CAE

Business Context and Reporting Period

This Form 6-K filing by CAE Inc. (CAE) serves as a proxy information circular for the Annual and Special Meeting of Shareholders scheduled for August 12, 2009. The document covers the fiscal year ended March 31, 2009 (FY2009). CAE is a global leader in simulation and modeling technologies and integrated training services for the civil aviation and defense sectors. The filing details corporate governance matters, executive compensation, and financial performance for the period.

Key Financial Metrics (Fiscal Year Ended March 31, 2009)

Note: All figures are in Canadian dollars unless otherwise specified. Net debt increased significantly due to foreign exchange fluctuations and business acquisitions.

Material Changes vs. Prior Period

• Revenue Growth: Driven by a 26% increase in Military Simulation Products revenue and a 21% increase in Civil Training & Services revenue. Military orders exceeded $1 billion for the first time in company history.
• Profitability: Earnings from continuing operations rose 22% to $200.5 million. Segment operating income increased across all segments except Civil Simulation Products, which saw a slight decline due to foreign exchange impacts and contract terminations.
• Cash Flow: Free cash flow decreased by 34% primarily due to increased non-cash working capital requirements and higher cash dividends ($29.6 million vs. $9.8 million in FY2008).
• Debt Position: Net debt more than doubled to $285.1 million. This was largely attributed to the depreciation of the Canadian dollar against foreign currencies (impacting foreign-denominated debt) and debt assumed in acquisitions.
• Acquisitions: CAE acquired Sabena Flight Academy, increased its stake in Academia Aeronautica de Evora S.A. to 90%, and acquired Kestrel Technologies Pte Ltd.

Guidance, Outlook, and Risks

• Outlook for FY2010: Management anticipates a challenging environment for the civil market due to the global economic recession but expects military orders to remain strong with top-line growth of approximately 10%. The company expects some earnings impact on the civil side but aims to convert fixed costs to variable costs to mitigate risks.
• Restructuring: Subsequent to the fiscal year-end, CAE announced a restructuring plan involving the layoff of approximately 700 employees to align with market conditions, with an estimated expense of $34 million to be recorded in the first quarter of FY2010.
• Shareholder Proposals: Shareholders are asked to vote on the renewal of the Shareholder Protection Rights Plan (poison pill) and the confirmation of amended General By-Laws removing age disqualifications for directors.
• Risks: Key risks include the global economic recession impacting civil aviation demand, foreign exchange volatility (approx. 95% of revenue is in foreign currencies), and the availability of capital for aircraft financing.

Important Facts for Investor Verification

• Restructuring Costs: Verify the impact of the $34 million restructuring charge announced in May 2009 on FY2010 earnings.
• Foreign Exchange Sensitivity: Monitor the Canadian dollar's strength, as a stronger CAD negatively impacts revenue translation, while a weaker CAD increases costs for Canadian-based manufacturing.
• Dividend Policy: Confirm the sustainability of the increased dividend ($0.03 per share quarterly) given the reduction in free cash flow.
• Backlog Quality: Review the composition of the $3.18 billion backlog, noting that a $78.3 million downward revision was made in the fourth quarter for Civil Training & Services contracts due to market conditions.
• Debt Covenants: Verify continued compliance with financial covenants, particularly given the significant increase in net debt.