CAE : FY22 First Quarter Financial Report

First

Quarter

Report 2022

Financial Report

for the three months ended June 30, 2021

Table of Contents

Report to Shareholders

Management's Discussion and Analysis

1. 1. Highlights
2. 2. Introduction

43. About CAE

1. 4. Foreign exchange
2. 5. Non-GAAP and other measures

16 6. Consolidated results

19 7. Results by segment

1. 8. Consolidated cash movements and liquidity
2. 9. Consolidated position

27 10. Business combinations

1. 11. Events after the reporting period
2. 12. Changes in accounting policies

1. 13. Controls and procedures
2. 14. Selected quarterly information

Consolidated Interim Financial Statements

30	Consolidated income (loss) statement
31	Consolidated statement of comprehensive income (loss)
32	Consolidated statement of	position
33	Consolidated statement of changes in equity
34	Consolidated statement of cash
	Notes to the Consolidated Interim Financial Statements
35	Note 1 - Nature of operations and summary of	accounting policies
36	Note 2 - Changes in accounting policies
36	Note 3 - Business combinations
37	Note 4 - Operating segments and geographic information
39	Note 5 - Other (gains) and losses
39	Note 6	- Restructuring, integration and acquisitions costs
39	Note 7	- Finance expense - net
39	Note 8	- Government participation
40	Note 9	- Earnings per share
40	Note 10	- Supplementary cash	information
41	Note 11	- Fair value of	instruments
43	Note 12	- Related party transactions
43	Note 13	- Events after the reporting period

Report to Shareholders

CAE reported revenue of $752.7 million for the first quarter of fiscal 2022, compared with $550.5 million in the first quarter last year. First quarter net income attributable to equity holders was $46.4 million ($0.16 per share) compared to a loss of $110.6 million (negative $0.42 per share) last year. Adjusted net income(*) in the first quarter of fiscal 2022 was $55.6 million ($0.19 per share) compared to a loss of $30.3 million (negative $0.11 per share) last year.

Operating income this quarter was $86.2 million (11.5% of revenue), compared to a loss of $110.3 million in the first quarter of fiscal 2021. First quarter adjusted segment operating income was $98.4 million (13.1% of revenue) compared to a loss of $2.1 million last year. Adjusted segment operating income excluding COVID-19 government support programs was $84.8 million (11.3% of revenue) compared to a loss of $46.5 million last year. All financial information is in Canadian dollars unless otherwise indicated.

"Our positive momentum continued into the new fiscal year and I am pleased with our strong first quarter performance, punctuated by 37% year over year revenue growth and $0.19 of adjusted earnings per share," said Marc Parent, CAE's President and Chief Executive Officer. "We made important strategic progress during the quarter, penetrating more share in the Civil training market with two new ten-year exclusive airline training agreements, and two new partnerships with OEMs in the emerging Advanced Air Mobility market. In Defence, we won prime contracts and key positions on major IDIQs that significantly expand CAE's customer base and market reach. Subsequent to the end of the quarter, we announced our $1 billion, five-year research and development program, Project Resilience, to develop the technologies of tomorrow, including digitally immersive solutions using data ecosystems and artificial intelligence in civil aviation, defence and security and healthcare."

On CAE's outlook, Marc Parent added, "we expect continued strong year over year growth in fiscal year 2022, as recovery takes hold in our end markets, we integrate our recent acquisitions and ramp up our cost savings initiatives. The slope of recovery to pre-pandemic levels and beyond continues to depend on the timing and rate at which border restrictions can be safely lifted and normal activities resume in our end markets and in the geographies where we operate. Notwithstanding disparate global vaccination rates and volatile border rules which obscure normal market visibility, we still expect strong growth in Civil, weighted more to the second half. In Defence, we are extremely pleased to have concluded the L3Harris Technologies Military Training business acquisition as early as we did, thereby creating the world's leading platform-agnostic, global training and simulation defence pure play business. COVID-related headwinds persist for international defence business; however, we view them as temporary, and we also expect strong growth in Defence this fiscal year, similarly weighted to the back half. In Healthcare, our outlook is for continued growth involving our core Healthcare training and simulation products. We made several highly strategic moves over the last year-and-a-half to expand CAE's position and further strengthen the Company. The multi-year outlook for CAE is more compelling than ever, and we expect to deliver superior and sustainable growth and strong free cash flow(*) over the long-term."

Civil Aviation Training Solutions (Civil)

First quarter Civil revenue was $432.9 million, up 75% compared to the first quarter last year. Operating income was $59.0 million compared to a loss of $97.9 million in the same quarter last year. Adjusted segment operating income was $69.7 million (16.1% of revenue) compared to a loss of $16.2 million in the first quarter last year. Adjusted segment operating income excluding COVID-19 government support programs was $64.5 million (14.9% of revenue) compared to a loss of $38.8 million in the same quarter last year. During the quarter, Civil delivered 11 full-flight simulators (FFSs)(*) to customers and first quarter Civil training centre utilization(*) was 56%.

During the quarter, Civil signed training solutions contracts valued at $338.1 million, including contracts for five FFSs sales. Notable training contracts for the quarter include ten-year exclusive aviation training agreements with Scandinavian Airlines (SAS) and WestJet, four-year business aviation training agreements with Journey Aviation and GAMA Aviation and a three-year business aviation training agreement with Avcon Jet AG.

Civil also made progress in the Advanced Air Mobility market with its selection by Jaunt Air Mobility to lead the design and development of the Jaunt Aircraft Systems Integration Lab (JASIL) for the company's new all-electric vertical take-off and landing (eVTOL) aircraft, the Journey aircraft. Civil also announced a strategic partnership with Volocopter to develop, certify and deploy an innovative pilot training program and courseware development for eVTOL operations.

The Civil book-to-sales ratio(*) was 0.78x for the quarter and 0.88x for the last 12 months. The Civil backlog at the end of the quarter was $4.2 billion.

Defence and Security (Defence)

First quarter Defence revenue was $288.2 million, up 3% compared to the first quarter last year. Operating income was $22.6 million compared to a loss of $9.2 million in the same quarter last year. Adjusted segment operating income was $23.7 million (8.2% of revenue) compared to $17.3 million (6.2% of revenue) in the first quarter last year. Adjusted segment operating income excluding COVID-19 government support programs was $15.7 million (5.4% of revenue) compared to a loss of $3.3 million in the same quarter last year.

During the quarter, Defence booked orders for $151.8 million, including newly awarded contracts from the U.S. Army to provide a new and upgraded Maritime Integrated Training System. Defence was also awarded a contract from the SOSSEC consortium to design and develop the initial prototype HH-60W virtual reality/mixed reality aircrew trainer for the USAF. Other notable contracts include: continuing to provide upgrades and updates on C-130J training systems for the U.S. Air Force as well as KC-130J training systems for the U.S. Marine Corps; continuing to provide a range of in-service support solutions for the Royal Canadian Air Force's CF-18 aircraft; and continuing to provide management and support to the Royal Australian Air Force aerospace simulators. Defence also received an order to provide a new part-task trainer, a range of updates, and additional training support services for the PC-21ground-based training system supporting pilot training for the French Air Force (Armée de l'Air).

The Defence book-to-sales ratio was 0.53x for the quarter and 0.87x 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 $3.7 billion. The Defence pipeline remains strong with some $5.8 billion of bids and proposals pending customer decisions.

Following the end of the quarter, CAE concluded the acquisition of L3Harris Technologies' Military Training business (L3H MT) for US$1.05 billion, subject to customary adjustments, with all regulatory approvals having been obtained and all other closing conditions having been met. Augmented by L3H MT, Defence won key positions on three major indefinite delivery/indefinite quantity contracts (IDIQs) and two noteworthy prime contract wins, including prime positions on the U.S. General Service Administration (GSA) ASTRO IDIQ vehicle, the largest-ever IDIQ contract win in CAE's history, for data operations, aircraft, development and systems integration, support and training pools, providing access to a budget of several billions of dollars over 10 years. In addition, Defence won a prime position on the Multiple Award Task Order Contract (MATOC) IDIQ to provide mission support services to the US Army Futures Command, and it won a position as a key partner to a small business on the National Cyber Range Complex IDIQ. Furthermore, Defence won a competitive prime contract with an expected life cycle value of $90 million USD over eight years to develop simulators and training for U.S. Air Force Joint Terminal Attack Controllers. Defence also won its first three letter agency prime contract, expanding its market penetration into synthetic environment-enhancedmulti-domain operational support and training.

Healthcare

First quarter Healthcare revenue was $31.6 million, up 42% compared to the first quarter last year. Operating income was $4.6 million compared to a loss of $3.2 million in the same quarter last year. Adjusted segment operating income was $5.0 million (15.8% of revenue) compared to a loss of $3.2 million in the first quarter last year. Adjusted segment operating income excluding COVID-19 government support programs was $4.6 million (14.6% of revenue), compared to a loss of $4.4 million in the same quarter last year.

During the quarter, Healthcare released CAE Vimedix 3.2, an advanced software technology that makes Vimedix the industry's first ultrasound simulator with 3D/4D ultrasonography and multiplanar reconstruction for improved fidelity and realism, and re-launched CAE ICCU, a digital portfolio of learning solutions targeting critical-care clinicians for ultrasound education. Additionally, Healthcare continued to provide new tools and training capabilities to meet its customers' training needs during the COVID-19 pandemic.

Healthcare also partnered with Rush Center for Clinical Skills and Simulation (RCCSS) to enhance healthcare education and improve patient safety, including support for RCCSS simulation research initiatives.

Additional financial highlights

CAE incurred restructuring, integration and acquisition costs of $12.2 million during the first quarter of fiscal 2022 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 expected levels of demand for certain products and services. This brings the total restructuring, integration and acquisition costs incurred since the start of the program in the second quarter of last year to $136.2 million. Related to these measures, CAE expects to incur total restructuring expenses of approximately $50 million in fiscal year 2022. The Company continues to expect significant annual recurring cost savings to ramp up to a run rate of approximately $65 to $70 million by the end of the current fiscal year 2022.

Net cash used in operating activities was $129.1 million for the quarter, compared to $88.4 million in the first quarter last year. Free cash flow was negative $147.6 million for the quarter compared to $92.7 million in the first quarter last year. The decrease was mainly due to higher investments in non-cash working capital, partially offset by an increase in cash provided by operating activities. CAE usually sees a higher level of investment in non-cash working capital accounts during the first half of the fiscal year and tends to see a portion of these investments reverse in the second half.

Income taxes this quarter were $10.3 million, representing an effective tax rate of 18%, compared to 24% for the first quarter last year. The income tax rate was impacted by restructuring costs this quarter, excluding which, the rate would have been 19%. On this basis, the decrease in the tax rate was mainly attributable to a beneficial impact on certain tax assets, partially offset by the change in the mix of income from various jurisdictions.

Growth and maintenance capital expenditures(*) totaled $73.9 million this quarter.

Net debt(*) at the end of the quarter was $1,669.2 million for a net debt-to-capital ratio(*) of 33.9%. This compares to net debt of $1,425.4 million and a net debt-to-capital ratio of 30.7% at the end of the preceding quarter.

Adjusted return on capital employed (ROCE)(*) was 6.7% this quarter compared to 5.0% last quarter and 8.0% in the first quarter last year. Adjusted ROCE excluding COVID-19 government support programs was 5.3% this quarter compared to 3.1% last quarter and 7.4% in the first quarter last year.

CAE's participation in the Government of Canada CEWS program (COVID-19 government support) ceased on June 5, 2021.

Management outlook for fiscal year 2022

CAE is a high technology company at the leading edge in digital immersion. The Company is poised to benefit from how the world is changing in a post-COVID-19 environment and management has adapted its growth strategy to seize on the opportunities presented by this new reality. CAE has made several important moves over the last year-and-a-half to expand its position, including raising approximately $1.5 billion in equity to pursue a pipeline of growth opportunities, including the acquisition of five companies in core and related markets in Civil and the Company's largest-ever acquisition, namely L3H MT. At the same time as expanding CAE's reach externally, the Company embarked on enterprise level projects to substantially lower its cost structure and achieve even greater levels of operational excellence, including consolidating its global asset base and innovating digitally enabled processes.

CAE's adapted strategy and expanded position are well aligned with a post-COVID-19 business and geopolitical landscape, with expected secular trends favorable for all three of the Company's business segments. Greater desire by airlines to entrust CAE with their critical training and operational support activities, higher expected pilot demand (attrition and crisis-induced career shifts) and strong growth in business jet travel demand are enduring positives for the Civil business. The paradigm shift from asymmetric to near-peer threat and recognition of the sharply increased need for digital immersion-based, synthetic solutions in national defence considerations are tailwinds that favour the Defence business. Healthcare is poised to leverage opportunities presented by a growing nursing shortage and rising demand for Public Safety and Security.

CAE's customers operate in high stakes, complex environments, and ensuring the highest levels of safety, efficiency and readiness requires innovative approaches rooted in technology. CAE intends to continue making important progress to galvanize its industrial technology leadership, underscored by the recent announcement that it will be investing $1 billion over the next five years in innovation via Project Resilience. This transformation project is intended for CAE to develop the technologies of tomorrow, including digitally immersive solutions using data ecosystems and artificial intelligence in civil aviation, defence & security and healthcare. The project will also allow CAE to position itself as a leader in end- to-end technology, operational support and training solutions for the emerging Advanced Air Mobility market.

The outlook for the Company is more compelling than ever, and it expects to deliver superior and sustainable growth and strong free cash flow over the long-term. The short-term outlook for CAE for fiscal year 2022 is for continued strong year over year growth as recovery takes hold in its end markets, it integrates recent acquisitions and ramps up cost savings initiatives. The slope of recovery to pre-pandemic levels and beyond continues to depend on the timing and rate at which border restrictions can be safely lifted and normal activities resume in CAE's end markets and in the geographies where it and its customers have significant operations. This is especially the case for its Civil business unit, where the Company believes there is considerable pent up demand for air travel. Notwithstanding disparate global vaccination rates and volatile border rules which obscure normal market visibility, the Company still expects strong growth in Civil, with a greater proportion of that growth expected to come in the second half. In Defence, the closing of the L3H MT acquisition provides greater definition to the remainder of fiscal year 2022. Management's focus will be on the successful integration of L3H MT, establishing CAE as the world's leading platform-agnostic, global training and simulation defence pure play business, which is expected to bring increased potential to capture business around the world, accelerated with the expanded capability and customer set the combined entity now possesses. COVID-related headwinds persist for international defence business; however, Management views them as temporary, and expects strong growth overall in Defence this fiscal year, also to be more heavily weighted to the second half. And in Healthcare, the outlook is for continued growth this fiscal year, based off the core Healthcare training and simulation products business.

With several attractive market-led expansion investment opportunities on the horizon, management sees more opportunities to deploy organic capital and has increased expectations for total capital expenditures to now exceed $250 million in fiscal year 2022. The Company usually sees a higher investment in non-cash working capital accounts in the first half of the fiscal year, and as in previous years, management expects a portion of the non-cash working capital investment to reverse in the second half. The Company continues to target a 100% conversion of net income to free cash flow for the year. CAE expects to incur total restructuring expenses of approximately $50 million in fiscal year 2022, and continues to expect significant annual recurring cost savings to ramp up to a run rate of approximately $65 to $70 million by the end of the current fiscal year.