Exhibit 99.2
Consolidated Financial Statements of
CGI GROUP INC.
For the three months ended December 31, 2010 and 2009
(unaudited)
(unaudited)
CGI GROUP INC.
Consolidated Statements of Earnings
For the three months ended December 31
(in thousands of Canadian dollars, except share data) (unaudited)
2010 | 2009 | |||||||
$ | $ | |||||||
Revenue | 1,120,688 | 913,006 | ||||||
Operating expenses | ||||||||
Costs of services, selling and administrative | 911,610 | 750,385 | ||||||
Amortization (Note 7) | 50,220 | 44,306 | ||||||
Acquisition-related and integration costs (Note 6b) | 2,185 | — | ||||||
Interest on long-term debt | 5,824 | 3,729 | ||||||
Interest income | (595 | ) | (371 | ) | ||||
Other income | (1,230 | ) | (528 | ) | ||||
Foreign exchange loss (gain) | 309 | (1,121 | ) | |||||
968,323 | 796,400 | |||||||
Earnings before income taxes | 152,365 | 116,606 | ||||||
Income tax expense | 25,791 | 5,387 | ||||||
Net earnings | 126,574 | 111,219 | ||||||
Attributable to: | ||||||||
Shareholders of CGI Group Inc. | 126,406 | 110,852 | ||||||
Non-controlling interest | 168 | 367 | ||||||
Basic earnings per share attributable to shareholders of CGI Group Inc. (Note 5e) | 0.47 | 0.38 | ||||||
Diluted earnings per share attributable to shareholders of CGI Group Inc. (Note 5e) | 0.45 | 0.37 | ||||||
Page 2 of 21
CGI GROUP INC.
Consolidated Statements of Comprehensive Income
For the three months ended December 31
(in thousands of Canadian dollars) (unaudited)
2010 | 2009 | |||||||
$ | $ | |||||||
Net earnings | 126,574 | 111,219 | ||||||
Net unrealized losses on translating financial statements of self-sustaining foreign operations (net of income taxes) | (61,338 | ) | (25,650 | ) | ||||
Net unrealized gains on translating long-term debt designated as hedges of net investments in self-sustaining foreign operations (net of income taxes) | 28,271 | 2,944 | ||||||
Net unrealized (losses) gains on cash flow hedges (net of income taxes) | (225 | ) | 5,171 | |||||
Net unrealized gains on available for sale investments (net of income taxes) | 337 | — | ||||||
Other comprehensive loss (Note 8) | (32,955 | ) | (17,535 | ) | ||||
Comprehensive income | 93,619 | 93,684 | ||||||
Attributable to: | ||||||||
Shareholders of CGI Group Inc. | 93,451 | 93,317 | ||||||
Non-controlling interest | 168 | 367 | ||||||
Consolidated Statements of Retained Earnings
For the three months ended December 31
(in thousands of Canadian dollars) (unaudited)
For the three months ended December 31
(in thousands of Canadian dollars) (unaudited)
2010 | 2009 | |||||||
$ | $ | |||||||
Retained earnings, beginning of period | 1,196,386 | 1,182,237 | ||||||
Net earnings attributable to shareholders of CGI Group Inc. | 126,406 | 110,852 | ||||||
Excess of purchase price over carrying value of Class A subordinate shares repurchased (Note 5a) | (56,974 | ) | (97,008 | ) | ||||
Change in subsidiary investment | — | (285 | ) | |||||
Retained earnings, end of period | 1,265,818 | 1,195,796 | ||||||
Page 3 of 21
CGI GROUP INC.
Consolidated Balance Sheets
(in thousands of Canadian dollars)(unaudited)
As at December 31, 2010 | As at September 30, 2010 | |||||||
$ | $ | |||||||
Assets | ||||||||
Current assets | ||||||||
Cash and cash equivalents (Note 2) | 79,997 | 127,824 | ||||||
Short-term investments | 11,965 | 13,196 | ||||||
Accounts receivable | 466,550 | 423,926 | ||||||
Work in progress | 359,165 | 358,984 | ||||||
Prepaid expenses and other current assets | 78,354 | 76,844 | ||||||
Income taxes | 8,401 | 7,169 | ||||||
Future income taxes | 7,314 | 16,509 | ||||||
Total current assets before funds held for clients | 1,011,746 | 1,024,452 | ||||||
Funds held for clients (Note 3) | 257,982 | 248,695 | ||||||
Total current assets | 1,269,728 | 1,273,147 | ||||||
Capital assets | 245,352 | 238,024 | ||||||
Intangible assets (Note 4) | 489,923 | 516,754 | ||||||
Other long-term assets | 43,025 | 42,261 | ||||||
Future income taxes | 10,995 | 11,592 | ||||||
Goodwill | 2,477,469 | 2,525,413 | ||||||
4,536,492 | 4,607,191 | |||||||
Liabilities | ||||||||
Current liabilities | ||||||||
Accounts payable and accrued liabilities | 327,953 | 304,376 | ||||||
Accrued compensation | 161,254 | 191,486 | ||||||
Deferred revenue | 177,493 | 145,793 | ||||||
Income taxes | 24,587 | 86,877 | ||||||
Future income taxes | 31,761 | 26,423 | ||||||
Current portion of long-term debt | 114,831 | 114,577 | ||||||
Total current liabilities before clients’ funds obligations | 837,879 | 869,532 | ||||||
Clients’ funds obligations (Note 3) | 257,508 | 248,695 | ||||||
Total current liabilities | 1,095,387 | 1,118,227 | ||||||
Future income taxes | 161,679 | 170,683 | ||||||
Long-term debt | 976,150 | 1,039,299 | ||||||
Other long-term liabilities | 114,335 | 119,899 | ||||||
2,347,551 | 2,448,108 | |||||||
Shareholders’ equity | ||||||||
Retained earnings | 1,265,818 | 1,196,386 | ||||||
Accumulated other comprehensive loss (Note 8) | (354,701 | ) | (321,746 | ) | ||||
911,117 | 874,640 | |||||||
Capital stock (Note 5a) | 1,187,463 | 1,195,069 | ||||||
Contributed surplus (Note 5d) | 83,741 | 82,922 | ||||||
Equity attributable to shareholders of CGI Group Inc. | 2,182,321 | 2,152,631 | ||||||
Equity attributable to non-controlling interest | 6,620 | 6,452 | ||||||
2,188,941 | 2,159,083 | |||||||
4,536,492 | 4,607,191 | |||||||
Page 4 of 21
CGI GROUP INC.
Consolidated Statements of Cash Flows
For the three months ended December 31
(tabular amounts only are in thousands of Canadian dollars) (unaudited)
2010 | 2009 | |||||||
$ | $ | |||||||
Operating activities | ||||||||
Net earnings | 126,574 | 111,219 | ||||||
Adjustments for: | ||||||||
Amortization (Note 7) | 55,635 | 49,881 | ||||||
Future income taxes | 9,740 | (22,879 | ) | |||||
Foreign exchange loss (gain) | 227 | (490 | ) | |||||
Stock-based compensation costs (Note 5d) | 4,405 | 3,241 | ||||||
Net change in non-cash working capital items | (101,371 | ) | 25,156 | |||||
Cash provided by operating activities | 95,210 | 166,128 | ||||||
Investing activities | ||||||||
Net change in short-term investments | 714 | (9,020 | ) | |||||
Purchase of capital assets | (16,821 | ) | (8,215 | ) | ||||
Additions to intangible assets | (17,642 | ) | (18,150 | ) | ||||
Cash used in investing activities | (33,749 | ) | (35,385 | ) | ||||
Financing activities | ||||||||
Use of credit facilities | 5,968 | — | ||||||
Repayment of credit facilities | (40,268 | ) | — | |||||
Repayment of long-term debt | (7,441 | ) | (4,250 | ) | ||||
Purchase of Class A subordinate shares held in trust (Note 5a) | (2,566 | ) | — | |||||
Repurchase of Class A subordinate shares (including share repurchase costs) (Note 5a) | (81,006 | ) | (150,368 | ) | ||||
Issuance of shares | 15,793 | 24,365 | ||||||
Change in subsidiary investment | — | (727 | ) | |||||
Cash used in financing activities | (109,520 | ) | (130,980 | ) | ||||
Effect of foreign exchange rate changes on cash and cash equivalents | 232 | (5,765 | ) | |||||
Net decrease in cash and cash equivalents | (47,827 | ) | (6,002 | ) | ||||
Cash and cash equivalents, beginning of period | 127,824 | 343,427 | ||||||
Cash and cash equivalents, end of period (Note 2) | 79,997 | 337,425 | ||||||
Interest paid | 3,514 | 1,306 | ||||||
Income taxes paid | 72,721 | 23,560 | ||||||
Non-cash transactions
Significant non-cash transactions consisted of capital assets and intangible assets acquired for a total amount of $15,775,000 for the three months ended December 31, 2010 ($10,267,000, for the three months ended December 31, 2009).
Page 5 of 21
CGI GROUP INC.
Notes to the Consolidated Financial Statements
For the three months ended December 31, 2010 and 2009
(tabular amounts only are in thousands of Canadian dollars, except share data) (unaudited)
1. | Summary of significant accounting policies |
a) Basis of presentation | ||
The interim consolidated financial statements for the three months ended December 31, 2010 and 2009 are unaudited and include all adjustments that management of CGI Group Inc. (the “Company”) considers necessary for a fair presentation of the financial position, results of operations and cash flows. | ||
The disclosures provided in these interim consolidated financial statements do not conform in all respects with the requirements of Canadian generally accepted accounting principles (“GAAP”) for annual consolidated financial statements; therefore, the interim consolidated financial statements should be read in conjunction with the annual consolidated financial statements of the Company for the year ended September 30, 2010. These interim consolidated financial statements have been prepared using the same accounting policies and methods of their application as the annual consolidated financial statements for the year ended September 30, 2010, except for new accounting policies adopted effective October 1, 2010. | ||
Certain comparative figures have been reclassified to conform to the current period’s presentation. |
Page 6 of 21
CGI GROUP INC.
Notes to the Consolidated Financial Statements
For the three months ended December 31, 2010 and 2009
(tabular amounts only are in thousands of Canadian dollars, except share data) (unaudited)
Notes to the Consolidated Financial Statements
For the three months ended December 31, 2010 and 2009
(tabular amounts only are in thousands of Canadian dollars, except share data) (unaudited)
1. | Summary of significant accounting policies (continued) | |
b) Change in accounting policies | ||
On October 1, 2010, the Company early adopted the following accounting guidance: |
i) | Emerging Issue Committee (“EIC”) Abstract No. 175 (“EIC-175”), “Revenue Arrangements with Multiple Deliverables” issued by the Canadian Institute of Chartered Accountants (“CICA”) in December 2009 which amends the EIC Abstract No. 142, “Revenue Arrangements with Multiple Deliverables”. The EIC-175 is equivalent to U.S. GAAP standard, Accounting Standards Update (“ASU”) No. 2009-13 (“ASU 2009-13”), “Multiple-Deliverable Revenue Arrangements” and applies to arrangements that include multiple-deliverables that are not accounted for pursuant to other specific guidance such as U.S. software revenue recognition guidance. The new guidance changes the requirements for establishing separate deliverables in a multiple-deliverable arrangement and requires the allocation of arrangement consideration to each separately identified deliverable based on the relative selling price. Based on this method, the selling price of each separately identified deliverable is determined using vendor-specific objective evidence (“VSOE”) of selling price if available, otherwise third-party evidence (“TPE”) of selling price, or estimated selling price (“ESP”) if neither VSOE nor TPE of selling price is available. The residual method of allocating arrangement consideration is no longer permitted. EIC-175 also expands the disclosures required for multiple-deliverable arrangements which are reflected below. | ||
ii) | ASU No. 2009-14 (“ASU 2009-14”), “Certain Revenue Arrangements that Include Software Elements” issued by the Financial Accounting Standards Board (“FASB”) under U.S. GAAP which amends Accounting Standards Codification Topic 985-605, “Software — Revenue Recognition”. ASU 2009-14 modifies the scope of the software recognition guidance to exclude the tangible products that contain both software and non-software components that function together to deliver a product’s essential functionality. There is no specific software revenue recognition guidance under Canadian GAAP, therefore the Company follows the U.S. guidance. |
The adoption of the above accounting guidance, which was made prospectively to new revenue arrangements with multiple-deliverables entered into or materially modified on or after October 1, 2010, did not have any material impact on the Company’s consolidated financial statements. There were no significant changes to the Company’s units of accounting within its multiple-deliverable arrangements, how the Company allocates arrangement consideration and the pattern or timing of revenue recognition as a result of the adoption of this accounting guidance. However, the residual method is no longer used by the Company when allocating arrangement consideration. The effects on future periods will depend on the nature and significance of the new or materially modified arrangements in any given period. |
Page 7 of 21
CGI GROUP INC.
Notes to the Consolidated Financial Statements
For the three months ended December 31, 2010 and 2009
(tabular amounts only are in thousands of Canadian dollars, except share data) (unaudited)
Notes to the Consolidated Financial Statements
For the three months ended December 31, 2010 and 2009
(tabular amounts only are in thousands of Canadian dollars, except share data) (unaudited)
1. | Summary of significant accounting policies (continued) | |
b) Change in accounting policies (continued) | ||
The Company revised its previously disclosed revenue recognition policy to reflect major changes resulting from the adoption of EIC-175 which applies to multiple-deliverable arrangements entered into or materially modified on or after October 1, 2010. The major changes to the revenue recognition policy are disclosed below. The previously disclosed revenue recognition policy remains effective for multiple-deliverable arrangements that were in place as of, and were not materially modified after, September 30, 2010. | ||
Multiple-deliverable arrangements — Non-software | ||
The Company enters into arrangements with multiple non-software deliverables that generally include systems integration and consulting services, outsourcing services and business process services (“BPS”). Under the new guidance, the total arrangement value is allocated to each element as a separate unit of accounting if: 1) the delivered item has value to the client on a stand-alone basis; and 2) in an arrangement that includes a general right of return relative to the delivered item, the delivery or performance of the undelivered item is considered probable and substantially in the control of the Company. If these criteria are met, then the total consideration of the arrangement is allocated among the separate units of accounting based on their relative selling price. Based on this method, the selling price of each separately identified deliverable is determined using VSOE of selling price if available, otherwise TPE of selling price, or ESP if neither VSOE nor TPE of selling price is available. VSOE of selling price is established using the price charged for a deliverable when sold separately by the Company. TPE of selling price is established using the vendor’s or competitors’ prices for similar deliverables. ESP is the price at which the Company would offer the service if the deliverable were sold regularly on a stand-alone basis. ESP is established by considering a number of internal and external factors including, but not limited to, geographies, Company’s pricing policies, internal costs, and gross margins. | ||
Multiple-deliverable arrangements — Software and non-software | ||
The Company also enters into multiple-deliverable arrangements that may include a combination of various software and software-related deliverables and non-software deliverables including software licenses, systems integration and consulting services, provision of maintenance, outsourcing services and BPS. In such arrangements, the Company first allocates the total arrangement consideration based on the relative selling prices of the software group of deliverables as a whole and to each of the non-software deliverables. The Company then further allocates consideration within the software group to the respective deliverables within that group following the software arrangement policies as described in Note 2 — Summary of Significant Accounting Policies of the Company’s annual consolidated financial statements for the year ended September 30, 2010. | ||
All deliverables that do not meet the separation criteria are combined into one unit of accounting and the most appropriate revenue recognition method is applied. Most of the deliverables within the Company’s multiple-deliverable arrangements qualify as a separate unit of accounting. |
Page 8 of 21
CGI GROUP INC.
Notes to the Consolidated Financial Statements
For the three months ended December 31, 2010 and 2009
(tabular amounts only are in thousands of Canadian dollars, except share data) (unaudited)
Notes to the Consolidated Financial Statements
For the three months ended December 31, 2010 and 2009
(tabular amounts only are in thousands of Canadian dollars, except share data) (unaudited)
2. | Cash and cash equivalents |
As at December 31, 2010 | As at September 30, 2010 | |||||||
$ | $ | |||||||
Cash | 43,187 | 27,162 | ||||||
Cash equivalents | 36,810 | 100,662 | ||||||
79,997 | 127,824 | |||||||
3. | Funds held for clients and clients’ funds obligations |
In connection with the Company’s payroll, tax filing and claims services, the Company collects and holds funds collected for payment of payroll, taxes and claims until such time as the funds need to be remitted to the clients’ employees, appropriate tax authorities or claim holders. Funds held for clients represent assets that, based upon the Company’s intent, are used solely for the purposes of satisfying the obligations to remit funds relating to our payroll, tax filing and claims services, which are classified as clients’ funds obligations on the consolidated balance sheets. | ||
The funds held for clients portfolio includes bonds, which have been classified as available for sale, and cash. The bonds are measured at fair value based on market rates, and therefore have been classified in Level 1 of the fair value hierarchy. Funds held for clients are classified as current assets since these funds are held solely for the purpose of satisfying the clients’ funds obligations, which will be repaid within one year of the balance sheet date. | ||
Unrealized gains and losses, net of applicable income taxes, are reported on a net basis in comprehensive income in the consolidated statements of comprehensive income. Interest income earned and realized gains and losses on the sale of available for sale investments are recorded in revenue in the period that the income is earned, since the collecting, holding and remitting of these funds are critical components of providing these services. | ||
The Company is exposed to credit risk in connection with these investments through the possible inability of borrowers to meet the terms of their bonds. In addition, the Company is exposed to interest rate risk, as volatility will cause fluctuations in the fair value of held investments and in the earnings potential of future investments. The Company mitigates these risks by investing primarily in high credit quality provincial and corporate bonds. | ||
The following table presents the investment portfolio of funds held for clients: |
As at December 31, 2010 | As at September 30, 2010 | |||||||
$ | $ | |||||||
Cash | 108,200 | 248,695 | ||||||
Short-term bonds | 5,709 | — | ||||||
Long-term bonds | 144,073 | — | ||||||
Funds held for clients | 257,982 | 248,695 | ||||||
No funds held for clients were invested in bonds as at September 30, 2010. |
Page 9 of 21
CGI GROUP INC.
Notes to the Consolidated Financial Statements
For the three months ended December 31, 2010 and 2009
(tabular amounts only are in thousands of Canadian dollars, except share data) (unaudited)
Notes to the Consolidated Financial Statements
For the three months ended December 31, 2010 and 2009
(tabular amounts only are in thousands of Canadian dollars, except share data) (unaudited)
4. | Intangible assets |
As at December 31, 2010 | As at September 30, 2010 | |||||||||||||||||||||||
Accumulated | Net book | Accumulated | Net book | |||||||||||||||||||||
Cost | amortization | value | Cost | amortization | value | |||||||||||||||||||
$ | $ | $ | $ | $ | $ | |||||||||||||||||||
Intangible assets | ||||||||||||||||||||||||
Contract costs | ||||||||||||||||||||||||
Incentives | 236,774 | 194,943 | 41,831 | 236,750 | 190,294 | 46,456 | ||||||||||||||||||
Transition costs | 200,579 | 99,374 | 101,205 | 200,154 | 102,734 | 97,420 | ||||||||||||||||||
437,353 | 294,317 | 143,036 | 436,904 | 293,028 | 143,876 | |||||||||||||||||||
Other intangible assets | ||||||||||||||||||||||||
Internal-use software | 91,174 | 68,861 | 22,313 | 90,704 | 66,841 | 23,863 | ||||||||||||||||||
Business solutions | 279,811 | 181,389 | 98,422 | 283,799 | 178,491 | 105,308 | ||||||||||||||||||
Software licenses | 177,529 | 126,297 | 51,232 | 174,412 | 123,977 | 50,435 | ||||||||||||||||||
Client relationships and other | 415,627 | 240,707 | 174,920 | 426,546 | 233,274 | 193,272 | ||||||||||||||||||
964,141 | 617,254 | 346,887 | 975,461 | 602,583 | 372,878 | |||||||||||||||||||
1,401,494 | 911,571 | 489,923 | 1,412,365 | 895,611 | 516,754 | |||||||||||||||||||
All intangible assets are subject to amortization. The following table presents the aggregate amount of intangible assets subject to amortization that were acquired or internally developed during the period: |
Three months ended December 31 | ||||||||
2010 | 2009 | |||||||
$ | $ | |||||||
Acquired | 8,236 | 13,334 | ||||||
Internally developed | 13,165 | 11,273 | ||||||
21,401 | 24,607 | |||||||
Page 10 of 21
CGI GROUP INC.
Notes to the Consolidated Financial Statements
For the three months ended December 31, 2010 and 2009
(tabular amounts only are in thousands of Canadian dollars, except share data) (unaudited)
Notes to the Consolidated Financial Statements
For the three months ended December 31, 2010 and 2009
(tabular amounts only are in thousands of Canadian dollars, except share data) (unaudited)
5. Capital stock, stock-based compensation costs, contributed surplus and earnings per share
a) | Capital stock |
Class A subordinate shares | Class B shares | Total | ||||||||||||||||||||||
Carrying | Carrying | Carrying | ||||||||||||||||||||||
Number | value | Number | value | Number | value | |||||||||||||||||||
$ | $ | $ | ||||||||||||||||||||||
Balance, as at September 30, 2010 | 237,684,791 | 1,148,182 | 33,608,159 | 46,887 | 271,292,950 | 1,195,069 | ||||||||||||||||||
Repurchased and cancelled(1) | (4,975,500 | ) | (24,032 | ) | — | — | (4,975,500 | ) | (24,032 | ) | ||||||||||||||
Issued upon exercise of options(2) | 1,634,072 | 18,992 | — | — | 1,634,072 | 18,992 | ||||||||||||||||||
Purchased and held in trust(3) | — | (2,566 | ) | — | — | — | (2,566 | ) | ||||||||||||||||
Balance, as at December 31, 2010 | 234,343,363 | 1,140,576 | 33,608,159 | 46,887 | 267,951,522 | 1,187,463 | ||||||||||||||||||
(1) | On January 27, 2010, the Company’s Board of Directors authorized the renewal of a Normal Course Issuer Bid for the purchase of up to 25,151,058 Class A subordinate shares. During the three months ended December 31, 2010, the Company repurchased 4,975,500 Class A subordinate shares for $81,006,000. The excess of the purchase price over the carrying value of Class A subordinate shares repurchased, in the amount of $56,974,000, was charged to retained earnings. | |
(2) | The carrying value of Class A subordinate shares includes $3,586,000 ($13,332,000 for the year ended September 30, 2010) which corresponds to a reduction in contributed surplus representing the value of accumulated compensation cost associated with the options exercised during the period. | |
(3) | In connection with the performance share unit (“PSU”) plan, the Company provided instructions to a trustee under the terms of a Trust Agreement to purchase 164,012 Class A subordinate shares of the Company in the open market for $2,566,000 during the three months ended December 31, 2010 (refer to Note 5c). |
Page 11 of 21
CGI GROUP INC.
Notes to the Consolidated Financial Statements
For the three months ended December 31, 2010 and 2009
(tabular amounts only are in thousands of Canadian dollars, except share data) (unaudited)
Notes to the Consolidated Financial Statements
For the three months ended December 31, 2010 and 2009
(tabular amounts only are in thousands of Canadian dollars, except share data) (unaudited)
5. Capital stock, stock-based compensation costs, contributed surplus and earnings per share (continued)
b) | Stock option plan |
Under the Company’s stock option plan, the Board of Directors may grant, at its discretion, options to purchase Class A subordinate shares to certain employees, officers, directors and consultants of the Company and its subsidiaries. The exercise price is established by the Board of Directors and is equal to the closing price of the Class A subordinate shares on the Toronto Stock Exchange on the day preceding the date of the grant. Options vest one to four years from the date of grant conditionally upon achievement of objectives and must be exercised within a ten-year period, except in the event of retirement, termination of employment or death. | ||
The following table presents information concerning all outstanding stock options granted by the Company: |
Outstanding, as at September 30, 2010 | 26,555,483 | |||
Granted | 6,576,432 | |||
Exercised | (1,634,072 | ) | ||
Forfeited | (2,893,231 | ) | ||
Expired | (19,994 | ) | ||
Outstanding, as at December 31, 2010 | 28,584,618 | |||
The following table presents the weighted average assumptions used to determine the stock-based compensation costs related to stock options recorded in cost of services, selling and administrative expenses using the Black-Scholes option pricing model: |
Three months ended December 31 | ||||||||
2010 | 2009 | |||||||
Stock-based compensation costs ($) | 4,246 | 3,241 | ||||||
Dividend yield (%) | 0.00 | 0.00 | ||||||
Expected volatility (%) | 27.11 | 27.33 | ||||||
Risk-free interest rate (%) | 1.99 | 2.48 | ||||||
Expected life (years) | 5.00 | 5.00 | ||||||
Weighted average grant date fair value ($) | 4.29 | 3.62 | ||||||
Page 12 of 21
CGI GROUP INC.
Notes to the Consolidated Financial Statements
For the three months ended December 31, 2010 and 2009
(tabular amounts only are in thousands of Canadian dollars, except share data) (unaudited)
Notes to the Consolidated Financial Statements
For the three months ended December 31, 2010 and 2009
(tabular amounts only are in thousands of Canadian dollars, except share data) (unaudited)
5. Capital stock, stock-based compensation costs, contributed surplus and earnings per share (continued)
c) | PSU plan |
On September 28, 2010, the Company adopted a PSU plan for senior executives and other designated employees (“participants”). Under that plan, the Board of Directors may grant PSUs to participants which entitles them to receive one Class A subordinate share for each PSU. The vesting and performance conditions are determined by the Board of Directors at the time of each grant. PSUs expire on December 31, of the third calendar year following the end of the Company’s fiscal year during which the award is made, except in the event of retirement, termination of employment or death. | ||
On October 1, 2010, the Company granted 164,012 PSUs with a grant date fair value of $15.51 per unit based on the closing price of the Class A subordinate shares on the Toronto Stock Exchange on that date. There was no grant under this plan in fiscal year 2010. Granted PSUs vest annually over a period of four years from the date of grant conditionally upon achievement of objectives. | ||
Class A subordinate shares purchased in connection with the PSU plan are held in trust for the benefits of the participants. The trust, considered as a variable interest entity, is consolidated in the Company’s financial statements with the cost of the purchased shares recorded as a reduction of capital stock (refer to Note 5a). | ||
The stock-based compensation costs related to PSUs recorded in cost of services, selling and administrative expenses for the three months ended December 31, 2010 was $159,000 (nil for the three months ended December 31, 2009). |
d) | Contributed surplus |
$ | ||||
Balance, as at September 30, 2010 | 82,922 | |||
Compensation costs associated with exercised options | (3,586 | ) | ||
Stock-based compensation costs | 4,405 | |||
Balance, as at December 31, 2010 | 83,741 | |||
Page 13 of 21
CGI GROUP INC.
Notes to the Consolidated Financial Statements
For the three months ended December 31, 2010 and 2009
(tabular amounts only are in thousands of Canadian dollars, except share data) (unaudited)
Notes to the Consolidated Financial Statements
For the three months ended December 31, 2010 and 2009
(tabular amounts only are in thousands of Canadian dollars, except share data) (unaudited)
5. Capital stock, stock-based compensation costs, contributed surplus and earnings per share (continued)
e) | Earnings per share |
The following table sets forth the computation of basic and diluted earnings per share attributable to shareholders of the Company: |
Three months ended December 31 | |||||||||||||||||||||||||
2010 | 2009 | ||||||||||||||||||||||||
Weighted | Weighted | ||||||||||||||||||||||||
average number | average number | ||||||||||||||||||||||||
Net | of shares | Earnings | Net | of shares | Earnings | ||||||||||||||||||||
Earnings | outstanding(1) | per share | Earnings | outstanding(1) | per share | ||||||||||||||||||||
$ | $ | $ | $ | ||||||||||||||||||||||
Basic | 126,406 | 269,903,334 | 0.47 | 110,852 | 295,477,129 | 0.38 | |||||||||||||||||||
Dilutive options and PSUs(2) | 8,554,265 | (0.02 | ) | 6,476,420 | (0.01 | ) | |||||||||||||||||||
Diluted | 126,406 | 278,457,599 | 0.45 | 110,852 | 301,953,549 | 0.37 | |||||||||||||||||||
(1) | The 4,975,500 Class A subordinate shares repurchased and the 164,012 Class A subordinate shares purchased and held in a trust during the three months ended December 31, 2010 (11,389,780 and nil, respectively, during the three months ended December 31, 2009), were excluded from the calculation of weighted average number of shares outstanding as of the date of transaction. | |
(2) | The calculation of diluted earnings per share excluded 6,582,090 options for the three months ended December 31, 2010 (13,079,312 for the three months ended December 31, 2009), as they were anti-dilutive. |
6. Investments in subsidiaries
a) | Modifications to purchase price allocation |
During the three months ended December 31, 2010, the Company modified the purchase price allocation and made adjustments relating to the acquisition of Stanley Inc. (“Stanley”), resulting in a decrease of intangible assets of $1,743,000, accrued compensation of $765,000 and future income taxes of $383,000, whereas goodwill increased by $595,000. The prior period figures have not been adjusted given that the effect of restatement was not significant. |
b) | Acquisition-related and integration costs |
In connection with the acquisition of Stanley in fiscal year 2010, the Company expensed $2,185,000 during the three months ended December 31, 2010. The expenses included costs to integrate the operations and to realize synergies. |
Page 14 of 21
CGI GROUP INC.
Notes to the Consolidated Financial Statements
For the three months ended December 31, 2010 and 2009
(tabular amounts only are in thousands of Canadian dollars, except share data) (unaudited)
Notes to the Consolidated Financial Statements
For the three months ended December 31, 2010 and 2009
(tabular amounts only are in thousands of Canadian dollars, except share data) (unaudited)
7. Amortization
Three months ended December 31 | ||||||||
2010 | 2009 | |||||||
$ | $ | |||||||
Amortization of capital assets | 18,816 | 17,181 | ||||||
Amortization of intangible assets | ||||||||
Contract costs related to transition costs | 5,970 | 4,903 | ||||||
Other intangible assets | 25,434 | 22,222 | ||||||
50,220 | 44,306 | |||||||
Amortization of contract costs related to incentives (presented as a reduction of revenue) | 4,999 | 5,254 | ||||||
Amortization of deferred financing fees (presented in interest on long-term debt) | 321 | 321 | ||||||
Amortization of premiums and discounts on investments related to funds held for clients (presented net as a reduction of revenue) | 95 | — | ||||||
55,635 | 49,881 | |||||||
8. Accumulated other comprehensive loss
Net changes | ||||||||||||
Balance, as at | incurred during | Balance, as at | ||||||||||
September 30, 2010 | the three months | December 31, 2010 | ||||||||||
$ | $ | $ | ||||||||||
Net unrealized losses on translating financial statements of self-sustaining foreign operations (net of accumulated income tax recovery of $15,300 as at December 31, 2010 and $12,686 as at September 30, 2010) | (413,021 | ) | (61,338 | ) | (474,359 | ) | ||||||
Net unrealized gains on translating long-term debt designated as hedges of net investments in self- sustaining foreign operations (net of accumulated income tax expense of $18,802 as at December 31, 2010 and $14,347 as at September 30, 2010) | 76,806 | 28,271 | 105,077 | |||||||||
Net unrealized gains on cash flow hedges (net of accumulated income tax expense of $5,048 as at December 31, 2010 and $5,336 as at September 30, 2010) | 14,469 | (225 | ) | 14,244 | ||||||||
Net unrealized gains on available for sale investments (net of accumulated income tax expense of $137 as at December 31, 2010) | — | 337 | 337 | |||||||||
(321,746 | ) | (32,955 | ) | (354,701 | ) | |||||||
For the three months ended December 31, 2010, $2,170,000 of the net unrealized gains previously recognized in other comprehensive income (net of income taxes of $916,000) were reclassified to net earnings for derivatives designated as cash flow hedges. |
Page 15 of 21
CGI GROUP INC.
Notes to the Consolidated Financial Statements
For the three months ended December 31, 2010 and 2009
(tabular amounts only are in thousands of Canadian dollars, except share data) (unaudited)
Notes to the Consolidated Financial Statements
For the three months ended December 31, 2010 and 2009
(tabular amounts only are in thousands of Canadian dollars, except share data) (unaudited)
9. Income tax expense
The Company’s effective income tax rate for the three months ended December 31, 2010 and 2009 were 16.9% and 4.6%, respectively. For the three months ended December 31, 2010, the expense contained a favorable tax adjustment of $18,727,000 mainly as a result of expiration of limitation periods. For the three months ended December 31, 2009, the expense contained a favorable tax adjustment in the amount of $30,532,000 mainly as a result of the final determinations and expiration of limitation periods. Without these favorable tax adjustments, the Company’s income tax rate for the three months ended December 31, 2010 and 2009 would have been 29.2% and 30.8%, respectively. |
10. Segmented information
In prior years, management regularly reviewed the Company’s operating results based on a geographic delivery view, in addition to Corporate services. As a result of changes to the management reporting structure, the Company is now managed through four operating segments based on its delivery model incorporating domestic activities as well as impacts from utilizing its centres of excellence. |
- | The Global Infrastructure Services (“GIS”) segment incorporates all services provided to clients for their technology infrastructure management. This segment incorporates results from these services world-wide. | ||
- | The other segments incorporate all other services provided to clients based on a geographical delivery model: Canada, U.S. & India and Europe & Asia Pacific. In addition to system integration and consulting, services may include the outsourcing of projects and applications, application maintenance and support as well as BPS. |
Due to the change in operating segments, the Company conducted a goodwill impairment test on October 1, 2010 on the revised reporting units, which are the same as the operating segments. Based on the results of this test, no impairment charge was required. |
Page 16 of 21
CGI GROUP INC.
Notes to the Consolidated Financial Statements
For the three months ended December 31, 2010 and 2009
(tabular amounts only are in thousands of Canadian dollars, except share data) (unaudited)
Notes to the Consolidated Financial Statements
For the three months ended December 31, 2010 and 2009
(tabular amounts only are in thousands of Canadian dollars, except share data) (unaudited)
10. Segmented information (continued)
The following presents information on the Company’s operations based on its management structure. The Company has restated the corresponding items of segmented information for the comparative period to conform to the new management reporting structure. |
As at and for the three months | U.S. & | Europe & | ||||||||||||||||||
ended December 31, 2010 | GIS | Canada | India | Asia Pacific | Total | |||||||||||||||
$ | $ | $ | $ | $ | ||||||||||||||||
Segment revenue | 224,088 | 468,409 | 540,009 | 66,153 | 1,298,659 | |||||||||||||||
Intersegment revenue elimination | (3,470 | ) | (129,804 | ) | (32,606 | ) | (12,091 | ) | (177,971 | ) | ||||||||||
Revenue | 220,618 | 338,605 | 507,403 | 54,062 | 1,120,688 | |||||||||||||||
Net earnings before acquisition- related and integration costs, interest on long-term debt, interest income, other income and income tax expense(1) | 29,837 | 71,346 | 55,714 | 1,652 | 158,549 | |||||||||||||||
Total assets | 514,706 | 1,738,550 | 2,122,866 | 160,370 | 4,536,492 | |||||||||||||||
(1) | Amortization included in GIS, Canada, U.S. & India and Europe & Asia Pacific is $21,845,000, $11,205,000, $21,357,000 and $907,000, respectively. |
As at and for the three months | U.S. & | Europe & | ||||||||||||||||||
ended December 31, 2009 | GIS | Canada | India | Asia Pacific | Total | |||||||||||||||
$ | $ | $ | $ | $ | ||||||||||||||||
Segment revenue | 227,451 | 461,668 | 331,723 | 65,653 | 1,086,495 | |||||||||||||||
Intersegment revenue elimination | (4,143 | ) | (124,151 | ) | (33,135 | ) | (12,060 | ) | (173,489 | ) | ||||||||||
Revenue | 223,308 | 337,517 | 298,588 | 53,593 | 913,006 | |||||||||||||||
Net earnings before acquisition- related and integration costs, interest on long-term debt, interest income, other income and income tax expense(1) | 25,060 | 58,864 | 35,023 | 489 | 119,436 | |||||||||||||||
Total assets | 653,498 | 1,885,426 | 1,055,335 | 190,972 | 3,785,231 | |||||||||||||||
(1) | Amortization included in GIS, Canada, U.S. & India and Europe & Asia Pacific is $22,736,000, $10,990,000, $14,366,000 and $1,468,000, respectively. |
Intersegment revenue are priced as if revenue was from third parties. |
Page 17 of 21
CGI GROUP INC.
Notes to the Consolidated Financial Statements
For the three months ended December 31, 2010 and 2009
(tabular amounts only are in thousands of Canadian dollars, except share data) (unaudited)
Notes to the Consolidated Financial Statements
For the three months ended December 31, 2010 and 2009
(tabular amounts only are in thousands of Canadian dollars, except share data) (unaudited)
11. Guarantees
In the normal course of business, the Company may provide certain clients, principally governmental entities, with bid and performance bonds. In general, the Company would only be liable for the amount of the bid bonds if the Company refuses to perform the project once the bid is awarded. The Company would also be liable for the performance bonds in the event of default in the performance of its obligations. As at December 31, 2010, the Company provided for a total of $57,084,000 of these bonds. To the best of its knowledge, the Company is in compliance with its performance obligations under all service contracts for which there is a performance or bid bond, and the ultimate liability, if any, incurred in connection with these guarantees would not have a materially adverse effect on the Company’s consolidated results of operations or financial condition. |
12. Financial instruments and hedges
The Company uses various financial instruments to manage its exposure to fluctuations in foreign currency exchange rates. The Company does not hold or use any derivative instruments for trading purposes. During the three months ended December 31, 2010, the Company entered into foreign currency forward contracts to hedge the variability in the foreign currency exchange rate between the U.S. dollar and the Indian rupee on future revenue. | ||
The hedges were documented as cash flow hedges and no component of the derivative instruments’ fair value is excluded from the assessment and measurement of hedge effectiveness. | ||
The forward contracts are derivative instruments, and, therefore, are recorded at fair value on the balance sheet. Valuation models, such as discounted cash flow analysis using observable market inputs, are utilized to determine the fair values of the forward contracts. | ||
The effective portion of the change in fair value of the derivative instruments is recognized in other comprehensive income and the ineffective portion, if any, in the consolidated statement of earnings. The effective portion of the change in fair value of the derivatives is reclassified out of other comprehensive income into earnings as an adjustment to revenue when the hedged revenue is recognized. The assessment of effectiveness is based on forward rates utilizing the hypothetical derivative method. | ||
During the three months ended December 31, 2010, the Company’s hedging relationships were effective. |
Page 18 of 21
CGI GROUP INC.
Notes to the Consolidated Financial Statements
For the three months ended December 31, 2010 and 2009
(tabular amounts only are in thousands of Canadian dollars, except share data) (unaudited)
Notes to the Consolidated Financial Statements
For the three months ended December 31, 2010 and 2009
(tabular amounts only are in thousands of Canadian dollars, except share data) (unaudited)
12. Financial instruments and hedges (continued)
The following table summarizes the fair value of outstanding hedging instruments: |
As at December | As at September | |||||||||||
31, 2010 | 30, 2010 | |||||||||||
$ | $ | |||||||||||
Hedge on net investments in self-sustaining foreign subsidiaries | Recorded in | |||||||||||
US$886,000 debt designated as the hedging instrument to the Company’s net investment in U.S. subsidiaries (US$920,000 as at September 30, 2010) | Long-term debt | 881,216 | 947,416 | |||||||||
€12,000 debt designated as the hedging instrument to the Company’s net investment in European subsidiaries (€12,000 as at September 30, 2010) | Long-term debt | 15,983 | 16,807 | |||||||||
Cash flow hedges on future revenue | ||||||||||||
US$116,970 foreign currency forward contracts to hedge the variability in the expected foreign currency exchange rate between the U.S. dollar and the Canadian dollar (US$130,380 as at September 30, 2010) | Other current assets | 8,170 | 8,918 | |||||||||
Other long-term assets | 14,258 | 11,433 | ||||||||||
US$68,340 foreign currency forward contracts to hedge the variability in the expected foreign currency exchange rate between the U.S. dollar and the Indian rupee (US$44,820 as at September 30, 2010) | Other current assets | 1,801 | 2,378 | |||||||||
Other long-term assets | 999 | 1,121 | ||||||||||
$82,335 foreign currency forward contracts to hedge the variability in the expected foreign currency exchange rate between the Canadian dollar and the Indian rupee ($89,040 as at September 30, 2010) | Accrued liabilities | 2,290 | 1,570 | |||||||||
Other long-term liabilities | 4,308 | 3,396 | ||||||||||
Cash flow hedges on the Senior U.S. unsecured notes | ||||||||||||
US$107,000 foreign currency forward contracts (US$107,000 as at September 30, 2010) | Other current assets | — | 1,277 | |||||||||
Other long-term assets | 31 | 763 | ||||||||||
Accrued liabilities | 1,994 | — | ||||||||||
The Company expects that approximately $7,768,000 of the accumulated net unrealized gains on all derivative financial instruments designated as cash flow hedges at December 31, 2010 will be reclassified in net income in the next 12 months. |
Page 19 of 21
CGI GROUP INC.
Notes to the Consolidated Financial Statements
For the three months ended December 31, 2010 and 2009
(tabular amounts only are in thousands of Canadian dollars, except share data) (unaudited)
Notes to the Consolidated Financial Statements
For the three months ended December 31, 2010 and 2009
(tabular amounts only are in thousands of Canadian dollars, except share data) (unaudited)
13. Reconciliation of results reported in accordance with Canadian GAAP to U.S. GAAP
The material differences between Canadian and U.S. GAAP affecting the Company’s consolidated financial statements are detailed in the table below. The Company’s most recent annual financial statements describe the circumstances which gave rise to the material differences between Canadian and U.S. GAAP applicable as at September 30, 2010. |
Three months ended December 31 | ||||||||
2010 | 2009 | |||||||
$ | $ | |||||||
Reconciliation of net earnings: | ||||||||
Net earnings — Canadian GAAP | 126,574 | 111,219 | ||||||
Adjustments for: | ||||||||
Stock-based compensation | (1,007 | ) | 629 | |||||
Warrants | — | 351 | ||||||
Other | (294 | ) | (23 | ) | ||||
Net earnings — U.S. GAAP | 125,273 | 112,176 | ||||||
Attributable to: | ||||||||
Shareholders of CGI Group Inc. | 125,105 | 111,809 | ||||||
Non-controlling interest | 168 | 367 | ||||||
Basic earnings per share attributable to shareholders of CGI Group Inc. — U.S. GAAP | 0.46 | 0.38 | ||||||
Diluted earnings per share attributable to shareholders of CGI Group Inc. — U.S. GAAP | 0.45 | 0.37 | ||||||
Net earnings — U.S. GAAP | 125,273 | 112,176 | ||||||
Other comprehensive loss | (32,955 | ) | (17,535 | ) | ||||
Comprehensive income — U.S. GAAP | 92,318 | 94,641 | ||||||
Attributable to: | ||||||||
Shareholders of CGI Group Inc. | 92,150 | 94,274 | ||||||
Non-controlling interest | 168 | 367 | ||||||
As at December 31, | As at September 30, | |||||||
2010 | 2010 | |||||||
$ | $ | |||||||
Reconciliation of shareholders’ equity: | ||||||||
Equity attributable to shareholders of CGI Group Inc. — Canadian GAAP | 2,182,321 | 2,152,631 | ||||||
Adjustments for: | ||||||||
Stock-based compensation | 58,411 | 58,411 | ||||||
Warrants | (7,125 | ) | (7,125 | ) | ||||
Reversal of income tax provision | (7,969 | ) | (7,969 | ) | ||||
Unearned compensation | (3,694 | ) | (3,694 | ) | ||||
Integration costs | (6,606 | ) | (6,606 | ) | ||||
Goodwill | 28,078 | 28,078 | ||||||
Income taxes and adjustment for change in accounting policy | 9,715 | 9,715 | ||||||
Other | (3,699 | ) | (3,405 | ) | ||||
Equity attributable to shareholders of CGI Group Inc. — U.S. GAAP | 2,249,432 | 2,220,036 | ||||||
Equity attributable to non-controlling interest — Canadian and U.S. GAAP | 6,620 | 6,452 | ||||||
Page 20 of 21
CGI GROUP INC.
Notes to the Consolidated Financial Statements
For the three months ended December 31, 2010 and 2009
(tabular amounts only are in thousands of Canadian dollars, except share data) (unaudited)
Notes to the Consolidated Financial Statements
For the three months ended December 31, 2010 and 2009
(tabular amounts only are in thousands of Canadian dollars, except share data) (unaudited)
13. Reconciliation of results reported in accordance with Canadian GAAP to U.S. GAAP (continued)
Recent accounting changes | ||
In October 2009, the FASB issued ASU 2009-13, “Multiple-Deliverable Revenue Arrangements”, which became effective for the Company via prospective application to new arrangements entered into or materially modified on or after October 1, 2010. This standard is equivalent to the corresponding provisions of CICA EIC-175, “Revenue Arrangements with Multiple Deliverables”, (refer to Note 1b). | ||
Concurrently to issuing ASU 2009-13, the FASB also issued ASU 2009-14, “Certain Revenue Arrangements that Include Software Elements” which became effective for the Company via prospective application at the same date. There is no equivalent under Canadian GAAP, therefore, the Company follows the U.S. guidance (refer to Note 1b). | ||
The adoption of these above updates did not have any material impact on the Company’s consolidated financial statements. The effects on future periods will depend on the nature and significance of the new or materially modified arrangements in any given period. |
Page 21 of 21