability and performance and how we allocate resources. As such, we believe the information presented to be more relevant as it is better aligned with the way our business is managed internally. The change has been made retrospectively in accordance with IAS 8,Accounting Policies, Changes in Accounting Estimates and Errors. The change did not impact the consolidated financial statement results. Operating segments’ disclosure has been restated to conform to the new operating segments, as described in Note 30 of our consolidated financial statements.  As at March 31, 2015, we renamed our Civil Simulation and Training segment to Civil Aviation Training Solutions.  10.2New and amended standards adopted The amendments to IFRS effective for the fiscal year 2015 have no material impact on our consolidated financial statements results.  10.3New and amended standards not yet adopted Employee benefits In November 2013, the IASB amended IAS 19, Employee Benefits. The amendment clarifies the accounting for contributions from employees or third parties to defined benefit plans. The amendment is effective on April 1, 2015 andis not expected to have an impact on our consolidated financial statements.  Revenue from contracts with customers In May 2014, the IASB released IFRS 15,Revenue from Contracts with Customers, which supersedes IAS 11,Construction Contractsand IAS 18,Revenue, and the related interpretations on revenue recognition: IFRIC 13,Customer Loyalty Programmes, IFRIC 15,Agreements for the Construction of Real Estate,IFRIC 18,Transfers of Assets from Customersand SIC 31,Revenue – Barter Transactions Involving Advertising Services.The standard is effective for annual periods beginning on or after January 1, 2017, with earlier application permitted. We are currently evaluating the impact of the standard on our consolidated financial statements.  Financial Instruments The IASB previously published versions of IFRS 9,Financial Instruments, that introduced new classification and measurement requirements in 2009 and 2010 and a new hedge accounting model in 2013. In July 2014, the IASB released the final version of IFRS 9,Financial Instruments, which replaces earlier versions of IFRS 9 issued and completes the IASB’s project to replace IAS 39,Financial Instruments: Recognition and Measurement. The standard is effective for annual periods beginning on or after January 1, 2018, with earlier application permitted. We are currently evaluating the impact of the standard on our consolidated financial statements.  10.4Use of judgements, estimates and assumptions  The preparation of the consolidated financial statements requires our management to make judgements, estimates and assumptions that affect the application of accounting policies, the reported amounts of assets and liabilities and disclosures at the date of the consolidated financial statements, as well as the reported amounts of revenues and expenses for the period reported. We also require management to exercise its judgement in applying our accounting policies. The areas involving a high degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed below. Actual results could differ from those estimates. Changes will be reported in the period in which they are identified. Business combinations Business combinations are accounted for in accordance with the acquisition method. The consideration transferred and the acquiree’s identifiable assets, liabilities and contingent liabilities are measured at their fair value. Depending on the complexity of determining these valuations, we either consult with independent experts or develop the fair value internally by using appropriate valuation techniques which are generally based on a forecast of the total expected future net discounted cash flows. These evaluations are linked closely to the assumptions made by management regarding the future performance of the related assets and the discount rate. Contingent consideration is measured at fair value using a discounted cash flow model. Development costs Development costs are recognized as intangible assets and are amortized over their useful lives when they meet the criteria for capitalization. Forecasted revenue and profitability for the relevant projects are used to assess compliance with the capitalization criteria and to assess the recoverable amount of the assets.  40| CAE Year-End Financial Results 2015


---



Management’s Discussion and Analysis
 Impairment of non-financial assets Our impairment test for goodwill is based on internal estimates (level 3) of fair value less costs of disposal calculations and uses valuation models such as the discounted cash flows model. Key assumptions which management has based its determination of fair value less costs of disposal include estimated growth rates, post-tax discount rates and tax rates. These estimates, including the methodology used, can have a material impact on the respective values and ultimately the amount of any goodwill impairment.  Likewise, whenever property, plant and equipment and intangible assets are tested for impairment, the determination of the assets’ recoverable amount involves the use of estimates by management and can have a material impact on the respective values and ultimately the amount of any impairment.  See Note 20 of our consolidated financial statements for further details regarding assumptions used.  Revenue recognition The percentage-of-completion method requires us to estimate the work performed to date as a proportion of the total work to be performed. Management conducts monthly reviews of its estimated costs to complete, percentage-of-completion estimates and revenue and margins recognized, on a contract-by-contract basis. The impact of any revisions in cost and revenue estimates is reflected in the period in which the need for a revision becomes known.  Defined benefit pension plans The cost of defined benefit pension plans and the present value of the employee benefits obligations are determined using actuarial valuations. Actuarial valuations involve, amongst others, making assumptions about discount rates, future salary increases and mortality rates. All assumptions are reviewed at each reporting date. Any changes in these assumptions will impact the carrying amount of the employee benefits obligations and the cost of the defined benefit pension plans. In determining the appropriate discount rate, management considers the interest rates of high quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating the terms of the related pension liability. The mortality rate is based on publicly available mortality tables for the specific country. Future salary increases and pension increases are based on expected future inflation rates for the specific country.  Other key assumptions for pension obligations are based, in part, on current market conditions. See Note 14 of our consolidated financial statements for further details regarding assumptions used.  Government assistance repayments In determining the amount of repayable government assistance, assumptions and estimates are made in relation to discount rates, expected revenues and the expected timing of revenues. Revenue projections take into account past experience and represent management’s best estimate about the future. Revenues after a five-year period are extrapolated using estimated growth rates, ranging from 5% to 9%, over the period of repayments. The estimated repayments are discounted using average rates ranging from 6% to 13% based on terms of similar financial instruments. These estimates, along with the methodology used to derive the estimates, can have a material impact on the respective values and ultimately any repayable obligation in relation to government assistance. A 1% increase to the growth rates would increase the royalty obligation at March 31, 2015 by approximately $9.9 million (2014 − $9.4 million).  Share-based payments We measure the cost of cash and equity-settled transactions with employees by reference to the fair value of the related instruments at the date at which they are granted. Estimating fair value for share-based payments requires determining the most appropriate valuation model for a grant, which depends on the terms and conditions of the grant. This also requires making assumptions and determining the most appropriate inputs to the valuation model including the expected life of the option, volatility and dividend yield.  Income taxes We are subject to income tax laws in numerous jurisdictions. Judgement is required in determining the worldwide provision for income taxes. The determination of tax liabilities and assets involves uncertainties in the interpretation of complex tax regulations. We provide for potential tax liabilities based on the weighted average probability of the possible outcomes. Differences between actual results and those estimates could have an effect on the income tax liabilities and deferred tax liabilities in the period in which such determinations are made.  Deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against the losses that can be utilized. Significant management judgement is required to determine the amount of deferred tax assets that can be recognized, based upon the likely timing and the level of future taxable profits together with future tax planning strategies. The recorded amount of total deferred tax assets could be altered if estimates of projected future taxable income and benefits from available tax strategies are lowered, or if changes in current tax regulations are enacted that impose restrictions on the timing or extent of our ability to utilize future tax benefits.  CAE Year-End Financial Results 2015 |41


---



Management’s Discussion and Analysis
 11.CONTROLS AND PROCEDURES The internal auditor reports regularly to management on any weaknesses it finds in our internal controls and these reports are reviewed by the Audit Committee.  In accordance with National Instrument 52-109 issued by the Canadian Securities Administrators (CSA), certificates signed by the President and Chief Executive Officer (CEO) and the Chief Financial Officer (CFO) have been filed. These filings certify the appropriateness of our disclosure controls and procedures and the design and effectiveness of the internal controls over financial reporting.  11.1Evaluation of disclosure controls and procedures  Our disclosure controls and procedures are designed to provide reasonable assurance that information is accumulated and communicated to our President and CEO and CFO and other members of management, so we can make timely decisions about required disclosure and ensure that information is recorded, processed, summarized and reported within the time periods specified under Canadian and U.S. securities laws.  Under the supervision of the President and CEO and the CFO, management evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2015. The President and CEO and the CFO concluded from the evaluation that the design and operation of our disclosure controls and procedures were effective as at March 31, 2015. 11.2Internal control over financial reporting Management is responsible for establishing and maintaining adequate internal controls over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting, and the preparation of consolidated financial statements for external purposes in accordance with IFRS. Management evaluated the design and operation of our internal controls over financial reporting as of March 31, 2015, based on the framework and criteria established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) on Internal Control – Integrated Framework (2013 Framework), and has concluded that our internal control over financial reporting is effective. Management did not identify any material weaknesses.  There were no changes in our internal controls over financial reporting that occurred during fiscal year 2015 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.  12.OVERSIGHT ROLE OF AUDIT COMMITTEE AND BOARD OF DIRECTORS The Audit Committee reviews our annual MD&A and related consolidated financial statements with management and the external auditor and recommends them to the Board of Directors for their approval. Management and our internal auditor also provide the Audit Committee with regular reports assessing our internal controls and procedures for financial reporting. The external auditor reports regularly to management on any weaknesses it finds in our internal control, and these reports are reviewed by the Audit Committee.  13.ADDITIONAL INFORMATION You will find additional information about CAE, including our most recent AIF, on our website at www.cae.com, or on SEDAR at www.sedar.com or on EDGAR at www.sec.gov.  42| CAE Year-End Financial Results 2015


---



Management’s Discussion and Analysis
 14.SELECTED FINANCIAL INFORMATION The following table provides selected quarterly financial information for the years 2013 through to 2015.  (amounts in millions, except per share amounts and exchange rates)

   Q1

   

   

   Q2

   

   

   Q3

   

   

   Q4

   

   

   TotalFiscal 2015Revenue

   $

   526.2

   

   529.4

   

   559.1

   

   631.6

   

   2,246.3Net income

   $

   41.6

   

   42.5

   

   52.9

   

   67.7

   

   204.7Equity holders of the CompanyContinuing operations

   $

   43.8

   

   42.0

   

   52.1

   

   63.3

   

   201.2Discontinued operations

   $

   (2.0)

   

   0.9

   

   0.9

   

   0.8

   

   0.6Non-controlling interests

   $

   (0.2)

   

   (0.4)

   

   (0.1)

   

   3.6

   

   2.9Basic and diluted EPS attributable to equity holders of the Company

   $

   0.16

   

   0.16

   

   0.20

   

   0.24

   

   0.76Continuing operations

   $

   0.17

   

   0.16

   

   0.20

   

   0.24

   

   0.76Discontinued operations

   $

   (0.01)

   

   -

   

   -

   

   -

   

   -Average number of shares outstanding (basic)

   

   263.9

   

   264.7

   

   265.5

   

   266.4

   

   265.1Average number of shares outstanding (diluted)

   

   265.0

   

   265.6

   

   266.4

   

   267.4

   

   266.0Average exchange rate, U.S. dollar to Canadian dollar

   

   1.09

   

   1.09

   

   1.14

   

   1.24

   

   1.14Average exchange rate, Euro to Canadian dollar

   

   1.50

   

   1.44

   

   1.42

   

   1.40

   

   1.44Average exchange rate, British pound to Canadian dollar

   

   1.84

   

   1.82

   

   1.80

   

   1.88

   

   1.83Fiscal 2014Revenue

   $

   520.1

   

   478.2

   

   503.9

   

   575.7

   

   2,077.9Net income

   $

   45.4

   

   38.2

   

   47.6

   

   59.9

   

   191.1Equity holders of the CompanyContinuing operations

   $

   44.7

   

   38.2

   

   45.5

   

   59.9

   

   188.3Discontinued operations

   $

   0.9

   

   0.1

   

   0.6

   

   0.1

   

   1.7Non-controlling interests

   $

   (0.2)

   

   (0.1)

   

   1.5

   

   (0.1)

   

   1.1Basic and diluted EPS attributable to equity holders of the Company

   $

   0.18

   

   0.15

   

   0.18

   

   0.23

   

   0.73Continuing operations

   $

   0.17

   

   0.15

   

   0.17

   

   0.23

   

   0.72Discontinued operations

   $

   0.01

   

   -

   

   0.01

   

   -

   

   0.01Average number of shares outstanding (basic)

   

   260.2

   

   261.0

   

   261.5

   

   262.7

   

   261.3Average number of shares outstanding (diluted)

   

   260.2

   

   261.5

   

   262.3

   

   264.0

   

   261.9Average exchange rate, U.S. dollar to Canadian dollar

   

   1.02

   

   1.04

   

   1.05

   

   1.10

   

   1.05Average exchange rate, Euro to Canadian dollar

   

   1.34

   

   1.38

   

   1.43

   

   1.51

   

   1.41Average exchange rate, British pound to Canadian dollar

   

   1.57

   

   1.61

   

   1.70

   

   1.83

   

   1.68Fiscal 2013Revenue

   $

   451.6

   

   496.6

   

   490.2

   

   555.3

   

   1,993.7Net income

   $

   21.9

   

   35.9

   

   37.2

   

   45.7

   

   140.7Equity holders of the CompanyContinuing operations

   $

   20.4

   

   35.0

   

   36.2

   

   42.7

   

   134.3Discontinued operations

   $

   1.1

   

   0.6

   

   1.3

   

   0.4

   

   3.4Non-controlling interests

   $

   0.4

   

   0.3

   

   (0.3)

   

   2.6

   

   3.0Basic and diluted EPS attributable to equity holders of the Company

   $

   0.08

   

   0.14

   

   0.14

   

   0.17

   

   0.53Continuing operations

   $

   0.08

   

   0.14

   

   0.14

   

   0.17

   

   0.52Discontinued operations

   $

   -

   

   -

   

   -

   

   -

   

   0.01Average number of shares outstanding (basic)

   

   258.4

   

   258.7

   

   259.2

   

   259.7

   

   259.0Average number of shares outstanding (diluted)

   

   258.6

   

   259.0

   

   259.5

   

   260.2

   

   259.4Average exchange rate, U.S. dollar to Canadian dollar

   

   1.01

   

   1.00

   

   0.99

   

   1.01

   

   1.00Average exchange rate, Euro to Canadian dollar

   

   1.30

   

   1.25

   

   1.29

   

   1.33

   

   1.29Average exchange rate, British pound to Canadian dollar

   

   1.60

   

   1.57

   

   1.59

   

   1.57

   

   1.58
  CAE Year-End Financial Results 2015 |43


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Management’s Discussion and Analysis
  Selected segment information(amounts in millions, except operating margins)

   

   

   Q4-2015

   

   

   Q4-2014

   

   

   FY2015

   

   

   FY2014

   

   

   FY2013Civil Aviation Training SolutionsRevenue

   $

   367.6

   $

   323.5

   $

   1,294.6

   $

   1,176.7

   $

   1,116.6Segment operating income

   

   61.8

   

   58.0

   

   210.5

   

   179.8

   

   188.9Operating margins (%)

   

   16.8

   

   17.9

   

   16.3

   

   15.3

   

   16.9Defence and SecurityRevenue

   $

   234.7

   $

   230.3

   $

   857.4

   $

   822.0

   $

   806.5Segment operating income

   

   39.5

   

   28.0

   

   115.6

   

   107.8

   

   107.4Operating margins (%)

   

   16.8

   

   12.2

   

   13.5

   

   13.1

   

   13.3HealthcareRevenue

   $

   29.3

   $

   21.9

   $

   94.3

   $

   79.2

   $

   70.6Segment operating income

   

   4.1

   

   0.7

   

   6.7

   

   1.7

   

   1.8Operating margins (%)

   

   14.0

   

   3.2

   

   7.1

   

   2.1

   

   2.5TotalRevenue

   $

   631.6

   $

   575.7

   $

   2,246.3

   $

   2,077.9

   $

   1,993.7Segment operating income

   

   105.4

   

   86.7

   

   332.8

   

   289.3

   

   298.1Operating margins (%)

   

   16.7

   

   15.1

   

   14.8

   

   13.9

   

   15.0Other

   

   $

   -

   $

   -

   $

   -

   $

   -

   $

   (68.4)Operating profit

   

   $

   105.4

   $

   86.7

   $

   332.8

   $

   289.3

   $

   229.7
  Selected annual information for the past five years(amounts in millions, except per share amounts)

   2015

   

   2014

   

   2013

   

   2012 1

   

   2011 1Revenue

   $

   2,246.3

   $

   2,077.9

   $

   1,993.7

   $

   1,821.2

   $

   1,630.8Net income

   

   204.7

   

   191.1

   

   140.7

   

   182.0

   

   160.9Equity holders of the CompanyContinuing operations

   

   201.2

   

   188.3

   

   134.3

   

   180.3

   

   160.3Discontinued operations

   

   0.6

   

   1.7

   

   3.4

   

   -

   

   -Non-controlling interests

   

   2.9

   

   1.1

   

   3.0

   

   1.7

   

   0.6Average exchange rate, U.S. dollar to Canadian dollar

   

   1.14

   

   1.05

   

   1.00

   

   0.99

   

   1.02Average exchange rate, Euro to Canadian dollar

   

   1.44

   

   1.41

   

   1.29

   

   1.37

   

   1.34Average exchange rate, British pound to Canadian dollar

   

   1.83

   

   1.68

   

   1.58

   

   1.58

   

   1.58Financial position:Total assets

   $

   4,656.9

   $

   4,236.7

   $

   3,691.3

   $

   3,183.7

   $

   2,817.3Total non-current financial liabilities2

   

   1,427.3

   

   1,340.2

   

   1,209.3

   

   869.0

   

   757.5Total net debt

   

   949.6

   

   856.2

   

   813.4

   

   534.3

   

   383.8Per share:Basic and diluted EPS attributable to equity holdersof the CompanyContinuing operations

   $

   0.76

   $

   0.72

   $

   0.52

   $

   0.70

   $

   0.62Discontinued operations

   

   -

   

   0.01

   

   0.01

   

   -

   

   -Dividends declared

   

   0.27

   

   0.22

   

   0.19

   

   0.16

   

   0.15Total equity

   

   6.28

   

   5.67

   

   4.43

   

   4.05

   

   3.63(1)Figures have not been restated to reflect the adoption of IFRS 11 and IAS 19 which was effective fiscal 2014 and the classification ofour mining business as discontinued operations in fiscal 2015.(2)Includes long-term debt, long-term derivative liabilities and other long-term liabilities meeting the definition of a financial liability.


44| CAE Year-End Financial Results 2015