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«Management Discussion and Analysis of Financial Position and Operating Results The purpose of this management discussion and analysis (“MD&A”) is ...»

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Following the February 2005 announcement of an agreement for the sale of its Logistics & Defence Division (Diemaco), all Diemaco’s operations were reclassified as discontinued operations (see Discontinued Operations below and Note 4 to the consolidated financial statements). The Diemaco sales transaction was completed on May 20, 2005, with total proceeds amounting to $19.0 million.

Consolidated Sales

Consolidated sales for the year ended March 31, 2006 rose 10.0% to $256.2 million from $233.0 million last year, essentially due to the increase in landing gear sales for large civil aircraft and business jets. However, sales were negatively affected by the strength of the Canadian dollar relative to the U.S. dollar, which reduced sales figures by $15.7 million or 6.7%.

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Aerospace sales rose by 10.4% to $233.7 million from $211.7 million last year. The increase was primarily due to the improved results at our Landing Gear Division. This improved performance comes from the continued growth in large civil and business jet sales and, military sales to civil customers, along with the impact in the last two quarters of the year of the supply of materials under the USAF repair and overhaul contract, which started last August.

Aerostructure sales were almost flat, year-over-year, with an increased built rate on business jet and turbo prop (commuter) contracts offset by reduced regional jets sales following the suspension of the Bombardier RJ200 program.

Aircraft engine components sales declined almost 20% to $15.1 million. These sales were impacted this year by the completion of a military contract and by certain delivery and quality issues at our Gas Turbine Division, which caused a customer to terminate the manufacturing of certain commercial parts. Aircraft Engine Component sales totalled $1.9 million in the last quarter of fiscal 2006.

Industrial Segment

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Gross Profit Consolidated gross profit improved from 5.8% to 7.5% of sales in fiscal 2006 in spite of a 1.4% negative impact attributable to the continued strength of the Canadian dollar relative to the US currency. The increase reflects the overall increase in sales, which contributed to a better absorption of manufacturing overhead costs, as well as improved pricing on certain civil aerospace contracts.

Gross profit was also impacted during the fiscal year 2006 by an insurance recovery of $1.8 million, which was partially offset by a $1.0 million provision for non-quality and certain terminated aircraft engine component parts referred to above. The net impact of the two abovementioned items, which were recorded as a reduction of cost of sales in fiscal year 2006, increased the gross profit by $0.8 million or 0.3% expressed as a percentage of sales.

Selling and Administrative Expenses

Selling and administrative expenses were as follows:

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Selling and administrative expenses were almost flat in dollars but were actually 0.6% lower as a percentage of sales. The increased variable costs associated with the Company’s higher sales were substantially offset by the favourable impact of the stronger Canadian dollar on these expenses.

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Operating Income (Loss) Aerospace Segment Aerospace operating income was $6.2 million or 2.7% of sales this year, compared to $1.0 million or 0.1% of sales last year, reflecting higher sales and the improved performance of the Landing Gear Division.

Industrial Segment The operating loss of $2.9 million or (12.7)% of sales in the industrial segment, compares to last year’s figures of $3.3 million or (15.5)% of sales, and reflects the slight increase in industrial segment sales. The negative operating margins for the industrial segment are essentially caused by the overall low business volume and the related high unabsorbed manufacturing overhead costs.

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The increase in financial expenses can be explained by the $528,000 gain on financial derivative instrument recorded in fiscal 2005 and the general increase in interest rates this year, mainly in the US. The reduction in interest expenses is mainly due to the $22.7 million in net capital repayments on the Company’s long-term debt since the beginning of the current fiscal year following the sale of Diemaco in the first quarter and the closing of the 4.5 million common shares offering in November.

On May 20, 2004, the Company designated its interest rate swap agreement as a hedging instrument to be recorded under the hedge accounting rules. This resulted in a gain of $528,000, representing the change in the fair value of the interest rate swap agreement between April 1, 2004 and May 20, 2004.

10Discontinued Operations

On May 20, 2005, the Company concluded the sale of its Logistics & Defence Division (Diemaco) to Colt Defense LLC. The final total sale price was $19.0 million. All assets and liabilities related to Diemaco were reclassified as discontinued assets and liabilities on the consolidated balance sheets. Diemaco’s revenues, expenses and net income are shown under discontinued operations in the consolidated statements of income (loss) and, the impact of Diemaco’s operations on the Company’s cash and cash equivalents is presented under discontinued operations in the consolidated statements of cash flows (see Note 4 to the consolidated financial statements).

A significant portion of the net proceeds from the sale of Diemaco was used to repay $15.3 million on the Company’s Secured Syndicated Revolving Credit Facilities.

Income Tax Recovery, Income Tax Receivable and Future Income Tax Assets Income Tax Recovery The income tax recovery for fiscal 2006 amounted to $0.4 million compared to $2.0 million for the previous year. Although the reduced recovery amount is primarily a function of the significant reduction in the loss from continued operations on a year-over-year basis, certain items particular to fiscal 2006 had a direct impact on the income tax recovery for the year.

The combined Canadian federal and provincial income tax rate, given the mix by jurisdiction as well as the combination of profitable and unprofitable business units, was 28.6% for fiscal 2006 compared to 32.6% last year. The aforementioned mix caused a reduction of the combined income tax rate from 32.5% to 28.6% for fiscal 2006. When applied to the consolidated loss before income tax recovery and discontinued operations for the fiscal year 2006, this rate resulted in an income tax recovery of $0.2 million. The actual recovery was increased by $1.2 million due to favorable permanent differences ($1.5 million last year) and by $0.5 million as a result of reevaluating the relevant net future tax assets in line with Quebec provincial income tax rate increases from 8.9% to 11.9% over a three-year period, enacted during the year. The main offset to the foregoing is the valuation allowance of $0.5 million this year ($1.5 million last year) taken by means of non-recognition of certain income tax benefits in relation to the pre-tax loss of a Canadian subsidiary (see Note 17 to the consolidated financial statements).

Income Tax Receivable

Prior to March 31, 2006, Héroux-Devtek Aérostructure inc., a wholly owned Canadian subsidiary, was wound-up into the Company. This resulted in an increase of approximately $4.2 million in income tax receivable at March 31, 2006, through the availability of certain tax attributes due to the winding-up. Since the materialization of these tax attributes is primarily related to tax depreciation, the ensuing counterpart was mainly reflected in an increase in longterm future income tax liabilities.

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The current future income tax assets amounted to $8.9 million at March 31, 2006, in comparison to $7.2 million a year ago. The main difference is the $0.8 million increase in tax benefits related to certain non deductible inventory provisions this year.

Long-term future income tax assets amounted to $6.5 million at March 31, 2006, a reduction of $1.1 million in comparison to last year. This reduction is mainly attributable to the use of previously recorded tax loss benefits in the amount of $1.6 million this year (see Note 17 to the consolidated financial statements).

Net Loss

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Earnings (loss) per share figures are based on weighted-averages of 28,727,386 common shares outstanding for fiscal 2006 and 26,932,650 for the previous year. The increase is essentially due to the 4.5 million common share offering completed last November, and the issuance of 34,047 common shares pursuant to the Company’s stock purchase and ownership incentive plan (see Note 15 to the consolidated financial statements).

On May 31, 2006, the date of this MD&A, the Company had 31,493.546 common shares and 873,021 stock options outstanding.

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The $8.1 million increase in cash flows from continuing operations for fiscal 2006 was mainly due to the reduction of $3.9 million in the net loss, a $0.6 million increase in amortization and a $3.0 million net increase in future income taxes, mainly due to the winding-up of a subsidiary into the Company in the last quarter of fiscal 2006. The net change of $3.1 million in non-cash items was mainly caused by an $8.0 million increase in accounts receivable due the higher sales, and a $3.4 million increase in income tax receivables, offset by a $9.7 million increase in accounts payable. The increase in accounts payable reflects the increase in purchase of raw materials in the last quarter of fiscal 2006, for which progress billings were made and received before the March 31, 2006 year-end. Amounts related to the progress billings are shown as a reduction of the related inventories on the Company’s balance sheets.

For fiscal 2005, the net change in non-cash items reduced cash flows from continuing operations by $17.9 million. The main reasons for this were the following: accounts receivable increased by $4.1 million due to higher fourth quarter sales; other receivables rose by $3.3 million, reflecting mainly tooling costs invoiced to customers; inventories grew by $3.6 million, primarily on the strength of higher business volume at the Landing Gear Division at fiscal year-end 2005; other current assets were up $2.3 million because of deposits for the purchase of machinery and equipment included in this item; and finally, customer advances at the Landing Gear Division declined by $5.0 million during the course of fiscal 2005 since they were liquidated as deliveries were made on the related sales contracts. All these net uses of cash flows were somewhat offset by a $2.8 million increase in accounts payable and accrued liabilities at March 31, 2005 (see Note 18 to the consolidated financial statements).

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The Company’s investing activities provided cash and cash equivalents of $2.5 million, having used $79.3 million last year.

In fiscal 2006, the Company invested $13.4 million in property, plant and equipment, which included investments for its Kitchener plant expansion and the first phase of the modernization of its plating department at the Longueuil plant.

Investments in business acquisition represent essentially the acquisition of Progressive on April 1, 2004 and additional payments of $3.4 million made in 2006 related to profitability performance at Progressive for fiscal 2005. The last additional payment to be made related to profitability performance for fiscal 2006 was estimated at US $1 million ($1.2 million) and was accrued for at March 31, 2006 (see Note 3 to the consolidated financial statements).

In fiscal 2005, the Company invested $13.4 million in property, plant and equipment, including $3.3 million invested to expand the assembly and machining section at the Laval plant and add a new landing gear test facility for business and regional jet landing gear. A further $3.9 million was invested at the Gas Turbine Components Division, representing essentially the exercise of a purchase options for equipment under operating leases.

Investments in capital expenditures for fiscal 2007 are expected to be close to $25 million.

On May 20, 2005, the Company concluded the sale of its Logistics and Defence Division, Diemaco. The final sale price amounted to $19.0 million (see Note 4 to the consolidated financial statements).

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During the first quarter of fiscal year 2006, subsequent to the sale of the Logistics and Defence Division, Diemaco, the Company repaid $15.3 million on its Secured Syndicated Revolving Term Credit Facilities.

On November 10, 2005, the Company closed a public offering of 4.5 million common shares priced at $3.75 per share for net proceeds of $15.7 million (net of $1.2 million in fees and expenses) (see Note 15 to the consolidated financial statements). The Company also applied the net proceeds from the sale of common shares to the reduction of its lines of credit under its credit facilities but not as a permanent reduction thereof. On a year-to-date basis, net capital repayments on the credit facilities totalled $24.7 million (see Note 13 to the consolidated financial statements).

In fiscal 2005, in order to finance the acquisition of Progressive, the Company used $36.4 million from its Secured Syndicated Revolving Credit Facilities and issued 3.5 million common shares for proceeds of $16.2 million. The Company also drew an additional $15.1 million and repaid a total of $20.6 million on its credit facilities.

At the end of the third quarter ended December 31, 2005, the Company concluded the annual extension of its credit facilities from March 21, 2006 to March 21, 2007.

The Company was in compliance with all its restrictive debt covenants at March 31, 2006, and expects to continue to comply with these restrictive financial covenants in fiscal 2007.

Pension Plans

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Capital Stock, Stock Option Plan and Stock Purchase and Ownership Incentive Plan (Stock Purchase Plan) At March 31, 2006, the Company had 31,488,599 common shares outstanding (26,954,552 in 2005).

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