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

   6

   11

   134.

   CONSOLIDATED RESULTS

   4.1    Results from operations – fourth quarter of fiscal 2017

   4.2    Results from operations – fiscal 2017

   15

   15

   174.3    Restructuring, integration and acquisition costs

   194.4    Consolidated orders and total backlog

   195.

   RESULTS BY SEGMENT

   5.1    Civil Aviation Training Solutions

   5.2    Defence and Security

   5.3    Healthcare

   20

   21

   24

   266.

   CONSOLIDATED CASH MOVEMENTS AND LIQUIDITY

   6.1    Consolidated cash movements

   6.2    Sources of liquidity

   6.3    Government participation

   6.4    Contractual obligations

   28

   28

   29

   30

   307.

   CONSOLIDATED FINANCIAL POSITION

   7.1    Consolidated capital employed

   7.2    Off balance sheet arrangements

   7.3    Financial instruments

   31

   31

   33

   338.

   BUSINESS COMBINATIONS

   369.

   BUSINESS RISK AND UNCERTAINTY

   9.1  Risks relating to the industry

   9.2  Risks relating to the Company

   9.3  Risks relating to the market

   37

   37

   39

   4210.

   RELATED PARTY TRANSACTIONS

   4311.

   CHANGES IN ACCOUNTING POLICIES

   11.1  New and amended standards adopted

   11.2  New and amended standards not yet adopted

   11.3  Use of judgements, estimates and assumptions

   44

   44

   44

   4512.

   CONTROLS AND PROCEDURES

   12.1  Evaluation of disclosure controls and procedures

   12.2  Internal control over financial reporting

   47

   47

   4713.

   OVERSIGHT ROLE OF AUDIT COMMITTEE AND BOARD OF DIRECTORS

   4714.

   ADDITIONAL INFORMATION

   4715.

   SELECTED FINANCIAL INFORMATION

   48


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Management’s Discussion and Analysis for the fourth quarter and year ended March 31, 2017  1.HIGHLIGHTS FINANCIAL FOURTH QUARTER OF FISCAL 2017 Revenue from continuing operations higher compared to last quarter and the fourth quarter of fiscal 2016 -Consolidated revenue from continuing operations was $734.7 million this quarter, $52.0 million or 8% higher than last quarter and $12.2 million or 2% higher than the fourth quarter of fiscal 2016.  Net income attributable to equity holders of the Company from continuing operations stable compared to last quarter and higher compared to the fourth quarter of fiscal 2016 -Net income attributable to equity holders of the Company from continuing operations was $67.4 million (or $0.25 per share) this quarter compared to $67.6 million (or $0.25 per share) last quarter and compared to $61.2 million (or $0.23 per share) in the fourth quarter of last year, representing an increase of $6.2 million or 10%; -Specific items included in net income attributable to equity holders of the Company from continuing operations this quarter were restructuring, integration and acquisition costs of $20.0 million ($15.0 million after tax or $0.06 per share) mainly related to the acquisition of Lockheed Martin Commercial Flight Training (LMCFT). This restructuring, integration and acquisition program was completed during the fourth quarter. Net income before specific items1 was $82.4 million and earnings per share before specific items1 was $0.31 for the quarter, compared to $69.6 million (or $0.26 per share) last quarter and $72.8 million (or $0.27 per share) in the fourth quarter of fiscal 2016; -Net income attributable to equity holders of the Company included a loss from discontinued operations this quarter of $0.7 million (or nil per share) compared to earnings of $0.2 million (or nil per share) last quarter and a loss of $2.4 million (or $0.01 per share) in the fourth quarter of fiscal 2016.  Positive free cash flow1from continuing operations at $160.4 million this quarter -Net cash provided by continuing operating activities was $197.5 million this quarter, compared to $156.1 million last quarter and $51.0 million in the fourth quarter of last year; -Maintenance capital expenditures1 and other asset expenditures were $26.8 million this quarter, $16.6 million last quarter and $18.8 million in the fourth quarter of last year; -Cash dividends were $20.5 million this quarter, $20.8 million last quarter and $19.3 million in the fourth quarter of last year.  FISCAL 2017 Higher revenue from continuing operations compared to fiscal 2016 -Consolidated revenue from continuing operations was $2,704.5 million, $191.9 million or 8% higher than last year.  Higher net income attributable to equity holders of the Company and diluted earnings per share from continuing operations -Net income attributable to equity holders of the Company from continuing operations was $252.0 million (or $0.93 per share) compared to $239.3 million (or $0.89 per share) last year, representing a $12.7 million or 5% increase; -Specific items included in net income attributable to equity holders of the Company from continuing operations this year were restructuring, integration and acquisition costs of $35.5 million ($26.4 million after tax or $0.10 per share). Net income before specific items was $278.4 million and earnings per share before specific items was $1.03 this year, compared to $230.5 million (or $0.86 per share) last year; -Net income attributable to equity holders of the Company included a loss from discontinued operations of $0.5 million (or nil per share) compared to a loss from discontinued operations of $9.6 million (or $0.04 per share) last year.  Positive free cash flow from continuing operations at $327.9 million -Net cash provided by continuing operating activities was $464.3 million this year, compared to $345.8 million last year; -Maintenance capital expenditures and other asset expenditures were $68.3 million this year, compared to $65.1 million last year; -Cash dividends were $80.6 million this year, compared to $56.7 million last year.  Capital employed1 increased by $104.1 million or 4% this year, ending at $2,831.7 million -Return on capital employed1(ROCE) was 11.2% this year compared to 10.6% last year; -Non-cash working capital1 increased by $4.1 million in fiscal 2017, ending at $193.0 million; -Property, plant and equipment increased by $109.5 million; -Other long-term assets and other long-term liabilities increased by $78.5 million and $86.5 million respectively; -Net debt1decreased by $36.6 million this year, ending at $750.7 million.  CAE Year-End Financial Results 2017 |1</BCLPAGE>
  1Non-GAAP and other financial measures (see Section 3.6).


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Management’s Discussion and Analysis
  ORDERS22 -The book-to-sales ratio2 for the quarter was 1.03x (Civil Aviation Training Solutions was 1.15x, Defence and Security was 0.84x and Healthcare was 1.0x). The ratio for the last 12 months was 1.18x (Civil Aviation Training Solutions was 1.09x, Defence and Security was 1.33x and Healthcare was 1.0x); -Total order intake this year was $3,193.4 million, up $411.4 million over last year; -Total backlog2, including obligated, joint venture and unfunded backlog was $7,530.2 million at March 31, 2017, $1,157.6 million higher than last year.  Civil Aviation Training Solutions -Civil Aviation Training Solutions obtained contracts with an expected value of $1,698.8 million, including contracts for 50 full-flight simulators (FFSs).  Defence and Security -Defence and Security won contracts valued at $1,383.9 million.  Healthcare -Healthcare order intake was valued at $110.7 million.  BUSINESS COMBINATIONS -On May 2, 2016, we completed the acquisition of LMCFT, a provider of aviation simulation training equipment and services.  OTHER -Our process improvement program results in the standardization of certain types of commercial aircraft simulators. For standardized simulators, percentage-of-completion (POC) accounting is no longer appropriate and thus we began recognizing revenue upon completion for such simulators in fiscal 2017; -On February 14, 2017, we announced the renewal of our normal course issuer bid (NCIB) to purchase, for cancellation, up to 5,366,756 of our issued and outstanding common shares over a one year period ending February 22, 2018.  2| CAE Year-End Financial Results 2017
  2Non-GAAPand other financial measures(see Section 3.6).


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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 yearand2017mean the fiscal year ending March 31, 2017; -Last year, prior yearanda year agomean the fiscal year ended March 31, 2016; -Dollar amounts are in Canadian dollars.  This report was prepared as of May 31, 2017, and includes our management’s discussion and analysis (MD&A) for the year and the three-month period ended March 31, 2017 and the consolidated financial statements and notes for the year ended March 31, 2017. We have prepared it to help you understand our business, performance and financial condition for fiscal 2017. 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, 2017. The MD&A provides you with a view of CAE as seen through the eyes of management and helps you understand the company from a variety of perspectives: -Our vision; -Our strategy; -Our operations; -Foreign exchange; -Non-GAAP and other financial measures; -Consolidated results; -Results by segment; -Consolidated cash movements and liquidity; -Consolidated financial position; -Business combinations; -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 2017 |3</BCLPAGE>


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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, research and development (R&D) activities, fixed-price and long-term supply contracts, strategic partnerships and long-term contracts, procurement and original equipment manufacturer (OEM) leverage, warranty or other product-related claims, product integration and program management, protection of our intellectual property, third-party intellectual property, loss of key personnel, labour relations, environmental liabilities, claims arising from casualty losses, integration of acquired businesses, our ability to penetrate new markets, information technology systems including cybersecurity risk, length of sales cycle, continued returns to shareholders and our reliance on technology and third-party providers, and risks relating to the market such as foreign exchange, political instability, availability of capital, pension plan funding, doing business in foreign countries including corruption risk and income tax laws. Additionally, differences could arise because of events announced or completed after the date of this report. You will find more information in 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 2017


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Management’s Discussion and Analysis
  3.ABOUT CAE 3.1Who weare  CAE is a global leader in training for the civil aviation, defence and security, and healthcare markets.Backed by a 70-year record of industry firsts, we continue to help define global training standards with our innovative virtual-to-live training solutions to make flying safer, maintain defence force readiness and enhance patient safety. We havethe broadestglobal presence in the industry, with over 8,500 employees,160 sites and training locations inover35 countries.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. Through the training we provide, our mission is to make air travel safer, defence forces mission ready and medical personnel better able to save lives.  3.3Our strategy  We address the imperatives of safety, efficiency and readiness for customers in three core markets: civil aviation, defence and security, and healthcare.  Our capital and other resource allocation decisions are guided by three overarching strategic imperatives:growby providing the most comprehensive solutions worldwide to enable us to be the recognized global training partner of choice;protectour leadership position by ensuring the highest levels of customer satisfaction and operational excellence; andinnovateby driving new technology and offerings which advance training for our customers.  We are a unique, pure-play simulation and training company with a proven record of commitment to our customers’ long-term training needs.  Six pillars of strength We believe there are six fundamental strengths that underpin our strategy and position us well for sustainable long-term growth: -High degree of recurring business; -Strong competitive moat; -Headroom in large markets; -Underlying secular tailwinds; -Potential for superior returns; -Culture of innovation.  High degree of recurring business Nearly 60% of our business is derived from the provision of services and largely involves long-term contracts and training demand from customers operating under regulations that require them to train on a recurrent basis.  Strong competitive moat We pride ourselves in building strong customer and partner relationships, which in many cases span several decades, and we are a market leader across all of our market segments. We offer our customers unique comprehensive solutions with market-leading global reach and scale.  Headroom in large markets We provide innovative training solutions to customers in large addressable markets in civil aviation, defence and security and healthcare with substantial headroom to grow our market share over the long term.  Underlying secular tailwinds Industry experts expect long-term commercial passenger traffic to grow at a rate of 4.2% annually over the next decade. In defence and security, we see renewed defence investment as a positive catalyst and an increasing use of simulation-based training. We also see an increased propensity for customers in both civil aviation and defence and security to outsource their training enterprises. In the emerging healthcare market, we also see a rising adoption of simulation for education and training of healthcare students and professionals.  Potential for superior returns Our rising proportion of revenue from training services provides potential for lower amplitude cyclicality as training is largely driven by the training requirements of the installed fleet. As well, we have potential to grow at a superior rate to that of our underlying markets by growing market share.  Culture of innovation We derive significant competitive advantage as an innovative leader in simulation products and training solutions. As well, we have a demonstrated flexibility by engaging customers under a variety of partnership models.  CAE Year-End Financial Results 2017 |5</BCLPAGE>


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Management’s Discussion and Analysis
  3.4Our operations  Weprovide integrated training solutions to threemarkets globally: -The civil aviation market includes major commercial airlines, regional airlines, business aircraft operators, civil helicopter operators, aircraft manufacturers, third-party training centres, flight training organizations (FTOs), maintenance repair and overhaul organizations (MROs) and aircraft finance leasing companies; -The defence and security market includes defence forces, OEMs, government agencies and public safety organizations worldwide; -The healthcare market includes hospital and university simulation centres, medical and nursing schools, paramedic organizations, defence forces, medical societies and OEMs.  CIVIL AVIATION MARKET We provide comprehensive training solutions for flight, cabin, maintenance and ground personnel in commercial, business and helicopter aviation, a complete range of flight simulation training devices, as well as ab initio pilot training and crew sourcing services.  We are uniquely capable of addressing the total lifecycle needs of the professional pilot, from cadet to captain, with our comprehensive aviation training solutions.We are theworld’slargest provider of commercial aviation training services and the second largestinbusiness aviation training services.Our deep industry expertise and credibility, installed base, strong relationships and reputation as a trusted partner, enable us to access a broader share of the market than any other company in our industry. We provide aviation training services in 30 countries and through our broad global network of training centres, we serve all sectors of civil aviation including airlines and other commercial, business and helicopter aviation operators.  Among our thousands of customers, we havelong-term training centre operations andtraining services agreements and joint ventures withapproximately 40major 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 operate269 FFSs, includingthoseoperating in our joint ventures. Weoffer industry-leading technology, and we are shaping the future of training through innovations such as theNext Generation Training System, which willimprove training quality and efficiency through the integration of untappedflight and simulatordata-driven insights into training.As the industry leader in training, we continue our strategy to recruit, develop and retain the best instructors, who represent our second largest employee group after engineers. In the formation of new pilots, CAE operates the largest ab initio flight training network in the world withsevenacademies and a fleet of over 165 aircraft.In the area of resource management, CAE is the global market leader in the provision of flight crew and technical personnel to airlines, aircraft leasing companies, manufacturers and MRO companies worldwide.  Quality, fidelity and reliability are hallmarks of the CAE brand in flight simulation and we are the world leader in the development of civil flight simulators. Wecontinuously innovate our processes andlead the market in thedesign,manufacture and integration 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.Our flight simulation equipment, including FFSs, are designed to meet the rigorous demands of their long and active service lives,oftenspanninga number of decadesof continuous use.We also provide best-in-class support with a full range of services and by leveragingour extensive worldwide network of spare parts and service teams.  Marketdrivers Demand for training solutions in the civil aviation market is driven by the following: -Pilot training and certification regulations; -Safety and efficiency imperatives of commercial airline and business aircraft operators; -Expected long-term global growth in air travel; -Growing active fleet of commercial and business aircraft; -Demand for trained aviation professionals.  Pilot training and certification regulations Civil aviation training is a largely recurring business driven by a highly-regulated environmentthrough global and national standards for pilot licensing and certification, amongst other regulatory requirements. These mandatory and recurring training requirements are regulated by national and international aviation regulatory authorities such as the International Civil Aviation Organization (ICAO), European Aviation Safety Agency (EASA), and Federal Aviation Administration (FAA).  In recent years,pilot certification processesand regulatory requirements have become increasingly stringent. Simulation-based pilot certification training is taking on a greater role internationally with theMulti-crew Pilot License (MPL), Upset Prevention and Recovery Training (UPRT) and the Airline Transport Pilot (ATP) requirements in the U.S.   6| CAE Year-End Financial Results 2017


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Management’s Discussion and Analysis
 Safety and efficiency imperatives of commercial airline and business aircraft operators The commercial airline industry is competitive, requiring operators to continuously pursue operational excellence and efficiency initiatives in order to achieve adequate returns while continuing to maintain the highest safety standards and the confidence of air travelers. Airlines are finding it increasingly more effective to seek expertise in training from trusted partners such as CAE to address growing efficiency gaps, pilot capability gaps, evolving regulatory and training environments, and on-going aircraft programs. Partnering with a training provider like CAE gives airlines immediate access to a world-wide fleet of simulators, courses, programs and instruction capabilities, and allows them flexibility in pursuing aircraft fleet options that suit their business.  Expected long-term global growth in air travel The seculargrowth in air travel is resulting in higher demand forflight, cabin, maintenance and ground personnel, which in turn drives demand for training solutions.  In commercial aviation, the aerospace industry’s widely held expectation is that long-term average growth for air travel will continue at 4.2% annually over the next decade. For calendar 2016, global passenger traffic increased by 6.3% compared to calendar 2015. For the first three months of calendar 2017, passenger traffic increased by 7.0% compared to the first three months of calendar 2016. Certain markets continued to outperform with passenger traffic in Asia and the Middle East growing at 10.0% and 9.1% respectively, while Europe, Latin America and North America increased 6.9%, 5.1% and 2.3% respectively.  In business aviation, training demand is closely aligned to business jet travel. According to the FAA, the total number of business jet flights, which includes all domestic and international flights, was up modestly with 1.4% growth over the past 12 months. Similarly, according to Eurocontrol, the European Organisation for the Safety of Air Navigation, the total number of business aviation flights in Europe has modestly improved by 1.4%.  In helicopter aviation, demand is driven mainly by the level of offshore activity in theoil and gas sector, as helicopter operators catering to this sector make up the majority of a relatively small training segment.The current protracted downturn in petroleum prices has negatively impacted offshore exploration activity for helicopter operators.  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.  Growing active fleet of commercial and business aircraft As an integrated training solutions provider, our long-term growth is closely tied to the active commercial and business aircraft fleet.  The global active commercial aircraft fleet has grown by an average of 3.2% annually over the past 20 years and is widely expected to continue to grow at an approximate average rate of 3.6% annually over the next two decades as a result of increasing emerging market and low-cost carrier demand and fleet replacement in established markets.From March 2016 to March 2017,the global commercial aircraft fleet increased by 4.2%, growing by 7.0%in Asia Pacific, 5.0% in Europe, the Middle East and Africa (EMEA), andincreasing modestlyby1.6% in the Americas.  Major business jet OEMs are continuing with plans to introduce a variety of new aircraft models in the upcoming years. Examples include Bombardier’s Global 7000/8000, Cessna’s Citation Longitude and Hemisphere, Dassault’s Falcon 5X, Gulfstream’s 500/600, Cirrus’ SF50 and Pilatus’ PC-24.  Our business aviation training network, comprehensive suite of training programs, key long-term OEM partnerships and ongoing network investments, position us well to effectively address the training demand arising from the entry-into-service of these new aircraft programs.  Our strong competitive moat, as defined by our extensive global training network, best-in-class instructors, comprehensive training programs and strength in training partnerships with airlines and business aircraft operators, allows us to effectively address training needs that arise from a growing active fleet of aircraft.  We are well positioned to leverage our technology leadership and expertise, including CAE 7000XR Series FFSs and CAE SimfinityTM procedures trainers, in delivering training equipment solutions that address the growing training needs of airlines that continue to operate their own training centers.  Demand for trained aviation professionals We have large headroom in the training services market driven by a sustained secular demand for trained aviation professionals. Demand for trained aviation professionals is driven by air traffic growth, pilot retirements and by the number of aircraft deliveries. The expansion of global economies and airline fleets have resulted in a shortage of qualified personnel needed to fulfill this growing capacity.Pilot supply constraints include aging crew demographicsandfewer military pilots transferring to civil airlines. According to a forthcoming CAE internal market study, expected to be released in the first half of fiscal 2017, approximately 255,000 new airline pilots will be needed over the next ten years to sustain the growth of the commercial air transport industry and support retirements. 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.   CAE Year-End Financial Results 2017 |7</BCLPAGE>


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Management’s Discussion and Analysis
 DEFENCE AND SECURITY MARKET We are a training systems integrator for defence forces across the air, land and naval domains, and for government organizations responsible for public safety.  We are a global leader in the development and delivery of integrated live, virtual and constructive (LVC) training solutions for defence forces. Most militaries leverage a combination of live training on actual platforms, virtual training in simulators, and constructive training using computer-generated simulations. CAE is skilled and experienced as a training systems integrator capable of helping defence forces achieve an optimal balance of LVC training to achieve mission readiness. Our expertise in training spans a broad variety of aircraft, including fighters, helicopters, trainer aircraft, maritime patrol, tanker/transport aircraft and remotely piloted aircraft, also called unmanned aerial systems. Increasingly, we are leveraging our training systems integration capabilities in the naval domain to provide naval training solutions, as evidenced by the contract to provide the United Arab Emirates (U.A.E) Navy with a comprehensive Naval Training Centre and the delivery of a naval warfare training system to the Swedish Navy. We also offer training solutions for land forces, including a range of driver, gunnery and maintenance trainers for tanks and armoured fighting vehicles as well as constructive simulation for command and staff training. We offer training solutions to government organizations for emergency and disaster management.  Defence forces seek to increasingly leverage virtual training and balance their training approach between live, virtual and constructive domains to achieve maximum readiness and efficiency. As such, we have been increasingly pursuing programs requiring the integration of LVC training and these tend to be larger in size than programs involving only a single component of such a solution. We are a first-tier training systems integrator and uniquely positioned to offer our customers a comprehensive range of innovative LVC solutions, ranging from academic, virtual and live training to immersive, networked mission rehearsal in a synthetic environment. Our solutions typically include a combination of training services, products and software tools designed to cost-effectively maintain and enhance safety, efficiency, mission readiness and decision-making capabilities. We have a wealth of experience delivering and operating training solutions across different business models, including government-owned government-operated; government-owned contractor-operated; or contractor-owned contractor-operated facilities. Our offerings include training needs analysis; instructional systems design; learning management information systems; purpose-built facilities; state-of-the-art synthetic training equipment; curriculum and courseware development; classroom, simulator, and live flying instruction; maintenance and logistics support; lifecycle support and technology insertion; and financing alternatives.  We have delivered simulation products and training systems to approximately 50 defence forces in over 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. We continue to increase our support for live flying training, such as the live training delivered as part of the NATO Flying Training in Canada and the U.S. Army Fixed-Wing Flight Training programs, as we help our customers achieve an optimal balance across their training enterprise.  Market drivers Demand for training solutions in the defence and security markets is driven by the following: -Growing defence budgets; -Installed base of enduring defence platforms and new customers; -Explicit desire of governments and defence forces to increase the use of synthetic training; -Desire to integrate training systems to achieve efficiencies and enhanced preparedness; -Attractiveness of outsourcing training and maintenance services; -Need for synthetic training to conduct integrated, networked mission training, including joint and coalition forces training; -Relationships with OEMs for simulation and training.  Growing defence budgets The U.S. Administration has proposed plans to increase annual defence spending by over USD $54 billion while also calling on members of the North Atlantic Treaty Organization (NATO) to increase their own defence investment. The majority of the 28 members of NATO have also expressed plans to increase defence spending in the coming years. NATO and allied nations continue to confront the immediate challenges posed by the war on terrorism and have been increasingly renewing and augmenting their strategic defences in view of emerging and resurgent geopolitical threats. Growing defence budgets in the U.S and much of NATO, as well as other regions such as Asia and the Middle East, will create increased opportunities throughout the defence establishment. Training is fundamental for defence forces to achieve and maintain mission readiness and growth in defence spending is expected to result in corresponding opportunities for training systems and solutions.  Installed base of enduring defence platforms and new customers CAE generates a high degree of recurring business from its strong position on enduring platforms, including long-term services contracts. Most defence forces in mature markets such as the U.S. have slowed down production of new platforms and delayed new acquisition programs, which has required military forces to maximize use of their existing platforms. Upgrades, updates, and life extension programs allow defence forces to leverage existing assets while creating a range of opportunities for simulator upgrades and training support services. Enduring platforms, such as the C-130 Hercules transport aircraft that is operated by more than 60 nations, provide a solid installed base from which to generate business. Because of our extensive installed base of simulators worldwide, our prime contractor position on programs such as the U.S. Air Force (USAF) KC-135 Aircrew Training System and MQ-1 Predator/MQ-9 Reaper aircrew training, and our experience on key enduring platforms, CAE is well-positioned for recurring product upgrades/updates as well as maintenance and support services. In addition, there is strong demand for enduring platforms such as the C-130, P-8A, C295, MH-60R and MQ-1/MQ-9 in global defence markets, thus providing opportunities to provide new training systems and services for platforms where CAE has significant experience.   8| CAE Year-End Financial Results 2017


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Management’s Discussion and Analysis
 Explicit desire of governments and defence forces to increase the use of synthetic training One of the underlying drivers for CAE’s expertise and capabilities is the increasing use of synthetic training throughout the defence community. More defence forces and governments are increasingly adopting synthetic training for a greater percentage of their overall approach because it improves training effectiveness, reduces operational demands on aircraft, lowers risk compared to operating actual weapon system platforms and significantly lowers costs. Synthetic training offers defence forces a cost-effective way to provide realistic training for a wide variety of scenarios while ensuring they maintain a high state of readiness. The higher cost of live training and the desire to save aircraft for operational use are two factors prompting a greater adoption of synthetic training. The nature of mission-focused training demands at least some live training; however, the shift to more synthetic training is advancing. The U.S. Navy reports the share of simulation-based training on some of their existing aircraft platforms could increase to nearly 50% by 2020, and for new aircraft such as the P-8A,the training program has been designed for approximately 70% synthetic training. Because of the high cost associated with conducting live training exercises, most defence forces are beginning to rebalance the mix of LVC training and shift more of the training curriculum to virtual and constructive simulation. An example are the contracts that CAE won under the USAFKC-135 programto support the Mobility Air Force Distributed Mission Operations initiative of the USAF. CAE has upgradeda range of KC-135 aircrew training devices thatare now authorized tobe used on theUSAF’s Distributed Training Center Network, thus providingthe USAFthe ability to conduct distributed, virtual tanker training. Desire to integrate training systems to achieve efficiencies and enhanced preparedness Increased operational tempo combined with limited personnel and budget pressures have prompted defence forces around the world to seek reliable partners who can help develop, manage and deliver the training systems required to support today’s complex platforms and operations. Increasingly, defence forces are considering a more integrated and holistic approach to training. To help manage the complexities and challenges, many training programs are calling for an industry partner to help design and manage the total training system. CAE refers to this approach as training systems integration and has positioned the Company globally as a platform-independenttraining systems integrator. The overall intent for defence forces is to maximize commonality for increased efficiencies, cost savings, and most importantly, enhanced capability for mission preparedness. A training systems integrator can address the overall LVC domain to deliver comprehensive training,from undergraduate individual training all the way through to operational, multi-service and joint mission training.  Attractiveness of outsourcing training and maintenance services Another driver for CAE’s expertise and capabilities is the efficiency gained by our customers from outsourcing training and support services. Defence forces and governments continue to find ways to reduce costs while not impacting readiness and allow active-duty personnel to focus on operational requirements. There has been a growing trend among defence forces to consider outsourcing a variety of training services and we expect this trend to continue,which aligns directly with CAE’s strategy to grow long-term, recurring services business. We believe governments will increasingly look to industry for training solutions to achieve faster delivery, lower capital investment requirements, and training support required to achieve desired readiness levels. For example,we inaugurated our new Dothan Training Center in Dothan, Alabama and have begun providing fixed-wing flight training. This new training centre supports the U.S. Army Fixed‐Wing Flight Training program and CAE offers comprehensive classroom, simulator and live-flying training to the U.S. Army, USAF and other customers.We believe this type of training service delivery program will become increasingly attractive to defence forces globally.  Need for synthetic training to conduct integrated, networked mission training, including joint and coalition forces training There is a growing trend among defence forces to use synthetic training to meet more of their mission training requirements, and to integrate and network various training systems so military forces cantrain in a virtual world. Simulation-basedtechnology solutions enable defence customers to plan sophisticated missions and carry out full-mission rehearsals in a synthetic environment as a complement to traditional live trainingfor mission preparation. Allies are cooperating and creating joint and coalition forces, which are driving the demand for networked training and operations. Training devices that can be networked to train different crews and allow for networked training across a range of platforms are increasingly important as the desire to conduct mission rehearsal exercises in a synthetic environment increases.For example, the Royal Canadian Air Force (RCAF) has released its Simulation Strategy 2025, which specifically calls forleveraging LVC domains within a networked common synthetic environment. The RCAF is transforming its training approach from one that relies on aircraft to one that exploits new technologies to train aircrews in a simulation-focused system that creates a virtual battlespace. The U.S., U.K. and Australian defence forces have published similar strategies.We areactively promoting open, standard simulation architectures, such as theCommon Database, to better enableintegrated and networked mission training.  Relationships with OEMs for simulation and training We are an important partner to OEMs because of our experience, global presence, and innovative technologies.We partner with manufacturers in the defence and security market to strengthen relationships and position for future opportunities. OEMs have introduced new platforms and continue to upgrade and extend the life of existing platforms, which drives worldwide demand for training systems. For example, Boeing has developed the P-8A maritime patrol aircraft and has subcontracted CAE to design and develop P-8A operational flight trainers for the U.S. Navy and Royal Australian Air Force and continues to market the P-8 internationally, which will create further opportunities for CAE. Other examples of CAE’s relationships with OEMs on specific platforms creating opportunities for training systems include Airbus Defence & Space on the C295, which was selected by Canada for the Fixed-Wing Search and Rescue program; Leonardo on the M-346 lead-in fighter trainer; Lockheed Martin on the C‐130J Super Hercules transport aircraft, which is being acquired by several branches of the USAF as well international militaries; and General Atomics on the Predator family of remotely piloted aircraft. We are also part of Team Seahawk in partnership with the U.S. Navy and companies such as Lockheed Martin/Sikorsky which is offering the MH-60R helicopter under the foreign military sales program to international customers.   CAE Year-End Financial Results 2017 |9</BCLPAGE>


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Management’s Discussion and Analysis
 HEALTHCARE MARKET We design and manufacture simulators, audiovisual and simulation centre management solutions, develop courseware and offer services for training of medical, nursing and allied healthcare students as well as 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 isexpanding, with simulation centres becomingincreasingly more prevalentin nursing and medical schools.  We offer the broadestrangeof medical simulation products and servicesinthe market today, including patient,ultrasoundand interventional(surgical)simulators, audiovisual andsimulation centre management solutionsandcoursewarefor simulation‐based healthcare education and training. We have sold simulators to customers inapproximately 90 countries that are currently supported by ournetworkin Australia, Brazil, Canada, Germany, Hungary, India,Singapore, theU.K.andtheU.S. Weare a leaderin high‐fidelity patient simulators that are uniquely powered by complex models of human physiology to mimic human responses to clinical interventions.For example,our Lucinachildbirth simulatorforboth normaldeliveriesand rare maternal emergencies was designed to offer exceptional reliability and realism in the high-fidelity patient simulation market.  Through our Healthcare Academy, we 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 Academy partnered with the International Nursing Association for Clinical Simulation and Learning (INACSL) to develop a fellowship program based on international best practices in healthcare simulation with cohorts in the U.S., U.K and U.A.E.  We offer turnkey solutions, project management and professional services for healthcare simulation programs, and collaborate with medical device companies and professional associations to develop innovative and custom training solutions. For example, we partnered with the American Society of Anesthesiologists to develop screen-based simulation training for practicing physicians. This new platform will deliver Maintenance of Certification in Anesthesiology (MOCA) education and allow us to expand access to simulation-based clinical training. Furthermore, through an industry partnership with a medical device company, we developed a specialized interventional simulator to train physicians to implant a new generation of pacemakers.  Market drivers Demand for our simulation products and services in the healthcare market is driven by the following: -Increasing use of simulation in healthcare education; -Growing emphasis on patient safety and outcomes; -Limited access to live patients during training; -Medical technology revolution.  Increasing use of simulation in healthcare education The majority of product and service sales in healthcare simulation involve healthcare education. Market research firm Markets and Markets estimates the total healthcare simulation market at approximately USD $1.1 billion. North America is the largest market for healthcare simulation, followed by Europe and Asia. Together with our more than 55 distributors worldwide, we are reaching new and emerging markets and addressing the international demand potential for simulation-based training. CAE segments the healthcare simulation marketby high-fidelity patient simulators,interventional simulators, mid/low fidelity task trainers,ultrasoundsimulators, audiovisual andsimulation 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 projects that annual national health spending will grow at an average rate of 5.8% annually over the next decade. Increasingly, hospitals are given incentives to become safer and more efficient which will drive higher demand for training. There is a growing body of evidence demonstrating that medical simulation improves patient outcomes and reduces medical errors, which can help mitigate the rate of increase in healthcare costs.  Growing emphasis on patient safety and outcomes CAE expects increased adoption of simulation-based training and certification of healthcare professionals as a means to improve patient safety and outcomes. We believe this would result in a significantly larger addressable market than the current market which is primarily education-based. According to a study by patient-safety researchers published in the British Medical Journal in May 2016, medical errors in hospitals and other healthcare facilities are the third-leading cause of death in the U.S. Training through the use of simulation can help clinicians gain confidence, knowledge and expertise for improving patient safety in a risk-free environment. Simulation is a required or recommended element in a growing movement towards High Stakes Assessment and Certification. Examples in the U.S. include MOCA, Fundamentals of Laparoscopic Surgery and Advanced Trauma Life Support. Moreover, the Accreditation Council for Graduate Medical Education is evolving towards outcome-based assessment with specific benchmarks to measure and compare performance which favours the adoption of simulation products and training.   10| CAE Year-End Financial Results 2017


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Management’s Discussion and Analysis
 Limited access to live patients during training Traditionally, medical education has been an apprenticeship model in which the student cares for patients under the supervision of more experienced staff. In this model, students have a limited role and access to high-risk procedures, rare complications and critical decision-making skills. The use of simulation in professional training programs complements traditional learning and allows students to hone their clinical and critical thinking skills for high risk, low frequency events. In 2014, the U.S. National Council of State Boards of Nursing (NCSBN) released a groundbreaking study on the effectiveness of simulation training in pre-licensure nursing programs. Among the findings, nursing students who spent up to 50 percent of clinical hours in high-quality simulation were as well-prepared for professional practice as those whose experiences were drawn from traditional clinical practice.  Simulation provides consistent, repeatable training and exposure to a broader range of patients and scenarios than one may experience in normal clinical practice. As an example, our Vimedix ultrasound simulator offers more than 200 patient pathologies for cardiac, emergency and obstetrics and gynaecology medicine. The training and education model is evolving, as evidenced by military branches around the world and most recently the U.S. Pentagon, prohibiting the use of live tissue testing in most medical training. CAE Healthcare simulators provide a low-risk alternative for practicing life-saving procedures, interprofessional team training, major disaster response and anaesthesia administration.  Medical technology revolution Advancements in medical technology are driving the use of simulation. New medical devices and advanced procedures, such as intra‐cardiac echocardiography, 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 training partner of choice with leading OEMs, we continue to collaborate to deliver innovative and custom training for new technologies. CAE Healthcare announced the release of CAE VimedixAR, an ultrasound training simulator integrated with the Microsoft HoloLens, the world’s first self-contained holographic computer. We are the first to bring a commercial Microsoft HoloLens mixed reality application to the medical simulation market.  1. 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 /2017

   2016

   (decrease)U.S. dollar (US$ or USD)

   1.33

   1.30

   2%Euro (€ or EUR)

   1.42

   1.48

   (4%)British pound (£ or GBP)

   1.67

   1.87

   (11%)
  We used the average foreign exchange rates below to value our revenues and expenses:2017

   2016

   (Decrease)U.S. dollar (US$ or USD)

   1.31

   1.31

   -Euro (€ or EUR)

   1.44

   1.45

   (1%)British pound (£ or GBP)

   1.71

   1.98

   (14%)
  For fiscal 2017, the effect of translating the results of our foreign operations into Canadian dollars resulted in adecrease in revenue of $35.9million and adecrease in net income of $5.3million, when compared to fiscal 2016. 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.   CAE Year-End Financial Results 2017 |11</BCLPAGE>


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Management’s Discussion and Analysis
 There are three areas of our business that are exposed to the fluctuations of foreign exchange rates:  -Our network of foreign training and services operations Most of our foreign training and services revenue and costs are denominated in local currency. Changes in the value of local currencies relative to the Canadian dollar therefore have an impact on these operations’ net profitability and net investment. Gains or losses in the net investmentin a foreign operation that result from changes in foreign exchange rates are deferred in the foreign currency translation account (accumulated other comprehensive income), which is part of the equity section of the consolidated statement of financial position. Any effect of the fluctuation between currencies on the net profitability has an immediate translation impact on the consolidated income statement and an impact on year-to-year and quarter-to-quarter comparisons. We apply net investment hedge accounting to hedge our net investments in our U.S.entities. We have designated a portion of the principal amount of our U.S. dollarprivate placements as the hedging item of those investments.  -Our production operations outside of Canada (Australia, Germany, India, U.K. and U.S.) Most of the revenue and costs in these foreign operations are generated in their local currency except for some data and equipment bought in different currencies from time to time, as well as any work performed by our Canadian manufacturing operations. Changes in the value of the local currency relative to the Canadian dollar have a translation impact on the operations’net profitability and net investment when expressed in Canadian dollars, as described above.  -Our production operations in Canada Although the net assets of our Canadian operations are not exposed to changes in the value of foreign currencies (except 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 foreigncurrencycost 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 foreign currencies experience significant short term volatility.  In order to minimize the impact foreign exchange market fluctuations may have, we also hedge some of theotherforeign 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)

   $

   13.7

   $

   3.6

   $

   (3.1)

   $

   0.5Euro (€ or EUR)

   

   3.6

   

   0.1

   

   (0.1)

   

   -British pound (£ or GBP)

   

   1.5

   

   0.1

   

   -

   

   

   0.1A possible strengthening of one cent in the Canadian dollar would have the opposite impact.
  12| CAE Year-End Financial Results 2017


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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. These measures should not be confused with, or used as an alternative for, performance measures calculated according to GAAP. Furthermore, these non-GAAP measures should not be compared with similarly titled measures provided or used by other companies. Backlog Obligated backlog is a non-GAAP measure that represents the expected value of orders we have received but have not yet executed. -For the Civil Aviation Training Solutions segment, we consider an item part of our obligated backlog when we have a legally binding commercial agreement with a client that includes enough detail about each party’s obligations to form the basis for a contract and includes the value of expected future revenues. Expected future revenues from customers under short-term and long-term training contracts are included when these customers commit to pay us training fees, or when we reasonably expect the revenue to be generated; -For the Defence and Security segment, we consider an item part of our obligated backlog when we have a legally binding commercial agreement with a client that includes enough detail about each party’s obligations to form the basis for a contract. Defence and Security contracts are usually executed over a long-term period but some of them must be renewed each year. For this segment, we only include a contract item in obligated backlog when the customer has authorized the contract item and has received funding for it; -For the Healthcare segment, order intake is typically converted into revenue within one year, therefore we assume that order intake is equal to revenue and consequently, backlog is nil.  Joint venture backlog is obligated backlog that represents the expected value of our share of orders that our joint ventures have received but have not yet executed. Joint venture backlog is determined on the same basis as obligated backlog described above.  Unfunded backlog is a non-GAAP measure that represents firm Defence and Security orders we have received but have not yet executed and for which funding authorization has not yet been obtained. We include unexercised negotiated options which we view as having a high probability of being exercised, but exclude indefinite-delivery/indefinite-quantity (IDIQ) contracts.  Total backlog includes obligated backlog, joint venture backlog and unfunded backlog.  The book-to-sales ratio is the total orders divided by total revenue in a given period. Capital employed Capital employed is a non-GAAP measure we use to evaluate and monitor how much we are investing in our business. We measure it from two perspectives: Capital used: -For the Company as a whole, we take total assets (not including cash and cash equivalents), and subtract total liabilities (not including long-term debt and the current portion of long-term debt); -For each segment, we take the total assets (not including cash and cash equivalents, tax accounts and other non-operating assets), and subtract total liabilities (not including tax accounts, long-term debt and the current portion of long-term debt, royalty obligations, employee benefit obligations and other non-operating liabilities).  Source of capital: -In order to understand our source of capital, we add net debt to total equity. Capital expenditures (maintenance and growth) from property, plant and equipment Maintenance capital expenditure is a non-GAAP measure we use to calculate the investment needed to sustain the current level of economic activity.  Growth capital expenditure is a non-GAAP measure we use to calculate the investment needed to increase the current level of economic activity. Earnings per share (EPS) before specific items Earnings per sharebeforespecific itemsis a non-GAAP measure calculatedby excluding the effect of restructuring, integration and acquisition costs and one-time tax items from the diluted earnings per share from continuing operations attributable to equity holders of the Company. The effect per share is obtained by dividing the restructuring, integration and acquisition costs, net of tax, and one‐time tax items by the average number of diluted shares. We track it because we believe it provides a better indication of our operating performance on a per share basis and makes it easier to compare across reporting periods.  Free cash flow Free cash flow is a non-GAAP measure that shows us how much cash we have available 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.   CAE Year-End Financial Results 2017 |13</BCLPAGE>


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Management’s Discussion and Analysis
 Gross profit Gross profit is a non-GAAP measure equivalent to the operating profit excluding research and development expenses, selling, general and administrative expenses, other (gains) losses – net, after tax share in profit of equity accounted investees and restructuring, integration and acquisitioncosts. We believe it is useful tomanagement andinvestors in evaluating our ongoing operational performance. Net debt Net debt is a non-GAAP measure we use to monitor how much debt we have after taking into account liquid assets such as cash and cash equivalents. We use it as an indicator of our overall financial position, and calculate it by taking our total long-term debt, including the current portion of long-term debt, and subtracting cash and cash equivalents.  Net debt-to-capitalis calculated as net debt divided by the sumof totalequity plus net debt. Net income before specific items Net income before specific items is a non-GAAP measure we use asan alternateview ofour operating results. We calculate it by taking our net income attributable to equity holders of the Company from continuing operations and adding back restructuring, integration and acquisition costs, net of tax, and one-time tax items. We track it because we believe it provides a better indication of our operating performance and makes it easier to compare across reporting periods.  Non-cash working capital Non-cash working capital is a non-GAAP measure we use to monitor how much money we have committed in the day-to-day operation of our business. We calculate it by taking current assets (not including cash and cash equivalentsandassets held for sale) and subtracting current liabilities (not including the current portion of long-term debtandliabilities held for sale). Operating profit Operating profit is an additionalGAAP measure that shows us how we have performed before the effects of certain financing decisions,tax structuresand discontinued operations. We trackitbecause 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. 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. Total segment operating income Total segment operating income is a non-GAAP measure andis the sum ofour key indicator of each segment’s financial performance.Segment operating incomegives usanindication 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 calculatetotal segment operating incomebytakingtheoperating profitand excluding the impact of restructuring, integration and acquisition costs. Utilization rate Utilization rateisan operatingmeasure we useto assess the performance of our Civil simulator training network. We calculate it by taking the number of training hours sold on our simulators during the period divided by the practical training capacity available for the same period.  14| CAE Year-End Financial Results 2017


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Management’s Discussion and Analysis
  4.CONSOLIDATED RESULTS3 4.1Results from operations – fourth quarter of fiscal 2017  (amounts in millions, except per share amounts)

   

   Q4-2017

   

   Q3-2017

   

   Q2-2017

   

   Q1-2017

   

   Q4-2016Revenue

   $

   734.7

   682.7

   635.5

   651.6

   722.5Cost of sales

   $

   499.7

   483.4

   448.6

   461.6

   511.9Gross profit3

   $

   235.0

   199.3

   186.9

   190.0

   210.6As a % of revenue

   %

   32.0

   29.2

   29.4

   29.2

   29.1Research and development expenses3

   $

   31.3

   28.8

   25.9

   25.0

   26.5Selling, general and administrative expenses

   $

   109.5

   90.0

   84.3

   80.6

   88.9Other (gains) losses – net

   $

   (12.3)

   (6.8)

   3.7

   2.7

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

   $

   (14.4)

   (14.1)

   (12.8)

   (10.4)

   (10.6)Restructuring, integration and acquisition costs

   $

   20.0

   2.8

   9.6

   3.1

   16.8Operating profit 3

   $

   100.9

   98.6

   76.2

   89.0

   99.8As a % of revenue

   %

   13.7

   14.4

   12.0

   13.7

   13.8Finance income

   $

   (4.3)

   (2.2)

   (2.8)

   (2.3)

   (2.8)Finance expense

   $

   20.6

   20.7

   20.7

   22.0

   21.2Finance expense – net

   $

   16.3

   18.5

   17.9

   19.7

   18.4Earnings before income taxes and discontinued operations

   $

   84.6

   80.1

   58.3

   69.3

   81.4Income tax expense (recovery)

   $

   14.8

   11.0

   9.5

   (0.1)

   19.3As a % of earnings before income taxes anddiscontinued operations (income tax rate)

   %

   17

   14

   16

   -

   24Earnings from continuing operations

   $

   69.8

   69.1

   48.8

   69.4

   62.1(Loss) earnings from discontinued operations

   $

   (0.7)

   0.2

   0.1

   (0.1)

   (2.4)Net income

   $

   69.1

   69.3

   48.9

   69.3

   59.7Attributable to:Equity holders of the CompanyContinuing operations

   $

   67.4

   67.6

   48.3

   68.7

   61.2Discontinued operations

   $

   (0.7)

   0.2

   0.1

   (0.1)

   (2.4)$

   66.7

   67.8

   48.4

   68.6

   58.8Non-controlling interests

   $

   2.4

   1.5

   0.5

   0.7

   0.9$

   69.1

   69.3

   48.9

   69.3

   59.7EPS attributable to equity holders of the CompanyBasic and diluted - continuing operations

   $

   0.25

   0.25

   0.18

   0.25

   0.23Basic and diluted - discontinued operations

   $

   -

   -

   -

   -

   (0.01)$

   0.25

   0.25

   0.18

   0.25

   0.22
  CAE Year-End Financial Results 2017 |15</BCLPAGE>
  3Non-GAAP and other financial measures (see Section 3.6).


---



Management’s Discussion and Analysis
  Revenue from continuing operations was 8% higher than last quarter and 2% higher compared to the fourth quarter of fiscal 2016 Revenue from continuing operations was $52.0 million higher than last quarter mainly because: -Defence and Security revenue increased by $39.0 million, or 16%, mainly due to higher revenue from North American and Middle Eastern programs partially offset by lower revenue from European programs; -Healthcare revenue increased by $8.0 million, or 31%, mainly due to higher revenue from centre management solutions and ultrasound simulators, primarily driven by higher sales to U.S. customers; -Civil Aviation Training Solutions revenue increased by $5.0 million, or 1%, mainly due to higher FFS utilization in the Americas and Europe, partially offset by lower revenue from LMCFT acquired in the first quarter of fiscal 2017 and an unfavourable foreign exchange impact on the translation of foreign operations.  Revenue from continuing operations was $12.2 million higher than the same period last year largely because: -Civil Aviation Training Solutions revenue increased by $24.8 million, or 6%, mainly due to higher revenue from our manufacturing facility due to the timing of production milestones, the integration into our results of the revenues of LMCFT and higher FFS utilization in the Americas and Europe. The increase was partially offset by the deferral of revenue recognition, to upon completion, from construction contracts for standardized simulators as a result of our process improvement program and an unfavourable foreign exchange impact on the translation of foreign operations; -Defence and Security revenue decreased by $11.0 million, or 4%, mainly due to lower revenue from North American programs and an unfavourable foreign exchange impact on the translation of foreign operations partially offset by higher revenue from Middle Eastern programs; -Healthcare revenue decreased by $1.6 million, or 4%, mainly due to lower patient simulator revenue due, in part, to lower volume from our international and military customers, partially offset by an increase in centre management solution and ultrasound simulator revenue in the U.S.  You will find more details inResults by segment. Totalsegment operating income4 was $19.5 million higher than last quarter and $4.3 million higher compared to the fourth quarter of fiscal 2016 Operating profit this quarter was $100.9 million or 13.7% of revenue, compared to $98.6 million or 14.4% of revenue last quarter and $99.8 million or 13.8% of revenue in the fourth quarter of fiscal 2016. Restructuring, integration and acquisition costs of $20.0 million were recorded this quarter compared to $2.8 million last quarter and $16.8 million in the fourth quarter of last year. Total segment operating income was $120.9 million this quarter compared to $101.4 million last quarter and $116.6 million in the fourth quarter of fiscal 2016.  Total segment operating income was $19.5 million or 19% higher compared to last quarter. Increases in segment operating income were $12.4 million, $4.1 million and $3.0 million for Civil Aviation Training Solutions, Healthcare and Defence and Security respectively.4 Total segment operating income increased by $4.3 million or 4% over the fourth quarter of fiscal 2016. Increases in segment operating income of $8.8 million for Civil Aviation Training Solutions and $0.6 million for Healthcare were partially offset by a decrease of $5.1 million for Defence and Security. You will find more details inRestructuring costsandResults by segment. Net finance expense was $2.2 million lower than last quarter and $2.1 million lower than the fourth quarter of fiscal 2016 Net finance expense was lower this quarter compared to last quarter. The decrease was mainly due to higher finance income.  Net finance expense this quarter was lower compared to the fourth quarter of fiscal 2016. The decrease was mainly due to higher finance income, lower interest expense on long-term debt as a result of a repayment, in June 2016, of senior notes issued by way of a private placement and a decrease in other finance expense. The decrease was partially offset by higher finance expense on royalty obligations and R&D obligations.  Income tax rate was 17% this quarter Income taxes this quarter were $14.8 million, representing an effective tax rate of 17%, compared to 14% last quarter and 24% for the fourth quarter of fiscal 2016.  The increase in the tax rate over last quarter was mainly due to a change in the mix of income from various jurisdictions, partially offset by an additional audit settlement in Canada this quarter. Excluding the effect of the audit settlement in Canada, the income tax rate would have been 22% this quarter.  The decrease in the tax rate from the fourth quarter of fiscal year 2016 was mainly due to an audit settlement in Canada and a change in the mix of income from various jurisdictions.  16| CAE Year-End Financial Results 2017
  4Non-GAAP and other financial measures (see Section 3.6).


---



Management’s Discussion and Analysis
  4.2Results from operations – fiscal 2017  (amounts in millions, except per share amounts)

   

   FY2017

   

   

   FY2016Revenue

   $

   2,704.5

   

   2,512.6Cost of sales

   $

   1,893.3

   

   1,816.7Gross profit

   $

   811.2

   

   695.9As a % of revenue

   %

   30.0

   

   27.7Research and development expenses

   $

   111.0

   

   87.6Selling, general and administrative expenses

   $

   364.4

   

   311.5Other gains – net

   $

   (12.7)

   

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

   $

   (51.7)

   

   (43.4)Restructuring, integration and acquisition costs

   $

   35.5

   

   28.9Operating profit

   $

   364.7

   

   335.5As a % of revenue

   %

   13.5

   

   13.4Finance income

   $

   (11.6)

   

   (9.5)Finance expense

   $

   84.0

   

   84.7Finance expense – net

   $

   72.4

   

   75.2Earnings before income taxes and discontinued operations

   $

   292.3

   

   260.3Income tax expense

   $

   35.2

   

   20.4As a % of earnings before income taxes anddiscontinued operations (income tax rate)

   %

   12

   

   8Earnings from continuing operations

   $

   257.1

   

   239.9Loss from discontinued operations

   $

   (0.5)

   

   (9.6)Net income

   $

   256.6

   

   230.3Attributable to:Equity holders of the CompanyContinuing operations

   $

   252.0

   

   239.3Discontinued operations

   $

   (0.5)

   

   (9.6)$

   251.5

   

   229.7Non-controlling interests

   $

   5.1

   

   0.6$

   256.6

   

   230.3EPS attributable to equity holders of the CompanyBasic - continuing operations

   $

   0.94

   

   0.89Basic - discontinued operations

   $

   -

   

   (0.04)$

   0.94

   

   0.85Diluted - continuing operations

   $

   0.93

   

   0.89Diluted - discontinued operations

   $

   -

   

   (0.04)$

   0.93

   

   0.85
  CAE Year-End Financial Results 2017 |17</BCLPAGE>


---



Management’s Discussion and Analysis
  Revenue from continuing operations was $191.9 million or 8% higher than last year Revenue from continuing operations was higher than last year mainly because: -Civil Aviation Training Solutions revenue increased by $127.8 million, or 9%, mainly due to higher revenue from our manufacturing facility, the integration into our results of the revenues of LMCFT and higher FFS utilization in Europe and the Americas. The increase was partially offset by the deferral of revenue recognition, to upon completion, from construction contracts for standardized simulators as a result of our process improvement program; -Defence and Security revenue increased by $66.8 million, or 7%, mainly due to the integration into our results of the revenues from BMAT acquired in the second quarter of last year and higher revenue from European and Middle Eastern programs. The increase was partially offset by lower revenue from North American programs and an unfavourable foreign exchange impact on the translation of foreign operations; -Healthcare revenue decreased by $2.7 million, or 2%, mainly due to lower patient simulator revenue due, in part, to lower volume from our international and military customers, partially offset by increased revenue from key partnerships with OEMs.  You will find more details inResults by segment.  Gross profit was $115.3 million higher than last year Gross profit was $811.2 million this year, or 30.0% of revenue compared to $695.9 million, or 27.7% of revenue last year. As a percentage of revenue, gross profit was higher when compared to last year. Total segment operating income was $35.8 million higher than last year Operating profit for the year was $364.7 million or 13.5% of revenue, compared to $335.5 million or 13.4% of revenue last year. Restructuring, integration and acquisition costs of $35.5 million were recorded this year compared to $28.9 million last year and total segment operating income was $400.2 million this year compared to $364.4 million last year.  Total segment operating income was $35.8 million or 10% higher compared to last year. Increases in segment operating income were $35.8 million for Civil Aviation Training Solutions and $0.6 million for Defence and Security respectively, were partially offset by a decrease of $0.6 million for Healthcare. You will find more details inRestructuring costsandResults by segment. Net finance expense was $2.8 million lower than last year  FY2016 to(amounts in millions)

   

   FY2017Net finance expense, prior period

   $

   75.2Change in finance expense from the prior period:Decrease in finance expense on long-term debt (other than finance leases)

   $

   (2.1)Increase in finance expense on royalty obligations

   

   2.6Increase in finance expense on amortization of deferred financing costs

   

   0.1Decrease in finance expense on accretion of provisions

   

   (0.8)Decrease in other finance expense

   

   (1.0)Decrease in borrowing costs capitalized

   

   0.5Decrease in finance expense from the prior period

   $

   (0.7)Change in finance income from the prior period:Increase in interest income on loans and finance lease contracts

   $

   (0.3)Increase in other finance income

   

   (1.8)Increase in finance income from the prior period

   $

   (2.1)Net finance expense, current period

   $

   72.4
  Net finance expense was $72.4 million this year, $2.8 million or 4% lower than last year. The decrease was mainly due to lower interest expense on long-term debt as a result of a repayment, in June 2016, of senior notes issued by way of a private placement, higher finance income and lower interest on other debt, partially offset by higher finance expense on R&D obligations and royalty obligations.   18| CAE Year-End Financial Results 2017


---



Management’s Discussion and Analysis
 Income tax rate was 12% this year This fiscal year, income taxes were $35.2 million, representing an effective tax rate of 12%, compared to 8% for the same period last year.  The increase in the tax rate compared to last year was mainly due to the net impact last year of the favourable settlement of tax oppositions in Canada with respect to the tax treatment of the sale of certain simulators, the negative impact of certain tax audits and the U.S. tax incentives applicable to domestic manufacturers, partially offset by this year’s recognition of deferred tax assets in Brazil, the favourable impact of the audit settlements in Canada and a change in mix of income from various jurisdictions. Excluding the effect of the recognition of deferred tax assets in Brazil and this year’s favourable impact of the audit settlements in Canada, the income tax rate would have been 18% this year.    4.3Restructuring, integration and acquisition costs During the first quarter of fiscal year 2016, we implemented a process improvement program to realize the benefits from the transformation of our production processes and product offering to further strengthen our competitive position, whichresulted in a reduction of our workforce. The restructuring program was completed during the second quarter of fiscal 2017. Restructuring costs consisting mainly of severances andother related costsrelated to this process improvement program of $4.3 million after-taxwere included in net income in fiscal 2017.  In the first quarter of fiscal 2017, we acquired 100% of the shares of LMCFT, a provider of aviation simulation training equipment and services.For the three months and twelve months ended March 31, 2017,costs for restructuring, integration and acquisition activities of $15.6 million after-tax and $22.1 million after-tax were included in net income, respectively, in relation to this acquisition. Restructuring costs consist mainly ofseverances, costs to exit leases andother related costs. Integration costs represent incremental costs directly related to the integration of LMCFT within our ongoing activities. This primarily includes expenditures related to regulatory and process standardization, systems integration and other activities. Acquisition costs include expenses, fees, commissions and other costs associated with the collection of information, negotiation of contracts, risk assessments, and the services of lawyers, advisors and specialists. The restructuring program related to the acquisition of LMCFT was completed during the fourth quarter of fiscal 2017.  You will find more details in Note 11 and Note 22 of our consolidated financial statements.  4.4Consolidated orders and total backlog Our total consolidated backlog was $7,530.2 million at the end of fiscal 2017, which is 18% higher than last year. New orders of $3,193.4 million were added this year, partially offset by $2,704.5 million in revenue generated from our obligated backlog. The adjustment of $23.8 million was mainly due to the cancellation of orders and the revaluation of prior year contracts, partially offset by a contract amendment related to the acquisition of Bombardier’s Military Aviation Training (BMAT) business, acquired last year, and an adjustment of $117.8 million added as a result of the acquisition of LMCFT. Our joint venture backlog5was $543.7 million and our unfunded backlog was $1,456.5 million.  Total backlog up 18% over last year(amounts in millions)

   

   FY2017

   

   

   FY2016Obligated backlog, beginning of period

   $

   5,064.9

   $

   4,354.1+ orders

   

   3,193.4

   

   2,782.0- revenue

   

   (2,704.5)

   

   (2,512.6)+ / - adjustments

   

   (23.8)

   

   441.4Obligated backlog, end of period

   $

   5,530.0

   $

   5,064.9Joint venture backlog (all obligated)

   

   543.7

   

   551.3Unfunded backlog

   

   1,456.5

   

   756.4Total backlog

   $

   7,530.2

   $

   6,372.6
  In fiscal 2016, adjustments were mainly related to the acquisition of BMAT, as well as the revaluation of certain contracts and the cancellation of two orders from previous years within the Civil Aviation Training Solutions segment and foreign exchange movements.  The book-to-sales ratio for the quarter was 1.03x. The ratio for the last 12 months was 1.18x.5  You will find more details inResults by segment.  CAE Year-End Financial Results 2017 |19</BCLPAGE>
  5Non-GAAP and other financial measures (see Section 3.6).


---



Management’s Discussion and Analysis
  5.RESULTS BY SEGMENT We manage our business and report our results in three segments:  -Civil Aviation Training Solutions; -Defence and Security; -Healthcare.6  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)

   FY2017

   

   FY2016

   

   

   Q4-2017

   

   Q3-2017

   

   Q2-2017

   

   Q1-2017

   

   Q4-2016Civil Aviation Training Solutions

   $

   273.2

   237.4

   

   83.8

   71.4

   54.2

   63.8

   75.0%

   17.5

   16.6

   

   20.1

   17.3

   15.3

   17.2

   19.1Defence and Security

   $

   120.4

   119.8

   

   33.0

   30.0

   29.0

   28.4

   38.1%

   11.6

   12.3

   

   11.7

   12.3

   11.5

   11.0

   13.0Healthcare

   $

   6.6

   7.2

   

   4.1

   -

   2.6

   (0.1)

   3.5%

   6.0

   6.3

   

   12.0

   -

   9.4

   -

   9.8Total segment operating income (SOI)

   $

   400.2

   364.4

   

   120.9

   101.4

   85.8

   92.1

   116.6Restructuring, integration and acquisition costs

   $

   (35.5)

   (28.9)

   

   (20.0)

   (2.8)

   (9.6)

   (3.1)

   (16.8)Operating profit

   $

   364.7

   335.5

   

   100.9

   98.6

   76.2

   89.0

   99.8
  Capital employed6  March 31

   

   December 31

   

   September 30

   

   June 30

   

   March 31(amounts in millions)

   

   2017

   2016

   2016

   2016

   2016Civil Aviation Training Solutions

   $

   1,985.3

   2,016.5

   2,052.4

   2,027.4

   2,017.1Defence and Security

   $

   881.2

   875.3

   862.6

   823.6

   720.3Healthcare

   $

   224.3

   222.8

   214.1

   210.4

   206.0$

   3,090.8

   3,114.6

   3,129.1

   3,061.4

   2,943.4
   20| CAE Year-End Financial Results 2017
  6Non-GAAP and other financial measures (see Section 3.6).


---



Management’s Discussion and Analysis
 5.1Civil Aviation Training Solutions FISCAL 2017 EXPANSIONS AND NEW INITIATIVES Acquisition -We completed the acquisition of LMCFT, a provider of aviation simulation training equipment and services on May 2, 2016. Expansions -We integrated six FFSs into our training network following the completion of our acquisition of LMCFT. The FFSs are located in South Korea, Brazil and Turkey; -Our joint venture Embraer-CAE Training Services announced an expansion of its training programs for Embraer Phenom 100 and Phenom 300 pilots and maintenance technicians at our location in Amsterdam. The program is expected to be ready for training in the first quarter of calendar 2018; -We inaugurated, together with the Hibernia Management and Development Company Ltd. and the Research & Development Corporation, a new helicopter training and R&D centre in Newfoundland and Labrador featuring the first civilian Level D helicopter simulator with night vision in Canada; -CAE Simulation Training Private Limited (CSTPL), a joint venture between CAE and InterGlobe Enterprises, announced the inauguration of its fourth A320 FFS; -We commenced training on the Gulfstream G650 FFS, located at the Emirates-CAE Flight Training centre in Dubai, UAE; -We announced the expansion of our commercial, business and helicopter aviation training agreement with Abu Dhabi Aviation (ADA) through which CAE and ADA will be delivering training to regional operators at ADA’s brand new training facility in Abu Dhabi, UAE; -CAE-Lider, a joint venture between CAE and Lider Aviação, announced its designation by Leonardo Helicopter as the Recognized Flight Simulation Centre for the delivery of AW139 flight simulator hours supporting training in South America.  New programs and products -We announced that our business aviation Upset Prevention and Recovery Training (UPRT) program is ready for training and has received endorsement by Dassault Aviation, reaffirming our leadership position in helping prevent Loss of Control In-Flight; -We initiated the Next Generation Training System and launched the validation phase with AirAsia, focusing on the validation and refinement of the system’s new training capabilities for pilot critical skill performance; -Our joint venture Flight Training Alliance unveiled its first C Series aircraft FFS during an inauguration held in Frankfurt, Germany and began pilot training at the Lufthansa Flight Training Center Frankfurt; -Our new CAE Terminal online portal aims to enrich the customer experience by providing line pilots and flight department leaders instant access to appropriate documentation, training records and reservation details.  ORDERS Civil Aviation Training Solutionsobtained contracts this quarter expected to generate future revenues of$481.3million, includingcontracts for 17 FFSs.  FFS contracts awarded for the quarter: -Five FFSs, including two Boeing 737MAX, one Boeing 787, one Airbus A350 and one Airbus A320neo to Shanghai Eastern Flight Training Co., the training centre subsidiary of China Eastern Airlines; -One Boeing 737NG FFS to Donghai Airlines; -One C Series CS300 FFS to Korean Air; -One Airbus A320 FFS to Avenger Flight Group; -One Airbus A350 FFS to Ethiopian Airlines; -One Airbus A320 FFS to Airbus; -One Boeing 737NG FFS to ChongQing Yu Xiang Aviation; -Six FFSs, including two Airbus A320s, two Airbus A330s, one Airbus A350 and one Boeing 767 to undisclosed customers in Asia and North America.  This brings the civil FFS order intake for the year to 50 FFSs.  Other notable contract awards for the quarter included: -A new long-term ab-initio pilot training program for an undisclosed customer in the Middle East; -An exclusive contract renewal with Scandinavian Airlines for pilot training and cabin crew recruitment and training services; -An exclusive pilot training contract with an undisclosed customer in Europe.   CAE Year-End Financial Results 2017 |21</BCLPAGE>


---



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

   FY2017

   

   FY2016

   

   

   Q4-2017

   

   Q3-2017

   

   Q2-2017

   

   Q1-2017

   

   Q4-2016Revenue

   $

   1,556.9

   1,429.1

   

   417.8

   412.8

   354.7

   371.6

   393.0Segment operating income

   $

   273.2

   237.4

   

   83.8

   71.4

   54.2

   63.8

   75.0Operating margins

   %

   17.5

   16.6

   

   20.1

   17.3

   15.3

   17.2

   19.1Depreciation and amortization

   $

   140.2

   133.8

   

   33.3

   37.3

   34.0

   35.6

   34.8Property, plant and equipmentexpenditures

   $

   124.8

   92.9

   

   52.5

   16.6

   25.1

   30.6

   29.6Intangible assets and otherassets expenditures

   $

   20.5

   33.7

   

   5.4

   4.7

   5.3

   5.1

   8.3Capital employed

   $

   1,985.3

   2,017.1

   

   1,985.3

   2,016.5

   2,052.4

   2,027.4

   2,017.1Total backlog

   $

   3,288.9

   3,078.6

   

   3,288.9

   3,253.5

   3,337.6

   3,221.6

   3,078.6SEU7

   

   210

   204

   

   210

   209

   210

   209

   205FFSs deployed

   

   269

   261

   

   269

   269

   269

   269

   261Utilization rate7

   %

   76

   71

   

   77

   76

   70

   79

   76
  Revenue up 1% over last quarter and up 6% over the fourth quarter of fiscal 20167 The increase over last quarter was mainly due to higher FFS utilization in the Americas and Europe, partially offset by lower revenue from LMCFT acquired in the first quarter of fiscal 2017 and an unfavourable foreign exchange impact on the translation of foreign operations.  The increase over the fourth quarter of fiscal 2016 was mainly due tohigher revenue from our manufacturing facility due to the timing of production milestones, the integration into our results of the revenues of LMCFT andhigher FFS utilization in the Americas and Europe. The increase waspartially offset by the deferral of revenue recognition, to upon completion, from construction contracts for standardized simulators as a result of our process improvement program and an unfavourable foreign exchange impact on the translation of foreign operations.  Revenue was $1,556.9 million this year, 9% or $127.8 million higher than last year The increase over last year was mainly due tohigher revenue from our manufacturing facility, the integration into our results of the revenues of LMCFT andhigher FFS utilization in Europe and the Americas.The increase waspartially offset by the deferral of revenue recognition, to upon completion, from construction contracts for standardized simulators as a result of our process improvement program. Segment operating income up 17% over last quarter and up 12% over the fourth quarter of fiscal 2016 Segment operating income was $83.8 million (20.1% of revenue) this quarter, compared to $71.4 million (17.3% of revenue) last quarter and $75.0 million (19.1% of revenue) in the fourth quarter of fiscal 2016.  Segment operating income increased by $12.4 million, or 17%, over last quarter.The increase was mainly due to higher FFS utilization in Europe and the Americas and gains on the sale of simulators from our network, partially offset by higher selling, general and administrative expenses and lower income from LMCFT.  Segment operating income increased by $8.8 million, or 12%, over the fourth quarter of fiscal 2016.The increase was mainly due to a favourable program mix from our manufacturing facility, gains on the sale of simulators from our network and higher FFS utilization in Europe and in the Americas. The increase was partially offset by higher selling, general and administrative expenses, non-recurring reorganization expenses in our FTOs following the consolidation of our operations in Europe and the impact on segment operating income of the deferral of revenue recognition for standardized simulators.  Segment operating income was $273.2 million, 15% or $35.8 million higher than last year Segment operating income was $273.2 million (17.5% of revenue) this year, compared to $237.4 million (16.6% of revenue) last year.  The increase was mainlyattributable to a favourable program mix from our manufacturing facility, higher income generated in Europe as a result of higher FFS utilization and a net favourable foreign exchange impact from operations. The increase waspartially offsetby higher selling, general and administrative expenses, non-recurring reorganization expenses in our FTOs following the consolidation of our operations in Europe and the impact on segment operating income of the deferral of revenue recognition for standardized simulators.  Property, plant and equipment expenditures at $52.5 million this quarter and $124.8 million for the year Maintenance capital expenditures were $17.9 million for the quarter and $46.8 million for the year. Growth capital expenditures were $34.6 million for the quarter and $78.0 million for the year.  22| CAE Year-End Financial Results 2017
  7Non-GAAP and other financial measures (see Section 3.6).


---



Management’s Discussion and Analysis
  Capital employed decreased $31.2 million from last quarter and decreased $31.8 million from last year The decrease in capital employed from last quarter was mainly due to a lower investment in non-cash working capital mainly as a result of higher accounts payable and accrued liabilities and deferred revenue, partially offset by higher accounts receivable. The decrease was also due to higher long-term provisions and was partially offset byan increase in property, plant and equipment resulting from investment in capital expenditures.  The decrease in capital employed from last year was mainly due to higher deferred gains and other non-current liabilities, higher long‐term provisions and a lower investment in non-cash working capital. The lower investment in non-cash working capital was mainly due to higher deferred revenue and accounts payable and accrued liabilities, lower contracts in progress assets and higher provisions, partially offset by an increase in inventory and higher accounts receivable. The decrease in capital employed was partially offset byan increase in property, plant and equipment anda higher investmentin equity accounted investees as a result ofincreased profitabilitywithin our joint ventures.  Total backlog was at $3,288.9 million at the end of the year(amounts in millions)

   FY2017

   

   FY2016Obligated backlog, beginning of period

   $

   2,623.3

   $

   2,397.7+ orders

   

   1,698.8

   

   1,683.0- revenue

   

   (1,556.9)

   

   (1,429.1)+ / - adjustments

   

   58.7

   

   (28.3)Obligated backlog, end of period

   $

   2,823.9

   $

   2,623.3Joint venture backlog (all obligated)

   

   465.0

   

   455.3Total backlog

   $

   3,288.9

   $

   3,078.6Fiscal 2017 adjustments includes $117.8 million added as a result of the acquisition of LMCFT, the revaluation of prior year contracts and the cancellation of an order from a previous year.Fiscal 2016 adjustments were mainly due to the revaluation of certain contracts during the year, the cancellation of two orders from previous years and foreign exchange movements.This quarter's book-to-sales ratio was 1.15x. The ratio for the last 12 months was 1.09x.
   CAE Year-End Financial Results 2017 |23</BCLPAGE>


---



Management’s Discussion and Analysis
 5.2Defence and Security FISCAL 2017 EXPANSIONS AND NEW INITIATIVES Expansions -We delivered the Naval Warfare Training System to the Swedish Navy and commenced the provision of training support services during the third quarter; -We continue to expand our naval capabilities and expertise, and have begun the design and build of the Naval Training Centre for the United Arab Emirates Navy; -We constructed and inaugurated the CAE Dothan Training Center in Dothan, U.S., where we began offering training for the U.S. Army Fixed-Wing Flight Training program in March 2017; -We received an Authorization to Operate KC-135 aircrew training devices on the U.S. Air Force’s Distributed Training Center Network.  New programs and products -We signed a Memorandum of Understanding with Draken International to pursue global opportunities related to the provision of advanced adversary and aggressor air training services; -We supported both the Royal Canadian Air Force and Royal Australian Air Force as they participated in Coalition Virtual Flag 16, one of the world's largest virtual air combat exercises; -We launched our next-generation CAE Medallion-6000XR image generator to support the creation of highly immersive and realistic synthetic environments; -The Open Geospatial Consortium (OGC), an international consortium developing geospatial standards and interoperable solutions, formally approved the CAE-developed Common Database (CDB) as an international OGC standard.  ORDERS Defence and Security was awarded $238.8 million in orders this quarter, including notable contract awards from: -Airbus Defence and Space for a comprehensive C295W aircrew and maintenance training solution to support the Royal Canadian Air Force’s (RCAF) Fixed-Wing Search and Rescue program; -The NATO Support and Procurement Agency to provide comprehensive training services, including instructors, for the NATO E-3A Airborne Warning and Control System aircrew training program; -Lockheed Martin to continue providing a range of training support services for the U.S. Air Force C-130J Maintenance and Aircrew Training System program.  Financial results(amounts in millions, except operating margins)

   FY2017

   

   FY2016

   

   

   Q4-2017

   

   Q3-2017

   

   Q2-2017

   

   Q1-2017

   

   Q4-2016Revenue

   $

   1,036.9

   970.1

   

   282.7

   243.7

   253.2

   257.3

   293.7Segment operating income

   $

   120.4

   119.8

   

   33.0

   30.0

   29.0

   28.4

   38.1Operating margins

   %

   11.6

   12.3

   

   11.7

   12.3

   11.5

   11.0

   13.0Depreciation and amortization

   $

   57.8

   69.8

   

   14.3

   14.5

   11.1

   17.9

   20.7Property, plant and equipmentexpenditures

   $

   95.8

   22.9

   

   19.7

   19.0

   33.5

   23.6

   9.4Intangible assets and otherassets expenditures

   $

   26.9

   17.6

   

   12.6

   6.7

   2.9

   4.7

   8.1Capital employed

   $

   881.2

   720.3

   

   881.2

   875.3

   862.6

   823.6

   720.3Total backlog

   $

   4,241.3

   3,294.0

   

   4,241.3

   4,139.6

   3,197.4

   3,306.0

   3,294.0
  Revenue up 16% over last quarter and down 4% from the fourth quarter of fiscal 2016 The increase over last quarter was mainly due to higher revenue from North American and Middle Eastern programs partially offset by lower revenue from European programs.  The decrease from the fourth quarter of fiscal 2016 was mainly due to lower revenue from North American programs and an unfavourable foreign exchange impact on the translation of foreign operations partially offset by higher revenue from Middle Eastern programs.  Revenue was $1,036.9 million this year, 7% or $66.8 million higher than last year The increase was mainly due to the integration into our results of the revenues from BMAT acquired in the second quarter of last year and higher revenue from European and Middle Eastern programs. The increase was partially offset by lower revenue from North American programs and an unfavourable foreign exchange impact on the translation of foreign operations.   24| CAE Year-End Financial Results 2017


---



Management’s Discussion and Analysis
 Segment operating income up 10% over last quarter and down 13% from the fourth quarter of fiscal 2016 Segment operating income was $33.0 million (11.7% of revenue) this quarter, compared to $30.0 million (12.3% of revenue) last quarter and was $38.1 million (13.0% of revenue) in the fourth quarter of fiscal 2016.  The increase over last quarter was mainly due to higher volume on North American programs and higher margins on Asian programs, partially offset by higher selling, general and administrative expenses and lower volume on European programs.  The decrease from the fourth quarter of fiscal 2016 was mainly due to a benefit recognized last year related to the renegotiation of long-term royalty obligations partially offset by an unfavourable tax assessment in one of our joint ventures and a loss on disposal of assets related to our process improvement plan. The decrease was partially offset by higher margins on North American and Asian programs and higher profitability in our joint ventures, offset, in part, by higher selling, general and administrative expenses.  Segment operating income was $120.4 million this year, 1% or $0.6 million higher than last year Segment operating income was $120.4 million (11.6% of revenue) this year, compared to $119.8 million (12.3% of revenue) last year.  The increase over last year was mainly due to higher margins on North American programs, the integration into our results of BMAT, higher margins on Asian programs, higher profitability in our joint ventures and higher volume on European and Middle Eastern programs, partially offset by higher selling, general and administrative expenses and higher net research and development expenses. The increase in segment operating income was partially offset by a benefit recognized last year related to the renegotiation of long‐term royalty obligations and higher investment tax credits claimed last year partially offset by an unfavourable tax assessment in one of our joint ventures,and a loss on disposal of assets related to our process improvement plan.  Capital employed increased $5.9 million over last quarter and increased $160.9 million over last year The increase over last quarter was mainly due to higher intangible assets, higher property, plant and equipment and lower deferred gains and other non-current liabilities, partially offset by a lower investment in non-cash working capitalas a result of higher accounts payable and accrued liabilities, partially offset by an increase in accounts receivables.  The increase over last year was mainly due to an increase in property, plant and equipmentas a result of capital expenditures related to the U.S. Army Fixed-Wing Flight Training program,lower deferred gains and other non-current liabilities, higher other assets, an increase in intangible assets and a higher investment in non-cash working capital. The higher investment in non-cash working capital was mainly duelower accounts payable and accrued liabilities and an increase in accounts receivables, partially offset by a decrease in prepayments.  Total backlog up 29% compared to last year(amounts in millions)

   FY2017

   

   FY2016Obligated backlog, beginning of period

   $

   2,441.6

   $

   1,956.4+ orders

   

   1,383.9

   

   985.6- revenue

   

   (1,036.9)

   

   (970.1)+ / - adjustments

   

   (82.5)

   

   469.7Obligated backlog, end of period

   $

   2,706.1

   $

   2,441.6Joint venture backlog (all obligated)

   

   78.7

   

   96.0Unfunded backlog

   

   1,456.5

   

   756.4Total backlog

   $

   4,241.3

   $

   3,294.0Fiscal 2017 adjustments include the cancellation of two orders and the revaluation of prior year contracts, partially offset by a contract amendment related to the acquisition of BMAT, acquired in the second quarter of fiscal 2016.Fiscal 2016 adjustments are mainly due to backlog added as a result of the acquisition of BMAT and foreign exchange movements.This quarter's book-to-sales ratio was 0.84x. The ratio for the last 12 months was 1.33x.In fiscal 2017, $146.7 million of unfunded backlog was transferred to obligated backlog and $939.2 million was added to the unfunded backlog.
  CAE Year-End Financial Results 2017 |25</BCLPAGE>


---



Management’s Discussion and Analysis
  5.3Healthcare FISCAL 2017 EXPANSIONS AND NEW INITIATIVES Expansions -Our Vimedix ultrasound simulator was used to deliver the European Diploma in Echocardiography exam for the first time during the European Society for Intensive Care Medicine Congress in Milan, Italy, demonstrating its use not only for training, but also for certification; -We commenced collaboration under a co-marketing agreement with a medical device manufacturer promoting point-of-care ultrasound training and its expanded use for patient assessment and diagnosis; -We released a new version of the Respiratory Education Simulation Program (RESP 1 and RESP 2) Learning Module for Apollo, iStan, METIman and the Human Patient Simulator; -Our Essentials of Simulation course, which is offered in partnership with the University of Rotterdam, was accredited by the Dutch National Office of Continuous Medical Education; -We hosted our 20th Human Patient Simulation Network (HPSN) World conference for attendees from 21 countries in the fourth quarter, and hosted our first HPSN conferences in China and India, expanding our potential customer bases and simulation markets.  New programs and products -We launched the VimedixAR ultrasound simulator with Microsoft Hololens, the first ultrasound simulator with real-time interactive holograms of human anatomy; -We launched the Blue Phantom Gen II PICC with IV and arterial access ultrasound model at the National League for Nursing conference in Orlando, U.S. This model is used to train clinicians in the skills associated with ultrasound guided peripheral venous and arterial access procedures; -We added a Spectral Doppler capability as well as a new Emergency Care pathology package to our Vimedix offerings.  ORDERS CAE Healthcare sales this quarter included: -13 patient simulators and five centre management systems for major contracts to customers in the U.S. and the Middle East; -Five VimedixAR ultrasound simulators with Microsoft Hololens to customers in the U.S. and a custom Vimedix solution to an OEM.  Financial results(amounts in millions, except operating margins)

   FY2017

   

   FY2016

   

   

   Q4-2017

   

   Q3-2017

   

   Q2-2017

   

   Q1-2017

   

   Q4-2016Revenue

   $

   110.7

   113.4

   

   34.2

   26.2

   27.6

   22.7

   35.8Segment operating income

   $

   6.6

   7.2

   

   4.1

   -

   2.6

   (0.1)

   3.5Operating margins

   %

   6.0

   6.3

   

   12.0

   -

   9.4

   -

   9.8Depreciation and amortization

   $

   13.9

   14.2

   

   3.8

   3.5

   3.3

   3.3

   3.6Property, plant and equipmentexpenditures

   $

   2.3

   2.0

   

   1.4

   0.2

   0.2

   0.5

   0.8Intangible assets and otherassets expenditures

   $

   3.7

   2.6

   

   -

   1.6

   1.0

   1.1

   0.4Capital employed

   $

   224.3

   206.0

   

   224.3

   222.8

   214.1

   210.4

   206.0
  Revenue up 31% over last quarter and down 4% from the fourth quarter of fiscal 2016 The increase over last quarter was mainly due to higher revenue from centre management solutions and ultrasound simulators, primarily driven by higher sales to U.S. customers.  The decrease from the fourth quarter of fiscal 2016 was mainly due to lower patient simulator revenue due, in part, to lower volume from our international and military customers, partially offset by an increase in centre management solution and ultrasound simulator revenue in the U.S.  26| CAE Year-End Financial Results 2017


---



Management’s Discussion and Analysis
 Revenue was $110.7 million this year, 2% or $2.7 million lower than last year The decrease was mainly due to lower patient simulator revenue due, in part, to lower volume from our international and military customers, partially offset by increased revenue from key partnerships with OEMs. Segment operating income higher over last quarter and the fourth quarter of fiscal 2016 Segment operating income was $4.1 million this quarter (12.0% of revenue), compared to nil last quarter and $3.5 million (9.8% of revenue) in the fourth quarter of fiscal 2016.  The increase over last quarter was mainly due to higher margins from a more favourable product mix and higher revenue, as mentioned above. The increase was partially offset by higher selling, general and administrative expenses and higher research and development expenses.  The increase over the fourth quarter of fiscal 2016 was mainly the result of higher margins from a more favourable product mix, partially offset by higher research and development expenses and lower revenue, as mentioned above. Segment operating income was $6.6 million this year, $0.6 million lower than last year Segment operatingincomewas $6.6million(6.0% of revenue)this year, compared to $7.2million(6.3% of revenue)last year.  The decrease from last year was mainly due to higher research and development expenses, higher selling, general and administrative expenses, driven mainly by a higher investment in marketing expenses, and lower revenue, as mentioned above. The decrease was partially offset by higher margins from a more favourable product mix. Capital employed increased by $1.5 million over last quarter and by $18.3 million over last year The increase over last quarter was mainlydueto higher non-cash working capital resulting primarily from an increase in accounts receivable and a decrease in deferred revenue, partially offset by an increase in accounts payable and accrued liabilities. The increase was offset in part bylowerintangible assets mainly as a result of amortization.  The increase over last year was primarily due to higher non-cash working capital resulting mainly from lower deferred revenue and accounts payable and accrued liabilities and higher accounts receivable and inventory.  CAE Year-End Financial Results 2017 |27</BCLPAGE>


---



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  6.1Consolidated cash movements  (amounts in millions)

   

   FY2017

   

   

   FY2016

   

   

   

   Q4-2017

   

   

   Q3-2017

   

   

   

   Q4-2016Cash provided by continuing operating activities*

   $

   435.2

   $

   348.9

   

   $

   116.9

   $

   124.4

   

   $

   100.3Changes in non-cash working capital

   

   29.1

   

   (3.1)

   

   

   80.6

   

   31.7

   

   

   (49.3)Net cash provided by continuing operating activities

   $

   464.3

   $

   345.8

   

   $

   197.5

   $

   156.1

   

   $

   51.0Maintenance capital expenditures8

   

   (62.8)

   

   (45.4)

   

   

   (24.5)

   

   (13.9)

   

   

   (12.7)Other assets

   

   (5.5)

   

   (19.7)

   

   

   (2.3)

   

   (2.7)

   

   

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

   

   6.6

   

   1.8

   

   

   4.1

   

   0.2

   

   

   0.3Net (payments to) proceeds from equity accounted investees

   

   (10.6)

   

   3.4

   

   

   (1.2)

   

   (0.6)

   

   

   (1.3)Dividends received from equity accounted investees

   

   16.5

   

   18.5

   

   

   7.3

   

   6.4

   

   

   0.9Dividends paid

   

   (80.6)

   

   (56.7)

   

   

   (20.5)

   

   (20.8)

   

   

   (19.3)Free cash flow from continuing operations8

   $

   327.9

   $

   247.7

   

   $

   160.4

   $

   124.7

   

   $

   12.8Growth capital expenditures8

   

   (160.1)

   

   (72.4)

   

   

   (49.1)

   

   (21.9)

   

   

   (27.1)Capitalized development costs

   

   (37.8)

   

   (35.6)

   

   

   (14.0)

   

   (8.9)

   

   

   (12.4)Common shares repurchased

   

   (41.7)

   

   (7.7)

   

   

   (3.0)

   

   (5.9)

   

   

   (7.7)Other cash movements, net

   

   13.4

   

   15.9

   

   

   2.3

   

   0.6

   

   

   1.8Business combinations, net of cash and cashequivalents acquired

   

   (5.5)

   

   13.9

   

   

   -

   

   5.4

   

   

   0.3Proceeds from disposal of discontinued operations

   

   -

   

   30.4

   

   

   -

   

   -

   

   

   1.2Effect of foreign exchange rate changes oncash and cash equivalents

   

   (4.9)

   

   5.7

   

   

   (0.1)

   

   (3.4)

   

   

   (16.1)Net increase (decrease) in cash before proceeds andrepayment of long-term debt

   $

   91.3

   $

   197.9

   

   $

   96.5

   $

   90.6

   

   $

   (47.2)* before changes in non-cash working capital
  Free cash flow from continuing operations was $160.4 million for the quarter Free cash flow was $35.7millionhigherthan last quarter and $147.6millionhigher compared tothe fourth quarter of fiscal 2016.  Free cash flow was higher compared to last quartermainly due to a lower investment in non-cash working capital, partially offset by higher maintenance capital expenditures.  Free cash flow was higher compared to the fourth quarter of fiscal 2016 mainly due to a lower investment in non-cash working capital and an increase in cash provided by continuing operating activities. Free cash flow from continuing operations was $327.9 million this year Free cash flowincreased by$80.2million, or32%, compared tolast year.  Free cash flow was higher compared to last yearmainly due toan increase in cash provided by continuing operating activities and a lower investment in non-cash working capital, partially offset by higher dividends paid and an increase in maintenance capital expenditures. Capital expenditures were $73.6 million this quarter and $222.9 million for the year Growth capital expenditures were $49.1 million this quarter and $160.1 million for the year. Our growth capital allocation decisions are market-driven in nature and are intended to keep pace with the demand of our existing and new customers. Maintenance capital expenditures were $24.5 million this quarter and $62.8 million for the year.  28| CAE Year-End Financial Results 2017
  8Non-GAAP and other financial measures (see Section 3.6).


---



Management’s Discussion and Analysis
  6.2Sources of liquidity  We have a committed line of credit at floating rates, provided by a syndicate of lenders. We and some of our subsidiaries can borrow funds directly from this credit facility to cover operating and general corporate expenses and to issue letters of credit and bank guarantees. The total amount available through this committed bank line at March 31, 2017 was US$550.0 million (2016 – US$550.0 million) with the option, subject to lender’s consent, to increase to a total amount of US$850.0 million. There was no amount drawn under the facility as at March 31, 2017 (2016 – nil) and US$92.0 million was used for letters of credit (2016 ‐ US$111.9 million). The applicable interest rate on this revolving term credit facility is 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. Subsequent to March 31, 2017 the maturity date of our revolving unsecured term credit facility was extended to October 2019. We have an unsecured Export Development Canada (EDC) Performance Security Guarantee (PSG) account for US$125.0 million. This is an uncommitted revolving facility for performance bonds, advance payment guarantees or similar instruments. As at March 31,2017 the total outstanding for these instruments was $115.9million (2016 – $57.2 million). We manage a program in which we sell undivided interests in certain of our accounts receivable (current financial assets program) to a third party for cash consideration for amounts up to US$150.0 million with limited recourse to CAE. As at March 31, 2017, the Canadian dollar equivalent of $141.6 million (2016 – $105.9 million) of specific accounts receivable were sold to a financial institution. In March 2017, we terminated a facility of €12.5 million with a European bank for the issuance of bank guarantees and letters of credit. As at March 31, 2016, we had used $9.9 million principally in support of our European defence and security operations. As at March 31, 2017, 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, repurchase of common shares and 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)

   2017

   2016Total long-term debt

   $

   1,255.4

   $

   1,272.9Less:Current portion of long-term debt

   

   31.2

   

   98.5Current portion of finance leases

   

   20.7

   

   20.8Long-term portion of long-term debt

   $

   1,203.5

   $

   1,153.6
  In December 2016, we entered into a term loan for the financing of aircraft operating in the U.S. This represents a loan obligation of $14.2 million as at March 31, 2017.  As part of the acquisition of LMCFT, we acquired leases for simulators in Asia. This represents a finance lease obligation of $25.3 million as at March 31, 2017.  In June 2016, we repaid $73.5 million of our senior notes issued by way of a private placement.  CAE Year-End Financial Results 2017 |29</BCLPAGE>


---



Management’s Discussion and Analysis
  6.3Government participation We have agreements with various governments whereby the latter contribute a portion of the cost, based on expenditures incurred by CAE, of certain R&D programs for modeling, simulation and training services technology.  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 Strategic Aerospace and Defence Initiative (SADI).  During fiscal 2016, we amended and extended our Project New Core Markets, an R&D program, for an additional four years. The aim is to leverage our modeling, simulation and training services expertise in healthcare. The Quebec government, through Investissement Québec, agreed to participate up to $70 million in contributions related to costs incurred before the end of fiscal 2020.  During fiscal 2017, we announced our participation in project SimÉco 4.0, an R&D project under the SA2GE program. The aim of this project is the development of new products or processes which will further contribute to greenhouse gas emissions reductions. The government of Quebec, through the Ministry of Economy, Science and Innovation, and SA2GE have committed to contribute amounts up to 50% of eligible costs incurred by CAE to fiscal 2020.  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. The table below represents our contractual obligations and commitments for the next five years and thereafter:  Contractual obligations(amounts in millions)

   

   2018

   

   

   2019

   

   

   2020

   

   

   2021

   

   

   2022

   

   Thereafter

   

   

   TotalLong-term debt (excluding interest)

   $

   31.9

   

   $

   18.4

   

   $

   190.7

   

   $

   26.9

   

   $

   178.8

   

   $

   638.2

   $

   1,084.9Finance leases (excluding interest)

   

   20.7

   

   

   18.4

   

   

   31.9

   

   

   29.3

   

   

   12.4

   

   

   60.6

   

   173.3Non-cancellable operating leases

   

   55.3

   

   

   38.9

   

   

   33.4

   

   

   29.2

   

   

   24.1

   

   

   82.0

   

   262.9Purchase commitments

   

   118.4

   

   

   54.9

   

   

   56.6

   

   

   7.2

   

   

   0.3

   

   

   1.7

   

   239.1$

   226.3

   

   $

   130.6

   

   $

   312.6

   

   $

   92.6

   

   $

   215.6

   

   $

   782.5

   $

   1,760.2
  We also had total availability under the committed credit facility of US$458.0 million as at March 31, 2017 compared to US$438.1 million at March 31, 2016.  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, 2017, 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.  30| CAE Year-End Financial Results 2017


---



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

   

   

   As at March 31(amounts in millions)

   2017

   2016Use of capital:Current assets

   $

   1,919.7

   $

   1,749.6Less: cash and cash equivalents

   

   (504.7)

   

   (485.6)Less: net assets held for sale

   

   -

   

   (1.5)Current liabilities

   

   (1,273.9)

   

   (1,192.9)Less: current portion of long-term debt

   

   51.9

   

   119.3Non-cash working capital9

   $

   193.0

   $

   188.9Net assets held for sale

   

   -

   

   1.5Property, plant and equipment

   

   1,582.6

   

   1,473.1Other long-term assets

   

   1,852.5

   

   1,774.0Other long-term liabilities

   

   (796.4)

   

   (709.9)Total capital employed

   $

   2,831.7

   $

   2,727.6Source of capital:Current portion of long-term debt

   $

   51.9

   $

   119.3Long-term debt

   

   1,203.5

   

   1,153.6Less: cash and cash equivalents

   

   (504.7)

   

   (485.6)Net debt9

   $

   750.7

   $

   787.3Equity attributable to equity holders of the Company

   

   2,020.8

   

   1,888.7Non-controlling interests

   

   60.2

   

   51.6Source of capital

   $

   2,831.7

   $

   2,727.6
  Capital employed increased $104.1 million, or 4%, over last year The increase over last year was mainly due to higher property, plant and equipment and other long-term assets, partially offset by an increase in other long-term liabilities.  Our return on capital employed9 (ROCE) was 11.2% this year compared to 10.6% last year. Non-cash working capitalincreased by $4.1 million9 The increase was mainly due to higher inventories and accounts receivable, partially offset by higher deferred revenue, accounts payable and accrued liabilities and contracts in progress liabilities and lower prepayments. Net property, plant and equipment up $109.5 million The increase was mainly due to $222.9 million of capital expenditures, partially offset by depreciation of $122.8 million. Other long-term assets up $78.5 million The increase was mainly due to higher other assets, a higher investment in equity accounted investees as a result of increased profitability within our joint ventures, partially offset by dividends issued, and higher intangible assets. Other long-term liabilities up $86.5 million The increase was mainly due to higher deferred gains and other non-current liabilities, an increase in provisions resulting mainly from the acquisition of LMCFT and higher deferred tax liabilities, partially offset by lower employee benefit obligations. Net debt lower than last year The decrease was mainly due to the impact of cash movements during the year, partially offset by the addition of leases for simulators in Asia, obtained as part of the acquisition of LMCFT.   CAE Year-End Financial Results 2017 |31</BCLPAGE>
  9Non-GAAP and other financial measures (see Section 3.6).


---



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

   FY2017

   

   FY2016Net debt, beginning of period

   $

   787.3

   $

   949.6Impact of cash movements on net debt(see table in the consolidated cash movements section)

   $

   (91.3)

   $

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

   

   14.0

   

   20.2Impact from business combinations

   

   25.8

   

   -Other

   

   14.9

   

   15.4Decrease in net debt during the period

   $

   (36.6)

   $

   (162.3)Net debt, end of period

   $

   750.7

   $

   787.3Net debt-to-capital10

   %

   26.5

   %

   28.9
  Total equity increased by $140.7 million this year10 The increase in equity was mainly due to net income of $256.6 million, partially offset by cash dividends of $80.6 million, common shares repurchased and cancelled of $41.7 million and an unfavourable foreign currency translation of $31.8 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 268,397,224 common shares issued and outstanding as at March 31, 2017 with total share capital of $615.4 million. In addition, we had 5,541,625 options outstanding under the Employee Stock Option Plan (ESOP).  As at April 30, 2017, we had a total of 268,405,774 common shares issued and outstanding and 5,533,075 options outstanding under the ESOP.  Repurchase and cancellation of shares On February 19, 2016, we announced that we received approval from the Toronto Stock Exchange (TSX) to purchase, by way of a normal course issuer bid (NCIB) up to 5,398,643 of our common shares, representing 2% of the 269,932,164 issued and outstanding common shares as of February 12, 2016. The NCIB began on February 23, 2016, and ended on February 22, 2017.  On February 14, 2017, we announced that we received approval from the Toronto Stock Exchange (TSX) to renew the normal course issuer bid (NCIB) up to 5,366,756 of our common shares, representing 2% of the 268,337,816 issued and outstanding common shares as of February 9, 2017. The NCIB began on February 23, 2017, and will end on February 22, 2018 or on such earlier date when we complete our purchases or elect to terminate the NCIB. These purchases will be made on the open market plus brokerage fees through the facilities of the TSX and/or alternative trading systems at the prevailing market price at the time of the transaction, in accordance with the TSX’s applicable policies. All common shares purchased pursuant to the NCIB will be cancelled.  In fiscal 2017, we repurchased and cancelled a total of 2,490,900 common shares (2016 – 515,200), at a weighted average price of $16.73 per common share (2016 – $15.01), for a total consideration of $41.7 million (2016 – $7.7 million). An excess of the shares’ repurchase value over their carrying amount of $36.1 million (2016 – $6.6 million) was charged to retained earnings as share repurchase premiums.  Dividends We paid a dividend of $0.075 per share in the first quarter and $0.08 per share in the second, third and fourth quarter of fiscal 2017. 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 $85.9 million in fiscal 2018 based on our current dividend and the number of common shares outstanding as at March 31, 2017.  Guarantees As at March 31, 2017, we have a total of $238.2 million outstanding letters of credit and performance guarantees which are not recognized in the consolidated statement of financial position, compared to $212.3 million last fiscal year.  Pension obligations We maintain defined benefit and defined contribution pension plans. Subsequent to recent legislative changes, the defined benefit pension plans are considered sufficiently funded. We expect to contribute $23.3 million in fiscal 2018.  32| CAE Year-End Financial Results 2017
  10Non-GAAP and other financial measures (see Section 3.6).


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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 operations are classified as finance leases and their obligations are included in the consolidated statement of financial position, other specific 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 for: -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 our Medium Support Helicopter (MSH) training centre for the U.K. Ministry of Defence to provide simulation training services; -Certain aircraft within our live training operations for the Canadian Department of National Defence.  These leases are non-recourse to us.  You can find more details about operating lease commitments in Note 27 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 (current financial assets program) to a third party for cash consideration for an amount up to US$150.0 million with limited 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. As at March 31, 2017, the Canadian dollar equivalent of $141.6 million (2016 ‐ $105.9 million) of specific accounts receivable were sold to a financial institution.   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 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 at 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 at 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 carried at amortized cost using the effective interest 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 is 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.  A description of the fair value hierarchy is discussed in Note 29 of our consolidated financial statements.  CAE Year-End Financial Results 2017 |33</BCLPAGE>


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Management’s Discussion and Analysis
   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. These risk management parameters remain unchanged since the previous period, unless otherwise indicated.  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.  Our customers are mainly established companies, some of which have publicly available credit ratings, as well as government agencies, which facilitates risk assessment and 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 to third-party financial institutions for cash consideration on a limited 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 29 of our 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 risk 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 for an amount of up to US$150.0 million (current financial assets program). We also regularly monitor any financing opportunities to optimize our capital structure and maintain appropriate financial flexibility.  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 mitigate foreign currency risks by having our foreign operations transact in their functional currency for material procurement, sale contracts and financing activities.   34| CAE Year-End Financial Results 2017


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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, 2017, and assuming all other variables remain constant, the pre-tax effects on net income would have been a negative net adjustment of $3.6 million (2016 – negative net adjustment of $0.7 million) and a negative net adjustment of $13.1 million (2016 – negative net adjustment of $13.1 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 90% fixed-rate and 10% floating-rate at the end of this year (2016 – 90% fixed rate and 10% 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 2017, a 1% increase in interest rates would decrease our net income by $1.3 million (2016 – $1.3 million) and decrease our OCI by $0.5 million (2016 – $0.5 million) 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 two (2016 – 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, 2017, the equity swap agreements covered 1,850,000 of our common shares (2016 – 1,950,000).  Hedge of net investments in foreign operations As at March 31, 2017, we have designated a portion of our senior notes totalling US$372.8 million (2016 – US$417.8 million) and a portion of the obligations under finance lease totalling US$9.9 million (2016 – US$12.1 million) as a hedge of our net investments in U.S. entities. 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 those U.S. entities.  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 29 of our consolidated financial statements for the classification of financial instruments.  CAE Year-End Financial Results 2017 |35</BCLPAGE>


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8.BUSINESS COMBINATIONS On May 2, 2016, the Company acquired 100% of the shares of Lockheed Martin Commercial Flight Training (LMCFT), a provider of aviation simulation training equipment and services for a purchase consideration of $25.6 million. The transaction includes cash remaining in the company at closing. With this acquisition, the Company expanded its customer installed base of commercial flight simulators and obtained assets including full-flight simulators, simulator parts and equipment, facilities, technology and a talented workforce.Total acquisition costs incurred during fiscal 2017 relating to LMCFT amount to $1.4 million and were included in restructuring, integration and acquisition costs in the consolidated income statement.  The determination of the fair value for the above acquisition of the net identifiable assets acquired and liabilities assumed is included in the following table. The fair value of the acquired identifiable intangible assets is $24.2 million (including customer relationships and other software) and goodwill is $3.3 million. The goodwill arising from the acquisition of LMCFT is attributable to the advantages gained, which include: -Expansion of CAE’s customer installed base of commercial flight simulators; -Experienced workforce with subject matter expertise.  The fair value and the gross contractual amount of the acquired accounts receivable were $8.7 million.  The revenue and segment operating income included in the consolidated income statement from LMCFT since the acquisition date is $62.7 million and $6.4 million respectively.Had LMCFT been consolidated from April 1, 2016, the consolidated income statement would have shown revenue and total segment operating income of $64.5million and $6.6 million respectively. These pro-forma amounts are estimated based on the operations of the acquired business prior to the business combination by the Company. The amounts are provided as supplemental information and are not indicative of the Company’s future performance.  Other During fiscal 2017, adjustments to the determination of net identifiable assets acquired and liabilities assumed for the fiscal 2016 acquisition of BMAT was completed and resulted in an increase in goodwill of $1.6 million.  Net assets acquired and liabilities assumed arising from the acquisitions are as follows:Total2017Current assets(1)

   $

   89.2Current liabilities

   

   (106.2)Property, plant and equipment

   

   38.5Non-current assets

   

   4.5Intangible assets(2)

   

   27.5Deferred tax

   

   6.7Non-current liabilities

   

   (49.3)Fair value of net assets acquired, excluding cash and cash equivalents

   $

   10.9Cash and cash equivalents acquired

   

   12.5Total purchase price

   $

   23.4Additional transaction costs paid on behalf of the seller

   

   2.2Additional consideration received related to previous fiscal years' acquisition

   

   (5.4)Total purchase consideration

   $

   20.2(1)Excluding cash on hand.(2)Goodwill, included in intangible assets, is not deductible in fiscal 2017 for tax purposes.The net assets, including goodwill, of LMCFT are included in the Civil Aviation Training Solutions segment.You will find more details in Note 3 of our consolidated financial statements.
  36| CAE Year-End Financial Results 2017


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Management’s Discussion and Analysis
  9.BUSINESS RISK AND UNCERTAINTY  We operate in several industry segments that have various risks and uncertainties. Management and the Board of Directors (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. One should carefully consider the following risk factors, in addition to the other information contained herein, before deciding to purchase CAE common stock. 9.1Risks 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. Most of our competitors in the simulation and training markets are also involved in other major segments of the aerospace and defence industry 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 with these organizations. In particular, we face competition from Boeing, which has pricing and other competitive advantages over us.  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 fees or 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. In addition, we work with some OEMs on business opportunities related to equipment and training services.  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.  CAE Year-End Financial Results 2017 |37</BCLPAGE>


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Management’s Discussion and Analysis
 Level and timing of defence spending A significant portion of our revenues is generated by sales to defence and security customers around the world. We provide products and services for numerous programs to U.S., Canadian, European, Australian, and other foreign governments as both prime and/or subcontractors. As defence spending comes from public funds and is always competing with other public interests for funding, there is a risk associated with the level of spending a particular country may devote to defence as well as the timing of defence contract awards. Significant cuts to defence spending by mature markets such as the U.S., Canada, Germany, U.K. and Australia or a significant delay in the timing of defence procurement could have a material negative impact on our future revenue, earnings and operations. In order to mitigate the level and timing of defence procurements, we have established a diversified global business and a strong position on enduring platforms.  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.  Lower jet fuel prices generally have a positive impact on airlines’ profitability; however, the long-term ramifications on the commercial aviation industry stemming from customers in oil-based economies are more complex. For example, in helicopter aviation training, which represents less than 2% of our Civil Aviation Training Solutions revenue, demand is driven mainly by the level of offshore operator activity servicing customers in the oil and gas sector. Lowerpetroleum pricesin recent years havenegatively impacted offshore activity which, in turn, has had some negative affect on our operating results. As well, airline and business jet customers originating from the Gulf states may have less capital resources available to them due to lower oil-related economic activity. We continue to monitor the potential impact on the civil aviation industry as it relates to such oil price movements. Conversely, 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 or from 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.   38| CAE Year-End Financial Results 2017


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Management’s Discussion and Analysis
 9.2Risks 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 contribution of governments, including the Government of Quebec through Investissement Québec (IQ) and the SA2GE program, and the Government of Canada through its Strategic Aerospace and Defence Initiative (SADI). The level of government financial participation 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 can 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.  Strategic partnerships and long-term contracts We have long-term strategic partnerships and contracts with major airlines, aircraft operators and defence forces around the world. We cannot be certain that these partnerships and contracts will be renewed on similar terms, or at all, when they expire.  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, or develops courseware 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 provision of training services or manufacturing, sale and/or deployment for training of a simulator for such aircraft, claiming breach of its intellectual property rights or other legal basis. Such actions may cause CAE to incur material legal fees and/or may delay or prevent completion of the simulator development project or provision of training services, which may negatively impact our financial results.  Similarly, where CAE uses open source software, freeware or commercial off-the-shelf software from a third party, the third party in question or other persons may attempt retaliatory or obstructive actions against CAE to block the use of such software or freeware, claiming breach of licence rights or other legal basis. Such actions may cause CAE to incur material legal fees and/or may delay or prevent completion of the simulator development project or provision of training services, which may negatively impact our financial results. Warranty or other product-related claims We manufacture simulators that are highly complex and sophisticated. Additionally, we may purchase simulators or obtain simulators in a business acquisition. These simulators may contain defects that are difficult to detect and correct and if they 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.   CAE Year-End Financial Results 2017 |39</BCLPAGE>


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Management’s Discussion and Analysis
 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, copyrights 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. 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. We also have succession plans in place to help identify and develop an internal pipeline of leadership talent pertaining to the technical, pilot instructor and general management domains.  Labour relations Approximately 1,600 of our employees are represented by unions and are covered by 42 collective agreements. These differing collective bargaining agreements have various expiration dates. While we maintain positive relationships with our respective unions, the re-negotiations of the collective bargaining agreements could result in work disruption including work stoppages or work slowdowns. Should a work stoppage occur, it could interrupt our manufacturing or service operations at the impacted locations which could adversely affect service to our customers and our financial performance.  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.  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 claims. 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.  40| CAE Year-End Financial Results 2017


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Management’s Discussion and Analysis
 Length of sales cycle The sales cycle for our products and services can be 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.  Government procurement policies often allow unsuccessful bidders to protest a contract award. The protest of a contract awarded to CAE may result in the cancellation of our award, extend the period before which we can start recognizing revenue or cause us to incur material legal fees. Returns to shareholders Payment of dividends, the repurchase of shares under our NCIB and other cash or capital returns to our shareholders depend on various factors, including our operating cash flows, sources of capital, the satisfaction of solvency tests and other financial requirements, our operations and financial results, as well as CAE’s dividend and other policies which may be reviewed from time to time.  Information technology systems An information technology system failure or non-availability, cyber-attack or breach of systems security could disrupt our operations, cause the loss of, corruption of, or unauthorized access to business information and data, compromise confidential or classified information belonging to CAE, our employees, or our business partners, including aircraft OEMs and Defence and Security customers, expose us to regulatory investigation, litigation or contractual penalties or cause reputational harm. We depend on information technology infrastructure 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. These information technology networks and systems are essential to our ability to perform day-to-day operations and to the effective operation of our business. If the systems do not operate as expected or when expected, 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.  We may, from time to time, replace or update our information technology networks and systems. The implementation of, and transition to, new networks and systems can temporarily disrupt our business activities and result in productivity disruptions. Reliance on third-party providers for information technology systems and infrastructure management We have outsourced certain information technology systems maintenance and support services and infrastructure management functions, to third-party service providers. If these service providers are disrupted or do not perform effectively, it may have a material adverse impact on our operations and/or 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. Cybersecurity We may experience cybersecurity threats to our information technology infrastructure and systems, and unauthorized attempts to gain access to our proprietary or sensitive information, as may our customers, suppliers, subcontractors and joint venture partners. Our dependence on information technology infrastructure and systems and our business relationships with aircraft OEMs and defence and security customers may increase the risk of such cybersecurity threats. We may experience similar security threats at customer sites that we operate or manage. We must rely on our own safeguards as well as the safeguards put in place by our partners to mitigate the threats. Our partners have varying levels of cybersecurity expertise and safeguards, and their relationships with government contractors, such as CAE, may increase the likelihood that they are targeted by the same cyber threats we face.  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. Our customers or governmental authorities may question the adequacy of our threat mitigation and detection processes and procedures and this could have a negative impact on existing business or future opportunities. Furthermore, given the highly evolving nature of cyber or other security threats or disruptions and their increased frequency, the impact of any future incident cannot be easily predicted or mitigated, and the costs related to such threats or disruptions may not be fully insured or indemnified by other means. We have implemented security controls, policy enforcement mechanisms, management oversight and monitoring systems in order to prevent, detect and address potential threats. The Audit Committee of our Board of Directors is responsible for the oversight of our cybersecurity risk mitigation strategy. Any prior cyber-attacks directed at us have not had a material impact on our financial results and we believe our threat detection and mitigation processes and procedures are adequate.   CAE Year-End Financial Results 2017 |41</BCLPAGE>


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9.3Risks 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 residualexposure 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 minimize the impact foreign exchange market fluctuations may have, we also hedge 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. Availability of capital We have various debt facilities with maturities ranging between May 2017 and October 2036, and we cannot provide assurance that these facilities will be refinanced at the same cost, for the same duration and on similar terms as were previously available. Pension plans Economic and capital market fluctuations can negatively affect the investment performance, funding and expense associated with our defined benefit pension plans. Pension funding for these plans is based on actuarial estimates and is subject to limitations under applicable regulations.Actuarial estimatesprepared during the year were based on, amongst others, assumptions regarding the performance of financial markets, discount rates, inflation rates, future salary increases, estimated retirement ages and mortality rates.The actuarial funding valuation reports determine the amount of cash contributions that we are required to make into registered retirement plans. There can be no assurance that our pension expense and the funding of these plans will not increase in the future, negatively impacting our earnings and cash flow. We seek to mitigate this risk by implementing policies and procedures designed to control investment risk and through ongoing monitoring of our funding position.  Additionalcash contributions, if required, to fund our defined benefit and defined contribution pension plans may have a negative effect on our operations, financial results and reputation.  Doing business in foreign countries We have operations in over 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 2017. 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.  Sales to foreign customers are subject to Canadian and foreign laws and regulations, including, without limitation, theCorruption of Foreign Public Officials Act(Canada), theForeign Corrupt Practices Act(United States) and other anti-corruption laws. While we have stringent policies in place to comply with such laws, failure by CAE, our employees, foreign representatives and consultants or others working on our behalf to comply with it could result in administrative, civil, or criminal liabilities, including suspension, debarment from bidding for or performing government contracts, which could have a material adverse effect on us. We frequently team with international subcontractors and suppliers who are also exposed to similar risks.  Changes to the political and regulatory environment in countries in which we do business may lead to higher tariffs or stricter trade policies that may have a negative impact on our sales, financial results and business model.  42| CAE Year-End Financial Results 2017


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Management’s Discussion and Analysis
 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, or the expropriation of assets, in which we have invested significant resources, particularly when the customers are state-owned or state-controlled entities. 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.  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, including any new action to address Base Erosion and Profit Shifting (BEPS) released by the Organization for Economic Co-Operation and Development (OECD), could result in a higher effective tax rate on our earnings which could significantly impact our financial results.  10.RELATED PARTY TRANSACTIONS  A list of principal investments which, in aggregate, significantly impact our results or assets is presented in Note 32 of our consolidated financial statements.  The following table presents our outstanding balances with joint ventures:  (amounts in millions)

   

   

   

   2017

   

   

   2016Accounts receivable

   

   

   $

   54.0

   

   $

   42.6Contracts in progress: assets

   

   

   

   14.2

   

   

   34.5Other assets

   

   

   

   27.4

   

   

   21.9Accounts payable and accrued liabilities

   

   

   

   15.3

   

   

   20.1Contracts in progress: liabilities

   

   

   

   25.9

   

   

   4.3
  Other assets include a finance lease receivable of $12.4 million (2016 – $14.8 million) maturing in October 2022 and carrying an interest rate of5.14% per annum, loans receivable of $8.4 million (2016 – $0.6 million) maturing August 2018 and June 2026 and carrying respectively interest rates of 11% and 5% per annum, and a fixed interest rate of ten years Euro swap rate plus a spread of 2.50%, and a long-term interest-free account receivable of $6.6 million (2016 – $6.5 million) with no repayment term. As at March 31, 2017 and 2016 there are no provisions held against the receivables from related parties.  The following table presents our transactions with joint ventures:  (amounts in millions)

   

   

   

   2017

   

   

   2016Revenue

   

   

   $

   71.5

   

   $

   95.3Purchases

   

   

   

   4.0

   

   

   2.9Other income

   

   

   

   1.8

   

   

   2.3
  In addition, during fiscal 2017, transactions amounting to $1.4 million (2016–$2.2 million) were made, at normal market prices, with organizations for which some of our directors are officers.  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)

   

   

   

   2017

   

   

   2016Salaries and other short-term employee benefits

   

   

   $

   7.1

   

   $

   4.8Post-employment benefits – defined benefit plans(1)

   

   

   

   1.3

   

   

   1.0Share-based payments

   

   

   

   16.8

   

   

   8.6$

   25.2

   

   $

   14.4(1)Includes net interest on employee benefit obligations.
  CAE Year-End Financial Results 2017 |43</BCLPAGE>


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Management’s Discussion and Analysis
  11.CHANGES IN ACCOUNTING POLICIES  11.1New and amended standards adopted The amendments to IFRS effective for fiscal year 2017 have no material impact on our consolidated financial statements.  11.2New and amended standards not yet adopted IFRS 9 - Financial Instruments In July 2014, the IASB released the final version of IFRS 9 -Financial Instrumentsreplacing IAS 39 -Financial Instruments: Recognition and Measurement.  IFRS 9 introduces a revised approach for the classification of financial assets based on how an entity manages financial assets and the characteristics of the contractual cash flows of the financial assets replacing the multiple rules in IAS 39. Most of the requirements in IAS 39 for classification and measurement of financial liabilities have been carried forward in IFRS 9. Our preliminary analysis has not identified any significant differences in respect to the classification and measurement of financial instruments.  IFRS 9 also introduces a new hedge accounting model that is more closely aligned with risk-management activities and a new expected credit loss model for calculating impairment on financial assets replacing the incurred loss model in IAS 39.  IFRS 9 is effective for annual periods beginning on April 1, 2018 for CAE. We continue to evaluate the impact of the new standard on our consolidated financial statements.  IFRS 15 - Revenue from contracts with customers In May 2014, the IASB released IFRS 15 -Revenue from Contracts with Customers. The core principle of the new standard is to recognize revenue to depict fulfillment of performance obligations to customers in amounts that reflect the consideration to which we expect to be entitled in exchange for those goods or services. The new standard also intends to enhance disclosures on revenue. IFRS 15 supersedes IAS 11 -Construction Contractsand IAS 18 -Revenueand related interpretations.  IFRS 15 is effective for annual periods beginning on April 1, 2018 for CAE. We have elected to apply IFRS 15 retrospectively and thus will restate our comparative results, with an opening adjustment to equity as at April 1, 2017.  We have conducted a preliminary assessment of the effects of the application of IFRS 15 on its interim and annual consolidated financial statements. Our preliminary analysis has identified that revenue from the sale of certain Civil training devices currently considered as construction contracts and accounted for under the percentage-of-completion method will not meet the requirements for revenue recognition over time. This change will result in the deferral of revenue recognition to the date when control is transferred to the customer, instead of revenue recognition over the construction period. We are currently assessing the impact of this expected change on our consolidated financial statements.  As we progress in our assessment, we continue to evaluate the impact of the new standard on our consolidated financial statements.  IFRS 16 - Leases In January 2016, the IASB released IFRS 16 -Leases. The new standard eliminates the classification of leases as either operating or finance leases and introduces a single accounting model for the lessee under which a lease liability and a right-of-use asset is recognized for all leases with a term of more than 12 months. IFRS 16 also substantially carries forward the lessor accounting requirements; accordingly, a lessor continues to classify its leases as operating leases or finance leases. IFRS 16 supersedes IAS 17 -Leasesand related interpretations.  IFRS 16 will be effective for annual periods beginning on April 1, 2019 for CAE, with earlier application permitted if we also apply IFRS 15. We are currently evaluating the impact of the new standard on our consolidated financial statements. Where CAE is the lessee, we expect that the adoption of IFRS 16 will result in the recognition of assets and liabilities on the consolidated statement of financial position for certain lease arrangements related to training devices and buildings that under current IFRS standards we classify as contractual obligations in the form of operating leases (Note 27).  We also expect a decrease of our rent expense and an increase of our finance and depreciation expenses resulting from the change to the recognition, measurement and presentation of lease expense.  IFRIC 22 – Foreign Currency In December 2016, the IASB issued IFRIC 22 -Foreign Currency Transactions and Advance Consideration.The interpretation clarifies how to determine the date of the transaction for the purpose of determining the exchange rate to use on initial recognition of related asset, expense or revenue on the derecognition of a non-monetary asset or non-monetary liability arising from the payment or receipt of advance consideration in a foreign currency. IFRIC 22 is effective for annual periods beginning on April 1, 2018 for CAE, and early adoption is permitted. We have completed our assessment and have concluded that the interpretation has no impact on our consolidated financial statements.   CAE Year-End Financial Results 2017 |44</BCLPAGE>


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Management’s Discussion and Analysis
 11.3Use of judgements, estimates and assumptions The preparation of the consolidated financial statements requires 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. It also requires management to exercise its judgement in applying 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.  Impairment of non-financial assets Our impairment test for goodwill is based on internal estimates of fair value less costs of disposal calculations and uses valuation models such as the discounted cash flows model (level 3). 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 benefit 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 benefit 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. Individual discount rates are derived from the yield curve and are used to determine the service cost and interest cost of the Canadian defined benefit pension plans at the beginning of the year. The present value of the employee benefit obligations for these Canadian plans is determined based on the individual discount rates derived from the yield curve at the end of the year.  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 royalties repayments In determining the amount of repayable government royalties, 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 15%, over the period of repayments. The estimated repayments are discounted using average rates ranging from 7% to 9.5% 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 participation. A 1% increase to the growth rates would increase the royalty obligation at March 31, 2017 by approximately $5.0 million (2016 − $4.5 million).   CAE Year-End Financial Results 2017 |45</BCLPAGE>


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Management’s Discussion and Analysis
 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.  Leases The classification as either finance or operating lease is based on management’s judgement of the application of criteria provided in IAS 17 –Leasesand on the substance of the lease arrangement. Most of our arrangements accounted for as operating leases are in relation to buildings and flight simulators. With regards to certain aircraft used in our live training operations, management has concluded that the undiscounted lease rental payments in the amount of $192.3 million (2016 - $265.1 million) associated with the lease convention to these aircraft should be accounted for as an off balance sheet arrangement as it is offset by a reciprocal arrangement with a third party and is non-recourse to CAE.  46| CAE Year-End Financial Results 2017


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Management’s Discussion and Analysis
  12.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.  12.1Evaluation 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, 2017. 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, 2017. 12.2Internal 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, 2017, 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 2017 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.  13.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.  14.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.  CAE Year-End Financial Results 2017 |47


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Management’s Discussion and Analysis
  15.SELECTED FINANCIAL INFORMATION The following table provides selected quarterly financial information for the years 2015 through to 2017.  (amounts in millions, except per share amounts and exchange rates)

   Q1

   

   

   Q2

   

   

   Q3

   

   

   Q4

   

   

   TotalFiscal 2017Revenue

   $

   651.6

   

   635.5

   

   682.7

   

   734.7

   

   2,704.5Net income

   $

   69.3

   

   48.9

   

   69.3

   

   69.1

   

   256.6Equity holders of the CompanyContinuing operations

   $

   68.7

   

   48.3

   

   67.6

   

   67.4

   

   252.0Discontinued operations

   $

   (0.1)

   

   0.1

   

   0.2

   

   (0.7)

   

   (0.5)Non-controlling interests

   $

   0.7

   

   0.5

   

   1.5

   

   2.4

   

   5.1Basic EPS attributable to equity holders of the Company

   $

   0.25

   

   0.18

   

   0.25

   

   0.25

   

   0.94Continuing operations

   $

   0.25

   

   0.18

   

   0.25

   

   0.25

   

   0.94Discontinued operations

   $

   -

   

   -

   

   -

   

   -

   

   -Diluted EPS attributable to equity holders of the Company

   $

   0.25

   

   0.18

   

   0.25

   

   0.25

   

   0.93Continuing operations

   $

   0.25

   

   0.18

   

   0.25

   

   0.25

   

   0.93Discontinued operations

   $

   -

   

   -

   

   -

   

   -

   

   -Earnings per share before specific items

   $

   0.26

   

   0.21

   

   0.26

   

   0.31

   

   1.03Average number of shares outstanding (basic)

   

   269.3

   

   268.7

   

   268.5

   

   268.3

   

   268.7Average number of shares outstanding (diluted)

   

   269.6

   

   269.6

   

   269.7

   

   269.6

   

   269.6Average exchange rate, U.S. dollar to Canadian dollar

   

   1.29

   

   1.30

   

   1.33

   

   1.32

   

   1.31Average exchange rate, Euro to Canadian dollar

   

   1.46

   

   1.46

   

   1.44

   

   1.41

   

   1.44Average exchange rate, British pound to Canadian dollar

   

   1.85

   

   1.71

   

   1.66

   

   1.64

   

   1.71Fiscal 2016Revenue

   $

   557.0

   

   616.8

   

   616.3

   

   722.5

   

   2,512.6Net income

   $

   44.5

   

   69.2

   

   56.9

   

   59.7

   

   230.3Equity holders of the CompanyContinuing operations

   $

   44.9

   

   75.3

   

   57.9

   

   61.2

   

   239.3Discontinued operations

   $

   (0.5)

   

   (6.5)

   

   (0.2)

   

   (2.4)

   

   (9.6)Non-controlling interests

   $

   0.1

   

   0.4

   

   (0.8)

   

   0.9

   

   0.6Basic and diluted EPS attributable to equity holders of the Company

   $

   0.17

   

   0.26

   

   0.21

   

   0.22

   

   0.85Continuing operations

   $

   0.17

   

   0.28

   

   0.21

   

   0.23

   

   0.89Discontinued operations

   $

   -

   

   (0.02)

   

   -

   

   (0.01)

   

   (0.04)Earnings per share before specific items

   $

   0.19

   

   0.18

   

   0.22

   

   0.27

   

   0.86Average number of shares outstanding (basic)

   

   267.4

   

   268.6

   

   269.3

   

   269.9

   

   268.8Average number of shares outstanding (diluted)

   

   267.8

   

   268.9

   

   269.7

   

   270.2

   

   269.2Average exchange rate, U.S. dollar to Canadian dollar

   

   1.23

   

   1.31

   

   1.33

   

   1.38

   

   1.31Average exchange rate, Euro to Canadian dollar

   

   1.36

   

   1.46

   

   1.46

   

   1.52

   

   1.45Average exchange rate, British pound to Canadian dollar

   

   1.88

   

   2.03

   

   2.02

   

   1.97

   

   1.98Fiscal 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

   

   1.83
  CAE Year-End Financial Results 2017 |48


---



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

   

   

   Q4-2017

   

   

   Q4-2016

   

   

   FY2017

   

   

   FY2016

   

   

   FY2015Civil Aviation Training SolutionsRevenue

   $

   417.8

   $

   393.0

   $

   1,556.9

   $

   1,429.1

   $

   1,294.6Segment operating income

   

   83.8

   

   75.0

   

   273.2

   

   237.4

   

   210.5Operating margins (%)

   

   20.1

   

   19.1

   

   17.5

   

   16.6

   

   16.3Defence and SecurityRevenue

   $

   282.7

   $

   293.7

   $

   1,036.9

   $

   970.1

   $

   857.4Segment operating income

   

   33.0

   

   38.1

   

   120.4

   

   119.8

   

   115.6Operating margins (%)

   

   11.7

   

   13.0

   

   11.6

   

   12.3

   

   13.5HealthcareRevenue

   $

   34.2

   $

   35.8

   $

   110.7

   $

   113.4

   $

   94.3Segment operating income

   

   4.1

   

   3.5

   

   6.6

   

   7.2

   

   6.7Operating margins (%)

   

   12.0

   

   9.8

   

   6.0

   

   6.3

   

   7.1TotalRevenue

   $

   734.7

   $

   722.5

   $

   2,704.5

   $

   2,512.6

   $

   2,246.3Segment operating income

   

   120.9

   

   116.6

   

   400.2

   

   364.4

   

   332.8Operating margins (%)

   

   16.5

   

   16.1

   

   14.8

   

   14.5

   

   14.8Restructuring, integration and acquisition costs

   

   $

   (20.0)

   $

   (16.8)

   

   $

   (35.5)

   $

   (28.9)

   $

   -Operating profit

   

   $

   100.9

   $

   99.8

   $

   364.7

   $

   335.5

   $

   332.8
  Selected annual information for the past five years(amounts in millions, except per share amounts)

   2017

   

   2016

   

   2015

   

   2014

   

   2013 (1)Revenue

   $

   2,704.5

   $

   2,512.6

   $

   2,246.3

   $

   2,077.9

   $

   1,993.7Net income

   

   256.6

   

   230.3

   

   204.7

   

   191.1

   

   140.7Equity holders of the CompanyContinuing operations

   

   252.0

   

   239.3

   

   201.2

   

   188.3

   

   134.3Discontinued operations

   

   (0.5)

   

   (9.6)

   

   0.6

   

   1.7

   

   3.4Non-controlling interests

   

   5.1

   

   0.6

   

   2.9

   

   1.1

   

   3.0Average exchange rate, U.S. dollar to Canadian dollar

   

   1.31

   

   1.31

   

   1.14

   

   1.05

   

   1.00Average exchange rate, Euro to Canadian dollar

   

   1.44

   

   1.45

   

   1.44

   

   1.41

   

   1.29Average exchange rate, British pound to Canadian dollar

   

   1.71

   

   1.98

   

   1.83

   

   1.68

   

   1.58Financial position:Total assets

   $

   5,354.8

   $

   4,996.7

   $

   4,656.9

   $

   4,236.7

   $

   3,691.3Total non-current financial liabilities(2)

   

   1,370.8

   

   1,318.6

   

   1,427.3

   

   1,340.2

   

   1,209.3Total net debt

   

   750.7

   

   787.3

   

   949.6

   

   856.2

   

   813.4Per share:Basic EPS attributable to equity holders of the CompanyContinuing operations

   $

   0.94

   $

   0.89

   $

   0.76

   $

   0.72

   $

   0.52Discontinued operations

   

   -

   

   (0.04)

   

   -

   

   0.01

   

   0.01Diluted EPS attributable to equity holders of the CompanyContinuing operations

   

   0.93

   

   0.89

   

   0.76

   

   0.72

   

   0.52Discontinued operations

   

   -

   

   (0.04)

   

   -

   

   0.01

   

   0.01Dividends declared

   

   0.315

   

   0.295

   

   0.27

   

   0.22

   

   0.19(1)Figures have not been restated to reflect the adoption of IFRS 11 and IAS 19 which was effective fiscal 2014 and the classification of ourmining 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.
  
  CAE Year-End Financial Results 2017 |49