SECURITIES AND EXCHANGE COMMISSION
Washington, DC  20549
Form 6-K
Report of Foreign Issuer
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
For the month of: February 2021                                          Commission File Number: 1-31402
CAE INC.
(Name of Registrant)
8585 Cote de Liesse
Saint-Laurent, Quebec
Canada H4T 1G6
(Address of Principal Executive Offices)
Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:
Form 20-F                         Form 40-F   X  
Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):   X  
Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the SEC pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934:
Yes                                             No   X  
If “Yes” is marked, indicate the file number assigned to the registrant in connection with Rule 12g3-2(b): N/A



SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. 
 
CAE Inc.
Date: February 12, 2021 By: /s/ Mark Hounsell   
Name: Mark Hounsell
Title: General Counsel, Chief Compliance Officer and Corporate Secretary




CAELOGORGBA301.JPG Press Release
CAE reports third quarter fiscal 2021 results
Revenue of $832.4 million up 18% vs. second quarter and down 10% vs. third quarter last year
EPS of $0.18 ($0.22 before specific items(1)) vs. negative $0.02 ($0.13 before specific items) in the second quarter and $0.37 ($0.37 before specific items) in the third quarter last year
Operating profit(2) of $82.9 million vs. $28.2 million in the second quarter and $154.9 million in the third quarter last year
Segment operating income before specific items(3) of $97.2 million vs. $79.3 million in the second quarter and $157.2 million in the third quarter last year
Net cash provided by operating activities of $234.8 million vs. $45.6 million in the second quarter and $322.1 million in the third quarter last year
Positive free cash flow(4) of $224.0 million vs. $44.9 million in the second quarter and $275.3 million in the third quarter last year
Issued $495.3 million in common equity and announced three acquisitions: Flight Simulation Company B.V., TRU Simulation + Training Canada Inc., and Merlot Aero Limited

Montreal, Canada, February 12, 2021 - (NYSE: CAE; TSX: CAE) - CAE today reported revenue of $832.4 million for the third quarter of fiscal 2021, compared with $923.5 million in the third quarter last year. Third quarter net income attributable to equity holders was $48.8 million ($0.18 per share) compared to $97.7 million ($0.37 per share) last year. Net income before specific items(5) in the third quarter of fiscal 2021 was $60.0 million ($0.22 per share) compared to $99.4 million ($0.37 per share) last year.

Operating profit this quarter was $82.9 million (10.0% of revenue), compared to $154.9 million (16.8% of revenue) in the third quarter of fiscal 2020. Restructuring costs of $14.3 million were recorded this quarter whereas there were no restructuring costs in the third quarter of fiscal 2020. Third quarter segment operating income before specific items was $97.2 million (11.7% of revenue) compared with $157.2 million (17.0% of revenue) last year. Backlog(6) remains solid at $7.8 billion. All financial information is in Canadian dollars unless otherwise indicated.

Summary of consolidated results
(amounts in millions, except operating margins and per share amounts) Q3-2021 Q3-2020 Variance %
Revenue $ 832.4  $ 923.5  (10  %)
Operating profit $ 82.9  $ 154.9  (46  %)
Segment operating income(7) (SOI)
$ 97.2  $ 154.9  (37  %)
Segment operating margins % 11.7  % 16.8 
SOI before specific items $ 97.2  $ 157.2  (38  %)
Segment operating margins before specific items % 11.7  % 17.0 
Net income $ 49.7  $ 99.8  (50  %)
Net income attributable to equity holders of the Company $ 48.8  $ 97.7  (50  %)
Basic and diluted earnings per share (EPS) $ 0.18  $ 0.37  (51  %)
Net income before specific items $ 60.0  $ 99.4  (40  %)
EPS before specific items $ 0.22  $ 0.37  (41  %)
Order intake(6)
$ 710.7  $ 1,106.6  (36  %)
Total backlog $ 7,820.1  $ 9,434.3  (17  %)


“CAE’s performance continued to strengthen sequentially in the third quarter, demonstrated by 69% higher earnings per share and a near five-fold increase in free cash flow to $224.0 million, underscoring the resiliency of our business,” said Marc Parent, CAE’s President and Chief Executive Officer. “We are managing well through a



challenging period and making important progress to significantly enhance CAE’s position for future growth. We bolstered our financial resources with the issuance of $495 million of common equity and we strengthened and expanded our market position with a succession of three acquisitions.”

On CAE’s outlook, Marc Parent added, “The pandemic continues to be a global reality and the resumption of CAE’s recovery remains highly dependent on the timing and rate at which travel restrictions and quarantines can eventually be safely lifted and normal activities resume in our end markets. Looking beyond, given our recent investments and future potential opportunities to deploy growth capital, we are confident CAE will emerge from this period in a position of even greater strength.”

Civil Aviation Training Solutions (Civil)
Civil training centre utilization(8) is well below pre-pandemic levels; however, remains stable with the second quarter, which was already much-improved compared to the lows seen at the outset of the pandemic. This reflects the benefits of a highly regulated aviation industry and the fundamental requirement for aviation training. It also shows the ongoing effects on air travel demand resulting from persistent mobility and border restrictions brought by the pandemic. In the months since the onset of the pandemic, business aviation has been experiencing a more rapid recovery than commercial. COVID-19 continued to negatively affect Civil training revenues during the quarter with a significant decrease in training services demand as a result of the reduction in airlines’ global operations, disruption to the global air transportation environment and diminished air passenger travel. While most CAE locations are operating, certain training locations have recently had to curtail operating activities temporarily as local authorities implement measures to contain the spread of COVID-19. Training centre utilization remained stable at an average of 50 percent for the quarter. Since the beginning of January, Civil training centre utilization has continued to average at approximately this level.

Third quarter Civil revenue was $412.2 million, up 13% compared to the preceding quarter, and down 26% compared to the third quarter last year. Operating profit was $48.4 million compared to $15.5 million in the second quarter and $123.0 million last year. Segment operating income before specific items was $62.0 million (15.0% of revenue) compared to $51.9 million (14.2% of revenue) in the second quarter and $123.4 million (22.1% of revenue) in the third quarter last year. During the quarter, Civil delivered 10 full-flight simulators (FFSs)(9) to customers.

During the quarter, Civil signed training solutions contracts valued at $329.3 million, including contracts for three FFSs sales. Notable training contracts for the quarter include a five-year business aviation training agreement with Bundeswehr in Germany, a five-year pilot training agreement with cargo airline, MasAir, a five-year pilot training agreement with TUI Airways, a five-year exclusive pilot training agreement with Iberia, Líneas Aéreas de España, a two-year pilot training agreement with LOT Polish Airlines, and a five-year housing agreement with Virgin Atlantic Airways.

During the quarter, CAE announced a succession of three acquisitions, involving Flight Simulation Company B.V., Merlot Aero Limited, and TRU Simulation + Training Canada Inc. The combination of these acquisitions strengthens Civil’s core position in pilot training and expands its suite of solutions for aviation customers into the growing market for digitally-enabled crew optimization services.

The Civil book-to-sales ratio(6) was 0.80x for the quarter and 0.83x for the last 12 months. The Civil backlog at the end of the quarter was $4.2 billion.




Summary of Civil Aviation Training Solutions results
(amounts in millions, except operating margins, SEU, FFSs and FFS deliveries) Q3-2021 Q3-2020 Variance %
Revenue $ 412.2  $ 558.1  (26  %)
Operating profit $ 48.4  $ 123.0  (61  %)
Segment operating income $ 62.0  $ 123.0  (50  %)
Segment operating margins % 15.0  % 22.0 
SOI before specific items $ 62.0  $ 123.4  (50  %)
Segment operating margins before specific items % 15.0  % 22.1 
Order intake $ 329.3  $ 706.2  (53  %)
Total backlog $ 4,198.1  $ 5,263.0  (20  %)
Simulator equivalent unit (SEU)(10) 
245  252  (3  %)
FFSs in CAEs network(9)
320  303  %
FFS deliveries 10  12  (17  %)

Defence and Security (Defence)
The COVID-19 pandemic continued to contribute to delays in the execution of programs from backlog and impacted a range of global defence programs involving government and OEM customers due to travel bans, border restrictions, client access restrictions and supply chain disruptions. Such delays continued to impact the attainment of key program milestones. Although Defence was awarded several strategic contracts during the third quarter, there have been delays in the award of additional contracts, as government acquisition authorities had to follow directives in their respective countries to shelter-in-place and eliminate travel.

Third quarter Defence revenue was $299.3 million, stable compared to the preceding quarter, and down 10% compared to the third quarter last year. Defence operating profit was $21.8 million compared to $11.4 million in the second quarter and $31.3 million last year. Defence segment operating income before specific items was $22.3 million (7.5% of revenue) compared to $24.2 million (8.0% of revenue) in the second quarter and $33.2 million (10.0% of revenue) in the third quarter last year.

During the quarter, Defence booked orders for $260.5 million, including contracts with Lockheed Martin to support the design, development and manufacture of a suite of C-130J training devices for the binational French and German C-130J training facility and to supply the CAE Magnetic Anomaly Detection-Extended Role system for U.S. Navy MH-60R Seahawk helicopters. Defence was also awarded a contract for the next increment of a multi-year contract with the U.S. Air Force to provide comprehensive C-130H aircrew training services. Other notable contracts include continuing to provide the U.S. Navy contract instruction services for the Chief of Naval Air Training at five naval air stations and T-44C aircrew training services.

Defence received authorization during the quarter to proceed on the previously awarded U.S. Army contract to provide advanced helicopter flight training support services at Fort Rucker, Alabama. In combination with the fixed-wing flight training program CAE currently supports at its Dothan Training Center, Defence now plays a pivotal role supporting the training of all Army aviators progressing to their assigned operational aircraft.

At the end of the quarter, Defence won the competitive recompete for the U.S. Air Force KC-135 Training System contract, valued at more than US$275 million, involving a one-year base contract and seven additional one-year option periods. In the security sector, Defence was also awarded a contract to provide United States Customs and Border Protection with Aircraft Pilot Training Services and was selected in a competitive process to demonstrate its prototype for a synthetic training environment training simulation management tool in support of the Army Futures Command.

The Defence book-to-sales ratio was 0.87x for the quarter and 0.83x for the last 12 months (excluding contract options). The Defence backlog, including options and CAE’s interest in joint ventures, at the end of the quarter was $3.6 billion. The Defence pipeline remains strong with some $4.8 billion of bids and proposals pending customer decisions.




Summary of Defence and Security results
(amounts in millions, except operating margins) Q3-2021 Q3-2020 Variance %
Revenue $ 299.3  $ 332.4  (10  %)
Operating profit $ 21.8  $ 31.3  (30  %)
Segment operating income $ 22.3  $ 31.3  (29  %)
Segment operating margins % 7.5  % 9.4 
SOI before specific items $ 22.3  $ 33.2  (33  %)
Operating margins before specific items % 7.5  % 10.0 
Order intake $ 260.5  $ 367.4  (29  %)
Total backlog $ 3,622.0  $ 4,171.3  (13  %)

Healthcare
Healthcare continued deliveries of the CAE Air1 ventilators to the Canadian government which contributed to third quarter Healthcare revenue of $120.9 million, which is 227% higher than the preceding quarter and 266% higher than the third quarter last year. Operating profit was $12.7 million compared to $1.3 million in the second quarter and $0.6 million last year. Third quarter segment operating income was $12.9 million (10.7% of revenue), compared to $3.2 million (8.6% of revenue) in the second quarter and $0.6 million (1.8% of revenue) in the third quarter last year.

Healthcare continued to provide new tools and training capabilities in support of its customers’ training needs during the COVID-19 pandemic. These include solutions like CAE Vimedix 3.1, an ultrasound education platform with new remote learning and screen sharing capabilities for faculty and students, curriculum development tools for distance learning and Microsoft HoloLens 2 mixed reality interface for remote education. Healthcare also expanded its adaptive clinical digital learning courses covering mechanical ventilation to include basic, advanced and COVID-19 patient management.

Healthcare continued to work with leading OEMs in developing transformative digital training solutions, including the launch of a mobile application developed for Cordis, a Cardinal Health Company, which enables users to expand and master skills through a series of procedurally based coronary and endovascular modules utilizing Cordis tools in a simulated virtual environment.

Summary of Healthcare results
(amounts in millions, except operating margins) Q3-2021 Q3-2020 Variance %
Revenue $ 120.9  $ 33.0  266  %
Operating profit $ 12.7  $ 0.6 
Segment operating income $ 12.9  $ 0.6 
Segment operating margins % 10.7  % 1.8 

Additional financial highlights
CAE incurred restructuring costs of $14.3 million during the third quarter of fiscal 2021 in connection with the previously announced measures to best serve the market by optimizing CAE’s global asset base and footprint, adapting its global workforce and adjusting its business to correspond with the expected lower level of demand for certain of its products and services. This brings the total restructuring costs incurred since the start of the program in the second quarter to $65.4 million. CAE now expects to record a total of approximately $140 million of restructuring expenses this fiscal year, which is higher than the previous $100 million estimate, because additional measures have been identified for global asset base and footprint optimization, workforce adjustments, and restructuring related to the optimization and integration of recent acquisitions. In connection with these efforts, the Company expects to incur additional restructuring expenses of approximately $30 million in fiscal year 2022. Taken together, the Company expects to realize significant annual recurring cost savings, commencing in fiscal year 2022 and ramping up to a run rate of approximately $65 to $70 million.





On November 30, 2020, CAE completed a public offering and a concurrent private placement of 16,594,126 common shares at a price of $29.85 per share for aggregate gross proceeds of $495.3 million (equity offering). Total issuance-related costs of the equity offering amounted to $22.4 million, less income tax recovery of $5.9 million. The net proceeds of the equity offering are for general corporate purposes, including to fund CAE’s recently completed acquisitions and other future potential acquisition and growth opportunities. Pending such uses, the proceeds have been used to repay indebtedness outstanding under the Company’s credit facilities and held as cash or cash equivalents.

Net cash provided by operating activities was $234.8 million for the quarter, compared to $322.1 million in the third quarter last year. Free cash flow was $224.0 million for the quarter compared to $44.9 million in the preceding quarter and $275.3 million in the third quarter last year. For the first nine months, free cash flow was $176.2 million, which compares to $166.1 million in the prior year period.

Income tax recovery this quarter was $0.1 million, representing an effective tax rate of nil, compared to 16% for the third quarter last year. The tax rate was lower due to the positive impact of tax audits and the restructuring costs incurred this quarter. Excluding the effect of these elements, the income tax rate would have been 16% this quarter.

Growth and maintenance capital expenditures(11) totaled $23.9 million this quarter and were $57.1 million for the first nine months of the fiscal year.

Net debt(12) at the end of the quarter was $1,819.9 million for a net debt-to-capital ratio(13) of 38.9%. This compares to net debt of $2,358.9 million and a net debt-to-capital ratio of 50.1% at the end of the preceding quarter.

Return on capital employed (ROCE)(14) was 6.4% this quarter compared to 11.4% in the third quarter last year, before specific items.


Management outlook for fiscal year 2021 largely unchanged

Consolidated outlook
CAE is a high technology solutions company at the leading edge in digital immersion. The extended-term outlook for the Company remains compelling, and it expects to emerge from the COVID-19 pandemic even better positioned as a result of several initiatives to strengthen its internal position during the current period.

In the short-term; however, the Company expects the COVID-19 pandemic to continue to have a significant negative impact on its performance relative to pre-pandemic levels. COVID-19 remains a global reality and the resumption of CAE’s recovery remains highly dependent on the timing and rate at which travel restrictions and quarantines can eventually be safely lifted and normal activities resume in our end markets. The Company continues to expect to generate positive free cash flow for the year and expects total capital expenditures of approximately $100 million for the fiscal year.

Having recently bolstered its liquidity position with a $495.3 million common share issuance and announced three acquisitions in its core markets, the Company intends to continue to capitalize on future opportunities to deploy growth capital to further strengthen its position with increased market reach and an expanded range of capabilities.

Civil outlook
In Civil, the regulated requirements for aviation training serve as a key demand driver, which is expected to continue mitigating some of the negative impacts of the civil aviation market downturn. The Company expects to continue building on its positive momentum in training, increasing market share and securing new customer partnerships with its innovative training and operational solutions. The Company believes more airline training partnership and outsourcing opportunities should materialize for CAE as the industry looks for ways to gain greater agility and resiliency in the post-COVID-19 era. For Civil overall, the Company expects to see a relatively stable performance in the fourth quarter compared to the current quarterly results. The global roll-out of vaccines to combat COVID-19 is indeed encouraging; however, renewed quarantine measures and border restrictions to



contain the spread of the virus have contributed to expectations for a potentially more protracted recovery period for commercial air travel, particularly for cross-border and transcontinental operations. In business aviation, which represents a substantial portion of CAE’s Civil business, the Company continues to expect a more rapid market recovery than in commercial aviation. Demand for Civil full-flight simulators is closely linked to new aircraft deliveries, and while the total market is expected to be substantially smaller this fiscal year, Civil expects to maintain its leading share of the available FFS sales and currently expects to deliver approximately 35 FFSs (previously indicated range of 35 to 40) to customers worldwide this fiscal year. CAE benefits from a large backlog of customer funded FFS orders, and while some deliveries have been delayed, the Company expects to substantially deliver this backlog over the next couple of years.

Defence outlook
In Defence, the Company also benefits from a large backlog of contracts with government customers to provide training and operational support solutions that are considered essential to national security. In addition, Defence is making progress toward addressing both the training and mission support market segments with digitally immersive solutions, as evidenced by awards to support the U.S. Special Operations Command, the UK Strategic Command, and its selection to demonstrate its prototype for a synthetic training environment training simulation management tool in support of the Army Futures Command. Defence also expects to make more progress penetrating the security sector as demonstrated by its recent win to provide United States Customs and Border Protection with Aircraft Pilot Training Services. In the current fiscal year, COVID-19-related issues have slowed Defence’s progress toward program milestones on work in backlog and have impacted training operations. The pandemic has also led to delays in contract awards globally. While Defence faces a challenging environment in fiscal year 2021, the long-term outlook continues to be for growth, supported by a large addressable market for training and operational support, and the realization of the benefits of its innovative digitally immersive solutions, new leadership, the ramp up of its reinvigorated growth strategy, and its strengthened organization.

Healthcare outlook
CAE believes Healthcare is well positioned to experience a change in the appreciation of the importance, relevancy and benefits of healthcare simulation and training to help save lives.

Management’s expectations are based on the prevailing market conditions, the timing and degree of easing of global COVID-19-related mobility restrictions, and customer receptivity to CAE’s training and operational support solutions as well as material assumptions contained in this press release, quarterly MD&A and in CAE’s fiscal year 2020 MD&A.

Corporate Social Responsibility
CAE’s noble purpose, focused on safety, has never been more relevant than during the current pandemic. It captures how CAE makes a difference in the world and drives its decisions and actions. CAE’s purpose makes its employees proud and delights its customers. Making civil aviation safer, helping defence forces return home safely and making healthcare safer are all rooted in the principles of corporate social responsibility (CSR).
CAE is further strengthening its Diversity and Inclusion program. CAE has secured a position for the third year in a row in the Bloomberg Gender Equality (GEI) Index 2021. The Bloomberg GEI tracks the performance of 380 public companies from around the world committed to disclosing their efforts to support gender equality through policy development, representation and transparency. CAE also embarked on The 50 – 30 Challenge, an initiative between the Government of Canada, business and diversity organizations to improve access for women, racialized persons, people who identify as LGBTQ2, people living with disabilities, as well as First Nations, Inuit and Métis to positions of influence and leadership on corporate boards and in senior management. CAE also became a signatory of the Women’s Empowerment Principles (WEPs), a set of Principles established by UN Global Compact and UN Women, offering guidance to business on how to promote gender equality and women’s empowerment in the workplace, marketplace and community. In addition, CAE recently launched a new Employee Resource Group (ERG) called EmbRACE which is focused on race and ethnicity. CAE also announced that it would create a new ERG for focused on veterans.
To learn more about CAE’s corporate sustainability roadmap and achievements, refer to CAE's FY20 Annual Activity and Corporate Social Responsibility Report.

Detailed information



Readers are strongly advised to view a more detailed discussion of our results by segment in the Management’s Discussion and Analysis (MD&A) and CAE’s consolidated financial statements which are posted on our website at www.cae.com/investors.

CAE’s consolidated financial statements and MD&A for the quarter ended December 31, 2020 have been filed with the Canadian Securities Administrators on SEDAR (www.sedar.com) and are available on our website (www.cae.com). They have also been filed with the U.S. Securities and Exchange Commission and are available on their website (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).

Conference call Q3 FY2021
Marc Parent, CAE President and CEO; Sonya Branco, Vice President, Finance, and CFO; and Andrew Arnovitz, Vice President, Strategy and Investor Relations will conduct an earnings conference call today at 1:00 p.m. ET. The call is intended for analysts, institutional investors and the media. Participants can listen to the conference by dialing + 1 877 586 3392 or +1 416 981 9024. The conference call will also be audio webcast live for the public at www.cae.com.

CAE is a high technology company, at the leading edge of digital immersion, providing solutions to make the world a safer place. Backed by a record of more than 70 years of industry firsts, we continue to reimagine the customer experience and revolutionize training and operational support solutions in civil aviation, defence and security, and healthcare. We are the partner of choice to customers worldwide who operate in complex, high-stakes and largely regulated environments, where successful outcomes are critical. As a testament to our customers’ ongoing needs for our solutions, over 60 percent of CAE’s revenue is recurring in nature. We have the broadest global presence in our industry, with approximately 10,000 employees, 160 sites and training locations in over 35 countries.

Caution concerning limitations of summary earnings press release
This summary earnings press release contains limited information meant to assist the reader in assessing CAE’s performance but it is not a suitable source of information for readers who are unfamiliar with CAE and is not in any way a substitute for the Company’s financial statements, notes to the financial statements, and MD&A reports.

Caution concerning forward-looking statements
This press release includes forward-looking statements, which may include, without limitation, statements relating to the potential impacts on our business, financial condition, liquidity and financial results of the outbreak of the COVID-19 pandemic and the effectiveness of plans and measures we have implemented in response thereto; general economic outlook; prospects and trends of an industry; available liquidities; CAE’s business outlook, objectives, plans and strategic priorities; and other statements that are not historical facts.

Forward-looking statements can generally be identified by the use of forward-looking terminology such as "believe", "expect", "anticipate", "plan", "intend", "continue", "estimate", "may", "will", "should", "strategy", "future" and similar expressions. All such forward-looking statements are made pursuant to the 'safe harbour' provisions of applicable Canadian securities laws and of the United States Private Securities Litigation Reform Act of 1995.

By their nature, forward-looking statements require us to make assumptions and are subject to inherent risks and uncertainties associated with our business which may cause actual results in future periods to differ materially from results indicated in forward-looking statements. These statements are not guarantees of future performance or events, and we caution you against relying on any of these forward-looking statements. While management considers these assumptions to be reasonable and appropriate based on information currently available, there is risk that they may not be accurate. The forward-looking statements contained in this press release describe our expectations as of February 12, 2021 and, accordingly, are subject to change after such date. 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 press release are expressly qualified by this cautionary statement. Except as otherwise indicated by CAE, forward-looking statements do not reflect the potential impact of any special items or of any dispositions, monetizations, mergers, acquisitions, other business combinations or other transactions that may occur after February 12, 2021. The financial impact of these transactions and special items can be complex and depends on



the facts particular to each of them. We therefore cannot describe the expected impact in a meaningful way or in the same way we present known risks affecting our business. Forward-looking statements are presented in this press release for the purpose of assisting investors and others in understanding certain key elements of our expected fiscal 2021 financial results and in obtaining a better understanding of our anticipated operating environment. Readers are cautioned that such information may not be appropriate for other purposes.

Material assumptions
The forward-looking statements set out in this press release are based on certain assumptions including, without limitation: our liquidity from our cash and cash equivalents, undrawn amounts on our revolving credit facilities, the balance available under our receivable purchase program, our cash flows from operations and continued access to debt funding will be sufficient to meet financial requirements in the foreseeable future; and no material financial, operational or competitive consequences of changes in regulations affecting our business. For additional information, including with respect to other assumptions underlying the forward-looking statements made in the press release, refer to the applicable reportable segment in CAE’s MD&A for the year ended March 31, 2020. Given the impact of the changing circumstances surrounding the COVID-19 pandemic and the related response from CAE, governments, regulatory authorities, businesses and customers, there is inherently more uncertainty associated with CAE’s assumptions. Accordingly, the assumptions outlined in this press release and, consequently, the forward-looking statements based on such assumptions, may turn out to be inaccurate.

Material risks
Important risk factors that could cause actual results or events to differ materially from those expressed in or implied by our forward-looking statements are set out in CAE’s MD&A for the year ended March 31, 2020 filed by CAE with the Canadian Securities Administrators (available at www.sedar.com) and with the U.S. Securities and Exchange Commission (available at www.sec.gov). The fiscal year 2020 MD&A is also available at www.cae.com. Any one or more of the factors set out in CAE’s MD&A may be exacerbated by the growing COVID-19 outbreak and may have a significantly more severe impact on CAE’s business, results of operations and financial condition than in the absence of such outbreak. Accordingly, readers are cautioned that any of the disclosed risks could have a material adverse effect on our forward-looking statements. We caution that the disclosed list of risk factors is not exhaustive and other factors could also adversely affect our results.

Non-GAAP and other financial measures
This press release includes non-GAAP and other financial measures. Non-GAAP measures are useful supplemental information but do not have a standardized meaning according to GAAP and therefore may not be comparable to similar measures presented by other issuers. These measures should not be confused with, or used as an alternative for, performance measures calculated according to GAAP. They should also not be used to compare with similar measures from other companies. Management believes that providing certain non-GAAP measures provides users with a better understanding of our results and trends and provides additional information on our financial and operating performance.

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

(2) Operating profit or loss is an additional GAAP measure that shows us how we have performed before the effects of certain financing decisions, tax structures and discontinued operations. We track it because we believe it 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.

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





(4) 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.

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

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

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

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

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

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

(10) 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.




(11) 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.

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

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

(14) 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.

For non-GAAP and other financial measures monitored by CAE, and a reconciliation of such measures to the most directly comparable measure under GAAP, please refer to Section 5 of CAE’s MD&A for the quarter ended December 31, 2020 filed with the Canadian Securities Administrators available on our website (www.cae.com) and on SEDAR (www.sedar.com).

Contacts
Investor Relations:
Andrew Arnovitz, Vice President, Strategy and Investor Relations 1-514-734-5760, andrew.arnovitz@cae.com

Media:
Hélène V. Gagnon, Vice President, Public Affairs and Global Communications 1-514-340-5536, helene.v.gagnon@cae.com




Consolidated Income (Loss) Statement
(Unaudited) Three months ended
December 31
Nine months ended
December 31
(amounts in millions of Canadian dollars, except per share amounts)
2020 2019 2020 2019
Revenue $ 832.4  $ 923.5  $ 2,087.6  $ 2,645.9 
Cost of sales 603.5  632.0  1,559.7  1,874.0 
Gross profit
$ 228.9  $ 291.5  $ 527.9  $ 771.9 
Research and development expenses 36.5  33.6  82.2  101.3 
Selling, general and administrative expenses 105.3  118.3  287.4  329.6 
Other (gains) and losses (1.5) (3.5) 92.4  (15.3)
Share of after-tax profit of equity accounted investees (8.6) (11.8) (0.3) (34.3)
Restructuring costs 14.3  —  65.4  — 
Operating profit $ 82.9  $ 154.9  $ 0.8  $ 390.6 
Finance expense – net 33.3  36.7  103.6  105.9 
Earnings (loss) before income taxes $ 49.6  $ 118.2  $ (102.8) $ 284.7 
Income tax (recovery) expense (0.1) 18.4  (36.5) 46.9 
Net income (loss) $ 49.7  $ 99.8  $ (66.3) $ 237.8 
Attributable to:    
Equity holders of the Company $ 48.8  $ 97.7  $ (67.0) $ 233.0 
Non-controlling interests 0.9  2.1  0.7  4.8 
Earnings (loss) per share attributable to equity holders of the Company
Basic $ 0.18  $ 0.37  $ (0.25) $ 0.88 
Diluted $ 0.18  $ 0.37  $ (0.25) $ 0.87 




Consolidated Statement of Comprehensive Income (Loss)
(Unaudited) Three months ended
December 31
Nine months ended
December 31
(amounts in millions of Canadian dollars)
2020 2019 2020 2019
Net income (loss) $ 49.7  $ 99.8  $ (66.3) $ 237.8 
Items that may be reclassified to net income (loss)
Foreign currency exchange differences on translation of foreign operations $ (79.2) $ (10.2) $ (198.8) $ (98.2)
Reclassification to income of foreign currency exchange differences (3.3) (8.0) (19.8) (19.9)
Net gain on cash flow hedges 17.0  5.9  60.4  15.4 
Reclassification to income of losses on cash flow hedges (6.0) (0.1) (18.4) (3.2)
Net gain on hedges of net investment in foreign operations 53.1  22.7  125.3  32.6 
Income taxes (4.5) (2.0) (15.5) 7.8 
  $ (22.9) $ 8.3  $ (66.8) $ (65.5)
Items that will never be reclassified to net income (loss)    
Remeasurement of defined benefit pension plan obligations $ 7.1  $ 30.9  $ (100.8) $ (29.5)
Net (loss) gain on financial assets carried at fair value through OCI (1.8) 0.1  (1.8) — 
Income taxes (1.7) (8.2) 26.8  7.8 
  $ 3.6  $ 22.8  $ (75.8) $ (21.7)
Other comprehensive (loss) income $ (19.3) $ 31.1  $ (142.6) $ (87.2)
Total comprehensive income (loss) $ 30.4  $ 130.9  $ (208.9) $ 150.6 
Attributable to:    
Equity holders of the Company $ 31.3  $ 129.0  $ (205.0) $ 147.4 
Non-controlling interests (0.9) 1.9  (3.9) 3.2 




Consolidated Statement of Financial Position
(Unaudited) December 31 March 31
(amounts in millions of Canadian dollars) 2020 2020
Assets
Cash and cash equivalents $ 619.9  $ 946.5 
Accounts receivable 491.0  566.1 
Contract assets 447.8  569.3 
Inventories 691.2  616.2 
Prepayments 56.7  55.1 
Income taxes recoverable 45.7  30.4 
Derivative financial assets 32.0  25.0 
Total current assets
$ 2,384.3  $ 2,808.6 
Property, plant and equipment 1,918.5  2,154.0 
Right-of-use assets 395.0  395.9 
Intangible assets 2,054.9  2,056.5 
Investment in equity accounted investees 408.5  460.6 
Deferred tax assets 109.1  84.5 
Derivative financial assets 9.6  13.1 
Other non-current assets 499.0  510.4 
Total assets
$ 7,778.9  $ 8,483.6 
Liabilities and equity
   
Accounts payable and accrued liabilities $ 917.9  $ 934.4 
Provisions 34.5  29.2 
Income taxes payable 16.9  26.4 
Contract liabilities 654.4  746.2 
Current portion of long-term debt 284.8  206.2 
Derivative financial liabilities 10.8  119.9 
Total current liabilities
$ 1,919.3  $ 2,062.3 
Provisions 31.7  28.6 
Long-term debt 2,155.0  3,106.0 
Royalty obligations 139.1  141.1 
Employee benefits obligations 325.5  212.8 
Deferred tax liabilities 111.1  150.6 
Derivative financial liabilities 5.4  12.8 
Other non-current liabilities 230.9  191.1 
Total liabilities
$ 4,918.0  $ 5,905.3 
Equity
 
Share capital   $ 1,169.4  $ 679.5 
Contributed surplus   34.3  26.9 
Accumulated other comprehensive income   129.2  193.2 
Retained earnings   1,449.1  1,590.1 
Equity attributable to equity holders of the Company   $ 2,782.0  $ 2,489.7 
Non-controlling interests   78.9  88.6 
Total equity
  $ 2,860.9  $ 2,578.3 
Total liabilities and equity
  $ 7,778.9  $ 8,483.6 




Consolidated Statement of Changes in Equity
(Unaudited)   Attributable to equity holders of the Company    
Nine months ended December 31, 2020 Common shares   Accumulated other      
(amounts in millions of Canadian dollars,
Number of Stated Contributed comprehensive Retained   Non-controlling Total
except number of shares) shares value surplus income earnings Total interests equity
Balances as at March 31, 2020 265,619,627  $ 679.5  $ 26.9  $ 193.2  $ 1,590.1  $ 2,489.7  $ 88.6  $ 2,578.3 
Net (loss) income —  $ —  $ —  $ —  $ (67.0) $ (67.0) $ 0.7  $ (66.3)
Other comprehensive loss —  —  —  (64.0) (74.0) (138.0) (4.6) (142.6)
Total comprehensive loss —  $ —  $ —  $ (64.0) $ (141.0) $ (205.0) $ (3.9) $ (208.9)
Issuance of common shares under an equity offering 16,594,126  478.8  —  —  —  478.8  —  478.8 
Exercise of stock options 547,025  11.1  (1.4) —  —  9.7  —  9.7 
Share-based payments expense —  —  8.8  —  —  8.8  —  8.8 
Transactions with non-controlling interests —  —  —  —  —  —  (5.8) (5.8)
Balances as at December 31, 2020 282,760,778  $ 1,169.4  $ 34.3  $ 129.2  $ 1,449.1  $ 2,782.0  $ 78.9  $ 2,860.9 
Attributable to equity holders of the Company    
Nine months ended December 31, 2019 Common shares   Accumulated other      
(amounts in millions of Canadian dollars,
Number of Stated Contributed comprehensive Retained   Non-controlling Total
except number of shares) shares value surplus income earnings Total interests equity
Balances as at April 1, 2019 265,447,603  $ 649.6  $ 24.8  $ 199.0  $ 1,430.4  $ 2,303.8  $ 78.7  $ 2,382.5 
Net income —  $ —  $ —  $ —  $ 233.0  $ 233.0  $ 4.8  $ 237.8 
Other comprehensive loss —  —  —  (63.9) (21.7) (85.6) (1.6) (87.2)
Total comprehensive (loss) income —  $ —  $ —  $ (63.9) $ 211.3  $ 147.4  $ 3.2  $ 150.6 
Exercise of stock options 1,317,280  25.7  (3.2) —  —  22.5  —  22.5 
Optional cash purchase of common shares 1,323  —  —  —  —  —  —  — 
Repurchase and cancellation of common shares (978,431) (2.4) —  —  (30.4) (32.8) —  (32.8)
Share-based payments expense —  —  5.1  —  —  5.1  —  5.1 
Transactions with non-controlling interests —  —  —  —  (1.4) (1.4) 1.6  0.2 
Stock dividends 85,887  2.9  —  —  (2.9) —  —  — 
Cash dividends —  —  —  —  (82.2) (82.2) —  (82.2)
Balances as at December 31, 2019 265,873,662  $ 675.8  $ 26.7  $ 135.1  $ 1,524.8  $ 2,362.4  $ 83.5  $ 2,445.9 




Consolidated Statement of Cash Flows
(Unaudited)
Nine months ended December 31
(amounts in millions of Canadian dollars)
2020 2019
Operating activities
 
Net (loss) income $ (66.3) $ 237.8 
Adjustments for:  
Depreciation and amortization 241.0  226.9 
Impairment of non-financial assets 137.6  — 
Share of after-tax profit of equity accounted investees (0.3) (34.3)
Deferred income taxes (39.5) 6.9 
Investment tax credits (22.6) 6.3 
Share-based payments expense 2.5  13.3 
Defined benefit pension plans 11.8  12.5 
Other non-current liabilities (15.0) (32.0)
Derivative financial assets and liabilities – net (27.5) (7.4)
Other 44.8  2.1 
Changes in non-cash working capital (74.5) (133.3)
Net cash provided by operating activities $ 192.0  $ 298.8 
Investing activities
 
Business combinations, net of cash acquired $ (134.7) $ (10.1)
Acquisition of investment in equity accounted investees   (113.5)
Additions to property, plant and equipment (57.1) (199.4)
Proceeds from disposal of property, plant and equipment 1.7  0.4 
Additions to intangible assets (45.0) (69.7)
Net proceeds from (payments to) equity accounted investees 1.4  (10.3)
Dividends received from equity accounted investees 11.7  22.6 
Other (5.1) 0.8 
Net cash used in investing activities
$ (227.1) $ (379.2)
Financing activities
   
Net (repayment) proceeds from borrowing under revolving credit facilities $ (705.6) $ 135.3 
Proceeds from long-term debt 23.3  161.4 
Repayment of long-term debt (18.4) (229.6)
Repayment of lease liabilities (59.9) (64.5)
Dividends paid   (82.2)
Net proceeds from the issuance of common shares 482.6  22.5 
Repurchase and cancellation of common shares   (32.8)
Changes in restricted cash   15.7 
Other (0.7) (1.3)
Net cash used in financing activities $ (278.7) $ (75.5)
Effect of foreign currency exchange differences on cash and cash equivalents
$ (12.8) $ (11.7)
Net decrease in cash and cash equivalents $ (326.6) $ (167.6)
Cash and cash equivalents, beginning of period
946.5  446.1 
Cash and cash equivalents, end of period
$ 619.9  $ 278.5 



Table of Contents
 
 
Management’s Discussion and Analysis  
1.
Highlights
1
2.
3
3.
4
4.
12
5.
13
6.
17
7.
20
8.
26
9.
27
10.
Business combinations
29
11.
Event after the reporting period
30
12.
30
13.
30
14.
31
Consolidated Interim Financial Statements
Consolidated income (loss) statement
32
Consolidated statement of comprehensive income (loss)
33
Consolidated statement of financial position
34
Consolidated statement of changes in equity
35
Consolidated statement of cash flows
36
Notes to the Consolidated Interim Financial Statements
Note 1 - Nature of operations and summary of significant accounting policies
37
Note 2 - Changes in accounting policies
38
Note 3 - Impact of the COVID-19 pandemic
39
Note 4 - Business combinations
40
Note 5 - Operating segments and geographic information
41
Note 6 - Other (gains) and losses
43
Note 7 - Restructuring costs
44
Note 8 - Debt facilities and finance expense - net
44
Note 9 - Government participation
45
Note 10 - Share capital, earnings per share and dividends
45
Note 11 - Supplementary cash flows information
46
Note 12 - Fair value of financial instruments
47
Note 13 - Related party transactions
48
Note 14 - Event after the reporting period
49































Management’s Discussion and Analysis
for the three months ended December 31, 2020

1.     HIGHLIGHTS
FINANCIAL
THIRD QUARTER OF FISCAL 2021
 (amounts in millions, except per share amounts, ROCE and book-to-sales) Q3-2021 Q3-2020 Variance $ Variance %
Income Statement
Revenue $ 832.4  $ 923.5  $ (91.1) (10  %)
Operating profit1
$ 82.9  $ 154.9  $ (72.0) (46  %)
Segment operating income (SOI)1 $ 97.2  $ 154.9  $ (57.7) (37  %)
SOI before specific items1
$ 97.2  $ 157.2  $ (60.0) (38  %)
Net income attributable to equity holders of the Company $ 48.8  $ 97.7  $ (48.9) (50  %)
Basic and diluted earnings per share (EPS) $ 0.18  $ 0.37  $ (0.19) (51  %)
Net income before specific items1
$ 60.0  $ 99.4  $ (39.4) (40  %)
EPS before specific items1
$ 0.22  $ 0.37  $ (0.15) (41  %)
Cash Flows
Free cash flow1
$ 224.0  $ 275.3  $ (51.3) (19  %)
Net cash provided by operating activities $ 234.8  $ 322.1  $ (87.3) (27  %)
Financial Position
Capital employed1
$ 4,680.8  $ 4,752.5  $ (71.7) (2  %)
Non-cash working capital1
$ 129.9  $ 134.1  $ (4.2) (3  %)
Net debt1
$ 1,819.9  $ 2,306.6  $ (486.7) (21  %)
Return on capital employed (ROCE)1
% 2.7  % 10.7 
ROCE before specific items1
% 6.4  % 11.4 
Backlog
Total backlog1
$ 7,820.1  $ 9,434.3  $ (1,614.2) (17  %)
Order intake1
$ 710.7  $ 1,106.6  $ (395.9) (36  %)
Book-to-sales ratio1
0.85  1.20 
Book-to-sales ratio for the last 12 months 0.84  1.22 
FISCAL 2021 YEAR TO DATE
 (amounts in millions, except per share amounts) Q3-2021 Q3-2020 Variance $ Variance %
(Loss) Income Statement
Revenue $ 2,087.6  $ 2,645.9  $ (558.3) (21  %)
Operating profit $ 0.8  $ 390.6  $ (389.8) (100  %)
Segment operating income $ 66.2  $ 390.6  $ (324.4) (83  %)
SOI before specific items $ 174.4  $ 396.5  $ (222.1) (56  %)
Net (loss) income attributable to equity holders of the Company $ (67.0) $ 233.0  $ (300.0) (129  %)
Basic (loss) earnings per share $ (0.25) $ 0.88  $ (1.13) (128  %)
Diluted (loss) earnings per share $ (0.25) $ 0.87  $ (1.12) (129  %)
Net income before specific items $ 63.9  $ 237.3  $ (173.4) (73  %)
EPS before specific items $ 0.24  $ 0.88  $ (0.64) (73  %)
Cash Flows
Free cash flow $ 176.2  $ 166.1  $ 10.1  %
Net cash provided by operating activities $ 192.0  $ 298.8  $ (106.8) (36  %)



1 Non-GAAP and other financial measures (see Section 5.1).
CAE Third Quarter Report 2021 I 1




Management’s Discussion and Analysis


IMPACT OF THE COVID-19 PANDEMIC
The COVID-19 pandemic has created unprecedented uncertainty in the global economy, the global air transportation environment, air passenger travel and to CAE's business. Several of our customers are facing significant challenges, with airlines and, to a lesser extent, business jet operators having to ground many aircraft in response to travel bans, border restrictions, and lower demand for air travel. We continue to take measures to protect the health and safety of our employees, work with our customers to minimize potential disruptions and support our community in addressing the challenges posed by this global pandemic. This outbreak has had an important and immediate impact on all our businesses, especially in the Civil Aviation Training Solutions segment, as a result of an unprecedented shock to demand together with significant disruptions to its own operations, including temporary facility closures, supply chain disruptions, program execution delays, slower procurement decisions and changes to its customers’ acquisition priorities.

For the Civil Aviation Training Solutions segment, the impacts of the COVID-19 pandemic started at the end of the fourth quarter of fiscal 2020 and resulted in the temporary closure of certain training centre operations, lower utilization of our simulators in the network due to reduced demand from aviation customers and interruptions in the execution of our backlog. At the worst point during the first quarter of fiscal 2021, more than half of our Civil training locations worldwide had totally suspended operations or operated at significantly reduced capacity. However, by the end of June 2020, all previously closed training locations had re-opened at full or reduced capacities, and opening hours gradually resumed to normal. We began to see some recoveries in training utilization starting in the second quarter of fiscal 2021, especially in our business aviation training business, but certain training locations have recently had to curtail operating activities temporarily as local authorities implement measures to contain the spread of COVID-19. Accordingly, we remain operating at significantly lower levels than the prior year.

For the Defence and Security segment, although we were awarded several strategic contracts during the third quarter of fiscal 2021, delays in the awarding of additional contracts and in the execution and advancement of certain programs continue to be experienced. Additionally, travel restrictions to certain countries and border closures have impacted our ability to deliver training for some international pilots that cannot travel to our training facilities.

For the Healthcare segment, customers continue to be focused on managing the acute operational demands of this healthcare crisis, which resulted in less budget for normal operations and training projects. Furthermore, as institutions begin to reopen, they have switched their focus to remote education and, while we have provided new distance learning solutions, we have seen a reduction in demand for on-site training in universities and hospitals resulting in delays of training events and simulator patient deliveries. However, the healthcare business looks well positioned to experience a change in the appreciation of the importance, relevancy and benefits of healthcare simulation and training to help save lives.

We continued to operate with several flexible measures implemented to protect our financial position and preserve liquidity, including the reduction of capital expenditures and R&D investments, strict cost containment measures, temporary salary freezes, salary reductions in the first half of fiscal 2021 and reduced work weeks, layoffs, a suspension of our common share dividend and share repurchase plan, as well as payment deferrals on certain lease liabilities and government royalty and R&D obligations in response to the impact of the COVID-19 pandemic. Additionally, we have worked with defence customers to secure more favorable terms for milestone payments and with suppliers for extended payment terms.

You will find more details on the impacts of the COVID-19 pandemic on our business in About CAE and Results by segment as well as in Business risk and uncertainty in our 2020 financial report.

BUSINESS COMBINATIONS
On November 16, 2020, we acquired the shares of Flight Simulation Company B.V. (FSC) for cash consideration (net of cash acquired) of $105.2 million. FSC is a provider of total training solutions as well as instructor provisioning in Europe for airline and cargo operators. The acquisition provides CAE with an expanded portfolio of customers and an established recurring training business which is complementary to CAE’s network;
On December 22, 2020 we acquired the shares of Merlot Aero Limited (Merlot) for cash consideration (net of cash acquired) of $29.5 million and a long-term contingent cash consideration payable of up to US $10 million if certain criteria are met. Merlot is a leading civil aviation crew management and optimization software company based in Auckland, New Zealand;
Subsequent to the end of the quarter, on January 26, 2021, we concluded the acquisition of TRU Simulation + Training Canada Inc. (TRU Canada), a manufacturer of full-flight simulators and flight training devices, for cash consideration of US $40 million, subject to post-closing adjustments. This acquisition will expand CAE’s global installed base of commercial flight simulators and customers, and the addressable market for simulator lifecycle support services and will also provide CAE with a backlog of simulator orders, full-flight simulators and access to a number of airline customers globally.

OTHER
On November 30, 2020, we completed a public offering and a concurrent private placement of 16,594,126 common shares at a price of $29.85 per share for aggregate gross proceeds of $495.3 million (equity offering). The proceeds of the equity offering are for general corporate purposes, including to fund our recently completed acquisitions, disclosed above, and other future potential acquisition and growth opportunities. Pending such uses, the proceeds have been used to repay indebtedness outstanding under our credit facilities and held as cash or cash equivalents.


2 I CAE Third Quarter Report 2021




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 2021 mean the fiscal year ending March 31, 2021;
Last year, prior year and a year ago mean the fiscal year ended March 31, 2020;
Dollar amounts are in Canadian dollars.
 
This report was prepared as of February 12, 2021 and includes our management’s discussion and analysis (MD&A), unaudited consolidated interim financial statements and notes for the third quarter ended December 31, 2020. We have prepared it to help you understand our business, performance and financial condition for the third quarter of fiscal 2021. 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, and based on unaudited figures. For additional information, please refer to our unaudited consolidated interim financial statements for the quarter ended December 31, 2020, and our annual audited consolidated financial statements, which you will find in our financial report for the year ended March 31, 2020. The MD&A section of our 2020 financial report also provides you with a view of CAE as seen through the eyes of management and helps you understand the Company from a variety of perspectives: 
Our mission;
Our vision;
Our strategy;
Our operations;
Foreign exchange;
Non-GAAP and other financial measures;
Consolidated results;
Results by segment;
Consolidated cash movements and liquidity;
Consolidated financial position;
Business combinations;
Events after the reporting period;
Business risk and uncertainty;
Related party transactions;
Changes in accounting policies;
Controls and procedures;
Oversight role of Audit Committee and Board of Directors.
 
You will find our most recent financial report and Annual Information Form (AIF) on our website at www.cae.com, on SEDAR at www.sedar.com or on EDGAR at www.sec.gov. Holders of CAE’s securities may also request a printed copy of the Company’s consolidated financial statements and MD&A free of charge by contacting Investor Relations (investor.relations@cae.com).
 
ABOUT MATERIAL INFORMATION
This report includes the information we believe is material to investors after considering all circumstances, including potential market sensitivity. We consider something to be material if:
It results in, or would reasonably be expected to result in, a significant change in the market price or value of our shares, or;
It is likely that a reasonable investor would consider the information to be important in making an investment decision.
 
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
This report includes forward-looking statements about our activities, events and developments that we expect to or anticipate may occur in the future including, for example, statements about our vision, strategies, market trends and outlook, future revenues, capital spending, expansions and new initiatives, financial obligations and expected sales. Forward-looking statements normally contain words like believe, expect, anticipate, plan, intend, continue, estimate, may, will, should, strategy, future and similar expressions. By their nature, forward‑looking statements require us to make assumptions and are subject to inherent risks and uncertainties associated with our business which may cause actual results in future periods to differ materially from results indicated in forward‑looking statements. While these statements are based on management’s expectations and assumptions regarding historical trends, current conditions and expected future developments, as well as other factors that we believe are reasonable and appropriate in the circumstances, readers are cautioned not to place undue reliance on these forward-looking statements as there is a risk that they may not be accurate. 


CAE Third Quarter Report 2021 I 3




Management’s Discussion and Analysis


Important risks that could cause such differences include, but are not limited to, risks relating to the COVID-19 pandemic such as health and safety, reduction and suspension of operations, global economic conditions, diversions of management attention, heightened IT risks, liquidity risks and credit risks, risks relating to the industry such as competition, business development and awarding of new contracts, level and timing of defence spending, government-funded defence and security programs, constraints within the civil aviation industry, regulatory matters, natural or other disasters, environmental laws and regulations, climate change, risks relating to CAE such as evolving standards and technology innovation, our ability to penetrate new markets, R&D activities, fixed-price and long‑term supply contracts, strategic partnerships and long-term contracts, procurement and original equipment manufacturer (OEM) leverage, product integration and program management, protection of our intellectual property and brand, third‑party intellectual property, loss of key personnel, labour relations, liability risks that may not be covered by indemnity or insurance, warranty or other product-related claims, integration of acquired businesses through mergers, acquisitions, joint ventures, strategic alliances or divestitures, reputational risk, U.S. foreign ownership, control or influence mitigation measures, length of sales cycle, seasonality, continued returns to shareholders, information technology and cybersecurity, our reliance on technology and third‑party providers, data privacy, and risks relating to the market such as foreign exchange, availability of capital, credit risk, pension plan funding, doing business in foreign countries, geopolitical uncertainty, anti‑corruption laws and taxation matters. Additionally, differences could arise because of events announced or completed after the date of this report. You will find more information about the risks and uncertainties affecting our business in our 2020 financial report. Any one or more of the factors described above and elsewhere in this MD&A may be exacerbated by the continuing COVID-19 pandemic and may have a more negative impact on CAE’s business, results of operations and financial condition. We caution readers that the risks described above and elsewhere in this MD&A are not necessarily the only ones we face; additional risks and uncertainties that are presently unknown to us or that we may currently deem immaterial may adversely affect our business.
 
Except as required by law, we disclaim any intention or obligation to update or revise any forward-looking statements whether as a result of new information, future events or otherwise. The forward-looking information and statements contained in this report are expressly qualified by this cautionary statement.

3.     ABOUT CAE
3.1       Who we are
 
CAE is a high technology company, at the leading edge of digital immersion, providing solutions to make the world a safer place. Backed by a record of more than 70 years of industry firsts, we continue to reimagine the customer experience and revolutionize training and operational support solutions in civil aviation, defence and security, and healthcare. We are the partner of choice to customers worldwide who operate in complex, high-stakes and largely regulated environments, where successful outcomes are critical. Testament to our customers’ ongoing needs for our solutions, over 60 percent of CAE’s revenue is recurring in nature. We have the broadest global presence in our industry, with approximately 10,000 employees, 160 sites and training locations in over 35 countries.
 
CAE’s common shares are listed on the Toronto and New York stock exchanges under the symbol CAE.
3.2       Our mission
 
To lead at the frontier of digital immersion with high-tech training and operational support solutions to make the world a safer place.
3.3       Our vision
 
To be the worldwide partner of choice in civil aviation, defence and security and healthcare by revolutionizing our customers’ training and critical operations with digitally immersive solutions to elevate safety, efficiency and readiness.

3.4       Our strategy

CAE’s eight pillars of strength
We believe there are eight fundamental strengths that underpin our strategy and investment thesis:
High degree of recurring business;
Industry leader with a strong competitive moat;
Headroom in large markets;
Technology and industry thought leader;
Potential for compound growth and superior returns over the long-term;
Culture of innovation, empowerment, excellence and integrity;
Excellent and diverse team with a unique social impact on safety;
Solid financial position and highly cash generative business model.


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Management’s Discussion and Analysis
High degree of recurring business
We operate in highly regulated industries with mandatory and recurring training requirements for maintaining professional certifications. Over 60% of our business is derived from the provision of technology-enabled services, which is an important source of recurring business, and largely involves long-term agreements with many airlines, business aircraft operators and defence forces.
 
Industry leader with a strong competitive moat
We are an industry leader in each of our three segments by way of scale, the range of our technological solutions and services, and our global reach. We benefit from a strong competitive moat, fortified by seven decades of industry firsts and by continuously pushing the boundaries using digitally immersive, high-tech training and operational support solutions. Our broad global training network, unique end‑to‑end cadet to captain training capacities, technology-intensive training and operational support solutions, deep subject matter expertise and industry thought leadership, unrivaled customer intimacy and strong, recognizable brand further strengthen our competitive moat.
 
Headroom in large markets
We provide innovative training and operational support solutions to customers in large addressable markets in civil aviation, defence and security and healthcare. Significant untapped market opportunities exist in these three core businesses, with substantial headroom to grow our market share over the long-term.
 
Technology and industry thought leader
CAE is a high-tech training and operational support solutions company and an industry thought leader in the application of modelling and simulation, virtual reality and advanced analytics to create highly innovative and digitally immersive training and operational support solutions for customers in civil aviation, defence and security and healthcare.

Potential for compound growth and superior returns over the long-term
In each of our businesses, we have the potential to grow at a rate superior to our underlying markets because of our potential to gain share within the markets we serve. Our rising proportion of recurring revenue is largely driven by our customers’ ongoing training, operational support requirements and our ability to assist them with these critical activities. We leverage our leading market position to deepen and expand our customer relationships and gain more share of their critical responsibilities. We expect to optimize and increase the utilization of our global training network and to deploy new assets with accretive returns, over the long-term.
 
Culture of innovation, empowerment, excellence and integrity
One CAE is the internal mantra that represents our culture of innovation, empowerment, excellence and integrity. It is the combination of these four key attributes that provides CAE with its market leadership, strong reputation and high degree of customer intimacy.

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

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

3.5       Our operations
 
We provide digitally immersive training and operational support solutions to three markets globally:
The civil aviation market includes major commercial airlines, regional airlines, business aircraft operators, civil helicopter operators, aircraft manufacturers, third-party training centres, flight training organizations, maintenance repair and overhaul organizations (MRO) and aircraft finance leasing companies;
The defence and security market includes defence forces, OEMs, government agencies and public safety organizations worldwide;
The healthcare market includes hospital and university simulation centres, medical and nursing schools, paramedic organizations, defence forces, medical societies, public health agencies and OEMs. 

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Management’s Discussion and Analysis


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

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

The COVID-19 pandemic started impacting several operational locations and markets in January and February in Asia, and through the rest of the world in March 2020. The impacts widened in April, and although some recoveries were experienced starting in June, especially in our business aviation training business, we remain operating at significantly lower levels than the prior year. The global roll-out of vaccines to combat COVID-19 is encouraging, however, renewed quarantine measures and border restrictions to contain the spread of the virus have contributed to expectations for a potentially more protracted recovery period for commercial air travel, particularly for cross-border and transcontinental operations. As such, several of our customers are continuing to face significant challenges, with airlines and, to a lesser extent, business jet operators having to ground many aircraft in response to travel bans, border restrictions, and lower demand for air travel. This outbreak has had an important and immediate impact on all our businesses, especially in Civil Aviation where commercial airlines are experiencing significant financial challenges, as a result of an unprecedented shock to demand together with significant disruptions to our own operations, including temporary facility closures, supply chain disruptions, program execution delays, slower procurement decisions and changes to our customer’s acquisition priorities. We continue to take measures to protect the health and safety of our employees, work with our customers to minimize potential disruptions and support our community in addressing the challenges posed by this global pandemic.

Impacts to CAE's operations
Civil Aviation
Pilot, maintenance and cabin crew training is an essential service and critical to maintaining our customers' operations, however, with the global airline industry facing a severe and abrupt drop in air passenger travel and with airlines and business jet operators having to ground many aircraft and furlough employees, we have experienced a significant drop in demand for our training services. Reduction in demand combined with public directives resulted in more than half of our civil aviation training locations suspending operations or operating at significantly reduced capacity at our lowest point in April 2020. By the end of June 2020, all previously closed training locations had re‑opened at full or reduced capacities, and opening hours gradually resumed to normal. We continue to operate on an adaptive basis and in accordance with the local COVID-19 situation and government protocols, accordingly certain training locations have recently had to curtail operating activities temporarily as local authorities implement measures to contain the spread of COVID-19. In addition to disruptions to our civil training centre network, under public directives, we also had to suspend most manufacturing operations of civil simulator products starting on March 25, 2020; with gradual recommencement of manufacturing operations in May 2020.

Reductions in domestic and international passenger demand have severely impacted the aviation industry. For calendar 2020, passenger traffic decreased by 66% compared to calendar 2019. The International Air Transport Association's current forecast is for passenger traffic to recover to 2019 levels by 2024. As a result, our commercial airline customers are deferring initial training for new pilots and in some cases, airlines have sought temporary deferrals of pilot recurrent training requirements from local authorities. In business aviation, while activity was also reduced due to self-isolation measures, travel bans, border restrictions and lockdown protocols, we have seen gradual recovery in training utilization during the third quarter of fiscal 2021. Since the end of the first quarter of fiscal 2021, business jet traffic has shown improvements from the April lows with the U.S. Federal Aviation Administration (FAA) reporting a year‑over‑year decline of 13% for the total number of business jet flights for the month of December compared to a decline of 16%, 24% and 75% for the months of September, June and April, respectively. Similarly, Eurocontrol, the European Organisation for the Safety of Air Navigation, reported a year-over-year decline of 15% in December compared to a decline of 14% in September, 41% in June and 71% in April. To preserve resources, airlines are also deferring new aircraft deliveries, planning early retirements for certain aircraft fleet types and seeking financial help from local governments. This will likely result in lower simulator orders for the current fiscal year when compared to recent years and some delays in the execution of our current backlog. Additionally, we have reassessed certain estimated contract values included in our Civil training backlog to reflect the change in estimates of our customer's training requirements during the downturn caused by the COVID-19 pandemic. CAE continues to work closely with our customers to monitor the situation and support their needs.
The financial impact from the decreased training utilization, production slowdown, reduced orders and deliveries and other disruptions is expected to significantly negatively impact the operations and financial performance of the current fiscal year. The resumption of our recovery remains highly dependent on the timing and rate at which travel restrictions and quarantines can eventually be safely lifted and normal activities resume.
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Management’s Discussion and Analysis
Defence and Security
While the COVID-19 pandemic has severely impacted all sectors of society, governments have reaffirmed the critical role played by the military and are taking measures to minimize impacts to both defence forces and the defence industrial base. In countries where we have significant operations, most of those governments have classified the defence market as an essential service and determined that some level of training must continue to meet readiness requirements in support of national security. Consequently, almost all of the sites where we provide services are operational with most back to full or near-full capacity. Manufacturing operations for defence simulator products have continued during the pandemic, however, timing of execution and deliveries have been disrupted by mobility limitations and client access restrictions.

Despite some of the mitigating initiatives taken by governments, there have been negative implications on CAE’s defence business segment due to the pandemic. We have a range of programs with defence and OEM customers globally that have experienced project advancement delays due to travel bans, border restrictions, client access restrictions and supply chain disruptions. Some of the required progress and acceptance testing has continued with virtual meetings and remote work procedures, but delays have impacted some key milestones and on-site upgrade work, thus negatively affecting revenue and operating profit. In addition, the level of fiscal stimulus by governments worldwide to counter the economic fallout of the COVID-19 pandemic may lead to increased pressures on defence spending. In the Middle East, CAE’s customers are currently contending with the negative impacts of the pandemic and lower oil prices, which is currently slowing the rate of progress on existing CAE programs and the awarding of new ones from our pipeline. We have also experienced delays in the awarding of new contracts due to reduced bandwidth within government acquisition agencies as well as government authorities following directives in their respective countries to shelter-in-place and eliminate travel. These delays are continuing to impact order intake and, although we were awarded several strategic contracts during the third quarter, we expect some continued delays in the awarding of additional contracts through the end of the fiscal year.

Healthcare
In Healthcare, a large contingent of the market for simulation products are medical and nursing schools who have also come under lockdown protocols, which has negatively affected our ability to conclude contracts and to deliver on existing orders. To accommodate our customers and offer remote education options, CAE Healthcare provided new tools and training on how to implement distance learning with our solutions, and we developed a transformative clinical learning platform with a virtual patient, virtual medical equipment and Simulated Clinical Experience (SCEs) for teaching. We offered new remote learning tools for clinical educators within our LearningSpace centre management solution, including a virtual examination room. In the hospital market, our customers continue to be focused on managing the acute operational demands of this healthcare crisis rather than focusing on their training needs, which resulted in less focus and budget for normal operations and training projects. Manufacturing operations for healthcare products also continued during the pandemic.

To provide support during the COVID-19 pandemic, our engineers and scientists have designed an easy-to-use, maintainable, easy‑to‑manufacture ventilator to provide life support to patients in intensive care. In April 2020, CAE was selected by the Canadian government to design and manufacture CAE Air1 ventilators. We have also provided complimentary training seminars on how to prepare healthcare workers in the fight against COVID-19. The CAE team launched simulation-based training solutions, both web and hardware based, to train personnel in the safe practice of ventilation and intubation, which is key to saving lives.

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

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

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


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Management’s Discussion and Analysis


Total available liquidity as at December 31, 2020 was approximately $2.4 billion, including $619.9 million in cash and cash equivalents, undrawn amounts on our revolving credit facility and the balance available under our receivable purchase program. The increase in available liquidity compared to the prior quarter was partially due to the proceeds from our equity offering. We believe that our cash and cash equivalents, the availability under our committed revolving credit facility and cash generated from our operations will be sufficient to provide liquidity for our operations over the foreseeable future.

To minimize the impact on employees through this difficult period, CAE has accessed government emergency relief measures and wage subsidy programs available around the world, including the Canada Emergency Wage Subsidy (CEWS) program. CAE was eligible for the CEWS subsidy program during the nine months ended December 31, 2020, which allowed us to recall employees previously placed on furlough or reduced work weeks. The wage subsidies were applied as a substitute for some of the cost saving measures previously taken and to alleviate some of the impact on affected employees. The Government of Canada has extended the CEWS program to June 2021 and, although the subsidy amounts available to CAE are expected to be significantly less for the rest of the fiscal year, we intend to continue participating in the program, subject to meeting the eligibility requirements.

In August 2020, we announced that we would be taking additional measures to best serve the market by optimizing our global asset base and footprint, adapting our global workforce and adjusting our business to correspond with the expected lower level of demand for certain of our products and services. These measures also include the introduction and acceleration of new digitally enhanced processes. As a result of these measures, we expect to record restructuring expenses of approximately $170 million for the entire program, consisting mainly of real estate costs, asset relocations and other direct costs related to the optimization of our footprint and employee termination benefits, which will be carried out throughout fiscal 2021 and into fiscal 2022. We expect to realize annual recurring cost savings ramping up to approximately $65 to $70 million, starting in fiscal 2022. We started executing the restructuring program in the second quarter of fiscal 2021 and have incurred $65.4 million of restructuring costs as at December 31, 2020.

Even with the above measures in place, there is no certainty that such measures will be sufficient to mitigate the direct and indirect effects of the virus and its impact on our business, financial condition and results of operations going forward. Additionally, the impact of new technologies and initiatives we have launched or will launch in response to the COVID-19 pandemic on our business, financial condition and results of operations is uncertain and we may be subject to additional risks in connection with such technologies and initiatives.

The COVID-19 pandemic and related restrictions may also disrupt or delay the ability of employees to work because they become sick or are required to care for those who become sick, cause delays or disruptions in our supply chain, increase our vulnerability and that of our partners and service providers to security breaches, denial of service attacks or other hacking or phishing attacks, or cause other unpredictable events. Additionally, although we have attempted to identify the COVID-19-related risks faced by our business, the uncertainty and lack of predictability around the COVID-19 pandemic means there may be other risks not presently known to us or that we presently believe are not material that could also affect our business, financial condition and results of operations.

Since the impact of COVID-19 is ongoing, the effect of the COVID-19 outbreak and the related impact on the global economy may not be fully reflected in our results of operations until future periods. It is difficult to predict the duration or severity of the pandemic and it is extremely challenging for CAE to estimate or quantify the magnitude of the pandemic’s impact on our operations, financial condition and strategic plan, though the impact may be material. Due to the unprecedented and ongoing nature of COVID-19 and the fact that the response to the pandemic is evolving in real time and differs geographically from one region to another, estimates of the economic impacts of the COVID-19 pandemic remain inherently highly uncertain and speculative. Even after the COVID-19 pandemic is over, we may continue to experience material adverse effects to our business, financial condition and strategic plans as a result of the continued disruption in the global economy and any resulting recession, the effects of which may persist beyond that time. Moreover, a material adverse effect on our employees, customers, suppliers, partners and/or other stakeholders could have a material adverse effect on us.

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

In Civil aviation, training is highly regulated, and for pilots to remain active and to continue to hold their certifications, they must train regularly to demonstrate proficiency, usually every six to nine months. While training activities related to growth of the global pilot population and movements of pilots to new positions have been curtailed significantly, recurrent training to maintain certification is non‑discretionary. To adapt to these new circumstances, we have already introduced new virtual service offerings to support our customers such as obtaining FAA and other Civil Aviation Authority approvals for virtual training in certain of our flight training organizations and remote support for the installation, acceptance and qualification of full-flight simulators. Our capacity to adapt and the increasing need for airlines to come up with cost containment measures as a result of this pandemic could act as a catalyst for potential customers who may come to realize the benefits of outsourcing their training needs to CAE as a means to reduce their in‑house training costs. Another important contributor to our resiliency is the solid backlog of Civil full-flight simulator orders, which have been pre-funded by customer deposits and progress payments. While we expect some requests for deferrals, full-flight simulator order cancellations are not common given the capital customers have deployed and since the orders are closely linked to airline operational requirements. During the third quarter of fiscal 2021, we announced three acquisitions within the Civil aviation market demonstrating that we are focused on deploying the capital we recently raised to bolster our position and expand our addressable markets, our global customer base and our suite of solutions for our aviation customers during this unprecedented period of disruption.
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Management’s Discussion and Analysis
In November 2020, we released our 2020-2029 Pilot Demand Outlook which estimates an expected global requirement of 264,000 new pilots in the civil aviation industry to sustain growth and support mandatory retirements over the next ten years. In the short-term, we estimate that approximately 27,000 of these new professional pilots are expected to be needed starting in late 2021.

For Defence, governments recognize the critical importance of national defence and have been proactive in implementing measures to maintain and protect the defence industry and its suppliers, evidenced by many governments who are using defence programs as a mechanism to maintain and stimulate the economy. For example, countries such as Canada, the United Kingdom and Australia have implemented measures such as accelerated payments to support supplier cash flows on existing programs. This, combined with our Defence backlog, provides an additional layer of diversification for our business. We have also demonstrated our ability to adapt in these challenging circumstances with, for example, the delivery and installation of a new NH90 flight training device to the Royal New Zealand Air Force (RNZAF) which was commissioned using local staff supported virtually and remotely by CAE personnel in Canada and Australia, the implementation of a range of classroom and distance learning solutions to sustain training for defence and public safety customers, and the development of virtual engineering internships for students in the United Arab Emirates.

We see future opportunities arising in the Healthcare business including our new digital and virtual learning products, COVID-19 related training solutions, and increased recognition of the value of simulation-based preparedness for pandemics and other high-risk scenarios. This is supported by professional organizations such as the International Nursing Association of Clinical Simulation and Learning (INACSL) and the Society for Simulation in Healthcare who are proposing that regulatory bodies and policymakers demonstrate flexibility by allowing the replacement of clinical hours usually completed in a live healthcare setting with that of virtually simulated experiences as a result of this pandemic. On this topic, starting in April 2020, we launched a series of Simulation Debrief podcasts featuring pioneers and experts in the field discussing the future of healthcare simulation. Our goal is to provide the highest quality training experience by offering innovative clinical learning solutions that can be quickly and easily implemented within today’s healthcare education environment. As a testament to Healthcare's innovation, our adaptive Ventilator Reskilling Course won both the Emergency Medical Services (EMS) World Innovation Award and Attendees’ Choice Award at the annual EMS World conference.

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

Among our thousands of customers, we have long-term training centre operations and training services agreements and joint ventures with approximately 40 major airlines and aircraft operators around the world. Our range of training solutions includes product and service offerings for pilot, cabin crew and aircraft maintenance technician training, training centre operations, curriculum development, courseware solutions and consulting services. We currently manage 320 full-flight simulators (FFSs)2, including those operating in our joint ventures. We offer industry-leading technology, and we are shaping the future of training through innovations such as our next generation training systems, including CAE Real-time Insights and Standardized Evaluations (CAE RiseTM), which improves training quality, objectivity and efficiency through the integration of untapped flight and simulator data-driven insights into training. In the formation of new pilots, CAE operates the largest ab initio flight training network in the world and has approximately 30 cadet training programs globally. In resource management, CAE is the global market leader in the provision of flight crew and technical personnel to airlines, aircraft leasing companies, manufacturers and MRO companies worldwide.

Quality, fidelity, reliability and innovation are hallmarks of the CAE brand in flight simulation and we are the world leader in the development of civil flight simulators. We continuously innovate our processes and lead the market in the design, manufacture and integration of civil FFSs for major and regional commercial airlines, business aircraft operators, third-party training centres and OEMs. For example, in response to the recent clearing from the FAA, European Aviation Safety Agency and other National Aviation Authorities across the globe for its return to flight and following Boeing's recommendation that all 737 MAX pilots undergo training in a simulator prior to flying the aircraft, CAE is supporting operators around the world with 737 MAX simulators, updated with the latest software package from Boeing, including five 737 MAX simulators installed at our training centres in Toronto, Dallas, Dubai and Singapore. We have established a wealth of experience in developing first-to-market simulators for more than 35 types of aircraft models. Our flight simulation equipment, including FFSs, are designed to meet the rigorous demands of their long and active service lives, often spanning several decades of continuous use. Our global reach enables us to provide best‑in‑class support services such as real-time, remote monitoring and enables us to leverage our extensive worldwide network of spare parts and service teams.


2 Non-GAAP and other financial measures (see Section 5.1).
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Management’s Discussion and Analysis


Market drivers
Demand for training solutions in the civil aviation market is driven by the following:
Pilot training and certification regulations;
Safety and efficiency imperatives of commercial airlines and business aircraft operators;
Expected long-term global growth in air travel;
Expected long-term growth or renewal of the active fleet of commercial and business aircraft;
Demand for trained aviation professionals.

DEFENCE AND SECURITY MARKET
We are a training and mission support solutions provider for defence forces across multi-domain operations, and for government organizations responsible for public safety.
 
We are a global leader in the development and delivery of training and mission support solutions for defence forces. Increasingly, we are focused on digital technologies and data-driven solutions that help our defence customers plan, prepare and analyze to enhance performance and make better decisions. While the COVID-19 pandemic has created uncertainty in all sectors of society, governments have reaffirmed the critical and essential role played by the military and are taking measures to minimize impacts to both defence forces and the defence industrial base. Most militaries use a combination of live training on actual platforms, virtual training in simulators, and constructive training using computer‑generated simulations. We are skilled and experienced as a training systems integrator capable of helping defence forces achieve an optimal balance of integrated live-virtual-constructive training to achieve mission preparedness. Our expertise in training spans a broad variety of aircraft, including fighters, helicopters, trainer aircraft, maritime patrol, tanker/transport aircraft and remotely piloted aircraft, also called unmanned aerial systems. Increasingly, we are leveraging our training systems integration capabilities in the naval domain to provide naval training solutions, as evidenced by the program to provide the United Arab Emirates Navy with a comprehensive Naval Training Centre and our role supporting the design phase of the Canadian Surface Combatant ship program. We offer training solutions for land forces, including a range of driver, gunnery and maintenance trainers for tanks and armoured fighting vehicles as well as constructive simulation for command and staff training. Increasingly, we are engaged with defence customers to leverage synthetic environments and digital immersion technologies to provide a range of mission support solutions, including analytics and systems engineering, decision support and staff augmentation. For example, during the third quarter of fiscal 2021 we announced a contract to further develop a Single Synthetic Environment (SSE) for the United Kingdom’s Strategic Command, the major organization of the British Armed Forces responsible for leading integration across all domains — cyber, space, maritime, land and air.

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

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

Market drivers
Demand for training and operational support solutions in the defence and security markets is driven by the following:
Defence budgets;
Installed base of enduring defence platforms and new customers;
Attractiveness of outsourcing training, maintenance and operational support services;
Pilot and aircrew recruitment, training and retention challenges faced by militaries globally;
Desire to integrate training systems to achieve efficiencies and enhanced preparedness;
Need for synthetic environments to conduct integrated, networked mission training, including joint and coalition forces exercises;
Desire of governments and defence forces to increase the use of synthetic environments, for planning, analysis and decision support;
Relationships with OEMs for simulation and training. 

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Management’s Discussion and Analysis
HEALTHCARE MARKET
We offer integrated education and training solutions including surgical and imaging simulations, curriculum, audiovisual and centre management platforms and patient simulators to healthcare students and clinical professionals across the professional life cycle. Additionally, to support the COVID-19 pandemic, we have designed and manufactured ventilators to provide life support to intensive care patients.
 
Simulation-based training is one of the most effective ways to prepare healthcare practitioners to care for patients and respond to critical situations while reducing medical errors. We are leveraging our experience and best practices in simulation-based aviation training to deliver innovative solutions to improve the safety and efficiency in the delivery of patient care. As such, we have established three CAE Healthcare Centres of Excellence to date to improve clinical education and develop new training technologies and curriculum for healthcare professionals and students. The healthcare simulation market is expanding, with a shift in the U.S. from fee‑for‑service to value-based care in hospitals, and with simulation centres becoming increasingly more prevalent in nursing and medical schools.

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

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

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

Market drivers
Demand for our simulation products and services in the healthcare market is driven by the following:
Limited access to live patients during training;
Medical and mixed reality technology revolution;
Broader adoption of simulation, with a demand for innovative and custom training approaches;
Growing emphasis on patient safety and outcomes.
 
You will find more information about our operations in our fiscal 2020 financial report, AIF or our Annual Activity and Corporate Social Responsibility Report.
CAE Third Quarter Report 2021 I 11




Management’s Discussion and Analysis


4.     FOREIGN EXCHANGE
 
We report all dollar amounts in Canadian dollars. We value assets, liabilities and transactions that are measured in foreign currencies using various exchange rates as required by IFRS.
 
The tables below show the variations of the closing and average exchange rates for the three main currencies in which we operate.

We used the closing foreign exchange rates below to value our assets, liabilities and backlog in Canadian dollars at the end of each of the following periods:
  December 31 September 30 Increase / March 31 Increase /
  2020 2020 (decrease) 2020 (decrease)
U.S. dollar (US$ or USD) 1.27  1.33  (5  %) 1.41  (10  %)
Euro (€ or EUR) 1.56  1.56  —  % 1.55  %
British pound (£ or GBP) 1.74  1.72  % 1.75  (1  %)
 
We used the average quarterly foreign exchange rates below to value our revenues and expenses:

  December 31 September 30 Increase / December 31 Increase /
  2020 2020 (decrease) 2019 (decrease)
U.S. dollar (US$ or USD) 1.30  1.33  (2  %) 1.32  (2  %)
Euro (€ or EUR) 1.55  1.56  (1  %) 1.46  %
British pound (£ or GBP) 1.72  1.72  —  % 1.70  %
 
The effect of translating the results of our foreign operations into Canadian dollars resulted in an increase in this quarter’s revenue of $4.8 million and a decrease in net income of $0.2 million when compared to the third quarter of fiscal 2020. For the first nine months of fiscal 2021, the effect of translating the results of our foreign operations into Canadian dollars resulted in an increase in revenue of $24.7 million and an increase in net income of $0.3 million when compared to the first nine months of fiscal 2020. We calculated this by translating the current quarter foreign currency revenue and net income using the average monthly exchange rates from the prior year’s third quarter and comparing these adjusted amounts to our current quarter reported results. You will find more details about our foreign exchange exposure and hedging strategies in Business Risk and Uncertainty in our 2020 financial report.

12 I CAE Third Quarter Report 2021




Management’s Discussion and Analysis
5.     NON-GAAP AND OTHER FINANCIAL MEASURES
This MD&A includes non-GAAP and other financial measures. Non-GAAP measures are useful supplemental information but do not have a standardized meaning according to GAAP. These measures should not be confused with, or used as an alternative for, performance measures calculated according to GAAP. Furthermore, these non-GAAP measures should not be compared with similarly titled measures provided or used by other companies.

5.1       Non-GAAP and other financial measure definitions

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

Capital used:
For the Company as a whole, we take total assets (not including cash and cash equivalents), and subtract total liabilities (not including long-term debt and the current portion of long-term debt);
For each segment, we take the total assets (not including cash and cash equivalents, tax accounts and other non-operating assets), and subtract total liabilities (not including tax accounts, long-term debt and the current portion of long-term debt, royalty obligations, employee benefit obligations and other non-operating liabilities).
 
Source of capital:
In order to understand our source of capital, we add net debt to total equity.

Refer to section 9.1 “Consolidated capital employed” of this MD&A for a reconciliation of this non-GAAP measure to the most directly comparable measure under GAAP.

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

Capital expenditures (maintenance and growth) from property, plant and equipment
Maintenance capital expenditure is a non-GAAP measure we use to calculate the investment needed to sustain the current level of economic activity.
 
Growth capital expenditure is a non-GAAP measure we use to calculate the investment needed to increase the current level of economic activity.
Earnings or loss per share (EPS) before specific items
Earnings or loss per share before specific items is a non-GAAP measure calculated by excluding restructuring costs, integration costs, acquisition costs and impairments and other gains and losses arising from significant strategic transactions or material events, after tax, as well as significant one-time tax items from the diluted earnings per share from continuing operations attributable to equity holders of the Company. The effect per share is obtained by dividing these restructuring costs, integration costs, acquisition costs, and other gains, after tax, as well as one-time tax items by the average number of diluted shares. We track it because we believe it provides a better indication of our operating performance on a per share basis and makes it easier to compare across reporting periods. Refer to section 5.2 “Non-GAAP measure reconciliations” of this MD&A for a reconciliation of this non-GAAP measure to the most directly comparable measure under GAAP.

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. Refer to section 8.1 “Consolidated cash movements” of this MD&A for a reconciliation of this non-GAAP measure to the most directly comparable measure under GAAP.
 
Gross profit
Gross profit is a non-GAAP measure equivalent to the operating profit excluding research and development expenses, selling, general and administrative expenses, other gains and losses, after tax share in profit or loss of equity accounted investees and restructuring, integration and acquisition costs. We believe it is useful to management and investors in evaluating our ongoing operational performance.


CAE Third Quarter Report 2021 I 13




Management’s Discussion and Analysis


Net debt
Net debt is a non-GAAP measure we use to monitor how much debt we have after taking into account cash and cash equivalents. We use it as an indicator of our overall financial position, and calculate it by taking our total long-term debt, including the current portion of long-term debt, and subtracting cash and cash equivalents. Refer to section 9.1 “Consolidated capital employed” of this MD&A for a reconciliation of this non-GAAP measure to the most directly comparable measure under GAAP.
 
Net debt-to-capital is calculated as net debt divided by the sum of total equity plus net debt.

Net debt-to-EBITDA is calculated as net debt divided by the last twelve months EBITDA. EBITDA comprises earnings before income taxes, finance expense – net, depreciation and amortization. EBITDA before specific items further excludes restructuring costs, integration costs, acquisition costs and other gains and losses arising from significant strategic transactions or material events. Refer to section 5.2 “Non-GAAP measure reconciliations” of this MD&A for a reconciliation of these non-GAAP measures to the most directly comparable measure under GAAP.

Net income or loss before specific items
Net income or loss before specific items is a non-GAAP measure we use as an alternate view of our operating results. We calculate it by taking our net income attributable to equity holders of the Company from continuing operations and excluding restructuring costs, integration costs, acquisition costs and other gains and losses arising from significant strategic transactions or material events, after tax, as well as significant one-time tax items. We track it because we believe it provides a better indication of our operating performance and makes it easier to compare across reporting periods. Refer to section 5.2 “Non-GAAP measure reconciliations” of this MD&A for a reconciliation of this non-GAAP measure to the most directly comparable measure under GAAP.

Non-cash working capital
Non-cash working capital is a non-GAAP measure we use to monitor how much money we have committed in the day-to-day operation of our business. We calculate it by taking current assets (not including cash and cash equivalents and assets held for sale) and subtracting current liabilities (not including the current portion of long-term debt and liabilities held for sale). Refer to section 9.1 “Consolidated capital employed” of this MD&A for a reconciliation of this non-GAAP measure to the most directly comparable measure under GAAP.

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

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

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


14 I CAE Third Quarter Report 2021




Management’s Discussion and Analysis
Research and development expenses (R&D)
Research and development expenses are a financial measure we use to measure the amount of expenditures directly attributable to research and development activities that we have expensed during the period, net of investment tax credits and government contributions.

Segment operating income or loss (SOI)
Segment operating income or loss is a non-GAAP measure and is the sum of our key indicators of each segment’s financial performance. Segment operating income or loss gives us an indication of the profitability of each segment because it does not include the impact of any items not specifically related to the segment’s performance. We calculate segment operating income by taking the operating profit and excluding restructuring costs of major programs that do not arise from significant strategic transactions. Refer to section 5.2 “Non-GAAP measure reconciliations” of this MD&A for a reconciliation of this non-GAAP measure to the most directly comparable measure under GAAP.

Segment operating income or loss before specific items further excludes reorganizational costs, integration costs, acquisition costs and other gains and losses arising from significant strategic transactions or material events. We track it because we believe it provides a better indication of our operating performance and makes it easier to compare across reporting periods. Refer to section 5.2 “Non‑GAAP measure reconciliations” of this MD&A for a reconciliation of this non-GAAP measure to the most directly comparable measure under GAAP.

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

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

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

5.2       Non-GAAP measure reconciliations

Reconciliation of segment operating income and segment operating income before specific items
Three months ended Nine months ended
December 31 December 31
(amounts in millions) 2020 2019 2020 2019
Operating profit $ 82.9  $ 154.9  $ 0.8  $ 390.6 
Restructuring costs 14.3  —  65.4  — 
Segment operating income $ 97.2  $ 154.9  $ 66.2  $ 390.6 
Net costs incurred in relation to the COVID-19 pandemic(1)
  —  108.2  — 
Impact of the integration of Bombardier's Business Aviation
Training Business (BBAT)
  0.4    4.0 
Defence and Security's reorganizational costs
  1.9    1.9 
Segment operating income before specific items $ 97.2  $ 157.2  $ 174.4  $ 396.5 

(1) Mainly from impairment charges on non-financial assets and amounts owed from customers.



CAE Third Quarter Report 2021 I 15




Management’s Discussion and Analysis


Reconciliation of net income before specific items and earnings per share before specific items
Three months ended Nine months ended
December 31 December 31
(amounts in millions, except per share amounts) 2020 2019 2020 2019
Net income (loss) attributable to equity holders of the Company $ 48.8  $ 97.7  $ (67.0) $ 233.0 
Restructuring costs, after tax 11.2  —  50.6  — 
Net costs incurred in relation to the COVID-19 pandemic(1), after tax
  —  80.3  — 
Impact of the integration of BBAT, after tax
  0.3    2.9 
Defence and Security's reorganizational costs, after tax
  1.4    1.4 
Net income before specific items $ 60.0  $ 99.4  $ 63.9  $ 237.3 
Average number of shares outstanding (diluted) 273.0  267.6  268.1  267.7 
Earnings per share before specific items $ 0.22  $ 0.37  $ 0.24  $ 0.88 

(1) Mainly from impairment charges on non-financial assets and amounts owed from customers.


Reconciliation of EBITDA and EBITDA before specific items
Last twelve months ending
December 31
(amounts in millions) 2020 2019
Operating profit $ 147.3  $ 561.0 
Depreciation and amortization 319.5  290.4 
EBITDA $ 466.8  $ 851.4 
Restructuring costs 65.4  — 
Net costs incurred in relation to the COVID-19 pandemic(1)
108.2  — 
Impact of the integration of BBAT 2.1  10.8 
Defence and Security's reorganizational costs 7.8  1.9 
Healthcare goodwill impairment charge 37.5  — 
EBITDA before specific items $ 687.8  $ 864.1 

(1) Mainly from impairment charges on non-financial assets and amounts owed from customers.


COVID-19 government support programs
Throughout fiscal 2021, we received amounts in relation to COVID-19 government support programs, mostly from the CEWS program. If the amount of COVID-19 government support programs credited to income during the three months ended December 31, 2020 was taken into account, segment operating income before specific items would have been $86.6 million, net income before specific items would have been $52.2 million and EPS before specific items would have been $0.19. Similarly, for the nine months ended December 31, 2020, segment operating income before specific items would have been $84.2 million, net loss before specific items would have been $2.3 million and EPS before specific items would have been negative $0.01.
16 I CAE Third Quarter Report 2021




Management’s Discussion and Analysis
6.     CONSOLIDATED RESULTS
6.1      Results from operations – third quarter of fiscal 2021
(amounts in millions, except per share amounts) Q3-2021 Q2-2021 Q1-2021 Q4-2020 Q3-2020
Revenue $ 832.4  704.7  550.5  977.3  923.5 
Cost of sales $ 603.5  513.7  442.5  665.6  632.0 
Gross profit3 $ 228.9  191.0  108.0  311.7  291.5 
As a % of revenue % 27.5  27.1  19.6  31.9  31.6 
Research and development expenses3 
$ 36.5  25.6  20.1  36.2  33.6 
Selling, general and administrative expenses $ 105.3  88.2  93.9  107.9  118.3 
Other (gains) and losses $ (1.5) (2.7) 96.6  14.3  (3.5)
After tax share in (profit) loss of equity accounted investees $ (8.6) 0.6  7.7  6.8  (11.8)
Segment operating income (loss)3
$ 97.2  79.3  (110.3) 146.5  154.9 
As a % of revenue % 11.7  11.3  —  15.0  16.8 
Restructuring costs $ 14.3  51.1  —  —  — 
Operating profit (loss)3 
$ 82.9  28.2  (110.3) 146.5  154.9 
As a % of revenue % 10.0  4.0  —  15.0  16.8 
Finance expense – net $ 33.3  35.2  35.1  38.5  36.7 
Earnings (loss) before income taxes $ 49.6  (7.0) (145.4) 108.0  118.2 
Income tax (recovery) expense $ (0.1) (1.0) (35.4) 26.9  18.4 
As a % of earnings (loss) before income taxes  
(income tax rate) %   14  24  25  16 
Net income (loss) $ 49.7  (6.0) (110.0) 81.1  99.8 
Attributable to:          
Equity holders of the Company $ 48.8  (5.2) (110.6) 78.4  97.7 
Non-controlling interests $ 0.9  (0.8) 0.6  2.7  2.1 
   $ 49.7  (6.0) (110.0) 81.1  99.8 
EPS attributable to equity holders of the Company        
Basic and diluted $ 0.18  (0.02) (0.42) 0.29  0.37 
EPS before specific items3
$ 0.22  0.13  (0.11) 0.46  0.37 

Revenue was 10% lower than the third quarter of fiscal 2020
Revenue was $91.1 million lower than the third quarter of fiscal 2020. Decreases in revenue were $145.9 million and $33.1 million for Civil Aviation Training Solutions and Defence and Security respectively, partially offset by an increase of $87.9 million for Healthcare.

For the first nine months of fiscal 2021, revenue was $558.3 million lower than the same period last year. Decreases in revenue were $540.9 million and $106.7 million for Civil Aviation Training Solutions and Defence and Security respectively, partially offset by an increase of $89.3 million for Healthcare.

You will find more details in Results by segment.
 
Gross profit was $62.6 million lower compared to the third quarter of fiscal 2020
Gross profit was $228.9 million this quarter (27.5% of revenue) compared to $291.5 million (31.6% of revenue) in the third quarter of fiscal 2020.

For the first nine months of fiscal 2021, gross profit was $527.9 million (25.3% of revenue) compared to $771.9 million (29.2% of revenue) last year.

Segment operating income was $57.7 million lower compared to the third quarter of fiscal 2020
Operating profit this quarter was $82.9 million (10.0% of revenue), compared to $154.9 million (16.8% of revenue) in the third quarter of fiscal 2020. Restructuring costs of $14.3 million were recorded this quarter whereas there were no restructuring costs in the third quarter of fiscal 2020. Segment operating income this quarter was $97.2 million (11.7% of revenue), compared to $154.9 million in the third quarter of fiscal 2020. The decrease in segment operating income was $61.0 million and $9.0 million for Civil Aviation Training Solutions and Defence and Security respectively, partially offset by an increase of $12.3 million for Healthcare.


3 Non-GAAP and other financial measures (see Section 5.1).
CAE Third Quarter Report 2021 I 17




Management’s Discussion and Analysis


For the first nine months of fiscal 2021, operating profit was $0.8 million, compared to $390.6 million last year. Restructuring costs of $65.4 million were recorded this year compared to nil last year. Segment operating income was $66.2 million (3.2% of revenue) compared to $390.6 million (14.8% of revenue) for the same period last year, representing a decrease of $324.4 million. The decrease in segment operating income was $305.8 million and $35.1 million for Civil Aviation Training Solutions and Defence and Security respectively, partially offset by an increase of $16.5 million for Healthcare.

There were no specific items affecting segment operating income this quarter and $2.3 million of specific items affecting segment operating income in the third quarter of fiscal 2020. For the first nine months of fiscal 2021, segment operating income before specific items4 was $174.4 million (8.4% of revenue), compared to $396.5 million (15.0% of revenue) last year. On this basis, the current period's segment operating income before specific items was $222.1 million lower on a year to date basis.

You will find more details in Restructuring costs and Results by segment.

Research and development expenses were $2.9 million higher compared to the third quarter of fiscal 2020
The increase compared to the third quarter of fiscal 2020 was mainly due to the amortization of development costs incurred in relation to the design and manufacturing of the CAE Air1 ventilators and higher net research and development expenses to support Defence and Security program advancements. The increase was partially offset by the benefit of cost containment measures taken and government support programs obtained in relation to the COVID-19 pandemic.

For the first nine months of fiscal 2021, research and development expenses were $19.1 million lower compared to the same period last year. The decrease was due to the benefit of cost containment measures taken and government support programs obtained in relation to the COVID-19 pandemic, partially offset by the amortization of development costs incurred in relation to the design and manufacturing of the CAE Air1 ventilators.

Net finance expense was $3.4 million lower compared to the third quarter of fiscal 2020
The decrease was mainly due to lower interest on long-term debt and lower interest on lease liabilities.

For the first nine months of fiscal 2021, net finance expense was $103.6 million, $2.3 million lower compared to the same period last year. The decrease was mainly due to higher finance income and lower finance expense on royalty obligations.

Income tax rate was nil this quarter
Income tax recovery this quarter amounted to $0.1 million, representing an effective tax rate of nil compared to an effective tax rate of 16% for the third quarter of fiscal 2020.

The income tax rate was impacted by the restructuring costs and the positive impact of tax audits incurred this quarter. Excluding the effect of these elements, the income tax rate would have been 16% this quarter, which is stable compared to the third quarter of fiscal 2020.

For the first nine months of fiscal 2021, the income tax recovery amounted to $36.5 million, representing an effective tax rate of 36% compared to 16% for the same period last year.

This year, the income tax rate was impacted by impairment charges on non-financial assets and amounts owed from customers incurred in relation to the COVID-19 pandemic, restructuring costs and the positive impact of tax audits this year. Excluding the effect of these elements, the income tax rate would have been 23% this period. On this basis, the increase in the tax rate from the same period last year was mainly due to the change in the mix of income and losses from various jurisdictions.

4 Non-GAAP and other financial measures (see Section 5.1).
18 I CAE Third Quarter Report 2021




Management’s Discussion and Analysis
6.2      Restructuring costs

On August 12, 2020, we announced that we would be taking additional measures to best serve the market by optimizing our global asset base and footprint, adapting our global workforce and adjusting our business to correspond with the expected lower level of demand for certain of our products and services.

As a result of these measures, we expect to record restructuring expenses of approximately $170 million for the entire program, consisting mainly of real estate costs, asset relocations and other direct costs related to the optimization of our footprint and employee termination benefits, which will be carried out throughout fiscal 2021 and into fiscal 2022.

During the third quarter of fiscal 2021, we recorded restructuring costs of $14.3 million, consisting of impairment of non-financial assets of $9.7 million, severances and other employee related costs of $1.8 million and other costs of $2.8 million. Since the beginning of the second quarter of fiscal 2021, we recorded restructuring costs of $65.4 million, consisting of impairment of non‑financial assets of $33.5 million, severances and other employee related costs of $21.7 million and other costs of $10.2 million. Impairment of non‑financial assets primarily includes impairment of property, plant and equipment of training devices determined to be in surplus and of buildings and right-of-use assets related to leased real estate facilities to align with the optimization of our footprint and asset base.

6.3      Consolidated orders and total backlog
 
Total backlog5 down 6% compared to last quarter
  Three months ended Nine months ended
(amounts in millions) December 31, 2020 December 31, 2020
Obligated backlog5, beginning of period
$ 6,551.9  $ 7,631.0 
'+ order intake5
710.7  1,795.6 
- revenue (832.4) (2,087.6)
+ / - adjustments (158.8) (1,067.6)
Obligated backlog, end of period $ 6,271.4  $ 6,271.4 
Joint venture backlog5 (all obligated)
334.6  334.6 
Unfunded backlog and options5
1,214.1  1,214.1 
Total backlog $ 7,820.1  $ 7,820.1 

Adjustments this quarter were mainly due to negative foreign exchange movements, partially offset by backlog acquired from the business acquisitions completed during the quarter.

The book-to-sales ratio5 for the quarter was 0.85x. The ratio for the last 12 months was 0.84x. 

You will find more details in Results by segment.

5 Non-GAAP and other financial measures (see Section 5.1).
CAE Third Quarter Report 2021 I 19




Management’s Discussion and Analysis


7.     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. Segment operating income or loss is calculated by taking the operating profit or loss and excluding restructuring costs of major programs that do not arise from significant strategic transactions. Segment operating income or loss before specific items further excludes reorganizational costs, integration costs, acquisition costs and other gains and losses arising from significant strategic transactions or material events.

KEY PERFORMANCE INDICATORS

Segment operating income (loss)
(amounts in millions, except segment operating margins) Q3-2021 Q2-2021 Q1-2021 Q4-2020 Q3-2020
Civil Aviation Training Solutions
Operating profit (loss) $ 48.4  15.5  (97.9) 151.5  123.0 
Restructuring costs $ 13.6  36.4  —  —  — 
Segment operating income (loss) $ 62.0  51.9  (97.9) 151.5  123.0 
Segment operating margins % 15.0  14.2  —  25.2  22.0 
Defence and Security
Operating profit (loss) $ 21.8  11.4  (9.2) 32.4  31.3 
Restructuring costs $ 0.5  12.8  —  —  — 
Segment operating income (loss) $ 22.3  24.2  (9.2) 32.4  31.3 
Segment operating margins % 7.5  8.0  —  9.5  9.4 
Healthcare
Operating profit (loss) $ 12.7  1.3  (3.2) (37.4) 0.6 
Restructuring costs $ 0.2  1.9  —  —  — 
Segment operating income (loss) $ 12.9  3.2  (3.2) (37.4) 0.6 
Segment operating margins % 10.7  8.6  —  —  1.8 
Operating profit (loss) $ 82.9  28.2  (110.3) 146.5  154.9 
Restructuring costs $ 14.3  51.1  —  —  — 
Segment operating income (loss) $ 97.2  79.3  (110.3) 146.5  154.9 
SOI before specific items $ 97.2  79.3  (2.1) 193.9  157.2 
 
Capital employed6
(amounts in millions) Q3-2021 Q2-2021 Q1-2021 Q4-2020 Q3-2020