Cae Inc (CAE) 6-K/A, filed Jul 10, 2020

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

Form 6-K/A

Report of Foreign Issuer

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

the Securities Exchange Act of 1934

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

CAE INC.

(Name of Registrant)

8585 Cote de Liesse

Saint-Laurent, Quebec

Canada H4T 1G6

(Address of Principal Executive Offices)

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

Form 20-F Form 40-F X

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

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

Yes No X

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

EXPLANATOARY NOTE

This amendment to the documents incorporated on From 6-K of CAE Inc. previously filed on June 26, 2020, is being filed to correct the inadvertent filing of its Exhibits in a locked graphics format that does not enable text searching. Accordingly, the Company is refiling Exhibits 1 and 2 hereto in a text searchable HTML format. Except as set forth herein, there are no other changes to the original Report on Form 6-K.

SIGNATURES

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

CAE Inc.

Date: July 10, 2020 By: /s/ Mark Hounsell

Name:	Mark Hounsell
Title:	General Counsel, Chief Compliance Officer and Corporate Secretary
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		Exhibit

Table of Contents

Letter to the Shareholders from the Chair of the
Board and the President and CEO i

Proxy Circular Summary ii

About CAE iv

Definitions 1

Notice of 2020 Annual Shareholders’ Meeting 3

Section 1 About Voting Your Shares 6

Section 2 Business of the Meeting 10

Section 3 About the Nominated Directors 14

Section 4 Corporate Governance 22

Section 5 Board Committee Reports 28

Section 6 Director Compensation 37

Section 7 Executive Compensation 40

Compensation Discussion and Analysis 40

FY2020 CAE Performance Highlights 40

Compensation Objectives 43

Setting Executive Compensation 43

Comparator Group 45

Compensation Policy and Objectives 47

Executive Share Ownership Requirements 58

Risk Mitigation 59

Determination of the NEOs’ Compensation in FY2020 61

Modifications to Compensation Programs
in Response to the COVID-19 Pandemic 63

President and CEO – FY2020 Accomplishments 64

Other NEOs – FY2020 Accomplishments 66

Shareholder Return Performance Graph 69

Pay for Performance Linkage 70

Pay for Performance Relative to Comparator Group 72

Compensation of Our Named Executive Officers 74

Summary Compensation Table 74

Incentive Plan Awards 75

Pension Arrangements 77

Termination and Change of Control Benefits 79

Section 8 Other Important Information 82

Section 9 Appendix A – Board of Directors’ Charter 83

Letter to the Shareholders from the Chair of the Board and the President and CEO

Dear fellow Shareholders,

It is our pleasure to invite you to attend CAE’s 2020 Annual Shareholder Meeting.

During this fiscal year, the world and global economy have been disrupted in a way that no one had anticipated. As we navigate and adapt through these unprecedented times, we can all be proud of CAE’s proactive and impactful response in the face of COVID-19. It truly demonstrates how we make a difference in the world. CAE’s noble purpose, focused on safety, has never been more relevant than during the current pandemic.

While leading CAE toward what would have been another record year, the COVID-19 pandemic impacted us in our fourth quarter. Our first response was to ensure the health and safety of our employees and customers, and this continues to be our top priority. We are extremely proud of our employees worldwide, who daily, through even the most extreme conditions, take to heart the continuity of our customers’ critical operations. We face this pandemic from a position of strength, with a global leading market position, a balanced business with recurring revenue streams, and a solid financial position. We continue to take measures to protect the health and safety of our employees, work with our customers to minimize potential disruptions and support our community in addressing the challenges posed by this global pandemic.

This year, to mitigate risks to the health and safety of our communities, shareholders, employees and other stakeholders, we will hold our Meeting via live webcast that will be available at https://web.lumiagm.com/117300299. Shareholders will not be able to attend the Meeting in person but will have an equal opportunity to participate in real time and vote at the Meeting online through a web-based platform regardless of their geographic location.

As a training partner of choice for its customers, CAE is committed to creating a positive societal impact everywhere it operates. Our mission to make civil aviation safer, help defence forces return home safely and make healthcare safer is rooted in the principles of corporate social responsibility (CSR). We continuously deepen and strengthen our corporate social responsibility commitments through concrete actions on several fronts, notably with our recent commitment to becoming carbon neutral in summer 2020. This year, we continued our progress in workplace diversity and inclusion, and launched several programs and initiatives that are rooted in our core CSR values. As a shareholder, we invite you to read our most notable achievements in our Annual Activity and Corporate Social Responsibility Report.

As in prior years, important matters affecting our Company will be considered at the Meeting. Whether or not you plan to attend the Meeting, we encourage you to review the enclosed information, consider the resolutions put forth by the Board and vote your Shares. This Circular gives you details about all the items for consideration and how to vote. It also contains information about the nominated Directors, the auditors, reports from the various committees of the Board and CAE’s corporate governance practices.

At the Meeting, we will, as always, review our financial position, including the increased value we are delivering to Shareholders, and our business operations. We will also respond to your comments and questions.

Finally, we want to thank you for your continued confidence in and support of CAE and we remain committed to delivering world-class performance and creating long-term value for our Shareholders. We look forward to discussing with you at this year’s Meeting.

Hon. John P. Manley (signed) Marc Parent (signed) Chair of the Board President and Chief Executive Officer

June 16, 2020

Proxy Circular Summary

This summary highlights some of the important information you will find in this Circular. These highlights do not contain all the information that you should consider, and you should read this entire Circular before voting your Shares.

Shareholder Voting Matters

Voting Matter	Board Vote Recommendation	Page Reference for More Information
Election of 10 Directors	FOR each nominee	10
Appointing PricewaterhouseCoopers LLP as Auditors	FOR	11
Advisory Vote on Executive Compensation	FOR	12

FY2020 Performance Highlights

1.	Before specific items in FY2019: The costs arising from the acquisition and integration of Bombardier’s BAT Business.
2.	Before specific items in FY2020: The costs arising from the acquisition and integration of Bombardier’s BAT Business, the impact of the D&S reorganizational costs and the goodwill impairment in Healthcare.
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Note: EPS before specific items and backlog are all non-GAAP financial measures and are defined in CAE’s FY2020 Management discussion and analysis

Review this Proxy Circular and Vote in One of the Following Ways

Voting by Proxy is the Easiest Way

Below are the different ways in which you can give your voting instructions, details of which are found in the enclosed proxy form or your voting instruction form, as applicable, or to Section 1 – “About Voting Your Shares” for more information on the voting methods available to you:

by mail: sign, date and return your proxy form in the envelope provided.

by telephone: call the telephone number on your proxy form.

on the Internet: visit the website listed on your proxy form.

by appointing another person to attend and vote at the Meeting online on your behalf.

Voting online at the Meeting

Log in online at https://web.lumiagm.com/117300299 and follow the steps listed in the Section “Attending and Participating”.

About CAE

CAE is a global leader in training for the civil aviation, defence and security, and healthcare markets. Backed by a record of more than 70 years of industry firsts, we continue to help define global training standards with our innovative virtual-to-live training solutions to make flying safer, maintain defence force readiness and make healthcare safer. We have the broadest global presence in the industry, with over 10,500 employees, 160 sites and training locations in over 35 countries. This year, we trained more than 220,000 civil and defence crewmembers, including more than 135,000 pilots, and thousands of healthcare professionals worldwide.

Founded in 1947 and headquartered in Montreal, Canada, CAE has built an excellent reputation and long-standing customer relationships based on experience, strong technical capabilities, a highly trained workforce and global reach.

Our Strategy

End-to-End Training Partner of Choice Our vision is to be the recognized global training partner of choice to enhance customer safety, efficiency and readiness. Achieving this goal depends on the successful implementation of four strategic imperatives, which will help protect our leadership position and grow our market share. Our global leadership stems from our: • Comprehensive training solutions • Highly qualified and passionate employees • Extensive experience and credibility delivering academic, simulator and live flying training • Industry-leading global training network • Commitment to excellence and innovation spanning more than 70 years • Close collaboration with regulators and policymakers to help shape the future of training • Ability to reduce customers’ environmental impact through simulation-based training

Four Areas of Strategic Priority Four areas of strategic priority to protect CAE’s leadership position, achieve superior growth, and ultimately realize our vision to be the recognized global training partner of choice:

Six pillars of strength

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

<br><br>High Degree of Recurring <br>Business<br><br>We operate in highly regulated industries with mandatory and recurring training requirements for maintaining professional certifications. Over 60% of our business is derived from the provision of services, which is an important source of recurring business, and largely involves long-term agreements with many airlines, business aircraft operators and defence forces.	<br><br>Headroom in Large Markets<br><br>We provide innovative training solutions to customers in large addressable markets in civil aviation, defence and security and healthcare. Significant untapped market opportunities exist in these three core businesses, with substantial headroom to grow our market share over the long-term.	<br><br>Potential for Superior Returns<br><br>In each of our businesses, we have the potential to grow at a rate superior to our underlying markets because of our potential to gain share within the markets we serve. Our rising proportion of revenue from training services provides potential for lower amplitude cyclicality as training is largely driven by the training requirements of the installed fleet. In addition, we leverage our leading market position to deepen and expand our customer relationships. We see opportunity to further utilize our training network and generate more revenue from existing assets and to deploy new assets with accretive returns.
<br><br>Strong Competitive Moat<br><br>Our broad global training network, unique end-to-end cadet-to captain training capacities, technology-intensive training and mission support solutions, deep subject matter expertise and industry thought leadership unrivalled customer intimacy and strong, recognizable brand further strengthen our competitive moat.	<br><br>Underlying Long-Term <br>Secular Tailwinds<br><br>The civil aviation sector is expected to grow over the long-term as passenger traffic recovers, and in defence and security, the market is expected to continue to grow with an emphasis on the operational readiness of defence forces. Healthcare is expected to become increasingly relevant in a world more accurately aware of the benefits of healthcare simulation and training to help save lives at a steady state and in a healthcare crisis.	<br><br>Culture of Innovation<br><br>We derive significant competitive advantage as an innovative leader in simulation products and training solutions. In collaboration with our customers, we design and deliver the industry’s most sophisticated training systems, employing the latest in simulation, mixed reality and digital technologies, which are shaping the future of training.

Executive Compensation Highlights

•	Executive bonus payout based on a corporate performance factor of 148% recognizing CAE’s strong performance in regard to strategic and financial objectives in FY2020.
•	197% payout of the Performance Share Units that vested in FY2020 based on the performance of FY2020 EPS compared to the set target.
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Our Executive Compensation Best Practices

• Minimum threshold levels of corporate performance to be met to allow for payments under the annual and long-term incentives	ü
• Caps on annual bonuses and PSU payouts	ü
• Balanced mix of short, medium and long-term compensation	ü
• 50% of FY2020 LTIP awards is performance based, directly tied to the achievement of the CAE strategic plan	ü
• Pensionable earnings based on actual years served (plus any severance period in certain circumstances)	ü
• Change of control severance limited to two times salary and bonuses	ü
• Clawback policy	ü
• Minimum share ownership and option profit retention guidelines	ü
• Anti-hedging policy	ü

Governance Highlights

The following table shows some of the ways CAE continues to adhere to the highest standards in corporate governance it has maintained throughout its history.

• Number of Director nominees	10
• Number of non-employee Independent Director nominees	9/10
• Board Committee members (including the Governance Committee, which is responsible for recommending new Directors to join the Board) are all independent	ü
• Average age of Director nominees	61
• Annual election of Directors	ü
• Directors elected individually (rather than slate voting)	ü
• Majority voting guidelines for Directors	ü
• Other board commitments and interlocks policy	ü
• Separate Chair and CEO	ü
• Director tenure and age term limits	ü
• Share ownership requirements for Directors and executives	ü
• Board orientation/education program	ü
• Number of Board meetings held in FY2020	7
• Number of financial experts on the Audit Committee	2
• Code of Business Conduct	ü
• Annual advisory vote on executive compensation	ü
• Formal Board and Committee evaluation processes	ü
• No dual-class shares	ü
• Gender Diversity Targets on the Board of Directors and in executive officer positions	ü

Our Director Nominees

Name	Age	Director<br><br>Since	Position	Indepen- <br>dent	Committee<br><br>Memberships^1^	Board and<br><br>Committee<br><br>Attendance<br><br>FY2020	Other<br><br>Public<br><br>Boards	Top Three Competencies^2^
Margaret S.<br><br>(Peg) Billson	58	2015	Corporate Director	YES	GC (Chair)<br><br>HRC	100%	1	• Knowledge of the Industry<br><br>• Strategic Leadership and Management<br><br>• Government Relations/ R&D
Hon. Michael M. Fortier	58	2010	Vice-Chair, RBC Capital Markets	YES	HRC (Chair)	100%	N/A	• Knowledge of the Industry<br><br>• Finance/Accounting<br><br>• Government Relations/R&D
Marianne Harrison	56	2019	President and CEO <br>John Hancock Life Insurance Company	YES	Audit	100%	N/A	• Strategic Leadership and Management<br><br>• Finance/Accounting<br><br>• Human Resources/Compensation
Alan N. <br>MacGibbon	64	2015	Corporate Director	YES	Audit (Chair)<br><br>HRC	100%	1	• Strategic Leadership and Management<br><br>• Finance/Accounting<br><br>• Human Resources/ Compensation
Hon. John P. Manley	70	2008	Corporate Director and Senior Business Advisor, <br>Bennett Jones LLP	YES	N/A	100%	2	• Strategic Leadership and Management<br><br>• Government Relations/ R&D<br><br>• Legal/Governance
François<br><br>Olivier	55	2017	President and CEO, Transcontinental Inc.	YES	Audit<br><br>GC	100%	1	• Strategic Leadership and Management<br><br>• Finance/Accounting<br><br>• Human Resources/Compensation
Marc<br><br>Parent	59	2008	President and CEO, <br>CAE	NO	N/A	100%	1	• Knowledge of the Industry<br><br>• Strategic Leadership and Management<br><br>• Government Relations/ R&D
Gen. David G. Perkins, USA (Ret.)	62	2020	Corporate Director	YES	Audit	N/A	N/A	• Strategic Leadership and Management<br><br>• Government Relations/ R&D<br><br>• Information Technology/Cybersecurity/Digital
Michael E. Roach	68	2017	Corporate Director	YES	Audit<br><br>GC	100%	1	• Strategic Leadership and Management<br><br>• Finance/Accounting<br><br>• Information Technology/Cybersecurity/ <br>Digital
Andrew J. Stevens	63	2013	Corporate Director	YES	GC<br><br>HRC	100%	N/A	• Knowledge of the Industry<br><br>• Strategic Leadership and Management<br><br>• Human Resources/Compensation
1	Refer to page 1 for definitions.
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2	Refer to description of competencies on page 21.
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Definitions

Certain Defined Terms	In this document, referred to as this “Circular”, the terms “you” and “your” refer to the Shareholder, while “we”, “us”, “our”, “Company” and “CAE” refer to CAE Inc. and where applicable, its subsidiaries.<br><br>We also use the following defined terms throughout this Circular:
$	Canadian dollars.
Audit Committee	The Audit Committee of our Board of Directors.
Board	Our Board of Directors.
Civil	Civil Aviation Training Solutions segment.
Circular	This Management Proxy Circular.
Common Shares or Shares	Refers to Common Shares of CAE.
CSA	Canadian Securities Administrators.
Defence	Defence and Security segment.
DSU	Refers to Deferred Share Units of CAE. The value of a DSU is equivalent to the value of a Share.
ESOP	Employee Stock Option Plan.
ESPP	Employee Stock Purchase Plan.
EPS	Earnings per Share.
Fiscal Year or FY	Refers to a financial year of CAE, from April 1 to March 31 of the following calendar year. For example, FY2020 refers to the 12 months ended March 31, 2020.
Governance Committee or GC	The Governance Committee of our Board.
Healthcare	Healthcare segment.
Human Resources Committee or HRC	The Human Resources Committee of our Board.
Independent Directors	Refers to the standards of independence established by CAE’s Corporate Governance Guidelines, applicable corporate governance rules of the New York Stock Exchange and SEC, and under the Canadian Securities Administrators’ National Instrument 58-101 – Disclosure of Corporate Governance Practices and National Policy 58-201.
LTU	Refers to a Long-Term Incentive Deferred Share Unit. The value of a LTU is equivalent to the value of a Share.
MD&A	Refers the Management Discussion and Analysis section of CAE’s annual report for the fiscal year ended March 31, 2020.
Meeting	The Annual Meeting of CAE Shareholders to be held on August 12, 2020.
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NEOs or Named Executive Officers	The President and CEO, Chief Financial Officer and the three most highly compensated policy-making executives as at March 31, 2020. Note that for FY2020, we also include Gene Colabatistto, former Group President, Defence & Security, who retired on December 31, 2019.
NYSE	The New York Stock Exchange.
PSU	Refers to Performance Share Units of CAE. The value of a PSU is equivalent to the value of a Share.
PwC	PricewaterhouseCoopers LLP, Chartered Professional Accountants in Montréal, Québec.
Rights Plan	The Shareholder Protection Rights Plan Agreement between CAE and Computershare Trust Company of Canada, as rights agent, dated as of March 7, 1990, as amended and restated on August 14, 2018, and as further amended, restated, supplemented or otherwise modified from time to time.
Record Date	June 16, 2020.
ROCE	Return on capital employed.
RSU (or time-RSU)	Refers to Restricted Share Units of CAE. The value of a RSU is equivalent to the value of a Share.
RSUP	Restricted Share Unit Plan.
SEC	United States Securities and Exchange Commission.
SOI	Segment operating income.
SOX	The Sarbanes-Oxley Act of 2002.
STIP	Short-term incentive program.
TSX	The Toronto Stock Exchange.
Currency, Exchange Rates and Share Prices	All amounts referred to in this Circular are presented in Canadian dollars, unless otherwise stated. In a number of instances in this Circular, including with respect to calculation of the in-the-money value of stock options denominated in Canadian dollars, information based on our Share price has been calculated on the basis of the Canadian dollar.

Information Currency	The information in this Circular is current as of June 16, 2020 unless otherwise stated.

Notice of 2020 Annual Shareholders’ Meeting

When

Wednesday, August 12, 2020 at 11:00 a.m. (Eastern Time)

Where

The meeting will be held online at https://web.lumiagm.com/117300299.

What the Meeting is About

1.	Receive CAE Consolidated Financial Statements and the independent auditors’ report for the fiscal year ended March 31, 2020;
2.	Elect Directors who will serve until the end of the next annual shareholders’ meeting;
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3.	Reappoint PricewaterhouseCoopers LLP as our independent auditors who will serve until the end of the next annual shareholders’ meeting and to authorize the Company’s Board to fix the independent auditors’ remuneration;
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4.	Vote, in an advisory, non-binding manner, on CAE’s approach to executive compensation described in the accompanying Circular;
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5.	Transact any other business that may properly come before the Meeting.
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You have the Right to Vote

As a holder of record of Common Shares at the close of business on June 16, 2020, you are entitled to receive notice of and vote at the Meeting.

You are asked to consider and to vote your Shares on items 2 to 4 listed above and any other items that may properly come before the Meeting or any adjournment.

If you are unable to attend the Meeting online and want to ensure that your Shares are voted, please submit your votes by proxy as described under “How to Vote Your Shares” in the accompanying Circular. To be valid, our transfer agent, Computershare Trust Company of Canada, must receive your proxy by 11:00 a.m. (Eastern Time) on August 10, 2020. If the Meeting is adjourned or postponed, Computershare must receive your proxy no later than 24 hours (excluding Saturdays, Sundays and holidays) prior to any such adjournment or postponement.

Accompanying this Notice of Annual Meeting is the Circular, which contains more information on the matters to be addressed at the Meeting.

Attending and Participating

This year, to proactively deal with the unprecedented health impact of the coronavirus pandemic (COVID-19), and to mitigate risks to the health and safety of our communities, shareholders, employees and other stakeholders, we will hold our Meeting in virtual-only format, which will be conducted via live webcast. Shareholders will have an equal opportunity to participate in real time and vote at the Meeting online through a web-based platform regardless of their geographic location.

Participating in the Meeting online allows registered Shareholders and duly appointed Proxyholders, including non-registered (beneficial) Shareholders who have appointed themselves or another person as a Proxyholder, to participate at the Meeting and ask questions, all in real time. Registered Shareholders and duly appointed Proxyholders can vote at the appropriate time during the Meeting. Voting will be conducted by virtual ballot.

Guests, including non-registered Shareholders who have not duly appointed themselves or another person as a Proxyholder, can log in to the Meeting as set out below. Guests will be able to participate in the Meeting but cannot vote.

To access the Meeting, follow the instructions below, as applicable to you:

•	Log in online at https://web.lumiagm.com/117300299. We recommend that you log in at least one hour before the Meeting starts;
•	Click “I am a guest” and then complete the online form; OR
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•	Click “I have a login” and then enter your 15-digit control number (see below) and Password “CAE2020” (case sensitive)
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In order to find the 15-digit control number to access the Meeting:

•	Registered shareholders: The control number located on the form of proxy or in the email notification you received is your control number.
•	Proxyholders: Duly appointed proxy holders, including non-registered (beneficial) shareholders that have appointed themselves or another person as a as proxyholder, will receive the control number from Computershare by e-mail after the proxy voting deadline has passed.
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If you attend the Meeting online, it is important that you are connected to the Internet at all times during the Meeting in order to vote when balloting commences. It is your responsibility to ensure connectivity for the duration of the Meeting. You should allow ample time to check into the Meeting online and complete the related procedure. For additional details on accessing the Meeting online from your tablet, smartphone or computer, please see the Virtual AGM User Guide provided by Computershare.

Notice-And-Access

As part of an effort to reduce environmental impacts of excessive printing, and to save postage costs, CAE is opting to use the “Notice-and-Access” provisions of Canadian securities rules.

The “Notice-and-Access” provisions allow Canadian companies to post electronic versions of shareholder meeting materials in lieu of mailing physical copies of such documents to shareholders. Shareholders will instead only receive a paper notification with information on how they may obtain a copy of the meeting materials electronically or request a paper copy (Notification). Shareholders who have already signed up for electronic delivery of shareholder materials will continue to receive them by email.

Non-registered shareholders who have not objected to their intermediary disclosing certain ownership information about themselves to CAE are referred to as “NOBOs”. The non-registered shareholders who have objected to their intermediary disclosing ownership information about themselves to CAE are referred to as “OBOs”. CAE has distributed the Notification in connection with the Meeting to intermediaries and clearing agencies for onward distribution to non-registered shareholders. CAE will not be paying for intermediaries to deliver to OBOs (who have not otherwise waived their right to receive proxy-related materials) copies of proxy related materials and related documents (including the Notification). Accordingly, an OBO will not receive copies of proxy-related materials and related documents unless the OBO’s intermediary assumes the costs of delivery.

How to Access Meeting Materials

On Computershare Investor Services Inc.’s (“Computershare”) website:
www.envisionreports.com/CAE2020^e^

On SEDAR: www.sedar.com

On CAE’s website: www.cae.com/investors/financial-reports/

Shareholders are reminded to read the Circular and other Meeting materials carefully before voting their Shares.

How to Request a Paper Copy of the Meeting Materials

Before the Meeting

If your name appears on a Share certificate, you are considered as a “registered shareholder”. You may request paper copies of the Meeting materials at no cost to you by calling Computershare toll-free, within North America at 1-866-962-0498 or direct, from outside of North America, at 514-982-8716 and entering your control number as indicated on your form of proxy.

If your Common Shares are listed in an account statement provided to you by an intermediary, you are considered as a “non-registered shareholder”. You may request paper copies of the Meeting materials from Broadridge at no cost to you up to one year from the date the Circular was filed on SEDAR through the Internet by going to www.proxyvote.com or by telephone at 1-877-907-7643 and entering the 16-digit control number provided on the voting instruction form and following the instructions provided.

Please note that you will not receive another form of proxy or voting instruction form; please retain your current one to vote your Shares.

In any case, requests should be received at least five (5) business days prior to the proxy deposit date and time set out in the accompanying proxy or voting instruction form in order to receive the Meeting materials in advance of such date and the Meeting date.

After the Meeting

By telephone at 1-866-962-0492 or online at investor.relations@cae.com. A copy of the Meeting materials will be sent to you within ten (10) calendar days of receiving your request.

By order of the Board of Directors

June 16, 2020 MARK HOUNSELL (signed) Montréal, Québec General Counsel, Chief Compliance Officer and Corporate Secretary

Section 1

About Voting Your Shares

Record Date

June 16, 2020 is the record date for the Meeting.

Who can vote

Only holders of our Common Shares at the close of business on the Record Date are entitled to receive notice of and to attend, including by proxy, and vote at the Meeting or any adjournment thereof. The list of Shareholders on the Record Date is available for inspection by appointment during usual business hours at Computershare Trust Company of Canada, 650 de Maisonneuve west 7^th^ floor, Montreal, QC H3A 3T2, and at the Meeting. As of June 15, 2020, 265,704,802 Common Shares are issued and outstanding. Each Common Share is entitled to one vote.

Principal Shareholders

To the knowledge of the Directors and officers of CAE (from records and publicly filed reports), there is no person who beneficially owns or exercises control or direction over more than 10% of the Common Shares.

All Directors and officers as a group (16 persons) beneficially owned or exercised control or direction over 388,449 Common Shares representing 0.15% of the class as at June 15, 2020.

Your Vote is Important

Your vote is important. Please read the information below to ensure your Shares are properly voted.

How do I participate in the Meeting?

Out of concern for the safety of our management, employees and shareholders in light of the COVID-19 pandemic, we are holding the Meeting in a virtual only format that will be conducted via live webcast online. Shareholders will not be able to attend the Meeting in person.

Participating in the Meeting online allows registered shareholders and duly appointed proxyholders, including non-registered (beneficial) shareholders who have appointed themselves or another person as a proxyholder, to participate at the Meeting and ask questions, all in real time. Registered shareholders and duly appointed proxyholders can vote at the appropriate time during the Meeting.

Guests, including non-registered beneficial shareholders who have not duly appointed themselves or another person as a proxyholder, can log in to the Meeting as set out below. Guests will be able to participate in the Meeting but cannot vote.

To access the Meeting, follow the instructions below, as applicable to you:

•	Log in online at https://web.lumiagm.com/117300299.
•	Click “I have a Login” and then enter your Control Number (see below) and Password “CAE2020” (note the password is case sensitive); OR
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•	Click “I am a guest” and then complete the online form.
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In order to find the 15-digit Control Number to access the Meeting:

•	Registered shareholders: The control number located on the form of proxy or in the email notification you received is your Control Number.
•	Proxyholders: Duly appointed proxy holders, including non-registered (beneficial) shareholders that have appointed themselves or another person as a as proxyholder, will receive the Control Number from Computershare by e-mail after the proxy voting deadline has passed.
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We recommend that you log in at least one hour before the start time of the Meeting. It is important to ensure you are connected to the Internet at all times if you participate in the Meeting online in order to vote when balloting commences. You are responsible for ensuring Internet connectivity for the duration of the Meeting. For additional details and instructions on accessing the Meeting online from your tablet, smartphone or computer, see the Virtual AGM User Guide provided by Computershare and accompanying this proxy circular.

How to Vote your Shares

You may vote your Shares in one of the following ways:

1.	By proxy using all the voting channels that have been available in the past; this has not changed. Only voting at the Meeting has changed.
	by mail: sign, date and return your proxy form in the envelope provided.
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	by telephone: call the telephone number on your proxy form.
	on the Internet: visit the website listed on your proxy form.
	by appointing another person to attend and vote at the Meeting online on your behalf.

Refer to the enclosed proxy form for instructions.

2.	Virtually at the Meeting online by following the instructions below. The voting process is different for registered or non-registered (beneficial) shareholders:
a)	if you are a registered Shareholder, you may vote at the Meeting by completing a ballot online during the Meeting. Follow the instructions above to access the Meeting and cast your ballot online during the designated time.
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b)	if you are a non-registered shareholder (including a participant in the employee plan) AND you wish to vote online at the Meeting, you must appoint yourself as Proxyholder in order to vote at the Meeting. You MUST complete and return a voting instruction form no later than 11:00 a.m. (Eastern Time) on August 10, 2020 appointing yourself as Proxyholder. Follow the instructions above to access the Meeting and cast your ballot online during the designated time. You will receive the Control Number for the Meeting from Computershare by e-mail after the proxy voting deadline has passed.
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United States Beneficial holders: To vote at the Meeting, you must first obtain a valid legal proxy from your broker, bank or other agent and then register in advance of the Meeting. Follow the instructions from your broker or bank included with this Circular, or contact your broker or bank to request a legal proxy form. To register to attend the Meeting online, you must submit a copy of your legal proxy form to Computershare. Requests for registration should be directed to Computershare at 100 University Avenue, 8^th^ Floor, Toronto, Ontario M5J 2Y1, or by e-mail at uslegalproxy@computershare.com. Requests for registration must be labelled as “Legal Proxy” and be received no later than 11:00 a.m. (EDT) on August 10, 2020. You will receive a confirmation of your registration after Computershare receives your registration materials. Please note that you are required to register your appointment as proxyholder at http://www.computershare.com/CAE.

Voting by proxy

If you choose to vote by proxy, you are giving the person or people named on your proxy form (referred to as a “Proxyholder”) the authority to vote your Shares on your behalf online at the Meeting or any adjournment or postponement thereof.

Proxies are being solicited by management

Through this Circular, management is soliciting your proxy in connection with the matters to be addressed at the Meeting (or any adjournment(s) or postponements(s) thereof) to be held at the time and place and for the purposes set forth in the accompanying Notice of the Meeting.

The solicitation will be primarily made by mail but proxies may also be solicited personally by the officers of CAE at nominal cost. The cost of management’s solicitation of proxies will be borne by CAE.

Unless you specify a different proxyholder, the CAE officers and/or Directors whose names are pre-printed on the enclosed form of proxy (John P. Manley, Marc Parent and Margaret S. (Peg) Billson) will vote your Shares.

Proxyholders other than management

Shareholders desiring to appoint some person other than John P. Manley, Marc Parent and Margaret S. (Peg) Billson as their representative at the Meeting may do so either by inserting such other person’s name in the blank space provided or by completing another proper proxy form and, in either case, delivering the completed proxy to CAE’s Corporate Secretary at 8585 Côte-de-Liesse, Saint-Laurent, Québec, H4T 1G6 or to Computershare Trust Company of Canada, 100 University Avenue, 8^th^ Floor, Toronto, Ontario, M5J 2Y1 no later than 11:00 a.m. (Eastern Time) on August 10, 2020 (or, in the case of an adjournment or postponement, no later than 11:00 a.m. (Eastern Time) on the last business day preceding the day of such adjournment or postponement thereof).

Voting of Proxies

You may indicate on the proxy form how you want your proxyholder to vote your Shares, or you can let your proxyholder decide for you. If you do not specify on the proxy form how you want your Shares to be voted, your proxyholder will have the discretion to vote your Shares as they see fit.

The enclosed proxy form gives the proxyholder discretion with respect to any amendments or changes to matters described in the Notice of Annual Meeting and with respect to any other matters which may properly come before the Meeting (including any adjournment or postponement thereof).

At the time of printing this Circular, the management of CAE knows of no such amendments, variations or other matters to come before the Meeting.

Unless you specify a different proxyholder or specify how you want your Shares to be voted, John P. Manley, Marc Parent and Margaret S. (Peg) Billson will vote your Shares:

a) FOR electing the nominated Directors who are listed in this Circular;

b) FOR appointing PwC as auditors and for the authorization of the Directors to fix their remuneration; and

c) FOR approving the advisory resolution on executive compensation.

Registered Shareholders who wish to appoint a third-party proxyholder to represent them at the Meeting must first use the Form of Proxy to appoint the proxyholder and then MUST register their proxyholder online. Failure to register the proxyholder will result in the proxyholder not receiving a Control Number and therefore being unable to participate in the Meeting. To register a third-party proxyholder, shareholders MUST visit https://www.computershare.com/CAE by August 10, 2020 at 11:00 a.m. (EST) and provide Computershare with the proxyholder’s contact information required. Computershare needs this information so they can confirm their registration and send an email notification with a control number. Your proxyholder needs the control number in order to participate in the meeting and vote your shares. Your third-party proxyholder should receive the email notification after 11:00 a.m. (EST) on August 10, 2020.

To be effective, your proxy must be received before 11:00 a.m. (EST) on August 10, 2020 or not less than 48 hours (excluding Saturdays, Sundays and holidays) prior to the time fixed for holding any adjournment of the Meeting.

Revocation of Proxies

You have the right to revoke a proxy by ANY of the following methods:

a)	Vote again by phone or Internet no later than 11:00 a.m. (Eastern Time) on August 10, 2020 (or not less than 48 hours (excluding Saturdays, Sundays and holidays) prior to the date of any adjourned or postponed Meeting); or
b)	Deliver another completed and signed proxy form, dated later than the first proxy form, by mail or fax such that it is received by CAE’s Corporate Secretary at 8585 Côte-de-Liesse, Saint-Laurent, Québec, H4T 1G6 or by Computershare Trust Company of Canada, 100 University Avenue, 8^th^ Floor, Toronto, Ontario, M5J 2Y1 no later than 11:00 a.m. (Eastern Time) on August 10, 2020 (or not less than 48 hours (excluding Saturdays, Sundays and holidays) prior to the date of any adjourned or postponed Meeting).
---	---

Vote again by phone or Internet no later than 11:00 a.m. (Eastern Time) on August 10, 2020 (or not less than 48 hours (excluding Saturdays, Sundays and holidays) prior to the date of any adjourned or postponed Meeting); or

Deliver another completed and signed proxy form, dated later than the first proxy form, by mail or fax such that it is received by CAE’s Corporate Secretary at 8585 Côte-de-Liesse, Saint-Laurent, Québec, H4T 1G6 or by Computershare Trust Company of Canada, 100 University Avenue, 8^th^ Floor, Toronto, Ontario, M5J 2Y1 no later than 11:00 a.m. (Eastern Time) on August 10, 2020 (or not less than 48 hours (excluding Saturdays, Sundays and holidays) prior to the date of any adjourned or postponed Meeting).

---

Electronic Access to Proxy-Related Materials and Annual and Quarterly Reports

We offer our Shareholders the opportunity to view management proxy circulars, annual reports and quarterly reports through the Internet instead of receiving paper copies in the mail. You will find more information on this matter in the Notice-and-Access section above.

Section 2

Business of the Meeting

1 Receive CAE’s Financial Statements

CAE’s consolidated financial statements including the auditors’ report, for the year ended on March 31, 2020 will be presented to Shareholders at the Meeting. They can also be accessed on CAE’s website at www.cae.com, on SEDAR at www.sedar.com, or on EDGAR at www.sec.gov. No Shareholder vote is required in connection with the financial statements.

2 Elect 10 Directors

10<br><br>Nominees	90%^1^<br><br>Independent	1<br><br>Interlock	98.7%<br><br>% Votes <br>FOR <br>in 2019	100%<br><br>Average Board Meeting Attendance
1	The only non-Independent Director is CAE’s President and CEO.
---	---

You will be electing a board of directors (“Board”) of 10 members. Each Director is elected annually for a term, which expires no later than the next annual meeting of Shareholders.

All of the following nominees are currently members of the Board of Directors, and have been recommended by the GC and the Board for election at the Meeting. Gen. Norton A. Schwartz, USAF (Ret.) retired from his position as Director of the Company on January 2, 2020. Gen. David G. Perkins, USA (Ret.) was appointed as a Director by the Board of Directors on May 1, 2020:
• Margaret S. (Peg) Billson<br><br>• The Honourable Michael M. Fortier, P.C.<br><br>• Marianne Harrison<br><br>• Alan N. MacGibbon<br><br>• The Honourable John P. Manley, P.C., O.C	• François Olivier<br><br>• Marc Parent<br><br>• Gen. David G. Perkins, USA (Ret.)<br><br>• Michael E. Roach<br><br>• Andrew J. Stevens

Each nominee was elected at our 2019 annual Shareholders’ meeting held on August 14, 2019, by a majority of the votes cast (average of 98.58% of votes cast in favour) except for Gen. David G. Perkins, USA (Ret.) who is a first-time nominee.

Please refer to Section 3 – “About the Nominated Directors” for further information regarding the experience, the selection process and other relevant information you should consider in casting your vote for each nominee.

Self-imposed term and age limits ensure CAE benefits from a combination of experience and fresh perspectives

The Board of Directors has passed a resolution establishing term limits comprising the following:

•	up to two six-year periods of service, to aggregate twelve years maximum; and
•	no nominee may be proposed past their attaining 72 years of age.
---	---

The Board of Directors believes these limits, subject to reasoned exceptions, are appropriate to ensure fresh skill sets and perspectives are periodically brought to the oversight of CAE’s business.

Majority voting guidelines

Each Director of the Company must be elected by a majority (50% +1 vote) of the votes cast with respect to his or her election, other than at contested meetings (“Majority Voting Requirement”).

In accordance with the Board’s majority voting policy, any nominee for Director in an uncontested election who receives a greater number of “withhold” votes from his or her election than votes “for” his or her election (a “majority withhold vote”) shall tender his or her resignation to the Chair of the Governance Committee immediately following certification of the Shareholder vote.

The Governance Committee will promptly consider the tendered resignation and recommend to the Board whether to accept or reject it. In the absence of exceptional circumstances, the Board expects the Governance Committee will recommend that the Board of Directors accept such resignation.

The Board will act on the Governance Committee’s recommendation not later than 90 days following the date of the Shareholders’ meeting at which the election occurred. In deciding whether to accept the tendered resignation, the Board will consider the factors considered by the Governance Committee and any additional information and factors the Board believes to be relevant. The Board shall accept the resignation absent exceptional circumstances.

The resignation of the Director whose election did not meet the Majority Voting Requirement will be effective when accepted by the Board. A Director who tenders a resignation pursuant to the policy will not participate in the decision-making process leading to the Governance Committee recommendation or the Board consideration whether to accept or reject the resignation, and will not attend any part of a meeting of the Board or the Governance Committee at which his or her resignation is discussed or a related resolution is voted upon.

Promptly following the Board’s decision, the Company will issue a news release disclosing that decision and providing a full explanation of the decision reached. A copy of the news release with the Board’s decision will be provided to the TSX.

If the Board decides to accept the Director’s resignation, the Governance Committee will recommend to the Board whether to fill the resulting vacancy or to reduce the size of the Board. If a majority of the members of the Governance Committee received a majority withhold vote at the same election, then the Independent Directors who did not receive a majority withhold vote will appoint a Board committee amongst themselves solely for the purpose of considering the tendered resignations and will recommend to the Board whether to accept or reject them.

Detailed voting results will be disclosed after the Meeting

Promptly, after the Meeting, we will publicly disclose the number and percentage of votes cast for and withheld in respect of each nominee, as well as those cast for and against each other matter voted on by Shareholders at the Meeting.

The Board of Directors recommends that Shareholders vote FOR the election of the 10 nominated members of the Board.

3 Appoint the Auditors

The Board, on recommendation by the Audit Committee, proposes that PricewaterhouseCoopers LLP(PwC), Chartered Accountants, Montréal, Québec be re-appointed as auditors of CAE to hold office until the close of the next annual meeting of Shareholders and that the Directors of CAE be authorized to fix their remuneration.

PwC has served as auditors of CAE since 1991.

PwC provides three types of services to CAE and its subsidiaries

1.	Audit Services: fees billed for professional services for the audit of CAE’s annual consolidated financial statements and services that are normally provided by PwC in connection with statutory and regulatory filings, including the audit of the internal controls and financial reporting as required by SOX.
2.	Audit-related Services: fees relating to work performed in connection with CAE’s acquisitions, translation and other miscellaneous accounting-related services.
---	---
3.	Tax Services: fees relating to tax compliance, tax planning and tax advice.
---	---

Auditors independence

The Audit Committee has discussed with PwC its independence from management and CAE, has considered and concluded that the provision of non-audit services is compatible with maintaining such independence.

Furthermore, as per its policy, the Audit Committee reviews and pre-approves all non-audit services provided by the external auditors above a specified level.

The following chart shows all fees paid to PwC by CAE and its subsidiaries in the most recent and prior fiscal year.

FEE TYPE	2020<br><br>($ millions)	2019<br><br>($ millions)
1. Audit services	4.5	4.6
2. Audit-related services	0.2	0.1
3. Tax services	0.6	0.6
Total	5.3	5.3

Fees Paid by CAE to PwC in FY2020

In order to further support PwC’s independence, the Audit Committee has set a policy concerning CAE’s hiring of current and former partners and employees of PwC who were engaged on CAE’s account in the recent years.

The Board of Directors recommends that Shareholders vote FOR the appointment of PwC as CAE’s auditors.

4 Advisory Vote on Executive Compensation

As detailed in Section 7 – ‘‘Executive Compensation”, CAE’s executive compensation philosophy and programs are based on the fundamental principle of pay-for-performance to align the interests of our executives with those of our Shareholders. This compensation approach allows CAE to attract and retain high-performing executives who are strongly incentivized to create value for CAE’s Shareholders on a sustainable basis.

We encourage you to carefully read this section of the Circular which describes our overall approach to executive compensation, the objectives of our executive compensation program, how compensation decisions are made and the compensation paid to our most highly paid executive officers in the last three years.

At the Meeting, Shareholders will be asked to consider and to cast an advisory, non-binding vote on CAE’s approach to executive compensation – this is often referred to as “say on pay”.

The text of the “say on pay” resolution reads as follows:

‘‘Resolved that the Shareholders accept the approach to executive compensation disclosed in this Management Proxy Circular’’.

Because your vote is advisory, it will not be binding upon the Board. However, the HRC will review and analyze the results of the vote and take into consideration such results when reviewing executive compensation philosophy and programs.

The Board of Directors recommends that Shareholders vote FOR the resolution set out above.

If a majority of the Shares represented, including by proxy, at the Meeting are voted against the above non-binding advisory resolution, the Board Chair or the HRC Chair will oversee a process to engage with Shareholders with a view to giving Shareholders the opportunity to express their specific concerns. The Board of Directors and the HRC will consider the results of this process and, if appropriate, review the Company’s approach to executive compensation in the context of Shareholders’ specific concerns.

Our approach to executive compensation was approved by 92.93% of the votes cast on the resolution during our August 14, 2019 annual meeting of Shareholders.

Other business

Following the conclusion of the formal business conducted at the Meeting, we will:

•	provide an update on our business operations, and
•	invite questions and comments from Shareholders.
---	---

Section 3

About the Nominated Directors

This Section presents biographical data, Board activity (i.e. Board and Committee meetings attended from April 1, 2019 to March 31, 2020) and Share ownership information with respect to each nominee the Board of Directors is recommending FOR election by Shareholders at the Meeting. A description of the Board Nominee selection criteria, and nomination process and Board Attributes follows the individual tables. “Market Value” refers to the product of the sum of the Common Shares and DSUs held by a Director multiplied by the closing price on the TSX of a Common Share on June 7, 2019 and June 5, 2020. Footnotes specific to each nominee are presented immediately below their biography.

98.7%<br><br>Average <br>2019 Votes <br>FOR	90%<br><br>Independent <br>Directors	61<br><br>Average <br>Age	5.1<br><br>Average <br>Tenure^1^ <br>(years)	100%<br><br>Average <br>Board Attendance
1	For non-executive Directors.
---	---

Age: 58

Albuquerque,

New Mexico, U.S.

Director since: 2015

(Independent)

Votes in Favour at Last

Annual Meeting: 98.26%

Margaret S. (Peg) Billson

Ms. Billson is a veteran aviation business leader with over 30 years of experience leading technology rich companies, including serving as the President & CEO of BBA Aviation Aftermarket Services, a division of BBA Aviation plc., as President & General Manager of the Airplane Division of Eclipse Aviation and as the Vice-President & General Manager of Airframe Systems at Honeywell International Inc. Ms. Billson has a Master’s degree in Engineering-Aerospace and, in recognition of her industry accomplishments, has been inducted into Embry-Riddle Aeronautical University’s Hall of Fame. Ms. Billson is also an instrument-rated pilot.

Board Membership and Attendance
Board of Directors	7 of 7	100	%
Governance Committee (Chair)	3 of 3	100	%
Human Resources Committee	5 of 5	100	%
Total	15 of 15	100	%
Other Public Company Boards
---	---	---
Current	Arconic, Corp.	April 2020
Former	Skywest, Inc.	’07 – ’15
Securities Held
---	---	---	---	---	---	---
Date	Common <br>Shares	DSUs	Total	Market <br>Value	Minimum <br>Ownership <br>Requirement	% of <br>Achievement
June 5, 2020	–	36,976	36,976	$958,048	$501,000	191%
June 7, 2019	–	29,561	29,561	$1,016,898	$501,000	202%

Age: 58

Mount-Royal,

Quebec, Canada

Director since: 2010

(Independent)

Votes in Favour at Last

Annual Meeting: 96.9%

The Honourable Michael M. Fortier, P.C.

Mr. Fortier joined RBC Capital Markets (RBCCM) as a Vice-Chair in 2010. Prior to joining RBCCM, Mr. Fortier was a partner of Ogilvy Renault LLP (now Norton Rose Fulbright Canada LLP) and a Senior Adviser to Morgan Stanley in Canada.

Between 2006 and 2008, Mr. Fortier held various positions in the Government of Canada, as Minister of Public Works and Government Services, Minister of International Trade and Minister responsible for Greater Montréal. Prior to that, Mr. Fortier was active in the investment banking industry, first as a Managing Director with Credit Suisse First Boston (1999 – 2004) and then as a Managing Director with TD Securities (2004 – 2006).

Mr. Fortier also practiced law with Ogilvy Renault LLP (1985 – 1999) in the areas of corporate finance and mergers and acquisitions. He was based in London, England for several years during this period.

Board Membership and Attendance
Board of Directors	7 of 7	100	%
Human Resources Committee (Chair)	5 of 5	100	%
Total	12 of 12	100	%
Other Public Company Boards
---	---	---
Current	N/A
Former	Aimia Inc.	’09 – ’18
Securities Held
---	---	---	---	---	---	---
Date	Common <br>Shares	DSUs	Total	Market <br>Value	Minimum <br>Ownership <br>Requirement	% of <br>Achievement
June 5, 2020	–	74,355	74,355	$1,926,538	$501,000	385%
June 7, 2019	–	66,419	66,419	$2,284,813	$501,000	456%

Age: 56

Boston, Massachusetts, U.S.

Director since: 2019

(Independent)

Votes in Favour at Last

Annual Meeting: 98.54%

Marianne Harrison

Ms. Marianne Harrison is President and Chief Executive Officer of John Hancock Life Insurance Company, the U.S. division of Toronto-based Manulife Financial Corporation. She also is a member of Manulife’s Executive Leadership Team. Before taking on her current role in 2017, Ms. Harrison served as President and Chief Executive Officer of Manulife Canada, Manulife’s Canadian Division. Prior to assuming this role in 2013, she held several leadership positions across the company, including President and General Manager for John Hancock Long-Term Care Insurance, and Executive Vice President and Controller for Manulife. Before joining Manulife, Marianne had been Chief Financial Officer of Wealth Management at TD Bank Group after holding various positions there; before that she worked for PwC.

Ms. Harrison graduated from the University of Western Ontario with a B.A. in English and earned a Diploma in Accounting from Wilfrid Laurier University. She is a Chartered Accountant and in 2016 was elected a Fellow of the Profession.

Board Membership and Attendance^1^
Board of Directors	3 of 3	100	%
Audit Committee	2 of 2	100	%
Total	5 of 5	100	%
Other Public Company Boards
---	---	---
Current	N/A
Former	N/A
Securities Held
---	---	---	---	---	---	---
Date	Common <br>Shares	DSUs	Total	Market <br>Value	Minimum <br>Ownership <br>Requirement	% of <br>Achievement
June 5, 2020	15,600	4,417	20,017	$518,640	$501,000	103%
1	Ms. Harrison was appointed to the Board and the Audit Committee on August 14, 2019.
---	---

Age: 64

Toronto, Ontario,

Canada

Director since: 2015 (Independent)

Votes in Favour at Last

Annual Meeting: 98.86%

Alan N. MacGibbon

Mr. MacGibbon is a Corporate Director. He was Managing Partner and Chief Executive of Deloitte LLP Canada (2004 – 2012) and served on the Executive and Global Board of Directors of Deloitte Touche Tohmatsu Limited during this term. Mr. MacGibbon served as Global Managing Director, Quality, Strategy and Communications of Deloitte Touche Tohmatsu Limited and as Senior Counsel to Deloitte LLP Canada from June 2012 to December 2013.

Mr. MacGibbon holds an undergraduate degree in Business Administration and an honorary doctorate degree from the University of New Brunswick. Mr. MacGibbon is a Chartered Professional Accountant, a Chartered Accountant and a Fellow of the Chartered Professional Accountants of Ontario.

Board Membership and Attendance
Board of Directors	7 of 7	100	%
Audit Committee (Chair)	4 of 4	100	%
Human Resources Committee	5 of 5	100	%
Total	16 of 16	100	%
Other Public Company Boards
---	---	---
Current	TD Bank	‘14 – present
Former	N/A
Securities Held
---	---	---	---	---	---	---
Date	Common <br>Shares^1^	DSUs	Total	Market <br>Value	Minimum <br>Ownership <br>Requirement	% of <br>Achievement
June 5, 2020	4,088	42,461	46,549	$1,206,085	$501,000	241%
June 7, 2019	4,088	34,679	38,767	$1,333,584	$501,000	266%
1	1,011 of these shares are owned beneficially by Mr. MacGibbon’s spouse, under the direction of Mr. MacGibbon.
---	---

Age: 70

Ottawa, Ontario,

Canada

Director since: 2008

(Independent)

Votes in Favour at Last

Annual Meeting: 98.93%

The Honourable John P. Manley, P.C., O.C.

Mr. Manley is a Senior Business Advisor with the law firm Bennett Jones LLP. He was President and Chief Executive Officer of the Business Council of Canada (not-for-profit) from 2010 to 2018 and is currently Chair of Canadian Imperial Bank of Commerce. From 2004 to 2009, he served as Counsel to McCarthy Tétrault LLP, a national law firm. Prior to that, Mr. Manley had a 16-year career in politics, serving as Deputy Prime Minister of Canada and Minister in the portfolios of Industry, Foreign Affairs and Finance. Mr. Manley obtained a Bachelor of Arts from Carleton University and a Juris Doctorate from the University of Ottawa, is a certified Chartered Director from McMaster University and holds honorary doctorates from six Canadian universities.

Board Membership and Attendance^1^
Board of Directors	7 of 7	100	%
Total	7 of 7	100	%

Other Public Company Boards
---	---	---
Current	Canadian Imperial Bank of Commerce (CIBC)	‘05 – present
	Telus Corporation	‘12 – present
Former	Canadian Pacific Railway Limited	‘06 – ‘13
	Nortel Corporation	‘04 – ‘09
Securities Held
---	---	---	---	---	---	---
Date	Common <br>Shares	DSUs	Total	Market <br>Value	Minimum <br>Ownership <br>Requirement	% of <br>Achievement
June 5, 2020	–	130,931	130,931	$3,392,422	$501,000	677%
June 7, 2019	–	117,984	117,984	$4,058,649	$501,000	810%
1	As Chair of the Board, Mr. Manley attends all Committee meetings.
---	---

Age: 55

Montreal, Quebec,

Canada

Director since: 2017 (Independent)

Votes in Favour at Last

Annual Meeting: 98.03%

François Olivier

Mr. Olivier has been President and Chief Executive Officer of Transcontinental Inc. since 2008. After joining the Printing Sector of TC Transcontinental in 1993, he rose through the ranks to ultimately take on the role of President of the Information Products Printing Sector, and then becoming Chief Operating Officer in 2007. Through the years, Mr. Olivier consolidated the Canadian printing industry and transformed the company by diversifying its assets into flexible packaging with strategic acquisitions. Under his leadership, TC Transcontinental has become Canada’s largest printer, a leader in flexible packaging in North America, and a Canadian leader in its specialty media segments. Prior to joining TC Transcontinental, François Olivier worked as General Manager of Canada Packers.

Mr. Olivier also serves on the boards of directors of the Conference Board of Canada, the Flexible Packaging Association and the Montreal Heart Institute Foundation. He has a B.Sc. from McGill University and is a graduate of the Program for Management Development at Harvard Business School.

Board Membership and Attendance
Board of Directors	7 of 7	100	%
Audit Committee	4 of 4	100	%
Governance Committee	3 of 3	100	%
Total	14 of 14	100	%
Other Public Company Boards
---	---	---
Current	Transcontinental Inc.	’08 – present
Former	N/A
Securities Held
---	---	---	---	---	---	---
Date	Common <br>Shares	DSUs	Total	Market <br>Value	Minimum <br>Ownership <br>Requirement	% of <br>Achievement
June 5, 2020	–	21,784	21,784	$564,423	$501,000	112%
June 7, 2019	–	14,847	14,847	$510,736	$501,000	101%

Age: 59

Montreal, Quebec,

Canada

Director since: 2008

Votes in Favour at Last

Annual Meeting: 99.91%

Marc Parent

Mr. Parent has been the President and CEO of CAE Inc. since October 2009. He joined the Company in February 2005 as Group President, Simulation Products, was appointed Group President, Simulation Products and Military Training & Services in May 2006, and then Executive Vice President and Chief Operating Officer in November 2008. Mr. Parent has over 35 years of experience in the aerospace industry. Before joining CAE, Mr. Parent held various positions with Canadair and within Bombardier Aerospace in Canada and the U.S. Mr. Parent is past Chair of the Board of Directors of the Aerospace Industries Association of Canada (AIAC) and of Aéro Montréal (Québec’s aerospace cluster). Mr. Parent graduated as an engineer from École Polytechnique, is a graduate of the Harvard Business School Advanced Management Program and holds an honorary doctorate from École Polytechnique. Mr. Parent is an active pilot holding a Transport Canada Airline Transport Pilot license.

Board Membership and Attendance^1^
Board of Directors	7 of 7	100	%
Total	7 of 7	100	%
Other Public Company Boards
---	---	---
Current	Telus Corporation	‘17 – present
Former	N/A
Securities Held^2^
---	---	---	---	---	---
Date	Common <br>Shares	FY2004 <br>LTUs	LTUs	Total	Market <br>Value
June 5, 2020	292,757	42,985	232,111	567,853	$14,713,071
June 7, 2019	270,780	42,325	228,551	542,656	$18,667,366
1	Upon invitation of Board Committees, Mr. Parent attended all or a part of their meetings.
---	---
2	As President and CEO, Mr. Parent has a higher ownership target than an Independent Director (please refer to “Executive Share Ownership Requirements” in Section 7 for details concerning Mr. Parent’s Share ownership requirements).
---	---

Age: 62

Jackson, New Hampshire, U.S.

Director since: May 1, 2020

First time nominee

(Independent)

Votes in Favour at Last Annual Meeting: N/A

General David G. Perkins, USA (Ret.)

Gen. Perkins served over 40 years in the US Army culminating as the Commander of the United States Army Training and Doctrine Command (TRADOC) which is responsible for designing, acquiring, building and constantly improving the US Army which is one of the largest, with over 1.2 million people, and most complex organizations in the world. Under his leadership TRADOC developed the Army’s concept of Multi-Domain Operations which has become a driver for future changes in operations and training, not only in the US Military, but around the world. Gen. Perkins holds a Bachelor of Science degree from the United States Military Academy, a master’s degree in Mechanical Engineering from the University of Michigan, and a master’s degree in National Security and Strategic Studies from the Naval War College.

Board Membership and Attendance^1^
Board of Directors	N/A
Audit Committee	N/A
Total	N/A
Other Public Company Boards
---	---	---
Current	N/A	N/A
Former	N/A
Securities Held
---	---	---	---	---	---	---
Date	Common <br>Shares	DSUs	Total	Market <br>Value	Minimum <br>Ownership <br>Requirement	% of <br>Achievement^2^
June 5, 2020	–	–	–	–	$501,000	–
1	Gen. Perkins was appointed to the Board on May 1, 2020.
---	---
2	Gen. Perkins joined the Board on May 1, 2020 and must meet his required holdings over the five-year period from such date.
---	---

Age: 68

Montreal, Quebec,

Canada

Director since: 2017

(Independent)

Votes in Favour at Last Annual Meeting: 99.9%

Michael E. Roach

An experienced international business and technology leader, Mr. Roach served as President and Chief Executive Officer (2006-2016) of CGI Group Inc. until his retirement. He continues to serve as a member of CGI’s board of directors. Prior positions include President and Chief Operating Officer of CGI Group Inc. and President and Chief Executive Officer of Bell Sygma Inc., a Bell Canada technology subsidiary. Mr. Roach holds a Bachelor of Arts in Economics and Political Science, as well as an Honorary Doctorate in Business Administration from Laurentian University in Sudbury, Ontario.

Board Membership and Attendance
Board of Directors	7 of 7	100	%
Audit Committee	4 of 4	100	%
Governance Committee	3 of 3	100	%
Total	14 of 14	100	%
Other Public Company Boards
---	---	---
Current	CGI Group Inc.	‘06 – present
Former	N/A
Securities Held
---	---	---	---	---	---	---
Date	Common <br>Shares	DSUs	Total	Market <br>Value	Minimum <br>Ownership <br>Requirement	% of <br>Achievement^1^
June 5, 2020	–	16,216	16,216	$420,157	$501,000	84%
June 7, 2019	–	9,471	9,471	$325,802	$501,000	65%
1	Mr. Roach joined the Board on November 10, 2017 and must meet his required holdings over the five-year period from such date.
---	---

Age: 63

Cheltenham, Gloucestershire, U.K.

Director since: 2013 (Independent)

Votes in Favour at Last

Annual Meeting: 97.89%

Andrew J. Stevens

Mr. Stevens is a corporate Director based in the U.K. who has operating experience globally in the aerospace and defence sector. Beginning with the Dowty Group, a leading British manufacturer of aircraft equipment (1976 – 1994), he joined Bowthorpe plc (1994 – 1996), Messier-Dowty as Managing Director then Chief Operating Officer (1996 – 2000), Rolls-Royce, where he served as Managing Director Defence Aerospace (2001 – 2003), and Cobham plc as a Board member where he served variously as Group Managing Director, Aerospace Systems, Chief Operating Officer and Chief Executive Officer (2003 – 2012).

Mr. Stevens is a Chartered Engineer, with a 1^st^ Class honour degree in Production Engineering from Aston University in Birmingham, England. He is a Fellow of the Royal Aeronautical Society, a Fellow of the Institution of Electrical Engineers and was awarded an honorary Doctor of Science in 2013 from Aston University.

Board Membership and Attendance
Board of Directors	7 of 7	100	%
Human Resources Committee	5 of 5	100	%
Governance Committee	3 of 3	100	%
Total	15 of 15	100	%
Other Public Company Boards
---	---	---
Current	N/A
Former	Héroux-Devtek Inc	‘14 – ‘19
	De La Rue plc	‘12 – ‘19
	Cobham plc	‘03 – ‘12
Securities Held
---	---	---	---	---	---	---
Date	Common <br>Shares	DSUs	Total	Market <br>Value	Minimum <br>Ownership <br>Requirement	% of <br>Achievement
June 5, 2020	–	68,863	68,863	$1,784,240	$501,000	356%
June 7, 2019	–	61,100	61,100	$2,101,840	$501,000	419%

Director Selection and Nomination Process

Part of the Governance Committee’s responsibility is to identify and recruit suitable potential Board members and recommend to the Board nominees for election at annual Shareholder meetings, taking into consideration the Policy Regarding Board and Executive Officer Diversity (the “Diversity Policy”).

To fulfill this mandate, the GC:

•	Identifies desirable skill sets, industry experience, diverse backgrounds, international experience, relationships and other attributes that would assist the Board of Directors in the conduct of its responsibilities and also further CAE’s interests (refer to “Board Attributes” below), taking into account criteria that promote diversity, including but not limited to gender, age, race, national or ethnic origin and disability.
•	Reviews with the Chair, President and CEO and other Directors possible candidates, including the existing members of the Board of Directors, which may meet some or all of such attributes.
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•	Considers potential conflicts of interest, independence issues and interlocking directorships of potential candidates.
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•	Approaches with the Chair and other Directors potential candidates not already serving as Directors to determine their availability and interest in serving on CAE’s Board, and interviews those interested to determine their suitability for nomination.
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•	Reviews with other members of the Board of Directors the potential nomination of any new Director before a final determination to nominate them is made and assess the effectiveness of the director nomination process at achieving CAE’s diversity objectives.
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Board members must:

•	Demonstrate high ethical standards and integrity, including abiding by CAE’s Code of Conduct;
•	Act honestly and in good faith regarding CAE’s best interests;
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•	Devote sufficient time to CAE’s affairs and exercise prudence and diligence in fulfilling all their Board-related responsibilities;
---	---
•	Give independent judgment on issues facing CAE;
---	---
•	Understand and challenge CAE’s business plans and strategy;
---	---
•	Effectively participate in all Board-related deliberations;
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•	Make reasonable efforts to attend Board and committee meetings; and
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•	Review the management materials provided in advance of, and otherwise prepare for, all Board meetings.
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Under the articles of CAE, the Board of Directors may consist of a minimum of three and a maximum of twenty-one Directors. The Directors are to be elected annually as provided in CAE’s by-laws. Each Director will hold office until the next annual meeting or until his or her successor is duly elected unless his or her office is earlier vacated in accordance with the by-laws. In accordance with the by-laws, the Board of Directors has fixed the number of Directors to be elected at the Meeting at ten.

Board Attributes

The following matrix identifying the age, tenure, professional skills, expertise and qualifications of nominated Directors is reviewed by the Governance Committee annually to ensure CAE benefits from an appropriate combination of skills, experience with CAE’s business matters and corporate governance standards and fresh perspectives:	• All non-employee Director nominees (9 out of a total number of 10 Directors) are independent.<br><br>• All Board Committee members are independent.
	Age			Tenure at CAE			Competencies
---	---	---	---	---	---	---	---	---	---	---	---	---	---	---
	Under 60	60 – 69	70+	0 – 5 years	6 – 10 years	More than 10 years	Knowledge of industry	Strategic leadership<br><br>and management	Finance/Accounting	Human Resources/Compensation	Government <br>Relations/R&D	Legal/Governance	Information Technology/ <br>Cybersecurity/Digital]	Environmental/ <br>Health & Safety
Margaret S. (Peg) Billson	•			•			•	•		•	•
Hon. Michael M. Fortier	•				•		•		•	•	•	•
Marianne Harrison	•			•				•	•	•	•
Alan N. MacGibbon		•		•				•	•	•			•
Hon. John P. Manley			•			•	•	•	•	•	•	•
François Olivier	•			•				•	•	•	•	•	•	•
Marc Parent	•					•	•	•	•	•	•	•	•	•
Gen. David G. Perkins, USA (Ret.)		•		•			•	•		•	•		•	•
Michael E. Roach		•		•				•	•	•	•	•	•
Andrew J. Stevens		•			•		•	•		•	•	•		•

Section 4

Corporate Governance

Our Commitment to Sound Corporate Governance

The Board of Directors and management team take pride in knowing that CAE has maintained the highest standards in corporate governance. CAE’s corporate governance is rooted in the basic principle that proper and ethical practices lead to the creation and preservation of Shareholder value.

Our governance structure enables independent, experienced and accomplished Directors to provide advice, insight and oversight to advance the interests of the Company and our Shareholders.

Regulatory compliance

As a Canadian reporting issuer with Common Shares listed on the TSX and the NYSE, CAE’s corporate governance practices are required to meet and exceed applicable rules adopted by the CSA and the SEC, as well as provisions of the rules of the NYSE and of SOX.

Most of the NYSE’s corporate governance listing standards are not mandatory for CAE as a non-U.S. company, but CAE is required to disclose the significant differences between its corporate governance practices and the requirements applicable to United States companies listed on the NYSE. Except as summarized on CAE’s website (http://www.cae.com/investors/governance), CAE is in compliance with the NYSE requirements in all significant respects. CAE also complies with those provisions of SOX and the rules adopted by the SEC pursuant to that Act that are currently applicable to CAE.

Best practices and continuous improvement

The Board and its Governance Committee continue to monitor governance practices in Canada and the United States, and to implement changes to CAE’s governance policies and practices as necessary to comply with any new rules issued by the CSA and other applicable regulatory authorities. We also monitor recommended best practices of shareholder representatives and other organizations and will implement any such practice we believe to be in the best interest of the Company.

Communication and shareholder engagement

CAE is committed to ensure open, ongoing dialogue with Shareholders, other investors and the public. Through CAE’s Disclosure Policy and procedures, the Board ensures that communication of material information to investors is timely and accurate, and broadly disseminated in accordance with all applicable securities laws and stock exchange rules.

CAE recognizes the importance of engaging in constructive and meaningful communications with Shareholders and values their input and insights. To that effect, we have put in place various means to ensure consistent and effective communication with Shareholders and to encourage them to express their views and provide direct feedback to the Board and management.

• We regularly communicate with our stakeholders through various channels, including via our website (www.cae.com). Shareholders, customers and other stakeholders can access comprehensive information about the Company through our investor’s webpage (www.cae.com/investors) where annual and quarterly reports, news releases, corporate social responsibility reports, corporate presentations and governance-related documents are available.
• We host quarterly earnings conference calls with financial analysts and institutional investors to review CAE’s most recently released financial and operating results. Our earning calls are webcast live and are followed by a question and answer period which all Shareholders can access.
• The Board strongly encourages Shareholders to attend the Company’s annual Shareholders’ meetings and Directors make themselves available at every annual meeting to engage with and respond to questions from Shareholders. Shareholders’ meetings can usually be attended in person or via live webcast, however this year, as a precautionary measure to proactively address the public health impact of coronavirus pandemic (COVID-19), to mitigate health and safety risks to our shareholders, employees and other stakeholders, and to abide by the Government of Québec’s directive that all indoor public events be avoided until further notice, the Shareholders’ meeting is being held in a virtual-only format, which will be conducted via live webcast. In any case, these meetings provide valuable opportunities to discuss the Company, its corporate governance and other important matters.
• The Company is committed to effectively engaging with Shareholders and other stakeholders on the topic of executive compensation on an ongoing basis. This year again, Shareholders will be asked at the Meeting to consider and to cast an advisory, non-binding vote on CAE’s approach to executive compensation – this is often referred to as “say on pay”. Although this is an advisory vote and the results are not binding, the HRC will review and analyze the results of the vote and take into consideration such results when reviewing executive compensation philosophy and programs.
• Shareholders are also always invited to submit proposals to be considered at an annual Shareholders’ meeting of the Company and included in our management proxy circular. More information is provided on p. 82 of this Circular.
• CAE’s Global Communications and Investor Relations departments actively engage with investors to address any specific questions or concerns they might have. Shareholders may send comments or questions via email to investor.relations@cae.com. In addition, CAE’s transfer agent, Computershare Trust Company of Canada, has a toll-free number (1-800-564-6253) and website (www.computershare.com) to assist Shareholders.
• Shareholders may communicate with the Board or management in writing to express their views on matters that are important to them, by addressing their correspondence to the Chair of the Board, either (i) by mail in an envelope marked “confidential” to the attention of the Chair of the Board, CAE Inc., 8585 Ch. de la Côte-de-Liesse St-Laurent (Québec) Canada H4T 1G6 or (ii) by email at shareholder@cae.com.
• Shareholders may ask to meet with the Chair of the Board, the Chair of any Board Committee or an individual Director to discuss compensation and governance-related topics for which the Board is directly responsible. The Chair of the Board will consider such meeting request in consultation with the Chair of the Governance Committee and the Corporate Secretary. The Board reserves the right to decline requests for meetings for any reason it deems appropriate, including where the proposed topics for the meeting are not related to compensation and corporate governance matters and are better handled by management.
• As part of our ongoing dialogue engagement with our Shareholders, we organize investors days and our President and Chief Executive Officer, Vice President, Finance and Chief Financial Officer and Vice President, Investor Relations, regularly meet in person or by telephone with institutional investors and proxy advisory groups.

Board and management roles

The purpose of the Board and its committees is to build long-term value for the Company’s Shareholders and to ensure the continuity and vitality of the Company’s businesses by setting policy for the Company, overseeing strategic planning, monitoring the Company’s performance, providing management with appropriate advice and performance feedback. Management is responsible for and the Board is committed to ensuring that CAE operates in a legal and ethically responsible manner. The Board’s stewardship role, specific responsibilities, composition requirements and various other matters are set out in Appendix A – Board of Directors’ Charter – to this Circular.

President and CEO’s role and responsibilities

The position description for the President and CEO is developed with input from the President and CEO, and is approved by the Governance Committee and the Board of Directors. The description (which is available on our website) provides that the President and CEO is responsible for defining, communicating and implementing the strategic direction, goals and core values of CAE with a view to increase CAE’s value as well as meeting the needs of customers, employees, and other stakeholders. It also provides that the President and CEO is accountable to the Board for, amongst other things, formulating and executing business strategies, overseeing CAE’s corporate governance structure and framework, overall responsibility for the management of CAE’s business, building and maintaining a network of strategic relationships with business leaders, governmental officials and investors, developing and implementing a human resource strategy which develops leadership capabilities, and creating an organizational structure and culture that optimize and sustain high levels of performance. In addition, the CEO is accountable to ensure the establishment and achievement of safety objectives and that CAE complies fully with all applicable environmental regulations, to foster a culture of ethical behaviour for CAE and to promote compliance with CAE’s Code of Business Conduct.

The Board Chair is independent

Hon. John P. Manley, the current non-executive Chair of the Board, is responsible for ensuring that the Board of Directors discharges its responsibilities independently of management. Correspondence to the Independent Directors may be sent to the attention of the Chair of the Board, by email at shareholder@cae.com or at CAE’s address listed in this Circular.

The Board Chair position description (which is available on our website) sets out the Chair’s responsibilities and duties in guiding the Board in the fulfillment of their stewardship role, namely:

Board meeting attendance averaged 100% in FY2020.

•	Represent the Board in discussion with management;
•	Represent the Board in discussion with third parties;
---	---
•	Generally ensure that the Board functions independently of management;
---	---
•	Chair and encourage free and open discussions at the Board meetings;
---	---
•	Together with the GC, identify guidelines for the selection of, and evaluation of conduct of the Directors; and
---	---
•	Report to Shareholders on behalf of the Board.
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Processes in place to ensure the Board may function independently of Management

The Independent Directors met separately from the President and CEO at each of the meetings of the Board of Directors during FY2020, and at each meeting of the HRC, GC and Audit Committee. At the Board meetings, the Independent Directors’ meetings are chaired by the non-executive Chair; at Committee meetings, by the Chair of that Committee. The Board, its Committees as well as individual Directors are also able to retain and meet with external advisors and consultants at the expense of CAE in appropriate circumstances. In fact, the Board has regular access to information independent of management through the external and internal auditors, as well as independent compensation consultants and independent legal counsel. The Board believes that sufficient processes are in place to enable it to function independently of management.

Delegation to standing Board committees composed entirely of Independent Directors

In order to enable it to effectively fulfill its responsibilities, the Board has established three standing committees currently composed of the following Independent Directors as of the Record Date:

	Governance	Audit	Human Resources
Margaret S. (Peg) Billson	Chair		•
Hon. Michael M. Fortier			Chair
Marianne Harrison		•
Alan N. MacGibbon		Chair	•
François Olivier	•	•
Gen. David G. Perkins, USA (Ret.)		•
Michael E. Roach	•	•
Andrew J. Stevens	•		•

The nature and scope of authority and responsibility delegated to each standing committee is set forth in the Committee Charters presented in Section 5 – “Board Committee Reports” which can also be found on our website under “Corporate Governance” along with each Committee Chair’s position description.

The appointment of specific Directors to each of the standing Board Committees is generally intended to reflect the relevance of Independent Directors’ skills and experience to the applicable Committee’s Charter (refer to Section 3 – “About the Nominated Directors” for details about the selection process and criteria).

Orientation and continuing education

New Directors meet with CAE executive officers, including the President and CEO and Vice President, Finance and CFO, to discuss CAE’s expectations of its Directors and to discuss CAE business and strategic plans. New Directors also review CAE’s current business plan, detailed agendas and materials of previous Board meetings. New Directors of CAE receive a comprehensive reference manual containing all key corporate and Board policies, including the Code of Business Conduct and other relevant materials and executive briefing sessions. All Directors have regular access to senior management to discuss Board presentations and other matters of interest. CAE management and the Governance Committee keep all Directors aware of major developments in corporate governance, important trends and new legal or regulatory requirements. The Board also receives presentations from senior management on CAE’s performance and issues relevant to the business of CAE, the industry and the competitive environment in which it operates.

The Governance Committee encourages CAE’s Directors to attend conferences, seminars or courses whether they be industry-specific to CAE or relevant to fulfill their role as a Director, the cost of which will be borne by CAE. Also, CAE’s Directors are invited to visit CAE’s sites, attend industry events and trade shows. In recognition of the rapidly changing technology and competitive environment and emerging markets in our business, the Board requires management to provide an in-depth review of the business segments in which we operate at regularly scheduled meetings, as well as our industry in general. The Board and its Committees are continually updated by management on developments related to corporate governance, Directors’ fiduciary duties, changes in law, industry news and other educational material.

Ethical business conduct

CAE has a written Code of Business Conduct that governs the conduct of CAE’s Directors, officers, employees, contractors and consultants. The Governance Committee is responsible for reviewing the design and ensuring compliance with CAE’s Code of Business Conduct. It also has oversight responsibilities with respect to the implementation of the Code throughout CAE, as well as the handling of issues raised thereunder and the annual attestation of compliance. The Code of Business Conduct is available on the Company’s website (www.cae.com). CAE uses Ethicspoint, a third-party whistleblower reporting service, to facilitate reporting of breaches of the Code of Business Conduct and any other misconduct. Apart from any individual reports the Board or its Committees may receive from management or the whistleblower service, the Governance Committee receives a quarterly and an annual report from the Ethics and Compliance Office on CAE’s management’s compliance with the Code of Business Conduct. Our objectives, management approach and highlights for our Ethics and Integrity pillar of our Corporate Social Responsibility (CSR) are outlined in our CSR report, which is available at www.cae.com/social-responsibility/.

Risk management oversight

Enterprise risk management is essential to CAE given the size, nature and complexity of its operations. CAE has implemented an Enterprise Risk Management Policy which sets out its framework and processes to ensure that risks are identified, measured, prioritized, managed, and reported proactively and in a manner that is consistent with the expectations of the Board and the interests of CAE’s internal and external stakeholders, including employees, shareholders, clients, and suppliers.

Pursuant to our policy:

•	the Board is accountable for the oversight of risk management of all material risk factors related to CAE’s business, including risks related to ethics and governance, strategy, legislation, finances and operations. This oversight requires the Board and management to establish risk management policies and practices and to ensure that these policies and practices remain adequate, prudent and comprehensive at all times. The Board is accountable for understanding CAE’s key enterprise risks. The Board and its Committees review the key enterprise risks to ensure the adequacy of the risk management process for identifying, assessing and managing such risks.
•	our business units exercise the daily management of their risks and controls and implement corrective actions to address any process and control deficiencies.
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•	the Vice President, Strategy and Investor Relations provides operational risk oversight in various risk management, compliance, and controllership functions and advises senior management accordingly.
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•	the Audit Committee and senior management provide an appraisal of CAE’s risk management framework, control environment and internal control systems.
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At the annual strategy session, the Board evaluates CAE’s identified categories of risk. Further, the Board receives updates from the President and CEO and other members of management on enterprise risk throughout the year.

In the fourth quarter of FY2020, to monitor and update CAE’s response to the evolving COVID-19 pandemic and its impacts, the Board adapted its routine to reflect the new reality of extreme uncertainty and receives frequent special updates from the President and CEO and other members of management to ensure that CAE successfully navigates through this global pandemic.

You can find a more comprehensive discussion of risk management in Section 10 – Business risk and uncertainty of our fourth quarter and year ended March 31, 2020 Management Discussion and Analysis, filed with the Canadian securities commissions, the U.S. Securities and Exchange Commission under Form 6-K, and available on our website (www.cae.com), on SEDAR (www.sedar.com), and on EDGAR (www.sec.gov).

Make Corporate social responsibility considerations

•	People and Safety
•	Ethics and Integrity
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•	Innovation and Customer Experience
---	---
•	Community and Environment
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Our performance and achievements related to environmental, social and governance (ESG) factors are set out in our Annual Activity and Corporate Social Responsibility report. Our objectives, management approach and highlights for our four CSR pillars are also outlined in this report, which is available at www.cae.com/social-responsibility/.

Reporting standards

Our reporting references the GRI Sustainability Standards of the Global Reporting Initiative (GRI). An independent institution, the GRI provides a globally accepted framework for sustainability reporting across companies and industries.

CAE abides by the principles of United Nations Global Compact as a signatory. We have begun to report on the United Nations’ Sustainable Development Goals (SDGs), by identifying five goals to which our corporate strategy and business model are most aligned and by mapping these goals to our material sustainability issues. We intend to continue the process of integrating the SDGs and to report on our progress for the main areas of focus we have identified:

Goal 3 – Good health and wellbeing

Goal 4 – Quality education

Goal 5 – Gender equality

Goal 8 – Decent work and economic growth

Goal 13 – Climate action

CAE’s commitment to the United Nations Global Compact, as well as its considerations of ESG factors are translated in its policies and codes, including the following policies available on CAE’s website:

•	Anti-corruption Policy;
•	Code of Business Conduct;
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•	Conflicts Mineral Policy;
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•	Donations and Sponsorships Policy;
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•	Diversity and Inclusion Policy;
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•	Environment, Health and Safety Policy;
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•	Gifts and Entertainment and Business Courtesies Policy;
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•	Human Rights Policy;
---	---
•	Lobbying and Political Contributions Policy; and
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•	Whistleblowing Policy.
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CAE also reports to the Carbon Disclosure Project and, for the first time in FY2020, we provide Taskforce on Climate-related Financial Disclosures (TCFD) reporting in our Annual Activity and Corporate Social Responsibility report.

We have been monitoring the global adoption of the Sustainability Accounting Standards Boards (SASB) disclosure standards and assessing their applicability to our business activities. We intend to begin reporting to the SASB standards for the Aerospace & Defence and Professional & Commercial Services industries in FY2021.

Governance and oversight

The Board has oversight and the Executive Management Committee (EMC) has responsibility for ESG issues. Such issues are reviewed by the Board, as needed, to allow for review and guidance on strategy and major plans of action, as well as monitoring of implementation and performance against any goals and targets. In addition, the Board has responsibility for reviewing and approving the Annual Activity and CSR report, including the underlying sustainability roadmap, objectives and performance data. From a management perspective, the EMC leads and oversees ESG issues. The EMC guides the various teams and ensures that the appropriate resources and targets are in place and executed.

Assessment of Directors by the GC

Refer to Section 5 – “Board Committee Reports”.

Compensation

Refer to Section 5 – “Board Committee Reports – The Human Resources Committee”, Section 6 – “Director Compensation” and Section 7 – “Executive Compensation – Setting Executive Compensation – Role of the HRC”.

Section 5

Board Committee Reports

The Governance Committee

Assists the Board in developing and implementing our corporate governance guidelines, identifying individuals qualified to become members of the Board and determining the composition of the Board and its committees, preparing the Board’s succession plan, determining the Directors’ remuneration, developing and overseeing an assessment process for the Board, and reviewing and recommending for Board approval our corporate policies concerning business conduct, high standards of corporate governance, ethics, corporate social responsibility and human rights.

The members of the GC are all Independent Directors and the GC’s charter is available in the governance section of our website at CAE.com.

The GC held three meetings in FY2020; aggregate attendance: 100%.

M.S. Billson (Chair) F. Olivier M.E. Roach A.J. Stevens

The members of the Governance Committee are selected for their experience and knowledge with respect to governance matters generally. Descriptions of Margaret S. (Peg) Billson’s and Andrew J. Stevens’ credentials and past experience can be found in the subsequent Human Resource Committee report. Descriptions of François Olivier and Michael E. Roach’s credentials and past experience can be found in the subsequent Audit Committee report.

Highlights for FY2020

•	The GC considered several possible candidates identified by an external recruitment firm for nomination to the Board to maintain the required skills and diversity profile of the Board in contemplation of the retirement of Gen. Norton Schwartz, USAF (Ret.) and considered and recommended the candidacy of Gen. David G. Perkins, USA (Ret.) for nomination to the Board.
•	The GC oversaw changes to the composition of Committees including as a result of Gen. Schwartz’s retirement from the Board and the appointment of Gen. Perkins.
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•	The GC reviewed and approved amendments to CAE’s Code of Business Conduct and the Internal Reporting/Whistleblowing policies as well as the Business Courtesies, Insider Trading, Anti-Hedging and Continuing Education policies.
---	---
•	An Annual Board of Directors and Governance Committee Performance Review survey was carried out; the overall results continue to be positive and reinforce strong levels of support and engagement.
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•	The GC reviewed the level of compensation of Directors and recommended changes for approval by the Board with effect as of January 1, 2020. However, during FY2021, considering the several measures implemented by CAE to protect its financial position and preserve liquidity in response to the impact of the COVID-19 pandemic, the Board decided to defer the changes in Board compensation approved in FY2020 to a later date and agreed to maintain the status quo.
---	---
•	The GC reviewed and recommended for approval to the Board amendments to the Corporate Governance Guidelines to allow directors to receive a portion of his or her compensation in DSUs and/or in cash prior to the minimum share ownership levels being attained, from the initial date of election of the director to the Board and to include a five-year window to attain the minimum share ownership levels.
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•	The GC reviewed and approved revisions to the Governance Committee Charter and Work Plan Checklist and recommended these modifications for approval by the Board.
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Following fiscal year end 2020, in May 2020 the GC reviewed and agreed to recommend for approval by the Board amendments to CAE’s Diversity Policy to broaden its scope by expressly enumerating women, Aboriginal peoples, persons with disabilities and members of visible minorities, as defined in the Employment Equity Act (Canada), among the diverse groups which are the focus of the Diversity Policy, to reiterate the target of 30% women director representation by 2022 and include a new target that women should represent at least 30% of executive officers by 2022.

In FY2020, the GC’s Charter was amended to include oversight over CSR strategy and reporting. In May 2020, the GC received its first official CSR report from management.

Continuing Education

In addition to access through the Board’s website to an evergreen supply of current research and analysis, news reports and academic studies on best governance and compensation practices and other aspects of board and fiduciary responsibilities and use of research and educational tools, the following activities were conducted in FY2020 to ensure that all required educational resources are available to Directors to properly discharge their responsibilities:

•	Quarterly updates from management on CAE’s compliance with such matters as anti-corruption, corporate policies and procedures, the use of foreign representatives, ethics in the workplace, export control laws and data protection and privacy; and
•	Numerous presentations on CAE’s markets, technology, industry developments and other educational material.
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Other Board commitments and Interlocks Policy

The following policy applies to all Directors:

(a)	No more than two Directors should serve on the same outside public board or outside board committee, unless otherwise agreed by the Board.
(b)	Directors who are employed as chief executive officers, or in other senior executive positions on a full-time basis with a public company, should not serve on the boards of more than two public companies in addition to CAE’s Board.
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(c)	Directors who: (i) have full time employment with non-public companies, (ii) have full-time employment with public companies but not as CEO, or (iii) do not have full time employment, should not serve on the boards of more than four public companies in addition to CAE’s Board.
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(d)	The President and Chief Executive Officer of CAE should not serve on the board of more than one other public company and should not serve on the board of any other public company where the chief executive officer of that other company serves on the CAE Board.
---	---
(e)	Prior to accepting any additional public company board of directors’ appointment, a Director must first disclose the proposed appointment for review by the Governance Committee and the Chair of the Board.
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Board evaluation process

The Governance Committee has the mandate and responsibility to review, on an annual basis, the performance and effectiveness of the Board as a whole and each individual Director. The Chair of the Governance Committee annually approves and distributes a comprehensive questionnaire to each member of the Board regarding various aspects of Board and individual performance. The questionnaire covers a wide range of issues, including the operation and effectiveness of the Board and its committees, the level of knowledge of the Directors relating to the business of CAE and the risks it faces, and the contribution of individual Directors, and allows for comment and suggestions. The Chair of the Governance Committee compiles responses to the questionnaire and prepares a report to the Governance Committee which provides a report to the full Board. The Governance Committee may then recommend changes based upon such feedback to enhance Board performance or refer any areas requiring follow-up to the relevant committees. In addition to the foregoing, each Director individually meets with the Chair of the Board at least once annually to discuss his or her individual performance and the performance of the Board as a whole. As well, the Chair of the Board’s performance is evaluated and assessed through one-on-one meetings between each Director and the Chair of the Governance Committee. Both the Chair of the Board and the Chair of the Governance Committee then report back to the full Board.

Review of Board members’ compensation

As a review of the Board compensation is scheduled every second year, with the last changes to compensation having been made with effect as of January 1, 2018, the GC reviewed in FY2020 with the assistance of the Board’s compensation consultants, Hugessen Consulting Inc., the level of compensation of Directors using an updated CAE peer group and recommended changes for approval by the Board with effect as of January 1, 2020.

However, in FY2021, CAE implemented several flexible measures to protect its financial position and preserve liquidity, including strict cost containment measures in response to the impact of the COVID-19 pandemic and the Board decided to defer the changes in Board compensation approved in FY2020 to a later date and agreed to maintain the status quo.

Resolution of complaints under the Code of Business Conduct

The Governance Committee is kept apprised of every report filed with the independent third party responsible for receiving any complaints under CAE’s Code of Business Conduct, as well as of relevant complaints received by CAE senior management. The GC is regularly informed of the resolution of such complaints (as is the Chair of the Audit Committee where misconduct relating to financial accounting, books and record keeping, fraud or similar financial impropriety is alleged) and of the results of the annual certification process for CAE employees under CAE’s Code of Business Conduct.

Diversity initiatives

In May 2015, following the GC’s recommendation, the Board adopted the Diversity Policy. The Diversity Policy was amended in 2018 and again on May 22, 2020 in order to broaden its scope by expressly enumerating women, Aboriginal peoples, persons with disabilities and members of visible minorities, as defined in the Employment Equity Act (Canada) (collectively, “Designated Groups”), among the diverse groups which are the focus of the Diversity Policy.

The Diversity Policy confirms the guiding principle that the Board will nominate Directors and appoint executive officers based on merit and the needs of CAE at the relevant time, and, that CAE is strongly committed to finding the best people to serve in such roles. The Diversity Policy also recognizes that diversity helps ensure that (a) Directors and executive officers provide the necessary range of perspectives, experiences and expertise required to achieve effective stewardship and management of CAE, and (b) a variety of differing perspectives are considered in addressing issues, while providing a greater likelihood that proposed solutions will be robust and comprehensive. CAE believes that diversity is an important attribute of a well-functioning Board and an effective team of executive officers.

The Diversity Policy provides that:

•

in identifying potential candidates to serve on the Board, the Governance Committee will (a) consider only candidates who are highly qualified based on their talents, experience, expertise, character and industry knowledge, (b) take into account criteria that promote diversity, including, but not limited to, gender, age, race, national or ethnic origin and disability, (c) endeavour to use any available network of organizations and associations that may help identify diverse candidates, and (d) in order to support CAE’s commitment to all aspects of diversity, consider the level of representation of women and other Designated Groups on the Board; and in identifying potential candidates for appointment as President and CEO and for other executive officer positions, the Human Resources Committee and the President and CEO, respectively, will (a) consider individuals from a variety of backgrounds and perspectives with the Company’s diversity objectives in mind, and (b) consider the level of representation of women and members of other Designated Groups in executive officer positions.

In order to ensure that the Diversity Policy is appropriately implemented and to measure its effectiveness, at least annually:

•	the Governance Committee will assess and report to the Board regarding the efficacy of the Director nomination process at achieving the Company’s diversity objectives; and
•	the President and CEO will assess and report annually to the Human Resources Committee regarding the efficacy of the executive officer appointment process at achieving the Company’s diversity objectives.
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In May 2018, the Board, on the recommendation of the GC, updated the Diversity Policy, and adopted a target that women represent at least 30% of Directors by 2022.

In May 2020, the Board, on the recommendation of the Governance Committee, amended the Diversity Policy by adopting a target that women represent at least 30% of executive officers by 2022. The policy was also updated to reflect that the Board seeks gender parity, with the target for Director representation continuing to be at least 30% women and at least 30% men by 2022.

The Company has not established a target regarding the number of visible minorities, persons with disabilities, or Aboriginal people on the Board due to the small size of this group and the need to carefully consider a broad range of criteria, most importantly, the appropriate matching of business needs to drive long term value for our stakeholders and the proven skills and capabilities of new appointees. However, CAE recognizes that diversity is an essential consideration in the selection process for any Board candidates and the succession plan is being monitored to ensure the fair representation of Designated Groups among this group.

Also, the Company has set a target for women only on the executive team at this time and not for any other members of Designated Groups as CAE determined to make this a priority and is working on programs and processes that clearly support women’s career development and a better gender balance. Our target aligns with CAE’s Diversity & Inclusion initiative to foster an inclusive, gender-diverse, bias-free environment and strengthen the representation and development of women in leadership positions. Furthermore, CAE received in 2019 the Bronze-level of the Parity Certification by Women in Governance for its efforts in promoting gender parity in the workplace and was selected for 2019 Bloomberg Gender-Equality Index setting a new standard of transparency as a core part of a company’s commitment to gender equality.

CAE’s Diversity and Inclusion commitments, human resources practices and processes and other diversity initiatives constitute concrete steps in ensuring that CAE’s talent pool of senior executive officers and managers is properly developed and candidates from all Designated Groups are actively sought, beyond the gender diversity target.

As at June 16, 2020, two (2) out of ten (10) Directors (i.e. 20%) and four (4) out of eleven (11) members of our Executive Management Committee (i.e. 36%) were women. No (0%) Aboriginal peoples, persons with disabilities nor members of visible minorities were represented on the Board. With respect to our executive officers, one (1) of eleven (11) members of our Executive Management Committee (i.e. 9%) was a member of visible minorities. No (0%) Aboriginal peoples nor persons with disabilities held executive officer positions. The foregoing disclosure about diversity is derived from information provided by the Directors and executive officers. In accordance with privacy legislation, such information was collected on a voluntary basis, and where a particular individual chose not to respond, CAE did not make any assumptions or otherwise assign data to that individual.

The Audit Committee

Assists the Board in its oversight of the integrity of our consolidated financial statements, compliance with applicable legal and regulatory requirements, the independence, qualifications and appointment of the external auditors, the performance of both the external and internal auditors, management’s responsibility for assessing and reporting on the effectiveness of internal controls and our enterprise risk management processes.

Also see our Annual Information Form for the year ended March 31, 2020 (which you can access on our website at CAE.com, on SEDAR at sedar.com and on EDGAR at sec.gov), for information about the Audit Committee, including its mandate and Audit Committee policies and procedures for engaging the external auditors.

All members of the Audit Committee are Independent Directors. Alan N. MacGibbon, and Marianne Harrison have been determined by the Board to be the Audit Committee financial experts. In addition, the Board, in its judgment, has determined that each other member of the Audit Committee is financially literate. The Charter of the Audit Committee is available in the governance section of our website at CAE.com.

The Audit Committee held four meetings in FY2020; aggregate attendance: 100%.

A.N. MacGibbon (Chair) M. Harrison F. Olivier Gen. D.G. Perkins, M.E. Roach USA (Ret.)

The members of the Audit Committee are selected for their experience and knowledge with respect to financial reporting, internal controls and risk management. Below are details of committee members’ career highlights that make them qualified and effective Audit Committee decision-makers:

Alan N. MacGibbon, Chair of the Audit Committee, brings a wealth of financial expertise to the committee. He was formerly the Managing Partner and Chief Executive of Deloitte LLP (Canada), a member of Deloitte’s Board of Directors, and a member of the Executive and Global Board of Directors of Deloitte Touche Tohmatsu Limited. Mr. MacGibbon is a Chartered Professional Accountant and a Fellow of the Ontario Institute of Chartered Professional Accountants.

Marianne Harrison is a Chartered Accountant with extensive financial expertise, cumulating many years of experience in the leadership positions of various financial institutions. Ms. Harrison currently serves as President and Chief Executive Officer of John Hancock Life Insurance Company and is also a member of the Executive Leadership Team of Manulife Financial Corporation. She previously acted as President and Chief Executive Officer of Manulife Canada and had been Chief Financial Officer of Wealth Management at TD Bank Group. Ms. Harrison was elected a Fellow of the Profession, the highest designation for professional achievement conferred by the Chartered Professional Accountants of Ontario.

François Olivier has significant experience in driving profitable business growth through M&A and in managing large-scale manufacturing operations, in particular as President and Chief Executive Officer of publicly traded company Transcontinental Inc. Mr. Olivier holds a B.Sc. from McGill University and is a graduate of the Program for Management Development at Harvard Business School.

Gen. David G. Perkins, USA (Ret.) has significant strategy and leadership experience that he acquired during its 38-year involvement with the United States Army. His last assignment was commander of the United States Army Training and Doctrine Command (TRADOC) which is responsible for designing, developing, building and constantly improving the US Army which is one of the largest, with over 1.2 million people, and most complex organizations in the world.

Michael E. Roach served as President and Chief Executive Officer of CGI Group Inc. for 10 years and has extensive international leadership experience in consulting and technology-focused companies. Mr. Roach holds a Bachelor of Arts in Economics and Political Science, as well as an Honorary Doctorate in Business Administration from Laurentian University in Sudbury, Ontario.

Highlights for FY2020

•	The committee reviewed the internal audit plan and quarterly internal audit reports.
•	The committee reviewed the impact and the application of IFRS 16 which became effective on a modified retrospective approach in FY2020.
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•	Throughout the past year, the committee reviewed, with and without management present, the results of PwC’s communications with CAE required by generally accepted auditing standards.
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•	The committee reviewed in detail quarterly interim financial information and earnings press releases before their public release.
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•	The committee also reviewed and recommended approval to the Board of the quarterly MD&A, the press releases for the quarterly results and declaration of dividend.
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•	The committee reviewed the MD&A and audited consolidated financial statements of CAE prepared by management for the fiscal year ended March 31, 2019 with management and PwC, and thereafter recommended that they be approved and filed with the Autorité des marchés financiers and the SEC.
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•	The committee reviewed the processes involved in evaluating CAE’s internal controls and oversaw the compliance process related to the certification and attestation requirements of SOX and related SEC rules, as well as of the rules relating to audit committees and certification of financial information adopted by the CSA.
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•	The committee also reviewed export controls, fraud review processes, litigation, securities and exchanges compliance, information technology and cyber security risks, insurance coverage, capital structure, financing activities and treasury, tax compliance and IFRS accounting standard changes.
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•	The committee reviewed amendments to the Enterprise Risk Policy and recommended these modifications for approval by the Board.
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Following fiscal year end 2020, in May 2020, the committee also reviewed the level and adequacy of disclosure as a result of the COVID-19 pandemic.

The Human Resources Committee

Assists the Board of Directors in its oversight responsibilities relating to compensation, nomination, evaluation and succession of the President and CEO, other officers and management personnel; oversees the Company’s environment, health and safety and aviation safety policies and practices, pension plan administration and pension fund investments, and management development and succession planning.

All members of the HRC are Independent Directors. The charter of the HRC is available in the governance section of our website at CAE.com.

The HRC held five meetings in FY2020, aggregate attendance: 100%.

Hon. M.M. Fortier (Chair) M.S. Billson A.N. MacGibbon A.J. Stevens

The HRC is responsible to oversee the Company’s executive compensation programs and succession planning. We constantly ensure that members of the HRC have the experience and knowledge to fulfill this role. Below are details of committee members’ career highlights that make them qualified and effective HR decision-makers:

•	The Honourable M. M. Fortier, Chair of the HRC, as past Chair of the Human Resources and Compensation Committee of Aimia Inc. and as past Minister of Public Works and Government Services, Minister of International Trade and Minister responsible for Greater Montréal for the Canadian Government, has extensive experience dealing with human resources and compensation matters in both corporate and government entities.
•	Margaret S. (Peg) Billson has extensive managerial experience within the aerospace sector. This managerial experience has provided her with significant insight into human resources and compensation issues encountered by companies conducting business within the aerospace sector.
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•	Alan N. MacGibbon was Managing Partner and Chief Executive of Deloitte LLP Canada from 2004 to 2012, a professional services firm with over 8,500 partners and employees. Mr. MacGibbon served on the Executive and Global Board of Directors of Deloitte Touche Tohmatsu Limited from 2004 to 2012 and as Global Managing Director, Quality, Strategy and Communications from June 2012 to December 2013. Mr. MacGibbon also serves as a director of TD Bank. In these roles, Mr. MacGibbon has dealt extensively with human resources and compensation issues.
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•	Andrew J. Stevens, as past CEO of a public company and a board member of Canadian and international companies, has extensive experience in compensation matters at both the executive and employee levels in a corporate environment.
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As past CEOs and/or government leaders/managing directors, all members of the HRC possess the financial knowledge required in order to assess and determine the applicability of measures and targets utilized in determining variable compensation and assessing executive performance against targets and overall Company performance.

Highlights for FY2020

Talent management

In FY2020, CAE continued to invest in its Talent and refine the execution of its leadership initiatives throughout the Company. An increased focus was directed towards the identification and development of current and future women leaders across CAE as part of our Dare program, which is a global development program encompassing 30 women leaders and individual contributors, designed to enhance their leadership skillsets. The intention of the program is to support the development of the participants and to create the awareness, tools and infrastructure to support the Company’s goals to increase the level of women representation in leadership positions. CAE continues to drive progress in respect of our Diversity and Inclusion (D&I) initiative. Related to the D&I efforts, we launched three global employees resource groups (ERG): Women in Aviation, Parents of children with Special needs and LGTBQ+ to cater to the needs of these employees. We launched Unconscious Bias Training to help leaders and employees be aware of their bias in the workplace and how these unconscious biases can impact how they execute their responsibilities. We further advanced gender parity within leadership roles and look to further facilitate development opportunities for key talent across the organization. We furthered our efforts to embed inclusion in our Talent and Leadership reviews by training leaders to recognize biases during their talent discussion and succession planning.

Through its commitment to leadership development, the Company continued to move and develop some of its key talents into development roles within various business units and regions, serving to develop these individuals and further strengthen leadership in identified areas. In support of this effort, we developed and launched the Leap development initiative. The Leap program is designed to develop our future Training Centre leaders, to ensure a pipeline of leaders available to support our growth in training services. The program is global and the first cohort of 11 participants was launched this year. In FY2020, investments in digitalizing the Talent and Leadership Reviews were made along with investment in a new platform to support effective performance management. The Company will continue to develop high potential individuals using systematic psychometric assessment to provide focused development plans. These actions will support the HRC’s oversight of the Company’s efforts to ensure the effective development of CAE’s future executive leaders so that a sufficient leadership and talent pipeline is in place to meet the Company’s future needs.

Executive compensation

The HRC also conducted a compensation risk assessment with the assistance of its independent compensation consultant to identify potential risks associated with CAE’s compensation programs, practices and policies. The assessment concluded that the risks are reasonably unlikely to have a material adverse effect on the Company.

Health and safety

In FY2020, CAE continued to demonstrate its commitment to the Health and Safety of its employees by issuing a new Global Environment, Health and Safety (EH&S) policy which now integrates the environment and health & safety into one policy. This unification aligns with our vision and reinforces EH&S as a key element of CAE’s business strategy.

Our FY2020 safety performance remained similar, with an Injury Frequency rate (IFR) of 0.52 compare to an IFR of 0.54 in FY2019. Of note, the events reported occurred over a greater number of sites, an indicator that our reporting culture is progressing well. Employees are becoming increasingly aware of the importance of incident reporting, and more and more familiar with CAE’s Global EH&S policy – our compliance-based software solution we implemented in FY2019. In FY2020, we attached great importance to incidents that have the potential to result in fatality or permanent injury. Part of the actions coming from the learning of incident investigations, we implemented a Contractor Management program to better supervise the execution of work and improve risk management performed by contractors. Deployment started in Montreal manufacturing and field installations. Program implementation will continue incrementally at all CAE sites. At the end of deployment, all contractors doing business with CAE must have met our requirements and demonstrated compliance.

FY2020 was also impacted by COVID-19, especially during the month of March. CAE developed many protocols providing guidance to our sites to ensure our activities remain safe for all employees, customers, visitors and contractors. As part of that, each site had to implement personal equipment, physical barriers to ensure physical distancing, disinfection and good hygiene practices.

Aviation Safety Programs

In FY2020 CAE’s aviation safety program has continued to evolve. Our enterprise-wide electronic Safety Management System (SMS) was fully deployed and delivering on our expectations. Both Civil and Defence Aviation Safety Teams have continued to work together as One CAE Aviation Safety team, at our second Global Aviation Safety Conference that took place at CAE Oxford flight school in the UK. The teams combined event facilitates sharing best practices with stakeholders across all of our live aviation training centres. Presentations were made to the HRC in terms of progress to identified safety performance targets, incident investigations and related actions and on-going program initiatives, such as initiating an Aviation Recognition Program, working using data analytics to enable us to be more proactive in our approach to aviation safety, and the addition of a Global Aviation Maintenance Safety Manager.

Major activities and topics covered by the HRC are detailed on a by-meeting basis in the calendar below:

Regular Meetings	Agenda
May 2019	Review of:<br><br>• Proxy circular<br><br>• President and CEO FY2019 performance and FY2020 objectives<br><br>• Annual HRC self-evaluation<br><br>• Environment, Health and Safety<br><br>• Executive compensation risk assessment<br><br>• Stock options legislation update<br><br>Approval of:<br><br>• STIP, LTIP awards and merit increases for the President and CEO’s direct reports<br><br>• Payouts under FY2019 STIP and Performance Share Unit grant awarded in FY2017<br><br>• FY2020 annual compensation plan<br><br>• President and CEO objectives for FY2020
August 2019	Review of:<br><br>• FY2020 Talent and Leadership Review<br><br>• Diversity Program<br><br>• STIP update<br><br>• Retirement and savings plans<br><br>• Proxy advisory reports<br><br>• Environment, health and safety<br><br>• Stock options legislation update<br><br>• Change of Control Provisions
November 2019	Review of:<br><br>• FY2021 STIP and LTIP design<br><br>• STIP update<br><br>• Executive Share ownership guidelines status<br><br>• Labour relations update<br><br>• Independence letter from the Board’s compensation consultant<br><br>• Environment, health and safety<br><br>• Aviation Safety Program Review<br><br>Approval of:<br><br>• Revised Comparator Group
February 2020	Review of:<br><br>• Environment, health and safety<br><br>• Talent and leadership update (Talent and Leadership review diversity and inclusion, Key Succession Talents)<br><br>• STIP update<br><br>• FY2021 STIP and LTIP design<br><br>• Review of HRC mandate and workplan<br><br>• Glass Lewis and ISS updates and trends and FY2020 proxy preparation<br><br>Approval of:<br><br>• FY2021 proposed LTIP design<br><br>• Change of Control Provisions

Section 6

Director Compensation

This section provides information pertaining to the compensation, Share ownership and Share ownership requirements of our non-employee Directors.

Our compensation program for non-employee Directors has the following objectives:

•	Attract and retain highly qualified, committed and talented members of the Board with an extensive and relevant breadth of experience; and
•	Align the interests of Directors with those of our Shareholders.
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The Board sets the compensation of non-employee Directors based on recommendations from the Governance Committee.

The Governance Committee reviews every second year the compensation of non-employee Directors and recommends to the Board such adjustments as it considers appropriate and necessary to recognize the workload, time commitment and responsibility of the Board and committee members and to remain competitive with Directors’ compensation trends. Any Director who is also an employee of the Company or any of its subsidiaries does not receive any compensation as a Director.

As planned, the Governance Committee reviewed during FY2020 the level of compensation of Directors and recommended changes for approval by the Board with effect as of January 1, 2020. However, during FY2021, considering the several measures implemented by CAE to protect its financial position and preserve liquidity in response to the impact of the COVID-19 pandemic, the Board decided to defer the changes in Board compensation approved in FY2020 to a later date and agreed to maintain the status quo.

Effective January 1, 2018, Directors’ all-inclusive fees were set as follows:

Position		Form of Payment
Board Chair	310,000	• $142,500 in DSUs<br><br>• $167,500 in cash or DSUs at Director’s election
Board Member	167,000	• $104,500 in DSUs<br><br>• $62,500 in cash or DSUs at Director’s election
Board Committee Chair^1^	25,000	• Cash or DSUs at Director’s election
Board Committee Member	10,000	• Cash or DSUs at Director’s election

All values are in US Dollars.

1	The Governance Committee chair compensation is of $20,000. Committee Chairs do not receive additional compensation for Committee membership.

The Board believes the all-inclusive annual flat fee (in lieu of retainers and attendance fees) compensate Directors fairly and equitably for the risks, time commitment and responsibilities involved in being effective Directors.

Director compensation benchmarking and comparator group

To benchmark Directors’ compensation, the Governance Committee uses the same comparator group of companies as that used to benchmark NEOs’ compensation. This comparator group comprises Canadian and U.S. publicly-listed companies that have relevance to CAE in terms of head office location, market segment or business activities, revenue and market capitalization. The comparator group was reviewed in FY2020 as adjustments were made to account for merger and acquisition activities and to ensure it continues to reflect CAE’s employment market and financial results. Refer to Section 7 – “Executive Compensation” of this Circular for the companies included in CAE’s latest Comparator Group and detailed selection criteria.

• Same comparator group as for NEOs. • Director comparator group last reviewed and adjusted in FY2020. • Directors are paid a flat all-inclusive fee to reflect responsibilities, time commitment and risks related to being effective Directors.

Non-Employee Directors’ Deferred Share Unit Plan (Directors’ DSU Plan)

A DSU is equal in value to one Common Share of CAE and accrues additional units in an amount equal to each dividend paid on Common Shares. DSUs earned by non-employee Directors vest immediately but are only redeemable after termination of the Director’s service with CAE. Payment in cash is then made based on the market value of the equivalent number of Common Shares, net of tax and any other applicable withholdings.

Minimum shareholding requirements

Directors are required to own the equivalent of three times the annual Board base retainer in the form of Common Shares and/or DSUs. The required holding must be acquired over a five-year period from the initial date of election of the director to the Board. A non-employee Director is not, once the minimum Common Share and/or DSU ownership target is reached, obligated to acquire more Shares or DSUs if the value of his/her investment in CAE drops due to stock market fluctuations.

• Minimum shareholding requirements align Directors’ and Shareholders’ interests. • Equal to three times the annual Board base retainer. • The required holding must be acquired over a five-year period from the initial date of election of the director to the Board

Risk mitigation

As per the terms of the DSU Plan, the rights and interests of a Director in respect of the DSUs held in such participant’s account are not transferable or assignable other than for specific cases of legal succession.

CAE maintains Directors’ and officers’ liability insurance for its Directors and officers, as well as those of its subsidiaries as a group.

Anti-Hedging Policy

The policy provides that no Director or CAE executive (defined to include senior officers and vice-presidents) may, at any time, purchase or otherwise enter into financial instruments, including prepaid variable forward contracts, instruments for the short sale or purchase or sale of call or put options, equity swaps, collars, or units of exchangeable funds, that are designed to or that may reasonably be expected to have the effect of monetizing equity awards or hedging or offsetting a decrease in the market value of any CAE securities, including but not limited to DSUs.

Directors’ compensation table

The following table summarizes compensation earned by non-employee Directors of CAE during FY2020:

Name	Total Fees Earned ($)	Paid in Cash ($)	Paid in DSUs ($)^1^
Margaret S. (Peg) Billson	193,290	–	193,290
Hon. Michael M. Fortier	192,000	–	192,000
Marianne Harrison^2^	111,339	–	111,339
Alan N. MacGibbon	202,000	–	202,000
Hon. John P. Manley	310,000	–	310,000
François Olivier	187,000	–	187,000
Michael E. Roach	183,290	–	183,290
Andrew J. Stevens	190,710	–	190,710
Gen. Norton A. Schwartz, USAF (Ret.)^3^	136,540	–	136,540
Katharine B. Stevenson^3^	69,371	–	69,371
1	Represents the value of DSUs determined based on the grant date fair value of the award in accordance with accounting standards. The value of each unit is set to CAE’s closing Share price on the date of grant.
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2	Marianne Harrison joined the Board on August 14, 2019.
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3	Katharine B. Stevenson and Gen. Norton A. Schwartz, USAF (Ret.) ceased service as Directors on August 14, 2019 and January 2, 2020 respectively.
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Directors’ share-based awards

The following table shows for each non-employee Director the number of DSUs outstanding at the beginning of the fiscal year ended March 31, 2020, the number and the value of the DSUs that vested during such year, and the number and the value of all outstanding DSUs as at March 31, 2020. The non-employee Directors are not eligible to receive stock options or other option-based awards.

	Share-based Awards
Name	Number of<br><br>DSUs at the<br><br>Beginning of<br><br>FY2020<br><br>(#)	Number of<br><br>DSUs Vested<br><br>During the<br><br>Year^1^<br><br>(#)	Value Vested<br><br>During the<br><br>Year^2^<br><br>($)	Number of<br><br>DSUs at the<br><br>End of FY2020<br><br>(#)	Market Value of DSUs not Paid Out or Distributed^3^<br><br>($)
Margaret S. (Peg) Billson	29,561	7,415	206,978	36,976	657,812
Hon. Michael M. Fortier	66,419	7,916	221,618	74,335	1,322,421
Marianne Harrison	–	4,418	111,629	4,418	78,591
Alan N. MacGibbon	34,679	7,782	217,954	42,461	755,389
Hon. John P. Manley	117,984	12,948	362,464	130,932	2,329,272
François Olivier	14,847	6,937	194,314	21,784	387,540
Michael E. Roach	9,471	6,746	188,250	16,217	288,492
Gen. Norton A. Schwartz, USAF (Ret.)^4^	4,146	4,027	138,300	–	–
Andrew J. Stevens	61,100	7,763	218,038	68,863	1,225,080
Katharine B. Stevenson^4^	117,744	2,756	94,517	1,073	19,092
1	Represents the number of DSUs each non-employee Director earned during FY2020, including additional DSUs equivalent in value to the dividends paid on the Common Shares credited in-year, rounded to the nearest whole number. The DSUs vest immediately but are redeemable and paid out only after the non-employee Director ceases to be a Director of CAE in accordance with the terms of the Directors DSU Plan.
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2	The value was determined by multiplying the number of DSUs, including additional DSUs equivalent in value to the dividends paid on the Common Shares credited in-year, by the closing prices of the Common Shares on the TSX on the respective dates of each grant. The DSUs are granted at the end of each quarter.
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3	The market value of the DSUs was determined by multiplying the number of all DSUs vested but not paid out or distributed, including additional DSUs equivalent in value to the dividends paid on the Common Shares credited in-year, as at March 31, 2020 by the closing price of the Common Shares on the TSX on March 30, 2020, which was $17.79. Numbers containing fractions have been rounded up for calculation purposes.
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4	Katharine B. Stevenson and Gen. Norton A. Schwartz, USAF (Ret.) ceased service as Directors on August 14, 2019 and January 2, 2020 respectively.
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Section 7

Executive Compensation

	Compensation Discussion and Analysis

This section describes our compensation philosophy, policies and programs, and provides the details with respect to the compensation awarded to our Named Executive Officers in FY2020. For FY2020, our NEOS were:

•	Marc Parent, President and Chief Executive Officer
•	Sonya Branco, Vice President, Finance and Chief Financial Officer
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•	Gene Colabatistto^1^, Former Group President, Defence and Security
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•	Nick Leontidis, Group President, Civil Aviation Training Solutions
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•	Rekha Ranganathan, President CAE Healthcare
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•	Mark Hounsell, General Counsel, Chief Compliance Officer and Corporate Secretary
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1	Mr. Colabatistto retired on December 31, 2019.
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FY2020 CAE Performance Highlights

In FY2020, CAE delivered a strong financial performance, with double-digit year-over-year revenue growth. The results continue to validate our training strategy and represent an important step in our pursuit to be the Recognized Global Training Partner of Choice. Testament to our strong position is CAE’s Civil segment performance, which exceeded our annual outlook. In Defence and Healthcare, we achieved modest revenue growth. All our business units were negatively impacted from the COVID-19 pandemic in the fourth quarter of 2020.

The COVID-19 pandemic has created unprecedented uncertainty in the global economy, the global air transportation environment and air passenger travel all of which are critical to CAE’s business. CAE Management has taken a series of strong measures to mitigate the financial impact of the pandemic on the Company. Additionally, the HRC approved changes to CAE compensation programs for FY2020 and FY2021 as described under Section 7 – “Modifications to Compensation Programs in Response to the COVID-19 Pandemic”.

The following chart outlines CAE’s strategy and highlights in relation to FY2020 achievements.

In FY2020, our strategy for capital and other resource allocation decisions was guided by four overarching strategic imperatives designed to enable us to be the recognized global training partner of choice:

•	Delight customers
•	Create value
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•	Drive innovation
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•	Bolster talent
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Strategic Priority	CAE’s Key Achievement
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Delight <br>Customers	• In Civil, we launched CAE’s Courseware Centre of Excellence (CoE) to continue to support our customers with the most innovative courseware materials and methods of delivery.<br><br>• In Civil, we delivered over one million hours of training.<br><br>• We delivered a more standardized best-in-class customer experience across segments.<br><br>• We exceeded all customer satisfaction metrics, reflecting continuous improvement in quality and on-time delivery.<br><br>• We elevated CAE’s customer journey with the launch of two product offerings and the acceleration of the Digital transformation team, adding new key talent and skills.
Create Value	• Year-over-year revenues increased by 10% to a record $3.6 billion.<br><br>• Delivered strong Order Intake^1^ of $3.8 billion and Backlog^1^ of $9.5 billion.<br><br>• 56 Civil full-flight simulators delivered to customers.<br><br>• Annual Segment Operating Income before specific items^1^ grew by 21% to $590M.<br><br>• Annual EPS before specific items^1^ grew by 7% to $1.34 and Return On Capital Employed (ROCE) before specific items^1^ of 10.7%.<br><br>• Strong financial position maintained with a net debt^1^ to total capital ratio of 47.8%.<br><br>• Multiple long-term partnerships signed in fiscal 2020 including: JetSmart, Jet Aviation, TAG Aviation, Air Canada and easyJet.<br><br>• Concluded a 15-year exclusive business aviation training services agreement with Directional Aviation Capital and the acquisition of a 50% stake in SIMCOM Holdings, Inc. (SIMCOM joint venture), an operator of a wide range of jet, turboprop and piston powered aircraft simulators and training devices.<br><br>• Successfully integrated Bombardier Business Aviation Training (BBAT) and Pelesys.<br><br>• Defence expanded E-series customer base to BAE and Leonardo with first 15 systems awarded. Also awarded 3 new C-130J Full Flight Simulators.<br><br>• CAE Healthcare broadened its market reach by expanding its sales force.
Drive <br>Innovation	• Delivered next generation flight training devices (600XR) and CAE’s new 3D visual system.<br><br>• CAE Rise^TM^ customer base growing in Civil and introduced for Defence.<br><br>• Implemented our digital strategy to enhance our customer experience and leverage the latest learning technologies. Deployed Augmented and Virtual Reality-based solutions in Defence and Mid-Fidelity products in Healthcare.
Bolster <br>Talent	• Launched a Training Centre Leader Development Program with a first cohort of 11 candidates.<br><br>• Launched a global Diversity & Inclusion initiative, with an initial focus on gender to build awareness, create policies and practices to support our Diversity & Inclusion efforts, eliminate bias and champion the identification, development and promotion of women leaders.<br><br>• Retained 98% of high potentials and leaders identified in key areas.<br><br>• Advanced our Employee Wellness effort that resulted in an improvement in employee sense of well-being and well-being metrics since the launch of the initiative.<br><br>• Further strengthened our Digital Transformation team, attracting key talent with new skill sets including tripling the number of Data Scientists on the team representing a significant new series of skills to help support our customer journey.
1.	Order intake is a non-GAAP measure that represents the expected value of orders we have received.
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Total backlog is a non-GAAP measure that represents expected future revenues and includes obligated backlog, joint venture backlog and unfunded backlog and options.

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

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

Segment operating income before specific items is a non-GAAP measure and is the sum of our key indicators of each segment’s financial performance.

Return On Capital Employed before specific items is a non-GAAP measure and is used to evaluate the profitability of our invested capital.

EPS Before Specific Items^1^<br><br>	Revenues (in $Billion)<br><br>
Share Price<br><br>	Backlog^1^ (in $Billion)<br><br>
Segmented Operating Income <br>Before Specific Items^1^ (in $Million)<br><br>
1.	The terms “EPS before specific items”, “Segment Operating Income before specific items” and “Backlog” are non-GAAP financial measures and do not have any standardized meaning under IFRS. Therefore, they are unlikely to be comparable to similar measures presented by other issuers. Refer to the section “’Non-GAAP and other financial measures” in our fourth quarter and year ended March 31, 2020 MD&A for more details.
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A significant decline in share price was observed in the last month of FY2020 due to the global effect of the COVID-19 pandemic and the resulting impact on the stock market, with a closing share price of $17.79 on March 31, 2020. With an all-time high share price of $42.00 in February 2020, CAE stock price had achieved an increase of 42% prior to the impact due to the Covid 19 pandemic when compared to FY2019.

Compensation Objectives

Much of CAE’s success in developing and growing its worldwide business is attributable to having highly qualified and motivated employees. The executive compensation programs are based on a pay-for-performance philosophy. Executives receive salaries, annual short-term incentive awards contingent upon attaining consolidated business results and individual achievements, and long-term incentive awards that motivate executives to create increasing and sustainable value for the Shareholders. In addition, executives receive perquisites and participate in pension and benefits programs.

The objectives of the CAE executive compensation programs are to:

• Attract, retain, and motivate qualified executives
• Align executives and Shareholders’ interests around the creation of incremental value
• Foster teamwork and entrepreneurial spirit
• Establish an explicit and visible link between all elements of compensation and corporate and individual performance
• Integrate compensation with the development and successful execution of strategic and operational plans

Setting Executive Compensation

Compensation principles

CAE’s compensation policies and practices are structured in a balanced way, such that they do not create risks that could have a material adverse effect on the Company.

The emphasis of CAE’s executive compensation programs is on variable and long-term compensation that ties interests of our executives with those of our Shareholders.

The principles underlying CAE’s executive compensation programs are as follows:

Pay for performance	The majority of compensation is variable, contingent and directly linked to financial and operational performance metrics, as well as CAE’s Share price performance.
Balance	The portion of total compensation that is performance-based increases with an executive’s level of responsibility.
Long-term focus	For our most senior executives, long-term stock-based compensation opportunities outweigh short-term cash-based opportunities.
Shareholder alignment	The financial interests of executives are aligned with the interests of our Shareholders through stock-based compensation, and annual and long-term performance metrics that correlate with sustainable Shareholder value growth.
Competitiveness	Total compensation is competitive to attract, retain, and motivate CAE’s executive team while fostering entrepreneurial spirit. This is achieved by targeting compensation at the median of our comparator group but paying above the median for superior performance.
Responsibility	Compensation takes into account each executive’s responsibility to always act in accordance with our values as well as our ethical, environmental and health and safety objectives, outlined in our Code of Business Conduct. Commitment to ethical and corporate responsibilities fundamentally underlies all aspects of our behavior and compensation plans, from setting targets to conducting regular performance assessments and succession planning. Financial and operational performance must not compromise these values.

Role of the HRC in setting executive compensation

The HRC acts as an advisory committee to the Board of Directors. The Board assigns responsibilities to the HRC with regards to the review, approval, and administration of CAE’s compensation programs. The main components of the HRC’s mandate with respect to compensation are:

•	Review and approve the design of executive compensation and benefits programs;
•	Review and consider the input of independent external consultants;
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•	Review and approve the composition of CAE’s comparator group;
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•	As appropriate, meet with Shareholders to discuss executive compensation and benefits;
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•	Report to the Board on how changes to compensation and benefits plans impact CAE’s financial performance and obligations;
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•	Recommend to the Board the President and CEO’s compensation;
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•	Review and approve on behalf of the Board the President and CEO’s recommendations for annual compensation of his direct reports;
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•	Review and approve changes to pension plans, including investment strategies; and
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•	Prepare the Compensation Discussion & Analysis section of the annual management proxy circular and other disclosure documents.
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Role of compensation consultants

The HRC retains the services of an independent compensation consultant, Hugessen Consulting Inc. (“Hugessen”), to provide advice on executive compensation matters. Hugessen reviews materials presented to the HRC and originates materials at the request of the Committee Chair. Furthermore, Hugessen advises on the design of the Company executive compensation programs. No CAE Director or officer has any affiliation with Hugessen.

CAE’s management also uses the services of PCI – Perrault Consulting Inc. (“PCI – Perrault”) to assist CAE in the bi-annual review of its executive programs, mainly the review and update of CAE comparator group, the benchmarking of its executive and Board of Director positions, as well as drafting the annual management proxy circular.

While the HRC and the Board receive input from others, they are responsible for the design, application and oversight of the CAE’s executive compensation programs.

The following table shows the fees related to executive compensation work paid by CAE to Hugessen and PCI-Perrault in FY2019 and FY2020.

Fees paid to<br><br>Hugessen		Fees paid to<br><br>PCI – Perrault
FY2020	FY2019	FY2020	FY2019
$189,144	$154,435	$72,882	$37,417

Comparator Group

Executive compensation is benchmarked periodically with the assistance of compensation consultants, PCI – Perrault, who prepare an analysis of CAE’s compensation against compensation practices within the comparator group. The comparator group was updated and approved by the Human Resources Committee. A complete executive compensation benchmarking will be conducted in FY2021.

The comparator group includes companies that operate in at least one of CAE’s market segments, have a similar financial and operational footprint, or with which CAE competes for talent.

CAE’s comparator group comprises a broad mixture of relevant Canadian and US companies. CAE’s business units compete within several market segments and not all CAE competitors are present in all the segments or provide segment-specific compensation disclosure relevant to CAE. The table below indicates the main activities for which the comparator group companies were chosen.

The following criteria are also considered when selecting comparator group companies:

•	Head office location
•	Company financials (revenue and market capitalization)
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•	Companies with business operations outside of Canada, reflecting the fact that over 90% of CAE’s revenues are generated outside of Canada
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•	Companies that compete with CAE for talent (in and outside of Canada) reflecting CAE’s multinational reality. In FY2020 two out of three of the President and CEO’s direct reports leading a business unit were based outside of Canada
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•	Companies with similar business profiles, specifically:
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o	Size
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o	Business mix/industry similarity
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o	Scale of operations outside home country
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o	Talent requirements/primary competitors for talent
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During FY2020, with the assistance of PCI-Perreault, the CAE comparator group was updated to ensure all companies still meet the criteria outlined on the previous page. Thus, the following is the list of comparator companies adopted by the HRC for FY2020:

	Aerospace	Med. Devices	Indus. Controls	IT/Software	Training/Simul.	Constr./Engin.	Other Services
Canadian Group
Air Canada	•
BRP Inc.							•
Linamar Corp.							•
Gildan Activewear							•
Open Text				•
NFI Group							•
ShawCor Ltd				•			•
SNC-Lavalin Group Inc.						•
Stantec Inc.						•	•
WSP Global						•
US Group
AAR Corp.	•
AMETEK Inc.	•	•	•			•
Autodesk Inc.				•
Cadence Design Systems				•		•
Crane Co.	•		•	•			•
Cubic Corp.	•			•	•
Curtiss-Wright Corp	•		•
Gartner Inc.				•
Hexcel Corporation	•		•			•
Moog Inc.	•	•	•
Spirit Aerosystems Holding	•
Synopsys Inc.				•
Teledyne Technologies	•	•		•
TransDigm Group	•
Triumph Group	•					•
Varian Medical Systems		•
Woodward Inc.	•		•

CAE utilizes the compensation data from each of the Canadian and the U.S. group of comparator companies for benchmarking purposes. The Canadian and U.S. companies are weighted in aggregate equally and the compensation value between the two comparator groups is compared at par.

Comparator group financials

	Canadian Comparator Group		US Comparator Group		Combined Comparator Group
	Revenue^1^	Market Cap^1^	Revenue^1^	Market Cap^1^	Revenue^1^	Market Cap^1^
P25	$2,875M	$3,536M	$2,450M	$4,295M	$2,801M	$3,785M
Median	$3,264M	$5,583M	$3,250M	$6,777M	$3,250M	$6,433M
P75	$5,387M	$8,776M	$4,245M	$13,785M	$4,405M	$12,190M
CAE	$3,623M	$4,725M	$3,623M	$4,725M	$3,623M	$4,725M
CAE Position	P55	P45	P78	P28	P68	P32
1	Based on the most recent annual reports
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Compensation Policy and Objectives

CAE’s executive compensation program consists of five main elements: base salary, short-term incentive, long-term incentives (Restricted Share Units, Performance Share Units and stock options), pension, and perquisites and benefits. The table below illustrates CAE’s compensation policy. Total target compensation is positioned at the median of the comparator group and is designed to result in paying above the median for superior performance.

Compensation Policy Summary

	Form	Plan Highlights	Plan Objectives	Policy
Base Salary	• Cash	• Fixed rate of pay<br><br>• Annual review	• Provide a base of regular income to attract and retain qualified leaders<br><br>• Recognize scope and responsibilities of the position as well as the experience of the individual<br><br>• Reward individual performance	• Set at the 50^th^ percentile of the comparator group
Short-term Incentive (STIP)	• Cash	• Annual award based on corporate and where appropriate, business unit metrics (75%) and personal objectives (KPIs) (25%) for the President and CEO and his direct reports<br><br>• As of FY2017, executives can elect to receive a portion of or their entire STIP payment in the form of Executive Deferred Share Units<br><br>• For other eligible employees, annual award based on corporate and business unit metrics multiplied by an individual performance multiplier	• Reward the achievement of the Company’s financial and operational objectives<br><br>• Reward the achievement of personal objectives aligned with an individual’s area of responsibility and role in realizing operational results<br><br>• Drive superior individual and corporate performance	• Set at the 50^th^ percentile of the comparator group but may result in paying above the median for superior performance
Long-term Incentive<br><br>(LTIP)	• Performance Share Units (50% weight)<br><br>• Stock options (30% weight)<br><br>• Restricted Share Units (20% weight)^1^	• LTIP value is awarded in different medium to long-term compensation vehicles with both time and performance vesting based on achievement of longer-term financial objectives	• Align management’s interests with Shareholder value growth<br><br>• Reward the achievement of sustained market performance<br><br>• Recognize individual contribution and potential<br><br>• Attract and retain key talent	• Set at the 50^th^ percentile of the comparator group but may result in paying above the median for superior performance
Pension	• Monthly pension in cash at retirement	• Defined Benefit Plan for executives representing 2% of average 5 best years of earnings (salary plus STIP), multiplied by pensionable service<br><br>• Supplementary Plan offered to the NEOs for pension rights exceeding limits for basic registered plans	• Support retention of key executives	• Set at the 50^th^ percentile of the comparator group
Perquisites and <br>Other Benefits	• Employee Stock Purchase Plan (“ESPP”)<br><br>• Perquisites	• ESPP: Employees and executives may purchase CAE Shares up to 18% of their base salary; CAE matches 50% of the employee contributions, up to a maximum of 3% of the employee’s annual base salary<br><br>• Perquisites: cash allowance to cover certain expenses, such as car, club membership and health spending account	• Provide executives with a Share ownership building vehicle	• Set to be market competitive
1	For FY2021 grants, LTIP allocation is weighted 60% stock options, 20% PSUs, and 20% RSUs. Further details are outlined under Section 7 – “Modifications to Compensation Programs in Response to the COVID-19 Pandemic”.
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The following illustrates the relative weight of each compensation policy element, at target:

President and CEO<br><br>	Other NEOs’ Average<br><br>

Base salaries

The base salaries of CAE’s executives are positioned at the median of the comparator group. While an executive’s salary is generally targeted at a specific range around the market median, such salary may vary depending on the individual’s performance and level of experience.

Base salaries are set to recognize the position’s scope and responsibilities, and individual experience and performance.

Base salaries are reviewed by the HRC annually, considering individual achievements, general performance, benchmark information and market conditions.

Annual short-term incentive program (STIP)

The STIP provides for an annual cash incentive for executives and management employees based on CAE’s consolidated performance and individual achievements (KPIs for the President and CEO and his direct reports).

The annual short-term incentive plan motivates the achievement of specific annual financial and operational results.

Financial targets and KPIs are established by the Board of Directors for the President and CEO at the beginning of each fiscal year; the same financial targets apply for the STIP globally.

In FY2020, STIP for all NEOs except the President of CAE Healthcare is based 100% on overall CAE results to reinforce collaboration across all regions and business units^1^. For the President of CAE Healthcare, STIP is weighted equally between CAE Healthcare and CAE overall results. The focus on business results remains important and is reflected through the individual STIP multiplier for the business unit Presidents.

The split between CAE business results and individual KPIs for executives in FY2020 was 75% and 25% respectively.

Financial and non-financial targets were specifically based on the four metrics detailed below^^.

•	Earnings per Share (“EPS”)
•	Order Intake
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•	Return on Capital Employed (“ROCE”)
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•	Customer Satisfaction
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The combination of financial and customer satisfaction metrics at the corporate and business unit levels ensures all executives are accountable for CAE executing on its vision of being the “Training Partner of Choice”.

The respective weighting of each individual metric is as follows:

Why EPS?

Intended to keep management focused on Earnings per Share achievement.

Why Order Intake^2^?

Demonstrates the level of growth in sales for the Company’s products and services, thus is a representation of future operational growth.

Why ROCE^2^?

ROCE is a measure that is used to quantify the value that is generated by our assets. It demonstrates the profitability of investments made by the Company, such as CAPEX, R&D, etc.

Why Customer Satisfaction?

Supports CAE’s “Training Partner of Choice” value proposition as it is critical in ensuring sustained and continued business with CAE’s clients, thus further strengthening the Company’s market leader position for the future.

Short-term objectives for the President and CEO and his direct reports are quantitative and qualitative performance targets set for the reporting business units as well as the corporate functions. These relate to, among others, quality measures, customer experience, operational efficiency, technology enhancements, risk management, and leadership development and employee engagement.

Short-term incentives are paid in the form of cash bonuses based on a percentage of salary that varies depending on the level of responsibility. Actual STIP awards can range from zero to two times target levels depending upon the achievement of the previously noted performance metrics and personal objectives. Following a review at year-end that considers overall business and individual performance as well as other factors, the STIP payments for the President and CEO’s direct reports are approved by the HRC and, in the case of the President and CEO, by the Board upon the HRC recommendation. Effective FY2017, Canadian and US-based executives can elect to defer a portion of, or their entire STIP payment to the Executive Deferred Share Unit Plan. Such deferred amount is converted into a number of DSUs, one DSU being equal in value to one Common Share of CAE (see details under “Executive Deferred Share Unit Plan”).

The table below outlines target and maximum short-term incentive levels by position:

	STIP Range as % of Base Salary
Position	Target		Maximum
President and CEO	100	%	200	%
Group President, Civil Aviation Training Solutions<br><br>Group President, Defence and Security<br><br>Vice President, Finance and CFO	75	%	150	%
Other Executives reporting to President and CEO	45	%	90	%

In accordance with the STIP terms, the overall corporate performance multiplier is capped at 100% if the EPS result does not meet the target approved by the Board of Directors.

Long-term incentive plan (LTIP)

The LTIP is designed to reward executives for their contribution to the creation of Shareholder value. These awards are considered annually as part of the total compensation review. The value of the LTIP grants varies by the level of responsibility and is granted within the range detailed below, based on each executive’s performance as assessed by the HRC and the Board.

CAE’s long-term incentive plan aligns management’s interests with Share price growth and related Shareholder value creation, and rewards sustained market performance.

	LTIP Range as % of Base Salary
Position	Minimum		Maximum
President and CEO	300	%	400	%
Group President, Civil Aviation Training Solutions<br><br>Group President, Defence and Security<br><br>Vice President, Finance and CFO	100	%	250	%
Other Executives reporting to President and CEO	40	%	150	%

For FY2020, CAE’s LTIP was comprised of Performance Share Units (“PSUs”), stock options and Restricted Share Units (“RSUs”). All NEOs were eligible for an annual grant under each of these plans, and awards were allocated as follows:

Stock Options

The purpose of the Employee Stock Option Plan (“ESOP”) is to provide key employees of CAE with an opportunity to purchase Common Shares and to benefit from the related Share price appreciation, thus aligning closely the interests of such employees with those of Shareholders. Stock options increase the ability of CAE to attract and retain individuals with exceptional skills. The ESOP was amended on June 15, 2016 and approved by Shareholders at the 2016 Annual and Special Shareholder Meeting on August 10, 2016.

Following the Shareholder approval of an additional 10,000,000 Shares under the ESOP at the 2016 Annual and Special Shareholder Meeting on August 10, 2016, the ESOP provides for the issuance of a maximum of 16,381,839 Common Shares upon exercise of stock options granted under the plan. The total maximum number of Shares available under the ESOP represents approximately 5% of CAE’s issued and outstanding Shares.

The HRC establishes rules and guidelines for the administration of the ESOP, selects the employees to whom awards are granted, determines the types of awards to be granted and the number of Shares covered by such awards, sets the terms and conditions of such awards and cancels, suspends and amends awards. The HRC has the sole discretion to make determinations under, and to interpret, the ESOP.

The number of stock options issued to each NEO under the ESOP varies as a percentage of the executive’s base salary divided by the fair value of a stock option at that time, which is determined by applying the Black-Scholes option-pricing valuation methodology. The number of outstanding stock options, as well as the other LTIP elements are considered by the HRC in determining how many new stock options may be granted in a fiscal year. During FY2020, stock options were granted to the NEOs and other key employees of CAE and its subsidiaries. CAE’s burn rate (the ratio of stock options granted vs CAE’s issued and outstanding Shares) was 0.50% in FY2020.

The plan permits stock option grants having a term of up to ten years (should the expiry date for a stock option fall within a blackout period or within nine business days following the expiration of a blackout period, such expiry date shall be automatically extended to the tenth business day after the end of the blackout period). However, stock options issued since FY2012 have a term of seven years. Vesting is incremental in 25% tranches, starting on the first anniversary date of the grant.

• Option term: 7 years. • Vesting: 25% per year starting on the first anniversary date of the grant. • FY2020 burn rate (ratio of granted options during the year versus issued and outstanding Shares): 0.50%.

The ESOP permits, at the discretion of the HRC, the surrender and cancellation without re-issue of an in-the-money option for cash equal to the fair market value of the Share underlying the option less the option exercise price, in lieu of the Share itself (the fair market value of a Share shall be the closing price of a Share on the TSX on the trading day on which the election described above is made).

The ESOP includes the following provisions:

Eligibility	Any salaried employee of CAE or its subsidiaries is eligible to participate in the ESOP. The ESOP does not permit grants to non-employee Directors. Subject to ESOP provisions related to employee death, retirement, or termination without cause, no option granted under ESOP may be exercised unless that employee wishing to exercise such option is currently employed by CAE or one of CAE’s subsidiaries and has served continuously in such capacity since the date of the grant of such option. The ESOP does not contain any financial assistance provisions to facilitate employees’ participation in the program.
Limitations on Grants	An ESOP participant (which may include an employee management insider of CAE) may not hold options on more than 5% (on an undiluted basis) of the issued and outstanding Common Shares. The number of Common Shares issuable to insiders of CAE at any time under all security-based compensation arrangements cannot exceed 10% of the issued and outstanding Common Shares. The number of Common Shares issued to insiders of the Company within any one-year period under all security-based compensation arrangements cannot exceed 10% of the Company’s issued and outstanding Shares.
Exercise Price	The weighted average price of the Common Shares on the TSX on the five trading days immediately preceding the grant date (if the grant date falls within a blackout period or within five trading days following the end of a blackout period, the grant date shall be presumed to be the sixth trading day following the end of such blackout period).
Termination of Employment	Death: options may be exercised to the extent that the optionee was entitled to do so at the time of death. The options can be exercised only during the period expiring on the day that is earlier of six months following the date of death and the option termination date.<br><br>Retirement: all unvested options shall continue to vest following the retirement date. Such retired optionee shall be entitled, (a) to exercise any vested options held as of the retirement date until the termination date for each such option; and (b) to exercise any options vesting after the retirement date only during the 30-day period following the vesting date of the post retirement vesting options, after which any such options which remain unexercised shall expire.<br><br>Involuntary termination for cause: each unvested option shall terminate and become null, void and of no effect on the date on which the optionees ceases to serve the Company.<br><br>Involuntary termination without cause and resignation: the optionee has the right for a period of 30 days (or until the normal expiry date of the option if earlier) from the date of ceasing to be an employee to exercise his or her option to the extent that he/she was entitled to exercise it on the date of ceasing to be an employee. Upon the expiration of such 30-day period (subject to extension if the end of the period falls within a blackout period), each option shall terminate and become null, void and of no effect on the date on which such optionee ceases to serve the Company.
Transferability/ Assignment of Options	Options are not transferable or assignable otherwise than by will or by operation of estate law.
Financial Assistance	The ESOP does not contain any financial assistance provisions to facilitate employees’ participation in the program.
Amendments	The ESOP provides that its terms, as well as those of any option, may be amended, terminated or waived in certain stated circumstances. The ESOP specifies in what situations Shareholder approval is required.
Amendments not Requiring Shareholder Approval	The HRC has the authority, in accordance with and subject to the terms of the ESOP, to amend, suspend or terminate the ESOP or any option granted under the ESOP without obtaining Shareholder approval to:<br><br>(a) (i) amend any terms relating to the granting or exercise of options, including the terms relating to the eligibility for (other than for non-executive Directors) and limitations or conditions on participation in the ESOP, the amount and payment of the option price (other than a reduction thereof) or the vesting, exercise, expiry (other than an extension of the termination date except as contemplated in the ESOP), assignment (other than for financing or derivative-type transaction purposes) and adjustment of options, or (ii) add or amend any terms relating to any cashless exercise features;<br><br>(b) amend the ESOP to permit the granting of Deferred or Restricted Share Units under the ESOP or to add or amend any other provisions which result in participants receiving securities of the Company while no cash consideration is received by the Company;<br><br>(c) make changes that are necessary or desirable to comply with applicable laws, rules or regulations of any regulatory authorities having jurisdiction or any applicable stock exchange;<br><br>(d) correct or rectify any ambiguity, defective provision, error or omission in the ESOP or in any option or make amendments of a “housekeeping” nature;<br><br>(e) amend any terms relating to the administration of the ESOP; and<br><br>(f) make any other amendment that does not require Shareholder approval by virtue of the ESOP, applicable laws or relevant stock exchange or regulatory requirements;<br><br>provided such amendment, suspension or termination (i) does not adversely alter or impair any previously granted option without the optionee’s consent and (ii) is made in compliance with applicable laws, rules, regulations, by-laws and policies of, and receipt of any required approvals from, any applicable stock exchange or regulatory authorities having jurisdiction.
Amendments Requiring Shareholder Approval	The ESOP provides that Shareholder approval is required to make the following amendments:<br><br>(a) increase the maximum number of Shares issuable under the ESOP, except in the case of an adjustment pursuant to Article VIII thereof (subdivisions, consolidations or reclassifications of Shares or other such events);<br><br>(b) increase the number of Shares that may be issued to insiders or to any one optionee under the ESOP, in both cases except in the case of an adjustment pursuant to Article VIII thereof (subdivisions, consolidations or reclassifications of Shares or other such events);<br><br>(c) allow non-employee Directors to be eligible for awards of options;
Amendments Requiring Shareholder Approval <br>(continued)	(d) permit any option granted under the ESOP to be transferable or assignable other than by will or pursuant to succession laws (estate settlements);<br><br>(e) reduce the exercise price of an option after the option has been granted or cancel any option and substitute such option by a new option with a reduced exercise price granted to the same optionee, except in the case of an adjustment pursuant to Article VIII of the ESOP;<br><br>(f) extend the term of an option beyond the original expiry date, except in case of an extension due to a blackout period;<br><br>(g) add a cashless exercise feature payable in cash or Shares, which does not provide for a full deduction of the number of underlying Shares from the ESOP reserve;<br><br>(h) add any form of or amendment to financial assistance provisions in the ESOP which is more favourable to optionees; and<br><br>(i) amend any provisions to the amendment provisions of the ESOP.
Change of Control	In the circumstances of a change in the beneficial ownership or control over the majority of the Shares of CAE or the sale of all or substantially all of CAE’s assets, the vesting of all options issued would be accelerated.
Adjustments	If certain corporate events affect the number or type of outstanding Common Shares, including, for example, a dividend in stock, stock split, stock consolidation or rights offering, adjustments will be made to the terms of the outstanding option grants as appropriate in such circumstances.

A copy of the ESOP can be accessed on SEDAR at www.sedar.com or on EDGAR at www.sec.gov.

The below chart is based on March 31, 2020 information. As of that date, the weighted average remaining contractual life for the outstanding options was 4.46 years.

	Number of<br><br>Securities to be Issued Upon<br><br>Exercise of<br><br>Outstanding<br><br>Options	Percentage of CAE’s Outstanding<br><br>Share Capital Represented By<br><br>Such Securities		Weighted-Average Exercise Price of Outstanding<br><br>Options		Number of<br><br>Securities<br><br>Remaining<br><br>Available For<br><br>Future Issuance Under Equity Compensation Plans (Excluding Securities Reflected in 1^st^ Column)	Percentage of CAE’s Outstanding Share Capital Represented by Such Securities
Employee Stock Option Plan	6,050,854	2.28	%		24.25	5,841,414	2.20	%

All values are in US Dollars.

The following table details the annual burn rate for the last three fiscal years ended March 31:

	2020		2019		2018
Annual burn rate	0.50	%	0.65	%	0.76	%

This burn rate indicates the number of Stock Options granted in each year as a percentage of the weighted average number of securities outstanding in the applicable fiscal year. CAE monitors its long-term dilution by limiting the equity compensation to reasonable awards under the ESOP.

Performance Share Unit Plan

In FY2015, CAE adopted a Performance Share Unit Plan (“PSUP”) for executives and senior management of CAE and its subsidiaries. The PSUP helps ensure that executives’ long-term incentive compensation includes an element directly tied to the achievement of the CAE strategic plan. The determination of the number of PSUs to be granted to a participant is made by dividing the dollar value of the PSU grant (a percentage of the participant’s base salary) by the weighted average market price of the Common Shares on the TSX on the five trading days preceding the date of grant (if the grant date falls within a blackout period or within five trading days following the end of a blackout period, the date of grant shall be presumed to be the sixth trading day following the end of such blackout period).

• PSUP directly ties CAE executives to the achievement of the CAE strategic plan. • PSU is equal in value to one Common Share of CAE. • PSUP is non-dilutive as all vested PSUs are paid out in cash. • Vesting: 3-year cliff subject to the achievement of set performance criteria and the participant’s continued employment with CAE. • Performance condition: Financial targets as set in the 3-year strategic plan approved by the Board of Directors. • Maximum payout multiplier set at 200%.

A PSU is equal in value to one Common Share of CAE. PSUs vest three years from the grant date, provided the participant is still employed by the Company on the vesting date and subject to achievement of EPS targets as set in the 3-year strategic plan approved by the Board of Directors. Starting FY2017, the EPS achievement is determined each year and a final PSU payout multiplier is applied as follows:

However, the final payout is only issued at the end of three years, provided the participant is still employed by the Company on the third anniversary of the grant date. This change was introduced to promote continuous improvement in our performance against the strategic plan and to improve the retention value of the plan.

EPS targets are determined on the basis on the strategic plan approved by the Board of Directors.

Based on the EPS result and the EPS payout grid approved by the HRC in respect of the original grant, the target rate of granted units is multiplied by a factor ranging from 0% to 200%. PSUP participants are entitled to receive their vested PSUs at the average fair market value of the Common Shares on the TSX for the 20 trading days preceding the final vesting date of the grant.

The PSUP is an unfunded plan and non-dilutive as all vested PSUs are paid out in cash. Therefore, no disclosure of the annual burn rate is provided. For details concerning the treatment of PSUs following the executive termination, resignation, retirement and change of control, please refer to Section 7 – “Executive Compensation – Termination and Change of Control Benefits”.

Restricted Share Unit Plan

In FY2015, CAE adopted a time-based Restricted Share Unit Plan (“RSUP”) for executives and senior management of CAE and its subsidiaries. The determination of the number of RSUs to be granted to a participant is made by dividing the dollar value of the RSU grant (a percentage of the participant’s base salary) by the weighted average market price of the Common Shares on the TSX on the five trading days preceding the date of grant (if the grant date falls within a blackout period or within five trading days following the end of a blackout period, the date of grant shall be presumed to be the sixth trading day following the end of such blackout period).

• RSU is equal in value to one Common Share of CAE. • RSUP is non-dilutive as all vested RSUs are paid out in cash. • Vesting: 3-year cliff subject to the participant’s continued employment with CAE.

The RSU is equal in value to one Common Share of CAE. RSUs are granted for a three-year period and vest on the third anniversary of the grant based on the participant’s continued employment with CAE until that time. RSUP participants are entitled to receive their vested RSUs at the average fair market value of the Common Shares on the TSX for the 20 trading days preceding the final vesting date of the grant.

The RSUP is an unfunded plan and non-dilutive as all vested RSUs are paid out in cash. Therefore, no disclosure of the annual burn rate is provided. For details concerning the treatment of RSUs following the executive termination, resignation, retirement and change of control, please refer to Section 7 – “Executive Compensation – Termination and Change of Control Benefits”.

Executive Deferred Share Unit Plan

In FY2017, CAE adopted an Executive Deferred Share Unit Plan (“Executive DSUP”). The purpose of the plan is to attract and retain talented individuals to serve as officers and executives of the Company and to help them build their Share ownership in CAE, thus promoting a greater alignment of interests between the executives and the Shareholders of the Company.

Under the Executive DSUP, Canadian and US-based executives can elect to defer a portion of or their entire short-term incentive payment to the Executive DSUP on an annual basis. Such deferred short-term incentive amount is converted to DSUs based on the volume weighted average price of the Common Shares on the TSX during the last five trading days prior to the date on which such incentive compensation becomes payable to the executive. If the five-trading-day period falls within a blackout period, then the volume weighted average price is calculated based on the five-trading day period following the end of such blackout period.

• Executive DSUP helps our executives build their Share ownership in CAE. • Allows for elective deferral of STIP to DSUs. • DSU is equal in value to one Common Share of CAE. • DSUs are only payable when the executive leaves CAE. • Executive DSUP is non-dilutive as all DSUs are paid out in cash.

A DSU is equal in value to one Common Share of CAE. The DSUs accrue dividend equivalents payable in additional units in an amount equal to dividends paid on Common Shares. The DSUs are only payable when the executive leaves the Company. Upon or within a defined period following the termination of their employment, DSU holders are entitled to receive a lump sum cash payment equal to the number of DSUs credited to their account as of that date multiplied by the volume weighted average price of the Common Shares on the TSX during the last five trading days prior to the settlement date.

Inactive Equity-Based Plans with Legacy Participants

Some NEOs have outstanding participation in the following long-term incentive plans, which are no longer active (no further awards are made under the plans) but have yet to be fully paid out.

Fiscal 2005 Deferred Share Unit Plan

CAE adopted a Long-Term Incentive Deferred Share Unit Plan (“LTUP”) in FY2005 that, as amended from time to time, applies to all grants made thereafter.

Deferred Share Units (“LTUs”) vest in 20% increments over five years, commencing one year after the grant date. LTUs accrue dividend equivalents payable in additional units in amounts equal to dividends paid on Common Shares. LTUs are only redeemable in cash, following the unit holder’s retirement or termination of employment. No LTUs have been granted by CAE after FY2014.

Fiscal 2004 Deferred Share Unit Plan

In FY2004, CAE adopted a Long-Term Incentive Deferred Share Unit Plan (“FY2004 LTUP”) for executives of CAE and its subsidiaries to partially replace the grant of options under CAE’s ESOP. No FY2004 Long-Term Incentive Deferred Share Units (“FY2004 LTUs”) have been granted by CAE since FY2004. All FY2004 LTUs are fully vested for remaining plan participants. FY2004 LTUs accrue dividend equivalents payable in additional units in amounts equal to dividends paid on Common Shares. FY2004 LTUs are only redeemable in cash, following the unit holder’s retirement or termination of employment.

Deferral of cash incentives

CAE had a Deferred Share Unit Plan (“legacy DSUP”) for executives under which an executive elected to receive cash incentive compensation in the form of Deferred Share Units (“legacy DSUs”). A legacy DSU is equal in value to one Common Share of CAE. The units were issued based on the average closing board lot sale price per Share of Common Shares on the TSX during the last 10 days on which such Shares traded prior to the date of issue. The legacy DSUs accrue dividend equivalents payable in additional units in an amount equal to dividends paid on Common Shares. Upon or within a defined period following termination of their employment, legacy DSU holders are entitled to receive the fair market value of the equivalent number of Common Shares based on the average closing board lot sale price per Share of Common Shares on the TSX during the last 10 days on which such Shares traded prior to the settlement date.

Pension, Benefits and Perquisites

Pension Benefits

Eligible employees participate in the Retirement Plan for Employees of CAE Inc. and Associated Companies. Executives at a vice president level and higher participate in the Pension Plan for Designated Executive Employees of CAE Inc. and Associated Companies (the “Designated Pension Plan”), and in the Supplementary Pension Plan of CAE Inc. and Associated Companies (the “Supplementary Pension Plan”). The Designated Pension Plan is a defined benefit plan to which CAE and participants contribute.

• Promote long-term employment with the Company. • Pensions payable under the Supplementary Pension Plan are conditional upon compliance with non-competition and non-solicitation clauses. • No extra years of service are generally granted under the pension plans.

Pensions payable under the Supplementary Pension Plan are paid directly by CAE. See Section 7 – “Executive Compensation – Pension Arrangements” for details about the value of the accrued benefit to each of the NEOs. Except as discussed in “Change in Control Contracts” below, CAE does not grant extra years of credited service under its pension plans. Receipt of pension benefits under the Supplementary Pension Plan is conditional upon compliance with non-competition and non-solicitation clauses.

Employee Stock Purchase Plan

Under the CAE Employee Stock Purchase Plan, employees may make contributions towards the purchase of Common Shares of up to 18% of their annual base salary. Under the plan, CAE contributes $1 for every $2 of employee contributions, to a maximum contribution of 3% of the participant’s annual base salary.	• Provide employees with a Share ownership building vehicle and a savings vehicle beyond the pension plan.

Change in Control contracts

All NEOs are entitled to termination of employment benefits following a change of control of CAE where the executive’s employment is terminated without cause within two years following the change of control. This is to safeguard the Company’s normal course of business in case of change of control. See Section 7 – “Executive Compensation – Termination and Change of Control Benefits” for a summary of the impact of various events on the different compensation programs for the NEOs and details about the approximate incremental value that could be realized by a NEO following termination or a change of control event.

Perquisites

Flexible perquisites provide executives with a cash allowance to cover certain expenses such as vehicle expenses, club memberships, personal legal and tax advice, and a health spending account. Such allowance is typical for senior executive positions and is capped at predetermined levels by position.

Executive Share Ownership Requirements

Under CAE’s Share Ownership Guidelines Policy, each executive is expected to own a minimum number of Common Shares and units under the DSUP and LTUP. The value of the required holding in Common Shares and units under the DSUP and LTUP represents:

Executives	% of Base Salary
President and CEO	500	%
Group President, Civil Aviation Training Solutions<br><br>Group President, Defence and Security<br><br>Vice President, Finance and CFO	250	%
Other Executives reporting to President and CEO	200	%

The required holding may be acquired over a five-year period from the date of hire or promotion to the executive position. Following the adoption of the RSUP in FY2015, the HRC decided to include 50% of the RSUs granted when calculating the Share ownership requirement as the executives are required to buy Common Shares with after-tax proceeds from the RSUs vested until they reach their minimum ownership requirements. Since February 2014, the Share ownership requirements are to be tested monthly until the requirement is met. At the time the required Share ownership value is reached, the minimum number of Shares/units to be held by the executive is locked-in and the executive is required to hold at least this number of Shares/units until retirement or termination of employment.

In addition, for each option exercise, the President and CEO, has agreed to, and the Group President, Civil Aviation Training Solutions, the Group President, Defence and Security, as well as the Vice President, Finance and CFO must retain ownership or control over CAE Shares equivalent in value to 25% of the net profit realized on such option exercise for the duration of their employment with CAE. This policy encourages all key executives to hold a meaningful ownership interest in CAE to further align their interests with those of our Shareholders.

• Share ownership requirements must be achieved within 5 years from hire or promotion to executive position. • Only Common Shares, DSUs and 50% of RSUs are included. • President and CEO, Group President, Civil Aviation Training Solutions, Group President, Defence and Security, and CFO retain 25% of the net profit realized from option exercise in CAE Shares for the duration of their employment at CAE.

As of March 31, 2020, all NEOs, except one, held CAE Shares and units under the DSUP, LTUP and RSUP in excess of the ownership guidelines. The table below sets forth the minimum number of Shares/units to be held by the NEOs who have already met the requirement, the required value in dollars to meet the ownership guidelines and the actual value held as a percent of the annual base salary.

NEO^1^	Share Ownership Requirement as Percent<br><br>of Salary<br><br>(%)	Ownership<br><br>Status	Target Date	Number of Shares/Units to be Held Once Requirement Met<br><br>(#)	Value<br><br>Required<br><br>to Meet<br><br>Guidelines^2^<br><br>($)	%<br><br>Completion<br><br>to Meet<br><br>Share Ownership Guidelines<br><br>(%)	Value<br><br>Held in<br><br>Shares/<br><br>Units^3^<br><br>($)	Value of<br><br>Shares/<br><br>Units<br><br>Held as<br><br>Percent of<br><br>Salary^4^<br><br>(%)
Marc Parent	500	Already Met	N/A	286,858	N/A	100	11,208,305	1,071
Sonya Branco	250	Already Met	N/A	36,553	N/A	100	849,143	173
Nick Leontidis	250	Already Met	N/A	65,044	N/A	100	5,363,592	1,072
Rekha Ranganathan	200	Not met	April 2024	59,734	1,103,900	5.6	62,278	11
Mark Hounsell	200	Already Met	N/A	28,093	N/A	100	692,720	158
1	Share ownership requirement for Mr. Gene Colabatistto is not included in the table since he retired on December 31, 2019.
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2	Not applicable if the share ownership requirement is already met.
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3	Calculated based on the number of Shares, DSUs, LTUs, and 50% of RSUs held as of March 31, 2020 and the average closing Share price during five trading days preceding March 31, 2020 ($18.48) in accordance with the Share Ownership Guidelines Policy.
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4	Calculated based on the annual base salary as of March 31, 2020. For Mrs. Ranganathan, the base salary was converted to Canadian dollars using March 31, 2020 exchange rate of $1.33.
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The following table details the total value of all accumulated Common Shares, LTUs and RSUs of the President and CEO as of March 31, 2020. The table excludes PSUs and stock options as their ultimate value is uncertain.

Equity Instrument	Number of Units^1^<br><br>(#)	Total Value^2^<br><br>($)
Common Shares	290,914	5,175,360
FY2004 LTUs	42,985	764,703
LTUs	232,111	4,129,255
RSUs^3^	81,000	1,440,990
Total	647,010	11,510,308
1	Represents the number of all Common Shares, LTUs and RSUs held as of March 31, 2020.
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2	The total value disclosed is calculated by multiplying the number of Shares/units by the closing price of the Common Shares on the TSX on March 31, 2020, which was $17.79.
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3	RSUs are subject to a time-vesting condition, specifically vesting three years from the grant date.
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Risk Mitigation

The HRC and the Board of CAE believe that executive compensation should be contingent on performance relative to pre-established targets and objectives. Also, management must achieve targets and objectives in a manner consistent with legal standards, as well as CAE’s ethical standards and internal policies. The HRC and the Board regularly review the Company’s compensation policies and practices to ensure that they do not encourage inappropriate risk-taking.

There are numerous risk management practices in place to ensure CAE compensation programs do not encourage inappropriate short-term risk-taking behaviors, but rather focus on long-term Shareholder value creation.

The HRC conducts an annual compensation risk assessment with the assistance of its independent compensation consultant Hugessen to identify potential risks associated with CAE’s compensation programs, practices and policies. In FY2020, the assessment concluded that the risks associated with the compensation programs are reasonably unlikely to have a material adverse effect on the Company.

The following characteristics of our compensation program in FY2020 were identified as having risk-mitigating effects:

•	A compensation risk assessment is completed annually by the HRC’s independent compensation consultant Hugessen.
•	Our mix of short, medium and longer-term compensation encourages CAE executives to take a balanced view and mitigates against excessive risk-taking or overly conservative behavior.
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•	Our emphasis on long-term performance: at target, only 16% to 17% of a NEO’s target total direct compensation is tied to short-term results (annual short-term incentive award), while 35% to 58% is tied to long-term incentives (PSUs, stock options and RSUs). For purpose of this paragraph, target total direct compensation is defined as the sum of base salary, target STIP and target LTIP.
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•	Our cap on NEO annual short-term incentive awards is directly linked to, and determined by, overall corporate financial performance (as measured by the STIP financial targets) and individual performance, so the NEO cannot reap an excessive reward based only on his/her own performance against financial or other targets.
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•	Threshold level of corporate performance and a cap on annual incentive awards provide that the annual short-term incentive award payout can be zero, if minimum threshold levels of corporate and individual performance are not met and is capped at 200% where corporate and individual performance objectives are exceeded, to prevent excessive payouts and to act as a disincentive against excessive risk-taking. Moreover, for the annual short-term incentive award, the corporate performance multiplier is capped at 100% if the EPS target is not met.
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•	Our clawback policy for executives provides that CAE may seek repayment of incentive compensation for years in which financial results are restated as a result of the executive’s fraudulent or intentional misconduct or in the event of the executive misconduct constituting cause for dismissal (such as, but not limited to, a breach of the CAE Code of Business Conduct or a breach of employment duties or obligations to the Company), or following a breach by the executive of his/her post-employment duties and obligations to the Company.
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•	Our anti-hedging policy prohibits executives from purchasing or otherwise entering into financial instruments, including prepaid variable forward contracts, instruments for the short sale or sale of call or put options, equity swaps, collars, or units of exchangeable funds, that are designed to or that may reasonably have the effect of monetizing equity awards or hedging or offsetting a decrease in the market value of any CAE securities.
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•	The President and CEO has agreed to, and the Group President, Civil Aviation Training Solutions, the Group President, Defence and Security, as well as the Vice President, Finance and CFO must retain ownership or control over CAE Shares equivalent in value to 25% of the net profits from any option exercise until their retirement or termination. This reduces the risk of short-term maneuvers designed to temporarily lift the CAE Share price to the detriment of sustainable long-term results.
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•	CAE’s Corporate Policies and Procedures preclude individual executives from acting unilaterally without approval in the case of material transactions identified in those policies.
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•	Our Share Ownership Guidelines Policy for the NEOs to own multiples of their annual base salary in CAE Shares (see Section 7 – “Executive Compensation – Executive Share Ownership Requirements” above for details) discourages excessive short-term risk-taking given the executives’ exposure to the longer-term CAE Share price movements through both their direct ownership and the LTIP elements they hold.
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•	Optional deferral of the annual short-term incentive to the Executive DSUP further aligns the executives with the long-term interests of our Shareholders through additional exposure to the long-term CAE Share price movements.
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•	Use of external compensation consultants ensures that the HRC gets an independent opinion on our executive compensation programs to validate the plans’ alignment with our pay-for-performance philosophy and market best practices.
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After considering the overall compensation program and taking into account both its knowledge of the past performance of the CAE management team and the nature of CAE’s various businesses, the HRC is not aware of any risks arising from the CAE’s compensation policies and practices that would be reasonably likely to have a material adverse effect on CAE.

Determination of the NEOs’ Compensation in FY2020

Base salary

The salaries of the President and CEO and other NEOs are determined in accordance with CAE’s compensation philosophy and policy, and are reviewed and approved, in the case of the President and CEO, annually by the independent members of the Board of Directors. The HRC reviews benchmark data to ensure that the President and CEO’s and his direct reports’ total direct compensation (base salary, short-term and long-term incentives) are in line with CAE’s compensation philosophy.

Short-Term Incentive Plan – Corporate and individual performance

75% of short-term incentive awards for the President and CEO and other NEOs, except the President, CAE Healthcare is based on the achievement of CAE performance metrics, namely EPS, Order Intake, ROCE and Customer Satisfaction. For the President, CAE Healthcare, the short-term incentive award is equally based on the achievement of CAE Healthcare performance metrics as well as CAE overall performance metrics. Details on these metrics are described under Section 7 – “Executive Compensation – Annual Short-Term Incentive Program”.

The table below illustrates the respective weights given to each FY2020 CAE corporate performance metric, as well as the actual results and related payout levels.

	Weighting		Threshold		Target		Maximum		Achieved		Payout Level
STIP Payout			0	%	100	%	200	%
Earnings per Share^1^	50	%		1.24		1.35		1.46	$1.41^2^		70	%
Order Intake	20	%	$3,468M		$3,770M		$4,072M			3,821.6	22	%
Return on Capital (ROCE)	20	%	9.4	%	10.0	%	10.6	%	10.59%^2^		38	%
Customer Satisfaction	10	%	Various Customer Satisfaction Indices								18	%
Weighted Average STIP Payout											148	%

All values are in US Dollars.

1	If the EPS target is not met, the corporate performance multiplier is capped at 100%.
2	Adjusted for certain elements as per plan provisions
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At the completion of the first eleven months of the fiscal year, Management was anticipating a record year in many respects, including corporate performance metrics against which the short-term incentive awards are measured. The Company’s history of delivering strong results in the month of March further enhanced Management’s confidence in reaching these goals. The unparalleled impact of the COVID-19 pandemic affected most of CAE’s clients globally during the fourth quarter and especially in the month of March. Across CAE’s business units, training activity was suspended or reduced in many locations and sales activity along with program execution was delayed as a result of travel restrictions and customer site closures/restrictions. The Board took into consideration the impacts deriving from COVID-19 described above and made adjustments to Earnings per Share and Return on Capital Employed. With these adjustments, the weighted average STIP payout for FY2020 is 148%. Despite these adjustments, the weighted average STIP payout for FY2020 (148%) is lower than it was for FY2019 (170%).

The Healthcare business unit performance metrics consisted of stretch targets with respect to Segment Operating Income, Revenue and Customer Satisfaction. Actual targets and results are not disclosed given the sensitive competitive nature of this information. The Healthcare business unit performance resulted in a 56% payout level, which also reflects an adjustment for the impact of COVID-19.

The remaining 25% of the NEOs’ annual incentive is awarded based on them achieving their business unit or function pre-determined individual objectives. As with other performance measures, such achievement is translated into an individual multiplier that ranges from 0% to 200%. For FY2020, the individual performance multiplier for the President and CEO was 200% while the average multiplier for other NEOs was 161%. The HRC determined the President and CEO’s individual performance multiplier and reviewed and approved the President and CEO’s recommendations on the individual performance multiplier for his direct reports following a detailed discussion about corporate and individual performance (described in detail in the next section).

The table below sets out the STIP targets, maximums and actual payout levels for the NEOs earned for FY2020, expressed as a percentage of base salary:

NEO	Position	Target		Max		Actual<br><br>Payout<br><br>Level
Marc Parent	President and CEO	100	%	200	%	161	%
Sonya Branco	Vice President, Finance and CFO	75	%	150	%	121	%
Gene Colabatistto	Former Group President, Defence and Security	75	%	150	%	107	%
Nick Leontidis	Group President, Civil Aviation Training Solutions	75	%	150	%	121	%
Rekha Ranganathan	President, CAE Healthcare	45	%	90	%	46	%
Mark Hounsell	General Counsel, Chief Compliance Officer and Corporate Secretary	45	%	90	%	70	%

Long-Term Incentive Plan

FY2020 LTIP Grants

The table below sets out the LTIP ranges and actual awards to the NEOs granted for FY2020, expressed as a percentage of salary.

		LTIP Range				Actual<br><br>Grant
NEO	Position	Minimum		Max
Marc Parent	President and CEO	300	%	400	%	400	%
Sonya Branco	Vice President, Finance and CFO	100	%	250	%	250	%
Gene Colabatistto	Former Group President, Defence and Security	100	%	250	%	230	%
Nick Leontidis	Group President, Civil Aviation Training Solutions	100	%	250	%	250	%
Rekha Ranganathan	President, CAE Healthcare	40	%	150	%	100	%
Mark Hounsell	General Counsel, Chief Compliance Officer and Corporate Secretary	40	%	150	%	135	%

FY2017 PSU Payouts

The vesting of the PSUs granted in FY2017 was tied to the performance of CAE EPS compared to predetermined target at the end of FY2019. As per the terms of the FY2017 PSUP, the HRC reviewed CAE’s EPS performance for the fiscal year ended March 31, 2019 and approved the following results for Performance Share Units granted in FY2017:

	Threshold		Target		Maximum		Achieved	Payout Level
PSU Payout	0	%	100	%	200	%
EPS FY2019		0.93		1.03		1.13	1/25/2001
PSU Payout								200	%

All values are in US Dollars.

1	Adjusted for certain elements as per plan provisions

The PSUs granted in FY2017 were paid out in June of FY2020. The final cash payout was based on a Share price of $32.86, the average fair market value of the Common Shares on the TSX for the 20 trading days preceding the final vesting date of the grant, which was May 31, 2019. The actual amounts paid to each eligible NEO in FY2020 are disclosed in the table “Incentive Plan Awards – Value Vested or Earned During the Year”.

Modifications to Compensation Programs in Response to the COVID-19 Pandemic

As a result of the COVID-19 pandemic, CAE has implemented a number of measures to protect the Company’s financial position and preserve liquidity:

•	Temporary 50% reduction in executive salaries
•	Salary freeze for FY2021
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•	Deferred payment of the FY2020 STIP and vested RSUs and PSUs to November 2020
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•	Added critical strategic COVID-19 response objectives to the FY2021 STIP
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In addition, in light of the challenges introduced by COVID-19, including the setting of short and long-term financial objectives, the Board has approved the following amendments to CAE’s Executive Compensation programs which are intended to be temporary:

FY2021 Short-Term Incentive Plan

The FY2021 STIP will include qualitative measures (weighted at 30%) aimed at ensuring CAE is adequately addressing the COVID-19 crisis. These will include cashflow management, revenue generation, employee engagement and retention, as well as business continuity. Financial metrics similar to the ones used in the past will also form part of the FY2021 STIP (weighted at 70%), however Free Cash Flow will replace ROCE for this year.

FY2021 Long-Term Incentive Plan

The grants under the FY2021 LTIP will remain allocated between PSUs, RSUs and stock options. However, stock options will be weighted at 60% of such allocation while RSUs and PSUs will each be weighted at 20%. In addition, the long-range financial targets associated with PSUs will not be set at the time of grant but rather in May 2021.

President and CEO – FY2020 Accomplishments

Main targets and objectives for FY2020 and related results of Marc Parent, the President and CEO, are set out below:

1. Delight Customers<br><br>• Through the net addition of 24 simulators into the civil network in FY2020, coupled with high utilization levels preceding the pandemic, successfully supported our customers’ growth. Within Defence, delivered next generation 3D visual system (Medallion Series MR) and launched CAE Trax Academy to better enhance the training experience for our Defence customers<br><br>• Exceeded all customer satisfaction metrics, reflecting continuous improvement in quality and on-time delivery. Additionally, achieved very strong results in Net Promotor Score within both the products and services components of the Civil business<br><br>• Significant advancement within CAE’s Digital Transformation initiative, with the launch of several customer related applications targeted to support the overall customer experience including a Customer Care application and another targeted to provide students the opportunity to access computer-based training, records, documents and manuals remotely<br><br>• Analytics dashboards and services developed and launched to further enhance the value offering and the customer experience<br><br>• Delivered over 1,000,000 training hours in Civil in the fiscal year
2. Create Value<br><br>• Achieved a record level of revenues at $3.6B, representing a 10% annual revenue growth, also drove a 7% annual increase in EPS (before special items)^^ Additionally, sold 49 FFS which represents a market share of 74% for an annual order intake^1^ of $3.8B, despite impact of COVID-19 late in the fourth quarter<br><br>• Achieved several key “wet” training agreements with strong regional diversity, including operators such as LATAM and easyJet<br><br>• Completed the integration of Bombardier Business Aircraft Training acquisition, exceeding planned synergies and financial performance. Additionally, acquired the remaining portion of Pelesys which facilitated the creation of a courseware Centre of Excellence which allows CAE to optimize courseware as a key competitive differentiator to help support our customers training experience<br><br>• Executed JV with Directional Capital (SIMCOM) which supports our training activates in new aircraft types<br><br>• Executed multiple long-term training partnerships with strong regional diversity including: JetSmart, Jet Aviation, TAG Aviation, Air Canada, easyJet<br><br>• Within the Healthcare business, engaged large Group Purchasing Organizations (VA-US Dept. of Veterans Affairs, Vizient, Premier) and major hospital groups (HCA-Hospital Corporation of America, Kaiser Permanente)<br><br>• Added new TSI contracts to our D&S portfolio (Germany Navy NH90 Sea Lion)<br><br>• Continued to expand the presence of CAE Rise across new clients within Defence, signed a new memorandum of agreement with Leonardo to collaborate and offer integrated solutions for helicopter training requirements for the U.S. government market<br><br>• Expanded the Healthcare sales and marketing team, leading to strong top line growth prior to the COVID-19 impact in the Healthcare business
3. Drive Innovation<br><br>• Courseware Centre of Excellence created leveraging existing capabilities that are enhanced and accelerated by recent acquisitions to deliver computer-based training standards providing a high-quality training experience for our customers<br><br>• Concluded the first customer sales of our Defence teams next generation 3D visual system Medallion Series MR to provide an enhanced customer visual experience in the training environment<br><br>• Launched CAE TRAX Academy to help our customers leverage CAE Rise, AI and data analytics to further enhance training outcomes for our Defence customers<br><br>• Launched partnerships with financial institutions globally for student cadet financing to facilitate candidates to finance the education and entrance into the profession<br><br>• Within the Healthcare business, successfully developed leading market/demand-based new products and services such as Simstat module-complete online e-learning system, as well as enhancing existing offerings via Digital Innovation such as Learning Space with enhanced data capability<br><br>• Certified Sarasota as approved American Heart Association training centre
4. Bolster Talent<br><br>• As part of the evolution of our Digital Transformation, continued to broaden the talent pool within CAE with the addition/expansion of several new skill sets within CAE including a focus on Data Scientists and Customer Experience leaders<br><br>• Launched a leadership development program the Leap Development program focused on preparing our next generation of training centre leaders. The first cohort of this global program was launched, with over 50% of the first group being women candidates<br><br>• Launched Dare Women Leadership development program. Targeted to support the development of current and future women leaders across CAE globally. We have launched the first tranche which includes 30 women from all Business Units and regions globally. Focus on the participants building skills in networking, self-confidence, negotiating, influencing, work life balance and risk taking<br><br>• Developed and implemented our new Mentorship program CAE MentorMe, with focus on the development of our high potential employees with initial pilot programs focused on supporting Dare and Leap program participants and members of our Professional Women’s Network<br><br>• Advanced our Diversity & Inclusion roadmap including the launch of three Employee Resource Groups (Women in Aviation, Parents of Children with Special Needs and LGBTQ+). Additionally, we launched an Unconscious Bias Training program for the organization, starting with the Executive team. We operationalized our Executive Diversity Council, led by the CEO focused on supporting our various D&I initiatives across the Company<br><br>• In support of the development of our current and future leaders we developed assessments of over 200 of our high potential employees and created development plans to support their growth as leaders<br><br>• Established our three-year CAEWellness roadmap and launched a number of initiatives globally and regionally in support of mental and physical well being<br><br>• An important component of our talent management efforts is focused on the development and retention of our high potential employees, in leadership and non-leadership roles. As a result of this focus we were successful in retaining 98% of identified high potentials and 100% of individuals identified as having potential to move to Executive level roles

Other NEOs – FY2020 Accomplishments

As previously discussed, this section paints a portrait of the major achievements of each NEO for FY2020. These were the main key performance indicators (KPIs) in determining the individual performance multiplier applicable to their annual incentive awards.

Sonya Branco<br><br>Vice President, Finance <br>and Chief Financial Officer	• Strong financial stewardship to CAE in FY2020. Having partnered with the business in establishing aggressive business goals, played a leadership role in achieving a strong financial outcome for CAE despite significant challenges in the last quarter of FY2020 as a result of the COVID-19 pandemic<br><br>• Delivered 10% revenue growth, 21% growth in SOI before specific items and 7% growth in EPS before specific items^1^<br><br>• Under Ms. Branco’s leadership, free cash flow generation was $351.2M for the year, for an annual cash conversion ratio of 98%, which is in line with our annual conversion target despite the challenges of the COVID-19 pandemic<br><br>• Ms. Branco’s actions in light of the COVID-19 have been exceptional. As a part of good fiscal management, prior to the pandemic, Ms. Branco capitalized on the favourable credit environment to increase the revolver facilities in August 2019 to $850M. Additionally, through effective planning, CAE has no significant debt maturities coming due before 2025. At the onset of the crisis, worked proactively to secure our expanded access to liquidity at competitive terms Additionally, Ms. Branco has been tireless in instituting and effectively monitoring cash and cost containment measures to position CAE to manage through the crisis. She continues to provide strong leadership in this regard<br><br>• Provided leadership and a high level of expertise in many of our M&A, joint ventures and partnership efforts this year, including the conclusion of the Pelesys acquisition, realization of synergies related to BBD BAT integration, acquisition of the Norwegian flight school and the several JVs including with Directional Capital (SIMCOM), GAA and Leonardo<br><br>• Effectively planned and executed the conversion to IFRS 16 and ensured effective communication for internal and external stakeholders, including an updated governance for capital and debt related to leases<br><br>• Worked closely with Civil/FTO team to secure financing solutions for Cadet training. Launched partnership with several financial institutions globally for student cadets training<br><br>• Played a high-profile leadership role in several CAE initiatives including Diversity & Inclusion, our Digital Transformation, cybersecurity and our work space initiative

Nick Leontidis<br><br>Group President, <br>Civil Aviation Training <br>Solutions	• In a very competitive marketplace, and despite being impacted by the COVID-19 pandemic in the last quarter of the fiscal year, delivered superior financial performance, in many cases, record setting:<br><br>o Revenue growth of 16%, SOI before specific items^1^ increase of 37%, order intake^1^ of $2.5B and a record backlog of $5.3B<br><br>o Strong FFS sales despite slowdown related to COVID-19, achieved 49 FFS representing a 74% market share. Deployed net addition of 24 simulators into our network to support organic growth and customers’ growth. Additionally, re-entered the Chinese civil training marketplace with establishment of GAA joint venture<br><br>• Implemented two key organizational model improvements in the Civil business. In the FTO unit, the establishment of key strategic priorities defined around Operational Excellence, coupled with the establishment of a central planning organization, helped facilitate a stronger financial performance across the FTO organization<br><br>• Developed and operationalized an organizational model to facilitate our Courseware efforts, including the creation of a Courseware Centre of Excellence (CoE). Courseware is a key differentiator for CAE. This new model allows us to more effectively optimize its value<br><br>• Championed the identification of new revenue opportunities through digital initiatives including New Flight Services, Training Management System (Crew APP, Courseware, Grading, Debrief and Records) and an Analytics Dashboard & Services for customers<br><br>• Continued to identify long term value creation initiatives including the signing of multiple long-term training partnerships with good geographical diversity: JetSmart, Jet Aviation, TAG Aviation, Air Canada and easyJet<br><br>• Executed two M&A transactions (SIMCOM JV and the acquisition of the remaining 55% of Pelesys) and effectively integrated them. Additionally, completed the integration of Bombardier’s Business Aircraft Training Centre while exceeding both the expected savings related to synergies and the anticipated financial performance<br><br>• Strong champion of talent development and retention within his business unit. Additionally, Mr. Leontidis is a strong Diversity & Inclusion champion across CAE. Retention of High Potentials achieved at 100%, high potentials within Civil were assessed and development plans created. Nick played a leadership role in the launch of the Leap program which targets the development of future Training Centre leaders
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Mark Hounsell<br><br>General Counsel, <br>Chief Compliance Officer <br>and Corporate Secretary	• Mr. Hounsell and his team successfully supported and helped close numerous deals/activities in Civil, including new long-term training partnerships and JVs (SIMCOM, GAA joint venture in Guangzhou, easyJet wet agreement, LATAM, SNCA, Sunwing, etc.) D&S, in the form of major Aircrew Training Services and TSI programs (NH90 Sea Lion in Germany) and Healthcare<br><br>• Led the legal and compliance teams efforts to support our transition to providing customers more data driven product/service offerings through transforming our training services agreements, templates and processes to effectively support the business sales efforts<br><br>• Continued to strengthen our overall compliance program through some key achievements including the completion of our significantly revamped Code of Conduct training. The training was rolled out to all employees worldwide, with completion rates of close to 100% for our full-time workforce. Mr. Hounsell also further strengthened the Compliance team staff, continued education of Data Privacy Officers worldwide and drove the roll out of updated policies and training relating to GDPR and the streamlining of our corporate policies and procedures with numerous policies updated<br><br>• Continued to advance our anti-corruption practices including implementation of new Anti-Corruption and Gifts & Entertainment Policies, further streamlining the number of third-party representatives used by the business and establishing more direct interfaces with foreign reps and enhanced due diligence protocols<br><br>• Strong efforts from Mr. Hounsell and his team this year in regard to management of Export Control practices. Department resources were strengthened in Montreal and regionally
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Rekha Ranganathan<br><br>President, CAE Healthcare	• In the course of her first year at CAE, Ms. Ranganathan was successful in a number of important aspects of the business. She strengthened the business management approach to Healthcare, including building out the infrastructure to support the growth of the business (e.g. marketing) as well as broaden the team offering to encompass more of a service orientation in addition to our product portfolio<br><br>• Ms. Ranganathan and the team made good progress in realigning the sales and marketing functions to both strengthen our talent base as well as strengthening the educational training offering through the Chief Learning Office. The segmentation of duties allowed the Sales organization to drive efforts in a more focused fashion<br><br>• Efforts to enhance sales activity through direct sales and upgrading of distribution networks domestically and globally delivered good results, with strong double-digit sales growth in China through an enhanced distribution approach. Additionally, focused sales and marketing efforts saw strong growth in key segments including professional markets where hospital sales such as partnering with major hospitals and hospital groups (such as Kaiser Permanente, HCA, Mayo Clinic and the VA hospital system) where there was a 65% increase in sales. Efforts with OEMs and Industry groups also supported strong growth in these areas<br><br>• Through a strong commitment to improving quality the team was able to reduce the failure rate by 17%<br><br>• Successful product launches and marketing efforts for a range of products, aimed at the mid-fidelity market, including Juno, Ares and Luna resulting in a significant increase in revenue<br><br>• Revenue performance was tracking at a double-digit pace prior to the impact of COVID-19. March revenue, normally a strong month, was negatively impacted by the pandemic
Gene Colabatistto<br><br>Former Group President, Defence and Security	• Mr. Colabatistto retired on December 31, 2019. He was instrumental in a number of key achievements which concluded prior to or shortly following his retirement including<br><br>o Strong performance in Order intake with orders up 13% year-over year to $1.2B, for a $4.1B Defence backlog, which provides CAE with a good measure of diversification<br><br>o Won notable contract awards for the following programs; USAF and US Marine Corps C-130J, USAF KC-135, German Army NH90 Sea Lion, US Army Fixed Wing flight training, Leonardo’s M346 and the French Air Force Pilatus PC-21<br><br>o Launched CAE Trax Academy, an integrated and advanced training continuum
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Not all details of the NEO targets have been disclosed due to the potential competitive prejudice to CAE of doing so. The NEOs’ performance against their objectives was reviewed by the HRC, in addition to having been reviewed by the President and CEO during the fiscal year.

Shareholder Return Performance Graph

The following graph compares the cumulative Shareholder return of the Common Shares with the cumulative returns of each of the S&P/TSX Composite Index and the S&P Aerospace & Defence Index for a five-year period commencing March 31, 2015^^.

Comparison of Five-year Cumulative Total Return of CAE Inc. vs. S&P/TSX Composite Index
and S&P Aerospace & Defence Index


CAE Inc.	100	104	143	171	214	255	245	251	131
S&P/TSX Composite Index	100	93	111	113	122	125	128	132	105
S&P Aerospace & Defence Index	100	90	116	151	160	181	187	191	133

All values are in US Dollars.

Pay for Performance Linkage

The following chart compares the evolution of CAE’s total Shareholder return with the evolution of executive compensation (as disclosed in the Summary Compensation Table) for both the President and CEO and the other Named Executive Officers. The total Shareholder return assumes $100 invested in Common Shares traded on the Toronto Stock Exchange on March 31, 2015. Values are as at the last trading day in the month of March in the specified years, including the reinvestment of dividends.

In FY2020, the decline in Total Shareholder Return is the result of a significant decline in share price observed in the last month of FY2020 due to the impact of COVID-19 and resulting stock market impact, with a closing share price of $17.79 on March 31, 2020. With an all-time high share price of $42.00 in February 2020, CAE stock price had achieved an increase of 42% prior to the impact due to the Covid 19 pandemic when compared to FY2019.

Change in President and CEO and Average NEO Compensation vs. Total Shareholder Return^1^

Notes:

1	In FY2017, the former CFO’s compensation was included up to his resignation from the Company on May 30, 2016

The President and CEO’s and the NEO’s total compensation is not specifically based on the performance of CAE’s Common Shares on the TSX, but rather on the overall Company financial and operational performance. In general, the trend in the President and CEO’s total compensation follows the trend in the CAE’s total Shareholder return (TSR). The performance graph shows a slow increase of CAE’s TSR from FY2015 to FY2016. From FY2017 to FY2019, the increase is accelerated correlating with outstanding Company performance. In FY2020, CAE’s TSR was negatively impacted by COVID-19 in the last month of the year. A similar trend can also be observed in the President and CEO’s total compensation, which was increasing year-over-year from FY2015 to FY2019, with a decrease in FY2020 mainly due to the drastic decline in share price in March 2020. The President and CEO’s compensation from FY2017 to FY2019 reflected CAE’s growth in EPS, revenue and backlog results, which resulted in a STIP achievement of 177% (versus target) on average during these years. In FY2020, the compensation decreased mainly due to the decline in share price at the end of FY2020. With regards to other NEOs, a similar trend is also observed from FY2015 to FY2019. Similar to the President and CEO’s compensation, the decline in compensation for the other NEOs in FY2020 is mainly a result of the share price decline at the end of the fiscal year.

In Section 7 – “Executive Compensation – Pay for Performance Relative to Comparator Group” there is a more robust comparison of the President and CEO’s compensation, both declared and realizable, with our comparator group and relative financial performance.

Pay for Performance Linkage	FY2020		FY2019		FY2018
Market Capitalization (as of March 31)	$4,725 billion		$7,848 billion		$6.420 billion
Return on equity excluding specific items^1^	14.8	%	14.3	%	14.0	%
Total Shareholders average return – three-year compounded annual growth rate	15.3	%	13.6	%	14.1	%
Diluted Earnings per Share		1.16		1.23		1.29
Diluted Earnings per Share before specific items^1^		1.34		1.25		1.11

All values are in US Dollars.

Specific items for FY2018 include the net gains on disposal of our equity interest in the joint venture Zhuhai Xiang Yi Aviation Technology Company Limited (ZFTC) and the remeasurement of the previously held Asian Aviation Centre of Excellence Sdn. Bhd. investment upon acquisition and the impact of the enactment of the US tax reform. Specific items for FY2019 include the impacts of the integration of Bombardier’s Business Aviation Training Business (BBAT) in FY2019. In FY2020, specific items also include the impacts of Defence and Security’s reorganizational costs and the impact of the goodwill impairment charge recognized in Healthcare.

Given the value and conditions related to the long-term incentive awards, it takes time to determine the effectiveness of our pay-for-performance approach and the alignment between the NEOs’ compensation and Shareholders’ return. The following table compares for each year the NEOs’ total compensation, as presented for the past 5 years (or lesser period as an executive with CAE), to the actual value realized over time.

Name and Principal Position	Year	Disclosed<br><br>Compensation<br><br>Less Pension<br><br>Value^1^<br><br>($)	Actual<br><br>Realized<br><br>Compensation^2^<br><br>($)
	at March 31, 2020
M. Parent<br><br>President and Chief<br><br>Executive Officer	2020<br><br>2019<br><br>2018<br><br>2017<br><br>2016	7,114,460<br><br>6,892,220<br><br>6,328,181<br><br>5,937,841<br><br>5,005,577	6,784,809<br><br>6,541,625<br><br>6,493,065<br><br>10,287,796<br><br>13,650,735
	Total	31,278,279	43,758,030
S. Branco<br><br>Vice President, Finance and<br><br>Chief Financial Officer	2020<br><br>2019<br><br>2018<br><br>2017<br><br>2016	2,377,692<br><br>2,097,261<br><br>1,547,928<br><br>1,110,905<br><br>458,259	2,392,267<br><br>1,081,101<br><br>1,225,061<br><br>1,578,865<br><br>590,695
	Total	7,592,045	6,867,989
G. Colabatistto<br><br>Former Group President, <br>Defence and Security	2020<br><br>2019<br><br>2018<br><br>2017<br><br>2016	2,712,600<br><br>3,237,677<br><br>3,430,644<br><br>2,647,407<br><br>1,840,079	4,703,088<br><br>3,275,274<br><br>3,590,084<br><br>3,964,952<br><br>2,708,325
	Total	13,868,407	18,241,723
N. Leontidis<br><br>Group President, Civil Aviation<br><br>Training Solutions	2020<br><br>2019<br><br>2018<br><br>2017<br><br>2016	2,524,363<br><br>2,564,477<br><br>2,267,257<br><br>1,873,988<br><br>1,548,314	3,164,368<br><br>3,006,486<br><br>1,611,271<br><br>3,212,891<br><br>2,835,386
	Total	10,778,399	13,830,402
R. Ranganathan<br><br>President, CAE Healthcare	2020	1,645,660	852,936
	Total	1,645,660	852,936
M. Hounsell<br><br>General Counsel, Chief Compliance Officer<br><br>and Corporate Secretary	2020<br><br>2019<br><br>2018<br><br>2017<br><br>2016	1,399,488<br><br>1,425,596<br><br>1,300,766<br><br>1,148,905<br><br>575,377	2,027,021<br><br>797,788<br><br>1,152,343<br><br>1,704,638<br><br>573,631
	Total	5,850,132	6,255,421
1	Sum of base salary, annual STIP paid, all other compensation, and the grant value of Share-based and option-based awards during the fiscal year as disclosed in the Circular.
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2	Sum of base salary, annual STIP paid, all other compensation, the payout value of RSUs and PSUs and the current market value of the vested DSUs associated with the grant awarded for that fiscal year, and the gains from any option exercise during the period.
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Pay for Performance Relative to Comparator Group

To ensure alignment between pay and performance, the HRC reviews the competitiveness of CAE President and CEO’s compensation in the context of the Company’s relative performance across several key financial metrics. The chart below provides a comparison of the three-year President and CEO’s compensation and CAE’s three-year performance relative to CAE’s comparator group (as measured on an “as reported” basis and on a realizable basis).

The chart below depicts the following:

1.	The percentile rank of CAE’s relative performance on the following metrics (measured over the last three fiscal years against the comparator group):
•	Earnings per Share (EPS) growth;
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•	Total Shareholder Return (TSR);
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•	Average Return on Capital Employed (ROCE);
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•	Average Operating Margin; and
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•	Overall performance – based on the weighted performance of each of these four metrics with weightings of 35%, 35%, 15% and 15% respectively.
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2.	The percentile rank of CAE on declared and realizable President and CEO compensation over the past three fiscal years as defined below.
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Three-year Declared Compensation = Total compensation for a three-year period as reported in the summary compensation table, excluding the pension value.

Three-year Realizable Compensation = Cash compensation plus the market value of equity awards granted over the past three years. It is equal to the sum of salary, the annual incentive paid, long-term incentives and all other compensation excluding the pension value. Long-term incentive values are based on the following:

•

For time-vested equity: Value of all time-vested awards granted (Share units and options) during the measurement period of three years valued at the closing price on the last day of the measurement period.

•

For performance-based equity: Value of all performance-based awards (regardless of the date it was granted) for which the final performance result was established during the measurement period, i.e., it is the value of performance-based awards earned based on the final performance results achieved during the measurement period of three years, and valued at the closing price on the last day of the measurement period.

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Note: President and CEO compensation for the US and Canadian companies was compared at par.

Pay-for-Performance FY2018-2020

CAE’s Percentile in Peer Group

The chart above shows that overall Company performance for the three-year period of FY2018 to FY2020, as defined by the EPS growth, TSR, average ROCE and average operating margin, compared to the performance of our peers during the same period was ranked at the 57^th^ percentile of the whole group. When comparing the three-year realizable compensation of the CAE President and CEO for the same period, it was lower than the overall Company performance at the 46^th^ percentile when compared to the realizable compensation of CEOs of companies in the CAE comparator group. This is mainly due to the drastic decline in share price in the last month of FY2020 as well as the COVID-19 pandemic impact on CAE results in March 2020. Note that overall company performance and CEO compensation of CAE peers are mostly reflective of results prior to COVID-19 pandemic.

The overall Company performance for the three-year period of FY2018 to FY2020 compared to CAE peers was in the 2^nd^ quartile, despite the COVID-19 pandemic impact on CAE results in the last month of FY2020; while the President and CEO’s realizable and declared compensation for the same period followed the overall Company performance with a slight lag, ranking at the 46^th^ and 39^th^ percentile, respectively.

	Compensation of Our Named Executive Officers

Summary Compensation Table

The first of the following tables provides a summary of compensation earned during the last three fiscal years ended March 31 by the President and Chief Executive Officer, the Vice President, Finance and Chief Financial Officer, and by the four most highly compensated policy-making executives who served as executive officers of CAE or its subsidiaries as at March 31, 2020 (collectively, “Named Executive Officers” or “NEOs”).

					Non-Equity Incentive<br><br>Plan Compensation
Name and Principal <br>Position	Year	Salary	Share-Based Awards^1^	Option-Based Awards^2^	Annual Incentive Plan^3^	Long-Term Incentive Plan	Pension Value^4^	All Other<br><br>Compen-<br><br>sation^5^	Total<br><br>Compen-<br><br>sation
		$	$	$	$	$	$	$	$
Marc Parent<br><br>President and Chief<br><br>Executive Officer	2020<br><br>2019<br><br>2018	1,039,683<br><br>999,650<br><br>961,200	2,930,078<br><br>2,465,126<br><br>2,370,416	1,254,825<br><br>1,450,890<br><br>1,126,080	1,684,700<br><br>1,785,830<br><br>1,695,370	0<br><br>0<br><br>0	308,000<br><br>653,000<br><br>596,000	206,175<br><br>190,724<br><br>175,114	7,423,461<br><br>7,545,220<br><br>6,924,180

Sonya Branco<br><br>Vice President,<br><br>Finance and Chief Financial Officer	2020<br><br>2019<br><br>2018	480,598<br><br>424,800<br><br>365,667	858,009<br><br>639,690<br><br>471,113	367,290<br><br>376,470<br><br>223,836	591,675<br><br>579,094<br><br>413,049	0<br><br>0<br><br>0	406,000<br><br>604,000<br><br>289,000	80,121<br><br>77,207<br><br>74,263	2,783,693<br><br>2,701,261<br><br>1,836,928

Gene Colabatistto^6, 7^<br><br>Former Group President, Defence & Security	2020<br><br>2019<br><br>2018	514,226<br><br>634,424<br><br>606,663	1,069,863<br><br>1,030,506<br><br>988,339	458,370<br><br>606,582<br><br>469,476	547,854<br><br>826,124<br><br>603,665	0<br><br>0<br><br>0	506,000<br><br>528,000<br><br>560,000	122,287<br><br>140,041<br><br>762,501	3,218,600<br><br>3,765,677<br><br>3,990,644

Nick Leontidis<br><br>Group President,<br><br>Civil Aviation Training Solutions	2020<br><br>2019<br><br>2018	495,808<br><br>469,167<br><br>451,433	876,461<br><br>826,413<br><br>794,573	375,210<br><br>486,450<br><br>377,568	604,390<br><br>628,616<br><br>504,621	0<br><br>0<br><br>0	622,000<br><br>756,000<br><br>529,000	172,494<br><br>153,831<br><br>139,062	3,146,363<br><br>3,320,477<br><br>2,796,257

Rekha Ranganathan^7, 8^<br><br>President, CAE Healthcare	2020	525,416	498,199	294,525	252,103	0	296,000	75,417	1,941,660

Mark Hounsell<br><br>General Counsel,<br><br>Chief Compliance Officer and Corporate Secretary	2020<br><br>2019<br><br>2018	435,317<br><br>415,217<br><br>399,217	414,824<br><br>395,158<br><br>366,027	177,705<br><br>232,650<br><br>173,880	308,038<br><br>324,395<br><br>307,377	0<br><br>0<br><br>0	203,000<br><br>225,000<br><br>198,000	63,605<br><br>58,176<br><br>54,266	1,602,489<br><br>1,650,596<br><br>1,498,767
1	Represents the value of Share-based awards granted under the RSUP and the PSUP. The value disclosed for the RSUs and PSUs represents the award date value calculated by multiplying the number of RSUs and PSUs awarded at target (100%) by CAE’s weighted average Share price during the five trading days immediately preceding the grant date ($22.17 for units awarded in FY2018, $27,14 for units awarded in FY2019 and $34.17 for units granted in May 2019). Such value differs from the accounting grant date fair value determined in accordance with IFRS2, Share-based Payments, as the accounting fair value is assessed with the Share price on the date of the award (rather than on an weighted average price). The accounting grant date fair value would be as follows if using the Common Share closing price on the TSX on the respective grant date ($22.18 on June 9, 2017, $27,42 on June 5, 2018 and $33,67 on May 29, 2019): Mr. Parent: $2,371,486 in FY2018 (a difference of $1,070), $2,490,559 in FY2019 (a difference of $25,432) and $2,887,203 in FY2020 (a negative difference of $42,875); Ms. Branco $471,325 in FY2018 (a difference of $212), $646,289 in FY2019 (a difference of $6,600) and $845,454 in FY2020 (a negative difference of $12,555); Mr. Colabatistto: $988,784 in FY2018 (a difference of $445), $1,041,137 in FY2019 (a difference of $10,632) and $1,054,208 in FY2020 (a negative difference of $15,655); Mr. Leontidis: $794,931 in FY2018 (a difference of $358), $834,939 in FY2019 (a difference of $8,526) and $863,636 in FY2020 (a negative difference of $12,825); for Mrs. Ranganathan: $490,909 in FY2020 (a negative difference of $7,290) and for Mr. Hounsell: $366,192 in FY2018 (a difference of $165), $399,235 in FY2019 (a difference of $4,077) and $414,824 (a negative difference of $6,070). Note that the actual value paid, if any, will differ.
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2	Represents the value of option-based awards granted under the ESOP and determined based on the grant date fair value of the award in accordance with IFRS2. Note that actual value received, if any, will differ. The value of each option is determined using the Black-Scholes model with the following assumptions:
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	FY2020		FY2019		FY2018
---	---	---	---	---	---	---
Dividend yield	1.19	%	1.31	%	1.44	%
Expected volatility	19.70	%	18.34	%	18.39	%
Risk-free interest rate	1.49	%	2.07	%	0.85	%
Expected option term	4		4		3.75
Black-Scholes Value	14,71%		15.41	%	12.45	%
3	Represents the STIP payout earned in each fiscal year and paid in the first quarter of the following year (see Section 7 – “Short-Term Incentive Plan – Corporate and Individual performance” for details). Ms. Branco has elected to defer a portion of her FY2018 STIP payouts to the Executive DSUP. Mr. Hounsell has elected to defer a portion of his FY2019 STIP payout to Executive DSUP.
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4	The pension value shown corresponds to the compensatory value reported in the Defined Benefit Plan Table and includes the service cost and the impact of the increase in earnings in excess of actuarial assumptions. For Mr. Colabatistto, the value in FY2018 also includes Company contributions to the Non-Qualified Deferred Compensation (NQDC) plan in the amount of $80,000. Mr. Colabatistto stopped his participation in the NQDC plan as of January 1, 2018.
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5	All other compensation in FY2020 comprises other benefit expenses and allowances paid by CAE as follows:
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	Automobile<br><br>Expenses	Health & Insurance<br><br>Benefits	Other<br><br>Perquisites	Consulting fees/Special bonus	Employer ESPP Contributions	Dividend<br><br>Equivalents	Total
---	---	---	---	---	---	---	---
	$	$	$	$	$	$	$
M. Parent	24,584	16,106	17,272	–	31,191	117,022	206,175
S. Branco	–	12,797	45,000	–	14,425	7,899	80,121
G. Colabatistto^a^	–	1,891	59,644	19,950	15,745	25,057	122,287
N. Leontidis	30,250	16,106	15,836	–	14,874	95,427	172,493
R. Ranganathan	–	2,267	46,550	26,600	–	–	75,417
M. Hounsell	12,593	18,106	16,703	–	13,060	3,143	63,605

a Mr. Colabatistto received consulting fees of $19,950 for work following his retirement.

6	Mr. Colabatistto retired from CAE as of December 31, 2019.
7	Amounts paid in US dollars have been converted to Canadian dollars using a conversion rate of $1.28 in FY2018, $1.29 in FY2019 and $1.33 in FY2020, same rate as used in the MD&A and financial statements.
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8	Mrs. Rekha Ranganathan joined CAE as of April 1, 2019. As part of her employment contract, CAE has provided the following sign-on bonuses: (i) $40,000 US payable on or about the first-year work anniversary ($20,000 US paid in FY2020 and presented under Other Compensation and $20,000 US payable in FY2021) to compensate for the estimated forfeited bonus with her former employer covering the period from January 1^st^ to March 31, 2019; (ii) a one-time payment of $220,000 US around May 31, 2020 and a further one-time payment of $75,000 US around May 31, 2021, to compensate for expected long-term incentive payment forfeited with her former employer. Such payments are conditional on being employed with CAE at the time of the payment. These bonuses are complemented by sign-on grants of 3,600 Restricted Share Units and 27,000 stock options, which occurred on May 29, 2019 in combination with the annual grants (which are included under Share-based Awards and Option-based Award).
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Incentive Plan Awards

The following tables provide information relating to each option-based awards and Share-based awards outstanding as at March 31, 2020 for each NEO, as well as the value vested or earned during FY2020 in respect of such incentive plan awards.

Share and option-based awards granted in FY2020

The following table details the awards made under CAE’s Share and option-based plans for the NEOs in FY2020.

Name	Award<br><br>Type	Award<br><br>Date	Number of Securities, units or Other Rights	Payout or Expiration Date	Grant<br><br>Price^4^
M. Parent	RSU^1^<br><br>PSU^2^<br><br>Stock Option^3^	05/29/2019<br><br>05/29/2019<br><br>05/29/2019	24,500<br><br>61,250<br><br>253,500	05/29/2022<br><br>05/29/2022<br><br>05/29/2026	$34.17<br><br>$34.17<br><br>$34.17
S. Branco	RSU^1^<br><br>PSU^2^<br><br>Stock Option^3^	05/29/2019<br><br>05/29/2019<br><br>05/29/2019	7,180<br><br>17,930<br><br>74,200	05/29/2022<br><br>05/29/2022<br><br>05/29/2026	$34.17<br><br>$34.17<br><br>$34.17
G. Colabatistto	RSU^1^<br><br>PSU^2^<br><br>Stock Option^3^	05/29/2019<br><br>05/29/2019<br><br>05/29/2019	8,950<br><br>22,360<br><br>92,600	05/29/2022<br><br>05/29/2022<br><br>05/29/2026	$34.17<br><br>$34.17<br><br>$34.17
N. Leontidis	RSU^1^<br><br>PSU^2^<br><br>Stock Option^3^	05/29/2019<br><br>05/29/2019<br><br>05/29/2019	7,330<br><br>18,320<br><br>75,800	05/29/2022<br><br>05/29/2022<br><br>05/29/2026	$34.17<br><br>$34.17<br><br>$34.17
R. Ranganathan	RSU^1^<br><br>PSU^2^<br><br>Stock Option^3^	05/29/2019<br><br>05/29/2019<br><br>05/29/2019	6,740<br><br>7,840<br><br>59,500	05/29/2022<br><br>05/29/2022<br><br>05/29/2026	$34.17<br><br>$34.17<br><br>$34.17
M. Hounsell	RSU^1^<br><br>PSU^2^<br><br>Stock Option^3^	05/29/2019<br><br>05/29/2019<br><br>05/29/2019	3,470<br><br>8,670<br><br>35,900	05/29/2022<br><br>05/29/2022<br><br>05/29/2026	$34.17<br><br>$34.17<br><br>$34.17
1	RSU awards under the RSUP (see Section 7 – “Compensation Discussion & Analysis” for details). Under this plan, 100% of the granted units will vest in May 2022, subject to the participant’s continued employment with CAE. Vested RSUs will be paid based on the average Common Share price on the TSX during the 20 trading days preceding the final vesting date of the grant.
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2	PSU awards under the PSUP (see Section 7 – “Compensation Discussion & Analysis” for details). Under this plan, the granted units may vest in May 2022, subject to CAE’s EPS performance and the EPS payout grid approved by the HRC and the participant’s continued employment with CAE. Depending on the EPS performance each year during the performance period, the target rate of granted units will be multiplied by a factor ranging from 0% to 200%. Vested PSUs will be paid based on the average Share price on the TSX during the 20 trading days preceding the final vesting date of the grant.
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3	Stock options awards under the ESOP (see Section 7 – “Compensation Discussion & Analysis” for details). Under this plan options are granted with an exercise price equal to the weighted average price per Common Share on the TSX on the five trading days immediately preceding the grant date (if the grant date falls within a blackout period or within five trading days following the end of the blackout period, the date of grant shall be presumed to be the sixth trading day following the end of such blackout period). At each of the first four anniversaries of the grant, 25% of the award vests and becomes exercisable.
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4	The grant price on grant date is equal to the weighted average price of the Common Shares on the TSX on the five trading days immediately preceding the grant date, (if the grant date falls within a blackout period or within five trading days following the end of the blackout period, the date of grant shall be presumed to be the sixth trading day following the end of such blackout period).
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Outstanding Share-based awards and option-based awards

The following table details the outstanding awards under the CAE’s Share and option-based plans for the NEOs.

			Option-Based Awards			Share-Based Awards<br><br><br><br>Market or Payout
Name	Number of<br><br>Securities<br><br>Underlying<br><br>Unexercised<br><br>Options	Option<br><br>Exercise<br><br>Price^1^	Option Expiration Date	Value of<br><br>Unexercised<br><br>In-the-Money<br><br>Options^2^	Number of Shares or Units of Shares that have not Vested^3^	Market or Payout value<br><br>of Share-<br><br>based Awards<br><br>that have not<br><br>Vested^4^	Value of Vested<br><br>Share-Based<br><br>Awards not<br><br>Paid Out or<br><br>Distributed^5^
	#	$		$	#	$	$
M. Parent	253,500<br><br>343,000<br><br>408,000<br><br>418,000<br><br>146,400	34.17<br><br>27.14<br><br>22.17<br><br>16.15<br><br>15.14	05/29/2026<br><br>06/05/2025<br><br>06/08/2024<br><br>05/30/2023<br><br>05/28/2022	0<br><br>0<br><br>0<br><br>685,520<br><br>387,960
Total				1,073,480	283,500	6,361,330	4,893,958
S. Branco	74,200<br><br>66,750<br><br>40,550<br><br>11,250	34.17<br><br>27.14<br><br>22.17<br><br>16.15	05/29/2026<br><br>06/05/2025<br><br>06/08/2024<br><br>05/30/2023	0<br><br>0<br><br>0<br><br>18,450
Total				18,450	69,930	1,506,012	330,287
G. Colabatistto^6^	92,600<br><br><br><br>143,400<br><br><br><br>170,100<br><br><br><br>126,600	34.17<br><br><br><br>27.14<br><br><br><br>22.17<br><br><br><br>16.15	06/29/2020 – 06/29/2023<br><br>07/05/2020 – 06/05/2025<br><br>07/09/2020 – 06/08/2024<br><br>06/30/2020 – <br>05/30/2023	0<br><br><br><br>0<br><br><br><br>0<br><br><br><br>207,624
Total				207,624	113,860	2,575,014	1,047,902
N. Leontidis	75,800<br><br>115,000<br><br>136,800<br><br>27,300	34.17<br><br>27.14<br><br>22.17<br><br>16.15	05/29/2026<br><br>06/05/2025<br><br>06/08/2024<br><br>05/30/2023	0<br><br>0<br><br>0<br><br>44,772
Total				44,772	91,940	2,077,374	3,989,313
R. Ranganathan	59,500	34.17	05/29/2026	0
Total				0	14,580	259,378	Nil
M. Hounsell	35,900<br><br>55,000<br><br>63,000<br><br>13,375<br><br>22,500	34.17<br><br>27.14<br><br>22.17<br><br>16.15<br><br>15.00	05/29/2026<br><br>06/05/2025<br><br>06/08/2024<br><br>05/30/2023<br><br>03/15/2023	0<br><br>0<br><br>0<br><br>21,935<br><br>62,775
Total				84,710	43,210	972,152	171,015
1	Pursuant to the terms of the plan, options under the ESOP were granted with an exercise price equal to the weighted average price of the Common Shares on the TSX on the five trading days immediately preceding the grant date (if the grant date falls within a blackout period or within five trading days following the end of a blackout period, the date of grant shall be presumed to be the sixth trading day following the end of such blackout period).
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2	Options are in-the-money if the market value of the Common Shares covered by the options is greater than the option exercise price. The value shown is equal to the excess, if any, of the Common Share closing price on the TSX on March 31, 2020 ($17.79) over the option’s exercise price. The actual value realized will be based on the actual in-the-money value upon exercise of the options, if any. The options vest at 25% per year commencing one year after the grant date.
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3	Represents the aggregate number of units that have not met all performance or employment conditions for payment.
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4	Payout value is established based on the expected payout as per the performance targets achieved as of March 31, 2020 for PSUs and based on the Common Share closing price on March 31, 2020 ($17.79) for LTUs, and for RSUs and PSUs payable in June 2020, June 2021 and May 2022.
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5	Represents the portion of units under the LTUP that are vested at the end of the fiscal year and the units under the Executive DSUP and for which payment is deferred to the termination of employment.
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6	Following his retirement, Mr. Colabatistto may exercise vested options up to their expiry date and unvested options continue to vest and must be exercised within 30 days following their vesting date.
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Incentive plan awards – value vested or earned during the year

The following table shows the value that was vested or earned, as well as the gain earned from options exercised, by the Named Executive Officers during FY2020 in respect of incentive plans.

Name	Option-Based Awards-Value<br><br>Vested<br><br>During the Year^1^	Number of Options Exercised<br><br>During the<br><br>Year	Gain on Exercise<br><br>During the<br><br>Year	Share-based Awards-Value<br><br>Vested<br><br>During the Year^2^	Non-Equity Incentive Plan<br><br>Compensation-Value Earned During the Year^3^
	$	#	$	$	$
M. Parent	5,409,358	189,000	3,854,252	7,381,670	1,684,700
S. Branco	682,244	94,550	1,239,874	794,226	591,675
G. Colabatistto	1,836,972	175,100	3,518,721	2,235,794	547,854
N. Leontidis	1,560,966	104,025	1,891,676	1,928,225	604,390
R. Ranganathan	–	–	–	–	252,103
M. Hounsell	709,540	62,625	1,220,061	943,411	308,038
1	This represents the value of potential gains from options that vested during FY2020. These generally include the portion of the options that were awarded in the last four fiscal years that vested in the year. The potential gains are calculated as the excess, if any, of the closing price of Common Shares on the TSX on each of the option vesting dates in FY2020 over the exercise price. The actual value realized, if any, will differ and will be based on the Common Share price on the actual exercise date.
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2	The value of Share units that vested during FY2020 include: (i) the PSUs that vested on May 31, 2019 based on the average closing price of Common Shares on the 20 trading days preceding the vesting date on May 31, 2019, specifically $6,151,392 for Mr. Parent, $661,800 for Ms. Branco, $1,863,162 for Mr. Colabatistto, $1,606,854 for Mr. Leontidis and $786,011 for Mr. Hounsell, Mrs. Ranganathan did not benefit from this grant; (ii) the RSUs that vested on May 31, 2019 based on the average closing price of Common Shares on the 20 trading days preceding the vesting date on May 31, 2019, specifically $1,230,278 for Mr. Parent, $132,426 for Ms. Branco, $372,632 for Mr. Colabatistto, $321,371 for Mr. Leontidis and $157,399 for Mr. Hounsell. Mrs. Ranganathan did not benefit from this grant. None of the other PSUs or RSUs have vested as of March 31, 2020.
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3	This represents the value paid to the NEOs under the short-term incentive plan for FY2020 year (see Section 7 – “Short-Term Incentive Plan – Corporate and Individual performance” for details).
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Pension Arrangements

The NEOs and key executives are members of the contributory Designated Pension Plan registered in Canada and the non-contributory Supplementary Pension Plan. The amounts payable under these arrangements are based on “average annual earnings” which are calculated on the basis of the 60 highest-paid consecutive months of base salary and STIP payouts.

The Supplementary Pension Plan provides a pension benefit upon normal retirement at age 65 so that the pensions payable under CAE’s pension arrangements will result in an annual pension equal to 2% of average annual earnings (being the five-year top average salary and actual short-term incentive compensation for NEOs other than the President and CEO for each year of pensionable service). The President and CEO’s short-term incentive compensation used for the purpose of determining his average pensionable annual earnings is the target bonus. His maximum annual pension benefit is limited to $1,050,000. Executives may retire from the Company from age 60 with full pension entitlement. An executive is considered as having retired for the purposes of the Supplementary Pension Plan if, at the time of termination of employment with CAE, he/she is at least age 55 with a minimum of 5 years of participation in the Supplementary Pension Plan. The annual pension benefit will be reduced by between 0.5% and 0.25% per month prior to NEO’s normal retirement age depending on the age of the NEO at time of retirement.

Pensions payable under the Supplementary Pension Plan are paid directly by CAE. In Canada, CAE is obligated to fund or provide security to ensure payments under the Supplementary Pension Plan upon retirement of the executive. CAE has elected to provide security by obtaining letters of credit for a trust fund established for those executives who have retired. CAE has secured certain NEO’s and key executives’ pension benefits by a letter of credit for a trust fund established for the executives.

• Pensions payable under the Supplementary Pension Plan are conditional upon compliance with non-competition and non-solicitation clauses. • No extra years of service are generally granted under the pension plans.

CAE does not generally grant extra years of credited service under its pension plans. Receipt of pension benefits under the Supplementary Pension Plan is conditional upon the compliance with non-competition and non-solicitation clauses.

The following table sets forth the credited years of pensionable service and the present value of the NEOs’ accumulated benefits as at March 31, 2020 under the Designated Pension Plan and the Supplementary Pension Plans in connection with retirement.

	Annual Benefits Payable
Name	Number of<br><br>years of<br><br>credited<br><br>service	At March 31,<br><br>2020	At age<br><br>65	Accrued<br><br>obligation at<br><br>start of the<br><br>year	Compensatory<br><br>change^1^	Non-<br><br>compensatory<br><br>change^2^	Accrued<br><br>obligation at<br><br>year-end^3^
	#	$	$	$	$	$	$
M. Parent	15.17	564,000	860,000	10,360,000	308,000	(519,000)	10,149,000
S. Branco	11.25	121,000	500,000	2,532,000	406,000	(409,000)	2,529,000
G. Colabatistto^4,5^	7.58	165,000	n.a.	3,030,000	506,000	(496,000)	3,040,000
N. Leontidis	20.00	353,000	464,000	6,320,000	622,000	(384,000)	6,558,000
R. Ranganathan^4^	1.00	11,000	288,000	–	296,000	(37,000)	259,000
M. Hounsell	4.17	56,000	240,000	770,000	203,000	(103,000)	870,000
1	The change in benefit obligation that is compensatory includes the service cost and the increase in earnings in excess or below what was assumed. The service cost is the estimated value of the benefits accrued during the calendar year.
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2	The change in benefit obligation that is not compensatory includes interest cost, change in assumptions, and gains and losses other than for a difference in earnings and the decrease in the discount rate used to value the pension plans which increases the accrued obligation.
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3	The present values of the accumulated benefits reported in the above table are calculated in accordance with the assumptions used for financial reporting purposes. See Note 14 to CAE’s consolidated financial statements for the fiscal year ended March 31, 2020. The total present value of accumulated benefits in our financial statements is calculated in accordance with IFRS.
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4	Mr. Colabatistto’s and Mrs. Ranganathan’s pension are payable in US dollars converted to Canadian dollars using a conversation rate of $1.33 as of March 31, 2020.
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5	Mr. Colabatistto retired on January 1, 2020 and receives an annual pension of: $89,597 US from the US DB SERP, $37,134 from the Canadian SERP and $12,279 from the registered plan.
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For additional information about the Designated Pension Plan and the Supplementary Pension Plan, see Section 7 – “Executive Compensation – Termination and Change of Control Benefits” below.

Termination and Change of Control Benefits

Payment entitlements upon termination

The various compensation plans applicable to the NEOs also contain different provisions that apply upon termination of employment or change of control of CAE. CAE does not have a formal policy for providing severance payment in the case of termination of employment but may provide severance payments and benefits as required by law.

CAE has nevertheless entered into employment agreements with Messrs. Parent, Mrs. Ranganathan and Mr. Hounsell that provide for the payment of severance amounts and certain other benefits in the event of involuntary termination other than for cause. Mr. Parent’s severance entitlement on termination of employment other than for cause is two years’ salary plus target bonus, benefits and expenses. Mr. Parent would also be entitled to two years of service credited to the Supplemental Pension Plan. Mrs. Ranganathan’s severance entitlement on termination of employment other than for cause is 12 months’ salary. Mr. Hounsell’s severance entitlement on termination of employment other than for cause is 14 months’ salary plus target bonus.

CAE is also party to agreements with all its executive officers who are NEOs, pursuant to which such executives are entitled to termination of employment benefits following a change of control of CAE where the executive’s employment is expressly or implicitly (constructive dismissal) terminated without cause within two years following the change of control. In such event, the executive is entitled to 24 months of annual compensation (salary, short-term incentive and employee benefits, payable as a lump sum), 24 months of credited service and the immediate vesting of supplementary credited service for the purposes of any pension or retirement income plans, payment of long-term incentive Deferred Share Units, and vesting of all unvested stock options, RSUs and PSUs, as per plan provisions.

The following is a summary of compensation that the NEOs are entitled to receive upon the occurrence of specific events of termination.

Compensation<br><br>Programs	Resignation and Termination<br><br>for Cause	Involuntary<br><br>Termination	Retirement	Change of Control^1^
Annual Short-Term Incentive	Forfeit	Partial payment based on performance and time in position	Partial payment based on performance and time in position	Two times the greater of average three-year bonus or target bonus in case of termination^2^
Stock Options	Resignation: 30 days to exercise vested options<br><br>Termination for cause: All options are cancelled	30 days to exercise vested options	Exercise vested options up to expiry date; unvested options continue to vest and must be exercised within 30 days following vesting date	All options become vested, as per plan provisions
Performance Share Units	All units are forfeited	PSUs granted as of FY2017: units partially vest at a rate of 1/6, 1/3 and 1/2 for each full year of employment completed since the grant date	All units will be paid out as scheduled subject to performance criteria	Unvested units vest at the greater of 100% or the multiplier resulting from the actual EPS performance as of the Change of Control date; all vested units become payable at the closing price of CAE Shares on the TSX on such date, as per plan provisions
Restricted Share Units	All units are forfeited	Units partially vest at a rate of 1/3 for each full year of employment completed since the grant date	All units will be paid out as scheduled	Unvested units vest as of the Change of Control date; all vested units become payable at the closing price of CAE Shares on the TSX on such date, as per plan provisions
Deferred Share Units Grants from 04/2004	Vested units are paid out	Vested units are paid out	All units become vested	All units become vested
Supplemental Pension Plan (SPP)	Resignation: If five or more years of participation in the SPP, accrued deferred pension at age 65 Termination for cause: No benefits payable from the SPP	If five or more years of participation in the SPP, accrued deferred pension benefits at age 65	If age 55 or older with a minimum of five years of participation in SPP, immediate monthly pension payable	Immediate vesting and two years of additional service in case of termination^2^
Severance payments	–	Severance amount^3^ in case of termination	–	Severance amount^4^ in case of termination^2^
1	Change of control is defined in the Change of Control Agreements between CAE and each Named Executive Officer. A change of control may be triggered by a number of events, notably an acquisition by a person of 20% of CAE’s voting rights which is accompanied by a change in the composition of the Board, an acquisition by a person of 35% of CAE’s voting rights or an acquisition of Shares representing half the equity of CAE. Compensation programs have various definitions of change of control events with different impacts on compensation. The provisions illustrated in the above table are for specific events that would provide the maximum benefits to the executives.
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2	Pursuant to the Change of Control Agreements between CAE and each NEOs, termination is defined as an involuntary termination that occurs within the first two years following the change of control.
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3	In the event of involuntary termination when severance is payable, it will be determined at the time of termination, taking into consideration the appropriate factors and current state of legislation and jurisprudence. Mr. Parent’s severance entitlement on termination of employment other than for cause is two years’ salary plus target bonus, benefits and expenses. Mr. Parent would also be entitled to two years of service credited to the Supplemental Pension Plan. Mrs. Ranganathan’s severance entitlement on termination of employment other than for cause is 12 months’ salary. Mr. Hounsell’s severance entitlement on termination of employment other than for cause is 14 months’ salary plus target bonus. The severance amount is undetermined for other NEOs.
---	---
4	The severance amount is equal to two times the sum of base salary, target bonus (or actual bonus averaged over the last three years, if greater), and the sum of the value of employee benefits and perquisites provided to the executive.
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In the event of death during active employment with CAE, the executive is deemed to have retired the day before his/her death if he/she was at least age 55, otherwise, he/she is deemed to have terminated his/her employment the day before his/her death.

Amounts payable to NEOs upon specified termination events

The following table sets forth estimates of the amounts payable to the NEOs upon specified events, assuming that each such event took place on March 31, 2020. The table does not quantify benefits under plans that are generally available to salaried employees and do not discriminate in favour of executive officers, including the Retirement Plan for Employees of CAE Inc. and Associated Companies, the ordinary DSU plan and the Employee Stock Purchase Plan. In addition, the table does not include the value of outstanding equity awards that have previously vested, such as stock options and DSUs/ LTUs, which are set forth above in Section 7 – “Executive Compensation – Incentive Plan Awards”. For descriptions of the compensation plans and agreements that provide for the payments set forth in the following table, including our change in control agreements, see Section 7 – “Executive Compensation – Termination and Change of Control Benefits”.

	M. Parent	S. Branco	N. Leontidis	R. Ranganathan	M. Hounsell
	$	$	$	$	$
Involuntary Termination
Salary/Severance^1^	4,285,600	Undetermined	Undetermined	551,950	742,303
LTUs	–	–	–	–	–
Options	–	–	–	–	–
RSUs^2^	701,043	152,047	234,996	–	109,525
PSUs^2^	2,175,471	456,177	729,249	–	338,168
Supplementary Plan	1,391,000	–	–	–	–
Total	8,553,114	608,224	964,245	551,950	1,189,996
Retirement	Eligible	Not eligible	Eligible	Not eligible	Not eligible
LTUs	–	–	–	–	–
RSUs	–	–	–	–	–
PSUs	–	–	–	–	–
Options	–	–	–	–	–
Supplementary Plan	–	–	–	–	–
Total	–	–	–	–	–
Termination Following Change in Control
Salary/Severance^3^	5,636,733	2,135,879	2,259,478	1,701,206	1,574,140
LTUs^4^	–	–	–	–	–
Options^5^	171,380	18,450	44,772	–	21,935
RSUs^6^	1,440,990	355,622	467,343	119,905	219,707
PSUs^6^	4,332,683	1,039,407	1,413,045	139,474	662,298
Supplementary Plan^7^	1,391,000	194,000	631,000	275,000	767,000
Total	12,972,786	3,743,358	4,815,638	2,235,585	3,245,080
1	In the event of involuntary termination when severance is payable, it will be determined at the time of termination, taking into consideration the appropriate factors and current state of legislation and jurisprudence. Mr. Parent’s severance entitlement on termination of employment other than for cause is two years’ salary plus target bonus, benefits and expenses. Mr. Parent would also be entitled to two years of service credited to the Supplemental Pension Plan. Mrs. Ranganathan’s severance was converted into Canadian dollars using an exchange rate of $1.33. Mr. Hounsell’s severance entitlement on termination of employment other than for cause is 14 months’ salary plus target bonus and Mrs. Ranganathan is 12 months’ salary.
---	---
2	The time-RSU and the PSU values have been established by multiplying the number of units that would have vested upon involuntary termination as of March 31, 2020, based on performance during completed years, where applicable, and using the average fair market value of Common Shares on the TSX during the 20 trading days preceding the vesting date of $24.16. Note that actual value will would differ.
---	---
3	Severance as per the Change of Control Agreements for each NEO.
---	---
4	The LTU value has been calculated by multiplying the number of units that would have vested upon a change of control as of March 31, 2020, and which will be redeemable within the year following the year the executive’s employment is terminated. As of March 31, 2020, all LTUs had already vested.
---	---
5	Option value has been calculated by multiplying the number of options that would have vested upon a change of control as of March 31, 2020 using a closing price of Common Shares of $17.79 on March 31, 2020, less the applicable option exercise price. Note that actual value will differ.
---	---
6	RSU and PSU value has been established by multiplying the number of units that would have vested upon a change of control as of March 31, 2020 using a closing price of Common Shares on the TSX of $17.79 on March 31, 2020. Note that actual value will differ.
---	---
7	The Supplementary Pension Plan benefits set forth for each NEO reflect the incremental value of benefits for each termination event that exceeds the present value of benefits set forth in the “Pension Benefits” tables above.
---	---

Section 8

Other Important Information

The management of CAE is aware of no business to be presented for action by the Shareholders at the Meeting other than that mentioned herein or in the Notice of Meeting.

Interest of informed persons in material transactions

No informed person (including any Director or executive officer) of CAE, any proposed Director of CAE, or any associate or affiliate of any informed person or proposed Director, had any material interest, direct or indirect, in any transaction since the commencement of CAE’s most recently completed financial year or in any proposed transaction which has materially affected or would materially affect CAE or any of its subsidiaries.

Indebtedness of Directors and executive officers

CAE does not offer its Directors or executive officers loans. CAE and its subsidiaries have not given any guarantee, support agreement, letter of credit or similar arrangement or understanding to any other entity in connection with indebtedness of CAE’s Directors or executive officers.

Shareholder proposals

To propose any matter for a vote by the Shareholders at an annual meeting of CAE, a Shareholder must send a proposal to the General Counsel, Chief Compliance Officer and Corporate Secretary at CAE’s office at 8585 Côte-de-Liesse, Saint-Laurent, Québec H4T 1G6 at least 90 days before the anniversary date of the notice for the previous year’s annual meeting, or within such other timeframe as prescribed by the applicable legislation. As at the date of the Circular, CAE expects the deadline for receiving Shareholder proposals for CAE’s 2021 annual meeting to be March 18, 2021. CAE may omit any proposal from its Proxy Circular and annual meeting for a number of reasons under applicable Canadian corporate law, including receipt of the proposal by CAE subsequent to the deadline noted above.

Request additional information

CAE shall provide to any person or company, upon written request to the General Counsel, Chief Compliance Officer and Corporate Secretary of CAE at CAE Inc., 8585 Côte-de-Liesse, Saint-Laurent, Québec, H4T 1G6, telephone number 514-734-5779 and facsimile number 514-340-5530:

1.	one copy of the latest Annual Information Form of CAE together with one copy of any document or the pertinent pages of any document incorporated by reference therein;
2.	one copy of the 2020 Annual Financial Report containing comparative financial statements of CAE for FY2020, together with the Auditors’ Report thereon and Management’s Discussion and Analysis; and
---	---
3.	one copy of this Circular.
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All such documents may also be accessed on CAE’s website (www.cae.com). Additional financial information is provided in CAE’s comparative financial statements and Management’s Discussion and Analysis available on SEDAR at www.sedar.com for the most recently completed financial year.

The contents of this Circular have been approved by the Board of Directors of CAE.

Mark Hounsell (signed) General Counsel, Chief Compliance Officer and Corporate Secretary

Montréal, Québec June 16, 2020

Section 9

Appendix A – Board of Directors’ Charter

CAE INC.

(“CAE” or the “Company”)

BOARD OF DIRECTORS’ MANDATE

RESPONSIBILITIES

CAE’s President and Chief Executive Officer and the Company’s other executive officers are responsible for the management of the Company. The Board of Directors (the “Board”) is responsible for the stewardship of the Company and for monitoring the actions of, and providing overall guidance and direction to management. The Board shall act in the best interest of the Company.

COMMITTEES

The Board may establish committees, as it deems necessary or desirable, to assist it in the fulfillment of its duties and responsibilities, with such terms of reference as the Board may determine, and may delegate from time to time to such committees or other persons any of the Board’s responsibilities that may be lawfully delegated. As such, the Board currently maintains an Audit Committee, a Human Resources Committee and a Governance Committee. Each committee is comprised entirely of independent directors, as determined by the Board in light of securities laws and applicable exchange rules, and each member of a committee is appointed by the Board after thorough review of the requirements for membership on each such committee. The independent directors will periodically, as they see fit, hold meetings without management.

STRATEGY

The Board will maintain a strategic planning process and annually approve a strategic plan that considers, among other things, the opportunities and principal risks of the Company’s business. The Board also supervises management in the implementation of appropriate risk management systems. Separately from the strategic plan, the Board also approves an annual budget for financial performance.

CORPORATE GOVERNANCE

Corporate governance issues are the responsibility of the full Board. This includes the disclosure thereof in the Company’s Annual Activity and Corporate Social Responsibility report and Management Proxy Circular.

The Board periodically reviews a Disclosure Policy for the Company that, inter alia, addresses how the Company shall interact with shareholders, analysts and other stakeholders and covers the accurate and timely communication of all important information. The Company communicates with its stakeholders through a number of channels including its website, and they in turn can provide feedback to the Company in a number of ways, including e-mail.

The Board, through its Governance Committee, regularly reviews reports on compliance with the Company’s Code of Business Conduct and ethical practices. It periodically reviews Company policies with respect to decisions and other matters requiring Board approval.

AUDIT, FINANCE AND RISK MANAGEMENT

The Board, directly and through the Audit Committee, oversees:

(i)	the integrity and quality of the Company’s financial reporting and the effectiveness of internal controls and the Company’s risk management processes;
(ii)	the Company’s compliance with legal and regulatory requirements;
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(iii)	the qualifications and independence of the Company’s external auditors;
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(iv)	the performance of the Company’s internal accounting function and external auditors; and
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(v)	the adequacy of the Company’s material public documents prior to their release.
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SUCCESSION PLANNING

The Board, with the help of the Human Resources Committee, ensures a succession plan is in place for the President and Chief Executive Officer and for other senior employees of the Company and monitors such plan.

OVERSIGHT AND COMPENSATION OF MANAGEMENT

The Board considers recommendations of the Human Resources Committee with respect to:

(i)	the appointment and compensation of senior officers of the Company at the level of Vice President and above;
(ii)	the implementation of processes for the recruitment, training, development and retention of senior employees who exhibit the highest standards of integrity and competence and any recommendation for improvement of the processes in place to develop high potential individuals, such as the Annual Leadership Development Process;
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(iii)	the compensation philosophy for the Company generally;
---	---
(iv)	the adoption of any incentive compensation and equity-based plans, including stock option, stock purchase, deferred share unit, restricted share unit or other similar plans, in which employees are or may be eligible to participate; and
---	---
(v)	the Company’s retirement policies and special cases.
---	---

The Board communicates to the President and Chief Executive Officer and periodically reviews the Board’s expectations regarding management’s performance and conduct of the affairs of the Company. The Board also periodically reviews the President and Chief Executive Officer’s position description and objectives and his performance against these objectives. Each year, after a performance evaluation, the Board approves, with the recommendation of the Human Resources Committee, the President and Chief Executive Officer’s compensation.

HEALTH, SAFETY, ENVIRONMENT AND CORPORATE SOCIAL RESPONSIBILITY MATTERS

The Board ensures, through reasonable measures, that the Company has appropriate health, safety and environment policies and procedures and reviews any material issues relating to such matters and management’s response thereto.

The Board reviews trends in corporate disclosure of non-financial performance and reviews the Company’s corporate social responsibility strategy and reporting.

DIRECTORS’ QUALIFICATIONS, COMPENSATION, EDUCATION AND ORIENTATION

The Board, through the Governance Committee, develops a process to determine, in light of the opportunities and risks facing the Company, what competencies, skills and personal qualities are required for new directors in order to add value to the Company while ensuring that the Board is constituted of a majority of individuals who are independent. With regards to Board composition, the Board ensures adherence to the term limits imposed on all directors and considers criteria that promote diversity, including but not limited to gender, international background, nationality, age and industry knowledge, in light of the Company’s Policy Regarding Board and Executive Officer Diversity.

The Board, through the Governance Committee, develops a program for the orientation and education of new directors, and ensures that prospective candidates for Board membership understand the role of the Board and its committees, the nature and operation of the Company’s business, and the contributions that individual directors are expected to make, and develops a program of continuing education if needed for directors.

The Board considers recommendations of the Governance Committee with respect to the level and forms of compensation for directors, which compensation shall reflect the responsibilities and risks involved in being a director of the Company.

ASSESSMENT OF BOARD AND COMMITTEE EFFECTIVENESS

The Board considers recommendations of the Governance Committee for the development and monitoring of processes for assessing the effectiveness of the Board, the committees of the Board, the committees’ chairs, the Chair of the Board and the contribution of individual directors, which assessments shall be made annually. These results are assessed by the Chair of the Board and/or the Chair of the Governance Committee and are reported to the full Board, which decides on actions deemed necessary, if any. The Board ensures that the number of directors and the composition of the Board permit the Board to operate in a prudent and efficient manner.

PENSION PLANS

The Board is responsible for overseeing the management of the Company’s pension plans and does this through its Human Resources Committee.

OUTSIDE ADVISORS

Directors may hire outside advisors at the Company’s expense, subject to the approval of the Chair of the Board, and have access to the advice and services of the Company’s Corporate Secretary, who is also the General Counsel and Chief Compliance Officer.

Last updated – November 13, 2019

FY20 Annual report

Fiscal year ended March 31, 2020 �� CAE Financial Report Financial Report Fiscal year ended March 31, 2020 cae.com

Training partner of choice. CAE is a global leader in training for the civil aviation, defence and security, and healthcare markets. Backed by a record of more than 70 years of industry firsts, we continue to help define global training standards with our innovative virtual-to-live training solutions to make flying safer, maintain defence force readiness and enhance patient safety. We have the broadest global presence in the industry, with over 10,500 employees, 160 sites and training locations in over 35 countries. Each year, we train more than 220,000 civil and defence crewmembers, including more than 135,000 pilots, and thousands of healthcare professionals worldwide. cae.com Follow us on Twitter @CAE_Inc. Check out our Annual Activity and Corporate Social Responsibility Report! Our Annual Activity and Corporate Social Responsibility Report is available online. It consolidates information on our company strategy, fiscal year 2020 performance and corporate social responsibility (CSR) into one document. Integrating our reporting in this way enables us to provide stakeholders with a single source of information in key areas. It also signals that CSR is inseparable from our core business strategy and activities. cae.com/social-responsibility/ As an eTree member, CAE Inc. is committed to meeting shareholder needs Contains FSC® certified post-consumer and 70% virgin fibre while being environmentally friendly. For each shareholder that receives Certified EcoLogo and FSC® Mix electronic copies of shareholder communications, CAE will plant a tree through Tree Canada, the leader in Canadian urban reforestation. To date Manufactured using biogas energy CAE has helped plant 5,271 trees.

Message from the Chair of the Board During this fiscal year, the world and global economy have been disrupted in a way that no one had anticipated. I certainly did not foresee a global pandemic as the lead to my second message to CAE shareholders. COVID-19 has created unprecedented uncertainty and has had a significant impact on CAE’s business units, on our employees and on our customers. COVID-19 measures and actions Corporate Social Responsibility CAE’s foremost priority – ensuring the health and safety of our CAE is committed to creating a positive societal impact everywhere employees and customers – became even more crucial in the we operate. �he company�s mission to make civil aviation safer, help COVID-19 pandemic. CAE’s leadership acted swiftly to implement the defence forces return home safely and make healthcare safer is highest recommended precautions and protocols, while also working rooted in the principles of corporate social responsibility (CSR). We to minimize disruptions in service to customers and protecting continuously deepen and strengthen our CSR commitments through C�E�s financial position. �he company took several immediate and concrete actions on several fronts, notably with the commitment to appropriate temporary measures to preserve li�uidity and cash flow, become carbon neutral in summer 2020. including strict cost containment measures, salary freezes, salary In recognition of this strategic imperative, while it has always been reductions, reduced work weeks, layo�s, and the suspension of C�E�s part of how CAE governs and operates, the Board has decided common share dividend and share repurchase plan. to make this more e�plicit by adding CS� o�cially to its charter. Making the world a safer place is at the core of CAE’s mission, and Oversight has been delegated to the Governance Committee, which the �oard applauds C�E�s company-wide e�orts to do its part in recently received its first o�cial report on CS� from �anagement. the fight against C��-��. �n a very short time, C�E designed a �s �oard Chair, � can confirm that having this visibility at the �oard ventilator prototype to provide life support to patients in intensive level is significant. care. �he C�E �ir� ventilator is in the final stages of certification, with CAE is also making major changes in its CSR reporting that delivery of 10,000 units to the Canadian government expected to incorporate best practices and respond to stakeholder requests, follow. CAE Healthcare rose to the challenge of new training needed, including the addition of �ask Force on Climate-related Financial created complimentary COVID-19 training seminars for healthcare �isclosures ��CF�� recommendations. �CF� reporting focuses on the professionals and also launched simulation-based training solutions. environment and stakeholder visibility, and is highly regarded by the �he company recogni�ed that its global supply chain was another financial community. �he �CF� inde� complements C�E�s disclosure resource at its disposal in the fight against C��-��, and used it on environmental matters through the Carbon Disclosure Project. to secure some 600,000 N95 masks, which were delivered to the Governments of Quebec and Manitoba to support health workers Board renewal battling the front lines of this pandemic. At the Board level, gender diversity and renewal of the Board composition remain key elements to CAE’s ability to sustain success. Our prior goal of attracting experienced women from diverse backgrounds to represent at least 30% of Board members by 2022 has been extended to include parallel representation in 30% of CAE’s e�ecutive o�cers. I would like to extend a warm welcome to General David G. Perkins, USA (Ret.), who has joined CAE’s Board. David served over 40 years in the U.S. Army, culminating as the Commander of the United States �rmy �raining and �octrine Command � one of the largest and most complex organizations in the world. He is an excellent addition to our �oard and will o�er invaluable strategic counsel. In closing, on behalf of myself and the entire Board, we would like congratulate CAE’s leadership and employees for their responsiveness, adaptability, compassion and resilience through challenging times. It is an honour to chair an iconic company like CAE, which has such great purpose and social impact. I have every confidence in the Company�s ability to navigate through the current challenges and to continue to prosper over the long term. The Honourable John Manley, P.C., O.C. Chair of the Board

Message to shareholders Average CAE stock price and revenues2 additional airline training outsourcings and �� full-flight simulator sales. Civil finished the year with a record backlog1 of $5.3 billion. Once again, we delivered more than one million hours of training this Unprecedented times underscore year, underscoring CAE’s position as the largest Civil aviation training company in the world. our agility and culture of innovation Our performance would have been even better, but as the pandemic set in, Civil e�perienced a significant decrease in training services demand following the sharp downdraft in airline and business We were leading CAE on a course towards what would have been certifying and shipping ventilators within the span of only three aircraft operations globally, and the resulting severe disruption to the yet another record year when the COVID-19 pandemic impacted us months. Today, some 500 CAE employees are working together to global air transportation environment. In addition to the downspike during what is normally our strongest �uarter of the year. �ur first deliver on a contract with the Government of Canada to manufacture in demand, travel restrictions and local self-isolation measures response was to take decisive action to protect the health and safety �0,000�ventilators to help save lives and relieve the strain on hospitals worldwide resulted in several Civil aviation training location closures. of our employees and customers — and this continues to be our around Canada. Such an accomplishment speaks volumes about who �eyond significant disruptions to our global training network, we had foremost priority. we are. CAE performance vs TSX to suspend the installation and delivery of Civil simulator products, We immediately assembled a daily COVID-19 pandemic taskforce As a world expert in the business of safety, applying speed-to-market, and under local public directives, our Montreal manufacturing plant and set our business continuity plans into motion. I am exceptionally teamwork and innovative capabilities for humanitarian needs outside paused manufacturing of Civil simulators during the last week of proud of how our CAE employees responded worldwide. Throughout of our core expertise stands as testimony to what we are capable of March. Despite these challenges, we still delivered an otherwise the past few months of this pandemic, amid lockdown, closed borders when presented with an urgent, novel requirement. I could not be impressive ��Civil full-flight simulators for the year. and many other complex challenges, our employees have taken prouder of our employees’ response in this time of crisis – not only Defence and Security initiative and ownership finding ways to ensure the continuity of our for the engineers who worked tirelessly to produce a high quality, customers’ most critical operations, and thus ensure we continue to certifiable design for the ventilator, for the resourcefulness of our In Defence and Security, we reported modest revenue growth as the earn the privilege of being our customers’ training partner of choice. supply chain team finding scarce but crucial parts, but also for our division, too, was impacted by the pandemic. We came up short on many employees who volunteered to help build ventilators so more our outlook for operating income growth, which was down 13%1, We could not stand idly by while fellow citizens of the world infected could be delivered to the hospitals sooner. Excellence, innovativeness, mainly on lower than expected progress on program milestones, and by COVID-19 struggled even to breathe, while hospitals became customer delight, compassion, speed, teamwork – these are all qualities delays in securing new orders. A range of programs with defence and overwhelmed, confronted by dire shortages of critical medical evident in a company built for the long term. We demonstrated OEM customers encountered project advancement delays principally safety equipment, especially ventilators and personal protective 1 1 these this year. So while we indeed fell short of this year�s financial $3.8 billion annual order intake and $9.5 billion order backlog also due to travel bans, client access restrictions and supply chain equipment. We felt it was our responsibility to expand the aperture potential due to COVID-19, the pandemic and the myriad of novel help bolster our position for the period ahead. disruptions. In addition, we experienced delays to contract awards, of our thinking and find ways to apply C�E�s strengths of innovation business complexities that ensued taught us more about who we as government acquisition authorities followed directives in their and speed in a meaningful way to the hospitals and front line health But perspective gets richer when one looks farther out; one year are, what we are capable of and we look back on this past year with respective countries to shelter-in-place and eliminate travel. In the workers fighting to save lives. does not convey the full story. We have been building revenue, a proud sense of achievement. Earnings Per Share (EPS) and backlog steadily year upon year with �iddle East, combined e�ects of the pandemic and lower oil prices Our employees challenged themselves to use their engineering resulted in work on certain programs to be halted and new contract A company built for the long term an expectation to deliver consistency, reliability and excellence. CAE and scientific skills to design a critical care ventilator. �t tooka has outperformed the �oronto Stock E�change ��S�� in five of the last awards to be materially delayed, as our customers confronted their team of �2� C�E engineers and scientists from our civil, defence Every industry experiences rolls, pitches and yaws and the last several si� fiscal years, even with C��-�� and in the last �� years, C�E stock new fiscal realities and ways to mitigate the pandemic. �espite these 1 and healthcare business units �ust �� days to develop a working months and most probably, the year ahead will not be steady. But is up 200% vs. the �S��s 70%�move. So clearly, while some years will headwinds, we booked $1.2 billion of order intake during the year, 1 prototype. �e received �ealth Canada certification in �une, which CAE is not only 73 years old, more crucially, its core high technology have volatility, including managing through a global pandemic, when for a $4.1 billion Defence backlog , which gives CAE an additional means from a cold start in mid-March, we were successful in creating, capabilities become even more relevant in the future. The long-term you examine us over the long term, we have shown and will continue measure of diversification. demand for air travel may be dented for the year or years ahead near to demonstrate a willingness to make the right decisions in support Healthcare term, but the long-term propensity to travel – for leisure, business of a broader long-term vision. and cargo – will be in an upward trajectory for decades ahead. World In Healthcare, we were tracking towards double-digit annual air travel is at its best when it is a�ordable, safe and ubi�uitous � as Capital allocation revenue growth until the division was also negatively impacted of this writing, a new kind of safety, biological safety is foremost of We completed 12 acquisitions and joint venture transactions in the by the pandemic, as medical and nursing school customers came concern. �owever this pandemic is solved, we are confident it will last 24 months, including Bombardier’s Business Aircraft Training under lockdown protocols, and hospital customers attention became be solved in time. We’ll make the case that when looking back to (BAT) business, the largest acquisition in CAE’s history, which we consumed by the healthcare crisis. CAE Healthcare did, however, this present period, this civil aviation downturn will not prove to be completed in March 2019. We have successfully integrated this succeed in strengthening its position as the innovation leader in lasting. Air travel has become an even stronger expectation of those business and have realized greater revenue and cost synergies than simulation-based healthcare education and training. We won the st of us in the 21 century than even 20 years ago, it is an imperative for we had originally projected. EMS World Innovation Award for CAE AresAR, the Microsoft HoloLens many global businesses as well as cargo, which likely grows stronger application for Healthcare’s emergency care manikin. as e-commerce expands. Air travel will recover, it is just a question �n the final month of our fiscal year, we suspended share repurchase of when. �s a conse�uence, you can remain confident that C�E�s and dividends, and also moved to secure additional liquidity given Healthcare also launched innovative products including new fundamentals are built on a solid foundation, that we remain steadily the near-term uncertainties. M&A activity these past several months Anesthesia SimSTAT modules, screen-based simulation approved trained on not only preserving our global leadership position but has also understandably been more restrained. We continue to be by the American Board of Anesthesiology for maintenance of expanding it. In addition, our revenues come from a high degree reflective on the �� environment as we build on our solid balance certification credits� and multiple custom simulators for �E�s and of recurring business in highly regulated markets, and our balance sheet and further bolster our financial position, and will remain alert leading medical device companies, including Edwards Lifesciences across several markets and geographies contributes to our long- for potential opportunities ahead. and Baylis Medical. term health. Civil Aviation Training Solutions CAE Healthcare was also at the forefront of the key humanitarian Notwithstanding the onset of the pandemic during our last quarter, contributions we made in the fight against C��-��, which are �n Civil �viation �raining Solutions�the largest of our three business C�E delivered a strong financial performance in fiscal 2020 with addressed in the context of the company’s actions overall. units�we e�ceeded our annual outlook, with �7% higher operating 10% revenue growth to $3.6 billion, 21% operating income1 growth income1. Annual order intake1 totaled $2.5 billion, including to ��0.�� million and earnings per share1 growing 7% to $1.34. Marc Parent I am especially pleased with our 98% conversion of net income to ��efore specific items. �hese terms are non-�� and other financial measures and do not have any standardi�ed meaning under �F�S. �herefore, they are unlikely to be comparable to similar President and generate ��.2 million in free cash flow1, which underscores the measures presented by other issuers. �efer to the definitions in �Section �.7 - �on-�� and other financial measures� in our �anagement �iscussion and �nalysis for the fourth �uarter and Chief Executive O�cer year ended March 31, 2020. cash-generative profile of C�E�s world-leading training solutions. � 2��eflects the adoption of �F�S � in 20��, �F�S �� in 20��, �F�S �� in 20�� and �F�S �� in 20��

Our social impact throughout the COVID-19 crisis every member of our team should feel valued, respected and safe Long-term traffic trends3 be supported by a large addressable market but we are expecting – without exception. While we are making progress, we see many fiscal pressures as lower oil prices for many of our customers in Beyond the ventilator success discussed earlier, Healthcare made opportunities to move the needle. Our D&I program covers all types international markets, may present near-term choppiness. additional significant contributions in response to C��-��. �he of diversity and makes sure that all employees feel included and team rapidly converged and created training seminars, free of charge, In Healthcare, our purpose, mission and passion is to make valued for who they are. on how to better prepare healthcare workers in the fight against healthcare safer. �e believe the significant changes wrought by this COVID-19. We also launched simulation-based solutions to train Looking forward – Tough times require new thinking pandemic will continue to result in new appreciation for the critical personnel in the safe practice of ventilation and intubation, which is role e-learning, healthcare simulation and training can provide. We The COVID-19 pandemic moved with unprecedented speed and key to saving lives. In addition, we leveraged our global supply chain might have been too early in these markets but looking forward, magnitude with respect to the disruption it has caused to our daily to deliver some 600,000 N95 masks to the Quebec and Manitoba the secular shifts ahead appear promising. We continue to believe lives across the world. The global air transportation environment governments who were in urgent need to enhance the protection CAE Healthcare is well positioned to capitalize on this change in the and air passenger travel have been especially hard hit, with IATA of front-line healthcare workers. Once again, our resourcefulness, appreciation of the importance, relevancy and benefits of healthcare forecasting commercial passenger tra�c to be down �0 to �0% creativity and agility were called upon and we delivered. simulation and training to improve safety and to help save lives both this year. As of this writing, several airline bankruptcies have been at a steady state and during a healthcare crisis. With its innovative 3 Carbon neutrality commitment announced and it is possible there are more ahead with global air Long-term traffic growth products and demonstrated agility, we expect Healthcare will become travel reported down some 90% last month. When you step back Last November, we announced CAE’s commitment to become carbon a more material part of the company over the long term. however and contemplate that the data shows global air tra�c is now neutral in Summer 2020. �his represents a necessary and significant some several standard deviations o� the �0-year mean� that aircraft In summary, we are confronting a challenging period in CAE’s history direction for the company, one in which we can take pride. CAE and retirements are also several standard deviations from historical due to COVID-19 and we immediately took action to secure the safety its employees want to do their share to prevent climate change for mean, it is logical to e�pect this present time reflects a highly short- and well-being of our employees and customers. We drove ourselves the well-being of future generations. We are taking interim measures, term reality. Statisticians often point to the tyranny of the reversion to innovate rapidly in response to an urgent need for ventilators, while also looking into the new technologies and solutions being to the mean. Taking into consideration some broadly recognized safety masks and better medical training; we wasted no time in developed to reduce emissions and talking with industry partners trends such as human population growth, ever-rising demand for heeding the call and discovered our own resourcefulness in the on the progressive use of electric aircraft for live flight training at higher technology, the rise of the middle class in emerging markets process. We have taken the most appropriate measures to safeguard our academies. CAE will continue to take other measures to reduce and the acceleration in e-commerce, expectations for a recovery in the best interests of the company, employees, customers and all overall emissions, continually investing to make our full-flight air travel demand appear realistic. other stakeholders. We have thoughtfully considered how the post- simulators more energy e�cient, allowing our customers worldwide C��-�� world might be di�erent and concluded that despite the to reduce their own footprint. In light of this abrupt and severe downturn, the management team present opaque environment and continued near-term uncertainty, imperatives, and e-learning, which are all in our wheelhouse. We and � have spent considerable e�orts envisioning what the post- air travel will recover and we will stand shoulder to shoulder with our �n parallel, we also created a Climate Change Committee to specifically are leaning forward to capture more organic growth by leveraging COVID-19 era might be like. It’s our view that the global propensity customers proactively to reimagine their needs before they ask and address climate-related issues. The Committee’s purpose is to our leading edge understanding of human-to-complex-machine to travel will recover, however unevenly at first and resume a steady, as such, continue our promise to be their training partner of choice. oversee the integration of climate-related issues into CAE’s business interfaces, continue to assert our leadership in three attractive positive tra�ectory within the ne�t few years. �he freedom to fly and Present rockiness notwithstanding, CAE’s fundamentals remain solid strategy, and to identify and manage risks and opportunities around markets with long-term secular tailwinds of civil aviation, defence and use air travel for leisure, business and cargo remains an inalienable and the ability to respond to challenges with agility is at the very core dedicated projects. st healthcare. For e�ample, we�ve e�perienced positive feedback from freedom and expectation of the 21 �century and history will likely of why CAE excels as a global market leader and innovator. We will our customers on recent new technology developments in the areas Diversity and Inclusion demonstrate that demand recovers and shows resilience as air forge ahead in applying leading edge technology to significantly travel’s contribution to global commerce is too vital to be suspended in artificial intelligence, machine learning-enabled data analytics, Diversity and Inclusion (D&I) continue to be among our top strategic improve our customers’ experience. As the industry thought leader, to such an extent for long. Time has shown that neither wars, oil remote delivery and virtual reality/augmented reality. priorities. This is not only the right thing to do, it is smart business. we are paving the way to modernize the very fundamentals of crises, recessions, nor terrorism were able to restrain air travel The global leadership team and I monitor the developments of the The more diverse our people are and the more inclusive our culture, training and operational support in Civil, Defence and Healthcare. demand; likewise, while a near term challenge, we do not expect pandemic daily to remain on the forefront of the best recommended the more innovatively and successfully we can leverage our talents CAE is and will remain a highly innovative company with over seven COVID-19 will keep demand in check for more than a few years. measures to ensure the safety of our customers and employees. We within to become an even greater company. Diversity and inclusion decades of industry firsts under its belt. �s we manage through this continue to implement necessary contingency plans in real-time as help us attract and retain top talent as well as better connect with �e e�pect that leisure travel will be the first to recover and business pandemic, we remain steadily focused on the future, and I am sure our understanding of COVID-19 grows. So far, the processes we have customers worldwide. CAE is strongly committed to programs and travel may trail longer. Business travel may perhaps see structural we will ultimately be stronger for it. put in place to manage through the pandemic are running smoothly initiatives that foster a D&I culture throughout the company. Here post-COVID-19 change and take longer to recover based on more In recognition of the Honourable John Manley and they are proving e�ective. �e remain vigilant about protecting are some milestones that occurred over the past year. universal acceptance and broader applications of web-based our employees’ health and safety; supporting our customers’ critical meetings. The abrupt shift in the pros and cons may result in some Finally, we would like to conclude by congratulating C�E�s �oard We were named to the Bloomberg Gender-Equality Index for a operations; and ensuring business continuity. forms of business travel to shift towards greater business jet demand Chair, the �onourable �ohn �anley, �.C., �.C., who received the second year and recognized among The Globe and Mail’s Women and more common usage, both for business continuity and planning In Defence, we maintain our leading position as a non-OEM training Woodrow Wilson Award for Public Service from the Wilson Center’s Lead Here honorees – a testament to CAE’s commitment to advancing purposes. and mission support partner thanks to our leading-edge capabilities Canada Institute in recognition of his contribution to enhancing the women in the workplace. �ecoming �ron�e �arity Certified by the in translating the physical world into the synthetic world. The U.S. Canada-U.S. bilateral relationship following the terrorist attacks of Women in Governance organization represents the progress we are Looking ahead, we are planning CAE’s future from a position of and other militaries will continue to seek out best-in-class support for September��, 200�, through the development of the Smart �order making to develop female talent and promote gender parity within resilience and strength given our global leading market positions, fighters, helicopters, trainer aircraft, maritime patrol, tanker/transport Declaration. our organization. We also launched Dare, our extensive 12-month attractive end markets of civil aviation, defence and healthcare, and remotely piloted aircraft. We are leveraging our training systems �he �ilson Center recogni�es e�emplary individuals who reflect the program that aims to equip and inspire women to take ownership recurring revenue streams, and solid financial position. �t may integrator capabilities in the land, naval, space and cyber domains values of Woodrow Wilson, the 28th U.S. President, a leader who of their careers. take some time before things get back to normal; there may even to provide multi-domain solutions, a market for which we expect believed that ��here is no higher religion than human service. �o be a �new normal� and we are readying for it. �n addition, we are �e welcomed the winners of the first edition of C�E�s �omen long-term healthy demand. We are expanding beyond training and work for the common good is the greatest creed.� exceptionally focused on managing the things we can control, in Flight scholarship program� this program has grown from an into mission support solutions, from systems engineering, decision including identifying opportunities for cost savings to challenge �ohn is certainly very deserving of this honour, which bestowed intention to a reality. This program encourages more women to support and sta� augmentation. �ur e�pertise in the integration of ourselves to improve e�ciency given the prospect for lower volumes in the spirit of service, is representative of a career in which his aspire to become professional pilots, tackling head-on the challenges live, virtual and constructive training is providing attractive inroads in the near term. thought leadership has served many, including C�E. �ohn became of gender diversity. �e introduced another first at C�E� Employee towards leveraging our modelling and simulation expertise towards an independent director of CAE in 2008 and in 2018 was appointed Resource Groups. Employees voted on the three themes they �s our core end markets recover, the �new normal� that emerges the synthetic environments for planning, analysis and operational Chair of CAE’s Board of Directors. He has served as Canada’s former thought would make the most di�erence� �arents of children with could present novel challenges for our customers, which could decision support. We have a large backlog of contracts with �eputy �rime �inister, �inister of Foreign ��airs, Finance �inister special needs, LGBTQ2+ and Women in Aviation and Technology. You translate into new opportunities for us. For e�ample, global airlines government customers to provide training solutions and operational and Industry Minister. can read about these and other valuable D&I contributions that CAE, cite the return-to-service for pilots as one of their chief concerns. support services that are considered essential to national security. our employees and our partners, are making in this report. Attentiveness to our customers positions us well to proactively Looking ahead, the long-term outlook for Defence continues to address this need. Certain trends may arise in greater force post- At CAE, diversity and inclusion are part of our values and there is no �� eflects �� historical figures and estimates place for racism or discrimination. CAE’s fundamental belief is that COVID-19 such as the demand for high technology solutions, safety

Table of Contents
Management’s Discussion and Analysis
1.	HIGHLIGHTS		1
2.	INTRODUCTION		3
3.	ABOUT CAE		4
	3.1	Who we are	4
	3.2	Our mission	4
	3.3	Our vision	4
	3.4	Our strategy	4
	3.5	Our operations	5
	3.6	Foreign exchange	14
	3.7	Non-GAAP and other financial measures	14
4.	CONSOLIDATED RESULTS		17
	4.1	Results from operations – fourth quarter of fiscal 2020	17
	4.2	Results from operations – fiscal 2020	18
	4.3	Consolidated orders and total backlog	19
5.	RESULTS BY SEGMENT		20
	5.1	Civil Aviation Training Solutions	21
	5.2	Defence and Security	23
	5.3	Healthcare	26
6.	CONSOLIDATED CASH MOVEMENTS AND LIQUIDITY		28
	6.1	Consolidated cash movements	28
	6.2	Sources of liquidity	28
	6.3	Government participation	30
	6.4	Contractual obligations	30
7.	CONSOLIDATED FINANCIAL POSITION		31
	7.1	Consolidated capital employed	31
	7.2	Off balance sheet arrangements	33
	7.3	Financial instruments	33
8.	BUSINESS COMBINATIONS		36
9.	EVENTS AFTER THE REPORTING PERIOD		36
10.	BUSINESS RISK AND UNCERTAINTY		37
	10.1	Risks relating to the COVID-19 pandemic	37
	10.2	Risks relating to the industry	39
	10.3	Risks relating to the Company	41
	10.4	Risks relating to the market	46
11.	RELATED PARTY TRANSACTIONS		48
12.	CHANGES IN ACCOUNTING POLICIES		49
	12.1	New and amended standards adopted	49
	12.2	Use of judgements, estimates and assumptions	50
13.	CONTROLS AND PROCEDURES		52
	13.1	Evaluation of disclosure controls and procedures	52
	13.2	Internal control over financial reporting	52
14.	OVERSIGHT ROLE OF AUDIT COMMITTEE AND BOARD OF DIRECTORS		52
15.	ADDITIONAL INFORMATION		52
16.	SELECTED FINANCIAL INFORMATION		53
Consolidated Financial Statements			55

Management’s Discussion and Analysis

for the fourth quarter and year ended March 31, 2020

1. HIGHLIGHTS

FINANCIAL^1^

FOURTH QUARTER OF FISCAL 2020

(amounts in millions, except per share amounts, ROCE and book-to-sales)		Q4-2020		Q4-2019	Variance		Variance %
Income Statement
Revenue	$	977.3	$	1,022.0	(44.7	)	(4	%)
Segment operating income (SOI)^1^	$	146.5	$	170.4	(23.9	)	(14	%)
SOI before specific items^1^	$	193.9	$	177.2	16.7		9	%
Net income attributable to equity holders of the Company	$	78.4	$	122.3	(43.9	)	(36	%)
Basic and diluted earnings per share (EPS)	$	0.29	$	0.46	(0.17	)	(37	%)
Net income before specific items^1^	$	122.3	$	127.5	(5.2	)	(4	%)
EPS before specific items^1^	$	0.46	$	0.48	(0.02	)	(4	%)
Cash Flows
Free cash flow^1^	$	185.1	$	116.8	68.3		58	%
Net cash provided by operating activities	$	246.3	$	166.3	80.0		48	%
Financial Position
Capital employed^1^	$	4,944.0	$	4,292.2	651.8		15	%
Non-cash working capital^1^	$	6.0	$	41.4	(35.4	)	(86	%)
Net debt^1^	$	2,365.7	$	1,882.2	483.5		26	%
Return on capital employed (ROCE)^1^	%	9.1	%	11.9
ROCE before specific items	%	10.7	%	12.9
Backlog
Total backlog^1^	$	9,458.1	$	9,494.9	(36.8	)	—	%
Order intake^1^	$	778.8	$	1,414.4	(635.6	)	(45	%)
Book-to-sales ratio^1^		0.80		1.38
Book-to-sales ratio for the last 12 months		1.05		1.20

FISCAL 2020

(amounts in millions, except per share amounts)		FY2020		FY2019	Variance		Variance %
Income Statement
Revenue	$	3,623.2	$	3,304.1	319.1		10	%
Segment operating income	$	537.1	$	480.6	56.5		12	%
SOI before specific items	$	590.4	$	487.4	103.0		21	%
Net income attributable to equity holders of the Company	$	311.4	$	330.0	(18.6	)	(6	%)
Basic earnings per share	$	1.17	$	1.24	(0.07	)	(6	%)
Diluted earnings per share	$	1.16	$	1.23	(0.07	)	(6	%)
Net income before specific items	$	359.7	$	335.2	24.5		7	%
EPS before specific items	$	1.34	$	1.25	0.09		7	%
Cash Flows
Free cash flow	$	351.2	$	323.8	27.4		8	%
Net cash provided by operating activities	$	545.1	$	530.4	14.7		3	%

All values are in US Dollars.

Specific items include the impacts of the integration of Bombardier's Business Aviation Training Business (BBAT) in fiscal 2019. In fiscal 2020, specific items also include the impacts of Defence and Security's reorganizational costs and the impact of the goodwill impairment charge recognized in Healthcare.

^1^ Non-GAAP and other financial measures (see Section 3.7).

CAE Financial Report 2020 I 1

Management’s Discussion and Analysis

IMPACT OF THE COVID-19 PANDEMIC

The COVID-19 pandemic has created unprecedented uncertainty in the global economy, the global air transportation environment, air passenger travel and to CAE's business. Several of our customers are facing significant challenges, with airlines and business jet operators having to ground a majority of their aircraft in response to travel bans, border restrictions, and lower demand for air travel. We continue to take measures to protect the health and safety of our employees, work with our customers to minimize potential disruptions and support our community in addressing the challenges posed by this global pandemic. This outbreak has had an important and immediate impact on all our businesses, especially in the Civil Aviation Training Solutions segment.

For the Civil Aviation Training Solutions segment, the impacts of the COVID-19 pandemic resulted in the closure of certain training centre operations, lower utilization of our simulators in the network due to reduced demand from aviation customers and interruptions in the execution of our backlog. For the Defence and Security segment, delays were experienced in the awarding of new contracts and in the execution and advancement of certain programs. For the Healthcare segment, customers were primarily focused on managing the acute operational demands of this healthcare crisis rather than focusing on their training needs, which resulted in less focus and budget for normal operations and training projects.

To date, we have implemented several flexible measures to protect our financial position and preserve liquidity, including the reduction of capital expenditures and R&D investments in fiscal 2021, strict cost containment measures, salary freezes, salary reductions, reduced work weeks and temporary layoffs, as well as a suspension of our common share dividend and share repurchase plan in response to the impact of the COVID-19 pandemic. Additionally, we have worked with defence customers to secure more favorable terms for milestone payments as well as offer contract modifications to increase work scope and with suppliers for extended payment terms. We have recalled 1,500 employees as a result of government relief programs but there is uncertainty as to how long these programs could last.

You will find more details on the impacts of the COVID-19 pandemic on our business in About CAE, Results by segment, Business risk and uncertainty and Use of judgements, estimates and assumptions.

ADOPTION OF IFRS 16 - LEASES

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

BUSINESS COMBINATIONS

–	On April 26, 2019, we acquired the remaining equity interest in Pelesys Learning Systems Inc. (Pelesys), a global leader in the provision of aviation training solutions and courseware;
–	On June 26, 2019, we acquired the shares of Luftfartsskolen AS, an ab-initio flight school located in Oslo, Norway, expanding our cadet training capabilities in Europe.
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OTHER

–	On November 4, 2019, we concluded a 15-year exclusive business aviation training services agreement with Directional Aviation Capital affiliates and the acquisition of a 50% stake in SIMCOM Holdings, Inc. (SIMCOM), an operator of a wide range of jet, turboprop and piston powered aircraft simulators and training devices;
–	In December 2019, we issued unsecured senior notes of US$100.0 million, maturing in December 2034, and repaid unsecured senior notes amounting to $95.0 million, which matured during the month;
---	---
–	After considering the general economic conditions and the deterioration in the global economic environment from the uncertainties of the COVID-19 pandemic, we recorded an impairment charge of $37.5 million relating to goodwill acquired in previous business acquisitions in Healthcare.
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EVENTS AFTER THE REPORTING PERIOD

–	On April 6, 2020, we announced a series of flexible measures to protect our financial position in response to the COVID-19 pandemic and mitigate the impact on our employees. The measures include temporarily laying off 2,600 of our 10,500 employees and placing another 900 employees on a reduced work week and the suspension of our common share dividend and normal course issuer bid (NCIB);
–	On April 9, 2020, we concluded a new two-year $500.0 million unsecured revolving credit facility which provides access to additional liquidity and further strengthens our financial position;
---	---
–	On April 10, 2020, we concluded an agreement with the Government of Canada to design and manufacture 10,000 CAE Air1 ventilators to provide life support to patients in intensive care to support the COVID-19 pandemic;
---	---
–	On April 20, 2020, we announced that we have recalled all remaining temporarily laid-off employees in Canada through the Canada Emergency Wage Subsidy (CEWS) program, impacting approximately 1,500 employees. We have accessed and are working to access government support programs in countries in which we operate;
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–	On May 19, 2020, we concluded an agreement to increase the limit of our receivable purchase program from US$300.0 million to US$400.0 million.
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2 I CAE Financial Report 2020

Management’s Discussion and Analysis

2. INTRODUCTION

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

–	This year and 2020 mean the fiscal year ending March 31, 2020;
–	Last year, prior year and a year ago mean the fiscal year ended March 31, 2019;
---	---
–	Dollar amounts are in Canadian dollars.
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This report was prepared as of May 22, 2020 and includes our management’s discussion and analysis (MD&A) for the year and the three‑month period ended March 31, 2020 and the consolidated financial statements and notes for the year ended March 31, 2020. We have prepared it to help you understand our business, performance and financial condition for fiscal 2020. Except as otherwise indicated, all financial information has been reported in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB). 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 financial report for the year ended March 31, 2020. 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 mission;
–	Our vision;
---	---
–	Our strategy;
---	---
–	Our operations;
---	---
–	Foreign exchange;
---	---
–	Non-GAAP and other financial measures;
---	---
–	Consolidated results;
---	---
–	Results by segment;
---	---
–	Consolidated cash movements and liquidity;
---	---
–	Consolidated financial position;
---	---
–	Business combinations;
---	---
–	Events after the reporting period;
---	---
–	Business risk and uncertainty;
---	---
–	Related party transactions;
---	---
–	Changes in accounting policies;
---	---
–	Controls and procedures;
---	---
–	Oversight role of Audit Committee and Board of Directors.
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You will find our most recent financial report and Annual Information Form (AIF) on our website at www.cae.com, on SEDAR at www.sedar.com or on EDGAR at www.sec.gov. Holders of CAE’s securities may also request a printed copy of the Company’s consolidated financial statements and MD&A free of charge by contacting Investor Relations (investor.relations@cae.com).

ABOUT MATERIAL INFORMATION

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

–	It results in, or would reasonably be expected to result in, a significant change in the market price or value of our shares, or;
–	It is quite likely that a reasonable investor would consider the information to be important in making an investment decision.
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CAUTION REGARDING FORWARD-LOOKING STATEMENTS

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

CAE Financial Report 2020 I 3

Management’s Discussion and Analysis

Important risks that could cause such differences include, but are not limited to, risks relating to the COVID-19 pandemic such as health and safety, reduction and suspension of operations, global economic conditions, diversions of management attention, heightened IT risks, liquidity risks and credit risks, risks relating to the industry such as competition, business development and awarding of new contracts, level and timing of defence spending, government-funded defence and security programs, constraints within the civil aviation industry, regulatory matters, risks relating to CAE such as evolving standards and technology innovation, our ability to penetrate new markets, R&D activities, fixed-price and long‑term supply contracts, strategic partnerships and long-term contracts, procurement and original equipment manufacturer (OEM) leverage, product integration and program management, protection of our intellectual property and brand, third-party intellectual property, loss of key personnel, labour relations, natural or other disasters, environmental laws and regulations, climate change, liability risks that may not be covered by indemnity or insurance, warranty or other product-related claims, integration of acquired businesses through mergers, acquisitions, joint ventures, strategic alliances or divestitures, reputational risk, U.S. foreign ownership, control or influence mitigation measures, length of sales cycle, seasonality, continued returns to shareholders, information technology and cybersecurity, our reliance on technology and third‑party providers, data privacy, and risks relating to the market such as foreign exchange, availability of capital, credit risk, pension plan funding, doing business in foreign countries, geopolitical uncertainty, anti-corruption laws and taxation matters. Additionally, differences could arise because of events announced or completed after the date of this report. You will find more information in the Business risk and uncertainty section of the MD&A. We caution readers that the risks described above are not necessarily the only ones we face; additional risks and uncertainties that are presently unknown to us or that we may currently deem immaterial may adversely affect our business.

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

3. ABOUT CAE

3.1 Who we are

CAE is a global leader in training for the civil aviation, defence and security, and healthcare markets. Backed by a record of more than 70 years of industry firsts, we continue to help define global training standards with our innovative virtual-to-live training solutions to make flying safer, maintain defence force readiness and enhance patient safety. We have the broadest global presence in the industry, with over 10,500 employees, 160 sites and training locations in over 35 countries. Each year, we train more than 220,000 civil and defence crewmembers, including more than 135,000 pilots, and thousands of healthcare professionals worldwide.

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

3.2 Our mission

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

3.3 Our vision

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

3.4 Our strategy

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

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

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

Six pillars of strength

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

–	High degree of recurring business;
–	Strong competitive moat;
---	---
–	Headroom in large markets;
---	---
–	Underlying long-term secular tailwinds;
---	---
–	Potential for superior returns;
---	---
–	Culture of innovation.
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High degree of recurring business

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

4 I CAE Financial Report 2020

Management’s Discussion and Analysis

Strong competitive moat

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

Headroom in large markets

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

Underlying long-term secular tailwinds

The civil aviation sector is expected to grow over the long-term as passenger traffic recovers, and in defence and security, the market is expected to continue to grow with an emphasis on the operational readiness of defence forces. Healthcare is expected to become increasingly relevant in a world more acutely aware of the benefits of healthcare simulation and training to help save lives at a steady state and in a healthcare crisis.

Potential for superior returns

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

Culture of innovation

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

3.5 Our operations

We provide integrated training solutions to three markets globally:

–	The civil aviation market includes major commercial airlines, regional airlines, business aircraft operators, civil helicopter operators, aircraft manufacturers, third-party training centres, flight training organizations, maintenance repair and overhaul organizations (MRO) and aircraft finance leasing companies;
–	The defence and security market includes defence forces, OEMs, government agencies and public safety organizations worldwide;
---	---
–	The healthcare market includes hospital and university simulation centres, medical and nursing schools, paramedic organizations, defence forces, medical societies and OEMs.
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IMPACT OF THE COVID-19 PANDEMIC

In late December 2019, a novel coronavirus (SARS-CoV-2/COVID-19) was identified with original cases in China and cases subsequently confirmed in multiple countries throughout the world. The outbreak was declared a Public Health Emergency of International Concern on January 30, 2020 and was subsequently categorized as a pandemic by the World Health Organization on March 11, 2020. The outbreak of the COVID-19 pandemic has resulted in governments and businesses worldwide adopting emergency measures to combat the spread of the virus while seeking to maintain essential services. These measures have included, without limitation, travel bans, border restrictions, lockdown protocols and self-isolation measures.

COVID-19 has created unprecedented uncertainty in the global economy, the global air transportation environment and air passenger travel, disrupted global supply chains, created significant economic downturn and disruption of financial markets. These adverse economic conditions are expected to continue for as long as the measures taken to contain the spread of the COVID-19 virus persist and certain conditions could continue even upon the gradual removal of such measures and thereafter, especially in the global air transportation environment and air passenger travel. These measures and conditions have adversely affected, and are expected to continue to adversely affect, our business and financial results, for as long as the measures adopted in response to the COVID-19 pandemic remain in place or are re-introduced, and such adverse effects could be material.

The COVID-19 pandemic started impacting several operational locations and markets across the globe starting in January and February in Asia, and through the rest of the world in March 2020. Several of our customers are facing significant challenges, with airlines and business jet operators having to ground a majority of their aircraft in response to travel bans, border restrictions, and lower demand for air travel. This outbreak has had an important and immediate impact on all our businesses, especially in Civil Aviation where commercial airlines are experiencing significant financial challenges, as a result of an unprecedented shock to demand together with significant disruptions to our own operations, including facility closures, supply chain disruptions, program execution delays, slower procurement decisions and changes to our customer’s acquisition priorities. We continue to take measures to protect the health and safety of our employees, work with our customers to minimize potential disruptions and support our community in addressing the challenges posed by this global pandemic.

CAE Financial Report 2020 I 5

Management’s Discussion and Analysis

Impacts to CAE's operations

Civil Aviation

Pilot training is an essential service and critical to maintaining our customers' operations, however, with the global airline industry facing a severe and abrupt drop in air passenger travel and with airlines and business jet operators having to ground a majority of their aircraft, we have experienced a significant drop in demand for our training services. Reduction in demand combined with public directives resulted in 19 of our civil aviation training locations, representing approximately one-third of our training network, suspending operations and another 10 training centres operating at significantly reduced capacity as at March 31, 2020. By the beginning of May 2020, 13 training centres were closed and 15 of the training centres that remained open were operating at reduced capacities. In addition to disruptions to our civil training centre network, under public directives, we also had to suspend most manufacturing operations of civil simulator products starting on March 25, 2020; with gradual recommencement of manufacturing operations in May 2020.

Reductions in domestic and international passenger demand have severely impacted the aviation industry. Our commercial airline customers are deferring initial training for new pilots and in some cases, airlines have sought temporary deferrals of pilot recurrent training requirements from local authorities. Business aviation activity has also reduced due to self-isolation measures, travel bans, border restrictions and lockdown protocols. This has resulted in considerably lower training utilization than normal in the fourth quarter of fiscal 2020, which has been reflected in our results for the quarter. To preserve resources, airlines are also deferring new aircraft deliveries and seeking financial help from local governments. This will likely result in lower simulator orders for the upcoming fiscal year than in recent years and some delays in the execution of our backlog. CAE continues to work closely with our customers to monitor the situation and support their needs.

The financial impact from the decreased training utilization, production slowdown, reduced orders and deliveries and other disruptions is expected to significantly negatively impact the operations and financial performance of fiscal of the upcoming fiscal year. The current view for fiscal year 2021 is for a material decrease in operational and financial performance in the first half, and for the second half of the year to potentially begin to inflect positively, as markets are expected to begin to reopen, and travel restrictions are eased.

Defence and Security

While the COVID-19 pandemic has severely impacted all sectors of society, governments have reaffirmed the critical role played by the military and are taking measures to minimize impacts to both defence forces and the defence industrial base. In countries where we have significant operations, most of those governments have classified the defence market as an essential service and determined that some level of training must continue to meet readiness requirements in support of national security. Consequently, only six defence operational sites were closed, which means that over 90% of the sites where we provide services have remained open at full or reduced capacity. Manufacturing operations for defence simulator products have continued during the pandemic, however, execution has been disrupted by mobility limitations and client access restrictions.

Despite some of the mitigating initiatives taken by governments, there have been negative implications on CAE’s defence business segment due to the pandemic. We have a range of programs with defence and OEM customers globally that have experienced project advancement delays due to travel bans, border restrictions, client access restrictions and supply chain disruptions. Some of the required progress and acceptance testing has continued with virtual meetings and remote work procedures, but delays have impacted some key milestones negatively affecting revenue and operating profit. In addition, there have been delays in the awarding of new contracts as government acquisition authorities follow directives in their respective countries to shelter-in-place and eliminate travel. These delays impacted order intake during the fourth quarter, and we expect a continued delay in the awarding of new contracts during at least the first half of fiscal year 2021.

Healthcare

In Healthcare, a large contingent of the market for simulation products are medical and nursing schools who have also come under lockdown protocols, which has negatively affected our ability to conclude contracts and to deliver on existing orders. The pandemic began to affect market demand in Asia early in the fourth quarter of fiscal 2020, as border restrictions were implemented, and in Europe and in North America later in March. In the hospital market, our customers are primarily focused on managing the acute operational demands of this healthcare crisis rather than focusing on their training needs, which could result in less focus and budget for normal operations and training projects in the near term. Manufacturing operations for healthcare products also continued during the pandemic.

You will find more details on the financial impacts of COVID-19 on our businesses in Results by segment.

Social impact

To help in the fight against COVID-19, our CAE engineers and scientists have designed an easy-to-use, maintainable, easy-to-manufacture ventilator prototype to provide life support to patients in intensive care. In April 2020, CAE was selected by the Canadian government to design and manufacture 10,000 of these CAE Air1 ventilators to support the COVID-19 pandemic.

CAE has also provided complimentary training seminars on how to prepare healthcare workers in the fight against COVID-19. The CAE team launched simulation-based training solutions, both web and hardware based, to train personnel in the safe practice of ventilation and intubation, which is key to saving lives. Additionally, CAE is leveraging its global supply chain to source scarce N95 masks for humanitarian purposes in support of front-line health workers. To date, CAE has secured some 600,000 N95 masks which have been delivered to the Governments of Quebec and Manitoba, doing our part to help keep healthcare-workers safe.

6 I CAE Financial Report 2020

Management’s Discussion and Analysis

Measures to bolster liquidity and mitigate the impacts to our business

To address the negative impact of COVID-19, CAE has been closely monitoring and actively implementing and updating our response to the evolving COVID-19 pandemic to attenuate the impact on our employees, to ensure CAE preserves the necessary liquidity through this downturn and to ensure that we will be in a position of strength to serve our customers when the markets begin to recover from this pandemic. We have formed a committee composed of the senior leadership team and key leaders in the organization to monitor, on a daily basis, the evolution of the pandemic, to evaluate the measures being put in place by local and national governments and the resulting impacts on CAE and to implement necessary contingency plans in real time as the current situation continues to unfold, with a focus on three priorities: protecting employees’ health and safety, supporting customers’ critical operations and ensuring business continuity.

To date, CAE has implemented several flexible measures to protect our financial position and preserve liquidity and reduce operating costs, including the reduction of capital expenditures and R&D investments in fiscal 2021, strict cost containment measures, salary freezes, salary reductions, reduced work weeks and temporary layoffs, as well as a suspension of our common share dividend and share repurchase plan in response to the impact of the COVID-19 pandemic. At the same time, we have taken initiatives to renegotiate contracts with defence customers to secure more favorable terms for milestone payments as well as offer contract modifications to increase work scope and with suppliers for extended payment terms. We have also successfully negotiated payment deferrals on certain lease liabilities and government royalty and R&D obligations. Subsequent to the year-end, we concluded a new two-year $500.0 million senior unsecured revolving credit facility and we increased our receivable purchase program from US$300.0 million to US$400.0 million. These transactions provide access to additional liquidity and further strengthen our financial position.

As at March 31, 2020, we had a higher than normal cash and cash equivalents balance on hand to increase liquidity and preserve financial flexibility in light of the COVID-19 pandemic. Total available liquidity at March 31, 2020 was $1.5 billion, including $946.5 million in cash and cash equivalents, undrawn amounts on our revolving credit facility and the balance available under our receivable purchase program. With the addition of our new revolving credit facility and increased limit on our receivable purchase program subsequent to the year-end, we have available liquidity of $2.1 billion. We believe that our cash and cash equivalents, the availability under our committed revolving credit facility and cash generated from our operations will be sufficient to provide liquidity for our operations over the foreseeable future.

To minimize the impact on employees through this difficult period, CAE has accessed government emergency relief measures and wage subsidy programs available around the world. In April 2020, through the Canadian CEWS program, CAE was able to recall all temporarily laid-off employees in Canada. We have accessed and are working to access government support programs in countries in which we operate.

Resiliency of CAE's business

We entered this pandemic from a position of strength with a global leading market position, a balanced business with recurring revenue streams, and a solid financial position. We have taken decisive yet flexible actions to help protect our people and operations over the short-term and to give us the necessary agility to resume long-term growth when global air travel eventually returns.

In Civil aviation, training is highly regulated, and for pilots to remain active and to continue to hold their certifications, they must train regularly to demonstrate proficiency, usually every six to nine months. While training activities related to growth of the global pilot population and movements of pilots to new positions, have been curtailed significantly, recurrent training to maintain certification is non‑discretionary. To adapt to these new circumstances, we have already introduced new virtual service offerings to support our customers such as obtaining U.S. Federal Aviation Administration (FAA) and other Civil Aviation Authority approvals for virtual training in certain of our flight training organizations. Our capacity to adapt and the increasing need for airlines to come up with cost containment measures as a result of this pandemic could act as a catalyst for potential customers who may come to realize the benefits of outsourcing their training needs to CAE as a means to reduce their in-house training costs. Another important contributor to our resiliency is the solid backlog of Civil full-flight simulator orders, which have been pre-funded by customer deposits and progress payments. While we expect some requests for deferrals, order cancellations are not common given the capital customers have deployed and since the orders are closely linked to airline operational requirements.

For Defence, governments recognize the critical importance of national defence and have been proactive in implementing measures to maintain and protect the defence industry and its suppliers, evidenced by many governments who are using defence programs as a mechanism to maintain and stimulate the economy. For example, countries such as Canada, the United Kingdom and Australia have implemented measures such as accelerated payments to support supplier cash flows. This, combined with our Defence backlog, provides an additional layer of diversification for our business. We have also demonstrated our ability to adapt in these challenging circumstances with, for example, the development of a range of offboard instructor operator station (IOS) solutions which are now being offered to global defence customers. These offboard IOS solutions help address social distancing requirements by removing the instructor from the cockpit of the simulator and still providing the required features and functionality to continue conducting training and mission rehearsal exercises.

We see future opportunities arising in the Healthcare business including our new CAE Air1 ventilator product line, COVID-19 related training solutions, and increased recognition of the value of simulation-based preparedness for pandemics and other high-risk scenarios. This is supported by professional organizations such as the International Nursing Association of Clinical Simulation and Learning (INACSL) and the Society for Simulation in Healthcare (SSH) who are proposing that regulatory bodies and policymakers demonstrate flexibility by allowing the replacement of clinical hours usually completed in a live healthcare setting with that of virtually simulated experiences as a result of this pandemic.

CAE Financial Report 2020 I 7

Management’s Discussion and Analysis

CIVIL AVIATION MARKET

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

We have the unique capability and global scale to address the total lifecycle needs of the professional pilot, from cadet to captain, with our comprehensive aviation training solutions. We are the world’s largest provider of civil aviation training services. Our deep industry experience and thought leadership, large installed base, strong relationships and reputation as a trusted partner, enable us to access a broader share of the market than any other company in our industry. We provide aviation training services in more than 35 countries and through our broad global network of more than 60 training locations, we serve all sectors of civil aviation including airlines and other commercial, business and helicopter aviation operators.

Among our thousands of customers, we have long-term training centre operations and training services agreements and joint ventures with approximately 40 major airlines and aircraft operators around the world. Our range of training solutions includes product and service offerings for pilot, cabin crew and aircraft maintenance technician training, training centre operations, curriculum development, courseware solutions and consulting services. We currently operate 306 full-flight simulators (FFSs)^2^, including those operating in our joint ventures. We offer industry-leading technology, and we are shaping the future of training through innovations such as our next generation training systems, including CAE Real-time Insights and Standardized Evaluations (CAE Rise^TM^), which improves training quality, objectivity and efficiency through the integration of untapped flight and simulator data-driven insights into training. In the formation of new pilots, CAE operates the largest ab initio flight training network in the world and has over 30 cadet training programs globally. In resource management, CAE is the global market leader in the provision of flight crew and technical personnel to airlines, aircraft leasing companies, manufacturers and MRO companies worldwide.

Quality, fidelity, reliability and innovation are hallmarks of the CAE brand in flight simulation and we are the world leader in the development of civil flight simulators. We continuously innovate our processes and lead the market in the design, manufacture and integration of civil FFSs for major and regional commercial airlines, business aircraft operators, third-party training centres and OEMs. We have established a wealth of experience in developing first-to-market simulators for more than 35 types of aircraft models. Our flight simulation equipment, including FFSs, are designed to meet the rigorous demands of their long and active service lives, often spanning several decades of continuous use. Our global reach enables us to provide best-in-class support services such as real-time, remote monitoring and enables us to leverage our extensive worldwide network of spare parts and service teams.

Market drivers

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

–	Pilot training and certification regulations;
–	Safety and efficiency imperatives of commercial airlines and business aircraft operators;
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–	Expected long-term global growth in air travel;
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–	Expected long-term growth or renewal of the active fleet of commercial and business aircraft;
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–	Demand for trained aviation professionals.
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Pilot training and certification regulations

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

In recent years, pilot certification processes and regulatory requirements have become increasingly stringent. Simulation-based pilot certification training is taking on a greater role internationally with the Multi-Crew Pilot License (MPL), with the Airline Transport Pilot certification requirements in the U.S. and with Upset Prevention and Recovery Training (UPRT) requirements mandated by both EASA and the FAA.

Safety and efficiency imperatives of commercial airlines and business aircraft operators

The commercial airline industry is competitive, requiring operators to continuously pursue operational excellence and efficiency initiatives to achieve satisfactory 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.

Our newest innovation in pilot training systems, CAE Rise™, is well positioned to elevate the pilot training experience. Backed by industry‑leading technology, this system enables instructors to deliver training in accordance with airlines’ Standard Operating Procedures and enables instructors to objectively assess pilot competencies using live data during training sessions. Furthermore, CAE Rise™ augments instructors’ capability to identify pilot proficiency gaps and evolve airline training programs to the most advanced aviation safety standards, including Advanced Qualification Program and Evidence Based Training methodologies.

^2^ Non-GAAP and other financial measures (see Section 3.7).

8 I CAE Financial Report 2020

Management’s Discussion and Analysis

Expected long-term global growth in air travel

The secular growth in air travel results in long-term demand for flight, cabin, maintenance and ground personnel, which in turn drives demand for training solutions.

Temporary disruptions due to the COVID-19 pandemic are significantly adversely impacting air travel as governments worldwide attempt to limit the spread of the virus. For the first three months of calendar 2020, passenger traffic decreased by 22% compared to the first three months of calendar 2019 and the International Air Transport Association (IATA) forecasts that, for the year, domestic and international passenger demand will experience a 48% decrease compared to calendar 2019.

In the short-term, as airlines adjust their fleets to accommodate demand for air travel, we anticipate some measure of pent up training demand as pilots are reassigned to different aircraft types in accordance with their seniority.

Looking ahead, once travel restrictions and lockdown protocols are lifted and as worldwide demand for air travel regains strength, both the commercial and business aviation industries are expected to level out and return to growth over the medium to long-term due to demand recovery combined with the introduction of new aircraft models and technologies.

Expected long-term growth or renewal of the 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. Short and medium-term growth in aircraft fleets will experience pressure as airlines realign fleet capacity to meet new demand levels and OEMs reduced production.

Major business jet OEMs are continuing with plans to introduce a variety of new aircraft models in the upcoming years including Dassault's Falcon 6X and Gulfstream’s G700.

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 in the aviation market, 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, CAE 400XR, 500XR, and 600XR Series Flight Training Devices and CAE Simfinity™ ground school solutions, in delivering training equipment solutions that address the growing training needs of airlines, business jet operators, and helicopter operators.

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. As global economies and airlines resume expansion following the COVID-19 pandemic disruption, we are well positioned in the training services market to address the training requirements of airline customers.

DEFENCE AND SECURITY MARKET

We are a training and mission support solutions provider 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 training and mission support solutions for defence forces. While the COVID-19 pandemic has created uncertainty in all sectors of society, governments have reaffirmed the critical and essential role played by the military and are taking measures to minimize impacts to both defence forces and the defence industrial base. Most militaries use a combination of live training on actual platforms, virtual training in simulators, and constructive training using computer-generated simulations. We are skilled and experienced as a training systems integrator capable of helping defence forces achieve an optimal balance of integrated live-virtual-constructive training to achieve mission preparedness. Our expertise in training spans a broad variety of aircraft, including fighters, helicopters, trainer aircraft, maritime patrol, tanker/transport aircraft and remotely piloted aircraft, also called unmanned aerial systems. Increasingly, we are leveraging our training systems integration capabilities in the naval domain to provide naval training solutions, as evidenced by the program to provide the United Arab Emirates Navy with a comprehensive Naval Training Centre and our role supporting the design phase of the Canadian Surface Combatant ship program. We offer training solutions for land forces, including a range of driver, gunnery and maintenance trainers for tanks and armoured fighting vehicles as well as constructive simulation for command and staff training. Increasingly, we are engaged with defence customers to provide a range of mission support solutions, including systems engineering, decision support and staff augmentation. For example, our CAE USA Mission Solutions Inc. (MSI), a subsidiary of CAE USA Inc., that is eligible to pursue and execute higher-level security programs, provides a variety of operational support solutions to the U.S. Department of Defense (DoD).

CAE Financial Report 2020 I 9

Management’s Discussion and Analysis

Defence forces continue to increasingly leverage virtual training and balance their training approach between live, virtual and constructive domains to achieve maximum readiness and efficiency. We pursue programs requiring the integration of live, virtual and constructive training which tend to be larger in size than programs involving only one of the three training domains. We are a first-tier training systems integrator and can offer our customers a comprehensive range of innovative training solutions, ranging from digital learning environments and mixed reality capabilities to integrated live, virtual and constructive training in a secure networked environment. Our solutions typically include a combination of training services, products and software tools designed to cost-effectively maintain and enhance safety, efficiency, and readiness. We have a wealth of experience delivering and operating outsourced training solutions with facilities that are government‑owned government-operated; government-owned contractor-operated; or contractor-owned contractor‑operated. We offer training needs analysis, training media analysis, courseware, instructional systems design, facilities, tactical control centres, synthetic environments, mixed reality solutions, a range of simulators and training devices, live assets, digital media classrooms, distributed training, scenario development, instructors, training centre operations, and a continuous training improvement process leveraging big data analytics. In addition, we are increasingly leveraging our modeling and simulation expertise to enable defence forces to use synthetic environments for planning, analysis, and operational decision support.

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

Market drivers

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

–	Defence budgets;
–	Installed base of enduring defence platforms and new customers;
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–	Attractiveness of outsourcing training, maintenance and operational support services;
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–	Pilot and aircrew recruitment, training and retention challenges faced by militaries globally;
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–	Desire to integrate training systems to achieve efficiencies and enhanced preparedness;
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–	Need for synthetic environments to conduct integrated, networked mission training, including joint and coalition forces exercises;
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–	Desire of governments and defence forces to increase the use of synthetic environments, including mixed reality solutions;
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–	Relationships with OEMs for simulation and training.
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Defence budgets

The global defence market continued its modest growth in 2019 as security threats remain and recapitalization efforts continued, thus requiring governments worldwide to continue increasing defence budgets. Prior to the COVID-19 pandemic, which has created uncertainty as governments introduce fiscal stimulus measures, defence expenditures were expected to grow approximately three percent in 2020 to reach an estimated US$1.9 trillion, with the United States continuing to be the largest contributor to defence spending. The approved DoD budget for fiscal 2020 was US$738 billion. In addition, the majority of the 29 members of NATO devised plans to increase defence spending to two percent of their Gross Domestic Product. For example, Canada expects to grow annual defence spending from approximately $19 billion to $33 billion by 2027. NATO and allied nations continue to confront the immediate challenges posed by security threats 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. Many countries are also implementing economic stimulus packages related to COVID-19 with defence and the defence industrial base identified as essential, for example the DoD received an additional budget of US$10.5 billion as a COVID-19 emergency stimulus package. Training is fundamental for defence forces to achieve and maintain mission preparedness and continued modest growth in defence spending is expected to result in corresponding opportunities for training and operational support solutions. There is however some risk that defence spending may be negatively impacted because of spending on COVID-19 stimulus measures and the impact of potentially recessionary environment.

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 are required to maximize use of their existing platforms. Upgrades, updates, and life extension programs allow defence forces to leverage existing assets while creating a range of opportunities for simulator upgrades and training support services. Given 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 C-130H Aircrew Training System, and our experience on key enduring platforms, we are well-positioned for recurring product upgrades or updates as well as maintenance and support services. In addition, there is strong demand for enduring platforms such as the C-130, P-8, C295, MH-60R, NH90 and MQ-9 in global defence markets, thus creating opportunities to provide new training systems and services for platforms where CAE has significant experience.

10 I CAE Financial Report 2020

Management’s Discussion and Analysis

Attractiveness of outsourcing training, maintenance and operational support 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 maximize efficiency and enhance readiness, which includes allowing active‑duty personnel to focus on operational requirements. There has been a growing trend among defence forces to consider outsourcing a variety of training and operational support services and we expect this trend to continue, which aligns directly with our strategy to grow long‑term, recurring services business. We believe governments will increasingly look to industry for training and operational support solutions to achieve faster delivery, lower capital investment requirements, and for support required to meet the demand for producing aircrews and achieve desired readiness levels. For example, we are delivering fixed-wing flight training to the U.S. Army at the CAE Dothan Training Center in Dothan, Alabama. At this training centre, we offer comprehensive classroom, simulator and live-flying training and we believe this type of training service delivery program will become increasingly attractive to defence forces globally.

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

The COVID-19 pandemic has introduced uncertainty across the commercial aviation landscape, but prior to the pandemic the expansion of global economies and airline fleets had resulted in a shortage of qualified personnel needed to fulfill the growing demand for pilots, as expressed in CAE’s Airline and Business Jet Pilot Demand Outlook. This demand from the civil and business aviation sector has a direct impact on the recruitment, training and retention of military pilots. The USAF alone estimates it has a shortfall of approximately 2,100 pilots, which represents 10% of the entire force. The challenge has led to militaries looking at numerous initiatives designed to address the pilot shortage, including initiatives specifically related to training such as the U.S. Air Force Pilot Training Transformation project. Militaries are considering further outsourcing as well as adopting new technologies that help make pilot training more streamlined and efficient. The military pilot and aircrew shortage and related training challenges will create opportunities for CAE’s products, services and solutions.

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 industry partners to help design and manage a total training system. Our approach has positioned us globally as a platform-independent training systems integrator. The overall intent for defence forces is to maximize commonality for increased efficiencies, cost savings, and most importantly, enhanced capability for mission preparedness. As a training systems integrator, we address the overall training enterprise to deliver comprehensive solutions, from undergraduate individual training all the way through to operational, multi-service and joint mission training.

Need for synthetic environments to conduct integrated, networked mission training, including joint and coalition forces exercises

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 can train in a virtual world. Simulation-based technology solutions enable defence customers to plan sophisticated missions and carry out full-mission rehearsals in a synthetic environment as a complement to traditional live training for 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 U.S., U.K., Australia, Canada and others all have plans and strategies to leverage live-virtual-constructive domains within a networked common synthetic environment. We are strong proponents of open, standard simulation architectures, such as the Open Geospatial Consortium Common Database, to better enable integrated and networked mission training. For instance, we are currently developing a Joint Multinational Simulation Centre for a Gulf Cooperation Council customer that will be used by commanders and operators from the Army, Air Force, Navy and Staff Colleges to conduct military training and decision support across all level of operations.

Desire of governments and defence forces to increase the use of synthetic environments, including mixed reality solutions

One of the underlying drivers for our expertise and capabilities is the increasing use of synthetic training throughout the defence community. More defence forces and governments are increasingly adopting synthetic environments for a greater percentage of their overall approach because it improves training effectiveness, reduces operational demands on aircraft, lowers risk compared to operating actual platforms and significantly lowers costs. Synthetic environments offer defence forces a cost-effective way to provide a realistic environment for a wide variety of scenarios while contributing to preparedness and readiness. The higher cost of live activities, the desire to save aircraft for operational use, and the advanced simulation technologies delivering more realism are several factors prompting a greater adoption of the use of synthetic environments.

The nature of mission-focused training demands at least some live training; however, the shift to more synthetic training is advancing. For example, in fiscal 2019, we introduced the CAE Medallion MR e-Series visual system designed specifically for fighter and fast-jet training. The CAE Medallion MR e-Series visual system is now being procured by BAE Systems to support synthetic training capabilities for undisclosed customers operating next-generation fighter aircraft. In addition, digital innovations have led to the introduction of the CAE Trax Academy, which integrates virtual-reality enhanced courseware, artificial intelligence virtual coaching, mixed reality capabilities and big data analytics to deliver a comprehensive training continuum for military student pilots. Included as part of the CAE Trax Academy is the CAE Sprint Virtual Reality (VR) trainer that leverages CAE Rise™ for virtual coaching and objective assessment.

CAE Financial Report 2020 I 11

Management’s Discussion and Analysis

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-8 maritime patrol aircraft and has subcontracted CAE to design and develop P-8 operational flight trainers for the U.S. Navy and other international customers. Boeing continues to market the P-8 internationally, which will create further opportunities for us. Other examples of our relationships with OEMs on specific platforms creating opportunities for training systems include Airbus Defence & Space on the C295, which will be delivered to the Royal Canadian Air Force 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 continues to be acquired by several branches of the USAF as well as 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.

HEALTHCARE MARKET

We offer integrated education and training solutions including surgical and imaging simulations, curriculum, audiovisual and centre management platforms and patient simulators to healthcare students and clinical professionals across the professional life cycle.

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

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

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

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

Market drivers

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

–	Limited access to live patients during training;
–	Medical and mixed reality technology revolution;
---	---
–	Broader adoption of simulation, with a demand for innovative and custom training approaches;
---	---
–	Growing emphasis on patient safety and outcomes.
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12 I CAE Financial Report 2020

Management’s Discussion and Analysis

Limited access to live patients during training

Traditionally, medical education has been an apprenticeship model in which students care for patients under the supervision of more experienced staff. In this model, students have limited 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 released a ground-breaking study on the effectiveness of simulation training in pre-licensure nursing programs and published national simulation guidelines that are still in use today. 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. In the U.K., the Nursing and Midwifery Council announced in April 2018 that it has lifted the cap on the number of hours nursing students can spend in simulation-based training in place of clinical hours. In addition, during the COVID-19 pandemic, SSH and INACSL called for more flexibility in replacing required clinical training hours for health science students with simulation hours, emphasizing that virtual simulation is an effective teaching method that results in improved student learning outcomes. State boards of nursing have begun to change requirements to help ensure that learners and new graduates can continue their education and would be ready to enter the workforce.

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 22 NATO countries prohibiting the use of live animals in military medical training. CAE Healthcare simulators provide a low-risk alternative for practicing life-saving procedures, inter-professional team training and major disaster response.

Medical and mixed reality 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 the introduction of new interventional procedures. We were the first to bring a commercial Microsoft HoloLens mixed reality application to the medical simulation market and, in January 2020, we released multiple HoloLens 2 applications which will integrate holographic, modeled physiology into our emergency care, ultrasound and childbirth simulators that allow learners to envision human anatomy.

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

The majority of product and service sales in healthcare simulation involve healthcare education. We estimate the total healthcare simulation market at approximately US$1.7 billion. North America is the largest market for healthcare simulation, followed by Europe and Asia. Together with our global distribution network, we are reaching new and emerging markets and addressing the international demand potential for simulation-based training. CAE segments the healthcare simulation market by virtual, augmented and mixed reality simulators, high-fidelity patient simulators, interventional simulators, task trainers, ultrasound simulators, audiovisual and simulation centre management solutions, simulated clinical environments and training services. There is a growing body of evidence demonstrating that medical simulation improves clinical competency, patient outcomes and reduces medical errors, which can help mitigate the rate of increase in healthcare costs. Healthcare is expected to become increasingly relevant in a world more acutely aware of the benefits of healthcare simulation and training to help save lives at a steady state and in a healthcare crisis.

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 are the third-leading cause of death in U.S. hospitals and the World Health Organization reported in 2018 that there is a 1 in 300 chance of being harmed during health care. Training using simulation can help clinicians gain confidence, knowledge and expertise for improving patient safety in a risk-free environment. As the Medicare and Medicaid reimbursement structure in U.S. hospitals shifts from being based solely on quantity of services to the quality of services (value-based care), including safety and patient outcomes, CAE expects more hospitals to implement simulation-based training to improve performance and reduce the risk of medical errors.

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.

CAE Financial Report 2020 I 13

Management’s Discussion and Analysis

3.6 Foreign exchange

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

The tables below show the variations of the closing and average exchange rates for the three main currencies in which we operate.

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

			Increase /
	2020	2019	(decrease)
U.S. dollar ( or )	1.41	1.34	5	%
Euro ( or )	1.55	1.50	3	%
British pound ( or )	1.75	1.74	1	%

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

			Increase /
	2020	2019	(decrease)
U.S. dollar ( or )	1.33	1.31	2	%
Euro ( or )	1.48	1.52	(3	%)
British pound ( or )	1.69	1.72	(2	%)

For fiscal 2020, the effect of translating the results of our foreign operations into Canadian dollars resulted in a decrease in revenue of $11.0 million and a decrease in net income of $2.3 million, when compared to fiscal 2019. We calculated this by translating the current year’s foreign currency revenue and net income using the average monthly exchange rates from the previous year and comparing these adjusted amounts to our current year reported results.

You will find more details about our foreign exchange exposure and hedging strategies in Business Risk and Uncertainty. A sensitivity analysis for foreign currency risk is included in Note 30 of our consolidated financial statements.

3.7 Non-GAAP and other financial measures

This MD&A includes non-GAAP and other financial measures. Non-GAAP measures are useful supplemental information but may not have a standardized meaning according to GAAP. These measures should not be confused with, or used as an alternative for, performance measures calculated according to GAAP. Furthermore, these non-GAAP measures should not be compared with similarly titled measures provided or used by other companies.

Capital employed

Capital employed 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).
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Source of capital:

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

Return on capital employed (ROCE)

ROCE is used to evaluate the profitability of our invested capital. We calculate this ratio over a rolling four-quarter period by taking net income attributable to equity holders of the Company excluding net finance expense, after tax, divided by the average capital employed.

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

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

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

14 I CAE Financial Report 2020

Management’s Discussion and Analysis

Earnings per share (EPS) before specific items

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

Free cash flow

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

Gross profit

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

Net debt

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

Net debt-to-EBITDA is calculated as net debt divided by the last twelve months EBITDA. EBITDA comprises earnings before income taxes, finance expense – net, depreciation and amortization.

Net income before specific items

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

Non-cash working capital

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

Operating profit

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

Order intake and Backlog

Order intake

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

–	For the Civil Aviation Training Solutions segment, we consider an item part of our order intake when we have a legally binding commercial agreement with a client that includes enough detail about each party’s obligations to form the basis for a contract. Additionally, expected future revenues from customers under short-term and long-term training contracts are included when these customers commit to pay us training fees, or when we reasonably expect the revenue to be generated;
–	For the Defence and Security segment, we consider an item part of our order intake when we have a legally binding commercial agreement with a client that includes enough detail about each party’s obligations to form the basis for a contract. Defence and Security contracts are usually executed over a long-term period but some of them must be renewed each year. For this segment, we only include a contract item in order intake when the customer has authorized the contract item and has received funding for it;
---	---
–	For the Healthcare segment, order intake is typically converted into revenue within one year, therefore we assume that order intake is equal to revenue.
---	---

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

CAE Financial Report 2020 I 15

Management’s Discussion and Analysis

Backlog

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

–	Obligated backlog represents the value of our order intake not yet executed and is calculated by adding the order intake of the current period to the balance of the obligated backlog at the end of the previous fiscal year, subtracting the revenue recognized in the current period and adding or subtracting backlog adjustments. If the amount of an order already recognized in a previous fiscal year is modified, the backlog is revised through adjustments;
–	Joint venture backlog is obligated backlog that represents the expected value of our share of orders that our joint ventures have received but have not yet executed. Joint venture backlog is determined on the same basis as obligated backlog described above;
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–	Unfunded backlog represents firm Defence and Security orders we have received but have not yet executed and for which funding authorization has not yet been obtained. Options are included in backlog when there is a high probability of being exercised, but indefinite-delivery/indefinite-quantity (ID/IQ) contracts are excluded. When an option is exercised, it is considered order intake in that period and it is removed from unfunded backlog and options.
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Remaining performance obligations

Remaining performance obligations is a GAAP measure, introduced under the application of IFRS 15, which represents the cumulative balance of unsatisfied promises to transfer a distinct good or service to customers as part of a legally binding commercial agreement. This measure is similar to our definition of backlog, however excludes joint venture balances, options and estimated contract values:

–	Estimated contract values represent estimated future revenue from customers under exclusive short-term and long-term training contracts when we expect the revenue to be generated, based on regulated customer training requirements but for which no training sessions have yet been booked.

Research and development expenses

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

Segment operating income (SOI)

Segment operating income is a non-GAAP measure and is the sum of our key indicators of each segment’s financial performance. Segment operating income gives us an indication of the profitability of each segment because it does not include the impact of any items not specifically related to the segment’s performance. We calculate segment operating income by taking the operating profit and excluding restructuring costs of major programs that do not arise from significant strategic transactions.

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

Simulator equivalent unit (SEU)

Simulator equivalent unit

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

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

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

Utilization rate

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

16 I CAE Financial Report 2020

Management’s Discussion and Analysis

4. CONSOLIDATED RESULTS

4.1 Results from operations – fourth quarter of fiscal 2020

(amounts in millions, except per share amounts)		Q4-2020	Q3-2020		Q2-2020		Q1-2020		Q4-2019
Revenue	$	977.3	923.5		896.8		825.6		1,022.0
Cost of sales	$	665.6	632.0		660.1		581.9		734.0
Gross profit^3^	$	311.7	291.5		236.7		243.7		288.0
As a % of revenue	%	31.9	31.6		26.4		29.5		28.2
Research and development expenses^3^	$	36.2	33.6		35.8		31.9		9.9
Selling, general and administrative expenses	$	107.9	118.3		98.0		113.3		123.2
Other losses (gains) – net	$	14.3	(3.5	)	(11.5	)	(0.3	)	(5.2	)
After tax share in loss (profit) of equity accounted investees	$	6.8	(11.8	)	(10.4	)	(12.1	)	(10.3	)
Operating profit^3^	$	146.5	154.9		124.8		110.9		170.4
As a % of revenue	%	15.0	16.8		13.9		13.4		16.7
Finance expense – net	$	38.5	36.7		34.3		34.9		25.7
Earnings before income taxes	$	108.0	118.2		90.5		76.0		144.7
Income tax expense	$	26.9	18.4		15.5		13.0		19.3
As a % of earnings before income taxes
(income tax rate)	%	25	16		17		17		13
Net income	$	81.1	99.8		75.0		63.0		125.4
Attributable to:
Equity holders of the Company	$	78.4	97.7		73.8		61.5		122.3
Non-controlling interests	$	2.7	2.1		1.2		1.5		3.1
	$	81.1	99.8		75.0		63.0		125.4
EPS attributable to equity holders of the Company
Basic and diluted	$	0.29	0.37		0.28		0.23		0.46
EPS before specific items^3^	$	0.46	0.37		0.28		0.24		0.48

Revenue was 4% lower compared to the fourth quarter of fiscal 2019

Revenue was $44.7 million lower than the fourth quarter of fiscal 2019. Decreases in revenue were $46.1 million and $7.1 million for Defence and Security and Healthcare respectively, partially offset by an increase of $8.5 million in Civil Aviation Training Solutions.

You will find more details in Results by segment.

Segment operating income^3^ was $23.9 million lower compared to the fourth quarter of fiscal 2019

Segment operating income was $146.5 million this quarter, or 15.0% of revenue, compared to $170.4 million, or 16.7% of revenue, in the fourth quarter of fiscal 2019. Decreases in segment operating income were $41.6 million and $18.3 million in Healthcare and Defence and Security respectively, partially offset by an increase of $36.0 million for Civil Aviation Training Solutions.

Segment operating income before specific items^4^ was $193.9 million this quarter, or 19.8% of revenue compared to $177.2 million, or 17.3% of revenue in the fourth quarter of fiscal 2019. On this basis, segment operating income before specific items was $16.7 million or 9% higher over the fourth quarter of fiscal 2019.

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

You will find more details in Results by segment.

Net finance expense was $12.8 million higher than the fourth quarter of fiscal 2019

The increase compared to the fourth quarter of fiscal 2019 was mainly due to higher interest on long-term debt due to the issuance of unsecured senior notes in March and December 2019, primarily to fund the acquisition of BBAT, and higher interest on lease liabilities as a result of the adoption of IFRS 16.

^3^ Non-GAAP and other financial measures (see Section 3.7).

CAE Financial Report 2020 I 17

Management’s Discussion and Analysis

Income tax rate was 25% this quarter

Income taxes this quarter were $26.9 million, representing an effective tax rate of 25%, compared to 13% for the fourth quarter of fiscal 2019.

In the fourth quarter last year, the tax rate was lower due to the recognition of deferred tax asset not previously recognized in Canada arising from the acquisition of BBAT and in Europe, partially offset by the negative impact of tax audits in Canada. Excluding these elements, the income tax rate would have been 20% in the fourth quarter last year.

In the fourth quarter this year, the income tax rate was impacted by a goodwill impairment charge for the Healthcare segment. Excluding the effect of the goodwill impairment, the income tax rate would have been 19% this quarter. On this basis, the decrease in the tax rate from the fourth quarter of fiscal 2019 was mainly due to the change in the mix of income from various jurisdictions.

4.2 Results from operations – fiscal 2020

(amounts in millions, except per share amounts)		FY2020		FY2019
Revenue	$	3,623.2		3,304.1
Cost of sales	$	2,539.6		2,362.6
Gross profit	$	1,083.6		941.5
As a % of revenue	%	29.9		28.5
Research and development expenses	$	137.5		101.4
Selling, general and administrative expenses	$	437.5		415.2
Other gains – net	$	(1.0	)	(22.3	)
After tax share in profit of equity accounted investees	$	(27.5	)	(33.4	)
Operating profit	$	537.1		480.6
As a % of revenue	%	14.8		14.5
Finance expense – net	$	144.4		80.9
Earnings before income taxes	$	392.7		399.7
Income tax expense	$	73.8		59.6
As a % of earnings before income taxes (income tax rate)	%	19		15
Net income	$	318.9		340.1
Attributable to:
Equity holders of the Company	$	311.4		330.0
Non-controlling interests	$	7.5		10.1
	$	318.9		340.1
EPS attributable to equity holders of the Company
Basic	$	1.17		1.24
Diluted	$	1.16		1.23
EPS before specific items	$	1.34		1.25

Revenue was $319.1 million or 10% higher than last year

Increases in revenue were $291.7 million, $24.5 million and $2.9 million for Civil Aviation Training Solutions, Defence and Security and Healthcare respectively.

You will find more details in Results by segment.

Gross profit was $142.1 million higher than last year

Gross profit was $1,083.6 million this year, or 29.9% of revenue compared to $941.5 million, or 28.5% of revenue last year.

Segment operating income was $56.5 million higher than last year

Segment operating income for the year was $537.1 million, or 14.8% of revenue, compared to $480.6 million, or 14.5% of revenue, last year. The increase in segment operating income was $129.0 million for Civil Aviation Training, partially offset by decreases of $45.8 million and $26.7 million for Healthcare and Defence and Security respectively.

Segment operating income before specific items was $590.4 million, or 16.3% of revenue, compared to $487.4 million, or 14.8% of revenue, last year. On this basis, segment operating income before specific items was $103.0 million or 21% higher compared to last year.

You will find more details in Results by segment.

18 I CAE Financial Report 2020

Management’s Discussion and Analysis

Net finance expense was $63.5 million higher than last year

	FY2019 to
(amounts in millions)	FY2020
Net finance expense, prior period	$	80.9
Change in finance expense from the prior period:
Increase in finance expense on long-term debt (other than lease liabilities)	$	42.0
Decrease in finance expense on royalty obligations	(1.9		)
Increase in finance expense on lease liabilities	15.7
Increase in other finance expense	1.6
Decrease in borrowing costs capitalized	1.4
Increase in finance expense from the prior period	$	58.8
Change in finance income from the prior period:
Decrease in interest income on loans and finance lease contracts	$	0.2
Decrease in other finance income	4.5
Increase in finance income from the prior period	$	4.7
Net finance expense, current period	$	144.4

Net finance expense was $144.4 million this year, $63.5 million or 78% higher than last year. The increase was mainly due to higher interest on long-term debt due to the issuance of unsecured senior notes in March and December 2019, primarily to fund the acquisition of BBAT, higher interest on lease liabilities as a result of the adoption of IFRS 16 and lower finance income.

Income tax rate was 19% this year

This fiscal year, income taxes were $73.8 million, representing an effective tax rate of 19%, compared to 15% for the same period last year.

Last year, the tax rate was lower due to the recognition of deferred tax asset not previously recognized in Canada arising from the acquisition of BBAT and in Europe, partially offset by the negative impact of tax audits in Canada. Excluding these elements, the income tax rate would have been 19% last year.

This year, the income tax rate was impacted by a goodwill impairment charge for the Healthcare segment. Excluding the effect of the goodwill impairment, the income tax rate would have been 17% this year. On this basis, the decrease in the tax rate compared to last year was mainly due to the change in the mix of income from various jurisdictions.

4.3 Consolidated orders and total backlog

Total backlog^4^ stable compared to last year

(amounts in millions)	FY2020			FY2019
Obligated backlog^4^, beginning of period	$	7,461.4		$	6,839.4
+ order intake^4^	3,821.6			3,971.4
- revenue	(3,623.2		)	(3,304.1		)
+ / - adjustments	(28.8		)	(45.3		)
Obligated backlog, end of period	$	7,631.0		$	7,461.4
Joint venture backlog^4^ (all obligated)	441.4			414.5
Unfunded backlog and options^4^	1,385.7			1,619.0
Total backlog	$	9,458.1		$	9,494.9

Reconciliation of total backlog to remaining performance obligations
Total backlog	$	9,458.1		$	9,494.9
Less: Joint venture backlog	(441.4		)	(414.5		)
Less: Options	(516.4		)	(494.5		)
Less: Estimated contract value^4^	(3,636.7		)	(3,172.2		)
Remaining performance obligations	$	4,863.6		$	5,413.7

The book-to-sales ratio for the quarter was 0.80x. The ratio for the last 12 months was 1.05x.

You will find more details in Results by segment.

^4^ Non-GAAP and other financial measures (see Section 3.7).

CAE Financial Report 2020 I 19

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

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

KEY PERFORMANCE INDICATORS

Segment operating income (loss)

(amounts in millions, except operating margins)		FY2020		FY2019	Q4-2020		Q3-2020	Q2-2020		Q1-2020		Q4-2019

Civil Aviation Training Solutions	$	473.3		344.3	151.5		123.0	100.2		98.6		115.5
	%	21.8		18.4	25.2		22.0	18.9		20.6		19.5

Defence and Security	$	104.8		131.5	32.4		31.3	26.0		15.1		50.7
	%	7.9		10.1	9.5		9.4	7.7		4.7		13.1

Healthcare	$	(41.0	)	4.8	(37.4	)	0.6	(1.4	)	(2.8	)	4.2
	%	—		3.9	—		1.8	—		—		10.3
Segment operating income	$	537.1		480.6	146.5		154.9	124.8		110.9		170.4
SOI before specific items	$	590.4		487.4	193.9		157.2	126.0		113.3		177.2

Capital employed^5^

	March 31	December 31	September 30	June 30	March 31
(amounts in millions)	2020	2019	2019	2019	2019
Civil Aviation Training Solutions	3,869.6	3,734.5	3,655.2	3,549.6	3,274.7
Defence and Security	1,154.0	1,074.4	1,191.8	1,192.2	1,032.0
Healthcare	208.0	224.7	225.8	226.8	222.8
Capital employed	5,231.6	5,033.6	5,072.8	4,968.6	4,529.5

All values are in US Dollars.

^5^ Non-GAAP and other financial measures (see Section 3.7).

20 I CAE Financial Report 2020

Management’s Discussion and Analysis

5.1 Civil Aviation Training Solutions

FISCAL 2020 EXPANSIONS AND NEW INITIATIVES

Acquisitions

–	On April 26, 2019, we acquired the remaining equity interest in Pelesys, a global leader in the provision of aviation training solutions and courseware;
–	On June 26, 2019, we acquired the shares of Luftfartsskolen AS, an ab-initio flight school located in Oslo, Norway, expanding our cadet training capabilities in Europe.
---	---

Expansions

–	We announced the expansion of our training capacity in Asia with new training centres in Bangkok, Thailand and Gurugram, India;
–	We announced the inauguration of new training centres in London Gatwick, Manchester, and Milan to support the start of our 10-year pilot training agreement with easyJet, as well as the growing training needs of airlines in Europe;
---	---
–	We announced the expansion of our business aviation network with a new Bombardier Global 7500 FFS and a Bombardier Learjet 75 flight-training device;
---	---
–	On November 4, 2019, we concluded a 15-year exclusive business aviation training services agreement with Directional Aviation Capital affiliates and the acquisition of a 50% stake in SIMCOM, an operator of a wide range of jet, turboprop and piston powered aircraft simulators and training devices.
---	---

New programs and products

–	We announced the launch of our new cutting-edge digital solution, the electronic training and checking authorization (eTCA) application, to better manage booking requests for training centres dedicated to business aviation;
–	We welcomed the first five CAE Women in Flight ambassadors and winners of the 2019 scholarships;
---	---
–	We announced the launch of a new cadet pilot training program in which CAE will train more than 700 new professional pilots over the next 10 years for Southwest Airlines Destination 225° program;
---	---
–	We announced two new MPL programs in partnership with easyJet and Volotea;
---	---
–	We announced, together with Jazz Aviation and Seneca School of Aviation, a new cadet pilot training program in Canada called Jazz Approach;
---	---
–	We have introduced new virtual service offerings to support our customers as a response to border restrictions arising from the COVID‑19 pandemic including offering remote support for the installation, acceptance and qualification of FFSs, obtaining FAA and other Civil Aviation Authority approvals for virtual training in certain of our flight training organizations, and developing remote IOS solutions for live instructor interactions during training sessions.
---	---

FISCAL 2020 ORDERS

Civil Aviation Training Solutions obtained contracts this quarter expected to generate future revenues of $468.6 million, including contracts for 12 FFSs sold to customers in all regions. This brings the total civil order intake to $2,471.5 million and 49 FFSs for the year.

Notable FFS contract awards for the year included:

–	Five FFSs including two Bombardier Challenger CL350s, one Gulfstream G650, one Embraer Legacy 500, and one Embraer Phenom 300 to SIMCOM International;
–	Two Boeing 737MAX FFSs to Emirates - CAE Flight Training, a joint venture of Emirates Airline and CAE;
---	---
–	One Embraer E190 FFS and one Embraer E190-E2 FFS to KLM Royal Airlines;
---	---
–	Three Boeing 737MAX FFSs to Southwest Airlines;
---	---
–	Two Boeing 777X FFSs to Emirates Airline;
---	---
–	One Airbus A330 FFS to Korean Air;
---	---
–	One Boeing 737MAX FFS to Alaska Airlines;
---	---
–	33 FFSs to undisclosed customers.
---	---

Notable contract awards for fiscal 2020 included:

–	An extension for 6.5 years for pilot training with LATAM;
–	An exclusive 5-year pilot and cabin crew training agreement with SAS;
---	---
–	A 10-year pilot training agreement with JetSmart Airlines SpA;
---	---
–	An extension for 5 years for pilot training with Sunwing Airlines;
---	---
–	A 3-year business aviation pilot training renewal with TAG Aviation Holdings;
---	---
–	A 3-year business aviation pilot training agreement with Western Air Charter.
---	---

CAE Financial Report 2020 I 21

Management’s Discussion and Analysis

FINANCIAL RESULTS^6^

(amounts in millions, except operating margins, SEU, FFSs deployed, utilization rate and FFS deliveries)		FY2020	FY2019	Q4-2020	Q3-2020	Q2-2020	Q1-2020	Q4-2019
Revenue	$	2,167.5	1,875.8	601.9	558.1	529.9	477.6	593.4
Segment operating income	$	473.3	344.3	151.5	123.0	100.2	98.6	115.5
Operating margins	%	21.8	18.4	25.2	22.0	18.9	20.6	19.5
SOI before specific items	$	479.4	351.1	153.6	123.4	101.4	101.0	122.3
Operating margins	%	22.1	18.7	25.5	22.1	19.1	21.1	20.6
Depreciation and amortization	$	232.8	157.2	59.8	59.8	57.3	55.9	47.5
Property, plant and equipment
expenditures	$	259.9	226.4	78.1	45.8	52.4	83.6	87.9
Intangible assets and other
assets expenditures	$	36.4	33.7	13.7	7.0	10.3	5.4	7.2
Capital employed	$	3,869.6	3,274.7	3,869.6	3,734.5	3,655.2	3,549.6	3,274.7
Total backlog	$	5,341.3	5,039.6	5,341.3	5,263.0	5,124.8	5,090.3	5,039.6
SEU^6^		247	218	250	252	243	242	224
FFSs deployed in CAE's network^6^		306	286	306	303	299	294	286
Utilization rate^6^	%	70	76	67	70	69	76	75
FFS deliveries		56	58	21	12	18	5	25

Revenue stable compared to the fourth quarter of fiscal 2019

Contributors of increased revenue include the integration into our results of BBAT following its acquisition in the fourth quarter of fiscal 2019, higher revenue recognized from simulator sales due to the timing of production milestones on devices for which revenue was not recognized upon delivery, and the contribution from recently deployed simulators in our network, prior to the negative COVID-19 impact. The increase was offset by a lower number of deliveries compared to record deliveries in the fourth quarter of fiscal 2019, lower utilization in the Americas and Europe, and the impact of COVID-19 as described below.

The COVID-19 pandemic has negatively affected our training revenues during the quarter due to a significant decrease in training services demand as a result of the reduction in airlines global operations and disruption to the global air transportation environment and air passenger travel. In addition, travel bans, border restrictions, lockdown protocols and world-wide self-isolation measures have resulted in centre closures in the quarter. As at March 31, 2020, 19 of our civil aviation training centres suspended operations, and 10 training centres that remained open began operating at significantly reduced capacity. We expect our training utilization to be even further impacted in the first half of fiscal 2021 as a result of continued closures and decreased demand. The Montreal manufacturing plant also ceased manufacturing operations for civil simulator products on March 25, 2020, under public directives, and while this did not have a significant impact on our fiscal 2020 fourth quarter results, we expect it will have an impact during at least the first half of fiscal 2021, subject to the timing of return of manufacturing operations and lifting of global travel restrictions.

Revenue was $2,167.5 million this year, 16% or $291.7 million higher than last year

The increase over last year was due to the integration into our results of BBAT, higher revenue recognized from simulator sales due to the timing of production and other milestones on devices for which revenue was not recognized upon delivery, the contribution from recently deployed simulators in our network prior to the negative COVID-19 impact, and a higher demand for our flight training organization. The increase was partially offset by lower utilization in the Americas and in Europe, a lower number of simulator deliveries, and the impact of COVID-19 as described above.

Segment operating income up 31% over the fourth quarter of fiscal 2019

Segment operating income was $151.5 million (25.2% of revenue) this quarter, compared to $115.5 million (19.5% of revenue) in the fourth quarter of fiscal 2019.

Segment operating income increased by $36.0 million, or 31%, over the fourth quarter of fiscal 2019. The increase was mainly due to the integration into our results of BBAT operations, a favourable program mix from our manufacturing facility, and the contribution from recently deployed simulators in our network, prior to the negative COVID-19 impact. The increase was partially offset by lower utilization mainly in Europe and the impact of COVID-19 as described above.

Excluding the costs arising from the acquisition and integration of BBAT, segment operating income before specific items was $153.6 million (25.5% of revenue) this quarter, compared to $122.3 million (20.6% of revenue) in the fourth quarter of fiscal 2019. On this basis, the current period's segment operating income before specific items was up 26% over the same quarter last year.

^6^ Non-GAAP and other financial measures (see Section 3.7).

22 I CAE Financial Report 2020

Management’s Discussion and Analysis

Segment operating income was $473.3 million, 37% or $129.0 million higher than last year

Segment operating income was $473.3 million (21.8% of revenue) this year, compared to $344.3 million (18.4% of revenue) last year.

The increase was mainly due to the integration into our results of BBAT operations, a favourable program mix from our manufacturing facility, and the contribution from recently deployed simulators in our network, before the negative COVID-19 impact. The increase was partially offset by lower utilization in the Americas and Europe and the impact of COVID-19 as described above.

Excluding the costs arising from the acquisition and integration of BBAT, segment operating income before specific items was $479.4 million (22.1% of revenue) in fiscal 2020, compared to $351.1 million (18.7% of revenue) in fiscal 2019. On this basis, segment operating income before specific items was up 37% over last year.

Property, plant and equipment expenditures at $78.1 million this quarter and $259.9 million for the year

Maintenance capital expenditures were $19.7 million for the quarter and $60.3 million for the year. Growth capital expenditures were $58.4 million for the quarter and $199.6 million for the year.

Capital employed increased $135.1 million over last quarter and $594.9 million over last year

The increase in capital employed over last quarter was due to higher property, plant and equipment, intangible assets and investment in equity accounted investees, primarily due to movements in foreign exchange rates. The increase was partially offset by lower non-cash working capital, driven by higher accounts payable and accrued liabilities, higher contract liabilities, and higher derivative financial liabilities, partially offset by higher accounts receivable and higher contract assets.

The increase in capital employed over last year was due to higher property, plant and equipment, higher investment in equity accounted investees as a result of the acquisition of a 50% stake in SIMCOM, the recognition of right-of-use assets as a result of the adoption of IFRS 16, and higher intangible assets.

Total backlog was up 6% compared to year

(amounts in millions)	FY2020			FY2019
Obligated backlog, beginning of period	$	4,679.2		$	3,835.3
+ order intake	2,471.5			2,769.9
- revenue	(2,167.5		)	(1,875.8		)
+ / - adjustments	10.3			(50.2		)
Obligated backlog, end of period	$	4,993.5		$	4,679.2
Joint venture backlog (all obligated)	347.8			360.4
Total backlog	$	5,341.3		$	5,039.6

Fiscal 2020 adjustments include foreign exchange movements, partially offset by the revaluation of prior year contracts and the cancellation of orders from a previous year.

Fiscal 2019 adjustments include the revaluation of prior year contracts and negative foreign exchange movements, partially offset by backlog acquired from BBAT.

This quarter's book-to-sales ratio was 0.78x. The ratio for the last 12 months was 1.14x.

5.2 Defence and Security

FISCAL 2020 EXPANSIONS AND NEW INITIATIVES

Expansions

–	CAE USA and Leonardo signed a memorandum of agreement to collaborate and offer integrated solutions for helicopter training requirements for the U.S. government market;
–	The Netherlands Ministry of Defence opened a new training facility at Maritime Air Base de Kooy in Den Helder, the Netherlands where CAE will provide on-site maintenance and support services for the NH90 full-flight and mission trainer located at the facility;
---	---
–	MSI was awarded a position on the U.S. Air Force Advisory & Assistance Services ID/IQ contract. MSI will now have opportunity to compete on task orders issued under the ID/IQ contract, which provides for technical training and analytical services to support and improve policy development, operational decision-making and management operations.
---	---

CAE Financial Report 2020 I 23

Management’s Discussion and Analysis

New programs and products

–	We introduced several new courses at the CAE Dothan Training Center, including C-12/King Air B200 recurrent/refresher courses and a new UPRT course;
–	We launched the CAE TRAX Academy, an integrated and advanced training continuum designed to deliver faster and more efficient throughput for military student pilot training. As an integral part of CAE TRAX Academy, we introduced the CAE Sprint Virtual Reality (VR) trainer, which will enable self-paced learning in an immersive, high-fidelity virtual environment;
---	---
–	A CAE-built Predator Mission Trainer was installed at General Atomics Flight Test and Training Center located near Grand Forks, North Dakota and will be used to advance the quality and capability of remotely piloted aircraft synthetic training;
---	---
–	We have introduced new virtual service offerings to support our customers to meet social distancing requirements arising from the COVID-19 pandemic, including virtual acceptance testing and developing offboard IOS solutions that allow for the removal of the instructor from the cockpit of the simulator while still providing the required functionality to continue conducting training exercises.
---	---

FISCAL 2020 ORDERS

Defence and Security was awarded $276.6 million in orders this quarter and $1,225.6 million in total for fiscal 2020, including notable contract awards from:

–	Lockheed Martin to support the design and manufacture of additional C-130J simulators and training devices as well as simulator upgrades for the USAF and U.S. Marine Corps;
–	The USAF to continue providing KC-135 aircrew training services as well as perform a range of simulator upgrades and modifications on KC-135 training devices;
---	---
–	The NATO Support and Procurement Agency to provide the German Navy with a comprehensive training solution for the NH90 Sea Lion helicopter;
---	---
–	The Federal Office of Bundeswehr Equipment, Information Technology and In-Service Support in Germany to upgrade and modify German Army NH90 full-mission simulators as part of a five-year extension to 2027 of the NH90 contract delivered by the Helicopter Flight Training Services joint venture;
---	---
–	The U.S. Army to provide fixed-wing flight training and support services at the CAE Dothan Training Center;
---	---
–	Leonardo to provide M346 training devices and upgrades;
---	---
–	BAE Systems to provide the CAE Medallion MR e-Series visual system for undisclosed customers;
---	---
–	Babcock France to provide an additional Pilatus PC-21 full-mission simulator to support pilot training for the French Air Force.
---	---

FINANCIAL RESULTS

(amounts in millions, except operating margins)		FY2020	FY2019	Q4-2020	Q3-2020	Q2-2020	Q1-2020	Q4-2019
Revenue	$	1,331.2	1,306.7	341.8	332.4	336.5	320.5	387.9
Segment operating income	$	104.8	131.5	32.4	31.3	26.0	15.1	50.7
Operating margins	%	7.9	10.1	9.5	9.4	7.7	4.7	13.1
SOI before specific items	$	114.5	131.5	40.2	33.2	26.0	15.1	50.7
Operating margins	%	8.6	10.1	11.8	10.0	7.7	4.7	13.1
Depreciation and amortization	$	58.2	46.5	15.4	14.1	14.6	14.1	12.4
Property, plant and equipment
expenditures	$	21.3	22.0	5.2	5.5	6.2	4.4	7.7
Intangible assets and other
assets expenditures	$	53.5	43.7	15.0	11.2	12.7	14.6	14.5
Capital employed	$	1,154.0	1,032.0	1,154.0	1,074.4	1,191.8	1,192.2	1,032.0
Total backlog	$	4,116.8	4,455.3	4,116.8	4,171.3	4,113.6	4,271.9	4,455.3

Revenue down 12% over the fourth quarter of fiscal 2019

The COVID-19 pandemic contributed to delays in the execution of programs from backlog and in order intake. A range of Defence programs involving government and OEM customers globally experienced delays due to travel bans, border restrictions, client access restrictions and supply chain disruptions. In addition, there have been delays in the awarding of new contracts as government acquisition authorities follow directives in their respective countries to shelter-in-place and eliminate travel. The decrease in revenue from the fourth quarter of fiscal 2019 was also due to a lower level of activity on North American programs, partially offset by an increased level of activity on European programs this quarter.

Revenue was $1,331.2 million this year, 2% or $24.5 million higher than last year

The increase was mainly due to the integration into our results of AOCE following its acquisition in the second quarter of fiscal 2019, as well as higher revenue from European programs and was partially offset by lower revenue due to COVID-19-related program delays, as described above, and lower revenue from Middle Eastern programs.

24 I CAE Financial Report 2020

Management’s Discussion and Analysis

Segment operating income down 36% over the fourth quarter of fiscal 2019

Segment operating income was $32.4 million (9.5% of revenue) this quarter, compared to $50.7 million (13.1% of revenue) in the fourth quarter of fiscal 2019.

The decrease from the fourth quarter of fiscal 2019 was due in part to COVID-19 related program delays and a lower level of activity on North American programs, as mentioned above, in addition to reorganizational costs incurred this quarter. The decrease was partially offset by lower selling, general and administrative expenses and increased activity on our European programs.

Following certain changes that we made in the segment focus, we have reviewed certain product offerings that resulted in a loss in value of some assets. This loss has been included in the reorganization costs for the segment. Excluding these reorganizational costs, segment operating income before specific items was $40.2 million (11.8% of revenue) this quarter, compared to $50.7 million (13.1% of revenue) in the fourth quarter of fiscal 2019. On this basis, the current period's segment operating income before specific items was down 21% from the same quarter last year.

Segment operating income was $104.8 million this year, 20% or $26.7 million lower than last year

Segment operating income was $104.8 million (7.9% of revenue) this year, compared to $131.5 million (10.1% of revenue) last year.

The decrease from last year was due in part to COVID-19-related program delays, as described above, lower contributions from North American product programs, due to order delays and execution on program milestones for certain contracts in backlog, as well as reorganizational costs incurred this year. The decrease was partially offset by increased activity on our European programs.

Excluding reorganizational costs, segment operating income before specific items was $114.5 million (8.6% of revenue) in fiscal 2020, compared to $131.5 million (10.1% of revenue) in fiscal 2019. On this basis, the current period's segment operating income before specific items was down 13% from last year.

Capital employed increased $79.6 million over last quarter and increased $122.0 million over last year

The increase over last quarter was mainly due to higher non-cash working capital, intangible assets and property, plant and equipment, primarily due to movements in foreign exchange rates and lower deferred gains and other non-current liabilities.

The increase over last year was primarily due to the recognition of right-of-use assets as a result of the adoption of IFRS 16, movements in foreign exchange rates, mainly on non‑cash working capital, intangible assets and property, plant and equipment, and lower deferred gains and other non-current liabilities.

Total backlog down 8% compared to last year

(amounts in millions)	FY2020			FY2019
Obligated backlog, beginning of period	$	2,782.2		$	3,004.1
+ order intake	1,225.6			1,079.9
- revenue	(1,331.2		)	(1,306.7		)
+ / - adjustments	(39.1		)	4.9
Obligated backlog, end of period	$	2,637.5		$	2,782.2
Joint venture backlog (all obligated)	93.6			54.1
Unfunded backlog and options	1,385.7			1,619.0
Total backlog	$	4,116.8		$	4,455.3

Fiscal 2020 adjustments include the revaluation of prior year contracts, partially offset by foreign exchange movements.

Fiscal 2019 adjustments include an addition to reflect the acquisition of AOCE, partially offset by the cancellation of an order and the revaluation of prior year contracts.

This quarter's book-to-sales ratio was 0.81x. The ratio for the last 12 months was 0.92x.

In fiscal 2020, $413.2 million of unfunded backlog was transferred to obligated backlog and $134.5 million was added to the unfunded backlog.

CAE Financial Report 2020 I 25

Management’s Discussion and Analysis

5.3 Healthcare

FISCAL 2020 EXPANSIONS AND NEW INITIATIVES

Expansions

–	We added a new Training for Life^TM^ site at Inspira Health Network in New Jersey, U.S., expanding access for customers to personalized product training opportunities from CAE Healthcare's expert educators;
–	We expanded our reach in the hospital segment by entering into a group purchasing agreement with Premier, a leading healthcare improvement company, uniting an alliance of approximately 4,000 U.S. hospitals and health systems and approximately 175,000 other providers and organizations;
---	---
–	We expanded our geographic reach in the Scandinavian market, with new distributors in Denmark, Finland, Norway and Sweden.
---	---

New programs and products

–	We announced a new CAE Centre of Excellence for simulation-based education at ESPA-Montreal, the first healthcare education and industry partnership devised to impact patient care in Quebec, Canada;
–	We collaborated with the Canadian Association of Schools of Nursing to develop a module of ten recommended SCE courseware packages for student nurses that can be practiced with the CAE Juno manikin;
---	---
–	We, together with ASA, launched the Anesthesia SimSTAT - PACU and Labor & Delivery Unit modules, new modules in a series of interactive screen-based anesthesia simulation modules, which have been approved by the American Board of Anesthesiology for MOCA credits;
---	---
–	We developed several custom solutions for OEMs including Baylis Medical for a simulator to support its cardiovascular transseptal puncture systems, Edwards Lifesciences for new advanced critical care and cardiac care devices, and Cardinal Health (Cordis) for a cardiovascular simulation mobile application, continuing to leverage our technologies and expertise to leading medical device companies by developing risk-free training for physicians;
---	---
–	We released Microsoft HoloLens 2 augmented reality training applications for our CAE Ares emergency care simulator, CAE Lucina childbirth simulator and CAE Vimedix ultrasound simulator using 3D, interactive cardiac, respiratory and circulatory systems that allow learners to envision human anatomy;
---	---
–	In response to the COVID-19 pandemic, we have offered several free training resources during March and April 2020 to support front‑line healthcare providers with their most urgent training needs including a ventilator reskilling course, a point-of-care lung ultrasound training, COVID-19 Simulated Clinical Experience, webinars, and an outreach toolkit;
---	---
–	On April 10, 2020, we concluded an agreement with the Government of Canada to manufacture and supply 10,000 CAE Air1 ventilators to provide life support to patients in intensive care to support the COVID-19 pandemic.
---	---

Other

–	On November 12, 2019, we invested in a healthcare software company that enables increased efficiency of learning. The investment is in the form of a controlling 50% equity interest, for cash consideration of $0.9 million;
–	We are collaborating with the McGill University Healthcare Centre Foundation, whereby CAE Healthcare donated $500,000 in cash and in kind, over 5 years to the Foundation, including state-of-the-art simulation training equipment and curriculum, to support its new Interprofessional Skills and Simulation Network.
---	---

Innovation Awards

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

FINANCIAL RESULTS

(amounts in millions, except operating margins)		FY2020		FY2019	Q4-2020		Q3-2020	Q2-2020		Q1-2020		Q4-2019
Revenue	$	124.5		121.6	33.6		33.0	30.4		27.5		40.7
Segment operating (loss)
income	$	(41.0	)	4.8	(37.4	)	0.6	(1.4	)	(2.8	)	4.2
Operating margins	%	—		3.9	—		1.8	—		—		10.3
SOI before specific items	$	(3.5	)	4.8	0.1		0.6	(1.4	)	(2.8	)	4.2
Operating margins	%	—		3.9	0.3		1.8	—		—		10.3
Depreciation and amortization	$	14.4		13.5	3.3		3.8	3.5		3.8		3.6
Property, plant and equipment
expenditures	$	2.2		3.4	0.7		0.3	0.2		1.0		0.6
Intangible assets and other
assets expenditures	$	10.7		9.2	2.2		3.1	2.7		2.7		2.8
Capital employed	$	208.0		222.8	208.0		224.7	225.8		226.8		222.8

26 I CAE Financial Report 2020

Management’s Discussion and Analysis

Revenue down 17% over the fourth quarter of fiscal 2019

The decrease from the fourth quarter of fiscal 2019 was mainly due to decreased volume on patient simulators and lower revenue from centre management solutions primarily driven by the impact of the COVID-19 pandemic as a large contingent of the market for simulation products are medical and nursing schools have come under lockdown protocols, which has negatively affected our ability to conclude contracts and to deliver on existing orders. In the hospital market, our customers are primarily focused on managing the acute operational demands of this healthcare crisis rather than focusing on their training needs.

Revenue was $124.5 million this year, 2% or $2.9 million higher than last year

The increase was due to higher revenue from key partnerships with OEMs and centre management solutions earned primarily during the first eleven months of the fiscal year. The increase was largely offset by decreased volume on patient and ultrasound simulators driven mainly by the impact of the COVID-19 pandemic as described above.

Segment operating income lower over the fourth quarter of fiscal 2019

Segment operating loss was $37.4 million this quarter, compared to a segment operating income of $4.2 million (10.3% of revenue) in the fourth quarter of fiscal 2019.

The decrease from the fourth quarter of fiscal 2019 was primarily due to the goodwill impairment charge recognized this quarter. The decrease was also due to decreased revenues, as described above, the net benefit from a remeasurement of long-term royalty obligations recognized last year and higher net research and development costs incurred for the development of recently launched programs and products, partially offset by reduced selling, general and administrative expenses.

Excluding the goodwill impairment charge, segment operating income before specific items was $0.1 million (0.3% of revenue) this quarter, compared to $4.2 million (10.3% of revenue) in the fourth quarter of fiscal 2019, which represents a decrease of $4.1 million over the same quarter last year.

Segment operating loss was $41.0 million this year, a decrease of $45.8 million compared to last year

Segment operating loss was $41.0 million this year, compared to a segment operating income of $4.8 million (3.9% of revenue) last year.

The $45.8 million decrease over last year was primarily due to the goodwill impairment charge recognized in the fourth quarter of fiscal 2020. The decrease was also due to the negative impacts of the COVID-19 pandemic on revenue, as described above, higher investments in selling, general and administrative expenses to support the expansion of our sales force, the net benefit from a remeasurement of long‑term royalty obligations recognized last year and higher net research and development expenses incurred for the development of recently launched programs and products. The decrease was partially offset by higher revenue earned during the first eleven months of the fiscal year.

Excluding the goodwill impairment charge, segment operating loss before specific items was $3.5 million in fiscal 2020, compared to a segment operating income of $4.8 million (3.9% of revenue) in fiscal 2019, which represent a decrease of $8.3 million over last year.

Capital employed decreased by $16.7 million over last quarter and decreased by $14.8 million from last year

The decrease over last quarter was mainly due to lower intangible assets because of the goodwill impairment charge. The decrease was partially offset by higher non-cash working capital, resulting primarily from an increase in inventories and accounts receivable, partially offset by an increase in accounts payable and accrued liabilities.

The decrease over last year was primarily due to lower intangible assets because of the goodwill impairment charge, partially offset by the recognition of right-of-use assets as a result of the adoption of IFRS 16.

CAE Financial Report 2020 I 27

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.
---	---

6.1 Consolidated cash movements^7^

(amounts in millions)	FY2020			FY2019			Q4-2020			Q4-2019
Cash provided by operating activities*	$	597.3		$	495.2		$	165.2		$	131.4
Changes in non-cash working capital	(52.2		)	35.2			81.1			34.9
Net cash provided by operating activities	$	545.1		$	530.4		$	246.3		$	166.3
Maintenance capital expenditures^7^	(80.3		)	(79.2		)	(25.0		)	(24.4		)
Other assets	(15.9		)	(14.5		)	(8.0		)	(3.9		)
Proceeds from the disposal of property, plant and equipment	0.5			2.7			0.1			0.2
Net (payments to) proceeds from equity accounted investees	(9.9		)	(37.7		)	0.4			(10.7		)
Dividends received from equity accounted investees	22.6			22.0			—			14.9
Dividends paid	(110.9		)	(99.9		)	(28.7		)	(25.6		)
Free cash flow^7^	$	351.2		$	323.8		$	185.1		$	116.8
Growth capital expenditures^7^	(203.1		)	(172.6		)	(59.0		)	(71.8		)
Capitalized development costs	(86.2		)	(69.4		)	(25.2		)	(20.8		)
Common shares repurchased	(49.6		)	(94.4		)	(16.8		)	(1.6		)
Other cash movements, net	40.9			24.0			4.0			12.4
Business combinations, net of cash and cash equivalents acquired	(10.1		)	(827.8		)	—			(794.3		)
Acquisition of investment in equity accounted investees	(113.5		)	—			—			—
Addition of assets through the monetization of royalties	—			(202.7		)	—			—
Effect of foreign exchange rate changes on cash and cash equivalents	7.8			(6.9		)	19.5			(7.5		)
Net change in cash before proceeds and repayment of long-term debt	$	(62.6	)	$	(1,026.0	)	$	107.6		$	(766.8	)
* before changes in non-cash working capital

Free cash flow of $185.1 million this quarter

Free cash flow was $68.3 million higher compared to the fourth quarter of fiscal 2019 mainly due to a lower investment in non-cash working capital and an increase in cash provided by operating activities, partially offset by lower dividends received from equity accounted investees.

Free cash flow of $351.2 million this year

Free cash flow was $27.4 million higher compared to last year mainly due to an increase in cash provided by operating activities and lower payments to equity accounted investees, partially offset by a higher investment in non-cash working capital and higher dividends paid.

Capital expenditures were $84.0 million this quarter and $283.4 million for the year

Growth capital expenditures were $59.0 million this quarter and $203.1 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 $25.0 million this quarter and $80.3 million for the year.

6.2 Sources 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.

The total amount available through this revolving credit facility at March 31, 2020 was US$850.0 million (2019 – US$550.0 million). There was an amount of US$505.5 million drawn under the facility as at March 31, 2020 (2019 – nil) and US$21.3 million was used for letters of credit (2019 – US$32.9 million). Given the uncertainty of the economic environment, a portion of the revolving credit facility was drawn down and the proceeds have been included in the cash on hand in short terms investments. The applicable interest rate on this revolving credit facility is variable, based on the bank’s prime rate, bankers’ acceptance rates or LIBOR plus a margin based on the private credit rating. Subsequent to the year-end we concluded a new two-year $500.0 million senior unsecured revolving credit facility, subject to the same financial covenants as the initial facility, to provide access to additional liquidity during the COVID-19 pandemic as a supplement to our current committed line of credit.

^7^ Non-GAAP and other financial measures (see Section 3.7).

28 I CAE Financial Report 2020

Management’s Discussion and Analysis

We have an unsecured Export Development Canada (EDC) Performance Security Guarantee (PSG) account for US$225.0 million (2019 – US$225.0 million). This is an uncommitted revolving facility strictly for the issuance of performance bonds, advance payment guarantees or similar instruments. As at March 31, 2020 the total outstanding for these instruments was $159.5 million (2019 – $160.9 million).

We manage a program in which we sell interests in certain of our accounts receivable (receivable purchase program) to a third party for cash consideration for amounts up to US$300.0 million (2019 – US$300.0 million). As at March 31, 2020, the Canadian dollar equivalent of $333.1 million (2019 – $266.2 million) of specific accounts receivable were sold to a financial institution. Subsequent to the year-end we concluded an agreement to increase the limit of our receivable purchase program from US$300.0 million to US$400.0 million.

As at March 31, 2020, we are compliant with all our financial covenants.

At the end of the fiscal year, we had a higher than normal cash and cash equivalents balance on hand to increase liquidity and preserve financial flexibility in light of the COVID-19 pandemic. Total available liquidity at March 31, 2020 was $1.5 billion, including $946.5 million in cash and cash equivalents, undrawn amounts on our revolving credit facility and the balance available under our receivable purchase program. With the addition of our new revolving credit facility and increased limit on our receivable purchase program subsequent to the year-end, we have total available liquidity of $2.1 billion.

We expect COVID-19 to have an immediate and negative impact on the amount and timing of cash generated from operations. 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, to ensure adequacy and efficient use of cash resources. Liquidity adequacy is assessed in view of seasonal needs, stress-test results, growth requirements and capital expenditures, and the maturity profile of indebtedness, including availability of credit facilities, working capital requirements, compliance with financial covenants and the funding of financial commitments. Based on our scenario analysis, we believe that our cash and cash equivalents, the availability under our committed revolving credit facility and cash we expect to generate from our operations will be sufficient to meet financial requirements in the foreseeable future. To preserve liquidity and reduce operating costs, we have enacted initiatives such as the reduction of capital expenditures and R&D investments in fiscal 2021, strict cost containment measures, salary freezes, salary reductions, reduced work weeks and temporary layoffs, as well as a suspension of our common share dividends and share repurchase plan.

The following table summarizes the long-term debt:

	As at March 31		As at March 31
(amounts in millions)	2020		2019
Total long-term debt	$	3,312.2	$	2,328.3
Less:
Current portion of long-term debt	93.5		201.3
Current portion of lease liabilities	112.7		62.8
Long-term portion of long-term debt	$	3,106.0	$	2,064.2

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

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

In June 2019, we entered into a term loan for the financing of several new aircraft for our operations in North America. This represents an obligation of $5.5 million as at March 31, 2020.

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

In December 2019, we repaid unsecured senior notes of $95.0 million, and issued notes for US $100.0 million, representing an obligation of $141.1 million as at March 31, 2020. Additionally, we used $15.7 million [US $11.7 million] of restricted cash, previously held as collateral, to repay part of an existing term loan.

CAE Financial Report 2020 I 29

Management’s Discussion and Analysis

6.3 Government 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 (IQ), 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 SA^2^GE 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 SA^2^GE have committed to contribute amounts up to 50% of eligible costs incurred by CAE to fiscal 2020.

During fiscal 2019, we announced a plan to invest in R&D innovations over the next five years, including Project Digital Intelligence. The aim is to develop the next generation training solutions for aviation, defence and security and healthcare to leverage digital technologies. The Government of Canada, through the Strategic Innovation Fund (SIF), and the Government of Québec, through IQ, agreed to participate in the project through interest free loans of up to $150.0 million and $47.5 million, respectively, in relation to eligible costs incurred from fiscal 2019 to fiscal 2023.

You will find more details in Note 1, Note 18 and Note 25 of our consolidated financial statements.

As part of our mitigation measures and to minimize the impact on employees, CAE has accessed and is working to access government emergency relief measures and wage subsidy programs available around the world, where we have operations.

On April 11, 2020, the Canada Emergency Wage Subsidy (CEWS) was brought into law in Canada. The CEWS covers employers who have suffered a drop in gross revenues of at least 15% in March, and 30% in April and May and is effective until June 6, 2020, subject to extensions to be determined by the government. CAE has qualified for the CEWS subsidy program which allowed us to recall previously furloughed Canadian-based employees until June 6, 2020.

6.4 Contractual 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)	2021		2022		2023		2024		2025		Thereafter		Total
Long-term debt (excluding interest)	$	93.5	$	360.7	$	412.0	$	266.0	$	232.6	$	1,459.6	$	2,824.4
Lease liabilities (excluding interest)	112.7		90.0		63.3		36.0		23.0		162.8		487.8
Purchase commitments	204.7		30.3		4.0		0.8		—		—		239.8
	$	410.9	$	481.0	$	479.3	$	302.8	$	255.6	$	1,622.4	$	3,552.0

We also had total availability under the committed revolving credit facility of US$323.2 million as at March 31, 2020 compared to US$517.1 million at March 31, 2019. Subsequent to the year-end we concluded a new two-year $500.0 million senior unsecured revolving credit facility which further increased our total availability under our committed line of credit.

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, 2020, we had other long-term liabilities that are not included in the table above. These include some accrued pension liabilities, deferred revenue 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 I CAE Financial Report 2020

Management’s Discussion and Analysis

7. CONSOLIDATED FINANCIAL POSITION

7.1 Consolidated capital employed

	As at March 31			As at April 1			As at March 31
(amounts in millions)	2020			2019^(1)^			2019
Use of capital:
Current assets	$	2,808.6		$	2,109.6		$	2,112.9
Less: cash and cash equivalents	(946.5		)	(446.1		)	(446.1		)
Current liabilities	(2,062.3		)	(1,917.0		)	(1,889.5		)
Less: current portion of long-term debt	206.2			295.9			264.1
Non-cash working capital^8^	$	6.0		$	42.4		$	41.4
Property, plant and equipment	2,154.0			1,943.3			2,149.3
Right-of-use assets	395.9			432.8			—
Other long-term assets	3,125.1			2,899.9			2,903.3
Other long-term liabilities	(737.0		)	(787.9		)	(801.8		)
Total capital employed	$	4,944.0		$	4,530.5		$	4,292.2
Source of capital^8^:
Current portion of long-term debt	$	206.2		$	295.9		$	264.1
Long-term debt	3,106.0			2,298.2			2,064.2
Less: cash and cash equivalents	(946.5		)	(446.1		)	(446.1		)
Net debt^8^	$	2,365.7		$	2,148.0		$	1,882.2
Equity attributable to equity holders of the Company	2,489.7			2,303.8			2,331.3
Non-controlling interests	88.6			78.7			78.7
Source of capital	$	4,944.0		$	4,530.5		$	4,292.2

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

Capital employed increased $413.5 million, or 9%, from last year (April 1, 2019)

The increase over last year was mainly due to higher other long-term assets and property, plant and equipment, partially offset by lower right-of-use assets.

Return on capital employed (ROCE)^8^

Our ROCE was 9.1% this quarter. ROCE before specific items was 10.7% this quarter, which compares to 12.9% in the fourth quarter of last year and 11.4% last quarter. Specific items include the impacts of the integration of BBAT in fiscal 2020 and in fiscal 2019. In fiscal 2020, specific items also include the impacts of Defence and Security reorganizational costs following the organization strategic changes and the review of certain product offerings mainly in Asia.

Excluding the impacts of IFRS 16, ROCE would have been 9.2% and ROCE before specific items would have been 10.9% this quarter, which compares to 12.9% in the fourth quarter of last year and 11.6% last quarter.

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

Non-cash working capital decreased by $36.4 million from last year (April 1, 2019)

The decrease was mainly due to higher derivative financial liabilities and contract liabilities, partially offset by higher inventories and accounts receivable.

Net property, plant and equipment increased by $210.7 million from last year (April 1, 2019)

The increase was mainly due to capital expenditures and movements in foreign exchange rates, partially offset by depreciation.

Right-of-use assets decreased by $36.9 million from last year (April 1, 2019)

The decrease was mainly due to depreciation, partially offset by movements in foreign exchange rates.

^8^ Non-GAAP and other financial measures (see Section 3.7).

CAE Financial Report 2020 I 31

Management’s Discussion and Analysis

Other long-term assets increased by $225.2 million from last year (April 1, 2019)

The increase was mainly due to a higher investment in equity accounted investees as a result of the acquisition of a 50% stake in SIMCOM, a higher investment in finance leases, and higher intangible assets.

Net debt higher than last year

The increase was mainly due to the recognition of new lease liabilities of $265.8 million as a result of the adoption of IFRS 16, movements in foreign exchange rates and the impact of cash movements during the year. Given the uncertainty of the economic environment, a portion of the revolving credit facility was drawn down and the proceeds have been included in the cash on hand in short terms investments.

Change in net debt^9^

(amounts in millions, except net debt-to-capital and net debt-to-EBITDA)		FY2020		FY2019
Net debt, beginning of period	$	1,882.2	$	649.4
Lease liabilities added on April 1, 2019 as a result of the adoption of IFRS 16	$	265.8	$	—
Impact of cash movements on net debt
(see table in the consolidated cash movements section)		62.6		1,026.0
Effect of foreign exchange rate changes on long-term debt		108.8		29.3
Impact from business combinations		1.6		152.8
Lease liability movements		27.3		—
Other		17.4		24.7
Change in net debt during the period	$	483.5	$	1,232.8
Net debt, end of period	$	2,365.7	$	1,882.2

Net debt-to-capital^9^	%	47.8	%	43.9
Net debt-to-capital excluding the impacts of IFRS 16	%	44.2
Net debt-to-EBITDA^9^		2.81		2.70
Net debt-to-EBITDA excluding the impacts of IFRS 16		2.62

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

Total equity increased by $168.3 million this year

The increase in equity was mainly due to net income of $318.9 million and stock options exercised of $26.5 million, partially offset by cash dividends of $110.9 million, common shares repurchased and cancelled of $49.6 million and the impacts of adoption of IFRS 16 of $27.5 million.

Outstanding share data

Our articles of incorporation authorize the issue of an unlimited number of common shares and an unlimited number of preferred shares issued in series. We had a total of 265,619,627 common shares issued and outstanding as at March 31, 2020 with total share capital of $679.5 million. In addition, we had 6,050,854 options outstanding under the Employee Stock Option Plan (ESOP).

As at April 30, 2020, we had a total of 265,621,627 common shares issued and outstanding and 6,042,104 options outstanding under the ESOP.

Repurchase and cancellation of common shares

On February 7, 2020, we announced the renewal of the NCIB to purchase up to 5,321,474 of our common shares. The NCIB began on February 25, 2020 and will end on February 24, 2021 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. Share repurchases under our NCIB program were suspended as part of our COVID-19 pandemic mitigation measures.

In fiscal 2020, we repurchased and cancelled a total of 1,493,331 common shares under the previous and current NCIB (2019 – 3,671,900), at a weighted average price of $33.22 per common share (2019 – $25.70), for a total consideration of $49.6 million (2019 – $94.4 million). An excess of $45.8 million (2019 – $85.6 million) of the shares’ repurchase value over their carrying amount was charged to retained earnings as share repurchase premiums.

^9^ Non-GAAP and other financial measures (see Section 3.7).

32 I CAE Financial Report 2020

Management’s Discussion and Analysis

Dividends

We paid a dividend of $0.10 per share in the first quarter and $0.11 per share in the second, third and fourth quarter of fiscal 2020. These dividends were eligible under the Income Tax Act (Canada) and its provincial equivalents.

Our Board of Directors (the Board) has the discretion to set the amount and timing of any dividend. The Board reviews the dividend policy annually based on the cash requirements of our operating activities, liquidity requirements and projected financial position. Dividend payments to common shareholders were suspended as part of our COVID-19 pandemic mitigation measures.

Guarantees

As at March 31, 2020, we have a total of $189.6 million outstanding letters of credit which are not recognized in the consolidated statement of financial position, compared to $205.1 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 $28.7 million in fiscal 2021.

7.2 Off balance sheet arrangements

In the normal course of business, we manage a program in which we sell interests in certain of our accounts receivable (receivable purchase program) to a financial institution for cash consideration with limited recourse to CAE.

You will find more details about our financial assets program in Sources of Liquidity.

7.3 Financial 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:

Financial assets:

–	Cash and cash equivalents, restricted cash and derivative instruments not designated as hedging instrument in a hedge relationship, are classified at fair value through profit and loss (FVTPL);
–	Accounts receivable, non-current receivables, net investment in finance leases and advances are classified at amortized cost, except for those that are acquired for the purpose of selling or repurchasing in the near term and classified as held for trading which are measured at FVTPL;
---	---
–	Equity investments are classified at fair value through OCI (FVOCI).
---	---

Financial liabilities:

–	Accounts payable and accrued liabilities, long-term debt, including interest payable, as well as lease liabilities and royalty obligations are classified at amortized cost;
–	Contingent consideration arising on business combinations and derivative instruments not designated as hedging instrument in a hedge relationship are is classified at FVTPL.
---	---

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. Counterparty credit risk and our own credit risk are taken into account in estimating the fair value of financial assets and financial liabilities.

CAE Financial Report 2020 I 33

Management’s Discussion and Analysis

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

–	The fair value of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their carrying values due to their short-term maturities;
–	The fair value of derivative instruments, which include forward contracts, swap agreements and embedded derivatives accounted for separately and is calculated as the present value of the estimated future cash flows using an appropriate interest rate yield curve and forward foreign exchange rate. Assumptions are based on market conditions prevailing at each reporting date. The fair value of derivative instruments reflect the estimated amounts that we would receive or pay to settle the contracts at the reporting date;
---	---
–	The fair value of the equity investments, which does not have a readily available market value, is estimated using a discounted cash flow model, which includes some assumptions that are not based on observable market prices or rates;
---	---
–	The fair value of non-current receivables is estimated based on discounted cash flows using current interest rates for instruments with similar risks and remaining maturities;
---	---
–	The fair value of long-term debts, royalties obligations and other non-current liabilities are estimated based on discounted cash flows using current interest rates for instruments with similar risks and remaining maturities. Upon adoption of IFRS 16 on April 1, 2019, fair value disclosures are no longer required for lease liabilities;
---	---
–	The fair value of the contingent considerations arising on business combinations are based on the estimated amount and timing of projected cash flows, the probability of the achievement of the criteria on which the contingency is based and the risk-adjusted discount rate used to present value the probability-weighted cash flows.
---	---

A description of the fair value hierarchy is discussed in Note 28 of our consolidated financial statements.

Financial risk management

Due to the nature of the activities that we carry out and as a result of holding financial instruments, we are exposed to credit risk, liquidity risk and market risk, including foreign currency risk and interest rate risk. Our exposure to credit risk, liquidity risk and market risk is managed within risk management parameters documented in corporate policies. 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 with 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 contracts with customers. 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 (receivable purchase 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 signed International Swaps & Derivatives Association, Inc. (ISDA) Master Agreements with all the 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 9 and Note 28 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, stress-test results, growth requirements and capital expenditures, and the maturity profile of indebtedness, including availability of credit facilities, working capital requirements, compliance with financial covenants and the funding of financial commitments. 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 revolving credit facilities and agreements to sell interests in certain of our accounts receivable. We also regularly monitor any financing opportunities to optimize our capital structure and maintain appropriate financial flexibility.

34 I CAE Financial Report 2020

Management’s Discussion and Analysis

Market risk

Market risk is defined as our exposure to a gain or a loss in the value of our financial instruments as a result of changes in market prices, whether those changes are caused by factors specific to the individual financial instruments or its issuer, or factors affecting all similar financial instruments traded in the market. We are mainly exposed to foreign currency risk and interest rate risk.

We use derivative instruments to manage market risk against the volatility in foreign exchange rates, interest rates and share-based payments in order to minimize their impact on our results and financial position. Our policy is not to utilize any derivative financial instruments for trading or speculative purposes.

Foreign currency risk

Foreign currency risk is defined as our exposure to a gain or a loss in the value of our financial instruments as a result of fluctuations in foreign exchange rates. We are exposed to foreign exchange rate variability primarily in relation to certain sale commitments, expected purchase transactions and debt denominated in a foreign currency, as well as on our net investment from our foreign operations which have functional currencies other than the Canadian dollar (in particular the U.S. dollar, Euro and British pound). In addition, these operations have exposures 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.

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.

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 floating rate debts through our revolving credit facilities and other 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 74% fixed-rate and 26% floating-rate at the end of this year (2019 – 83% fixed rate and 17% 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.

Hedge of share-based payments expense

We have entered into equity swap agreements with major Canadian financial institutions to reduce our income exposure to fluctuations in our share price relating to the deferred share units (DSU) plans, restricted share units (RSU) plans and the performance share units (PSU) plan. 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, RSU and PSU plans.

Hedge of net investments in foreign operations

As at March 31, 2020, we have designated a portion of our unsecured senior notes and term loans and a portion of our lease liabilities as a hedge of our net investments in U.S. entities. Gains or losses on the translation of the designated portion of these USD long-term debts are recognized in OCI to offset any foreign exchange gains or losses on translation of the financial statements of those U.S. entities.

A sensitivity analysis for foreign currency risk and interest rate risk is included in Note 30 of our consolidated financial statements.

CAE Financial Report 2020 I 35

Management’s Discussion and Analysis

8. BUSINESS COMBINATIONS

Pelesys Learning Systems Inc.

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

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

Luftfartsskolen AS

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

The purchase prices of Pelesys and Luftfartsskolen AS are mainly allocated to goodwill and intangible assets. The net assets, including intangibles, arising from these acquisitions are included in Civil Aviation Training Solutions segment.

Other

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

During the year ended March 31, 2020, we completed our final assessment of the fair value of assets acquired and liabilities assumed of all acquisitions realized in fiscal 2020 and those of Avianca’s Training Business, Logitude, the Indian Training Centres and Bombardier's Business Aircraft Training Business which were acquired in the year ended March 31, 2019. Adjustments to the determination of net identifiable assets acquired and liabilities assumed for acquisitions realized in the year ended March 31, 2019 resulted in an increase of intangible assets of $6.2 million, a decrease of deferred tax assets of $4.7 million and a decrease of other net assets of $1.5 million.

During the year ended March 31, 2020, an additional net cash consideration of $1.7 million was paid for acquisitions realized in the year ended March 31, 2019.

You will find more details in Note 3 of our consolidated financial statements.

9. EVENTS AFTER THE REPORTING PERIOD

Impact of the COVID-19 pandemic

COVID-19 has created unprecedented uncertainty in the global economy, the global air transportation environment and air passenger travel and to CAE’s business. Several of our customers are facing significant challenges, with airlines and business jet operators having to ground a majority of their aircraft in response to travel bans, border restrictions, and lower demand for air travel. We continue to take measures to protect the health and safety of our employees, work with our customers to minimize potential disruptions and support our community in addressing the challenges posed by this global pandemic. This outbreak has had an important and immediate impact on all our businesses, especially in the Civil Aviation Training Solutions segment, as a result of an unprecedented shock to demand together with significant disruptions to our own operations, including facility closures, supply chain disruptions, program execution delays, slower procurement decisions and changes to our customers’ acquisition priorities.

To date, we have implemented several flexible measures to protect our financial position and preserve liquidity, including the reduction of capital expenditures and R&D investments in fiscal 2021, strict cost containment measures, salary freezes, salary reductions, reduced work weeks for 900 employees and 2,600 temporary layoffs, as well as a suspension of our common share dividends and share repurchase plan announced on April 6, 2020 in response to the COVID-19 pandemic. Additionally, we have worked with defence customers to secure more favorable terms for milestone payments as well as offer contract modifications to increase work scope and with suppliers for extended payment terms.

CEWS and other government programs

On April 20, 2020, we announced that we have recalled all remaining temporarily laid-off employees in Canada through the CEWS program, impacting approximately 1,500 employees. We have accessed and are working to access government support programs in countries in which we operate.

36 I CAE Financial Report 2020

Management’s Discussion and Analysis

Cash and liquidity mitigation measures

On April 9, 2020, we concluded a new two-year $500.0 million senior unsecured revolving credit facility and on May 19, 2020, we increased our receivable purchase program from US$300.0 million to US$400.0 million. These transactions provide access to additional liquidity and further strengthen our financial position.

Contract with Government of Canada for CAE Air1 ventilators

On April 10, 2020, we concluded an agreement with the Government of Canada to design and manufacture 10,000 CAE Air1 ventilators to provide life support to patients in intensive care to support the COVID-19 pandemic.

10. BUSINESS RISK AND UNCERTAINTY

We operate in several industry segments that have various risks and uncertainties. Management and the Board discuss the principal risks facing our business quarterly and 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 risks arising from the COVID-19 pandemic, 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.

To mitigate the risks that may impact our future performance, management has established an enterprise risk management policy and a framework that provides a structured approach to assess, identify and prioritize risks. This framework relies on a three lines of defence (LoD) model where the business segments, the risk management function and our internal auditor function work together to manage these risks and continuously improve the risk management process. Management develops and deploys risk mitigation strategies that align with our strategic objectives and business processes. Management continuously reviews the evolution of the principal risks facing our business 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 securities.

10.1 Risks relating to the COVID-19 pandemic

In conducting our activities, CAE is exposed to operational risk events, including biological events. Such external events have occurred in the past such as the Ebola virus, Severe Acute Respiratory Syndrome, H1N1 influenza virus, Avian flu, or the Zika virus, and although not frequent, can have high adverse impacts on our industry and our business. COVID-19 has created unprecedented uncertainty in the global economy, the global air transportation environment and air passenger travel, disrupted global supply chains, created significant economic downturn and disruption of financial markets. The pandemic began to affect market demand in Asia early in the fourth quarter of fiscal 2020 as border restrictions were implemented and through the rest of the world in March 2020. Several of our customers are facing significant challenges, with airlines and business jet operators having to ground a majority of their aircraft in response to travel bans, border restrictions, and lower demand for air travel. This outbreak has had an important and immediate impact on all our businesses, especially in Civil Aviation where certain commercial airlines are experiencing financial difficulties.

It is difficult to accurately predict the duration or severity of the pandemic and it is extremely challenging for CAE to accurately estimate or quantify the magnitude of the pandemic’s impact on our operations, financial condition and strategic plan. Due to the unprecedented and ongoing nature of COVID-19 and the fact that the response to the pandemic is evolving in real time and differs geographically from one region to another, estimates of the economic impacts of the COVID-19 pandemic remain inherently highly uncertain and speculative. Even after the COVID-19 pandemic is over, we may continue to experience material adverse effects to our business, financial condition and strategic plans as a result of the continued disruption in the global economy and any resulting recession, the effects of which may persist beyond that time.

CAE has been closely monitoring and actively implementing and updating our response to the evolving COVID-19 pandemic and its impacts on employees, operations, the global economy and the demand for our products and services. We have formed a committee composed of the senior leadership team and key leaders in the organization to monitor, on a daily basis, the evolution of the pandemic, to evaluate the measures being put in place by local and national governments and the resulting impacts on CAE. As needed, the committee implements necessary contingency plans in real time as the current situation continues to unfold, with a focus on three priorities: protecting employees’ health and safety; supporting customers to the best of our abilities, and ensuring that we can successfully navigate through this global pandemic.

Health and Safety

The spread of COVID-19 may impact the health of our personnel, partners and contractors, including members of our management team, and may make it difficult to recruit, attract and retain skilled personnel, reducing the availability of our workforce and causing human impacts that may, in turn, negatively impact our business. Prolonged illness of our senior executives could also have an adverse effect on the management of our business and financial results. Since safety is one of our main priorities at CAE, we implemented mitigation measures to reduce the risk of potential outbreaks, including compelling most employees to work from home, where possible, initiating production shifts, creating protocols, policies and guidelines for employees, suppliers, customers and visitors, and closing certain areas in our facilities to facilitate maintenance. We also have in place an emergency succession plan to deal with any situation which requires the immediate replacement of our key senior executives.

CAE Financial Report 2020 I 37

Management’s Discussion and Analysis

Reduction and Suspension of Operations

The pandemic is causing a slowdown and temporary restrictions to our operations in certain geographic locations impacted by the outbreak, including but not limited to the manufacturing plant in Montreal, since non-essential services have been closed by government public directives. Several of our training centres worldwide have also closed, or are operating at significantly reduced capacities, as a result of the severe and abrupt drop in air passenger travel and airlines and business jet operators having to ground a majority of their aircraft. We cannot predict how long the restrictive measures will last or whether other measures will need to be implemented to contain the outbreak in any jurisdiction where CAE operates or holds assets, however, these measures could have a material and adverse effect on our financial and operating performance.

Delay in the production of goods and completion of CAE’s services may require us to incur additional non-compensable costs, including overtime work, that are necessary to meet clients’ schedules. Due to various factors, a delay in the commencement or completion of a project may also result in penalties or sanctions under contracts or even the cancellation of some contracts. Additionally, some of our customers, including governments, airlines and hospitals around the world, could delay contract awards as they are dealing with the pandemic and their own cash conservation measures.

Global Economy

As an emerging risk, the economic impact could be severe to global economies depending on the duration of the pandemic, the likelihood and scope of any subsequent waves of COVID-19 and the continued measures put in place to contain the outbreak. Global financial markets have experienced, and could continue to experience, significant volatility and weakness. Governments and central banks have reacted with significant monetary and fiscal interventions designed to stabilize economic conditions and financial markets. However, the efficacy of the government and central bank interventions is uncertain. This uncertainty has already materialized with falling global GDP growth, causing a global financial market shock which has directly impacted our share price. Uncertainties related to, and perceived or experienced negative effects from, COVID-19 may continue to cause significant volatility or decline in the trading price of our securities, capital market conditions and general economic conditions. In addition, severe disruption and instability in the global financial markets and continued deteriorations in credit and financing conditions may increase the likelihood of litigation, increase the cost of or limit or restrict our ability to access debt and equity capital or other sources of funding on favourable terms, or at all, lead to consolidation that negatively impacts our business, increased competition, result in reductions in our work force, cause us to further reduce our capital spending or otherwise disrupt our business or make it more difficult to implement our strategic plans. Sustained adverse effects may also prevent us from satisfying debt financial covenants or result in possible credit ratings watch or downgrades. Also the return on our pension plan assets and/or the discount rate used for valuing our post-employment benefit obligations may both be negatively impacted in the near to medium term. This could have an adverse effect on our post-employment benefit plan obligations and pension contributions in future years.

Several governments have implemented temporary measures to help offset the negative economic impacts such as the CEWS program in Canada and deferred tax filings for businesses and individuals worldwide. While these measures are beneficial for CAE and our employees, should the negative economic impacts exceed the period for which these relief measures have been granted, it can lead to increased cost containment policies such as job reductions and capital spending reductions in our own network.

Diversion of management attention

Preparing for and responding to the continuing pandemic has and may continue to divert management’s attention from our key strategic priorities, increase costs as we prioritize health and safety matters for our personnel and the continuation of critical ongoing projects, and cause us to reduce, delay, or alter initiatives that may otherwise increase our long-term value.

Heightened IT risks and inefficiencies

The immediate unanticipated rise in remote work arrangements implemented by CAE in response to the COVID-19 outbreak may cause inefficiencies and increased pressure on our information technology infrastructure, and may increase CAE’s vulnerability to information technology and cybersecurity related risks and disruption to our information systems.

Liquidity risk

The continuing pandemic has increased the risk that we may encounter difficulty in meeting our obligations associated with financial liabilities. To preserve liquidity throughout the pandemic, subsequent to the year end, we enacted strict cost containment measures and suspended dividend payments to common shareholders and share buybacks under the NCIB program. In addition, we concluded a new two-year $500.0 million senior unsecured revolving credit facility and expanded our receivable purchase program from US$300.0 million to US$400.0 million. These transactions provide us access to additional liquidity and further strengthen our financial position. We believe that our cash and cash equivalents, the availability of cash under our committed revolving credit facility and the cash we expect to generate from our operations, is sufficient to meet financial requirements in the foreseeable future.

Credit risk

There is uncertainty regarding the duration of the COVID-19 pandemic and how it will impact the sufficiency of our customers' liquidity during the period where their operations are significantly impacted by a significant and abrupt reduction in air travel, self-isolation measures, travel bans, border restrictions and lockdown protocols. There is an increased credit risk for our airline customers due to the reduction of their operations and uncertainty relating to air travel recovery and the increased risk of airline bankruptcies. We are, however, a provider of regulated training services which are critical to airline operations, and therefore if any of our customers engage in reorganization or bankruptcy proceedings we are often designated as a critical supplier.

38 I CAE Financial Report 2020

Management’s Discussion and Analysis

Overall, adverse changes in a customer's financial condition, including those resulting from the COVID-19 pandemic, could cause us to limit or discontinue business with that customer, require us to assume more credit risk relating to that customer's future business, or result in uncollectible trade accounts receivable from that customer. Future credit losses relating to any one of our major customers could be material and could result in a material charge to our financial results.

10.2 Risks relating to the industry

Competition

We sell our simulation products and training services in highly competitive international markets. New participants have emerged in recent years and the competitive environment is intense, with aerospace and defence companies positioning themselves to try to take greater market share by consolidating through mergers and acquisitions and vertical integration strategies 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 and market share which could adversely affect CAE’s ability to compete successfully. 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.

OEMs 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 permit any training on their respective simulators. However, CAE may have some advantages, as an independent training provider and simulator manufacturer, having the ability to replicate certain aircraft without data, parts and equipment packages from an OEM, as well as our global reach and diversified training network that includes joint ventures with large airline operators, who are aircraft customers for OEMs. In addition, we work with some OEMs on business opportunities related to equipment and training services.

Economic growth and pressure underlie 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 demand of our services and products. 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.

Business development and awarding of new contracts

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 CAE. A significant portion of our revenue is dependent on obtaining new orders and continued replenishment of 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, additionally, the impacts of the COVID-19 pandemic could cause a delay in the awarding of orders. 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. We intend to continue to grow market share by leveraging a high level of customer satisfaction and operational and organizational productivity.

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 Australian, Canadian, European, UAE, U.S., and other foreign governments as both the prime and/or subcontractor. 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, which can be very difficult to predict and may be impacted by numerous factors such as the political environment, foreign policy, macroeconomic conditions and nature of the international threat environment. Significant reductions to defence spending by mature markets such as in Australia, Canada, Europe, the UAE, and the U.S. or a significant delay in the timing of defence procurement could have a material negative impact on our future revenue, earnings and operations. Particularly, with the increased focus on COVID-19 relief measures around the globe, governments may be forced to reduce their defence spending. Additionally, the precipitous drop in oil prices has further impacted opportunity flow in the Middle East. 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, government agencies routinely audit and investigate government contractors. These agencies may review our performance under our contracts, business processes, cost structure, and compliance with applicable laws, regulations and standards. Our incurred costs for each year are subject to audit by government agencies, which can result in payment demands related to costs they believe should be disallowed. We work with governments to assess the merits of claims and where appropriate reserve for amounts disputed. We could be required to provide repayments to governments and may have a negative effect on our results of operations. Contrary to cost-reimbursable contracts, some costs may not be reimbursed or allowed under fixed-price contracts, which may have a negative effect on our results of operations if we experience costs overruns.

CAE Financial Report 2020 I 39

Management’s Discussion and Analysis

Civil aviation industry

A significant portion of our revenue comes from supplying equipment and training services to the commercial and business airline industries. The civil aviation market is predominantly driven by long-term trends in airline passenger and cargo traffic. The principal factors underlying long-term traffic growth are sustained economic growth and political stability both in developed and emerging markets. Air travel experienced a sharp deterioration in the first few months of calendar 2020. There is a risk that we may experience a delayed recovery in air travel demand due to the unprecedented worldwide travel restrictions, expected higher unemployment rates, and a fall in consumer spending. At this rate, IATA forecasts that domestic and international passenger demand will decrease 48% compared to calendar 2019, and a decrease of 55% for airline passenger revenue. Decreased airline passenger and cargo traffic for an extended period of time could have a material and adverse effect on our financial and operating performance. Specifically, as airlines struggle with reduced capacities or bankruptcies, CAE could experience the cancellation of aircraft orders, reduction in FFS demand and lower demand for pilot recruitment, placement, and training. Despite the temporary global shock caused by the COVID-19 pandemic, the business aviation industry is expected to grow in the long term due to demand recovery combined with the introduction of new aircraft models and technologies.

Demand for training solutions in the civil aviation market is further influenced by airline profitability, availability of aircraft financing, OEMs ability to supply aircraft, world trade policies, technological advances, government-to-government relations, national aviation authority regulations (including the grounding order of the 737 MAX aircraft by global civil aviation authorities and the uncertainties surrounding the implications of the U.K.’s departure from the EASA at the end of calendar 2020 as a result of Brexit), price and other competitive factors, fuel prices and geopolitical environment. Potential impediments to steady growth in air travel include major disruptions such as regional political instability, acts of terrorism, epidemics, pandemics, the prolonged continuation or future waves of the novel coronavirus, natural disasters, prolonged economic recessions, the interruption of global mobility including travel bans and border restrictions, oil price volatility, increased global environmental regulations or other major world events.

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. In addition, airline consolidations, fleet decisions or financial challenges involving any of our major commercial airline customers could impact our revenues and limit our opportunity to generate profits from those customers. Finally, prolonged reduction in operations as a result of COVID-19 could drive an increase of bankruptcies amongst airlines.

Regulatory matters

Our businesses are heavily regulated. We deal with many government agencies and entities and are subject to laws and regulations such as export controls, health, national security and aviation authority of each country. These regulations may change without notice, which could impact 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, higher inventory levels or resulting in postponed or cancelled sales or changes to sales predictions.

The export of CAE’s technology and services is subject to export permit approvals and regulatory requirements, which can sometimes take several months to go through the approval process. These can result in delays in obtaining export permits or even prevent us from exporting to certain countries, entities or people in or from a country, and result in negative financial impacts.

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 and we cannot be certain that we will be permitted to sell or licence certain products to customers or otherwise export CAE’s technology and services, which could cause a potential loss of revenue for us. Any changes in governmental policy or government actions resulting form the COVID-19 pandemic could disrupt our supply chain, prevent the sale or delivery of our products, or result in export license delays.

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.

Natural or other disasters

Extreme weather conditions or natural or other disasters, such as earthquakes, fires, floods, pandemics, epidemics (such as COVID-19) and similar events could disrupt our operations, damage our infrastructure or properties, endanger our employee's health and safety, impact the availability and cost of materials and resources, increase insurance and other operating costs and have a material adverse effect on our operating results, financial position or liquidity. In addition, we cannot be certain that our insurance coverage will be sufficient to cover all significant risk exposures. We are exposed to liabilities that are unique to the products and services that we provide. CAE maintains insurance for certain risks and may be adequately covered for said risks, however, insurance may not be available, or limits may not be adequate to cover all significant risk exposures. For example, CAE is not covered from the financial losses caused by communicable disease, including viruses and other epidemics, as certain coverages are not available for commercially reasonable terms. It is not certain whether there will be any insurance products in the future covering the risks of communicable disease.

40 I CAE Financial Report 2020

Management’s Discussion and Analysis

Environmental laws and regulations

CAE is exposed to various environmental risks and is subject to complying with environmental laws and regulations which vary from country to country and are subject to change. CAE’s inability to comply with environmental laws and regulations could result in penalties, lawsuits and potential harm to its reputation.

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 committed to may result in us having to incur substantial costs. This could have a materially negative effect on our financial condition and results of operations.

Climate changes

Increased public awareness and growing concerns about climate change and the global transition to a low carbon economy result in a broad range of impacts, including potential strategic, reputational and structural related risks for CAE and its business partners and the emergence and evolvement additional environmental and climate change regulations, frameworks, and guidance. Increasing regulatory expectations create a new set of compliance risks that need to be managed. Global climate change also results in regulatory risks which vary according to the national and local requirements implemented by each jurisdiction where we are present.

In addition, concerns about the environmental impacts of air travel, the “anti-flying” movement and tendencies towards “green” travel initiatives have contributed to higher levels of scrutiny with respect to emissions which could have the effect of reducing demand for air travel and could materially adversely impact our aviation business and reputation. As a result of these increased concerns, we announced that we have committed to become carbon neutral by summer 2020; should we not achieve this objective, it could be badly received or result in further damage to our reputation.

10.3 Risks relating to the Company

Evolving standards and technology innovation

The civil aviation and defence and security markets in which we operate are characterized by changes in customer requirements, new aircraft models, evolving industry standards, increased power to analyze data and evolving customer expectations influenced by global trends such as climate change, pandemics, the growth of developing markets, population growth and demographic factors. If we do not accurately predict the needs of our existing and prospective customers, develop new products, enhance existing products and services and invest in and develop new technologies that address those evolving standards and technologies, we may lose current customers and be unable to attract new customers. This could reduce our revenue and market share.

The evolution of technology could also have a negative impact on the value of our fleet of FFSs or require significant investments to our fleet to update to the evolving technology. The adoption of new technologies, such as artificial intelligence, machine learning and unmanned aerial systems or remotely piloted aircraft, presents opportunities for us, but may result in new and complex risks that would need to be managed effectively.

Our ability to penetrate new markets

Penetration of the new markets represents both a risk and an opportunity for CAE. Success in these markets is by no means assured. As we operate in new markets, unforeseen difficulties, major investments and additional expenditures could arise, which may have an adverse effect on our operations, financial position, profitability and reputation. Penetrating a new market is inherently more difficult than managing within our already established markets. New products and technologies introduced in new markets could also generate unanticipated safety or other concerns resulting in expanded product liability risks, potential product recalls and other regulatory issues that could have an adverse impact on us. In particular, we may be exposed to increased risks in the current year as a result of the development of our CAE Air1 ventilator, as we attempt to enter the medical equipment market.

Research and development activities

We carry out some of our R&D initiatives with the financial participation of governments, including the Government of Quebec through IQ and the SA^2^GE program, and the Government of Canada through its SADI and SIF. 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 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. and the U.K. 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.

Furthermore, our R&D investments in new products or technologies may or may not be successful. Our results may be impacted if we invest in products that are not accepted on the market, if customer demand or preferences change, if new products are not brought to market in a timely manner, if we lack commercial or procurement experience, if we experience delays in obtaining regulatory approvals, or if our products become obsolete. We may incur cost overruns in developing new products.

CAE Financial Report 2020 I 41

Management’s Discussion and Analysis

Fixed-price and long-term supply contracts

We provide our products and services mainly through fixed-price contracts that enable us, contrary to cost-reimbursable contracts, to benefit from performance improvements, cost reductions and efficiencies, but also require us to absorb cost overruns reducing profit margins or incurring losses if we are unable to achieve estimated costs and revenues. 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 25 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. 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.

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, including Authorized Training Provider agreements. These long-term contracts are included in our backlog at the awarded amount but could be subject to unexpected adjustments or cancellations and therefore do not represent a guarantee of our future revenues. We cannot be certain that these partnerships and contracts will be renewed on similar terms, or at all, when they expire, and our financial results could be adversely affected by our partners' level of operations and revenue, financial health, contribution and indemnifications. We can make no assurance that customers will fulfill existing purchase commitments, exercise purchase options or purchase additional products or services from CAE.

Procurement and OEM leverage

We secure data, parts, equipment and many other inputs from a wide variety of OEMs, subcontractors 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 we use an internally produced simulation model for an aircraft or develop courseware without using OEM-sourced and licenced data, parts and equipment, the OEM in question may attempt retaliatory or obstructive actions against us 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 us 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 we use 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 us to block the use of such software or freeware, claiming breach of licence rights or other legal basis. Such actions may cause us 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.

Product integration and program management

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 which may impact timing and profitability.

Protection of our intellectual property and brand

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.

As the training partner of choice to enhance safety, efficiency and readiness, our brand is a significant asset. From time to time, we may authorize the use of our brand, under third party license agreements, such as our partnership with the Saudi National Company of Aviation to create a CAE Authorized Training Centre in the Middle East. Additionally, in certain of our flight training organizations, we outsource some flying to third-party providers, but ultimately remain accountable for their performance operating for our brand. We control and manage the use of our brand and ensure that our partners and suppliers meet rigorous standards to ensure that our brand value is preserved. Adverse publicity related to incidents or litigation involving us, our partners or suppliers may impact the value of our brand.

42 I CAE Financial Report 2020

Management’s Discussion and Analysis

Third-party intellectual property

Our products contain sophisticated software and computer systems that are supplied to us by third parties. These may not always be available to us. Our production of simulators often depends on receiving confidential or proprietary data on the functions, design and performance of a product or system that our simulators are intended to simulate. Our training systems may also involve the collection and analysis of customer performance data in connection with the use of our training systems. We may not be able to obtain access to these multiple data sets 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 and services 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 attract, recruit and retain key personnel and management with relevant skills, expertise and experience. Our compensation policy is designed to mitigate this risk, however, the temporary compensation measures put in place during the COVID-19 pandemic could result in increased risks of losing talent to industries that have not been as severely impacted. We also have succession plans in place to help identify and develop an internal pipeline of leadership talent pertaining to engineers, technical and pilot instructors and general management domains. CAE is dependent on the industry experience, qualifications and knowledge of a variety of employees, including our executive officers, managers and other key employees to execute our business plan and operate our business. If we were to experience a shortfall, illness or a substantial turnover in our leadership or other key employees, our business, results from operations and financial condition could be materially adversely affected. Failure to establish a complete and effective succession plan, including preparation of internal talent and identification of potential external candidates, where relevant, for key roles, could impair our business until qualified replacements are found.

Labour relations

Approximately 2,600 employees are represented by unions and are covered by 55 collective agreements as of March 31, 2020. 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 location which could adversely affect service to our customers and to our financial performance.

Liability risks that may not be covered by indemnity or insurance

We are exposed to liabilities that are unique to the products and services we provide, as our business is complex, international and involves extensive coordination and integration with numerous suppliers, large numbers of highly-skilled employees and partners, advanced technologies and stringent regulatory requirements and performance and reliability standards.

Accordingly, we may be exposed to claims and litigation, including claims for personal injury, illness, death, property damage or business interruption, arising from:

–	Deficiencies in our simulation products and services that directly or indirectly cause damage and/or injury;
–	Deficiencies in training programs or our training services delivery that directly or indirectly cause damage or injury;
---	---
–	Incidents occurring during the use of equipment that we have manufactured or operate;
---	---
–	Incidents involving products and services that we have provided, including claims for personal injuries or death;
---	---
–	Deficiencies in our live flight training equipment, personnel or operations that directly or indirectly cause damage or injury;
---	---
–	Deficiencies in our mitigation and protective measures implemented to reduce the risk of a potential COVID-19 outbreak in one of our facilities or failure to adequately protect our customers, employees, contractors, workers and visitors from the virus.
---	---

Substantial costs could adversely impact our financial condition, cash flows, or operating results. In some but not all circumstances, we may be entitled to certain legal protections or indemnifications from our customers. Although we maintain insurance coverage from established insurance carriers to cover these risks, our insurance coverage may be inadequate to cover all claims and liabilities, the amount of such insurance coverage may not be sufficient, and we may be forced to bear substantial costs. Any accident, failure of, or defect in our products or services, even if fully indemnified or insured, could result in significant investment and negatively affect our reputation with our customers and the public. It also could affect the cost and availability of adequate insurance in the future.

Warranty or other product-related claims

We manufacture simulators that are highly complex and sophisticated. Additionally, we may purchase simulators or obtain simulators via acquisitions. These simulators may contain defects that are difficult to detect and correct and if they fail to operate correctly, there could be warranty claims or we may incur significant additional costs to modify or retrofit these products. Correcting these defects could require significant additional costs. If a defective product is integrated into our customers' equipment, we could face product liability claims based on damages to the customers' equipment. Any claims, errors or failures could have a negative effect on our operating results and business. We may also be subject to product liability claims relating to equipment and services related to discontinued operations sold in the past.

CAE Financial Report 2020 I 43

Management’s Discussion and Analysis

Mergers, acquisitions, joint ventures, strategic alliances or divestitures

As part of our growth strategy, at times we engage in business acquisitions or form joint ventures and strategic alliances. The realization of anticipated benefits from these acquisitions and related activities depends, in part, upon our ability to integrate the acquired business, the realization of synergies both in terms of successfully marketing our broadened product and service portfolio, efficient consolidation of the operations of the acquired businesses into our existing operations, cost management to avoid duplication, information systems integration, staff reorganization, establishment of controls, procedures, and policies, performance of the management team and other personnel of the acquired operations as well as cultural alignment. There can be no assurance that we will realize anticipated synergies, or that we will meet any financial and performance targets provided. In addition, our inability to adequately integrate an acquired business in a timely manner might result in departures of qualified personnel or lost business opportunities which would negatively impact operations and financial results. There are also risks associated with the acquisition of a business where certain legacy liabilities could arise. We also may make strategic divestitures from time to time. These transactions may result in continued involvement in the divested businesses, such as through guarantees and transition services following the transaction.

Reputational risk

Reputational risk may arise under many situations including, among others, quality or performance issues on our products or services, inability to penetrate new markets or to meet expectations or demand for newly developed products and technologies, failure to maintain ethically and socially responsible operations, injuries or death arising from health and safety incidents during the operation process or training activities, or alleged or proven non-compliance with laws or regulations by our employees, agents, subcontractors, suppliers and/or business partners. Any negative publicity about, or significant damage to, our image and reputation could have an adverse impact on customer perception and confidence and may cause the cancellation of current work or influence our ability to obtain future sales or award of a contract. Furthermore, any unethical conduct by one of our suppliers or subcontractors or any allegations of unfair or illegal business practices by a supplier or subcontractor could also negatively affect our image and reputation. An occurrence of any of these situations could materially adversely affect our business and financial results.

Perceptions pertaining to social and governance approaches have changed in the recent years, and many customers and investors now agree that these issues have become a current concern and could affect corporate profitability and reputation.

U.S. foreign ownership, control or influence mitigation measures

CAE and certain of our subsidiaries are parties to agreements with various departments and agencies of the U.S. government, including the U.S. Department of Defense, which require that these subsidiaries be issued facility security clearances under the U.S. Government National Industrial Security Program. This program requires that any corporation that maintains a facility security clearance be insulated from foreign ownership, control or influence (FOCI) via a mitigation agreement. As a Canadian company, we have entered into FOCI mitigation agreements with U.S. Department of Defense that enable these U.S. subsidiaries to obtain and maintain the requisite facility security clearances to enter into and perform on classified contracts with the U.S. Government. Specifically, these mitigation agreements are a special security agreement for CAE USA Inc. and a proxy agreement (Proxy Agreement) for CAE USA Inc.’s wholly owned subsidiary, CAE USA Mission Solutions Inc. (MSI). If we fail to maintain compliance with either of these FOCI mitigation agreements, the facility security clearances for each entity may be terminated. If this occurred, our U.S. subsidiaries would no longer be eligible to enter into new contracts requiring a facility security clearance and would lose the right to perform its existing contracts with the U.S. government to completion.

A separate board of directors has been established to oversee the management and operations of MSI. Under the Proxy Agreement, we, and our board of directors, are restricted in our oversight over MSI’s separate board of directors and its management. In addition, under U.S. Department of Defense rules and procedures, subject to a limited number of restricted matters (such as the sale or disposal of MSI’s assets; corporate mergers, consolidations, or reorganizations relating to MSI; pledges, mortgages or other encumbrances on the capital stock of MSI for purposes other than obtaining working capital; the dissolution of MSI; and the filing of a bankruptcy petition with respect to MSI) MSI board of directors acts independently and has sole authority to make all decisions regarding the management of MSI and its business. The actions taken or not taken by the management or MSI board of directors could have an impact on our growth, reputation and profitability.

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.

Seasonality

Our business, revenues and cash flows are affected by certain seasonal trends. In the Civil segment, the level of training delivered is driven by the availability of pilots to train, which tends to be lower in the second quarter as pilots are flying more and training less and thus resulting in lower revenues. In the Defence segment, revenue and cash collection tend to be higher in the second half of the year as contract awards and availability of funding are influenced by the federal government’s budget cycle, which in the U.S. is based on a September year-end. We expect these trends to continue in fiscal 2021.

44 I CAE Financial Report 2020

Management’s Discussion and Analysis

Returns to shareholders

Payment of dividends, the repurchase of shares under our NCIB program and other cash or capital returns to our shareholders are at the discretion of the Board of Directors and 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 our dividend and other policies which may be reviewed from time to time.

Given the impacts of the COVID-19 pandemic, CAE’s Board of Directors has approved a suspension of dividend payments to common shareholders and share repurchases under our NCIB program to preserve liquidity. This position will be reviewed on a quarterly basis and payments will resume as soon as it is appropriate.

Information technology and cybersecurity

We depend on information technology infrastructure and systems, hosted internally or outsourced, to conduct day-to-day operations and for the effective operation of our business. Our business also requires the appropriate and secure utilization of sensitive and confidential information belonging to third parties such as aircraft OEMs, national defence forces and customers. While we strive to leverage technology to meet the growing needs of our customers and enhance the efficiency of our operations, it nevertheless comes with information security and cybersecurity risks.

Due to the size, scale, and global nature of our operations, our heavy reliance on the internet to conduct day-to-day business activities, our intricate technological infrastructure, our business relationships with aircraft OEMs and defence and security customers and our use of third party service providers, we are subject to heightened risks. These risks include information technology system failures and non‑availability, cyber-attacks, cyber extortion, breaches of systems security, malware, unauthorized attempts to gain access to our proprietary and sensitive information, hacking, phishing, identity theft, theft of intellectual property and confidential information, denial‑of‑service attacks aimed at causing network failures and services interruption and other cybersecurity threats to our information technology infrastructure and systems.

These IT and cybersecurity risks 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 client attrition, non-compliance with privacy legislation or any other laws in effect, litigation, fines, penalties or regulatory action, compliance costs, corrective measures, investigative or restoration costs, cost hikes to maintain and upgrade technological infrastructures and systems or reputational harm, all of which could have a negative effect on CAE’s operating results, reporting capabilities, profitability and reputation.

A series of governance processes are in place to mitigate these risks. To address the challenges of the evolving cyber threat landscape and as the volume and sophistication of cyber-attacks continue to increase, we continuously review our security measures. We have developed a three year cybersecurity program in order to cope with these increasing threats. We have implemented security controls, policy enforcement mechanisms, management oversight and monitoring systems in order to prevent, detect and address potential threats. However, we may find it necessary to make further investments to protect our data and infrastructure, as well as our customers data, against cyber-attacks.

The increased volume of employees working remotely and using online video conferencing and collaborative platforms due to COVID-19 social distancing measures could result in increased cybersecurity threats. In order to manage these threats, we have increased our monitoring of these threats, we have accelerated certain initiatives and we have been working with third parties to focus on our 24/7 monitoring of our activities.

The amount of cyber insurance coverage that we maintain may not be adequate nor sufficient to cover the claims or liabilities resulting from cyber-attacks. 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. In addition, the digital transformation and the adoption of emerging technologies, such as artificial intelligence and machine learning, call for continued focus and investment to manage our risks effectively.

Furthermore, we may experience similar security threats at customer sites that we operate or manage or to which we gain access to deliver services. 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.

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, and can have a negative impact on our reputation. To cope with these risks we have implemented a third party vendor cybersecurity risk process in order to ensure that our suppliers have the appropriate level of controls over the process of CAE information assets outsourced to them.

CAE Financial Report 2020 I 45

Management’s Discussion and Analysis

Data privacy

The management, use and protection of data, including sensitive data, are becoming increasingly important, particularly given the high value attributed to data and the potential exposure to operational risks, reputational risks, and regulatory compliance risks and the coming into force of the General Data Protection Regulation by the European Union in May 2018, and the expected proliferation of similar regulatory frameworks in other regions, such as the enactment of the California Consumer Privacy Act in January 2020. Further, as our collaboration with third parties continues to grow and as we adopt new technologies and business models, our potential exposure to regulatory compliance, operational and reputational risk increases.

If we fail to comply with applicable privacy laws, we could be subject to regulatory penalties, experience damage to our reputation or a loss of confidence in our products and services. We may also incur additional costs for remediation and modification or enhancement of our information systems to prevent future occurrences, all of which could adversely affect our business, operations or financial results.

Furthermore, the adoption of emerging technologies, such as cloud computing, artificial intelligence, process automatization and robotics could lead to both new and complex risks that require continued focus and investment to manage effectively. We identify, assess and manage the operational risk associated with the implementation of new technologies prior to their adoption.

10.4 Risks relating to the market

Foreign exchange

Our operations are global with more than 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.

Three areas of our business are exposed to fluctuations of foreign exchange rates; our network of foreign training and services operations, our production operations outside of Canada (Germany, and U.S.) and our production operations in Canada. 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 generally hedge the milestone payments of sales contracts denominated in foreign currencies to mitigate some of the foreign exchange exposure. 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 to allow the unhedged portion to match the foreign cost component of the contract. Since not all of our revenue is hedged, it is not possible to completely offset the effects of changing foreign currency values, which leaves some residual exposure that 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.

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 depend, in part, upon our debt funding. We have various debt facilities with maturities ranging between April 2020 and July 2043, 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. If we require additional debt funding, our market liquidity may not be sufficient considering multiple factors including a decline in our financial performance, outlook or our credit ratings, which may adversely affect our ability to fund our operations and contractual or financing commitments.

Our credit facilities have certain financial covenants that require us to maintain a minimum leverage ratio. In the event that we are unable to maintain compliance with such covenants, we may have restricted access to capital and we would be required to obtain an amendment or waiver from our lenders, refinance the indebtedness subject to covenants or take other mitigating actions prior to a potential breach.

Credit risk

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.

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 estimates prepared 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, cash flow and shareholders' equity. We seek to mitigate this risk by implementing policies and procedures designed to control investment risk and through ongoing monitoring of our funding position.

46 I CAE Financial Report 2020

Management’s Discussion and Analysis

During the last quarter of fiscal 2020, the markets experienced a high level of fluctuations due to the impacts of COVID-19. The decrease in value of our plan assets was however offset by an increase in the pension discount rates. Depending how the markets fluctuate, additional cash contributions may be required to fund our defined benefit and defined contribution pension plans. This may have a negative effect on our operations and financial results.

Doing business in foreign countries

We have operations in over 35 countries including our joint venture operations. We also sell and deliver products and services to customers around the world. Sales to customers outside Canada made up more than 90% of revenue in fiscal 2020. 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 attributable to international operations:

–	Change in Canadian and foreign government policies, laws, regulations and regulatory requirements, or the interpretation, application, and/or enforcement thereof;
–	Adoption of new, and the expansion of existing tariffs, embargoes, controls, sanctions trade, work or travel restrictions and other restrictions;
---	---
–	Recessions and other economic crises in other regions, or specific foreign economies and the impact on our cost of doing business in those countries;
---	---
–	Acts of war, civil unrest, force majeure and terrorism;
---	---
–	Social, economic and geopolitical instability;
---	---
–	Risk that inter-governmental relationships may deteriorate such that CAE’s operations in a given country may be negatively impacted;
---	---
–	Limitations on the CAE’s ability to repatriate cash, funds or capital invested or held in jurisdictions outside Canada;
---	---
–	Difficulties, delays and expense that may be experienced or incurred in connection with the movement and clearance of personnel and goods through the customs and immigration authorities of multiple jurisdictions;
---	---
–	Complexity and corruption risks of using foreign representatives and consultants.
---	---

Also, changes to the regulatory environment in countries in which we do business may lead to higher custom tariffs, stricter trade policies, changes in the sanctions regime, export restrictions and other restrictions, that may have a negative impact on our sales, financial results and business model.

Geopolitical uncertainty

Global uncertainty continued to intensify throughout fiscal 2020 and, in some parts of the world, political instability has become more pronounced, protracted and unpredictable.

Rising or persisting geopolitical tensions, policy changes and prolonged political instability in various countries where we have a presence 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. It is possible that in the markets we serve, unanticipated political instability could impact our operating results and financial position.

The social, political and economic impacts of the changing political landscape in Europe pertaining to the exit of the United Kingdom from the European Union (EU) as of January 31, 2020 may lead to increased complexity in terms of regulations and increased geopolitical and economic risks and could cause disruptions to and create uncertainty surrounding our businesses, including affecting our relationships with existing and future customers, suppliers and employees. The withdrawal transition period will last until December 31, 2020 during which time the U.K. will remain part of the EU’s customs union and single market and will work towards negotiating a trade deal with the EU before the transition period ends. Uncertainties pertaining to the political direction of the U.S. and the current Chinese-American trade tension may continue to impact global economic growth prospects and market sentiment.

Anti-corruption laws

Sales to foreign customers are subject to Canadian and foreign laws and regulations, including, without limitation, the Corruption of Foreign Public Officials Act (Canada), the Foreign 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.

Taxation matters

We collect and pay significant amounts of taxes to various tax authorities. As our operations are complex and the related tax interpretations, regulations, legislation and jurisprudence that pertain to our activities are subject to continual change and evolving interpretation, the final outcome of the taxation of many transactions is uncertain. Also, a substantial portion of our business is conducted in foreign countries and is thereby subject to numerous countries’ tax laws and fiscal policies. A change in applicable tax laws, treaties or regulations or their interpretation could result in a higher effective tax rate on our earnings which could significantly impact our financial results. Additionally, many governments have introduced temporary tax relief measures as a result of the COVID-19 pandemic and there is a risk that we will not qualify for them all.

CAE Financial Report 2020 I 47

Management’s Discussion and Analysis

11. RELATED PARTY TRANSACTIONS

A list of principal investments which, in aggregate, significantly impact our results or assets is presented in Note 31 of our consolidated financial statements.

Outstanding balances with our equity accounted investees are as follows:

(amounts in millions)	2020		2019
Accounts receivable	$	51.2	$	33.9
Contract assets	38.5		13.4
Other non-current assets	25.6		18.7
Accounts payable and accrued liabilities	5.7		2.2
Contract liabilities	28.8		30.7
Other non-current liabilities	1.7		1.6

Transactions with our equity accounted investees are as follows:

(amounts in millions)	2020		2019
Revenue	$	166.0	$	65.5
Purchases	2.5		2.4
Other income	1.5		1.4

Compensation of key management personnel

Key management personnel have the ability and responsibility to make major operational, financial and strategic decisions for CAE and include certain executive officers. The compensation of key management for employee services are as follows:

(amounts in millions)	2020			2019
Salaries and other short-term employee benefits	$	6.5		$	6.4
Post-employment benefits – defined benefit plans	2.5			1.9
Share-based payments expense	(8.8		)	18.9
	$	0.2		$	27.2

48 I CAE Financial Report 2020

Management’s Discussion and Analysis

12. CHANGES IN ACCOUNTING POLICIES

12.1 New and amended standards adopted

IFRS 16 - Leases

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

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

We have elected to apply the following transitional practical expedients:

–	Maintain previous assessment of whether a contract is, or contains, a lease at the date of initial application;
–	Use of hindsight when evaluating the lease term if a contract contains options to extend or terminate the lease;
---	---
–	Recognize short-term leases and leases of low-value assets as a lease expense on a straight-line basis, consistent with current IAS 17 accounting;
---	---
–	Account for leases for which the remaining lease term ends within 12 months of the effective date as short-term leases;
---	---
–	Adjust the right-of-use asset by the amount of the previously assessed IAS 37 onerous contract provision as an alternative to an impairment review;
---	---
–	Exclude initial direct costs from the measurement of the right-of-use asset at the date of initial application;
---	---
–	Measure the right-of-use asset as if IFRS 16 had been applied since the lease commencement date using the incremental borrowing rate at the date of initial application.
---	---

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

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

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

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

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

	March 31				IFRS 16			April 1
(amounts in millions)	2019			Adjustments				2019
Assets
Total current assets		$	2,112.9		$	(3.3	)		$	2,109.6
Property, plant and equipment		2,149.3			(206.0		)		1,943.3
Right-of-use assets		—			432.8				432.8
Investment in equity accounted investees		312.1			(3.7		)		308.4
Other non-current assets		2,591.2			0.3				2,591.5
Total assets		$	7,165.5		$	220.1			$	7,385.6

Liabilities and equity
Current portion of long-term debt		$	264.1		$	31.8			$	295.9
Other current liabilities		1,625.4			(4.3		)		1,621.1
Total current liabilities		$	1,889.5		$	27.5			$	1,917.0
Long-term debt		2,064.2			234.0				2,298.2
Other non-current liabilities		801.8			(13.9		)		787.9
Total liabilities		$	4,755.5		$	247.6			$	5,003.1
Total equity		$	2,410.0		$	(27.5	)		$	2,382.5
Total liabilities and equity		$	7,165.5		$	220.1			$	7,385.6

CAE Financial Report 2020 I 49

Management’s Discussion and Analysis

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

IFRIC 23 - Uncertainty over income tax treatments

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

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

Amendment to IAS 19 - Employee benefits

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

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

12.2 Use 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 the recoverable amount of the cash generating unit (CGU) or group of CGUs to which goodwill has been allocated and uses valuation models such as the discounted cash flows model (level 3). Key assumptions on which management based its determination of the recoverable amount include expected growth rates and discount 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 26 of our consolidated financial statements for further details regarding assumptions used.

Revenue recognition

Transaction price allocated to performance obligations

In allocating the transaction price for contracts with multiple performance obligations, we estimate the stand-alone selling price using the expected cost plus a margin approach if they are not directly observable.

50 I CAE Financial Report 2020

Management’s Discussion and Analysis

Timing of satisfaction of performance obligations

For contracts where revenue is recognized over time using the cost input method, we are required 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 as well as its 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 19 of our consolidated financial statements for further details regarding assumptions used.

Government royalty 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 consider 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 8.0% to 15.0%, over the period of repayments. The estimated repayments are discounted using average rates ranging from 6.0% 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 obligations at March 31, 2020 by approximately $2.8 million (2019 - $3.5 million). A 1% decrease to the growth rates would have an opposite impact on the royalty obligations.

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 influence 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.

Impact of the COVID-19 pandemic

The COVID-19 pandemic and the resulting measures taken in response to its spread have resulted in significant temporary disruptions to our business operations. The rapidly evolving situation has created a high level of uncertainty and risk that may result in significant impacts on our business, financial performance and operations.

The uncertainties created by the COVID-19 pandemic required the use of judgements and estimates in the areas set out below. The future impact of the COVID-19 pandemic increases the risk, in future reporting periods, of material adjustments to the carrying amount of our net assets.

Goodwill impairment test

We performed our annual impairment test for goodwill during the fourth quarter of fiscal 2020. Goodwill is allocated to CGUs or a group of CGUs, which generally corresponds to our operating segments or one level below. The value in use of each CGU is calculated using estimated cash flows derived from our five-year strategic plan. Cash flows subsequent to the five-year period were extrapolated using a constant growth rate of 2% to 3%. These projections are inherently uncertain due to the fluidly evolving impact of the COVID-19 pandemic. Significant assumptions and estimates are used to determine the expected growth rates embedded in our cash flow projections and the discount rate based on observable market data during the fourth quarter.

Based on the results of our impairment test, we recorded an impairment charge of goodwill of $37.5 million in relation to the Healthcare CGU. See Note 26 of our consolidated financial statements for further details regarding assumptions used.

CAE Financial Report 2020 I 51

Management’s Discussion and Analysis

Impairment of non-financial assets

We have considered the impact of the COVID-19 pandemic on our assessment of impairment indicators, which required significant judgement. We have reviewed our property, plant and equipment, right-of-use assets, amortizable intangible assets, investment in equity accounted investees as well as other assets such as inventories and deferred tax assets. Where impairment indicators were identified in the Civil Aviation Training Solutions segment, no significant impairment charge has been recorded. No impairment indicators were identified in the Defence and Security and Healthcare segments.

Expected credit loss

We have considered the impact of the COVID-19 pandemic on the expected credit loss of our financial instruments (mainly trade receivable and contract assets). The amount and timing of the expected credit losses, as well as the probability assigned thereto, has been based on the available information as at March 31, 2020. As a result of this review, no significant credit loss allowances adjustments have been recorded.

13. 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, 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.

13.1 Evaluation 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, 2020. 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, 2020.

13.2 Internal 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, 2020, based on the framework and criteria established by the Committee of Sponsoring Organizations of the Treadway Commission 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 2020 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

14. 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 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.

15. 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.

52 I CAE Financial Report 2020

Management’s Discussion and Analysis

16. SELECTED FINANCIAL INFORMATION

The following table provides selected quarterly financial information for the years 2018 through to 2020.

(amounts in millions, except per share amounts and exchange rates)	Q1		Q2	Q3	Q4	Total
Fiscal 2020
Revenue	$	825.6	896.8	923.5	977.3	3,623.2
Net income	$	63.0	75.0	99.8	81.1	318.9
Equity holders of the Company	$	61.5	73.8	97.7	78.4	311.4
Non-controlling interests	$	1.5	1.2	2.1	2.7	7.5
Basic EPS attributable to equity holders of the Company	$	0.23	0.28	0.37	0.29	1.17
Diluted EPS attributable to equity holders of the Company	$	0.23	0.28	0.37	0.29	1.16
Earnings per share before specific items	$	0.24	0.28	0.37	0.46	1.34
Average number of shares outstanding (basic)	265.8		266.2	265.8	266.1	266.0
Average number of shares outstanding (diluted)	267.6		268.2	267.6	267.7	267.6
Average exchange rate, U.S. dollar to Canadian dollar	1.34		1.32	1.32	1.34	1.33
Average exchange rate, Euro to Canadian dollar	1.50		1.47	1.46	1.48	1.48
Average exchange rate, British pound to Canadian dollar	1.72		1.63	1.70	1.72	1.69
Fiscal 2019^(1)^
Revenue	$	722.0	743.8	816.3	1,022.0	3,304.1
Net income	$	71.6	63.6	79.5	125.4	340.1
Equity holders of the Company	$	69.4	60.7	77.6	122.3	330.0
Non-controlling interests	$	2.2	2.9	1.9	3.1	10.1
Basic EPS attributable to equity holders of the Company	$	0.26	0.23	0.29	0.46	1.24
Diluted EPS attributable to equity holders of the Company	$	0.26	0.23	0.29	0.46	1.23
Earnings per share before specific items	$	0.26	0.23	0.29	0.48	1.25
Average number of shares outstanding (basic)	267.6		267.4	266.1	265.1	266.6
Average number of shares outstanding (diluted)	269.3		269.2	267.5	266.8	268.0
Average exchange rate, U.S. dollar to Canadian dollar	1.29		1.31	1.32	1.33	1.31
Average exchange rate, Euro to Canadian dollar	1.54		1.52	1.51	1.51	1.52
Average exchange rate, British pound to Canadian dollar	1.76		1.71	1.70	1.73	1.72
Fiscal 2018^(1)^
Revenue	$	656.2	618.2	828.2	720.9	2,823.5
Net income	$	61.2	62.1	145.8	85.6	354.7
Equity holders of the Company	$	59.6	60.3	143.8	82.3	346.0
Non-controlling interests	$	1.6	1.8	2.0	3.3	8.7
Basic EPS attributable to equity holders of the Company	$	0.22	0.22	0.54	0.31	1.29
Diluted EPS attributable to equity holders of the Company	$	0.22	0.22	0.53	0.31	1.28
Earnings per share before specific items	$	0.22	0.20	0.38	0.31	1.11
Average number of shares outstanding (basic)	268.6		268.7	268.1	267.6	268.2
Average number of shares outstanding (diluted)	269.8		269.9	269.5	269.0	269.5
Average exchange rate, U.S. dollar to Canadian dollar	1.35		1.26	1.27	1.26	1.28
Average exchange rate, Euro to Canadian dollar	1.48		1.47	1.49	1.55	1.50
Average exchange rate, British pound to Canadian dollar	1.72		1.64	1.68	1.75	1.70

^(1)^Figures have not been restated to reflect the adoption of IFRS 16. Refer to Changes in accounting policies for further details.

CAE Financial Report 2020 I 53

Management’s Discussion and Analysis

Selected segment information

(amounts in millions, except operating margins)	Q4-2020			Q4-2019		FY2020			FY2019^(1)^		FY2018^(1)^
Civil Aviation Training Solutions
Revenue	$	601.9		$	593.4	$	2,167.5		$	1,875.8	$	1,625.3
Segment operating income	151.5			115.5		473.3			344.3		330.1
Operating margins (%)	25.2			19.5		21.8			18.4		20.3
Defence and Security
Revenue	$	341.8		$	387.9	$	1,331.2		$	1,306.7	$	1,083.0
Segment operating income	32.4			50.7		104.8			131.5		123.9
Operating margins (%)	9.5			13.1		7.9			10.1		11.4
Healthcare
Revenue	$	33.6		$	40.7	$	124.5		$	121.6	$	115.2
Segment operating (loss) income	(37.4		)	4.2		(41.0		)	4.8		8.8
Operating margins (%)	—			10.3		—			3.9		7.6
Total
Revenue	$	977.3		$	1,022.0	$	3,623.2		$	3,304.1	$	2,823.5
Segment operating income	146.5			170.4		537.1			480.6		462.8
Operating margins (%)	15.0			16.7		14.8			14.5		16.4

Selected annual information for the past five years

(amounts in millions, except per share amounts and exchange rates)	2020		2019^(1)^		2018^(1)^		2017^(1)^			2016^(1)^
Revenue	$	3,623.2	$	3,304.1	$	2,823.5	$	2,704.5		$	2,512.6
Net income	318.9		340.1		354.7		256.6			230.3
Equity holders of the Company
Continuing operations	311.4		330.0		346.0		252.0			239.3
Discontinued operations	—		—		—		(0.5		)	(9.6		)
Non-controlling interests	7.5		10.1		8.7		5.1			0.6
Average exchange rate, U.S. dollar to Canadian dollar	1.33		1.31		1.28		1.31			1.31
Average exchange rate, Euro to Canadian dollar	1.48		1.52		1.50		1.44			1.45
Average exchange rate, British pound to Canadian dollar	1.69		1.72		1.70		1.71			1.98
Financial position:
Total assets	$	8,483.6	$	7,165.5	$	5,780.2	$	5,354.8		$	4,996.7
Total non-current financial liabilities^(2)^	3,301.9		2,242.8		1,380.6		1,370.8			1,318.6
Total net debt	2,365.7		1,882.2		649.4		750.7			787.3
Per share:
Basic EPS attributable to equity holders of the Company
Continuing operations	$	1.17	$	1.24	$	1.29	$	0.94		$	0.89
Discontinued operations	—		—		—		—			(0.04		)
Diluted EPS attributable to equity holders of the Company
Continuing operations	1.16		1.23		1.28		0.93			0.89
Discontinued operations	—		—		—		—			(0.04		)
Earnings per share before specific items	1.34		1.25		1.11		1.03			0.86
Dividends declared	0.43		0.39		0.35		0.315			0.295

^(1)^Figures have not been restated to reflect the adoption of IFRS 16. Refer to Changes in accounting policies for further details. Figures in fiscal 2017 and 2016 have not been restated to reflect the adoption of IFRS 15 which was effective fiscal 2019.

^(2)^ Includes long-term debt, long-term derivative liabilities and other long-term liabilities meeting the definition of a financial liability.

54 I CAE Financial Report 2020

CAE INC.

CONSOLIDATED FINANCIAL STATEMENTS

Management’s Report on Internal Control Over Financial Reporting	56
Report of Independent Registered Public Accounting Firm	57
Consolidated Financial Statements
Consolidated Income Statement	60
Consolidated Statement of Comprehensive Income	61
Consolidated Statement of Financial Position	62
Consolidated Statement of Changes in Equity	63
Consolidated Statement of Cash Flows	64
Notes to the Consolidated Financial Statements
Note 1 – Nature of Operations and Summary of Significant Accounting Policies	65
Note 2 – Changes in Accounting Policies	79
Note 3 – Business Combinations	81
Note 4 – Operating Segments and Geographic Information	83
Note 5 – Other Gains – Net	85
Note 6 – Finance Expense – Net	85
Note 7 – Income Taxes	85
Note 8 – Share Capital, Earnings per Share and Dividends	87
Note 9 – Accounts Receivable	88
Note 10 – Balance from Contracts with Customers	88
Note 11 – Inventories	88
Note 12 – Property, Plant and Equipment	89
Note 13 – Intangible Assets	90
Note 14 – Leases	90
Note 15 – Other Non-Current Assets	91
Note 16 – Accounts Payable and Accrued Liabilities	91
Note 17 – Provisions	92
Note 18 – Debt Facilities	92
Note 19 – Employee Benefits Obligations	93
Note 20 – Other Non-Current Liabilities	96
Note 21 – Supplementary Cash Flows Information	97
Note 22 – Accumulated Other Comprehensive Income	97
Note 23 – Share-Based Payments	97
Note 24 – Employee Compensation	100
Note 25 – Government Participation	100
Note 26 – Impairment of Non-Financial Assets	100
Note 27 – Contingencies and Commitments	101
Note 28 – Fair Value of Financial Instruments	101
Note 29 – Capital Risk Management	102
Note 30 – Financial Risk Management	103
Note 31 – Related Party Relationships	107
Note 32 – Related Party Transactions	109
Note 33 – Events After the Reporting Period	109

CAE Financial Report 2020 | 55

Management’s Report on Internal Control Over Financial Reporting

Management of CAE is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f), 15d-15(f) under the Securities Exchange Act of 1934). CAE’s internal control over financial reporting is a process designed under the supervision of CAE’s President and Chief Executive Officer and Chief Financial Officer to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s consolidated financial statements for external reporting purposes in accordance with IFRS, as issued by the International Accounting Standards Board (IASB).

As of March 31, 2020, management conducted an assessment of the effectiveness of the Company’s internal control over the financial reporting 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). Based on this assessment, management concluded that the Company’s internal control over financial reporting as of March 31, 2020 was effective.

M. Parent S. Branco

President and Chief Executive Officer Vice-president, Finance and Chief Financial Officer

Montreal (Canada)

May 22, 2020

56 | CAE Financial Report 2020

Report of Independent Registered Public Accounting Firm

To the Board of

Directors and Shareholders of CAE Inc.

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated statement of financial position of CAE Inc. and its subsidiaries (together, the Company) as of March 31, 2020 and 2019, and the related consolidated statements of income, comprehensive income, changes in equity and cash flows for the years then ended, including the related notes (collectively referred to as the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of March 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of March 31, 2020 and 2019, and its financial performance and its cash flows for the years then ended in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Change in Accounting Principle

As discussed in Note 2 to the consolidated financial statements, the Company changed the manner in which it accounts for leases on April 1, 2019.

Basis for Opinions

The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express opinions on the Company’s consolidated financial statements and on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

CAE Financial Report 2020 | 57

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Goodwill impairment assessment - Healthcare cash-generating unit

As described in Notes 1, 13 and 26 to the consolidated financial statements, the goodwill allocated to the Healthcare cash-generating unit (CGU) was $117.3 million as of March 31, 2020, net of an impairment charge of $37.5 million for the year ended March 31, 2020. Management tests goodwill for impairment annually or at any time if an indicator of impairment exists. Where the recoverable amount of a CGU to which goodwill has been allocated is lower than the CGU’s carrying amount, the related goodwill is impaired. The Company’s impairment test for goodwill is based on internal estimates of value in use calculations using a discounted cash flow model. Management applied judgment in developing the cash flow projections for the Healthcare CGU, which included the use of significant assumptions relating to expected growth rates and the discount rate.^^

The principal considerations for our determination that performing procedures relating to the goodwill impairment assessment of the Healthcare CGU is a critical audit matter are there was judgment applied by management in developing the cash flow projections for the Healthcare CGU. This in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence related to management’s cash flow projections and significant assumptions, including expected growth rates and the discount rate. In addition, the audit effort involved the use of professionals with specialized skill and knowledge.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessment. These procedures also included, among others, testing management’s process for developing the cash flow projections for the Healthcare CGU; evaluating the appropriateness of the discounted cash flows model; testing the completeness, accuracy and relevance of the underlying data used in the model; and evaluating the reasonableness of the significant assumptions used by management. Evaluating the reasonableness of the significant assumptions used by management related to expected growth rates involved considering the current and historical performance of the Healthcare CGU and the market’s response to new products launched by the Company; the consistency with external market and healthcare industry data; and whether these assumptions were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in the evaluation of the Company’s discounted cash flows model and the discount rate assumption.

Revenue recognition - Estimated costs to complete certain contracts in the Defence and Security and Civil Aviation Training Solutions segments

As described in Note 1 to the consolidated financial statements, the Company recognizes revenue from contracts with customers for the design, engineering, and manufacturing of training devices over time using the cost input method when the Company determines that these devices have a sufficient level of customization such that they have no alternative use and the Company has enforceable rights to payment for work completed to date. For the year ended March 31, 2020, a portion of total consolidated revenue of $3,623.2 million related to revenue recognized from contracts with customers over time using the cost input method in the Defence and Security and Civil Aviation Training Solutions segments.

The measure of progress toward complete satisfaction of the performance obligation is determined by comparing the actual direct contract costs incurred to date to the total estimated costs for the entire contract. Management applies judgment to estimate the work performed to date as a proportion of the total work to be performed.

The principal considerations for our determination that performing procedures relating to revenue recognition for estimated costs to complete certain contracts in the Defence and Security and Civil Aviation Training Solutions segments is a critical audit matter are there was judgment applied by management in determining the estimated costs to complete the contracts. This in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence related to the cost assumptions applied by management in determining the estimated costs to complete the contracts.

58 | CAE Financial Report 2020

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements. These procedures included testing the effectiveness of controls relating to the revenue recognition process, including controls over the determination of estimated costs to complete the contracts. These procedures also included, among others, testing management’s process for determining estimated costs to complete the contracts in the Defence and Security and Civil Aviation Training Solutions segments for a sample of contracts; testing the completeness, accuracy and relevance of the data used in the estimate of the work performed to date as a proportion of the total work to be performed; and evaluating the reasonableness of cost assumptions used by management. Evaluating the reasonableness of cost assumptions used by management involved assessing management’s ability to reasonably estimate costs to complete contracts by comparing changes in estimated costs with prior period estimates; performing a look-back analysis to assess variances between actual and estimated costs for completed contracts; and performing procedures to evaluate the timely identification of circumstances which may warrant a modification to a previous cost estimate.^^

/s/PricewaterhouseCoopers LLP^1^

Montréal, Quebec

May 22, 2020

We have served as the Company’s auditor since 1991.

_____________________________________________________________________________________________

1 CPA auditor, CA, public accountancy permit No. A119714

CAE Financial Report 2020 | 59

Consolidated Financial Statements

Consolidated Income Statement

Years ended March 31
(amounts in millions of Canadian dollars, except per share amounts)	Notes	2020		^(1)^	2019
Revenue	4	3,623.2		$	3,304.1
Cost of sales		2,539.6			2,362.6
Gross profit		1,083.6		$	941.5
Research and development expenses		137.5			101.4
Selling, general and administrative expenses		437.5			415.2
Other gains – net	5	(1.0	)		(22.3	)
Share of after tax profit of equity accounted investees	4	(27.5	)		(33.4	)
Operating profit		537.1		$	480.6
Finance expense – net	6	144.4			80.9
Earnings before income taxes		392.7		$	399.7
Income tax expense	7	73.8			59.6
Net income		318.9		$	340.1
Attributable to:
Equity holders of the Company		311.4		$	330.0
Non-controlling interests		7.5			10.1
Earnings per share attributable to equity holders of the Company
Basic	8	1.17		$	1.24
Diluted	8	1.16		$	1.23

All values are in US Dollars. ^(1) Refer to Note 2 - Changes in accounting policies for the impact of adopting IFRS16.^

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

60 | CAE Financial Report 2020

Consolidated Financial Statements

Consolidated Statement of Comprehensive Income

Years ended March 31
(amounts in millions of Canadian dollars)	Notes	2020		2019
Net income		318.9		340.1
Items that may be reclassified to net income
Foreign currency exchange differences on translation of foreign operations		118.3		(12.6	)
Reclassification to income of foreign currency exchange differences		(40.4	)	(23.2	)
Net loss on cash flow hedges		(32.3	)	(6.9	)
Reclassification to income of (loss) gain on cash flow hedges		(0.2	)	2.1
Net loss on hedges of net investment in foreign operations		(71.0	)	(20.0	)
Income taxes	7	23.0		2.2
		(2.6	)	(58.4	)
Items that will never be reclassified to net income
Remeasurement of defined benefit pension plan obligations	19	13.4		4.2
Income taxes	7	(3.6	)	(1.1	)
		9.8		3.1
Other comprehensive income (loss)		7.2		(55.3	)
Total comprehensive income		326.1		284.8
Attributable to:
Equity holders of the Company		315.4		271.8
Non-controlling interests		10.7		13.0

All values are in US Dollars.

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

CAE Financial Report 2020 | 61

Consolidated Financial Statements

Consolidated Statement of Financial Position


As at March 31
(amounts in millions of Canadian dollars)	Notes	2020	^(1)^	2019
Assets
Cash and cash equivalents		946.5	$	446.1
Accounts receivable	9	566.1		496.0
Contract assets	10	569.3		523.5
Inventories	11	616.2		537.0
Prepayments		55.1		57.4
Income taxes recoverable		30.4		33.6
Derivative financial assets	28	25.0		19.3
Total current assets		2,808.6	$	2,112.9
Property, plant and equipment	12	2,154.0		2,149.3
Right-of-use assets	14	395.9		—
Intangible assets	13	2,056.5		2,027.9
Investment in equity accounted investees	31	460.6		312.1
Deferred tax assets	7	84.5		71.0
Derivative financial assets	28	13.1		12.8
Other non-current assets	15	510.4		479.5
Total assets		8,483.6	$	7,165.5

Liabilities and equity
Accounts payable and accrued liabilities	16	934.4	$	883.8
Provisions	17	29.2		28.7
Income taxes payable		26.4		25.7
Contract liabilities	10	746.2		670.2
Current portion of long-term debt	18	206.2		264.1
Derivative financial liabilities	28	119.9		17.0
Total current liabilities		2,062.3	$	1,889.5
Provisions	17	28.6		36.3
Long-term debt	18	3,106.0		2,064.2
Royalty obligations		141.1		136.2
Employee benefits obligations	19	212.8		212.6
Deferred tax liabilities	7	150.6		147.0
Derivative financial liabilities	28	12.8		2.7
Other non-current liabilities	20	191.1		267.0
Total liabilities		5,905.3	$	4,755.5
Equity
Share capital	8	679.5	$	649.6
Contributed surplus		26.9		24.8
Accumulated other comprehensive income	22	193.2		199.0
Retained earnings		1,590.1		1,457.9
Equity attributable to equity holders of the Company		2,489.7	$	2,331.3
Non-controlling interests		88.6		78.7
Total equity		2,578.3	$	2,410.0
Total liabilities and equity		8,483.6	$	7,165.5

All values are in US Dollars.

^(1) Refer to Note 2 - Changes in accounting policies for the impact of adopting IFRS16.^

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

62 | CAE Financial Report 2020

Consolidated Financial Statements

Consolidated Statement of Changes in Equity

		Attributable to equity holders of the Company
		Common shares								Accumulated other								Non-
(amounts in millions of Canadian dollars,		Number of		Stated			Contributed			comprehensive			Retained				controlling			Total
except number of shares)	Notes	shares		value			surplus			income (Note 22)			earnings		Total		interests			equity
Balances as at March 31, 2018		267,738,530		$	633.2		$	21.3		$	260.3		1,314.3		2,229.1		$	68.4		2,297.5
Net income		—		$	—		$	—		$	—		330.0		330.0		$	10.1		340.1
Other comprehensive (loss) income		—			—			—			(61.3	)	3.1		(58.2	)		2.9		(55.3	)
Total comprehensive (loss) income		—		$	—		$	—		$	(61.3	)	333.1		271.8		$	13.0		284.8
Exercise of stock options	23	1,231,600			21.1			(2.9	)		—		—		18.2			—		18.2
Optional cash purchase of common shares		2,459			0.1			—			—		—		0.1			—		0.1
Repurchase and cancellation of common shares	8	(3,671,900	)		(8.8	)		—			—		(85.6	)	(94.4	)		—		(94.4	)
Share-based payments expense	23	—			—			6.4			—		—		6.4			—		6.4
Transactions with non-controlling interests		—			—			—			—		—		—			(2.7	)	(2.7	)
Stock dividends	8	146,914			4.0			—			—		(4.0	)	—			—		—
Cash dividends	8	—			—			—			—		(99.9	)	(99.9	)		—		(99.9	)
Balances as at March 31, 2019		265,447,603		$	649.6		$	24.8		$	199.0		1,457.9		2,331.3		$	78.7		2,410.0
Impact of adopting IFRS 16	2	—			—			—			—		(27.5	)	(27.5	)		—		(27.5	)
Balances as at April 1, 2019		265,447,603		$	649.6		$	24.8		$	199.0		1,430.4		2,303.8		$	78.7		2,382.5
Net income		—		$	—		$	—		$	—		311.4		311.4		$	7.5		318.9
Other comprehensive (loss) income		—			—			—			(5.8	)	9.8		4.0			3.2		7.2
Total comprehensive (loss) income		—		$	—		$	—		$	(5.8	)	321.2		315.4		$	10.7		326.1
Exercise of stock options	23	1,553,846			30.2			(3.7	)		—		—		26.5			—		26.5
Optional cash purchase of common shares		2,433			0.1			—			—		—		0.1			—		0.1
Repurchase and cancellation of common shares	8	(1,493,331	)		(3.8	)		—			—		(45.8	)	(49.6	)		—		(49.6	)
Share-based payments expense	23	—			—			5.8			—		—		5.8			—		5.8
Transactions with non-controlling interests		—			—			—			—		(1.4	)	(1.4	)		(0.8	)	(2.2	)
Stock dividends	8	109,076			3.4			—			—		(3.4	)	—			—		—
Cash dividends	8	—			—			—			—		(110.9	)	(110.9	)		—		(110.9	)
Balances as at March 31, 2020		265,619,627		$	679.5		$	26.9		$	193.2		1,590.1		2,489.7		$	88.6		2,578.3

All values are in US Dollars.

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

CAE Financial Report 2020 | 63

Consolidated Financial Statements

Consolidated Statement of Cash Flows

Years ended March 31
(amounts in millions of Canadian dollars)	Notes	2020		^(1)^	2019
Operating activities
Net income		318.9		$	340.1
Adjustments for:
Depreciation and amortization		305.4			217.2
Share of after tax profit of equity accounted investees		(27.5	)		(33.4	)
Deferred income taxes	7	2.9			(23.1	)
Investment tax credits		9.0			8.2
Impairment of goodwill	26	37.5			—
Share-based payments expense	23	14.5			9.3
Defined benefit pension plans	19	15.1			14.8
Other non-current liabilities		(39.2	)		(30.3	)
Derivative financial assets and liabilities – net		15.3			(5.8	)
Other		(54.6	)		(1.8	)
Changes in non-cash working capital	21	(52.2	)		35.2
Net cash provided by operating activities		545.1		$	530.4
Investing activities
Business combinations, net of cash acquired	3	(10.1	)	$	(827.8	)
Acquisition of investment in equity accounted investees	32	(113.5	)		—
Addition of assets through the monetization of royalties	4	—			(202.7	)
Additions to property, plant and equipment	12	(283.4	)		(251.8	)
Proceeds from disposal of property, plant and equipment		0.5			2.7
Additions to intangible assets	13	(100.6	)		(86.6	)
Net payments to equity accounted investees		(9.9	)		(37.7	)
Dividends received from equity accounted investees		22.6			22.0
Other		(1.5	)		2.7
Net cash used in investing activities		(495.9	)	$	(1,379.2	)
Financing activities
Net proceeds from borrowing under revolving credit facilities	18	708.2		$	—
Proceeds from long-term debt	18	167.6			955.3
Repayment of long-term debt	18	(233.0	)		(72.7	)
Repayment of lease liabilities	18	(79.8	)		(22.0	)
Dividends paid		(110.9	)		(99.9	)
Issuance of common shares		26.6			18.3
Repurchase and cancellation of common shares	8	(49.6	)		(94.4	)
Changes in restricted cash		15.7			—
Other		(1.4	)		5.7
Net cash provided by financing activities		443.4		$	690.3
Effect of foreign currency exchange differences on cash
and cash equivalents		7.8		$	(6.9	)
Net increase (decrease) in cash and cash equivalents		500.4		$	(165.4	)
Cash and cash equivalents, beginning of year		446.1			611.5
Cash and cash equivalents, end of year		946.5		$	446.1

All values are in US Dollars.

^(1) Refer to Note 2 - Changes in accounting policies for the impact of adopting IFRS16.^

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

64 | CAE Financial Report 2020

Notes to the Consolidated Financial Statements

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

The consolidated financial statements were authorized for issue by the board of directors on May 22, 2020.

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

Nature of operations

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

The Company’s operations are managed through three segments:

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

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

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

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

Basis of preparation

The key accounting policies applied in the preparation of these consolidated financial statements are described below. These policies have been consistently applied to all years presented, unless otherwise stated.

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

The consolidated financial statements have been prepared under the historical cost convention, except for the following items measured at fair value: contingent consideration, derivative financial instruments, financial instruments at fair value through profit and loss, financial instruments at fair value through other comprehensive income and liabilities for cash-settled share-based arrangements.

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

Basis of consolidation

Subsidiaries

Subsidiaries are all entities over which the Company has control. Control exists when the Company is exposed to, or has the rights to, variable returns from its involvement with the entity and has the ability to affect those returns through the power over the entity. Subsidiaries are fully consolidated from the date control is obtained and they are no longer consolidated on the date control ceases. All intercompany accounts and transactions have been eliminated.

Joint arrangements

Joint arrangements are arrangements in which the Company exercises joint control as established by contracts requiring unanimous consent for decisions about the activities that significantly affect the arrangement’s returns. When the Company has the rights to the net assets of the arrangement, the arrangement is classified as a joint venture and is accounted for using the equity method. When the Company has rights to the assets and obligations for the liabilities relating to an arrangement, the arrangement is classified as a joint operation and the Company accounts for each of its assets, liabilities and transactions, including its share of those held or incurred jointly, in relation to the joint operation.

Under the equity method of accounting, interests in joint ventures are initially recognized at cost and adjusted thereafter to recognize the Company’s share of the profits or losses and movements in other comprehensive income (OCI) of the investee. When the Company’s share of losses in a joint venture equals or exceeds its interests in the joint ventures, the Company does not recognize further losses, unless it will incur obligations or make payments on behalf of the joint ventures.

CAE Financial Report 2020 | 65

Notes to the Consolidated Financial Statements

Unrealized gains resulting from transactions with joint ventures are eliminated, to the extent of the Company’s share in the joint venture. For sales of products or services from the Company to its joint ventures, the elimination of unrealized profits is considered in the carrying value of the investment in equity accounted investees in the consolidated statement of financial position and in the share in profit or loss of equity accounted investees in the consolidated income statement.

Business combinations

Business combinations are accounted for under the acquisition method. The consideration transferred for the acquisition of a subsidiary is the fair value of the assets transferred, the liabilities incurred and the equity interests issued by the Company, if any, at the date control is obtained. The consideration transferred includes the fair value of any liability resulting from a contingent consideration arrangement. Acquisition-related costs, other than share and debt issue costs incurred to issue financial instruments that form part of the consideration transferred, are expensed as incurred. Identifiable assets acquired and liabilities assumed in a business combination are measured initially at their fair value at the acquisition date. If a business combination is achieved in stages, the Company remeasures its previously held interest in the acquiree at its acquisition-date fair value and recognizes the resulting gain or loss, if any, in net income.

Contingent consideration classified as a liability is measured at fair value, with subsequent changes recognized in income. If the contingent consideration is classified as equity, it is not remeasured until it is finally settled within equity.

New information obtained during the measurement period, up to 12 months following the acquisition date, about facts and circumstances existing at the acquisition date affect the acquisition accounting.

Non-controlling interests

Non-controlling interests (NCI) represent equity interests in subsidiaries owned by outside parties. The share of net assets of subsidiaries attributable to non-controlling interests is presented as a component of equity. Changes in the Company’s ownership interest in subsidiaries that do not result in a loss of control are accounted for as equity transactions.

The Company treats transactions with non-controlling interests as transactions with equity owners of the Company. For interests purchased from non-controlling interests, the difference between any consideration paid and the relevant share acquired of the carrying value of net assets of the subsidiary is recorded in equity. Gains or losses on disposals of non-controlling interests are also recorded in equity.

Financial instruments and hedging relationships

Recognition, classification and measurement

A financial instrument is any contract that gives rise to a financial asset in one entity and a financial liability or equity instrument in another entity. Financial assets and financial liabilities, including derivatives, are recognized in the consolidated statement of financial position when the Company becomes a party to the contractual provisions of the financial instrument. On initial recognition, all financial instruments are measured at fair value. When there is a difference between the fair value of the consideration given or received at initial recognition and the amount determined using a valuation technique, such difference is recognized immediately in income unless it qualifies for recognition as some other type of asset or liability.

Financial instruments are subsequently measured based on their classification, which are:

–	Financial instruments measured at amortized cost;
–	Financial instruments measured at fair value through profit or loss (FVTPL);
---	---
–	Financial instruments measured at fair value through other comprehensive income (FVOCI).
---	---

Financial assets

A financial asset is measured at amortized cost if it meets both of the following conditions:

– The asset is held within a business model whose objective is to hold assets to collect contractual cash flows; and

– The contractual terms of the financial asset give rise, on specific dates, to cash flows that are solely payments of principal and interest (SPPI) on the principal amount outstanding.

Financial assets at amortized cost are subsequently measured using the effective interest rate (EIR) method and are subject to impairment. Gains and losses are recognized in income when the asset is derecognized, modified or impaired. The Company’s financial assets at amortized cost include accounts receivable and advances to a portfolio investment.

Financial assets at FVTPL include financial assets held for trading, financial assets designated upon initial recognition at fair value through profit or loss, and financial assets mandatorily required to be measured at fair value. Financial assets are classified as held for trading if they are acquired for the purpose of selling or repurchasing in the near term. Derivatives, including separated embedded derivatives, are also classified as held for trading unless they are designated as effective hedging instruments. Financial assets with cash flows that are not SPPI are classified and measured at FVTPL, irrespective of the business model. Financial assets at FVTPL are carried in the statement of financial position at fair value with net changes in fair value recognized in the income statement. The Company’s financial assets at FVTPL include cash and cash equivalents, and derivative instruments not designated as hedging instrument in a hedge relationship.

66 | CAE Financial Report 2020

Notes to the Consolidated Financial Statements

Financial assets at FVOCI are equity investments the Company has irrevocably elected to classify at FVOCI. This classification is determined on an instrument-by-instrument basis. Gains and losses on these financial assets are never transferred to income. Dividends are recognized in the income statement when the right of payment has been established, except when the Company benefits from such proceeds as a recovery of part of the cost of the financial asset, in which case, such gains are recorded in OCI.

Financial assets are not reclassified subsequent to their initial recognition, unless the Company changes its business model for managing financial assets.

Financial liabilities

Financial liabilities at FVTPL include financial liabilities held for trading and financial liabilities designated upon initial recognition as at FVTPL. Financial liabilities are classified as held for trading if they are incurred for the purpose of repurchasing in the near term. This category also includes derivatives financial instruments that are not designated as hedging instrument in a hedge relationship. Separated embedded derivatives are also classified as held for trading unless they are designated as effective hedging instruments.

Financial liabilities at FVTPL are carried in the statement of financial position at fair value with net changes in fair value recognized in the income statement. The Company’s financial liabilities measured at FVTPL include contingent liabilities arising on business combinations and also derivative instruments not designated as hedging instrument in a hedge relationship.

Financial liabilities at amortized cost are subsequently measured using the EIR method. Gains and losses are recognized in income when the liabilities are derecognized as well as through the EIR amortization process. The Company’s financial liabilities at amortized cost include accounts payables, accrued liabilities, long-term debt, including interest payable, as well as royalty obligations.

Transaction costs

Transaction costs that are directly related to the acquisition or issuance of financial assets and financial liabilities (other than those classified at FVTPL and FVOCI) are included in the fair value initially recognized for those financial instruments. These costs are amortized to income using the EIR method.

Offsetting of financial assets and financial liabilities

Financial assets and financial liabilities are offset and the net amount is presented in the consolidated statement of financial position when the Company has an unconditional and legally enforceable right to set off the recognized amounts and intends to settle on a net basis or to realize the assets and settle the liabilities simultaneously.

Hedge accounting

The Company uses derivative financial instruments, such as forward currency contracts, cross currency swaps and interest rate swaps to hedge its foreign currency risks and interest rate risks, respectively. A hedging relationship qualifies for hedge accounting when it meets all of the following effectiveness requirements:

–	There is ‘an economic relationship’ between the hedged item and the hedging instrument;
–	The effect of credit risk does not ‘dominate the value changes’ that result from that economic relationship;
---	---
–	The hedge ratio of the hedging relationship is the same as that resulting from the quantities of:
---	---

–The hedged item that the Company actually hedges; and

–The hedging instrument that the Company actually uses to hedge that quantity of hedged item.

For the purpose of hedge accounting, hedges are classified as:

–	Cash flow hedges when hedging the exposure to variability in cash flows that is either attributable to a particular risk associated with a recognized asset or liability or a highly probably forecast transaction or the foreign currency risk in an unrecognized firm commitment;
–	Hedges of a net investment in a foreign operation;
---	---
–	Fair value hedges when hedging the exposure to changes in the fair value of a recognized asset or liability or an unrecognized firm commitment.
---	---

Documentation

At the inception of a hedge relationship, the Company formally documents the designation of the hedge, the risk management objectives and strategy, the hedging relationship between the hedged item and hedging item and the method for testing the effectiveness of the hedge, which must be reasonably assured over the term of the hedging relationship and can be reliably measured. The Company formally assesses, both at inception of the hedge relationship and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items in relation to the hedged risk.

Cash flow hedge

The effective portion of changes in the fair value of derivative instruments that are designated and qualify as cash flow hedges is recognized in OCI, while the ineffective portion is recognized immediately in income. Amounts accumulated in OCI are reclassified to income in the period in which the hedged item affects income. However, when the forecasted transactions that are hedged items result in recognition of non-financial items, gains and losses previously recognized in OCI are included in the initial carrying value of the related non-financial assets acquired or liabilities incurred. The deferred amounts are ultimately recognized in income as the related non-financial items are derecognized or amortized.

CAE Financial Report 2020 | 67

Notes to the Consolidated Financial Statements

Hedge accounting is discontinued prospectively when the hedging relationship no longer meets the criteria for hedge accounting, when the designation is revoked, or when the hedging instrument expires or is sold. Any cumulative gain or loss directly recognized in OCI at that time remains in OCI until the hedged item is recognized in income. When it is probable that a hedged transaction will not occur, the cumulative gain or loss that was recognized in OCI is recognized in income immediately.

Hedge of net investments in foreign operations

The Company has designated certain long-term debts as a hedging item of the Company’s overall net investments in foreign operations whose activities are denominated in a currency other than the Company’s functional currency. The portion of gains or losses on the hedging item that is determined to be an effective hedge is recognized in OCI and is limited to the translation gain or loss on the net investment.

Fair value hedge

The Company currently does not enter into fair value hedge transactions.

Derecognition

Financial assets

A financial asset is derecognized when:

–	The rights to receive cash flows from the asset have expired; or
–	The Company has transferred its rights to receive cash flows from the asset and either has transferred substantially all the risks and rewards of the asset or has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.
---	---

The Company is involved in a program in which it sells interests in certain of its accounts receivable. The Company continues to act as a collection agent. Under the program the Company transfers some significant risks and rewards of the accounts receivable it sells and retains others. The accounts receivable are derecognized up to an amount corresponding to the extent of the Company's continuing involvement, which represents its maximum retained exposure.

Impairment of financial assets

The Company uses the expected credit loss (ECL) model for calculating impairment of financial assets and recognizes expected credit losses as loss allowances for assets measured at amortized cost. ECLs are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the Company expects to receive, discounted at the original or credit adjusted effective interest rate. ECLs are recognized in two stages. For credit exposures for which there has not been a significant increase in credit risk since initial recognition, ECLs are provided for credit losses that result from default events that are possible within the next 12-months (a 12-month ECL). For those credit exposures for which there has been a significant increase in credit risk since initial recognition, a loss allowance is required for credit losses expected over the remaining life of the exposure, irrespective of the timing of the default (a lifetime ECL).

For trade receivables and contract assets, the Company applies the simplified approach permitted by IFRS 9, which requires expected lifetime losses to be recognized from initial recognition of the assets.

Financial liabilities

A financial liability is derecognized when the obligation under the liability is discharged, cancelled or expired.

When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as a derecognition of the original liability and the recognition of a new liability, and the difference in the respective carrying amounts is recognized in the income statement.

Foreign currency translation

Foreign operations

Assets and liabilities of subsidiaries that have a functional currency other than the Canadian dollar are translated from their functional currency to Canadian dollars at exchange rates in effect at the reporting date. Revenue and expenses are translated at the average exchange rates. The resulting translation adjustments are included in OCI.

When CAE Inc. and its subsidiaries have a long-term intercompany balance receivable from or payable to a foreign operation for which settlement is not planned in the foreseeable future, such item is considered, in substance, a part of the Company’s net investment in that foreign operation. Gains or losses arising from the translation of those intercompany balances denominated in foreign currencies are also included in OCI.

68 | CAE Financial Report 2020

Notes to the Consolidated Financial Statements

Transactions and balances

Monetary assets and liabilities denominated in foreign currencies are translated at the prevailing exchange rate at the reporting date. Non-monetary assets and liabilities, and revenue and expense items denominated in foreign currencies are translated into the functional currency using the exchange rate prevailing at the dates of the respective transactions. Foreign exchange gains and losses resulting from the settlement of such transactions are recognized in income, except when deferred in OCI as qualifying cash flow hedges and qualifying net investment hedges.

Cash and cash equivalents

Cash and cash equivalents consist of cash and highly-liquid investments with original terms to maturity of 90 days or less at the date of purchase.

Accounts receivable

Receivables are initially recognized at fair value and are subsequently carried at amortized cost, net of credit loss allowances, based on expected recoverability. The amount of the allowance is the difference between the asset’s carrying amount and the present value of the estimated future cash flows, discounted at the original effective interest rate. The loss is recognized in income. Subsequent recoveries of amounts previously provided for or written-off are recognized in income.

Inventories

Raw materials are valued at the lower of average cost and net realizable value. Spare parts to be used in the normal course of business are valued at the lower of cost, determined on a specific identification basis, and net realizable value.

Work in progress is stated at the lower of cost, determined on a specific identification basis, and net realizable value. The cost of work in progress includes material, labour and an allocation of manufacturing overhead, which is based on normal operating capacity.

Net realizable value is the estimated selling price in the ordinary course of business, less estimated costs of completion and the estimated costs necessary to generate revenue. In the case of raw materials and spare parts, the replacement cost is the best measure of net realizable value.

Property, plant and equipment

Property, plant and equipment are recorded at cost less any accumulated depreciation and any accumulated net impairment losses. Costs include expenditures that are directly attributable to the acquisition or manufacturing of the item. The cost of an item of property, plant and equipment that is initially recognized includes, when applicable, the initial present value estimate of the costs required to dismantle and remove the asset and restore the site on which it is located at the end of its useful life. Purchased software that is integral to the functionality of the related equipment is capitalized as part of that equipment. Subsequent costs, such as updates on training devices, are included in the asset’s carrying amount or recognized as a separate asset only when it is probable that future economic benefits will flow to the Company and the cost of the item can be reliably measured; otherwise, they are expensed.

A loss on disposal is recognized in income when the carrying value of a replaced item is derecognized, unless the item is transferred to inventories. If it is not practicable to determine the carrying value, the cost of the replacement and the accumulated depreciation calculated by reference to that cost will be used to derecognize the replaced part. The costs of day-to-day servicing of property, plant and equipment are recognized in income as incurred. Gains and losses on disposal of property, plant and equipment are determined by comparing the proceeds from disposal with its carrying amount, and are recognized net within other gains and losses.

The different components of property, plant and equipment are recognized separately when their useful lives are materially different and such components are depreciated separately in income.

Prior to the adoption of IFRS 16 on April 1, 2019, leased assets were depreciated over the shorter of the lease term and their useful lives. If it was reasonably certain that the Company would obtain ownership by the end of the lease term, the leased asset was depreciated over its useful life. Land is not depreciated. The estimated useful lives, residual values and depreciation methods are as follows:

	Method	Amortization rate/period
Buildings and improvements	Declining balance/Straight-line	2.5 to 10%/3 to 40 years
Simulators	Straight-line (10% residual)	Not exceeding 25 years
Machinery and equipment	Declining balance/Straight-line	20 to 35%/2 to 15 years
Aircraft	Straight-line (residual not exceeding 15%)	Not exceeding 25 years
Aircraft engines	Based on utilization	Not exceeding 3,500 hours

As at March 31, 2020, the average remaining amortization period for full-flight simulators is 12.0 years (2019 – 11.1 years).

Depreciation methods, useful lives and residual values are reviewed and adjusted, if appropriate, on a prospective basis at each reporting date.

CAE Financial Report 2020 | 69

Notes to the Consolidated Financial Statements

Leases – As a result of adopting IFRS 16 on April 1, 2019

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

The Company as a lessee

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

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

	Method	Amortization period
Buildings and land	Straight-line	Not exceeding 40 years
Simulators	Straight-line (10% residual)	Not exceeding 25 years
Machinery and equipment	Straight-line	Not exceeding 7 years

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

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

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

Lease modifications

A lease modification is a change in the scope of a lease, or the consideration for a lease, that was not part of its original terms and conditions. A lease modification is accounted for as a separate lease if the modification increases the scope of the lease by adding the right to use one or more underlying assets and the consideration for the lease increases by an amount commensurate with the stand-alone price that reflects the circumstances of the contract. Any other modification is not accounted for as a separate lease.

For a lease modification resulting in a decrease in the scope of the lease, the lease liability is remeasured, using a revised discount rate, to reflect the modified lease payments and the carrying amount of the right-of-use asset is reduced to reflect the partial or full termination of the lease. The difference between the reduction in the lease liability and the reduction in the corresponding right-of-use asset’s carrying value is recognized in profit or loss.

For all other lease modifications, the lease liability is remeasured, using a revised discount rate, to reflect the modified lease payments, with a corresponding adjustment to the right-of-use asset.

Short-term leases and leases of low-value assets

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

Sale and leaseback transaction

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

70 | CAE Financial Report 2020

Notes to the Consolidated Financial Statements

The Company as a lessor

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

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

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

Leases – Prior to adopting IFRS 16 on April 1, 2019

Leases in which substantially all the risks and rewards of ownership were transferred and were accounted for finance leases. All other leases were accounted for as operating leases.

The Company as a lessee

Finance leases were capitalized at the lease’s commencement at the lower of the fair value of the leased item and the present value of the minimum lease payments. Any initial direct costs of the lessee were added to the amount recognized as an asset. The corresponding obligations were included in long-term debt. Finance expense was recognized over the term of the lease based on the effective interest method. Payments made under operating leases was charged to income on a straight-line basis over the term of the lease. With regards to certain aircraft used in the Company’s live training operations, management had concluded that, as at March 31, 2019, the undiscounted lease rental payments in the amount of $46.6 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.

Sale and leaseback transactions

The Company engaged in sales and leaseback transactions as part of the Company’s financing strategy to support investment in the Civil Aviation training Solutions and Defence and Security segments. Where a sale and leaseback transaction resulted in a finance lease, any excess of sales proceeds over the carrying amount was deferred and amortized over the lease term. Where a sale and leaseback transaction results in an operating lease, and it was clear that the transaction was established at fair value, any profit or loss was recognized in income. If the sales price was below fair value, the shortfall was recognized in income immediately except if the loss was compensated for by future lease payments at below market price, it was deferred and amortized in proportion to the lease payments over the period the asset was expected to be used. If the sale price was above fair value, the excess over fair value was deferred and amortized over the period the asset was expected to be used.

The Company as a lessor

With regards to finance leases, the asset was derecognized at the commencement of the lease. The net present value of the minimum lease payments and any discounted unguaranteed residual values of leased assets are presented as investment in finance leases. Finance income was recognized over the term of the lease based on the effective interest method. Income from operating leases was recognized on a straight-line basis over the term of the corresponding lease.

Intangible assets

Goodwill

Goodwill is measured at cost less accumulated impairment losses, if any.

Goodwill arises on the acquisition of subsidiaries. Goodwill represents the excess of the aggregate of the cost of an acquisition, including the Company’s best estimate of the fair value of contingent consideration and the acquisition-date fair value of any previous held equity interest in the acquiree, over the fair value of the net identifiable assets of the acquiree at the acquisition date.

Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.

Research and development (R&D)

Research costs are expensed as incurred. Development costs are also charged to income in the period incurred unless they meet all the specific capitalization criteria established in IAS 38, Intangible Assets. Capitalized development costs are stated at cost and net of accumulated amortization and accumulated impairment losses, if any. Amortization of the capitalized development costs commences when the asset is available for use and is included in research and development expense.

Other intangible assets

Intangible assets acquired separately are measured at cost upon initial recognition. The cost of intangible assets acquired in a business combination is the fair value as at the acquisition date. Following initial recognition, intangible assets are carried at cost, net of accumulated amortization and accumulated impairment losses, if any.

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Notes to the Consolidated Financial Statements

The cost of an internally generated intangible asset comprises all directly attributable costs necessary to create, produce, and prepare the asset to be capable of operating in the manner intended by management.

Gains and losses on disposal of intangible assets are determined by comparing the proceeds from disposal with its carrying amount and are recognized within other gains and losses.

Amortization

Amortization is calculated using the straight-line method for all intangible assets over their estimated useful lives as follows:

	Amortization period
Capitalized development costs	3 to 10 years
Customer relationships	3 to 20 years
Licenses	3 to 20 years
ERP and other software	3 to 10 years
Other intangible assets	2 to 40 years

As at March 31, 2020, the average remaining amortization period for the capitalized development costs is 5.2 years (2019 – 5.2 years).

Amortization methods and useful lives are reviewed and adjusted, if appropriate, on a prospective basis at each reporting date.

Impairment of non-financial assets

The carrying amounts of the Company’s non-financial assets subject to amortization are tested for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Goodwill and assets that are not yet available for use are tested for impairment annually or at any time if an indicator of impairment exists.

The recoverable amount of an asset or a cash-generating unit (CGU) is the greater of its value in use and its fair value less costs of disposal. The recoverable amount is determined for an individual asset; unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. In such case, the CGU that the asset belongs to is used to determine the recoverable amount.

For the purposes of impairment testing, the goodwill acquired in a business combination is allocated to CGUs or groups of CGUs, which generally corresponds to its operating segments or one level below, that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units.

An impairment loss is recognized if the carrying amount of an asset or CGU exceeds its estimated recoverable amount. Where the recoverable amount of a CGU to which goodwill has been allocated is lower than the CGU’s carrying amount, the related goodwill is impaired. Any remaining amount of impairment exceeding the impaired goodwill is recognized on a pro rata basis of the carrying amount of each asset in the respective CGU. Impairment losses are recognized in income.

The Company evaluates impairment losses, other than goodwill impairment, for potential reversals at each reporting date. An impairment loss is reversed if there is any indication that the loss has decreased or no longer exists due to changes in the estimates used to determine the recoverable amount. An impairment loss is reversed only to the extent that the asset’s carrying amount does not exceed the carrying amount that would have been determined, net of depreciation or amortization, if no impairment loss had been recognized. Such reversal is recognized in income.

Borrowing costs

Borrowing costs that are directly attributable to the acquisition or construction of a qualifying asset are capitalized as part of the cost of the asset. A qualifying asset is one that takes a substantial period of time to get ready for its intended use. Capitalization of borrowing costs ceases when the asset is completed and ready for its intended use. All other borrowing costs are recognized as finance expense in income, as incurred.

Other assets

Restricted cash

The Company is required to hold a defined amount of cash as collateral under the terms of certain subsidiaries’ external bank financing, government-related sales contracts and business combination arrangements.

Deferred financing costs

Deferred financing costs related to the revolving credit facilities, when it is probable that some or all of the facilities will be drawn down, and deferred financing costs related to sale and leaseback agreements are included in other assets at cost and are amortized on a straight-line basis over the term of the related financing agreements.

Accounts payable and accrued liabilities

Accounts payable and accrued liabilities are recognized initially at fair value and subsequently measured at amortized cost using the effective interest method.

72 | CAE Financial Report 2020

Notes to the Consolidated Financial Statements

Provisions

Provisions are recognized when the Company has a present legal or constructive obligation as a result of past events, it is probable that an outflow of resources will be required to settle the obligation and the amount can be reliably estimated. Provisions are measured at the present value of the expenditures expected to be required to settle the obligation using a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the obligation. The increase in the provision due to passage of time is recognized as a finance expense. When there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole.

Provisions for estimated contract losses are recognized as an onerous contract provision in the period in which the loss is determined. Contract losses are measured at the amount by which the estimated total costs exceed the estimated total revenue from the contract. Warranty provisions are recorded when revenue is recognized based on historical experience, current trends and other assumptions that are believed to be reasonable under the circumstances.

Restoration and simulator removal

In certain situations, simulators are installed at locations that are not owned by the Company. In some of these cases, the Company has an obligation to dismantle and remove the simulators from these sites and to restore the location to its original condition. A provision is recognized for the present value of estimated costs to be incurred to dismantle and remove the simulators from these sites and restore the location. The provision also includes amounts relating to leased land and building where restoration costs are contractually required at the end of the lease. Where such costs arise as a result of capital expenditure, these restoration costs are also capitalized.

Restructuring

Restructuring costs consist mainly of severances and other related costs.

Legal claims

The amount represents a provision for certain legal claims brought against the Company. The corresponding charge is recognized in income within selling, general and administrative expenses or other gains – net. Management’s best estimate is that the outcome of these legal claims will not give rise to any significant loss beyond the amounts provided at March 31, 2020.

Warranties

A provision is recognized for expected warranty claims on products sold based on historical experience of the level of repairs and returns. It is expected that most of these costs will be incurred between 1 to 7 years. Assumptions used to calculate the provision for warranties were based on current sales levels and current information available about returns based on the warranty period of products sold.

Long-term debt

Long-term debt is recognized initially at fair value, net of transaction costs incurred. They are subsequently stated at amortized cost. Any difference between the proceeds, net of transaction costs, and the redemption value is recognized in income over the period of borrowings using the effective interest method.

Fees paid on the establishment of loan facilities are recognized as transaction costs of the loan to the extent that it is probable that some or all of the facility will be drawn down. In these cases, the fee is deferred until the drawdown occurs. To the extent that there is no evidence that it is probable that some or all of the facility will be drawn down, the fee is capitalized as a pre-payment for liquidity services and amortized over the period of the facility to which it relates.

Share capital

Common shares are classified as equity. Incremental costs directly attributable to the issue of new shares or stock options are shown in equity as a deduction, net of tax, from the proceeds.

When share capital recognized as equity is repurchased, the amount of the consideration paid, which includes directly attributable costs, net of tax, is recognized as a deduction from equity.

Revenue recognition

The Company recognizes revenue when it transfers the control of the promised goods or services to the customer. The transaction price is the amount of consideration to which the Company is expected to be entitled to in exchange for transferring promised goods or services. Variable consideration is included in the transaction price when it is highly probable that there will be no significant reversal of revenue in the future. Variable consideration is usually derived from sales incentives, in the form of discounts or volume rebates, and penalties. The Company identifies the various performance obligations of the contract and allocates the transaction price based on the estimated relative stand-alone selling prices of the promised goods or services underlying each performance obligation.

The Company’s performance obligations are satisfied over time or at a point in time depending on the transfer of control to the customer.

CAE Financial Report 2020 | 73

Notes to the Consolidated Financial Statements

Sales of goods and services

Customized training devices

Revenues from contracts with customers for the design, engineering, and manufacturing of training devices are recognized over time using the cost input method when the Company determines that these devices have a sufficient level of customization such that they have no alternative use and the Company has enforceable rights to payment for work completed to date. The measure of progress toward complete satisfaction of the performance obligation is generally determined by comparing the actual direct contract costs incurred to date to the total estimated costs for the entire contract. When the Company determines that there is an alternative use for these devices, revenue is recognized at a point in time, when the customer obtains control of the device.

Standardized training devices

Revenue from contracts with customers for the construction of standardized training devices is recognized at a point in time, when the customer obtains control of the device.

Training services

Revenues from the sale of training hours or training courses are recognized at a point in time, when services are rendered.

For flight schools, cadet training courses are offered mainly by way of ground school and live aircraft flight. For both phases, revenue is recognized over time, using the time elapsed input method.

Product maintenance, support and updates

Revenues from the sale of product maintenance services and post-delivery customer support are recognized over time, using the time elapsed output method or costs incurred method. Revenues from update services, to enhance a training device currently owned by a customer, are recognized over time, using the cost input method.

Spare parts

Revenue from the sale of spare parts is recognized at a point in time, which is generally on delivery to the customer.

Software arrangements

Revenue from off-the-shelf software sales is recognized at a point in time, on delivery. Revenue from fixed-price software arrangements and software customization contracts that require significant production, modification, or customization of software is recognized over time using the cost input method.

Other

Significant financing component

The Company accounts for a significant financing component on contracts of more than 12 months where timing of cash receipts and revenue recognition differ substantially. The transaction price for such contracts is adjusted for the time value of money, using the rate that would be reflected in a separate financing transaction between the Company and its customers at contract inception, to take into consideration the significant financing component.

Non-monetary transactions

The Company may also enter into sales arrangements where little or no monetary consideration is involved. The non-monetary transactions are measured at the most reliable measure of the fair value of the asset or service given up or fair value of the asset or service received.

Contract modifications

Contract modifications, which consist of an increase in the scope or price of a contract, are accounted for as a separate contract when the additional goods or services to be delivered are distinct from those delivered prior to the contract modification and when the price increases by an amount of consideration that reflects its stand-alone selling price. Contract modifications are treated prospectively when the additional goods or services are distinct, but the price increase does not reflect the stand-alone selling price. When the remaining goods or services are not distinct, the Company recognizes an adjustment to revenue of the initial contract on a cumulative catch-up basis at the date of the contract modification.

Costs to obtain and to fulfill a contract

The Company recognizes incremental costs of obtaining a contract as an asset when they are expected to be recovered over a period of more than one year. The Company recognizes costs directly related to fulfilling a contract with a customer as an asset when they generate or enhance resources that will be used to satisfy the performance obligation in the future and they are expected to be recovered, These assets are amortized on a systematic basis that is consistent with the Company’s transfer of the related goods or services to the customer.

Right to invoice

If the Company has the right to invoice a customer in an amount that directly corresponds with the value of the Company’s performance to date then revenue can be recognized at the invoice amount.

74 | CAE Financial Report 2020

Notes to the Consolidated Financial Statements

Contract balances

The timing of revenue recognition, billing and cash collections results in accounts receivable, contract assets and contract liabilities on the consolidated financial position.

Contract assets are recognized when revenue is recognized in excess of billings or when the Company has a right to consideration and that right is conditional to something other than the passage of time. Contract assets are subsequently transferred to accounts receivable when the right to payment becomes unconditional.

Contract liabilities are recognized when payments received from customers are in excess of revenue recognized. Contract liabilities are subsequently recognized in revenue when the Company satisfies its performance obligations.

Contract assets and contract liabilities are reported in a net position on a contract-by-contract basis at the end of each reporting period and are classified as current based on our normal operating cycle.

Employee benefits

Defined benefit pension plans

The Company maintains defined benefit pension plans that provide benefits based on length of service and final average earnings.

The defined benefit asset or liability comprises the present value of the defined benefit obligation at the reporting date less the fair value of plan assets out of which the obligations are to be settled. The defined benefit obligations are actuarially determined for each plan using the projected unit credit method. The present value of the defined benefit obligation is determined by discounting the estimated future cash flows using the interest rate of high-quality corporate bonds that are denominated in the currency in which the benefit will be paid and that have terms to maturity approximating the terms of the related pension obligation. In countries where there is no deep market in such bonds, the market rates on government bonds are used.

The value of any employee benefit asset recognized is restricted to the present value of any economic benefits available in the form of refunds from the plan or reductions in the future contributions to the plan (asset ceiling test). Minimum funding requirements may give rise to an additional liability to the extent that they require paying contributions to cover an existing shortfall. Plan assets can only be used to fund employee benefits, are not available to the creditors of the Company, nor can they be paid directly to the Company. Fair value of plan assets is based on market price information.

The Company determines the net pension cost of its Canadian defined benefit plans utilizing individual discount rates derived from the yield curve.

Actuarial gains and losses arising from experience adjustments, changes in actuarial assumptions and the effect of any asset ceiling and minimum liability are recognized to OCI in the period in which they arise. Past service costs are recognized as an expense as incurred at the earlier of when the plan amendment or curtailment occurs and when the entity recognizes related termination benefits.

Defined contribution pension plans

The Company also maintains defined contribution plans for which the Company pays fixed contributions to publicly or privately administered pension insurance plans on a mandatory, contractual or voluntary basis. The Company has no legal or constructive obligation to pay further amounts if the fund does not hold sufficient assets to pay the benefits to all employees. Obligations for contributions to defined contribution pension plans are recognized as an employee benefit expense in income as the services are provided.

Termination benefits

Termination benefits are recognized as an expense when the Company is demonstrably committed, without realistic possibility of withdrawal, to a formal detailed plan to either terminate employment before the normal retirement date, or to provide termination benefits as a result of an offer made to encourage voluntary redundancy. Termination benefits for voluntary redundancies are recognized as an expense, if the Company has made an offer of voluntary redundancy, based on the number of employees expected to accept the offer. Benefits falling due more than 12 months after the reporting date are discounted to their present value.

Share-based payment transactions

The Company’s share-based payment plans consist of two categories: an equity-settled share-based payment plan comprised of the stock option plan; and cash-settled share-based payments plans that include the stock purchase plan, deferred share units (DSU) plans, restricted share units (RSU) plans and the performance share units (PSU) plan.

For both categories, the fair value of the employee services received in exchange is recognized as an expense in income. Service and non-market performance conditions attached to the transactions are not taken into account in determining fair value.

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Notes to the Consolidated Financial Statements

For the equity-settled plan, the cost of equity-settled transactions is measured at fair value using the Black-Scholes option pricing model. The compensation expense is measured at the grant date and recognized over the service period with a corresponding increase to contributed surplus. The cumulative expenses recognized for equity-settled transactions at each reporting date represents the extent to which the vesting period has expired and management’s best estimate of the number of equity instruments that will ultimately vest. For options with graded vesting, each tranche is considered a separate grant with a different vesting date and fair value, and each tranche is accounted for separately. When the stock options are exercised, the Company issues new common shares and the proceeds received net of any directly attributable transaction costs are credited to share capital.

For cash-settled plans, a corresponding liability is recognized. The fair value of employee services received is calculated by multiplying the number of units expected to vest with the fair value of one unit as of grant date based on the market price of the Company’s common shares. The fair value of the stock purchase plan is a function of the Company’s contributions. Until the liability is settled, the Company re-measures the fair value of the liability at the end of each reporting period and at the date of settlement, with any changes in fair value recognized in income for the period. The Company has entered into equity swap agreements in order to reduce its earnings exposure related to the fluctuation in the Company’s share price relating to the DSU plans, RSU plans and PSU plan.

Current and deferred income tax

Income tax expense comprises current and deferred tax. An income tax expense is recognized in income except to the extent that it relates to items recognized in OCI or directly in equity, in which case it is recognized in OCI or directly in equity, respectively,

Current tax is the amount expected to be paid or recovered from taxation authorities on the taxable income or loss for the year, using tax rates enacted or substantively enacted at the reporting date in the countries where the Company and its subsidiaries operate and generate taxable income, and any adjustment to tax payable or receivable in respect of previous years.

Management periodically evaluates positions taken in tax returns with respect to situations in which applicable tax regulation is subject to interpretation. It establishes provisions, where appropriate, on the basis of amounts expected to be paid to the tax authorities.

Deferred tax is recognized using the financial position liability method, providing for temporary differences between the tax bases of assets or liabilities and their carrying amounts in the consolidated financial statements, except for temporary differences on the initial recognition of assets and liabilities in a transaction that is not a business combination and that affects neither accounting nor taxable income and taxable.

Deferred income tax is provided on temporary differences arising on investments in subsidiaries, and jointly controlled entities, except where the timing of the reversal of the temporary difference is controlled by the Company and it is probable that the temporary difference will not reverse in the foreseeable future.

Deferred tax is measured on an undiscounted basis at the tax rates that are expected to be applied to temporary differences when they reverse, based on the laws that have been enacted or substantively enacted by the reporting date.

Deferred tax assets are recognized for all deductible temporary differences and carry forward of unused tax losses. The recognition of deferred tax assets are limited to the amount which is probable to be realized.

Deferred tax assets are reviewed at each reporting date and are reduced to the extent that it is no longer probable that a recognized deferred tax asset will be realized. Unrecognized deferred tax assets are reassessed at each reporting date and are recognized to the extent that it has become probable that an unrecognized deferred tax asset will be realized.

Deferred tax assets and liabilities are offset if there is a legally enforceable right to offset current tax liabilities and assets, and they relate to income taxes levied by the same tax authority on the same taxable entity, or on different taxable entities which intend to settle current tax liabilities and assets on a net basis or if their tax assets and liabilities will be realized simultaneously.

Taxes on income in the interim periods are accrued by jurisdiction using the effective tax rate that would be applicable to expected total annual profit or loss of the jurisdiction.

Earnings per share

Earnings per share is calculated by dividing the net income for the period attributable to the equity holders of the Company by the weighted average number of common shares outstanding during the period. The diluted weighted average number of common shares outstanding is calculated by taking into account the dilution that would occur if the securities or other agreements for the issuance of common shares were exercised or converted into common shares at the later of the beginning of the period or the issuance date unless it is anti-dilutive. The treasury stock method is used to determine the dilutive effect of the stock options. The treasury stock method is a method of recognizing the use of proceeds that could be obtained upon the exercise of stock options in computing diluted earnings per share. It assumes that any proceeds would be used to purchase common shares at the average market price during the period. Only the Company’s stock options have a dilutive potential on common shares.

76 | CAE Financial Report 2020

Notes to the Consolidated Financial Statements

Government participation

Government contributions are recognized when there is reasonable assurance that the contributions will be received, and all attached conditions will be complied with by the Company. Government participation related to the acquisition of intangible assets is recorded as

a reduction of the cost of the related asset while government participation related to current expenses is recorded as a reduction of the

related expenses.

The Company benefits from investment tax credits that are deemed to be equivalent to government contributions. Contributions are received for Project New Core Markets from Investissement Québec (IQ) for costs incurred in R&D programs. Contributions were received

in previous fiscal years for Project Phoenix from Industry Canada under the Technology Partnerships Canada (TPC) program and from IQ.

Project New Core Markets and Project Phoenix require the Company to pay royalties. The obligation to pay royalties, recognized as royalty

obligations, is recorded when the contribution is receivable and is estimated based on future projections. The obligation is discounted using the prevailing market rates of interest, at that time, for a similar instrument (similar as to currency, term, type of interest rate, guarantees or other factors) with a similar credit rating. The current portion is included as part of accrued liabilities. The difference between

the amounts received and the discounted value of royalty obligations is accounted for as a government contribution which is recognized as a reduction of related expenses or as a reduction of the cost of the related asset.

The Company recognizes the Government of Canada’s participation in Project Falcon and Project Innovate and the Government of Canada's and the Government of Québec's in Project Digital Intelligence as interest-bearing long-term debt. The initial measurement of

the accounting liability is discounted using the prevailing market rates of interest, at that time, for a similar instrument (similar as to currency, term, type of interest rate, guarantees or other factors) with a similar credit rating. The difference between the face value of the long-term obligation and the discounted value of the long-term obligation is accounted for as a government contribution which is recognized as a reduction of related expenses or as a reduction of the cost of the related asset.

Investment tax credits

Investment tax credits (ITCs) arising from R&D activities are deducted from the related costs and are accordingly included in the determination of net income when there is reasonable assurance that the credits will be realized. ITCs arising from the acquisition or development of property, plant and equipment and capitalized development costs are deducted from the cost of those assets with amortization calculated on the net amount. Investment tax credits expected to be recovered beyond 12 months are classified in Other non-current assets. Investment tax credits are deemed to be equivalent to government contributions. These government contributions are received for costs incurred in R&D projects.

Use of judgements, estimates and assumptions

The preparation of the consolidated financial statements requires the Company’s management (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 the Company’s 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, the Company either consults with independent experts or develops 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

and to assess the recoverable amount of the assets.

Impairment of non-financial assets

The Company’s impairment test for goodwill is based on internal estimates of the recoverable amount of the CGU or group of CGUs to which goodwill has been allocated and uses valuation models such as the discounted cash flows model (level 3). Key assumptions on which management based its determination of the recoverable amount include expected growth rates and discount rates. These estimates, including the methodology used, can have a material impact on the respective values and ultimately the amount of any goodwill impairment.

See Note 26 for further details regarding assumptions used.

CAE Financial Report 2020 | 77

Notes to the Consolidated Financial Statements

Revenue recognition

Transaction price allocated to performance obligations

In allocating the transaction price for contracts with multiple performance obligations, the Company estimates the stand-alone selling price using the expected cost plus a margin approach if they are not directly observable.

Timing of satisfaction of performance obligations

For contracts where revenue is recognized over time using the cost input method, the Company is required 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 as well as its 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

Other key assumptions for pension obligations are based, in part, on current market conditions. See Note 19 for further details regarding assumptions used.

Government royalty 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 consider 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 8.0% to 15.0%, over the period of repayments. The estimated repayments are discounted using average rates ranging from 6.0% 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 obligations at March 31, 2020 by approximately $2.8 million (2019 – $3.5 million). A 1% decrease to the growth rates would have an opposite impact on the royalty obligations.

Income taxes

The Company is 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. The Company provides for potential tax liabilities based on the weighted average probability of the possible outcomes. Differences between actual results and those estimates could influence the income tax liabilities and deferred tax liabilities in the period in which such determinations are made.

Impact of the COVID-19 pandemic

The COVID-19 pandemic and the resulting measures taken in response to its spread have resulted in significant temporary disruptions to the Company business operations. The rapidly evolving situation has created a high level of uncertainty and risk that may result in significant impacts on the Company’s business, financial performance and operations.

78 | CAE Financial Report 2020

Notes to the Consolidated Financial Statements

Goodwill impairment test

The Company performed its annual impairment test for goodwill during the fourth quarter of fiscal 2020. Goodwill is allocated to CGUs or a group of CGUs, which generally corresponds to the Company’s operating segments or one level below. The value in use of each CGU is calculated using estimated cash flows derived from the Company's five-year strategic plan. Cash flows subsequent to the five-year period were extrapolated using a constant growth rate of 2% to 3%. These projections are inherently uncertain due to the fluidly evolving impact of the COVID-19 pandemic. Significant assumptions and estimates are used to determine the expected growth rates embedded in our cash flow projections and the discount rate based on observable market data during the fourth quarter.

Based on the results of its impairment test, the Company recorded an impairment charge of goodwill of $37.5 million in relation to the Healthcare CGU (see Note 26).

Impairment of non-financial assets

The Company has considered the impact of the COVID-19 pandemic on its assessment of impairment indicators, which required significant judgement. The Company has reviewed its property, plant and equipment, right-of-use assets, amortizable intangible assets, investment in equity accounted investees as well as other assets such as inventories and deferred tax assets. Where impairment indicators were identified in the Civil Aviation Training Solutions segment, no significant impairment charge has been recorded. No impairment indicators were identified in the Defence and Security and Healthcare segments.

Expected credit loss

The Company has considered the impact of the COVID-19 pandemic on the expected credit loss of its financial instruments (mainly trade receivable and contract assets). The amount and timing of the expected credit losses, as well as the probability assigned thereto, has been based on the available information as at March 31, 2020. As a result of this review, no significant credit loss allowances adjustments have been recorded (see Note 9).

NOTE 2 – CHANGES IN ACCOUNTING POLICIES

New and amended standards adopted by the Company

IFRS 16 - Leases

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

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

–	Maintain previous assessment of whether a contract is, or contains, a lease at the date of initial application;
–	Use of hindsight when evaluating the lease term if a contract contains options to extend or terminate the lease;
---	---
–	Recognize short-term leases and leases of low-value assets as a lease expense on a straight-line basis, consistent with current IAS 17 accounting;
---	---
–	Account for leases for which the remaining lease term ends within 12 months of the effective date as short-term leases;
---	---
–	Adjust the right-of-use asset by the amount of the previously assessed IAS 37 onerous contract provision as an alternative to an impairment review;
---	---
–	Exclude initial direct costs from the measurement of the right-of-use asset at the date of initial application;
---	---
–	Measure the right-of-use asset as if IFRS 16 had been applied since the lease commencement date using the incremental borrowing rate at the date of initial application.
---	---

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

CAE Financial Report 2020 | 79

Notes to the Consolidated Financial Statements

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

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

	March 31				IFRS 16			April 1
(amounts in millions)	2019			Adjustments				2019
Assets
Total current assets		$	2,112.9		$	(3.3	)		$	2,109.6
Property, plant and equipment		2,149.3			(206.0		)		1,943.3
Right-of-use assets		—			432.8				432.8
Investment in equity accounted investees		312.1			(3.7		)		308.4
Other non-current assets		2,591.2			0.3				2,591.5
Total assets		$	7,165.5		$	220.1			$	7,385.6

Liabilities and equity
Current portion of long-term debt		$	264.1		$	31.8			$	295.9
Other current liabilities		1,625.4			(4.3		)		1,621.1
Total current liabilities		$	1,889.5		$	27.5			$	1,917.0
Long-term debt		2,064.2			234.0				2,298.2
Other non-current liabilities		801.8			(13.9		)		787.9
Total liabilities		$	4,755.5		$	247.6			$	5,003.1
Total equity		$	2,410.0		$	(27.5	)		$	2,382.5
Total liabilities and equity		$	7,165.5		$	220.1			$	7,385.6

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

IFRIC 23 - Uncertainty over income tax treatments

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

Amendment to IAS 19 - Employee benefits

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

80 | CAE Financial Report 2020

Notes to the Consolidated Financial Statements

NOTE 3 – BUSINESS COMBINATIONS

Year ended March 31, 2020

Pelesys Learning Systems Inc.

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

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

Luftfartsskolen AS

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

Other

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

During the year ended March 31, 2020, the Company completed its final assessment of the fair value of assets acquired and liabilities assumed of all acquisitions realized in fiscal 2020 and those of Avianca’s Training Business, Logitude, the Indian Training Centres and Bombardier’s Business Aircraft Training Business which were acquired during the year ended March 31, 2019. Adjustments to the determination of net identifiable assets acquired and liabilities assumed for acquisitions realized in the year ended March 31, 2019 resulted in an increase of intangible assets of $6.2 million, a decrease of deferred tax assets of $4.7 million and a decrease of other net assets of $1.5 million.

During the year ended March 31, 2020, an additional net cash consideration of $1.7 million was paid for acquisitions realized during the year ended March 31, 2019.

Year ended March 31, 2019

Alpha-Omega Change Engineering

On July 31, 2018, the Company acquired the shares of Alpha-Omega Change Engineering Inc. (AOCE) for cash consideration of $34.4 million, subject to purchase price adjustments related to working capital. AOCE is a provider of aircrew training services, operational test and evaluation, and engineering support services to the U.S. Department of Defense and U.S. intelligence service.

Avianca's Training Business

On January 30, 2019, as part of an exclusive 15-year training outsourcing agreement, the Company acquired the remaining 50% equity interest in Avianca-CAE Flight Training (ACFT), a recently formed training joint venture, and training assets located in Colombia and El Salvador from Avianca Holdings, for cash consideration of $50.1 million.

Prior to this transaction, the Company's 50% ownership interest in ACFT was accounted for using the equity method.

Logitude

On March 7, 2019, the Company acquired the shares of Logitude Oy for total consideration of $8.7 million. Logitude designs and develops software solutions related to flight and cabin crew training management and training records management, including evidence-based training.

Bombardier's Business Aircraft Training Business

On March 13, 2019, the Company acquired Bombardier’s Business Aircraft Training (BAT) Business for cash consideration of $709.9 million, subject to purchase price adjustments primarily related to working capital.

The acquisition provides the Company with a specialized workforce, a portfolio of customers, and business jet full-flight simulators and training devices to add to its training network.

Indian Training Centres

On March 27, 2019, the Company acquired the remaining 50% equity interest in the CAE Flight Training (India) Private Limited (CFTPL) joint venture and an additional 25% equity interest in the CAE Simulation Training Private Limited (CSTPL) Indian joint venture for cash consideration of $31.5 million.

CAE Financial Report 2020 | 81

Notes to the Consolidated Financial Statements

As a result, the Company acquired control over CFTPL's assets for the training centres located in India, including a portfolio of customers, and now owns a 50% equity interest in CSTPL, a joint venture training centre between CAE and InterGlobe Enterprises located in India.

Prior to this acquisition, the Company's 50% ownership interest in CFTPL was accounted for using the equity method. The gain resulting from the remeasurement to fair value of the previously held interest in CFTPL is included in Other gains - Net in the consolidated income statement.

The determination of the fair value of the net assets acquired and liabilities assumed arising from the acquisitions are as follows:

Bombardier's BAT
	Business			Other		Total
Current assets, excluding cash on hand	$	—		45.4		45.4
Current liabilities		(6.1	)	(39.8	)	(45.9	)
Property, plant and equipment		134.6		40.6		175.2
Investment in equity accounted investee		—		21.7		21.7
Intangible assets		695.8		115.7		811.5
Deferred tax		13.1		14.1		27.2
Other non-current assets		9.3		—		9.3
Long-term debt, including current portion		(137.6	)	(15.2	)	(152.8	)
Other non-current liabilities		(2.7	)	(49.0	)	(51.7	)
Fair value of net assets acquired, excluding cash acquired	$	706.4		133.5		839.9
Cash acquired		—		4.6		4.6
Total purchase consideration	$	706.4		138.1		844.5
Net short-term receivable (payable)		2.9		(4.1	)	(1.2	)
Settlement of pre-existing relationship		0.6		0.5		1.1
Fair value of previously held interest in equity accounted investees		—		(12.0	)	(12.0	)
Total cash consideration	$	709.9		122.5		832.4

All values are in US Dollars.

The fair value of the acquired identifiable intangible assets amount to $811.5 million and consists of goodwill of $443.0 million ($334.5 million is deductible for tax purposes), licenses of $169.5 million, customer relationships of $191.4 million and other intangible assets of $7.6 million.

The fair value and the gross contractual amount of the acquired accounts receivable were $23.6 million.

During the year ended March 31, 2019, total acquisition costs incurred relating to these acquisitions were included in Other gains - Net in the consolidated income statement.

The net assets acquired, including intangibles, of AOCE are included in the Defence and Security segment. The goodwill arising from the acquisition is attributable to the enhancement of the Company’s core capabilities as a training systems integrator, strengthening of its position on enduring platforms such as fighter aircraft and expanded ability to pursue higher-level security programs in the United States.

The net assets acquired, including intangibles, of Avianca's Training Business, Logitude, Bombardier’s BAT Business and the Indian Training Business are included in the Civil Aviation Training Solutions segment. The goodwill arising from these acquisitions is mainly attributable to the expansion of CAE’s customer installed base of business jet and commercial flight simulators, market capacity consolidation and expected synergies from combining operations.

During the year ended March 31, 2019, the Company finalized the purchase price allocation of AOCE and the acquisitions realized in the year ended March 31, 2018. As at March 31, 2019, the purchase price allocation for Avianca's Training Business, Logitude, Bombardier's Business Aircraft Training Business and the Indian Training Centres were preliminary at that time.

82 | CAE Financial Report 2020

Notes to the Consolidated Financial Statements

NOTE 4 – OPERATING SEGMENTS AND GEOGRAPHIC INFORMATION

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

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

Results by segment

The profitability measure employed by the Company for making decisions about allocating resources to segments and assessing segment performance is operating profit (hereinafter referred to as segment operating income). The accounting principles used to prepare the information by operating segments are the same as those used to prepare the Company’s consolidated financial statements. The method used for the allocation of assets jointly used by operating segments and costs and liabilities jointly incurred (mostly corporate costs) between operating segments is based on the level of utilization when determinable and measurable, otherwise the allocation is based on a proportion of each segment’s cost of sales and revenue.

	Civil Aviation				Defence
	Training Solutions				and Security				Healthcare							Total
	2020		2019		2020		2019		2020			2019		2020		2019
External revenue	$	2,167.5	$	1,875.8	$	1,331.2	$	1,306.7	$	124.5		$	121.6	$	3,623.2	$	3,304.1
Depreciation and amortization	232.8		157.2		58.2		46.5		14.4			13.5		305.4		217.2
Impairment of non-financial assets – net	1.8		4.9		3.2		—		37.5			—		42.5		4.9
Write-downs of inventories – net	1.3		0.7		4.9		0.9		0.2			0.1		6.4		1.7
Write-downs of accounts receivable – net	5.4		4.4		—		0.2		0.1			—		5.5		4.6
Share of after tax profit of
equity accounted investees	18.3		23.0		9.2		10.4		—			—		27.5		33.4
Segment operating income (loss)	473.3		344.3		104.8		131.5		(41.0		)	4.8		537.1		480.6

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

	2020		2019
Civil Aviation Training Solutions	$	296.3	$	260.1
Defence and Security	74.8		65.7
Healthcare	12.9		12.6
Total capital expenditures	$	384.0	$	338.4

Addition of assets through the monetization of royalties

During the year ended March 31, 2019, the Company agreed to monetize its future royalty obligations under an Authorized Training Provider agreement with Bombardier and extend this agreement to 2038. In December 2018, the Company concluded the monetization transaction which resulted in a cash outlay of $202.7 million. The monetization represents the discounted sum of expected royalties payable by CAE over the next 20 years. As a result of this transaction, $156.7 million of intangible assets (Note 13) and $46.0 million of property, plant and equipment (Note 12) were recognized in the Civil Aviation Training Solutions segment.

Assets and liabilities employed by segment

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

CAE Financial Report 2020 | 83

Notes to the Consolidated Financial Statements

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

	2020	2019
Assets employed
Civil Aviation Training Solutions	5,089.5	4,373.0
Defence and Security	1,767.5	1,627.2
Healthcare	253.9	271.6
Assets not included in assets employed	1,372.7	893.7
Total assets	8,483.6	7,165.5
Liabilities employed
Civil Aviation Training Solutions	1,219.9	1,098.3
Defence and Security	613.5	595.2
Healthcare	45.9	48.8
Liabilities not included in liabilities employed	4,026.0	3,013.2
Total liabilities	5,905.3	4,755.5

All values are in US Dollars.

Products and services information

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

	2020	2019
Simulation products	1,537.0	1,473.8
Training and services	2,086.2	1,830.3
Total external revenue	3,623.2	3,304.1

All values are in US Dollars.

Geographic information

The Company markets its products and services globally. Revenues are attributed to geographical regions based on the location of customers. Non-current assets other than financial instruments and deferred tax assets are attributed to geographical regions based on the location of the assets excluding goodwill. Goodwill is attributed to geographical regions based on the Company’s allocation of the related purchase price. The Company has retrospectively revised the geographic information for the comparative period to conform to the current presentation.

	2020	2019
External revenue
Canada	323.2	253.3
United States	1,541.8	1,285.0
United Kingdom	208.8	210.4
Rest of Americas	127.7	76.2
Europe	631.7	682.6
Asia	707.1	699.7
Africa and Oceania	82.9	96.9
	3,623.2	3,304.1

	2020	2019
Non-current assets other than financial instruments and deferred tax assets
Canada	1,449.4	1,395.2
United States	1,845.5	1,580.7
United Kingdom	403.4	285.2
Rest of Americas	250.4	269.2
Europe	801.0	692.6
Asia	586.9	533.2
Africa and Oceania	35.1	35.4
	5,371.7	4,791.5

All values are in US Dollars.

84 | CAE Financial Report 2020

Notes to the Consolidated Financial Statements

NOTE 5 – OTHER GAINS – NET

	2020		2019
Disposal of property, plant and equipment	7.0		1.2
Net gain on foreign currency exchange differences	41.6		24.8
Remeasurement of royalty obligations	1.9		7.9
Impairment of goodwill (Note 26)	(37.5	)	—
Other	(12.0	)	(11.6	)
Other gains – net	1.0		22.3

All values are in US Dollars.

Other

During the year ended March 31, 2020, reorganizational costs of $9.7 million, which includes write-downs of inventories of $3.8 million and impairment of intangible assets of $3.2 million, were recognized in the Defence and Security segment following changes made in the segment organization and the review of certain product offerings. Additionally, write-downs of assets of $9.4 million, which includes impairment of property, plant and equipment of $1.8 million, and integration costs of Bombardier's BAT Business of $6.1 million were recognized in the Civil Aviation Training Solutions segment. These costs were offset by a remeasurement gain of $13.4 million, due to the decrease in fair value of a contingent consideration liability incurred in connection with a fiscal 2018 business combination.

During the year ended March 31, 2019, an impairment of $4.9 million on certain older assets in our network and acquisition and integration costs of Bombardier's BAT Business of $6.8 million were recognized in the Civil Aviation Training Solutions segment. These costs were offset by a gain of $3.7 million generated primarily from the remeasurement to fair value of the previously held interest in CFTPL.

NOTE 6 – FINANCE EXPENSE – NET

	2020		2019
Finance expense:
Long-term debt (other than lease liabilities)	105.1		63.1
Lease liabilities	23.3		7.6
Royalty obligations	10.0		11.9
Employee benefits obligations (Note 19)	5.6		5.7
Other	15.5		13.8
Borrowing costs capitalized	(3.6	)	(5.0	)
Finance expense	155.9		97.1
Finance income:
Loans and investment in finance leases	(8.3	)	(8.5	)
Other	(3.2	)	(7.7	)
Finance income	(11.5	)	(16.2	)
Finance expense – net	144.4		80.9

All values are in US Dollars.

NOTE 7 – INCOME TAXES

Income tax expense

A reconciliation of income taxes at Canadian statutory rates with the reported income taxes is as follows:

	2020		2019
Earnings before income taxes	392.7		399.7
Canadian statutory income tax rates	26.64	%	26.72	%
Income taxes at Canadian statutory rates	104.6		106.8
Effect of differences in tax rates in other jurisdictions	(19.9	)	(13.4	)
Unrecognized tax benefits and tax benefits not previously recognized	3.4		(33.0	)
Non-taxable revenues	(6.2	)	(5.5	)
Tax impact on after tax profit of equity accounted investees	(6.1	)	(8.0	)
Other	(2.0	)	12.7
Income tax expense	73.8		59.6

All values are in US Dollars.

The Company's applicable tax rate corresponds to the combined Canadian tax rates applicable in the provinces where the Company operates. The decrease is due to a change in the tax rates and the allocation of income in the jurisdictions it operates.

CAE Financial Report 2020 | 85

Notes to the Consolidated Financial Statements

Significant components of the provision for the income tax expense are as follows:

	2020		2019
Current income tax expense :
Current year	65.1		69.9
Prior years' tax adjustments	5.8		12.8
Deferred income tax (recovery) expense:
Tax benefit not previously recognized used to reduce the deferred tax expense	(2.8	)	(36.1	)
Change in income tax rates	(1.0	)	(1.3	)
Origination and reversal of temporary differences	6.7		14.3
Income tax expense	73.8		59.6

All values are in US Dollars.

Deferred tax assets and liabilities

During the year ended March 31, 2020, movements in temporary differences are as follows:

				Impact of															Foreign
	Balance			adopting														currency
	beginning			IFRS 16		Recognized				Recognized				Business				exchange					Balance
	of year			(Note 2)		in income					in OCI			combinations				differences				end of year
Non-capital loss carryforwards	$	35.2		$	—		$	(1.2	)		$	—			$	—			$	(0.6	)		$	33.4
Unclaimed research & development
expenditures	45.1			—			19.3				—				—				—				64.4
Capital loss carryforwards	0.7			—			0.7				—				—				—				1.4
Investment tax credits	(74.1		)	—			4.1				—				—				—				(70.0		)
Property, plant and equipment
and right-of-use of assets	(73.2		)	5.8			(11.2		)		—				(3.1		)		(6.7		)		(88.4		)
Intangible assets	(87.4		)	—			(1.9		)		—				(2.9		)		(0.8		)		(93.0		)
Deferred revenues, contract assets
and contract liabilities	2.0			—			(18.9		)		—				—				1.0				(15.9		)
Foreign currency exchange difference	(13.9		)	—			(2.1		)		13.3				—				0.4				(2.3		)
Derivative financial assets and liabilities	0.2			—			15.6				9.7				—				—				25.5
Defined benefit obligation	55.4			—			0.1				(3.6		)		—				1.2				53.1
Other	34.0			—			(7.4		)		—				(0.6		)		(0.3		)		25.7
Net deferred income tax (liabilities) assets	$	(76.0	)	$	5.8		$	(2.9	)		$	19.4			$	(6.6	)		$	(5.8	)		$	(66.1	)

During the year ended March 31, 2019, movements in temporary differences are as follows:


																	Foreign
	Balance															currency
	beginning			Recognized				Recognized				Business				exchange					Balance
	of year			in income					in OCI			combinations				differences				end of year
Non-capital loss carryforwards	$	45.7			$	(9.6	)		$	—			$	0.8			$	(1.7	)		$	35.2
Unclaimed research & development expenditures	37.4				7.7				—				—				—				45.1
Capital loss carryforwards	—				0.7				—				—				—				0.7
Investment tax credits	(64.6		)		(9.5		)		—				—				—				(74.1		)
Property, plant and equipment
and right-of-use of assets	(104.6		)		16.4				—				18.3				(3.3		)		(73.2		)
Intangible assets	(87.8		)		5.7				—				(6.2		)		0.9				(87.4		)
Deferred revenues, contract assets
and contract liabilities	(8.6		)		(2.8		)		—				14.3				(0.9		)		2.0
Foreign currency exchange difference	(13.9		)		(1.3		)		1.0				—				0.3				(13.9		)
Derivative financial assets and liabilities	(0.3		)		(0.7		)		1.2				—				—				0.2
Defined benefit obligation	51.6				0.7				(1.1		)		0.7				3.5				55.4
Other	21.6				15.8				—				(0.7		)		(2.7		)		34.0
Net deferred income tax (liabilities) assets	$	(123.5	)		$	23.1			$	1.1			$	27.2			$	(3.9	)		$	(76.0	)

As at March 31, 2020, a deferred income tax liability on taxable temporary differences of $2,544.3 million (2019 – $2,294.4 million) related to investments in subsidiaries and interests in joint ventures has not been recognized, because the Company controls whether the liability will be incurred and it is satisfied that it will not be incurred in the foreseeable future.

86 | CAE Financial Report 2020

Notes to the Consolidated Financial Statements

The non-capital losses incurred in various jurisdictions expire as follows:

Expiry date	Unrecognized		Recognized
2021 - 2025	$	18.2	$	1.2
2026 - 2039		116.0		50.5
No expiry date		41.0		84.5
	$	175.2	$	136.2

As at March 31, 2020, the Company has $149.9 million (2019 – $125.4 million) of deductible temporary differences for which deferred tax assets have not been recognized. These amounts will reverse during a period of up to 25 years.

NOTE 8 – SHARE CAPITAL, EARNINGS PER SHARE AND DIVIDENDS

Share capital

Authorized and issued shares

The Company is authorized to issue an unlimited number of common shares without par value and an unlimited number of preferred shares without par value, issuable in series.

The preferred shares may be issued with rights and conditions to be determined by the Board of Directors, prior to their issue. To date, the Company has not issued any preferred shares.

As at March 31, 2020, the number of common shares issued and fully paid was 265,619,627 (2019 – 265,447,603).

Repurchase and cancellation of common shares

On February 7, 2020, the Company announced the renewal of the normal course issuer bid (NCIB) to purchase up to 5,321,474 of its common shares. The NCIB began on February 25, 2020 and will end on February 24, 2021 or on such earlier date when the Company completes its purchases or elects to terminate the NCIB. These purchases will be made on the open market plus brokerage fees through the facilities of the TSX and/or alternative trading systems at the prevailing market price at the time of the transaction, in accordance with the TSX’s applicable policies. All common shares purchased pursuant to the NCIB will be cancelled.

During the year ended March 31,2020, the Company repurchased and cancelled a total of 1,493,331 common shares under the previous and current NCIB (2019 – 3,671,900), at a weighted average price of $33.22 per common share (2019 – $25.70), for a total consideration of $49.6 million (2019 – $94.4 million). An excess of $45.8 million (2019 – $85.6 million) of the shares’ repurchase value over their carrying amount was charged to retained earnings as share repurchase premiums. Subsequent to year end, the Company has temporary suspended its NCIB (see Note 33).

Earnings per share computation

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

	2020	2019
Weighted average number of common shares outstanding	265,951,131	266,580,019
Effect of dilutive stock options	1,644,353	1,394,135
Weighted average number of common shares outstanding for diluted earnings per share calculation	267,595,484	267,974,154

As at March 31, 2020, stock options to acquire 1,293,200 common shares (2019 – 1,722,800) have been excluded from the above calculation since their inclusion would have had an anti-dilutive effect.

Dividends

During the year ended March 31, 2020, the dividends declared were $114.3 million or $0.43 per share (2019 – $103.9 million or $0.39 per share). Subsequent to year end, the Company has temporary suspended its common share dividends (see Note 33).

CAE Financial Report 2020 | 87

Notes to the Consolidated Financial Statements

NOTE 9 – ACCOUNTS RECEIVABLE

Details of accounts receivable are as follows:

	2020		2019
Current trade receivables	215.1		227.3
Past due trade receivables
1-30 days	95.7		55.4
31-60 days	27.8		19.5
61-90 days	34.1		7.6
Greater than 90 days	105.3		79.6
Credit loss allowances	(27.5	)	(22.0	)
Total trade receivables	450.5		367.4
Investment in finance leases (Note 14)	16.8		11.4
Receivables from related parties (Note 32)	45.8		30.9
Other receivables	53.0		86.3
Total accounts receivable	566.1		496.0

All values are in US Dollars.

Changes in credit loss allowances are as follows:

	2020		2019
Credit loss allowances, beginning of year	(22.0	)	(20.9	)
Additions	(7.4	)	(7.3	)
Amounts charged off	0.8		5.0
Unused amounts reversed	1.8		0.7
Foreign currency exchange differences	(0.7	)	0.5
Credit loss allowances, end of year	(27.5	)	(22.0	)

All values are in US Dollars.

NOTE 10 – BALANCE FROM CONTRACTS WITH CUSTOMERS

Net contract liabilities are as follows:

	2020		2019
Contract assets	569.3		523.5
Contract liabilities - current	(746.2	)	(670.2	)
Contract liabilities - non-current	(83.3	)	(102.5	)
Net contract liabilities	(260.2	)	(249.2	)

All values are in US Dollars.

During the year ended March 31, 2020, the Company recognized revenue of $532.2 million (2019 - $599.4 million) that was included in the contract liability balance at the beginning of the year.

During the year ended March 31, 2020, the Company recognized revenue of $29.8 million (2019 - $22.4 million) related to performance obligations satisfied in previous years. This primarily relates to estimate at completion adjustments that impacted revenue and measures of completion.

Remaining performance obligations

As at March 31, 2020, the amount of the revenues expected to be realized in future years from performance obligations that are unsatisfied, or partially unsatisfied, was $4,863.5 million. The Company expects to recognize approximately 41% of these remaining performance obligations as revenue by March 31, 2021, an additional 22% by March 31, 2022 and the balance thereafter.

NOTE 11 – INVENTORIES

	2020	2019
Work in progress	405.1	342.4
Raw materials, supplies and manufactured products	211.1	194.6
	616.2	537.0

All values are in US Dollars.

During the year ended March 31, 2020, use of inventory recognized in cost of sales amounted to $500.3 million (2019 – $523.5 million).

88 | CAE Financial Report 2020

Notes to the Consolidated Financial Statements

NOTE 12 – PROPERTY, PLANT AND EQUIPMENT

												Assets
							Machinery					under			Assets
	Buildings							and				finance			under
(amounts in millions)		and land		Simulators			equipment			Aircraft		lease		construction			Total
Net book value as at March 31, 2018	$	226.7		$	1,185.9		$	50.3		55.4		121.2		$	164.4		1,803.9
Additions		27.3			10.3			16.9		2.5		—			194.8		251.8
Additions – business combinations (Note 3)		0.2			70.4			0.5		0.3		103.4			0.4		175.2
Additions – monetization of royalties (Note 4)		—			46.0			—		—		—			—		46.0
Disposals		—			(1.3	)		—		(0.2	)	—			—		(1.5	)
Depreciation		(16.8	)		(83.1	)		(17.3	)	(4.5	)	(15.9	)		—		(137.6	)
Impairment		—			(4.9	)		—		—		—			—		(4.9	)
Transfers and others		4.4			232.3			1.2		—		(6.2	)		(212.8	)	18.9
Foreign currency exchange differences		(0.1	)		(5.3	)		(0.1	)	1.3		3.5			(1.8	)	(2.5	)
Net book value as at March 31, 2019	$	241.7		$	1,450.3		$	51.5		54.8		206.0		$	145.0		2,149.3
Impact of adopting IFRS 16 (Note 2)		—			—			—		—		(206.0	)		—		(206.0	)
Net book value as at April 1, 2019	$	241.7		$	1,450.3		$	51.5		54.8		—		$	145.0		1,943.3
Additions		31.0			27.3			13.9		11.3		—			207.1		290.6
Additions – business combinations (Note 3)		0.1			—			0.1		0.6		—			—		0.8
Disposals		(0.1	)		(0.5	)		—		(0.1	)	—			—		(0.7	)
Depreciation		(17.7	)		(105.0	)		(17.9	)	(5.0	)	—			—		(145.6	)
Impairment		—			(1.8	)		—		—		—			—		(1.8	)
Transfers and others		2.2			155.0			2.8		4.6		—			(151.6	)	13.0
Foreign currency exchange differences		5.6			44.0			1.0		3.1		—			0.7		54.4
Net book value as at March 31, 2020	$	262.8		$	1,569.3		$	51.4		69.3		—		$	201.2		2,154.0

All values are in US Dollars.

												Assets
							Machinery					under			Assets
	Buildings							and				finance			under
(amounts in millions)		and land		Simulators			equipment			Aircraft		lease		construction		Total
Cost	$	455.4		$	2,005.0		$	221.1		67.0		345.7		$	145.0	3,239.2
Accumulated depreciation and impairment		(213.7	)		(554.7	)		(169.6	)	(12.2	)	(139.7	)		—	(1,089.9	)
Net book value as at March 31, 2019	$	241.7		$	1,450.3		$	51.5		54.8		206.0		$	145.0	2,149.3
Impact of adopting IFRS 16 (Note 2)		—			—			—		—		(206.0	)		—	(206.0	)
Net book value as at April 1, 2019	$	241.7		$	1,450.3		$	51.5		54.8		—		$	145.0	1,943.3
Cost	$	490.0		$	2,191.1		$	203.1		82.2		—		$	201.2	3,167.6
Accumulated depreciation and impairment		(227.2	)		(621.8	)		(151.7	)	(12.9	)	—			—	(1,013.6	)
Net book value as at March 31, 2020	$	262.8		$	1,569.3		$	51.4		69.3		—		$	201.2	2,154.0

All values are in US Dollars.

During the year ended March 31, 2020, depreciation of $142.8 million (2019 – $134.9 million) has been recorded in cost of sales, $0.8 million (2019 – $0.7 million) in research and development expenses and $2.0 million (2019 – $2.0 million) in selling, general and administrative expenses.

CAE Financial Report 2020 | 89

Notes to the Consolidated Financial Statements

NOTE 13 – INTANGIBLE ASSETS

				Capitalized									ERP and				Other
(amounts in millions)	Goodwill			development			Customer						other			intangible
	(Note 26)				costs		relationships			Licenses			software				assets		Total
Net book value as at March 31, 2018	$	625.5		$	173.7		$	154.5		$	—		$	64.9		$	37.0		1,055.6
Additions – internal development		—			69.4			—			—			17.2			—		86.6
Additions – business combinations (Note 3)		443.0			7.6			191.4			169.5			—			—		811.5
Additions – monetization of royalties (Note 4)		—			—			—			156.7			—			—		156.7
Amortization		—			(30.5	)		(22.4	)		(2.3	)		(14.3	)		(5.4	)	(74.9	)
Transfers and others		—			(10.0	)		—			—			2.7			0.5		(6.8	)
Foreign currency exchange differences		(0.8	)		0.4			(0.7	)		0.5			0.2			(0.4	)	(0.8	)
Net book value as at March 31, 2019	$	1,067.7		$	210.6		$	322.8		$	324.4		$	70.7		$	31.7		2,027.9
Additions – internal development		—			86.2			—			—			12.0			—		98.2
Additions – acquired separately		—			—			—			1.8			—			0.6		2.4
Additions – business combinations (Note 3)		20.1			5.8			13.0			(7.0	)		—			—		31.9
Amortization		—			(39.6	)		(34.7	)		(12.8	)		(14.1	)		(4.9	)	(106.1	)
Impairment		(37.5	)		(3.2	)		—			—			—			—		(40.7	)
Transfers and others		—			(11.1	)		2.9			(2.7	)		4.1			—		(6.8	)
Foreign currency exchange differences		35.0			0.8			8.0			5.0			0.3			0.6		49.7
Net book value as at March 31, 2020	$	1,085.3		$	249.5		$	312.0		$	308.7		$	73.0		$	28.0		2,056.5

All values are in US Dollars.


				Capitalized									ERP and				Other
				development			Customer						other			intangible
	Goodwill				costs		relationships			Licenses				software			assets		Total
Cost	$	1,067.7		$	375.0		$	460.9		$	326.7		$	208.8		$	104.1		2,543.2
Accumulated amortization and impairment		—			(164.4	)		(138.1	)		(2.3	)		(138.1	)		(72.4	)	(515.3	)
Net book value as at March 31, 2019	$	1,067.7		$	210.6		$	322.8		$	324.4		$	70.7		$	31.7		2,027.9
Cost	$	1,122.8		$	454.2		$	486.1		$	326.2		$	213.3		$	98.3		2,700.9
Accumulated amortization and impairment		(37.5	)		(204.7	)		(174.1	)		(17.5	)		(140.3	)		(70.3	)	(644.4	)
Net book value as at March 31, 2020	$	1,085.3		$	249.5		$	312.0		$	308.7		$	73.0		$	28.0		2,056.5

All values are in US Dollars.

During the year ended March 31, 2020, amortization of $65.8 million (2019 – $43.7 million) has been recorded in cost of sales, $38.5 million (2019 – $29.4 million) in research and development expenses and $1.8 million (2019 – $1.8 million) in selling, general and administrative expenses.

NOTE 14 – LEASES

Leases as lessee

Right-of-use assets

							Machinery
	Buildings							and
	and land			Simulators			equipment			Aircraft		Total
Net book value as at March 31, 2019	$	—		$	—		$	—		—		—
Impact of adopting IFRS 16 (Note 2)		241.8			183.7			7.3		—		432.8
Net book value as at April 1, 2019	$	241.8		$	183.7		$	7.3		—		432.8
Additions and remeasurements		30.1			(3.4	)		0.6		—		27.3
Additions – business combinations (Note 3)		1.1			—			—		0.4		1.5
Depreciation		(25.3	)		(20.1	)		(3.1	)	(0.2	)	(48.7	)
Transfers and others		(1.0	)		(25.3	)		0.2		—		(26.1	)
Foreign currency exchange differences		5.2			3.9			—		—		9.1
Net book value as at March 31, 2020	$	251.9		$	138.8		$	5.0		0.2		395.9

All values are in US Dollars.

During the year ended March 31, 2020, depreciation of $47.0 million has been recorded in cost of sales and $1.7 million in selling, general and administrative expenses.

Short-term leases, leases of low-value assets and variable lease payments

During the year ended March 31, 2020, expenses of $16.3 million have been recognized in net income relating to short-term leases, leases of low-value assets and variable lease payments not included in the measurement of lease liabilities.

90 | CAE Financial Report 2020

Notes to the Consolidated Financial Statements

Leases as lessor

Operating Lease

As at March 31, 2020, the net book value of property, plant and equipment leased under operating lease to third parties was $72.8 million (2019 - $91.7 million).

Undiscounted lease payments to be received under operating leases are as follows:

	2020	2019
Less than 1 year	38.3	36.2
Between 1 and 2 years	35.6	30.6
Between 2 and 3 years	30.4	29.7
Between 3 and 4 years	25.8	25.8
Between 4 and 5 years	25.3	21.4
More than 5 years	65.7	42.8
Total undiscounted lease payments receivable	221.1	186.5

All values are in US Dollars.

Finance Lease

Undiscounted lease payments to be received under finance leases are as follows:

	2020		2019
Less than 1 year	19.5		13.4
Between 1 and 2 years	19.8		13.7
Between 2 and 3 years	27.4		11.4
Between 3 and 4 years	10.3		10.1
Between 4 and 5 years	11.6		13.3
More than 5 years	146.8		113.3
Total undiscounted lease payments receivable	235.4		175.2
Unearned finance income	(71.4	)	(66.0	)
Discounted unguaranteed residual values of leased assets	(9.0	)	(6.3	)
Total investment in finance leases	155.0		102.9
Current portion (Note 9)	16.8		11.4
Non-current portion (Note 15)	138.2		91.5

All values are in US Dollars.

NOTE 15 – OTHER NON-CURRENT ASSETS

	2020	2019
Restricted cash	12.4	27.3
Prepaid rent to a portfolio investment	23.3	27.3
Advances to a portfolio investment	29.7	29.5
Investment in finance leases (Note 14)	138.2	91.5
Non-current receivables	40.2	40.7
Investment tax credits	231.5	231.9
Other	35.1	31.3
	510.4	479.5

All values are in US Dollars.

NOTE 16 – ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

	2020	2019
Accounts payable trade	539.7	458.9
Accrued liabilities	370.9	400.2
Deferred revenue	15.2	11.6
Amount due to related parties (Note 32)	5.7	2.2
Current portion of royalty obligations	2.9	10.9
	934.4	883.8

All values are in US Dollars.

CAE Financial Report 2020 | 91

Notes to the Consolidated Financial Statements

NOTE 17 – PROVISIONS

Changes in provisions are as follows:

	Restoration
	and simulator
	removal			Restructuring			Legal		Warranties			Other		Total
Provisions, as at March 31, 2019	$	8.0		$	11.8		3.4		$	37.5		4.3		65.0
Impact of adopting IFRS 16 (Note 2)		—			(10.2	)	—			—		—		(10.2	)
Provisions, as at April 1, 2019	$	8.0		$	1.6		3.4		$	37.5		4.3		54.8
Additions		3.7			—		0.1			10.4		9.3		23.5
Business combinations (Note 3)		—			—		—			—		0.2		0.2
Amount used		(0.1	)		(0.3	)	(0.1	)		(15.4	)	(5.3	)	(21.2	)
Reversal of unused amounts		—			—		—			(0.2	)	(0.5	)	(0.7	)
Foreign currency exchange differences		0.4			0.1		0.2			0.1		0.4		1.2
Provisions, as at March 31, 2020	$	12.0		$	1.4		3.6		$	32.4		8.4		57.8
Current portion		0.4			1.4		2.8			17.6		7.0		29.2
Non-current portion	$	11.6		$	—		0.8		$	14.8		1.4		28.6

All values are in US Dollars.

NOTE 18 – DEBT FACILITIES

Long-term debt, net of transaction costs is as follows:

					2020			2019
Notional amount		Maturity	Current	Non-current		Current	Non-current
Unsecured senior notes
U.S. dollar, fixed rate - 3.60% to 4.90%	975.0	2024-2034	—	$	1,370.4	80.1	$	1,163.1
Canadian dollar, fixed rate - 4.15%	30.0	2024-2027	—		30.0	45.0		30.0
Canadian dollar, variable rate			—		—	50.0		—
Term loans
U.S. dollar, variable rate	183.1	2021-2025	79.7		177.1	8.0		259.2
Canadian dollar, variable rate	46.5	2020-2028	5.6		40.7	5.6		46.3
Other			8.2		7.9	8.4		24.8
Lease liabilities
U.S. dollar		2020-2041	91.7		214.4	61.4		179.3
Other		2020-2043	21.0		160.7	1.4		17.2
R&D obligations
Canadian dollar		2021-2039	—		391.5	4.2		344.3
Revolving credit facilities
U.S. dollar, variable rate		2023	—		423.3	—		—
Canadian dollar, variable rate		2023	—		290.0	—		—
Total long-term debt			206.2	$	3,106.0	264.1	$	2,064.2

All values are in US Dollars.

Unsecured senior notes

In December 2019, the Company issued unsecured senior notes amounting to US$100.0 million maturing in 2034 and bearing interest of 4.90%.

In June and December 2019, the Company repaid unsecured senior notes amounting to US$60.0 million and $95.0 million respectively.

R&D obligations

Represents obligations with the Government of Canada and the Government of Quebec relative to R&D programs whereby the government entities provide funding through loans for a portion of eligible spending related to specified R&D projects, up to a predetermined maximum funding amount. As at March 31, 2020, the remaining undrawn amount available under these programs was $86.3 million (2019 - $149.7 million). In March 2020, as part of the governments economic response to the COVID-19 pandemic, the Company obtained payment deferrals of nine months on amounts due in fiscal 2021.

Revolving credit facilities

In August 2019, the Company renegotiated its revolving credit facilities agreement, increasing the total amount available from US $550.0 million to US $850.0 million. The maturity date of September 2023 and the applicable interest rate of the revolving term credit facilities remained unchanged.

92 | CAE Financial Report 2020

Notes to the Consolidated Financial Statements

The facilities bear interest at variable rates, plus a margin that is determined based on the Company’s private credit rating. The Company has the ability to draw down amounts in U.S. dollar, Canadian dollar, Euro or British pound. The facilities have standard financial covenants requiring a minimum fixed charge coverage and a maximum debt coverage.

Subsequent to year end, the Company concluded a new two-year $500.0 million unsecured revolving credit facility (see Note 33).

Information on the change in liabilities for which cash flows have been classified as financing activities in the statement of cash flows are as follows:

	Unsecured										Revolving
		senior		Term		Lease			R&D			credit
		notes		loans		liabilities		obligations				facilities	Total
Net book value as at March 31, 2018	$	684.1		131.1		145.4		$	300.3		$	—	1,260.9
Changes from financing cash flows
Proceeds from long-term debt		663.7		255.1		—			36.5			—	955.3
Repayment of long-term debt		—		(70.6	)	—			(2.1	)		—	(72.7	)
Repayment of lease liabilities		—		—		(22.0	)		—			—	(22.0	)
Total changes from financing cash flows	$	663.7		184.5		(22.0	)	$	34.4		$	—	860.6
Non-cash changes
Business combinations (Note 3)		—		15.2		137.6			—			—	152.8
Foreign currency exchange differences		20.1		4.2		5.0			—			—	29.3
Interests		—		—		0.8			13.8			—	14.6
Other		0.3		17.3		(7.5	)		—			—	10.1
Total non-cash changes	$	20.4		36.7		135.9		$	13.8		$	—	206.8
Net book value as at March 31, 2019	$	1,368.2		352.3		259.3		$	348.5		$	—	2,328.3
Impact of adopting IFRS 16 (Note 2)		—		—		265.8			—				265.8
Net book value as at April 1, 2019	$	1,368.2		352.3		525.1		$	348.5		$	—	2,594.1
Changes from financing cash flows
Net proceeds from borrowing under
revolving credit facilities		—		—		—			—			708.2	708.2
Proceeds from long-term debt		131.7		5.5		—			30.4			—	167.6
Repayment of long-term debt		(175.4	)	(53.4	)	—			(4.2	)		—	(233.0	)
Repayment of lease liabilities		—		—		(79.8	)		—			—	(79.8	)
Total changes from financing cash flows	$	(43.7	)	(47.9	)	(79.8	)	$	26.2			708.2	563.0
Non-cash changes
Business combinations (Note 3)		—		—		1.6			—			—	1.6
Foreign currency exchange differences		75.2		14.7		13.8			—			5.1	108.8
Additions and remeasurement
of lease liabilities		—		—		27.3			—			—	27.3
Interests		—		—		—			16.8			—	16.8
Other		0.7		0.1		(0.2	)		—			—	0.6
Total non-cash changes	$	75.9		14.8		42.5		$	16.8		$	5.1	155.1
Net book value as at March 31, 2020	$	1,400.4		319.2		487.8		$	391.5		$	713.3	3,312.2

All values are in US Dollars.

As at March 31, 2020, the Company is in compliance with all of its financial covenants.

NOTE 19 – EMPLOYEE BENEFITS OBLIGATIONS

Defined benefit pension plans

The Company has three registered funded defined benefit pension plans in Canada (two for employees and one for designated executives) that provide benefits based on length of service and final average earnings. The Company also maintains funded pension plans for employees in the Netherlands and United Kingdom that provide benefits based on similar provisions.

The Company’s annual contributions, to fund both benefits accruing in the year and deficits accumulated over prior years, and the plans’ financial position are determined based on actuarial valuations. Applicable pension legislations prescribe minimum funding requirements.

In addition, the Company maintains unfunded plans in Canada, United States and Germany that provide defined benefits based on length of service and final average earnings. These unfunded plans are the sole obligation of the Company, and there is no requirement to fund them. However, the Company is obligated to pay the benefits when they become due. As at March 31, 2020, the Company has issued letters of credit totalling $60.6 million (2019 – $58.9 million) to collateralize the obligations under the Canadian plans.

The funded plans are trustee administered funds. Plan assets held in trusts are governed by local regulations and practices in each country, as is the nature of the relationship between the Company and the trustees and their composition. Responsibility for governance of the plans, including investment decisions and contribution schedules, lies jointly with the Company and the board of trustees.

CAE Financial Report 2020 | 93

Notes to the Consolidated Financial Statements

The employee benefits obligations are as follows:

	2020	2019
Funded defined benefit pension obligations	649.2	664.4
Fair value of plan assets	530.1	543.7
Funded defined benefit pension obligations – net	119.1	120.7
Unfunded defined benefit pension obligations	93.7	91.9
Employee benefits obligations	212.8	212.6

All values are in US Dollars.

Changes in funded defined benefit pension obligations and fair value of plan assets are as follows:

					2020							2019
Canadian			Foreign		Total		Canadian			Foreign		Total
Pension obligations, beginning of year	597.2		67.2		664.4		$	546.8		65.2		612.0
Current service cost	30.4		2.1		32.5			27.2		1.8		29.0
Interest cost	18.0		1.1		19.1			17.4		1.2		18.6
Past service cost	—		—		—			1.7		—		1.7
Actuarial loss (gain) arising from:
Experience adjustments	9.2		0.4		9.6			1.4		0.1		1.5
Economic assumptions	(64.3	)	0.5		(63.8	)		13.3		4.1		17.4
Demographic assumptions	—		(0.4	)	(0.4	)		—		(0.8	)	(0.8	)
Employee contributions	7.2		0.6		7.8			6.9		0.5		7.4
Pension benefits paid	(20.8	)	(1.5	)	(22.3	)		(17.5	)	(1.3	)	(18.8	)
Foreign currency exchange differences	—		2.3		2.3			—		(3.6	)	(3.6	)
Pension obligations, end of year	576.9		72.3		649.2		$	597.2		67.2		664.4
Fair value of plan assets, beginning of year	485.3		58.4		543.7		$	440.9		56.3		497.2
Interest income	14.9		0.9		15.8			14.3		1.0		15.3
Return on plan assets, excluding amounts
included in interest income	(40.0	)	(0.2	)	(40.2	)		21.3		2.9		24.2
Employer contributions	22.1		2.3		24.4			20.3		2.1		22.4
Employee contributions	7.2		0.6		7.8			6.9		0.5		7.4
Pension benefits paid	(20.8	)	(1.5	)	(22.3	)		(17.5	)	(1.3	)	(18.8	)
Administrative costs	(0.9	)	(0.2	)	(1.1	)		(0.9	)	(0.1	)	(1.0	)
Foreign currency exchange differences	—		2.0		2.0			—		(3.0	)	(3.0	)
Fair value of plan assets, end of year	467.8		62.3		530.1		$	485.3		58.4		543.7

All values are in US Dollars.

Changes in unfunded defined benefit pension obligations are as follows:

					2020							2019
Canadian			Foreign		Total		Canadian			Foreign		Total
Pension obligations, beginning of year	77.2		14.7		91.9		$	72.2		13.6		85.8
Current service cost	3.3		0.6		3.9			3.4		0.1		3.5
Interest cost	2.1		0.2		2.3			2.2		0.2		2.4
Past service cost	—		(0.1	)	(0.1	)		(1.7	)	1.7		—
Actuarial loss (gain) arising from:
Experience adjustments	7.7		(0.6	)	7.1			—		0.1		0.1
Economic assumptions	(7.2	)	1.1		(6.1	)		1.2		0.5		1.7
Demographic assumptions	—		—		—			—		0.1		0.1
Pension benefits paid	(2.8	)	(0.7	)	(3.5	)		(2.8	)	(0.9	)	(3.7	)
Business combinations (Note 3)	(2.3	)	—		(2.3	)		2.7		—		2.7
Foreign currency exchange differences	—		0.5		0.5			—		(0.7	)	(0.7	)
Pension obligations, end of year	78.0		15.7		93.7		$	77.2		14.7		91.9

All values are in US Dollars.

94 | CAE Financial Report 2020

Notes to the Consolidated Financial Statements

Net pension cost is as follows:

					2020							2019
Canadian			Foreign		Total		Canadian			Foreign		Total
Funded plans
Current service cost	30.4		2.1		32.5		$	27.2		1.8		29.0
Interest cost	18.0		1.1		19.1			17.4		1.2		18.6
Interest income	(14.9	)	(0.9	)	(15.8	)		(14.3	)	(1.0	)	(15.3	)
Past service cost	—		—		—			1.7		—		1.7
Administrative cost	0.9		0.2		1.1			0.9		0.1		1.0
Net pension cost of funded plans	34.4		2.5		36.9		$	32.9		2.1		35.0
Unfunded plans
Current service cost	3.3		0.6		3.9		$	3.4		0.1		3.5
Interest cost	2.1		0.2		2.3			2.2		0.2		2.4
Past service cost	—		(0.1	)	(0.1	)		(1.7	)	1.7		—
Net pension cost of unfunded plans	5.4		0.7		6.1		$	3.9		2.0		5.9
Total net pension cost	39.8		3.2		43.0		$	36.8		4.1		40.9

All values are in US Dollars.

During the year ended March 31, 2020, pension costs of $15.8 million (2019 – $15.4 million) have been charged in cost of sales, $4.3 million (2019 – $5.5 million) in research and development expenses, $14.3 million (2019 – $11.8 million) in selling, general and administrative expenses, $5.6 million (2019 – $5.7 million) in finance expense and $3.0 million (2019 – $2.5 million) were capitalized.

Fair value of the plan assets, by major categories, are as follows:

(amounts in millions)				2020				2019
	Quoted	Unquoted		Total	Quoted	Unquoted		Total
Canadian plans
Equity funds
Canadian	—	$	55.2	55.2	—	$	58.1	58.1
Foreign	—		165.7	165.7	—		210.5	210.5
Bond funds
Government	—		92.2	92.2	—		109.7	109.7
Corporate	—		85.2	85.2	—		68.8	68.8
Cash and cash equivalents	—		4.3	4.3	—		9.7	9.7
Other	—		65.2	65.2	—		28.5	28.5
Total Canadian plans	—	$	467.8	467.8	—	$	485.3	485.3
Foreign plans
Insured annuities	—	$	55.9	55.9	—	$	52.2	52.2
Equity instruments	2.4		—	2.4	2.5		—	2.5
Debt instruments
Corporate	3.5		—	3.5	3.3		—	3.3
Other	—		0.5	0.5	—		0.4	0.4
Total Foreign plans	5.9	$	56.4	62.3	5.8	$	52.6	58.4
Total plans	5.9	$	524.2	530.1	5.8	$	537.9	543.7

All values are in US Dollars.

As at March 31, 2020 and March 31, 2019, there were no common shares of the Company in the pension plan assets.

Significant assumptions (weighted average) used are as follows:

							Foreign
	2020		2019		2020		2019
Pension obligations as at March 31:
Discount rate	3.96	%	3.33	%	1.46	%	1.64	%
Compensation rate increases	3.66	%	3.65	%	2.92	%	2.92	%
Net pension cost for years ended March 31:
Discount rate	3.33	%	3.48	%	1.64	%	1.88	%
Compensation rate increases	3.66	%	3.65	%	2.92	%	2.86	%

CAE Financial Report 2020 | 95

Notes to the Consolidated Financial Statements

Assumptions regarding future mortality are based on actuarial advice in accordance with published statistics and mortality tables and experience in each territory. The mortality tables and the average life expectancy in years for a member age 45 and 65 are as follows:

As at March 31, 2020			Life expectancy over 65 for a member
(in years)						Male						Female
Country	Mortality table	at age 45			at age 65			at age 45			at age 65
Canada	CPM private tables		23.5			22.0			25.6			24.3
Netherlands	AG2018		23.9			21.8			25.9			23.7
Germany	Heubeck RT2018G		23.0			20.2			25.9			23.7
United Kingdom	S2PxA CMI 2018		23.1			22.0			25.1			22.0
United States	CPM private tables		24.7			23.3			26.2			24.9
As at March 31, 2019			Life expectancy over 65 for a member
---	---	---	---	---	---	---	---	---	---	---	---	---	---
(in years)						Male						Female
Country	Mortality table	at age 45			at age 65			at age 45			at age 65
Canada	CPM private tables		23.4			21.9			25.5			24.2
Netherlands	AG2018		23.8			21.7			25.8			23.6
Germany	Heubeck RT2018G		22.8			20.0			25.8			23.6
United Kingdom	S2PxA CMI 2018		23.5			22.4			25.5			24.2
United States	CPM private tables		23.4			21.9			25.8			24.4

As at March 31, 2020, the weighted average duration of the defined benefit obligation is 18 years.

The impact on the defined benefit obligation as a result of a 0.25% change in the significant assumptions as at March 31, 2020 are as follows:

			Funded plans				Unfunded plans
Canadian				Foreign		Canadian			Foreign		Total
Discount rate:
Increase	(24.4	)	$	(3.6	)	$	(2.5	)	(0.5	)	(31.0	)
Decrease	26.1			3.9			2.7		0.5		33.2
Compensation rate:
Increase	6.7			0.3			0.3		—		7.3
Decrease	(6.4	)		(0.3	)		(0.3	)	—		(7.0	)

All values are in US Dollars.

Through its defined benefit plans, the Company is exposed to a number of risks, the most significant being the exposure to asset volatility, to changes in bond yields and to changes in life expectancy. The plan liabilities are calculated using a discount rate set with reference to corporate bond yields, if plan assets underperform against this yield, this will create a deficit. A decrease in corporate bond yields will increase plan liabilities, although this will be partially offset by an increase in the value of the plans’ bond holdings. The plans’ obligations are to provide benefits for the duration of the life of its members, therefore, increases in life expectancy will result in an increase in the plans’ liabilities.

Contributions reflect actuarial assumptions of future investment returns, salary projections and future service benefits. The expected employer contributions and expected benefits paid for the next fiscal year are as follows:

				Canadian			Foreign		Total
Expected employer contributions in funded plans				$	21.7		3.1		24.8
Expected benefits paid in unfunded plans					3.3		0.6		3.9

All values are in US Dollars.

NOTE 20 – OTHER NON-CURRENT LIABILITIES

	2020	2019
Deferred revenue and contract liabilities	104.7	134.1
Share-based payments liabilities (Note 23)	35.1	75.4
Contingent consideration arising on business combinations	—	11.9
Interest payable	21.1	15.1
Other	30.2	30.5
	191.1	267.0

All values are in US Dollars.

96 | CAE Financial Report 2020

Notes to the Consolidated Financial Statements

NOTE 21 – SUPPLEMENTARY CASH FLOWS INFORMATION

Changes in non-cash working capital are as follows:

	2020		2019
Cash (used in) provided by non cash working capital :
Accounts receivable	(39.9	)	(1.3	)
Contract assets	(29.9	)	(72.1	)
Inventories	(87.5	)	(22.2	)
Prepayments	(0.9	)	(5.7	)
Income taxes	8.2		6.5
Accounts payable and accrued liabilities	53.5		154.5
Provisions	(6.5	)	(8.7	)
Contract liabilities	50.8		(15.8	)
	(52.2	)	35.2

All values are in US Dollars.

Supplemental information:

	2020	2019
Interest paid	108.7	55.2
Interest received	11.4	14.9
Income taxes paid	34.2	34.0

All values are in US Dollars.

NOTE 22 – ACCUMULATED OTHER COMPREHENSIVE INCOME

	Foreign currency
	exchange differences											Net changes in
	on translation of					Net changes in						financial assets
	foreign operations					cash flow hedges						carried at FVOCI							Total
	2020		2019			2020			2019			2020		2019		2020			2019
Balances, beginning of year	$	208.9	$	266.6		$	(10.5	)	$	(6.9	)	$	0.6	$	0.6	$	199.0		$	260.3
Other comprehensive income (loss)	17.0		(57.7		)	(22.8		)	(3.6		)	—		—		(5.8		)	(61.3		)
Balances, end of year	$	225.9	$	208.9		$	(33.3	)	$	(10.5	)	$	0.6	$	0.6	$	193.2		$	199.0

NOTE 23 – SHARE-BASED PAYMENTS

The expense and the carrying amount of liability arising from share-based arrangements are as follows:

					Carrying
		Share-based			amount of share-based
	payments expense				payments liabilities
		2020		2019	2020		2019
Equity-settled plan
Stock option plan	$	5.8		6.4	n.a.		n.a.
Cash-settled plans
Stock purchase plan		10.3		8.5	—		—
Deferred share unit (DSU) plans		(2.4	)	6.3	(8.4	)	(15.5	)
Restricted share unit (RSU) plans		(10.9	)	13.0	(24.7	)	(43.2	)
Performance share unit (PSU) plan		(2.9	)	26.5	(16.2	)	(47.0	)
	$	(0.1	)	60.7	(49.3	)	(105.7	)

All values are in US Dollars.

During the year ended March 31, 2020, share-based payments expense of $1.2 million (2019 – $0.8 million) was capitalized.

The Company holds equity swap agreements in order to mitigate the compensation expense related to the DSU plans, RSU plans and PSU plan (see Note 30). During the year ended March 31, 2020, an expense of $44.0 million was recognized in income (2019 – recovery of $13.2 million).

CAE Financial Report 2020 | 97

Notes to the Consolidated Financial Statements

Stock option plan

Stock options to purchase common shares of the Company are granted to certain employees, officers and executives of the Company. The stock option exercise price is equal to the common shares weighted average price on the TSX of the five days of trading prior to the grant date. Stock options vest over four years of continuous employment from the grant date. The stock options must be exercised within a seven-year period, but are not exercisable during the first year after the grant date. As at March 31, 2020, a total of 11,892,268 common shares (2019 – 13,446,114) remained authorized for issuance under the stock option plan.

Changes in outstanding stock options are as follows:

				2020				2019
			Weighted				Weighted
	Number of		average exercise		Number of		average exercise
stock options			price		stock options		price
Stock options outstanding, beginning of year	6,504,125		$	20.41	6,155,525		$	17.31
Granted	1,320,700			34.50	1,733,100			27.15
Exercised	(1,553,846	)		17.06	(1,231,600	)		14.78
Forfeited	(196,825	)		24.17	(82,525	)		17.41
Expired	(23,300	)		10.06	(70,375	)		18.20
Stock options outstanding, end of year	6,050,854		$	24.25	6,504,125		$	20.41
Stock options exercisable, end of year	2,187,379		$	19.05	2,082,325		$	16.36

During the year ended March 31, 2020, the weighted average market share price for stock options exercised was $34.77 (2019 – $27.11).

As at March 31, 2020, summarized information about the stock options issued and outstanding is as follows:

		Options Outstanding				Options Exercisable
		Weighted
	Number of	average remaining		Weighted		Number of	Weighted
Range of	stock options	contractual life		average exercise		stock options	average exercise
exercise prices	outstanding	(years)		price		exercisable	price
$11.02 to $15.14	570,125		1.73	$	14.56	570,125	$	14.56
$15.34 to $22.26	2,654,704		3.77		19.68	1,308,279		19.09
$27.14 to $40.53	2,826,025		5.66		30.51	308,975		27.14
Total	6,050,854		4.46	$	24.25	2,187,379	$	19.05

During the year ended March 31, 2020, the weighted average fair value of stock options granted was $4.98 (2019 – $4.23).

The assumptions used in the calculation of the fair value of the stock options on the grant date using the Black-Scholes option pricing model are as follows:

	2020		2019
Common share price	33.94		27.42
Exercise price	34.50		27.15
Dividend yield	1.18	%	1.31	%
Expected volatility	19.70	%	18.34	%
Risk-free interest rate	1.48	%	2.07	%
Expected stock option life	4 years		4 years

All values are in US Dollars.

Expected volatility is estimated by considering historical average common share price volatility over the expected life of the stock options.

Stock purchase plan

Employees of the Company and its participating subsidiaries can acquire common shares through regular payroll deductions. The Company contributes $1 for every $2 of employee contributions, up to a maximum of 3% of the employee’s base salary. The employee and Company’s contributions are remitted to an independent plan administrator who purchases common shares on the market on behalf of the employee.

Deferred share unit (DSU) plans

Non-employee directors holding less than the minimum required holdings of common shares of the Company receive their Board retainer compensation in the form of deferred share units (DSUs). A non-employee director holding no less than the minimum required holdings of common shares may also elect to participate in the DSU plan in respect of part or all of his or her retainer. Such retainer amount is converted to DSUs based on the common shares price on the TSX on the date such retainer becomes payable to the non-employee director.

98 | CAE Financial Report 2020

Notes to the Consolidated Financial Statements

Certain executives can elect to defer a portion or entire short-term incentive payment to the DSU plan on an annual basis. Such deferred short-term incentive amount is converted to DSUs based on the common shares weighted average price on the TSX of the five days of trading prior to the date such incentive becomes payable to the executives.

DSUs entitle the holders to receive a cash payment equal to the common shares closing price on the TSX on the payment date, or, in certain cases, the weighted average price of to the five days prior to the payment date. Holders are also entitled to dividend equivalents payable in additional DSUs in an amount equal to the dividends paid on the common shares from the date of issuance to the payment date.

DSUs vest immediately and are paid upon any termination of employment or when a non-employee director ceases to act as a director.

Changes in outstanding DSUs are as follows:

	2020		2019
DSUs outstanding, beginning of year	523,470		675,097
Granted	79,196		92,211
Redeemed	(140,251	)	(253,176	)
Dividends paid in DSUs	7,420		9,338
DSUs vested and outstanding, end of year	469,835		523,470

Restricted share unit (RSU) plans

Restricted share units (RSUs) are granted to certain employees, officers and executives of the Company. RSUs entitle the holders to receive a cash payment based on the average closing price on the TSX for the 20 trading days preceding the vesting date, if restriction criteria are met. Restriction criteria include continuing employment for a period of up to three years. RSUs are paid three years after the grant date.

Changes in outstanding RSUs are as follows:

	2020		2019
RSUs outstanding, beginning of year	1,570,063		1,688,664
Granted	149,477		148,670
Cancelled	(16,207	)	(11,010	)
Redeemed	(228,928	)	(268,836	)
Dividends paid in RSUs	16,198		12,575
RSUs outstanding, end of year	1,490,603		1,570,063
RSUs vested, end of year	1,391,195		1,462,052

As at March 31, 2020, vested and outstanding RSUs includes 1,044,359 RSUs granted under the previous plan (2019 – 1,067,648), which are paid upon any termination of employment of the holder. Under the previous plan, holders are also entitled to dividend equivalents payable in additional RSUs in an amount equal to the dividends paid on the common shares from the date of issuance to the payment date.

Performance share unit (PSU) plan

Performance share units (PSUs) are granted to certain employees, officers and executives of the Company. PSUs entitle the holders to receive a cash payment equal to the average closing price on the TSX of the common shares for the 20 trading days preceding the vesting date multiplied by a factor which ranges from 0% to 200% based on the attainment of performance criteria set out pursuant to the plan, if restriction criteria are met. Restriction criteria include continuing employment for a period of up to three years. PSUs are paid three years after the grant date.

Changes in outstanding PSUs are as follows:

	2020		2019
PSUs outstanding, beginning of year	1,141,200		1,230,717
Granted	730,352		756,386
Cancelled	(41,991	)	(25,491	)
Redeemed	(852,688	)	(820,412	)
PSUs outstanding, end of year	976,873		1,141,200
PSUs vested, end of year	758,209		876,095

CAE Financial Report 2020 | 99

Notes to the Consolidated Financial Statements

NOTE 24 – EMPLOYEE COMPENSATION

Total employee compensation expense recognized in income is as follows:

(amounts in millions)	2020	2019
Salaries and other short-term employee benefits	1,218.6	1,071.2
Share-based payments expense, net of equity swap (Note 23)	42.7	46.7
Post-employment benefits – defined benefit plans (Note 19)	40.0	38.4
Post-employment benefits – defined contribution plans	19.2	17.2
Termination benefits	4.4	4.3
Total employee compensation	1,324.9	1,177.8

All values are in US Dollars.

NOTE 25 – GOVERNMENT PARTICIPATION

Government contributions were recognized as follows:

	2020	2019
Credited to property, plant and equipment and intangible assets	15.6	16.8
Credited to income	18.0	28.4
Total government contributions	33.6	45.2

All values are in US Dollars.

NOTE 26 – IMPAIRMENT OF NON-FINANCIAL ASSETS

The carrying amount of goodwill allocated to the Company's CGUs per operating segment is as follows:

Civil Aviation			Defence
Training Solutions			and Security		Healthcare			Total
Net book value as at March 31, 2018	266.8		$	217.5	$	141.2		625.5
Business combinations (Note 3)	375.1			67.9		—		443.0
Foreign currency exchange differences	(11.3	)		5.4		5.1		(0.8	)
Net book value as at March 31, 2019	630.6		$	290.8	$	146.3		1,067.7
Business combinations (Note 3)	19.2			—		0.9		20.1
Impairment	—			—		(37.5	)	(37.5	)
Foreign currency exchange differences	17.5			9.9		7.6		35.0
Net book value as at March 31, 2020	667.3		$	300.7	$	117.3		1,085.3

All values are in US Dollars.

Goodwill is allocated to CGUs or a group of CGUs, which generally corresponds to the Company’s operating segments or one level below.

The Company performed its annual impairment test for goodwill during the fourth quarter of fiscal 2020. The Company determined the recoverable amount of the Civil Aviation Training Solutions, Defense and Security and Healthcare CGUs based on value in use calculations. The value in use of each CGU is calculated using estimated cash flows derived from the Company's five-year strategic plan as approved by management. Cash flows subsequent to the five-year period were extrapolated using a constant growth rate of 2% to 3%. These projections are inherently uncertain due to the fluidly evolving impact of the COVID-19 pandemic. The discount rates used to calculate the recoverable amounts reflect each CGUs’ specific risks and market conditions and range from 7.0% to 15.0%.

Based on the results of its impairment test of the Healthcare CGU, the Company recorded an impairment charge of $37.5 million relating to goodwill acquired in previous business acquisitions. The impairment charge is based on the general economic conditions at the time of the test, which negatively affected the discount rate used and the Healthcare CGU’s cash flow projections. The determination of the recoverable amount of the Healthcare CGU excluded the cash flows expected from the contract with the Government of Canada to design and manufacture 10,000 CAE Air1 ventilators, which was concluded subsequent to year end (see Note 33). Variations in the Company assumptions and estimates, particularly in the expected growth rates embedded in its cash flow projections and the discount rate could have a significant impact on fair value. An increase of 1% in the discount rate would have resulted in an additional impairment charge of approximately $17.0 million. A decrease of 1% in the growth rate would have resulted in an additional impairment charge of approximately $10.0 million.

No impairment charge was identified for the CGUs included in the Civil Aviation Training Solutions and Defense and Security segments.

100 | CAE Financial Report 2020

Notes to the Consolidated Financial Statements

NOTE 27 – CONTINGENCIES AND COMMITMENTS

Contingencies

In the normal course of operations, the Company is party to a number of lawsuits, claims and contingencies. Although it is possible that liabilities may be incurred in instances for which no accruals have been made, the Company does not believe that the ultimate outcome of these matters will have a material impact on its consolidated financial position.

The Company is subject to audits from various government and regulatory agencies on an ongoing basis. As a result, from time to time, authorities may disagree with positions and conclusions taken by the Company in its filings.

During the year ended March 31, 2015, the Company received a reassessment from the Canada Revenue Agency challenging the Company’s characterization of the amounts received under the SADI program. No amount has been recognized in the Company’s financial statements, since the Company believes that there are strong grounds for defence and will vigorously defend its position. Such matters cannot be predicted with certainty, however, the Company believes that the resolution of these proceedings will not have a material adverse effect on its financial position.

Commitments

Contractual purchase commitments that are not recognized as liabilities are as follows:

	2020	2019
Less than 1 year	204.7	240.2
Between 1 and 5 years	35.1	51.5
Total contractual purchase commitments	239.8	291.7

All values are in US Dollars.

NOTE 28 – FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

(i)	The fair value of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate their carrying values due to their short-term maturities;
(ii)	The fair value of derivative instruments, which include forward contracts, swap agreements and embedded derivatives accounted for separately and is calculated as the present value of the estimated future cash flows using an appropriate interest rate yield curve and forward foreign exchange rate. Assumptions are based on market conditions prevailing at each reporting date. The fair value of derivative instruments reflect the estimated amounts that the Company would receive or pay to settle the contracts at the reporting date;
---	---
(iii)	The fair value of the equity investments, which does not have a readily available market value, is estimated using a discounted cash flow model, which includes some assumptions that are not based on observable market prices or rates;
---	---
(iv)	The fair value of non-current receivables is estimated based on discounted cash flows using current interest rates for instruments with similar risks and remaining maturities;
---	---
(v)	The fair value of long-term debts, royalties obligations and other non-current liabilities are estimated based on discounted cash flows using current interest rates for instruments with similar risks and remaining maturities. Upon adoption of IFRS 16 on April 1, 2019, fair value disclosures are no longer required for lease liabilities;
---	---
(vi)	The fair value of the contingent considerations arising on business combinations are based on the estimated amount and timing of projected cash flows, the probability of the achievement of the criteria on which the contingency is based and the risk-adjusted discount rate used to present value the probability-weighted cash flows.
---	---

Fair value hierarchy

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

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

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

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

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

CAE Financial Report 2020 | 101

Notes to the Consolidated Financial Statements

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

						2020						2019
	Level	Carrying Value			Fair value			Carrying Value			Fair value
			Total			Total			Total			Total
Financial assets (liabilities) measured at FVTPL
Cash and cash equivalents	Level 1	$	946.5		$	946.5		$	446.1		$	446.1
Restricted cash	Level 1		12.4			12.4			27.3			27.3
Embedded foreign currency derivatives	Level 2		—			—			0.1			0.1
Equity swap agreements	Level 2		(55.5	)		(55.5	)		10.4			10.4
Forward foreign currency contracts	Level 2		(7.2	)		(7.2	)		(2.5	)		(2.5	)
Contingent consideration arising on business combinations	Level 3		—			—			(11.9	)		(11.9	)
Derivatives assets (liabilities) designated in a hedge relationship
Foreign currency swap agreements	Level 2		(0.3	)		(0.3	)		11.1			11.1
Forward foreign currency contracts	Level 2		(31.6	)		(31.6	)		(6.5	)		(6.5	)
Financial assets (liabilities) measured at amortized cost
Accounts receivable^(1)^	Level 2		514.5			514.5			440.3			440.3
Investment in finance leases	Level 2		155.0			183.2			102.9			114.5
Advances to a portfolio investment	Level 2		29.7			29.7			29.5			29.5
Other assets^(2)^	Level 2		22.1			20.5			25.7			25.7
Accounts payable and accrued liabilities^(3)^	Level 2		(709.1	)		(709.1	)		(770.8	)		(770.8	)
Total long-term debt^(4)^	Level 2		(2,830.6	)		(2,960.4	)		(2,335.4	)		(2,470.7	)
Other non-current liabilities^(5)^	Level 2		(182.0	)		(167.9	)		(164.0	)		(184.6	)
Financial assets measured at FVOCI
Equity investments	Level 3		3.3			3.3			3.3			3.3
		$	(2,132.8	)	$	(2,221.9	)	$	(2,194.4	)	$	(2,338.7	)

^(1)^ Includes trade receivables and certain other receivables.

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

^(3)^ Includes trade accounts payable, accrued liabilities, interest payable, certain payroll-related liabilities and current royalty obligations.

^(4)^ The carrying value excludes transaction costs.

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

Changes in level 3 financial instruments are as follows:

Balance as at March 31, 2019			(8.6	)
Total realized and unrealized gains included in income			11.9
Balance as at March 31, 2020			3.3

All values are in US Dollars.

NOTE 29 – CAPITAL RISK MANAGEMENT

The Company’s objectives when managing capital are threefold:

(i) Optimize the Company’s cost of capital;

(ii) Maintain the Company’s financial strength and credit quality;

(iii) Provide the Company’s shareholders with an appropriate rate of return on their investment.

The Company manages its capital structure and makes corresponding adjustments based on changes in economic conditions and the risk characteristics of the underlying assets. In order to maintain or adjust the capital structure, the Company may adjust the amount of dividends paid to shareholders, issue new shares or debt, use cash to reduce debt or repurchase shares.

To accomplish its objectives stated above, the Company monitors its capital on the basis of the net debt to capital. This ratio is calculated as net debt divided by the sum of the net debt and total equity. Net debt is calculated as total debt, including the short-term portion (as presented in the consolidated statement of financial position and including non-recourse debt) less cash and cash equivalents. Total equity comprises share capital, contributed surplus, accumulated other comprehensive income, retained earnings and non-controlling interests.

102 | CAE Financial Report 2020

Notes to the Consolidated Financial Statements

The level of debt versus equity in the capital structure is monitored, and the ratios are as follows:

	2020		2019
Total long-term debt (Note 18)	3,312.2		2,328.3
Less: cash and cash equivalents	(946.5	)	(446.1	)
Net debt	2,365.7		1,882.2
Equity	2,578.3		2,410.0
Total net debt plus equity	4,944.0		4,292.2
Net debt: equity	48:52		44:56

All values are in US Dollars.

The Company has certain debt agreements which require the maintenance of a certain level of capital.

NOTE 30 – FINANCIAL RISK MANAGEMENT

Due to the nature of the activities that the Company carries out and as a result of holding financial instruments, the Company is exposed to credit risk, liquidity risk and market risk, including foreign currency risk and interest rate risk. The Company’s 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 the Company’s exposure to a financial loss if a debtor fails to meet its obligations in accordance with the terms and conditions of its arrangements with the Company. The Company is exposed to credit risk on its accounts receivable and certain other assets through its normal commercial activities. The Company is also exposed to credit risk through its normal treasury activities on its cash and cash equivalents and derivative financial assets. Credit risks arising from the Company’s normal commercial activities are managed with regards to customer credit risk.

The Company’s 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, the Company typically receives substantial non-refundable advance payments for contracts with customers. The Company closely monitors its exposure to major airline companies in order to mitigate its risk to the extent possible. Furthermore, the Company’s trade receivables are not concentrated with specific customers but are held with a wide range of commercial and government organizations. As well, the Company’s credit exposure is further reduced by the sale of certain of its accounts receivable to third-party financial institutions for cash consideration on a limited recourse basis (receivable purchase program). The Company does 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.

The Company is exposed to credit risk in the event of non-performance by counterparties to its derivative financial instruments. The Company uses several measures to minimize this exposure. First, the Company enters into contracts with counterparties that are of high credit quality. The Company signed International Swaps & Derivatives Association, Inc. (ISDA) Master Agreements with all the counterparties with whom it trades 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 the Company or its 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, the Company monitors the credit standing of counterparties on a regular basis to help minimize credit risk exposure.

The carrying amounts presented in Note 9 and Note 28 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 the Company cannot meet its cash obligations as they become due.

The Company manages 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 the Company’s consolidated liquidity position, for efficient use of cash resources. Liquidity adequacy is assessed in view of seasonal needs, stress-test results, growth requirements and capital expenditures, and the maturity profile of indebtedness, including availability of credit facilities, working capital requirements, compliance with financial covenants and the funding of financial commitments. The Company manages its liquidity risk to maintain sufficient liquid financial resources to fund its operations and meet its commitments and obligations. In managing its liquidity risk, the Company has access to revolving credit facilities of US$850.0 million (2019 – US$550.0 million). As well, the Company has agreements to sell interests in certain of its accounts receivable for an amount of up to US$300.0 million (2019 – US$300.0 million) (receivable purchase program). As at March 31, 2020, the Canadian dollar equivalent of $333.1 million (2019 – $266.2 million) of specific accounts receivable were sold to a financial institution pursuant to these agreements. Proceeds were net of $4.2 million in fees (2019 – $4.4 million). Subsequent to the year end, the Company concluded an agreement to increase the limit of its receivable purchase program from US$300.0 million to US$400.0 million (see Note 33). The Company also regularly monitors any financing opportunities to optimize its capital structure and maintain appropriate financial flexibility.

CAE Financial Report 2020 | 103

Notes to the Consolidated Financial Statements

The following tables present a maturity analysis based on contractual maturity date, of the Company’s financial liabilities based on expected cash flows. Cash flows from derivatives presented either as derivative assets or liabilities have been included, as the Company manages its derivative contracts on a gross basis. The amounts are the contractual undiscounted cash flows. All amounts contractually denominated in foreign currency are presented in Canadian dollar equivalent amounts using the period-end spot rate except as otherwise stated:

										Between			Between			Between			Between
	Carrying			Contractual			Less than				1 and			2 and			3 and			4 and		More than
As at March 31, 2020	amount			cash flows				1 year			2 years			3 years			4 years			5 years			5 years
Non-derivative financial liabilities
Accounts payable and
accrued liabilities ^(1)^	$	709.1		$	709.1		$	709.1		$	—		$	—		$	—		$	—		$	—
Total long-term debt ^(2)^		3,305.2			4,319.8			296.5			555.1			564.8			383.4			340.1			2,179.9
Other non-current liabilities ^(3)^		182.0			397.8			0.7			49.8			31.2			32.1			32.4			251.6
	$	4,196.3		$	5,426.7		$	1,006.3		$	604.9		$	596.0		$	415.5		$	372.5		$	2,431.5
Net derivative financial liabilities
Forward foreign
currency contracts ^(4)^	$	38.8
Outflow				$	1,862.5		$	1,636.1		$	171.0		$	42.4		$	9.2		$	3.8		$	—
Inflow					(1,822.8	)		(1,606.6	)		(164.8	)		(39.4	)		(8.5	)		(3.5	)		—
Swap derivatives on total
long-term debt		0.3			(6.3	)		7.8			(4.0	)		(3.9	)		(3.0	)		(2.2	)		(1.0	)
Equity swap agreement		55.5			55.5			55.5			—			—			—			—			—
	$	94.6		$	88.9		$	92.8		$	2.2		$	(0.9	)	$	(2.3	)	$	(1.9	)	$	(1.0	)
	$	4,290.9		$	5,515.6		$	1,099.1		$	607.1		$	595.1		$	413.2		$	370.6		$	2,430.5
									Between			Between			Between			Between
---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---
	Carrying		Contractual			Less than				1 and			2 and			3 and			4 and		More than
As at March 31, 2019	amount		cash flows				1 year			2 years			3 years			4 years			5 years			5 years
Non-derivative financial liabilities
Accounts payable and
accrued liabilities ^(1)^	770.8		$	770.8		$	770.8		$	—		$	—		$	—		$	—		$	—
Total long-term debt^(2)^	2,335.4			3,393.0			359.8			251.7			200.3			239.4			228.6			2,113.2
Other non-current liabilities^(3)^	175.9			413.0			0.3			19.3			44.2			31.6			32.6			285.0
	3,282.1		$	4,576.8		$	1,130.9		$	271.0		$	244.5		$	271.0		$	261.2		$	2,398.2
Net derivative financial
liabilities (assets)
Forward foreign
currency contracts^(4)^	9.0
Outflow			$	1,708.0		$	1,448.0		$	186.4		$	55.0		$	16.3		$	1.0		$	1.3
Inflow				(1,699.0	)		(1,437.1	)		(189.4	)		(54.7	)		(15.5	)		(1.0	)		(1.3	)
Swap derivatives on total
long-term debt	(11.1	)		(12.7	)		(2.1	)		(2.0	)		(2.0	)		(2.0	)		(1.9	)		(2.7	)
Embedded foreign currency
derivatives^^	(0.1	)		(0.1	)		(0.1	)		—			—			—			—			—
Equity swap agreement	(10.4	)		(10.4	)		(10.4	)		—			—			—			—			—
	(12.6	)	$	(14.2	)	$	(1.7	)	$	(5.0	)	$	(1.7	)	$	(1.2	)	$	(1.9	)	$	(2.7	)
	3,269.5		$	4,562.6		$	1,129.2		$	266.0		$	242.8		$	269.8		$	259.3		$	2,395.5

All values are in US Dollars.

^(1)^ Includes trade accounts payable, accrued liabilities, interest payable and certain payroll-related liabilities.

^(2)^ Contractual cash flows include contractual interest and principal payments related to debt obligations and excludes transaction costs.

^(3)^ Includes non-current royalty obligations and other non-current liabilities.

^(4)^ Outflows and inflows are presented in CDN equivalent using the contractual forward foreign currency rate and include forward foreign currency contracts

Market risk

Market risk is defined as the Company’s exposure to a gain or a loss in the value of its 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. The Company is mainly exposed to foreign currency risk and interest rate risk.

Derivative instruments are utilized by the Company to manage market risk against the volatility in foreign exchange rates, interest rates and share-based payments in order to minimize their impact on the Company’s results and financial position. The Company’s policy is not to utilize any derivative financial instruments for trading or speculative purposes.

104 | CAE Financial Report 2020

Notes to the Consolidated Financial Statements

Foreign currency risk

Foreign currency risk is defined as the Company’s exposure to a gain or a loss in the value of its financial instruments as a result of fluctuations in foreign exchange rates. The Company is 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 the net investment from its foreign operations which have functional currencies other than the Canadian dollar (in particular the U.S. dollar (USD), Euro (€ or EUR) and British pound (GBP or £). In addition, these operations have exposures to foreign exchange rates primarily through cash and cash equivalents and other working capital accounts denominated in currencies other than their functional currencies.

The Company mitigates foreign currency risks by having its foreign operations transact in their functional currency for material procurement, sale contracts and financing activities.

The Company uses forward foreign currency contracts and foreign currency swap agreements to manage the Company’s exposure from transactions in foreign currencies. These transactions include forecasted transactions and firm commitments denominated in foreign currencies.

The forward foreign currency contracts outstanding are as follows:

(amounts in millions, except average rate)			2020			2019
	Notional	(1)	Average	Notional	(1)	Average
Currencies (sold/bought)	Amount		Rate	Amount		Rate
USD/CDN
Less than 1 year	833.7		0.74	717.4		0.77
Between 1 and 3 years	176.4		0.76	167.3		0.77
Between 3 and 5 years	13.0		0.77	17.4		0.79
More than 5 years	—		—	1.3		—
EUR/CDN
Less than 1 year	180.5		0.64	166.2		0.65
Between 1 and 3 years	12.3		0.60	71.3		0.61
GBP/CDN
Less than 1 year	71.5		0.59	49.8		0.58
Between 1 and 3 years	0.2		0.60	1.8		0.55
CDN/USD
Less than 1 year	289.7		1.36	282.9		1.33
Between 1 and 3 years	23.7		1.32	—		—
Other currencies
Less than 1 year	247.5		n.a.	231.6		n.a.
Between 1 and 3 years	0.8		n.a.	1.0		n.a.
Between 3 and 5 years	13.2		n.a.	—		n.a.
Total	1,862.5			1,708.0

All values are in US Dollars.

^(1)^ Exchange rates as at the end of the respective periods were used to translate amounts in foreign currencies.

During the year ended March 31, 2013, the Company entered into interest-only cross currency swap agreements related to its multi-tranche private placement debt issued in December 2012, to effectively fix the USD-denominated interest cash flows in CDN equivalent. The Company designated two USD to CDN interest-only currency swap agreements as cash flow hedges with outstanding notional amounts of US$127.0 million ($130.5 million) (2019 – US$127.0 million ($130.5 million)) and US$98.0 million ($100.7 million) (2019 – US$98.0 million ($100.7 million)) corresponding to the two tranches of the private placement until December 2024 and December 2027 respectively.

The Company’s 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

The following table presents the Company’s exposure to foreign currency risk of financial instruments and the pre-tax effects on net income and OCI as a result of a reasonably possible strengthening of 5% in the relevant foreign currency against the Canadian dollar as at March 31. This analysis assumes all other variables remain constant.

	USD						€							GBP
	Net income			OCI			Net income				OCI			Net income			OCI
2020		$	4.8	$	(19.6	)		$	(0.5	)	$	(3.1	)		$	0.2	$	(0.4	)
2019		3.0		(17.2		)		(0.4		)	(4.0		)		1.2		(0.2		)

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.

CAE Financial Report 2020 | 105

Notes to the Consolidated Financial Statements

Interest rate risk

Interest rate risk is defined as the Company’s exposure to a gain or a loss to the value of its financial instruments as a result of fluctuations in interest rates. The Company bears some interest rate fluctuation risk on its floating rate long-term debt and some fair value risk on its fixed interest long-term debt. The Company mainly manages interest rate risk by fixing project-specific floating rate debt in order to reduce cash flow variability. The Company has floating rate debts through its revolving credit facilities and other-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. As at March 31, 2020, 74% (2019 – 83%) of the long-term debt bears fixed interest rates.

The Company’s 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

During the year ended March 31, 2020, a 1% increase in interest rates would decrease the Company’s net income by $5.7 million (2019 – $4.1 million) and would have no impact on the Company’s OCI (2019 – nil) assuming all other variables remained constant. A 1% decrease in interest rates would have an opposite impact on net income.

Hedge of share-based payments expense

The Company has entered into equity swap agreements with major Canadian financial institutions to reduce its income exposure to fluctuations in its share price relating to the deferred share units (DSU) plans, restricted share units (RSU) plans and the performance share units (PSU) plan. Pursuant to the agreement, the Company receives 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 the Company’s share price impacting the cost of the DSU, RSU and PSU plans. As at March 31, 2020, the equity swap agreements covered 2,800,000 common shares (2019 – 2,250,000) of the Company.

Hedge of net investments in foreign operations

As at March 31, 2020, the Company has designated a portion of its unsecured senior notes and term loans totalling US$862.8 million (2019 – US$822.8 million) and a portion of its lease liabilities totaling US$48.1 million (2019 – US$64.0 million) as a hedge of its net investments in U.S. entities. Gains or losses on the translation of the designated portion of these USD long-term debts are recognized in OCI to offset any foreign exchange gains or losses on translation of the financial statements of those U.S. entities.

Letters of credit and guarantees

As at March 31, 2020, the Company had outstanding letters of credit and performance guarantees in the amount of $189.6 million (2019 – $205.0 million) issued in the normal course of business. These guarantees are issued under the revolving credit facilities and the Performance Securities Guarantee (PSG).

The advance payment guarantees are related to progress/milestone payments made by the Company’s customers and are reduced or eliminated upon delivery of the product. The contract performance guarantees are linked to the completion of the intended product or service rendered by the Company and to the customer’s requirements. The customer releases the Company from these guarantees at the signing of a certificate of completion. The letter of credit for the lease obligation provides credit support for the benefit of the owner participant on a sale and leaseback transaction and varies according to the payment schedule of the lease agreement.

	2020	2019
Advance payments	36.0	44.7
Contract performance	44.0	42.3
Lease obligations	37.1	39.9
Financial obligations	63.0	76.9
Other	9.5	1.2
	189.6	205.0

All values are in US Dollars.

Indemnifications

In certain instances when the Company sells businesses, it may retain certain liabilities for known exposures and provide indemnification to the buyer with respect to future claims for certain unknown liabilities that exist, or arise from events occurring, prior to the sale date, including liabilities for taxes, legal matters, environmental exposures, product liability, and other obligations. The terms of the indemnifications vary in duration, from one to two years for certain types of indemnities, terms for tax indemnifications that are generally aligned to the applicable statute of limitations for the jurisdiction in which the divestiture occurred, and terms for environmental liabilities that typically do not expire. The maximum potential future payments that the Company could be required to make under these indemnifications are either contractually limited to a specified amount or unlimited.

The Company believes that other than the liabilities already accrued, the maximum potential future payments that it could be required to make under these indemnifications are not determinable at this time, as any future payments would be dependent on the type and extent of the related claims, and all available defences, which cannot be estimated. However, historically, costs incurred to settle claims related to these indemnifications have not been material to the Company’s consolidated financial position, net income or cash flows.

106 | CAE Financial Report 2020

Notes to the Consolidated Financial Statements

NOTE 31 – RELATED PARTY RELATIONSHIPS

The following tables include principal investments which, in aggregate, significantly impact the results or assets of the Company:

Investments in subsidiaries consolidated in the Company’s financial statements:		% equity			% equity
		interest		interest
Name	Country of incorporation	2020		2019
AACE Vietnam Limited Liability Company	Vietnam	100.0	%	100.0	%
CAE Academia de Aviacion (Espana) S.L.	Spain	100.0	%	100.0	%
CAE (UK) plc	United Kingdom	100.0	%	100.0	%
CAE (US) Inc.	United States	100.0	%	100.0	%
CAE Aircrew Training Services plc	United Kingdom	76.5	%	76.5	%
CAE Australia Pty Ltd.	Australia	100.0	%	100.0	%
CAE Aviation Services Pte Ltd.	Singapore	100.0	%	100.0	%
CAE Aviation Training B.V.	Netherlands	100.0	%	100.0	%
CAE Aviation Training Peru S.A.	Peru	100.0	%	100.0	%
CAE Brunei Multi Purpose Training Centre Sdn Bhd	Brunei	60.0	%	60.0	%
CAE Center Amsterdam B.V.	Netherlands	100.0	%	100.0	%
CAE Center Brussels N.V.	Belgium	100.0	%	100.0	%
CAE Centre Copenhagen A/S	Denmark	100.0	%	100.0	%
CAE Centre Hong Kong Limited	Hong Kong	100.0	%	100.0	%
CAE Centre Oslo AS	Norway	100.0	%	100.0	%
CAE Centre Stockholm AB	Sweden	100.0	%	100.0	%
CAE CFT B.V.	Netherlands	100.0	%	100.0	%
CAE Civil Aviation Training Solutions Inc.	United States	100.0	%	100.0	%
CAE Colombia Flight Training S.A.S.	Colombia	100.0	%	100.0	%
CAE Crewing Services Limited	Ireland	100.0	%	100.0	%
CAE El Salvador Flight Training S.A. de C.V.	El Salvador	99.5	%	99.5	%
CAE Electronik GmbH	Germany	100.0	%	100.0	%
CAE Engineering Korlatolt Felelossegu Tarsasag	Hungary	100.0	%	100.0	%
CAE Entrenamiento de Vuelo Chile Limitada	Chile	100.0	%	100.0	%
CAE Flight & Simulator Services Sdn. Bhd.	Malaysia	100.0	%	100.0	%
CAE Flight Training (India) Private Limited	India	100.0	%	100.0	%
CAE Flight Training Center Mexico, S.A. de C.V.	Mexico	100.0	%	100.0	%
CAE GAH Aviation Technology Services Co Ltd	China	80.0	%	—	%
CAE Global Academy Évora, SA	Portugal	100.0	%	100.0	%
CAE Healthcare Canada Inc.	Canada	100.0	%	100.0	%
CAE Healthcare Inc.	United States	100.0	%	100.0	%
CAE India Private Limited	India	100.0	%	100.0	%
CAE Integrated Enterprise Solutions Australia Pty Ltd.	Australia	100.0	%	100.0	%
CAE International Holdings Limited	Canada	100.0	%	100.0	%
CAE Kuala Lumpur Sdn Bhd	Malaysia	100.0	%	100.0	%
CAE Luxembourg Acquisition S.à r.l.	Luxembourg	100.0	%	100.0	%
CAE Maritime Middle East L.L.C.	United Arab Emirates	49.0	%	49.0	%
CAE Middle East L.L.C.	United Arab Emirates	49.0	%	49.0	%
CAE Military Aviation Training Inc.	Canada	100.0	%	100.0	%
CAE New Zealand Pty Ltd.	New Zealand	100.0	%	100.0	%
CAE North East Training Inc.	United States	100.0	%	100.0	%
CAE Oslo - Aviation Academy AS	Norway	100.0	%	—	%
CAE Oxford Aviation Academy Phoenix Inc.	United States	100.0	%	100.0	%
CAE Services Italia S.r.l.	Italy	100.0	%	100.0	%
CAE Servicios Globales de Instrucción de Vuelo (España), S.L.	Spain	100.0	%	100.0	%
CAE Shanghai Company, Limited	China	100.0	%	100.0	%
CAE SimuFlite Inc.	United States	100.0	%	100.0	%
CAE Simulation Technologies Private Limited	India	100.0	%	100.0	%
CAE Simulator Services Inc.	Canada	100.0	%	100.0	%

CAE Financial Report 2020 | 107

Notes to the Consolidated Financial Statements

Investments in subsidiaries consolidated in the Company’s financial statements (continued):

				% equity
		interest		interest
Name	Country of incorporation	2020		2019
CAE Singapore (S.E.A.) Pte Ltd.	Singapore	100.0	%	100.0	%
CAE South America Flight Training do Brasil Ltda.	Brazil	100.0	%	100.0	%
CAE STS Limited	United Kingdom	100.0	%	100.0	%
CAE Training & Services Brussels NV	Belgium	100.0	%	100.0	%
CAE Training & Services UK Ltd.	United Kingdom	100.0	%	100.0	%
CAE Training Norway AS	Norway	100.0	%	100.0	%
CAE USA Inc.	United States	100.0	%	100.0	%
CAE USA Mission Solutions Inc.	United States	100.0	%	100.0	%
CAE Verwaltungsgesellschaft mbH	Germany	100.0	%	100.0	%
Flight Training Device (Mauritius) Ltd.	Mauritius	100.0	%	100.0	%
Logitude Oy	Finland	100.0	%	100.0	%
Oxford Aviation Academy (Oxford) Limited	United Kingdom	100.0	%	100.0	%
Parc Aviation Engineering Services Ltd.	Ireland	100.0	%	100.0	%
Parc Aviation Limited	Ireland	100.0	%	100.0	%
Parc Aviation UK Ltd	United Kingdom	100.0	%	100.0	%
Parc Interim Limited	Ireland	100.0	%	100.0	%
Pelesys Aviation Maintenance Training Inc.	Canada	100.0	%	29.3	%
Pelesys Learning Systems Inc.	Canada	100.0	%	45.0	%
Presagis Canada Inc.	Canada	100.0	%	100.0	%
Presagis Europe (S.A.)	France	100.0	%	100.0	%
Presagis USA Inc.	United States	100.0	%	100.0	%
Servicios de Instrucción de Vuelo, S.L.	Spain	80.0	%	80.0	%
SIM-Industries Brasil Administracao de Centros de Treinamento Ltda.	Brazil	100.0	%	100.0	%
SIV Ops Training, S.L.	Spain	80.0	%	80.0	%

Investments in joint ventures accounted for under the equity method:

				% equity
		interest		interest
Name	Country of incorporation	2020		2019
Aviation Training Northeast Asia B.V.	Netherlands	50.0	%	50.0	%
CAE Flight and Simulator Services Korea, Ltd.	Korea	50.0	%	50.0	%
CAE-LIDER Training do Brasil Ltda.	Brazil	50.0	%	50.0	%
CAE Melbourne Flight Training Pty Ltd.	Australia	50.0	%	50.0	%
CAE Middle East Pilot Services LLC	United Arab Emirates	49.0	%	49.0	%
CAE Simulation Training Private Limited	India	50.0	%	50.0	%
Embraer CAE Training Services LLC	United States	49.0	%	49.0	%
Emirates-CAE Flight Training LLC	United Arab Emirates	49.0	%	49.0	%
Flight Training Alliance GmbH	Germany	50.0	%	50.0	%
HATSOFF Helicopter Training Private Limited	India	50.0	%	50.0	%
Helicopter Training Media International GmbH	Germany	50.0	%	50.0	%
HFTS Helicopter Flight Training Services GmbH	Germany	25.0	%	25.0	%
JAL CAE Flight Training Co. Ltd.	Japan	50.0	%	50.0	%
National Flying Training Institute Private Limited	India	51.0	%	51.0	%
Pegasus Ucus Egitim Merkezi A.S.	Turkey	49.9	%	49.9	%
Philippine Academy for Aviation Training Inc.	Philippines	40.0	%	40.0	%
Rotorsim s.r.l.	Italy	50.0	%	50.0	%
Rotorsim USA LLC	United States	50.0	%	50.0	%
SIMCOM Holdings, Inc	United States	50.0	%	—	%
Singapore CAE Flight Training Pte Ltd.	Singapore	50.0	%	50.0	%

During the year ended March 31, 2020, the unrecognized share of losses of joint ventures for which the Company ceased to recognize when applying the equity method was $3.3 million (2019 – $5.7 million). As at March 31, 2020, the cumulative unrecognized share of losses for these entities was $16.0 million (2019 – $12.7 million) and the cumulative unrecognized share of comprehensive loss of joint ventures was $16.1 million (2019 – $13.4 million).

108 | CAE Financial Report 2020

Notes to the Consolidated Financial Statements

Partnership with Directional Aviation Capital

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

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

NOTE 32 – RELATED PARTY TRANSACTIONS

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

	2020	2019
Accounts receivable (Note 9)	51.2	33.9
Contract assets	38.5	13.4
Other non-current assets	25.6	18.7
Accounts payable and accrued liabilities (Note 16)	5.7	2.2
Contract liabilities	28.8	30.7
Other non-current liabilities	1.7	1.6

All values are in US Dollars.

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

	2020	2019
Revenue	166.0	65.5
Purchases	2.5	2.4
Other income	1.5	1.4

All values are in US Dollars.

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 are as follows:

	2020		2019
Salaries and other short-term employee benefits	6.5		6.4
Post-employment benefits – defined benefit plans	2.5		1.9
Share-based payments expense	(8.8	)	18.9
	0.2		27.2

All values are in US Dollars.

NOTE 33 – EVENTS AFTER THE REPORTING PERIOD

Impact of the COVID-19 pandemic

COVID-19 has created unprecedented uncertainty in the global economy, the global air transportation environment and air passenger travel and to CAE’s business. Several of its customers are facing significant challenges, with airlines and business jet operators having to ground a majority of their aircraft in response to travel bans, border restrictions, and lower demand for air travel. The Company continues to take measures to protect the health and safety of its employees, work with its customers to minimize potential disruptions and support its community in addressing the challenges posed by this global pandemic. This outbreak has had an important and immediate impact on all of the Company's businesses, especially in the Civil Aviation Training Solutions segment, as a result of an unprecedented shock to demand together with significant disruptions to its own operations, including facility closures, supply chain disruptions, program execution delays, slower procurement decisions and changes to its customers’ acquisition priorities.

For the Civil Aviation Training Solutions segment, the impacts of the COVID-19 pandemic resulted in the closure of certain training centre operations, lower utilization of its simulators in the network due to reduced demand from aviation customers and interruptions in the execution of its products backlog. For the Defence and Security segment, delays were experienced in the awarding of new contracts and in the execution and advancement of certain programs. For the Healthcare segment, customers were primarily focused on managing the acute operational demands of this healthcare crisis rather than focusing on their training needs, which resulted in less focus and budget for normal operations and training projects.

CAE Financial Report 2020 | 109

Notes to the Consolidated Financial Statements

To date, the Company has implemented several flexible measures to protect its financial position and preserve liquidity, including the reduction of capital expenditures and R&D investments in fiscal 2021, strict cost containment measures, salary freezes, salary reductions, reduced work weeks for 900 employees and 2,600 temporary layoffs, as well as a suspension of the Company’s common share dividends and share repurchase plan announced on April 6, 2020 in response to the COVID-19 pandemic. Additionally, the Company has worked with defence customers to secure more favorable terms for milestone payments as well as offer contract modifications to increase work scope and with suppliers for extended payment terms.

CEWS and other government programs

On April 20, 2020, the Company announced that it has recalled all remaining temporarily laid-off employees in Canada through the Canada Emergency Wage Subsidy (CEWS) program, impacting approximately 1,500 employees. The Company has also accessed and is working to access government support programs in countries in which the Company operates.

Cash and liquidity mitigation measures

On April 9, 2020, the Company concluded a new two-year $500.0 million senior unsecured revolving credit facility and on May 19, 2020, increased its receivable purchase program from US$300.0 million to US$400.0 million. These transactions provide access to additional liquidity and further strengthen the Company’s financial position.

Contract with Government of Canada for CAE Air1 ventilators

On April 10, 2020, the Company concluded an agreement with the Government of Canada to design and manufacture 10,000 CAE Air1 ventilators to provide life support to patients in intensive care to support the COVID-19 pandemic.

110 | CAE Financial Report 2020

Fiscal year ended March 31, 2020 �� CAE Financial Report Financial Report Fiscal year ended March 31, 2020 cae.com

Cae Inc 6-K/A, filed Jul 10, 2020

About this 6-K/A