EX-99.3 2018 MD&A 4 ex993q42018mda-en.htm MD&A FOR FISCAL YEAR ENDED MARCH 31, 2018

Table of Contents |
Management’s Discussion and Analysis |
1. | HIGHLIGHTS | 1
2. | INTRODUCTION | 3
3. | ABOUT CAE | 5
| 3.1 | Who we are | 5
| 3.2 | Our mission | 5
| 3.3 | Our vision | 5
| 3.4 | Our strategy | 5
| 3.5 | Our operations | 6
| 3.6 | Foreign exchange | 12
| 3.7 | Non-GAAP and other financial measures | 13
4. | CONSOLIDATED RESULTS | 15
| 4.1 | Results from operations – fourth quarter of fiscal 2018 | 15
| 4.2 | Results from operations – fiscal 2018 | 17
| 4.3 | Consolidated orders and total backlog | 18
5. | RESULTS BY SEGMENT | 19
| 5.1 | Civil Aviation Training Solutions | 20
| 5.2 | Defence and Security | 23
| 5.3 | Healthcare | 25
6. | CONSOLIDATED CASH MOVEMENTS AND LIQUIDITY | 27
| 6.1 | Consolidated cash movements | 27
| 6.2 | Sources of liquidity | 28
| 6.3 | Government participation | 29
| 6.4 | Contractual obligations | 29
7. | CONSOLIDATED FINANCIAL POSITION | 30
| 7.1 | Consolidated capital employed | 30
| 7.2 | Off balance sheet arrangements | 32
| 7.3 | Financial instruments | 32
8. | BUSINESS COMBINATIONS | 35
9. | BUSINESS RISK AND UNCERTAINTY | 35
| 9.1 | Risks relating to the industry | 35
| 9.2 | Risks relating to the Company | 37
| 9.3 | Risks relating to the market | 40
10. | RELATED PARTY TRANSACTIONS | 42
11. | CHANGES IN ACCOUNTING POLICIES | 43
| 11.1 | New and amended standards not yet adopted | 43
| 11.2 | Use of judgements, estimates and assumptions | 44
12. | CONTROLS AND PROCEDURES | 46
| 12.1 | Evaluation of disclosure controls and procedures | 46
| 12.2 | Internal control over financial reporting | 46
13. | OVERSIGHT ROLE OF AUDIT COMMITTEE AND BOARD OF DIRECTORS | 46
14. | ADDITIONAL INFORMATION | 46
15. | SELECTED FINANCIAL INFORMATION | 47

Management’s Discussion and Analysis

for the fourth quarter and year ended March 31, 2018

1. HIGHLIGHTS

FINANCIAL

FOURTH QUARTER OF FISCAL 2018

Revenue from continuing operations higher compared to last quarter and the fourth quarter of fiscal 2017

– Consolidated revenue from continuing operations was $780.7 million this quarter, $76.3 million or 11% higher than last quarter and $46.0 million or 6% higher than the fourth quarter of fiscal 2017.

Total segment operating income1 higher compared to last quarter and the fourth quarter of fiscal 2017

– Total segment operating income was $141.1 million this quarter, $28.3 million or 25% higher than last quarter and $20.2 million or 17% higher than the fourth quarter of fiscal 2017.

Net income attributable to equity holders of the Company from continuing operations lower compared to last quarter and higher compared to the fourth quarter of fiscal 2017

– Net income attributable to equity holders of the Company from continuing operations was $100.1 million (or $0.37 per share) this quarter compared to $117.9 million (or $0.44 per share) last quarter, representing a decrease of $17.8 million or 15% and compared to $67.4 million (or $0.25 per share) in the fourth quarter of last year, representing an increase of $32.7 million or 49%;

– As there were no restructuring, integration and acquisition costs or one-time tax items this quarter or last quarter, net income before specific items1 was equal to net income attributable to equity holders of the Company from continuing operations, compared to net income before specific items of $82.4 million (or $0.31 per share) in the fourth quarter of fiscal 2017;

– Last quarter's results include impacts of the income tax recovery resulting from the enactment of a lower U.S. federal income tax rate and the gain on the remeasurement of the previously held Asian Aviation Centre of Excellence Sdn. Bhd. (AACE) investment net of reorganizational costs. Excluding these elements, earnings per share would have been $0.28.

Positive free cash flow1 from continuing operations at $117.3 million this quarter

– Net cash provided by continuing operating activities was $137.8 million this quarter, compared to $187.6 million last quarter and $197.5 million in the fourth quarter of last year;

– Maintenance capital expenditures1 and other asset expenditures were $22.8 million this quarter, $17.7 million last quarter and $26.8 million in the fourth quarter of last year;

– Cash dividends were $22.5 million this quarter, $23.2 million last quarter and $20.5 million in the fourth quarter of last year.

FISCAL 2018

Higher revenue from continuing operations compared to fiscal 2017

– Consolidated revenue from continuing operations was $2,830.0 million, $125.5 million or 5% higher than last year.

Total segment operating income higher compared to fiscal 2017

– Total segment operating income was $461.0 million, $60.8 million or 15% higher than last year.

Higher net income attributable to equity holders of the Company and diluted earnings per share from continuing operations

– Net income attributable to equity holders of the Company from continuing operations was $347.0 million (or $1.29 per share) compared to $252.0 million (or $0.93 per share) last year, representing a $95.0 million or 38% increase;

– As there were no restructuring, integration and acquisition costs or one-time tax items in fiscal 2018, net income before specific items was equal to net income attributable to equity holders of the Company from continuing operations, compared to net income before specific items of $278.4 million (or $1.03 per share) last year;

– Fiscal 2018 results include impacts of the income tax recovery resulting from the enactment of a lower U.S. federal income tax rate, the gain on the remeasurement of the previously held AACE investment net of reorganizational costs and the gain realized from the disposal of our equity interest in the joint venture Zhuhai Xiang Yi Aviation Technology Company Limited (ZFTC). Excluding these elements, earnings per share would have been $1.11.

Positive free cash flow from continuing operations at $288.9 million

– Net cash provided by continuing operating activities was $403.3 million this year, compared to $464.3 million last year;

– Maintenance capital expenditures and other asset expenditures were $77.6 million this year, compared to $68.3 million last year;

– Cash dividends were $89.9 million this year, compared to $80.6 million last year.

CAE Year-End Financial Results 2018 I

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

Management’s Discussion and Analysis

Capital employed2 increased by $184.3 million or 7% this year, ending at $3,016.0 million

– Return on capital employed2 (ROCE) was 14.4% this year compared to 11.2% last year. Excluding the impacts of the income tax recovery resulting from the enactment of a lower U.S. federal income tax rate, the gain on the remeasurement of the previously held AACE investment net of reorganizational costs and the gain realized from the disposal of our equity interest in the joint venture ZFTC, our ROCE would have been 12.3% this year;

– Non-cash working capital2 decreased by $12.1 million in fiscal 2018, ending at $180.9 million;

– Property, plant and equipment increased by $221.3 million;

– Other long-term liabilities increased by $26.9 million;

– Net debt2 decreased by $101.3 million this year, ending at $649.4 million.

ORDERS2

– The book-to-sales ratio2 for the quarter was 1.30x (Civil Aviation Training Solutions was 1.20x, Defence and Security was 1.50x and Healthcare was 1.00x). The ratio for the last 12 months was 1.36x (Civil Aviation Training Solutions was 1.44x, Defence and Security was 1.29x and Healthcare was 1.00x);

– Total order intake this year was $3,855.0 million, up $661.6 million over last year;

– Total backlog2, including obligated, joint venture and unfunded backlog was $7,849.1 million at March 31, 2018, $318.9 million higher than last year.

Civil Aviation Training Solutions

– Civil Aviation Training Solutions obtained contracts with an expected value of $2,339.5 million, including contracts for 50 full-flight simulators (FFSs).

Defence and Security

– Defence and Security won contracts valued at $1,400.3 million.

Healthcare

– Healthcare order intake was valued at $115.2 million.

BUSINESS COMBINATIONS

– During the second quarter, we acquired a portfolio of training assets in North America and Europe from a full-flight simulator leasing business for cash consideration of $24.7 million. With this transaction, we obtained fully operational full-flight simulators and various customer contracts;

– During the third quarter, we completed the acquisition of the remaining 50% equity interest in AACE from AirAsia, for a cash consideration of $114.8 million [US$90 million] and long-term contingent cash consideration payable of up to US$10 million if certain criteria are met.

OTHER

– During the second quarter, we signed a Memorandum of Understanding with Singapore Airlines, to establish a joint venture for pilot training in Singapore. The joint venture will initially focus on primarily providing simulator training for Boeing aircraft types, supporting Singapore Airlines, its subsidiaries and other operators' pilot training needs in the region. The closing of the transaction is subject to customary closing conditions;

– During the second quarter, we concluded a sale to China Southern Airlines of our 49% equity interest in the joint venture ZFTC for US$96 million, excluding post-closing adjustments. As part of the transaction, both companies reached an agreement on the outsourcing to CAE of third-party airline training conducted at China Southern Airlines’ ZFTC facility;

– During the third quarter, we purchased a 45% interest in Pelesys, forming a joint venture with a global leader in the provision of aviation training solutions and courseware;

– On February 9, 2018, we announced the renewal of our normal course issuer bid (NCIB) to purchase, for cancellation, up to 5,349,804 of our issued and outstanding common shares over a one year period ending February 22, 2019.

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

Management’s Discussion and Analysis

2. INTRODUCTION

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

– This year and 2018 mean the fiscal year ending March 31, 2018;

– Last year, prior year and a year ago mean the fiscal year ended March 31, 2017;

– Dollar amounts are in Canadian dollars.

This report was prepared as of May 25, 2018, and includes our management’s discussion and analysis (MD&A) for the year and the three‑month period ended March 31, 2018 and the consolidated financial statements and notes for the year ended March 31, 2018. We have prepared it to help you understand our business, performance and financial condition for fiscal 2018. Except as otherwise indicated, all financial information has been reported in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board. All quarterly information disclosed in the MD&A is based on unaudited figures.

For additional information, please refer to our annual consolidated financial statements for this fiscal year, which you will find in the financial report for the year ended March 31, 2018. The MD&A provides you with a view of CAE as seen through the eyes of management and helps you understand the company from a variety of perspectives:

– Our mission;

– Our vision;

– Our strategy;

– Our operations;

– Foreign exchange;

– Non-GAAP and other financial measures;

– Consolidated results;

– Results by segment;

– Consolidated cash movements and liquidity;

– Consolidated financial position;

– Business combinations;

– Business risk and uncertainty;

– Related party transactions;

– Changes in accounting policies;

– Controls and procedures;

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

You will find our most recent financial report and Annual Information Form (AIF) on our website at www.cae.com, on SEDAR at www.sedar.com or on EDGAR at www.sec.gov. Holders of CAE’s securities may also request a printed copy of the Company’s consolidated financial statements and MD&A free of charge by contacting Investor Relations (investor.relations@cae.com).

CAE Year-End Financial Results 2018 I

Management’s Discussion and Analysis

ABOUT MATERIAL INFORMATION

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

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

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

CAUTION REGARDING FORWARD-LOOKING STATEMENTS

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

Important risks that could cause such differences include, but are not limited to, risks relating to the industry such as competition, level and timing of defence spending, government-funded defence and security programs, constraints within the civil aviation industry, regulatory rules and compliance, risks relating to CAE such as product evolution, research and development (R&D) activities, fixed-price and long‑term supply contracts, strategic partnerships and long-term contracts, procurement and original equipment manufacturer (OEM) leverage, warranty or other product-related claims, product integration and program management, protection of our intellectual property, third-party intellectual property, loss of key personnel, labour relations, environmental matters, claims arising from casualty losses, integration of acquired businesses, our ability to penetrate new markets, U.S. foreign ownership, control or influence mitigation measures, length of sales cycle, seasonality, continued returns to shareholders, information technology systems including cybersecurity risk, data privacy risk and our reliance on technology and third-party providers, and risks relating to the market such as foreign exchange, availability of capital, pension plan funding, doing business in foreign countries including corruption risk, political instability and income tax laws. Additionally, differences could arise because of events announced or completed after the date of this report. You will find more information in the Business risk and uncertainty section of the MD&A. We caution readers that the risks described above are not necessarily the only ones we face; additional risks and uncertainties that are presently unknown to us or that we may currently deem immaterial may adversely affect our business.

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

Management’s Discussion and Analysis

3. ABOUT CAE

3.1 Who we are

CAE is a global leader in training for the civil aviation, defence and security, and healthcare markets. Backed by a record of more than 70 years of industry firsts, we continue to help define global training standards with our innovative virtual-to-live training solutions to make flying safer, maintain defence force readiness and enhance patient safety. We have the broadest global presence in the industry, with over 8,500 employees, 160 sites and training locations in over 35 countries. Each year, we train more than 120,000 civil and defence crewmembers and thousands of healthcare professionals worldwide.

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

3.2 Our mission

Through the training we provide, our mission is to make air travel safer, defence forces mission ready and medical personnel better able to save lives.

3.3 Our vision

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

3.4 Our strategy

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

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

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

Six pillars of strength

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

– High degree of recurring business;

– Strong competitive moat;

– Headroom in large markets;

– Underlying secular tailwinds;

– Potential for superior returns;

– Culture of innovation.

High degree of recurring business

Nearly 60% of our business is derived from the provision of services and largely involves long-term contracts and training demand from customers operating under regulations that require them to train on a recurrent basis. As well, we have good visibility owing to a large order backlog and high success rate of renewing existing customer contracts.

Strong competitive moat

We pride ourselves in building strong customer and partner relationships, which in many cases span several decades, and we are a market leader across all of our segments. We focus on providing an excellent end-to-end customer experience and we offer our customers unique comprehensive solutions with market-leading global reach and scale.

Headroom in large markets

We provide innovative training solutions to customers in large addressable markets in civil aviation, defence and security and healthcare with substantial headroom to grow our market share over the long term.

Underlying secular tailwinds

Industry experts expect long-term commercial passenger traffic to grow at a rate of 3.7% annually over the next decade. In defence and security, we see renewed defence investment as a positive catalyst and an increased focus on training for mission readiness. We also see an increased propensity for customers in both civil aviation and defence and security to outsource their training enterprises. In the emerging healthcare market, we also see a rising adoption of simulation for education and training of healthcare students and professionals. Each of our three core markets is characterized by a scarcity of critical personnel for which we are in a prime position to help customers meet their needs for highly trained professionals.

CAE Year-End Financial Results 2018 I

Management’s Discussion and Analysis

Potential for superior returns

Our rising proportion of revenue from training services provides potential for lower amplitude cyclicality as training is largely driven by the training requirements of the installed fleet. As well, we have potential to grow at a superior rate to that of our underlying markets by growing market share.

Culture of innovation

We derive significant competitive advantage as an innovative leader in simulation products and training solutions. Backed by more than 70 years of industry firsts, we continue to help define global training standards with our innovative virtual-to-live training solutions to make flying safer, maintain defence force readiness and enhance patient safety. We design and deliver the industry's most sophisticated training systems, employing the latest in simulation, extended reality and digital, including data-enabled technologies. As well, we have a demonstrated flexibility by engaging customers under a variety of partnership models.

3.5 Our operations

We provide integrated training solutions to three markets globally:

– The civil aviation market includes major commercial airlines, regional airlines, business aircraft operators, civil helicopter operators, aircraft manufacturers, third-party training centres, flight training organizations (FTOs), maintenance repair and overhaul organizations (MROs) and aircraft finance leasing companies;

– The defence and security market includes defence forces, OEMs, government agencies and public safety organizations worldwide;

– The healthcare market includes hospital and university simulation centres, medical and nursing schools, paramedic organizations, defence forces, medical societies and OEMs.

CIVIL AVIATION MARKET

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

We have the unique capability to address the total lifecycle needs of the professional pilot, from cadet to captain, with our comprehensive aviation training solutions. We are the world’s largest provider of commercial aviation training services and the second largest in business aviation training services. Our deep industry experience and thought leadership, large installed base, strong relationships and reputation as a trusted partner, enable us to access a broader share of the market than any other company in our industry. We provide aviation training services in more than 30 countries and through our broad global network of more than 50 training centres, we serve all sectors of civil aviation including airlines and other commercial, business and helicopter aviation operators.

Among our thousands of customers, we have long-term training centre operations and training services agreements and joint ventures with approximately 40 major airlines and aircraft operators around the world. Our range of training solutions includes products and services offerings for pilot, cabin crew and aircraft maintenance technician training, training centre operations, curriculum development, courseware solutions and consulting services. We currently operate 255 FFSs, including those operating in our joint ventures. We offer industry‑leading technology, and we are shaping the future of training through innovations such as our next generation training systems, including CAE Real‑time Insights and Standardized Evaluations (CAE RiseTM), which will improve training quality, objectivity and efficiency through the integration of untapped flight and simulator data‑driven insights into training. As the industry leader in training, we continue our strategy to recruit, develop and retain the best instructors, who represent our second largest employee group after engineers. In the formation of new pilots, CAE operates the largest ab initio flight training network in the world. In the area of resource management, CAE is the global market leader in the provision of flight crew and technical personnel to airlines, aircraft leasing companies, manufacturers and MRO companies worldwide.

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

Market drivers

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

– Pilot training and certification regulations;

– Safety and efficiency imperatives of commercial airline and business aircraft operators;

– Expected long-term global growth in air travel;

– Growing active fleet of commercial and business aircraft;

– Demand for trained aviation professionals.

CAE Year-End Financial Results 2018 I

Management’s Discussion and Analysis

Pilot training and certification regulations

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

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

Safety and efficiency imperatives of commercial airline and business aircraft operators

The commercial airline industry is competitive, requiring operators to continuously pursue operational excellence and efficiency initiatives to achieve satisfactory returns while continuing to maintain the highest safety standards and the confidence of air travelers. Airlines are finding it increasingly more effective to seek expertise in training from trusted partners such as CAE to address growing efficiency gaps, pilot capability gaps, evolving regulatory and training environments, and on-going aircraft programs. Partnering with a training provider like CAE gives airlines immediate access to a world-wide fleet of simulators, courses, programs and instruction capabilities, and allows them flexibility in pursuing aircraft fleet options that suit their business.

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

Expected long-term global growth in air travel

The secular growth in air travel is resulting in higher demand for flight, cabin, maintenance and ground personnel, which in turn drives demand for training solutions.

In commercial aviation, the aerospace industry’s widely held expectation is that long-term average growth for air travel will continue at 3.7% annually over the next decade. For calendar 2017, passenger traffic increased by 7.6% compared to calendar 2016. For the first three months of calendar 2018, passenger traffic increased by 7.2% compared to the first three months of calendar 2017. Passenger traffic in Asia and Europe grew by 9.0% and 7.7% respectively, while Latin America, North America and the Middle East increased by 7.3%, 5.3% and 5.2% respectively.

In business aviation, training demand is closely aligned to business jet travel. According to the FAA, the total number of business jet flights, which includes all domestic and international flights, was up with 3.2% growth over the past 12 months. Similarly, according to Eurocontrol, the European Organisation for the Safety of Air Navigation, the total number of business aviation flights in Europe has improved by 4.8%.

In helicopter aviation, demand is driven mainly by the level of offshore activity in the oil and gas sector, as helicopter operators catering to this sector make up the majority of a relatively small training segment.

Potential impediments to steady growth in air travel include major disruptions such as regional political instability, acts of terrorism, pandemics, natural disasters, prolonged economic recessions, oil price volatility or other major world events.

Growing active fleet of commercial and business aircraft

As an integrated training solutions provider, our long-term growth is closely tied to the active commercial and business aircraft fleet.

The global active commercial aircraft fleet has grown by an average of 3.1% annually over the past 20 years and is widely expected to continue to grow at an approximate average rate of 3.5% annually over the next two decades because of increasing emerging markets, low-cost carrier demand and fleet replacement in established markets. From March 2017 to March 2018, the global commercial aircraft fleet increased by 6.6%, growing by 9.3% in Asia Pacific, 6.3% in Europe, the Middle East and Africa (EMEA) and 4.6% in the Americas.

Major business jet OEMs are continuing with plans to introduce a variety of new aircraft models in the upcoming years. Examples include Bombardier’s Global 7000/8000, Cessna’s Citation Longitude and Hemisphere, Dassault's Falcon 6X and Gulfstream’s 500/600.

Our business aviation training network, comprehensive suite of training programs, key long-term OEM partnerships and ongoing network investments, position us well to effectively address the training demand arising from the entry-into-service of these new aircraft programs.

Our strong competitive moat in the civil aviation market, as defined by our extensive global training network, best-in-class instructors, comprehensive training programs and strength in training partnerships with airlines and business aircraft operators, allows us to effectively address training needs that arise from a growing active fleet of aircraft.

We are well positioned to leverage our technology leadership and expertise, including CAE 7000XR Series FFSs, CAE 400XR, 500XR, 550XR and 600XR Series Flight Training Devices (FTD) and CAE Simfinity™ ground school solutions, in delivering training equipment solutions that address the growing training needs of airlines, business jet operators, and helicopter operators.

Management’s Discussion and Analysis

Demand for trained aviation professionals

We have large headroom in the training services market driven by a sustained secular demand for trained aviation professionals. Demand for trained aviation professionals is driven by air traffic growth, pilot retirements and by the number of aircraft deliveries. The expansion of global economies and airline fleets have resulted in a shortage of qualified personnel needed to fulfill this growing capacity.

Our Airline Pilot Demand Outlook, released in June 2017, identifies a global requirement for 255,000 new pilots over the next 10 years to sustain and grow the commercial air transport industry. Rapid fleet expansion and high pilot retirement rates create a further need to develop 180,000 first officers into new airline captains. These numbers mean that over 50% of the pilots who will fly the world’s commercial aircraft in 10 years have not yet started to train. To support this growth in demand, the aviation industry will require innovative solutions to match the learning requirements of a new generation of trained aviation professionals, leading to an increase in demand for simulation‑based training services and products.

DEFENCE AND SECURITY MARKET

We are a training systems integrator for defence forces across the air, land and naval domains, and for government organizations responsible for public safety.

We are a global leader in the development and delivery of integrated live, virtual and constructive (iLVC) training solutions for defence forces. Most militaries leverage a combination of live training on actual platforms, virtual training in simulators, and constructive training using computer-generated simulations. CAE is skilled and experienced as a training systems integrator capable of helping defence forces achieve an optimal balance of iLVC training to achieve mission readiness. Our expertise in training spans a broad variety of aircraft, including fighters, helicopters, trainer aircraft, maritime patrol, tanker/transport aircraft and remotely piloted aircraft, also called unmanned aerial systems. Increasingly, we are leveraging our training systems integration capabilities in the naval domain to provide naval training solutions, as evidenced by the program to provide the United Arab Emirates (UAE) Navy with a comprehensive Naval Training Centre. We offer training solutions for land forces, including a range of driver, gunnery and maintenance trainers for tanks and armoured fighting vehicles as well as constructive simulation for command and staff training. We also offer training solutions to government organizations for emergency and disaster management.

Defence forces seek to increasingly leverage virtual training and balance their training approach between live, virtual and constructive domains to achieve maximum readiness and efficiency. As such, we have been increasingly pursuing programs requiring the integration of live, virtual and constructive training and these tend to be larger in size than programs involving only a single component of such a solution. We are a first-tier training systems integrator and uniquely positioned to offer our customers a comprehensive range of innovative iLVC solutions, ranging from academic, virtual and live training to immersive, networked mission rehearsal in a synthetic environment. Our solutions typically include a combination of training services, products and software tools designed to cost-effectively maintain and enhance safety, efficiency, mission readiness and decision-making capabilities. We have a wealth of experience delivering and operating outsourced training solutions across different business models, including government-owned government-operated; government-owned contractor-operated; or contractor-owned contractor-operated facilities. Our offerings include training needs analysis; instructional systems design; learning management information systems; purpose-built facilities; state-of-the-art synthetic training equipment; curriculum and courseware development; classroom, simulator, and live flying instruction; maintenance and logistics support; lifecycle support and technology insertion; and financing alternatives.

We have delivered simulation products and training systems to approximately 50 defence forces in over 35 countries. We provide training support services such as contractor logistics support, maintenance services, classroom instruction and simulator training at over 80 sites around the world, including our joint venture operations. We continue to increase our support for live flying training, such as the live training delivered as part of the NATO Flying Training in Canada and the U.S. Army Fixed-Wing Flight Training programs, as we help our customers achieve an optimal balance across their training enterprise.

Market drivers

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

– Growing defence budgets;

– Attractiveness of outsourcing training and maintenance services;

– Desire to integrate training systems to achieve efficiencies and enhanced preparedness;

– Need for synthetic training to conduct integrated, networked mission training, including joint and coalition forces training;

– Explicit desire of governments and defence forces to increase the use of synthetic training;

– Installed base of enduring defence platforms and new customers;

– Relationships with OEMs for simulation and training.

CAE Year-End Financial Results 2018 I

Management’s Discussion and Analysis

Growing defence budgets

In March 2018, the U.S. Congress finalized the U.S. federal budget for fiscal year 2018, which included the authorization of a defence budget for approximately USD $700 billion. In addition, the majority of the 29 members of NATO have expressed plans to increase defence spending in the coming years, and this includes Canada, which plans to grow annual defence spending from approximately $19 billion to $33 billion by 2027. NATO and allied nations continue to confront the immediate challenges posed by the war on terrorism and have been increasingly renewing and augmenting their strategic defences in view of emerging and resurgent geopolitical threats. Growing defence budgets in the U.S and much of NATO, as well as other regions such as Asia and the Middle East, will create increased opportunities throughout the defence establishment. Training is fundamental for defence forces to achieve and maintain mission readiness and growth in defence spending is expected to result in corresponding opportunities for training systems and solutions.

Attractiveness of outsourcing training and maintenance services

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

Desire to integrate training systems to achieve efficiencies and enhanced preparedness

Increased operational tempo combined with limited personnel and budget pressures have prompted defence forces around the world to seek reliable partners who can help develop, manage and deliver the training systems required to support today’s complex platforms and operations. Increasingly, defence forces are considering a more integrated and holistic approach to training. To help manage the complexities and challenges, many training programs are calling for an industry partner to help design and manage the total training system. CAE refers to this approach as training systems integration and has positioned the Company globally as a platform-independent training systems integrator. The overall intent for defence forces is to maximize commonality for increased efficiencies, cost savings, and most importantly, enhanced capability for mission preparedness. As a training systems integrator, CAE can address the overall iLVC domain to deliver comprehensive training, from undergraduate individual training all the way through to operational, multi-service and joint mission training.

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

There is a growing trend among defence forces to use synthetic training to meet more of their mission training requirements, and to integrate and network various training systems so military forces can train in a virtual world. Simulation-based technology solutions enable defence customers to plan sophisticated missions and carry out full-mission rehearsals in a synthetic environment as a complement to traditional live training for mission preparation. Allies are cooperating and creating joint and coalition forces, which are driving the demand for networked training and operations. Training devices that can be networked to train different crews and allow for networked training across a range of platforms are increasingly important as the desire to conduct mission rehearsal exercises in a synthetic environment increases. For example, the U.S., U.K., Australia, Canada and others all have plans and strategies to leverage iLVC domains within a networked common synthetic environment. According to the U.K. Ministry of Defence, they will be establishing and acquiring a simulation architecture designed to better enable networked training while shifting more training from the live to the synthetic environment. We are actively teaming with other industry partners, as evidenced by our November 2017 announcement of a collaborative agreement to develop iLVC training solutions. We are also promoting open, standard simulation architectures, such as the Open Geospatial Consortium Common Database (OGC CDB), to better enable integrated and networked mission training.

Explicit desire of governments and defence forces to increase the use of synthetic training

One of the underlying drivers for CAE’s expertise and capabilities is the increasing use of synthetic training throughout the defence community. More defence forces and governments are increasingly adopting synthetic training for a greater percentage of their overall approach because it improves training effectiveness, reduces operational demands on aircraft, lowers risk compared to operating actual weapon system platforms and significantly lowers costs. Synthetic training offers defence forces a cost-effective way to provide realistic training for a wide variety of scenarios while ensuring they maintain a high state of readiness. The higher cost of live training, the desire to save aircraft for operational use, and the advanced simulation technologies delivering more realism are several factors prompting a greater adoption of synthetic training. The nature of mission-focused training demands at least some live training; however, the shift to more synthetic training is advancing. An example of this shift is the U.S. Navy P-8A program, which is replacing the P-3C Orion. CAE has been contracted to design and manufacture a total of 18 P-8A operational flight trainers for the Navy. The training curriculum for the P-3C was made up of approximately 30 percent synthetic training, while the P-8A training program leverages synthetic training for approximately 70 percent of the training curriculum. This level of rebalancing of live and virtual training is representative of the desire of governments and defence forces around the world to increase the use of synthetic training.

Management’s Discussion and Analysis

Installed base of enduring defence platforms and new customers

CAE generates a high degree of recurring business from its strong position on enduring platforms, including long-term services contracts. Most defence forces in mature markets such as the U.S. have slowed down production of new platforms and delayed new acquisition programs, which has required military forces to maximize use of their existing platforms. Upgrades, updates, and life extension programs allow defence forces to leverage existing assets while creating a range of opportunities for simulator upgrades and training support services. Enduring platforms, such as the C-130 Hercules transport aircraft that is operated by more than 60 nations, provide a solid installed base from which to generate business. Because of our extensive installed base of simulators worldwide, our prime contractor position on programs such as the U.S. Air Force (USAF) KC-135 Aircrew Training System and MQ-9 Reaper aircrew training, and our experience on key enduring platforms, CAE is well-positioned for recurring product upgrades/updates as well as maintenance and support services. In addition, there is strong demand for enduring platforms such as the C-130, P-8, C295, MH-60R and MQ-9 in global defence markets, thus creating opportunities to provide new training systems and services for platforms where CAE has significant experience.

Relationships with OEMs for simulation and training

We are an important partner to OEMs because of our experience, global presence, and innovative technologies. We partner with manufacturers in the defence and security market to strengthen relationships and position for future opportunities. OEMs have introduced new platforms and continue to upgrade and extend the life of existing platforms, which drives worldwide demand for training systems. For example, Boeing has developed the P-8 maritime patrol aircraft and has subcontracted CAE to design and develop P-8 operational flight trainers for the U.S. Navy and other international customers. Boeing continues to market the P-8 internationally, which will create further opportunities for CAE. Other examples of CAE’s relationships with OEMs on specific platforms creating opportunities for training systems include Airbus Defence & Space on the C295, which was selected by Canada for the Fixed-Wing Search and Rescue program; Leonardo on the M-346 lead-in fighter trainer; Lockheed Martin on the C-130J Super Hercules transport aircraft, which is being acquired by several branches of the USAF as well international militaries; and General Atomics on the Predator family of remotely piloted aircraft. We are also part of Team Seahawk in partnership with the U.S. Navy and companies such as Lockheed Martin/Sikorsky which is offering the MH-60R helicopter under the foreign military sales program to international customers.

HEALTHCARE MARKET

We design and manufacture simulators, audiovisual and simulation centre management solutions, develop courseware and offer services for training of medical, nursing and allied healthcare students as well as medical practitioners worldwide.

Simulation-based training is one of the most effective approaches to prepare healthcare practitioners to care for patients and respond to critical situations while reducing medical errors. We are leveraging our experience and best practices in simulation‑based aviation training to deliver innovative solutions to improve the safety and efficiency in the delivery of patient care. The healthcare simulation market is expanding, with simulation centres becoming increasingly more prevalent in nursing and medical schools.

We offer the broadest range of medical simulation products and services in the market today, including patient, ultrasound and interventional (surgical) simulators, audiovisual and simulation centre management solutions as well as courseware for simulation-based healthcare education and training. We have sold simulators to customers in approximately 90 countries that are currently supported by our global network. We are a leader in high-fidelity patient simulators that are uniquely powered by advanced models of human physiology to realistically mimic human responses to clinical interventions. For example, our high-fidelity childbirth simulator, Lucina, was designed to offer exceptional realism for simulated scenarios of both normal deliveries and rare maternal emergencies. In June 2017, we introduced CAE Juno, the first contemporary clinical skills manikin that meets requirements for fundamental nurse training, currently the largest segment of the healthcare education market. Juno allows nursing programs to adapt to new realities of more complex conditions of hospital patients, liability concerns in healthcare, and thus, decreased access to live patients for learners.

Through our Healthcare Academy, we deliver peer-to-peer training at customer sites as well as in our training centres in the U.S., U.K., Germany and Canada. Our Healthcare Academy includes more than 50 adjunct faculty consisting of nurses, physicians, paramedics and sonographers who, in collaboration with leading healthcare institutions, have developed more than 500 Simulated Clinical Experience courseware packages for our customers. Our Academy partnered with the International Nursing Association for Clinical Simulation and Learning (INACSL) to develop a fellowship program based on international best practices in healthcare simulation with cohorts in the U.S., U.K. and UAE.

We offer turnkey solutions, project management and professional services for healthcare simulation programs. We also collaborate with medical device companies and scientific societies to develop innovative and custom training solutions. In September 2017, in collaboration with the American Society of Anesthesiologists (ASA), we released Anesthesia SimSTAT, a virtual healthcare training environment for practicing physicians. This new platform provides continuing medical education for Maintenance of Certification in Anesthesiology (MOCA) and has allowed us to expand access to simulation-based clinical training among the anesthesia community. Furthermore, through an industry partnership with a medical device company, we developed a specialized interventional simulator to train physicians to implant a new generation of pacemakers. In January 2018, we announced that in collaboration with the American Heart Association (AHA), we will establish a network of International Training Sites to deliver lifesaving AHA courses in countries that are currently underserved. The first authorized site operated by CAE Healthcare has opened within the CAE Brunei Multi-Purpose Training Centre in Brunei Darussalam.

CAE Year-End Financial Results 2018 I

Management’s Discussion and Analysis

Market drivers

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

– Limited access to live patients during training;

– Medical technology revolution;

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

– Growing emphasis on patient safety and outcomes.

Limited access to live patients during training

Traditionally, medical education has been an apprenticeship model in which the student cares for patients under the supervision of more experienced staff. In this model, students have a limited role and access to high-risk procedures, rare complications and critical decision‑making skills. The use of simulation in professional training programs complements traditional learning and allows students to hone their clinical and critical thinking skills for high risk, low frequency events. In 2014, the U.S. National Council of State Boards of Nursing (NCSBN) released a ground-breaking study on the effectiveness of simulation training in pre-licensure nursing programs. Among the findings, nursing students who spent up to 50 percent of clinical hours in high-quality simulation were as well-prepared for professional practice as those whose experiences were drawn from traditional clinical practice. In the U.K., the Nursing and Midwifery Council announced in April 2018 that it has lifted the cap on the number of hours nursing students can spend in simulation-based training in place of clinical hours.

Simulation provides consistent, repeatable training and exposure to a broader range of patients and scenarios than one may experience in normal clinical practice. As an example, our Vimedix ultrasound simulator offers more than 200 patient pathologies for cardiac, emergency and obstetrics and gynaecology medicine. The training and education model is evolving, as evidenced by 22 NATO countries prohibiting the use of live animals in military medical training. CAE Healthcare simulators provide a low-risk alternative for practicing life-saving procedures, interprofessional team training and major disaster response.

Medical technology revolution

Advancements in medical technology are driving the use of simulation. New medical devices and advanced procedures, such as intra‑cardiac echocardiography, cardiac assist devices, and mechanical ventilation enhancements, require advanced training solutions, such as simulation, for internal product development and customer training. Regulatory and certification agencies are increasingly stringent in requesting that clinicians be trained before adopting new disruptive technologies, an undertaking for which simulation is well suited. As a training partner of choice with leading OEMs, we continue to collaborate to deliver innovative and custom training for the introduction of new interventional procedures. We were the first to bring a commercial Microsoft HoloLens mixed reality application to the medical simulation market with the release of the CAE VimedixAR ultrasound simulator. In January 2018, we launched a new mixed reality application, LucinaAR, the world's first childbirth simulator that integrates modeled physiology and augmented reality.

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

The majority of product and service sales in healthcare simulation involve healthcare education. We estimate the total healthcare simulation market at approximately USD $1.1 billion. North America is the largest market for healthcare simulation, followed by Europe and Asia. Together with our more than 55 distributors worldwide, we are reaching new and emerging markets and addressing the international demand potential for simulation-based training. CAE segments the healthcare simulation market by virtual, augmented and mixed reality simulators, high-fidelity patient simulators, interventional simulators, mid/low fidelity task trainers, ultrasound simulators, audiovisual and simulation centre management solutions, simulated clinical environments and training services. There is a growing body of evidence demonstrating that medical simulation improves clinical competency, patient outcomes and reduces medical errors, which can help mitigate the rate of increase in healthcare costs.

Growing emphasis on patient safety and outcomes

CAE expects increased adoption of simulation-based training and certification of healthcare professionals as a means to improve patient safety and outcomes. We believe this would result in a significantly larger addressable market than the current market which is primarily education-based. According to a study by patient-safety researchers published in the British Medical Journal in May 2016, medical errors are the third-leading cause of death in U.S. hospitals. Training using simulation can help clinicians gain confidence, knowledge and expertise for improving patient safety in a risk-free environment. As the Medicare and Medicaid reimbursement structure in U.S. hospitals shifts from being based solely on quantity of services to the quality of services, including safety and patient outcomes, CAE expects more hospitals to implement simulation-based training to improve performance and reduce the risk of medical errors.

Simulation is a required or recommended element in a growing movement towards High Stakes Assessment and Certification. Examples in the U.S. include MOCA, Fundamentals of Laparoscopic Surgery and Advanced Trauma Life Support. Moreover, the Accreditation Council for Graduate Medical Education is evolving towards outcome-based assessment with specific benchmarks to measure and compare performance which favours the adoption of simulation products and training.

Management’s Discussion and Analysis

3.6 Foreign exchange

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

The tables below show the variations of the closing and average exchange rates for our three main operating currencies.

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

|  |  |  |  |  |  |  | Increase /
|  | 2018 |  |  | 2017 |  |  | (decrease)
U.S. dollar (US$ or USD) |  | 1.29 |  |  | 1.33 |  |  | (3 | %)
Euro (€ or EUR) |  | 1.59 |  |  | 1.42 |  |  | 12 | %
British pound (£ or GBP) |  | 1.81 |  |  | 1.67 |  |  | 8 | %

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

|  |  |  |  |  |  |  | Increase /
|  | 2018 |  |  | 2017 |  |  | (decrease)
U.S. dollar (US$ or USD) |  | 1.28 |  |  | 1.31 |  |  | (2 | %)
Euro (€ or EUR) |  | 1.50 |  |  | 1.44 |  |  | 4 | %
British pound (£ or GBP) |  | 1.70 |  |  | 1.71 |  |  | (1 | %)

For fiscal 2018, the effect of translating the results of our foreign operations into Canadian dollars resulted in a decrease in revenue of $3.8 million and a decrease in net income of $0.5 million, when compared to fiscal 2017. We calculated this by translating the current year’s foreign currency revenue and net income using the average monthly exchange rates from the previous year and comparing these adjusted amounts to our current year reported results.

You will find more details about our foreign exchange exposure and hedging strategies in Business Risks and Uncertainties.

Sensitivity analysis

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

– Foreign currency revenues and expenses in Canada for our manufacturing activities – we hedge a portion of these exposures;

– Translation of foreign currency of operations in foreign countries. Our exposure is mainly in our operating profit.

First we calculated the revenue and expenses per currency from our Canadian operations to determine the operating profit in each currency. Then we deducted the amount of hedged revenues to determine a net exposure by currency. Next we added the net exposure from foreign operations to determine the consolidated foreign exchange exposure in different currencies.

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

|  |  |  |  | Operating |  |  |  | Net
Exposure | (amounts in millions) |  | Revenue |  | Profit |  | Hedging |  | Exposure
U.S. dollar (US$ or USD) |  | $ | 16.2 |  |  | $ | 4.2 |  |  | $ | (3.5 | ) |  | $ | 0.7 |
Euro (€ or EUR) |  | 4.5 |  |  | 0.3 |  |  | (0.2 | ) |  | 0.1 |
British pound (£ or GBP) |  | 1.3 |  |  | 0.1 |  |  | (0.1 | ) |  | — |

A possible strengthening of one cent in the Canadian dollar would have the opposite impact.

Management’s Discussion and Analysis

3.7 Non-GAAP and other financial measures

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

Capital employed

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

Capital used:

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

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

Source of capital:

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

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

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

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

Earnings per share (EPS) before specific items

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

Free cash flow

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

Gross profit

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

Net debt

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

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

Net income before specific items

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

Non-cash working capital

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

CAE Year-End Financial Results 2018 I

Management’s Discussion and Analysis

Operating profit

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

Order intake and Backlog

Order intake

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

– For the Civil Aviation Training Solutions segment, we consider an item part of our order intake when we have a legally binding commercial agreement with a client that includes enough detail about each party’s obligations to form the basis for a contract and includes the value of expected future revenues. Expected future revenues from customers under short-term and long-term training contracts are included when these customers commit to pay us training fees, or when we reasonably expect the revenue to be generated;

– For the Defence and Security segment, we consider an item part of our order intake when we have a legally binding commercial agreement with a client that includes enough detail about each party’s obligations to form the basis for a contract. Defence and Security contracts are usually executed over a long-term period but some of them must be renewed each year. For this segment, we only include a contract item in order intake when the customer has authorized the contract item and has received funding for it;

– For the Healthcare segment, order intake is typically converted into revenue within one year, therefore we assume that order intake is equal to revenue.

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

Backlog

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

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

Unfunded backlog is a non-GAAP measure that represents firm Defence and Security orders we have received but have not yet executed and for which funding authorization has not yet been obtained. We include unexercised negotiated options which we view as having a high probability of being exercised, but exclude indefinite-delivery/indefinite-quantity (IDIQ) contracts. When an option is exercised, it is removed from the unfunded backlog and is considered order intake in the period that it is exercised.

Total backlog includes obligated backlog, joint venture backlog and unfunded backlog.

Research and development expenses

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

Return on capital employed

Return on capital employed (ROCE) is a non-GAAP measure we use to evaluate the profitability of our invested capital. We calculate this ratio over a rolling four-quarter period by taking net income attributable to equity holders of the Company excluding net finance expense, after tax, divided by the average capital employed.

Simulator equivalent unit

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

Total segment operating income

Total segment operating income is a non-GAAP measure and is the sum of our key indicator of each segment’s financial performance. Segment operating income gives us an indication of the profitability of each segment because it does not include the impact of any items not specifically related to the segment’s performance. We calculate total segment operating income by taking the operating profit and excluding the impact of restructuring, integration and acquisition costs.

Utilization rate

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

Management’s Discussion and Analysis

4. CONSOLIDATED RESULTS

4.1 Results from operations – fourth quarter of fiscal 20183

(amounts in millions, except per share amounts) |  | Q4-2018 | Q3-2018 | Q2-2018 | Q1-2018 | Q4-2017
Revenue | $ | 780.7 |  | 704.4 |  | 646.0 |  | 698.9 |  | 734.7 |
Cost of sales | $ | 520.2 |  | 488.7 |  | 458.0 |  | 486.2 |  | 499.7 |
Gross profit3 | $ | 260.5 |  | 215.7 |  | 188.0 |  | 212.7 |  | 235.0 |
As a % of revenue | % | 33.4 |  | 30.6 |  | 29.1 |  | 30.4 |  | 32.0 |
Research and development expenses3 | $ | 22.8 |  | 29.8 |  | 30.0 |  | 32.3 |  | 31.3 |
Selling, general and administrative expenses | $ | 112.3 |  | 98.6 |  | 75.1 |  | 94.8 |  | 109.5 |
Other (gains) losses – net | $ | (4.3 | ) | (15.1 | ) | (18.3 | ) | 0.3 |  | (12.3 | )
After tax share in profit of equity accounted investees | $ | (11.4 | ) | (10.4 | ) | (8.1 | ) | (12.5 | ) | (14.4 | )
Restructuring, integration and acquisition costs | $ | — |  | — |  | — |  | — |  | 20.0 |
Operating profit3 | $ | 141.1 |  | 112.8 |  | 109.3 |  | 97.8 |  | 100.9 |
As a % of revenue | % | 18.1 |  | 16.0 |  | 16.9 |  | 14.0 |  | 13.7 |
Finance expense – net | $ | 24.0 |  | 16.9 |  | 17.5 |  | 17.8 |  | 16.3 |
Earnings before income taxes and discontinued operations | $ | 117.1 |  | 95.9 |  | 91.8 |  | 80.0 |  | 84.6 |
Income tax expense (recovery) | $ | 13.7 |  | (24.0 | ) | 24.8 |  | 14.6 |  | 14.8 |
As a % of earnings before income taxes and |  |  |  |  |  |
discontinued operations (income tax rate) | % | 12 |  | (25 | ) | 27 |  | 18 |  | 17 |
Earnings from continuing operations | $ | 103.4 |  | 119.9 |  | 67.0 |  | 65.4 |  | 69.8 |
Loss from discontinued operations | $ | — |  | — |  | — |  | — |  | (0.7 | )
Net income | $ | 103.4 |  | 119.9 |  | 67.0 |  | 65.4 |  | 69.1 |
Attributable to: |  |  |  |  |  |
Equity holders of the Company |  |  |  |  |  |
Continuing operations | $ | 100.1 |  | 117.9 |  | 65.2 |  | 63.8 |  | 67.4 |
Discontinued operations | $ | — |  | — |  | — |  | — |  | (0.7 | )
| $ | 100.1 |  | 117.9 |  | 65.2 |  | 63.8 |  | 66.7 |
Non-controlling interests | $ | 3.3 |  | 2.0 |  | 1.8 |  | 1.6 |  | 2.4 |
| $ | 103.4 |  | 119.9 |  | 67.0 |  | 65.4 |  | 69.1 |
EPS attributable to equity holders of the Company |  |  |  |
Basic and diluted | $ | 0.37 |  | 0.44 |  | 0.24 |  | 0.24 |  | 0.25 |

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

Management’s Discussion and Analysis

Revenue from continuing operations was 11% higher than last quarter and 6% higher compared to the fourth quarter of fiscal 2017

Revenue from continuing operations was $76.3 million higher than last quarter. Increases in revenue were $41.5 million, $27.6 million and $7.2 million for Civil Aviation Training Solutions, Defence and Security and Healthcare respectively.

Revenue from continuing operations was $46.0 million higher than the same period last year. Increases in revenue were $37.4 million, $7.7 million and $0.9 million for Civil Aviation Training Solutions, Defence and Security and Healthcare respectively.

You will find more details in Results by segment.

Total segment operating income4 was $28.3 million higher than last quarter and $20.2 million higher compared to the fourth quarter of fiscal 2017

Operating profit this quarter was $141.1 million or 18.1% of revenue, compared to $112.8 million or 16.0% of revenue last quarter and $100.9 million or 13.7% of revenue in the fourth quarter of fiscal 2017. There were no restructuring, integration and acquisition costs recorded this quarter or last quarter compared to $20.0 million in the fourth quarter of last year. Total segment operating income was $141.1 million this quarter compared to $112.8 million last quarter and $120.9 million in the fourth quarter of fiscal 2017.

Total segment operating income was $28.3 million or 25% higher compared to last quarter. Increases in segment operating income were $17.1 million, $6.0 million and $5.2 million for Civil Aviation Training Solutions, Defence and Security and Healthcare respectively.

Total segment operating income increased by $20.2 million or 17% over the fourth quarter of fiscal 2017. Increases in segment operating income were $11.9 million, $5.7 million and $2.6 million for Civil Aviation Training Solutions, Defence and Security and Healthcare respectively.

You will find more details in Results by segment.

Net finance expense was $7.1 million higher than last quarter and $7.7 million higher than the fourth quarter of fiscal 2017

Net finance expense was higher this quarter compared to last quarter. The increase was mainly due to higher other finance expense resulting from a change in presentation of the classification of certain cumulative finance costs previously accounted within income taxes, following clarification issued by the IFRS interpretation committee during fiscal 2018, as well as higher interest on long-term provisions. The increase was also due to higher finance expense on royalty obligations and higher interest on long-term debt.

Net finance expense this quarter was higher compared to the fourth quarter of fiscal 2017. The increase was mainly due to higher other finance expense, as mentioned above, lower finance income and higher finance expense on royalty obligations.

Income tax rate was 12% this quarter

Income taxes this quarter were $13.7 million, representing an effective tax rate of 12%, compared to a negative effective tax rate of 25% last quarter and an effective tax rate of 17% for the fourth quarter of fiscal 2017.

The increase in the tax rate over last quarter was mainly due to the third quarter's adjustment resulting from the enactment of a lower U.S. federal corporate income tax rate and the non-taxable portion of the net gain on the remeasurement of the previously held AACE investment. The increase was partially offset by a change in the mix of income from various jurisdictions mainly from the recognition, this quarter, of deferred tax assets not previously recognized in Europe. Excluding the effect of these deferred tax assets, the income tax rate would have been 23% this quarter.

The decrease in the tax rate from the fourth quarter of fiscal year 2017 was mainly due to a change in the mix of income from various jurisdictions from the recognition, this quarter, of deferred tax assets not previously recognized in Europe, partially offset by an audit settlement in Canada last year.

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

Management’s Discussion and Analysis

4.2 Results from operations – fiscal 2018

(amounts in millions, except per share amounts) |  | FY2018 | FY2017
Revenue | $ | 2,830.0 |  | 2,704.5 |
Cost of sales | $ | 1,953.1 |  | 1,893.3 |
Gross profit | $ | 876.9 |  | 811.2 |
As a % of revenue | % | 31.0 |  | 30.0 |
Research and development expenses | $ | 114.9 |  | 111.0 |
Selling, general and administrative expenses | $ | 380.8 |  | 364.4 |
Other gains – net | $ | (37.4 | ) | (12.7 | )
After tax share in profit of equity accounted investees | $ | (42.4 | ) | (51.7 | )
Restructuring, integration and acquisition costs | $ | — |  | 35.5 |
Operating profit | $ | 461.0 |  | 364.7 |
As a % of revenue | % | 16.3 |  | 13.5 |
Finance expense – net | $ | 76.2 |  | 72.4 |
Earnings before income taxes and discontinued operations | $ | 384.8 |  | 292.3 |
Income tax expense |  | 29.1 |  | 35.2 |
As a % of earnings before income taxes and |  |  |
discontinued operations (income tax rate) | % | 8 |  | 12 |
Earnings from continuing operations | $ | 355.7 |  | 257.1 |
Loss from discontinued operations | $ | — |  | (0.5 | )
Net income | $ | 355.7 |  | 256.6 |
Attributable to: |  |  |
Equity holders of the Company |  |  |
Continuing operations | $ | 347.0 |  | 252.0 |
Discontinued operations | $ | — |  | (0.5 | )
| $ | 347.0 |  | 251.5 |
Non-controlling interests | $ | 8.7 |  | 5.1 |
| $ | 355.7 |  | 256.6 |
EPS attributable to equity holders of the Company |
Basic - continuing and discontinued operations | $ | 1.29 |  | 0.94 |
Diluted - continuing and discontinued operations | $ | 1.29 |  | 0.93 |

Revenue from continuing operations was $125.5 million or 5% higher than last year

Revenue from continuing operations was higher than last year. Increases in revenue were $72.8 million, $48.2 million and $4.5 million for Civil Aviation Training Solutions, Defence and Security and Healthcare respectively.

You will find more details in Results by segment.

Gross profit was $65.7 million higher than last year

Gross profit was $876.9 million this year, or 31.0% of revenue compared to $811.2 million, or 30.0% of revenue last year. As a percentage of revenue, gross profit was higher when compared to last year.

Total segment operating income was $60.8 million higher than last year

Operating profit for the year was $461.0 million or 16.3% of revenue, compared to $364.7 million or 13.5% of revenue last year. Restructuring, integration and acquisition costs of nil were recorded this year compared to $35.5 million last year and total segment operating income was $461.0 million this year compared to $400.2 million last year.

Total segment operating income was $60.8 million or 15% higher compared to last year. Increases in segment operating income were $51.3 million, $7.3 million and $2.2 million for Civil Aviation Training Solutions, Defence and Security and Healthcare respectively.

You will find more details in Results by segment.

Management’s Discussion and Analysis

Net finance expense was $3.8 million higher than last year

| FY2017 to
(amounts in millions) | FY2018
Net finance expense, prior period | $ | 72.4 |
Change in finance expense from the prior period: |
Decrease in finance expense on long-term debt (other than finance leases) | $ | (0.2 | )
Increase in finance expense on royalty obligations | 1.3 |
Decrease in finance expense on amortization of deferred financing costs | (0.1 | )
Increase in finance expense on accretion of provisions | 0.4 |
Increase in other finance expense | 5.0 |
Increase in borrowing costs capitalized | (0.5 | )
Increase in finance expense from the prior period | $ | 5.9 |
Change in finance income from the prior period: |
Increase in interest income on loans and finance lease contracts | $ | (1.7 | )
Increase in other finance income | (0.4 | )
Increase in finance income from the prior period | $ | (2.1 | )
Net finance expense, current period | $ | 76.2 |

Net finance expense was $76.2 million this year, $3.8 million or 5% higher than last year. The increase was mainly due to higher other finance expense resulting from higher interest on long-term provisions and higher interest from a change in presentation of the classification of certain cumulative finance costs previously accounted within income taxes, following clarification issued by the IFRS interpretation committee during fiscal 2018. The increase was also due to higher finance expense on royalty obligations, partially offset by higher finance income.

Income tax rate was 8% this year

This fiscal year, income taxes were $29.1 million, representing an effective tax rate of 8%, compared to 12% for the same period last year.

The decrease in the tax rate compared to last year was mainly due to an adjustment resulting from the enactment of a lower U.S. federal corporate income tax rate, the non-taxable portion of the net gain on the remeasurement of the previously held AACE investment and a change in the mix of income from various jurisdictions mainly from the recognition of previously unrecognized deferred tax assets in Europe. The decrease was partially offset by the impact of audits in Canada, last year's recognition of deferred tax assets in Brazil and the sale of our equity interest in the joint venture ZFTC during the year.

Excluding the effect of the adjustment resulting from the enactment of a lower U.S. federal corporate income tax rate, the recognition of deferred tax assets this year, the remeasurement of our previously held AACE investment and the sale of our interest in ZFTC, the income tax rate would have been 21% this year.

4.3 Consolidated orders and total backlog

Total backlog up 4% over last year

(amounts in millions) |  | FY2018 |  | FY2017
Obligated backlog, beginning of period |  | $ | 5,530.0 |  |  | $ | 5,064.9 |
+ orders |  | 3,855.0 |  |  | 3,193.4 |
- revenue |  | (2,830.0 | ) |  | (2,704.5 | )
+ / - adjustments |  | 67.2 |  |  | (23.8 | )
Obligated backlog, end of period |  | $ | 6,622.2 |  |  | $ | 5,530.0 |
Joint venture backlog (all obligated) |  | 366.7 |  |  | 543.7 |
Unfunded backlog |  | 860.2 |  |  | 1,456.5 |
Total backlog |  | $ | 7,849.1 |  |  | $ | 7,530.2 |

The book-to-sales ratio for the quarter was 1.30x. The ratio for the last 12 months was 1.36x.

You will find more details in Results by segment.

CAE Year-End Financial Results 2018 I

Management’s Discussion and Analysis

5. RESULTS BY SEGMENT

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

– Civil Aviation Training Solutions;

– Defence and Security;

– Healthcare.

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

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

KEY PERFORMANCE INDICATORS

Segment operating income

(amounts in millions, except operating margins) |  | FY2018 | FY2017 | Q4-2018 | Q3-2018 | Q2-2018 | Q1-2018 | Q4-2017
Civil Aviation Training Solutions | $ | 324.5 |  | 273.2 |  | 95.7 |  | 78.6 |  | 77.1 |  | 73.1 |  | 83.8 |
| % | 19.9 |  | 17.5 |  | 21.0 |  | 19.0 |  | 22.1 |  | 17.8 |  | 20.1 |
Defence and Security | $ | 127.7 |  | 120.4 |  | 38.7 |  | 32.7 |  | 30.0 |  | 26.3 |  | 33.0 |
| % | 11.8 |  | 11.6 |  | 13.3 |  | 12.4 |  | 11.2 |  | 10.0 |  | 11.7 |
Healthcare | $ | 8.8 |  | 6.6 |  | 6.7 |  | 1.5 |  | 2.2 |  | (1.6 | ) | 4.1 |
| % | 7.6 |  | 6.0 |  | 19.1 |  | 5.4 |  | 7.8 |  | — |  | 12.0 |
Total segment operating income (SOI) | $ | 461.0 |  | 400.2 |  | 141.1 |  | 112.8 |  | 109.3 |  | 97.8 |  | 120.9 |
Restructuring, integration and acquisition costs | $ | — |  | (35.5 | ) | — |  | — |  | — |  | — |  | (20.0 | )
Operating profit | $ | 461.0 |  | 364.7 |  | 141.1 |  | 112.8 |  | 109.3 |  | 97.8 |  | 100.9 |

Capital employed5

|  | March 31 | December 31 | September 30 | June 30 | March 31
(amounts in millions) |  | 2018 | 2017 | 2017 | 2017 | 2017
Civil Aviation Training Solutions | $ | 2,096.4 |  | 1,998.9 |  | 1,850.6 |  | 2,073.4 |  | 1,985.3 |
Defence and Security | $ | 982.4 |  | 955.5 |  | 965.5 |  | 924.6 |  | 881.2 |
Healthcare | $ | 211.5 |  | 205.0 |  | 206.4 |  | 213.4 |  | 224.3 |
| $ | 3,290.3 |  | 3,159.4 |  | 3,022.5 |  | 3,211.4 |  | 3,090.8 |

CAE Year-End Financial Results 2018 I

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

Management’s Discussion and Analysis

5.1 Civil Aviation Training Solutions

FISCAL 2018 EXPANSIONS AND NEW INITIATIVES

Acquisitions and Divestitures

– We concluded a sale to China Southern Airlines of our 49% equity interest in the joint venture ZFTC. As part of the transaction, both companies reached an agreement on the outsourcing to CAE of third-party airline training conducted at China Southern Airlines’ ZFTC facility;

– We acquired a portfolio of training assets in North America and Europe from a full-flight simulator leasing business for cash consideration of $24.7 million, where we obtained fully operational FFSs and various customer contracts;

– We completed the acquisition of the remaining 50% equity interest in AACE from AirAsia, for a cash consideration of $114.8 million [US$90 million] and long-term contingent cash consideration payable of up to US$10 million if certain criteria are met;

– We purchased a 45% interest in Pelesys, forming a joint venture with a global leader in the provision of aviation training solutions and courseware.

Expansions

– We signed a Memorandum of Understanding with Singapore Airlines, to establish a joint venture for pilot training in Singapore. The joint venture will initially focus on primarily providing simulator training for Boeing aircraft types, supporting Singapore Airlines, its subsidiaries and other operators’ pilot training needs in the region. The closing of the transaction is subject to customary closing conditions;

– We announced the extension of our North American training footprint in Minneapolis-Saint Paul, U.S. Through this centre, we have extended our ability to support regional airline customers and have the capacity to train more than 20,000 pilots every year;

– We, together with Korea Airports Corporation, inaugurated a new training facility at Gimpo Airport, Seoul, Korea, to support the growing pilot training needs of Korean carriers;

– We announced the expansion of our North American pilot training capacity with the addition of a new CAE-built Bombardier CRJ900 FFS and an Embraer ERJ-145 in Phoenix, U.S., and the deployment of one Airbus A320 FFS in Montreal, one Airbus A320 FFS in Mexico and one Bombardier Q400 FFS in Vancouver to be delivered throughout the year;

– We inaugurated an ATR 72-600 FFS at our training centre in Madrid, Spain;

– We announced, together with Abu Dhabi Aviation Training Center (ADA), a new Embraer ERJ-145 pilot training program with Falcon Aviation. Training will be delivered to Falcon Aviation's pilots and other regional operators at ADA's brand-new training facility in Abu Dhabi, UAE.

New programs and products

– We achieved Level D qualification for the world’s first CAE-built Bombardier C Series FFS, located at the Bombardier Training Centre in Montreal, Canada and Interim Level C qualification for the world’s first airline operated Boeing 737MAX FFS, located at Air Canada’s training centre in Toronto, Canada;

– We launched the CAE Master Pilot Training Program, a badge of honor dedicated to further elevate the experience of business aviation pilots throughout their career, raising pilot levels of platform knowledge, safety awareness and situational response capabilities;

– We launched our newest pilot training innovation, the CAE RiseTM training system, with longstanding partner AirAsia;

– We launched the CAE 600XR Series FTD, the latest addition to CAE's innovative XR Series training equipment suite.

FISCAL 2018 ORDERS

Civil Aviation Training Solutions obtained contracts this quarter expected to generate future revenues of $544.5 million, including contracts for 5 FFSs sold to customers in all regions. This brings the total civil order intake to $2,339.5 million and 50 FFSs for the year.

Notable contract awards for fiscal 2018 included:

– An exclusive 10-year long-term training contract with Virgin Atlantic Airways;

– An exclusive long-term training contract extension to 2036 with AirAsia;

– An exclusive 12-year long-term training contract with Air Transat;

– An exclusive 8-year long-term training contract extension with Jazz Aviation LP;

– An exclusive long-term pilot training contract extension with Flexjet;

– An exclusive long-term contract renewal with Elit'Avia for business aviation pilot training to include UPRT.

CAE Year-End Financial Results 2018 I

Management’s Discussion and Analysis

FINANCIAL RESULTS6

(amounts in millions, except operating margins, SEU, FFSs deployed and utilization rate) |  | FY2018 | FY2017 | Q4-2018 | Q3-2018 | Q2-2018 | Q1-2018 | Q4-2017
Revenue | $ | 1,629.7 |  | 1,556.9 |  | 455.2 |  | 413.7 |  | 349.0 |  | 411.8 |  | 417.8 |
Segment operating income | $ | 324.5 |  | 273.2 |  | 95.7 |  | 78.6 |  | 77.1 |  | 73.1 |  | 83.8 |
Operating margins | % | 19.9 |  | 17.5 |  | 21.0 |  | 19.0 |  | 22.1 |  | 17.8 |  | 20.1 |
Depreciation and amortization | $ | 136.6 |  | 140.2 |  | 33.7 |  | 35.9 |  | 31.8 |  | 35.2 |  | 33.3 |
Property, plant and equipment |  |  |  |  |  |  |  |
expenditures | $ | 143.7 |  | 124.8 |  | 50.2 |  | 38.9 |  | 21.9 |  | 32.7 |  | 52.5 |
Intangible assets and other |  |  |  |  |  |  |  |
assets expenditures | $ | 18.3 |  | 20.5 |  | 4.1 |  | 6.3 |  | 1.9 |  | 6.0 |  | 5.4 |
Capital employed | $ | 2,096.4 |  | 1,985.3 |  | 2,096.4 |  | 1,998.9 |  | 1,850.6 |  | 2,073.4 |  | 1,985.3 |
Total backlog | $ | 3,975.9 |  | 3,288.9 |  | 3,975.9 |  | 3,822.3 |  | 3,106.6 |  | 3,225.0 |  | 3,288.9 |
SEU6 |  | 206 |  | 210 |  | 212 |  | 205 |  | 199 |  | 209 |  | 210 |
FFSs deployed |  | 255 |  | 269 |  | 255 |  | 252 |  | 249 |  | 269 |  | 269 |
Utilization rate6 | % | 76 |  | 76 |  | 82 |  | 75 |  | 70 |  | 78 |  | 77 |

Revenue up 10% over last quarter and up 9% over the fourth quarter of fiscal 2017

The increase over last quarter was mainly due to higher FFS utilization in the Americas and Europe, higher revenue from our manufacturing facility due to the timing of production milestones and the integration into our results of the revenues from AACE following the acquisition last quarter of the remaining 50% equity interest. The increase was also due to a favourable foreign exchange impact on the translation of foreign operations.

The increase over the fourth quarter of fiscal 2017 was due to higher FFS utilization in the Americas and the contribution of newly deployed simulators in our network in Europe and in the Americas, the integration into our results of the revenues from AACE, as mentioned above, a favourable foreign exchange impact on the translation of foreign operations and higher revenue recognized from simulator sales due to higher deliveries.

Revenue was $1,629.7 million this year, 5% or $72.8 million higher than last year

The increase over last year was mainly due to higher FFS utilization in the Americas and the contribution of newly deployed simulators in our network in Europe and in the Americas, the integration into our results of the revenues from AACE, as mentioned above, a favourable foreign exchange impact on the translation of foreign operations and an increase in demand for our crew sourcing business. The increase was also due to higher revenue recognized from simulator sales due to higher level of deliveries.

Segment operating income up 22% over last quarter and up 14% over the fourth quarter of fiscal 2017

Segment operating income was $95.7 million (21.0% of revenue) this quarter, compared to $78.6 million (19.0% of revenue) last quarter and $83.8 million (20.1% of revenue) in the fourth quarter of fiscal 2017.

Segment operating income increased by $17.1 million, or 22%, over last quarter. The increase was mainly due to higher FFS utilization mainly in the Americas and in Europe, higher revenue from our manufacturing facility, as mentioned above, and gains on the sale of existing simulators from our network to our customers. The increase was partially offset by higher selling, general and administrative expenses and a gain, recorded in the previous quarter, on the remeasurement of the previously held AACE investment net of reorganizational costs.

Segment operating income increased by $11.9 million, or 14%, over the fourth quarter of fiscal 2017. The increase was mainly due to higher FFS utilization and newly deployed simulators, as mentioned above, and higher revenue from our manufacturing facility. The increase was partially offset by higher selling, general and administrative expenses and an unfavourable foreign exchange impact from the revaluation of non-cash working capital accounts.

Segment operating income was $324.5 million, 19% or $51.3 million higher than last year

Segment operating income was $324.5 million (19.9% of revenue) this year, compared to $273.2 million (17.5% of revenue) last year.

The increase was mainly due to higher FFS utilization and newly deployed simulators, as mentioned above, gains realized in the second quarter from the disposal of our equity interest in the joint venture ZFTC, a favourable foreign exchange impact from operations and the net gain on the remeasurement of the previously held AACE investment following the acquisition in the third quarter. The increase was partially offset by higher selling, general and administrative expenses.

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

Management’s Discussion and Analysis

Property, plant and equipment expenditures at $50.2 million this quarter and $143.7 million for the year

Maintenance capital expenditures were $20.9 million for the quarter and $54.7 million for the year. Growth capital expenditures were $29.3 million for the quarter and $89.0 million for the year.

Capital employed increased $97.5 million over last quarter and $111.1 million over last year

The increase in capital employed over last quarter was mainly due to higher property, plant and equipment and intangible assets mainly as a result of movements in foreign exchange rates, a higher investment in equity accounted investees and higher non-cash working capital.

The increase in capital employed over last year was mainly due to higher property, plant and equipment and intangible assets and a lower investment in equity accounted investees resulting from the acquisition of AACE. This increase was partially offset by a lower investment in non-cash working capital, mainly due to higher deferred revenue and lower inventory, partially offset by higher accounts receivable.

Total backlog was at $3,975.9 million at the end of the year

(amounts in millions) | FY2018 | FY2017
Obligated backlog, beginning of period | $ | 2,823.9 |  | $ | 2,623.3 |
+ orders | 2,339.5 |  | 1,698.8 |
- revenue | (1,629.7 | ) | (1,556.9 | )
+ / - adjustments | 148.2 |  | 58.7 |
Obligated backlog, end of period | $ | 3,681.9 |  | $ | 2,823.9 |
Joint venture backlog (all obligated) | 294.0 |  | 465.0 |
Total backlog | $ | 3,975.9 |  | $ | 3,288.9 |

Fiscal 2018 adjustments includes $224.1 million added as a result of the acquisition of AACE, positive foreign exchange movements and the revaluation of prior year contracts. An adjustment was made to the joint venture backlog to reflect the removal of the AACE contracts that were transferred to obligated backlog.

Fiscal 2017 adjustments includes $117.8 million added as a result of the acquisition of Lockheed Martin Commercial Flight Training, the revaluation of prior year contracts and the cancellation of an order from a previous year.

This quarter's book-to-sales ratio was 1.20x. The ratio for the last 12 months was 1.44x.

CAE Year-End Financial Results 2018 I

Management’s Discussion and Analysis

5.2 Defence and Security

FISCAL 2018 EXPANSIONS AND NEW INITIATIVES

Expansions

– During the year, we began offering the new Initial Entry Fixed-Wing course at CAE's Dothan Training Center. A total of 56 U.S. Army students have since graduated from the program to become Army fixed-wing aviators.

New programs and products

– We upgraded the C-130 Aeromedical Evacuation Training System for the USAF at Dobbins Air Reserve Base with a motion platform, a first-of-its-kind in the world for an aeromedical fuselage trainer;

– We supported the Royal Australian Air Force’s (RAAF) participation in the Diamond Thunder distributed mission training exercise, which saw the RAAF network various simulation assets across the country as part of its inaugural Air Warfare Instructor Course;

– Our CAE 7000 Series C295 FFS and CAE 3000 Series SW-4 FFS were accepted into service by the Polish Air Force at the 8th Air Base Krakow-Balice and 41st Air Base School in Deblin, Poland respectively, where they will play a key role in the training of Polish Air Force aircrews and cadets;

– Our Predator Mission Trainer was accepted into service by the Italian Air Force at Amendola Air Force Base in Italy.

FISCAL 2018 ORDERS

Defence and Security was awarded $434.5 million in orders this quarter and $1,400.3 million in total for fiscal 2018, including notable contract awards from:

– Leonardo Helicopters to provide the Qatar Emiri Air Force with a comprehensive NH90 helicopter training solution that includes simulators, training devices and long-term training services;

– The U.S. Navy under a U.S. foreign military sale program to provide the Brazilian Navy with a comprehensive S-70B Seahawk helicopter training system;

– The Royal Australian Air Force to continue providing King Air 350 simulator services through 2024;

– The U.S. Navy exercising contract options as part of the MH-60R/S Tech Refresh and Procurement of Simulators program;

– The U.K. Ministry of Defence to continue providing aircrew training services at CAE's Medium Support Helicopter Aircrew Training Facility (MSHATF);

– The General Headquarters of the UAE to provide the UAE Air Force with a comprehensive training solution for the RQ-1E Predator remotely piloted aircraft.

FINANCIAL RESULTS

(amounts in millions, except operating margins) |  | FY2018 | FY2017 | Q4-2018 | Q3-2018 | Q2-2018 | Q1-2018 | Q4-2017
Revenue | $ | 1,085.1 |  | 1,036.9 |  | 290.4 |  | 262.8 |  | 268.7 |  | 263.2 |  | 282.7 |
Segment operating income | $ | 127.7 |  | 120.4 |  | 38.7 |  | 32.7 |  | 30.0 |  | 26.3 |  | 33.0 |
Operating margins | % | 11.8 |  | 11.6 |  | 13.3 |  | 12.4 |  | 11.2 |  | 10.0 |  | 11.7 |
Depreciation and amortization | $ | 49.9 |  | 57.8 |  | 10.8 |  | 10.3 |  | 14.0 |  | 14.8 |  | 14.3 |
Property, plant and equipment |  |  |  |  |  |  |  |
expenditures | $ | 27.6 |  | 95.8 |  | 6.8 |  | 3.4 |  | 2.3 |  | 15.1 |  | 19.7 |
Intangible assets and other |  |  |  |  |  |  |  |
assets expenditures | $ | 21.6 |  | 26.9 |  | 9.2 |  | 3.6 |  | 5.2 |  | 3.6 |  | 12.6 |
Capital employed | $ | 982.4 |  | 881.2 |  | 982.4 |  | 955.5 |  | 965.5 |  | 924.6 |  | 881.2 |
Total backlog | $ | 3,873.2 |  | 4,241.3 |  | 3,873.2 |  | 3,546.0 |  | 3,607.0 |  | 4,101.2 |  | 4,241.3 |

Revenue up 11% over last quarter and up 3% over the fourth quarter of fiscal 2017

The increase over last quarter was mainly due to higher revenue from North American programs partially offset by lower revenue from Middle Eastern and European programs.

The increase over the fourth quarter of fiscal 2017 was mainly due to higher revenue from North American programs partially offset by lower revenue from European, Australian and Asian programs resulting from a higher level of activity in the prior year and an unfavourable foreign exchange impact on the translation of foreign operations.

Revenue was $1,085.1 million this year, 5% or $48.2 million higher than last year

The increase was mainly due to higher revenue from North American and Middle Eastern programs partially offset by lower revenue from European and Australian programs and an unfavourable foreign exchange impact on the translation of foreign operations.

Management’s Discussion and Analysis

Segment operating income up 18% over last quarter and up 17% over the fourth quarter of fiscal 2017

Segment operating income was $38.7 million (13.3% of revenue) this quarter, compared to $32.7 million (12.4% of revenue) last quarter and $33.0 million (11.7% of revenue) in the fourth quarter of fiscal 2017.

The increase over last quarter was mainly due to higher volume on North American programs, higher margins on Australian programs and lower net research and development expenses, partially offset by higher selling, general and administrative expenses.

The increase over the fourth quarter of fiscal 2017 was mainly due to higher margins on European programs and lower net research and development expenses, partially offset by lower margins on Asian programs.

Segment operating income was $127.7 million this year, 6% or $7.3 million higher than last year

Segment operating income was $127.7 million (11.8% of revenue) this year, compared to $120.4 million (11.6% of revenue) last year.

The increase over last year was mainly due to higher margins on European programs, lower selling, general and administrative expenses and higher volume on North American and Middle Eastern programs. The increase was partially offset by lower margins on Australian programs.

Capital employed increased $26.9 million over last quarter and increased $101.2 million over last year

The increase over last quarter was mainly due to movements in foreign exchange rates and a higher profitability in our joint ventures, partially offset by a lower investment in non-cash working capital.

The increase over last year was mainly due to a higher investment in non-cash working capital as a result of higher contracts in progress assets and lower accounts payable and accrued liabilities, partially offset by a decrease in prepayments. The increase was also due to a higher profitability in our joint ventures.

Total backlog down 9% compared to last year

(amounts in millions) | FY2018 | FY2017
Obligated backlog, beginning of period | $ | 2,706.1 |  | $ | 2,441.6 |
+ orders | 1,400.3 |  | 1,383.9 |
- revenue | (1,085.1 | ) | (1,036.9 | )
+ / - adjustments | (81.0 | ) | (82.5 | )
Obligated backlog, end of period | $ | 2,940.3 |  | $ | 2,706.1 |
Joint venture backlog (all obligated) | 72.7 |  | 78.7 |
Unfunded backlog | 860.2 |  | 1,456.5 |
Total backlog | $ | 3,873.2 |  | $ | 4,241.3 |

Fiscal 2018 adjustments include the removal of the Initial Entry Rotary-Wing Instructor Support Services contract following a protest which resulted in the client's decision to award the contract to the incumbent and the revaluation of prior year contracts.

Fiscal 2017 adjustments include the cancellation of two orders and the revaluation of prior year contracts, partially offset by a contract amendment related to the acquisition of Bombardier's Military Aviation Training, acquired in fiscal 2016.

This quarter's book-to-sales ratio was 1.50x. The ratio for the last 12 months was 1.29x.

In fiscal 2018, $283.3 million of unfunded backlog was transferred to obligated backlog and $262.1 million was added to the unfunded backlog. An adjustment was made to the unfunded backlog to reflect the removal of the Initial Entry Rotary-Wing Instructor Support Services contract.

CAE Year-End Financial Results 2018 I

Management’s Discussion and Analysis

5.3 Healthcare

FISCAL 2018 EXPANSIONS AND NEW INITIATIVES

Expansions

– We hosted our first expanded Human Patient Simulation Network (HPSN) U.K. conference, expanding our potential customer base and simulation market to include specialties outside of nursing;

– We formed a partnership with the AHA to establish a network of International Training Sites to deliver lifesaving AHA courses in countries that are currently underserved. We began delivering courses in the fourth quarter for clinicians at our first training site, the CAE Brunei Multi-Purpose Training Centre.

New programs and products

– We launched CAE Juno, a new clinical skills manikin for nursing programs designed to help bridge the gap between classroom and hospital settings, in the first quarter of fiscal 2018 at the INACSL annual conference;

– We, together with ASA, launched the Anesthesia SimSTAT - Trauma, the first in a series of interactive screen-based anesthesia simulation modules, which has been approved by the American Board of Anesthesiology for MOCA credits;

– We delivered a Microsoft Hololens augmented reality training solution for the Abiomed Impella, a heart pump system;

– We developed a physics-driven simulator for the Medtronic MicraTM Transcatheter Pacing System, that offers an augmented reality training solution for up to 12 simultaneous learners;

– We developed the LucinaAR, the world's first augmented reality childbirth simulator, which was launched at the International Meeting on Simulation in Healthcare. This high-fidelity patient manikin allows clinical teams and learners to practice emergency labour and delivery manoeuvers while guided by 3D holograms;

– We signed a distributor contract with WorldPoint to sell CAE Juno manikins to simulation centres in the U.S., which will give us access to WorldPoint's unique network of customers.

Innovation Awards

– Evidencing our thought leadership in healthcare simulation, Anesthesia SimSTAT earned the .orgCommunity Innovation 2017 Award;

– We received the Unity Impact Award for our CAE VimedixAR ultrasound simulator, which integrates real-time interactive holograms of the human anatomy.

FISCAL 2018 ORDERS

CAE Healthcare sales this year included large orders for patient and ultrasound simulators and centre management solutions sold to customers in North America directly and internationally, through distributors, as well as patient and interventional simulators sold to military customers.

FINANCIAL RESULTS

(amounts in millions, except operating margins) |  | FY2018 | FY2017 | Q4-2018 | Q3-2018 | Q2-2018 | Q1-2018 | Q4-2017
Revenue | $ | 115.2 |  | 110.7 |  | 35.1 |  | 27.9 |  | 28.3 |  | 23.9 |  | 34.2 |
Segment operating income | $ | 8.8 |  | 6.6 |  | 6.7 |  | 1.5 |  | 2.2 |  | (1.6 | ) | 4.1 |
Operating margins | % | 7.6 |  | 6.0 |  | 19.1 |  | 5.4 |  | 7.8 |  | — |  | 12.0 |
Depreciation and amortization | $ | 13.1 |  | 13.9 |  | 3.2 |  | 3.2 |  | 3.1 |  | 3.6 |  | 3.8 |
Property, plant and equipment | $ | 2.6 |  | 2.3 |  | 0.4 |  | 0.7 |  | 0.2 |  | 1.3 |  | 1.4 |
expenditures |  |  |  |  |  |  |  |
Intangible assets and other | $ | 7.4 |  | 3.7 |  | 2.1 |  | 1.5 |  | 2.3 |  | 1.5 |  | — |
assets expenditures |  |  |  |  |  |  |  |
Capital employed | $ | 211.5 |  | 224.3 |  | 211.5 |  | 205.0 |  | 206.4 |  | 213.4 |  | 224.3 |

Revenue up 26% over last quarter and up 3% over the fourth quarter of fiscal 2017

The increase over last quarter and the fourth quarter of fiscal 2017 was mainly due to higher revenue from centre management solutions and patient simulators, primarily driven by higher sales to North American and military customers. The increase was partially offset by lower revenue from interventional simulators.

Revenue was $115.2 million this year, 4% or $4.5 million higher than last year

The increase was due to higher revenue from centre management solutions as a result of higher sales to North American customers and higher revenue from interventional simulators sold to military customers. The increase was partially offset by lower revenue from key partnerships with OEMs.

Management’s Discussion and Analysis

Segment operating income higher over last quarter and the fourth quarter of fiscal 2017

Segment operating income was $6.7 million this quarter (19.1% of revenue), compared to $1.5 million last quarter (5.4% of revenue) and $4.1 million (12.0% of revenue) in the fourth quarter of fiscal 2017.

The increase over last quarter was mainly due to higher revenue, as mentioned above, the benefit recognized this quarter from a remeasurement of long-term royalty obligations and a more favourable product mix. The increase was partially offset by higher selling, general and administrative expenses.

The increase over the fourth quarter of fiscal 2017 was mainly due to the benefit from a remeasurement of long-term royalty obligations and lower research and development expenses.

Segment operating income was $8.8 million this year, $2.2 million higher than last year

Segment operating income was $8.8 million (7.6% of revenue) this year, compared to $6.6 million (6.0% of revenue) last year.

The increase over last year was mainly due to higher revenues, as mentioned above, and the net benefit from a remeasurement of long‑term royalty obligations less non-recurring selling, general and administrative expenses for investments to support product launches, an expansion to the sales force and marketing. The increase was also due to lower research and development expenses.

Capital employed increased by $6.5 million over last quarter and decreased by $12.8 million from last year

The increase over last quarter was mainly due to higher intangible assets as a result of movements in foreign exchange rates. The increase was also due to higher non-cash working capital, resulting primarily from an increase in accounts receivable from higher revenues.

The decrease from last year was primarily due to lower intangible assets as a result of amortization and lower non-cash working capital.

CAE Year-End Financial Results 2018 I

Management’s Discussion and Analysis

6. CONSOLIDATED CASH MOVEMENTS AND LIQUIDITY

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

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

– Capital expenditure requirements;

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

6.1 Consolidated cash movements7

(amounts in millions) | FY2018 |  | FY2017 |  | Q4-2018 |  | Q3-2018 |  | Q4-2017
Cash provided by continuing operating activities* | $ | 446.4 |  |  | $ | 435.2 |  |  | $ | 130.8 |  |  | $ | 117.4 |  |  | $ | 116.9 |
Changes in non-cash working capital | (43.1 | ) |  | 29.1 |  |  | 7.0 |  |  | 70.2 |  |  | 80.6 |
Net cash provided by continuing operating activities | $ | 403.3 |  |  | $ | 464.3 |  |  | $ | 137.8 |  |  | $ | 187.6 |  |  | $ | 197.5 |
Maintenance capital expenditures7 | (68.5 | ) |  | (62.8 | ) |  | (25.9 | ) |  | (13.9 | ) |  | (24.5 | )
Other assets | (9.1 | ) |  | (5.5 | ) |  | 3.1 |  |  | (3.8 | ) |  | (2.3 | )
Proceeds from the disposal of property, plant and equipment | 27.0 |  |  | 6.6 |  |  | 10.6 |  |  | 0.5 |  |  | 4.1 |
Net (payments to) proceeds from equity accounted investees | (11.5 | ) |  | (10.6 | ) |  | 0.2 |  |  | (7.7 | ) |  | (1.2 | )
Dividends received from equity accounted investees | 37.6 |  |  | 16.5 |  |  | 14.0 |  |  | 6.5 |  |  | 7.3 |
Dividends paid | (89.9 | ) |  | (80.6 | ) |  | (22.5 | ) |  | (23.2 | ) |  | (20.5 | )
Free cash flow from continuing operations7 | $ | 288.9 |  |  | $ | 327.9 |  |  | $ | 117.3 |  |  | $ | 146.0 |  |  | $ | 160.4 |
Growth capital expenditures7 | (105.4 | ) |  | (160.1 | ) |  | (31.5 | ) |  | (29.1 | ) |  | (49.1 | )
Capitalized development costs | (32.5 | ) |  | (37.8 | ) |  | (13.5 | ) |  | (6.9 | ) |  | (14.0 | )
Common shares repurchased | (44.8 | ) |  | (41.7 | ) |  | (0.4 | ) |  | (21.8 | ) |  | (3.0 | )
Other cash movements, net | 12.8 |  |  | 13.4 |  |  | 1.9 |  |  | 1.4 |  |  | 2.3 |
Business combinations, net of cash and cash |  |  |  |  |  |  |  |  |
equivalents acquired | (124.4 | ) |  | (5.5 | ) |  | — |  |  | (99.7 | ) |  | — |
Net proceeds from disposal of interest in investment | 117.8 |  |  | — |  |  | — |  |  | 3.8 |  |  | — |
Effect of foreign exchange rate changes on cash |  |  |  |  |  |  |  |  |
and cash equivalents | 15.0 |  |  | (4.9 | ) |  | 15.4 |  |  | 4.0 |  |  | (0.1 | )
Net increase (decrease) in cash before proceeds and |  |  |  |  |  |  |  |  |
repayment of long-term debt | $ | 127.4 |  |  | $ | 91.3 |  |  | $ | 89.2 |  |  | $ | (2.3 | ) |  | $ | 96.5 |
* before changes in non-cash working capital |  |  |  |  |  |  |  |  |

Free cash flow from continuing operations was $117.3 million for the quarter

Free cash flow was $28.7 million lower than last quarter and $43.1 million lower compared to the fourth quarter of fiscal 2017.

Free cash flow was lower compared to last quarter and the fourth quarter of fiscal 2017 mainly due to a higher investment in non-cash working capital, partially offset by an increase in cash provided by continuing operating activities, higher proceeds from the disposal of property, plant and equipment and higher dividends received from equity accounted investees.

Free cash flow from continuing operations was $288.9 million this year

Free cash flow decreased by $39.0 million, or 12%, compared to last year.

Free cash flow was lower compared to last year mainly due to a higher investment in non-cash working capital, partially offset by higher dividends received from equity accounted investees and higher proceeds from the disposal of property, plant and equipment.

Capital expenditures were $57.4 million this quarter and $173.9 million for the year

Growth capital expenditures were $31.5 million this quarter and $105.4 million for the year including strategic purchases of existing FFSs in the market. Our growth capital allocation decisions are market-driven in nature and are intended to keep pace with the demand of our existing and new customers. Maintenance capital expenditures were $25.9 million this quarter and $68.5 million for the year.

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

Management’s Discussion and Analysis

6.2 Sources of liquidity

We have a committed line of credit at floating rates, provided by a syndicate of lenders. We and some of our subsidiaries can borrow funds directly from this credit facility to cover operating and general corporate expenses and to issue letters of credit and bank guarantees.

The total amount available through this committed bank line at March 31, 2018 was US$550.0 million (2017 – US$550.0 million) with the option, subject to lender’s consent, to increase to a total amount of US$850.0 million. There was no amount drawn under the facility as at March 31, 2018 (2017 – nil) and US$46.4 million was used for letters of credit (2017 – US$92.0 million). The applicable interest rate on this revolving credit facility is variable, based on the bank’s prime rate, bankers’ acceptance rates or LIBOR plus a spread which depends on the credit rating assigned by Standard & Poor’s Rating Services. During the year, the maturity date of our revolving unsecured term credit facility was extended to September 30, 2022.

We have an unsecured Export Development Canada (EDC) Performance Security Guarantee (PSG) account for US$225.0 million (2017 – US$125.0 million). This is an uncommitted revolving facility for performance bonds, advance payment guarantees or similar instruments. As at March 31, 2018 the total outstanding for these instruments was $163.6 million (2017 – $115.9 million).

We manage a program in which we sell interests in certain of our accounts receivable (current financial assets program) to a third party for cash consideration for amounts up to US$300.0 million (2017 – US$150.0 million) with limited recourse to CAE. As at March 31, 2018, the Canadian dollar equivalent of $168.3 million (2017 – $141.6 million) of specific accounts receivable were sold to a third party.

As at March 31, 2018, we are compliant with all our financial covenants.

We believe that our cash and cash equivalents, access to credit facilities and expected free cash flow will provide sufficient flexibility for our business, repurchase of common shares and payment of dividends and will enable us to meet all other expected financial requirements in the near term.

The following table summarizes the long-term debt:

| As at March 31 | As at March 31
(amounts in millions) | 2018 | 2017
Total long-term debt | $ | 1,260.9 |  | $ | 1,255.4 |
Less: |  |
Current portion of long-term debt | 35.2 |  | 31.2 |
Current portion of finance leases | 17.0 |  | 20.7 |
Long-term portion of long-term debt | $ | 1,208.7 |  | $ | 1,203.5 |

As part of our acquisition, in fiscal 2018, of a portfolio of training assets from a full-flight simulator leasing business, we acquired a term loan for the financing of a simulator. This represents a loan obligation of $5.3 million as at March 31, 2018.

As part of the acquisition of the remaining 50% equity interest in AACE, we acquired loans in the amount of $28.9 million as at March 31, 2018.

Management’s Discussion and Analysis

6.3 Government participation

We have agreements with various governments whereby the latter contribute a portion of the cost, based on expenditures incurred by CAE, of certain R&D programs for modeling, simulation and training services technology.

During fiscal 2014, we announced Project Innovate, an R&D program extending over five and a half years. The goal of Project Innovate is to expand our modeling and simulation technologies, develop new ones and continue to differentiate our service offering. Concurrently, the Government of Canada agreed to participate in Project Innovate through a repayable loan of up to $250 million made through the Strategic Aerospace and Defence Initiative (SADI).

During fiscal 2016, we amended and extended our Project New Core Markets, an R&D program, for an additional four years. The aim is to leverage our modeling, simulation and training services expertise in healthcare. The Quebec government, through Investissement Québec, agreed to participate up to $70 million in contributions related to costs incurred before the end of fiscal 2020.

During fiscal 2017, we announced our participation in Project SimÉco 4.0, an R&D project under the SA2GE program. The aim of this project is the development of new products or processes which will further contribute to greenhouse gas emissions reductions. The government of Quebec, through the Ministry of Economy, Science and Innovation, and SA2GE have committed to contribute amounts up to 50% of eligible costs incurred by CAE to fiscal 2020.

You will find more details in Note 1 and Note 13 of our consolidated financial statements.

6.4 Contractual obligations

We enter into contractual obligations and commercial commitments in the normal course of our business. The table below represents our contractual obligations and commitments for the next five years and thereafter:

Contractual obligations

(amounts in millions) | 2019 | 2020 | 2021 | 2022 | 2023 | Thereafter | Total
Long-term debt (excluding interest) | $ | 35.6 |  | $ | 195.9 |  | $ | 34.1 |  | $ | 176.7 |  | $ | 43.5 |  | $ | 631.7 |  | $ | 1,117.5 |
Finance leases (excluding interest) | 17.0 |  | 30.7 |  | 27.4 |  | 11.0 |  | 11.9 |  | 47.4 |  | 145.4 |
Non-cancellable operating leases | 44.4 |  | 37.9 |  | 32.5 |  | 26.1 |  | 22.4 |  | 76.7 |  | 240.0 |
Purchase commitments | 132.0 |  | 70.5 |  | 19.5 |  | 0.2 |  | 0.5 |  | 0.5 |  | 223.2 |
| $ | 229.0 |  | $ | 335.0 |  | $ | 113.5 |  | $ | 214.0 |  | $ | 78.3 |  | $ | 756.3 |  | $ | 1,726.1 |

We also had total availability under the committed credit facility of US$503.6 million as at March 31, 2018 compared to US$458.0 million at March 31, 2017.

We have purchase commitments related to agreements that are enforceable and legally binding. Most are agreements with subcontractors to provide services for long-term contracts that we have with our clients. The terms of the agreements are significant because they set out obligations to buy goods or services in fixed or minimum amounts, at fixed, minimum or variable prices and at various points in time.

As at March 31, 2018, we had other long-term liabilities that are not included in the table above. These include some accrued pension liabilities, deferred revenue, deferred gains on assets and various other long-term liabilities. CAE’s cash obligation in respect of the accrued employee pension liability depends on various elements including market returns, actuarial gains and losses and interest rates. We did not include deferred tax liabilities since future payments of income taxes depend on the amount of taxable earnings and on whether there are tax loss carry-forwards available.

Management’s Discussion and Analysis

7. CONSOLIDATED FINANCIAL POSITION

7.1 Consolidated capital employed

| As at March 31 |  | As at March 31
(amounts in millions) | 2018 |  | 2017
Use of capital: |  |  |
Current assets | $ | 2,060.8 |  |  | $ | 1,919.7 |
Less: cash and cash equivalents | (611.5 | ) |  | (504.7 | )
Current liabilities | (1,320.6 | ) |  | (1,273.9 | )
Less: current portion of long-term debt | 52.2 |  |  | 51.9 |
Non-cash working capital8 | $ | 180.9 |  |  | $ | 193.0 |
Property, plant and equipment | 1,803.9 |  |  | 1,582.6 |
Other long-term assets | 1,854.5 |  |  | 1,852.5 |
Other long-term liabilities | (823.3 | ) |  | (796.4 | )
Total capital employed | $ | 3,016.0 |  |  | $ | 2,831.7 |
Source of capital: |  |  |
Current portion of long-term debt | $ | 52.2 |  |  | $ | 51.9 |
Long-term debt | 1,208.7 |  |  | 1,203.5 |
Less: cash and cash equivalents | (611.5 | ) |  | (504.7 | )
Net debt8 | $ | 649.4 |  |  | $ | 750.7 |
Equity attributable to equity holders of the Company | 2,298.2 |  |  | 2,020.8 |
Non-controlling interests | 68.4 |  |  | 60.2 |
Source of capital | $ | 3,016.0 |  |  | $ | 2,831.7 |

Capital employed increased $184.3 million, or 7%, over last year

The increase over last year was mainly due to higher property, plant and equipment, partially offset by an increase in other long-term liabilities and lower non-cash working capital.

Our return on capital employed8 (ROCE) was 14.4% this year compared to 11.2% last year. Our ROCE this year was impacted by the income tax recovery resulting from the enactment of a lower U.S. federal income tax rate, the gain on the remeasurement of the previously held AACE investment net of reorganizational costs and the gain realized from the disposal of our equity interest in the joint venture ZFTC. Excluding these impacts, our ROCE would have been 12.3% this year.

Non-cash working capital decreased by $12.1 million

The decrease was mainly due to higher deferred revenue and lower inventories, partially offset by higher contracts in progress assets, lower contract in progress liabilities and accounts payable and accrued liabilities.

Net property, plant and equipment up $221.3 million

The increase was mainly due to capital expenditures and the integration into our operations of the fixed assets acquired from AACE, partially offset by depreciation.

Other long-term liabilities up $26.9 million

The increase was mainly due to higher employee benefit obligations resulting primarily from a decrease in the discount rate used to determine our defined benefit pension plan obligations and higher deferred gains and other non-current liabilities, partially offset by lower deferred tax liabilities.

Net debt lower than last year

The decrease was mainly due to the impact of cash movements during the year, partially offset by the addition of loans obtained as part of the acquisition of AACE.

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

Management’s Discussion and Analysis

Change in net debt9

(amounts in millions) |  | FY2018 |  | FY2017
Net debt, beginning of period | $ | 750.7 |  | $ | 787.3 |
Impact of cash movements on net debt |  |  |  |
(see table in the consolidated cash movements section) | $ | (127.4 | ) | $ | (91.3 | )
Effect of foreign exchange rate changes on long-term debt |  | (22.9 | ) |  | 14.0 |
Impact from business combinations |  | 37.7 |  |  | 25.8 |
Other |  | 11.3 |  |  | 14.9 |
Decrease in net debt during the period | $ | (101.3 | ) | $ | (36.6 | )
Net debt, end of period | $ | 649.4 |  | $ | 750.7 |
Net debt-to-capital9 | % | 21.5 |  | % | 26.5 |

Total equity increased by $285.6 million this year

The increase in equity was mainly due to net income of $355.7 million and a favourable foreign currency translation of $80.5 million, partially offset by cash dividends of $89.9 million, common shares repurchased and cancelled of $44.8 million and defined benefit plan remeasurements of $24.1 million.

Outstanding share data

Our articles of incorporation authorize the issue of an unlimited number of common shares and an unlimited number of preferred shares issued in series. We had a total of 267,738,530 common shares issued and outstanding as at March 31, 2018 with total share capital of $633.2 million. In addition, we had 6,155,525 options outstanding under the Employee Stock Option Plan (ESOP).

As at April 30, 2018, we had a total of 267,604,005 common shares issued and outstanding and 6,137,450 options outstanding under the ESOP.

Repurchase and cancellation of shares

On February 9, 2018, we announced the renewal of the normal course issuer bid (NCIB) to purchase up to 5,349,804 of our common shares. The NCIB began on February 23, 2018 and will end on February 22, 2019 or on such earlier date when the Company completes its purchases or elects to terminate the NCIB. These purchases will be made on the open market plus brokerage fees through the facilities of the TSX and/or alternative trading systems at the prevailing market price at the time of the transaction, in accordance with the TSX’s applicable policies. All common shares purchased pursuant to the NCIB will be cancelled.

In fiscal 2018, we repurchased and cancelled a total of 2,081,200 common shares under the previous and current NCIB (2017 – 2,490,900), at a weighted average price of $21.53 per common share (2017 – $16.73), for a total consideration of $44.8 million (2017 – $41.7 million). An excess of $39.9 million (2017 – $36.1 million) of the shares’ repurchase value over their carrying amount was charged to retained earnings as share repurchase premiums. Included in the above amount were 600,000 common shares that were repurchased under a private agreement with a third-party seller at a discount to the prevailing market price of the Company's common shares at the time of purchase.

Dividends

We paid a dividend of $0.08 per share in the first quarter and $0.09 per share in the second, third and fourth quarter of fiscal 2018. These dividends were eligible under the Income Tax Act (Canada) and its provincial equivalents.

Our Board of Directors has the discretion to set the amount and timing of any dividend. The Board reviews the dividend policy annually based on the cash requirements of our operating activities, liquidity requirements and projected financial position. We expect to declare dividends of approximately $96.4 million in fiscal 2019 based on our current dividend and the number of common shares outstanding as at March 31, 2018.

Guarantees

As at March 31, 2018, we have a total of $223.4 million outstanding letters of credit and performance guarantees which are not recognized in the consolidated statement of financial position, compared to $238.2 million last fiscal year.

Pension obligations

We maintain defined benefit and defined contribution pension plans. Subsequent to recent legislative changes, the defined benefit pension plans are considered sufficiently funded. We expect to contribute $23.7 million in fiscal 2019.

CAE Year-End Financial Results 2018 I

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

Management’s Discussion and Analysis

7.2 Off balance sheet arrangements

In the normal course of operations, we use off-balance sheet activities through operating leases for building, land, simulators, aircrafts and other equipment. These leases are non-recourse to us.

You can find more details about operating lease commitments in Notes 1 and 26 of our consolidated financial statements.

In the normal course of business we also manage a program in which we sell interests in certain of our accounts receivable (current financial assets program) to a third party for cash consideration with limited recourse to CAE.

You will find more details about our financial assets program in Sources of Liquidity.

7.3 Financial instruments

We are exposed to various financial risks in the normal course of business. We enter into forward contracts and swap agreements to manage our exposure to fluctuations in foreign exchange rates, interest rates and share price which have an effect on our share‑based payments costs. We formally assess, both at inception of the hedge relationship and on an ongoing basis, whether the derivatives we use in hedging transactions are highly effective in offsetting changes in cash flows of hedged items in relation to the hedged risk. We enter into these transactions to reduce our exposure to risk and volatility, and not for trading or speculative purposes. We only enter into contracts with counterparties that are of high credit quality.

Classification of financial instruments

We have made the following classifications for our financial instruments:

– Cash and cash equivalents, restricted cash and all derivative instruments, except for derivatives designated as effective hedging instruments, are classified at fair value through profit and loss (FVTPL);

– Accounts receivable, contracts in progress, non-current receivables and advances are classified as loans and receivables, except for those that we intend to sell immediately or in the near term which are classified at FVTPL;

– Portfolio investments are classified as available-for-sale;

– Accounts payable and accrued liabilities and long-term debt, including interest payable, as well as finance lease obligations and royalty obligations are classified as other financial liabilities, all of which are carried at amortized cost using the effective interest method.

Fair value of financial instruments

The fair value of a financial instrument is determined by reference to the available market information at the reporting date. When no active market exists for a financial instrument, we determine the fair value of that instrument based on valuation methodologies as discussed below. In determining assumptions required under a valuation model, we primarily use external, readily observable market data inputs. Assumptions or inputs that are not based on observable market data incorporate our best estimates of market participant assumptions. Counterparty credit risk and our own credit risk are taken into account in estimating the fair value of all financial assets and financial liabilities.

The following assumptions and valuation methodologies have been used to measure the fair value of financial instruments:

– The fair value of cash and cash equivalents, accounts receivable, contracts in progress, accounts payable and accrued liabilities approximate their carrying values due to their short-term maturities;

– The fair value of derivative instruments, which include forward contracts, swap agreements and embedded derivatives accounted for separately and is calculated as the present value of the estimated future cash flows using an appropriate interest rate yield curve and foreign exchange rate. Assumptions are based on market conditions prevailing at each reporting date. The fair value of derivative instruments reflect the estimated amounts that we would receive or pay to settle the contracts at the reporting date;

– The fair value of the available-for-sale investment, which does not have a readily available market value, is estimated using a discounted cash flow model, which includes some assumptions that are not based on observable market prices or rates;

– The fair value of non-current receivables is estimated based on discounted cash flows using current interest rates for instruments with similar risks and remaining maturities;

– The fair value of long-term debts and non-current liabilities, including finance lease obligations and royalty obligations, are estimated based on discounted cash flows using current interest rates for instruments with similar risks and remaining maturities;

– The fair value of the contingent consideration arising on a business combination is based on the estimated amount and timing of projected cash flows, the probability of the achievement of the criteria on which the contingency is based and the risk-adjusted discount rate used to present value the probability-weighted cash flows.

A description of the fair value hierarchy is discussed in Note 28 of our consolidated financial statements.

CAE Year-End Financial Results 2018 I

Management’s Discussion and Analysis

Financial risk management

Due to the nature of the activities that we carry out and as a result of holding financial instruments, we are exposed to credit risk, liquidity risk and market risk, including foreign currency risk and interest rate risk. Our exposure to credit risk, liquidity risk and market risk is managed within risk management parameters documented in corporate policies. These risk management parameters remain unchanged since the previous period, unless otherwise indicated.

Credit risk

Credit risk is defined as our exposure to a financial loss if a debtor fails to meet its obligations in accordance with the terms and conditions of its arrangements with CAE. We are exposed to credit risk on our accounts receivable and certain other assets through our normal commercial activities. We are also exposed to credit risk through our normal treasury activities on our cash and cash equivalents and derivative financial assets. Credit risks arising from our normal commercial activities are managed in regards to customer credit risk.

Our customers are mainly established companies, some of which have publicly available credit ratings, as well as government agencies, which facilitates risk assessment and monitoring. In addition, we typically receive substantial non-refundable advance payments for construction contracts. We closely monitor our exposure to major airline companies in order to mitigate our risk to the extent possible. Furthermore, our trade receivables are not concentrated with specific customers but are held with a wide range of commercial and government organizations. As well, our credit exposure is further reduced by the sale of certain of our accounts receivable to third-party financial institutions for cash consideration on a limited recourse basis (current financial assets program). We do not hold any collateral as security. The credit risk on cash and cash equivalents is mitigated by the fact that they are mainly in place with a diverse group of major North American and European financial institutions.

We are exposed to credit risk in the event of non-performance by counterparties to our derivative financial instruments. We use several measures to minimize this exposure. First, we enter into contracts with counterparties that are of high credit quality. We signed International Swaps & Derivatives Association, Inc. (ISDA) Master Agreements with the majority of counterparties with whom we trade derivative financial instruments. These agreements make it possible to offset when a contracting party defaults on the agreement, for each of the transactions covered by the agreement and in force at the time of default. Also, collateral or other security to support derivative financial instruments subject to credit risk can be requested by CAE or our counterparties (or both parties, if need be) when the net balance of gains and losses on each transaction exceeds a threshold defined in the ISDA Master Agreement. Finally, we monitor the credit standing of counterparties on a regular basis to help minimize credit risk exposure.

The carrying amounts presented in Note 4 and Note 28 of our consolidated financial statements represent the maximum exposure to credit risk for each respective financial asset as at the relevant dates.

Liquidity risk

Liquidity risk is defined as the potential risk that we cannot meet our cash obligations as they become due.

We manage this risk by establishing cash forecasts, as well as long-term operating and strategic plans. The management of consolidated liquidity requires a regular monitoring of expected cash inflows and outflows which is achieved through a forecast of our consolidated liquidity position, for efficient use of cash resources. Liquidity adequacy is assessed in view of seasonal needs, growth requirements and capital expenditures, and the maturity profile of indebtedness, including off-balance sheet obligations. We manage our liquidity risk to maintain sufficient liquid financial resources to fund our operations and meet our commitments and obligations. In managing our liquidity risk, we have access to a revolving unsecured credit facility and agreements to sell certain of our accounts receivable. We also regularly monitor any financing opportunities to optimize our capital structure and maintain appropriate financial flexibility.

Market risk

Market risk is defined as our exposure to a gain or a loss in the value of our financial instruments as a result of changes in market prices, whether those changes are caused by factors specific to the individual financial instruments or its issuer, or factors affecting all similar financial instruments traded in the market. We are mainly exposed to foreign currency risk and interest rate risk.

We use derivative instruments to manage market risk against the volatility in foreign exchange rates, interest rates and share-based payments in order to minimize their impact on our results and financial position. Our policy is not to utilize any derivative financial instruments for trading or speculative purposes.

CAE Year-End Financial Results 2018 I

Management’s Discussion and Analysis

Foreign currency risk

Foreign currency risk is defined as our exposure to a gain or a loss in the value of our financial instruments as a result of fluctuations in foreign exchange rates. We are exposed to foreign exchange rate variability primarily in relation to certain sale commitments, expected purchase transactions and debt denominated in a foreign currency, as well as on our net investment from our foreign operations which have functional currencies other than the Canadian dollar (in particular the U.S. dollar, Euro and British pound). In addition, these operations have exposure to foreign exchange rates primarily through cash and cash equivalents and other working capital accounts denominated in currencies other than their functional currencies.

We mitigate foreign currency risks by having our foreign operations transact in their functional currency for material procurement, sale contracts and financing activities.

We use forward foreign currency contracts and foreign currency swap agreements to manage our exposure from transactions in foreign currencies. These transactions include forecasted transactions and firm commitments denominated in foreign currencies. Our foreign currency hedging programs are typically unaffected by changes in market conditions, as related derivative financial instruments are generally held until their maturity, consistent with the objective to fix currency rates on the hedged item.

Interest rate risk

Interest rate risk is defined as our exposure to a gain or a loss to the value of our financial instruments as a result of fluctuations in interest rates. We bear some interest rate fluctuation risk on our floating rate long-term debt and some fair value risk on our fixed interest long‑term debt. We mainly manage interest rate risk by fixing project-specific floating rate debt in order to reduce cash flow variability. We have a floating rate debt through our revolving unsecured credit facility and other asset-specific floating rate debts. A mix of fixed and floating interest rate debt is sought to reduce the net impact of fluctuating interest rates. Derivative financial instruments used to manage interest rate exposures are mainly interest rate swap agreements.

We use financial instruments to manage our exposure to changing interest rates and to adjust our mix of fixed and floating interest rate debt on long-term debt. The mix was 88% fixed-rate and 12% floating-rate at the end of this year (2017 – 90% fixed rate and 10% floating rate).

Our interest rate hedging programs are typically unaffected by changes in market conditions, as related derivative financial instruments are generally held until their maturity to establish asset and liability management matching, consistent with the objective to reduce risks arising from interest rate movements.

Hedge of share-based payments cost

We have entered into equity swap agreements with four (2017 – two) major Canadian financial institutions to reduce our income exposure to fluctuations in our share price relating to the Deferred Share Unit (DSU), Long-Term Incentive Deferred Share Unit (LTI‑DSU) and Long-Term Incentive Time Based Restricted Share Unit (LTI-TB RSU) programs. Pursuant to the agreement, we receive the economic benefit of dividends and share price appreciation while providing payments to the financial institutions for the institution’s cost of funds and any share price depreciation. The net effect of the equity swaps partly offset movements in our share price impacting the cost of the DSU, LTI-DSU and LTI-TB RSU programs and is reset quarterly.

Hedge of net investments in foreign operations

As at March 31, 2018, we have designated a portion of our senior notes and a portion of the obligations under finance lease as a hedge of our net investments in U.S. entities. Gains or losses on the translation of the designated portion of our senior notes are recognized in OCI to offset any foreign exchange gains or losses on translation of the financial statements of those U.S. entities.

We have determined that there is no concentration of risks arising from financial instruments and estimated that the information disclosed above is representative of our exposure to risk during the period.

Refer to the consolidated statement of comprehensive income for the total amount of the change in fair value of financial instruments designated as cash flow hedges recognized in income for the period and total amount of gains and losses recognized in OCI and to Note 28 of our consolidated financial statements for the classification of financial instruments.

A sensitivity analysis for foreign currency risk and interest rate risk is included in Note 29 of our consolidated financial statements.

Management’s Discussion and Analysis

8. BUSINESS COMBINATIONS

Acquisition of a portfolio of training assets

During the second quarter of fiscal 2018, we acquired a portfolio of training assets in North America and Europe from a full-flight simulator leasing business for cash consideration of $24.7 million. With this acquisition, we obtained fully operational full-flight simulators and various customer contracts.

The determination of the fair value of the identifiable assets acquired and liabilities assumed are as follows: $24.7 million of property plant and equipment, $4.6 million of goodwill, $1.4 million of non-current assets and $6.0 million of non-current liabilities.

Asian Aviation Centre of Excellence Sdn. Bhd.

During the third quarter of fiscal 2018, we completed the acquisition of the remaining 50% equity interest in Asian Aviation Centre of Excellence Sdn. Bhd. (AACE) from AirAsia, for a cash consideration of $114.8 million [US$90 million] and long-term contingent cash consideration payable of up to US$10 million if certain criteria are met.

As a result, our interest in AACE increased from 50% to 100%, obtaining control over AACE’s three training centres located in Malaysia, Singapore and Vietnam, as well as its 50% joint control of Philippine Academy of Aviation Training, a joint venture training centre between AACE and Cebu Pacific, located in the Philippines. With this acquisition, we own a customer installed base of commercial flight simulators and own assets including full-flight simulators, simulator parts and equipment, facilities and a talented workforce.

Before the transaction, our 50% ownership interest in AACE was accounted for using the equity method. The net gain resulting from the remeasurement to fair value of the previously held interest in AACE was included in Other gains – Net in the consolidated income statement.

The goodwill arising from both acquisitions is attributable to the expansion of our customer installed base of commercial flight simulators, market capacity and expected synergies from combining operations.

The net assets acquired, including intangibles, are included in the Civil Aviation Training Solutions segment.

You will find more details in Note 3 and 21 of our consolidated financial statements.

9. BUSINESS RISK AND UNCERTAINTY

We operate in several industry segments that have various risks and uncertainties. Management and the Board of Directors (the Board) discuss quarterly the principal risks facing our business, as well as annually during the strategic planning and budgeting processes. The risks and uncertainties described below are risks that could materially affect our business, financial condition and results of operation. These risks are categorized as industry-related risks, risks specific to CAE and risks related to the current market environment. These are not necessarily the only risks we face; additional risks and uncertainties that are presently unknown to us or that we may currently deem immaterial may adversely affect our business.

In order to mitigate the risks that may impact our future performance, management has established an enterprise risk management process to identify, assess and prioritize these risks. Management develops and deploys risk mitigation strategies that align with our strategic objectives and business processes. Management reviews the evolution of the principal risks facing our business on a quarterly basis and the Board oversees the risk management process and validates it through procedures performed by our internal auditors when it deems necessary. One should carefully consider the following risk factors, in addition to the other information contained herein, before deciding to purchase CAE common stock.

9.1 Risks relating to the industry

Competition

We sell our simulation products and training services in highly competitive markets. New participants have emerged in recent years and the competitive environment is intense, with aerospace and defence companies positioning themselves to try to take greater market share by consolidating existing commercial aircraft simulation companies and by developing their own internal capabilities. Most of our competitors in the simulation and training markets are also involved in other major segments of the aerospace and defence industry beyond simulation and training. As such, some of them are larger than we are, and may have greater financial, technical, marketing, manufacturing and distribution resources. In addition, our main competitors are either aircraft manufacturers, or have well-established relationships with aircraft manufacturers, airlines and governments, which may give them an advantage when competing for projects with these organizations.

OEMs like Airbus and Boeing have certain advantages in competing with independent training service providers. An OEM controls the pricing for the data, parts and equipment packages that are often required to manufacture a simulator specific to that OEM’s aircraft, which in turn is a critical capital cost for any simulation-based training service provider. OEMs may be in a position to demand licence fees or royalties to permit the manufacturing of simulators based on the OEM’s aircraft, and/or to permit any training on such simulators. CAE also has some advantages, including being an independent training provider and simulator manufacturer, having the ability to replicate certain aircraft without data, parts and equipment packages from an OEM and owning a diversified training network that includes joint ventures with large airline operators which are aircraft customers for OEMs. In addition, we work with some OEMs on business opportunities related to equipment and training services.

Management’s Discussion and Analysis

We obtain most of our contracts through competitive bidding processes that subject us to the risk of spending a substantial amount of time and effort on proposals for contracts that may not be awarded to us. A significant portion of our revenue is dependent on obtaining new orders and continuously replenishing our backlog. We cannot be certain that we will continue to win contracts through competitive bidding processes at the same rate as we have in the past. The presence of new market participants as noted above, and their efforts to gain market share, creates heightened competition in bidding which may negatively impact pricing and margins.

Economic growth underlies the demand for all of our products and services. Periods of economic recession, constrained credit, government austerity and/or international commercial sanctions generally lead to heightened competition for each available order. This in turn typically leads to a reduction in profit on sales won during such a period. Should such conditions occur, we could experience price and margin erosion.

Level and timing of defence spending

A significant portion of our revenues is generated by sales to defence and security customers around the world. We provide products and services for numerous programs to U.S., Canadian, European, Australian, and other foreign governments as both the prime and/or subcontractor. As defence spending comes from public funds and is always competing with other public interests for funding, there is a risk associated with the level of spending a particular country may devote to defence as well as the timing of defence contract awards. Significant reductions to defence spending by mature markets such as the U.S., Canada, Germany, U.K. and Australia or a significant delay in the timing of defence procurement could have a material negative impact on our future revenue, earnings and operations. In order to mitigate the level and timing of defence procurements, we have established a diversified global business and a strong position on enduring platforms.

Government-funded defence and security programs

Like most companies that supply products and services to governments, we can be audited and reviewed from time to time. Any adjustments that result from government audits and reviews may have a negative effect on our results of operations. Some costs may not be reimbursed or allowed in negotiations of fixed-price contracts. As a result, we may also be subject to a higher risk of legal actions and liabilities than companies that cater only to the private sector, which could have a materially negative effect on our operations.

Civil aviation industry

A significant portion of our revenue comes from supplying equipment and training services to the commercial and business airline industry.

Lower jet fuel prices generally have a positive impact on airlines’ profitability; however, the long-term ramifications on the commercial aviation industry are more complex. If jet fuel prices attain high levels for a sustained period, there could be a greater impetus for airlines to replace older, less fuel‑efficient aircraft. However, higher fuel costs could also limit the airlines’ available financial resources and could potentially cause deliveries of new aircraft to be delayed or cancelled. Airlines may slow capacity growth or cut capacity should sustained high fuel costs make the availability of such capacity economically unviable. Such a reaction would negatively affect the demand for our training equipment and services.

Constraints in the credit market may reduce the ability of airlines and others to purchase new aircraft, negatively affecting the demand for our training equipment and services, and the purchase of our products.

We are also exposed to credit risk on accounts receivable from our customers. We have adopted policies to ensure we are not significantly exposed to any individual customer. Our policies include analyzing the financial position of certain customers and regularly reviewing their credit quality. We also subscribe from time to time to credit insurance and, in some instances, require a bank letter of credit to secure our customers’ payments to us.

Regulations imposed by aviation authorities

We are required to comply with regulations imposed by aviation authorities. These regulations may change without notice, which could disrupt our sales and operations. Any changes imposed by a regulatory agency, including changes to safety standards imposed by aviation authorities such as the U.S. FAA, could mean that we have to make unplanned modifications to our products and services, causing delays or resulting in cancelled sales. We cannot predict the impact that changing laws or regulations might have on our operations. Any changes could present opportunities or, to the contrary, have a materially negative effect on our results of operations or financial condition.

Sales or licences of certain CAE products require regulatory approvals and compliance

The sale or licence of many of our products is subject to regulatory controls. These can prevent us from selling to certain countries, or to certain entities or people in or from a country, and require us to obtain from one or more governments an export licence or other approvals to sell certain technology such as defence and security simulators or other training equipment, including data or parts. These regulations change often and we cannot be certain that we will be permitted to sell or licence certain products to customers, which could cause a potential loss of revenue for us.

If we fail to comply with government laws and regulations related to export controls and national security requirements, we could be fined and/or suspended or barred from government contracts or subcontracts for a period of time, which would negatively affect our revenue from operations and profitability, and could have a negative effect on our reputation and ability to procure other government contracts in the future.

Management’s Discussion and Analysis

9.2 Risks relating to the Company

Product evolution

The civil aviation and defence and security markets in which we operate are characterized by changes in customer requirements, new aircraft models and evolving industry standards. If we do not accurately predict the needs of our existing and prospective customers or develop product and service enhancements that address evolving standards and technologies, we may lose current customers and be unable to attract new customers. This could reduce our revenue. The evolution of technology could also have a negative impact on the value of our fleet of FFSs.

Research and development activities

We carry out some of our R&D initiatives with the financial contribution of governments, including the Government of Quebec through Investissement Québec (IQ) and the SA2GE program, and the Government of Canada through its Strategic Aerospace and Defence Initiative (SADI). The level of government financial participation reflects government policy, fiscal policy and other political and economic factors. We may not, in the future, be able to replace these existing programs with other government funding and/or risk‑sharing programs of comparable benefit to us, which could have a negative impact on our financial performance and research and development activities.

We receive investment tax credits from federal and provincial governments in Canada and from the federal government in the U.S. on eligible R&D activities that we undertake. The credits we receive are based on legislation currently enacted. The investment tax credits available to us can be reduced by changes to the respective governments’ legislation which could have a negative impact on our financial performance and research and development activities.

Fixed-price and long-term supply contracts

We provide our products and services mainly through fixed-price contracts that require us to absorb cost overruns, even though it can be difficult to estimate all of the costs associated with these contracts or to accurately project the level of sales we may ultimately achieve. In addition, a number of contracts to supply equipment and services to commercial airlines and defence organizations are long-term agreements that can run up to 20 years. While some of these contracts can be adjusted for increases in inflation and costs, the adjustments may not fully offset the increases, which could negatively affect the results of our operations.

Strategic partnerships and long-term contracts

We have long-term strategic partnerships and contracts with major airlines, aircraft operators and defence forces around the world. These long-term contracts are included in our backlog at the awarded amount but could be subject to unexpected adjustments or cancellations and therefore do not represent a guarantee of our future revenues. Additionally, we cannot be certain that these partnerships and contracts will be renewed on similar terms, or at all, when they expire.

Procurement and OEM leverage

We secure data, parts, equipment and many other inputs from a wide variety of OEMs, subcontractors and other sources. We are not always able to find two or more sources for inputs that we require and in the case of specific aircraft simulators and other training equipment, significant inputs can only be sole sourced. We may therefore be vulnerable to delivery schedule delays, the financial condition of the sole-source suppliers and their willingness to deal with us. Within their corporate groups, some sole-source suppliers include businesses that compete with parts of our business. This could lead to onerous licencing terms, high licence fees or even refusal to licence to us the data, parts and equipment packages that are often required to manufacture and operate a simulator based on an OEM’s aircraft.

Where CAE uses an internally produced simulation model for an aircraft, or develops courseware without using OEM-sourced and licenced data, parts and equipment, the OEM in question may attempt retaliatory or obstructive actions against CAE to block the provision of training services or manufacturing, sale and/or deployment for training of a simulator for such aircraft, claiming breach of its intellectual property rights or other legal basis. Such actions may cause CAE to incur material legal fees and/or may delay or prevent completion of the simulator development project or provision of training services, which may negatively impact our financial results.

Similarly, where CAE uses open source software, freeware or commercial off-the-shelf software from a third party, the third party in question or other persons may attempt retaliatory or obstructive actions against CAE to block the use of such software or freeware, claiming breach of licence rights or other legal basis. Such actions may cause CAE to incur material legal fees and/or may delay or prevent completion of the simulator development project or provision of training services, which may negatively impact our financial results.

Warranty or other product-related claims

We manufacture simulators that are highly complex and sophisticated. Additionally, we may purchase simulators or obtain simulators in a business acquisition. These simulators may contain defects that are difficult to detect and correct and if they fail to operate correctly or have errors, there could be warranty claims or we could lose customers. Correcting these defects could require significant capital investment. If a defective product is integrated into our customer’s equipment, we could face product liability claims based on damages to the customer’s equipment. Any claims, errors or failures could have a negative effect on our operating results and business. We cannot be certain that our insurance coverage will be sufficient to cover one or more substantial claims.

Management’s Discussion and Analysis

Product integration and program management risk

Our business could be negatively affected if our products do not successfully integrate or operate with other sophisticated software, hardware, computing and communications systems that are also continually evolving. If we experience difficulties on a project or do not meet project milestones, we may have to devote more engineering and other resources than originally anticipated. While we believe we have recorded adequate provisions for risks of losses on fixed-price contracts, it is possible that fixed-price and long-term supply contracts could subject us to additional losses that exceed obligations under the terms of the contracts.

Protection of our intellectual property

We rely, in part, on trade secrets, copyrights and contractual restrictions, such as confidentiality agreements, patents and licences to establish and protect our proprietary rights. These may not be effective in preventing a misuse of our technology or in deterring others from developing similar technologies. We may be limited in our ability to acquire or enforce our intellectual property rights in some countries. Litigation related to our intellectual property rights could be lengthy and costly and could negatively affect our operations or financial results, whether or not we are successful in defending a claim.

Third-party intellectual property

Our products contain sophisticated software and computer systems that are supplied to us by third parties. These may not always be available to us. Our production of simulators often depends on receiving confidential or proprietary data on the functions, design and performance of a product or system that our simulators are intended to simulate. Our training systems may also involve the collection and analysis of customer performance data in connection with the use of our training systems. We may not be able to obtain access to these multiple data sets on reasonable terms, or at all.

Infringement claims could be brought against us or against our customers. We may not be successful in defending these claims and we may not be able to develop processes that do not infringe on the rights of third parties, or obtain licences on terms that are commercially acceptable, if at all.

The markets in which we operate are subject to extensive patenting by third parties. Our ability to modify existing products or to develop new products and services may be constrained by third-party patents such that we incur incremental costs to licence the use of the patent or design around the claims made therein.

Key personnel

Our continued success will depend in part on our ability to retain and attract key personnel with the relevant skills, expertise and experience. Our compensation policy is designed to mitigate this risk. We also have succession plans in place to help identify and develop an internal pipeline of leadership talent pertaining to the technical, pilot instructor and general management domains.

Labour relations

Approximately 1,700 of our employees are represented by unions and are covered by 42 collective agreements. These differing collective bargaining agreements have various expiration dates, including that of an employee group in Montreal, Canada which is expiring in June 2018 and is currently in the process of being renewed. While we maintain positive relationships with our respective unions, the re‑negotiations of the collective bargaining agreements could result in work disruption including work stoppages or work slowdowns. Should a work stoppage occur, it could interrupt our manufacturing or service operations at the impacted locations which could adversely affect service to our customers and our financial performance.

Environmental matters

We use, generate, store, handle and dispose of hazardous materials at our operations, and used to at some of our discontinued or sold operations. Past operators at some of our sites also carried out these activities.

New laws and regulations, stricter enforcement of existing laws and regulations, the discovery of previously unknown contamination, new clean-up requirements or claims on environmental indemnities we have given may result in us having to incur substantial costs. This could have a materially negative effect on our financial condition and results of operations.

Additionally, the potential impacts of continued climate change are unpredictable. The occurrence of one or more natural disasters or weather-related events could result in a disruption of operations, property damage and adverse effects to the cost or availability of materials and resources. We cannot be certain that our insurance coverage will be sufficient to cover one or more substantial claims, though to date our insurance coverage has been adequate to meet claims.

Liability claims arising from casualty losses

Because of the nature of our business, we may be subject to liability claims, including claims for serious personal injury or death, arising from:

– Accidents or disasters involving training equipment that we have sold or aircraft for which we have provided training equipment or services;

– Our pilot provisioning;

– Our live flight training operations.

We may also be subject to product liability claims relating to equipment and services that our discontinued operations sold in the past. We cannot be certain that our insurance coverage will be sufficient to cover one or more substantial claims, though to date our insurance coverage has been adequate to meet claims.

CAE Year-End Financial Results 2018 I

Management’s Discussion and Analysis

Integration of acquired businesses

The success of our acquisitions depends on our ability to crystallize synergies both in terms of successfully marketing our broadened product offering as well as efficiently consolidating the operations of the acquired businesses into our existing operations.

Our ability to penetrate new markets

We are leveraging our knowledge, experience and best practices in simulation-based aviation training and optimization to penetrate the simulation-based training market in healthcare.

As we operate in this market, unforeseen difficulties and expenditures could arise, which may have an adverse effect on our operations, profitability and reputation. Penetrating a new market is inherently more difficult than managing within our already established markets.

U.S. foreign ownership, control or influence mitigation measures

CAE and certain of its subsidiaries are parties to agreements with various departments and agencies of the U.S. government, including the U.S. Department of Defense, which require that these subsidiaries be issued facility security clearances under the U.S. Government National Industrial Security Program. This program requires that any corporation that maintains a facility security clearance be insulated from foreign ownership, control or influence (FOCI) via a mitigation agreement. As a Canadian company, CAE has entered into FOCI mitigation agreements with U.S. Department of Defense that enable these U.S. subsidiaries to obtain and maintain the requisite facility security clearances to enter into and perform on classified contracts with the U.S. Government. Specifically, these mitigation agreements are a special security agreement (SSA) for CAE USA Inc. and a proxy agreement (Proxy Agreement) for CAE USA Inc.’s wholly owned subsidiary, CAE USA Mission Solutions Inc. (Proxy Company). If CAE fails to maintain compliance with either of these FOCI mitigation agreements, the facility security clearances for each entity may be terminated. If this occurred, CAE’s U.S. subsidiaries would no longer be eligible to enter into new contracts requiring a facility security clearance and would lose the right to perform its existing contracts with the U.S. government to completion.

A separate board of directors has been established to oversee the management and operations of the Proxy Company. Under the Proxy Agreement, CAE and its board of directors are restricted in their oversight over the Proxy Company’s separate board of directors and its management. In addition, under U.S. Department of Defense rules and procedures, subject to a limited number of restricted matters (such as the sale or disposal of the Proxy Company’s assets; corporate mergers, consolidations, or reorganizations relating to the Proxy Company; pledges, mortgages or other encumbrances on the capital stock of the Proxy Company for purposes other than obtaining working capital; the dissolution of the Proxy Company; and the filing of a bankruptcy petition with respect to the Proxy Company) the Proxy Company board of directors acts independently and has sole authority to make all decisions regarding the management of the proxy company and its business. The actions taken or not taken by the management or the Proxy Company board of directors could have an impact on CAE’s growth, reputation and profitability.

Length of sales cycle

The sales cycle for our products and services can be long and unpredictable, ranging from 6 to 18 months for civil aviation applications and from 6 to 24 months or longer for defence and security applications. During the time when customers are evaluating our products and services, we may incur expenses and management time. Making these expenditures in a period that has no corresponding revenue will affect our operating results and could increase the volatility of our share price. We may pre-build certain products in anticipation of orders to come and to facilitate a faster delivery schedule to gain competitive advantage; if orders for those products do not materialize when expected, we have to carry the pre-built product in inventory for a period of time until a sale is realized.

Government procurement policies often allow unsuccessful bidders to protest a contract award. The protest of a contract awarded to CAE may result in the cancellation of our award, extend the period before which we can start recognizing revenue or cause us to incur material legal fees.

Seasonality

Our business, revenues and cash flows are affected by certain seasonal trends. In the Civil segment, the utilization rate is driven by the availability of pilots to train, which tends to be lower in the second quarter as pilots are flying more and training less and thus resulting in lower revenues. In the Defence segment, revenue and cash collection tend to be higher in the second half of the year as contract awards and availability of funding are influenced by the federal government’s budget cycle, which in the U.S. is based on a September year-end. We expect these trends to continue in fiscal 2019.

Returns to shareholders

Payment of dividends, the repurchase of shares under our NCIB and other cash or capital returns to our shareholders depend on various factors, including our operating cash flows, sources of capital, the satisfaction of solvency tests and other financial requirements, our operations and financial results, as well as CAE’s dividend and other policies which may be reviewed from time to time.

Management’s Discussion and Analysis

Information technology systems

An information technology system failure or non-availability, cyber-attack or breach of systems security could disrupt our operations, cause the loss of, corruption of, or unauthorized access to business information and data, compromise confidential or classified information belonging to CAE, our employees, or our business partners, including aircraft OEMs and Defence and Security customers, expose us to regulatory investigation, litigation or contractual penalties or cause reputational harm. We depend on information technology infrastructure and systems, hosted internally or outsourced, to process, transmit and store electronic data and financial information, to manage business operations and to comply with regulatory, legal, national security, contractual and tax requirements. These information technology networks and systems are essential to our ability to perform day-to-day operations and to the effective operation of our business. If the systems do not operate as expected or when expected, this may have a negative effect on our operations, reporting capabilities, profitability and reputation. A series of governance processes are in place to mitigate this risk.

We may, from time to time, replace or update our information technology networks and systems. The implementation of, and transition to, new networks and systems can temporarily disrupt our business activities and result in productivity disruptions.

Reliance on third-party providers for information technology systems and infrastructure management

We have outsourced certain information technology systems maintenance and support services and infrastructure management functions, to third-party service providers. If these service providers are disrupted or do not perform effectively, it may have a material adverse impact on our operations and/or we may not be able to achieve the expected cost savings and may have to incur additional costs to correct errors made by such service providers. Depending on the function involved, such errors may also lead to business disruption, processing inefficiencies and/or security vulnerability.

Cybersecurity

The cyber threat landscape is becoming more complex and prevalent and represents a rapidly evolving risk to our information technology infrastructure and systems and to our proprietary or sensitive information. Our dependence on information technology infrastructure and systems and our business relationships with aircraft OEMs and defence and security customers may increase the risk of such threats. Our customers, suppliers, subcontractors and joint venture partners may face similar security threats, as well as customer sites that we operate or manage. We must rely on our own safeguards as well as the safeguards put in place by our partners to mitigate the threats. Our partners have varying levels of cybersecurity expertise and safeguards, and their relationships with government contractors, such as CAE, may increase the likelihood that they are targeted by the same cyber threats we face.

Our business requires the appropriate and secure utilization of sensitive and confidential information belonging to third parties such as aircraft OEMs and national defence forces. Our customers or governmental authorities may question the adequacy of our threat mitigation and detection processes and procedures and this could have a negative impact on existing business or future opportunities. Furthermore, given the highly evolving nature of cyber or other security threats or disruptions and their increased frequency, the impact of any future incident cannot be easily predicted or mitigated, and the costs related to such threats or disruptions may not be fully insured or indemnified by other means. To address the challenges of the evolving cyber threat landscape, we continuously review our security measures. We have implemented and enhanced security controls, policy enforcement mechanisms, management oversight and monitoring systems in order to prevent, detect and address potential threats, though we may find it necessary to make further investments to protect our data and infrastructure. The Audit Committee of our Board of Directors is responsible for the oversight of our cybersecurity risk mitigation strategy. Any prior cyber-attacks directed at us have not had a material impact on our financial results and we believe our threat detection and mitigation processes and procedures are adequate.

Data privacy

If we fail to comply with applicable domestic and foreign laws regarding privacy and security of employee, customer and other data (including the recently enacted European Union General Data Protection Regulation), or as a result of a cyber-attack or other security breach, we could be subject to regulatory penalties, experience damage to our reputation or a loss of confidence in our products and services. We may also incur additional costs for remediation and modification or enhancement of our information systems to prevent future occurrences, all of which could adversely affect our business, operations or financial results.

9.3 Risks relating to the market

Foreign exchange

Our operations are global with approximately 90% of our revenue generated from worldwide exports and international activities generally denominated in foreign currencies, mainly the U.S. dollar, the Euro and the British pound. Our revenue is generated approximately one‑third in each of the U.S, Europe and the rest of the world.

Three areas of our business are exposed to fluctuations of foreign exchange rates; our network of foreign training and services operations, our production operations outside of Canada (Australia, Germany, India, U.K. and U.S.) and our production operations in Canada. A significant portion of the revenue generated in Canada is in foreign currencies, while a large portion of our operating costs is in Canadian dollars. When the Canadian dollar increases in value, it negatively affects our foreign currency-denominated revenue and hence our financial results. We continue to hold a portfolio of currency hedging positions intended to mitigate the risk to a portion of future revenues presented by the volatility of the Canadian dollar versus foreign currencies. The hedges are intended to cover a portion of the revenue to allow the unhedged portion to match the foreign cost component of the contract. Since not all of our revenue is hedged, it is not possible to completely offset the effects of changing foreign currency values, which leaves some residual exposure that may impact our financial results. This residual exposure may be higher when currencies experience significant short term volatility. When the Canadian dollar decreases in value, it negatively affects our foreign currency-denominated costs. In order to minimize the impact foreign exchange market fluctuations may have, we also hedge some of the foreign currency costs incurred in our manufacturing process.

CAE Year-End Financial Results 2018 I

Management’s Discussion and Analysis

Business conducted through our foreign operations are substantially based in local currencies. A natural hedge exists by virtue of revenues and operating expenses being in like currencies. However, changes in the value of foreign currencies relative to the Canadian dollar creates unhedged currency translation exposure since results are consolidated in Canadian dollars for financial reporting purposes. Appreciation of foreign currencies against the Canadian dollar would have a positive translation impact and a devaluation of foreign currencies against the Canadian dollar would have the opposite effect. We generally hedge the milestone payments of sales contracts denominated in foreign currencies to mitigate some of the foreign exchange exposure.

Availability of capital

We have various debt facilities with maturities ranging between April 2018 and October 2036, and we cannot provide assurance that these facilities will be refinanced at the same cost, for the same duration and on similar terms as were previously available.

Pension plans

Economic and capital market fluctuations can negatively affect the investment performance, funding and expense associated with our defined benefit pension plans. Pension funding for these plans is based on actuarial estimates and is subject to limitations under applicable regulations. Actuarial estimates prepared during the year were based on, amongst others, assumptions regarding the performance of financial markets, discount rates, inflation rates, future salary increases, estimated retirement ages and mortality rates. The actuarial funding valuation reports determine the amount of cash contributions that we are required to make into registered retirement plans. There can be no assurance that our pension expense and the funding of these plans will not increase in the future, negatively impacting our earnings and cash flow. We seek to mitigate this risk by implementing policies and procedures designed to control investment risk and through ongoing monitoring of our funding position.

Additional cash contributions, if required, to fund our defined benefit and defined contribution pension plans may have a negative effect on our operations, financial results and reputation.

Doing business in foreign countries

We have operations in over 35 countries including our joint venture operations and sell our products and services to customers around the world. Sales to customers outside Canada made up approximately 90% of revenue in fiscal 2018. We expect sales outside Canada to continue to represent a significant portion of revenue in the foreseeable future. As a result, we are subject to the risks of doing business internationally, including geopolitical instability.

These are the main risks we are facing:

– Change in laws and regulations;

– Tariffs, embargoes, controls, sanctions and other restrictions;

– General changes in economic and geopolitical conditions;

– Complexity and corruption risks of using foreign representatives and consultants.

Sales to foreign customers are subject to Canadian and foreign laws and regulations, including, without limitation, the Corruption of Foreign Public Officials Act (Canada), the Foreign Corrupt Practices Act (United States) and other anti-corruption laws. While we have stringent policies in place to comply with such laws, failure by CAE, our employees, foreign representatives and consultants or others working on our behalf to comply with it could result in administrative, civil, or criminal liabilities, including suspension, debarment from bidding for or performing government contracts, which could have a material adverse effect on us. We frequently team with international subcontractors and suppliers who are also exposed to similar risks.

Changes to the political and regulatory environment in countries in which we do business may lead to higher tariffs or stricter trade policies that may have a negative impact on our sales, financial results and business model.

Political instability

Political instability in certain regions of the world may be prolonged and unpredictable. A prolongation of political instability could lead to delays or cancellation of orders, deliveries or projects, or the expropriation of assets, in which we have invested significant resources, particularly when the customers are state-owned or state-controlled entities. Geopolitical risks will change over time and CAE must respect any applicable sanctions and controls applied in the countries in which we carry on business. It is possible that in the markets we serve, unanticipated political instability could impact our operating results and financial position.

Income tax laws

A substantial portion of our business is conducted in foreign countries and is thereby subject to numerous countries’ tax laws and fiscal policies. A change in applicable tax laws, treaties or regulations or their interpretation could result in a higher effective tax rate on our earnings which could significantly impact our financial results.

CAE Year-End Financial Results 2018 I

Management’s Discussion and Analysis

10. RELATED PARTY TRANSACTIONS

A list of principal investments which, in aggregate, significantly impact our results or assets is presented in Note 31 of our consolidated financial statements.

The following table presents our outstanding balances with joint ventures:

(amounts in millions) |  | 2018 |  | 2017
Accounts receivable |  | $ | 39.5 |  |  | $ | 54.0 |
Contracts in progress: assets |  | 14.5 |  |  | 14.2 |
Other assets |  | 25.4 |  |  | 27.4 |
Accounts payable and accrued liabilities |  | 9.7 |  |  | 15.3 |
Contracts in progress: liabilities |  | 3.9 |  |  | 25.9 |

Other assets include a finance lease receivable of $9.3 million (2017 – $12.4 million) maturing in October 2022 and carrying an interest rate of 5.14% per annum, a loan receivable of $8.9 million (2017 – $8.4 million) maturing June 2026 and carrying a fixed interest rate of ten years Euro swap rate plus a spread of 2.50% and a long-term interest-free account receivable of $7.2 million (2017 – $6.6 million) with no repayment term. As at March 31, 2018 and 2017 there are no provisions held against the receivables from related parties.

The following table presents our transactions with joint ventures:

(amounts in millions) |  | 2018 |  | 2017
Revenue |  | $ | 65.2 |  |  | $ | 71.5 |
Purchases |  | 2.6 |  |  | 4.0 |
Other income |  | 1.5 |  |  | 1.8 |

In addition, during fiscal 2018, transactions amounting to $0.8 million (2017 – $1.4 million) were made, at normal market prices, with organizations for which some of our directors are officers.

Compensation of key management personnel

Key management personnel have the ability and responsibility to make major operational, financial and strategic decisions for CAE and include certain executive officers. The compensation of key management for employee services is shown below:

(amounts in millions) | 2018 |  | 2017
Salaries and other short-term employee benefits | $ | 7.0 |  |  | $ | 7.1 |
Post-employment benefits – defined benefit plans(1) | 1.8 |  |  | 1.3 |
Share-based payments | 17.8 |  |  | 16.8 |
| $ | 26.6 |  |  | $ | 25.2 |

(1)Includes net interest on employee benefits obligations.

CAE Year-End Financial Results 2018 I

Management’s Discussion and Analysis

11. CHANGES IN ACCOUNTING POLICIES

11.1 New and amended standards not yet adopted

IFRS 9 - Financial Instruments

In July 2014, the IASB released the final version of IFRS 9 - Financial Instruments replacing IAS 39 - Financial Instruments: Recognition and Measurement.

IFRS 9 introduces a revised approach for the classification of financial assets based on how an entity manages financial assets and the characteristics of the contractual cash flows of the financial assets replacing the multiple rules in IAS 39. Most of the requirements in IAS 39 for classification and measurement of financial liabilities have been carried forward in IFRS 9. IFRS 9 also introduces a new hedge accounting model that is more closely aligned with risk-management objectives as well as a new expected credit loss model for calculating impairment on financial assets replacing the incurred loss model in IAS 39.

IFRS 9 is effective for the fiscal period beginning on April 1, 2018 for CAE. We have completed our assessment and have concluded that the adoption of this standard has no impact on our consolidated financial statements.

IFRS 15 - Revenue from contracts with customers

In May 2014, the IASB released IFRS 15 - Revenue from Contracts with Customers, which supersedes IAS 11 - Construction Contracts and IAS 18 - Revenue and related interpretations. The core principle of the new standard is to recognize revenue to depict fulfillment of performance obligations to customers in amounts that reflect the consideration to which we expect to be entitled in exchange for those goods or services. Revenue is recognized when, or as, the customer obtains control of the goods or services. The new standard also provides guidance for transactions that were not previously addressed comprehensively, improves guidance for multiple-element arrangements and enhances revenue related disclosures.

IFRS 15 is effective for the fiscal period beginning on April 1, 2018 for CAE. We have elected to apply IFRS 15 retrospectively and thus will restate our 2018 results, with an opening adjustment to equity as at April 1, 2017. We have elected to use the following practical expedients:

– No restatement for contracts that were completed as at, or prior to April 1, 2017; and

– Reflecting the aggregate effect of modifications to contracts that occurred prior to April 1, 2017 in identifying the satisfied and unsatisfied performance obligations and in determining the transaction prices to be allocated thereto.

We have reviewed our revenue contracts to evaluate the effect of the new standard on our revenue recognition practices. Based on our assessment, the adoption of the new standard will have the following impacts:

– Revenue recognition for certain performance obligations currently accounted for using the percentage-of-completion method will no longer meet the requirements for revenue recognition over time. Revenue for these performance obligations will instead be recognized upon completion. As the performance obligations for these devices are met and manufacturing advances, the costs to build will be recognized as inventory. Payments received from customers that were previously applied as a reduction of the contracts in progress: assets will now need to be presented as contract liabilities;

– Contracts in which we receive significant payment in advance now require a portion of the contract consideration to be allocated to a significant financing component, when certain criteria are met;

– A change in the identification of performance obligations for certain multiple-element arrangements.

The following table presents the impact of IFRS 15 on our consolidated statement of financial position as at April 1, 2017 and March 31, 2018:

As previously reported |  | IFRS 15 | As restated | As currently reported |  | IFRS 15 | As restated
(amounts in millions) | April 1, 2017 | Adjustments | April 1, 2017 | March 31, 2018 | Adjustments | March 31, 2018
Assets |  |  |  |  |  |  |  |  |  |  |  |
Total current assets |  | $ | 1,919.7 |  |  | $ | 45.4 |  |  | $ | 1,965.1 |  |  | $ | 2,060.8 |  |  | $ | 62.5 |  |  | $ | 2,123.3 |
Total long-term assets |  | 3,435.1 |  |  | (2.5 | ) |  | 3,432.6 |  |  | 3,658.4 |  |  | (1.5 | ) |  | 3,656.9 |
|  | $ | 5,354.8 |  |  | $ | 42.9 |  |  | $ | 5,397.7 |  |  | $ | 5,719.2 |  |  | $ | 61.0 |  |  | $ | 5,780.2 |
Liabilities |  |  |  |  |  |  |  |  |  |  |  |
Total current liabilities |  | $ | 1,273.9 |  |  | $ | 137.2 |  |  | $ | 1,411.1 |  |  | $ | 1,320.6 |  |  | $ | 153.5 |  |  | $ | 1,474.1 |
Total long-term liabilities |  | 1,999.9 |  |  | (25.6 | ) |  | 1,974.3 |  |  | 2,032.0 |  |  | (23.4 | ) |  | 2,008.6 |
|  | $ | 3,273.8 |  |  | $ | 111.6 |  |  | $ | 3,385.4 |  |  | $ | 3,352.6 |  |  | $ | 130.1 |  |  | $ | 3,482.7 |
Shareholders' Equity |  |  |  |  |  |  |  |  |  |  |  |
Equity attributable to equity holders of the Company | $ | 2,020.8 |  |  | $ | (68.7 | ) |  | $ | 1,952.1 |  |  | $ | 2,298.2 |  |  | $ | (69.1 | ) |  | $ | 2,229.1 |
Non-controlling interests |  | 60.2 |  |  | — |  |  | 60.2 |  |  | 68.4 |  |  | — |  |  | 68.4 |
|  | $ | 2,081.0 |  |  | $ | (68.7 | ) |  | $ | 2,012.3 |  |  | $ | 2,366.6 |  |  | $ | (69.1 | ) |  | $ | 2,297.5 |

Management’s Discussion and Analysis

For fiscal 2018, the impact of adopting IFRS 15 is a decrease to revenue of $6.5 million, an increase to operating profit of $1.8 million and an increase to finance expense - net of $1.0 million.

While these changes will impact the timing of contract revenue and profit recognition, there will be no change to cash flows from the contract.

We have updated and are finalizing the implementation of revised procedures and controls in order to meet the requirements of IFRS 15, as well as expanding disclosures which will be required under the new standard in fiscal 2019.

IFRS 16 - Leases

In January 2016, the IASB released IFRS 16 - Leases, which will replace IAS 17 - Leases and related interpretations. The new standard introduces a single lessee accounting model and eliminates the classification of leases as either operating or finance leases. It requires the lessee to recognize a right-of-use asset and a lease obligation for all leases. Lessors will continue to classify leases as operating leases or finance leases as IFRS 16 substantially carries forward the current lessor accounting requirements.

IFRS 16 will be effective for the fiscal period beginning on April 1, 2019 for CAE. We are currently evaluating the impact of the new standard on our consolidated financial statements. Where we are the lessee, for leases that are considered operating leases under IAS 17, the adoption of IFRS 16 is expected to result in the recognition of assets and liabilities on the consolidated statement of financial position. The change to the recognition, measurement and presentation requirements from the adoption of this standard is expected to result in a decrease of our operating lease expense and an increase of our finance and depreciation expenses.

IFRIC 23 - Uncertainty over income tax treatments

In June 2017, the IASB released IFRIC 23 - Uncertainty over Income Tax Treatments, which addresses how to determine the taxable profit (loss), tax bases, unused tax losses, unused tax credits and tax rates, when there is uncertainty over income tax treatments under IAS 12 - Income taxes. It specifically considers whether tax treatments should be considered independently or collectively and assumptions for taxation authorities’ examinations in regards to taxable profit (loss), tax bases, unused tax losses, unused tax credits or tax rates.

IFRIC 23 is effective for the fiscal period beginning on April 1, 2019 for CAE. We have completed our assessment and have concluded that the interpretation has no impact on our consolidated financial statements.

11.2 Use of judgements, estimates and assumptions

The preparation of the consolidated financial statements requires management to make judgements, estimates and assumptions that affect the application of accounting policies, the reported amounts of assets and liabilities and disclosures at the date of the consolidated financial statements, as well as the reported amounts of revenues and expenses for the period reported. It also requires management to exercise its judgement in applying accounting policies. The areas involving a high degree of judgement or complexity, or areas where assumptions and estimates are significant to the consolidated financial statements are disclosed below. Actual results could differ from those estimates. Changes will be reported in the period in which they are identified.

Business combinations

Business combinations are accounted for in accordance with the acquisition method. The consideration transferred and the acquiree’s identifiable assets, liabilities and contingent liabilities are measured at their fair value. Depending on the complexity of determining these valuations, we either consult with independent experts or develop the fair value internally by using appropriate valuation techniques which are generally based on a forecast of the total expected future net discounted cash flows. These evaluations are linked closely to the assumptions made by management regarding the future performance of the related assets and the discount rate. Contingent consideration is measured at fair value using a discounted cash flow model.

Development costs

Development costs are recognized as intangible assets and are amortized over their useful lives when they meet the criteria for capitalization. Forecasted revenue and profitability for the relevant projects are used to assess compliance with the capitalization criteria and to assess the recoverable amount of the assets.

Impairment of non-financial assets

Our impairment test for goodwill is based on internal estimates of fair value less costs of disposal calculations and uses valuation models such as the discounted cash flows model (level 3). Key assumptions which management has based its determination of fair value less costs of disposal include estimated growth rates, post-tax discount rates and tax rates. These estimates, including the methodology used, can have a material impact on the respective values and ultimately the amount of any goodwill impairment.

Likewise, whenever property, plant and equipment and intangible assets are tested for impairment, the determination of the assets’ recoverable amount involves the use of estimates by management and can have a material impact on the respective values and ultimately the amount of any impairment.

See Note 20 of our consolidated financial statements for further details regarding assumptions used.

Management’s Discussion and Analysis

Revenue recognition

The percentage-of-completion method requires us to estimate the work performed to date as a proportion of the total work to be performed. Management conducts monthly reviews of its estimated costs to complete, percentage-of-completion estimates and revenue and margins recognized, on a contract-by-contract basis. The impact of any revisions in cost and revenue estimates is reflected in the period in which the need for a revision becomes known.

Defined benefit pension plans

The cost of defined benefit pension plans and the present value of the employee benefit obligations are determined using actuarial valuations. Actuarial valuations involve, amongst others, making assumptions about discount rates, future salary increases and mortality rates. All assumptions are reviewed at each reporting date. Any changes in these assumptions will impact the carrying amount of the employee benefit obligations and the cost of the defined benefit pension plans. In determining the appropriate discount rate, management considers the interest rates of high quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating the terms of the related pension liability. The mortality rate is based on publicly available mortality tables for the specific country. Future salary increases and pension increases are based on expected future inflation rates for the specific country. Individual discount rates are derived from the yield curve and are used to determine the service cost and interest cost of the Canadian defined benefit pension plans at the beginning of the year. The present value of the employee benefit obligations for these Canadian plans is determined based on the individual discount rates derived from the yield curve at the end of the year.

Other key assumptions for pension obligations are based, in part, on current market conditions. See Note 14 of our consolidated financial statements for further details regarding assumptions used.

Government royalty repayments

In determining the amount of repayable government royalties, assumptions and estimates are made in relation to discount rates, expected revenues and the expected timing of revenues. Revenue projections take into account past experience and represent management’s best estimate about the future. Revenues after a five-year period are extrapolated using estimated growth rates, ranging from 6% to 15%, over the period of repayments. The estimated repayments are discounted using average rates ranging from 6% to 10% based on terms of similar financial instruments. These estimates, along with the methodology used to derive the estimates, can have a material impact on the respective values and ultimately any repayable obligation in relation to government participation. A 1% increase to the growth rates would increase the royalty obligation at March 31, 2018 by approximately $4.0 million (2017 − $4.4 million).

Share-based payments

We measure the cost of cash and equity-settled transactions with employees by reference to the fair value of the related instruments at the date at which they are granted. Estimating fair value for share-based payments requires determining the most appropriate valuation model for a grant, which depends on the terms and conditions of the grant. This also requires making assumptions and determining the most appropriate inputs to the valuation model including the expected life of the option, volatility and dividend yield.

Income taxes

We are subject to income tax laws in numerous jurisdictions. Judgement is required in determining the worldwide provision for income taxes. The determination of tax liabilities and assets involves uncertainties in the interpretation of complex tax regulations. We provide for potential tax liabilities based on the weighted average probability of the possible outcomes. Differences between actual results and those estimates could have an effect on the income tax liabilities and deferred tax liabilities in the period in which such determinations are made.

Deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against the losses that can be utilized. Significant management judgement is required to determine the amount of deferred tax assets that can be recognized, based upon the likely timing and the level of future taxable profits together with future tax planning strategies. The recorded amount of total deferred tax assets could be altered if estimates of projected future taxable income and benefits from available tax strategies are lowered, or if changes in current tax regulations are enacted that impose restrictions on the timing or extent of our ability to utilize future tax benefits.

Leases

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

CAE Year-End Financial Results 2018 I

Management’s Discussion and Analysis

12. CONTROLS AND PROCEDURES

The internal auditor reports regularly to management on any weaknesses it finds in our internal controls and these reports are reviewed by the Audit Committee.

In accordance with National Instrument 52-109 issued by the Canadian Securities Administrators (CSA), certificates signed by the President and Chief Executive Officer (CEO) and the Chief Financial Officer (CFO) have been filed. These filings certify the appropriateness of our disclosure controls and procedures and the design and effectiveness of the internal controls over financial reporting.

12.1 Evaluation of disclosure controls and procedures

Our disclosure controls and procedures are designed to provide reasonable assurance that information is accumulated and communicated to our President and CEO and CFO and other members of management, so we can make timely decisions about required disclosure and ensure that information is recorded, processed, summarized and reported within the time periods specified under Canadian and U.S. securities laws.

Under the supervision of the President and CEO and the CFO, management evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2018. The President and CEO and the CFO concluded from the evaluation that the design and operation of our disclosure controls and procedures were effective as at March 31, 2018.

12.2 Internal control over financial reporting

Management is responsible for establishing and maintaining adequate internal controls over financial reporting. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting, and the preparation of consolidated financial statements for external purposes in accordance with IFRS. Management evaluated the design and operation of our internal controls over financial reporting as of March 31, 2018, based on the framework and criteria established by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) on Internal Control – Integrated Framework (2013 Framework), and has concluded that our internal control over financial reporting is effective. Management did not identify any material weaknesses.

There were no changes in our internal controls over financial reporting that occurred during fiscal year 2018 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

13. OVERSIGHT ROLE OF AUDIT COMMITTEE AND BOARD OF DIRECTORS

The Audit Committee reviews our annual MD&A and related consolidated financial statements with management and the external auditor and recommends them to the Board of Directors for their approval. Management and our internal auditor also provide the Audit Committee with regular reports assessing our internal controls and procedures for financial reporting. The external auditor reports regularly to management on any weaknesses it finds in our internal control, and these reports are reviewed by the Audit Committee.

14. ADDITIONAL INFORMATION

You will find additional information about CAE, including our most recent AIF, on our website at www.cae.com, or on SEDAR at www.sedar.com or on EDGAR at www.sec.gov.

CAE Year-End Financial Results 2018 I

Management’s Discussion and Analysis

15. SELECTED FINANCIAL INFORMATION

The following table provides selected quarterly financial information for the years 2016 through to 2018.

(amounts in millions, except per share amounts and exchange rates) | Q1 | Q2 | Q3 | Q4 | Total
Fiscal 2018 |  |  |  |  |
Revenue | $ | 698.9 |  | 646.0 |  | 704.4 |  | 780.7 |  | 2,830.0 |
Net income | $ | 65.4 |  | 67.0 |  | 119.9 |  | 103.4 |  | 355.7 |
Equity holders of the Company | $ | 63.8 |  | 65.2 |  | 117.9 |  | 100.1 |  | 347.0 |
Non-controlling interests | $ | 1.6 |  | 1.8 |  | 2.0 |  | 3.3 |  | 8.7 |
Basic and diluted EPS attributable to equity holders of the Company | $ | 0.24 |  | 0.24 |  | 0.44 |  | 0.37 |  | 1.29 |
Average number of shares outstanding (basic) | 268.6 |  | 268.7 |  | 268.1 |  | 267.6 |  | 268.2 |
Average number of shares outstanding (diluted) | 269.8 |  | 269.9 |  | 269.5 |  | 269.0 |  | 269.5 |
Average exchange rate, U.S. dollar to Canadian dollar | 1.35 |  | 1.26 |  | 1.27 |  | 1.26 |  | 1.28 |
Average exchange rate, Euro to Canadian dollar | 1.48 |  | 1.47 |  | 1.49 |  | 1.55 |  | 1.50 |
Average exchange rate, British pound to Canadian dollar | 1.72 |  | 1.64 |  | 1.68 |  | 1.75 |  | 1.70 |
Fiscal 2017 |  |  |  |  |
Revenue | $ | 651.6 |  | 635.5 |  | 682.7 |  | 734.7 |  | 2,704.5 |
Net income | $ | 69.3 |  | 48.9 |  | 69.3 |  | 69.1 |  | 256.6 |
Equity holders of the Company |  |  |  |  |
Continuing operations | $ | 68.7 |  | 48.3 |  | 67.6 |  | 67.4 |  | 252.0 |
Discontinued operations | $ | (0.1 | ) | 0.1 |  | 0.2 |  | (0.7 | ) | (0.5 | )
Non-controlling interests | $ | 0.7 |  | 0.5 |  | 1.5 |  | 2.4 |  | 5.1 |
Basic EPS attributable to equity holders of the Company | $ | 0.25 |  | 0.18 |  | 0.25 |  | 0.25 |  | 0.94 |
Continuing operations | $ | 0.25 |  | 0.18 |  | 0.25 |  | 0.25 |  | 0.94 |
Discontinued operations | $ | — |  | — |  | — |  | — |  | — |
Diluted EPS attributable to equity holders of the Company | $ | 0.25 |  | 0.18 |  | 0.25 |  | 0.25 |  | 0.93 |
Continuing operations | $ | 0.25 |  | 0.18 |  | 0.25 |  | 0.25 |  | 0.93 |
Discontinued operations | $ | — |  | — |  | — |  | — |  | — |
Earnings per share before specific items | $ | 0.26 |  | 0.21 |  | 0.26 |  | 0.31 |  | 1.03 |
Average number of shares outstanding (basic) | 269.3 |  | 268.7 |  | 268.5 |  | 268.3 |  | 268.7 |
Average number of shares outstanding (diluted) | 269.6 |  | 269.6 |  | 269.7 |  | 269.6 |  | 269.6 |
Average exchange rate, U.S. dollar to Canadian dollar | 1.29 |  | 1.30 |  | 1.33 |  | 1.32 |  | 1.31 |
Average exchange rate, Euro to Canadian dollar | 1.46 |  | 1.46 |  | 1.44 |  | 1.41 |  | 1.44 |
Average exchange rate, British pound to Canadian dollar | 1.85 |  | 1.71 |  | 1.66 |  | 1.64 |  | 1.71 |
Fiscal 2016 |  |  |  |  |
Revenue | $ | 557.0 |  | 616.8 |  | 616.3 |  | 722.5 |  | 2,512.6 |
Net income | $ | 44.5 |  | 69.2 |  | 56.9 |  | 59.7 |  | 230.3 |
Equity holders of the Company |  |  |  |  |
Continuing operations | $ | 44.9 |  | 75.3 |  | 57.9 |  | 61.2 |  | 239.3 |
Discontinued operations | $ | (0.5 | ) | (6.5 | ) | (0.2 | ) | (2.4 | ) | (9.6 | )
Non-controlling interests | $ | 0.1 |  | 0.4 |  | (0.8 | ) | 0.9 |  | 0.6 |
Basic and diluted EPS attributable to equity holders of the Company | $ | 0.17 |  | 0.26 |  | 0.21 |  | 0.22 |  | 0.85 |
Continuing operations | $ | 0.17 |  | 0.28 |  | 0.21 |  | 0.23 |  | 0.89 |
Discontinued operations | $ | — |  | (0.02 | ) | — |  | (0.01 | ) | (0.04 | )
Earnings per share before specific items | $ | 0.19 |  | 0.18 |  | 0.22 |  | 0.27 |  | 0.86 |
Average number of shares outstanding (basic) | 267.4 |  | 268.6 |  | 269.3 |  | 269.9 |  | 268.8 |
Average number of shares outstanding (diluted) | 267.8 |  | 268.9 |  | 269.7 |  | 270.2 |  | 269.2 |
Average exchange rate, U.S. dollar to Canadian dollar | 1.23 |  | 1.31 |  | 1.33 |  | 1.38 |  | 1.31 |
Average exchange rate, Euro to Canadian dollar | 1.36 |  | 1.46 |  | 1.46 |  | 1.52 |  | 1.45 |
Average exchange rate, British pound to Canadian dollar | 1.88 |  | 2.03 |  | 2.02 |  | 1.97 |  | 1.98 |

CAE Year-End Financial Results 2018 I

Management’s Discussion and Analysis

Selected segment information

(amounts in millions, except operating margins) | Q4-2018 |  | Q4-2017 |  | FY2018 |  | FY2017 |  | FY2016
Civil Aviation Training Solutions |  |  |  |  |  |  |  |  |
Revenue | $ | 455.2 |  |  | $ | 417.8 |  |  | $ | 1,629.7 |  |  | $ | 1,556.9 |  |  | $ | 1,429.1 |
Segment operating income | 95.7 |  |  | 83.8 |  |  | 324.5 |  |  | 273.2 |  |  | 237.4 |
Operating margins (%) | 21.0 |  |  | 20.1 |  |  | 19.9 |  |  | 17.5 |  |  | 16.6 |
Defence and Security |  |  |  |  |  |  |  |  |
Revenue | $ | 290.4 |  |  | $ | 282.7 |  |  | $ | 1,085.1 |  |  | $ | 1,036.9 |  |  | $ | 970.1 |
Segment operating income | 38.7 |  |  | 33.0 |  |  | 127.7 |  |  | 120.4 |  |  | 119.8 |
Operating margins (%) | 13.3 |  |  | 11.7 |  |  | 11.8 |  |  | 11.6 |  |  | 12.3 |
Healthcare |  |  |  |  |  |  |  |  |
Revenue | $ | 35.1 |  |  | $ | 34.2 |  |  | $ | 115.2 |  |  | $ | 110.7 |  |  | $ | 113.4 |
Segment operating income | 6.7 |  |  | 4.1 |  |  | 8.8 |  |  | 6.6 |  |  | 7.2 |
Operating margins (%) | 19.1 |  |  | 12.0 |  |  | 7.6 |  |  | 6.0 |  |  | 6.3 |
Total |  |  |  |  |  |  |  |  |
Revenue | $ | 780.7 |  |  | $ | 734.7 |  |  | $ | 2,830.0 |  |  | $ | 2,704.5 |  |  | $ | 2,512.6 |
Segment operating income | 141.1 |  |  | 120.9 |  |  | 461.0 |  |  | 400.2 |  |  | 364.4 |
Operating margins (%) | 18.1 |  |  | 16.5 |  |  | 16.3 |  |  | 14.8 |  |  | 14.5 |
Restructuring, integration and acquisition costs | $ | — |  |  | $ | (20.0 | ) |  | $ | — |  |  | $ | (35.5 | ) |  | $ | (28.9 | )
Operating profit | $ | 141.1 |  |  | $ | 100.9 |  |  | $ | 461.0 |  |  | $ | 364.7 |  |  | $ | 335.5 |

Selected annual information for the past five years

(amounts in millions, except per share amounts) | 2018 |  | 2017 |  | 2016 |  | 2015 |  | 2014
Revenue | $ | 2,830.0 |  |  | $ | 2,704.5 |  |  | $ | 2,512.6 |  |  | $ | 2,246.3 |  |  | $ | 2,077.9 |
Net income | 355.7 |  |  | 256.6 |  |  | 230.3 |  |  | 204.7 |  |  | 191.1 |
Equity holders of the Company |  |  |  |  |  |  |  |  |
Continuing operations | 347.0 |  |  | 252.0 |  |  | 239.3 |  |  | 201.2 |  |  | 188.3 |
Discontinued operations | — |  |  | (0.5 | ) |  | (9.6 | ) |  | 0.6 |  |  | 1.7 |
Non-controlling interests | 8.7 |  |  | 5.1 |  |  | 0.6 |  |  | 2.9 |  |  | 1.1 |
Average exchange rate, U.S. dollar to Canadian dollar | 1.28 |  |  | 1.31 |  |  | 1.31 |  |  | 1.14 |  |  | 1.05 |
Average exchange rate, Euro to Canadian dollar | 1.50 |  |  | 1.44 |  |  | 1.45 |  |  | 1.44 |  |  | 1.41 |
Average exchange rate, British pound to Canadian dollar | 1.70 |  |  | 1.71 |  |  | 1.98 |  |  | 1.83 |  |  | 1.68 |
Financial position: |  |  |  |  |  |  |  |  |
Total assets | $ | 5,719.2 |  |  | $ | 5,354.8 |  |  | $ | 4,996.7 |  |  | $ | 4,656.9 |  |  | $ | 4,236.7 |
Total non-current financial liabilities(1) | 1,380.6 |  |  | 1,370.8 |  |  | 1,318.6 |  |  | 1,427.3 |  |  | 1,340.2 |
Total net debt | 649.4 |  |  | 750.7 |  |  | 787.3 |  |  | 949.6 |  |  | 856.2 |
Per share: |  |  |  |  |  |  |  |  |
Basic EPS attributable to equity holders of the Company |  |  |  |  |  |  |  |  |
Continuing operations | $ | 1.29 |  |  | $ | 0.94 |  |  | $ | 0.89 |  |  | $ | 0.76 |  |  | $ | 0.72 |
Discontinued operations | — |  |  | — |  |  | (0.04 | ) |  | — |  |  | 0.01 |
Diluted EPS attributable to equity holders of the Company |  |  |  |  |  |  |  |  |
Continuing operations | 1.29 |  |  | 0.93 |  |  | 0.89 |  |  | 0.76 |  |  | 0.72 |
Discontinued operations | — |  |  | — |  |  | (0.04 | ) |  | — |  |  | 0.01 |
Earnings per share before specific items | 1.29 |  |  | 1.03 |  |  | 0.86 |  |  | 0.76 |  |  | 0.72 |
Dividends declared | 0.35 |  |  | 0.315 |  |  | 0.295 |  |  | 0.27 |  |  | 0.22 |

(1) Includes long-term debt, long-term derivative liabilities and other long-term liabilities meeting the definition of a financial liability.