40-F - CAE - Equibles

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 40-F

(Check One)

☐ REGISTRATION STATEMENT PURSUANT TO SECTION 12 OF THE SECURITIES EXCHANGE ACT OF 1934

☑ ANNUAL REPORT PURSUANT TO SECTION 13(A) OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For fiscal year ended March 31, 2022 Commission File number 1-31402

CAE INC.

(Exact name of Registrant as specified in its charter)

Not Applicable

(Translation of Registrant’s name into English (if applicable))

Canada<br><br>(Province or other jurisdiction of incorporation or organization)	3699<br><br>(Primary Standard Industrial Classification Code Number (if applicable))	Not Applicable<br><br>(I.R.S. Employer Identification Number (if applicable))

8585 Côte-de-Liesse, Saint-Laurent, Québec, H4T 1G6

514-341-6780

(Address and telephone number of Registrant’s principal executive office)

CT Corporation System, 111 Eighth Avenue, 13th Floor, New York, NY 10011 (212) 894-8700

(Name, address (including zip code) and telephone number (including area code) of

agent for service in the United States)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Title of Each Class Trading Name of Each Exchange

Symbol On Which Registered

Common Shares, CAE New York Stock Exchange including associated Common Share purchase rights pursuant to the Registrant’s

Shareholder Rights Plan, which purchase rights will trade together with the Common Shares

Securities registered or to be registered pursuant to Section 12(g) of the Act: Not Applicable

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: Not Applicable

For annual reports, indicate by check mark the information filed with this form:

☑ Annual Information Form ☑ Audited Annual Financial Statements

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 317,024,123 common shares

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☑ No ☐

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 12b-2 of the Exchange Act.

Emerging growth company ☐

If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐

† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☑

DISCLOSURE CONTROLS AND PROCEDURES

A. Evaluation of disclosure controls and procedures. Disclosure controls and procedures are designed to ensure that information required to be disclosed by CAE Inc. (“CAE” or the “Company”) in reports filed with securities regulatory agencies is recorded, processed, summarized and reported on a timely basis and is accumulated and communicated to CAE’s management, including our President and Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding disclosure.

Under the supervision of the President and Chief Executive Officer and Chief Financial Officer, management evaluated the effectiveness of CAE’s disclosure controls and procedures, as defined in Rule 13a-15(e) and 15d-15(e) under the U.S. Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of March 31, 2022, the end of the period covered by this Annual Report on Form 40-F. The President and Chief Executive Officer and the Chief Financial Officer concluded from the evaluation that the design and operation of CAE’s disclosure controls and procedures were effective as at March 31, 2022. Management’s evaluation of and conclusion on the effectiveness of the Company’s internal control over financial reporting did not include an evaluation of the internal control over financial reporting of L3Harris Technologies’ Military Training business (L3H MT), which was acquired on July 2, 2021 nor Sabre’s AirCentre airline

operations portfolio (AirCentre), which was acquired on February 28, 2022. The contribution of the acquired L3H MT operations to the Company’s consolidated financial statements for the year ended March 31, 2022 was 12% of consolidated revenue and 14% of consolidated operating income. Additionally, as at March 31, 2022, the total assets of the acquired L3H MT operations represented 18% of the Company’s consolidated total assets. The contribution of the acquired AirCentre operations to the Company’s consolidated financial statements for the year ended March 31, 2022 was less than 1% of consolidated revenue and operating income. Additionally, as at March 31, 2022, the total assets of the acquired AirCentre operations represented 6% of the Company’s consolidated total assets.

B. Management’s annual report on internal control over financial reporting. CAE’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act.

CAE’s internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of CAE’s assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that CAE’s receipts and expenditures are being made only in accordance with authorizations of its management and directors; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of CAE’s assets that could have a material effect on the financial statements.

Management evaluated the effectiveness of CAE’s internal controls over financial reporting as of March 31, 2022, based on the framework and criteria set forth in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and has concluded that CAE’s internal control over financial reporting is effective as of the end of the period covered by this Annual Report on Form 40-F.

C. Attestation report of the Independent Auditors. PricewaterhouseCoopers LLP (PCAOB ID 271), independent auditors who audited and reported on CAE’s financial statements included in this annual report, has issued an attestation report on the effectiveness of CAE’s internal control over financial reporting as of the end of the period covered by this Annual Report on Form 40-F. This attestation report is included in Exhibit 99.2 to this Annual Report on Form 40-F.

D. Changes in internal control over financial reporting. There were no changes to CAE’s internal control over financial reporting during the year ended March 31, 2022 that have materially affected, or are reasonably likely to materially affect, CAE’s internal control over financial reporting.

E. Limitations on the effectiveness of controls. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance with respect to the reliability of financial reporting and financial statement preparation. Accordingly, CAE’s management, including our President and Chief Executive Officer and our Chief Financial Officer, does not

expect that CAE’s internal control over financial reporting will prevent or detect all errors and all fraud.

CAE will continue to periodically review its disclosure controls and procedures and internal control over financial reporting and may make modifications from time to time as considered necessary or desirable.

NOTICES PURSUANT TO REGULATION BTR

The Company was not required by Rule 104 of Regulation BTR to send any notices to any of its directors or executive officers during the fiscal year ended March 31, 2022.

AUDIT COMMITTEE AND AUDIT COMMITTEE FINANCIAL EXPERT

CAE has a separately-designated standing Audit Committee established in accordance with section 3(a)(58)(A) of the Exchange Act. The Company’s Audit Committee is comprised of seven directors, all of whom, in the opinion of the CAE’s board of directors, are independent (as determined under Rule 10A-3 of the Exchange Act and the rules of the NYSE) and are financially literate. CAE’s Audit Committee is, as of the date hereof, comprised of the following directors: Marianne Harrison, Alan N. MacGibbon, Mary Lou Maher, François Olivier, Gen. David G. Perkins, USA (Ret.), Michael E. Roach and Patrick M. Shanahan.

CAE’s board of directors has determined that, as of the date hereof, it has three audit committee financial experts serving on its audit committee. The board of directors has determined that Ms. Marianne Harrison, Mr. Alan N. MacGibbon and Ms. Mary Lou Maher are audit committee financial experts within the meaning of General Instruction B(8)(b) of Form 40-F and are independent as that term is defined by the New York Stock Exchange’s corporate governance standards applicable to CAE.

The Securities and Exchange Commission (the “Commission”) has indicated that the designation of a person as an audit committee financial expert does not make such person an “expert” for any purpose, does not impose on such person any duties, obligations or liability that are greater than those imposed on such person as a member of the audit committee and the board of directors in the absence of such designation and does not affect the duties, obligations or liability of any other member of the audit committee or board of directors.

CODE OF ETHICS

CAE has a code of ethics entitled “Code of Business Conduct,” which applies to all directors, officers, and employees of CAE and CAE’s wholly-owned and controlled subsidiaries, including CAE’s principal executive officer, principal financial officer, principal accounting officer, employees seconded to joint venture companies, agents, representatives, contractors, suppliers and consultants. The Code of Business Conduct is available at CAE’s website http://www.cae.com/investors/governance/ and is available in print to any shareholder who requests it. Requests for copies of the Code of Business Conduct should be made by contacting CAE’s Investor Relations department, 8585 de la Côte-de-Liesse Saint-Laurent (Québec) Canada H4T

1G6, email: investor.relations@cae.com. Amendments to the Code of Business Conduct and waivers, if any, for executive officers will be disclosed on CAE’s website. Unless specifically referred to herein, the information on CAE’s website shall not be deemed to be incorporated by reference in this annual report.

PRINCIPAL ACCOUNTANT FEES AND SERVICES

The disclosure provided under section 11.3 “Approval Of Services” on page 33 of Exhibit 99.1, Annual Information Form, providing details on the fees billed by PricewaterhouseCoopers LLP, the Company’s principal accountant, to CAE in each of the years ended March 31, 2022 and March 31, 2021 for professional services rendered to CAE, is incorporated by reference herein.

AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES

The disclosure provided under section 11.3 “Approval of Services” on page 33 of Exhibit 99.1, Annual Information Form, is incorporated by reference herein.

OFF-BALANCE SHEET ARRANGEMENTS

The disclosure provided under section 7.2 “Off balance sheet arrangements” on page 39 of Exhibit 99.3, Management’s Discussion and Analysis, is incorporated by reference herein.

CONTRACTUAL OBLIGATIONS

The disclosure provided under section 6.4 “Contingencies and Commitments” on page 37 of Exhibit 99.3, Management’s Discussion and Analysis, is incorporated by reference herein.

SIGNIFICANT DIFFERENCES

There are significant ways in CAE’s corporate governance practices differ from those required of domestic companies under NYSE listing standards. Disclosure concerning these differences is available at CAE’s website http://www.cae.com/investors/governance/.

UNDERTAKING AND CONSENT TO

SERVICE OF PROCESS

A. Undertaking

CAE Inc. (the “Registrant”) undertakes to make available, in person or by telephone, representatives to respond to inquiries made by the Commission staff, and to furnish promptly, when requested to do so by the Commission staff, information relating to: the securities in relation to which the obligation to file an annual report on Form 40-F arises; or transactions in said securities.

B. Consent to Service of Process

The Registrant has previously filed with the Commission a Form F-X in connection with the Common Shares, including the associated Common Share purchase rights pursuant to the Registrant’s Shareholder Rights Plan, which purchase rights trade together with the Common Shares.

SIGNATURES

Pursuant to the requirements of the Exchange Act, the Registrant certifies that it meets all of the requirements for filing on Form 40-F and has duly caused this annual report to be signed on its behalf by the undersigned, thereto duly authorized.

Date: June 23, 2022 CAE INC.

By: /s/ Mark Hounsell

Name: Mark Hounsell

Title: General Counsel, Chief Compliance Officer and Corporate Secretary

EXHIBIT INDEX

Exhibit No.	Description
99.1	Annual Information Form for the fiscal year ended March 31, 202 2 dated June 1 5 , 202 2
---	---
99.2	Audited annual financial statements for the fiscal year ended March 31, 2022
99.3	Management’s Discussion and Analysis for the fiscal year ended March 31, 202 2
99.4	Consent of PricewaterhouseCoopers LLP
99.5	Certification of Marc Parent required by Rule 13a-14(a) or Rule 15d-14(a)
99.6	Certification of Sonya Branco required by Rule 13a-14(a) or Rule 15d-14(a)
99.7	Certification of Marc Parent pursuant to 18 U.S.C. Section 1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.8	Certification of Sonya Branco pursuant to 18 U.S.C. Section 1350, as enacted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.9	Notice and Management Proxy Circular dated June 15, 2022 (incorporated by reference to CAE’s Form 6-K (commission file no. 1-31402) furnished to the Commission on June 23, 2022
101	XBRL Documents

Document

2022 ANNUAL INFORMATION FORM

(Fiscal Year Ended March 31, 2022)

CORPORATE OFFICE

8585 Chemin Côte-de-Liesse

Saint-Laurent, Quebec

June 15, 2022 Canada H4T 1G6

TABLE OF CONTENTS

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       CORPORATE STRUCTURE OF CAE.. 3
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1.1 Name, Address and Incorporation. 3

1.2 Inter-Corporate Relationships. 3

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       OVERVIEW OF CAE.. 3
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2.1 Overview.. 3

2.2 Geographic and Segment Revenues and Locations. 4

2.3 Our Mission. 8

2.4 Our Vision. 8

       GENERAL DEVELOPMENT OF THE BUSINESS.. 8

3.1 Significant Developments of the Three Most Recent Fiscal Years. 8

       DESCRIPTION OF THE BUSINESS.. 11

4.1 Our Strategy. 11

4.2 Our operations. 12

4.3 Industry Overview and Trends. 13

4.4 Innovation and Research and Development (R&D) 14

4.5 Production and Services. 16

4.6 Specialized Skills and Knowledge. 17

4.7 Competition. 18

4.8 Components. 18

4.9 Intellectual Property. 18

4.10 Cycles. 19

4.11 Employees. 19

4.12 ESG and Corporate Social Responsibility. 20

4.13 Foreign Exchange. 22

4.14 Reorganizations. 22

       BUSINESS RISK AND UNCERTAINTY. 22

       DIVIDENDS AND DISTRIBUTIONS.. 22

6.1 Dividends. 22

6.2 Repurchase and Cancellation of Common Shares. 22

       DESCRIPTION OF CAPITAL STRUCTURE.. 23

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       MARKET FOR SECURITIES.. 23
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8.1 Trading Price and Volume. 23

8.2 Prior Sales. 24

       DIRECTORS AND EXECUTIVE OFFICERS.. 24

9.1 Name and Occupation. 25

9.2 Cease Trade Orders, Bankruptcies, Penalties or Sanctions. 31

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     TRANSFER AGENT AND REGISTRAR.. 31
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     AUDIT COMMITTEE.. 32
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11.1 Charter 32

11.2 Membership. 32

11.3 Approval of Services. 33

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     INTERESTS OF EXPERTS.. 34
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     ADDITIONAL INFORMATION.. 34
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GLOSSARY.. 35

SCHEDULE A – SUBSIDIARIES AND OTHER INVESTMENTS.. 38

SCHEDULE B – AUDIT COMMITTEE CHARTER.. 44

INFORMATION INCORPORATED BY REFERENCE

CAE’s Management’s Discussion and Analysis (MD&A) and our Consolidated Financial Statements for the year ended March 31, 2022, and the notes thereto (Consolidated Financial Statements) appear in the Annual Financial Report to Shareholders for the year ended March 31, 2022 (Annual Financial Report). 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 information contained in the MD&A and the Consolidated Financial Statements for the year ended March 31, 2022, and the notes thereto, available on SEDAR at www.sedar.com, is specifically incorporated by reference into this Annual Information Form (AIF). Any parts of the Annual Financial Report not specifically incorporated by reference do not form part of this AIF.

Unless otherwise noted, all dollar references in this AIF are expressed in Canadian dollars. In this AIF, the terms “we”, “us”, “our”, “Company” and “CAE” refer to CAE Inc. and where applicable, its subsidiaries. We also use the other defined terms throughout this AIF which are defined in the Glossary annexed to this AIF.

References to fiscal 2022 or FY2022 refer to the period from April 1, 2021 to March 31, 2022, references to fiscal 2021 or FY2021 refer to the period from April 1, 2020 to March 31, 2021 and references to fiscal 2020 or FY2020 refer to the period from April 1, 2019 to March 31, 2020.

CAUTION REGARDING FORWARD-LOOKING STATEMENTS

This AIF 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, available liquidities, expected sales, general economic outlook, prospects and trends of an industry, expected annual recurring cost savings from operational excellence programs, estimated addressable markets, statements relating to our acquisitions of L3Harris Technologies Military Training business (L3H MT) and Sabre’s AirCentre airline operations portfolio (AirCentre), CAE’s access to capital resources, the expected accretion in various financial metrics, expectations regarding anticipated cost savings and synergies, the strength, complementarity and compatibility of the L3H MT and AirCentre acquisitions with our existing business and teams, other anticipated benefits of the L3H MT and AirCentre acquisitions and their impact on our future growth, results of operations, performance, business, prospects and opportunities, our business outlook, objectives, development, plans, growth strategies and other strategic priorities, and our leadership position in our markets and other statements that are not historical facts. Forward-looking statements normally contain words like believe, expect, anticipate, plan, intend, continue, estimate, may, will, should, strategy, future and similar expressions. All such forward-looking statements are made pursuant to the "safe harbour" provisions of applicable Canadian securities laws and of the United States Private Securities Litigation Reform Act of 1995. By their nature, forward‑looking statements require us to make assumptions and are subject to inherent risks and uncertainties associated with our business which may cause actual results in future periods to differ materially from results indicated in forward-looking statements. While these statements are based on management’s expectations and assumptions regarding historical trends, current conditions and expected future developments, as well as other factors that we believe are reasonable and appropriate in the circumstances, readers are cautioned not to place undue reliance on these forward-looking statements as there is a risk that they may not be accurate.

(ESG) matters, environmental laws and regulations, liability risks that may not be covered by indemnity or insurance, warranty or other product-related claims, U.S. foreign ownership, control or influence mitigation measures, compliance with laws and regulations, and government audits and investigations, risks relating to information technology, cybersecurity and intellectual property, such as reliance on third-party providers for information technology systems and infrastructure management, data rights and governance, the protection of our intellectual property and brand, and third-party intellectual property, risks relating to talent and labour, such as talent management, key personnel and management, corporate culture, and labour relations, risks relating to mergers, acquisitions, joint ventures, strategic alliances or divestitures, such as the risk that we will not effectively manage our growth, integration risks, our continued reliance on certain parties and information, and acquisition and integration costs, risks relating to controls and accounting matters, such as the effectiveness of internal controls over financial reporting, estimates used in accounting, impairment risk, and pension plans funding, risks relating to indebtedness and liquidity, such as indebtedness to finance acquisitions and ability to meet debt service requirements, availability of capital, liquidity risk, and interest rate volatility, and risks relating to our common shares and ownership of our securities, such as sales of additional common shares, the market price and volatility of our common shares, returns to shareholders, our foreign private issuer status, and enforceability of civil liabilities against our directors and officers. The foregoing list is not exhaustive and other unknown or unpredictable factors could also have a material adverse effect on the performance or results of CAE. Additionally, differences could arise because of events announced or completed after the date of this AIF. You will find more information in section 9 “Business Risk and Uncertainty” of the MD&A of the financial report for the year ended March 31, 2022 which has been filed with the Canadian Securities Administrators on SEDAR (www.sedar.com) and is available on CAE's website (www.cae.com). The MD&A has also been filed with the U.S. Securities and Exchange Commission and is available on its website (www.sec.com). Any one or more of the factors described above and elsewhere in this AIF may be exacerbated by the continuing COVID-19 pandemic and may have a heightened negative impact on CAE’s business, results of operations and financial condition.

Accordingly, readers are cautioned that any of the disclosed risks could have a material adverse effect on CAE’s forward-looking statements. Readers are also cautioned that the risks described above and elsewhere in this AIF 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 AIF are expressly qualified by this cautionary statement.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this AIF. While we believe that information provides a reasonable basis for these statements, that information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements.

MATERIAL ASSUMPTIONS

The forward-looking statements set out in this AIF are based on certain assumptions including, without limitation: the anticipated negative impacts of the COVID-19 pandemic on our businesses, operating results, cash flows and/or financial condition, including the intended effect of mitigation measures implemented as a result of the COVID-19 pandemic and the timing and degree of easing of global COVID-19-related mobility restrictions, the prevailing market conditions, customer receptivity to CAE’s training and operational support solutions, the accuracy of our estimates of addressable markets and market opportunity, the realization of anticipated annual recurring cost savings and other intended benefits from recent restructuring initiatives and operational excellence programs, the ability to respond to anticipated inflationary pressures and our ability to pass along rising costs through increased prices, the actual impact to supply, production levels, and costs from global supply chain logistics challenges, the stability of foreign exchange rates, the ability to hedge exposures to fluctuations in interest rates and foreign exchange rates, the availability of borrowings to be drawn down under, and the utilization, of one or more of our senior credit agreements, our available liquidity from cash and cash equivalents, undrawn amounts on our revolving credit facilities, the balance available under our receivable purchase facility, our cash flows from operations and continued access to debt funding will be sufficient to meet financial requirements in the foreseeable future, access to expected capital resources within anticipated timeframes, no material financial, operational or competitive consequences from changes in regulations affecting our business, our ability to retain and attract new business, our ability to achieve synergies and maintain market position arising from

successful integration plans relating to the L3H MT and AirCentre acquisitions, our ability to otherwise complete the integration of the L3H MT and AirCentre businesses acquired within anticipated time periods and at expected cost levels, our ability to attract and retain key employees in connection with the L3H MT and AirCentre acquisitions, management's estimates and expectations in relation to future economic and business conditions and other factors in relation to the L3H MT and AirCentre acquisitions and resulting impact on growth and accretion in various financial metrics, the realization of the expected strategic, financial and other benefits of the L3H MT and AirCentre acquisitions in the timeframe anticipated, economic and political environments and industry conditions, the accuracy and completeness of public and other disclosure, including financial disclosure, by L3Harris Technologies and AirCentre, absence of significant undisclosed costs or liabilities associated with the L3H MT and AirCentre acquisitions. For additional information, including with respect to other assumptions underlying the forward-looking statements made in this AIF, refer to section 9 “Business Risk and Uncertainty” in CAE’s 2022 MD&A, which section is incorporated into the AIF by this reference. Given the impact of the changing circumstances surrounding the COVID-19 pandemic and the related response from CAE, governments, regulatory authorities, businesses and customers, there is inherently more uncertainty associated with CAE’s assumptions. Air travel is a major driver for CAE's business and management relies on analysis from the International Air Transport Association (IATA) to inform its assumptions about the rate and profile of recovery in its key civil aviation market. Accordingly, the assumptions outlined in this AIF and, consequently, the forward-looking statements based on such assumptions, may turn out to be inaccurate.

1.CORPORATE STRUCTURE OF CAE

1.1Name, Address and Incorporation

On March 17, 1947 CAE Inc. (Company or CAE) was incorporated as Canadian Aviation Electronics Ltd. under the laws of Canada by letters patent. In 1965, the name of the Company was changed to CAE Industries Ltd. and in 1993 the Company changed its name to CAE Inc.

CAE was continued in 1977 under the Canada Business Corporations Act (CBCA). In 1979, CAE’s articles were amended to change its authorized share capital to an unlimited number of common shares, and again in 1981 to authorize an unlimited number of preferred shares, issuable in series, with such rights, privileges, restrictions and conditions as the Directors of CAE may determine.

On June 9, 1995, CAE’s articles were amended to authorize the Directors to appoint additional Directors in accordance with the provisions of the CBCA. On April 1, 2001, the Company amalgamated with CAE Electronics Ltd., our wholly owned subsidiary.

CAE’s registered office is located at 8585 Côte-de-Liesse, Saint-Laurent, Quebec, Canada H4T 1G6, telephone: (514) 341-6780, fax: (514) 340-5530.

1.2Inter-Corporate Relationships

The direct and indirect subsidiaries and other investments or ownership interests of CAE are set out in Schedule A.

2.OVERVIEW OF CAE

2.1Overview

At CAE, we equip people in critical roles with the expertise and solutions to create a safer world. As a high-technology company, we digitalize the physical world, deploying simulation training and critical operations support solutions. Above all else, we empower pilots, airlines, defence and security forces, and healthcare practitioners to perform at their best every day and when the stakes are the highest. Around the globe, we’re everywhere customers need us to be with more than 13,000 employees, in more than 200 sites, and training locations in over 35 countries. CAE represents 75 years of industry firsts—the highest-fidelity flight and mission simulators, surgical manikins, and personalized training programs powered by artificial intelligence. We’re investing our time and resources into building the next generation of cutting-edge, digitally immersive training and critical operations solutions. Today and tomorrow, we’ll make sure our customers are ready for the moments that matter.

CAE’s common shares are listed on the Toronto and New York stock (TSX / NYSE) exchanges under the symbol CAE.

2.2Geographic and Segment Revenues and Locations

CAE’s consolidated revenue in fiscal 2022 was $3,4 billion and in fiscal 2021 was $3.0 billion, and is broken down as follows:

Revenue by Segment (%)			Geographic Distribution of Revenue (%)<br><br>(based on location of customers)
	FY2022	FY2021		FY2022	FY2021
Civil Aviation	48	47	United States	50	44
Defense and Security	48	41	Europe	14	19
Healthcare	4	12	Asia	14	13
	100	100	Canada	11	15
			United Kingdom	6	5
			Africa and Oceania	3	2
			Rest of Americas	2	2
				100	100

For information on CAE revenues by reportable segment, reference is made to sections 5.1, 5.2 and 5.3 of the Company’s 2022 MD&A, which sections are incorporated by reference into this AIF.

The following sets out, by business segment, the locations of CAE’s primary subsidiaries’ and divisions’ material sites as of the date of this AIF1:

Location	Civil Aviation	Defense and <br>Security	Healthcare
Canada
Cold Lake, Alberta		√
Comox, British Columbia		√
Greenwood, Nova Scotia		√
Halifax, Nova Scotia		√
Montreal, Québec	√	√	√
Moose Jaw, Saskatchewan		√
Ottawa, Ontario		√
Petawawa, Ontario		√
Saint John’s, Newfoundland	√
Toronto, Ontario	√
Trenton, Ontario		√
Vancouver, British Columbia	√

1 The list includes CAE’s main offices, operations, training centres, and primary military base locations where we provide training support services worldwide. It does not include sites with a limited number of employees or sites where we perform higher-level security programs.

Location	Civil Aviation	Defense and <br>Security	Healthcare
United States
Albuquerque, New Mexico		√
Altus, Oklahoma		√
Arlington, Texas		√
Binghamton, NY		√
Broken Arrow, Oklahoma		√
Chantilly, Virginia		√
Chicopee, Massachusetts		√
China Lake, California		√
Corpus Christi, Texas		√
Dallas/Fort Worth, Texas	√	√
Dothan, Alabama		√
Elmendorf, Alaska		√
Fairborn, Ohio		√
Fort Bragg, North Carolina		√
Fort Rucker, Alabama		√
Goldsboro, North Carolina		√
Grand Forks, North Dakota		√
Hancock, New York		√
Kirtland, New Mexico		√
Knob Noster, Missouri		√
Little Rock, Arkansas		√
MacDill, Florida		√
Mesa, Arizona	√
Minneapolis, Minnesota	√
Moody, Georgia		√
Morristown, New Jersey	√
Offutt, Nebraska		√
Oklahoma City, Oklahoma		√
Orlando, Florida	√	√
Pensacola, Florida		√
Phoenix, Arizona	√
Pueblo, Colorado		√
Sarasota, Florida			√
Seattle, Washington			√
Sherwood, Arkansas		√
Tampa, Florida		√
Tucson, Arizona		√
Tulsa, Oklahoma		√
Warner Robins, Georgia		√
Washington, D.C.		√
Whiting Field, Florida		√
Williamsburg, Virginia		√
Location	Civil Aviation	Defense and <br>Security	Healthcare
---	---	---	---
United Kingdom
Benson, United Kingdom		√
Burgess Hill, United Kingdom	√	√
Gatwick, United Kingdom	√
Helston, United Kingdom		√
Moray, United Kingdom		√
Oxford, United Kingdom	√
South America
Bogota, Colombia	√		√
Lima, Peru	√
Montevideo, Uruguay	√
Santiago, Chile	√
Sao Paulo, Brazil	√		√
Toluca, Mexico	√
Europe
Amsterdam, Netherlands	√
Antwerp, Belgium	√
Barcelona, Spain	√
Bordeaux, France	√
Bremen, Germany		√
Brussels, Belgium	√
Buchel, Germany		√
Buckeburg, Germany		√
Budapest, Hungary		√	√
Cognac, France		√
Copenhagen, Denmark	√
Den Helder, Netherlands		√
Dublin, Ireland	√
Eindhoven, Netherlands		√
Frankfurt, Germany	√
Geilenkirchen, Germany		√
Istanbul, Turkey	√
Jagel, Germany		√
Krakow, Poland	√
Madrid, Spain	√
Mainz, Germany			√
Manching, Germany		√
Milano, Italy	√
Nordholz, Germany		√
Oslo, Norway	√
Location	Civil Aviation	Defense and <br>Security	Healthcare
---	---	---	---
Europe
Prague, Czech Republic	√
Reykjavik, Iceland	√
Rome, Italy	√
Sesto Calende, Italy		√
Shannon, Ireland	√
Stockholm, Sweden	√
Stolberg, Germany		√
Veszprem, Hungary			√
Vienna, Austria	√
Warsaw, Poland		√
Asia and Middle East
Abu Dhabi, United Arab Emirates	√	√
Beijing, China	√		√
Bengaluru, India	√	√
Bandar Seri Begawan, Brunei		√	√
Bangkok, Thailand	√
Doha, Qatar	√
Dubai, United Arab Emirates	√	√
Gondia, India	√
Ho Chi Minh, Vietnam	√
Hong Kong, Hong Kong	√
Jakarta, Indonesia	√
Kuala Lumpur, Malaysia	√	√
Manila/Clark, Philippines	√
New Delhi, India	√
Seoul, South Korea	√
Shanghai, China	√
Singapore, Singapore	√	√
Tokyo, Japan	√
Africa and Oceania
Amberley, Australia		√
Auckland, New Zealand	√	√
Brisbane, Australia		√
Homebush, Australia (Sydney)		√
Johannesburg, South Africa	√
Melbourne, Australia	√	√
Nowra Hill, Australia		√
Oakey, Australia		√
Perth, Australia	√
Richmond, Australia		√

2.3Our Mission

To lead at the frontier of digital immersion with high-tech training and operational support solutions to make the world a safer place.

2.4Our Vision

To be the worldwide partner of choice in civil aviation, defence and security and healthcare by revolutionizing our customers’ training and critical operations with digitally immersive solutions to elevate safety, efficiency and readiness.

3.GENERAL DEVELOPMENT OF THE BUSINESS

3.1Significant Developments of the Three Most Recent Fiscal Years

Fiscal Year 2022 Highlights

Leadership Changes

–Effective May 3, 2021, Mary Lou Maher was appointed to the Board of Directors of CAE (Board).

–On August 30, 2021, Carter Copeland was appointed Senior Vice President, Global Strategy as a new leadership position and Andrew Arnovitz was appointed to the position of Senior Vice President, Investor Relations and Enterprise Risk Management.

–On October 28, 2021, Pascal Grenier was appointed to the position of Senior Vice President, Civil Flight Services & Global Manufacturing Operations.

–Effective March 30, 2022, Hélène V. Gagnon was appointed to the newly created position of Chief Sustainability Officer and Senior Vice President, Stakeholder Engagement.

–Following the end of fiscal 2022, on April 1, 2022, Patrick M. Shanahan joined the Board.

Business Combinations

–On April 1, 2021, we acquired the remaining 79% equity interest in the RB Group, a leading provider of fully integrated solutions that modernize the way airlines and business aircraft operators interact with their crew. This acquisition further supports CAE’s expansion into digital flight crew management in our goal to drive additional software-enabled Civil aviation services.

–On June 10, 2021, we acquired GlobalJet Services, a provider of aviation maintenance training that is recognized around the world for its services for both business and helicopter sectors. This acquisition expands our aircraft platform addressability in the maintenance training market through world-class, regulatory approved training programs.

–On July 2, 2021, we acquired L3Harris Technologies Military Training business (L3H MT), which includes Link Simulation & Training, Doss Aviation and AMI for cash consideration of $1,337.7 million Link Simulation & Training is one of the leading providers of military training solutions in the U.S., Doss Aviation is the provider of initial flight training to the United States Air Force, and AMI is a design and manufacturing facility for simulator hardware. The acquisition expands our position as a platform-agnostic training systems integrator by diversifying its training and simulation leadership in the air domain, complementing land and naval training solutions, and enhancing our training and simulation capabilities in space and cyber.

–On February 28, 2022, we acquired Sabre’s AirCentre airline operations portfolio (AirCentre), a suite of flight crew management and optimization solutions for cash consideration (net of cash acquired) of $498.9 million. The transaction provides us with the Sabre AirCentre product portfolio, related technology and intellectual property as well as the transfer of its highly talented workforce. The acquisition further expands our reach across our broad customer base beyond pilot

training and establishes ourselves as a technology leader in the growing market for industry-leading, digitally enabled flight and crew operations solutions.

Other

–In July 2021, concurrent with the completion of the L3H MT acquisition, 22,400,000 outstanding subscription receipts were converted into CAE common shares on a one-for-one basis.

–In July 2021, we entered into unsecured term loan agreements for an aggregate amount of US$300.0 million to partially finance the payment for the L3H MT acquisition.

–In July 2021, we were included in the S&P/TSX 60 index, which represents the 60 leading businesses in leading industries in Canada.

–In September 2021, we extended the maturity date of our US$850.0 million unsecured revolving credit facility until September 29, 2026.

–In September 2021, we concluded new financial participation agreements with the Government of Canada and the Government of Québec who will fund up to $190.0 million and $150.0 million, respectively, in the form of partially repayable loans for eligible spending related to R&D projects. The investments will fund Project Resilience, a plan to invest $1 billion in R&D innovations over the next 5 years.

Fiscal Year 2021 Highlights

Leadership Changes

–Effective May 1, 2020, General David G. Perkins, USA (Ret.) joined the Board of Directors of CAE.

–On May 5, 2020, Heidi R. Wood was appointed Executive Vice‐President, Business Development & Growth Initiatives as a new executive leadership position.

–On June 26, 2020, Todd Probert stepped down from his position of Group President, Defense and Security. Heidi R. Wood acted as interim leader.

–Effective August 24, 2020, Daniel Gelston was appointed Group President, Defense & Security, succeeding Heidi R. Wood who acted as interim Group President.

–On September 25, 2020, Rekha Ranganathan stepped down from her position as President of Healthcare.

–Effective September 28, 2020, Heidi R. Wood was appointed to the position of President, Healthcare and continued in her role as Executive Vice President, Business Development and Growth Initiatives.

Business Combinations

–On November 16, 2020, we acquired the shares of Flight Simulation Company B.V. (FSC) for cash consideration (net of cash acquired) of $105.2 million. FSC is a provider of training solutions as well as instructor provisioning in Europe for airline and cargo operators. The acquisition provides CAE with an expanded portfolio of customers and an established recurring training business which is complementary to CAE’s network.

–On December 22, 2020 we acquired the shares of Merlot Aero Limited (Merlot) for cash consideration (net of cash acquired) of $31.7 million and a long-term contingent cash consideration payable of up to US$10 million if certain criteria are met. Merlot is a leading civil aviation crew management and optimization software company based in Auckland, New Zealand. This acquisition expands our reach beyond pilot training and into the market for digitally enabled crew optimization services.

–On January 26, 2021, we acquired the shares of TRU Simulation + Training Canada Inc. (TRU Canada), a manufacturer of full-flight simulators and flight training devices, for cash consideration (net of cash acquired) of $49.6 million. This

acquisition expands CAE’s global installed base of commercial flight simulators and customers, and the addressable market for simulator lifecycle support services and also provides CAE with a backlog of simulator orders, full-flight simulators and access to a number of airline customers globally.

Other

–On April 6, 2020, we announced a series of flexible measures to protect our financial position in response to the COVID-19 pandemic and to 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 20, 2020, we announced that we had recalled all remaining temporarily laid-off employees in Canada through the Canada Emergency Wage Subsidy (CEWS) program.

–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 CAE Air1 ventilators to provide life support to patients in intensive care to support the COVID-19 pandemic.

–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.

–During the first quarter of fiscal 2021, we recorded non-operational costs of $108.2 million relating mainly to impairment charges on property, plant and equipment, intangible assets, and certain financial assets as a result of the continued negative impacts of the COVID-19 pandemic.

–On August 12, 2020, we announced that we would be taking additional measures to best serve the market by optimizing our global asset base and footprint, adapting our global workforce and adjusting our business to correspond with the expected lower level of demand for certain of our products and services. We announced that we expect to record restructuring expenses of approximately $170 million, which has been carried out throughout fiscal 2021 and will continue into fiscal 2022, and to realize annual recurring cost savings ramping up to approximately $65 to $70 million by the end of fiscal 2022. We started executing the restructuring program in the second quarter of fiscal 2021 and have incurred $124.0 million of restructuring, integration and acquisition costs as at March 31, 2021.

–On November 30, 2020, we completed a public equity offering and a concurrent private placement of 16,594,126 common shares at a price of $29.85 per share for aggregate gross proceeds of $495.3 million. The proceeds of the equity offering are for general corporate purposes, including to fund our recently completed acquisitions, disclosed above, and other future potential acquisitions and growth opportunities.

–On March 4, 2021, we completed a private placement of 22,400,000 subscription receipts at a price of $31.25 per receipt for aggregate gross proceeds of $700.0 million. As at March 31, 2021, the cash proceeds from the issuance of the subscription receipts from the private placement were held by an escrow agent, in a restricted account, pending the fulfilment or waiver of all outstanding conditions precedent to the closing of the L3H MT acquisition.

–On March 12, 2021, we completed a marketed public equity offering of 10,454,545 common shares at a price of $34.29 [US$27.50] per share for gross proceeds of $358.5 million. The proceeds of the equity offering are for financing a portion of the purchase price and related costs of the L3H MT acquisition.

–On March 29, 2021, we acquired a 50% equity interest in Leonardo CAE Advanced Jet Training Srl for cash consideration of $18.7 million. This joint venture will support the operations of the International Flight Training School (IFTS) in Italy, delivering a comprehensive lead-in to fighter training to the Italian Air Force and foreign customers. The joint venture will provide training support services, including full maintenance and operation of the M-346 aircraft and its ground-based training system, as well as operation of IFTS base facilities.

Fiscal Year 2020 Highlights

Leadership Changes

–Effective April 1, 2019, Rekha Ranganathan was appointed President, Healthcare, replacing Robert Amyot.

–On August 14, 2019, Marianne Harrison was appointed to the Board of Directors of CAE.

–On December 31, 2019, Gene Colabatistto, Group President, Defense and Security retired from CAE.

–Effective January 27, 2020, Todd Probert was appointed as Group President, Defense and Security.

Business Combinations

–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.

–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 expands our cadet training capabilities in Europe.

Other

–In February 2020, we announced the renewal of our NCIB to purchase, for cancellation, up to 5,321,474 of our issued and outstanding common shares over a one-year period ending February 24, 2021.

–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., 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.

4.DESCRIPTION OF THE BUSINESS

4.1Our Strategy

CAE's eight pillars of strength

We believe there are eight fundamental strengths that underpin our strategy and investment thesis:

–High degree of recurring business;

–Industry leader with a strong competitive moat;

–Headroom in large markets;

–Technology and industry thought leader;

–Potential for compound growth and superior returns over the long-term;

–Culture of innovation, empowerment, excellence and integrity;

–Excellent and diverse team with a unique social impact on safety;

–Solid financial position and highly cash generative business model.

More information about CAE’s strategy can be found in the section 3.4 entitled "Our strategy" of CAE’s 2022 MD&A, which section is incorporated by reference herein.

4.2Our operations

We provide digitally immersive training and operational support 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, public health agencies and OEMs.

Impact of the COVID-19 Pandemic

Two years since the outbreak of the novel coronavirus (SARS-CoV-2/COVID-19), the COVID-19 pandemic continues to affect our business and financial results due to the uncertainty it has caused in the global economy, impacts on the global air transportation environment, air passenger travel and CAE's business. Information about the impact of the COVID-19 pandemic on the operations of CAE in FY2022 can be found in the section entitled "IMPACT OF COVID-19 PANDEMIC" under section 3.5 of CAE’s 2022 MD&A, which section is incorporated by reference herein.

Russian Invasion of Ukraine

In light of Russia’s invasion of Ukraine, CAE announced that it suspended all services and training to Russian airlines, aircraft operators and healthcare distributors. Information about the impact of the Russian Invasion of Ukraine on the operations of CAE in FY2022 can be found in the section entitled "RUSSIAN INVASION OF UKRAINE" under section 3.5 of CAE’s 2022 MD&A, which section is incorporated by reference herein.

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, ab initio pilot training and crew sourcing services, as well as end to end digitally enabled crew management, training operations solutions and optimization software.

Information about CAE’s Civil Aviation segment, including market drivers and profitability drivers can be found in the section entitled " CIVIL AVIATION MARKET" under section 3.5 of CAE’s 2022 MD&A, which section is incorporated by reference herein.

Defense and Security Market

We are a platform agnostic, global training and simulation pure play focusing on ensuring mission readiness by integrating systems and solutions across all five domains for government organizations responsible for public safety.

Information about CAE’s Defense and Security segment, including market drivers and profitability drivers can be found in the section entitled “DEFENSE AND SECURITY MARKET" under section 3.5 of CAE’s 2022 MD&A, which section is incorporated by reference herein.

Healthcare Market

We offer healthcare students and clinical professionals integrated education and training solutions, including interventional and imaging simulations, curricula, audiovisual debriefing solutions, centre management platforms and patient simulators. Information about CAE’s Healthcare segment, including market drivers can be found in the section entitled "HEALTHCARE MARKET" under section 3.5 of CAE’s 2022 MD&A, which section is incorporated by reference herein.

4.3Industry Overview and Trends

The civil, defence and security and healthcare markets that CAE serves are driven by factors particular to each market. As all of the civil, defence and security and healthcare markets were impacted by the pandemic, we also believe certain trends will arise in greater force post-COVID-19, such as e-learning, remote work, the imperative on safety, and the digital transformation and virtualization of the physical world. CAE’s core capabilities align very well with these future needs and we will make use of the current period to further strengthen our technological expertise.

CAE believes the civil market is most affected by the world gross domestic product, which in turn drives air travel, measured in revenue passenger kilometers (RPK). A positive RPK generation needs to be satisfied by aircraft deliveries in addition to the existing fleet, and then corrected for attrition. As the civil market continues to recover from the impacts of COVID-19, the financial impact from the lower training utilization, production slowdown, reduced orders and deliveries and other disruptions is expected to continue to negatively impact the operations and financial performance of the upcoming fiscal year when compared to pre-pandemic levels. However, with the gradual increase of commercial and business traffic, the upcoming fiscal year should show improvements compared to fiscal 2022, but the resumption of our recovery remains highly dependent on the timing and rate at which travel restrictions and quarantines can eventually be safely lifted and normal activities resume. Other factors influencing Civil include the nature, size and composition of aircraft fleets, aircraft delivery schedules, pilot demographics, certification requirements, market demand for commercial and business air travel and helicopter transport; the latter two in particular are also influenced by corporate profits and activity in the oil and gas sector. Section 3.5 of CAE’s 2022 MD&A provides more detail regarding the civil market trends and outlook.

CAE believes the defence and security market is mostly influenced by a combination of defence spending and the nature of military activity. Demand for CAE’s Defense products and services are also influenced by the degree to which governments globally lean towards the outsourcing of functions to the private sector. As a result of the COVID-19 pandemic, we have experienced delays in the awarding of new contracts due to reduced bandwidth within government procurement agencies as well as government authorities following directives in their respective countries to shelter‑in‑place and eliminate travel. These delays are continuing to impact order intake2 and, although we were awarded several strategic contracts this fiscal year, we expect the already lengthy defence procurement processes to result in ongoing delays in the awarding of additional contracts until travel bans, access restrictions and quarantine measures can be safely removed and normal customer engagement activities resume, which will affect the rate at which orders can be converted to revenue for the upcoming fiscal year. As well, our Defense business is affected by the extent to which synthetic training and mission rehearsal solutions gain market acceptance as a complement or alternative to live training such as flying an actual aircraft. Section 3.5 of CAE’s 2022 MD&A provides more detail regarding the defence market trends and outlook.

CAE believes the healthcare market is influenced by an increased focus on healthcare systems as well as hospitals being increasingly compensated, accredited on patient safety, medical errors, and outcomes. We believe these developments in North America and quality focus in international markets bode well for the need for training solutions. We are also seeing that the regulatory environment is moving towards increased acceptance of simulation-based training approaches vs. the present system of on-the-job learning assisted by seasoned clinicians. As well, CAE believes the introduction of disruptive medical technology will have a bearing on the rate of adoption for simulation-based training solutions. New medical devices and advanced procedures, such as percutaneous heart valves, pacemakers, complex spinal procedures, cardiac assist devices and mechanical ventilation enhancements, require advanced training solutions, such as simulation, for internal product development and customer training. Section 3.5 of CAE’s 2022 MD&A provides more detail regarding the healthcare market trends and outlook.

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

•For the Civil Aviation 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 Defense 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. Defense 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.

4.4Innovation and Research and Development (R&D)

Overview

CAE represents 75 years of industry firsts—the highest-fidelity flight and mission simulators, surgical manikins, and personalized training programs powered by artificial intelligence. We’re investing our time and resources into building the next generation of cutting-edge, digitally immersive training and critical operations solutions.

As a high-technology company, we digitalize the physical world, deploying simulation training and critical operations support solutions to the civil aviation, defence and security and healthcare markets globally. Our full-spectrum solutions are helping deliver more immersive and effective products, services, and solutions and empower pilots, airlines, defence and security forces, and healthcare practitioners to perform at their best every day and when the stakes are the highest.

Technology leadership and a deep-rooted innovation culture are key fundamentals in the eight pillars of CAE’s growth strategy.

Sectors Technology Trends

The fundamental trends in the aerospace sector coming out of the COVID-19 pandemic remain, the digitalization of operations, the decarbonization of the industry, as well as advancements in future mobility platforms, all of which remained priorities for the industry. New entrants into the logistics and transportation sectors are developing platforms for urban air mobility and are introducing the use of drones for commercial applications, a trend that is contributing to accelerate the development cycles and that is supported by significant investments into this promising sector. Electrical propulsion, hydrogen powered aircraft and sustainable aviation fuels are also on the drafting table of several technology demonstrators and the aerospace sector strategic plans toward decarbonization of flight.

The near-peer threats underscored the importance of defence technology trends such as large operational and training intelligence data sets processed, integrated, and made available for use in real-time. Common operating views amongst the five domains (Air, Sea, Land, Space, and Cyber) are being integrated across large scale interoperable training systems. Digital twins in an immersive synthetic world are being assembled to bridge the boundaries between real-time operations, intelligence, training, and planning. Addressing the pilot shortage and pilot training cycles continue to be a priority given the challenges of the complex fifth-generation fighter platforms.

Technology trends in healthcare delivery worldwide continue to be impacted by the COVID-19 pandemic. Mainstream telehealth services are now commonplace in the healthcare industry, a trend which came out of pandemic isolation requirements. We are also witnessing increased use of big data technologies to help alleviate healthcare labour shortages and assist with the upskilling and re-skilling of the workforce.

Innovation and R&D Programs

CAE has a long history of conducting large-scale R&D Programs in the field of modeling and simulation for aerospace and healthcare training services and products. CAE consistently ranks among the top 20 Canadian companies for investments in R&D. We continue to focus significant resources in areas such as data analytics, artificial intelligence, and more – all aimed at digital immersion that will help our customers achieve their best performance.

CAE continues to invest in innovation following the FY2019 announcement that it would invest $1 billion over five years to stay at the forefront of the global training industry. CAE is constantly strengthening its products and services by leveraging digital technologies, ranging from big data to artificial intelligence, cloud-computing, cybersecurity and augmented/virtual reality. CAE is developing next-generation training technologies for aviation, defence & security, and healthcare, while making use of its extensive training network and data ecosystem. CAE maintains strong partnerships with the innovation ecosystem including OEMs, Small/Medium Enterprises, and collaboration partners, such as Universities, Colleges and Research centers that continue to contribute to CAE’s success.

CAE continues to work on an innovation-intensive program launched in 2020 to accelerate the development of leading simulation products and technologies in our Healthcare portfolio. We are developing new patient simulators and new modules for

interventional simulators and enhancing the breadth of pathologies and medical conditions our products support to meet the needs of our customers. We are also injecting new technologies in our existing platforms to ensure that healthcare professionals have access to world-class simulation-based training.

In March 2021, CAE has also launched a collaborative R&D project for the development of the “Aircraft for the digital and sustainable mobility of tomorrow.” As part of this initiative, CAE and its partners will be accelerating the technology development, the digital transformation, and knowledge for the advancement of future aircraft technologies, such as electric aircraft, hybrid propulsion, as well as advancing the development of associated infrastructures and services.

In July 2021, CAE launched a major five-year R&D investment program that will reinforce CAE’s position as a global technology leader, create high-value jobs and collaborations and contribute to a greener, safer and more inclusive world. We are investing $1 billion in a transformation project to develop the technologies of tomorrow, including digitally immersive solutions using data ecosystems and artificial intelligence in civil aviation, defence and security, and healthcare. As part of this project, CAE is developing dedicated end-to-end technology, operational support and training solutions tailored for Advanced Air Mobility (AAM), as well as green light aircraft technologies. We are also partnering with Governments of Canada and Quebec to open up these new markets for CAE, Canada and Quebec. CAE will collaborate and co-develop technology solutions with small and medium companies and work with post-secondary institutions, research centres and STEM institutions to create Work Integrated Learning opportunities for students as well as scholarship positions.

Selected Innovation Highlights Across CAE’s Business Segments

Artificial intelligence and big data for and from training services delivered by CAE remain high priority strategic transformation themes in the CAE R&D technology roadmap. The development of artificial intelligence algorithms from the data generated during the pilot’s training journey is at the center of future aviation training marked by a paradigm shift towards data driven evidence and insights. The CAE Rise™ family of software products have been augmented with new AI algorithms providing deeper training assessment insights to flight instructors and training managers. CAE is shaping the future of training through innovations introduced with CAE Rise™ allowing to improve training quality, objectivity and efficiency through the integration of untapped data-driven insights into the training journey of aviation professionals.

CAE’s digital transformation, which started in FY2019, has continued at an accelerated pace with a clear strategic focus to achieve its major digital transformation objectives across CAE’s businesses. CAE AirsideTM, a new digital platform and online community for pilots which was developed and introduced during the COVID-19 pandemic continues to grow and achieve its design objectives of providing career and training tools to support pilots throughout their professional career.

Strong demand from the emerging eVTOL (Electric Vertical Takeoff and Landing) market for simulation technologies has materialized in new products and services in CAE’s R&D roadmap. CAE’s legacy of augmented engineering environment products and services used on prototype aircraft development programs like the A220 is landing new service offerings to the eVTOL emerging from OEMs. CAE technology solutions coupled with its impressive aerospace engineering expertise enables eVTOL OEMs to accelerate their development lifecycle, minimize their risks, and leverage CAE’s world leading and proven pilot training solutions.

CAE’s synthetic immersive world technologies continue to be part of our leading position in this domain in the defence and security global market. Along the changing fundamentals described above, CAE is transforming its synthetic immersive world solutions with cloud-based gaming engines software stack solutions. The cloud infrastructure technologies and the mainstream game engine software stack solutions have pushed the boundaries of the scale and size of synthetic immersive worlds to an unpreceded level. This technology pivot is significantly increasing the level and ease of interoperability between training sites and devices in operation.

CAE has continued the development of the new industry leading 3D MR e-series visual display solution. The MR e-series is a turnkey complete visual system designed specifically for military fighter and fast-jet training. It is a 360-degree back-projection dome display equipped with laser projectors and the latest generation of CAE Medallion image generators with 3-dimensional rendering capabilities.

In FY2022, CAE continued the development of the CAE TRAX Academy solution, which is an integrated and advanced training continuum designed to deliver faster and more efficient throughput for military student pilot training which leverages the CAE Sprint Virtual Reality (VR) trainer powered by state-of-the-art mixed reality technologies. This training system is designed to enable self-paced learning in an immersive, high-fidelity virtual environment. The fundamentals of this training system continue to be leveraged in the emerging eVTOL training market yielding synergies and efficiencies in development and engineering activities.

Innovation Across CAE’s Operations

In FY2022, CAE continued major transformation projects to strengthen CAE’s position as a high-tech company and introduce processes for our Company to emerge out of the COVID-19 pandemic stronger than before as we prepare for the future. We are pursuing several projects under a transversal umbrella initiative with the goal of improving our operating model, optimizing our real estate services, further digitalizing our processes, and ultimately generating significant and recurring economies of scale for CAE. CAE has introduced leading technologies into our processes and operations which includes the digitalization and optimization of our manufacturing, sourcing activities, and related IT infrastructure. CAE and its project partners are collaborating to develop capabilities to reduce production cycle times, minimize inventory, and improve product time-to-market.

4.5Production and Services

CAE provides comprehensive solutions involving products and services to equip people in critical roles with the expertise and solutions to create a safer world. As a high-technology company, we digitalize the physical world, deploying simulation training and critical operations support solutions.

Production

CAE’s manufacturing and assembly facilities are located in Montreal, Canada; Arlington, Tampa, Tucson and Sarasota in the U.S.; and Stolberg, Germany.

Most of our manufacturing and integration activities for Civil and Defense are conducted at CAE’s facilities in Montreal, with some integration and update related work also being conducted at the Tampa, Arlington, Tucson and Stolberg sites. The Arlington, Tampa and Tucson facilities conduct military systems integration and testing activities for simulation equipment destined for U.S. military-related contracts. Following the L3H MT acquisition, the operation teams focused on the integration of the Arlington and Tucson sites delivering on the committed synergies. Specific project teams were put in place to identify synergy opportunities, best practices sharing and review manufacturing capabilities.

The primary manufacturing and integration activities for Healthcare products are conducted at CAE’s facilities in Sarasota.

Investments such as manufacturing automation equipment, supply chain logistics tools and artificial intelligence continue to improve CAE’s manufacturing efficiency and agility as well as to augmenting the accuracy of supply chain decision making.

Services

CAE’s training and service facilities are based around the world. While our head office is located in Montreal, Canada, CAE has over 200 sites and training locations in over 35 countries.

These locations include type rating training organizations offering pilot, maintenance and cabin crew training to business and commercial aircraft operators; ab-initio training centres which provide commercial pilot license training to aspiring pilots; Defense training centres offering academic, simulator and live flying training to produce qualified military aircrews; and several locations from which CAE offers technical support services to aviation training centres.

CAE provides a range of technical support services to Civil and Defense simulator operators, including parts replacement and repairs, installations, relocations, upgrades and technical training. Customers use CAE’s technical services to answer questions, troubleshoot and receive advice. This extends to service visits by CAE’s engineers to assist in customer maintenance and repair activities. Defense and Civil upgrade services are not restricted to CAE products as CAE can upgrade most other manufacturers’ simulators. CAE services are offered either in conjunction with a sale of a simulator, through maintenance contracts or individual orders. CAE believes that our service business provides opportunities to influence the upgrade of installed full flight simulators while providing valuable insights into customer training needs.

With the acquisitions of Merlot, RB Group and AirCentre completed in FY2021 and FY2022, CAE now also provides robust end-to-end flight operations and optimization software solutions, helping airlines and business aviation operators make optimal data-driven decisions across their entire flight operations.

In Defense, CAE provides a range of training support services such as contractor logistics support, maintenance services, classroom instruction and simulator training at over 145 sites around the world.

CAE also provides analytical and engineering services that leverage modeling and simulation and other advanced technologies to develop innovative solutions to our clients’ most complex challenges. CAE offers clients a range of services and subject matter expertise, including human factors and human system integration, capability-based planning, advanced synthetic environments, cybersecurity, system and software engineering for Command, Control, Communications, Computers, Intelligence, Surveillance and Reconnaissance and electronic warfare systems, training systems and services, integrated information environments, and in-service support for fleet operations and maintenance.

4.6Specialized Skills and Knowledge

CAE employs predominantly graduates in engineering and software development, as well as pilots, instructors, and other flight training experts. As an industry leader, CAE is able to train its staff in the technology and software required for simulation software and equipment. Flight trainers are typically recruited from the ranks of former airline or military pilots. Recognizing that engineering talent is critical to CAE’s innovation capability, CAE has an engineering career framework to develop the talent pipeline within the CAE engineering community.

Flight instructors are CAE’s second-largest employee group after engineers and the Company’s face in front of customers. They are also key to ensuring we maintain our position as the industry’s gold standard in training. We have implemented a number of initiatives to improve our instructor capabilities under our new training organization. The Global Leader in Training strategy enhances our value proposition in aviation training and engages instructors in achieving our vision. Our strategy was developed to recruit, develop and retain the best instructors and includes identifying the attributes of best-in-class instructors and setting the industry standard for instructor performance management to enhance our competitive edge. It will serve to elevate the profile of our instructors both internally and externally. This initiative will also help us build the right HR infrastructure around instructors and give them the tools they need to excel.

To optimize training leadership, CAE is investing in certain key areas:

–Enhancing instructor performance - as a result, CAE is strengthening the instructor support infrastructure, including new functions, processes and technical support tools;

–Enhancing course offering by investing in courseware development and training delivery support tools;

–Training service innovation - CAE is continuing to invest in R&D to innovate the training service offering and is leveraging on its engineering organization and capabilities to support strategic training solutions;

–Upskilling and reskilling of its workforce especially as emerging and disruptive technologies are adopted and implemented in CAE’s processes, products, and services; and

Creating relevant and meaningful work-integrated learning opportunities in support of future generations and CAE’s future talent and workforce

4.7Competition

4.8Components

CAE deals with a variety of goods and services suppliers across our business segments. 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. The COVID-19 pandemic and widening geopolitical fractures intensified global supply chain imbalances. Furthermore, conservative and protective behaviours from businesses and governments, such as increasing demand and hoarding, as well as increased competition for critical electrical components and products and commodities, commodity-based products have also intensified. In this context, supply chain disruptions may hinder our ability to execute projects in a timely manner, support aftermarket needs, finish projects or leave us with unsold materials or products, all of which could result in penalties or impacts on contract profitability and could have a material adverse effect on our business, financial condition and results of operations.

Global supply chain disruptions of electronics, computer chip and specialized components have been managed strategically with a focused diligence. This continuous governance process with new logistics parameters on inventory and product consolidation has protected CAE delivery skyline through the global disruptions and is enabling us to secure future delivery schedules.

Special sourcing strategies to protect the supply chain from the disruption from the COVID-19 pandemic continue to be implemented (protected inventory, alternate 2d source, supplier audit on COVID mitigation plans).

Please refer to Section 9.1 of CAE’s 2022 MD&A for more detail regarding supply chain disruptions, OEM leverage and encroachment, Subcontractors and Third-party intellectual property as risk factors for CAE.

4.9Intellectual Property

CAE relies, in part, on trade secrets, copyrights and contractual restrictions, such as confidentiality agreements, patents and licences to establish and protect its proprietary rights. CAE owns a comprehensive patent portfolio and continues to file new patent applications. The patent portfolio has grown from 192 active patents and 156 pending applications to 255 active patents and 124 pending applications reflecting the continuous high-tech innovation at the core of CAE.

CAE enters into agreements containing non-disclosure and confidentiality clauses with third parties and has similar provisions in place with our employees to protect our proprietary information and trade secrets. CAE also has internal policies concerning both ethics and intellectual property which guide our employees in their dealings with CAE’s intellectual property and that of third parties.

CAE believes that certain intellectual property is adequately protected by either maintaining it as a trade secret or selectively disclosing enough of it to forestall anyone else from subsequently claiming it as their own original innovation.

Given CAE’s history of success in the field of aviation simulation and training, CAE believes that the CAE brand and some of our trademarked products and services have significant value in the markets we address. As the training partner of choice to enhance safety, efficiency and readiness, our brand is a significant asset.

Please refer to Section 9.5 of CAE’s 2022 MD&A for more detail regarding risks relating to information technology, cybersecurity and intellectual property.

4.10Cycles

In Defense, order levels may vary significantly from quarter to quarter because of the irregular timing of government orders and procurement processes.

The Civil segment’s equipment sales to airlines are affected by the cycles of expansion and contraction of the entire commercial airline industry, as well as the availability of credit and general economic conditions. Demand for training services is to a lesser extent, also affected by the longer wave cycles of the commercial airline industry. The Civil segment also experiences a significant degree of seasonality; in times of peak travel (holiday periods, etc.) airline and business jet pilots are often too busy flying aircraft to attend training sessions.

Healthcare is subject to the irregular timing of orders by hospitals, universities, government entities and defence forces.

In addition to all the above, business risks relating to our business and business strategy, our markets and the international scope of our business and our industries and macroeconomic conditions, as detailed in Section 9 of CAE’s 2022 MD&A, each add their own elements of uncertainty pertaining to the Company’s business cycles.

4.11Employees

To support our growth strategies, objectives and normal business operations, CAE needs to maintain a sufficient, qualified and engaged workforce.

CAE employs over 13,000 employees; of these, approximately 2,300 are unionized and covered by 54 different collective agreements as of March 31, 2022. These differing collective bargaining agreements have various expiration dates. The Company maintains constructive relationships with its unions and strives to achieve mutually beneficial relationships while maintaining cost competitiveness.

CAE strives to have practices in place that drive employee development and engagement through employee communications, processes such as its Annual Talent and Leadership Review Process, a focus on Diversity, Equity and Inclusion and the assessment and related development plans for current and future leaders and an overall commitment to employees’ physical and mental well-being. The Company invests in its employees through technical and leadership training, as well as project assignments and developmental career moves focused on supporting the employees overall work experience and career growth.

Our financial position, global brand reputation and ability to achieve strategic objectives may be negatively affected by a failure to manage attrition, to retain and integrate key personnel, to maintain an appropriately sized workforce to meet contract needs and to transition employees from completed projects to new projects or between internal business groups.

Please refer to Section 9.6 of CAE’s 2022 MD&A for more detail regarding risks relating to talent and labour as risk factors for CAE.

4.12ESG and Corporate Social Responsibility

At CAE, corporate social responsibility (CSR) is integral to who we are as a company and how we make a difference in the world. CSR is embedded in our culture and drives our decisions and actions. Our priority is to ensure the safety and well-being of our employees and customers, as well as having a positive impact on the communities where we are located. The Board has responsibility for reviewing and approving the Annual Activity and CSR Report, including the underlying sustainability roadmap, objectives and performance data.

CAE’s noble purpose, making the world safer, has never been more relevant than over the last year with the lingering consequences of the pandemic and the Ukraine crisis. It captures how CAE makes a difference in the world and drives its decisions and actions. Making civil aviation safer, supporting peace and, democracy with allied forces preparedness, and making healthcare safer are all rooted in the principles of CSR.

Over fiscal year 2022, many of our initiatives had a significant social impact. Amongst those initiatives:

–This year marks the end of our five-year initial CSR roadmap. Since 2018, we made strong progress on our CSR pillars: People and safety, Ethics and Integrity, Innovation and Customer Experience and Community and Environment and progressed against our targets. In FY2022, we conducted an Environment Social Governance (ESG)-materiality exercise with more than 3,600 internal and external stakeholders. They prioritized 17 material ESG topics in terms of importance to CAE’s strategy. The survey also included four likert-scale questions about CAE’s mission, products and services, post-COVID response and social impact. Equipped with this new matrix, we will revisit our CSR pillars and develop a multi-year ESG strategy roadmap with precise targets to measure and report progress of our initiatives.

–To accelerate even further the deployment of our ESG strategy roadmap and as Environment, Social and Governance factors are increasingly important in today’s market, this year we appointed a Chief Sustainability Officer. She will lead CAE’s ESG strategy and agenda, sustainability, environment and social impact including diversity, equity and inclusion. Three dedicated teams now directly report to her: the newly created ESG strategy and reporting group, Global Environment and Climate Change and the team who develops and executes government funding programs and manages the collaboration with Higher Education institutions. In addition, as our focus on DE&I remains fundamental to CAE’s values, we also appointed a Chief Diversity, Equity and Inclusion Officer reporting directly to our Senior Vice-President Global Human Resources and indirectly to the Chief Sustainability Officer. This new organization demonstrates our commitment to bring ESG performance to the next level and to strengthen its connexion with CAE’s corporate strategy. To further align our business and our leaders around our ESG efforts, we have deployed individual ESG criteria in the compensation schemes of the members of the Executive Management Committee in addition to one collective ESG target on Diversity, Equity and Inclusion.

–As the effects of the COVID-19 pandemic continued to linger over the last year, we led the Industry for Vaccination coalition that led the Quebec government to accept private sector support to undertake COVID-19 vaccination. CAE’s own COVID-19 Vaccination Centre, located at CAE’s headquarters in the St-Laurent borough, was the first workplace hub of its kind to start operations in the Province of Quebec on April 26, 2021. It administered close to 33,000 vaccine doses in the four months it operated.

–When the war in Ukraine broke out, CAE took immediate action. We suspended our services and training to Russian airlines and operators as an expression of support to the Ukrainian people. In February, we launched our fundraising campaign for the Red Cross to support its humanitarian aid operations for refugees fleeing Ukraine. The whole CAE community including its employees raised more than $258,000 for humanitarian relief operations in Ukraine. Furthermore, in March 2022, we joined 50 Quebec companies to sponsor up to 1,000 Ukrainian affected by the war to come to Canada with their families, offering them job opportunities and support as part of the Canada-Ukraine authorization initiative.

–This year, CAE developed and issued its formal Code of Conduct to its suppliers and contractors worldwide to reinforce the ESG impact across its value chain. As an industry leader with a strong focus on ESG, CAE mobilizes its suppliers to take action to manage their own impact on society and environment. Our new Supplier Code of Conduct addresses a large range of ESG matters such as ethical and business compliance standards, respect of human rights, environment and risk management. It is now embedded in our terms and conditions with our suppliers and contractors.

–As Climate Change resilience continues to be one of our top priorities, we have maintained our carbon neutrality since 2020. In FY2022, we have made a significant progress with all CAE sites 100% sourced with renewable energy or covered by Renewable Energy Certificates (RECs). We continue to make significant progress on decarbonization with the below priorities

◦The reduction of our buildings’ GHG emissions

◦The development of the electric aircraft.

◦Product upgrades for greener simulators

The Climate Change Committee (CCC) has also completed the Climate Change risk assessment exercise on a sample of six strategic sites that are representative of CAE’s range of activities and geographical footprint. The results will be reported under the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD).

We continue to support our customers in mitigating their own carbon footprint:

◦It is estimated that more than five million tons of CO2e emissions were avoided (associated with the combustion of aviation fuel) on an annual basis through the substitution of real flight training with full-flight simulators in CAE Civil training centers.

◦In March 2022, we completed the acquisition of AirCentre: we will now offer our customers a software that will enable them to optimize their flight plans to reduce their carbon footprint associated to the combustion of aviation fuel. One year from now, we will be able to quantify the avoided emissions for our customers based on our software.

CAE’s commitment to the United Nations Global Compact and to the United Nations Women Empowerment Principles, 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;

–Supplier Code of Conduct;

–Conflicts Mineral Policy;

–Charitable Donations and Sponsorships Policy;

–Diversity and Inclusion Policy;

–Environment, Health and Safety Policy;

–Gifts, Entertainment and Business Courtesies Policy;

–Human Rights Policy;

–Lobbying and Political Contributions Policy; and

–Internal Reporting/Whistleblowing Policy.

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 also reports to the Carbon Disclosure Project (CDP) and we provide Taskforce on Climate-related Financial Disclosures reporting in our Annual Activity and CSR report. As the regulators further advance potential disclosure requirements, we are preparing for climate change risks financial reporting. In FY2022, we reported to the Sustainability Accounting Standards Board (SASB standards) for the Aerospace & Defence and Professional & Commercial Services industries for the second time. CAE abides

by the principles of the United Nations Global Compact. We continue to report on the United Nations Sustainable Development Goals (SDGs), on the five goals to which our corporate strategy and business model are most aligned. We intend to continue the process of integrating the SDGs and to report on our progress accordingly.

Information about CAE’s CSR pillars and initiatives can be found in our Annual activity and corporate social responsibility report available online at https://www.cae.com/social-responsibility/.

4.13Foreign Exchange

Our operations are global with approximately 90% of our revenue generated from worldwide exports and international activities generally denominated in foreign currencies, mainly the U.S. dollar, the Euro and the British pound. Our revenue is generated approximately 50% in the U.S., and the balance in the rest of the world. Sections 7.3 and 9.2 of CAE’s 2022 MD&A contain more information regarding foreign currency as a risk factor for CAE.

4.14Reorganizations

In fiscal 2021, we announced that we would be taking additional measures to best serve the market by optimizing our global asset base and footprint and adjusting our business to correspond with the expected level of demand and the structural efficiencies that will be enduring. As a result of these measures, $117.1 million of restructuring expenses were incurred and reported during fiscal 2021 and $54.7 million were incurred in fiscal 2022. These expenses consist mainly of real estate costs, asset relocations and other direct costs related to the optimization of our footprint and employee termination benefits, which have been carried out throughout fiscal 2021 and fiscal 2022.

Please refer to Section 4.3 of CAE’s 2022 MD&A for more information on Restructuring, integration and acquisition costs.

5. BUSINESS RISK AND UNCERTAINTY

For a description of risk factors associated with CAE and its business, refer to section 9 “Business Risk and Uncertainty” in CAE’s 2022 MD&A, which section is incorporated into the AIF by this reference.

6.DIVIDENDS AND DISTRIBUTIONS

6.1Dividends

Our 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. CAE 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. CAE did not declare nor pay any dividend in fiscal 2021 and fiscal 2022.

CAE’s Dividend Reinvestment Plan provides that Canadian and U.K. resident shareholders can elect to receive Common Share dividends in lieu of cash dividends. During fiscal 2020, 2021 and 2022, CAE issued 109,076, 0, and 0 common shares, respectively, as stock dividends.

6.2Repurchase and Cancellation of Common Shares

As part of our COVID-19 pandemic mitigation measures in April 2020, share repurchases under the Company’s NCIB program were suspended. The NCIB has since expired and has not been renewed.

As such, in fiscal 2021 and fiscal 2022, no common shares were repurchased and cancelled under the NCIB. In fiscal 2020, 1,493,331 common shares were repurchased at a weighted average price of $33.22 per share and cancelled, for a total consideration of $49.6 million.

7.DESCRIPTION OF CAPITAL STRUCTURE

Our authorized capital consists of an unlimited number of common shares without par value and an unlimited number of preferred shares without par value, issuable in series.

Each common share entitles the holder thereof to dividends if, as and when declared by our Board, to one vote at all meetings of holders of common shares and to participate, pro rata, with the holders of common shares, in any distribution of our assets upon liquidation, dissolution or winding-up, subject to the prior rights of holders of shares ranking in priority to common shares.

As at the close of business on March 31, 2022 and June 14, 2022 respectively, 317,024,123 and 317,213,587 common shares were issued and outstanding. There are no preferred shares issued and outstanding.

8.MARKET FOR SECURITIES

The outstanding common shares of CAE are listed and posted for trading on the Toronto Stock Exchange (TSX) and on the New York Stock Exchange (NYSE) under the symbol CAE.

8.1Trading Price and Volume

CAE Inc.<br><br>TSX Share Price Information - FY2022
Month	Min.	Max.	Total Volume
April-21	$36.17	$39.07	10,991,457
May-21	$35.41	$38.24	8,450,467
June-21	$36.70	$39.08	9,861,763
July-21	$34.70	$39.01	23,962,782
August-21	$34.38	$39.70	12,422,567
September-21	$36.20	$38.70	16,949,386
October-21	$36.56	$38.79	10,498,205
November-21	$30.70	$42.36	20,898,849
December-21	$26.82	$32.75	17,037,218
January-22	$30.27	$33.50	10,754,890
February-22	$31.27	$33.96	13,312,890
March-22	$29.92	$35.03	20,410,418
CAE Inc.<br><br>NYSE Share Price Information - FY2022
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Month	Min. (USD)	Max. (USD)	Total Volume
April-21	$28.83	$31.61	6,957,431
May-21	$29.40	$31.38	5,505,070
June-21	$30.45	$31.85	6,523,109
July-21	$27.26	$31.39	7,660,305
August-21	$26.81	$31.69	5,201,084
September-21	$28.26	$30.78	4,482,803
October-21	$29.05	$31.31	3,744,550
November-21	$24.07	$34.05	6,794,044
December-21	$23.20	$25.51	7,995,234
January-22	$23.76	$26.96	5,104,055
February-22	$24.55	$26.76	6,423,990
March-22	$23.35	$27.74	8,407,936

8.2Prior Sales

For the 12-month period ending March 31, 2022, the Company has issued common shares and securities convertible into, or exercisable or exchangeable for, common shares as listed on the table set forth below:

Date of Issuance	Type of Security Issued	Reason for Issuance	Number of Securities Issued	Issuance / Exercise Price per Security
March 31, 2021 – March 31,2022	Common Shares	Exercise of options	1,268,660	$21.37 (weighted average price)
March 31, 2021 – March 31,2022	Stock options	Grant of options	685,977	$36.79 (weighted average price)
July 2, 2021	Common Shares issuable pursuant to Subscription Receipts	Private Placements with Caisse de dépôt et placement du Quebec and GIC Private Limited	22,400,000	$31.25

9.DIRECTORS AND EXECUTIVE OFFICERS

The Directors of CAE are elected at each annual meeting of shareholders and hold office until the next annual meeting of shareholders or until their successors are elected or appointed. The names and municipalities of residence of the Directors and Executive Officers of CAE as of the date hereof, the positions and offices held by them in CAE, their respective principal occupations for the last five years, and the year in which they became a Director are set forth below.

More information concerning the nominees proposed for election as CAE’s Directors may be found in the Management Proxy Circular dated June 15, 2022, in connection with our Annual Meeting of Shareholders to be held on August 10, 2022 (Meeting). All current members of the Board (except for Mr. Manley) are nominees for election at the Meeting and two additional individuals are nominees for election at the Meeting. Patrick M. Shanahan was appointed as a Director of CAE by the Board on April 1, 2022.

In addition to fulfilling all statutory requirements, the Board oversees and reviews: (i) the strategic and operating plans and financial budgets and the performance against these objectives; (ii) the principal risks and the adequacy of the systems and procedures to manage these risks; (iii) the monitoring of the corporate governance system; (iv) the integrity of internal controls and management information systems; (v) CAE’s compliance with legal and regulatory requirements; (vi) management development and succession planning; (vii) appointment and compensation of senior officers and the compensation and benefit policies; (viii) health, safety, environment and corporate social responsibility matters; (ix) business development initiatives; (x) the communications policies and activities, including shareholder communications; and (xi) the performance of the President and Chief Executive Officer.

The Committees of the Board are the Audit Committee, the Governance Committee and the Human Resources Committee.

9.1Name and Occupation

CURRENT DIRECTORS

Name and Place of Residence, and Year First Became a Director	Principal Occupation
MARGARET S. (PEG) BILLSON<br><br>New Mexico, USA<br><br>(2015)	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.<br><br><br><br>Ms. Billson is the Chair of the Governance Committee and a member of the Human Resources Committee.
THE HONOURABLE MICHAEL M. FORTIER, P.C.<br><br>Quebec, Canada<br><br>(2010)	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.<br><br><br><br>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).<br><br><br><br>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. Mr. Fortier holds a bachelor’s degree in Law from the University of Laval and has been a member of the Barreau du Québec since 1985.<br><br><br><br>Mr. Fortier is Chair of the Human Resources Committee.
MARIANNE HARRISON<br><br>Massachusetts, U.S.<br><br>(2019)	Ms. 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 also serves on the boards of directors of the Boston Medical Center and Massachusetts Competitive Partnership.<br><br><br><br>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.<br><br><br><br>Ms. Harrison is the Chair of the Audit Committee and a member of the Governance Committee.
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ALAN N. MACGIBBON, CPA, CA<br><br>Ontario, Canada<br><br>(2015)	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.<br><br><br><br>Mr. MacGibbon is currently a member of the Audit and Human Resources Committees. Following the Meeting, Mr. MacGibbon will occupy the position of Chair of the Board of Directors. As a Chair of the Board, Mr. MacGibbon will attend all Committee meetings.
MARY LOU MAHER<br><br>Ontario, Canada (2021)	Ms. Maher was Canadian Managing Partner, Quality and Risk, KPMG Canada from 2017 to February 2021. She was also Global Head of Inclusion and Diversity KPMG International for the same period. Ms. Maher has held various executive and governance roles at KPMG, including Chief Financial Officer and Chief Human Resources Officer. Ms. Maher created KPMG Canada's first ever National Diversity Council and was the executive sponsor of pride@kpmg. Ms. Maher received the Wayne C. Fox Distinguished Alumni Award from McMaster University in recognition of her work on inclusion and diversity, was inducted into the Hall of Fame for the WXN 100 Top Most Powerful Women in Canada, received a Lifetime Achievement Award from Out on Bay Street (Proud Strong), and the Senior Leadership Award for Diversity from the Canadian Centre for Diversity and Inclusion.<br><br>Ms. Maher is a member of the World Economic Forum focused on Human Rights - the business perspective, the Alzheimer's Society of Toronto, and has served on other not-for-profit boards including as Chair of Women's College Hospital and member of the CPA Ontario Council.<br><br>Ms. Maher holds a Bachelor of Commerce degree from McMaster University and holds the designation of FCPA, FCA.<br><br>Ms. Maher is a member of the Audit and Human Resource Committees.
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THE HONOURABLE JOHN P. MANLEY, P.C., O.C.<br><br>Ontario, Canada<br><br>(2008)	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. 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.<br><br><br><br>Mr. Manley is currently Chair of the Board of Directors and will be stepping down at the conclusion of the Meeting.
FRANÇOIS OLIVIER<br><br>Quebec, Canada<br><br>(2017)	Mr. Olivier is a corporate director. He recently retired from Transcontinental Inc. in December 2021, where he was President and Chief Executive Officer 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, Mr. Olivier worked as General Manager of Canada Packers.<br><br><br><br>Mr. Olivier also serves as a governor of Portage, a Canadian non-profit organization helping people suffering from substance-abuse related problems overcome their dependencies. Mr. Olivier holds a B.Sc. from McGill University and is a graduate of the Program for Management Development at Harvard Business School.<br><br><br><br>Mr. Olivier is a member of the Audit and Governance Committees.
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MARC PARENT, C.M.<br><br>Quebec, Canada<br><br>(2008)	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 (Quebec’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. In November 2020, Mr. Parent became a Member of the Order of Canada, and in 2021 was inducted into Canada’s Aviation Hall of Fame for his longstanding commitment to the growth and development of Canadian aerospace. In 2022, Mr. Parent was honoured with the Living Legends of Aviation’s Industry Leader of the Year Award for his significant contributions to the aviation industry.
GENERAL DAVID G. PERKINS, USA (RET.)<br><br>New Hampshire, U.S.<br><br>(2020)	Gen. Perkins, USA (Ret.) 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.<br><br><br><br>General Perkins is a member of the Audit and Human Resource Committees.
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MICHAEL E. ROACH<br><br>Quebec, Canada<br><br>(2017)	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.<br><br><br><br>Mr. Roach is a member of the Audit and Governance Committees.
PATRICK M. SHANAHAN<br><br>Washington, U.S.<br><br>(2022)	Patrick M. Shanahan served as the 33rd U.S. Deputy Secretary of Defense. He also served as U.S. Acting Secretary of Defense (2019). After joining the Department of Defense, Mr. Shanahan helped lead the development of several key Department of Defense policies and strategies. Mr. Shanahan previously served as the Senior Vice President, Supply Chain & Operations at The Boeing Company. He previously worked as senior vice president of Commercial Airplane Programs, managing profit and loss for the 737, 747, 767, 777 and 787 programs and the operations at Boeing’s principal manufacturing sites; as vice president and general manager of the 787 Dreamliner, leading the program during a critical development period; as vice president and general manager of Boeing Missile Defense Systems, overseeing the Ground-based Midcourse Defense system, Airborne Laser and Advanced Tactical Laser; and as vice president and general manager of Boeing Rotorcraft Systems, overseeing the Apache, Chinook and Osprey. Mr. Shanahan spent over three decades with The Boeing Company.<br><br><br><br>Mr. Shanahan is a National Academy of Engineering Member, Royal Aeronautical Society Fellow, Society of Manufacturing Engineers Fellow and American Institute of Aeronautics and Astronautics Associate Fellow. He served as a regent at the University of Washington for over five years.<br><br><br><br>Mr. Shanahan holds a Bachelor of Science degree in mechanical engineering from the University of Washington and two advanced degrees from the Massachusetts Institute of Technology.<br><br><br><br>Mr. Shanahan is a member of the Audit Committee.
ANDREW J. STEVENS<br><br>Gloucestershire, UK<br><br>(2013)	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).<br><br><br><br>Mr. Stevens is a Chartered Engineer, with a 1st 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.<br><br><br><br>Mr. Stevens is a member of the Governance and Human Resources Committees.
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EXECUTIVE OFFICERS

In addition to Marc Parent, President and CEO, the other Executive Officers of the Company are:

Name and Place of Residence	Position Held Within the Company
ANDREW ARNOVITZ<br><br>Quebec, Canada	Senior Vice President, Investor Relations and Enterprise Risk Management since August 30, 2021, with CAE since 2001; formerly Senior Vice President, Strategy and Investor Relations.
SONYA BRANCO<br><br>Quebec, Canada	Executive Vice President, Finance and Chief Financial Officer since May 2016, with CAE since 2008; formerly Vice President, Finance and Corporate Controller (2011-2016), and Director Planning and Forecasting (2008-2011). Ms. Branco is a Chartered Professional Accountant.
CARTER COPELAND<br><br>Georgia, United States	Senior Vice President, Global Strategy since August 2021, with CAE since 2021; formerly President and co-founder of Melius Research (2017-2021). Mr. Copeland is a Charted Financial Analyst.
HÉLÈNE V. GAGNON<br><br>Quebec, Canada	Chief Sustainability Officer and Senior Vice President, Stakeholder Engagement since March 2022, with CAE since 2015; formerly Vice President, Public Affairs, Communications, Corporate Social Responsibility and Achieving Excellence System for Bombardier Aerospace (2006-2014).
DANIEL GELSTON<br><br>Utah, United States	Group President, Defense and Security since August 2020. Formerly President of L3Harris Technologies’ Broadband Communications Systems Sector (2018-2020), President of the Special Security Agreement (SSA) businesses Smiths Detection Inc. (2016-2017) and President (2014-2016) and Senior Vice President (2013-2014) of Cobham Tactical Communications and Surveillance. Mr. Gelston’s military experience includes active and reserve duty from 1998 to 2007 as an Armor and Military Intelligence Officer.
Name and Place of Residence	Position Held Within the Company
---	---
PASCAL GRENIER<br><br>Quebec, Canada	Senior Vice President, Civil Flight Services & Global Manufacturing Operations since October 28, 2021; with CAE since 1996 occupying multiple functions; formerly Senior Vice President, Global Operations, Technologies & Innovation (2017-2021), Vice-President Global Engineering (2016-2017) and Director, Post Delivery Services (2013-2016).
MARK HOUNSELL<br><br>Quebec, Canada	General Counsel, Chief Compliance Officer and Corporate Secretary, with CAE since February 2016; formerly Chief Legal Officer and Corporate Secretary of Aimia Inc. (2006-2016).
NICK LEONTIDIS<br><br>Quebec, Canada	Group President, Civil Aviation since 2013; previously Executive Vice-President, Strategy and Business Development (2009 to 2013), Executive Vice President Sales, Marketing and Business Development - Civil Training and Services (2005-2009).
DAN SHARKEY<br><br>Ontario, Canada	Senior Vice President, Global Human Resources since February 2015, with CAE since 2015; formerly Senior Human Resources Business Partner in various Bombardier Aerospace divisions (1997-2014).
HEIDI WOOD<br><br>Florida, United States	Executive Vice President, Business Development & Growth Initiatives since May 2020 and President of Healthcare since September 2020, formerly Senior Vice President of Corporate Strategy and Technology (2016-2019) of L3 Technologies and Senior Vice President, Strategy (2013-2016) of Spirit AeroSystems Inc.

All Directors and Executive Officers as a group (22 persons) owned beneficially or exercised control or direction, directly or indirectly, over 463,851 Common Shares representing 0.14% of the class as at June 14, 2022.

9.2Cease Trade Orders, Bankruptcies, Penalties or Sanctions

According to the information provided to us, none of the Directors or Executive Officers of CAE is at the date of this AIF, or within ten years prior hereto has been, a director, chief executive officer or chief financial officer or, regarding item (iii) below, an executive officer of a company which, while the person was acting in this capacity:

(i)was the subject of a cease trade or similar order or an order that denied the relevant company access to any exemption under securities legislation, for a period of more than 30 consecutive days;

(ii)was, after the person ceased to be a director, chief executive officer or chief financial officer, the subject of a cease trade or similar order or an order that denied the relevant company access to any exemption under securities legislation, for a period of more than 30 consecutive days as a result of an event which occurred while the director, chief executive officer or chief financial officer was acting in this capacity; or

(iii)within a year of that person ceasing to act in that capacity, became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold its assets.

10.TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar of our common shares in the United States is Computershare Trust Company, N.A. at its principal office in Canton, Massachusetts, and in Canada is Computershare Trust Company of Canada at its principal office in the City of Toronto, Ontario.

11.AUDIT COMMITTEE

11.1Charter

The charter of CAE’s Audit Committee is as set out in Schedule B.

11.2Membership

The members of CAE’s Audit Committee are:

–Ms. Marianne Harrison (Chair)

–Mr. Alan N. MacGibbon

–Ms. Mary Lou Maher

–Mr. François Olivier

–General David G. Perkins, USA (Ret.)

–Mr. Michael E. Roach

–Patrick M. Shanahan (joined April 1, 2022)

Each of these members is independent and financially literate.

Marianne Harrison, Chair of the Audit Committee, 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.

Alan N. MacGibbon 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 Chartered Professional Accountants of Ontario.

Mary Lou Maher has a strong business acumen and financial expertise in a variety of industries and has extensive board experience and an understanding of the role of the Board through direct Board participation and work as an audit partner that she acquired during her 38-year involvement with KPMG. Most recently, she was Canadian Managing Partner, Quality and Risk, KPMG Canada and Global Head of Inclusion and Diversity KPMG International, but also served in various executive and governance roles including Chief Financial Officer and Chief Human Resources Officer. She is a Fellow of 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 the former President and Chief Executive Officer of publicly traded company Transcontinental Inc. from 2008 to 2021. 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 his 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.

Patrick M. Shanahan served as the 33rd U.S. Deputy Secretary of Defense and as the U.S. Acting Secretary of Defense. Mr. Shanahan has over three decades of experience managing profit and loss for various programs and operations of The Boeing Company. Mr. Shanahan holds a Bachelor of Science degree in mechanical engineering from the University of Washington and two advanced degrees from the Massachusetts Institute of Technology.

11.3Approval of Services

The Audit Committee is responsible for the appointment, compensation, retention and oversight of the work of CAE’s independent auditor. The Audit Committee must pre-approve any audit and non-audit services performed by PricewaterhouseCoopers LLP (PwC), or such services must be entered into pursuant to the policies and procedures established by the Committee. Pursuant to such policies the Audit Committee annually authorizes CAE and our affiliates to engage the auditor for specified permitted tax, financial advisory and other audit-related services up to specified fee levels. The Audit Committee has considered and concluded that the provision of these services by PwC is compatible with maintaining PwC’s independence. The Audit Committee’s policy also identifies prohibited services that PwC is not to provide to CAE. 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.

Fees Paid by CAE to PwC in FY2022

The following chart shows all fees paid to PwC by CAE and our subsidiaries in the most recent and prior fiscal year for the various categories of services (generic description only).

FEE TYPE	2022<br><br>($ millions)	2021<br><br>($ millions)
1. Audit services	5.8	4.7
2. Audit-related services	0.1	0.8
3. Tax services	0.5	1.0
Total	6.4	6.5

Audit fees are comprised of 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 over financial reporting as required by the Sarbanes-Oxley legislation.

Audit-related fees are comprised of fees relating to work performed in connection with CAE’s acquisitions, financings/prospectuses, translation and other miscellaneous accounting-related services.

Tax fees are mainly related to tax compliance, tax planning and tax advice.

12.INTERESTS OF EXPERTS

The auditors of the Company are PricewaterhouseCoopers LLP (PwC), a partnership of Chartered Professional Accountants, located at 1250 René-Lévesque Boulevard West, Suite 2500, Montréal, Quebec, Canada H3B 4Y1. PwC is independent of the Company within the meaning of the Code of ethics of chartered professional accountants (Quebec). PwC is a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and is 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 SEC and the PCAOB.

13.ADDITIONAL INFORMATION

Additional information, including Directors' and Officers' remuneration and indebtedness, principal holders of CAE's securities, options to purchase securities and interests of insiders in material transactions, where applicable, is contained in the Management Proxy Circular dated June 15, 2022, in connection with CAE's Annual Meeting of Shareholders to be held on August 10, 2022.

Additional financial information, including comparative consolidated audited financial statements and MD&A, are provided in CAE’s Annual Financial Report to the shareholders for the financial year ended March 31, 2022. A copy of such documents may be obtained from the Vice President, Public Affairs and Global Communications or the Corporate Secretary of CAE upon request or are available online on SEDAR at www.sedar.com, as well as CAE’s website at www.cae.com.

In addition, CAE will provide to any person or company, upon request to the Vice President, Public Affairs and Global Communications or the Corporate Secretary of CAE, the documents specified below:

(a)When the securities of CAE are in the course of a distribution under a preliminary short form prospectus or a short form prospectus:

(i)one copy of this AIF together with one copy of any document, or the pertinent pages of any document, incorporated by reference;

(ii)one copy of CAE’s comparative financial statements for our most recently completed financial year together with the accompanying report of the auditors and one copy of CAE’s most recent interim financial statements for any period after the end of our most recently completed financial year;

(iii)one copy of the Management Proxy Circular in respect of our most recent annual meeting of shareholders that involved the election of Directors; and

(iv)one copy of any other documents which are incorporated by reference into a short form prospectus and are not required to be provided under (i) to (iii) above; or

(b)At any other time, one copy of any other document referred to in clauses (i), (ii) and (iii) of paragraph (a) above, provided that CAE may require the payment of a reasonable charge if the request is made by a person or company who is not a security holder of CAE.

GLOSSARY

For the purposes of this Annual Information Form, the terms “we”, “us”, “our”, “Company” and “CAE” refer to CAE Inc. and where applicable, its subsidiaries. The following other defined terms have the meanings set out below:

“AAM” means Advanced Air Mobility

“AI” means artificial intelligence

“AIAC” means Aerospace Industries Association of Canada

“AIF” means the Annual Information Form

“AirCentre” means Sabre’s AirCentre airline operations portfolio

“Annual Financial Report” means the Annual Financial Report to Shareholders for the year ended March 31, 2022

“Board” means the Board of Directors of CAE Inc.

“CAE” means CAE Inc. and where applicable, its subsidiaries

“CAE RiseTM” means CAE Real-time Insights and Standardized Evaluations

“CBCA” means the Canada Business Corporations Act

“CCC” means Climate Change Committee

“CDP” means Carbon Disclosure Project

“CEWS” means Canada Emergency Wage Subsidy

“Civil” means Civil Aviation segment

“Company” means CAE Inc. and where applicable, its subsidiaries

“Consolidated Financial Statements” means the Consolidated Financial Statements for the year ended March 31, 2022 and the notes thereto

“CSR” means corporate social responsibility

“DE&I” means diversity, equity and inclusion

“Defense” means Defense and Security segment

“DISR” means U.S. DoD Information Technology Standards Registry

“DoD” means U.S. Department of Defense

“ESG” means environmental, social and governance

“eVTOL” means Electric Vertical Takeoff and Landing

“Executive Officers” means executive officers of CAE

“FSC” means Flight Simulation Company B.V.

“FY2020” means fiscal 2020, which refers to the period from April 1, 2019 to March 31, 2020

“FY2021” means fiscal 2021, which refers to the period from April 1, 2020 to March 31, 2021

“FY2022” means fiscal 2022, which refers to the period from April 1, 2021 to March 31, 2022

“GRI” means the Global Reporting Initiative

“Healthcare” means the Healthcare segment

“IFTS” means International Flight Training School

“I/ITSEC” means Interservice/Industry Training, Simulation, and Education Conference

“L3H MT” L3 Harris Technologies’ Military Training business

“MD&A” means CAE’s Management’s Discussion and Analysis of Financial Condition and Results of Operations

“Meeting” means CAE’s Annual Meeting of Shareholders to be held on August 10, 2022

“Merlot” means Merlot Aero Limited

“MR” means mixed reality

“MRO” means maintenance repair and overhaul organizations

“NCIB” means normal course issuer bid

“NYSE” means the New York Stock Exchange

“OEM” means the original equipment manufacturer

“OGC” means Open Geospatial Consortium

“PCAOB” means Public Company Accounting Oversight Board (United States)

“Pelesys” means Pelesys Learning Systems Inc.

“PCAOB” means Public Company Accounting Oversight Board (United States)

“PwC” means PricewaterhouseCoopers LLP

“R&D” means research and development

“RBCCM” means RBC Capital Markets

“RECs” means Renewable Energy Certificates

“RPK” means revenue passenger kilometers

“SASB standards” means Sustainability Accounting Standards Board

“SDGs” means United Nations Sustainable Development Goals

“TCFD” means Taskforce on Climate-related Financial Disclosures

“TRADOC” means United States Army Training and Doctrine Command

“TRU Canada” means TRU Simulation + Training Canada Inc.

“TSX” means the Toronto Stock Exchange

“USD” means United States dollars

“VR” means Virtual Reality

SCHEDULE A – SUBSIDIARIES AND OTHER INVESTMENTS

Set forth below are the names of all the direct and indirect subsidiaries and other investments of CAE as at March 31, 2022. Please note that all entities are wholly owned, except as mentioned.

Name of Subsidiary or other investment	Jurisdiction of Incorporation
Canada
9595058 Canada Inc.	Canada
CAE BC ULC	British Columbia
CAE Digital Inc.	Canada
CAE Healthcare Canada Inc.	Canada
CAE International Holdings Limited	Canada
CAE Military Aviation Training Inc.	Canada
CAE Simulator Services Inc.	Québec
CAE TSP Inc.	Canada
Medicor Lab Inc.	Quebec
Pelesys Aviation Maintenance Training Inc.	British Columbia
Pelesys Learning Systems Inc	British Columbia
Presagis Canada Inc.	Canada
SKYALYNE Canada Inc. (50%)	Canada
United States
Advanced Medical Technologies, LLC.	Washington
CAE (US) Inc.	Delaware
CAE Civil Aviation Training Solutions Inc.	Florida
CAE Delaware Buyco Inc.	Delaware
CAE Doss Aviation Inc.	Texas
CAE Flight Services USA, Inc.	Delaware
CAE Flight Solutions USA Inc.	Delaware
CAE Healthcare, Inc.	Delaware
CAE North East Training Inc.	Delaware
CAE Oxford Aviation Academy Phoenix Inc.	Arizona
CAE SimuFlite Inc.	Delaware
CAE US Capital LLC	Delaware
CAE US Capital Management LLC	Delaware
CAE US Finance GP LLC	Delaware
CAE US Finance LP1	Delaware
CAE US Management LLC	Delaware
CAE USA Inc.	Delaware
CAE USA Mission Solutions Inc.	Delaware
Embraer CAE Training Services, LLC. (49%)	Delaware
Engenuity Holdings (USA) Inc.	Delaware
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Flightline Data Services, Inc.	Georgia
KVDB Flight Training Services, Inc. (49%)	Arizona
Merlot Aero Inc.	Delaware
Oxford Airline Training Center Inc.	Arizona
Parc U.S. Inc.	Delaware
Presagis USA Inc.	California
PTC Solutions JV, LLC (49%)	Wisconsin
Rotorsim USA LLC. (50%)	Delaware
SimCom Holdings Inc. (50%)	Delaware
SimCom Inc. (50%)	Delaware
SimCom International Inc. (50%)	Florida
SkyWarrior Flight Training LLC (37%)	Florida
Xebec Government Services, LLC (49%)	Delaware
Europe
ARGE Rheinmetall Defence Electronics Gmbh/CAE Elektronik GmbH (50%)2	Germany
Aviation Personnel Support Services Limited	Ireland
Aviation Training Northeast Asia B.V. (50%)	Netherlands
CAE (UK) plc	United Kingdom
CAE Academia de Aviacion España S.L.	Spain
CAE Aircrew Training Services plc (76.5%)	United Kingdom
CAE Aviation Training B.V.	Netherlands
CAE Beyss Grundstücksgesellschaft GmbH	Germany
CAE Center Amsterdam B.V.	Netherlands
CAE Center Brussels N.V.	Belgium
CAE Centre Copenhagen A/S	Denmark
CAE Centre Oslo AS.	Norway
CAE Centre Stockholm AB	Sweden
CAE CFT B.V.	Netherlands
CAE CFT Holdings B.V.	Netherlands
CAE Engineering Korlátolt Felelősségű Társaság	Hungary
CAE Flight Services Austria GmbH	Austria
CAE Flight Services Poland Sp z.o.o.	Poland
CAE France SAS	France
CAE Global Academy Évora, SA.	Portugal
CAE GmbH	Germany
CAE Healthcare GmbH	Germany
CAE Healthcare KFT	Hungary
CAE Holdings BV	Netherlands
CAE Holdings Limited	United Kingdom
CAE Investments SARL	Luxembourg
CAE Luxembourg Acquisition SARL	Luxembourg
CAE Management Hungary Korlátolt Felelősségű Társaság	Hungary
CAE Oslo-Aviation Academy AS	Norway
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CAE Oxford Aviation Academy Amsterdam B.V.	Netherlands
CAE Parc Aviation Jersey Limited	Jersey
CAE Services GmbH	Germany
CAE Services Italia, S.r.l.	Italy
CAE Servicios Globales de Instrucción de Vuelo (España) S.L.	Spain
CAE STS Limited	United Kingdom
CAE Training & Services Brussels NV	Belgium
CAE Training & Services Netherlands B.V.	Netherlands
CAE Training & Services UK Ltd.	United Kingdom
CAE Training Norway AS	Norway
CAE Verwaltungsgesellschaft mbH	Germany
CVS Leasing Limited (13.39%)	United Kingdom
ETOPS (AS) UK Limited	United Kingdom
ETOPS SAS	France
Eurofighter Simulation Systems GmbH (12%)	Germany
Flight Training Alliance GmbH (50%)	Germany
GCAT Flight Academy Germany GmbH	Germany
GCAT Flight Academy Malta Limited	Malta
Helicopter Training Media International GmbH (50%)	Germany
HFTS Helicopter Flight Training Services GmbH (25%)	Germany
iRIS Health Solutions Limited	United Kingdom
Leonardo CAE Advanced Jet Training S.r.l. (50%)	Italy
Oxford Aviation Academy (Oxford) Limited	United Kingdom
Oxford Aviation Academy Europe AB	Sweden
Oxford Aviation Academy European Holdings AB	Sweden
Oxford Aviation Academy Finance Limited	Ireland
Oxford Aviation Academy Ireland Holdings Limited	Ireland
Oxford Aviation Academy Norway Holdings AS	Norway
Parc Aviation (UK) Limited	United Kingdom
Parc Aviation Engineering Services Limited	Ireland
Parc Aviation International Limited	Ireland
Parc Aviation Limited	Ireland
Parc Aviation Services Limited	Isle of Man
Parc Interim Limited	Ireland
Parc Selection Limited	Isle of Man
Presagis Europe (S.A.S.)	France
RosterBuster B.V.	Netherlands
Rotorsim s.r.l. (50%)	Italy
CAE Flight Services Sweden AB (previously named Sabre Rocade AB)	Sweden
Servicios de Instrucción de Vuelo, S.L. (80%)	Spain
Sim-Industries Production B.V.	Netherlands
Simubel NV (a CAE Training Center)	Belgium
SIV Ops Training, S.L. (80%)	Spain
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TRU Flight Training Iceland ehf (33.34%)	Iceland	Other
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CAE Aircraft Maintenance Pty Ltd. (50%)	Australia
CAE Australia Pty Ltd	Australia
CAE Aviation Services Pte Ltd.	Singapore
CAE Aviation Training Chile Limitada3	Chile
CAE Aviation Training International Ltd.	Mauritius
CAE Aviation Training Peru S.A.	Peru
CAE Bangkok Co., Limited	Thailand
CAE Brunei Multi-Purpose Training Center SDN BHD (60%)	Brunei
CAE Centre Hong Kong Limited	China
CAE CFT Korea Ltd.	Korea
CAE China Support Services Company Limited	China
CAE Colombia Flight Training S.A.S.	Colombia
CAE Defence Solutions Middle East LLC (50%)	Qatar
CAE El Salvador Flight Training S.A. de C.V.	El Salvador
CAE Flight & Simulator Services Sdn. Bhd.	Malaysia
CAE Flight and Simulation Services Korea Ltd. (50%)	Korea
CAE Flight Training (India) Private Limited (100%)	India
CAE Flight Training Center Mexico, S.A. de C.V.	Mexico
CAE Kuala Lumpur Sdn. Bhd. (100%)	Malaysia
CAE India Private Limited	India
CAE Integrated Enterprise Solutions Australia Pty Ltd	Australia
CAE Japan Flight Training Inc.	Japan
CAE Maritime Middle East LLC (49%)	UAE
CAE Melbourne Flight Training Pty Ltd. (50%)	Australia
CAE Middle East L.L.C. (49%)	UAE
CAE Middle East Holdings Limited (50%)	UAE
CAE Middle East Pilot Services L.L.C. (49%)	UAE
CAE New Zealand Pty Limited	New Zealand
CAE Shanghai Company, Limited	Shanghai
CAE Simulation Technologies Private Limited	India
CAE Simulation Training Private Limited (50%)	India
CAE Singapore (S.E.A.) Pte Ltd.	Singapore
CAE South America Flight Training do Brasil Ltda	Brazil
CAE Vietnam Limited Liability Company	Vietnam
CAE-GAH Aviation Technology Services Co. Ltd.	China
CAE-LIDER Training Do Brasil Ltda. (50%)	Brazil
China Southern West Australia Flying College Pty Ltd (14.26%)	Australia
Emirates-CAE Flight Training (L.L.C.) (49%)	Dubai
ETOPS Aviation Services Malaysia Sdn Bhd	Malaysia
Flight Training Device (Mauritius) Limited	Mauritius
HATSOFF Helicopter Training Private Limited (50%)	India
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International Flight School (Mauritius) Ltd.	Mauritius
JAL CAE Flight Training Co., Ltd. (50%)	Japan
Merlot Aero International Limited	New Zealand
Merlot Aero Limited	New Zealand
Merlot Aero Ventures Limited	New Zealand
National Flying Training Institute Private Limited (51%)	India
Oxford Aviation Academy (Australia) Pty Ltd. (50%)	Australia
Oxford Aviation Academy Holdings Pty Ltd. (50%)	Australia
Parc Aviation Japan Limited	Japan
Pegasus Uçus Egitim Merkezi A.S	Turkey
Philippine Academy for Aviation Training, Inc. (40%)	Philippines
RB Aero Development Services India Private Limited	India
Sabena Flight Academy – Africa (34%)	Cameroun
SIM-Industries Brasil Administração de Centros de Treinamento Ltda	Brasil
Simulator Servicios Mexico, S.A. de C.V.	Mexico
Singapore CAE Flight Training Pte Ltd.	Singapore
Soralay S.A.	Uruguay

INACTIVE

Name of Subsidiary or other investment	Jurisdiction of Incorporation
CAE Crewing Services Limited	Ireland
CAE Screenplates SA	France
Invertron Simulators plc	United Kingdom
Parc Aviation Training Limited	Ireland
Xtend Inc.	Utah

DISCONTINUED

Name of Subsidiary or other investment	Jurisdiction of Incorporation
Asian Aviation Centre of Excellence (Singapore) Pte Ltd. (50%)	Singapore
CAE Beteiligungsgesellschaft mbH	Germany
CAE Machinery Ltd.	British Columbia
CAE Railway Ltd.	Canada
CAE Services (Canada) Inc.	Canada
CAE Training Aircraft B.V.	Netherlands
CAE Wood Products G.P.1	Québec
Flight Simulation Company Korlátolt Felelősségű Társaság	Hungary
Logitude OY	Finland

Notes 1; 2; 3 refer to a partnership.

SCHEDULE B – AUDIT COMMITTEE CHARTER

CAE INC.

MEMBERSHIP AND RESPONSIBILITIES OF

THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS

1.GENERAL RESPONSIBILITIES

1.1The Audit Committee (the “Committee”) shall be a committee of the Board of Directors.

1.2The Committee shall consist of three to five directors (one of whom shall be the Chair of the Committee). All members of the Committee shall be independent directors, as determined by the Board taking into consideration applicable laws, regulations and other requirements and regulatory guidelines applicable to such determination. Each member shall annually certify to CAE Inc. (“CAE” or the “Company”) as to his or her independence, in form compliant with the standards of independence set out by regulatory authorities, stock exchanges and other applicable laws, regulations and requirements. Each member shall be able to read and understand financial statements (statement of financial position, income statement, statement of cash flows) that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of the issues that can reasonably be expected to be raised by CAE’s financial statements, or shall become able to do so within a reasonable period of time after joining the Committee. At least one member shall qualify as a “financial expert” (as defined by applicable regulation) and therefore have past employment in finance, accounting or any other comparable experience or background providing financial expertise. The Committee composition, including the qualifications of its members, shall comply with the requirements of regulatory authorities, stock exchanges and other applicable laws, regulations and requirements, as such requirements may be amended from time to time.

1.3The Chair of the Committee and its members shall be elected annually by the Board of Directors following recommendation of the Governance Committee and the Chair of the Board. If the designated Chair of the Committee is unable to attend a Committee meeting, the other Committee members present shall elect a replacement Chair for that meeting.

1.4A majority of members of the Committee shall constitute a quorum.

1.5The Committee shall work closely and cooperatively with such officers and employees of CAE, its auditors, and/or other appropriate advisors and with access to such information as the Committee considers to be necessary or advisable in order to perform its duties and responsibilities, as assigned by the Board of Directors and described herein.

2.REVIEW OF AUDITED FINANCIAL STATEMENTS

2.1Review the annual audited consolidated financial statements and make specific recommendations to the Board of Directors. As part of this process the Committee should:

a)Review the appropriateness of the financial statements and any changes to the underlying accounting principles and practices;

b)Review the appropriateness of estimates, judgments of choice and level of conservatism of accounting alternatives;

c)Review quarterly IT and Cyber-Security risks and elements impacting controls.

d)Review annually with management, external and internal auditors the identification, assessment and resulting mitigation strategy for financial risk, and the input of the integrated risk assessment into the annual audit planning cycle with subsequent quarterly updates by the Chief Financial Officer of any material changes with respect to financial risk assessment;

e)Oversee the review by internal audit of the existence and effectiveness of CAE’s Enterprise Risk Management Policy framework;

f)Approve the audited financial statements and actuarial valuation reports for the Supplementary Pension, Designated Executive Pension Plan, Employee Pension Plan, CAE MAT Inc. Employees and any other material Canadian pension plans;

g)Approve the annual audited financial statements for the U.S. 401(K) Retirement Savings Plans and other material U.S. pension plans of the Company and its subsidiaries; and

h)Receive the summary of annual actuarial reports for defined benefit pension plans for information purposes.

3.ENGAGEMENT OF EXTERNAL AUDITORS

3.1Recommend to the Board of Directors the appointment of the external independent auditors.

3.2Review and approval of engagement letter. As part of this review the Committee reviews and recommends to the Board of Directors for its approval the auditors’ fees for the annual audit. The Committee shall:

a)Oversee the Company’s auditors’ work in connection with the issuance of the annual audit report and quarterly review reports;

b)Approve the engagement of the external auditors for the audit, any audit-related services, advice with respect to taxation matters and other permitted services

and fees for such services. Determine the envelope for the auditors preapproved services, including as to the type of work and dollars threshold. Approve on an ad hoc basis services outside the scope of the pre-approved services, if any;

c)Receipt of a written statement, at least annually, from the external auditors describing all relationships between the auditors and CAE that may impact the objectivity and independence of the auditors;

d)Review annually with the Board of Directors the independence of the external auditors and either confirm to the Board of Directors that the external auditors are independent, or recommend that the Board of Directors take appropriate action to satisfy itself of their independence; and

e)Review periodically (at least every second year) and approve CAE’s hiring policies regarding partners, employees and former partners and employees of the present and former external auditors of CAE.

4.REVIEW AND DISCUSSION WITH EXTERNAL AUDITORS

4.1Review with the external auditors and management the annual external audit plans and agenda, including objectives, scope, risk assessments, timing, materiality level and fee estimate.

4.2Request and review an annual report prepared by the external auditors of recommendations to improve internal controls over financial reporting and corresponding management responses.

4.3Regarding the auditor’s internal quality-control procedures, review when applicable, material issues raised by the most recent internal quality-control review of the auditors, or by any inquiry or investigation by governmental or professional authorities, within the preceding 5 years, respecting one or more audits carried out by the auditors, and any steps taken to deal with any such issues.

4.4Hold timely discussions with the external auditors regarding (i) critical accounting policies and practices, including future regulations and accounting standards, (ii) alternative accounting treatments of financial information within generally accepted accounting principles related to material items discussed with management, ramifications thereof and treatment preferred by the external auditor, and (iii) other material written communication between the external auditors and management, including the management letter and schedule of unadjusted differences.

4.5Meet to review and discuss with the external auditors the annual audited financial statements and quarterly financial statements, including disclosures in management discussion and analysis.

4.6Meet separately, quarterly, with the external auditors (including the engagement partner).

4.7Make specific and direct inquiry of the external auditors’ work relating to:

a)Performance of management involved in the preparation of financial statements;

b)Any restrictions on the scope of audit work;

c)The level of cooperation received in the performance of the audit;

d)The effectiveness of the work of internal audit;

e)Any unresolved material differences of opinion or disputes between management and the external auditors;

f)Any transactions or activities which may be illegal or unethical; and

g)Independence of the external auditors, including the nature and fees of nonaudit services performed by the external audit firm and its affiliates.

4.8Provide evaluation and regular feedback to the external auditors.

4.9Conduct an annual performance assessment of the external auditors.

5.REVIEW AND DISCUSSION WITH INTERNAL AUDITORS

5.1Review and approve the annual internal audit plan, including assessment of audit risk, planned activities, level and nature of reporting, audit resources/organization and any significant changes during the year

5.2Review the annual internal audit department budget.

5.3Periodically review the adequacy and effectiveness of the Company’s disclosure controls and procedures and the Company’s internal controls over financial reporting, including any significant deficiencies and significant changes in internal controls.

5.4Set and communicate to the Director of Internal Audit high expectations and hold him/her and the department accountable for meeting them. Provide guidance on reported potential management lapses and evaluate the status and implementation of recommendations.

5.5Meet separately, regularly, with the Director of Internal Audit.

5.6Make specific and direct inquiry of the internal auditors’ work relating to:

a)Any significant recommendations to improve financial, operational and compliance internal controls and corresponding management responses;

b)The level of independence of internal audit; and

c)Any material disagreement with management or scope or restrictions encountered in the course of the function’s work.

5.7Concurrent with the review of the annual Internal Audit Plan, discuss goals, evaluate the performance and review remuneration of the Director of Internal Audit.

5.8Oversee at least once every five years an external review of the internal audit function and annual internal quality self-assessment program of the function.

6.REVIEW AND DISCUSSION WITH MANAGEMENT

6.1Review and assess the adequacy and quality of organization, staffing and succession planning for accounting and financial responsibilities (including internal audit).

6.2Review analyses prepared by management setting forth significant financial reporting issues and judgements made in connection with the preparation of the financial statements, including analyses of the effect of alternative GAAP methods on the financial statements. Such revision should also include:

a)Review with management the effect of regulatory and accounting initiatives, as well as off-balance-sheet structures, on the financial statements of the Company; and

b)Review and approve all related-party transactions with organizations determined as related from associations with Directors and Officers.

6.3Discuss with management the annual audited financial statements and quarterly financial statements and the independent auditor, including CAE’s disclosures under Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A).

6.4Review quarterly with management the measurement of audit quality indicators and evaluate relevance of usefulness of established indicators.

6.5Review, and have specific oversight responsibility for, CAE’s:

a)Enterprise risk management policy framework;

b)Risk management activities for M&A integration and program execution;

c)Global Insurance Coverage (including the Director & Officer Plan).

6.6Review at least annually with management:

a)Capital structure and Treasury appropriateness and efficiency; and

b)Tax compliance.

7.REVIEW AND DISCUSSION WITH THE HUMAN RESOURCES COMMITTEE

7.1On request, provide support to the Human Resources Committee of the Board (“HR Committee”) regarding management incentives and related topics (including compensation and appropriate use of corporate assets).

7.2Support the HR Committee in its assessment of the incentive structure and whether it contributes to increased fraud or other risks.

8.REVIEW OF PUBLIC DISCLOSURE DOCUMENTS

8.1Review all material public documents relating to CAE’s financial performance, financial position or analyses thereon, including financial statements, MD&A, annual and interim earnings press releases and the Annual Information Form (AIF), prior to their release.

8.2Review and monitor practices and procedures adopted by the Company to assure compliance with applicable listing requirements, laws, regulations and other rules, and where appropriate, make recommendations or reports to the Board of Directors.

8.3Discuss CAE’s financial information and earnings guidance provided to analysts and rating agencies.

8.4Review major issues regarding accounting principles and financial report presentations, including any significant changes in the accounting principles to be observed in the preparation of the accounts of the Company and its subsidiaries, or in their application; major issues as to the Company’s internal controls; and any special audit steps adopted in light of material control deficiencies.

8.5Prepare/review reports of the Committee as may be required by any applicable securities regulatory authority to be included in the Company’s management proxy circular or any other disclosure documents.

8.6Review and approve the procedures in the Company’s Disclosure Policy and annually verify that adequate procedures exist for the review of the disclosure of financial information derived from financial statements.

9.LEGAL AND COMPLIANCE

9.1Review, with the Company’s General Counsel, legal and compliance matters that could have a significant impact on the Company’s financial statements.

10.HANDLING OF COMPLAINTS

10.1Maintain procedures for the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting controls or auditing matters, and the confidential, anonymous submission by employees regarding questionable accounting or auditing matters.

11.ANNUAL REVIEW

11.1Review and assess the adequacy of its mandate annually, report to the Board of Directors thereon and recommend to the Board of Directors (for approval) any proposed changes.

11.2Perform an annual evaluation of the performance of the Committee and report to the Chair of the Governance Committee of the CAE Board of Directors thereon.

12.ORIENTATION AND CONTINUING EDUCATION

12.1Identify and participate where appropriate or necessary in continuing Committee education reading and/activities.

13.OTHER RESPONSIBILITIES

13.1The Board may refer from time to time such matters relating to the financial affairs and risk management of the Company as the Board may deem appropriate.

14.MEETINGS

14.1The Committee shall meet at such times as deemed necessary by the Board or the Committee and shall report regularly to the Board.

15.ENGAGEMENT OF PROFESSIONAL SERVICES

15.1The Committee is authorized to engage independent counsel, and other advisors, as it determines necessary to carry out its duties. The Company shall provide for appropriate funding, as determined by the Committee, for such services.

Last updated on February 10, 2022

cae-20220331_d2

CAE INC.

CONSOLIDATED FINANCIAL STATEMENTS

Management’s Report on Internal Control Over Financial Reporting	1
Report of Independent Registered Public Accounting Firm	2
Consolidated Financial Statements
Consolidated income (loss) statement	5
Consolidated statement of comprehensive income (loss)	6
Consolidated statement of financial position	7
Consolidated statement of changes in equity	8
Consolidated statement of cash flows	9
Notes to the Consolidated Financial Statements
Note 1 - Nature of operations and summary of significant accounting policies	10
Note 2 - Changes in accounting policies	24
Note 3 - Business combinations	24
Note 4 - Operating segments and geographic information	28
Note 5 - Other (gains) and losses	30
Note 6 - Restructuring, integration and acquisition costs	30
Note 7 - Finance expense - net	31
Note 8 - Income taxes	31
Note 9 - Share capital and earnings per share	33
Note 10 - Accounts receivable	34
Note 11 - Balance from contracts with customers	34
Note 12 - Inventories	34
Note 13 - Property, plant and equipment	35
Note 14 - Intangibles assets	36
Note 15 - Leases	37
Note 16 - Other non-current assets	38
Note 17 - Accounts payable and accrued liabilities	38
Note 18 - Provisions	38
Note 19 - Debt facilities	39
Note 20 - Employee benefits obligations	40
Note 21 - Other non-current liabilities	43
Note 22 - Supplementary cash flows information	44
Note 23 - Accumulated other comprehensive income	44
Note 24 - Share-based payments	44
Note 25 - Employee compensation	47
Note 26 - Government participation	47
Note 27 - Impairment of non-financial assets	48
Note 28 - Contingencies and commitments	48
Note 29 - Fair value of financial instruments	49
Note 30 - Capital risk management	51
Note 31 - Financial risk management	51
Note 32 - Related party relationships	56
Note 33 - Related party transactions	59

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, 2022, 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, 2022 was effective.

Management’s evaluation of and conclusion on the effectiveness of the Company’s internal control over financial reporting did not include an evaluation of the internal control over financial reporting of L3Harris Technologies’ Military Training business (L3H MT), which was acquired on July 2, 2021 nor Sabre’s AirCentre airline operations portfolio (AirCentre), which was acquired on February 28, 2022. The contribution of the acquired L3H MT operations to the Company’s consolidated financial statements for the year ended March 31, 2022 was 12% of consolidated revenue and 14% of consolidated operating income. Additionally, as at March 31, 2022, the total assets of the acquired L3H MT operations represented 18% of the Company’s consolidated total assets. The contribution of the acquired AirCentre operations to the Company’s consolidated financial statements for the year ended March 31, 2022 was less than 1% of consolidated revenue and operating income. Additionally, as at March 31, 2022, the total assets of the acquired AirCentre operations represented 6% of the Company’s consolidated total assets.

M. Parent S. Branco

President and Chief Executive Officer Executive Vice President, Finance and Chief Financial Officer

Montréal, Canada

May 31, 2022

CAE Financial Report 2022 | 1

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 statements of financial position of CAE Inc. and its subsidiaries (together, the Company) as of March 31, 2022 and 2021, and the related consolidated statements of income (loss), comprehensive income (loss), 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, 2022, 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, 2022 and 2021, 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, 2022, based on criteria established in Internal Control – Integrated Framework (2013) issued by the COSO.

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.

As described in Management’s Report on Internal Control over Financial Reporting, management has excluded L3Harris Technologies’ Military Training business and Sabre’s AirCentre airline operations portfolio from its assessment of internal control over financial reporting as of March 31, 2022, because they were acquired by the Company in purchase business combinations during the year ended March 31, 2022. We have also excluded L3Harris Technologies’ Military Training business and Sabre’s AirCentre airline operations portfolio from our audit of internal control over financial reporting. L3Harris Technologies’ Military Training business and Sabre’s AirCentre airline operations portfolio are wholly-owned subsidiaries whose consolidated total assets, revenue and operating income excluded from management’s assessment and our audit of internal control over financial reporting represent approximately 18% and 6% of consolidated total assets, approximately 12% and less than 1% of consolidated revenue, and approximately 14% and less than 1% of consolidated operating income respectively of the related consolidated financial statement amounts as of and for the year ended March 31, 2022.

2 | CAE Financial Report 2022

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.

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.

Revenue recognition – Estimated costs to complete certain contracts in the Defense and Security and Civil Aviation segments

As described in Notes 1 and 4 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, 2022, a portion of total consolidated revenue of the Defense and Security and the Civil Aviation segments in the amounts of $1,602.1 million and $1,617.8 million respectively were related to revenue recognized from contracts with customers over time using the cost input method. The measure of progress toward complete satisfaction of the performance obligation is generally determined by comparing the actual direct costs incurred to date to the total estimated direct costs for the entire contract. Management applies judgment in estimating 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 Defense and Security and Civil Aviation 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.

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 Defense and Security and Civil Aviation segments for a sample of contracts, which included 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, on a sample basis, management’s ability to reasonably estimate costs to complete contracts by comparing changes in estimated costs with the prior year estimate or estimated costs to complete contracts for new contracts; 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.

Acquisition of L3Harris Technologies’ Military Training business – Valuation of customer relationships and technology intangible assets

As described in Note 3 to the consolidated financial statements, the Company completed the acquisition of L3Harris Technologies’ Military Training business for total purchase consideration of $1,360.9 million in July 2021, which resulted in $217.7 million of customer relationships and $99.5 million of technology being recorded. Management accounted for this transaction as a business combination using the acquisition method. Under this method, identifiable assets acquired and liabilities assumed are measured initially at their fair value at the acquisition date. To estimate the fair value of the intangible assets, management uses the multi-period excess earnings method to value the customer relationships and the relief from royalty method to value the technology. Management applied significant judgment in estimating the fair value of customer relationships and the technology acquired, which involved the use of significant assumptions with respect to projected revenue.

CAE Financial Report 2022 | 3

The principal considerations for our determination that performing procedures relating to the acquisition of L3Harris Technologies’ Military Training business - valuation of customer relationships and technology intangible assets is a critical audit matter are there was significant judgment applied by management when developing the fair value estimates. This in turn led to a high degree of auditor judgment, subjectivity and effort in performing procedures and evaluating audit evidence related to significant assumptions with respect to projected revenue applied by management in determining the valuation of customer relationships and technology intangible assets.

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 accounting for the acquisition, including controls over the valuation of the customer relationships and technology intangible assets and controls over the development of significant assumptions related to projected revenue. These procedures also included, among others (i) reading the purchase agreement; and (ii) testing management’s process for estimating the fair value of the customer relationships and technology intangible assets. Testing management’s process included evaluating the appropriateness of the valuation methods, testing the completeness and accuracy of data provided by management, and evaluating the reasonableness of significant assumptions related to projected revenue of the customer relationships and of technology intangible assets. Evaluating the reasonableness of the projected revenue of the customer relationships and of technology intangible assets involved consideration of the consistency with industry data and whether these assumptions were consistent with evidence obtained in other areas of the audit.

/s/PricewaterhouseCoopers LLP

Montréal, Canada

May 31, 2022

We have served as the Company’s auditor since 1991.

4 | CAE Financial Report 2022

Consolidated Financial Statements

Consolidated Income (Loss) Statement

Years ended March 31
(amounts in millions of Canadian dollars, except per share amounts)	Notes		2022		2021
Revenue	4	$	3,371.3	$	2,981.9
Cost of sales			2,415.8		2,216.9
Gross profit		$	955.5	$	765.0
Research and development expenses			120.8		104.7
Selling, general and administrative expenses			489.1		398.9
Other (gains) and losses	5		(37.0)		91.7
Share of after-tax profit of equity accounted investees	4		(48.5)		(2.7)
Restructuring, integration and acquisition costs	6		146.9		124.0
Operating income		$	284.2	$	48.4
Finance expense – net	7		130.6		135.6
Earnings (loss) before income taxes		$	153.6	$	(87.2)
Income tax expense (recovery)	8		3.6		(39.7)
Net income (loss)		$	150.0	$	(47.5)
Attributable to:
Equity holders of the Company		$	141.7	$	(47.2)
Non-controlling interests			8.3		(0.3)
Earnings (loss) per share attributable to equity holders of the Company
Basic	9	$	0.46	$	(0.17)
Diluted	9	$	0.45	$	(0.17)

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

CAE Financial Report 2022 | 5

Consolidated Financial Statements

Consolidated Statement of Comprehensive Income (Loss)

Years ended March 31
(amounts in millions of Canadian dollars)	Notes		2022		2021
Net income (loss)		$	150.0	$	(47.5)
Items that may be reclassified to net income (loss)
Foreign currency exchange differences on translation of foreign operations		$	(101.4)	$	(284.8)
Net gain on hedges of net investment in foreign operations			15.8		140.4
Reclassification to income of foreign currency exchange differences			(4.7)		(21.2)
Net (loss) gain on cash flow hedges			(6.0)		61.4
Reclassification to income of gains on cash flow hedges			(7.0)		(20.3)
Income taxes	8		(2.0)		(14.6)
		$	(105.3)	$	(139.1)
Items that will never be reclassified to net income (loss)
Remeasurement of defined benefit pension plan obligations	20	$	125.6	$	1.1
Net loss on financial assets carried at fair value through OCI			(0.1)		(1.8)
Income taxes	8		(33.4)		(0.3)
		$	92.1	$	(1.0)
Other comprehensive loss		$	(13.2)	$	(140.1)
Total comprehensive income (loss)		$	136.8	$	(187.6)
Attributable to:
Equity holders of the Company		$	129.8	$	(181.5)
Non-controlling interests			7.0		(6.1)

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

6 | CAE Financial Report 2022

Consolidated Financial Statements

Consolidated Statement of Financial Position

As at March 31
(amounts in millions of Canadian dollars)	Notes		2022		2021
Assets
Cash and cash equivalents		$	346.1	$	926.1
Restricted funds for subscription receipts deposit	9		—		700.1
Accounts receivable	10		556.9		518.6
Contract assets	11		608.3		461.9
Inventories	12		519.8		647.8
Prepayments			56.7		52.1
Income taxes recoverable			33.2		39.8
Derivative financial assets			27.6		32.2
Total current assets		$	2,148.6	$	3,378.6
Property, plant and equipment	13		2,129.3		1,969.4
Right-of-use assets	15		373.0		308.5
Intangible assets	14		3,796.3		2,055.8
Investment in equity accounted investees	32		454.0		422.2
Deferred tax assets	8		117.4		104.9
Derivative financial assets			10.5		13.2
Other non-current assets	16		549.7		495.8
Total assets		$	9,578.8	$	8,748.4
Liabilities and equity
Accounts payable and accrued liabilities	17	$	975.1	$	945.6
Provisions	18		36.7		52.6
Income taxes payable			22.7		16.2
Contract liabilities	11		788.3		674.7
Current portion of long-term debt	19		241.8		216.3
Liabilities for subscription receipts	9		—		714.1
Derivative financial liabilities			26.6		13.8
Total current liabilities		$	2,091.2	$	2,633.3
Provisions	18		20.6		30.9
Long-term debt	19		2,804.4		2,135.2
Royalty obligations			126.0		141.8
Employee benefits obligations	20		109.7		222.2
Deferred tax liabilities	8		93.7		123.5
Derivative financial liabilities			1.0		3.1
Other non-current liabilities	21		245.6		245.6
Total liabilities		$	5,492.2	$	5,535.6
Equity
Share capital	9	$	2,224.7	$	1,516.2
Contributed surplus			38.6		22.5
Accumulated other comprehensive income	23		(31.2)		58.1
Retained earnings			1,777.6		1,543.7
Equity attributable to equity holders of the Company		$	4,009.7	$	3,140.5
Non-controlling interests			76.9		72.3
Total equity		$	4,086.6	$	3,212.8
Total liabilities and equity		$	9,578.8	$	8,748.4

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

CAE Financial Report 2022 | 7

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 23)			earnings		Total	interests			equity
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
Net loss		—	$	—	$	—	$	—	$	(47.2)	$	(47.2)	$	(0.3)	$	(47.5)
Other comprehensive (loss) income		—		—		—		(135.1)		0.8		(134.3)		(5.8)		(140.1)
Total comprehensive (loss) income		—	$	—	$	—	$	(135.1)	$	(46.4)	$	(181.5)	$	(6.1)	$	(187.6)
Issuance of common shares under an equity offering	9	27,048,671		822.7		—		—		—		822.7		—		822.7
Subscription receipts issuance-related costs		—		—		(12.5)		—		—		(12.5)		—		(12.5)
Exercise of stock options	24	687,165		14.0		(1.7)		—		—		12.3		—		12.3
Share-based payments expense	24	—		—		9.8		—		—		9.8		—		9.8
Transactions with non-controlling interests		—		—		—		—		—		—		(10.2)		(10.2)
Balances as at March 31, 2021		293,355,463	$	1,516.2	$	22.5	$	58.1	$	1,543.7	$	3,140.5	$	72.3	$	3,212.8
Net income		—	$	—	$	—	$	—	$	141.7	$	141.7	$	8.3	$	150.0
Other comprehensive (loss) income		—		—		—		(104.1)		92.2		(11.9)		(1.3)		(13.2)
Total comprehensive (loss) income		—	$	—	$	—	$	(104.1)	$	233.9	$	129.8	$	7.0	$	136.8
Issuance of common shares upon conversion of
subscription receipts	9	22,400,000		677.2		12.5		—		—		689.7		—		689.7
Exercise of stock options	24	1,268,660		31.3		(4.2)		—		—		27.1		—		27.1
Share-based payments expense	24	—		—		7.8		—		—		7.8		—		7.8
Transfer of realized cash flow hedge losses related
to business combinations		—		—		—		14.8		—		14.8		—		14.8
Transactions with non-controlling interests		—		—		—		—		—		—		(2.4)		(2.4)
Balances as at March 31, 2022		317,024,123	$	2,224.7	$	38.6	$	(31.2)	$	1,777.6	$	4,009.7	$	76.9	$	4,086.6

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

8 | CAE Financial Report 2022

Consolidated Financial Statements

Consolidated Statement of Cash Flows

Years ended March 31
(amounts in millions of Canadian dollars)	Notes		2022		2021
Operating activities
Net income (loss)		$	150.0	$	(47.5)
Adjustments for:
Depreciation and amortization	4		310.5		319.5
Impairment of non-financial assets	4		41.8		171.7
Share of after-tax profit of equity accounted investees			(48.5)		(2.7)
Deferred income taxes			(32.4)		(33.3)
Investment tax credits			(27.5)		(36.9)
Share-based payments expense			6.4		9.6
Defined benefit pension plans			13.7		12.0
Other non-current liabilities			(65.9)		(19.9)
Derivative financial assets and liabilities – net			11.3		(26.7)
Other			36.3		70.3
Changes in non-cash working capital	22		22.5		(49.5)
Net cash provided by operating activities		$	418.2	$	366.6
Investing activities
Business combinations, net of cash acquired	3	$	(1,883.7)	$	(186.5)
Acquisition of investment in equity accounted investees	32		(4.3)		(18.7)
Additions to property, plant and equipment	13		(272.2)		(107.6)
Proceeds from disposal of property, plant and equipment			8.4		4.5
Additions to intangible assets	14		(90.6)		(56.0)
Net (payments to) proceeds from equity accounted investees			(19.4)		0.7
Dividends received from equity accounted investees			27.1		12.1
Other			(2.4)		8.1
Net cash used in investing activities		$	(2,237.1)	$	(343.4)
Financing activities
Net proceeds from (repayment of) borrowing under revolving credit facilities	19	$	344.6	$	(705.6)
Proceeds from long-term debt	19		429.1		151.1
Repayment of long-term debt	19		(132.1)		(86.1)
Repayment of lease liabilities	19		(89.5)		(200.8)
Net proceeds from the issuance of common shares			696.1		820.8
Changes in restricted cash			9.4		—
Other			(2.0)		(0.7)
Net cash provided by (used in) financing activities		$	1,255.6	$	(21.3)
Effect of foreign currency exchange differences on cash and cash equivalents		$	(16.7)	$	(22.3)
Net decrease in cash and cash equivalents		$	(580.0)	$	(20.4)
Cash and cash equivalents, beginning of year			926.1		946.5
Cash and cash equivalents, end of year		$	346.1	$	926.1

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

CAE Financial Report 2022 | 9

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 31, 2022.

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

Nature of operations

CAE equips people in critical roles with the expertise and solutions to create a safer world. As a high-technology company, CAE digitalizes the physical world by deploying simulation training and critical operations support solutions.

CAE Inc. and its subsidiaries’ (or the Company) operations are managed through three segments:

(i)Civil Aviation – Provides comprehensive training solutions for flight, cabin, maintenance and ground personnel in commercial, business and helicopter aviation, a complete range of flight simulation training devices, ab initio pilot training and crew sourcing services, as well as end-to-end digitally-enabled crew management, training operations solutions and optimization software;

(ii)Defense and Security – A platform agnostic, global training and simulation pure play focusing on ensuring mission readiness by integrating systems and solutions across all five domains for government organizations responsible for public safety;

(iii)Healthcare – Provides healthcare students and clinical professionals integrated education and training solutions, including interventional and imaging simulations, curricula, audiovisual debriefing solutions, centre management platforms and patient simulators.

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 right 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.

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.

10 | CAE Financial Report 2022

Notes to the Consolidated Financial Statements

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, restricted funds for subscription receipts deposit, and derivative instruments not designated as hedging instrument in a hedge relationship.

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.

CAE Financial Report 2022 | 11

Notes to the Consolidated Financial Statements

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, royalty obligations and liabilities for subscription receipts.

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.

12 | CAE Financial Report 2022

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.

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.

CAE Financial Report 2022 | 13

Notes to the Consolidated Financial Statements

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.

Land is not depreciated. The estimated useful lives, residual values and depreciation methods are as follows:

	Method	Depreciation 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 3500 hours

As at March 31, 2022, the average remaining depreciation period for full-flight simulators is 11.8 years (2021 – 12.2 years).

Depreciation methods, useful lives and residual values are reviewed and adjusted, if appropriate, on a prospective basis at each reporting date.

Leases

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

The Company as a lessee

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

14 | CAE Financial Report 2022

Notes to the Consolidated Financial Statements

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	Depreciation 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
Aircraft	Straight-line (residual not exceeding 15%)	Not exceeding 25 years
Aircraft engines	Based on utilization	Not exceeding 3500 hours

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.

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.

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Notes to the Consolidated Financial Statements

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.

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 expenses.

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.

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.

Configuration or customization costs in a cloud computing arrangement are also included when they meet the specific capitalization criteria.

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
Technology, software and ERP	3 to 12 years
Other intangible assets	2 to 40 years

As at March 31, 2022, the average remaining amortization period for the capitalized development costs is 5.8 years (2021 ‑ 5.3 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 cases, 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.

16 | CAE Financial Report 2022

Notes to the Consolidated Financial Statements

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.

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 and losses. 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, 2022.

CAE Financial Report 2022 | 17

Notes to the Consolidated Financial Statements

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.

Sales of goods and services

Customized training devices

Revenue 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 costs incurred to date to the total estimated direct 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 and medical devices

Revenue from contracts with customers for the manufacturing of standardized training and medical devices is recognized at a point in time, when the customer obtains control of the device.

Training services

Revenue 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

Revenue 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. Revenue 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.

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Notes to the Consolidated Financial Statements

Software arrangements

Revenue from software arrangements that provide the Company’s customers with the right to use the software without any significant development or integration work 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. Revenue from Software as a service (SaaS) arrangements provide the Company's customers with the right to access a cloud-based environment that the Company provides and manages, the right to receive support and to use the software, however the customer does not have the right to take possession of the software. Revenue from SaaS arrangements is recognized over time, using the time elapsed output 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.

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.

CAE Financial Report 2022 | 19

Notes to the Consolidated Financial Statements

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.

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.

Restructuring, integration and acquisition costs

Restructuring costs

Restructuring costs are part of a program that is planned and controlled by management, and materially changes either the scope of a business undertaken by the Company or the manner in which that business is conducted. Restructuring costs include costs directly related to significant exit activities, such as the sale or termination of a line of business, the closure of business locations or the relocation of business activities, significant changes in management structure, or fundamental reorganizations that have a material effect on the nature and focus of the Company’s operations.

For the Company, restructuring costs include severances and other employee related costs, cost associated with the impairment of non-financial assets, including property, plant and equipment, right-of-use assets, intangible assets and inventory, and other direct costs associated with the closing or relocation of facilities, the closing of a product line or activity, or the downsizing of operations.

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Notes to the Consolidated Financial Statements

Restructuring costs are expensed when incurred, or when a legal or constructive obligation exists. A restructuring provision is only recognized when an obligating event has arisen.

Integration costs

Integration costs represent incremental costs directly related to the integration of recently acquired businesses in the Company’s ongoing activities. This primarily includes expenditures related to regulatory and process standardization, systems integration and other activities.

Acquisition costs

Acquisition costs represent costs directly related to business combinations, successful or not. These costs include expenses, fees, commissions and other costs associated with the collection of information, negotiation of contracts, risk assessments, and the services of lawyers, advisors and specialists.

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.

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 contributions related to the acquisition of non-financial assets is recorded as a reduction of the cost of the related asset while government contributions related to current expenses is recorded as a reduction of the related expenses.

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Notes to the Consolidated Financial Statements

Royalty obligations

The Company receives partial funding from government entities for eligible spending related to specified R&D projects. In exchange, the Company repays a percentage of certain revenue during specified years. The initial measurement of the royalty 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 difference between the funding received and the discounted value of the royalty obligation is accounted for as a government contribution. The current portion of the royalty obligation is included as part of accrued liabilities.

R&D obligations

The Company enters into loans with below market interest rates with government entities to fund a portion of eligible spending related to specified R&D projects. The initial measurement of the R&D 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 difference between the funding received and the discounted value of the R&D obligation is accounted for as a government contribution R&D obligations are presented as part of the long-term debt.

Investment tax credits

Investment tax credits are deemed to be equivalent to government contributions. These government contributions are received for costs incurred in R&D projects. Investment tax credits expected to be recovered beyond 12 months are classified in Other non-current assets.

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 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 as of the date control is transferred. The consideration transferred and the acquiree’s identifiable assets, liabilities and contingent liabilities are measured at their fair value at the date of acquisition, which may be estimated using an income, market or cost valuation method. 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.

The judgments made in determining the estimated fair value assigned to the net identifiable assets acquired, as well as the estimated useful life of non-financial assets, could impact the net income of subsequent periods through depreciation and amortization, and in certain instances through impairment charges. The Company believes that the estimated fair values assigned to the net identifiable assets acquired are based on reasonable assumptions that a marketplace participant would use. While the Company uses its best estimates and assumptions to accurately value the net identifiable assets acquired at the acquisition date, estimates are inherently uncertain and subject to refinement.

To estimate the fair value of the intangible assets of the L3Harris Technologies’ Military Training business and Sabre’s AirCentre airline operations portfolio acquisitions, the multi-period excess earnings method was used to value the customer relationship and the relief from royalty method was used to value the technology and software. Significant judgment is applied in estimating the fair value of customer relationships and the technology acquired, which involves the use of significant assumptions with respect to projected revenue.

During the measurement period, for up to 12 months following the acquisition, the Company records adjustments to the initial estimate of the net identifiable assets acquired based on new information obtained that would have existed as of the date of the acquisition. Any adjustment that arises from information obtained that did not exist as of the date of the acquisition will be recorded in the period the adjustment arises.

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.

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Notes to the Consolidated Financial Statements

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.

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.

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 applies judgement in estimating 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 20 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 3.0% to 9.0%, over the period of repayments. The estimated repayments are discounted using average rates ranging from 6.0% to 10.4% 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, 2022 by approximately $1.7 million (2021 – $2.3 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.

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 the Company’s ability to utilize future tax benefits.

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Notes to the Consolidated Financial Statements

Impact of the COVID-19 pandemic

The uncertainties created by the COVID-19 pandemic required the use of judgements and estimates in certain areas, such as impairment of financial and non-financial assets and revenue recognition. The future impact of the COVID-19 pandemic increases the risk, in future reporting periods, of material adjustments to the carrying amount of the Company’s net assets.

NOTE 2 – CHANGES IN ACCOUNTING POLICIES

New and amended standards adopted by the Company

Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 – Interest rate benchmark reform – Phase 2

In August 2020, the IASB issued an amendment to IFRS 9 – Financial instruments, IAS 39 – Financial instruments: recognition and measurement, IFRS 7 – Financial instrument: disclosures, IFRS 4 – Insurance contracts and IFRS 16 – Leases. The amendments address issues that arise from implementation of Interbank Offered Rate (IBOR) reform, where IBORs are replaced with alternative benchmark rates. For financial instruments at amortized cost, the amendments introduce a practical expedient such that if a change in the contractual cash flows is as a result of IBOR reform and occurs on an economically equivalent basis, the change will be accounted for by updating the effective interest rate with no immediate gain or loss recognized. The amendments also provide additional temporary relief from applying specific IAS 39 and IFRS 9 hedge accounting requirements to hedging relationships affected by IBOR reform and will require disclosure of information about new risks arising from the reform and how the transition to alternative benchmark rates will be managed.

This amendment to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 was adopted April 1, 2021. The Company has elected to apply the practical expedient and will apply to transactions occurring subsequent to April 1, 2021. The Company’s treasury department is managing the transition plan so that the existing contracts that refer to IBORs shall be adjusted to ensure contract continuity and address term and credit differences between IBORs and alternative reference rates. The adoption of this amendment had no material impact on the consolidated financial statements.

Configuration or customization costs in a cloud computing arrangement – IAS 38

In fiscal 2022, the IFRS Interpretations Committee finalized an agenda decision which clarifies the accounting for configuration and customization costs incurred in a cloud computing arrangement, more specifically in a Software as a Service arrangement (SaaS). The agenda decision provides guidance on assessing whether costs incurred can be capitalized as an intangible asset and on the timing of expense recognition. Judgement is required to determine if the capitalization criteria are met. The Company modified its accounting policy to align with the agenda decision and previously capitalized costs that no longer qualify for capitalization were expensed in the current period (Note 5).

NOTE 3 – BUSINESS COMBINATIONS

Year ended March 31, 2022

L3Harris Technologies’ Military Training business

On July 2, 2021, the Company concluded the acquisition of L3Harris Technologies’ Military Training business (L3H MT) for cash consideration of $1,337.7 million, subject to additional purchase price adjustments. L3H MT includes Link Simulation & Training, Doss Aviation and AMI. Link Simulation & Training is one of the leading providers of military training solutions in the U.S., Doss Aviation is the provider of initial flight training to the United States Air Force, and AMI is a design and manufacturing facility for simulator hardware. The acquisition expands the Company’s position as a platform-agnostic training systems integrator by diversifying its training and simulation leadership in the air domain, complementing land and naval training solutions, and enhancing its training and simulation capabilities in space and cyber.

In March 2021, in order to mitigate the potential impact on the purchase price of variations in the foreign exchange rate, the Company entered into forward foreign currency contracts to hedge a portion of the purchase price of the L3H MT acquisition (US$800 million). The Company applied hedge accounting and the change in fair value of these financial instruments prior to the L3H MT acquisition date was recorded in other comprehensive income. On July 2, 2021, these financial instruments were exercised in connection with the closing of the L3H MT acquisition, and the realized cash flow hedge losses of $17.1 million, less income tax recovery of $2.3 million, were transferred from accumulated other comprehensive income and included as an adjustment to the purchase consideration.

24 | CAE Financial Report 2022

Notes to the Consolidated Financial Statements

As at March 31, 2022, the preliminary determination of the fair value of the net assets acquired and liabilities assumed arising from the L3H MT acquisition are as follows:

		L3H MT
Current assets	$	110.0
Current liabilities		(130.8)
Property, plant and equipment		96.3
Right-of-use assets		31.6
Intangible assets		1,342.8
Deferred tax		41.2
Other non-current assets		7.7
Long-term debt, including current portion		(33.9)
Other non-current liabilities		(104.0)
Total purchase consideration, including the hedge of the purchase price	$	1,360.9
Purchase price adjustment payable		(8.4)
Total cash consideration paid on acquisition date	$	1,352.5

During the year ended March 31, 2022, the purchase price adjustment of $8.4 million was paid to the seller.

The preliminary fair value of the acquired intangible assets amounts to $1,342.8 million and consists of goodwill of $1,025.6 million ($868.3 million is deductible for tax purposes), customer relationships of $217.7 million and technology of $99.5 million.

The fair value and the gross contractual amount of the acquired accounts receivable were $41.9 million.

The revenue and adjusted segment operating income included in the consolidated income statement from L3H MT since the acquisition date was $409.9 million and $49.1 million respectively. Had L3H MT been consolidated from April 1, 2021, the consolidated income statement would have shown revenue and adjusted segment operating income of approximately $549.0 million and $65.3 million respectively. These pro-forma amounts are estimated based on the operations of the acquired businesses prior to the business combinations by the Company and assuming that the purchase price allocations were effective April 1, 2021.

The net assets acquired, including intangibles, of L3H MT are included in the Defense and Security segment.

The purchase price allocation is preliminary as at March 31, 2022.

Sabre’s AirCentre airline operations portfolio

On February 28, 2022, the Company concluded the acquisition of Sabre’s AirCentre airline operations portfolio (AirCentre), a suite of flight and crew management and optimization solutions, for cash consideration (net of cash acquired) of $498.9 million. The transaction provides the Company with the Sabre AirCentre product portfolio, related technology and intellectual property as well as the transfer of its highly talented workforce. The acquisition further expands the Company’s reach across its broad customer base beyond pilot training and establishes itself as a technology leader in the growing market for industry-leading, digitally‑enabled flight and crew operations solutions.

As at March 31, 2022, the preliminary determination of the fair value of the net assets acquired and liabilities assumed arising from the AirCentre acquisition are as follows:

		AirCentre
Current assets	$	42.0
Current liabilities		(3.4)
Right-of-use assets		0.3
Intangible assets		423.2
Deferred tax		1.2
Other non-current assets		36.9
Long-term debt, including current portion		(0.3)
Other non-current liabilities		(1.0)
Fair value of net assets acquired, excluding cash acquired	$	498.9
Cash acquired		3.8
Total cash consideration paid on acquisition date	$	502.7

The preliminary fair value of the acquired intangible assets amounts to $423.2 million and consists of goodwill of $257.8 million ($191.0 million is deductible for tax purposes), customer relationships of $101.8 million and technology and software of $63.6 million.

CAE Financial Report 2022 | 25

Notes to the Consolidated Financial Statements

The revenue and adjusted segment operating income included in the consolidated income statement from AirCentre since the acquisition date was $10.5 million and $2.2 million respectively. Had AirCentre been consolidated from April 1, 2021, the consolidated income statement would have shown revenue and adjusted segment operating income of approximately $151.5 million and $18.9 million respectively. These pro-forma amounts are estimated based on the operations of the acquired businesses prior to the business combinations by the Company and assuming that the purchase price allocations were effective April 1, 2021.

The net assets acquired, including intangibles, of AirCentre are included in the Civil Aviation segment.

The purchase price allocation is preliminary as at March 31, 2022.

Other fiscal 2022 business combinations

RB Group

On April 1, 2021, the Company acquired the remaining 79% equity interest in the RB Group, a leading provider of fully integrated solutions that modernize the way airlines and business aircraft operators interact with their crew. This acquisition further supports the Company’s expansion into digital flight crew management in its goal to drive additional software-enabled Civil aviation services. Prior to this transaction, the Company's 21% ownership interest in the RB Group was accounted for using the equity method.

GlobalJet Services

On June 10, 2021, the Company acquired GlobalJet Services (GlobalJet), a provider of aviation maintenance training that is recognized around the world for its services for both business and helicopter sectors. This acquisition expands the Company’s aircraft platform addressability in the maintenance training market through world-class, regulatory approved training programs.

Medicor Lab Inc.

On July 5, 2021, the Company acquired the shares of Medicor Lab Inc. (Medicor), a company which specializes in task trainer and realistic synthetic skin production. This acquisition augments the Company’s portfolio of products and expands its capabilities to offer improved quality simulators for a better customer experience.

The aggregate purchase price for the acquisitions of the RB Group, GlobalJet and Medicor consist of cash consideration (net of cash acquired) of $19.0 million, a long‑term payable of $1.2 million and a contingent consideration of up to $4.0 million if certain targets are met, and are mainly allocated to goodwill and intangible assets.

The net assets acquired, including intangibles, of the RB Group and GlobalJet are included in the Civil Aviation segment, and those of Medicor are included in the Healthcare segment.

Other

During the year ended March 31, 2022, the Company completed its final assessment of the fair value of assets acquired and liabilities assumed of Flight Simulation Company B.V., Merlot Aero Limited and TRU Simulation + Training Canada acquired in fiscal 2021 as well as the RB Group, GlobalJet and Medicor acquired in fiscal 2022.

Total acquisition costs of $38.4 million were incurred during fiscal 2022 relating to the Company's acquisitions and are included in Restructuring, integration and acquisition costs in the consolidated income statement (Note 6).

During the year ended March 31, 2022, adjustments to preliminary purchase price allocations of acquisitions realized in fiscal 2021 resulted in increases of intangible assets of $19.2 million, current liabilities of $15.2 million, and deferred tax assets of $3.8 million, and a decrease of current assets of $7.8 million.

During the year ended March 31, 2022, net cash considerations of $4.9 million were paid for acquisitions realized in prior years.

Year ended March 31, 2021

Flight Simulation Company B.V.

On November 16, 2020, the Company acquired the shares of Flight Simulation Company B.V. (FSC) for cash consideration (net of cash acquired) of $105.2 million, subject to purchase price adjustments. FSC is a provider of training solutions as well as instructor provisioning in Europe for airline and cargo operators. The acquisition provides the Company with an expanded portfolio of customers and an established recurring training business which is complementary to its network.

Merlot Aero Limited

On December 22, 2020, the Company acquired the shares of Merlot Aero Limited (Merlot) for cash consideration (net of cash acquired) of $31.7 million and a long-term contingent cash consideration payable of up to US$10.0 million if certain criteria are met. Merlot is a leading civil aviation crew management and optimization software company based in Auckland, New Zealand. This acquisition expands the Company's reach beyond pilot training and into the market for digitally-enabled crew optimization services.

26 | CAE Financial Report 2022

Notes to the Consolidated Financial Statements

TRU Simulation + Training Canada Inc.

On January 26, 2021, the Company acquired the shares of TRU Simulation + Training Canada Inc. (TRU Canada) for cash consideration (net of cash acquired) of $49.6 million, subject to purchase price adjustments. TRU Canada is a manufacturer of full⁃flight simulators and flight training devices. The acquisition expands the Company’s global installed base of commercial flight simulators and customers, and the addressable market for simulator lifecycle support services and also provides the Company with a backlog of simulator orders, full-flight simulators and access to a number of airline customers globally, as well as a 33.3% equity interest in TRU Flight Training Iceland ehf, a joint venture training centre with Iceland Air, located in Iceland.

As at March 31, 2021, the preliminary determination of the fair value of the net assets acquired and liabilities assumed arising from the acquisitions are as follows:

		Total
Current assets, excluding cash on hand	$	128.8
Current liabilities		(132.5)
Property, plant and equipment		8.5
Right-of-use assets		62.6
Intangible assets		219.8
Investment in equity accounted investees		4.1
Deferred tax		0.7
Other non-current assets		0.5
Long-term debt, including current portion		(73.0)
Other non-current liabilities		(20.1)
Fair value of net assets acquired, excluding cash acquired	$	199.4
Cash acquired		6.0
Total purchase consideration	$	205.4
Net short-term payable		(1.1)
Settlement of pre-existing relationship		(0.3)
Fair value of long-term contingent cash consideration payable		(11.5)
Total cash consideration paid on acquisition date	$	192.5

The fair value of the acquired identifiable intangible assets amount to $219.8 million and consists of goodwill of $169.0 million (non deductible for tax purposes), customer relationships of $47.9 million and other intangible assets of $2.9 million.

The fair value and the gross contractual amount of the acquired accounts receivable were $14.6 million.

Total acquisition costs incurred during fiscal 2021 relating to these acquisitions are included in Restructuring, integration and acquisition costs in the consolidated income statement (Note 6).

The net assets acquired, including intangible assets, of FSC, Merlot and TRU Canada are included in the Civil Aviation segment. The goodwill arising from these acquisitions is mainly attributable to the expansion of CAE’s installed base of commercial flight simulators, the expansion of the Company’s reach into the market for digitally-enabled crew optimization services, market capacity consolidation and expected synergies from combining operations.

As at March 31, 2021, the purchase price allocation for FSC, Merlot and TRU Canada were preliminary.

CAE Financial Report 2022 | 27

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 adjusted segment operating income. Adjusted segment operating income is calculated by taking operating income and excluding restructuring, integration and acquisition costs, and impairments and other gains and losses arising from significant strategic transactions or specific events, which gives an indication of the profitability of each segment because it does not include the impact of items not specifically related to the segment’s performance. For the years ended March 31, 2022 and 2021, impairments and other gains and losses arising from significant strategic transactions or specific events consist of the cloud computing transition adjustment and impairments and other gains and losses incurred in relation to the COVID-19 pandemic. 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.

					Defense
	Civil Aviation				and Security				Healthcare						Total
	2022		2021		2022		2021		2022		2021		2022		2021
External revenue	$	1,617.8	$	1,412.9	$	1,602.1	$	1,217.1	$	151.4	$	351.9	$	3,371.3	$	2,981.9
Depreciation and amortization	224.1		242.9		73.4		54.3		13.0		22.3		310.5		319.5
Impairment of non-financial assets – net	34.5		119.9		3.0		43.2		4.3		8.6		41.8		171.7
Share of after-tax profit (loss) of equity accounted investees	42.1		5.2		6.4		(2.5)		—		—		48.5		2.7
Operating income	224.1		6.5		56.0		15.5		4.1		26.4		284.2		48.4
Adjusted segment operating income	314.7		164.3		119.2		87.0		10.6		29.3		444.5		280.6

Reconciliation of adjusted segment operating income is as follows:

					Defense
	Civil Aviation				and Security				Healthcare						Total
	2022		2021		2022		2021		2022		2021		2022		2021
Operating income	$	224.1	$	6.5	$	56.0	$	15.5	$	4.1	$	26.4	$	284.2	$	48.4
Restructuring, integration and acquisition costs (Note 6)	79.0		76.1		61.4		45.0		6.5		2.9		146.9		124.0
Cloud computing transition adjustment (Note 5)	11.6		—		1.8		—		—		—		13.4		—
Impairments and other gains and losses incurred
in relation to the COVID-19 pandemic	—		81.7		—		26.5		—		—		—		108.2
Adjusted segment operating income	$	314.7	$	164.3	$	119.2	$	87.0	$	10.6	$	29.3	$	444.5	$	280.6

Capital expenditures by segment, which consist of additions to property, plant and equipment and intangible assets (excluding those acquired in business combinations), are as follows:

	2022		2021
Civil Aviation	$	300.7	$	116.7
Defense and Security	46.5		27.5
Healthcare	15.6		19.4
Total capital expenditures	$	362.8	$	163.6

28 | CAE Financial Report 2022

Notes to the Consolidated Financial Statements

Assets and liabilities employed by segment

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

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

		2022		2021
Assets employed
Civil Aviation	$	5,269.6	$	4,847.5
Defense and Security		3,163.1		1,561.9
Healthcare		269.2		250.2
Assets not included in assets employed		876.9		2,088.8
Total assets	$	9,578.8	$	8,748.4
Liabilities employed
Civil Aviation	$	1,012.7	$	1,039.4
Defense and Security		824.8		540.5
Healthcare		64.9		159.3
Liabilities not included in liabilities employed		3,589.8		3,796.4
Total liabilities	$	5,492.2	$	5,535.6

Products and services information

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

		2022		2021
Products	$	1,403.6	$	1,359.7
Training and services		1,967.7		1,622.2
Total external revenue	$	3,371.3	$	2,981.9

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 presented by geographical regions based on the Company’s allocation of the related purchase price.

		2022		2021
External revenue
Canada	$	366.8	$	455.9
United States		1,682.5		1,324.2
United Kingdom		208.5		137.7
Rest of Americas		78.4		55.0
Europe		473.4		553.2
Asia		472.2		381.4
Oceania and Africa		89.5		74.5
	$	3,371.3	$	2,981.9
		2022		2021
Non-current assets other than financial instruments and deferred tax assets
Canada	$	1,570.8	$	1,459.1
United States		3,554.2		1,571.1
United Kingdom		370.4		358.8
Rest of Americas		177.0		205.6
Europe		916.3		906.2
Asia		498.1		501.6
Oceania and Africa		79.5		81.8
	$	7,166.3	$	5,084.2

CAE Financial Report 2022 | 29

Notes to the Consolidated Financial Statements

NOTE 5 – OTHER (GAINS) AND LOSSES

		2022		2021
Impairment of non-financial assets	$	—	$	103.5
Net gain on foreign currency exchange differences		(0.9)		(17.2)
Cloud computing transition adjustment		13.4		—
Remeasurement of royalty obligations		(23.8)		(12.7)
Remeasurement of contingent consideration arising on business combinations		(11.4)		—
Other		(14.3)		18.1
Other (gains) and losses	$	(37.0)	$	91.7

Cloud computing transition adjustment

In fiscal 2022, the IFRS Interpretations Committee published a final agenda decision that clarified how to recognize certain configuration and customization expenditures related to cloud computing arrangements with retrospective application (Note 2). Costs that do not meet the capitalization criteria should be expensed as incurred. The Company modified its accounting policy to align with the agenda decision and previously capitalized costs that no longer qualify for capitalization were expensed in the current period.

Impairment of non-financial assets

During the year ended March 31, 2021, given the negative impacts of the COVID-19 pandemic on the global economy, the Company’s main markets, its product offering and its customers, the Company recorded impairment charges totaling $103.5 million. For the Civil Aviation segment, the reduced demand from aviation customers, shifts in aircraft fleet type operated by its customers and reduced activity in helicopter training in relation to the COVID-19 pandemic resulted in impairment charges of $46.7 million of property, plant and equipment, mostly simulators and parts, $22.2 million of intangible assets, including capitalized development costs and customer relationships, and $11.2 million of inventories. For the Defense and Security segment, the market was impacted by the evolving conditions of the COVID-19 pandemic which led to changes in customers focus and in the expected recoverability of certain technologies and products and resulted in impairment charges of $12.6 million of intangible assets, mostly capitalized development costs, and $10.8 million of inventories.

NOTE 6 – RESTRUCTURING, INTEGRATION AND ACQUISITION COSTS

		2022		2021
Integration and acquisition costs	$	87.8	$	6.9
Impairment of non-financial assets		37.1		59.5
Severances and other employee related costs		6.9		42.9
Other costs		15.1		14.7
Total restructuring, integration and acquisition costs	$	146.9	$	124.0

In fiscal 2021, the Company announced that it would be taking additional measures to best serve the market by optimizing its global asset base and footprint and adjusting its business to correspond with the expected level of demand and the structural efficiencies that will be enduring. As a result of these measures, the Company has implemented a restructuring program consisting mainly of real estate costs, asset relocations and other direct costs related to the optimization of its footprint and employee termination benefits, which have been carried out throughout fiscal 2021 and fiscal 2022.

Impairment of non-financial assets incurred in relation to this restructuring program primarily includes impairment of property, plant and equipment of training devices determined to be in surplus, intangible assets related to the termination of certain product offerings and buildings and right-of-use assets related to leased real estate facilities to align with the optimization of the Company’s footprint and asset base.

For the year ended March 31, 2022, restructuring, integration and acquisition costs associated with the L3H MT acquisition (Note 3) amounted to $63.5 million (2021 – $4.3 million) and the AirCentre acquisition amounted to $18.1 million (2021 – nil).

30 | CAE Financial Report 2022

Notes to the Consolidated Financial Statements

NOTE 7 – FINANCE EXPENSE – NET

		2022		2021
Finance expense:
Long-term debt (other than lease liabilities)	$	104.1	$	100.2
Lease liabilities		16.0		21.4
Royalty obligations		11.9		9.8
Employee benefits obligations (Note 20)		5.3		6.5
Other		13.2		13.7
Borrowing costs capitalized		(7.1)		(2.9)
Finance expense	$	143.4		148.7
Finance income:
Loans and investment in finance leases	$	(9.1)	$	(10.6)
Other		(3.7)		(2.5)
Finance income	$	(12.8)	$	(13.1)
Finance expense – net	$	130.6	$	135.6

NOTE 8 – INCOME TAXES

Income tax expense

The reconciliation of income taxes at Canadian statutory rates with the reported income taxes is as follows:

		2022			2021
Earnings (loss) before income taxes	$	153.6		$	(87.2)
Canadian statutory income tax rates		26.54	%		26.53	%
Income taxes at Canadian statutory rates	$	40.8		$	(23.1)
Effect of differences in tax rates in other jurisdictions		(16.8)			(5.8)
Unrecognized tax benefits and tax benefits not previously recognized		2.2			3.2
Non-deductible expenses (non-taxable revenues)		1.5			(4.8)
Tax impact on after-tax profit of equity accounted investees		(12.1)			(1.1)
Prior years' tax adjustments		(1.5)			(6.3)
Other		(10.5)			(1.8)
Income tax expense (recovery)	$	3.6		$	(39.7)

The Company's applicable tax rate corresponds to the combined Canadian tax rates applicable in the provinces where the Company operates. The increase is due to a change in the allocation of income in the jurisdictions it operates.

Significant components of the provision for the income tax expense are as follows:

		2022		2021
Current income tax expense (recovery):
Current year	$	30.4	$	8.6
Prior years' tax adjustments		3.1		(15.0)
Deferred income tax (recovery) expense:
Tax benefit not previously recognized used to reduce the deferred tax expense		(4.1)		(5.2)
Change in income tax rates		(6.6)		(0.8)
Origination and reversal of temporary differences		(19.2)		(27.3)
Income tax expense (recovery)	$	3.6	$	(39.7)

CAE Financial Report 2022 | 31

Notes to the Consolidated Financial Statements

Deferred tax assets and liabilities

During the year ended March 31, 2022, movements in temporary differences are as follows:

															Foreign
	Balance												currency
	beginning		Recognized			Recognized			Recognized			Business			exchange			Balance
	of year		in income				in OCI		in equity	combinations			differences			end of year
Non-capital loss carryforwards	$	48.1		$	48.3		$	—		$	—		$	0.2		$	0.3	$	96.9
Unclaimed research & development expenditures	70.8			15.9			—			—			(0.1)			—		86.6
Capital loss carryforwards	1.1			1.0			—			—			2.3			—		4.4
Investment tax credits	(76.4)			(9.0)			—			—			—			—		(85.4)
Property, plant and equipment and right-of-use of assets	(75.2)			(6.5)			—			—			(4.6)			0.1		(86.2)
Intangible assets	(92.5)			8.3			—			—			(5.9)			(0.1)		(90.2)
Deferred revenues, contract assets and contract liabilities	1.5			(42.2)			—			—			41.6			0.3		1.2
Foreign currency exchange difference	(1.4)			9.2			(4.9)			—			—			(0.3)		2.6
Derivative financial assets and liabilities	(6.5)			6.2			0.6			—			—			(0.5)		(0.2)
Defined benefit obligation	57.2			4.3			(33.4)			—			—			(0.9)		27.2
Amounts not currently deductible	65.0			4.6			—			—			13.5			—		83.1
Other	(10.3)			(10.2)			—			3.7			—			0.5		(16.3)
Net deferred tax assets (liabilities)	$	(18.6)		$	29.9		$	(37.7)		$	3.7		$	47.0		$	(0.6)	$	23.7

During the year ended March 31, 2021, movements in temporary differences are as follows:

																	Foreign
	Balance															currency
	beginning		Recognized				Recognized			Recognized			Business			exchange				Balance
	of year			in income				in OCI		in equity			combinations			differences			end of year
Non-capital loss carryforwards	$	33.4			$	12.0		$	—		—			$	2.4		$	0.3		$	48.1
Unclaimed research & development expenditures	64.4				5.8			—			—			0.6			—			70.8
Capital loss carryforwards	1.4				(0.3)			—			—			—			—			1.1
Investment tax credits	(70.0)				(6.4)			—			—			—			—			(76.4)
Property, plant and equipment and right-of-use of assets	(88.4)				(5.8)			—			—			6.9			12.1			(75.2)
Intangible assets	(93.0)				9.0			—			—			(11.5)			3.0			(92.5)
Deferred revenues, contract assets and contract liabilities	(15.9)				6.4			—			—			11.2			(0.2)			1.5
Foreign currency exchange difference	(2.3)				2.7			(1.6)			—			—			(0.2)			(1.4)
Derivative financial assets and liabilities	25.5				(18.9)			(13.0)			—			—			(0.1)			(6.5)
Defined benefit obligation	53.1				4.5			(0.3)			—			—			(0.1)			57.2
Amounts not currently deductible	42.7				33.2			—			—			(8.9)			(2.0)			65.0
Other	(17.0)				(8.9)			—			15.7			—			(0.1)			(10.3)
Net deferred tax (liabilities) assets	$	(66.1)			$	33.3		$	(14.9)		$	15.7		$	0.7		$	12.7		$	(18.6)

As at March 31, 2022, net deferred tax assets of $88.7 million (2021 – $85.8 million) were recognized in jurisdictions that incurred losses this fiscal year or the preceding fiscal year. Based upon the level of historical taxable income or projections for future taxable income, management believes it is probable that the Company will realize the benefits of these net deferred tax assets.

As at March 31, 2022, a deferred income tax liability on taxable temporary differences of $2,468.6 million (2021 – $2,439.9 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.

The non-capital losses incurred in various jurisdictions expire as follows:

Expiry date	Unrecognized		Recognized
2023-2027	$	29.1	$	18.4
2028-2041		27.5		198.7
No expiry date		144.6		165.0
	$	201.2	$	382.1

As at March 31, 2022, the Company has $118.8 million (2021 – $107.4 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.

32 | CAE Financial Report 2022

Notes to the Consolidated Financial Statements

NOTE 9 – SHARE CAPITAL AND EARNINGS PER SHARE

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, 2022, the number of common shares issued and fully paid was 317,024,123 (2021 – 293,355,463).

Issuance of common shares upon conversion of subscription receipts

On July 2, 2021, concurrent with the completion of the L3H MT acquisition (Note 3), 22,400,000 outstanding subscription receipts were converted into CAE common shares in accordance with the terms of the subscription receipts, on a one-for-one basis. Proceeds from the issuance of the subscription receipts of $700.0 million together with interest earned of $0.4 million were released from escrow and used to fund the L3H MT acquisition. Total issuance-related costs amounted to $31.0 million, less income tax recovery of $8.2 million.

Issuance of common shares

On November 30, 2020, the Company completed a public equity offering and a concurrent private placement of 16,594,126 common shares at a price of $29.85 per share for aggregate gross proceeds of $495.3 million.

On March 12, 2021, the Company completed a marketed public equity offering of 10,454,545 common shares at a price of $34.29 (US$27.50) per share for gross proceeds of $358.5 million.

Total issuance-related costs of the equity offerings amounted to $42.3 million, less income tax recovery of $11.2 million.

Earnings per share computation

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

	2022	2021
Weighted average number of common shares outstanding	311,016,278	272,009,538
Effect of dilutive stock options	1,885,078	—
Weighted average number of common shares outstanding for diluted earnings per share calculation	312,901,356	272,009,538

As at March 31, 2022, stock options to acquire 663,430 common shares (2021 – 7,476,902) have been excluded from the above calculation since their inclusion would have had an anti-dilutive effect.

CAE Financial Report 2022 | 33

Notes to the Consolidated Financial Statements

NOTE 10 – ACCOUNTS RECEIVABLE

Details of accounts receivable are as follows:

		2022		2021
Current trade receivables	$	230.4	$	180.3
Past due trade receivables
1-30 days		50.4		48.2
31-60 days		29.0		22.6
61-90 days		15.0		11.8
Greater than 90 days		121.2		139.5
Total trade receivables	$	446.0	$	402.4
Investment in finance leases (Note 15)		21.6		13.6
Receivables from related parties (Note 33)		40.3		29.4
Other receivables		76.9		107.6
Credit loss allowances		(27.9)		(34.4)
Total accounts receivable	$	556.9	$	518.6

Changes in credit loss allowances are as follows:

		2022		2021
Credit loss allowances, beginning of year	$	(34.4)	$	(27.5)
Additions		(4.7)		(15.7)
Amounts charged off		8.9		6.3
Unused amounts reversed		0.8		0.4
Foreign currency exchange differences		1.5		2.1
Credit loss allowances, end of year	$	(27.9)	$	(34.4)

NOTE 11 – BALANCE FROM CONTRACTS WITH CUSTOMERS

Net contract liabilities are as follows:

		2022		2021
Contract assets - current	$	608.3	$	461.9
Contract assets - non-current		34.1		—
Contract liabilities - current		(788.3)		(674.7)
Contract liabilities - non-current		(130.3)		(96.2)
Net contract liabilities	$	(276.2)	$	(309.0)

During the year ended March 31, 2022, the Company recognized revenue of $482.6 million (2021 – $517.7 million) that was included in the contract liability balance at the beginning of the year.

During the year ended March 31, 2022, the Company recognized revenue of $55.5 million (2021 – reversal of revenue of $8.9 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, 2022, the amount of the revenues expected to be realized in future years from performance obligations that are unsatisfied, or partially unsatisfied, was $5,420.0 million. The Company expects to recognize approximately 38% of these remaining performance obligations as revenue by March 31, 2023, an additional 21% by March 31, 2024 and the balance thereafter.

NOTE 12 – INVENTORIES

		2022		2021
Work in progress	$	291.5	$	446.0
Raw materials, supplies and manufactured products		228.3		201.8
Total inventories	$	519.8	$	647.8

During the year ended March 31, 2022, the use of inventory recognized in cost of sales amounted to $413.9 million (2021 ⁃ $394.9 million), and the impairment of inventories to net realizable value amounted to $5.2 million (2021 – $34.0 million).

34 | CAE Financial Report 2022

Notes to the Consolidated Financial Statements

NOTE 13 – PROPERTY, PLANT AND EQUIPMENT

					Machinery					Assets
	Buildings					and				under
(amounts in millions)		and land	Simulators		equipment			Aircraft	construction			Total
Net book value as at March 31, 2020	$	262.8	$	1,569.3	$	51.4	$	69.3	$	201.2	$	2,154.0
Additions		16.2		13.4		13.4		19.1		45.5		107.6
Additions – business combinations (Note 3)		0.3		7.9		0.3		—		—		8.5
Disposals		—		(1.9)		(0.1)		(0.4)		(1.6)		(4.0)
Depreciation		(19.8)		(113.3)		(15.9)		(5.8)		—		(154.8)
Impairment		—		(76.7)		—		—		—		(76.7)
Purchase of assets under lease (Note 15)		—		96.5		—		—		—		96.5
Transfers and others		36.1		48.8		1.4		0.6		(97.3)		(10.4)
Foreign currency exchange differences		(13.5)		(120.9)		(2.2)		(6.7)		(8.0)		(151.3)
Net book value as at March 31, 2021	$	282.1	$	1,423.1	$	48.3	$	76.1	$	139.8	$	1,969.4
Additions		29.4		14.5		15.5		1.6		211.2		272.2
Additions – business combinations (Note 3)		52.1		18.7		21.5		2.1		2.1		96.5
Disposals		(2.2)		(0.4)		(0.1)		(1.1)		—		(3.8)
Depreciation		(21.4)		(101.1)		(19.3)		(5.2)		—		(147.0)
Impairment		(13.8)		(10.5)		—		—		—		(24.3)
Purchase of assets under lease (Note 15)		—		21.7		—		—		—		21.7
Transfers and others		1.1		97.6		1.1		(1.0)		(95.5)		3.3
Foreign currency exchange differences		(7.2)		(48.5)		(0.8)		(1.0)		(1.2)		(58.7)
Net book value as at March 31, 2022	$	320.1	$	1,415.1	$	66.2	$	71.5	$	256.4	$	2,129.3
					Machinery					Assets
---	---	---	---	---	---	---	---	---	---	---	---	---
	Buildings					and				under
(amounts in millions)		and land	Simulators		equipment			Aircraft	construction			Total
Cost	$	513.8	$	2,140.6	$	192.9	$	91.9	$	139.8	$	3,079.0
Accumulated depreciation and impairment		(231.7)		(717.5)		(144.6)		(15.8)		—		(1,109.6)
Net book value as at March 31, 2021	$	282.1	$	1,423.1	$	48.3	$	76.1	$	139.8	$	1,969.4
Cost	$	561.9	$	2,180.7	$	209.2	$	89.4	$	256.4	$	3,297.6
Accumulated depreciation and impairment		(241.8)		(765.6)		(143.0)		(17.9)		—		(1,168.3)
Net book value as at March 31, 2022	$	320.1	$	1,415.1	$	66.2	$	71.5	$	256.4	$	2,129.3

During the year ended March 31, 2022, depreciation of $145.0 million (2021 – $152.4 million) has been recorded in cost of sales, $0.5 million (2021 – $0.5 million) in research and development expenses and $1.5 million (2021 – $1.9 million) in selling, general and administrative expenses.

CAE Financial Report 2022 | 35

Notes to the Consolidated Financial Statements

NOTE 14 – INTANGIBLE ASSETS

			Capitalized						Technology,			Other
(amounts in millions)	Goodwill		development		Customer				software		intangible
	(Note 27)			costs	relationships		Licenses		and ERP			assets		Total
Net book value as at March 31, 2020	$	1,085.3	$	249.5	$	312.0	$	308.7	$	78.9	$	22.1	$	2,056.5
Additions – internal development		—		48.6		—		—		6.9		—		55.5
Additions – acquired separately		—		—		—		—		—		0.5		0.5
Additions – business combinations (Note 3)		169.0		—		47.9		—		2.9		—		219.8
Amortization		—		(44.6)		(29.7)		(17.6)		(14.7)		(2.7)		(109.3)
Impairment		—		(41.4)		(9.3)		—		—		(1.1)		(51.8)
Transfers and others		—		5.3		(0.9)		(0.9)		(1.4)		0.4		2.5
Foreign currency exchange differences		(81.1)		(1.7)		(22.5)		(10.8)		(1.1)		(0.7)		(117.9)
Net book value as at March 31, 2021	$	1,173.2	$	215.7	$	297.5	$	279.4	$	71.5	$	18.5	$	2,055.8
Additions – internal development		—		55.6		—		—		35.0		—		90.6
Additions – business combinations (Note 3)		1,316.8		2.2		323.7		—		169.7		—		1,812.4
Amortization		—		(32.7)		(40.7)		(16.0)		(18.3)		(1.8)		(109.5)
Impairment		—		(4.2)		—		—		—		—		(4.2)
Cloud computing transition adjustment (Note 5)		—		—		—		—		(13.4)		—		(13.4)
Transfers and others		—		(2.1)		(0.1)		(0.1)		0.4		—		(1.9)
Foreign currency exchange differences		(25.7)		(0.1)		(5.4)		(0.5)		(1.2)		(0.6)		(33.5)
Net book value as at March 31, 2022	$	2,464.3	$	234.4	$	575.0	$	262.8	$	243.7	$	16.1	$	3,796.3
			Capitalized						Technology,			Other
---	---	---	---	---	---	---	---	---	---	---	---	---	---	---
	Goodwill		development		Customer				software		intangible
	(Note 27)			costs	relationships		Licenses			and ERP		assets		Total
Cost	$	1,210.7	$	433.6	$	482.6	$	313.6	$	257.8	$	52.4	$	2,750.7
Accumulated amortization and impairment		(37.5)		(217.9)		(185.1)		(34.2)		(186.3)		(33.9)		(694.9)
Net book value as at March 31, 2021	$	1,173.2	$	215.7	$	297.5	$	279.4	$	71.5	$	18.5	$	2,055.8
Cost	$	2,501.8	$	480.9	$	794.7	$	312.8	$	445.4	$	51.1	$	4,586.7
Accumulated amortization and impairment		(37.5)		(246.5)		(219.7)		(50.0)		(201.7)		(35.0)		(790.4)
Net book value as at March 31, 2022	$	2,464.3	$	234.4	$	575.0	$	262.8	$	243.7	$	16.1	$	3,796.3

During the year ended March 31, 2022, amortization of $77.2 million (2021 – $63.8 million) has been recorded in cost of sales, $30.6 million (2021 – $43.6 million) in research and development expenses and $1.7 million (2021 – $1.9 million) in selling, general and administrative expenses.

36 | CAE Financial Report 2022

Notes to the Consolidated Financial Statements

NOTE 15 – LEASES

Leases as lessee

Right-of-use assets

					Machinery
	Buildings					and
	and land		Simulators		equipment			Aircraft	Total
Net book value as at March 31, 2020	$	251.9	$	138.8	$	5.0	$	0.2	$	395.9
Additions and remeasurements		(2.3)		0.1		16.1		13.0		26.9
Additions – business combinations (Note 3)		13.1		49.5		—		—		62.6
Depreciation		(29.0)		(17.2)		(3.4)		(0.5)		(50.1)
Impairment		(9.2)		—		—		—		(9.2)
Purchase of assets under lease (Note 13)		—		(96.5)		—		—		(96.5)
Transfers and others		1.1		(0.6)		0.4		(0.2)		0.7
Foreign currency exchange differences		(13.6)		(8.2)		—		—		(21.8)
Net book value as at March 31, 2021	$	212.0	$	65.9	$	18.1	$	12.5	$	308.5
Additions and remeasurements		59.4		60.0		0.2		—		119.6
Additions – business combinations (Note 3)		32.7		—		—		—		32.7
Depreciation		(31.2)		(13.8)		(2.6)		(0.8)		(48.4)
Impairment		(8.1)		—		—		—		(8.1)
Purchase of assets under lease (Note 13)		—		(21.7)		—		—		(21.7)
Transfers and others		(3.3)		0.5		(0.2)		—		(3.0)
Foreign currency exchange differences		(6.2)		(0.4)		—		—		(6.6)
Net book value as at March 31, 2022	$	255.3	$	90.5	$	15.5	$	11.7	$	373.0

During the year ended March 31, 2022, depreciation of $46.0 million (2021 – $47.8 million) has been recorded in cost of sales and $2.4 million (2021 – $2.3 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, 2022, expenses of $15.4 million (2021 – $19.5 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.

Leases as lessor

Operating Leases

As at March 31, 2022, the net book value of property, plant and equipment leased under operating leases to third parties was $51.8 million (2021 – $58.2 million).

Undiscounted lease payments to be received under operating leases are as follows:

		2022		2021
Less than 1 year	$	36.3	$	28.6
Between 1 and 2 years		24.1		24.1
Between 2 and 3 years		23.3		20.6
Between 3 and 4 years		21.0		20.2
Between 4 and 5 years		13.6		17.9
More than 5 years		26.8		28.9
Total undiscounted lease payments receivable	$	145.1	$	140.3

CAE Financial Report 2022 | 37

Notes to the Consolidated Financial Statements

Finance Leases

Undiscounted lease payments to be received under finance leases are as follows:

		2022		2021
Less than 1 year	$	24.9	$	17.2
Between 1 and 2 years		12.0		17.2
Between 2 and 3 years		12.9		20.6
Between 3 and 4 years		11.1		10.6
Between 4 and 5 years		11.8		12.4
More than 5 years		114.5		124.8
Total undiscounted lease payments receivable	$	187.2	$	202.8
Unearned finance income		(59.1)		(65.2)
Discounted unguaranteed residual values of leased assets		(9.4)		(9.1)
Total investment in finance leases	$	118.7	$	128.5
Current portion (Note 10)		21.6		13.6
Non-current portion (Note 16)	$	97.1	$	114.9

NOTE 16 – OTHER NON-CURRENT ASSETS

		2022		2021
Restricted cash	$	1.9	$	11.4
Contract assets (Note 11)		34.1		—
Prepaid rent to a portfolio investment		18.2		21.2
Advances to a portfolio investment		10.5		11.1
Investment in finance leases (Note 15)		97.1		114.9
Non-current receivables		42.0		45.6
Investment tax credits		315.1		259.2
Other		30.8		32.4
	$	549.7	$	495.8

NOTE 17 – ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

		2022		2021
Accounts payable trade	$	436.2	$	461.9
Accrued liabilities		498.5		452.1
Deferred revenue		16.2		9.7
Amount due to related parties (Note 33)		5.1		5.8
Current portion of royalty obligations		19.1		16.1
	$	975.1	$	945.6

NOTE 18 – PROVISIONS

Changes in provisions are as follows:

	Restoration
	and simulator		Restructuring
	removal		(Note 6)			Legal	Warranties			Other		Total
Provisions, as at March 31, 2021	$	10.9	$	31.8	$	5.3	$	31.2	$	4.3	$	83.5
Additions		0.1		13.2		1.1		8.5		1.9		24.8
Business combinations (Note 3)		—		—		1.5		0.7		—		2.2
Amount used		(1.1)		(29.4)		—		(15.1)		—		(45.6)
Reversal of unused amounts		(0.2)		(6.3)		—		(2.6)		(0.4)		(9.5)
Foreign currency exchange differences		(0.3)		(0.3)		(0.3)		—		(0.1)		(1.0)
Transfers and others		—		0.2		0.4		2.3		—		2.9
Provisions, as at March 31, 2022	$	9.4	$	9.2	$	8.0	$	25.0	$	5.7	$	57.3
Current portion		—		9.2		7.7		15.6		4.2		36.7
Non-current portion	$	9.4	$	—	$	0.3	$	9.4	$	1.5	$	20.6

38 | CAE Financial Report 2022

Notes to the Consolidated Financial Statements

NOTE 19 – DEBT FACILITIES

Long-term debt, net of transaction costs is as follows:

							2022				2021
Notional amount			period		Current	Non-current			Current	Non-current
Unsecured senior notes
U.S. dollar, fixed rate - 3.60% to 4.90%	US$	960.5	2022-2034	$	17.4	$	1,176.5	$	17.2	$	1,202.3
Canadian dollar, fixed rate - 4.15%	$	27.1	2022-2027		2.9		24.2		2.9		27.1
Term loans
U.S. dollar, variable rate	US$	412.4	2022-2025		69.7		443.1		71.2		149.3
Canadian dollar, variable rate	$	35.2	2022-2028		5.6		29.4		5.6		35.1
Other			2022-2026		14.1		58.4		15.3		54.7
Lease liabilities
U.S. dollar			2022-2043		66.1		164.6		60.8		110.7
Other			2022-2043		32.9		131.4		27.0		148.7
R&D obligations
Canadian dollar			2022-2042		33.1		439.9		16.3		407.3
Revolving credit facilities
U.S. dollar, variable rate					—		336.9		—		—
Total long-term debt				$	241.8	$	2,804.4	$	216.3	$	2,135.2

Term loans

On July 2, 2021, concurrent with the completion of the L3H MT acquisition (Note 3), the Company entered into unsecured term loan agreements for an aggregate amount of US$300.0 million, which consists of a first tranche of US$175.0 million due in 2023 and a second tranche of US$125.0 million due in 2025, bearing interest at variable rates.

In March 2022, the Company repaid a term loan of US$50.0 million.

Revolving credit facility amendments

In September 2021, the Company extended the maturity date of its US$850.0 million unsecured revolving credit facility until September 29, 2026.

On March 31, 2022, the Company amended its Sidecar unsecured revolving credit facility, that it entered into in April 2020, to decrease its total limit from $500.0 million to $300.0 million and extend the maturity date until April 10, 2023. This Sidecar facility is intended to provide access to additional liquidity as a supplement to the Company’s committed line of credit of US$850.0 million.

CAE Financial Report 2022 | 39

Notes to the Consolidated Financial Statements

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, 2020	$	1,400.4	$	319.2	$	487.8	$	391.5	$	713.3	$	3,312.2
Changes from financing cash flows
Net repayment from borrowing under
revolving credit facilities		—		—		—		—		(705.6)		(705.6)
Proceeds from long-term debt		—		127.2		—		23.9		—		151.1
Repayment of long-term debt		—		(86.1)		—		—		—		(86.1)
Repayment of lease liabilities		—		—		(200.8)		—		—		(200.8)
Total changes from financing cash flows	$	—	$	41.1	$	(200.8)	$	23.9	$	(705.6)	$	(841.4)
Non-cash changes
Business combinations (Note 3)		—		0.8		72.2		—		—		73.0
Foreign currency exchange differences		(151.4)		(30.2)		(31.5)		—		(7.7)		(220.8)
Additions and remeasurement of lease liabilities		—		—		26.9		—		—		26.9
Accretion		—		—		—		20.7		—		20.7
Other		0.5		0.3		(7.4)		(12.5)		—		(19.1)
Total non-cash changes	$	(150.9)	$	(29.1)	$	60.2	$	8.2	$	(7.7)	$	(119.3)
Net book value as at March 31, 2021	$	1,249.5	$	331.2	$	347.2	$	423.6	$	—	$	2,351.5
Changes from financing cash flows
Net proceeds from borrowing under
revolving credit facilities		—		—		—		—		344.6		344.6
Proceeds from long-term debt		—		402.3		—		26.8		—		429.1
Repayment of long-term debt		(20.5)		(110.8)		—		(0.8)		—		(132.1)
Repayment of lease liabilities		—		—		(89.5)		—		—		(89.5)
Total changes from financing cash flows	$	(20.5)	$	291.5	$	(89.5)	$	26.0		344.6	$	552.1
Non-cash changes
Business combinations (Note 3)		—		0.2		34.9		—		—		35.1
Foreign currency exchange differences		(8.5)		(4.1)		(7.8)		—		(7.7)		(28.1)
Additions and remeasurement of lease liabilities		—		—		119.6		—		—		119.6
Accretion		—		—		—		25.3		—		25.3
Other		0.5		1.5		(9.4)		(1.9)		—		(9.3)
Total non-cash changes	$	(8.0)	$	(2.4)	$	137.3	$	23.4	$	(7.7)	$	142.6
Net book value as at March 31, 2022	$	1,221.0	$	620.3	$	395.0	$	473.0	$	336.9	$	3,046.2

As at March 31, 2022, the Company is in compliance with all of its covenants.

NOTE 20 – 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 a funded pension plan for employees in the United Kingdom that provides benefits based on similar provisions. During the year ended March 31, 2022, the funded pension plan for employees in the Netherlands was settled, and members were transferred to a defined contribution plan.

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, 2022, the Company has issued letters of credit totalling $67.0 million (2021 – $68.0 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.

40 | CAE Financial Report 2022

Notes to the Consolidated Financial Statements

The employee benefits obligations are as follows:

		2022		2021
Funded defined benefit pension obligations	$	638.7	$	761.5
Fair value of plan assets		623.9		641.9
Funded defined benefit pension obligations – net	$	14.8	$	119.6
Unfunded defined benefit pension obligations		94.9		102.6
Employee benefits obligations	$	109.7	$	222.2

Changes in funded defined benefit pension obligations and fair value of plan assets are as follows:

						2022						2021
Canadian				Foreign		Total	Canadian			Foreign		Total
Pension obligations, beginning of year	$	687.0	$	74.5	$	761.5	$	576.9	$	72.3	$	649.2
Current service cost		35.0		1.4		36.4		28.4		2.4		30.8
Interest cost		19.2		0.6		19.8		20.5		1.1		21.6
Past service cost		—		(5.9)		(5.9)		1.0		(2.8)		(1.8)
Actuarial loss (gain) arising from:
Experience adjustments		(2.6)		0.2		(2.4)		(0.6)		(1.7)		(2.3)
Economic assumptions		(92.1)		(1.7)		(93.8)		72.3		9.1		81.4
Demographic assumptions		—		—		—		—		(1.3)		(1.3)
Employee contributions		7.8		0.3		8.1		7.4		0.5		7.9
Pension benefits paid		(22.5)		(1.2)		(23.7)		(18.9)		(1.4)		(20.3)
Plan settlements		—		(60.3)		(60.3)		—		—		—
Foreign currency exchange differences		—		(1.0)		(1.0)		—		(3.7)		(3.7)
Pension obligations, end of year	$	631.8	$	6.9	$	638.7	$	687.0	$	74.5	$	761.5
Fair value of plan assets, beginning of year	$	574.7	$	67.2	$	641.9	$	467.8	$	62.3	$	530.1
Interest income		16.4		0.5		16.9		16.9		1.0		17.9
Return on plan assets, excluding amounts
included in interest income		16.6		1.6		18.2		79.7		6.3		86.0
Employer contributions		25.1		(0.1)		25.0		22.7		1.9		24.6
Employee contributions		7.8		0.3		8.1		7.4		0.5		7.9
Pension benefits paid		(22.5)		(1.2)		(23.7)		(18.9)		(1.4)		(20.3)
Plan settlements		—		(60.3)		(60.3)		—		—		—
Administrative costs		(1.0)		(0.1)		(1.1)		(0.9)		(0.2)		(1.1)
Foreign currency exchange differences		—		(1.1)		(1.1)		—		(3.2)		(3.2)
Fair value of plan assets, end of year	$	617.1	$	6.8	$	623.9	$	574.7	$	67.2	$	641.9

Changes in unfunded defined benefit pension obligations are as follows:

						2022						2021
Canadian				Foreign		Total	Canadian			Foreign		Total
Pension obligations, beginning of year	$	88.6	$	14.0	$	102.6	$	78.0	$	15.7	$	93.7
Current service cost		4.4		0.8		5.2		3.2		0.6		3.8
Interest cost		2.2		0.2		2.4		2.6		0.2		2.8
Past service cost		—		0.3		0.3		—		—		—
Actuarial loss (gain) arising from:
Experience adjustments		0.3		(0.4)		(0.1)		—		—		—
Economic assumptions		(9.8)		(1.3)		(11.1)		7.9		(0.8)		7.1
Pension benefits paid		(3.1)		(0.6)		(3.7)		(3.1)		(0.7)		(3.8)
Foreign currency exchange differences		—		(0.7)		(0.7)		—		(1.0)		(1.0)
Pension obligations, end of year	$	82.6	$	12.3	$	94.9	$	88.6	$	14.0	$	102.6

CAE Financial Report 2022 | 41

Notes to the Consolidated Financial Statements

Net pension cost is as follows:

						2022						2021
Canadian				Foreign		Total	Canadian			Foreign		Total
Funded plans
Current service cost	$	35.0	$	1.4	$	36.4	$	28.4	$	2.4	$	30.8
Interest cost		19.2		0.6		19.8		20.5		1.1		21.6
Interest income		(16.4)		(0.5)		(16.9)		(16.9)		(1.0)		(17.9)
Past service cost		—		(5.9)		(5.9)		1.0		(2.8)		(1.8)
Administrative cost		1.0		0.1		1.1		0.9		0.2		1.1
Net pension cost of funded plans	$	38.8	$	(4.3)	$	34.5	$	33.9	$	(0.1)	$	33.8
Unfunded plans
Current service cost	$	4.4	$	0.8	$	5.2	$	3.2	$	0.6	$	3.8
Interest cost		2.2		0.2		2.4		2.6		0.2		2.8
Past service cost		—		0.3		0.3		—		—		—
Net pension cost of unfunded plans	$	6.6	$	1.3	$	7.9	$	5.8	$	0.8	$	6.6
Total net pension cost	$	45.4	$	(3.0)	$	42.4	$	39.7	$	0.7	$	40.4

During the year ended March 31, 2022, pension costs of $17.9 million (2021 – $18.5 million) have been charged in cost of sales, $7.7 million (2021 – $5.5 million) in research and development expenses, $9.8 million (2021 – $10.2 million) in selling, general and administrative expenses, $5.3 million (2021 – $6.5 million) in finance expense, and no amount (2021 – net gain of $1.8 million) has been recorded in restructuring, integration and acquisition costs. In addition, pension costs of $1.7 million (2021 – $1.5 million) were capitalized.

Fair value of the plan assets, by major categories, are as follows:

(amounts in millions)						2022						2021
		Quoted	Unquoted			Total		Quoted	Unquoted			Total
Canadian plans
Equity funds
Canadian	$	—	$	72.9	$	72.9	$	—	$	78.2	$	78.2
Foreign		—		145.4		145.4		—		187.3		187.3
Bond funds
Government		—		115.4		115.4		—		113.0		113.0
Corporate		—		105.7		105.7		—		104.3		104.3
Private and property investments		—		164.8		164.8		—		80.2		80.2
Cash and cash equivalents		—		12.1		12.1		—		11.2		11.2
Other		—		0.8		0.8		—		0.5		0.5
Total Canadian plans	$	—	$	617.1	$	617.1	$	—	$	574.7	$	574.7
Foreign plans
Insured annuities	$	—	$	—	$	—	$	—	$	60.3	$	60.3
Equity instruments		2.6		—		2.6		2.6		—		2.6
Debt instruments
Corporate		3.6		—		3.6		3.7		—		3.7
Other		—		0.6		0.6		—		0.6		0.6
Total Foreign plans	$	6.2	$	0.6	$	6.8	$	6.3	$	60.9	$	67.2
Total plans	$	6.2	$	617.7	$	623.9	$	6.3	$	635.6	$	641.9

As at March 31, 2022 and March 31, 2021, there were no common shares of the Company in the pension plan assets.

Significant assumptions (weighted average) used are as follows:

							Foreign
	2022		2021		2022		2021
Pension obligations as at March 31:
Discount rate	4.14	%	3.32	%	2.41	%	1.06	%
Compensation rate increases	3.65	%	3.65	%	2.66	%	3.01	%
Net pension cost for years ended March 31:
Discount rate	3.32	%	3.96	%	1.06	%	1.46	%
Compensation rate increases	3.65	%	3.66	%	2.06	%	2.92	%

42 | CAE Financial Report 2022

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, 2022			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		23.6		22.1		25.7		24.4
Germany	Heubeck RT2018G		23.2		20.5		26.2		23.9
United Kingdom	S2PxA CMI 2020		23.1		22.1		25.2		24.0
United States	CPM private tables		24.9		23.4		26.4		25.0
As at March 31, 2021			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		22.1		25.6		24.3
Germany	Heubeck RT2018G		23.1		20.3		26.0		23.8
United Kingdom	S2PxA CMI 2020		23.0		22.0		25.2		23.9
United States	CPM private tables		24.8		23.4		26.3		25.0

As at March 31, 2022, 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, 2022 are as follows:

			Funded plans			Unfunded plans
Canadian				Foreign	Canadian			Foreign		Total
Discount rate:
Increase	$	(26.6)	$	(0.2)	$	(2.6)	$	(0.4)	$	(29.8)
Decrease		28.4		0.2		2.7		0.4		31.7
Compensation rate:
Increase		7.8		—		0.5		—		8.3
Decrease		(8.0)		—		(0.5)		—		(8.5)

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	$	28.3	$	0.3	$	28.6
Expected benefits paid in unfunded plans		3.2		0.3		3.5

NOTE 21 – OTHER NON-CURRENT LIABILITIES

		2022		2021
Contract liabilities (Note 11)	$	130.3	$	96.2
Share-based payments liabilities (Note 24)		70.0		79.7
Contingent consideration arising on business combinations		3.7		11.2
Interest payable		14.4		19.8
Other		27.2		38.7
	$	245.6	$	245.6

CAE Financial Report 2022 | 43

Notes to the Consolidated Financial Statements

NOTE 22 – SUPPLEMENTARY CASH FLOWS INFORMATION

Changes in non-cash working capital are as follows:

		2022		2021
Cash provided by (used in) non-cash working capital:
Accounts receivable	$	34.2	$	32.6
Contract assets		(49.3)		75.5
Inventories		107.3		43.4
Prepayments		(5.6)		2.3
Income taxes		(11.5)		(12.0)
Accounts payable and accrued liabilities		(24.6)		(54.0)
Provisions		(25.8)		27.7
Contract liabilities		(2.2)		(165.0)
	$	22.5	$	(49.5)

Supplemental information:

		2022		2021
Interest paid	$	78.0	$	98.0
Interest received		13.1		13.2
Income taxes paid		44.5		26.4

NOTE 23 – 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
	2022		2021		2022		2021		2022		2021		2022		2021
Balances, beginning of year	$	64.5	$	225.9	$	(5.2)	$	(33.3)	$	(1.2)	$	0.6	$	58.1	$	193.2
Other comprehensive (loss) income	(93.9)		(161.4)		4.7		28.1		(0.1)		(1.8)		(89.3)		(135.1)
Balances, end of year	$	(29.4)	$	64.5	$	(0.5)	$	(5.2)	$	(1.3)	$	(1.2)	$	(31.2)	$	58.1

NOTE 24 – SHARE-BASED PAYMENTS

Share-based payments expense are as follows:

		2022		2021
Equity-settled plan
Stock option plan	$	7.8	$	9.8
Cash-settled plans
Stock purchase plan		11.6		10.0
Deferred share unit (DSU) plans		1.1		11.4
Restricted share unit (RSU) plans		1.3		28.6
Performance share unit (PSU) plan		9.2		39.3
Total share-based payments expense	$	31.0	$	99.1
Impact of equity swap agreements (Note 31)		9.2		(45.6)
Amount capitalized		(0.5)		(0.5)
Share-based payments expense, net of equity swap (Note 25)	$	39.7	$	53.0

44 | CAE Financial Report 2022

Notes to the Consolidated Financial Statements

Carrying amount of share-based payments liabilities are as follows:

		2022		2021
Cash-settled plans
Deferred share unit (DSU) plans	$	20.6	$	19.7
Restricted share unit (RSU) plans		42.4		46.3
Performance share unit (PSU) plan		26.8		36.8
Total carrying amount of share-based payments liabilities	$	89.8	$	102.8
Current portion		19.8		23.1
Non-current portion (Note 21)	$	70.0	$	79.7

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, 2022, a total of 9,936,443 common shares (2021 – 11,205,103) remained authorized for issuance under the stock option plan.

Changes in outstanding stock options are as follows:

			2022			2021
		Weighted			Weighted
	Number of	average exercise		Number of	average exercise
stock options		price		stock options	price
Stock options outstanding, beginning of year	7,476,902	$	23.39	6,050,854	$	24.25
Granted	712,477		36.79	2,697,713		20.65
Exercised	(1,268,660)		21.37	(687,165)		17.94
Forfeited	(134,275)		28.57	(579,700)		26.28
Expired	(3,000)		14.66	(4,800)		11.02
Stock options outstanding, end of year	6,783,444	$	25.08	7,476,902	$	23.39
Stock options exercisable, end of year	3,395,732	$	23.35	2,934,364	$	21.66

During the year ended March 31, 2022, the weighted average market share price for stock options exercised was $38.13 (2021 ⁃ $30.19).

As at March 31, 2022, 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
$15.14 to $16.15	750,163		1.06	$	16.04	750,163	$	16.04
$20.24 to $27.14	4,338,416		3.98		22.68	2,187,516		23.58
$32.43 to $38.01	1,694,865		4.98		35.22	458,053		34.20
Total	6,783,444		3.91	$	25.07	3,395,732	$	23.35

During the year ended March 31, 2022, the weighted average fair value of stock options granted was $11.53 (2021 – $5.22).

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:

		2022			2021
Common share price	$	37.24		$	21.48
Exercise price	$	36.79		$	20.65
Dividend yield		0.64	%		2.01	%
Expected volatility		40.51	%		35.22	%
Risk-free interest rate		0.76	%		0.36	%
Expected stock option life		4 years			4 years

Expected volatility is estimated by considering historical average common share price volatility over the expected life of the stock options.

CAE Financial Report 2022 | 45

Notes to the Consolidated Financial Statements

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.

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 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:

	2022	2021
DSUs outstanding, beginning of year	550,742	469,835
Granted	86,876	81,980
Redeemed	(3,276)	(1,073)
DSUs vested and outstanding, end of year	634,342	550,742

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:

	2022	2021
RSUs outstanding, beginning of year	1,430,524	1,490,603
Granted	289,745	246,249
Cancelled	(13,690)	(42,264)
Redeemed	(176,875)	(264,064)
RSUs outstanding, end of year	1,529,704	1,430,524
RSUs vested, end of year	1,303,042	1,295,233

As at March 31, 2022, vested and outstanding RSUs includes 922,665 RSUs granted under the previous plan (2021 – 943,250), 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.

46 | CAE Financial Report 2022

Notes to the Consolidated Financial Statements

Changes in outstanding PSUs are as follows:

	2022	2021
PSUs outstanding, beginning of year	820,089	976,873
Granted	571,460	585,162
Cancelled	(23,135)	(41,266)
Redeemed	(521,243)	(700,680)
PSUs outstanding, end of year	847,171	820,089
PSUs vested, end of year	570,457	649,449

NOTE 25 – EMPLOYEE COMPENSATION

Total employee compensation expense recognized in income is as follows:

(amounts in millions)		2022		2021
Salaries and other short-term employee benefits	$	1,326.2	$	1,095.9
Share-based payments expense, net of equity swap (Note 24)		39.7		53.0
Post-employment benefits – defined benefit plans (Note 20)		40.7		38.9
Post-employment benefits – defined contribution plans		17.9		17.9
Termination benefits		6.9		43.9
Total employee compensation	$	1,431.4	$	1,249.6

NOTE 26 – GOVERNMENT PARTICIPATION

Government contributions, other than COVID-19 government support programs, were recognized as follows:

		2022		2021
Credited to non-financial assets	$	14.6	$	11.7
Credited to income		19.5		20.2
	$	34.1	$	31.9

COVID-19 government support programs

The Company previously accessed government emergency relief measures and wage subsidy programs available around the world, mainly the Canada Emergency Wage Subsidy (CEWS) program. The Company's participation in the CEWS program ceased on June 5, 2021 and accordingly, the Company did not claim any CEWS benefits for wages and salary costs incurred subsequent to June 5, 2021.

For the year ended March 31, 2022, the Company received government contributions related to COVID-19 support programs, mainly provided as a reimbursement of employee wages, in the amount of $14.9 million (2021 – $160.5 million), of which $1.3 million (2021 – $33.1 million) were credited to non-financial assets and $13.6 million (2021 – $127.4 million) were credited to income.

New financial participation agreements

In September 2021, the Company concluded new financial participation agreements with the Government of Canada and the Government of Québec who will fund up to $190.0 million and $150.0 million, respectively, in the form of partially repayable loans for eligible spending related to R&D projects. The investments will fund Project Resilience, a plan to invest in R&D innovations over the next five years with the aim to develop technologies of the future, including digitally immersive solutions using data ecosystems and artificial intelligence in Civil Aviation, Defense and Security and Healthcare.

CAE Financial Report 2022 | 47

Notes to the Consolidated Financial Statements

NOTE 27 – IMPAIRMENT OF NON-FINANCIAL ASSETS

The carrying amount of goodwill allocated to the Company's CGUs per operating segment is as follows:

			Defense
	Civil Aviation		and Security		Healthcare			Total
Net book value as at March 31, 2020	$	667.3	$	300.7	$	117.3	$	1,085.3
Business combinations (Note 3)		169.0		—		—		169.0
Foreign currency exchange differences		(47.1)		(21.4)		(12.6)		(81.1)
Net book value as at March 31, 2021	$	789.2	$	279.3	$	104.7	$	1,173.2
Business combinations (Note 3)		283.4		1,025.6		7.8		1,316.8
Foreign currency exchange differences		(25.8)		0.9		(0.8)		(25.7)
Net book value as at March 31, 2022	$	1,046.8	$	1,305.8	$	111.7	$	2,464.3

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 2022. The Company determined the recoverable amount of the Civil Aviation, Defense and Security and Healthcare CGUs based on fair value less costs of disposal calculations. The recoverable amount of each CGU is calculated using estimated cash flows derived from the Company's five-year strategic plan as approved by the Board of Directors. The cash flows derived from the Company's five-year strategic plan are based on management’s expectations of market growth, industry reports and trends, and past performance. Cash flows subsequent to the five‑year period were extrapolated using a constant growth rate of 2% to 3%. These growth rates were consistent with forecasts included in industry reports specific to the industry in which each CGU operates. 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% to 13%.

During the year ended March 31, 2022, the estimated recoverable amount of each CGU exceeded their carrying amount. As a result, there was no impairment identified.

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. For the year ended March 31, 2022, an increase of 1% in the discount rate or a decrease of 1% in the growth rate would not have resulted in an impairment charge.

NOTE 28 – 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 fiscal 2015, the Company received tax notices of reassessment from the Canada Revenue Agency (CRA) in connection with the Company’s characterization of amounts received under the Strategic Aerospace and Defence Initiative (SADI) program during its 2012 and 2013 taxation years. Under the SADI program, the Company received funding from the Government of Canada for its eligible spending in R&D projects, in the form of an unconditionally repayable interest-bearing loan, which the Company commenced repayment of the principal and interest in fiscal 2016 in accordance with the terms of the agreement. The CRA has taken the position that amounts received under the SADI program qualify as government assistance. The Company filed notices of objection against the CRA’s reassessments and subsequently filed a notice of appeal to the Tax Court of Canada.

On September 14, 2021, the Tax Court of Canada ruled in favour of the CRA’s contention and held that the amounts received under the SADI program qualified as government assistance. The Company subsequently filed an appeal to the Federal Court of Appeal against the Tax Court’s decision. Accordingly, the Company has not recognized the impacts of the CRA’s reassessments in its consolidated financial statements.

Although the Company believes that its position will ultimately prevail at the Federal Court of Appeal level, should the Company be unsuccessful, the impact of the reassessments would not result in a material adverse effect on the Company’s overall income tax expense nor income tax payable, but would, however, affect the timing of payment of such tax.

48 | CAE Financial Report 2022

Notes to the Consolidated Financial Statements

Commitments

Contractual purchase commitments that are not recognized as liabilities are as follows:

		2022		2021
Less than 1 year	$	290.9	$	195.9
Between 1 and 5 years		210.0		92.8
Later than 5 years		3.6		—
Total contractual purchase commitments	$	504.5	$	288.7

NOTE 29 – 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, restricted funds for subscription receipts deposit, accounts receivable, accounts payable and accrued liabilities and liabilities for subscription receipts 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;

(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).

CAE Financial Report 2022 | 49

Notes to the Consolidated Financial Statements

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

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

					2022				2021
	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	$	346.1	$	346.1	$	926.1	$	926.1
Restricted cash	Level 1		1.9		1.9		11.4		11.4
Restricted funds for subscription receipts deposit	Level 2		—		—		700.1		700.1
Equity swap agreements	Level 2		(13.0)		(13.0)		(0.6)		(0.6)
Forward foreign currency contracts	Level 2		7.0		7.0		7.5		7.5
Contingent consideration arising on business combinations	Level 3		(3.7)		(3.7)		(11.2)		(11.2)
Derivatives assets (liabilities) designated in a hedge relationship
Foreign currency and interest rate swap agreements	Level 2		8.2		8.2		5.1		5.1
Forward foreign currency contracts	Level 2		8.3		8.3		16.5		16.5
Financial assets (liabilities) measured at amortized cost
Accounts receivable(1)	Level 2		501.7		501.7		478.7		478.7
Investment in finance leases	Level 2		118.7		124.4		128.5		141.0
Advances to a portfolio investment	Level 2		10.5		10.5		11.1		11.1
Other assets(2)	Level 2		25.0		25.0		28.6		29.0
Accounts payable and accrued liabilities(3)	Level 2		(696.6)		(696.6)		(674.9)		(674.9)
Liabilities for subscription receipts	Level 2		—		—		(714.1)		(714.1)
Total long-term debt(4)	Level 2		(2,658.8)		(2,765.4)		(2,010.9)		(2,216.3)
Other non-current liabilities(5)	Level 2		(151.8)		(164.5)		(174.2)		(187.4)
Financial assets measured at FVOCI
Equity investments	Level 3		1.4		1.4		1.5		1.5
		$	(2,495.1)	$	(2,608.7)	$	(1,270.8)	$	(1,476.5)

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

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

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

(4) Excludes lease liabilities. The carrying value of long-term debt excludes transaction costs.

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

Changes in level 3 financial instruments are as follows:

		Contingent
		consideration
		arising on
		business		Equity
		combinations		investments			Total
Balances as at March 31, 2021	$	(11.2)	$	1.5		$	(9.7)
Additions – business combinations (Note 3)		(4.0)		—			(4.0)
Total realized and unrealized gains (losses) included in other comprehensive income		0.1		$	(0.1)		—
Total realized and unrealized gains included in income		11.4		—			11.4
Balances as at March 31, 2022	$	(3.7)	$	1.4		$	(2.3)

50 | CAE Financial Report 2022

Notes to the Consolidated Financial Statements

NOTE 30 – CAPITAL RISK MANAGEMENT

The Company’s capital allocation priorities continue to be focused on:

(i) Investing in superior and sustainable growth opportunities;

(ii) Maintaining a strong financial position consistent with the Company’s investment grade profile;

(iii) Providing current returns to shareholders.

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 current portion less cash and cash equivalents. Total equity comprises share capital, contributed surplus, accumulated other comprehensive income, retained earnings and non-controlling interests.

The level of debt versus equity in the capital structure is monitored, and the ratios are as follows:

		2022		2021
Total long-term debt (Note 19)	$	3,046.2	$	2,351.5
Less: cash and cash equivalents		(346.1)		(926.1)
Net debt	$	2,700.1	$	1,425.4
Equity		4,086.6		3,212.8
Total net debt plus equity	$	6,786.7	$	4,638.2
Net debt: equity		40:60		31:69

The Company has certain debt agreements which require the maintenance of a certain level of capital.

NOTE 31 – 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 facility). 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 10 and Note 29 represent the maximum exposure to credit risk for each respective financial asset as at the relevant dates.

CAE Financial Report 2022 | 51

Notes to the Consolidated Financial Statements

As at March 31, 2022, exposure to credit risk and credit loss allowances for accounts receivable and contract assets by segments are as follows:

		Civil Aviation			Defense and<br>Security			Healthcare			Amounts not allocated to a segment			Total
Gross accounts receivable	$	293.4		$	219.9		$	53.2		$	18.3		$	584.8
Gross contract assets		137.2			500.9			4.3			—			642.4
Total	$	430.6		$	720.8		$	57.5		$	18.3		$	1,227.2
Credit loss allowances	$	(25.7)		$	(0.8)		$	(1.4)		$	—		$	(27.9)
As a %		6.0	%		0.1	%		2.4	%		—	%		2.3	%

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. The Company also regularly monitors any financing opportunities to optimize its capital structure and maintain appropriate financial flexibility.

In managing its liquidity risk, the Company has access to committed revolving credit facilities of $300.0 million and US$850.0 million (2021 – $500.0 million and US$850.0 million). As well, the Company has agreements to sell interests in certain of its accounts receivable (receivable purchase facility) for an amount of up to US$400.0 million (2021 – US$400.0 million). As at March 31, 2022, the carrying amount of the original accounts receivable sold to a financial institution pursuant to the receivable purchase facility totaled $213.9 million (2021 – 298.8 million) of which $21.0 million (2021 – $26.4 million), corresponding to the extent of the Company’s continuing involvement, remains in accounts receivable with a corresponding liability included in accounts payable and accrued liabilities.

The following tables present a maturity analysis based on contractual maturity date of the Company’s financial liabilities, excluding liabilities for subscription receipts, 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, 2022	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)	$	696.6	$	696.6	$	696.6	$	—	$	—	$	—	$	—	$	—
Total long-term debt (2)		3,053.8		3,674.0		337.6		492.3		347.3		337.3		573.0		1,586.5
Other non-current liabilities (3)		155.5		330.1		—		35.5		31.2		30.8		30.2		202.4
	$	3,905.9	$	4,700.7	$	1,034.2	$	527.8	$	378.5	$	368.1	$	603.2	$	1,788.9
Net derivative financial
liabilities (assets)
Forward foreign currency contracts (4)	$	(15.3)
Outflow			$	1,320.5		1,175.3		118.1		15.4		11.7		—		—
Inflow				(1,336.9)		(1,188.6)		(121.0)		(15.7)		(11.6)		—		—
Foreign currency and
interest rate swap agreements		(8.2)		(2.9)		(1.4)		(0.9)		(0.3)		(0.1)		(0.2)		—
Equity swap agreements		13.0		13.0		13.0		—		—		—		—		—
	$	(10.5)	$	(6.3)	$	(1.7)	$	(3.8)	$	(0.6)	$	—	$	(0.2)	$	—
	$	3,895.4	$	4,694.4	$	1,032.5	$	524.0	$	377.9	$	368.1	$	603.0	$	1,788.9

52 | CAE Financial Report 2022

Notes to the Consolidated Financial Statements

							Between		Between		Between		Between
		Carrying	Contractual		Less than			1 and		2 and		3 and		4 and	More than
As at March 31, 2021		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)	$	674.9	$	674.9	$	674.9	$	—	$	—	$	—	$	—	$	—
Total long-term debt (2)		2,358.0		2,954.5		291.4		238.1		230.0		320.0		151.7		1,723.3
Other non-current liabilities (3)		185.4		376.3		—		29.3		41.0		31.1		30.7		244.2
	$	3,218.3	$	4,005.7	$	966.3	$	267.4	$	271.0	$	351.1	$	182.4	$	1,967.5
Net derivative financial
liabilities (assets)
Forward foreign currency contracts (4)	$	(24.0)
Outflow			$	2,449.7	$	2,157.6	$	233.0	$	49.8	$	9.3	$	—	$	—
Inflow				(2,475.3)		(2,175.6)		(238.8)		(51.3)		(9.6)		—		—
Foreign currency and
interest rate swap agreements		(5.1)		(3.9)		(1.2)		(1.2)		(0.9)		(0.3)		(0.2)		(0.1)
Equity swap agreements		0.6		0.6		0.6		—		—		—		—		—
	$	(28.5)	$	(28.9)	$	(18.6)	$	(7.0)	$	(2.4)	$	(0.6)	$	(0.2)	$	(0.1)
	$	3,189.8	$	3,976.8	$	947.7	$	260.4	$	268.6	$	350.5	$	182.2	$	1,967.4

(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 Canadian dollar equivalent using the contractual forward foreign currency rate.

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.

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.

CAE Financial Report 2022 | 53

Notes to the Consolidated Financial Statements

The forward foreign currency contracts outstanding are as follows:

(amounts in millions, except average rate)			2022				2021
	Notional		Average		Notional		Average
Currencies (sold/bought)	amount	(1)	rate		amount	(1)	rate
/CDN
Less than 1 year	514.5		0.80	$	530.9		0.77
Between 1 and 3 years	85.0		0.78		127.4		0.77
Between 3 and 5 years	11.5		0.79		20.5		0.78
/CDN
Less than 1 year	169.9		0.67		88.4		1.54
Between 1 and 3 years	15.7		0.65		95.2		1.57
Between 3 and 5 years	0.2		0.64		—		n.a
/CDN
Less than 1 year	72.0		0.59		52.7		0.57
Between 1 and 3 years	2.3		0.58		11.5		0.58
CDN/
Less than 1 year	132.1		1.29		1,224.7		1.27
Between 1 and 3 years	30.3		1.28		31.0		1.37
Other currencies
Less than 1 year	286.8		n.a.		260.8		n.a.
Between 1 and 3 years	0.3		n.a.		1.5		n.a.
Between 3 and 5 years	—		n.a.		5.0		n.a.
Total	1,320.6			$	2,449.6

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.

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.


	Net income		OCI		Net income		OCI		Net income		OCI
2022		(5.6)	$	(8.0)		(2.1)	$	(0.7)		—	$	0.1
2021			28.9				(3.8)				(0.7)

All values are in US Dollars.

A weakening of 5% in the relevant foreign currency against the Canadian dollar would have an opposite impact on pre-tax income and OCI.

Interest rate risk

Interest rate risk is defined as 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, 2022, 75% (2021 – 94%) 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, 2022, a 1% increase in interest rates would decrease the Company’s net income by $5.0 million (2021 – $1.7 million) and would have no impact on the Company’s OCI (2021 – nil) assuming all other variables remained constant. A 1% decrease in interest rates would have an opposite impact on net income.

54 | CAE Financial Report 2022

Notes to the Consolidated Financial Statements

Hedge of share-based payments expense

The Company has entered into equity swap agreements with major Canadian financial institutions to reduce its 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 swap agreements partly offset movements in the Company’s share price impacting the cost of the DSU, RSU and PSU plans. As at March 31, 2022, the equity swap agreements covered 2,700,000 common shares (2021 – 2,500,000) of the Company.

Hedge of net investments in foreign operations

As at March 31, 2022, the Company has designated a portion of its unsecured senior notes, term loans and revolving credit facility totaling US$1,132.8 million (2021 – US$862.8 million) and a portion of its lease liabilities totaling nil (2021 – US$23.9 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 denominated 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, 2022, the Company had outstanding letters of credit and performance guarantees in the amount of $216.1 million (2021 – $196.2 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.

		2022		2021
Advance payments	$	42.0	$	41.0
Contract performance		83.9		46.4
Lease obligations		19.5		30.1
Financial obligations		69.2		70.3
Other		1.5		8.4
	$	216.1	$	196.2

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.

CAE Financial Report 2022 | 55

Notes to the Consolidated Financial Statements

NOTE 32 – 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
		interest		interest
Name	Country of incorporation	2022		2021
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 Bangkok Co., Ltd.	Thailand	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	China	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 Doss Aviation, Inc.	United States	100.0	%	—	%
CAE El Salvador Flight Training S.A. de C.V.	El Salvador	99.5	%	99.5	%
CAE Engineering Korlatolt Felelossegu Tarsasag	Hungary	100.0	%	100.0	%
CAE Entrenamiento de Vuelo Chile Limitada	Chile	100.0	%	100.0	%
CAE Flight Services Austria GmbH	Austria	100.0	%	—	%
CAE Flight Services Poland Sp z.o.o	Poland	100.0	%	—	%
CAE Flight Services Sweden AB	Sweden	100.0	%	—	%
CAE Flight Services USA, Inc.	United States	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 France SAS	France	100.0	%	100.0	%
CAE Global Academy Évora, SA	Portugal	100.0	%	100.0	%
CAE GmbH	Germany	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 Investments SARL	Luxembourg	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.	UAE	49.0	%	49.0	%
CAE Middle East L.L.C.	UAE	49.0	%	49.0	%
CAE Military Aviation Training Inc.	Canada	100.0	%	100.0	%
CAE New Zealand Pty Limited	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	%	100.0	%
CAE Oxford Aviation Academy Phoenix Inc.	United States	100.0	%	100.0	%
CAE Services GmbH	Germany	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	%

56 | CAE Financial Report 2022

Notes to the Consolidated Financial Statements

Investments in subsidiaries consolidated in the Company’s financial statements (continued):

				% equity
		interest		interest
Name	Country of incorporation	2022		2021
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 South America Flight Training do Brasil Ltda.	Brazil	100.0	%	100.0	%
CAE STS Limited	United Kingdom	100.0	%	100.0	%
CAE Training & Services Netherlands B.V.	Netherlands	100.0	%	100.0	%
CAE Training & Services Brussels N.V.	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 TSP Inc.	Canada	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 Vietnam Limited Liability Company	Vietnam	100.0	%	100.0	%
Medicor Lab Inc.	Canada	100.0	%	—	%
Merlot Aero Limited	New Zealand	100.0	%	100.0	%
Oxford Aviation Academy (Oxford) Limited	United Kingdom	100.0	%	100.0	%
RosterBuster B.V.	Netherlands	100.0	%	21.0	%
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 Ltd.	Ireland	100.0	%	100.0	%
Pelesys Learning Systems Inc.	Canada	100.0	%	100.0	%
Presagis Canada Inc.	Canada	100.0	%	100.0	%
Presagis Europe (S.A.S)	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	%
SIV Ops Training, S.L.	Spain	80.0	%	80.0	%

CAE Financial Report 2022 | 57

Notes to the Consolidated Financial Statements

Investments in joint ventures and affiliates accounted for under the equity method:

				% equity
		interest		interest
Name	Country of incorporation	2022		2021
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 L.L.C	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)	UAE	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	%
Leonardo CAE Advanced Jet Training S.r.l.	Italy	50.0	%	50.0	%
National Flying Training Institute Private Limited	India	51.0	%	51.0	%
Pegasus Uçus 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	%	50.0	%
Singapore CAE Flight Training Pte Ltd.	Singapore	50.0	%	50.0	%
SkyWarrior Flight Training LLC	United States	37.0	%	—	%
TRU Flight Training Iceland ehf	Iceland	33.3	%	33.3	%
Xebec Government Services, LLC	United States	49.0	%	49.0	%

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. During the year ended March 31, 2022, the Company's unrecognized share of profit in joint ventures was $1.6 million (2021 – $2.2 million). As at March 31, 2022, the cumulative unrecognized share of losses for these joint ventures was $12.2 million (2021 – $13.8 million) and the cumulative unrecognized share of comprehensive loss of these joint ventures was $11.2 million (2021 – $13.1 million).

SkyWarrior Flight Training LLC

In August 2021, the Company acquired a 37% equity interest in SkyWarrior Flight Training LLC (SkyWarrior) for cash consideration of $4.3 million. SkyWarrior is a flight training operation which primarily delivers Phase 1 initial flight training to U.S. and international military customers.

Joint venture with Leonardo

On March 29, 2021, the Company acquired a 50% equity interest in Leonardo CAE Advanced Jet Training Srl for cash consideration of $18.7 million. This joint venture will support the operations of the International Flight Training School (IFTS) in Italy, delivering a comprehensive lead-in to fighter training to the Italian Air Force and foreign customers. The joint venture will provide training support services, including full maintenance and operation of the M-346 aircraft and its ground-based training system, as well as operation of IFTS base facilities.

58 | CAE Financial Report 2022

Notes to the Consolidated Financial Statements

NOTE 33 – RELATED PARTY TRANSACTIONS

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

		2022		2021
Accounts receivable (Note 10)	$	49.7	$	33.3
Contract assets		23.0		14.3
Other non-current assets		12.8		26.4
Accounts payable and accrued liabilities (Note 17)		5.1		5.8
Contract liabilities		46.5		22.0
Other non-current liabilities		1.5		1.5

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

		2022		2021
Revenue	$	111.8	$	129.2
Purchases		3.5		2.8
Other income		3.8		1.4

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 members of the Board of Directors and certain executive officers. The compensation of key management for employee services are as follows:

		2022		2021
Salaries and other short-term employee benefits	$	8.4	$	6.5
Post-employment benefits – defined benefit plans		2.2		1.6
Share-based payments expense		6.6		24.8
	$	17.2	$	32.9

For the year ended March 31, 2022, the compensation earned by non-employee Directors of the Company amounted to $2.4 million (2021 – $1.9 million), which include the grant date fair value of deferred share units (DSUs) as well as cash payments.

CAE Financial Report 2022 | 59

Document

Table of Contents
Management’s Discussion and Analysis
1.	HIGHLIGHTS		1
2.	INTRODUCTION		3
3.	ABOUT CAE		5
	3.1	Who we are	5
	3.2	Our mission	5
	3.3	Our vision	5
	3.4	Our strategy	6
	3.5	Our operations	7
	3.6	Foreign exchange	17
	3.7	Non-GAAP and other financial measures	17
	3.8	Non-GAAP measure reconciliations	20
4.	CONSOLIDATED RESULTS		22
	4.1	Results from operations – fourth quarter of fiscal 2022	22
	4.2	Results from operations – fiscal 2022	24
	4.3	Restructuring, integration and acquisition costs	26
	4.4	Consolidated orders and total backlog	26
5.	RESULTS BY SEGMENT		27
	5.1	Civil Aviation	27
	5.2	Defense and Security	30
	5.3	Healthcare	33
6.	CONSOLIDATED CASH MOVEMENTS AND LIQUIDITY		35
	6.1	Consolidated cash movements	35
	6.2	Sources of liquidity	36
	6.3	Government participation	37
	6.4	Contingencies and commitments	37
7.	CONSOLIDATED FINANCIAL POSITION		38
	7.1	Consolidated capital employed	38
	7.2	Off balance sheet arrangements	39
	7.3	Financial instruments	40
8.	BUSINESS COMBINATIONS AND ACQUISITION OF EQUITY ACCOUNTED INVESTEES		43
9.	BUSINESS RISK AND UNCERTAINTY		44
	9.1	Risks relating to our Business and Business Strategy	45
	9.2	Risks relating to our Markets and the International Scope of our Business	48
	9.3	Risks relating to our Industries and Macroeconomic Conditions	50
	9.4	Legal and Regulatory Risks	52
	9.5	Risks relating to Information Technology, Cybersecurity and Intellectual Property	54
	9.6	Risks relating to Talent and Labour	55
	9.7	Risks relating to Mergers, Acquisitions, Joint Ventures, Strategic Alliances or Divestitures	56
	9.8	Risks relating to Controls and Accounting Matters	57
	9.9	Risks relating to Indebtedness and Liquidity	58
	9.10	Risks relating to our Common Shares and Ownership of our Securities	58
10.	RELATED PARTY TRANSACTIONS		60
11.	CHANGES IN ACCOUNTING POLICIES		61
	11.1	New and amended standards adopted	61
	11.2	Use of judgements, estimates and assumptions	61
12.	CONTROLS AND PROCEDURES		63
	12.1	Evaluation of disclosure controls and procedures	63
	12.2	Internal control over financial reporting	63
13.	OVERSIGHT ROLE OF AUDIT COMMITTEE AND BOARD OF DIRECTORS		63
14.	ADDITIONAL INFORMATION		63
15.	SELECTED FINANCIAL INFORMATION		64

Management’s Discussion and Analysis

for the fourth quarter and year ended March 31, 2022

1. HIGHLIGHTS

FINANCIAL1

FOURTH QUARTER OF FISCAL 2022

(amounts in millions, except per share amounts, ROCE and book-to-sales)		Q4-2022		Q4-2021	Variance	Variance %
Income Statement
Revenue	$	955.0	$	894.3		7	%
Operating income1	$	93.3	$	47.6		96	%
Adjusted segment operating income (SOI)1	$	142.7	$	106.2		34	%
Adjusted SOI excluding COVID-19 government support programs1	$	142.7	$	69.0		107	%
Net income attributable to equity holders of the Company	$	55.1	$	19.8		178	%
Basic and diluted earnings per share (EPS)	$	0.17	$	0.07		143	%
Adjusted net income1	$	92.0	$	63.2		46	%
Adjusted EPS1	$	0.29	$	0.22		32	%
Adjusted net income excluding COVID-19 government support programs1	$	92.0	$	35.9		156	%
Adjusted EPS excluding COVID-19 government support programs1	$	0.29	$	0.12		142	%
Cash Flows
Free cash flow1	$	187.6	$	170.6		10	%
Net cash provided by operating activities	$	206.8	$	174.6		18	%
Financial Position
Capital employed1	$	6,786.7	$	4,638.2		46	%
Non-cash working capital1	$	(46.9)	$	35.5		(232	%)
Net debt1	$	2,700.1	$	1,425.4		89	%
Return on capital employed (ROCE)1	%	4.3	%	1.7
Adjusted ROCE1	%	6.2	%	5.0
Adjusted ROCE excluding COVID-19 government support programs1	%	6.1	%	3.1
Backlog
Total backlog1	$	9,577.5	$	8,201.1		17	%
Order intake1	$	1,321.1	$	927.9		42	%
Book-to-sales ratio1		1.38		1.04
Book-to-sales ratio for the last 12 months		1.21		0.91
FISCAL 2022
(amounts in millions, except per share amounts)		FY2022		FY2021	Variance	Variance %
Income Statement
Revenue	$	3,371.3	$	2,981.9		13	%
Operating income	$	284.2	$	48.4		487	%
Adjusted segment operating income	$	444.5	$	280.6		58	%
Adjusted SOI excluding COVID-19 government support programs	$	430.9	$	153.2		181	%
Net income (loss) attributable to equity holders of the Company	$	141.7	$	(47.2)		400	%
Basic earnings (loss) per share	$	0.46	$	(0.17)		371	%
Diluted earnings (loss) per share	$	0.45	$	(0.17)		365	%
Adjusted net income	$	261.5	$	127.1		106	%
Adjusted EPS	$	0.84	$	0.47		79	%
Adjusted net income excluding COVID-19 government support programs	$	251.5	$	33.6		649	%
Adjusted EPS excluding COVID-19 government support programs	$	0.80	$	0.12		567	%
Cash Flows
Free cash flow	$	341.5	$	346.8		(2	%)
Net cash provided by operating activities	$	418.2	$	366.6		14	%

All values are in US Dollars.

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

CAE Financial Report 2022 I 1

Management’s Discussion and Analysis

BUSINESS COMBINATIONS

–On June 10, 2021, we acquired GlobalJet Services (GlobalJet), a provider of aviation maintenance training that is recognized around the world for its services for both business and helicopter sectors. This acquisition expands our aircraft platform addressability in the maintenance training market through world-class, regulatory approved training programs;

–On July 2, 2021, we acquired the L3Harris Technologies Military Training business (L3H MT), which includes Link Simulation & Training, Doss Aviation and AMI. Link Simulation & Training is one of the leading providers of military training solutions in the U.S., Doss Aviation is the provider of initial flight training to the United States Air Force, and AMI is a design and manufacturing facility for simulator hardware;

–On February 28, 2022, we acquired Sabre’s AirCentre airline operations portfolio (AirCentre), a highly valuable suite of flight crew management and optimization solutions. The acquisition further expands our reach across our broad customer base beyond pilot training and establishes ourself as a technology leader in the growing market for industry-leading, digitally-enabled flight and crew operations solutions.

OTHER

–In July 2021, concurrent with the completion of the L3H MT acquisition, 22,400,000 outstanding subscription receipts were converted into CAE common shares on a one-for-one basis;

–In July 2021, we entered into unsecured term loan agreements for an aggregate amount of US$300.0 million to partially finance the payment for the L3H MT acquisition;

–In July 2021, we were included in the S&P/TSX 60 index, which represents the 60 leading businesses in leading industries in Canada;

–In September 2021, we extended the maturity date of our US$850.0 million unsecured revolving credit facility until September 29, 2026;

2 I CAE Financial Report 2022

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 2022 mean the fiscal year ending March 31, 2022;

–Last year, prior year and a year ago mean the fiscal year ended March 31, 2021;

–Dollar amounts are in Canadian dollars.

This report was prepared as of May 31, 2022 and includes our management’s discussion and analysis (MD&A) for the year and the three‑month period ended March 31, 2022 and the consolidated financial statements and notes for the year ended March 31, 2022. We have prepared it to help you understand our business, performance and financial condition for fiscal 2022. 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, 2022. 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;

–Business risk and uncertainty;

–Related party transactions;

–Changes in accounting policies;

–Controls and procedures;

–Oversight role of Audit Committee and Board of Directors (the Board).

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 likely that a reasonable investor would consider the information to be important in making an investment decision.

CAUTION REGARDING FORWARD-LOOKING STATEMENTS

This report includes forward-looking statements about our activities, events and developments that we expect to or anticipate may occur in the future including, for example, statements about our vision, strategies, market trends and outlook, future revenues, capital spending, expansions and new initiatives, financial obligations, available liquidities, expected sales, general economic outlook, prospects and trends of an industry, expected annual recurring cost savings from operational excellence programs, estimated addressable markets, statements relating to our acquisitions of L3H MT and AirCentre, CAE's access to capital resources, the expected accretion in various financial metrics, expectations regarding anticipated cost savings and synergies, the strength, complementarity and compatibility of the L3H MT and AirCentre acquisitions with our existing business and teams, other anticipated benefits of the L3H MT and AirCentre acquisitions and their impact on our future growth, results of operations, performance, business, prospects and opportunities, our business outlook, objectives, development, plans, growth strategies and other strategic priorities, and our leadership position in our markets and other statements that are not historical facts. 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 2022 I 3

Management’s Discussion and Analysis

Important risks that could cause such differences include, but are not limited to, risks relating to our business and business strategy, such as evolving standards and technology innovation and disruption, our ability to penetrate new markets, estimates of market opportunity, supply chain disruptions, original equipment manufacturer (OEM) leverage and encroachment, subcontractors, diversion of management attention, product integration and program management and execution, research and development (R&D) activities, strategic partnerships and long-term contracts, fixed-price and long-term supply contracts, backlog, customer credit risk, length of sales cycle, seasonality, and our reputation, risks relating to our markets and the international scope of our business, such as the international scope of our business, geopolitical uncertainty, global economic conditions, the military conflict in Ukraine, foreign exchange, and taxation matters, risks relating to our industries and macroeconomic conditions, such as our competitive business environment, constraints within the civil aviation industry, inflation, the continued risk of global health crises, the level and timing of defence spending, business development and awarding of new contracts, and extreme weather conditions and the impact of natural or other disasters (including effects of climate change), legal and regulatory risks, such as ethics and compliance, continued scrutiny regarding environmental, social and governance (ESG) matters, environmental laws and regulations, liability risks that may not be covered by indemnity or insurance, warranty or other product-related claims, U.S. foreign ownership, control or influence mitigation measures, compliance with laws and regulations, and government audits and investigations, risks relating to information technology, cybersecurity and intellectual property, such as reliance on third-party providers for information technology systems and infrastructure management, data rights and governance, the protection of our intellectual property and brand, and third-party intellectual property, risks relating to talent and labour, such as talent management, key personnel and management, corporate culture, and labour relations, risks relating to mergers, acquisitions, joint ventures, strategic alliances or divestitures, such as the risk that we will not effectively manage our growth, integration risks, our continued reliance on certain parties and information, and acquisition and integration costs, risks relating to controls and accounting matters, such as the effectiveness of internal controls over financial reporting, estimates used in accounting, impairment risk, and pension plans funding, risks relating to indebtedness and liquidity, such as indebtedness to finance acquisitions and ability to meet debt service requirements, availability of capital, liquidity risk, and interest rate volatility, and risks relating to our common shares and ownership of our securities, such as sales of additional common shares, the market price and volatility of our common shares, returns to shareholders, our foreign private issuer status, and enforceability of civil liabilities against our directors and officers. The foregoing list is not exhaustive and other unknown or unpredictable factors could also have a material adverse effect on the performance or results of CAE. 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. Any one or more of the factors described above and elsewhere in this MD&A may be exacerbated by the continuing COVID-19 pandemic and may have a heightened negative impact on CAE’s business, results of operations and financial condition. Accordingly, readers are cautioned that any of the disclosed risks could have a material adverse effect on CAE’s forward-looking statements. Readers are also cautioned that the risks described above and elsewhere in this MD&A 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.

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based on information available to us as of the date of this report. While we believe that information provides a reasonable basis for these statements, that information may be limited or incomplete. Our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all relevant information. These statements are inherently uncertain, and investors are cautioned not to unduly rely on these statements.

4 I CAE Financial Report 2022

Management’s Discussion and Analysis

MATERIAL ASSUMPTIONS

The forward-looking statements set out in this report are based on certain assumptions including, without limitation: the anticipated negative impacts of the COVID-19 pandemic on our businesses, operating results, cash flows and/or financial condition, including the intended effect of mitigation measures implemented as a result of the COVID-19 pandemic and the timing and degree of easing of global COVID-19-related mobility restrictions, the prevailing market conditions, customer receptivity to CAE’s training and operational support solutions, the accuracy of our estimates of addressable markets and market opportunity, the realization of anticipated annual recurring cost savings and other intended benefits from recent restructuring initiatives and operational excellence programs, the ability to respond to anticipated inflationary pressures and our ability to pass along rising costs through increased prices, the actual impact to supply, production levels, and costs from global supply chain logistics challenges, the stability of foreign exchange rates, the ability to hedge exposures to fluctuations in interest rates and foreign exchange rates, the availability of borrowings to be drawn down under, and the utilization, of one or more of our senior credit agreements, our available liquidity from cash and cash equivalents, undrawn amounts on our revolving credit facilities, the balance available under our receivable purchase facility, our cash flows from operations and continued access to debt funding will be sufficient to meet financial requirements in the foreseeable future, access to expected capital resources within anticipated timeframes, no material financial, operational or competitive consequences from changes in regulations affecting our business, our ability to retain and attract new business, our ability to achieve synergies and maintain market position arising from successful integration plans relating to the L3H MT and AirCentre acquisitions, our ability to otherwise complete the integration of the L3H MT and AirCentre businesses acquired within anticipated time periods and at expected cost levels, our ability to attract and retain key employees in connection with the L3H MT and AirCentre acquisitions, management's estimates and expectations in relation to future economic and business conditions and other factors in relation to the L3H MT and AirCentre acquisitions and resulting impact on growth and accretion in various financial metrics, the realization of the expected strategic, financial and other benefits of the L3H MT and AirCentre acquisitions in the timeframe anticipated, economic and political environments and industry conditions, the accuracy and completeness of public and other disclosure, including financial disclosure, by L3Harris Technologies and AirCentre, absence of significant undisclosed costs or liabilities associated with the L3H MT and AirCentre acquisitions. For additional information, including with respect to other assumptions underlying the forward-looking statements made in this report, refer to “Business Risk and Uncertainty” in this report. Given the impact of the changing circumstances surrounding the COVID-19 pandemic and the related response from CAE, governments, regulatory authorities, businesses and customers, there is inherently more uncertainty associated with CAE’s assumptions. Accordingly, the assumptions outlined in this report and, consequently, the forward-looking statements based on such assumptions, may turn out to be inaccurate.

3. ABOUT CAE

3.1 Who we are

At CAE, we equip people in critical roles with the expertise and solutions to create a safer world. As a high-technology company, we digitalize the physical world, deploying simulation training and critical operations support solutions. Above all else, we empower pilots, airlines, defence and security forces, and healthcare practitioners to perform at their best every day and when the stakes are the highest. Around the globe, we’re everywhere customers need us to be with more than 13,000 employees in more than 200 sites and training locations in over 35 countries. CAE represents 75 years of industry firsts—the highest-fidelity flight and mission simulators, surgical manikins, and personalized training programs powered by artificial intelligence. We’re investing our time and resources into building the next generation of cutting-edge, digitally immersive training and critical operations solutions. Today and tomorrow, we’ll make sure our customers are ready for the moments that matter.

CAE’s common shares are listed on the Toronto and New York stock exchanges (TSX / NYSE) under the symbol CAE.

3.2 Our mission

To lead at the frontier of digital immersion with high-tech training and operational support solutions to make the world a safer place.

3.3 Our vision

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Management’s Discussion and Analysis

3.4 Our strategy

CAE's eight pillars of strength

We believe there are eight fundamental strengths that underpin our strategy and investment thesis:

–High degree of recurring business;

–Industry leader with a strong competitive moat;

–Headroom in large markets;

–Technology and industry thought leader;

–Potential for compound growth and superior returns over the long-term;

–Culture of innovation, empowerment, excellence and integrity;

–Excellent and diverse team with a unique social impact on safety;

–Solid financial position and highly cash generative business model.

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 technology enabled services and software-based solutions, which is an important source of recurring business, and largely involves long-term agreements with many airlines, business aircraft operators and defence forces.

Industry leader with a strong competitive moat

We are an industry leader in each of our three segments by way of scale, the range of our technological solutions and services, and our global reach. We benefit from a strong competitive moat, fortified by seven decades of industry firsts and by continuously pushing the boundaries using digitally immersive, high-tech training and operational support solutions. Our broad global training network, unique end‑to‑end cadet to captain training capacities, technology-intensive training and operational support solutions, deep subject matter expertise and industry thought leadership, unrivaled customer intimacy and strong, recognizable brand further strengthen our competitive moat.

Headroom in large markets

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

Technology and industry thought leader

CAE is a high-tech training and operational support solutions company and an industry thought leader in the application of modelling and simulation, virtual reality and advanced analytics to create highly innovative and digitally immersive training and operational support solutions for customers in civil aviation, defence and security and healthcare.

Potential for compound growth and superior returns over the long-term

In each of our businesses, we believe 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 and expand through adjacencies. Our rising proportion of recurring revenue is largely driven by our customers’ ongoing training, operational support requirements and our ability to assist them with these critical activities by means of our highly innovative products, and technology- and software-enabled service solutions. We leverage our leading market position to deepen and expand our customer relationships and gain more share of their critical responsibilities. We expect to optimize and increase the utilization of our global training network and to deploy new assets with accretive returns, over the long-term.

Culture of innovation, empowerment, excellence and integrity

One CAE is the internal mantra that represents our culture of innovation, empowerment, excellence and integrity. It is the combination of these four key attributes that provides CAE with its market leadership, strong reputation and high degree of customer intimacy.

Excellent and diverse team with a unique social impact on safety

CAE prides itself in having an excellent and diverse team with a unique social impact on safety. Each day, our employees support our customers’ most critical operations with the most innovative solutions and in doing so, they help make the world a safer place. We help make air travel and healthcare safer and help our defence forces maintain security.

Solid financial position and highly cash generative business model

A constant priority for CAE is the maintenance of a solid financial position and we use established criteria to evaluate capital allocation opportunities. Our business model and training network, specifically, is highly cash generative by nature.

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Management’s Discussion and Analysis

3.5 Our operations

We provide digitally immersive training and operational support solutions to three markets globally:

–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, public health agencies and OEMs.

IMPACT OF THE COVID-19 PANDEMIC

Two years since the outbreak of the novel coronavirus (SARS-CoV-2/COVID-19), the COVID-19 pandemic continues to affect our business and financial results due to the uncertainty it has caused in the global economy, impacts on the global air transportation environment, air passenger travel and CAE's business. 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 adverse economic conditions could continue even upon the gradual removal of such measures and thereafter, especially in the global air transportation environment and air passenger 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. Throughout the downturn, we executed several initiatives, both internally and externally, to strengthen CAE and position us to emerge from the pandemic a larger, more profitable and more resilient company. Since the third quarter of fiscal 2021, we closed six acquisitions within the Civil aviation market, we completed one tuck-in acquisition in Healthcare and, on July 2, 2021, we completed the largest acquisition in CAE’s history in Defense and Security, demonstrating that we are focused on deploying the capital we raised to bolster our position and expand our addressable markets, our global customer base and our suite of solutions for our customers during this unprecedented period of disruption. We also announced a restructuring program for which we expect to realize annual recurring cost savings of approximately $70 million in fiscal 2023.

Together, we believe this gives us the necessary agility to resume long-term growth when global air travel fully recovers. Overall, we believe the resumption of our recovery remains highly dependent on the timing and rate at which travel restrictions and quarantines can eventually be safely lifted and normal activities resume.

You will find more details on the impacts of the COVID-19 pandemic on our business in Results by Segment as well as in Our Operations and Business Risk and Uncertainty in our fiscal 2022 financial report.

RUSSIAN INVASION OF UKRAINE

In light of Russia’s invasion of Ukraine, CAE announced that it suspended all services and training to Russian airlines, aircraft operators and healthcare distributors. Although Russia does not represent a large market for CAE, the suspension of its related activities is expected to have some direct impact on financial performance. The magnitude of potential indirect impacts on CAE are expected to be a function of the duration, severity, and scope of this geopolitical and humanitarian crisis. Beyond these impacts, the potential negative impacts on our Civil business would most likely result from the economic fallout driven by the high cost of fuel and high inflation, which impacts our customers’ operating costs and could potentially impact consumer demand for air travel. Overall, these events increase uncertainty about the timeline of a broad global recovery in our Civil markets. This crisis is a stark reminder that the world needs to be prepared to defend freedom at a moment’s notice and CAE’s Defense and Security business is positioned to support that preparedness and is aligned with national defence priorities focused on near-peer threats involving multiple domains. Actual and expected increased defence spending across NATO and allied nations and a greater emphasis on mission preparedness are likely to lead to increased demand for our defence and security training and mission solutions. Given the long lead times for defence procurements, such increased activity would potentially translate to higher performance for CAE Defense in the years ahead.

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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, ab initio pilot training and crew sourcing services, as well as end-to-end digitally-enabled crew management, training operations solutions and optimization software.

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 approximately 70 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 manage 316 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 RiseTM), which improves training quality, objectivity and efficiency through the integration of untapped flight and simulator data-driven insights into training. In the development of new pilots, CAE operates the largest ab initio flight training network in the world and has over 20 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. With the acquisition of AirCentre, paired with our existing crew operations and optimization software, we are in a position to provide robust end-to-end flight management and crew optimization solutions, helping airlines and business aircraft operators make optimal data‑driven decisions.

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. For example, as we are entering a new era of aviation with advanced air mobility, disruptive aerospace companies are building new aircraft types from the ground up. This will create a large demand for trained professional pilots to safely fly both passengers and cargo across markets. CAE has already partnered with four of the leading electric vertical takeoff and landing (eVTOL) developers, including Jaunt Air Mobility to design and develop an Aircraft System integration lab and jointly build an engineering simulator which will accelerate cockpit design and system development and will reduce the airworthiness flight test time, Volocopter as authorized training provider and to develop an eVTOL pilot training program in preparation for Volocopter’s first eVTOL aircraft entry-into-service, BETA Technologies to design and develop pilot and maintenance training programs for the ALIA eVTOL aircraft with a focus on training design and courseware and most recently, Joby Aviation Inc. to develop and qualify flight simulation training devices that will be used to train the future pilots of their revolutionary eVTOL aircraft. 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.

While reductions in domestic and international passenger demand as a result of the COVID-19 pandemic have severely impacted the aviation industry, we are seeing an increase in commercial and business traffic. As per the International Air Transport Association's (IATA) latest forecast issued October 4, 2021, they expect the calendar 2022 global passenger demand, or revenue passenger‑kilometers (RPKs), to be 61% of calendar 2019 pre-COVID levels, which would be a 51% improvement over calendar 2021. Additionally, IATA now expects RPKs to recover to 2019 levels by calendar 2024. For calendar 2022, RPKs have decreased by 41% compared to calendar 2019. North America has shown the strongest RPK recovery with a 15% decrease in March 2022, while Europe and Asia have been slower with a 36% decrease and 67% decrease respectively compared to March 2019.

Air Cargo is continuing to see strong performance with an increase of 5% in cargo tonne‑kilometers for calendar 2022 compared to 2019. Among the regions, North America was one of the strongest with a 19% increase.

In business aviation, U.S. Federal Aviation Administration reported an increase of 21% in the total number of business jet flights, which includes all domestic and international flights in fiscal 2022, compared to fiscal 2020. Additionally, monthly business jet activity has surpassed pre-COVID 2019 levels for the last thirteen months, specifically with March 2022 showing a 24% improvement over March 2019. Similarly, according to Eurocontrol, the European Organisation for the Safety of Air Navigation, the total number of business aviation flights in Europe has continued to improve and has returned to pre-COVID 2019 levels. In calendar 2022, Eurocontrol reported a 13% increase in fiscal 2022 compared to fiscal 2020, with March 2022 above 2019 levels with a 6% increase.

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

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Management’s Discussion and Analysis

In November 2020, we released our 2020-2029 Pilot Demand Outlook in which we estimate an expected global requirement of 264,000 new pilots in the civil aviation industry to sustain growth and support mandatory retirements over the next ten years. In the short-term, we estimated that approximately 27,000 of these new professional pilots were expected to be needed starting in late calendar 2021. Furthermore, in June 2021, we released a report on Pilot Training for Advanced Air Mobility (AAM) which estimates that AAM will create an additional surge in demand for pilots, which could be close to 60,000 pilots by 2028.

We believe CAE’s Civil Aviation segment is positioned as a gateway in a highly regulated, secular growth market, with an addressable market estimated at approximately $6.5 billion, and headroom for growth.

Market drivers

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

–Pilot and maintenance training and industry regulations;

–Safety and efficiency imperatives of commercial airlines and business aircraft operators, including fuel and crew costs;

–Expected long-term secular global growth in air travel;

–Expected long-term growth, including new aircraft deliveries and renewal of the active fleet of commercial and business aircraft;

–Emergence of the newer market for advanced air mobility;

–Demand for trained aviation professionals;

–Complexity of flight operations solutions.

Profitability drivers

We believe profitability drivers for CAE’s civil aviation market include the following:

–Favourable business mix drivers, including large market headroom in training services;

–Potential to increase the ratio of wet versus dry training in commercial training;

–Expansion of operational support offering by using advanced analytics, software solutions and digital technology to enhance our value offering across the whole organization;

–Operational excellence programs expected to realize significant annual recurring cost savings;

–Training outsourcing and partnerships.

Pilot and maintenance training and industry 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, 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, including fuel and crew costs

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 pilot training system, 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.

Expected long-term secular 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.

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, as air travel restrictions and lockdowns continue to be lifted and as air traffic activity regains strength, the commercial aviation industry is expected to grow over the medium- to long-term due to increased demand and the combination of new aircraft models and technologies.

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Management’s Discussion and Analysis

The global business aviation market showed record flight activity in 2021 and continues to remain above 2019 activity levels. We expect this market to remain at these levels due to expected increased aircraft deliveries and record high resale levels of existing business aircraft. To better serve the increase in business jet activity, we recently announced plans to expand our business jet operations by better serving the West Coast with the launch of our Las Vegas business aviation training centre.

Expected long-term growth, including new aircraft deliveries and 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 8X, Gulfstream's G280 and the Bombardier Challenger 3500.

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, helicopter operators and now advanced air mobility solutions.

Emergence of the newer market for advanced air mobility

AAM and the developing eVTOL aircraft are emerging into a new era of aviation. With this, comes a large demand for uniquely trained professional pilots to safely fly passenger and cargo across global markets.

We look at this new industry as an opportunity for pilot training. This technology is expected to promote community acceptance, instill confidence in the public, influence regulators to implement rules and policies that will stimulate growth, and ensure safety in this emerging industry.

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.

Complexity of flight operations solutions

Airlines need to closely manage their operations which come with daily challenges. To help optimize these operations we now offer a suite of flight service products. This suite of products provides solutions for flight operations including scheduling, crew, flight, personnel movement and in-flight management. These products enable optimized management for schedule disruptions and allows for maximized resources for all personnel and aircrafts.

The benefits for flight management include reduced fuel and carbon emissions for both regular and irregular operations. Crew and airport management decreases disruptions related crew costs and improved staff utilization. Finally, movement management decreases delay and cancellation costs for airlines.

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Management’s Discussion and Analysis

DEFENSE AND SECURITY MARKET

We’ve adapted our Defense and Security business to confront the realities our customers are facing and have aligned the business so that we are best positioned to address the needs of our customers. First and foremost is the shift in the nature of conflicts for the U.S. and its allies from focusing on an asymmetric, counterterrorism engagement to the need to prepare for a near‑peer threat across multi-domain operations – air, land, sea, space and cyber. This shift, combined with the budget challenges that will be manifested because of higher deficits, will push more training towards cost-effective, more capable, synthetic environments. In addition, these immersive synthetic environments will become much more prevalent as the only way for defence forces to “train as they fight” across multi-domain operations. As the world reacts to Russian’s invasion of Ukraine, the need for revolutionary digital training and next generation situational awareness solutions becomes even more critical.

To address our customer requirements in this rapidly changing environment, the Defense and Security business unit has aligned to the priorities set forth in the U.S. National Defense Strategy, which outlines the need for the US and its allies to enhance training and readiness across complex, multi-domain operations. This includes the continued requirement to develop strategic partnerships with the customer and across industry. During the second quarter of fiscal 2022, we concluded the previously announced L3H MT acquisition, which accelerates our strategy as a platform agnostic, global training and simulation pure play focusing on ensuring mission readiness by integrating systems and solutions across all five domains.

We’ve focused on investing in digital training and next generation situational awareness solutions that help our defence customers plan, prepare, and analyze to enhance performance and make better decisions across multi-domain operations. Most militaries use a combination of live training on actual platforms, virtual training in simulators, and constructive training using computer-generated simulations. While militaries will always do some level of live training exercises, we believe there will be an increasing reliance on immersive virtual training in order to prepare in a secured environment while decreasing the reliance on more costly, carbon dependent live-flying training. These immersive synthetic environments are also being leveraged more and more for mission and operational support by enabling course of action analysis and data-centric decision support.

Training Solutions

As an industry leader in training and simulation, CAE’s agnostic approach ensures mission readiness for government organizations responsible for public safety. Following the acquisition of L3H MT, we have solidified our leadership in the air domain, augmented our capabilities in land and sea, and established an induction to space and cyber. Our expertise in training, further enhanced by our acquisition of L3H MT, spans a broad variety of aircraft, including fighters, bombers, helicopters, trainer aircraft, maritime patrol, tanker/transport aircraft and remotely piloted aircraft, also called unmanned aerial systems. The acquisition of L3H MT brings experience on submarine training to complement CAE’s existing experience on surface ship training. We offer training solutions for land forces, including a range of driver, gunnery and maintenance trainers for tanks and armored fighting vehicles as well as for the Joint Terminal Centre Training Rehearsal System (JTC-TRS). The acquisition of L3H MT also brings us into the space domain, as evidenced by the position on the Ground Based Strategic Deterrent program for the U.S. Air Force (USAF), as well as additional cyber capabilities through programs such as the USAF’s Simulator Common Architecture Requirements and Standards (SCARS).

As an established, market leading training systems integrator, we 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 data-driven insights.

We have delivered simulation products and training services to approximately 60 defence forces in over 50 countries. We provide training support services such as contractor logistics support, maintenance services, systems engineering, staff augmentation, classroom instruction and simulator training at over 145 sites around the world, including our joint ventures. We also support live-flying training, such as the live training delivered as part of the USAF Initial Flight Training program where all USAF pilot candidates begin their aviation career. Another critical program where we support live-flying training is to the North Atlantic Treaty Organization (NATO) on the NATO Flying Training in Canada (NFCT). In the fourth quarter of fiscal 2022, the Government of Canada announced that it has extended this contract with CAE through 2027, with an option through 2028 if necessary, as it looks to transition to the next-generation Future Aircrew Training (FAcT) program. Other training solution programs include the International Flight Training School in Italy, a joint venture between CAE and Leonardo, and the Army Fixed-Wing Flight Training programs in the U.S., as we help our customers achieve an optimal balance across their training enterprise. In addition, during the second quarter of fiscal 2022, we acquired a 37% equity interest in the flight training operation of SkyWarrior Flight Training LLC, a flight training operation based in Florida that primarily delivers Phase 1 initial flight training to U.S. and international military customers. With this new partnership, we now deliver best‑in‑class initial flight training across the USAF, Army and Navy along with international student pilots. Furthermore, subsequent to the end of the quarter, we launched our ab initio flight training program at our new training facility at the Bremen airport in Germany which will provide academic, simulator and live-flying training services to the German Air Force at this facility as well as a training site in Montpellier, France.

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Management’s Discussion and Analysis

Mission and Operational Support Solutions

Increasingly, our defence and security customers are requiring solutions that need to leverage synthetic environments and digitally immersive technologies to provide a range of mission support. We are now the prime contractor for the U.S. Special Operations Command on the Mission Command System Common Operational Picture (MCS/COP) program, which will deliver enhanced and improved global situational awareness. We were selected as the partner of choice to the U.S. Special Operations Command by combining decades of experience creating digital ecosystems with our multi-source data fusion and artificial intelligence/machine learning capabilities to provide a single visualization platform to support collaborative command and control decision-making in real‑time. This unique combination of experience, digital technology and subject matter expertise has also given us the occasion to prime our first opportunity for the U.S. Intelligence Community as we were selected to lead the Beyond 3D prototype development and integration efforts for the National Geospatial Intelligence Agency (NGA). Another example of how we are aligning to the U.S. National Defense Strategy priorities, the Beyond 3D project aims to accelerate NGA’s ability to process, exploit, disseminate and generate 3D geospatial data to support real-time analysis, mission planning and tactical operations.

In addition, we are part of the development of a Single Synthetic Environment for the United Kingdom’s Strategic Command, the major organization of the British Armed Forces responsible for leading integration across all domains — air, land, sea, space and cyber. We are continuing to expand and extend our addressable market into mission and operational support as we leverage our modeling and simulation expertise to enable defence forces to use synthetic environments for planning, analysis and operational decision support; highlighting that we are at the forefront of this digital evolution where synthetic environments play an increasingly important role for multi-domain operations.

We believe CAE’s Defense and Security business unit is positioned as the partner of choice for training and mission support across multi-domain operations and is focused on becoming a global leader in digitally immersive training and operational support solutions. We estimate our addressable defence market across all five domains to be approximately $14 billion with the largest opportunity still remaining in the air domain where CAE is the platform‑agnostic leader, a position that has been further solidified with the acquisition of L3H MT.

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;

–Attractiveness of outsourcing training, maintenance and operational support services;

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

–Desire to network and integrate training systems to achieve efficiencies and better prepare for the complexities of conflict in a joint multi-domain environment;

–Desire of governments and defence forces to increase the use of synthetic environments as a more cost effective and environmentally friendly solution for training, planning, analysis and decision support;

–Progression of commercially available digital technology enablers for training solutions.

Profitability drivers

We believe profitability drivers for CAE’s defence and security market include the following:

–Leading platform-agnostic training and simulation integrator leveraging solutions across a global footprint;

–Access to strategic contract vehicles, allowing flexibility to offer solutions to more customers and at the point of need;

–Adding customers with more complex problem sets and solution demands to include space and cyber domains and the intelligence community;

–Partnering with OEMs on next-generation platforms for more effective and efficient program execution;

–Operational focus on improving contracting, sub-contracting and program delivery quality processes.

Defence budgets

Despite the COVID-19 pandemic impacting most of calendar 2020 and 2021, the Stockholm International Peace Research Institute estimates global defence spending during calendar 2021 increased by 6% in nominal terms compared to calendar 2020. The U.S. continued to pace global defence spending at approximately 40% of this total amount. In addition, defence spending among the 30 members of NATO grew for the seventh consecutive year with more NATO members pledging to meet the defence spending threshold of two percent of their Gross Domestic Product, with other nations likely to follow suit after the war in Ukraine. With the U.S., NATO, and allied nations continuing to confront the immediate challenges posed by security threats and pivoting to being prepared for a near-peer threat across multi-domain operations, defence budgets are expected to grow over the next year. The fiscal pressures due to COVID-19 and a potential need to reverse current levels of deficit spending, though, could impact global defence budgets from calendar 2022 onward. However, training is fundamental for defence forces to achieve and maintain mission readiness and budget pressures will push more training into the more cost-effective virtual environment, thus creating increased opportunities for our products, services and digital capabilities.

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Management’s Discussion and Analysis

Installed base of enduring defence platforms and new customers

CAE generates a high degree of recurring business from our 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 USAF KC-135 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. The acquisition of L3H MT further enhances CAE’s installed base of enduring platforms, such as the training systems for the F-16 fighter.

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 all branches of the U.S. armed forces, including the U.S. Army at the CAE Dothan Training Center in Dothan, Alabama and the USAF at CAE Doss Aviation Inc. in Pueblo, Colorado. At these training centres, we offer comprehensive classroom, simulator and live-flying training and we believe these types of training service delivery programs 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. This demand from the civil and business aviation sector has a direct impact on the recruitment, training and retention of military pilots. The challenge has led to militaries looking at numerous initiatives designed to address the future potential 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, which will create opportunities for CAE’s products, services and solutions.

Desire to network and integrate training systems to achieve efficiencies and better prepare for the complexities of conflict in a joint multi-domain environment

Global tensions and the pivot to preparing for a near-peer threat 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 multi-domain operations. Increasingly, defence forces are considering a more integrated and holistic approach to training across all the battlespace domains – air, land, maritime, space and cyber. 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-agnostic training and mission 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. This will continue to take on added relevance as the United States and its allies pivot to preparing for a near‑peer adversary, which will require integrated and immersive training across multi-domain operations. As a training systems integrator, we address the overall training enterprise to deliver comprehensive solutions, from platform-centric individual training all the way through to operational, multi-service and multi-domain mission training.

Desire of governments and defence forces to increase the use of synthetic environments as a more cost effective and environmentally friendly solution for training, planning, analysis and decision support

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 platforms, 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 platforms for operational use, and the advanced simulation technologies delivering more realism are several factors prompting a greater adoption of the use of synthetic environments for training. Moreover, synthetic environments support our customers’ efforts to reduce their environmental impact by providing a safer form of multi-domain training with a significant reduction in the carbon footprint compared to live training in a real environment. At the same time, these digitally immersive synthetic environments, when combined with artificial intelligence and cloud computing, can provide a tool for planning, course of action analysis, and mission support. For example, the UK Single Synthetic Environment technology demonstrator aims to create a digital twin with the scale and complexity necessary to provide the UK Strategic Command with a tool for operational planning and decision support.

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Management’s Discussion and Analysis

Progression of commercially available digital technology enablers for training solutions

Militaries are beginning to adopt a range of new technologies that will transform how defence forces train. These new technologies include immersive training devices connected to a digital ecosystem using a combination of virtual reality, artificial intelligence and machine learning as part of the training continuum. For example, the U.S. Air Force’s Pilot Training Transformation initiative is doing exactly this as they completely transform undergraduate pilot training in an effort to accelerate the production of pilots. CAE is part of the U.S. Air Force’s Pilot Training Transformation program and will provide elements of the CAE Trax Academy. Specifically, CAE has the responsibility for developing and delivering the learning management system that will monitor the competencies that the students learn, adapt the learning to individual student pilots, and manage the overall training process. Digital innovations such as the CAE Trax Academy integrate 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. The growing adoption of new digital technologies and innovations for training will drive opportunities for CAE’s offerings as we bring in more commercial technology partners and integrate into our customer’s desired solutions.

HEALTHCARE MARKET

Simulation-based training is one of the most effective ways to prepare healthcare practitioners to treat patients, handle critical situations and reduce medical errors. We leverage the experience and best practices gained over our 75-year simulation-based aviation training history to deliver innovative solutions to improve healthcare training efficiency, increase patient safety and enhance the quality of patient care. Our reputation as a leader in simulation-based medical training is reflected in our exclusive research partnerships with several esteemed simulation-focused universities worldwide. Designated as CAE Centres of Excellence, these universities collaborate with CAE to push the boundaries of healthcare simulation, develop new, evidenced-based practices and design training technologies for tomorrow’s clinicians. We see the healthcare simulation market expanding, as the U.S. shifts from fee‑for‑service to value-based care in hospitals, simulation centres become increasingly more prevalent in nursing and medical schools, access to patients and clinical sites for hands-on training decreases due to pandemic pressures, and the demand for remote and virtual simulation solutions increases as a result.

We offer one of the broadest and most innovative portfolios of medical training solutions, including patient, ultrasound and interventional simulators, audiovisual debriefing solutions, centre management platforms, augmented reality applications, e‑learning and curricula for simulation-based healthcare education and training. We provide training solutions to customers in more than 95 countries and are a leader in the design, development and delivery of patient simulators which are based on advanced models of human physiology to realistically mimic human responses to clinical interventions. We have applied that same degree of rigor and innovation to the introduction of digital, remote and virtual simulation solutions. For example, we recently introduced Vimedix 3.3, an advanced ultrasound simulator that offers augmented reality for remote and virtual learning, significantly reducing the time it takes to master ultrasound scanning and comprehend ultrasonographic anatomy. Throughout the past two years, we have continued to invest in the development of new products to address growing demand in the healthcare simulation market. We launched a learning management system that consolidates the delivery of digital learning solutions to augment simulation-centre-based training, giving learners the ability to learn anytime, anywhere and at their own pace. We introduced a new pediatric medical manikin, CAE Aria, which provides training opportunities for the most common and complicated pediatric emergencies. We continue to offer the CAE Juno clinical skills manikin, which enables nursing programs to adapt to decreased access to live patients; the CAE Ares emergency care manikin designed for advanced life support and American Heart Association training; CAE Lucina, our obstetric medical manikin designed to simulate normal deliveries and rare maternal emergencies; and CAE Luna, an innovative critical-care simulator for newborns and infants. With these solutions, we are providing a family of innovative learning tools to hospitals and academic institutions, which represent the largest segment of the healthcare simulation market. We continue to integrate the latest in augmented and virtual reality technologies into our advanced software platforms to deliver easy-to-use training solutions and products. Mixed reality is featured across our portfolio, including patient simulation (AresAR and LucinaAR), interventional simulation (CathLabVR), and ultrasound simulation (VimedixAR). In July 2021, we completed a small tuck-in acquisition of Medicor Lab Inc. (Medicor), a company which specializes in task trainer and realistic synthetic skin production. The addition enhances and expands CAE Healthcare’s procedure-focused portfolio, providing a full suite of products across three major categories: high-fidelity patient simulators, skills‑training manikins, and task trainers. The CAE Medicor line complements the CAE Blue Phantom line of ultrasound‑focused training products.

We deliver peer-to-peer training at customer sites as well as in our training centres in Canada, Germany, the U.K. and the U.S. Our Healthcare educational resources include adjunct faculty consisting of nurses, respiratory therapists, physicians, paramedics and sonographers who, in collaboration with leading healthcare institutions, have developed approximately 200 Learning Modules for patient simulators and over 3,600 Simulated Clinical Experience courseware packages for our customers across our virtual and physical platforms. Through a collaboration with the British Columbia Institute of Technology (BCIT), we have released 26 online courses for nursing students. Available on-demand, each course features a virtual simulation targeting specific medical assessments and treatments and can be used independently or in support of a hands-on simulation session.

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Management’s Discussion and Analysis

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, we have released five online modules for Anesthesia SimSTAT, a virtual healthcare training environment for practicing physicians. This platform provides continuing medical education for Maintenance of Certification in Anesthesiology 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.

We see future opportunities arising in the Healthcare business, including supporting government customers; our new digital and virtual learning products 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 and the Society for Simulation in Healthcare, 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.

We believe CAE’s Healthcare segment is positioned as a leader in developing healthcare professionals through technology, educational content and training, with an estimated healthcare simulation market of approximately US$1.7 billion. North America is the largest market for healthcare simulation, followed by Europe and Asia.

Market drivers

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

–Limited access to patients for educational and clinical development purposes;

–Evolving medical technologies and growing use and acceptance of remote and virtual delivery methods;

–Rising use of simulation, with a demand for innovative and custom training approaches to prevent medical errors;

–Increased focus on pandemic and disaster preparedness, alongside growing demand for medical professionals, especially nurses;

–Growing emphasis on patient safety and outcomes.

Limited access to patients for educational and clinical development purposes

Traditionally, medical education has adhered to 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 and rare complications, inhibiting their ability to practice critical decision‑making skills. The use of simulation in professional programs complements traditional learning and helps students hone their clinical and critical thinking skills for high-risk, low-frequency events. In 2014, the U.S. National Council of State Boards of Nursing (NCSBN) released a landmark study on the effectiveness of simulation training in pre-licensure nursing programs. Among the findings, nursing students who spent up to 50 percent of clinical hours in high‑quality simulation were as well prepared for professional practice as those whose experiences were drawn from traditional clinical practice. The NCSBN's national simulation guidelines, which are still in use today, indicate a prelicensure nursing education program may substitute simulation for up to 50% of its traditional clinical hours. In the U.K., the Nursing and Midwifery Council agreed to increase the allowance of simulation activities from 300 to 600 hours for nursing students as part of their clinical practice. In addition, SSH and INACSL continued pandemic-related calls for more flexibility in replacing required clinical training hours with simulation hours for health science students, emphasizing that virtual simulation is an effective teaching method that results in improved student learning outcomes.

Simulation provides consistent, repeatable training and exposure to a broader range of patients and scenarios than a learner may experience in normal clinical practice settings. As an example, our CAE Vimedix ultrasound simulator offers more than 200 patient pathologies for cardiac, emergency and obstetrics and gynecology medicine. As the training and education model continues to evolve. CAE Healthcare simulators provide a low-risk alternative for practicing life-saving procedures, inter-professional team training and major disaster response.

Evolving medical technologies and growing use and acceptance of remote and virtual delivery methods

Advancements in medical technology along with greater acceptance of remote and virtual delivery methods 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. We continue to collaborate with OEMs to deliver innovative and custom training for the introduction of new interventional procedures. Additionally, we are broadening our use of remote and virtual learning through programs, such as Maestro Evolve, an interactive virtual learning platform for remote instruction, and online digital learning courses focused on nurses and respiratory therapists.

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Management’s Discussion and Analysis

Rising use of simulation, with a demand for innovative and custom training approaches to prevent medical errors

The majority of product and service sales in healthcare simulation involve healthcare education. 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, patient simulators, interventional simulators, skills 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.

Increased focus on pandemic and disaster preparedness, alongside growing demand for medical professionals, especially nurses

The COVID-19 pandemic highlighted the importance of preparedness in all sectors, including healthcare, and has underscored the vital role of health professionals in global crises. The World Health Organization (WHO) estimates a projected shortfall of 18 million health workers by 2030, mostly in low- and lower-middle income countries. However, countries at all levels of socioeconomic development face, to varying degrees, difficulties in the education, employment, deployment, retention, and performance of their workforce. The pandemic has been especially challenging for nurses, straining an already limited supply of these valuable healthcare professionals. According to the International Council of Nurses, the pandemic contributed to higher nurse turnover. Prior to COVID-19, the world was already short 6 million nurses, and by 2030 that number is projected to reach 13 million.

According to the Association of American Medical Colleges (AAMC), the U.S. faces a projected physician shortage of between 37,800 and 124,000 doctors by 2034, and the COVID-19 pandemic has put additional serious strains on this workforce. In addition, AAMC data shows that 40% of the country’s practicing physicians felt burnt out at least once a week before the COVID-19 crisis began, which could cause doctors and other health professionals to cut back their hours or even accelerate their plans for retirement. This situation will exacerbate the need for accessible, effective and affordable training solutions for healthcare professionals.

Growing emphasis on patient safety and outcomes

CAE expects increased adoption of simulation-based training and certification of healthcare professionals will 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 WHO 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 Cognitive Assessment and Advanced Trauma Life Support. Moreover, the Accreditation Council for Graduate Medical Education is evolving towards competency-based assessment with specific benchmarks to measure and compare performance which favours the adoption of simulation products and training.

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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 /
	2022	2021	(decrease)
U.S. dollar (US$ or USD)	1.25	1.26	(1	%)
Euro (€ or EUR)	1.38	1.47	(6	%)
British pound (£ or GBP)	1.64	1.73	(5	%)

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

			Increase /
	2022	2021	(decrease)
U.S. dollar (US$ or USD)	1.25	1.32	(5	%)
Euro (€ or EUR)	1.46	1.54	(5	%)
British pound (£ or GBP)	1.71	1.73	(1	%)

For fiscal 2022, the effect of translating the results of our foreign operations into Canadian dollars resulted in a decrease in revenue of $112.4 million and a decrease in net income of $8.7 million, when compared to fiscal 2021. 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 31 of our consolidated financial statements.

3.7 Non-GAAP and other financial measure definitions

This MD&A includes non-GAAP and other financial measures. Non-GAAP measures are useful supplemental information but do 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.

Adjusted earnings or loss per share (EPS)

Adjusted earnings or loss per share is a non-GAAP measure calculated by excluding restructuring, integration and acquisition costs, and impairments and other gains and losses arising from significant strategic transactions or specific events, after tax, 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, integration and acquisition costs and impairments and other gains and losses, after tax, as well as one-time tax items by the weighted 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 facilitates the comparison across reporting periods.

Adjusted earnings or loss per share excluding COVID-19 government support programs further excludes the impacts of government contributions related to COVID-19 support programs that were credited to income, after tax, but does not adjust for COVID-19 heightened operating costs that we have been carrying and that have been included in our results. Refer to section 3.8 “Non-GAAP measure reconciliations” of this MD&A for a reconciliation of these non-GAAP measures to the most directly comparable measure under GAAP.

Adjusted net income or loss

Adjusted net income or loss 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, integration and acquisition costs, and impairments and other gains and losses arising from significant strategic transactions or specific events, after tax, as well as significant one-time tax items. We track it because we believe it provides a better indication of our operating performance and facilitates the comparison across reporting periods.

Adjusted net income or loss excluding COVID-19 government support programs further excludes the impacts of government contributions related to COVID-19 support programs that were credited to income, after tax, but does not adjust for COVID-19 heightened operating costs that we have been carrying and that have been included in our results. Refer to section 3.8 “Non-GAAP measure reconciliations” of this MD&A for a reconciliation of these non-GAAP measures to the most directly comparable measure under GAAP.

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Management’s Discussion and Analysis

Adjusted segment operating income or loss (SOI)

Adjusted segment operating income or loss is a non-GAAP measure and is the sum of our key indicators of each segment’s financial performance. Adjusted segment operating income or loss 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 adjusted segment operating income by taking operating income and excluding restructuring, integration and acquisition costs, and impairments and other gains and losses arising from significant strategic transactions or specific events. We track it because we believe it provides a better indication of our operating performance and facilitates the comparison across reporting periods. Additionally, adjusted segment operating income or loss is the profitability measure employed by management for making decisions about allocating resources to segments and assessing segment performance.

Adjusted segment operating income or loss excluding COVID-19 government support programs further excludes the impacts of government contributions related to COVID-19 support programs that were credited to income but does not adjust for COVID-19 heightened operating costs that we have been carrying and that have been included in our results. While management is aware of such further adjusted measure, it is not specifically employed by management as a profitability measure for making decisions about allocating resources to segments and assessing segment performance. Refer to section 3.8 “Non‑GAAP measure reconciliations” of this MD&A for a reconciliation of these non-GAAP measures to the most directly comparable measure under GAAP.

Capital employed

Capital employed is a non-GAAP measure we use to evaluate and monitor how much we are investing in our business. We measure it from two perspectives:

Capital used:

–For the Company as a whole, we take total assets (not including cash and cash equivalents), and subtract total liabilities (not including long-term debt and the current portion of long-term debt);

–For each segment, we take the total assets (not including cash and cash equivalents, tax accounts and other non-operating assets), and subtract total liabilities (not including tax accounts, long-term debt and the current portion of long-term debt, royalty obligations, employee benefit obligations and other non-operating liabilities).

Source of capital:

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

Refer to section 7.1 “Consolidated capital employed” of this MD&A for a reconciliation of this non-GAAP measure to the most directly comparable measure under GAAP.

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.

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, changes in ERP and 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. Refer to section 6.1 “Consolidated cash movements” of this MD&A for a reconciliation of this non-GAAP measure to the most directly comparable measure under GAAP.

Gross profit

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

Net debt

Net debt is a non-GAAP measure we use to monitor how much debt we have after taking into account cash and cash equivalents. We use it as an indicator of our overall financial position, and calculate it by taking our total long-term debt, including the current portion of long-term debt, and subtracting cash and cash equivalents. Refer to section 7.1 “Consolidated capital employed” of this MD&A for a reconciliation of this non-GAAP measure to the most directly comparable measure under GAAP.

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Management’s Discussion and Analysis

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. Adjusted EBITDA further excludes restructuring, integration and acquisition costs, and impairments and other gains and losses arising from significant strategic transactions or specific events. Refer to section 3.8 “Non-GAAP measure reconciliations” of this MD&A for a reconciliation of these non-GAAP measures to the most directly comparable measure under GAAP.

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). Refer to section 7.1 “Consolidated capital employed” of this MD&A for a reconciliation of this non-GAAP measure to the most directly comparable measure under GAAP.

Operating income or loss

Operating income or loss 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 facilitates the comparison across reporting 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 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 Defense 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. Defense 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.

Backlog

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

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

–Joint venture backlog is obligated backlog that represents the expected value of our share of orders that our joint ventures have received but have not yet executed. Joint venture backlog is determined on the same basis as obligated backlog described above;

–Unfunded backlog represents firm Defense 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.

Refer to section 4.3 “Consolidated orders and total backlog” of this MD&A for a reconciliation of this non-GAAP measure to the most directly comparable measure under GAAP.

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.

CAE Financial Report 2022 I 19

Management’s Discussion and Analysis

Research and development expenses (R&D)

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.

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 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) 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 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.

3.8 Non-GAAP measure reconciliations

Reconciliation of adjusted segment operating income

					Defense
	Civil Aviation				and Security				Healthcare						Total
Three months ended March 31	2022		2021		2022		2021		2022		2021		2022		2021
Operating income (loss)	$	58.1	$	40.5	$	25.8	$	(8.5)	$	9.4	$	15.6	$	93.3	$	47.6
Restructuring, integration and acquisition costs	26.6		26.1		9.2		31.7		0.2		0.8		36.0		58.6
Cloud computing transition adjustment*	11.6		—		1.8		—		—		—		13.4		—
Adjusted segment operating income	$	96.3	$	66.6	$	36.8	$	23.2	$	9.6	$	16.4	$	142.7	$	106.2
COVID-19 government support programs	—		19.7		—		16.4		—		1.1		—		37.2
Adjusted SOI excluding COVID-19 government
support programs	$	96.3	$	46.9	$	36.8	$	6.8	$	9.6	$	15.3	$	142.7	$	69.0
					Defense
---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---	---
	Civil Aviation				and Security				Healthcare						Total
Twelve months ended March 31	2022		2021		2022		2021		2022		2021		2022		2021
Operating income	$	224.1	$	6.5	$	56.0	$	15.5	$	4.1	$	26.4	$	284.2	$	48.4
Restructuring, integration and acquisition costs	79.0		76.1		61.4		45.0		6.5		2.9		146.9		124.0
Cloud computing transition adjustment*	11.6		—		1.8		—		—		—		13.4		—
Impairments and other gains and losses incurred
in relation to the COVID-19 pandemic(1)	—		81.7		—		26.5		—		—		—		108.2
Adjusted segment operating income	$	314.7	$	164.3	$	119.2	$	87.0	$	10.6	$	29.3	$	444.5	$	280.6
COVID-19 government support programs	5.2		63.6		8.0		60.3		0.4		3.5		13.6		127.4
Adjusted SOI excluding COVID-19 government
support programs	$	309.5	$	100.7	$	111.2	$	26.7	$	10.2	$	25.8	$	430.9	$	153.2

* New and amended standards adopted (see Section 11.1)

20 I CAE Financial Report 2022

Management’s Discussion and Analysis

Reconciliation of adjusted net income and adjusted earnings per share

		Three months ended					Twelve months ended
	March 31					March 31
(amounts in millions, except per share amounts)		2022		2021			2022		2021
Net income (loss) attributable to equity holders of the Company		$	55.1	$	19.8		$	141.7	$	(47.2)
Restructuring, integration and acquisition costs, after tax		27.1		43.4			110.0		94.0
Impairments and other gains and losses incurred in relation
to the COVID-19 pandemic(1), after tax		—		—			—		80.3
Cloud computing transition adjustment, after tax		9.8		—			9.8		—
Adjusted net income		$	92.0	$	63.2		$	261.5	$	127.1
COVID-19 government support programs, after tax		—		27.3			10.0		93.5
Adjusted net income excluding COVID-19 government support programs		$	92.0	$	35.9		$	251.5	$	33.6
Average number of shares outstanding (diluted)		318.5		287.3			312.9		272.0
Adjusted EPS		$	0.29	$	0.22		$	0.84	$	0.47
Adjusted EPS excluding COVID-19 government support programs		$	0.29	$	0.12		$	0.80	$	0.12

Reconciliation of EBITDA and adjusted EBITDA


	March 31
(amounts in millions)		2022		2021
Operating income		$	284.2	$	48.4
Depreciation and amortization		310.5		319.5
EBITDA		$	594.7	$	367.9
Restructuring, integration and acquisition costs		146.9		124.0
Impairments and other gains and losses incurred in relation to the COVID-19 pandemic(1)		—		108.2
Cloud computing transition adjustment		13.4		—
Adjusted EBITDA		$	755.0	$	600.1
COVID-19 government support programs		(13.6)		(127.4)
Adjusted EBITDA excluding COVID-19 government support programs		$	741.4	$	472.7

(1) Mainly from impairment charges on non-financial assets and amounts owed from customers. This reconciling item does not adjust for any operational elements, including COVID-19 heightened employee costs. Throughout fiscal 2021 and the first quarter of fiscal 2022, we carried higher employee costs than we would have otherwise been carrying as amounts received under COVID-19 government support programs either flowed through directly to employees according to the objective of the subsidy programs and the way they were designed in certain countries, or the amounts were offset by the increased costs we incurred in revoking some of our initial cost saving measures including eliminating salary reductions and bringing back employees who were previously placed on furlough or reduced work weeks. We also incurred additional operating costs including the purchase of personal protective equipment, increased sanitary measures to protect the health and safety of our employees and costs of safety protocols implemented. These higher costs have been included in our results. While these additional costs are in certain cases estimated, they almost entirely neutralize the positive impacts of the COVID-19 government support programs. CAE's participation in the CEWS program ceased on June 5, 2021 and accordingly, we did not claim any CEWS benefits for wages and salary costs incurred subsequent to June 5, 2021.

CAE Financial Report 2022 I 21

Management’s Discussion and Analysis

4. CONSOLIDATED RESULTS

4.1 Results from operations – fourth quarter of fiscal 2022

(amounts in millions, except per share amounts)		Q4-2022	Q3-2022	Q2-2022	Q1-2022	Q4-2021
Revenue	$	955.0	848.7	814.9	752.7	894.3
Cost of sales	$	683.4	606.2	587.3	538.9	657.2
Gross profit3	$	271.6	242.5	227.6	213.8	237.1
As a % of revenue	%	28.4	28.6	27.9	28.4	26.5
Research and development expenses3	$	34.9	31.7	30.7	23.5	22.5
Selling, general and administrative expenses	$	143.6	117.5	122.1	105.9	111.5
Other (gains) and losses	$	(20.9)	(6.3)	(4.1)	(5.7)	(0.7)
After tax share in (profit) loss of equity accounted investees	$	(15.3)	(13.1)	(11.8)	(8.3)	(2.4)
Restructuring, integration and acquisition costs	$	36.0	47.2	51.5	12.2	58.6
Operating income3	$	93.3	65.5	39.2	86.2	47.6
As a % of revenue	%	9.8	7.7	4.8	11.5	5.3
Finance expense – net	$	32.5	34.5	35.0	28.6	32.0
Earnings before income taxes	$	60.8	31.0	4.2	57.6	15.6
Income tax (recovery) expense	$	3.7	2.6	(13.0)	10.3	(3.2)
As a % of earnings (loss) before income taxes
(income tax rate)	%	6	8	(310)	18	(21)
Net income (loss)	$	57.1	28.4	17.2	47.3	18.8
Attributable to:
Equity holders of the Company	$	55.1	26.2	14.0	46.4	19.8
Non-controlling interests	$	2.0	2.2	3.2	0.9	(1.0)
	$	57.1	28.4	17.2	47.3	18.8
EPS attributable to equity holders of the Company
Basic and diluted	$	0.17	0.08	0.04	0.16	0.07
Adjusted segment operating income3	$	142.7	112.7	90.7	98.4	106.2
Adjusted SOI excluding COVID-19 government support programs3	$	142.7	112.7	90.7	84.8	69.0
Adjusted net income3	$	92.0	60.7	53.2	55.6	63.2
Adjusted net income excluding COVID-19 government
support programs3	$	92.0	60.7	53.2	45.6	35.9
Adjusted EPS3	$	0.29	0.19	0.17	0.19	0.22
Adjusted EPS excluding COVID-19 government support programs3	$	0.29	0.19	0.17	0.15	0.12

Revenue was 7% higher compared to the fourth quarter of fiscal 2021

Revenue was $60.7 million higher than the fourth quarter of fiscal 2021. Increases in revenue were $135.1 million and $44.5 million for Defense and Security and Civil Aviation respectively, partially offset by a decrease of $118.9 million in Healthcare. Revenue in the fourth quarter of fiscal 2021 included a contribution from the CAE Air1 ventilators in the amount of $130.0 million reported in the Healthcare segment.

You will find more details in Results by segment.

Gross profit was $34.5 million higher compared to the fourth quarter of fiscal 2021

Gross profit was $271.6 million this quarter, or 28.4% of revenue, compared to $237.1 million, or 26.5% of revenue, in the fourth quarter of fiscal 2021.

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

22 I CAE Financial Report 2022

Management’s Discussion and Analysis

Adjusted segment operating income was $36.5 million higher compared to the fourth quarter of fiscal 2021

Operating income this quarter was $93.3 million (9.8% of revenue), compared to $47.6 million (5.3% of revenue) in the fourth quarter of fiscal 2021. Adjusted segment operating income was $142.7 million this quarter (14.9% of revenue) compared to $106.2 million (11.9% of revenue) in the fourth quarter of fiscal 2021. Increases in adjusted segment operating income were $29.7 million and $13.6 million in Civil Aviation and Defense and Security respectively, partially offset by a decrease of $6.8 million for Healthcare. Adjusted segment operating income in the fourth quarter of fiscal 2021 included a contribution from the CAE Air1 ventilators reported in the Healthcare segment.

Adjusted segment operating income excluding COVID-19 government support programs was $73.7 million higher compared to the fourth quarter of fiscal 2021

To minimize the impact on employees through this difficult period, CAE previously accessed government emergency relief measures and wage subsidy programs available around the world, mainly the Canada Emergency Wage Subsidy (CEWS) program. CAE was eligible for the CEWS subsidy program during the first quarter of fiscal 2022, and the wage subsidies were applied as a substitute for some of the cost saving measures previously taken and to alleviate some of the impact on affected employees. The Government of Canada extended the CEWS program to October 2021, however CAE's participation in the CEWS program ceased on June 5, 2021 and accordingly, CAE did not claim any CEWS benefits for wages and salary costs incurred subsequent to June 5, 2021.

Adjusted segment operating income excluding COVID-19 government support programs was $142.7 million (14.9% of revenue), representing an increase of $73.7 million compared to the same period last year. The increase was $49.4 million and $30.0 million for Civil Aviation and Defense and Security respectively, partially offset by a decrease of $5.7 million for Healthcare.

You will find more details in Results by segment.

Research and development expenses were $12.4 million higher compared to the fourth quarter of fiscal 2021

The increase compared to the fourth quarter of fiscal 2021 was mainly due to last year's benefit of cost containment measures taken and government support programs obtained in relation to the COVID-19 pandemic and lower investment tax credits recognized, partially offset by lower amortization of development costs incurred in relation to the design and manufacturing of the CAE Air1 ventilators, for which deliveries were completed in the prior year.

Net finance expense was stable compared to the fourth quarter of fiscal 2021

Higher finance expense on long-term debt was offset by lower other finance expense and higher borrowing costs capitalized.

Income tax rate

Income tax expense this quarter amounted to $3.7 million, representing an effective tax rate of 6%, compared to a negative effective tax rate of 21% for the fourth quarter of fiscal 2021.

The income tax rate was impacted by restructuring, integration and acquisition costs, and the cloud computing transition adjustment this quarter. In the fourth quarter of last year, the income tax rate was impacted by restructuring costs. Excluding the effect of these elements, the income tax rate would have been 15% this quarter compared to 16% in the fourth quarter of fiscal 2021, which is stable compared to the fourth quarter of fiscal 2021.

CAE Financial Report 2022 I 23

Management’s Discussion and Analysis

4.2 Results from operations – fiscal 2022

(amounts in millions, except per share amounts)		FY2022	FY2021
Revenue	$	3,371.3	2,981.9
Cost of sales	$	2,415.8	2,216.9
Gross profit	$	955.5	765.0
As a % of revenue	%	28.3	25.7
Research and development expenses	$	120.8	104.7
Selling, general and administrative expenses	$	489.1	398.9
Other (gains) and losses	$	(37.0)	91.7
After tax share in profit of equity accounted investees	$	(48.5)	(2.7)
Restructuring, integration and acquisition costs	$	146.9	124.0
Operating income	$	284.2	48.4
As a % of revenue	%	8.4	1.6
Finance expense – net	$	130.6	135.6
Earnings (loss) before income taxes	$	153.6	(87.2)
Income tax (recovery) expense	$	3.6	(39.7)
As a % of (loss) earnings before income taxes (income tax rate)	%	2	46
Net income (loss)	$	150.0	(47.5)
Attributable to:
Equity holders of the Company	$	141.7	(47.2)
Non-controlling interests	$	8.3	(0.3)
	$	150.0	(47.5)
EPS attributable to equity holders of the Company
Basic	$	0.46	(0.17)
Diluted	$	0.45	(0.17)
Adjusted segment operating income	$	444.5	280.6
Adjusted SOI excluding COVID-19 government support programs	$	430.9	153.2
Adjusted net income	$	261.5	127.1
Adjusted net income excluding COVID-19 government support programs	$	251.5	33.6
Adjusted EPS	$	0.84	0.47
Adjusted EPS excluding COVID-19 government support programs	$	0.80	0.12

Revenue was $389.4 million or 13% higher compared to last year

Increases in revenue were $385.0 million and $204.9 million for Defense and Security and Civil Aviation respectively, partially offset by a decrease of $200.5 million for Healthcare. Revenue in fiscal 2021 included a contribution from the CAE Air1 ventilators in the amount of $230.6 million reported in the Healthcare segment.

You will find more details in Results by segment.

Gross profit was $190.5 million higher compared to last year

Gross profit was $955.5 million this year, or 28.3% of revenue, compared to $765.0 million, or 25.7% of revenue, last year as savings from the comprehensive program put in place to structurally lower our cost base are ramping up.

Adjusted segment operating income was $163.9 million higher compared to last year

Operating income for the year was $284.2 million (8.4% of revenue), compared to $48.4 million (1.6% of revenue) last year. Adjusted segment operating income was $444.5 million this year (13.2% of revenue) compared to $280.6 million (9.4% of revenue) last year. Increases in adjusted segment operating income were $150.4 million and $32.2 million in Civil Aviation and Defense and Security respectively, partially offset by a decrease of $18.7 million for Healthcare. Adjusted segment operating income in fiscal 2021 included a contribution from the CAE Air1 ventilators reported in the Healthcare segment.

24 I CAE Financial Report 2022

Management’s Discussion and Analysis

Adjusted segment operating income excluding COVID-19 government support programs was $277.7 million higher compared to last year

Adjusted segment operating income excluding COVID-19 government support programs for the year was $430.9 million (12.8% of revenue), representing an increase of $277.7 million compared to last year. The increase was $208.8 million and $84.5 million for Civil Aviation and Defense and Security respectively, partially offset by a decrease of $15.6 million for Healthcare.

Throughout fiscal 2021 and during the first quarter of fiscal 2022, we also carried higher employee costs than we would have otherwise been carrying as amounts received under these programs flowed through directly to employees according to the objective of the subsidy programs and the way they were designed in certain countries. We also incurred additional operating costs including the purchase of personal protective equipment, increased sanitary measures to protect the health and safety of our employees and costs of safety protocols implemented. While these additional costs are in certain cases estimated, they almost entirely neutralize the positive impacts of the COVID-19 government support programs in fiscal 2021 and during the first quarter of fiscal 2022.

You will find more details in Results by segment.

Research and development expenses were $16.1 million higher compared to last year

The increase compared to last year was mainly due to last year's benefit of cost containment measures taken and government support programs obtained in relation to the COVID-19 pandemic and the recognition of additional investment tax credits, partially offset by the amortization of development costs incurred in relation to the design and manufacturing of the CAE Air1 ventilators for which deliveries were completed in the prior year.

Net finance expense was $5.0 million lower than last year

	FY2021 to
(amounts in millions)	FY2022
Net finance expense, prior period	$	135.6
Change in finance expense from the prior period:
Increase in finance expense on long-term debt (other than lease liabilities)	$	3.9
Increase in finance expense on royalty obligations	2.1
Decrease in finance expense on lease liabilities	(5.4)
Decrease in other finance expense	(1.7)
Increase in borrowing costs capitalized	(4.2)
Decrease in finance expense from the prior period	$	(5.3)
Change in finance income from the prior period:
Decrease in interest income on loans and finance lease contracts	$	1.5
Increase in other finance income	(1.2)
Decrease in finance income from the prior period	$	0.3
Net finance expense, current period	$	130.6

Income tax rate

Income tax expense this year amounted to $3.6 million, representing an effective tax rate of 2%, compared to an income tax recovery of $39.7 million for the same period last year, representing an effective tax rate of 46%.

The income tax rate was impacted by restructuring, integration and acquisition costs, and the cloud computing transition adjustment this year. Last year, the income tax rate was impacted by impairment charges on non-financial assets and amounts owed from customers incurred in relation to the COVID-19 pandemic, restructuring costs and the positive impact of tax audits. Excluding the effect of these elements, the effective tax rate would have been 14% this year compared to 19% last year. On this basis, the decrease in the tax rate from last year was mainly attributable to this year's beneficial impact on tax assets from changes in the substantially enacted tax laws in the U.K., Netherlands and Colombia, the positive impact of tax audits in Canada and the change in the mix of income from various jurisdictions.

CAE Financial Report 2022 I 25

Management’s Discussion and Analysis

4.3 Restructuring, integration and acquisition costs

	FY2022		FY2021		Q4-2022		Q4-2021
Integration and acquisition costs	$	87.8	$	6.9	$	23.6	$	6.9
Impairment of non-financial assets	37.1		59.5		6.5		26.0
Severances and other employee related costs	6.9		42.9		2.3		21.2
Other costs	15.1		14.7		3.6		4.5
Total restructuring, integration and acquisition costs	$	146.9	$	124.0	$	36.0	$	58.6

In fiscal 2021, we announced that we would be taking additional measures to best serve the market by optimizing our global asset base and footprint and adjusting our business to correspond with the expected level of demand and the structural efficiencies that will be enduring. As a result of these measures, $117.1 million of restructuring expenses were incurred and reported during fiscal 2021 and $54.7 million has been incurred in fiscal 2022. These expenses consist mainly of real estate costs, asset relocations and other direct costs related to the optimization of our footprint and employee termination benefits, which have been carried out throughout fiscal 2021 and fiscal 2022.

For the year ended March 31, 2022, restructuring, integration and acquisition costs associated with the L3H MT acquisition amounted to $63.5 million (2021 – $4.3 million) and the AirCentre acquisition amounted to $18.1 million (2021 – nil).

4.4 Consolidated orders and total backlog

Total backlog4 17% higher compared to last year

(amounts in millions)		FY2022	FY2021
Obligated backlog4, beginning of period	$	6,412.6	7,631.0
+ order intake4		4,091.2	2,723.5
- revenue		(3,371.3)	(2,981.9)
+ / - adjustments		738.9	(960.0)
Obligated backlog, end of period	$	7,871.4	6,412.6
Joint venture backlog4 (all obligated)		308.1	328.2
Unfunded backlog and options4		1,398.0	1,460.3
Total backlog	$	9,577.5	8,201.1
Reconciliation of total backlog to remaining performance obligations
Total backlog	$	9,577.5	8,201.1
Less: Joint venture backlog		(308.1)	(328.2)
Less: Options		(544.2)	(476.5)
Less: Estimated contract value4		(3,305.2)	(2,957.7)
Remaining performance obligations	$	5,420.0	4,438.7

Fiscal 2022 adjustments include backlog acquired from the business acquisitions completed during the year, partially offset by negative foreign exchange movements and the revaluation of prior year contracts.

The book-to-sales ratio for the quarter was 1.38x. The ratio for the last 12 months was 1.21x.

You will find more details in Results by segment.

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

26 I CAE Financial Report 2022

Management’s Discussion and Analysis

5. RESULTS BY SEGMENT

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

–Civil Aviation;

–Defense and Security;

–Healthcare.

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

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

5.1 Civil Aviation

FISCAL 2022 EXPANSIONS AND NEW INITIATIVES

Acquisitions

–On February 28, 2022, we acquired Sabre’s AirCentre airline operations portfolio (AirCentre), a suite of flight crew management and optimization solutions. The acquisition further expands our reach across our broad customer base beyond pilot training and establishes ourself as a technology leader in the growing market for industry-leading, digitally-enabled flight and crew operations solutions.

Expansions

–We launched our commercial aviation network in Bangkok, Thailand with the deployment of one new Airbus A320 FFS at our recently opened training centre;

–We expanded our commercial aviation network with the deployment of our first CAE-built Boeing 737 MAX FFS in Europe at our Amsterdam training centre;

–We announced the expansion of our business aviation footprint with the introduction of a new flight-training location in Las Vegas, Nevada. The centre is expected to open in the second half of calendar 2022 and will be our first west coast training facility in the U.S.;

–We announced the expansion of our training capacity in Dubai with the addition of the first Global 7500 FFS and the future deployment expected in fiscal 2024 of the first Bombardier Global 6500 FFS at the Emirates-CAE Flight Training joint venture in Dubai, UAE;

–We expanded our business aviation training network with the deployment of our first Gulfstream 650 FFS in Europe at our Burgess Hill training centre in the U.K.

New programs and products

–We were selected by Jaunt Air Mobility to lead the design and development of the Jaunt Aircraft Systems Integration Lab for their new all-electric vertical take-off and landing (eVTOL) aircraft;

–We announced a strategic partnership with Volocopter to develop, certify, and deploy an innovative pilot training program and courseware development for eVTOL operations;

–We announced a strategic partnership with BETA Technologies to design and develop a best-in-class pilot and maintenance technician training program for the ALIA eVTOL aircraft with a focus on training design and courseware;

–We announced a strategic partnership with Joby Aviation Inc. to develop and qualify flight simulation training devices that will be used to train the future pilots of their revolutionary eVTOL aircraft;

–We were selected by Innotech-Execaire Aviation Group to provide our digital ecosystem to improve efficiency of their operations, and they will become our launch partner for our innovative suite of digital services in the business aviation market;

–We announced a new relationship with Starr Insurance Companies for a first of its kind program that combines a rigorous training regimen and insurance for single-pilot jet owners. The program will increase insurability and ensure the highest safety standards for single-pilot turbojet owners and operators who are not professional pilots;

–We announced that Air Busan has successfully launched the CAE Rise training system for its flight training operations. This makes Air Busan the first airline in Korea to leverage CAE’s innovative training system based on big data.

CAE Financial Report 2022 I 27

Management’s Discussion and Analysis

FISCAL 2022 ORDERS

Civil Aviation obtained contracts this quarter expected to generate future revenues of $517.0 million, including contracts for 15 FFSs. This brings the total civil order intake to $2,016.5 million and 48 FFSs for the year.

Notable FFS contract awards for the year included:

–Six FFSs including Boeing 737 MAX, Airbus A320s and CRJs to American Airlines Group;

–One Global 6500 to Emirates-CAE Flight Training;

–Three FFSs including Airbus A320, Airbus A330 and Boeing 737 NG to Delta Air Lines;

–Three ARJ21 FFSs to Commercial Aviation Corporation of China;

–Six Boeing 737 MAX FFSs to Ryanair;

–Two Embraer 170 FFSs to Envoy Air;

–Three Boeing 737 MAX FFSs to Southwest Airlines;

–One Boeing 787 FFS to United Airlines;

–One Praetor FFS to Simcom Aviation Training, a joint venture between CAE and Directional Aviation Capital;

–One Airbus A320 FFS to Airbus Vietnam Training Centre;

–One eVTOL FFS to Joby Aviation Inc;

–20 FFSs to undisclosed and other customers.

Notable contract awards for fiscal 2022 included:

–A 5-year commercial aviation training agreement extension with Endeavor Air;

–A 5-year commercial aviation training agreement extension with Avianca;

–A 10-year exclusive commercial aviation training agreement with Scandinavian Airlines (SAS) in Europe;

–A 10-year exclusive commercial aviation training agreement with WestJet;

–A 5-year commercial aviation training agreement with Envoy Air;

–A 2-year exclusive commercial training agreement with LOT Polish Airlines;

–A 3-year business aviation training agreement with Sun Air Jets.

FINANCIAL RESULTS5

(amounts in millions, except SEU, FFSs in CAE's network, utilization rate and FFS deliveries)		FY2022	FY2021	Q4-2022	Q3-2022	Q2-2022	Q1-2022	Q4-2021
Revenue	$	1,617.8	1,412.9	432.7	390.1	362.1	432.9	388.2
Operating income	$	224.1	6.5	58.1	57.1	49.9	59.0	40.5
Adjusted SOI	$	314.7	164.3	96.3	83.4	65.3	69.7	66.6
As a % of revenue	%	19.5	11.6	22.3	21.4	18.0	16.1	17.2
Adjusted SOI excluding COVID-19
government support programs	$	309.5	100.7	96.3	83.4	65.3	64.5	46.9
As a % of revenue	%	19.1	7.1	22.3	21.4	18.0	14.9	12.1
Depreciation and amortization	$	224.1	242.9	57.7	55.5	55.4	55.5	58.2
Property, plant and equipment
expenditures	$	247.3	88.8	68.1	69.7	39.3	70.2	40.7
Intangible assets and other
assets expenditures	$	53.4	27.9	16.7	13.6	13.3	9.8	9.9
Capital employed5	$	4,256.9	3,808.1	4,256.9	3,883.5	3,937.5	3,885.5	3,808.1
Total backlog	$	4,919.2	4,293.1	4,919.2	4,606.0	4,263.2	4,200.4	4,293.1
SEU5		246	246	246	249	245	243	240
FFSs in CAE's network5		316	317	316	312	312	319	317
Utilization rate5	%	60	47	69	60	53	56	55
FFS deliveries		30	36	7	7	5	11	14

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

28 I CAE Financial Report 2022

Management’s Discussion and Analysis

Revenue up 11% compared to the fourth quarter of fiscal 2021

The increase in revenue compared to the fourth quarter of fiscal 2021 was due to higher utilization across our network and from the integration into our results of AirCentre, acquired this quarter. The increase was partially offset by lower revenue recognized from simulator sales mainly due to lower deliveries and an unfavourable foreign exchange impact on the translation of foreign operations.

Revenue was $1,617.8 million this year, $204.9 million or 15% higher than last year

The increase in revenue compared to last year was due to increased utilization across our network and from the integration into our results of the businesses acquired during the fiscal year. The increase was partially offset by an unfavourable foreign exchange impact on the translation of foreign operations and lower revenue recognized from simulator sales mainly due to lower deliveries.

Since the first quarter of fiscal 2021, we have seen gradual recoveries from the enduring impacts of the COVID-19 pandemic in regards to improved utilization of the FFSs in our network and order intake. However, as a result of continued unpredictability from new variants of the virus, we continue to be affected by ongoing supply chain disruptions, employee and customer absenteeism due to infections, operational constraints imposed by local authorities, and intermittent border restrictions.

Adjusted segment operating income up 45% compared to the fourth quarter of fiscal 2021

Adjusted segment operating income was $96.3 million (22.3% of revenue) this quarter, compared to $66.6 million (17.2% of revenue) in the fourth quarter of fiscal 2021.

The increase compared to the fourth quarter of fiscal 2021 was mainly due to increased utilization in the Americas and Europe, a gain on remeasurement of a contingent consideration liability, the net benefit from the remeasurement of long-term royalty obligations, as well as savings from the comprehensive program in place to structurally lower our cost base. The increase was partially offset by lower revenue from simulator sales and lower government support programs obtained in relation to the COVID-19 pandemic.

Adjusted segment operating income excluding COVID-19 government support programs up 105% compared to the fourth quarter of fiscal 2021

CAE's participation in the CEWS program ceased on June 5, 2021 and accordingly, we did not claim any CEWS benefits for wages and salary costs incurred subsequent to June 5, 2021. During the fourth quarter of fiscal 2021, $19.7 million of COVID-19 government support programs were credited to income. On this basis, and without adjusting for the COVID-19 heightened operating costs that we continued to incur, adjusted segment operating income excluding COVID-19 government support programs was up 105% compared to the same period last year.

Adjusted segment operating income was $314.7 million this year, $150.4 million or 92% higher than last year

Adjusted segment operating income was $314.7 million (19.5% of revenue) this year, compared to $164.3 million (11.6% of revenue) last year.

The increase compared to last year was mainly due to increased utilization in the Americas and Europe and in our joint ventures in the Middle East, the ramping up of savings from the comprehensive program put in place to structurally lower our cost base and the integration into our results of recently acquired businesses. The increase was partially offset by lower revenue from simulator sales and lower government support programs obtained in relation to the COVID-19 pandemic.

Adjusted segment operating income excluding COVID-19 government support programs was $309.5 million this year, $208.8 million or 207% higher than last year

During the year, $5.2 million of COVID-19 government support programs were credited to income compared to $63.6 million last year. On this basis, and without adjusting for the COVID-19 heightened operating costs that we have been carrying, adjusted segment operating income excluding COVID-19 government support programs was up 207% compared to last year.

Property, plant and equipment expenditures at $68.1 million this quarter and $247.3 million for the year

Growth capital expenditures were $55.0 million for the quarter and $201.8 million for the year. Maintenance capital expenditures were $13.1 million for the quarter and $45.5 million for the year.

Capital employed increased by $373.4 million compared to last quarter and increased by $448.8 million compared to last year

The increase in capital employed compared to last quarter was due to higher intangible assets and contract assets mainly as a result of the integration into our results of AirCentre, acquired this quarter and higher property, plant and equipment. The increase was partially offset by lower investment in non-cash working capital and movements in foreign exchange rates.

The increase in capital employed compared to last year was due to higher intangible assets mainly as a result of the integration into our results of the businesses acquired during the year and movements in foreign exchange rates. The increase was partially offset by lower investment in non-cash working capital.

CAE Financial Report 2022 I 29

Management’s Discussion and Analysis

Total backlog up 15% compared to last year

(amounts in millions)	FY2022		FY2021
Obligated backlog, beginning of period	$	4,047.4	$	4,993.5
+ order intake	2,016.5		1,261.9
- revenue	(1,617.8)		(1,412.9)
+ / - adjustments	272.2		(795.1)
Obligated backlog, end of period	$	4,718.3	$	4,047.4
Joint venture backlog (all obligated)	200.9		245.7
Total backlog	$	4,919.2	$	4,293.1

Fiscal 2022 adjustments include backlog acquired from the business acquisitions completed during the year, partially offset by the revaluation of prior year contracts and negative foreign exchange movements.

This quarter's book-to-sales ratio was 1.19x. The ratio for the last 12 months was 1.25x.

5.2 Defense and Security

FISCAL 2022 EXPANSIONS AND NEW INITIATIVES

Acquisitions

–On July 2, 2021, we concluded the acquisition of L3H MT. The acquisition is highly complementary to CAE’s core military training business in the U.S. and broadens CAE’s position in training and simulation across multi-domain operations;

–In August 2021, we acquired a 37% equity interest in SkyWarrior Flight Training LLC, a flight training operation based in Florida that primarily delivers Phase 1 initial flight training to U.S. and international military customers. This equity interest expands CAE's connection to the initial flight training of all aviation candidates entering the U.S. military.

Expansions

–We announced the expansion of our ab initio and initial flight training for military forces with the introduction of our first military program in Europe, which was launched subsequent to the end of the quarter. Through a contract from the Federal Office of Bundeswehr Equipment, Information Technology and In-Service Support, we established a new training facility at the Bremen airport in Germany to support ab initio training services for the German Air Force.

New programs and products

–We were contracted to develop and deploy new build Joint Terminal Control Training Rehearsal System simulators for the USAF, a new program and offering in CAE’s portfolio resulting from the acquisition of L3H MT;

–We launched the CAE Prodigy image generator (IG), which delivers high-fidelity graphics, physics-based simulation, and the ability to support a thousand-fold increase in the number of entities in a virtual environment. The CAE Prodigy IG builds on the proven features of CAE’s existing family of IGs.

FISCAL 2022 ORDERS

Defense and Security was awarded $751.3 million in orders this quarter and $1,923.3 million in total for fiscal 2022, including notable contract awards from:

–The Government of Canada to extend the contract for the NATO Flying Training in Canada program through 2027;

–The German Navy for a second NH90 Sea Lion helicopter simulator;

–The USAF to continue providing KC-135 aircrew training services;

–The German Air Force for Ab Initio Flight Training;

–The U.S. Army to continue providing fixed-wing flight training and support services at the CAE Dothan Training Center;

–Leonardo to support the development of an Alenia C-27J flight training device;

–The USAF and Air National Guard to perform a range of simulator upgrades and modifications on F-16 simulators;

–Lockheed Martin to provide upgrades and updates on C-130J training systems for the USAF as well as KC-130J training systems for the U.S. Marine Corps;

–The USAF to continue supporting SCARS, a program which integrates and standardizes the service’s aircraft training simulators;

–The Australian Defence Force to continue providing management and support for the Royal Australian Air Force aerospace simulators;

–The U.S. Army Contracting Command-Orlando to lead the Beyond 3D prototype development and integration efforts for the National Geospatial Intelligence Agency;

–The U.S. Army to provide a new and upgraded Maritime Integrated Training System together with Xebec Government Services, our joint venture with Pinnacle Solutions;

–Canada’s Department of National Defence to expand cyber intrusion detection capabilities on the Innovation for Defence Excellence and Security (IDEaS) program.

30 I CAE Financial Report 2022

Management’s Discussion and Analysis

FINANCIAL RESULTS

(amounts in millions)		FY2022	FY2021	Q4-2022	Q3-2022	Q2-2022	Q1-2022	Q4-2021
Revenue	$	1,602.1	1,217.1	469.5	426.5	417.9	288.2	334.4
Operating income (loss)	$	56.0	15.5	25.8	16.5	(8.9)	22.6	(8.5)
Adjusted SOI	$	119.2	87.0	36.8	32.0	26.7	23.7	23.2
As a % of revenue	%	7.4	7.1	7.8	7.5	6.4	8.2	6.9
Adjusted SOI excluding COVID-19
government support programs	$	111.2	26.7	36.8	32.0	26.7	15.7	6.8
As a % of revenue	%	6.9	2.2	7.8	7.5	6.4	5.4	2.0
Depreciation and amortization	$	73.4	54.3	20.1	21.1	20.0	12.2	13.8
Property, plant and equipment
expenditures	$	21.6	17.3	6.0	6.5	5.7	3.4	9.3
Intangible assets and other
assets expenditures	$	24.9	10.2	6.9	9.0	3.5	5.5	0.5
Capital employed	$	2,338.3	1,021.4	2,338.3	2,360.7	2,466.2	1,100.8	1,021.4
Total backlog	$	4,658.3	3,908.0	4,658.3	4,571.2	4,564.7	3,733.7	3,908.0

Revenue up 40% compared to the fourth quarter of fiscal 2021

The increase compared to the fourth quarter of fiscal 2021 was mainly due to the integration into our results of L3H MT in the amount of $146.9 million, acquired in the second quarter of this year. The increase was partially offset by an unfavourable foreign exchange impact on the translation of foreign operations.

Revenue was $1,602.1 million this year, $385.0 million or 32% higher than last year

The increase was mainly due to the integration into our results of L3H MT and higher revenue on our North American and European programs, partially offset by an unfavourable foreign exchange impact on the translation of foreign operations.

Since the first quarter of fiscal 2021, we have seen some gradual recoveries from the enduring impacts of the COVID-19 pandemic, however as a result of continued unpredictability from new variants and the Continuing Resolution in the U.S., order intake and the execution of certain product programs, particularly internationally, continue to be affected by ongoing supply chain disruptions, employee and customer absenteeism due to infections and operational constraints imposed by local authorities.

Adjusted segment operating income up 59% compared to the fourth quarter of fiscal 2021

Adjusted segment operating income was $36.8 million (7.8% of revenue) this quarter, compared to $23.2 million (6.9% of revenue) in the fourth quarter of fiscal 2021.

The increase compared to the fourth quarter of fiscal 2021 was mainly due to the integration into our results of L3H MT in the amount of $13.3 million, higher margins on our North American and Middle Eastern programs, the net benefit from the remeasurement of long‑term royalty obligations and higher profitability in our joint ventures. The increase was partially offset by lower government support programs obtained in relation to the COVID-19 pandemic and an increase in selling, general and administrative expenses from higher bids and proposal costs and the easing of prior year temporary cost containment measures introduced in the first quarter of fiscal 2021.

Adjusted segment operating income excluding COVID-19 government support programs up 441% compared to the fourth quarter of fiscal 2021

CAE's participation in the CEWS program ceased on June 5, 2021 and accordingly, we did not claim any CEWS benefits for wages and salary costs incurred subsequent to June 5, 2021. During the fourth quarter of fiscal 2021, $16.4 million of COVID-19 government support programs were credited to income. On this basis, and without adjusting for the COVID-19 heightened operating costs that we continued to incur, adjusted segment operating income excluding COVID-19 government support programs was up 441% compared to the same period last year.

Adjusted segment operating income was $119.2 million this year, $32.2 million or 37% higher than last year

Adjusted segment operating income was $119.2 million (7.4% of revenue) this year, compared to $87.0 million (7.1% of revenue) last year.

The increase was mainly due to the integration into our results of L3H MT, higher margins on North American and Middle Eastern programs and higher profitability in our joint ventures. The increase was partially offset by lower government support programs obtained in relation to the COVID-19 pandemic and an increase in selling, general and administrative expenses from higher bids and proposal costs and the easing of prior year temporary cost containment measures introduced in the first quarter of fiscal 2021.

CAE Financial Report 2022 I 31

Management’s Discussion and Analysis

Adjusted segment operating income excluding COVID-19 government support programs was $111.2 million this year, $84.5 million or 316% higher than last year

During the year, $8.0 million of COVID-19 government support programs were credited to income compared to $60.3 million last year. On this basis, and without adjusting for the COVID-19 heightened operating costs that we have been carrying, adjusted segment operating income excluding COVID-19 government support programs was down 316% compared to last year.

Capital employed decreased by $22.4 million compared to last quarter and increased by $1,316.9 million compared to last year

The decrease compared to last quarter was mainly due to movements in foreign exchange rates and lower non-cash working capital, partially offset by lower other non-current liabilities.

The increase compared to last year was mainly due to the integration into our results of the L3H MT acquisition, resulting in an increase in intangible assets, property, plant and equipment and other non-current liabilities. The increase was partially offset by movements in foreign exchange rates.

Total backlog up 19% compared to last year

(amounts in millions)	FY2022		FY2021
Obligated backlog, beginning of period	$	2,365.2	$	2,637.5
+ order intake	1,923.3		1,109.7
- revenue	(1,602.1)		(1,217.1)
+ / - adjustments	466.7		(164.9)
Obligated backlog, end of period	$	3,153.1	$	2,365.2
Joint venture backlog (all obligated)	107.2		82.5
Unfunded backlog and options	1,398.0		1,460.3
Total backlog	$	4,658.3	$	3,908.0

Fiscal 2022 adjustments include backlog acquired from the business acquisition completed during the year, partially offset by negative foreign exchange movements.

This quarter's book-to-sales ratio was 1.60x. The ratio for the last 12 months was 1.20x.

In fiscal 2022, $714.9 million of unfunded backlog was transferred to obligated backlog and $489.1 million was added to the unfunded backlog.

32 I CAE Financial Report 2022

Management’s Discussion and Analysis

5.3 Healthcare

FISCAL 2022 EXPANSIONS AND NEW INITIATIVES

Acquisitions

–On July 5, 2021, we completed a small tuck-in acquisition of Medicor, a company which specializes in task trainer and realistic synthetic skin production. This acquisition augments CAE Healthcare’s portfolio of products and expands our capabilities to offer improved quality simulators for a better customer experience.

New programs and products

–We began worldwide deliveries of our newest pediatric patient simulator, CAE Aria, which simulates a 7-year-old child and enables students and clinicians to learn how to manage a pediatric patient in a variety of environments;

–We released two updates to our ultrasound simulation platform, CAE Vimedix, adding remote learning capabilities, introducing a new virtual probe and making it the industry’s first ultrasound simulator with 3D/4D ultrasonography and multiplanar reconstruction for improved fidelity and realism;

–We enhanced our cardiac training tool CAE CathLabVR to include 31,000 unique scenarios for treating coronary blockages and heart attacks. The upgrade also includes an updated percutaneous coronary intervention module that leverages mixed reality for learning coronary angioplasty and stenting techniques;

–We launched an update of the Inventory Manager for CAE LearningSpace Enterprise tool. The update expands LearningSpace by offering a single platform to track, manage and report on simulation centre assets;

–We launched a new e-commerce platform for our skills trainers, significantly elevating the user experience and broadening customer access;

–In continuing our support in the fight against COVID-19, we offered several new clinical digital learning courses focusing on treating COVID-19 related topics for intensive care units and emergency departments, including Management of the COVID-19 Hypoxic Patient, Management of the COVID-19 Patient with Mechanical Ventilator Problems, Management of the Head-Injured Patient with COVID-19 and Managing Sedation of the COVID-19 Patient;

–We announced three new CAE Centres of Excellence for simulation training and research: the Rush Center for Clinical Skills and Simulation in the U.S., the Royal College of Surgeons in Ireland and Staffordshire University in the U.K. As Centres of Excellence, these institutions support the vision and mission of CAE Healthcare by participating in product development and beta testing, helping to develop future content and promoting the expansion of simulation in healthcare.

Awards and achievements

–Our Sarasota manufacturing facility was awarded the Gold prize in the Florida Sterling Manufacturing Business Excellence Awards. The awards recognize the state’s high-performing manufacturers across seven categories of criteria: leadership, strategy; customers; measurement, analysis and knowledge management; workforce; operations and results.

FINANCIAL RESULTS

(amounts in millions)		FY2022	FY2021	Q4-2022	Q3-2022	Q2-2022	Q1-2022	Q4-2021
Revenue	$	151.4	351.9	52.8	32.1	34.9	31.6	171.7
Operating income (loss)	$	4.1	26.4	9.4	(8.1)	(1.8)	4.6	15.6
Adjusted SOI	$	10.6	29.3	9.6	(2.7)	(1.3)	5.0	16.4
As a % of revenue	%	7.0	8.3	18.2	—	—	15.8	9.6
Adjusted SOI excluding COVID-19
government support programs	$	10.2	25.8	9.6	(2.7)	(1.3)	4.6	15.3
As a % of revenue	%	6.7	7.3	18.2	—	—	14.6	8.9
Depreciation and amortization	$	13.0	22.3	3.1	3.3	3.2	3.4	6.5
Property, plant and equipment
expenditures	$	3.3	1.5	0.6	0.7	1.7	0.3	0.5
Intangible assets and other
assets expenditures	$	12.3	17.9	2.6	2.9	2.8	4.0	0.6
Capital employed	$	204.3	90.9	204.3	193.7	210.1	185.9	90.9

CAE Financial Report 2022 I 33

Management’s Discussion and Analysis

Revenue down 69% compared to the fourth quarter of fiscal 2021

The decrease compared to the fourth quarter of fiscal 2021 was due to the contribution in the prior year from the CAE Air1 ventilators in the amount of $130.0 million. The decrease was partially offset by higher revenue from patient simulators, key partnerships with OEMs and higher revenue from centre management solutions. Excluding the CAE Air1 ventilators, revenue was up 27% compared to the fourth quarter of fiscal 2021.

Revenue was $151.4 million this year, $200.5 million or 57% lower than last year

The decrease compared to last year was due to the contribution in the prior year from the CAE Air1 ventilators in the amount of $230.6 million, partially offset by higher revenue from centre management solutions, patient simulators, ultrasound simulators and key partnerships with OEMs as well as the integration into our results of Medicor, acquired in the second quarter of this year. Excluding the contribution from CAE Air1 ventilators, revenue was up 25% compared to the same period last year.

The impact of supply chain disruptions and employee and customer absenteeism due to infections are contributing factors to concluding contracts and delivering on existing orders and our customers are continuing to navigate the demands of the healthcare crisis from the COVID-19 pandemic.

Adjusted segment operating income down 41% compared to the fourth quarter of fiscal 2021

Adjusted segment operating income was $9.6 million (18.2% of revenue) this quarter, compared to $16.4 million (9.6% of revenue) in the fourth quarter of fiscal 2021.

The decrease compared to the fourth quarter of fiscal 2021 was mainly due to the contribution from the CAE Air1 ventilators in the prior year and higher costs from supply chain disruptions, partially offset by a gain on remeasurement of a contingent consideration liability and the net benefit from the remeasurement of long-term royalty obligations. The decrease was further offset by higher revenue as described above.

Adjusted segment operating income excluding COVID-19 government support programs down 37% compared to the fourth quarter of fiscal 2021

CAE's participation in the CEWS program ceased on June 5, 2021 and accordingly, we did not claim any CEWS benefits for wages and salary costs incurred subsequent to June 5, 2021. During the fourth quarter of fiscal 2021, $1.1 million of COVID-19 government support programs were credited to income. On this basis, and without adjusting for the COVID-19 heightened operating costs that we continued to incur, adjusted segment operating income excluding COVID-19 government support programs was down $5.7 million compared to the same period last year.

Adjusted segment operating income was $10.6 million this year, $18.7 million or 64% lower compared to last year

Adjusted segment operating income was $10.6 million (7.0% of revenue) this year, compared to $29.3 million last year.

The decrease compared to last year was mainly due to the contribution from the CAE Air1 ventilators in the prior year, higher costs from supply chain disruptions and employee absenteeism due to infections, as well as increases in the selling, general and administrative expenses. The decrease was partially offset by lower net research and development expenses due to the recognition of previously unrecognized investment tax credits this year, a gain on remeasurement of a contingent consideration liability, and the net benefit from the remeasurement of long-term royalty obligations. The decrease was further offset by higher revenue, in core product categories.

Adjusted segment operating income excluding COVID-19 government support programs was $10.2 million this year, $15.6 million or 60% lower than last year

During the year, $0.4 million of COVID-19 government support programs were credited to income compared to $3.5 million last year. On this basis, and without adjusting for the COVID-19 heightened operating costs that we have been carrying, adjusted segment operating income excluding COVID-19 government support programs was down $15.6 million compared to last year.

Capital employed increased by $10.6 million compared to last quarter and increased by $113.4 million from last year

The increase compared to last quarter was mainly due to higher non-cash working capital, driven by higher accounts receivable, partially offset by higher accounts payable and lower inventory.

The increase compared to last year was mainly due to higher non-cash working capital, driven by lower accounts payable and higher inventories, partially offset by lower accounts receivable. The increase was also due to higher intangible assets mainly as a result of the integration into our results of the Medicor acquisition.

34 I CAE Financial Report 2022

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 movements6

(amounts in millions)	FY2022		FY2021		Q4-2022		Q4-2021
Cash provided by operating activities*	$	395.7	$	416.1	$	83.2	$	149.6
Changes in non-cash working capital	22.5		(49.5)		123.6		25.0
Net cash provided by operating activities	$	418.2	$	366.6	$	206.8	$	174.6
Maintenance capital expenditures6	(55.4)		(37.8)		(16.1)		(18.9)
Change in ERP and other assets	(37.4)		0.7		(10.4)		12.4
Proceeds from the disposal of property, plant and equipment	8.4		4.5		0.3		2.8
Net (payments to) proceeds from equity accounted investees	(19.4)		0.7		0.5		(0.7)
Dividends received from equity accounted investees	27.1		12.1		6.5		0.4
Free cash flow6	$	341.5	$	346.8	$	187.6	$	170.6
Growth capital expenditures6	(216.8)		(69.8)		(58.6)		(31.6)
Capitalized development costs	(55.6)		(48.6)		(15.8)		(10.2)
Net proceeds from the issuance of common shares	696.1		820.8		0.6		338.2
Other cash movements, net	7.4		(0.7)		9.3		—
Business combinations, net of cash acquired	(1,883.7)		(186.5)		(498.9)		(51.8)
Acquisition of investment in equity accounted investees	(4.3)		(18.7)		—		(18.7)
Effect of foreign exchange rate changes on cash and cash equivalents	(16.7)		(22.3)		(8.8)		(9.5)
Net change in cash before proceeds and repayment of long-term debt	$	(1,132.1)	$	821.0	$	(384.6)	$	387.0
* before changes in non-cash working capital

Free cash flow of $187.6 million this quarter

Free cash flow was $17.0 million higher compared to the fourth quarter of fiscal 2021 mainly due to a lower investment in non-cash working capital, partially offset by a decrease in cash provided by operating activities, including payments of approximately $32 million in the quarter related to the integration and acquisition costs for our recently acquired businesses and severances and other costs associated with our previously announced restructuring program. The increase was further offset by a higher investment in other assets.

Free cash flow of $341.5 million this year

Free cash flow was $5.3 million lower compared to last year mainly due to a higher investment in other assets, a decrease in cash provided by operating activities, including payments of approximately $132 million in the year related to the integration and acquisition costs for our recently acquired businesses and severances and other costs associated with our previously announced restructuring program. The decrease was also due to higher payments to equity accounted investees, offset by a lower investment in non-cash working capital.

Capital expenditures were $74.7 million this quarter and $272.2 million for the year

Growth capital expenditures were $58.6 million this quarter and $216.8 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 $16.1 million this quarter and $55.4 million for the year.

COVID-19 government support programs

Cash received from COVID-19 government support programs amounted to $38.3 million for the year. CAE's participation in the CEWS program ceased on June 5, 2021 and accordingly, we did not claim any CEWS benefits for wages and salary costs incurred subsequent to June 5, 2021.

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

CAE Financial Report 2022 I 35

Management’s Discussion and Analysis

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 these revolving credit facilities at March 31, 2022 was US$850.0 million and $300.0 million (2021 – US$850.0 million and $500.0 million). There was US$270.0 million drawn under the facility as at March 31, 2022 (2021 – nil), used to pay for the acquisition of AirCentre, and US$26.6 million was used for letters of credit (2021 – US$30.9 million). The applicable interest rate on these revolving credit facilities is variable, based on the bank’s prime rate, bankers’ acceptance rates or LIBOR/SOFR plus a margin based on the private credit rating.

We have an unsecured Export Development Canada (EDC) Performance Security Guarantee (PSG) account for US$225.0 million (2021 – 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, 2022 the total outstanding for these instruments was $182.9 million (2021 – $157.4 million).

We manage a program in which we sell interests in certain of our accounts receivable (receivable purchase facility) to third parties for cash consideration for amounts up to US$400.0 million (2021 – US$400.0 million). As at March 31, 2022, the carrying amount of the original accounts receivable sold to financial institutions pursuant to the receivable purchase facility totaled $213.9 million (2021 – $298.8 million) of which $21.0 million (2021 – $26.4 million), corresponding to the extent of our continuing involvement, remains in accounts receivable with a corresponding liability included in accounts payable and accrued liabilities.

We have certain debt agreements which require the maintenance of standard financial covenants. As at March 31, 2022, we are compliant with all our financial covenants.

The negative impact of COVID-19 on our liquidity is evolving in real time and differs geographically from one region to another. 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 facilities and cash we expect to generate from our operations will be sufficient to meet financial requirements in the foreseeable future.

The following table summarizes the long-term debt:

	As at March 31		As at March 31
(amounts in millions)	2022		2021
Total long-term debt	$	3,046.2	$	2,351.5
Less:
Current portion of long-term debt	142.8		128.5
Current portion of lease liabilities	99.0		87.8
Long-term portion of long-term debt	$	2,804.4	$	2,135.2

Term loans

On July 2, 2021, concurrent with the completion of the L3H MT acquisition, we entered into unsecured term loan agreements for an aggregate amount of US$300.0 million, which consists of a first tranche of US$175.0 million due in 2023 and a second tranche of US$125.0 million due in 2025, bearing interest at variable rates.

In March 2022, we repaid a term loan of US$50.0 million.

Revolving credit facility amendments

In September 2021, we extended the maturity date of our US$850.0 million unsecured revolving credit facility until September 29, 2026.

On March 31, 2022, we amended our Sidecar unsecured revolving credit facility, that we entered into in April 2020, to decrease our total limit from $500.0 million to $300.0 million and extend the maturity date until April 10, 2023. This Sidecar facility is intended to provide access to additional liquidity as a supplement to our committed line of credit of US$850.0 million.

Pension obligations

We maintain defined benefit and defined contribution pension plans. Our defined benefit pension plans are considered sufficiently funded. We expect to pay employer contributions and benefits of $32.1 million in fiscal 2023.

36 I CAE Financial Report 2022

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 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.

During fiscal 2021, we concluded a new financial participation agreement with IQ. Under this agreement, IQ agreed to invest up to $30.0 million in repayable contributions on eligible CAE spending of $82.4 million related to Healthcare R&D programs which will support CAE's continued development of technologies, products and services that will allow to make healthcare safer.

During fiscal 2021, we, along with other industry partners, entered into a new financial participation agreement with the government of Quebec, through the Ministry of Economy and Innovation for the L'aéronef de demain project. The project will focus on the acceleration of technology development, digital transformation and knowledge for the advancement of the aircraft of the future, in particular those with hybrid electric propulsion, and implementation of associated services. The government of Quebec has committed to contribute amounts up to 50% of eligible costs incurred by CAE to fiscal 2022, up to a maximum of $10 million in non-refundable grants. This program ended on March 31, 2022.

In September 2021, we concluded new financial participation agreements with the Government of Canada and the Government of Québec who will fund up to $190.0 million and $150.0 million, respectively, in the form of partially repayable loans for eligible spending related to R&D projects. The investments will fund Project Resilience, a plan to invest $1 billion in R&D innovations over the next five years with the aim to develop technologies of the future, including digitally immersive solutions using data ecosystems and artificial intelligence in Civil Aviation, Defense and Security and Healthcare. The project will also allow CAE to position itself as a leader in end‑to-end technology, operational support and training solutions for Advanced Air Mobility, as well as develop green light aircraft technologies.

6.4 Contingencies and commitments

Contingencies

During fiscal 2015, we received tax notices of reassessment from the Canada Revenue Agency (CRA) in connection with our characterization of amounts received under the Strategic Aerospace and Defence Initiative (SADI) program during our 2012 and 2013 taxation years. Under the SADI program, we received funding from the Government of Canada for our eligible spending in R&D projects, in the form of an unconditionally repayable interest-bearing loan, which we commenced repayment of the principal and interest in fiscal 2016 in accordance with the terms of the agreement. The CRA has taken the position that amounts received under the SADI program qualify as government assistance. We filed notices of objection against the CRA’s reassessments and subsequently filed a notice of appeal to the Tax Court of Canada.

On September 14, 2021, the Tax Court of Canada ruled in favour of the CRA’s contention and held that the amounts received under the SADI program qualified as government assistance. We subsequently filed an appeal to the Federal Court of Appeal against the Tax Court’s decision. Accordingly, we have not recognized the impacts of the CRA’s reassessments in our consolidated financial statements.

Although we believe that our position will ultimately prevail at the Federal Court of Appeal level, should we be unsuccessful, the impact of the reassessments would not result in a material adverse effect on our overall income tax expense nor income tax payable, but would, however, affect the timing of payment of such tax.

Commitments

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:

(amounts in millions)	2023		2024		2025		2026		2027		Thereafter		Total
Long-term debt (excluding interest)	$	142.8	$	345.3	$	232.5	$	238.4	$	489.9	$	1,202.3	$	2,651.2
Lease liabilities (excluding interest)	99.0		54.7		33.7		29.9		26.3		151.4		395.0
Purchase commitments	290.9		85.0		43.3		41.2		40.5		3.6		504.5
	$	532.7	$	485.0	$	309.5	$	309.5	$	556.7	$	1,357.3	$	3,550.7

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.

CAE Financial Report 2022 I 37

Management’s Discussion and Analysis

As at March 31, 2022, 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.

7. CONSOLIDATED FINANCIAL POSITION

7.1 Consolidated capital employed

	As at March 31		As at March 31
(amounts in millions)	2022		2021
Use of capital:
Current assets	$	2,148.6	$	3,378.6
Less: cash and cash equivalents	(346.1)		(926.1)
Current liabilities	(2,091.2)		(2,633.3)
Less: current portion of long-term debt	241.8		216.3
Non-cash working capital7	$	(46.9)	$	35.5
Property, plant and equipment	2,129.3		1,969.4
Other long-term assets	5,300.9		3,400.4
Other long-term liabilities	(596.6)		(767.1)
Total capital employed	$	6,786.7	$	4,638.2
Source of capital7:
Current portion of long-term debt	$	241.8	$	216.3
Long-term debt	2,804.4		2,135.2
Less: cash and cash equivalents	(346.1)		(926.1)
Net debt7	$	2,700.1	$	1,425.4
Equity attributable to equity holders of the Company	4,009.7		3,140.5
Non-controlling interests	76.9		72.3
Source of capital	$	6,786.7	$	4,638.2

Capital employed increased $2,148.5 million, or 46% higher than last year

The increase over last year was mainly due to, higher other long-term assets, lower other long-term liabilities and higher property, plant and equipment, partially offset by lower non-cash working capital.

Return on capital employed (ROCE)7

Our ROCE was 4.3% this quarter. Adjusted ROCE was 6.2% this quarter, which compares to 5.0% in the fourth quarter of last year and 6.1% last quarter. Adjusted ROCE excluding COVID-19 government support programs was 6.1% this quarter.

Non-cash working capital decreased by $82.4 million compared to last year

The decrease was mainly due to lower inventories and higher contract liabilities, partially offset by higher contract assets.

Property, plant and equipment increased by $159.9 million compared to last year

The increase was mainly due to capital expenditures in excess of depreciation and the integration into our results of the L3H MT acquisition, partially offset by movements in foreign exchange rates.

Other long-term assets increased by $1,900.5 million compared to last year

The increase was mainly due to higher intangible assets, resulting primarily from the integration into our results of the L3H MT and AirCentre acquisitions.

Other long-term liabilities decreased by $170.5 million compared to last year

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

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

38 I CAE Financial Report 2022

Management’s Discussion and Analysis

Net debt increased by $1,274.7 million compared to last year 8

(amounts in millions, except net debt ratios)		FY2022		FY2021
Net debt, beginning of period	$	1,425.4	$	2,365.7
Impact of cash movements on net debt
(see table in the consolidated cash movements section)		1,132.1		(821.0)
Effect of foreign exchange rate changes on long-term debt		(28.0)		(220.8)
Impact from business combinations		35.1		73.0
Non-cash lease liability movements		112.1		26.9
Other		23.4		1.6
Change in net debt during the period	$	1,274.7	$	(940.3)
Net debt, end of period	$	2,700.1	$	1,425.4
Net debt-to-capital8	%	39.8	%	30.7
EBITDA8	$	594.7	$	367.9
Net debt-to-EBITDA8		4.54		3.87
Adjusted EBITDA8	$	755.0	$	600.1
Net debt-to-adjusted EBITDA8		3.58		2.38
Adjusted EBITDA excluding COVID-19 government support programs8	$	741.4	$	472.7
Net debt-to-adjusted EBITDA excluding COVID-19 government support programs8		3.64		3.02

Total equity increased by $873.8 million this year

The increase compared to last year was mainly due to the issuance of common shares upon conversion of subscription receipts and the net income realized this year.

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 317,024,123 common shares issued and outstanding as at March 31, 2022 with total share capital of $2,224.7 million. In addition, we had 6,783,444 options outstanding under the Employee Stock Option Plan (ESOP).

As at April 30, 2022, we had a total of 317,030,173 common shares issued and outstanding and 6,764,094 options outstanding under the ESOP.

Issuance of common shares upon conversion of subscription receipts

On July 2, 2021, concurrent with the completion of the L3H MT acquisition, 22,400,000 outstanding subscription receipts were converted into CAE common shares in accordance with the terms of the subscription receipts, on a one-for-one basis. Proceeds from the issuance of the subscription receipts of $700.0 million together with interest earned of $0.4 million were released from escrow and used to fund the L3H MT acquisition. Total issuance-related costs amounted to $31.0 million, less income tax recovery of $8.2 million.

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 facility) to financial institutions for cash consideration with limited recourse to CAE.

You will find more details about our financial assets program in Sources of Liquidity.

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

CAE Financial Report 2022 I 39

Management’s Discussion and Analysis

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, restricted funds for subscription receipts deposit 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, liabilities for subscription receipts, 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.

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, restricted funds for subscription receipts deposit, accounts receivable, accounts payable and accrued liabilities and liabilities for subscription receipts 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;

–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 29 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.

40 I CAE Financial Report 2022

Management’s Discussion and Analysis

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 facility). 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 10 and Note 29 of our consolidated financial statements represent the maximum exposure to credit risk for each respective financial asset as at the relevant dates. A summary of our exposure to credit risk and credit loss allowances for accounts receivable and contract assets by segments is included in Note 31 of our consolidated financial statements.

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. We also regularly monitor any financing opportunities to optimize our capital structure and maintain appropriate financial flexibility.

Market risk

Market risk is defined as our exposure to a gain or a loss in the value of our financial instruments as a result of changes in market prices, whether those changes are caused by factors specific to the individual financial instruments or its issuer, or factors affecting all similar financial instruments traded in the market. We are mainly exposed to foreign currency risk and interest rate risk.

We use derivative instruments to manage market risk against the volatility in foreign exchange rates, interest rates and share-based payments in order to minimize their impact on our results and financial position. Our policy is not to utilize any derivative financial instruments for trading or speculative purposes.

Foreign currency risk

Foreign currency risk is defined as our exposure to a gain or a loss in the value of our financial instruments as a result of fluctuations in foreign exchange rates. We are exposed to foreign exchange rate variability primarily in relation to certain sale commitments, expected purchase transactions and debt denominated in a foreign currency, as well as on our net investment from our foreign operations which have functional currencies other than the Canadian dollar (in particular the U.S. dollar, Euro and British pound). In addition, these operations have 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.

CAE Financial Report 2022 I 41

Management’s Discussion and Analysis

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. As at March 31, 2022, 75% (2021 – 94%) of the long-term debt bears fixed interest rates.

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 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 swap agreements 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, 2022, we have designated a portion of our unsecured senior notes, term loans and revolving credit facility 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 denominated 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 31 of our consolidated financial statements.

42 I CAE Financial Report 2022

Management’s Discussion and Analysis

8. BUSINESS COMBINATIONS AND ACQUISITION OF EQUITY ACCOUNTED INVESTEES

Business combinations

L3Harris Technologies’ Military Training business

On July 2, 2021, we concluded the acquisition of L3Harris Technologies’ Military Training business (L3H MT) for cash consideration of $1,337.7 million, subject to additional purchase price adjustments. L3H MT includes Link Simulation & Training, Doss Aviation and AMI. Link Simulation & Training is one of the leading providers of military training solutions in the U.S., Doss Aviation is the provider of initial flight training to the United States Air Force, and AMI is a design and manufacturing facility for simulator hardware. The acquisition expands our position as a platform-agnostic training systems integrator by diversifying our training and simulation leadership in the air domain, complementing land and naval training solutions, and enhancing our training and simulation capabilities in space and cyber.

The net assets acquired, including intangibles, of L3H MT are included in the Defense and Security segment. The purchase price allocation is preliminary as at March 31, 2022.

Sabre’s AirCentre airline operations portfolio

On February 28, 2022, we concluded the acquisition of Sabre’s AirCentre airline operations portfolio (AirCentre), a suite of flight and crew management and optimization solutions, for cash consideration (net of cash acquired) of $498.9 million. The transaction provides us with the Sabre AirCentre product portfolio, related technology and intellectual property as well as the transfer of its highly talented workforce. The acquisition further expands our reach across our broad customer base beyond pilot training and establishes ourself as a technology leader in the growing market for industry-leading, digitally-enabled flight and crew operations solutions.

The net assets acquired, including intangibles, of AirCentre are included in the Civil Aviation segment. The purchase price allocation is preliminary as at March 31, 2022.

Other fiscal 2022 business combinations

RB Group

On April 1, 2021, we acquired the remaining 79% equity interest in the RB Group, a leading provider of fully integrated solutions that modernize the way airlines and business aircraft operators interact with their crew. This acquisition further supports CAE’s expansion into digital flight crew management in our goal to drive additional software-enabled Civil aviation services. Prior to this transaction, our 21% ownership interest in the RB Group was accounted for using the equity method.

GlobalJet Services

On June 10, 2021, we acquired GlobalJet Services (GlobalJet), a provider of aviation maintenance training that is recognized around the world for its services for both business and helicopter sectors. This acquisition expands our aircraft platform addressability in the maintenance training market through world‑class, regulatory approved training programs.

Medicor Lab Inc.

On July 5, 2021, we acquired the shares of Medicor Lab Inc. (Medicor), a company which specializes in task trainer and realistic synthetic skin production. This acquisition augments our portfolio of products and expands our capabilities to offer improved quality simulators for a better customer experience.

The net assets acquired, including intangibles, of the RB Group and GlobalJet are included in the Civil Aviation segment, and those of Medicor are included in the Healthcare segment.

Other

During the year ended March 31, 2022, we completed our final assessment of the fair value of assets acquired and liabilities assumed of Flight Simulation Company B.V., Merlot Aero Limited and TRU Simulation + Training Canada acquired in fiscal 2021 as well as the RB Group, GlobalJet and Medicor acquired in fiscal 2022.

During the year ended March 31, 2022, net cash considerations of $4.9 million were paid for acquisitions realized in prior years.

Investment in equity accounted investees

SkyWarrior Flight Training LLC

In August 2021, we acquired a 37% equity interest in SkyWarrior Flight Training LLC (SkyWarrior) for cash consideration of $4.3 million. SkyWarrior is a flight training operation which primarily delivers Phase 1 initial flight training to U.S. and international military customers.

You will find more details in Note 3 of our consolidated financial statements.

CAE Financial Report 2022 I 43

Management’s Discussion and Analysis

9. BUSINESS RISK AND UNCERTAINTY

Risk strategy and philosophy

We operate in several industry segments which present a variety of risks and uncertainties. Our risk management strategy is forward‑looking and aligned with our business strategy. CAE’s risk-taking activities are undertaken with the understanding that risk‑taking and effective management of risks are necessary and integral to achieving strategic objectives and managing business operations.

When making decisions about risk-taking and risk management, we place the highest priority on the following objectives:

–To protect the health and safety of our employees, customers, stakeholders and the general public;

–To protect our reputation and brand;

–To maintain financial strength;

–To effectively and prudently deploy capital invested by our shareholders; and

–To safeguard the expectations, we have established with our shareholders, customers and creditors.

The risks and uncertainties described below are risks that we currently believe could materially and adversely affect our business, financial condition and results of operation. 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. One should carefully consider the following risk factors, in addition to the other information contained herein, before deciding to purchase CAE securities.

Risk governance

We maintain strong risk governance and oversight practices. Management and the Board discuss the critical risks facing our business quarterly and annually during the strategic planning and budgeting processes, or ad hoc, as deemed necessary. To mitigate the risks that may impact our business or future performance, management has established an enterprise risk management (ERM) policy and a framework that provides a structured approach to identify, assess, manage, monitor and report on risks.

This framework relies on the Three Lines Model where the business segments, the risk management function and our internal audit function work in collaboration to manage critical risks and continuously improve the risk management process:

–The first line is our leaders who are accountable for the risks they assume and for the daily management of their risks and controls. They are responsible for implementing preventive and corrective actions and maintaining and executing effective internal controls on a day-to-day basis;

–The second line involves various risk management, compliance, business continuity and controllership functions. This group helps facilitate and monitor the implementation of effective risk management practices and assist risk owners in defining the target risk exposure and reporting adequate risk-related information throughout CAE. The second line also provides risk oversight across the enterprise and advises senior management in connection with ERM. Led by the Senior Vice President, Investor Relations and Enterprise Risk Management, the second line manages the ERM process and is supported as required by experts, risk champions, consultants and any other resources deemed appropriate to achieve the desired level of risk management; and

–At the third line, Internal Audit provides to the Audit Committee and management an independent appraisal of our risk management framework, control environment and internal control systems. They advise and recommend to senior management opportunities for improvements in internal controls, risk management systems as well as bring to management’s attention organizational and operational benefits to be derived from engagements. Internal Audit is governed by the Internal Audit Charter.

Management develops and deploys risk strategies that align with our strategic objectives and business processes. Management continuously reviews the evolution of the critical 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.

Risk approach and implementation

CAE promotes a strong risk culture that allows individuals and groups to make better risk-informed decisions aligned with our strategic objectives and risk appetite. A strong risk culture also allows us to maximize opportunities. Early identification of risks also helps CAE be more proactive and prevent major incidents. A strong risk culture and common approach to risk management are integral to our risk management practices.

Each business unit and functional group identifies and assesses critical and emerging risks on an ongoing basis. Risk owners are responsible for managing risks they own, and for reporting, via the chain of command, the evolution of their risk profile. All risks are either measured quantitatively or assessed qualitatively and aggregated at an enterprise level. Risk assessment criteria provide a consistent risk assessment process and risk ratings.

CAE’s comprehensive risk profile is updated on a regular basis as well as when a major shift occurs, such as for significant merger and acquisition activity. It is prepared considering CAE’s strategic and business plans and identifies an “owner” for each risk. It is presented to the Executive Management Committee, and a summary thereof to the Board, together with risk management activities to address those risks. All risk issues or weaknesses are reported to the Executive Management Committee or the Senior Vice President, Investor Relations and Enterprise Risk Management, who assesses their severity and potential impact. Corrective action plans are developed, monitored and reported on a timely basis.

44 I CAE Financial Report 2022

Management’s Discussion and Analysis

Risk Categories

We have grouped the risks that our business faces in the following categories and investors should read this Business Risk and Uncertainty section in full:

–Risks relating to our Business and Business Strategy

–Risks relating to our Markets and the International Scope of our Business

–Risks relating to our Industries and Macroeconomic Conditions

–Legal and Regulatory Risks

–Risks relating to Information Technology, Cybersecurity and Intellectual Property

–Risks relating to Talent and Labour

–Risks relating to Mergers, Acquisitions, Joint Ventures, Strategic Alliances or Divestitures

–Risks relating to Controls and Accounting Matters

–Risks relating to Indebtedness and Liquidity

–Risks relating to our Common Shares and Ownership of our Securities

9.1 Risks relating to our Business and Business Strategy

Evolving standards and technology innovation and disruption

The Civil aviation and Defense 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 or penetrate new markets successfully. 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 (AI), machine learning and unmanned aerial systems or remotely piloted aircraft, presents opportunities for us, but may result in new and complex risks.

Our ability to penetrate new markets

Penetration of new markets, including as a result of new technologies, 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.

Estimates of market opportunity

The estimates of market opportunity included in this report, including those we have generated ourselves, are subject to significant uncertainty and are based on assumptions and estimates. While our estimates of the addressable markets included in this report were made in good faith and are based on assumptions and estimates we believe to be reasonable, these estimates may not prove to be accurately indicative of our future growth. Further, even if the estimates of our market opportunity do prove to be accurate, we could fail to capture a significant portion, or any portion, of the available markets.

Supply chain disruptions

The pandemic and widening geopolitical fractures intensified global supply chain imbalances. Further, conservative and protective behaviours from businesses and governments, such as increasing demand and hoarding, as well as increased competition for critical electrical components and products and commodities, commodity-based products have also intensified. In this context, supply chain disruptions may hinder our ability to execute projects in a timely manner, support aftermarket needs, finish projects or leave us with unsold materials or products, all of which could result in penalties or impacts on contract profitability and could have a material adverse effect on our business, financial condition and results of operations. Delays and volatility in our supply chain could lead to potential losses of market share to competitors and have an overall negative impact on client relationships, our growth and our cashflows.

OEM leverage and encroachment

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 and reap certain critical advantages; 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. 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.

CAE Financial Report 2022 I 45

Management’s Discussion and Analysis

CAE, as an independent training provider and simulator manufacturer, has the ability to replicate certain aircraft platforms without data, parts and equipment from the OEM. 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 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.

Subcontractors

We engage subcontractors for many of our contracts with whom we may have disputes, including with regard to the quality and timeliness of their work, customer concerns, or their failure to comply with applicable laws. Subcontractors may not be able to acquire or maintain the quality of the materials, components, subsystems and services they supply, which might result in greater product returns, service problems and warranty claims. In connection with our government contracts, we may be required to procure certain materials, components and parts from supply sources approved by government authorities and CAE relies on subcontractors and other suppliers to comply with applicable laws, regulations and other requirements regarding procurement of counterfeit, unauthorized or otherwise non-compliant parts or materials. Each of these subcontractor risks could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Diversion of management attention

Responding to competing priorities as well as critical and time-sensitive matters as they emerge throughout the organization may divert management’s attention from our key strategic priorities, and cause us to reduce, delay, or alter initiatives that could otherwise increase our long-term value.

Product integration and program management and execution

Our business could be negatively affected if, despite our projections and estimates, 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 or do not meet program milestones, we may have to devote more engineering and other resources than originally anticipated which may impact timely execution and profitability.

Research and development activities

We carry out some of our R&D initiatives with the financial participation of governments, including the Government of Quebec and the Government of Canada. We also 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 level of government financial participation and investment tax credits we receive 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 R&D activities. Moreover, 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 R&D activities. In addition, these credits and programs are routinely subject to review and audit, which may result in challenges and disputes and could result in reductions or reversals of grants, credits or contributions previously received.

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 also incur cost overruns in developing and bringing to market new products.

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, 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.

46 I CAE Financial Report 2022

Management’s Discussion and Analysis

Fixed-price and long-term supply contracts

We provide a number of our products and services 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. Other contracts involve new technologies and applications and unforeseen events, such as technological difficulties, fluctuations in the price of raw materials, a significant increase in inflation, problems with our suppliers and cost overruns, can result in the contractual price becoming less favourable or even unprofitable to us over time.

Backlog

Backlog represents management’s estimate of the aggregate amount of the revenues expected to be realized in the future. The termination, modification, delay, or suspension of multiple contracts may have a material and adverse effect on future revenues and profitability. We cannot guarantee that the revenues initially anticipated in our new orders will be realized in full, in a timely manner, or at all, or that, even if realized, such revenues will result in profits or cash generation as expected, and any shortfall may be significant.

Customer credit risk

We are exposed to credit risk on accounts receivable from our customers. Adverse changes in a customer's financial condition 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.

The ongoing COVID-19 pandemic has brought added uncertainty regarding the sufficiency of our customers' liquidity during the period where their operations are impacted. 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.

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 Defense and Security applications. During the time when customers are evaluating our products and services, we may incur expenses and management time. Incurring these expenditures in a period that has no corresponding revenue will affect our operating results and financial position. 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.

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 Defense and Security 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 government’s budget cycle, which in the U.S. is based on a September year-end. We expect these trends to continue. However, results are not expected to follow historical patterns during the year ending March 31, 2023 due to the ongoing impact of the COVID-19 pandemic and volatile geopolitical environment.

Reputational risk

Reputational risk may arise under many situations including, among other things:

–Quality or performance issues on our products or services and new technologies we launch;

–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;

–Relationships or dealings with customers and other counterparties that could expose CAE to ethics, compliance and reputational risks;

–Negative perceptions regarding the defence and security industry and related product and service offerings;

–Injuries or death arising from health and safety incidents during the operation process or training activities;

–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.

CAE Financial Report 2022 I 47

Management’s Discussion and Analysis

9.2 Risks relating to our Markets and the International Scope of our Business

International scope of our business

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 approximately 90% of revenue in fiscal 2022. 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 inherent in conducting business abroad, including, among other things:

–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 regions;

–Acts of war, civil unrest, force majeure and terrorism;

–Social and economic 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 expenditures 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; and

–Complexity and corruption risks of using foreign representatives and consultants.

While the impact of these risks is difficult to predict, any one of them could adversely affect our financial position, results of operations, reputation and/or cash flows.

Geopolitical uncertainty

Government decisions and international relations can have a significant impact on CAE’s operating environment and financial position. Throughout fiscal 2022, global uncertainty continued to intensify, and, in some parts of the world, political instability has become more pronounced, protracted and unpredictable. Such 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, difficulties or increased costs related to repatriating capital 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.

Global economic conditions

CAE’s results from operations are sensitive to and may be significantly impacted by changes in the economic conditions of the industries and geographic areas in which we operate. Any prolonged or significant impact arising from difficult economic conditions may have an adverse effect on our business, results from operations and financial condition.

The global economy continues to experience significant adverse impacts due to the COVID-19 pandemic. 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 workforce, cause us to 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.

Governments and central banks have reacted to these developments with significant monetary and fiscal interventions designed to stabilize economic conditions and financial markets. However, while these measures are or have been 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.

48 I CAE Financial Report 2022

Management’s Discussion and Analysis

Military conflict in Ukraine

Since February 24, 2022, the U.S., Canada, and the U.K., in coordination with European and NATO allies have issued severe sanctions targeting Russia’s largest banks and removed most Russian banks from the global SWIFT financial messaging system. Additional sanctions were imposed on Russia’s oil and gas industry, and on export of technology and services to Russia and Belarus. Additional sanctions or other measures may be imposed by the global community, and counteractive measures may be taken by the Russian government, other entities in Russia or governments or other entities outside of Russia. CAE has suspended all services and training to Russian airlines, aircraft operators and healthcare distributors, which will impact our results of operations in fiscal 2023. It may also lead to legal action from counterparties in the region to whom we have ceased providing products and/or services in light of the conflict. While the precise effects of the ongoing military conflict and sanctions on the Russian and global economies remain uncertain, they have already resulted in significant volatility in financial markets as well as in an increase in energy and commodity prices globally. Should the conflict continue or escalate, there may be heightened economic and security consequences including, but not limited to, supply shortages, further increases in prices of commodities, reduced consumer purchasing power, significant disruptions in logistics infrastructure, telecommunications services and risks relating to the unavailability of information technology systems and infrastructure. The resulting impacts to the global economy, financial markets, inflation, interest rates and unemployment, among others, could adversely impact economic and financial conditions, and may disrupt the global economy’s ongoing recovery following the COVID-19 pandemic. In addition, we may experience other risks, difficulties and challenges in the way we conduct our business and operations generally as a result of the ongoing conflict. For example, the conflict may result in an increased risk of cybersecurity attacks. Such attacks on us or our third-party providers or other systems could adversely affect our network systems or operations and could have an adverse effect on our operating results and financial position.

A protracted conflict between Ukraine and Russia, any escalation of that conflict, and the financial and economic sanctions and import and/or export controls imposed on Russia by the international community could have a material adverse impact on our business, financial condition, cash flows and results of operations and could cause the market value of our common shares to decline.

Foreign exchange

Three areas of our business are exposed to fluctuations of foreign exchange rates; our global network of training and services operations, our production operations abroad (mainly in Germany, and the U.S.) and our production operations in Canada as 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.

For our Canadian operations, when the Canadian dollar increases in value, it negatively affects the translation of our foreign currency‑denominated revenue and hence our financial results since results are consolidated in Canadian dollars for financial reporting purposes. However, when the Canadian dollar decreases in value, it negatively affects our foreign currency-denominated costs. 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.

Business conducted through our foreign operations are substantially based in local currencies which are translated to 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.

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, such as the introduction of Pillar Two Model Rules designed to ensure large multinational enterprises pay a minimum level of tax on income arising in each jurisdiction they operate, could result in a higher effective tax rate on our earnings which could significantly impact our financial results.

CAE Financial Report 2022 I 49

Management’s Discussion and Analysis

9.3 Risks relating to our Industries and Macroeconomic Conditions

Competitive business environment

We sell our simulation products, training services and software solutions in highly competitive international markets and we expect such competition to intensify in the future. We intend to continue to grow market share by leveraging a high level of customer satisfaction and operational and organizational productivity. However, 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.

Moreover, as we expand our product portfolio to software solutions, we face new competitors who are able to leverage a larger installed customer base and their involvement beyond software solutions to adopt more aggressive pricing policies and offer more attractive sales terms, which could cause us to lose potential sales or to sell our software at lower prices. We also face competition from niche companies that offer particular software solutions that attempt to address certain of the problems that our software solves or certain customer needs. We expect to continue to invest significant resources in research and development to continue to enhance our software solutions and leverage a high level of customer satisfaction, but there is no assurance that we can satisfy customer demands as they evolve.

Finally, 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.

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, and potential impediments to steady growth include acts of terrorism, health crises, natural disasters, the interruption of global mobility including travel bans and border restrictions, oil price volatility, increased global environmental regulations or other major world events.

Air travel experienced a sharp deterioration in passenger traffic in calendar 2020 as a result of the COVID-19 pandemic. While we have seen an increase in commercial and business traffic throughout the fiscal year, there is a risk that we may experience a delayed recovery in air travel demand to pre-COVID levels due to the unprecedented worldwide travel restrictions, expected higher unemployment rates, and a fall in consumer spending. 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.

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, price and other competitive factors, fuel prices and geopolitical environment.

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 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 may result in further bankruptcies amongst airlines.

Inflation

Our operations are vulnerable to increases in costs of significant inputs, such as energy, components, raw materials, and transportation. The global energy crisis could continue to contribute to global inflation, which has been substantial particularly given recent geopolitical events. Ongoing inflation would further drive up our overall operation costs.

We may not be able to pass these higher costs to our customers in full or at all in a timely manner, and as a result any significant increases in our costs and/or the failure of our measures to limit their impact could have a material adverse effect on our business, financial condition, prospects and/or results of operations.

50 I CAE Financial Report 2022

Management’s Discussion and Analysis

Continued risk of global health crises

In conducting our activities, CAE is exposed to various risks related to public health crises which can have adverse impacts on our industry and our business. The ongoing COVID-19 pandemic and the emergence of new variants continues to have significant effects on our business, financial condition, results of operations and cash flows. We face significant risks related to the global economic downturn, the global air transportation environment and air passenger travel, restrictions to our operations in certain geographic locations, employee and customer absenteeism due to infections, prolonged illness of our key personnel and management, disruptions in global supply chains as well as volatility of financial markets. Such disruptions may cause delays in the execution of certain programs which require us to incur additional non-compensable costs, including overtime work, that are necessary to meet clients’ schedules to avoid penalties or sanctions under contracts or even the cancellation of some contracts. Our vulnerability and that of our partners and service providers to security breaches, denial of service attacks or other hacking or phishing attacks has also increased as a result of the pandemic. Moreover, the uncertainty around the COVID-19 pandemic means there may be other risks not presently known to us or that we presently believe are not material that could also affect our business, financial condition and results of operations.

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. COVID-19 remains a global reality and CAE’s recovery remains highly dependent on the timing and rate at which travel restrictions and quarantines can eventually be safely lifted and normal activities resume in our end markets. Even after the COVID-19 pandemic is over, we may continue to experience material adverse effects on 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. Moreover, a material adverse effect on our employees, customers, suppliers, partners and/or other stakeholders could have a material adverse effect on us.

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.K., 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. Fluctuations in defence spending by mature markets in which we operate or a significant delay in the timing of defence procurement could have a material negative impact on our future revenue, earnings and operations.

Business development and awarding of new contracts

We obtain most of our contracts through competitive bidding processes. Significant costs and managerial time are required to prepare bids and proposals for contracts that may not ultimately be awarded to CAE or may be split with competitors. 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.

Moreover, certain foreign governments increasingly rely on certain types of contracts that are subject to multiple competitive bidding processes, including multi-vendor indefinite delivery/indefinite quantity (ID/IQ), General Services Administration Pricing Schedule and other supply chain leveraging strategies, which may result in greater competition and increased pricing pressure.

We are also seeing a significant number of bid protests from unsuccessful bidders on new program awards. Bid protests can result in contract modifications or the award decision being reversed and loss of the contract award. Even where a bid protest does not result in the loss of an award, the resolution can extend the time until the contract activity can begin, and delay earnings.

Finally, even if a contract is awarded to CAE following a competitive bidding process, CAE may have failed to accurately estimate the resources and costs required to fulfill the contract.

Extreme weather conditions and the impact of natural or other disasters (including effects of climate change)

Extreme weather conditions or natural or other disasters, such as earthquakes, fires, floods, pandemics, epidemics and similar events (including effects of climate change) could disrupt our internal operations, damage our infrastructure or properties, endanger our employee's health and safety, impact the availability and cost of materials and resources, decrease air travel, increase insurance and other operating costs and have a material adverse effect on our operating results, financial position or liquidity as well as our business model. 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. Insurance may not be available, or limits may not be adequate to cover all significant risk exposures.

CAE Financial Report 2022 I 51

Management’s Discussion and Analysis

9.4 Legal and Regulatory Risks

Ethics and compliance

Our employees, officers, Board members, suppliers and other business partners are expected to adhere to applicable legal and ethical standards. However, there can be no assurance that our corporate governance practices will be sufficient to prevent violations of legal and ethical standards. This risk of improper conduct may increase as we continue to expand globally, with greater opportunities and demands to do more business with local and new partners. Any such violation exposes CAE to litigation and significant fines and penalties and result in reputational harm or being disqualified from bidding on contracts.

Continued scrutiny regarding ESG matters

Evolving stakeholder expectations with respect to ESG matters may pose risks to CAE’s market outlook, brand and reputation, financial outlook, cost of capital, global supply chain and business continuity, which may impact our ability to achieve long-term business objectives. 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 our business partners and the emergence and evolution of additional environmental and climate change regulations, frameworks and guidance. Increasing regulatory expectations as well as continuing reforms pertaining to mandatory ESG‑related disclosure create a new and evolving set of compliance risks. Rising reporting expectations also add pressure to secure reliable and precise ESG data and to deploy robust data collection processes with effective controls that will allow external verification in the near future. A lack of precise and complete data could hinder CAE’s credibility as an ESG leader in the industry.

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. Moreover, perceptions pertaining to social and governance approaches have also changed in the recent years, and many customers and investors now agree that these issues have become a current concern. Failure to adequately monitor the interests of various external stakeholders and to sufficiently address evolving expectations related to corporate culture, business conduct and ethics, transparency, respect for human rights, working and safety conditions as well as diversity and inclusion, among other things, could affect corporate profitability and reputation.

As capital markets and governmental institutions include more and more ESG-related exclusionary criteria, the perception of CAE’s involvement in the military sector adds exposure to financial risks. With the acquisition of L3H MT, CAE’s portfolio in defence has expanded with a larger variety of platforms now being supported. Some of them may be interpreted as controversial related to armaments and CAE may be reported as involved in controversies of that kind. It could result in CAE losing support of current shareholders or failing to attract potential new investors.

As CAE’s ESG performance is being assessed by proxy advisory agencies, we could also face governance issues if we do not meet their expectations.

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 our 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.

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Management’s Discussion and Analysis

Liability risks that may not be covered by indemnity or insurance

We are 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;

–Negligence in training delivery;

–Incidents occurring during the use of equipment that we have manufactured or operate;

–Incidents involving any products and services sold or delivered, leading to claims for personal injuries or death;

–Deficiencies in our live flight training equipment, personnel or operations that directly or indirectly cause damage, injuries or death;

–Deficiencies in our mitigation and protective measures implemented to reduce the risk of a potential microbial infection outbreak in one of our facilities or failure to adequately protect our customers, employees, contractors, workers and visitors from disease;

–Any deficiency in products sold or delivered, including interruption in delivery of software services, whether said interruption is due to a cyber event, breach or any unforeseen event which may lead to interruption of our customers' operations and potential financial loss.

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, and we may be forced to bear substantial costs, resulting in an adverse impact on our financial condition, cash flows, or operating results. Moreover, any accident, failure of, or defect in our products or services, even if fully indemnified or insured, could significantly impact the cost and availability of adequate insurance in the future.

Warranty or other product-related claims

Simulators and other products sold by CAE may contain defects that are difficult to detect and correct. If these defects fail or present a safety risk, they could result in warranty claims or potential product liability and personal injury claims. CAE may incur significant costs to issue a product recall or to modify or retrofit these products to ensure their safety, in addition to litigation and settlement costs related to liability claims. A product liability or personal injury issue or judgment against us or a product recall could also damage our reputation and have a significant adverse effect on our businesses, reputation, operating results and/or financial condition.

CAE may also be subject to product liability claims relating to equipment and services related to discontinued operations or business sold whereby CAE has retained past liabilities.

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 a FOCI mitigation agreement with the 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, the mitigation agreement is a Special Security Agreement (SSA) for CAE USA Inc. and its wholly owned subsidiary, CAE USA Mission Solutions Inc. If CAE fails to maintain compliance with the SSA, the facility security clearances for each entity could 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 could lose the right to perform certain existing contracts with the U.S. government to completion.

Compliance with laws and regulations

Our businesses are heavily regulated. We deal with many government agencies and entities and are subject to laws and regulations such as export controls and sanctions, health and medical devices, national security and aviation authority of each country. These laws and regulations may change without notice, which could impact our sales and operations in ways which we cannot predict. Any change could present opportunities or, to the contrary, have a materially negative effect on our results of operations or financial condition. For instance, 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 will not 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. We could also be required 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.

CAE’s technology and services are subject to export permit approvals and regulatory requirements which can sometimes take several months to obtain, thereby resulting in potential delays in obtaining export permits or even preventing us from exporting to certain countries, entities or people in or from a country, and resulting in negative financial impacts. Failing to comply with export control / sanctions regulations and government national security requirements could lead to fines and/or being excluded from government contracts or subcontracts and reputational damages, which would negatively affect our revenue from operations and profitability and could have a negative effect on our ability to procure other government contracts in the future.

As a contractor to various governments, CAE must comply with procurement regulations and other specific legal requirements. These regulations and other requirements, although often customary in government contracting, increase our performance and compliance costs and risks and are regularly evolving. In various jurisdictions, governments have been pursuing and may continue to pursue policies that could negatively impact our profitability, including seeking to shift additional responsibility and performance risks to the contractor. Changes in procurement practices favouring incentive-based fee arrangements; different award criteria; non-traditional contract provisions; and government contract negotiation offers that indicate what our costs should be, among others, may further affect our profitability.

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Management’s Discussion and Analysis

In addition, 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. Failure by CAE, our employees, foreign representatives and consultants or others working on our behalf to comply with them could result in administrative, civil, or criminal liabilities, including suspension and 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.

Government audits and investigations

Government agencies routinely audit and investigate government contractors, as well as recipients of government grants and contributions, thereby increasing performance and compliance costs. 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 or a reduction or reversal of government grants and contributions to R&D programs. Although 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 which could have a negative effect on our results of operations. We may continue to experience an increased number of audits and challenges to government accounting matters and business systems for current and past years, as well as a lengthened period of time required to close open audits, an increased number of broad requests for information and an increased risk of withholding of payments. If an audit or investigation were to uncover improper or illegal activities, we could be subject to further fines, administrative actions, termination of contracts, forfeiture of profits, suspension of payments or debarment from business with the government. The government could impose additional payment withholds or seek consideration for material not in compliance with associated sourcing standards.

9.5 Risks relating to Information Technology, Cybersecurity and Intellectual Property

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. In expanding our product portfolio to software solutions and increasing our focus on digital strategy and AI, this dependence on information technology infrastructure and systems has only grown in importance. 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. This presents heightened information security and cybersecurity risks, including system failures and non-availability, software bugs or defects, 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. More recently, the rise in remote work arrangements and use of video conferencing and collaborative platforms implemented by CAE in response to the COVID-19 outbreak increased the pressure on our information technology infrastructure which, in turn, may increase CAE’s vulnerability to these risks. In addition, subcontractors may, based on the requirements of their participation in our processes, be granted access to our IT platform and software solutions, thereby exposing us to heightened IT and cybersecurity risks. A successful breach of security of our information systems could lead to theft or misuse of our customers’, employees’, suppliers’, shareholders’ or business contacts’ proprietary, confidential or personal data information and result in third-party claims against us, reputational harm, regulatory fines or ransom demands.

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, regulatory 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. Any material interruption in our technology systems could have a material adverse effect on our business, financial condition, prospects and/or results of operations. As CAE’s software solutions and digital services increase, the risk of financial loss and/or impairment that may be suffered by customers could increase, severe IT and cybersecurity disruptions could impair or prevent the operations of our airline customers, which could expose CAE to significant penalties and reputational damage, which in turn could have a material adverse effect on our business, financial condition, prospects and/or results of operations.

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, 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 AI 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. 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.

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Management’s Discussion and Analysis

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 that of our clients. We may also 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.

Data rights and governance

The management, use and protection of data, including personal information, 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, including compliance with the European Union’s General Data Protection Regulation, the U.K.’s General Data Protection Regulation, Canada’s federal Personal Information Protection and Electronic Documents Act and substantially similar equivalents at the provincial level, the California Consumer Privacy Act, and the proliferation of similar regulatory frameworks in other regions. Compliance with these requirements may prove to be complex and may add to our compliance costs. Further, as a result of our growing collaboration with third parties, our adoption of new technologies (including AI) and business models and the launch of new data-driven initiatives our exposure to regulatory compliance, operational and reputational risks could increase.

In providing services and solutions to clients, we also collect, utilize and store confidential or classified client data and proprietary information that may be highly sensitive. Any security breach, improper use and other types of unauthorized access or misappropriation of such information could not only lead to regulatory penalties, audits or investigations by various government agencies relating to our compliance with applicable laws, but also damage to our reputation or loss of confidence in our products and services.

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 licence agreements. 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. Adverse publicity related to incidents or litigation involving us, our partners or suppliers may impact the value of our brand.

Third-party intellectual property

Our products contain sophisticated software and computer systems that are supplied to us by third parties. Moreover, 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 such software, systems and 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.

9.6 Risks relating to Talent and Labour

Talent management

To support our growth strategies, objectives and normal business operations, CAE needs to maintain a sufficient, qualified and engaged workforce. Our financial position, global brand reputation and ability to achieve strategic objectives may be negatively affected by a failure to manage attrition, to retain and integrate key personnel, to maintain an appropriately sized workforce to meet contract needs and to transition employees from completed projects to new projects or between internal business groups. The COVID-19 pandemic introduced new talent-related challenges and risks, including higher employee mobility, a re-evaluation of employee’s relationship with their workplace and a highly competitive employee marketplace which may make it more 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.

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Management’s Discussion and Analysis

Key personnel and management

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, including technology developers of our intellectual property. 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. The emergency succession plan put in place to deal with any situation which requires immediate replacement of our key personnel and management presents logistical challenges in its application and incremental costs to CAE. Failure to successfully implement such a succession plan, where relevant, for key roles, could impair our business until qualified replacements are found.

Corporate culture

We believe that a critical contributor to our success has been our corporate culture, which is based on our core values of One CAE, innovation, empowerment, excellence and integrity. As we continue to grow and develop, we must effectively integrate, develop and motivate a growing number of new employees, based in various countries around the world, some of whom come to us via acquisitions. In addition, we must preserve our ability to execute quickly in further developing our products and services and implementing new features and initiatives. As a result, maintaining our corporate culture could potentially be challenging, which would affect the engagement of our employees and could limit our ability to innovate and operate effectively. Any failure to preserve our culture and evolve it to adapt to our new reality could also negatively affect our ability to recruit and retain personnel, to continue to perform at current levels or to execute on our business strategy effectively and efficiently.

Labour relations

Approximately 2,300 employees are represented by unions and are covered by 54 collective agreements as of March 31, 2022. These differing collective bargaining agreements have various expiration dates. If we experience difficulties with renewals and renegotiations of existing collective agreements or if our employees pursue new collective representation, we could incur additional expenses and may be subject to work stoppages, slow-downs or other labour-related disruptions. Any such expenses or delays could adversely affect our programs served by employees who are covered by such agreements or representation.

9.7 Risks relating to Mergers, Acquisitions, Joint Ventures, Strategic Alliances or Divestitures

CAE cannot assure investors that we will effectively manage our growth

Our growth has placed and may continue to place significant demands on our management and operational and financial infrastructure. As our operations grow in size, scope and complexity, and as we identify and pursue new opportunities, we may be subject to both transition and growth-related risks, including capacity constraints and pressure on our internal systems and controls, and may need to increase the scale of our infrastructure (financial, management, informational, personnel and otherwise). There can be no assurance we will be able to respond adequately or quickly enough to the changing demands that material expansion will impose on management, team members and existing infrastructure, and changes to our operating structure may result in increased costs or inefficiencies that we cannot anticipate. Our ability to manage future growth effectively requires us to continue to implement and improve financial, management and operational processes and systems and to expand, train and manage our employee base. As our organization continues to grow and we are required to implement more complex organizational management structures, we may find it increasingly difficult to maintain the benefits of our corporate culture and efficiencies, including our ability to quickly develop and launch new and innovative products. Any of these difficulties could adversely impact our business performance and results of operations.

Integration risks

The realization of anticipated benefits from mergers, 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.

Continued reliance on certain parties and information

Following an acquisition closing date, CAE may remain reliant on the target’s personnel, good faith, expertise, historical performance, technical resources and information systems, proprietary information and judgment in providing the services under a transitional services agreement. Accordingly, we may continue to be exposed to adverse developments in the business and affairs of parties with which we contract.

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Management’s Discussion and Analysis

Although we strive to conduct a sufficient level of investigation in connection with any acquisition or related transaction, an unavoidable level of risk remains regarding the accuracy and completeness of the information provided to CAE. There may also be liabilities, deficiencies or other claims associated with companies or assets we acquire that we failed to discover or were unable to quantify accurately or at all in our due diligence which may result in unanticipated costs. CAE may not be in a position to independently verify the accuracy or completeness of such information, and there may be events which may have occurred with respect to acquisition targets or which may affect the completeness or accuracy of the information provided which are unknown to CAE.

Acquisition and integration costs

We incur a number of costs associated with completing acquisitions and integrating the operations of CAE and acquired companies. The substantial majority of these costs are non-recurring expenses resulting from an acquisition and will consist of transaction costs related to the acquisition, including financial, legal and accounting costs, facilities and systems consolidation costs and employment‑related costs. Such expenses are difficult to estimate accurately and may exceed estimates. We may also fail to accurately forecast the financial impact of an acquisition or other strategic transaction, including tax and accounting charges. Accordingly, the benefits from an acquisition may be offset by unexpected costs incurred in integrating the businesses, which could cause our revenue assumptions to be inaccurate.

9.8 Risks relating to Controls and Accounting Matters

Effectiveness of internal controls over financial reporting

Our disclosure controls and procedures and internal controls over financial reporting may fail to prevent certain errors and fraud. A control system, no matter how well-designed and implemented, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in control systems, no evaluation of controls can provide absolute assurance that all control issues within an organization are detected. The inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple errors or mistakes. Controls can also be circumvented by individual acts of certain persons, by collusion of two or more people or by management override of the controls. Due to these inherent limitations, misstatements due to error or fraud may occur and may not be detected in a timely manner or at all.

Any failure of our internal controls could have an adverse effect on our results of operations, harm our reputation and limit our ability to produce timely and accurate financial statements or comply with applicable regulations, causing investors to lose confidence in our reported financial information. If we are unable to implement any of the required changes to our internal control over financial reporting effectively or efficiently or are required to do so earlier than anticipated, it could adversely affect our operations, financial reporting and results of operations.

Estimates used in accounting

Accounting for our contracts, notably contracts for the design, engineering, and manufacturing of training devices, requires judgment associated with estimating contract revenue and costs and assumptions for schedule and technical issues. Because of the significance of the judgments and estimation processes involved in accounting for our contracts, materially different amounts could be recorded if we used different assumptions or if the underlying circumstances were to change. Changes in underlying assumptions, circumstances or estimates may adversely affect our future results of operations and financial condition.

Impairment risk

The carrying amounts of our 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. Factors that may result in a change in circumstances, indicating that the carrying value of our goodwill or non-financial assets may not be recoverable include reduced future estimated cash flows, slower growth rates than forecasted and a decline in our stock price and market capitalization. Change in key assumptions, such as a failure to meet our five-year strategic plan or other unanticipated circumstances may affect the accuracy or validity of our estimates. Because of the significance of our goodwill and other non-financial assets, any future impairment of these assets could require material non-cash charges to our operating results, which also could have a material adverse effect on our financial condition.

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, thereby negatively impacting our earnings, cash flow and shareholders' equity.

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Management’s Discussion and Analysis

9.9 Risks relating to Indebtedness and Liquidity

Indebtedness to finance acquisitions and ability to meet debt service requirements

CAE may achieve strategic growth objectives by financing costs of acquisitions out of available liquidities, including cash on hand and/or advances or drawdowns under one or more of our revolving credit facilities or other debt financing. Such borrowings could have material adverse consequences for CAE, including: limiting our ability to obtain additional financing for working capital, capital expenditures, product development, debt service requirements, acquisitions and general corporate or other purposes; restricting our flexibility and discretion to operate our business; limiting our ability to declare dividends on our common shares; having to dedicate a portion of our cash flows from operations to the payment of interest on our existing indebtedness and not having such cash flows available for other purposes, exposing us to increased interest expense on borrowings at variable rates; limiting our ability to adjust to changing market conditions; placing CAE at a competitive disadvantage compared to our competitors that have incurred less debt; making CAE more vulnerable in a downturn in general economic conditions; increasing our financial expense and reducing our profitability; and making it more difficult for us to satisfy our covenants with respect to our indebtedness. There is no guarantee that we will be able to obtain additional indebtedness or other financing on terms favourable to us or at all in order to repay the principal on such indebtedness when it becomes due.

If we are unable to generate sufficient funds to meet our obligations under our outstanding indebtedness, we may be required to refinance, restructure or otherwise amend some or all of such obligations, sell assets or raise additional cash through additional issuances of our equity. In such case, we cannot make any assurances that we would be able to obtain such refinancing on terms as favourable as our current financing or that such restructuring, sales of assets or issuances of equity can be accomplished or, if accomplished, would raise sufficient funds to meet these obligations.

Availability of capital

We depend, in part, upon our debt funding and access to capital markets. We have various debt facilities with maturities ranging between April 2022 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 significant instability or disruptions of the capital markets, a deterioration in or weakening of our financial position due to internal or external factors, restrictions or prohibitions on CAE’s access to these facilities, or significant increase in the cost of one or more of these facilities, including credit facilities or the issuance of medium- and long-term debt, which may adversely affect our ability to fund our operations and contractual or financing commitments.

Our credit facilities have standard financial covenants. In the event that we are unable to maintain compliance with such covenants, however, 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.

Liquidity risk

CAE faces liquidity risks which stem from holding assets that cannot be readily converted to cash when needed. The continuing pandemic and recent geopolitical uncertainty have increased the unpredictability of business and transaction cycles, thereby bringing uncertainty as to the cash we expect to generate from our operations and our ability to meet financial requirements in the foreseeable future.

Interest rates

We are exposed to risk on the interest rate of our debt. If interest rates increase, our floating rate long-term debt would increase even though the amount borrowed remained the same, and net income and cash flows would decrease, which could materially and adversely affect CAE’s financial condition and operating results. Increasing interest rates may also restrict our ability to expand into new markets if we do not have access to debt or equity capital on acceptable terms, which in turn may negatively affect our competitiveness and results of operations. Similarly, changes in interest rates may negatively affect the ability of our customers to deploy capital or to obtain credit to finance their businesses on acceptable terms, which will impact their demand and ability to pay for our products and services.

9.10 Risks relating to our Common Shares and Ownership of our Securities

Sales of additional common shares

Any future issuance of common shares, or other securities convertible into common shares, may result in dilution to present and prospective common shareholders as well as dilution in earnings per share. CAE cannot predict the size of future issuances of common shares or the effect that future issuances and sales of common shares will have on the market price of the common shares. Issuances of a substantial number of additional common shares (or securities convertible into common shares), or the perception that such issuances could occur, may adversely affect the prevailing market price for the common shares.

Market price and volatility of our common shares

The market price of our common shares may be volatile and subject to wide fluctuations in response to numerous factors, many of which are beyond our control and are unrelated to our performance. These factors have been heightened in the context of the COVID-19 pandemic and recent global economic and geopolitical uncertainty. There can be no assurance that the market price of the common shares will not experience significant fluctuations in the future, including fluctuations that are unrelated to our performance.

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Management’s Discussion and Analysis

In the past, following a significant decline in the market price of a company’s securities, there have been instances of securities class action litigation having been instituted against such company. If we were involved in any similar litigation, we could incur substantial costs, our management’s attention and resources could be diverted and it could harm our business, financial condition, operating results and future prospects.

Returns to shareholders

Payment of dividends 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.

No assurance can be given as to whether or when CAE will declare and pay dividends in the future, or the frequency or amount of any such dividend. In addition, there is no assurance that shareholders who currently have their common shares enrolled in CAE’s Dividend Reinvestment Plan (DRIP) will continue to have their common shares participate in the DRIP, which may have an impact on our cash flows.

Foreign private issuer status

As a “foreign private issuer,” as such term is defined in Rule 405 under the U.S. Securities Act, we are permitted, under a multijurisdictional disclosure system adopted by the securities regulatory authorities in Canada and the U.S., to prepare our disclosure documents filed under the U.S. Securities Exchange Act of 1934, as amended (U.S. Exchange Act), in accordance with Canadian disclosure requirements. Under the U.S. Exchange Act, we are subject to reporting obligations that, in certain respects, are less detailed and less frequent than those of U.S. domestic reporting companies. As a result, we do not file the same reports that a U.S. domestic issuer would file with the SEC, although we are required to file or furnish to the SEC the continuous disclosure documents that we are required to file in Canada under Canadian securities laws.

In relying on NYSE rules that permit a foreign private issuer to follow the corporate governance practices of its home country, CAE is permitted to follow certain Canadian corporate governance practices instead of those otherwise required under the corporate governance standards for U.S. domestic issuers, except to the extent that such laws would be contrary to U.S. securities laws and provided that we disclose the significant differences between our corporate governance practices and the applicable corporate governance standards applicable to U.S. domestic issuers.

Further, as a foreign private issuer, we are exempt from a number of requirements under U.S. securities laws that apply to public companies that are not foreign private issuers. In particular, we are exempt from the rules and regulations under the Exchange Act related to the furnishing and content of proxy statements, and our officers, directors and principal shareholders are exempt from the reporting and short-swing profit recovery provisions contained in Section 16 of the U.S. Exchange Act. CAE is exempt from the provisions of Regulation FD, which prohibits the selective disclosure of material non-public information to, among others, broker‑dealers and holders of a company’s securities under circumstances in which it is reasonably foreseeable that the holder will trade in our securities on the basis of the information.

Even though Canadian securities law requirements regarding the disclosure of material and non-public information by public companies are similar to U.S. securities law requirements and we voluntarily comply with Regulation FD, these exemptions and leniencies will reduce the frequency and scope of information and protections to which purchasers are entitled as investors. Shareholders should not expect to receive the same information at the same time as such information is provided by U.S. domestic companies. In addition, we have four months after the end of each fiscal year to file our Annual Information Form with the SEC and are not required under the U.S. Exchange Act to file quarterly reports with the SEC as promptly as U.S. domestic companies whose securities are registered under the U.S. Exchange Act would do.

Enforceability of civil liabilities against our directors and officers

CAE is governed by the Canada Business Corporations Act with our principal place of business in Canada. Most of our directors and officers reside in Canada or elsewhere outside the U.S. The majority of our assets and all or a substantial portion of the assets of these directors and officers may be located outside the U.S. Consequently, it may be difficult for investors who reside in the U.S. to effect service of process in the U.S. upon CAE or upon such persons who are not residents of the U.S., or to realize upon judgments of courts of the U.S. predicated upon the civil liability provisions of the U.S. federal securities laws. Similarly, some of CAE’s directors and officers may be residents of countries other than Canada and all or a substantial portion of the assets of such persons may be located outside Canada. As a result, it may be difficult for Canadian investors to initiate a lawsuit within Canada against these persons.

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Management’s Discussion and Analysis

10. RELATED PARTY TRANSACTIONS

A list of principal investments which, in aggregate, significantly impact our results or assets is presented in Note 32 of our consolidated financial statements.

Outstanding balances with our equity accounted investees are as follows:

(amounts in millions)	2022		2021
Accounts receivable	$	49.7	$	33.3
Contract assets	23.0		14.3
Other non-current assets	12.8		26.4
Accounts payable and accrued liabilities	5.1		5.8
Contract liabilities	46.5		22.0
Other non-current liabilities	1.5		1.5

Transactions with our equity accounted investees are as follows:

(amounts in millions)	2022		2021
Revenue	$	111.8	$	129.2
Purchases	3.5		2.8
Other income	3.8		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 members of the Board and certain executive officers. The compensation of key management for employee services are as follows:

(amounts in millions)	2022		2021
Salaries and other short-term employee benefits	$	8.4	$	6.5
Post-employment benefits – defined benefit plans	2.2		1.6
Share-based payments expense	6.6		24.8
	$	17.2	$	32.9

For the year ended March 31, 2022, the compensation earned by non-employee Directors amounted to $2.4 million (2021 – $1.9 million), which include the grant date fair value of deferred share units (DSUs) as well as cash payments.

60 I CAE Financial Report 2022

Management’s Discussion and Analysis

11. CHANGES IN ACCOUNTING POLICIES

11.1 New and amended standards adopted

Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 – Interest rate benchmark reform – Phase 2

This amendment to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16 was adopted April 1, 2021. We have elected to apply the practical expedient and will apply to transactions occurring subsequent to April 1, 2021. Our treasury department is managing the transition plan so that the existing contracts that refer to IBORs shall be adjusted to ensure contract continuity and address term and credit differences between IBORs and alternative reference rates. The adoption of this amendment had no material impact on the consolidated financial statements.

Configuration or customization costs in a cloud computing arrangement – IAS 38

In fiscal 2022, the IFRS Interpretations Committee finalized an agenda decision which clarifies the accounting for configuration and customization costs incurred in a cloud computing arrangement, more specifically in a Software as a Service arrangement (SaaS). The agenda decision provides guidance on assessing whether costs incurred can be capitalized as an intangible asset and on the timing of expense recognition. Judgement is required to determine if the capitalization criteria are met. We modified our accounting policy to align with the agenda decision and previously capitalized costs that no longer qualify for capitalization were expensed in the current period.

11.2 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 as of the date control is transferred. The consideration transferred and the acquiree’s identifiable assets, liabilities and contingent liabilities are measured at their fair value at the date of acquisition, which may be estimated using an income, market or cost valuation method. 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.

The judgments made in determining the estimated fair value assigned to the net identifiable assets acquired, as well as the estimated useful life of non-financial assets, could impact the net income of subsequent periods through depreciation and amortization, and in certain instances through impairment charges. We believe that the estimated fair values assigned to the net identifiable assets acquired are based on reasonable assumptions that a marketplace participant would use. While we use our best estimates and assumptions to accurately value the net identifiable assets acquired at the acquisition date, estimates are inherently uncertain and subject to refinement.

To estimate the fair value of the intangible assets of the L3H MT and AirCentre acquisitions, the multi-period excess earnings method was used to value the customer relationship and the relief from royalty method was used to value the technology and software. Significant judgment is applied in estimating the fair value of customer relationships and the technology acquired, which involves the use of significant assumptions with respect to projected revenue.

During the measurement period, for up to 12 months following the acquisition, we recorded adjustments to the initial estimate of the net identifiable assets acquired based on new information obtained that would have existed as of the date of the acquisition. Any adjustment that arises from information obtained that did not exist as of the date of the acquisition will be recorded in the period the adjustment arises.

CAE Financial Report 2022 I 61

Management’s Discussion and Analysis

Development costs

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.

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.

Timing of satisfaction of performance obligations

For contracts where revenue is recognized over time using the cost input method, we apply judgement in estimating the work performed to date as a proportion of the total work to be performed. Management conducts monthly reviews of our estimated costs to complete as well as our 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 20 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 3.0% to 9.0%, over the period of repayments. The estimated repayments are discounted using average rates ranging from 6.0% to 10.4% 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, 2022 by approximately $1.7 million (2021 - $2.3 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.

62 I CAE Financial Report 2022

Management’s Discussion and Analysis

Impact of the COVID-19 pandemic

12. CONTROLS AND PROCEDURES

The internal auditor reports regularly to management on any weaknesses it finds in our internal controls and these reports are reviewed by the Audit Committee.

In accordance with National Instrument 52-109 issued by the Canadian Securities Administrators, certificates signed by the President and Chief Executive Officer (CEO) and the Chief Financial Officer (CFO) have been filed. These filings certify the appropriateness of our disclosure controls and procedures and the design and effectiveness of the internal controls over financial reporting.

12.1 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, 2022. 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, 2022.

12.2 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, 2022, 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 2022 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

During fiscal year 2022, we acquired L3H MT and AirCentre. In accordance with National Instrument 52-109 - Certification of Disclosure in Issuers’ Annual and Interim Filings, the CEO and the CFO of the Company have limited the scope of their design of CAE’s disclosure controls and procedures and internal control over financial reporting to exclude controls, policies and procedures of L3H MT and AirCentre. These entities utilize separate information systems and processes. We have begun to integrate their internal controls, policies and procedures. These integration processes are expected to be completed during fiscal 2023.

L3H MT's contribution to our consolidated financial statements for the year ended March 31, 2022 was 12% of consolidated revenue and 11% of adjusted segment operating income. Additionally, as at March 31, 2022, total assets and total liabilities of the acquired L3H MT operations were 18% and 5% of consolidated total assets and liabilities, respectively.

AirCentre's contribution to our consolidated financial statements for the year ended March 31, 2022 was less than 1% of consolidated revenue and adjusted segment operating income. Additionally, as at March 31, 2022, total assets of the acquired AirCentre operations were 6% of consolidated total assets and less than 1% of consolidated total liabilities.

13. OVERSIGHT ROLE OF AUDIT COMMITTEE AND BOARD OF DIRECTORS

The Audit Committee reviews our annual MD&A and related consolidated financial statements with management and the external auditor and recommends them to the Board for their approval. Management and our internal auditor also provide the Audit Committee with regular reports assessing our internal controls and procedures for financial reporting. The external auditor reports regularly to management on any weaknesses it finds in our internal control, and these reports are reviewed by the Audit Committee.

14. ADDITIONAL INFORMATION

You will find additional information about CAE, including our most recent AIF, on our website at www.cae.com, or on SEDAR at www.sedar.com or on EDGAR at www.sec.gov.

CAE Financial Report 2022 I 63

Management’s Discussion and Analysis

15. SELECTED FINANCIAL INFORMATION

The following table provides selected quarterly financial information for the years 2020 through to 2022.

(amounts in millions, except per share amounts and exchange rates)	Q1		Q2	Q3	Q4	Total
Fiscal 2022
Revenue	$	752.7	814.9	848.7	955.0	3,371.3
Net income	$	47.3	17.2	28.4	57.1	150.0
Equity holders of the Company	$	46.4	14.0	26.2	55.1	141.7
Non-controlling interests	$	0.9	3.2	2.2	2.0	8.3
Basic EPS attributable to equity holders of the Company	$	0.16	0.04	0.08	0.17	0.46
Diluted EPS attributable to equity holders of the Company	$	0.16	0.04	0.08	0.17	0.45
Adjusted EPS	$	0.19	0.17	0.19	0.29	0.84
Adjusted EPS excluding COVID-19 government support programs	$	0.15	0.17	0.19	0.29	0.80
Average number of shares outstanding (basic)	293.6		316.5	316.9	317.0	311.0
Average number of shares outstanding (diluted)	295.8		318.7	318.7	318.5	312.9
Average exchange rate, U.S. dollar to Canadian dollar	1.23		1.26	1.26	1.27	1.25
Average exchange rate, Euro to Canadian dollar	1.48		1.48	1.44	1.42	1.46
Average exchange rate, British pound to Canadian dollar	1.72		1.74	1.70	1.70	1.71
Fiscal 2021
Revenue	$	550.5	704.7	832.4	894.3	2,981.9
Net (loss) income	$	(110.0)	(6.0)	49.7	18.8	(47.5)
Equity holders of the Company	$	(110.6)	(5.2)	48.8	19.8	(47.2)
Non-controlling interests	$	0.6	(0.8)	0.9	(1.0)	(0.3)
Basic and diluted EPS attributable to equity holders of the Company	$	(0.42)	(0.02)	0.18	0.07	(0.17)
Adjusted EPS	$	(0.24)	0.03	0.19	0.12	0.12
Average number of shares outstanding (basic)	265.7		265.8	271.7	285.2	272.0
Average number of shares outstanding (diluted)	265.7		265.8	273.0	287.3	272.0
Average exchange rate, U.S. dollar to Canadian dollar	1.39		1.33	1.30	1.27	1.32
Average exchange rate, Euro to Canadian dollar	1.53		1.56	1.55	1.53	1.54
Average exchange rate, British pound to Canadian dollar	1.72		1.72	1.72	1.75	1.73
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
Adjusted EPS	$	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

64 I CAE Financial Report 2022

Management’s Discussion and Analysis

Selected segment information

(amounts in millions)	Q4-2022		Q4-2021		FY2022		FY2021		FY2020
Civil Aviation
Revenue	$	432.7	$	388.2	$	1,617.8	$	1,412.9	$	2,167.5
Operating income	58.1		40.5		224.1		6.5		473.3
Adjusted segment operating income	96.3		66.6		314.7		164.3		479.4
Adjusted SOI excluding COVID-19 government support programs	96.3		46.9		309.5		100.7		479.4
Defense and Security
Revenue	$	469.5	$	334.4	$	1,602.1	$	1,217.1	$	1,331.2
Operating income (loss)	25.8		(8.5)		56.0		15.5		104.8
Adjusted segment operating income	36.8		23.2		119.2		87.0		114.5
Adjusted SOI excluding COVID-19 government support programs	36.8		6.8		111.2		26.7		114.5
Healthcare
Revenue	$	52.8	$	171.7	$	151.4	$	351.9	$	124.5
Operating income (loss)	9.4		15.6		4.1		26.4		(41.0)
Adjusted segment operating income (loss)	9.6		16.4		10.6		29.3		(3.5)
Adjusted SOI excluding COVID-19 government support programs	9.6		15.3		10.2		25.8		(3.5)
Total
Revenue	$	955.0	$	894.3	$	3,371.3	$	2,981.9	$	3,623.2
Operating income	93.3		47.6		284.2		48.4		537.1
Adjusted segment operating income	142.7		106.2		444.5		280.6		590.4
Adjusted SOI excluding COVID-19 government support programs	142.7		69.0		430.9		153.2		590.4

Selected annual information for the past five years

(amounts in millions, except per share amounts and exchange rates)	2022		2021		2020		2019(1)		2018(1)
Revenue	$	3,371.3	$	2,981.9	$	3,623.2	$	3,304.1	$	2,823.5
Net income (loss)	150.0		(47.5)		318.9		340.1		354.7
Equity holders of the Company	141.7		(47.2)		311.4		330.0		346.0
Non-controlling interests	8.3		(0.3)		7.5		10.1		8.7
Average exchange rate, U.S. dollar to Canadian dollar	1.25		1.32		1.33		1.31		1.28
Average exchange rate, Euro to Canadian dollar	1.46		1.54		1.48		1.52		1.50
Average exchange rate, British pound to Canadian dollar	1.71		1.73		1.69		1.72		1.70
Financial position:
Total assets	$	9,578.8	$	8,748.4	$	8,483.6	$	7,165.5	$	5,780.2
Total non-current financial liabilities(2)	2,959.9		2,330.3		3,301.9		2,242.8		1,380.6
Total net debt	2,700.1		1,425.4		2,365.7		1,882.2		649.4
Per share:
Basic EPS attributable to equity holders of the Company	$	0.46	$	(0.17)	$	1.17	$	1.24	$	1.29
Diluted EPS attributable to equity holders of the Company	0.45		(0.17)		1.16		1.23		1.28
Adjusted earnings per share	0.84		0.47		1.34		1.25		1.11
Adjusted EPS excluding COVID-19 government support programs	0.80		0.47		1.34		1.25		1.11
Dividends declared	—		—		0.43		0.39		0.35

(1) Figures have not been restated to reflect the adoption of IFRS 16 which was effective in fiscal 2020.

(2) Includes long-term debt, long-term derivative liabilities and other long-term liabilities meeting the definition of a financial liability.

CAE Financial Report 2022 I 65

Document

Consent of Independent registered public accounting firm

We hereby consent to the incorporation by reference in this Annual Report on Form 40-F for the year ended March 31, 2022 of CAE Inc. of our report dated May 31, 2022, relating to the consolidated financial statements and the effectiveness of internal control over financial reporting, which appears in Exhibit 99.2 in this Annual Report.

We also consent to the incorporation by reference in the Registration Statements on Form F-10 (No. 333-250113) and Form S-8 (No. 333-97185, 333-155366 and 333-213708) of our report dated May 31, 2022 referred to above. We also consent to reference to us under the heading “Interests of Experts,” which appears in the Annual Information Form included in the Exhibit 99.1 of CAE Inc.’s Annual Report on Form 40-F, which is incorporated by reference in such Registration Statements.

/s/PricewaterhouseCoopers LLP

Montreal, Quebec Canada

June 23, 2022

PricewaterhouseCoopers LLP/s.r.l./s.e.n.c.r.l.

1250 René-Lévesque Boulevard West, Suite 2500, Montreal, Quebec, Canada H3B 4Y1 T: +1 514 205 5000, F: +514 867 1502, www.pwc.com/ca

“PwC” refers to PricewaterhouseCoopers LLP/s.r.l./s.e.n.c.r.l., an Ontario limited liability partnership, which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity.

Document

CERTIFICATION REQUIRED BY RULE 13a-14(a) OR RULE 15d-14(a), PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Marc Parent, certify that:

1.I have reviewed this annual report on Form 40-F of CAE Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the issuer as of, and for, the periods presented in this report;

4.The issuer’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the issuer and have:

(a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, 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;

(c)Evaluated the effectiveness of the issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d)Disclosed in this report any change in the issuer’s internal control over financial reporting that occurred during the period covered by the annual report that has materially affected, or is reasonably likely to materially affect, the issuer’s internal control over financial reporting; and

5.The issuer’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the issuer’s auditors and the audit committee of the issuer’s board of directors (or persons performing the equivalent functions):

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the issuer’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer’s internal control over financial reporting.

Date: June 23, 2022

/s/ Marc Parent

Name: Marc Parent

Title: President and Chief Executive Officer

Document

CERTIFICATION REQUIRED BY RULE 13a-14(a) OR RULE 15d-14(a), PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Sonya Branco, certify that:

1.I have reviewed this annual report on Form 40-F of CAE Inc.;

(a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to

adversely affect the issuer’s ability to record, process, summarize and report financial information; and

(b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the issuer’s internal control over financial reporting.

Date: June 23, 2022

/s/ Sonya Branco

Name: Sonya Branco

Title: Executive Vice President, Finance and Chief Financial Officer

Document

CERTIFICATION REQUIRED BY PURSUANT TO 18 U.S.C. SECTION 1350,

AS ENACTED PURSUANT TO

SECTION 906 OF THE U.S. SARBANES-OXLEY ACT OF 2002

CAE Inc. (the “Company”) is filing with the U.S. Securities and Exchange Commission on the date hereof, its annual report on Form 40-F for the fiscal year ended March 31, 2022 (the “Report”).

I, Marc Parent, President and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as enacted pursuant to section 906 of the U.S. Sarbanes-Oxley Act of 2002, that:

(i)the Report fully complies with the requirements of section 13(a) or 15(d) of the U.S. Securities Exchange Act of 1934; and

(ii)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Marc Parent

Marc Parent

President and Chief Executive Officer

Date: June 23, 2022

Document

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,

AS ENACTED PURSUANT TO

SECTION 906 OF THE U.S. SARBANES-OXLEY ACT OF 2002

CAE Inc. (the “Company”) is filing with the U.S. Securities and Exchange Commission on the date hereof, its annual report on Form 40-F for the fiscal year ended March 31, 2022 (the “Report”).

I, Sonya Branco, Executive Vice President, Finance and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. section 1350, as enacted pursuant to section 906 of the U.S. Sarbanes-Oxley Act of 2002, that:

(i)the Report fully complies with the requirements of section 13(a) or 15(d) of the U.S. Securities Exchange Act of 1934; and

(ii)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/ Sonya Branco

Sonya Branco

Executive Vice President, Finance

and Chief Financial Officer

Date: June 23, 2022