Corporate Profile

CAE is a world leader in providing simulation and modelling technologies and integrated training solutions for the civil aviation industry and defence forces around the globe. With annual revenues exceeding C$1.5 billion, CAE employs more than 7,000 people at more than 100 sites and training locations in more than 20 countries. We have the largest installed base of civil and military full-flight simulators and training devices. Through our global network of 29 civil aviation and military training centres, we train more than 75,000 crewmembers yearly. We also offer modelling and simulation software to various market segments and, through CAE’s professional services division, we assist customers with a wide range of simulation-based needs. www.cae.com

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Chairman’s Message

Your company performed well in difficult markets in fiscal year 2010. Geographical diversification and revenue balance among our operating segments allowed the company to end the year with a healthy financial position, and well-positioned to continue to pursue our growth objectives.

At mid-year, we appointed a new Chief Executive Officer, Marc Parent, upon the retirement of Robert E. Brown.

On behalf of the Board of Directors, I hasten to acknowledge Mr. Brown’s significant contribution to CAE during the past five years. He led and executed the strategic changes that have produced a healthy portfolio of products and services in the right markets.

Marc Parent, who joined the company in 2005, has an intimate knowledge of CAE’s operations and a proven performance record. Mr. Parent served most recently as Executive Vice President and Chief Operating Officer and joined the Board of Directors in November 2008. He is an outstanding leader and we are confident that he will continue to lead CAE to new levels of success.

On behalf of the Board, we are pleased with the direction of the company and with the tangible results to date from the execution of major corporate initiatives. One of our tasks is to ensure that executive and management compensation is fully aligned with the interests of shareholders. In this regard, CAE is proud to have received from Korn Ferry and Les Affaires an Excellence in Corporate Governance award for our compensation policies and programs.

On behalf of our shareholders, I would like to thank all CAE employees for their contribution to the company’s development. The CAE brand is stronger for your efforts.

Lynton R. Wilson
Chairman of the Board

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Message to Shareholders

CAE performed well in fiscal year 2010 despite a very difficult civil aviation market and we are emerging gradually from the downturn with a unique global position in civil aviation, continued growth prospects in defence and a solid financial base.

Our total revenue reached $1.53 billion compared to $1.66 billion generated a year ago. Contributing to this result was the continued double-digit growth we achieved in our defence segments, which helped to offset the impacts of the economic downturn and the contraction of the civil aviation market. This past year was challenging but it gave us the opportunity to test the merits of our diversification strategy. Taken together with the measures we took to improve and align our cost base, we demonstrated the resiliency of CAE’s business model. Our consolidated net earnings, including a restructuring charge of $34.1 million, were $144.5 million compared to $201.1 million in fiscal year 2009. We maintained our lead in a competitive market and continued to have a solid backlog of $3.0 billion.

Our overall performance in fiscal year 2010 provided more evidence of how CAE has become less vulnerable to the cyclicality of new civil aircraft deliveries, with about two-thirds of our civil market activities now involved in the provision of training and services, which depends more on the vast installed base of commercial, business and general aircraft worldwide. In terms of our diversification by industry sector, more than half of our revenue was derived from defence products and services, and from a geographic standpoint, about one-third of our revenue was generated in high growth markets such as Asia, the Middle East and South America, which continued to exhibit strong demand for our products and services during the downturn. These results demonstrate the sound balance we have achieved in our overall business mix and validate our diversification strategy.

Highlights

In defence, we concluded the year with a strong fourth quarter that increased total orders to $969.1 million. We signed contracts during the year with the defence forces of 21 nations, including a multi-year $250 million contract in support of Canada’s CH-147 Chinook helicopter training requirements. We also signed contracts to upgrade the helicopter simulators and expand training services at CAE’s Medium Support Helicopter Aircrew Training Facility in the U.K. for both the Royal Air Force and Royal Netherlands Air Force. As well, we continued to demonstrate our global leadership in providing C-130 training systems and services by expanding our C-130 training centre in Tampa, Florida and winning contracts to support the Indian Air Force, U.S. Air Force Special Operations Command and several other militaries. These contracts increase our recurring revenue and provide long-term stability for CAE.

In civil aerospace, we maintained our leadership in a difficult and competitive environment. We sold 20 full-flight simulators, mainly to customers in Asia and the Middle East and we maintained more than a 70% share of the competed market. We further developed our relationships with aircraft manufacturers, a prime example being the selection of CAE by Bombardier to support

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in the design, integration and development of the CSeries aircraft program, and in the aircraft’s entry-into-service training program. In training and services, we booked orders during the year with an expected value of $351 million, including a contract from the U.S. Federal Aviation Administration, which selected CAE to train its own pilots under a new five-year agreement. As well, we reached an important milestone with our first Multi-crew Pilot License beta program with a contract from AirAsia. Demand for training and services in the emerging markets continued to be strong and we signed a ten-year contract renewal to train LAN pilots at our Santiago training centre. We generated solid margins in our overall Civil business despite lower utilization in our training centres and lower revenue from the sale of products.

We made more progress during the year to further diversify CAE for long-term sustainable growth by leveraging our core capabilities of modelling, simulation and training into New Core Markets, including healthcare and mining. We made a number of small acquisitions to develop our capabilities in the healthcare field by providing us with subject matter expertise, products and distribution channels. On the mining sector front, following the end of the fiscal year, we advanced our entry into mine simulation and optimization through the acquisition of Datamine, a company with proven expertise and global customer reach. Similar to civil aviation and defence, these new market sectors have mission-critical needs for safety and efficiency and CAE is already helping to address them.

We are 7,000 people strong and the world is our market.

Outlook
For CAE overall, we are increasingly optimistic about the future.

Patience will still be required as the civil aerospace market works its way back from a deep downturn but recovery is now clearly underway. The effects of the civil aviation downturn experienced last year, particularly in terms of market pressure on pricing, as well as the lower production volume, will continue to affect us in fiscal year 2011 as we work our way through our products backlog. However, higher volumes and margins in training and services should provide some relief. Ultimately, we believe that when the civil aviation market fully recovers, our combined Civil business can achieve similar levels of performance as it did during the last market up-cycle.

We expect our Defence business to continue to deliver solid growth and profitability. Government spending constraints are a factor for all defence companies, but the cost efficiency and effectiveness of simulation-based training make CAE’s solutions even more relevant. As well, we specialize in training systems for aircraft types that are germane to national security in a world of persistent low-intensity conflicts. Our backlog is strong and the underlying drivers for more simulation-based training in defence, along with a healthy pipeline of opportunities for the outsourcing of training and maintenance services, give us reason to believe our growth in this area is sustainable over the long-term.

From a geographic perspective, our strong local presence in emerging markets such as Southeast Asia, the Indian sub-continent, the Middle East and South America will remain an important source of stability and a growth driver

for CAE. Among many initiatives, we are strengthening our presence in India with a joint venture helicopter training centre in Bangalore, which will be operational during the 2010 calendar year. Our New Core Markets, even though still at an early stage, give us another reason for our optimism. There is large market potential and we expect these new business endeavours to become material parts of CAE in the future.

Our firm commitment to innovation and research and development helps to ensure our market leadership. This fiscal year we embarked on a $714 million, five-year R&D investment plan to expand our current technologies, develop new ones and increase our capabilities beyond training. The launch of our CAE 3000 Series family of helicopter mission trainers, funded under our R&D program, is a tangible example of our innovation. We are also planning investments over a seven-year period of up to $274 million in R&D to support our entry in our New Core Markets.

Through several years of strong performance and prudent capital management, we have a healthy balance sheet and the means to support our growth. In addition to our ongoing R&D investments and strategic investments in New Core Markets, we continue to seek opportunities to acquire businesses that complement our ability to serve customers in our different markets.

Taking all of these factors into account, we believe CAE is in a good position to prosper in the years ahead as the civil aviation market recovery takes hold, as our defence business continues to produce strong results, and as we continue growing our New Core Markets.

Acknowledgements

It is a privilege and an honour for me to lead CAE and follow in the footsteps of Robert E. Brown, an outstanding mentor, who retired from CAE on September 30, 2009.

I am very proud of this company and its history of innovation and technology breakthroughs.

From its Canadian base in Montreal, CAE has spread its wings to 23 countries in every continent except Antarctica, with customers in 100 countries. We have expanded from the civil aircraft market into defence and are now positioning ourselves for further diversification into new industry sectors where our knowledge and rigour can make a difference in safety and efficiency.

The CAE brand is admired globally, a powerful calling card throughout the world. The company has credibility in all segments of aviation, a depth and breadth of expertise that is unmatched in the industry. Most important of all, customers think highly of CAE. The company is known for world-class training tools, delivered by the best people.

Our brand is our people. They have made CAE the industry leader it is today and our more than 7,000 employees will drive its future success. By listening, adapting and tailoring solutions to meet customer needs, they make our brand stronger.

In closing, I take this opportunity to thank the members of the CAE team around the world for their dedication and service to the company. I wish to acknowledge the governments of Canada and Québec for partnering with CAE in our long-term R&D initiatives. My thanks also to our Board of Directors for their support and counsel and to our shareholders for their confidence in CAE.

Marc Parent
President and Chief Executive Officer

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Defence

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Defence

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Civil

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Civil

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Civil

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New Core Markets

CAE is proud of its leadership in providing modelling and simulation-based solutions to a global customer base in the defence and aerospace markets. While continuing to grow in these markets, we believe there are growth opportunities in other industry sectors where our expertise is most relevant.

CAE has spent considerable time analyzing and gaining insight into new vertical markets where modelling, simulation and technical training expertise can be applied with compelling results. Three target sectors show the best promise: healthcare, mining and energy.

CAE is determined to achieve the same level of excellence in these new markets as in our current markets. To this end, we are investing up to $274 million in new R&D over the next seven years to support our market penetration and growth strategy. The Québec government has agreed to participate with up to $100 million in contribution.

3 target sectors

Healthcare

CAE Healthcare is applying CAE’s training, simulation and modelling expertise as well as best practices from aviation to the healthcare industry in order to improve patient safety and increase efficiency.

Mining

CAE brings unique expertise to the mining industry in large database management, scenario simulation and technical training. CAE plans to introduce simulation-based mine planning, scheduling and training in an industry where safety is paramount and task complexity is very high.

Energy

CAE will offer modelling and simulation-based solutions designed for the energy industry, aimed at production, distribution and marketing.

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Social Responsibility

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Social Responsibility

Management’s Discussion and Analysis

for the fourth quarter and year ended March 31, 2010

1.     HIGHLIGHTS

FINANCIAL

FOURTH QUARTER OF FISCAL 2010

Higher revenue over last quarter and lower revenue year over year

-     Consolidated revenue was $395.9 million this quarter, $13.0 million or 3% higher than last quarter and $42.9 million or 10% lower than the same quarter last year.

Net earnings and diluted earnings per share were higher than last quarter and lower year over year

-     Net earnings were $40.5 million (or $0.16 per share) this quarter, compared to $37.7 million (or $0.15 per share) last quarter, representing an increase of $2.8 million or 7%, and compared to $52.7 million (or $0.21 per share) in the fourth quarter of last year, representing a decrease of $12.2 million or 23%;

-     A restructuring charge of $1.9 million was booked this quarter, compared to $3.9 million last quarter and nil in the fourth quarter of last year. Excluding the restructuring charge, earnings from continuing operations were $42.3 million this quarter (or $0.16 per share) and $40.3 million (or $0.16 per share) last quarter.

Positive free cash flow¹ at $114.9 million

-     Net cash provided by continuing operations was $148.7 million this quarter, compared to $21.8 million last quarter and $71.8 million in the fourth quarter of last year;

-     Maintenance capital expenditures and other assets were $26.2 million this quarter, compared to $14.2 million last quarter and $29.8 million in the fourth quarter of last year;

-     Cash dividends were $7.6 million this quarter, last quarter and in the fourth quarter of last year.

FISCAL 2010

Lower revenue year over year

-    Consolidated revenue was $1,526.3 million this year, $135.9 million or 8% lower than last year.

Lower net earnings and diluted earnings per share

-     Net earnings were $144.5 million (or $0.56 per share) this year, compared to $201.1 million (or $0.79 per share) last year, representing a decrease of $56.6 million or 28%;

-     A restructuring charge of $34.1 million was booked this year compared to nil last year. Excluding the restructuring charge, earnings from continuing operations were $168.6 million (or $0.66 per share).

Positive free cash flow at $179.0 million

-    Net cash provided by continuing operations was $267.0 million this year, compared to $194.4 million last year;

-    Maintenance capital expenditures and other assets were $66.5 million this year, compared to $60.2 million last year;

-    Cash dividends were $30.3 million this year, compared to $29.6 million last year.

Capital employed1 ending at $1,335.6 million

-    Capital employed decreased by $147.3 million or 10% this year;

-    Property, plant and equipment decreased by $155.2 million;

-    Non-cash working capital increased by $20.0 million in fiscal 2010, ending at negative $40.4 million;

-    Net debt1 decreased by $105.3 million this year, ending at $179.8 million.

ORDERS¹

-     The book-to-sales ratio for the quarter was 1.59x (combined civil was 1.11x and combined military was 1.98x). The ratio for the last 12 months was 1.03x (combined civil was 0.84x and combined military was 1.20x);

-    Total order intake was $1,574.9 million, down 19% over last year;

-    Total backlog1 was $3,042.8 million as at March 31, 2010, 4% lower than last year.

Training & Services/Civil obtained contracts expected at $351.2 million

-     Signed a contract with sponsoring airline AirAsia for our first Multi-crew Pilot License (MPL) beta program that will adhere to new performance-based Approved Training Organization (ATO) certification requirements developed by Transport Canada and based on International Civil Aviation Organization (ICAO) guidelines. Graduates of our first MPL beta program are expected to enter the initial operating experience (IOE) program to become A320 First Officers with AirAsia;

-     Signed a contract with the Kingdom of Saudi Arabia to deliver a CAE Flightscape flight recorder and analysis laboratory;

-     Extended our training service agreement with Brussels Airlines through calendar 2012 on an exclusive basis for AVRO, A320, A330 and B737-300 simulator training;

-     Awarded by the Federal Aviation Administration (FAA) a Multiple Award for General Aviation and Business Aircraft Pilot Training for five years;

-     Signed LAN Airlines to a ten-year contract renewal for B767 training at our Santiago training centre;

-     Signed training service contracts or extensions with existing customers at Emirates-CAE Flight Training (ECFT) in Dubai. Clients include AMAC Aerospace, Falcon Aviation Services, Jet Aviation, Kingfisher Airlines, MSC Aviation and Transaero Airlines;

-     Signed a ten-year agreement with Air Transat to provide dry lease training for its A310 and A330 fleet at our Montreal training centre;

-     Signed a contract to provide wet initial training to 28 CRJ200 crews from Volga Avia Express at our Madrid training centre;

-     Signed contracts with Air Astana, Wind Rose Aviation Company and Avianca.

Simulation Products/Civil won $254.6 million of orders including a total of 20 full-flight simulators (FFSs)

CAE 5000 Series A320 FFSs

-    Two to Bahrain Mumtalakat Holding Company (Mumtalakat).

CAE 7000 Series ARJ21-700 FFSs

-    Two to COMAC Shanghai Customer Service Co. Ltd.

CAE 7000 Series ATR72-500 FFSs

-    One to Mount Cook Airlines;

-    One to Lion Air.

CAE 7000 Series Boeing 737-800 FFSs

-    One to Malaysian Airlines System;

-    One to Skymark Airlines.

CAE 7000 Series Boeing 737-900ER FFSs

-    Two to Lion Air.

Other

-    One CAE 5000 Series B737NG FFS to Kenya Airways;

-    One CAE 5000 Series Beech King B200 FFS to Lufttransport AS;

-    One CAE 5000 Series Cessna Citation CJ1 FFS to Korean Air;

-    One CAE 7000 Series A320 FFS to Shanghai Eastern Flight Training Company;

-    One CAE 7000 Series A330 FFS to Shanghai Eastern Flight Training Company;

-    One CAE 7000 Series A330/340 convertible FFS to Saudi Arabian Airlines;

-    One CAE 7000 Series Boeing 777-300ER FFS to Turkish Airlines;

-    One CAE 7000 Series Embraer 170/190 FFS to Mumtalakat;

-    One CSeries aircraft FFS to Bombardier;

-    One engineering development simulator to Bombardier.

During the third quarter, the segment also received a cancellation of a simulator order from a prior year.

Simulation Products/Military won $545.7 million of orders for new training systems and upgrades

-     One CH-147F training suite to Canada’s Department of National Defence (DND) under the Operational Training Systems Provider (OTSP) program in support of Canada’s new fleet of 15 CH-147F Chinook medium-to-heavy lift helicopters;

-     A comprehensive academic training system for the C-130 and KDC-10 aircraft, which includes a CAE Simfinity^TM virtual simulator (VSIM) and multimedia courseware, to the Royal Netherlands Air Force;

-    Major upgrade on one CH-47 FMS used by the Royal Netherlands Air Force;

-    Major product enhancements to the CAE GESI command and staff training system for the German Army;

-    Upgrade on one Tornado simulator used by the German Air Force;

-     Major upgrades on two CAE-built CH-53 full-mission simulators (FMSs) operated at the German Army Aviation school in Bückeburg;

-    Ground-based tactical mission trainers to Lockheed Martin to be used by the U.K. military;

-     A330 Multi-Role Tanker Transport part-task trainers and integrated procedures trainers to be used by the United Arab Emirates (UAE) and the Royal Saudi Air Force (RSAF);

-     One HC/MC-130J FMS for the U.S. Air Force Special Operations Command;

-     One C-130H FMS, avionics part-task trainer, computer-based training and instructional courseware, brief/debrief stations and a training management information system to an undisclosed customer;

-     Major upgrades on two CH-47 FMSs used by the U.K. Royal Air Force;

-     Major upgrades on two MH-60S operational flight trainers used by the U.S. Navy.

Training & Services/Military awarded contracts for more than $423.0 million

-     A 20-year in-service support contract for the CH-147F aircrew training program to Canada’s DND under the OTSP program;

-     Continued to provide training support services as part of the U.S. Air Force’s C-130J Maintenance and Aircrew Training System program and C-130E/H Aircrew Training System program;

-     Continued development and services as part of the Synthetic Environment Core (SE Core) program;

-     A nine-year training services contract with the Royal Netherlands Air Force to train its Chinook aircrews at our Medium Support Helicopter Aircrew Training Facility (MSHATF) in the U.K.;

-     Simulator maintenance and support services to the German Ministry of Defence on various types of simulators for the German Army and Air Force;

-     A one-year contract to continue to provide avionics software upgrades, integrated logistics support and data management services for the Canadian Forces’ CF-18 aircraft;

-     A three-year contract with the Royal Netherlands Navy to provide Lynx simulator maintenance and technical logistics support;

-     C-130H training services for a Middle East customer;

-     An amendment to our existing PFI training contract with the United Kingdom Royal Air Force to provide training on two
CH-47 Chinook simulators to be upgraded at our U.K. training centre in Benson;

-     Increased management and support services for the Australian Defence Forces aircraft simulators;

-     A multi-year C-130H pilot training contract to an undisclosed customer.

ACQUISITIONS AND JOINT VENTURES

-     We acquired Bell Aliant’s Defence, Security and Aerospace (DSA) business unit through an asset purchase agreement in the first quarter of fiscal 2010. DSA supplies real-time software and systems for simulation training defence and integrated lifecycle information management for the aerospace and defence industries;

-     We acquired Seaweed Systems Inc. (Seaweed) during the second quarter of fiscal 2010. Seaweed has embedded graphics solutions for the military and aerospace market, with experience in the development of safety critical graphic drivers;

-     We acquired ICCU Imaging Inc. (ICCU) during the third quarter of fiscal 2010. ICCU specializes in developing multimedia educative material and offering educational solutions to help medical providers perform a focused bedside ultrasound examination;

-     We acquired VIMEDIX Virtual Medical Imaging Training Systems Inc. (VIMEDIX) during the fourth quarter of fiscal 2010. VIMEDIX specializes in developing virtual reality animated transthoracic echocardiograph simulators and advanced echographic simulation training;

-     We acquired part of Immersion Corporation’s (Immersion) medical simulation business unit through an asset purchase agreement during the fourth quarter of fiscal 2010. Immersion’s medical line of business designs, manufactures, and markets computer-based virtual reality simulation training systems with realistic touch feedback that allows clinicians and students to practice and improve minimally invasive surgical skills in an environment that poses no risk to patients;

-     We entered into two joint ventures during fiscal 2010: Rotorsim S.r.l (50% participation) and Embraer CAE Training Services (U.K.) Limited (49% participation);

-     Following the end of fiscal 2010, we announced the acquisition of The Datamine Group (Datamine). Datamine is a supplier of mining optimization software tools and services.

OTHER

-     Effective April 1, 2009, we adopted CICA Handbook Section 3064, Goodwill and Intangible Assets. Since adopting the new standard, we expense our pre-operating costs as they are incurred. We have retroactively restated comparative prior period information. You will find more details in Change in accounting standards;

-     On May 14, 2009, we introduced actions required to size our company to current and expected market conditions. The plan has now been completed. You will find more details in Restructuring;

-     On June 8, 2009, we announced that we issued senior notes for $15.0 million and US$105.0 million by way of a private placement;

-     On June 21, 2009, we, in collaboration with the Québec government, announced an investment of up to $274.0 million in a new research and development (R&D) program extending up to seven years to leverage our modelling, simulation and training services expertise into our new core markets of healthcare, mining and energy;

-     On July 24, 2009, we, the Solidarity Fund QFL and Société générale de financement du Québec (SGF) announced the creation of a limited partnership to provide qualifying customers competitive lease financing for our civil flight simulation equipment manufactured in Québec and exported around the world;

-     Effective October 1, 2009, our former Executive Vice President and Chief Operating Officer, Marc Parent, succeeded
Robert E. Brown as our President and CEO;

-     On April 6, 2010, we announced that we finalized an agreement to refinance our existing credit facility due to expire in July 2010. The new agreement is a committed three-year revolving credit facility of US$450.0 million with an option to increase to a total amount of up to US$650.0 million.

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 2010 mean the fiscal year ending March 31, 2010;

-    Last year, prior year and a year ago mean the fiscal year ended March 31, 2009;

-    Dollar amounts are in Canadian dollars.

This report was prepared as of May 13, 2010, and includes our management’s discussion and analysis (MD&A) for the year and the three-month period ended March 31, 2010 and the consolidated financial statements and notes for the year ended March 31, 2010. We have written it to help you understand our business, performance and financial condition for fiscal 2010. Except as otherwise indicated, all financial information has been reported in accordance with Canadian generally accepted accounting principles (GAAP). 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 this annual report for the year ended March 31, 2010. The MD&A provides you with a view of CAE as seen through the eyes of management and helps you understand the company from a variety of perspectives:

-    Our vision;

-    Our strategy and value proposition;

-    Our capability to execute strategy and deliver results;

-    Our operations;

-    Foreign exchange;

-    Non-GAAP and other financial measures;

-    Consolidated results;

-    Acquisitions, business combinations and divestitures;

-    Business risk and uncertainty;

-    Controls and procedures;

-    Oversight role of the Audit Committee and Board of Directors.

You will find our most recent annual report and annual information form (AIF) on our website at www.cae.com, on SEDAR at www.sedar.com or on EDGAR at www.sec.gov.

ABOUT MATERIAL INFORMATION

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

-    It results in, or would reasonably be expected to result in, a significant change in the market price or value of our shares, or;

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

ABOUT FORWARD-LOOKING STATEMENTS

This report includes forward-looking statements about our activities, events and developments that we expect or anticipate may occur in the future including, for example, statements about our business outlook, assessment of market conditions, strategies, future plans, future sales, pricing for our major products and capital spending. Forward-looking statements normally contain words like believe, expect, anticipate, intend, continue, estimate, may, will, should and similar expressions. Such statements are not guarantees of future performance. They 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 appropriate in the circumstances.

We have based these statements on estimates and assumptions that we believed were reasonable when the statements were prepared. Our actual results could be substantially different because of the risks and uncertainties associated with our business. Important risks that could cause such differences include, but are not limited to, the length of sales cycle, rapid product evolution, level of defence spending, condition of the civil aviation industry, competition, availability of critical inputs, foreign exchange rate occurrences and doing business in foreign countries. Additionally, differences could arise because of events that are announced or completed after the date of this report, including mergers, acquisitions, other business combinations and divestitures. You will find more information about the risks and uncertainties affecting our business in Business risk and uncertainty in the MD&A.

We do not update or revise forward-looking information even if new information becomes available unless legislation requires us to do so. You should not place undue reliance on forward-looking statements.

3.     ABOUT CAE

3.1      Who we are

CAE is a world leader in providing simulation and modelling technologies and integrated training services primarily to the civil aviation industry and defence forces around the globe.

We design, develop, manufacture and supply simulation tools and equipment and provide a wide range of training and other modelling and simulation-based services. This includes integrated modelling, simulation and training solutions for commercial airlines, business aircraft operators, aircraft manufacturers and military organizations. We are launching some of these solutions for healthcare education and service providers and the mining industry. We also operate a global network of training centres serving pilots and maintenance staff.

Our main products include full-flight simulators (FFSs), which replicate aircraft performance in a full array of situations and environmental conditions. Sophisticated visual systems simulate hundreds of airports around the world, as well as a wide range of landing areas and flying environments. These work with motion and sound to create a realistic training environment for pilots and crews at all levels.

Founded in 1947 and headquartered in Montreal, Canada, CAE has built an excellent reputation and long-standing customer relationships based on more than 60 years of experience, strong technical capabilities, a highly trained workforce and global reach. CAE employs more than 7,000 people at more than 100 sites and training locations in more than 20 countries. Revenue from worldwide exports and international activities accounted for 90% of CAE’s total revenue in 2010.

CAE’s common shares are listed on the Toronto Stock Exchange and the New York Stock Exchange, under the symbol CAE.

3.2      Our vision

Our vision is for CAE to be synonymous with safety, efficiency and mission readiness. We intend to be the partner of choice for customers operating in complex mission-critical environments by providing the most accessible and most innovative modelling and simulation-based solutions to enhance safety, improve efficiency, and help solve challenging problems.

3.3      Our strategy and value proposition

Our strategy

We are a world-leading provider of modelling and simulation-based training and decision support solutions. We currently serve customers in two primary markets: civil aerospace and defence. We have begun to extend our capabilities into new markets of simulation-based training and optimization solutions in healthcare, mining and energy.

A key tenet of our strategy in our core civil aerospace and defence markets is to derive an increasing proportion of our business from the existing fleet. This would include providing solutions for customers in support of the global fleet of civilian and military aircraft. Historically, the primary driver of our business was the delivery of new commercial aircraft. Over the past few years, we have engaged in a strategy to diversify our revenue base away from the volatility of new commercial aircraft deliveries. Our SP/C segment, which in fiscal 2010 represented approximately 19% of our consolidated revenue, is most dependent on this market driver. The balance of our business involves mainly more stable and recurring sources of revenue like training and services as well as military simulation products and services.

In addition to diversifying our interests between customer markets, our strategy has also involved more balance between products, which tend to be more short-term and cyclical, and services, which tend to be more long term and stable. As well, we continue to diversify our interests globally. This is intended to bring our solutions closer to our customers’ home bases, which we think is a distinct competitive advantage. This also allows us to be less dependent on any one market and since business conditions are rarely identical in all regions of the world, we believe this provides a degree of stability to our performance. We are investing in both the mature and emerging markets to capitalize on current and future growth opportunities. Approximately one third of our revenue comes from the U.S., one third from Europe and one third from the rest of the world. We consider the maintenance of our sound capital structure a priority. We continue to execute our growth strategy by selectively investing to meet the long-term needs of our aerospace and defence customers and to seed our initiatives in our new core markets.

Value proposition

The value we provide customers is the ability to enhance the safety of their operations, improve their mission readiness for potentially dangerous situations and lower their costs by helping them become more operationally efficient. We offer a complete range of products and services that can be arranged in a customized package to suit our customers’ needs and can be adapted as their needs evolve over the lifecycle of their operations. We offer the broadest global reach of any of our competitors. As a result, we are able to provide solutions in proximity to our customers, which is an important cost-benefit consideration for them.

Our core competencies and competitive advantages include:

-    World-leading modelling and simulation technology;

-     Comprehensive knowledge of training and learning methodologies for the operation of complex systems using modeling and simulation;

-    Total array of training products and services solutions;

-    Broad-reaching customer intimacy;

-    Extensive global coverage;

-    High-brand equity;

-    Proven systems engineering and program management processes;

-    Best-in-class customer support;

-    Well established in new and emerging markets.

World-leading modelling and simulation technology

We pride ourselves on our technological leadership. Pilots around the world view our simulation as the closest thing to the true experience of flight. We have consistently led the evolution of flight training and simulation systems technology with a number of industry firsts. We have simulated the entire range of large civil aircraft, a large number of the leading regional and business aircraft and a number of civil helicopters. We are an industry leader in providing simulation and training solutions for fixed-wing transport aircraft, maritime patrol aircraft and helicopter platforms for the military. We also have extensive knowledge, experience and credibility in designing and developing simulators for prototype aircraft of major aircraft manufacturers. We are now applying this capability to new markets, such as healthcare and mining.

Comprehensive knowledge of training and learning methodologies for the operation of complex systems using modelling and simulation

We revolutionized the way aviation training is performed when we introduced our CAE Simfinity^TM-based training solutions
and courseware. These training devices effectively bring the virtual aircraft cockpit into the classroom at the earliest stages of ground school training, making it a more effective and efficient training experience overall. We build upon the CAE Simfinity^TM product line to develop the trainers that are used in the Airbus pilot and maintenance technician training programs. We also developed e-Learning solutions to enable pilots and technicians to train anytime and anywhere.

Total array of training products and services solutions

We have the broadest and most comprehensive range of aviation training products and services in the industry, and thus we are the best positioned to tailor solutions to meet the specific needs of individual operators. Our portfolio of training solutions is more operationally oriented and scenario based to ensure aviation professionals receive the most practical training possible for the situations they may face. Our approach is to first understand an operator’s needs and objectives, and then to propose an optimal solution that is made up of various elements of our product and service portfolio.

Broad-reaching customer intimacy

We have been in business for more than 60 years and have relationships with many of the world’s airlines and the governments of approximately 50 different national defence forces, including all branches of the U.S. forces. Our customer advisory boards and technical advisory boards involve airlines and operators worldwide. By listening carefully to customers, we are able to gain a deep understanding of their needs and respond with innovative product and service offerings that help improve the safety and efficiency of their operations.

Extensive global coverage

We have operations and offer training and support services in more than 20 countries on five continents and sell into many more countries. Our broad geographic coverage allows us to respond quickly and cost effectively to customer needs and new business opportunities while respecting the regulations and customs of the local market. We operate a fleet of more than 160 full-flight and
full-mission simulators in 29 civil and military training centres to meet the wide range of operational requirements of our customers. Our fleet includes simulators for various types of aircraft from major manufacturers, including commercial jets, business jets and helicopters, both civil and military.

High-brand equity

Our simulators are typically rated among the highest in the industry for reliability and availability. This is a key benefit because simulators normally operate in high-duty cycles of up to 20 hours a day.

We design our products so customers can upgrade them, giving them more flexibility and opportunity as products change or new
air-worthiness regulations are introduced.

As we enter new markets like healthcare and mining, we find that the CAE brand is widely regarded as the benchmark for modelling and simulation-based technology and for training services.

Proven systems engineering and program management processes

We continue to develop solutions and deliver technically complex programs within schedule to ensure that there are trained and mission-ready aircrew and combat troops around the world. This includes MH-60 simulators for the U.S. Navy, C-130J simulators for U.S. and Canadian Defence Forces, NH90 simulators for the Royal Australian Air Force, Royal Netherlands Navy and German Navy,  the maritime P-3C operational flight and tactics trainers for the German Navy and the M-346 jet trainer simulator for the Italian Air Force. These and other programs combined with our continued investment in R&D continue to strengthen our technological leadership and strengthen our management expertise to deliver complex programs that feature sensor simulation for maritime operations, synthetic tactical environments for naval and fighter operations as well as our visualization and common database technologies that deliver rich, immersive synthetic environments for the most effective training possible.

Best-in-class customer support

We maintain a strong focus on after-sales support, which is often critical in winning additional sales contracts as well as important update and maintenance services business. Our customer support practices, including a web-based customer portal, performance dashboard, and automated report cards, have resulted in enhanced customer support according to customer comments and feedback.

Well established in new and emerging markets

Our approach to global markets is to model ourselves as a multi-domestic rather than a foreign company. This has enabled us to be a first mover into growth markets like China, India, the Middle East, South America and Southeast Asia.

3.4      Our capability to execute strategy and deliver results

Our resources and processes help ensure that we can carry out our strategy and deliver results. We have three other attributes that are critical to our success:

Our financial position

At March 31, 2010, our net debt was $179.8 million, representing an adjusted net debt to capital ratio of 23% (including the present value of operating leases). With cash we are able to generate from operations, our strong balance sheet and available credit, we have adequate funding in place or available to sustain our current development projects. See Section 7, Consolidated financial position, for a more detailed discussion. As at March 31, 2010, we are in compliance with our financial covenants.

A skilled workforce and experienced management team

At the end of fiscal 2010, we had more than 7,000 employees. The skills of our workforce have a significant impact on the efficiency and effectiveness of our operations. While competition for well-trained and skilled employees is high, we have been successful at attracting and retaining people because of our quality reputation as an industry leader, our commitment to providing an engaging and challenging work environment and by offering competitive compensation.

We also have an experienced management team with a proven track record in the aerospace industry. Strong leadership and governance are critical to the successful implementation of our corporate strategy. We are focusing on leadership development of key executives and members of senior management.

Proven ability to adapt to changing market conditions

We have restructured our business during fiscal 2010. We have institutionalized a culture of continuous improvement and cost reduction. Despite major headwinds like the surging Canadian dollar this past year, we managed to maintain profitability and enhance our market position. We continue to focus on becoming more efficient by lowering costs without affecting the quality of our products and services.

3.5      Our operations

We primarily serve two markets globally:

-     The civil market includes aircraft manufacturers, major commercial airlines, regional airlines, business aircraft operators, helicopter operators, training centres, pilot provisioning and flight training organizations;

-    The military market includes original equipment manufacturers (OEMs), government agencies and defence forces worldwide.

We manage our operations and report our results in four segments, one for products and one for services, for each market. Each segment is a significant contributor to our overall results.

CIVIL MARKET

Training & Services/Civil (TS/C)

Provides business and commercial aviation training for flight and ground personnel and associated services

Our TS/C business is the largest provider of commercial aviation training services in the world and the second largest provider of business aviation training services. CAE has the broadest global network of training centres and we serve all sectors of the civil aviation market including general aviation, regional airlines, commercial airlines and business aviation. We offer a full range of services, including training centre operations, pilot training, aircraft technician training services, simulator spare parts inventory management, curriculum development, consulting services and e-Learning solutions. We are a leader in flight sciences, using flight data analysis to enable the effective study and understanding of recorded flight data to improve airline safety, maintenance and flight operations. As well, we are offering airlines a long-term solution to pilot recruitment with our pilot provisioning capability. We achieved our leading position through acquisitions, joint ventures and organic investments in new facilities. We currently have 148 FFSs in operation and we provide aviation training and services in more than 20 countries around the world, including aviation training centres, flight training organizations (FTOs) and third-party locations. We make selective investments to add new revenue simulator equivalent units (RSEUs) to our network to maintain our position, increase our market share, and address new market opportunities. We are developing our training network primarily to meet the long-term, steady stream of recurring training needs from the existing fleet, so that we continue to become less dependent on new aircraft deliveries to drive revenue.

Simulation Products/Civil (SP/C)

Designs, manufactures and supplies civil flight simulation, training devices and visual systems

Our SP/C segment is a world leader in the provision of civil flight simulation equipment. We design and manufacture more civil FFSs and visual systems for major and regional carriers, third-party training centres and OEMs than any other company. We have a wealth of experience in developing simulators for new types of aircraft, including over 20 models and, more recently, the Bombardier CSeries and Global Express, Boeing 747-8 and 787, Airbus A380, Embraer Phenom 100/300, Dassault Falcon 7X and the Commercial Aircraft Corporation of China, Ltd (COMAC) ARJ21. We also offer a full range of support services including simulator updates, maintenance services, sales of spare parts and simulator relocations.

Market trends and outlook

Demand for commercial air transportation decreased over the past year in light of the global economic recession. Air carriers adjusted by reducing flight capacity, most notably in North America and Europe. So far, these conditions have resulted in a moderate decrease in the global active fleet of commercial aircraft, which is one of the key drivers for our training business. As well, we have seen a high proportion of existing business jets put up for sale, which compete with the supply of new aircraft. This has also meant fewer flight cycles and flight crews and consequently less demand for training.

A portion of our training services’ revenue comes from recurrent training that is essential to support the existing global in-service aircraft fleet, which totals approximately 40,000 aircraft. While the recurrent training segment is relatively more stable, capacity reduction from airlines and business jet operators has impacted training demand on several platforms. Specifically, we have seen lower training activity commensurate with airline capacity reductions and some reductions in aircraft deliveries in business aviation, resulting in lower capacity utilization and pricing pressure in general. As well, pilot movements within and between airlines have been lower, resulting in less training demand. Our training business, to a certain extent, also relies on new aircraft deliveries. In business aviation, a number of aerospace companies have said they expect business jet deliveries to bottom out in calendar 2010 and gradually recover thereafter.

More recently, we have seen demand for air travel and air cargo show signs that market conditions are recovering. We expect demand for air transportation to resume its long-term growth trajectory as conditions improve. Despite recent market setbacks, newly revised forecasts from major aircraft OEMs still point to an approximate doubling of the global aircraft fleet over the next two decades. These assumptions continue to support our underlying strategy as a global provider of aviation training services.

In the SP/C segment, new simulation product orders were lower this year as a result of airline capital constraints and lower aircraft capacity flown in Western markets. We were successful in maintaining our leadership position with 20 sales during
fiscal 2010, representing a competed market share of more than 70%. During the last year in the market down-cycle, we experienced acute pricing pressure for the sale of simulation products as a result of CAE and our competitors pursuing fewer market opportunities. These factors, combined with a strong Canadian dollar, have resulted in lower margins on orders booked this year in our SP/C segment backlog. Our SP/C segment normally lags the civil aerospace cycle by approximately 12 months. We expect market conditions to gradually improve and to eventually be reflected in our performance as we make our way through an SP/C backlog that represents the brunt of the down-cycle.

We believe that over the medium-to-long term, the aerospace business, and more specifically the training products and services segments, will continue to experience growth. Recognizing that this is a dynamic market, we continue to monitor key economic and market factors that could impact our business and potentially change our outlook. Actual and potential changes in production rates and aircraft order cancellations by the major OEMs are important determinants in the level of demand for some of our products and solutions. 

The impact of the global economic recession is most acute in mature markets like the U.S. and Europe. Economic growth in emerging markets has slowed somewhat from its previous robust pace. However, on a percentage basis, economic growth in these regions continues to outpace the typical growth rate in mature markets. We anticipate positive world GDP growth in the current 2010 calendar year.

The following trends support our positive medium-to-long-term view for the civil market:

-    Aircraft backlogs;

-    New and more fuel-efficient aircraft platforms;

-    Demand in emerging markets arising from secular growth and a need for infrastructure to support air travel;

-    Expected long-term growth in air travel;

-    Long-term demand for trained crew members;

-    New international requirements for the qualification of flight simulation training devices (FSTDs).

Aircraft backlogs

In calendar 2009, Boeing received a total of 142 net orders (firm orders less cancellations) for new aircraft and Airbus received a total of 271 net orders. For the three-month period ending March 31, 2010, net aircraft orders for Boeing and Airbus were 83 and 60, respectively. While the pace of order activity has slowed dramatically in calendar 2009, Boeing and Airbus continue to work through lower but still strong backlog levels and this should help generate opportunities for our full portfolio of training products and services. In calendar 2009, Boeing reported a total of 481 commercial airplane deliveries, while Airbus reported 498 deliveries for the same period. For the three-month period ending March 31, 2010, Boeing reported 108 deliveries, while Airbus reported 122 deliveries.

Recently Boeing and Airbus have announced production rate increases for both wide-body and narrow-body aircraft. The increases will take some time to implement and should ultimately translate into higher demand for training products and services.

In the business jet segment, aircraft order deferrals and cancellations have led a number of business aircraft manufacturers to lower their production rates.

New and more fuel-efficient aircraft platforms

OEMs have announced plans to introduce, or have already introduced, new platforms that will drive worldwide demand for simulators and training services. The Boeing 747-8 and 787, Airbus A350XWB, Embraer 190, Dassault Falcon 7X, Embraer Phenom 100 VLJ and 300 LJ aircraft, Mitsubishi Regional Jet, COMAC ARJ21 and the Bombardier CSeries are some recent examples.

New platforms will drive the demand for new kinds of simulators and training programs. One of our strategic priorities is to partner with manufacturers to strengthen relationships and position ourselves for future opportunities. For example, during fiscal 2010, we signed contracts with Bombardier to use our modelling and simulation expertise to support the design, development and validation of the new CSeries aircraft, and we will also develop the prototype CSeries FFS. We also have a joint venture with Embraer that is providing comprehensive training for the new Phenom 100 VLJ and will provide training for the Phenom 300 LJ aircraft. Deliveries of new model aircraft are susceptible to program launch delays, which in turn will affect the timing of our orders and deliveries.

Demand in emerging markets arising from secular growth and a need for infrastructure to support air travel

Emerging markets such as Southeast Asia, the Indian sub-continent and the Middle East are expected to experience higher air traffic and economic growth over the long term than mature markets, as well as an increasing liberalization of air policy and bilateral air agreements. We expect these markets to drive the long-term demand for FFSs and training centres.

Expected long-term growth in air travel

Passenger traffic declined 3.5% in calendar 2009 compared to 2008. We anticipate that passenger traffic will resume its growth in the long term. There have been signs in recent months that passenger traffic as well as cargo traffic are recovering. In the first quarter of calendar 2010, passenger traffic increased 8.6% compared to the first quarter of calendar 2009. Over the past 20 years, air travel grew at an average of 4.8% and we expect that over the next 20 years both passenger and cargo travel will meet or slightly exceed this growth. Possible impediments to the steady growth progression in air travel include major disruptions like regional political instability, acts of terrorism, pandemics, natural disasters, a sharp and sustained increase in fuel costs, major prolonged economic recessions or other major world events.

Long-term demand for trained crew members

Worldwide demand is expected to increase over the long term

Growth in the civil aviation market has driven the demand for pilots, maintenance technicians and flight attendants worldwide, which has created a shortage of qualified crew members in some markets. The shortage is impacted by aging demographics, fewer military pilots transferring to civil airlines, and low enrolment in technical schools. In emerging markets like India and China,
long-term air traffic growth is expected to outpace the growth expected in developed countries, and the infrastructure available to meet the projected demand for crew members is lacking.

This shortage creates opportunities for pilot provisioning, our turnkey service that includes recruiting, screening, selection and training. It is also prompting us to seek out partners to develop a global pipeline for developing and supplying pilots to meet market demand.

A global shortage of maintenance technicians has created an opportunity for us to accelerate our technical training solutions. This trend is, to a lesser degree, also affecting cabin crew, for whom we are also exploring new training solutions.

New pilot certification process requires simulation-based training

Simulation-based pilot certification training will begin taking on an even greater role with the Multi-crew Pilot License (MPL) certification process developed by the International Civil Aviation Organization (ICAO) which may be adopted in the near future by individual national regulatory bodies. The MPL process places more emphasis on simulation-based training to develop ab initio students into first officers for modern aircraft. In the fourth quarter of fiscal 2010, we launched an MPL beta program with AirAsia using new performance-based requirements developed by Transport Canada. If the MPL process is adopted in emerging markets like China, India and Southeast Asia where there is the greatest need for a large supply of qualified pilots, trained in an efficient and effective manner, it would result in increased use of simulation-based training.

New international requirements for the qualification of flight simulation training devices

During the summer of 2009, the International Civil Aviation Organization (ICAO) published a strategic analysis intended to define flight simulation requirements for the qualification of the new seven ICAO standard FSTDs in the 190 ICAO member States. The ICAO document was drafted by members of the international regulatory community, pilot representative bodies, airlines, and the training and flight simulation industry. The ICAO group conducted a fundamental review to establish the simulation fidelity levels required to support each of the required training tasks for each type of pilot license, qualification, rating or training type. The resulting conclusions have already started to become the basis of reference for all national and international standards for a complete range of seven FSTDs.

The ICAO document states that the top-fidelity ICAO Standard FSTD (Type VII) is required to support each of the required training tasks contained in a number of crucial training to proficiency contexts including recurrent and initial training, MPL and the Airline Transport Pilot License. It also confirms and recognizes the long-term necessity of high-fidelity FSTDs for such highly critical training contexts. The qualification requirements of the ICAO Type VII simulator require a higher fidelity of simulation (including visuals, motion, sound and air traffic control simulation) than today’s level D simulator requirements and we believe the increased demands for more realistic and more immersive training aligns well with our strengths in aviation training as a global modelling and simulation technology leader.

MILITARY MARKET

We generate revenue in six interrelated areas of the defence market value chain. We provide simulation products such as full-mission simulators (FMS); we perform updates and upgrades to simulators; we provide maintenance and support services; we offer turnkey training services; we have a range of capabilities to provide simulation-based professional services for analysis, training and operational decision-making; and we have a software business called Presagis, which develops and sells commercial-off-the-shelf modelling and simulation software solutions to mid-tier markets.

Our strategy in the defence market has been to globalize and diversify our military business. We have diversified our interests across a broad range of national markets and related defence budgets to have a more resilient and predictable stream of military business. We are a leading supplier of simulation and training solutions and have a significant local presence in seven countries. Through the successful execution of our strategy, we see tangible positive results from our efforts.  Over the past two fiscal years (2009 and 2010), we have achieved record military order intake totalling over $2 billion. The strong and diverse base of business that we have developed, combined with the encouraging trends that we see in the global defence market, specifically related to our modelling and simulation niche, give us confidence that we can continue to grow for the foreseeable future.

We approach the world’s defence markets by leveraging our global footprint and our in-country expertise. We have a local presence and centres of excellence in key markets including the U.S., U.K., Canada, Germany, Australia, India and Singapore. We have developed global operating processes which allow us to place a high level of decision-making autonomy within the regions while leveraging the full breadth of our products, services and capabilities. This results in greater efficiency and stronger customer relationships.

Simulation Products/Military (SP/M)

Designs, manufactures and supplies advanced military training equipment and software tools for air forces, armies and navies

Our SP/M segment is a world leader in the design and production of military flight simulation equipment. We develop simulation equipment, training systems and software tools for a variety of military aircraft, including fast jets, helicopters, maritime patrol and tanker/transport aircraft. We also offer simulation-based solutions for land and naval forces. We have designed the broadest range of military helicopter simulators in the world, and we have also developed more training systems for the C-130 Hercules aircraft than any other company. Our military simulators provide high-fidelity combat environments that include interactive enemy and friendly forces, as well as simulated weapon and sensor systems. We have delivered simulation products and training systems to more than
50 military operators in approximately 35 countries, including all of the U.S. services.

Training & Services/Military (TS/M)

Supplies turnkey training services, support services, systems maintenance and modelling and simulation solutions

Our TS/M segment provides turnkey training services and training systems integration expertise to global military forces. We also provide a range of training support services such as contractor logistics support, maintenance services and simulator training at over 60 sites around the world. TS/M additionally provides a variety of modelling and simulation-based professional and defence services.

Market trends and outlook

As a result of successful deliveries on prior programs, we are well positioned on a range of military platforms involving transport aircraft, aerial refuelling tankers, helicopters, lead-in fighter trainers, and maritime patrol aircraft. These aircraft segments specifically include the C-130J Hercules transport aircraft, P-8A Poseidon and P-3C Orion maritime patrol aircraft, A330 Multi-Role Tanker Transport, NH90 helicopter, M-346 and Hawk lead-in fighter trainers, S-70 and H-60 helicopter variants, CH-47 Chinook heavy-lift helicopter, Unmanned Aerial Vehicles (UAVs) and other aircraft that form part of the backbone of defence forces globally. Our positive outlook is supported by the expectation that these aircraft types will continue to be in demand globally. These platforms involve newer aircraft types with long program lives ahead of them and we believe this will drive opportunities for us over the next decade. Our focus in these specific market segments is an important distinction for us as a defence contractor as we believe they are vital to the maintenance of a defence force’s operational capability and readiness. We believe that we have minimal exposure to platform types that may be viewed as more discretionary by the defence establishment and therefore more susceptible to defence spending constraints.

We anticipate ongoing rationalization of defence budgets globally and for overall spending to remain stable in some markets or modestly decrease in others such as the U.S., which is the world’s largest defence market. We believe, however, that defence spending in the areas involving our products and services will be stable or increase modestly as a result of:

-    Explicit desire of governments and defence forces to increase the use of modelling and simulation;

-    Growing demand for our specialized modelling and simulation-based products and services;

-    High cost of operating live assets for training which leads to more use of simulation;

-    Current nature of warfare which requires joint forces training and mission rehearsal.

We expect that approximately 10,000 new military manned aircraft will be deployed into global military fleets over the next five years and this will generate demand for approximately 300 FMSs. While we do not today address all platforms and all markets, we are able to serve a good portion of this expected demand.

Explicit desire of governments and defence forces to increase the use of modelling and simulation

Also helping to drive our military business is the explicit desire of governments and defence forces to increase the use of modelling and simulation for analysis, training, and operational decision-making. Unlike commercial aerospace where the use of simulation is widely proliferated, the use of simulation in defence has to date been more limited. For example, the Australian government issued a Defence White Paper in 2009 specifically calling for increased use of modelling and simulation to relieve bottlenecks in training. This echoes the sentiments expressed by other militaries globally, especially those expressed by the U.S. defence community. Simulation offers a number of advantages that address an ever-increasing global threat level and new economic constraints that are pressuring top-line defence spending. The cost savings from the use of modelling and simulation are considerable. The U.S. Air Force estimates that live training is approximately 10 times more costly than simulation-based training. The cost of fuel, detrimental environmental impacts, and significant wear and tear on weapon systems all point to the greater use of simulation and synthetic training. This type of training is critical for ensuring the readiness of global defence forces as they face new and challenging threats.

Growing demand for our specialized modelling and simulation-based products and services

New aircraft platforms

One of our strategic priorities is to partner with manufacturers in the military market to strengthen relationships and position ourselves for future opportunities. Original equipment manufacturers are introducing new platforms that will drive worldwide demand for simulators and training. For example, Boeing is developing a new maritime patrol aircraft called the P-8A Poseidon, NH Industries is delivering the NH90 helicopter, EADS is aggressively marketing the A330 MRTT and C-295 transport aircraft worldwide,
Lockheed Martin is doubling production of the C-130 aircraft, Alenia Aermacchi is successfully marketing the M-346 advanced lead-in fighter trainer and Sikorsky is offering new models of its H-60 helicopter to armies and navies worldwide, all of which fuel the demand for new simulators and training, and for all of which we have products at different development and production stages.

Trend towards outsourcing of training and maintenance services

With finite defence budgets and resources, defence forces and governments continue to scrutinize expenditures to find ways to save money and allow active-duty personnel to focus on operational requirements. There has been a growing trend among defence forces to outsource a variety of training services and we expect this trend to continue. Governments are outsourcing training services because they can be delivered more quickly and more cost effectively. For example, we have won or participated in contracts of this nature in Canada, Germany, Australia, the U.K. and the U.S.

Extension and upgrade of existing weapon system platforms

Original equipment manufacturers are extending the life of existing weapon system platforms by introducing upgrades or adding new features, which increases the demand for upgrading simulators to meet the new standards. For example, several OEMs are offering global militaries operating C-130 aircraft a suite of avionics upgrades, which in turn leads to a requirement for major upgrades to existing C-130 training systems or potential new C-130 training systems. We have recently expanded our C-130 Tampa Training Center with a new C-130H FMS featuring an upgraded glass cockpit avionics suite.

High cost of operating live assets for training which leads to more use of simulation

More defence forces and governments are adopting simulation in training programs because it improves realism, significantly lowers costs, reduces operational demands on aircraft that are being depreciated faster than originally planned, and lowers risk compared to operating actual weapon system platforms. Using a simulator for training also reduces actual aircraft flying hours and allows training for situations where an actual aircraft and/or its crew and passengers would be at risk.

Current nature of warfare which requires joint forces training and mission rehearsal

Demand for networking

Allies are cooperating and creating joint and coalition forces, which is driving the demand for joint and networked training and operations. Training devices can be networked to train different crews and allow for networked training across a range of platforms.

Growing acceptance of synthetic training for mission rehearsal

There is a growing trend among defence forces to use synthetic training to meet more of their training requirements. Synthetic environment software allows defence clients to plan sophisticated missions and carry out full-mission rehearsals as a complement to traditional live training or mission preparation. Synthetic training offers militaries a cost-effective way to provide realistic training for a wide variety of scenarios while ensuring they maintain a high state of readiness. For example, over the past years we have delivered
MH-47G and MH-60L combat mission simulators to the U.S. Army’s 160^th Special Operations Aviation Regiment that feature the
CAE-developed Common Environment/Common Database (CE/CDB). The CE/CDB promises to significantly enhance rapid
simulation-based mission rehearsal capabilities.

HEALTHCARE MARKET

The simulation-based aviation training model is becoming universally recognized as one of the effective ways to prepare healthcare professionals to care for patients and respond to critical situations while reducing the overall risk to patients. Through partnerships with experts in the healthcare field, we are leveraging our knowledge, experience and best practices in simulation-based aviation training to work with healthcare experts to deliver innovative education, technologies and service solutions to improve the safety and efficiency of the healthcare industry. Currently, our healthcare services range from providing simulation-based training solutions to managing simulation-based training centres.

During the year, CAE Healthcare further developed its capabilities in two areas: training centre solutions and medical solutions. We leveraged our broad expertise in managing aviation simulation centres to expand our offering for healthcare simulation centres, including training centre management services and training solutions, as well as the launch of the CAE OWL^TM system. The
CAE OWL^TM system is used for optimizing the way training is conducted. In the area of medical solutions, we entered the imaging and surgical training fields; both of which are important focus areas for us and where CAE Healthcare can leverage CAE’s core simulation and modeling capabilities. The acquisitions of ICCU and VIMEDIX give us the ability to offer a complete solution for bedside ultrasound training by combining simulators with a comprehensive curriculum. The acquisition of three medical product lines from Immersion enables our entry into the training field for minimally invasive surgical procedures.

We estimate that the total global market for simulation-based healthcare training will be in excess of $1.5 billion by 2012. Although the market potential in this area is large, as our initiative is still in its infancy stage, the results are not yet material for CAE.

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 GAAP.

The tables below show the variations of the closing and average exchange rates for our three main operating currencies. We used the foreign exchange rates below to value our assets, liabilities and backlog in Canadian dollars at the end of each of the following periods:

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

The effect of translating the results of our self-sustaining subsidiaries into Canadian dollars resulted in a decrease in this year’s earnings from continuing operations (after tax) by approximately $4.0 million compared to fiscal 2009.

Three areas of our business are affected by changes in foreign exchange rates: 

-    Our network of civil and military training centres

Most of our training network revenue and costs are in local currencies. Changes in the value of local currencies relative to the Canadian dollar therefore have an impact on the network’s net profitability and net investment. Under GAAP, gains or losses in the net investment in a self-sustaining subsidiary that result from changes in foreign exchange rates are deferred in the foreign currency translation adjustment (accumulated other comprehensive loss), which is part of the shareholders’ equity section of the balance sheet. Any effect of the fluctuation between currencies on the net profitability has an immediate translation impact on the statement of earnings and an impact on year-to-year and quarter-to-quarter comparisons.

-    Our simulation products operations outside of Canada (Germany, U.S., U.K., Australia and India)

Most of the revenue and costs in these operations from self-sustaining subsidiaries are generated in their local currency except for some data and equipment bought in different currencies from time to time as well as any work performed by our Canadian manufacturing operations. Changes in the value of the local currency relative to the Canadian dollar therefore have a translation impact on the operation’s net profitability and net investment when expressed in Canadian dollars.

-    Our simulation products operations in Canada

Although the net assets of our Canadian operations are not exposed to changes in the value of foreign currencies (except for receivables and payables in foreign currencies), a significant portion of our annual revenue generated from Canada is in foreign currencies, while a significant portion of our expenses are in Canadian dollars.

We generally hedge the milestone payments in sales contracts denominated in foreign currencies to protect ourselves from some of the foreign exchange exposure. Since less than 100% of our revenue is hedged, it is not possible to completely offset the effects of changing foreign currency values, which leaves some residual exposure that can affect the statement of earnings.

We continue to hold a portfolio of currency hedging positions intended to mitigate the risk to a portion of future revenues presented by the current high-level volatility of the Canadian dollar versus the U.S. currency. The hedges are intended to cover a portion of the revenue in order to allow the unhedged portion to match the foreign cost component of the contract. With respect to the remaining expected future revenues, our manufacturing operations in Canada remain exposed to changes in the value of the Canadian dollar.

To reduce the variability of specific U.S. and euro-denominated manufacturing costs, we hedged the foreign currency costs incurred in our manufacturing process.

Sensitivity analysis

We conducted a sensitivity analysis to determine the current impact of variations in the value of foreign currencies. We evaluated the sources of foreign currency revenues and expenses and determined that our consolidated exposure to foreign currency mainly occurs in two areas:

-     Foreign currency revenues and expenses in Canada for the manufacturing business – we hedge a portion of these exposures;

-     Translation of foreign currency operations of self-sustaining subsidiaries in foreign countries. Our exposure is mainly in our operating profits.

First we calculated the revenue and expenses per currency to determine the operating income in each currency. Then we deducted the amount of hedged revenues to determine a net exposure by currency. Next we added the net exposure from the self-sustaining subsidiaries to determine the consolidated foreign exchange exposure in different currencies.

Finally, we conducted a sensitivity analysis to determine the impact of a change of one cent in the Canadian dollar against each of the other four currencies. The table below shows the typical impact of this change, after taxes, on our yearly revenue and operating income, as well as our net exposure:

3.7      Non-GAAP and other financial measures

This MD&A includes non-GAAP and other financial measures. Non-GAAP measures are useful supplemental information but may not have a standardized meaning according to GAAP. You should not confuse this information with, or use it as an alternative for, performance measures calculated according to GAAP. You should also not use them to compare with similar measures from other companies.

Backlog

Backlog is a non-GAAP measure that represents the expected value of orders we have received but have not yet executed.

-     For the SP/C, SP/M and TS/M segments, we consider an item part of our backlog when we have a legally binding commercial agreement with a client that includes enough detail about each party’s obligations to form the basis for a contract or an order;

-     Military contracts are usually executed over a long-term period and some of them must be renewed each year. For the SP/M and TS/M segments, we only include a contract item in backlog when the customer has authorized the contract item and has received funding for it;

-     For the TS/C segment, we include revenues from customers with both long-term and short-term contracts when these customers commit to paying us training fees, or when we reasonably expect them from current customers.

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

Capital employed

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

Capital used:

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

-     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 its current portion and other non-operating liabilities).

Source of capital:

-    We add net debt to total shareholders’ equity to understand where our capital is coming from.

Maintenance and growth capital expenditure

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.

EBIT

Earnings before interest and taxes (EBIT) is a non-GAAP measure that shows us how we have performed before the effects of certain financing decisions and tax structures. We track EBIT because we believe it makes it easier to compare our performance with previous periods, and with companies and industries that do not have the same capital structure or tax laws.

Free cash flow

Free cash flow is a non-GAAP measure that shows us how much cash we have available to build the business, 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, other assets and dividends paid and adding proceeds from the sale of property, plant and equipment. Dividends are deducted in the calculation of free cash flow.

Gross margin

Gross margin is a non-GAAP measure equivalent to the segment operating income excluding selling, general and administrative expenses.

Net debt

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

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 or the current portion of assets held-for-sale) and subtracting current liabilities (not including the current portion of long-term debt or the current portion of liabilities related to assets held-for-sale).

Non-recourse financing

Non-recourse financing to CAE is a non-GAAP measure we use to classify debt, when recourse against the debt is limited to the assets, equity interest and undertaking of a subsidiary, and not CAE Inc.

Return on capital employed

Return on capital employed (ROCE) is a non-GAAP measure that we use to evaluate the profitability of our invested capital. We calculate this ratio over a rolling four-quarter period by taking earnings from continuing operations excluding interest expense, after tax, divided by the average capital employed. In addition, we also calculate this ratio adjusting earnings and capital employed to reflect the ordinary off-balance sheet operating leases.

Revenue simulator equivalent unit

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

Segment operating income

Segment operating income (SOI) is a non-GAAP measure and our key indicator of each segment’s financial performance. This measure gives us a good indication of the profitability of each segment because it does not include the impact of any items not specifically related to the segment’s performance. We calculate it by using earnings before other income (expense), interest, income taxes and discontinued operations. These items are presented in the reconciliation between total segment operating income and EBIT (See Note 27 of the consolidated financial statements).

4.     CONSOLIDATED RESULTS

All comparative prior period information of fiscal 2009 has been retroactively restated for a change in accounting standards, which affected our accounting treatment for pre-operating costs. You will find more details in change in accounting standards.

4.1      Results of our operations – fourth quarter of fiscal 2010

Summary of consolidated results

The fourth quarter of fiscal 2009 has been restated to reflect a change in the accounting treatment for pre-operating costs.

Revenue was 3% higher than last quarter and 10% lower year over year

Revenue was $13.0 million higher than last quarter mainly because:

-     TS/C’s revenue increased by $11.2 million, or 11%, mainly due to a change in our training revenue mix combined with an increase of flight training organizations’ (FTOs) activities. The increase was partially offset by the negative effect from the stronger Canadian dollar;

-     SP/M’s revenue increased by $8.9 million, or 6%, mainly due to an increase in volume this quarter, particularly from our Canadian programs. The increase was partially offset by a negative foreign exchange impact;

-     TS/M’s revenue increased by $1.0 million, or 1%, mainly as a result of a higher level of activity in our Professional Services business, partially offset by a negative foreign exchange impact;

-     SP/C’s revenue decreased by $8.1 million, or 11%, mainly due to lower production levels resulting from a decline in order intake.

Revenue was $42.9 million lower than the same period last year largely because:

-     SP/C’s revenue decreased by $42.8 million, or 40%, mainly due to lower production levels resulting from a decline in order intake;

-     TS/C’s revenue decreased by $7.8 million, or 6%, mainly due to the negative effect from the stronger Canadian dollar and to the market softness in Europe. The decrease was partially offset by the contribution of additional RSEUs to our network, by the increase of FTOs’ activities and by higher revenue generated in the emerging markets;

-     SP/M’s revenue increased by $5.7 million, or 4%, primarily due to the integration into our results of Bell Aliant’s former
Defence, Security and Aerospace (DSA) business unit, acquired in May 2009, in addition to an increase in volume, particularly from our Canadian programs. The increase was partially offset by a negative foreign exchange impact;

-     TS/M’s revenue increased by $2.0 million, or 3%, mainly due to a strong level of activity in our Professional Services business, combined with an increase in training services in Europe. The increase was partially offset by a negative foreign exchange impact.

You will find more details in Results by segment.

EBIT ¹ was $2.3 million higher than last quarter and $16.6 million lower year over year

EBIT for this quarter was $63.0 million, or 15.9% of revenue. EBIT was up $2.3 million, or 4%, compared to last quarter, and down $16.6 million, or 21%, year over year. A restructuring charge of $1.9 million was booked this quarter, compared to $3.9 million last quarter and nil in the fourth quarter of last year.

Compared to last quarter, segment operating income was up by $0.3 million. Increases of $3.6 million from TS/C and $2.4 million from SP/M were partially offset by decreases of $3.2 million and $2.5 million from TS/M and SP/C, respectively.

Year over year, segment operating income was down by 18%, or $14.7 million. SP/C, TS/C and SP/M experienced decreases in segment operating income of $9.6 million, $4.1 million and $1.0 million, respectively, while TS/M’s segment operating income remained stable.

You will find more details in Results by segment.

Net interest expense was $1.0 million lower than last quarter and $0.4 million higher year over year

Net interest expense was lower than last quarter mainly because of lower average foreign exchange rates and higher capitalized interest for assets under construction. The year-over-year increase on net interest expense was mainly because of an increase on long-term debt and other interests, partially offset by an increase in capitalized interests for assets under construction and lower average foreign exchange rates.

Effective income tax rate is 30% this quarter

Income taxes this quarter were $17.0 million, representing an effective tax rate of 30%, compared to 30% for the last quarter and 29% in the fourth quarter of fiscal 2009.

4.2      Results of our operations – fiscal 2010

Summary of consolidated results

Fiscal 2009 and fiscal 2008 have been restated to reflect a change in the accounting treatment for pre-operating costs.

Revenue was 8% or $135.9 million lower than last year

Revenue was lower than last year mainly because:

-     SP/C’s revenue decreased by $193.4 million, or 41%, mainly due to lower production levels resulting from a decline in order intake. The decrease was partially offset by more favourable rates on revenue hedging contracts this year;

-     TS/C’s revenue decreased by $27.0 million, or 6%, mainly due to market softness in North America and Europe and to the negative effect from the stronger Canadian dollar. The decrease was partially offset by the contribution of additional RSEUs to our network, by the increase of FTOs’ activities and by higher revenue generated in the emerging markets;

-     SP/M’s revenue increased by $62.1 million, or 13%, mainly due to an increase in volume and the integration into our results of DSA, acquired in May 2009. The increase was partially offset by a negative foreign exchange impact;

-     TS/M’s revenue increased by $22.4 million, or 9%, mainly as a result of a higher level of activity in our Professional Services business and increased training services in Europe. The increase was partially offset by a negative foreign exchange impact.

You will find more details in Results by segment.

Gross margin was $47.7 million lower than last year

The gross margin was $452.2 million this year, or 29.6% of revenue compared to $499.9 million or 30.1% of revenue last year. As a percentage of revenue, gross margin was stable when compared to last year.

EBIT was $75.8 million lower than last year

EBIT this year was $230.0 million, or 15.1% of revenue. EBIT was down $75.8 million, or 25%, compared to last year. A restructuring charge of $34.1 million was booked this year, compared to nil last year.

Segment operating income was down by 14%, or $41.7 million. Decreases in segment operating income for the civil segments of $42.7 million for SP/C and $11.9 million for TS/C were partially offset by increases for the military segments of $8.0 million and
$4.9 million for SP/M and TS/M respectively.

You will find more details in Results by segment.

Net interest expense was $5.8 million higher than last year

Net interest expense was $26.0 million this year, which is $5.8 million or 29% higher than last year. This is mainly attributed to:

-     Higher interest expense on overall long-term debt, mainly resulting from the net increase of senior notes for $15.0 million and
US$45.0 million by way of a private placement in the first quarter of fiscal 2010, the net increase in capital leases, and issuance of new debts;

-     Decrease in capitalized interests for assets under construction;

-     Increase in other interest expense.

Effective income tax rate is 29%

This fiscal year, income taxes were $59.5 million, representing an effective tax rate of 29%, compared to 29% for the same period last year.

4.3      Restructuring

On May 14, 2009, we introduced actions required to size our company to current and expected market conditions. Approximately
700 employees were affected. A restructuring charge of $34.1 million, consisting mainly of severance and other related costs, including the associated pension expense, was included in net earnings in fiscal 2010. The plan has been completed.

The following summarizes the restructuring costs and remaining provision for fiscal 2010:

4.4      Results of our operations – fiscal 2009 versus fiscal 2008

Revenue

Revenue grew to $1,662.2 million in fiscal 2009, $238.6 million or 17% higher than fiscal 2008. Growth in each of the four segments was mainly due to:

-     A higher level of activity on various simulator contracts awarded in fiscal 2009, for both helicopters (NH90, Super Puma) and transport aircraft (C-130, KDC-10) for the SP/M segment;

-     The integration into our results of the fiscal 2009 acquisitions of Sabena Flight Academy and Academia Aeronautica de Evora S.A. and the August 2007 acquisition of Flightscape Inc., as well as the contribution of additional RSEUs into our network for the TS/C segment. The increase was partially offset by market softness in North America and preliminary indications of softness in Europe;

-     A higher level of activity in fiscal 2009 in addition to more revenue recorded for simulators that were already manufactured prior to 2009 for which we signed sales contracts during that year for the SP/C segment;

-     A strong level of activity in our Professional Services business, revenue generated from the recently began maintenance phase of the Synthetic Environment Core (SE Core) program in the U.S. and an increased level of effort on some of our maintenance service contracts in Germany for the TS/M segment.

Revenue was also positively impacted by the depreciation of the Canadian dollar against the U.S. dollar and the euro.

EBIT

EBIT was $305.8 million, or 18.4% of revenue, in fiscal 2009, representing an increase of $55.2 million or 22% over the fiscal 2008 EBIT of $250.6 million. The increase was due to higher segment operating income from the SP/M, TS/C and TS/M segments, which increased their segment operating income by $36.0 million, $15.4 million and $7.0 million respectively. The increase was partially offset by a decrease in SP/C’s segment operating income of $3.2 million.

Net interest

Net interest was $20.2 million in fiscal 2009, a $2.7 million or 15% increase over fiscal 2008. This was mainly due to:

-     Higher interest expense on overall long-term debt and increased amortization of deferred financing costs, mainly related to the
non-recourse financing secured at the end of the first quarter of fiscal 2008;

-     Lower interest income resulting from lower cash on hand in fiscal 2009 compared to fiscal 2008, in addition to lower interest rates.

The increase in net interest expense was partially offset by an increase in capitalized interest. In fiscal 2009, compared to fiscal 2008, we had a higher level of assets under construction to support our growth initiatives.

Income taxes

We recorded an income tax expense of $83.4 million in fiscal 2009, representing an effective tax rate of 29%, compared to 30% in fiscal 2008. The lower tax rate in fiscal 2009 was mainly due to a change in the mix of income from various jurisdictions.

Discontinued operations

Net loss from discontinued operations was $1.1 million in fiscal 2009, mainly attributed to fees incurred in the litigation initiated by us for further payment following the disposal, in fiscal 2003, of the assets of the sawmill division of our Forestry Systems.

4.5      Consolidated orders and backlog

Our consolidated backlog was $3,042.8 million at the end of fiscal 2010, which is 4% lower than last year. New orders of $1,574.9 million increased the backlog this year, while $1,526.3 million in revenue was generated from the backlog.

Backlog down by 4% over last year

In addition to the negative foreign exchange impact resulting from the stronger Canadian dollar, the fiscal 2010 adjustments include the following:

-     A downward revision of $44.5 million made in TS/C to incorporate the impact of revised revenue expectations for contracts signed with customers, reflecting current market conditions;

-     Contracts acquired in the DSA acquisition have been included in the backlog of SP/M and TS/M for a total of $177.8 million.

The book-to-sales ratio for the quarter was 1.59x. The ratio for the last 12 months was 1.03x.

You will find more details in Results by segment, below.

5.     RESULTS BY SEGMENT

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

Civil segments:

-    Training & Services/Civil (TS/C);

-    Simulation Products/Civil (SP/C).

Military segments:

-    Simulation Products/Military (SP/M);

-    Training & Services/Military (TS/M).

Transactions between segments are mainly transfers of simulators from SP/C to TS/C and are recorded at cost at the consolidated level.

If we can measure a segment’s use of jointly used assets, costs and liabilities (mostly corporate costs), we allocate them to the segment in that proportion. If we cannot measure a segment’s use, we allocate in proportion to the segment’s cost of sales.

KEY PERFORMANCE INDICATORS

Segment operating income

Comparative periods of fiscal 2009 have been restated to reflect a change in the accounting treatment for pre-operating costs.

Capital employed

The comparative period of fiscal 2009 has been restated to reflect a change in the accounting treatment for pre-operating costs.

5.1      Civil segments

FISCAL 2010 EXPANSIONS AND NEW INITIATIVES

-     We launched a new suite of products and services as part of Bombardier’s CSeries aircraft program called the CAE Augmented Engineering Environment^TM. The CAE Augmented Engineering Environment^TM includes a modelling and simulation environment that allows OEMs to evaluate, test, and validate a range of aircraft models and systems during the development phase. We complement the delivery of the CAE Augmented Engineering Environment^TM with engineering design and support services throughout the development phase of the aircraft program;

-     We launched the CAE 3000 Series helicopter mission simulator product family for the previously underserved civil helicopter market. Our new simulation capability offers unprecedented realism for helicopter-specific mission training, including offshore, emergency medical services, law enforcement, long line, high-altitude, corporate, and other operations. We are the first to incorporate artificially intelligent human form and moving vehicle dynamic simulation for civil helicopter training tasks and mission scenarios. The first CAE 3000 Series will be available for training by the summer of 2010;

-     We will begin offering Bell 412 training programs later in the year in Mexico, for which Bell Helicopter is providing aircraft systems and performance data and technical support;

-     We added a Bombardier Global Express FFS and training program at the Emirates-CAE Flight Training (ECFT) joint venture in Dubai, bringing the total number of simulators at the facility to 12;

-     We, together with the Solidarity Fund QFL and SGF, announced the creation of a limited partnership to provide qualifying customers competitive lease financing for our civil flight simulation equipment manufactured in Québec and exported around the world.

TRAINING & SERVICES/CIVIL

TS/C obtained contracts this quarter expected to generate future revenues of $123.6 million, including:

-     A contract with sponsoring airline AirAsia for our first MPL beta program that will adhere to new performance-based ATO certification requirements developed by Transport Canada and based on ICAO guidelines. Graduates of our first MPL beta program are expected to enter the IOE program to become A320 First Officers with AirAsia;

-     A contract with the Kingdom of Saudi Arabia to deliver a CAE Flightscape flight recorder and analysis laboratory;

-     Extended our training service agreement with Brussels Airlines through calendar 2012 on an exclusive basis for AVRO, A320, A330 and B737-300 simulator training;

-     A contract awarded by the FAA for a Multiple Award for General Aviation and Business Aircraft Pilot Training for five years;

-     A ten-year contract renewal for B767 training at our Santiago training centre with LAN airlines.

Financial results

Comparative periods of fiscal 2009 have been restated to reflect a change in the accounting treatment for pre-operating costs.

Revenue up by 11% over last quarter and down by 6% year over year

The increase from last quarter was mainly attributable to the change in our training revenue mix combined with an increase in FTOs’ activities. The increase was partially offset by the negative effect from the stronger Canadian dollar.

The decrease year over year was mainly attributed to the negative effect from the stronger Canadian dollar and to the market softness in Europe. The decrease was partially offset by the contribution of additional RSEUs to our network, by the increase in FTOs’ activities and by higher revenue generated in the emerging markets.

Revenue was $433.5 million this year, 6% or $27.0 million lower than last year

The decrease over last year was mainly attributed to the market softness in North America and Europe and to the negative effect from the stronger Canadian dollar. The decrease was partially offset by the contribution of additional RSEUs to our network, by the increase in FTOs’ activities and by higher revenue generated in the emerging markets.

Segment operating income up by 21% over last quarter and down by 16% year over year

Segment operating income was $21.0 million (18.5% of revenue) this quarter, compared to $17.4 million (17.0% of revenue) last quarter and $25.1 million (20.7% of revenue) in the same period last year.

Segment operating income increased by $3.6 million, or 21%, over last quarter. The increase was mainly attributable to the change in our training revenue mix and by an increase in our FTOs’ activities. The increase was partially offset by the negative effect from the stronger Canadian dollar.

Year-over-year segment operating income decreased by $4.1 million, or 16%, mainly due to the negative effect from the stronger Canadian dollar and to market softness in Europe. As well, last year’s segment operating income included the realization of a
one-time gain resulting from finalization of a contribution to a venture. The decrease was partially offset by higher income from FTOs’ activities and by the cost containment measures taken this year.

Segment operating income was $75.1 million, down 14% or $11.9 million over last year

Segment operating income was $75.1 million (17.3% of revenue) this year, compared to $87.0 million (18.9% of revenue) last year.

The decrease over last year was attributed to the market softness in Europe and North America combined with the negative effect from the stronger Canadian dollar. The decrease was partially offset by the cost containment measures taken this year, by the contribution of additional RSEUs to our network, by the gain on the disposal of three used FFSs, in addition to higher segment operating income generated in the emerging markets and from FTOs’ activities. As well, last year’s segment operating income included a realization of cost savings due to the successful integration of a venture and a one-time realization of cost savings from the integration of another venture.

Capital expenditures at $23.9 million this quarter and $79.5 million for the year

Maintenance capital expenditures were $9.3 million for the quarter and $32.0 million for the year. Growth capital expenditures were
$14.6 million for the quarter and $47.5 million for the year. We continue to selectively expand the training network to address additional market share and in response to training demands from our customers.

Capital employed decreased by $25.2 million over last quarter and by $181.6 million over last year

Capital employed decreased over the last quarter mainly due to the impact of foreign exchange fluctuations partially offset by the increase in non-cash working capital.

Capital employed decreased over the prior year mainly due to the impact of foreign exchange and by the decrease in non-cash working capital.

Backlog down by 28% over last year

Adjustments include the foreign exchange impact and a downward revision of $44.5 million made during the year to incorporate the impact of revised revenue expectations for contracts signed with customers, reflecting current market conditions.

This quarter’s book-to-sales ratio was 1.09x. The ratio for the last 12 months was 0.81x.

SIMULATION PRODUCTS/CIVIL

SP/C was awarded contracts for the following 6 FFSs this quarter:

-     One CAE 7000 Series Boeing 777-300ER FFS to Turkish Airlines;

-     One CAE 7000 Series Boeing 737-800 FFS to Skymark Airlines;

-     One CAE 7000 Series ATR 72-500 FFS and two CAE 7000 Series Boeing 737-900ER FFSs to Lion Air;

-     One CAE 7000 Series A330/A340 convertible FFS to Saudi Arabian Airlines.

This brings SP/C’s order intake for the year to 20 FFSs.

During the fourth quarter, a change order contract amendment was signed with Mumtalakat to switch their order for an A330/340 FFS to an Embraer 170/190 FFS.

Financial results

Revenue down by 11% over last quarter and 40% year over year

The decrease over last quarter was primarily due to lower production levels resulting from a decline in order intake and less revenue recognized this quarter for simulator sales not accounted for using the percentage-of-completion method. In the prior quarter, the cancellation of an order, for which the production of the simulator was already in progress, had a negative effect on revenue for that period.

The year-over-year decrease was primarily due to lower production levels resulting from a decline in order intake.

Revenue was $284.1 million for the year, 41% or $193.4 million lower than last year

The decrease in revenue was primarily due to lower production levels resulting from a decline in order intake. The decrease was partially offset by more favourable rates on revenue hedging contracts this year.

Segment operating income down by 22% over last quarter and 52% year over year

Segment operating income was $8.9 million (13.8% of revenue) this quarter, compared to $11.4 million (15.7% of revenue) last quarter and $18.5 million (17.2% of revenue) in the same period last year.

The decrease over last quarter was primarily due to decreased volume and a lower utilization of funds from our R&D cost-sharing programs.

The year-over-year decrease was mainly due to lower volume, lower prices on orders booked this year resulting from more intense competition as a consequence of the current market environment and a decrease in the utilization of funds from our R&D cost-sharing programs. The decrease was partially offset by a favourable impact resulting from the revaluation of our non-cash working capital accounts denominated in foreign currencies.

Segment operating income was $49.4 million for the year, 46% or $42.7 million lower than last year

Segment operating income was $49.4 million (17.4% of revenue) this year, compared to $92.1 million (19.3% of revenue) last year.

The decrease was primarily due to lower volume and a decline in project margins, resulting from challenging market conditions. The decrease was partially offset by a positive impact resulting from our favourable hedging rates.

Capital employed decreased by $10.3 million from last quarter and increased by $83.5 million over last year

Capital employed decreased from last quarter mainly as a result of lower non-cash working capital accounts. This was primarily due to a higher collection of accounts receivable, in addition to a reduction of our inventory levels and contracts in progress. The decrease was partially offset by an increase in our property, plant and equipment, resulting from the purchase of a building in India for
CAE Simulation Technologies Private Ltd and lower deposits on contracts.

Capital employed was higher than last year, mainly due to higher non-cash working capital accounts. This was principally due to lower levels of accounts payable and accrued liabilities and an increase in the value of our foreign exchange contracts, partially offset by lower accounts receivable. The increase was also due to higher property, plant and equipment, resulting from the purchase of a building in India for CAE Simulation Technologies Private Ltd.

Backlog down by 12% over last year

This quarter’s book-to-sales ratio was 1.15x. The ratio for the last 12 months was 0.90x.

5.2      Military segments

FISCAL 2010 EXPANSIONS AND NEW INITIATIVES

-     We continued our development of an Augmented Visionics System (AVS) to enable helicopter pilots to operate safely in the most extreme conditions, including landing in brownouts when dust recirculation caused by rotor downwash obscures the pilot’s view during critical maneuvering operations at very low altitudes. During fiscal 2010, we conducted several successful tests of our AVS solution at the U.S. Department of Defence Yuma Proving Grounds;

-     We are developing the CAE Volume-Based Intelligence, Surveillance and Reconnaissance System (CAE VISR), which integrates advanced sensor technologies and a Common Database (CDB) similar to our augmented visionics system (AVS) to help dramatically improve situational awareness and provide real-time intelligence gathering, information rendering and visualization, and improvised explosive device (IED) detection to battlefield commanders. The goal of our VISR program is to develop an effective system for IED detection;

-     We are collaborating with the National Aerospace Laboratory (NLR) in the Netherlands, an independent technological institute responsible for applied research in aerospace and defence, on a wide range of R&D projects designed to expand the role of modelling and simulation at the NLR;

-     We, together with Hindustan Aeronautics Limited (HAL), held a ceremony to lay the foundation stone for a new helicopter training centre in Bangalore, which will be operated by the Helicopter Academy to Train by Simulation of Flying (HATSOFF), an
equally-owned joint venture between HAL and CAE. In early 2010, HATSOFF announced that the first simulator for the Bell 412 would be arriving in India and be operational by mid-summer 2010;

-     We completed a major upgrade of the CAE-built Lynx Mk8 FMS for the Royal Navy, as well as delivered a new Lynx cockpit procedures trainer (LCPT) and a CAE Simfinity^TM system-based trainer (SBT) located at the Royal Naval Air Station (RNAS) Yeovilton, U.K. This suite of training equipment has given the Royal Navy a comprehensive suite of synthetic training devices in support of the Lynx Mk8 maritime helicopter;

-     We expanded our C-130 training centre located in Tampa, Florida with the addition of a new C-130H full-mission simulator. The new simulator which is being used to train the RSAF, features Esterline CMC Electronics’ C-130 glass cockpit avionics system, which CMC offers to global C-130 operators considering avionics modernization programs for existing C-130 Hercules aircraft.

SIMULATION PRODUCTS/MILITARY

SP/M was awarded $222.7 million in orders this quarter, including:

-     One CH-147F training suite to Canada’s DND under the OTSP program in support of Canada’s new fleet of 15 CH-147F Chinook medium-to-heavy lift helicopters;

-     A comprehensive academic training system for the C-130 and KDC-10 aircraft, which includes CAE Simfinity^TM virtual simulators (VSIM) and multimedia courseware, to the Royal Netherlands Air Force.

Financial results

Revenue up by 6% over last quarter and by 4% year over year

The increase over last quarter was mainly due to an increase in volume this quarter, particularly from our Canadian programs. The increase was partially offset by a negative foreign exchange impact.

The increase year over year was primarily due to the integration into our results of DSA, acquired in May 2009, in addition to an increase in volume, particularly from our Canadian programs. The increase was partially offset by a negative foreign exchange impact.

Revenue was $545.6 million this year, 13% or $62.1 million higher than last year

The increase in revenue over last year was mainly due to an increase in volume and the integration into our results of DSA, acquired in May 2009. The increase was partially offset by a negative foreign exchange impact.

Segment operating income up by 10% over last quarter and down 4% year over year

Segment operating income was $25.8 million (17.3% of revenue) this quarter, compared to $23.4 million (16.7% of revenue) last quarter and $26.8 million (18.7% of revenue) in the same period last year.

The increase over last quarter was mainly due to the higher volume, as explained above, in addition to a more favourable program mix. The increase was partially offset by increased R&D activities this quarter.

The year-over-year decrease was mainly due to increased R&D activities and a negative foreign exchange impact. The decrease was partially offset by the integration into our results of DSA, acquired in May 2009, and a more favourable program mix this quarter.

Segment operating income was $95.7 million this year, 9% or $8.0 million higher than last year

Segment operating income was $95.7 million (17.5% of revenue) this year, compared to $87.7 million (18.1% of revenue) last year.

Segment operating income increased mainly due to the above-mentioned increase in volume and the integration into our results of DSA, acquired in May 2009. The increase was partially offset by increased R&D activities and a negative foreign exchange impact.

Capital employed decreased by $34.9 million over last quarter and $1.8 million over last year

The decrease over last quarter was primarily due to lower non-cash working capital accounts, mainly due to a decrease in accounts receivable and increased accounts payable and accrued liabilities.

The decrease over last year was mainly due to lower non-cash working capital accounts, mainly due to a decrease in accounts receivable and an increase in accounts payable and accrued liabilities, partially offset by an increase in goodwill and other assets.

Backlog down by 3% over last year

Adjustments include the negative foreign exchange impact and certain contracts acquired in the DSA transaction that have been identified as SP/M related.

This quarter’s book-to-sales ratio was 1.49x. The ratio for the last 12 months was 1.00x.

TRAINING & SERVICES/MILITARY

TS/M was awarded $207.8 million in orders this quarter, including:

-     A 20-year in-service support contract for the CH-147F aircrew training program to Canada’s DND under the OTSP program;

-     The continuation to provide training support services as part of the U.S. Air Force’s C-130J Maintenance and Aircrew Training System program and C-130E/H Aircrew Training System program;

-     The continuation to provide development and services as part of the Synthetic Environment Core (SE Core) program.

Financial results

Comparative periods of fiscal 2009 have been restated to reflect a change in the treatment for pre-operating costs.

Revenue up by 1% over last quarter and by 3% year over year

The increase over last quarter mainly resulted from a higher level of activity in our Professional Services business, partially offset by a negative foreign exchange impact.

The increase year over year was primarily due to a strong level of activity in our Professional Services business, combined with an increase in training services in Europe. The increase was partially offset by a negative foreign exchange impact.

Revenue was $263.1 million this year, 9% or $22.4 million higher than last year

The increase was mainly the result of a higher level of activity in our Professional Services business and increased training services in Europe. The increase was partially offset by a negative foreign exchange impact.

Segment operating income down 26% over last quarter and stable year over year

Segment operating income was $9.2 million (13.4% of revenue) this quarter, compared to $12.4 million (18.4% of revenue) last quarter and $9.2 million (13.8% of revenue) in the same period last year.

The decrease from last quarter was due to a less favourable program mix and a negative foreign exchange impact this quarter.

Segment operating income was stable year over year. The increase in volume was offset by a negative foreign exchange impact.

Segment operating income was $43.9 million this year, 13% or $4.9 million higher than last year

Segment operating income was $43.9 million (16.7% of revenue) this year, compared to $39.0 million (16.2% of revenue) last year.

The increase was primarily due to increased training services in Europe, partially offset by a lower utilization of funds from our R&D cost-sharing program and a negative foreign exchange impact.

Capital employed decreased by $22.2 million over last quarter and increased $12.0 million over last year

The decrease from last quarter was primarily due to decrease in non-cash working capital accounts, mainly due to a decrease in accounts receivable and increased accounts payable and accrued liabilities.

The increase over last year was mainly due to an increase in property, plant and equipment, resulting from investments for additional simulators to support training demand, partially offset by a decrease in non-cash working capital.

Backlog up by 20% over last year

Adjustments include the negative foreign exchange impact and certain contracts acquired in the DSA transaction that have been identified as TS/M related.

This quarter’s book-to-sales ratio was 3.03x. The ratio for the last 12 months was 1.61x.

Combined military performance favourable over last year

For fiscal 2010, our $808.7 million combined military revenue represented an $84.5 million or 12% increase over fiscal 2009 and our $139.6 million combined military operating income represented a $12.9 million or 10% increase over the same period. You will find more details in the above Results by segment sections of SP/M and TS/M.

This quarter’s combined military book-to-sales ratio was 1.98x. The ratio for the last 12 months was 1.20x.

6.     CONSOLIDATED CASH MOVEMENTS AND LIQUIDITY

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

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

-    Capital expenditure requirements;

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

6.1      Consolidated cash movements