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1. | Earnings before acquisition-related and integration costs, interest on long-term debt, interest income, other (income) expenses, gain on sale of assets, and income tax expense (“adjusted EBIT”); | ||
2. | Constant currency growth; | ||
3. | Days Sales Outstanding (“DSO”); | ||
4. | Return on Invested Capital (“ROIC”); | ||
5. | Return on Equity (“ROE”); and | ||
6. | Net Debt to Capitalization ratio. |
(800) 564-6253
Lorne Gorber
Senior Vice-President, Global Communications & Investor Relations
Telephone: (514) 841-3355
lorne.gorber@cgi.com
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• | Provide a narrative explanation of the consolidated financial statements through the eyes of management; | |
• | Provide the context within which the consolidated financial statements should be analyzed, by giving enhanced disclosure about the dynamics and trends of the Company’s business; and | |
• | Provide information to assist the reader in ascertaining the likelihood that past performance is indicative of future performance. |
Section | Contents | Pages | ||||
1. Corporate Overview | This includes a description of our business and how we generate revenue as well as the markets in which we operate. | |||||
1.1. About CGI | 6 | |||||
1.2. Vision and Strategy | 7 | |||||
1.3. Competitive Environment | 7 | |||||
2. Highlights and Key Performance Measures | A summary of key achievements during the quarter, the past eight quarters’ key performance measures, and CGI share performance. | |||||
2.1. Q3 2011 Highlights | 7 | |||||
2.2. Key Performance Measures Defined | 8 | |||||
2.3. Selected Quarterly Information & Key Performance Measures | 9 | |||||
2.4. Stock Performance | 10 | |||||
3. Financial Review | A discussion of year-over-year changes to operating results for the three and nine months ended June 30, 2011 and 2010, describing the factors affecting revenue and earnings on a consolidated and reportable segment basis, and also by describing the factors affecting changes in the major expense categories. Also discussed are bookings broken down by geography and vertical market. | |||||
3.1. Bookings and Book-to-Bill Ratio | 11 | |||||
3.2. Foreign Exchange | 11 | |||||
3.3. Revenue Distribution | 13 | |||||
3.4. Revenue Variation and Revenue by Segment | 14 | |||||
3.5. Operating Expenses | 16 | |||||
3.6. Adjusted EBIT by Segment | 17 | |||||
3.7. Earnings before Income Taxes | 19 | |||||
3.8. Net Earnings and Earnings Per Share | 20 | |||||
4. Liquidity | This includes a discussion of changes in cash flows from operating, investing and financing activities. This section also describes the Company’s available capital resources, financial instruments, and off-balance sheet financing and guarantees. Measures of liquidity (Days sale outstanding) and capital structure (Return on equity, net debt to capitalization, and return on invested capital) are analyzed on a year-over-year basis. | |||||
4.1 Statements of Cash Flows | 21 | |||||
4.2 Capital Resources | 23 | |||||
4.3 Contractual Obligations | 23 | |||||
4.4 Financial Instruments and Hedges | 23 | |||||
4.5 Selected Measures of Liquidity and Capital Resources | 24 | |||||
4.6 Off-Balance Sheet Financing and Guarantees | 25 | |||||
4.7 Capability to Deliver Results | 26 |
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Section | Contents | Pages | ||||
5. Related Party Transactions | This section presents the total value of transactions and resulting balances with our joint venture — Innovapost Inc. (“Innovapost”). | 26 | ||||
6. Joint Venture: Supplementary Information | This section presents CGI’s proportionate share of the joint venture included in our consolidated financial statements. | 27 | ||||
7. Summary of Significant Accounting Policies | This section explains the areas in the financial statements where critical estimates and assumptions are used to calculate amounts in question. In addition, we provided an update on the status of the International Financial Reporting Standards (“IFRS”) changeover project. | |||||
7.1 Changes in Accounting Policies | 27 | |||||
7.2 Critical Accounting Estimates | 28 | |||||
7.3 International Financial Reporting Standards | 29 | |||||
8. Integrity of Disclosure | A discussion of the existence of appropriate information systems, procedures and controls to ensure that information used internally and disclosed externally is complete and reliable. | 40 | ||||
9. Risk Environment | A discussion of the risks affecting our business activities and what may be the impact if these risks are realized. | |||||
9.1 Risks and Uncertainties | 41 | |||||
9.2 Legal Proceedings | 46 |
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• | Consulting — CGI provides a full range of IT and management consulting services, including business transformation, IT strategic planning, business process engineering and systems architecture. | ||
• | Systems integration — CGI integrates and customizes leading technologies and software applications to create IT systems that respond to clients’ strategic needs. | ||
• | Management of IT and business functions (“outsourcing”) — Clients delegate entire or partial responsibility for their IT or business functions to CGI to achieve significant savings and access the best suited technology, while retaining control over strategic IT and business functions. As part of such agreements, we implement our quality processes and practices to improve the efficiency of the clients’ operations. We also integrate clients’ operations into our technology network. Finally, we may take on specialized professionals from our clients, enabling our clients to focus on key operations. Services provided as part of an outsourcing contract may include development and integration of new projects and applications; applications maintenance and support; technology infrastructure management (enterprise and end-user computing and network services); transaction and business processing such as payroll, insurance processing, and document management services. Outsourcing contracts typically have terms from five to ten years and may be renewable. |
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• | Bookings of $1.4 billion; | ||
• | Book-to-bill ratio of 104% for the last 12 months; | ||
• | Constant currency revenue growth of 18.0% over last year; | ||
• | Adjusted EBIT margin of 13.9%; | ||
• | Basic and diluted EPS grew by 50.0% and 43.3% respectively compared to the prior year; | ||
• | Return on equity reached 20.3%; | ||
• | Return on invested capital of 15.8%; and | ||
• | Repurchased 2.8 million Class A subordinate shares of the Company. |
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Profitability | • Adjusted EBIT — is a measure of earnings before items not directly related to the cost of operations, such as financing costs, acquisition-related and integration costs and income taxes (see definition on page 3). Management believes this best reflects the profitability of our operations. | |
• Diluted earnings per share attributable to shareholders of CGI — is a measure of earnings generated for shareholders on a per share basis, assuming all dilutive elements are exercised. | ||
Liquidity | • Cash provided by operating activities — is a measure of cash generated from managing our day-to-day business operations. We believe strong operating cash flow is indicative of financial flexibility, allowing us to execute our corporate strategy. | |
• Days sales outstanding — is the average number of days to convert our trade receivables and work in progress into cash. Management tracks this metric closely to ensure timely collection, healthy liquidity, and is committed to a DSO below its 45-day target. | ||
Growth | • Constant currency growth — is a measure of revenue growth before foreign currency impacts. This growth is calculated by translating current period results in local currency using the conversion rates in the equivalent period from the prior year. We believe that it is helpful to adjust revenue to exclude the impact of currency fluctuations to facilitate period-to-period comparisons of business performance. | |
• Backlog — represents management’s best estimate of revenue to be realized in the future based on the terms of respective client agreements active at a point in time. | ||
• Book-to-Bill ratio — is a measure of the proportion of contract wins to our revenue in the period. This metric allows management to monitor the Company’s business development efforts to ensure we grow our backlog and our business over time. Management remains committed to maintaining a target ratio greater than 100% over a 12-month period. Management believes that the longer period is a more effective measure as the size and timing of bookings could cause this measurement to fluctuate significantly if taken for only a three-month period. | ||
Capital Structure | • Net Debt to Capitalization ratio — is a measure of our level of financial leverage net of our cash and cash equivalents, short-term investments and marketable long-term investments. Management uses this metric to monitor the proportion of debt versus capital used to finance our operations and it provides insight into our financial strength. | |
• Return on Equity — is a measure of the rate of return on the ownership interest of our shareholders. Management looks at ROE to measure its efficiency at generating profits for the Company’s shareholders and how well the Company uses the invested funds to generate earnings growth. | ||
• Return on Invested Capital — is a measure of the Company’s efficiency at allocating the capital under its control to profitable investments. Management examines this ratio to assess how well it is using its money to generate returns. |
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As at and for the three months ended | June 30, | Mar. 31, | Dec. 31, | Sept. 30, | June 30, | Mar. 31, | Dec. 31, | Sept. 30, | ||||||||||||||||||||||||
(in thousands of dollars unless otherwise noted) | 2011 | 2011 | 2010 | 2010 | 2010 | 2010 | 2009 | 2009 | ||||||||||||||||||||||||
Growth | ||||||||||||||||||||||||||||||||
Backlog1(in millions of dollars) | 12,657 | 12,553 | 13,090 | 13,320 | 11,358 | 11,420 | 11,410 | 10,893 | ||||||||||||||||||||||||
Bookings(in millions of dollars) | 1,442 | 771 | 1,191 | 1,083 | 838 | 1,131 | 1,591 | 549 | ||||||||||||||||||||||||
Book-to-bill ratio | 139 | % | 68 | % | 106 | % | 108 | % | 93 | % | 124 | % | 174 | % | 59 | % | ||||||||||||||||
Revenue | 1,037,913 | 1,133,071 | 1,120,688 | 1,007,056 | 901,614 | 910,441 | 913,006 | 926,051 | ||||||||||||||||||||||||
Year-over-year growth | 15.1 | % | 24.5 | % | 22.7 | % | 8.7 | % | -5.1 | % | -4.0 | % | -8.7 | % | -0.3 | % | ||||||||||||||||
Constant currency growth2 | 18.0 | % | 27.9 | % | 25.9 | % | 13.8 | % | 0.7 | % | 3.5 | % | -3.7 | % | -1.4 | % | ||||||||||||||||
Profitability | ||||||||||||||||||||||||||||||||
Adjusted EBIT3 | 144,342 | 156,290 | 158,549 | 139,801 | 128,702 | 123,963 | 119,436 | 126,128 | ||||||||||||||||||||||||
Adjusted EBIT margin | 13.9 | % | 13.8 | % | 14.1 | % | 13.9 | % | 14.3 | % | 13.6 | % | 13.1 | % | 13.6 | % | ||||||||||||||||
Net earnings | 118,438 | 116,961 | 126,574 | 84,076 | 85,880 | 81,591 | 111,219 | 82,640 | ||||||||||||||||||||||||
Net earnings margin | 11.4 | % | 10.3 | % | 11.3 | % | 8.3 | % | 9.5 | % | 9.0 | % | 12.2 | % | 8.9 | % | ||||||||||||||||
Basic EPS(in dollars)4 | 0.45 | 0.44 | 0.47 | 0.31 | 0.30 | 0.28 | 0.38 | 0.27 | ||||||||||||||||||||||||
Diluted EPS(in dollars)4 | 0.43 | 0.42 | 0.45 | 0.30 | 0.30 | 0.28 | 0.37 | 0.27 | ||||||||||||||||||||||||
Liquidity | ||||||||||||||||||||||||||||||||
Cash provided by operating activities | 90,076 | 193,147 | 95,210 | 158,473 | 102,750 | 125,016 | 166,128 | 192,450 | ||||||||||||||||||||||||
As a percentage of revenue | 8.7 | % | 17.0 | % | 8.5 | % | 15.7 | % | 11.4 | % | 13.7 | % | 18.2 | % | 20.8 | % | ||||||||||||||||
Days sales outstanding5 | 52 | 43 | 42 | 47 | 36 | 35 | 30 | 39 | ||||||||||||||||||||||||
Capital structure | ||||||||||||||||||||||||||||||||
Net debt to capitalization ratio6 | 28.3 | % | 28.7 | % | 30.6 | % | 30.6 | % | 0.2 | % | n/a | n/a | n/a | |||||||||||||||||||
Net debt (cash) | 913,372 | 923,144 | 1,000,982 | 1,010,816 | 6,361 | (35,280 | ) | (73,049 | ) | (66,034 | ) | |||||||||||||||||||||
Return on equity7 | 20.3 | % | 18.9 | % | 17.2 | % | 16.4 | % | 16.1 | % | 15.5 | % | 15.2 | % | 14.2 | % | ||||||||||||||||
Return on invested capital8 | 15.8 | % | 16.0 | % | 15.7 | % | 16.3 | % | 16.9 | % | 16.0 | % | 15.4 | % | 14.0 | % | ||||||||||||||||
Balance sheet | ||||||||||||||||||||||||||||||||
Cash & cash equivalents and short-term investments | 28,185 | 83,851 | 91,962 | 141,020 | 406,475 | 419,110 | 346,445 | 343,427 | ||||||||||||||||||||||||
Total assets | 4,428,075 | 4,561,671 | 4,536,492 | 4,607,191 | 3,813,138 | 3,872,980 | 3,785,231 | 3,899,910 | ||||||||||||||||||||||||
Long-term financial liabilities9 | 1,033,288 | 1,102,990 | 1,090,485 | 1,159,198 | 387,341 | 379,227 | 354,392 | 349,362 |
1 | Backlog includes new contract wins, extensions and renewals (“bookings”), partially offset by the backlog consumed during the quarter as a result of client work performed and adjustments related to the volume, cancellation and/or the impact of foreign currencies to our existing contracts. Backlog incorporates estimates from management that are subject to change. | |
2 | Constant currency growth is adjusted to remove the impact of foreign currency exchange rate fluctuations. Please refer to page 14 for details. | |
3 | Adjusted EBIT is a non-GAAP measure for which we provide the reconciliation to its closest GAAP measure on page 19. | |
4 | Earnings per share (“EPS”) amounts are attributable to shareholders of CGI. | |
5 | Days sales outstanding is obtained by subtracting deferred revenue from trade accounts receivable and work in progress; the result is divided by the quarter’s revenue over 90 days. | |
6 | The net debt to capitalization ratio represents the proportion of long-term debt, net of cash and cash equivalents, short-term and marketable long-term investments (“net debt”) over the sum of shareholders’ equity attributable to shareholders of CGI and long-term debt. Net debt and capitalization are both net of the fair value of forward contracts. During certain quarters, the net debt to capitalization ratio was negative (a net cash position) and therefore shown as not applicable (“n/a”). | |
7 | The return on equity ratio is calculated as the proportion of earnings for the last 12 months over the last four quarters’ average equity attributable to shareholders of CGI. | |
8 | The return on invested capital ratio represents the proportion of the after-tax adjusted EBIT over the last four quarters’ average invested capital, which is defined as the sum of equity attributable to shareholders of CGI and debt less cash and cash equivalents, short-term and marketable long-term investments, net of the impact of the fair value of forward contracts. | |
9 | Long-term financial liabilities include the long-term portion of debt and other long-term liabilities. |
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TSX | (CDN$) | NYSE | (US$) | |||||||
Open: | 20.35 | Open: | 20.85 | |||||||
High: | 23.86 | High: | 24.74 | |||||||
Low: | 19.75 | Low: | 20.42 | |||||||
Close: | 23.81 | Close: | 24.65 | |||||||
CDN average daily trading volumes: | 1,019,668 | U.S. average daily trading volumes: | 240,618 |
Includes the average daily volumes of both the TSX and Alternative Trading Systems. |
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33,608,159 Class B shares
25,141,179 options to purchase Class A subordinate shares
June 30, | June 30, | Sep. 30, | ||||||||||||||||||
As at | 2011 | 2010 | Change | 2010 | Change | |||||||||||||||
U.S. dollar | 0.9643 | 1.0606 | -9.1 | % | 1.0298 | -6.4 | % | |||||||||||||
Euro | 1.4005 | 1.3035 | 7.4 | % | 1.4006 | 0.0 | % | |||||||||||||
Indian rupee | 0.0216 | 0.0228 | -5.3 | % | 0.0231 | -6.5 | % | |||||||||||||
British pound | 1.5493 | 1.5852 | -2.3 | % | 1.6198 | -4.4 | % |
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Three months ended June 30, | Nine months ended June 30, | |||||||||||||||||||||||
2011 | 2010 | Change | 2011 | 2010 | Change | |||||||||||||||||||
U.S. dollar | 0.9676 | 1.0276 | -5.8 | % | 0.9886 | 1.0412 | -5.1 | % | ||||||||||||||||
Euro | 1.3934 | 1.3073 | 6.6 | % | 1.3731 | 1.4343 | -4.3 | % | ||||||||||||||||
Indian rupee | 0.0217 | 0.0226 | -4.0 | % | 0.0220 | 0.0226 | -2.7 | % | ||||||||||||||||
British pound | 1.5784 | 1.5330 | 3.0 | % | 1.5865 | 1.6264 | -2.5 | % |
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Contract Types A. Management of IT and business functions (outsourcing) — 70% 1. IT services — 53% 2. Business process services — 17% B. Systems integration and consulting — 30% | ||
Client Geography Based on client’s domicile A. U.S. — 47% B. Canada — 46% C. Europe — 7% | ||
Verticals A. Government and healthcare — 46% B. Financial services — 26% C. Telecommunications and utilities — 13% D. Retail and distribution — 10% E. Manufacturing — 5% |
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Three months ended June 30, | Nine months ended June 30, | |||||||||||||||||||||||
(in thousands of dollars except for percentage) | 2011 | 2010 | Change | 2011 | 2010 | Change | ||||||||||||||||||
Total CGI Revenue | 1,037,913 | 901,614 | 15.1 | % | 3,291,672 | 2,725,061 | 20.8 | % | ||||||||||||||||
Variation prior to foreign currency impact | 18.0 | % | 0.7 | % | 24.0 | % | 0.1 | % | ||||||||||||||||
Foreign currency impact | -2.9 | % | -5.8 | % | -3.2 | % | -6.1 | % | ||||||||||||||||
Variation over previous period | 15.1 | % | -5.1 | % | 20.8 | % | -6.0 | % | ||||||||||||||||
Global Infrastructure Services | ||||||||||||||||||||||||
Revenue prior to foreign currency impact | 196,400 | 212,265 | -7.5 | % | 643,440 | 640,914 | 0.4 | % | ||||||||||||||||
Foreign currency impact | (701 | ) | (3,457 | ) | ||||||||||||||||||||
Global Infrastructure Services revenue | 195,699 | 212,265 | -7.8 | % | 639,983 | 640,914 | -0.1 | % | ||||||||||||||||
Canada | ||||||||||||||||||||||||
Revenue prior to foreign currency impact | 322,297 | 343,653 | -6.2 | % | 1,026,646 | 1,031,194 | -0.4 | % | ||||||||||||||||
Foreign currency impact | (1,145 | ) | (2,542 | ) | ||||||||||||||||||||
Canada revenue | 321,152 | 343,653 | -6.5 | % | 1,024,104 | 1,031,194 | -0.7 | % | ||||||||||||||||
U.S. | ||||||||||||||||||||||||
Revenue prior to foreign currency impact | 492,944 | 301,568 | 63.5 | % | 1,536,797 | 908,035 | 69.2 | % | ||||||||||||||||
Foreign currency impact | (28,106 | ) | (75,797 | ) | ||||||||||||||||||||
U.S. revenue | 464,838 | 301,568 | 54.1 | % | 1,461,000 | 908,035 | 60.9 | % | ||||||||||||||||
Europe | ||||||||||||||||||||||||
Revenue prior to foreign currency impact | 52,556 | 44,128 | 19.1 | % | 171,711 | 144,918 | 18.5 | % | ||||||||||||||||
Foreign currency impact | 3,668 | (5,126 | ) | |||||||||||||||||||||
Europe revenue | 56,224 | 44,128 | 27.4 | % | 166,585 | 144,918 | 15.0 | % |
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Three months ended June 30, | Nine months ended June 30, | |||||||||||||||||||||||||||||||
% of | % of | % of | % of | |||||||||||||||||||||||||||||
(in thousands of dollars except for percentage) | 2011 | Revenue | 2010 | Revenue | 2011 | Revenue | 2010 | Revenue | ||||||||||||||||||||||||
Costs of services, selling and administrative | 846,584 | 81.6 | % | 727,708 | 80.7 | % | 2,686,230 | 81.6 | % | 2,217,423 | 81.4 | % | ||||||||||||||||||||
Foreign exchange (gain) loss | (320 | ) | (0.0 | %) | 872 | 0.1 | % | (2,870 | ) | (0.1 | %) | (290 | ) | (0.0 | %) | |||||||||||||||||
Amortization | 47,307 | 4.6 | % | 44,332 | 4.9 | % | 149,131 | 4.5 | % | 135,827 | 5.0 | % | ||||||||||||||||||||
Capital assets | 18,252 | 1.8 | % | 17,786 | 2.0 | % | 56,282 | 1.7 | % | 52,595 | 1.9 | % | ||||||||||||||||||||
Contract costs related to transition costs | 5,198 | 0.5 | % | 5,710 | 0.6 | % | 17,313 | 0.5 | % | 16,935 | 0.6 | % | ||||||||||||||||||||
Other intangible assets | 23,857 | 2.3 | % | 20,836 | 2.3 | % | 75,536 | 2.3 | % | 66,297 | 2.4 | % |
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Three months ended June 30, | Nine months ended June 30, | |||||||||||||||||||||||
(in thousands of dollars except for percentage) | 2011 | 2010 | Change | 2011 | 2010 | Change | ||||||||||||||||||
Global Infrastructure Services | 28,496 | 21,409 | 33.1 | % | 96,625 | 57,825 | 67.1 | % | ||||||||||||||||
As a percentage of GIS revenue | 14.6 | % | 10.1 | % | 15.1 | % | 9.0 | % | ||||||||||||||||
Canada | 73,882 | 66,766 | 10.7 | % | 216,871 | 201,204 | 7.8 | % | ||||||||||||||||
As a percentage of Canada revenue | 23.0 | % | 19.4 | % | 21.2 | % | 19.5 | % | ||||||||||||||||
U.S. | 41,433 | 42,499 | -2.5 | % | 140,233 | 116,637 | 20.2 | % | ||||||||||||||||
As a percentage of U.S. revenue | 8.9 | % | 14.1 | % | 9.6 | % | 12.8 | % | ||||||||||||||||
Europe | 531 | (1,972 | ) | 126.9 | % | 5,452 | (3,565 | ) | 252.9 | % | ||||||||||||||
As a percentage of Europe revenue | 0.9 | % | -4.5 | % | 3.3 | % | -2.5 | % | ||||||||||||||||
Adjusted EBIT | 144,342 | 128,702 | 12.2 | % | 459,181 | 372,101 | 23.4 | % | ||||||||||||||||
Adjusted EBIT margin | 13.9 | % | 14.3 | % | 13.9 | % | 13.7 | % |
Page 17 of 46
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Three months ended June 30, | Nine months ended June 30, | |||||||||||||||||||||||||||||||
% of | % of | % of | % of | |||||||||||||||||||||||||||||
(in thousands of dollars except for percentage) | 2011 | Revenue | 2010 | Revenue | 2011 | Revenue | 2010 | Revenue | ||||||||||||||||||||||||
Adjusted EBIT | 144,342 | 13.9 | % | 128,702 | 14.3 | % | 459,181 | 13.9 | % | 372,101 | 13.7 | % | ||||||||||||||||||||
Acquisition-related and integration costs | 545 | 0.1 | % | 4,228 | 0.5 | % | 3,675 | 0.1 | % | 4,228 | 0.2 | % | ||||||||||||||||||||
Interest on long-term debt | 4,249 | 0.4 | % | 4,363 | 0.5 | % | 15,263 | 0.5 | % | 11,917 | 0.4 | % | ||||||||||||||||||||
Interest income | (437 | ) | 0.0 | % | (786 | ) | -0.1 | % | (3,067 | ) | -0.1 | % | (1,770 | ) | -0.1 | % | ||||||||||||||||
Other (income) expenses | (2,413 | ) | -0.2 | % | 1,135 | 0.1 | % | (4,475 | ) | -0.1 | % | 480 | 0.0 | % | ||||||||||||||||||
Gain on sale of assets | — | 0.0 | % | (396 | ) | 0.0 | % | — | 0.0 | % | (396 | ) | 0.0 | % | ||||||||||||||||||
Earnings before income taxes | 142,398 | 13.7 | % | 120,158 | 13.3 | % | 447,785 | 13.6 | % | 357,642 | 13.1 | % |
Page 19 of 46
Three months ended June 30, | Nine months ended June 30, | |||||||||||||||||||||||
(in thousands of dollars unless otherwise indicated) | 2011 | 2010 | Change | 2011 | 2010 | Change | ||||||||||||||||||
Earnings before income taxes | 142,398 | 120,158 | 18.5 | % | 447,785 | 357,642 | 25.2 | % | ||||||||||||||||
Income tax expense | 23,960 | 34,278 | -30.1 | % | 85,812 | 78,952 | 8.7 | % | ||||||||||||||||
Effective tax rate | 16.8 | % | 28.5 | % | 19.2 | % | 22.1 | % | ||||||||||||||||
Net earnings | 118,438 | 85,880 | 37.9 | % | 361,973 | 278,690 | 29.9 | % | ||||||||||||||||
Margin | 11.4 | % | 9.5 | % | 11.0 | % | 10.2 | % | ||||||||||||||||
Earnings attributable to shareholders of CGI Group Inc. | 118,438 | 85,824 | 38.0 | % | 361,717 | 278,392 | 29.9 | % | ||||||||||||||||
Earnings attributable to non-controlling interest | — | 56 | -100.0 | % | 256 | 298 | -14.1 | % | ||||||||||||||||
Weighted average number of shares | ||||||||||||||||||||||||
Class A subordinate shares and Class B shares (basic) | 263,088,326 | 281,996,673 | -6.7 | % | 266,490,789 | 288,297,942 | -7.6 | % | ||||||||||||||||
Class A subordinate shares and Class B shares (diluted) | 273,914,231 | 290,226,120 | -5.6 | % | 276,548,138 | 296,446,444 | -6.7 | % | ||||||||||||||||
Earnings per share(in dollars)1 | ||||||||||||||||||||||||
Basic EPS | 0.45 | 0.30 | 50.0 | % | 1.36 | 0.97 | 40.2 | % | ||||||||||||||||
Diluted EPS | 0.43 | 0.30 | 43.3 | % | 1.31 | 0.94 | 39.4 | % |
Three months ended June 30, | Nine months ended June 30, | |||||||||||||||||||||||
(in thousands of dollars unless otherwise indicated) | 2011 | 2010 | Change | 2011 | 2010 | Change | ||||||||||||||||||
Earnings before income taxes | 142,398 | 120,158 | 18.5 | % | 447,785 | 357,642 | 25.2 | % | ||||||||||||||||
Add back: | ||||||||||||||||||||||||
Acquisition-related and integration costs | 545 | 4,228 | -87.1 | % | 3,675 | 4,228 | -13.1 | % | ||||||||||||||||
Earnings before income taxes prior to adjustments | 142,943 | 124,386 | 14.9 | % | 451,460 | 361,870 | 24.8 | % | ||||||||||||||||
Income tax expense | 23,960 | 34,278 | -30.1 | % | 85,812 | 78,952 | 8.7 | % | ||||||||||||||||
Add back: | ||||||||||||||||||||||||
Tax adjustments | 15,179 | 3,587 | 323.2 | % | 41,415 | 34,119 | 21.4 | % | ||||||||||||||||
Tax deduction on acquisition-related and integration costs | 213 | — | N/A | 1,235 | — | N/A | ||||||||||||||||||
Income tax expense prior to adjustments | 39,352 | 37,865 | 3.9 | % | 128,462 | 113,071 | 13.6 | % | ||||||||||||||||
Effective tax rate prior to adjustments | 27.5 | % | 30.4 | % | 28.5 | % | 31.2 | % | ||||||||||||||||
Net earnings prior to adjustments | 103,591 | 86,521 | 19.7 | % | 322,998 | 248,799 | 29.8 | % | ||||||||||||||||
Margin | 10.0 | % | 9.6 | % | 9.8 | % | 9.1 | % | ||||||||||||||||
Earnings per share (in dollars)1 | ||||||||||||||||||||||||
Basic EPS | 0.39 | 0.31 | 25.8 | % | 1.21 | 0.86 | 40.7 | % | ||||||||||||||||
Diluted EPS | 0.38 | 0.30 | 26.7 | % | 1.17 | 0.84 | 39.3 | % |
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Three months ended June 30, | Nine months ended June 30, | |||||||||||||||||||||||
(in thousands of dollars) | 2011 | 2010 | Change | 2011 | 2010 | Change | ||||||||||||||||||
Cash provided by operating activities | 90,076 | 102,750 | (12,674 | ) | 378,433 | 393,894 | (15,461 | ) | ||||||||||||||||
Cash used in investing activities | (16,147 | ) | (20,546 | ) | 4,399 | (96,961 | ) | (93,328 | ) | (3,633 | ) | |||||||||||||
Cash used in financing activities | (125,109 | ) | (108,676 | ) | (16,433 | ) | (386,919 | ) | (244,997 | ) | (141,922 | ) | ||||||||||||
Effect of foreign exchange rate changes on cash and cash equivalents | 75 | 12,798 | (12,723 | ) | 1,484 | (4,398 | ) | 5,882 | ||||||||||||||||
Net (decrease) increase in cash and cash equivalents | (51,105 | ) | (13,674 | ) | (37,431 | ) | (103,963 | ) | 51,171 | (155,134 | ) |
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Available at | Outstanding at | |||||||||||
(in thousands of dollars) | Total commitment | June 30, 2011 | June 30, 2011 | |||||||||
$ | $ | $ | ||||||||||
Cash and cash equivalents | — | 23,861 | — | |||||||||
Short-term investments | — | 4,324 | — | |||||||||
Long-term marketable investments | — | 12,004 | — | |||||||||
Unsecured committed revolving facilities1 | 1,500,000 | 646,609 | 853,391 | 2 | ||||||||
Total | 1,500,000 | 686,798 | 853,391 | 2 |
1 | Excluding any existing credit facility under non-majority owned entities. | |
2 | Consists of drawn portion of $837.1 million and Letters of Credit for $16.3 million. |
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• | US$855.0 million debt designated as the hedging instrument to the Company’s net investment in U.S. subsidiaries; | ||
• | €9.0 million debt designated as the hedging instrument to the Company’s net investment in European subsidiaries. |
• | US$90.2 million 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$51.6 million foreign currency forward contracts to hedge the variability in the expected foreign currency exchange rate between the U.S. dollar and the Indian rupee; | ||
• | $68.9 million foreign currency forward contracts to hedge the variability in the expected foreign currency exchange rate between the Canadian dollar and the Indian rupee. |
• | US$20.0 million foreign currency forward contracts. |
As at June 30, | 2011 | 2010 | ||||||
Net debt to capitalization ratio | 28.3 | % | 0.2 | % | ||||
Net debt(in thousands of dollars) | 913,372 | 6,361 | ||||||
Return on equity | 20.3 | % | 16.1 | % | ||||
Return on invested capital | 15.8 | % | 16.9 | % | ||||
Days sales outstanding | 52 | 36 |
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Three months ended June 30, | Nine months ended June 30, | |||||||||||||||
(in ’000 of dollars) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Revenue | 19,613 | 15,442 | 58,647 | 62,537 | ||||||||||||
Accounts receivable | 874 | 996 | 874 | 996 | ||||||||||||
Work in progress | 1,993 | 971 | 1,993 | 971 | ||||||||||||
Contract costs | 4,337 | 6,834 | 4,337 | 6,834 | ||||||||||||
Deferred revenue | 941 | 1,172 | 941 | 1,172 |
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Three months ended June 30, | Nine months ended June 30, | |||||||||||||||
(in ’000 of dollars) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Revenue | 24,993 | 23,565 | 71,101 | 71,317 | ||||||||||||
Net earnings | 3,580 | 3,872 | 9,176 | 7,921 | ||||||||||||
Current assets | 38,512 | 35,696 | 38,512 | 35,696 | ||||||||||||
Non-current assets | 2,209 | 3,318 | 2,209 | 3,318 | ||||||||||||
Current liabilities | 15,679 | 16,890 | 15,679 | 16,890 | ||||||||||||
Non-current liabilities | 1,071 | 1,019 | 1,071 | 1,019 |
a) | Emerging Issue Committee (“EIC”) Abstract No. 175 (“EIC-175”), “Revenue Arrangements with Multiple Deliverables” issued by the CICA in December 2009 which amends the EIC Abstract No. 142 (“EIC-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. |
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The residual method of allocating arrangement consideration is no longer permitted. EIC-175 also expands the disclosures required for multiple-deliverable arrangements. |
b) | 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 (“ASC”) 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. |
Consolidated statements of earnings | ||||||||||
Costs of services, | ||||||||||
Consolidated | selling and | Amortization/ | Income | |||||||
Areas impacted by estimates | balance sheets | Revenue | administrative | Impairment | taxes | |||||
Purchase accounting | X | X | ||||||||
Income taxes | X | X | ||||||||
Contingencies and other liabilities | X | X | ||||||||
Accrued integration charges | X | X | ||||||||
Revenue recognition | X1 | X | ||||||||
Stock-based compensation | X | X | ||||||||
Investment tax credits and government programs | X | X | ||||||||
Impairment of long-lived assets and goodwill | X | X |
1 | Accounts receivable, work in progress and deferred revenue. |
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7.3.International Financial Reporting Standards |
In February 2008, the Canadian Accounting Standards Board confirmed that the use of International Financial Reporting Standards (“IFRS”) would be required for Canadian publicly accountable enterprises for fiscal years beginning on or after January 1, 2011. Accordingly, our first quarter under the IFRS reporting standards will be for the three-month period ending December 31, 2011. Financial reporting under IFRS differs from current GAAP in a number of respects, some of which are significant. IFRS on the date of adoption may also differ from current IFRS due to new standards that are expected to be issued before the changeover date. | ||
We describe below our IFRS changeover plan, key deliverables and their status, and the significant known impacts on our financial reporting. This is provided to allow readers to obtain a better understanding of our IFRS changeover plan and the resulting possible effects on our financial statements and operating performance measures. Readers are cautioned, however, that it may not be appropriate to use such information for any other purpose. This information also reflects our most recent assumptions and expectations; circumstances may arise, such as changes in IFRS, regulations or economic conditions, which could change these assumptions or expectations. We will continue to monitor and adjust for any movements in the standards made to ensure the reader is kept abreast of such developments. | ||
In preparation for the conversion to IFRS, the Company has developed an IFRS changeover plan consisting of four phases: |
Phase | Status | Details | ||
Phase 1 Diagnostic | Completed | • Completed a high-level review of the differences between current GAAP and IFRS, as well as a review of the alternatives available on adoption; and | ||
• Assessed these differences and their impact on the financial statements, business processes and/or IT systems in order to determine the scope of the project. | ||||
Phase 2 Detailed Impact Assessment | Completed | • Completed a detailed impact assessment of differences between Canadian GAAP and IFRS; | ||
• Documented the rationale supporting initial accounting policy choices, new disclosure requirements, authoritative literature supporting these choices and the quantification of any impacts; and | ||||
• Further assessed impacts on our other key elements such as information technology changes, education and training requirements, impacts on business activities, integrity of internal control over financial reporting and disclosure controls and procedures. |
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Phase | Status | Details | ||
Phase 3 & 4 Design & Implementation | In progress | • Adjusting or redesigning the appropriate systems and business processes; | ||
• Updating and developing of any accounting policies, disclosure controls and procedures, and internal controls over financial reporting; | ||||
• Preparing our opening balance sheet and the parallel run of our comparative year financial statements; | ||||
• Conducted an engagement with our external auditors addressing the opening financial position upon conversion; | ||||
• Continuing education and training in areas that will have the most significant impact on our operations; and | ||||
• Monitoring the development of any new accounting standards and their impact on the choices and exemptions made by the Company to date. |
We have a project manager, a detailed project plan and a progress reporting mechanism in place to support and communicate the evolution of the changeover plan. In addition to the working team, we have established an IFRS Steering Committee responsible for monitoring the progress and approving recommendations from the working team. The working team meets weekly, while the Steering Committee meets monthly, and quarterly updates are provided to the Audit and Risk Management Committee. | ||
In order to establish IFRS financial reporting expertise at all levels, our Company has established a training plan. Beyond the technical training for the key finance working team, we have been delivering training to other finance and operational personnel throughout the current phase. Our strategy has been to gather and retain the expertise “in-house” as much as possible supplementing with external resources as necessary. On a quarterly basis, our Audit and Risk Management Committee members also gather the necessary knowledge through training topics at each meeting. We also provided our Board of Directors with a briefing in November 2010. | ||
IFRS 1, “First-time Adoption of International Financial Reporting Standards”, requires that first-time adopters select accounting policies that are in compliance with each IFRS effective at the end of the Company’s first IFRS reporting period and apply those policies to all periods presented in their first IFRS financial statements. The general requirement of IFRS 1 is full retrospective application of all accounting standards; however, certain mandatory exceptions and optional exemptions are available. The significant optional exemptions that we expect to apply are described within the relevant notes below, along with the opening balance sheet impact. | ||
The Company has assessed the impact of IFRS on its opening balance sheet. We will continue to assess the quantitative impact IFRS will have on the financial statements of fiscal 2011. Below is the preliminary, opening balance sheet of the Company as at October 1, 2010 (“Transition Date”). The original published balance sheet prepared with Canadian GAAP is presented, followed by the IFRS adjustments in the next column which are further explained in the corresponding notes. The final column is the balance sheet we expect to present upon our transition date of December 31, 2011 (first quarter of fiscal 2012). The opening consolidated IFRS balance sheet may differ significantly from this internal opening consolidated balance sheet due to changes in financial reporting requirements arising from new or revised standards issued by the International Accounting Standards Board (“IASB”), interpretations issued by the International Financial Reporting Interpretations Committee or other items identified through the first quarter of 2012. |
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Canadian | Adjustments (see notes below) | IFRS | ||||||||||||||
GAAP | ||||||||||||||||
(in thousands of Canadian dollars) | $ | $ | $ | |||||||||||||
Assets | ||||||||||||||||
Current assets | ||||||||||||||||
Cash and cash equivalents | 127,824 | — | 127,824 | |||||||||||||
Short-term investments | 13,196 | — | 13,196 | |||||||||||||
Accounts receivable | 423,926 | V | 11,842 | 435,768 | ||||||||||||
Work in progress | 358,984 | — | 358,984 | |||||||||||||
Prepaid expenses and other current assets | 76,844 | — | 76,844 | |||||||||||||
Income taxes | 7,169 | — | 7,169 | |||||||||||||
Future income taxes | 16,509 | U | (16,509 | ) | -- | |||||||||||
Total current assets before funds held for clients | 1,024,452 | (4,667 | ) | 1,019,785 | ||||||||||||
Funds held for clients | 248,695 | — | 248,695 | |||||||||||||
Total current assets | 1,273,147 | (4,667 | ) | 1,268,480 | ||||||||||||
Property, plant and equipment | 238,024 | D | (723 | ) | 237,301 | |||||||||||
Contract costs | — | I, K, V | 133,587 | 133,587 | ||||||||||||
Intangible assets | 516,754 | H, K, V | (145,978 | ) | 370,776 | |||||||||||
Other long-term assets | 42,261 | — | 42,261 | |||||||||||||
Deferred tax assets | 11,592 | D, K, U | 11,658 | 23,250 | ||||||||||||
Goodwill | 2,525,413 | — | 2,525,413 | |||||||||||||
4,607,191 | (6,123 | ) | 4,601,068 | |||||||||||||
Liabilities | ||||||||||||||||
Current liabilities | ||||||||||||||||
Accounts payable and accrued liabilities | 304,376 | L, T | (635 | ) | 303,741 | |||||||||||
Accrued compensation | 191,486 | — | 191,486 | |||||||||||||
Deferred revenue | 145,793 | — | 145,793 | |||||||||||||
Income taxes | 86,877 | — | 86,877 | |||||||||||||
Provisions | — | T | 10,998 | 10,998 | ||||||||||||
Future income taxes | 26,423 | U | (26,423 | ) | -- | |||||||||||
Current portion of long-term debt | 114,577 | — | 114,577 | |||||||||||||
Total current liabilities before clients’ funds obligations | 869,532 | (16,060 | ) | 853,472 | ||||||||||||
Clients’ funds obligations | 248,695 | — | 248,695 | |||||||||||||
Total current liabilities | 1,118,227 | (16,060 | ) | 1,102,167 | ||||||||||||
Deferred tax liabilities | 170,683 | C, D, H, I, K, U | 17,986 | 188,669 | ||||||||||||
Long-term provisions | — | D, T | 9,266 | 9,266 | ||||||||||||
Long-term debt | 1,039,299 | — | 1,039,299 | |||||||||||||
Other long-term liabilities | 119,899 | C, K, T | (8,000 | ) | 111,899 | |||||||||||
2,448,108 | 3,192 | 2,451,300 | ||||||||||||||
Equity | ||||||||||||||||
Attributable to shareholders of CGI Group Inc. | ||||||||||||||||
Retained earnings | 1,196,386 | B, C, D, H, I, J, K, L | (350,562 | ) | 845,824 | |||||||||||
Accumulated other comprehensive income (loss) | (321,746 | ) | B | 336,215 | 14,469 | |||||||||||
Capital stock | 1,195,069 | — | 1,195,069 | |||||||||||||
Contributed surplus | 82,922 | J, K | 11,484 | 94,406 | ||||||||||||
Attributable to shareholders of CGI Group Inc. | 2,152,631 | (2,863 | ) | 2,149,768 | ||||||||||||
Attributable to non-controlling interest | 6,452 | L | (6,452 | ) | -- | |||||||||||
2,159,083 | (9,315 | ) | 2,149,768 | |||||||||||||
4,607,191 | (6,123 | ) | 4,601,068 | |||||||||||||
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A. | Business combinations | |
IFRS 1 provides the option to apply IFRS 3, “Business Combinations” (as revised in 2008), retrospectively or prospectively from the Transition Date. The retrospective basis would require restatement of all business combinations that occurred prior to the Transition Date. The Company elected not to retrospectively apply IFRS 3. As a result, there is no adjustment in the opening balance sheet related to business combinations entered into prior to the Transition Date. IFRS 3 will be applied to business combinations entered into subsequently. Additionally, due to the Company’s election to apply IFRS 3 prospectively, International Accounting Standards (“IAS”) 27, “Consolidated and Separate Financial Statements”, will also be applied prospectively. | ||
B. | Currency translation differences | |
Retrospective application of IFRS would require the Company to determine cumulative foreign currency translation differences in accordance with IAS 21, “The Effects of Changes in Foreign Exchange Rates”, from the date a subsidiary was formed or acquired to the Transition Date. IFRS 1 permits cumulative foreign translation gains and losses to be reset to zero at the Transition Date. The Company elected to apply this exemption and as such reversed the balance of $413.0 million within “net unrealized losses on translating financial statements of self-sustaining foreign operations” and $76.8 million within “net unrealized gains on translating long-term debt designated as a hedge of net investments in self-sustaining foreign operations” included in accumulated other comprehensive loss. The net loss of $336.2 million was recognized as a decrease to accumulated other comprehensive loss with a corresponding decrease to retained earnings. | ||
C. | Employee benefits | |
IFRS 1 provides the option to recognize all cumulative actuarial gains and losses deferred as a result of applying the corridor approach in accounting for defined benefit plans in retained earnings at Transition Date. The Company elected to apply this exemption. As a result, other long-term liabilities decreased by $0.8 million. After a related increase to deferred income tax liabilities of $0.2 million, retained earnings increased by $0.6 million. Additionally, the Company’s joint venture applied the same exemption. The proportionate share of the joint investee’s adjustment resulted in an increase to other long-term liabilities of $2.4 million. After a related decrease to deferred income tax liabilities of $0.6 million, retained earnings decreased by $1.8 million. | ||
D. | Decomissioning liabilities included in the cost of property, plant and equipment | |
IFRS 1 allows a first-time adopter to use a simplified treatment of historic changes when estimating the decommissioning liability between initial inception of the liability and the Transition Date. The Company elected to apply the method specified within IFRS 1 for valuing the decommissioning liability and as a result, property, plant and equipment decreased by $0.7 million and long-term provisions increased by $0.6 million. After a related decrease to deferred income tax liabilities of $0.2 million and an increase to deferred income tax assets of $0.2 million, retained earnings decreased by $0.9 million. | ||
E. | Borrowing costs | |
IFRS 1 allows the Company to choose the effective date of IAS 23, “Borrowing Costs”. The Company elected to apply IAS 23 as of the Transition Date and as such will capitalize borrowing costs for qualifying assets for which construction commences on or after the Transition Date. |
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F. | Hedge accounting | |
Hedge accounting can only be applied prospectively from the Transition Date to transactions that satisfy the hedge accounting criteria in IAS 39, “Financial Instruments: Recognition and Measurement”, at that date. Hedging relationships cannot be designated retrospectively and the supporting documentation cannot be created retrospectively. As a result, only hedging relationships that satisfy the hedge accounting criteria as of the Transition Date are reflected as hedges in the Company’s results under IFRS. The application of this mandatory exception did not result in any adjustments upon IFRS conversion. | ||
G. | Estimates | |
Hindsight is not used to create or revise estimates. The estimates previously made by the Company under Canadian GAAP were not revised for application of IFRS except where necessary to reflect any difference in accounting policies. |
H. | Reversal of intangible asset impairment | |
As opposed to current GAAP, impairments under IFRS are conducted in one step using discount rates that are asset specific. In addition, when determining future cash flows associated with an asset, there are certain limitations in what can be included. With the more restrictive guidance under IFRS, there is a higher probability of asset impairment. However, there are also provisions under IFRS for the subsequent reversal of these impairment charges if circumstances change such that the previously determined impairment is reversed. Under Canadian GAAP, the reversal of impairment losses is prohibited. Upon adoption of IFRS, the Company reversed an impairment recognized under Canadian GAAP as a result of changes in the expected cash flows relating to a business solution. As a result, intangible assets increased by $0.8 million as of the Transition Date. After a related increase to deferred income tax liabilities of $0.2 million, retained earnings increased by $0.6 million. | ||
I. | Reversal of contract cost impairment | |
Under Canadian GAAP, contract costs consisting of transition costs and incentives are classified as intangible assets. Under IFRS, contract costs are recognized in accordance with IAS 11, “Construction Contracts” and no longer qualify as intangible assets. Upon adoption of IFRS, the Company reversed an impairment loss on a contract cost that was recognized under Canadian GAAP due to the fact that at the Transition Date the contract was profitable and, in accordance with IAS 11, did not require a provision for loss. As a result, contract costs increased by $2.1 million as of the Transition Date. After a related increase to deferred income tax liabilities of $0.8 million, retained earnings increased by $1.3 million. | ||
J. | Share-based payment | |
With respect to compensation costs for stock options, IFRS requires the use of the graded vesting method for grants with vesting periods greater than one year. Each tranche in an award with graded vesting is considered a separate grant with a different vesting date and fair value, and each grant is accounted for on that basis. Currently, CGI accounts for the costs under the straight-line method for Canadian GAAP, but reconciles to the graded vesting method for U.S. GAAP purposes. Under IFRS 1, CGI has chosen to not apply IFRS retroactively on transition to vested options and will only retroactively apply IFRS to unvested options. As a result of the difference of accounting for each grant of graded share-based awards, contributed surplus increased by $8.1 million as of the Transition Date with a corresponding decrease to retained earnings. |
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K. | Income taxes | |
Assets or liabilities acquired other than in a business combination | ||
Under Canadian GAAP, the carrying amount of an asset or liability acquired other than in a business combination is adjusted for by the amount of the related recognized deferred tax asset or liability. Under IFRS, a deferred tax asset or liability cannot be recognized if it arises from the initial recognition of an asset or liability in a transaction that is not a business combination and if at the time of the transaction neither accounting profit nor taxable profit is affected. As a result, the Company decreased deferred tax liabilities by $3.4 million, intangible assets by $2.9 million, contract costs by $0.5 million and deferred tax assets by $5.0 million with a corresponding decrease to other long-term liabilities of $0.9 million and retained earnings of $4.1 million. | ||
Share-based payment | ||
Under Canadian GAAP, a deferred tax asset is recognized on the difference between the accounting expense and the tax deduction relating to a share-based payment. Under IFRS, the deferred tax asset recognized in relation to the share-based payment is adjusted each period to reflect the amount of the tax deduction the Company would receive if the award were tax deductible in the current period based on the current market price of the shares. If the tax deduction or future tax deduction estimated exceeds the related cumulative share-based payment expense, the excess associated current and deferred tax is recognized in contributed surplus. As a result, deferred tax liabilities decreased by $5.5 million and retained earnings increased by $2.1 million while contributed surplus increased by $3.4 million. | ||
L. | Commitment to purchase outstanding shares of non-controlling interest | |
As at April 4, 2011, this commitment to purchase the remaining shares of CIA no longer exists. However, IFRS requires the restatement of all comparative financial statements and therefore, the impact of IFRS will have to be assessed for the period before CGI sold its interest in CIA. Under Canadian GAAP, the value of the put and call option to purchase the remaining shares of CIA is disclosed as a commitment, but not recorded as a liability. Under IFRS, it must be recorded as a liability. As a result, accounts payable and accrued liabilities increased by $10.4 million. The equity attributable to non-controlling interest of $6.5 million was eliminated and retained earnings decreased by the remaining balance of $3.9 million. | ||
M. | Property, plant and equipment | |
We do not expect any modifications to the groupings of our major assets. Management will continue to use historical cost as its measurement basis and in addition, indicators of impairment will be assessed at the transition date and annually thereafter if there are triggering events. | ||
N. | Leases | |
Unlike Canadian GAAP, when classifying capital leases (or “finance leases”) under IFRS, more judgement is applied due to the lack of quantitative thresholds. IFRS includes additional qualitative indicators that assist in determining lease classification. After our review during the detailed assessment phase, we concluded that we had no classification differences. When quantifying the value of a finance lease, IFRS requires the use of the interest rate implicit in the lease. This differs from current GAAP in that the rate to use is the lower of the incremental borrowing rate and the implicit rate. This difference does not result in a material difference in the value of our finance leases. An IFRS exposure draft on leases was issued in August 2010, which if adopted, would result in all leases as well as all expected payments being recognized on the balance sheet. This adoption could have a material impact to our balance sheet. It has recently been announced that a revised exposure draft will be issued within the next two months. |
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O. | Consolidation | |
Uniform accounting policies and reporting periods are applied throughout the Company under current GAAP. Under IFRS, non-controlling interest is initially recognised at fair value as opposed to carrying value under current GAAP. In fiscal 2010, we elected for the early adoption of Sections 1601, “Consolidated Financial Statements” and 1602 “Non-Controlling Interests”, of the CICA Handbook which are similar to the corresponding provisions of IFRS standard, IAS 27, “Consolidated and Separate Financial Statements”. | ||
P. | Intangibles | |
Other than the adjustments noted in sections (I) and (V), IAS 38, “Intangible Assets”, is similar to CICA Handbook Section 3064, “Goodwill and Intangible Assets”, which was adopted by the Company during fiscal 2009. | ||
Q. | Government grants | |
IAS 20, “Accounting for Government Grants and Disclosure of Government Assistance”, permits the same accounting treatment as current GAAP for investment tax credits. | ||
R. | Joint ventures | |
Currently under IAS 31, “Interests in Joint Ventures”, companies are allowed to account for any joint venture interest under either the proportionate consolidation or equity method. CGI currently accounts for its investment in Innovapost under the proportionate consolidation method and will not change upon conversion to IFRS. During the quarter, IFRS 11 “Joint Arrangements” was issued and is effective for annual periods beginning January 1, 2013, with early adoption permitted. This new standard focuses on the rights and obligations of the arrangement rather than the legal form. CGI is currently evaluating this standard. | ||
S. | Revenue recognition | |
The revenue recognition guidance under IAS 11 as well as IAS 18, “Revenue”, is not as specific as many standards under Canadian and U.S. GAAP. Over the past few months, the Company has been reviewing guidance from the standard setting authorities as well as accounting firms’ interpretations in order to develop its proposed treatment based on current IFRS standards. The following provides a high level summary of the differences upon conversion to IFRS using standards in place today. | ||
Under Canadian GAAP, the allocation of the consideration for arrangements that fall under ASC 985-605 is done based on VSOE of fair value. VSOE of fair value is established through internal evidence of prices charged for each revenue item when that item is sold separately. Under IFRS, the total arrangement value is allocated based on relative selling price. Relative selling price will maximize the use of observable inputs, or the Company’s best estimate of selling price. In addition, under Canadian GAAP, the residual method can be used as an allocation method when there is objective and reliable evidence of the fair value(s) of the undelivered item(s) but no such evidence of the delivered item(s). Under IFRS, the residual method will no longer be an appropriate method and the allocation of the consideration needs to be done based on the relative selling price. With the adoption of EIC 175 on October 1, 2010, these differences do not exist for arrangements that fall under this new guidance. | ||
Currently, under ASC 985-605, software arrangements for the sale of software licenses with other services (i.e., customization or installation) are bundled as a single deliverable for revenue recognition when the services are essential to the functionality of the software license. Under IFRS, the standard permits the recognition of the software license separately from the other services if it meets the criteria of a separately identifiable component (i.e., it has value to a client on a stand-alone basis). | ||
Under IFRS, revenue from arrangements with extended payment terms can be recognized when the services are rendered and it is probable that the economic benefits associated with the transition will flow to the entity. Under current GAAP, the criteria for these arrangements are more restrictive and often revenue needs to be recognized on a cash basis. |
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Under IFRS, when payment from a client is due either significantly before or after the transfer of goods or services, the amount of revenue is adjusted to reflect the time value of money, if deemed material. | ||
Canadian GAAP requires revenue for long-term contracts under fixed-fee arrangements such as outsourcing and BPS arrangements to be recognized on a straight-line basis over the term of the arrangement, unless there is a better measure of performance or delivery. Under IFRS, revenue for those types of arrangement will be recognized as services are provided to the client, and recognized based on contractual prices within an acceptable threshold based on demonstrated fair values. | ||
Currently, under GAAP, revenue is limited to the amount not contingent on future performance obligations. Under IFRS, revenue is recognized when it is probable that the economic benefits associated with the transaction will flow to the entity. | ||
A revised exposure draft is expected to be issued by the IASB and the Financial Accounting Standards Board on revenue recognition in the near future. The standards are not expected to be in place until the Fall of 2012. |
T. | Provisions | |
IAS 37, “Provisions, Contingent Liabilities and Contigent Assets”, requires a provision to be recognized when an entity has a present obligation as a result of a past event and it is probable that an outflow of resources will be required to settle the obligation. The thresholds for recognition of provisions are lower under IFRS than under Canadian GAAP. | ||
Under Canadian GAAP, provision for decommissioning liabilities, onerous leases and legal claims were presented within accounts payable and accrued liabilities or other long-term liabilities. Under IFRS, provisions require separate line disclosure on the face of the balance sheet according to their short-term or long-term classification. As a result, an amount of $11.0 million was reclassified from accounts payable and accrued liabilities into short-term provisions and an amount of $8.7 million was reclassified from other long-term liabilities to long-term provisions. | ||
U. | Tax reclassification | |
Under Canadian GAAP, deferred taxes are split between current and non-current components on the basis of either the underlying asset or liability or the expected reversal of items not related to an asset or liability. Under IFRS, all deferred tax assets are classified as non-current. As a result, the short-term portion of future income tax assets of $16.5 million was reclassified to deferred income tax assets and the short-term portion of future income tax liabilities of $26.4 million was reclassified to deferred income tax liabilities. | ||
V. | Contract costs | |
Under Canadian GAAP, contract costs consisting of transition costs and incentives are classified as intangible assets. Under IFRS, transition costs and incentives provided in the form of cash or equity instruments are presented separately as contract costs and incentives provided in the form of discounts are presented within accounts receivable. As a result, $97.4 million of transition costs and $34.6 million of incentives in the form of cash or equity instruments were reclassified from intangible assets to contract costs and $11.8 million was reclassified from intangible assets to accounts receivable. |
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Presentation | ||
The presentation section is addressed through individual IAS, most of which do not have significant differences from current GAAP. However, certain sections will require additional disclosure within the notes to the financial statements. Examples include property, plant and equipment, intangible assets, costs of services, selling and administrative expenses, income taxes, goodwill and provisions. In certain cases, there will be a shift of information between the notes and the face of the financial statements. | ||
Under IFRS, it will be mandatory for CGI to present a separate Statement of Equity whereas the Statement of Retained Earnings will be discontinued. | ||
With respect to our reportable segment disclosure under IFRS 8, “Operating Segments”, we do not see any significant differences from our current presentation. | ||
Further to the above assessment of the impact of transitioning to IFRS on the opening balance sheet and on certain presentation items, below is a summary of the expected impact on our internal control and information systems. |
Key Activities | Expected Changes | |
Information technology and data systems | No material system impact | |
To date, the Company did not identify any material system impact as we convert to IFRS. Development and testing of a dual-recordkeeping process is complete and dual-recordkeeping is in progress. | ||
Internal controls over financial reporting | No impact expected | |
The Company has concluded that internal controls applicable to our reporting processes under current GAAP are fundamentally the same as those required in our IFRS reporting environment. During fiscal 2011, special attention is being given to the effectiveness of controls during our transition year. | ||
Disclosure controls and procedures | Implementation in progress | |
During the current phase, the Company will be designing appropriate procedures and controls to ensure additional information can be gathered and reported upon. As communicated earlier, our financial statement note disclosures will be expanded. The working team is also producing a draft of our first set of interim consolidated financial statements under IFRS. | ||
Documentation is being amended in all areas and processes are being developed for the production and communication of asset or liability specific discount rates. | ||
Business processes | Implementation in progress | |
Over the past few months, training has been targeted to our employees based in the operations especially as it pertains to revenue recognition, provisions and asset impairments. In addition, we continue to provide guidance to those involved in client contracts to ensure they are aware of potential impacts once we convert to IFRS. | ||
We are currently assessing the implications of IFRS on our debt covenants but do not expect any impacts that would cause debt covenants to be breached. | ||
During the current phase, processes are being developed to prepare budgets and strategic plans under IFRS for fiscal 2012. In addition, we are assessing impacts on the Company’s incentive programs. |
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8. | INTEGRITY OF DISCLOSURE |
Our management assumes the responsibility for the existence of appropriate information systems, procedures and controls to ensure that information used internally and disclosed externally is complete and reliable. The Board of Directors’ duties include the assessment of the integrity of the Company’s internal control and information systems. | ||
CGI has a formal Corporate Disclosure Policy as a part of its Fundamental Texts whose goal is to raise awareness of the Company’s approach to disclosure among the Board of Directors, senior management and employees. The Board of Directors has established a Disclosure Policy Committee responsible for all regulatory disclosure requirements and overseeing the Company’s disclosure practices. | ||
The Audit and Risk Management Committee of CGI is composed entirely of independent directors who meet the independence and experience requirements of the New York Stock Exchange as well as those that apply under Canadian securities regulation. The responsibilities of our Audit and Risk Management Committee include: a) the review of all our public disclosure documents containing audited or unaudited financial information; b) identifying and examining the financial and operating risks to which we are exposed and reviewing the various policies and practices that are intended to manage those risks; c) the review and assessment of the effectiveness of our accounting policies and practices concerning financial reporting; d) the review and monitoring of our internal control procedures, programs and policies and assessment of the adequacy and effectiveness thereof; e) reviewing the adequacy of our internal audit resources including the mandate and objectives of the internal auditor; f) recommendation to the Board of Directors of CGI on the appointment of external auditors, the assertion of the external auditors’ independence, the review of the terms of their engagement as well as pursuing ongoing discussions with them; g) the review of the audit procedures; h) the review of related party transactions; and i) such other responsibilities usually attributed to audit and risk committees or as directed by our Board of Directors. | ||
As reported in our 2010 Annual Report, the Company evaluated the effectiveness of its disclosure controls and procedures and internal controls over financial reporting, supervised by and with the participation of the Chief Executive Officer and the Chief Financial Officer as of September 30, 2010. The CEO and CFO concluded that, based on this evaluation, the Company’s disclosure controls and procedures and internal controls over financial reporting were adequate and effective, at a reasonable level of assurance, to ensure that material information related to the Company and its consolidated subsidiaries would be made known to them by others within those entities. | ||
The CEO and CFO have limited the scope of the design of disclosure controls and procedures and internal controls over financial reporting to exclude controls, policies and procedures of Innovapost, a joint venture in which we have a 49% interest. The design was excluded from our evaluation as we do not have the ability to dictate or modify the entity’s internal controls over financial reporting, and we do not have the practical ability to assess those controls. Our assessment is limited to the internal controls over the inclusion of our share of the joint venture and its results in our consolidated financial statements. CGI’s interest in the joint venture represents approximately 1% of our consolidated total assets and approximately 2% of our consolidated revenue as at and for the quarter ended June 30, 2011. Please refer to page 27 of this MD&A for supplementary financial information about Innovapost. | ||
In addition, management’s assessment and conclusion on the effectiveness of internal controls over financial reporting excluded the controls, policies and procedures of Stanley which was acquired six weeks prior to CGI’s fiscal year-end. Our assessment which was performed at the fiscal 2010 year-end was limited to the internal controls over the inclusion of its financial position and results in our consolidated financial statements. The exclusion was due to the short time frame between the consummation date of the acquisition and the date of management’s assessment. The internal controls over financial reporting of Stanley have been included in the Company’s scope and will be evaluated for their effectiveness at the year-end of fiscal 2011. |
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For the quarter ending June 30, 2011, there was no change in our internal control over financial reporting that materially affected, or is reasonably likely to materially affect the Company’s internal controls over financial reporting. |
9. | RISK ENVIRONMENT |
9.1. | Risks and Uncertainties |
While we are confident about our long-term prospects, the following risks and uncertainties could affect our ability to achieve our strategic vision and objectives for growth and should be considered when evaluating our potential as an investment. |
9.1.1. | Risks Related to the Market |
Economic risk — The level of business activity of our clients, which is affected by economic conditions, has a bearing upon the results of our operations. We can neither predict the impact that current economic conditions will have on our future revenue, nor predict when economic conditions will show meaningful improvement. During an economic downturn, our clients and potential clients may cancel, reduce or defer existing contracts and delay entering into new engagements. In general, companies also decide to undertake fewer IT systems projects during difficult economic times, resulting in limited implementation of new technology and smaller engagements. Since there are fewer engagements in a downturn, competition usually increases and pricing for services may decline as competitors, particularly companies with significant financial resources, decrease rates to maintain or increase their market share in our industry and this may trigger pricing adjustments related to the benchmarking obligations within our contracts. Our pricing, revenue and profitability could be negatively impacted as a result of these factors. |
9.1.2. | Risks Related to our Industry |
The competition for contracts — CGI operates in a global marketplace in which competition among providers of IT services is vigorous. Some of our competitors possess greater financial, marketing, sales resources, and larger geographic scope in certain parts of the world than we do, which, in turn, provides them with additional leverage in the competition for contracts. In certain niche, regional or metropolitan markets, we face smaller competitors with specialized capabilities who may be able to provide competing services with greater economic efficiency. Some of our competitors have more significant operations than we do in lower cost countries that can serve as a platform from which to provide services worldwide on terms that may be more favourable. Increased competition among IT services firms often results in corresponding pressure on prices. There can be no assurance that we will succeed in providing competitively priced services at levels of service and quality that will enable us to maintain and grow our market share. | ||
The length of the sales cycle for major outsourcing contracts — As outsourcing deals become larger and more complex, the Company is experiencing longer selling cycles lasting between 12 and 24 months. The lengthening sales cycle could affect our ability to meet annual growth targets. | ||
The availability and retention of qualified IT professionals — There is strong demand for qualified individuals in the IT industry. Therefore, it is important that we remain able to successfully attract and retain highly qualified staff. If our comprehensive programs aimed at attracting and retaining qualified and dedicated professionals do not ensure that we have staff in sufficient numbers and with the appropriate training, expertise and suitable government security clearances required to serve the needs of our clients, we may have to rely on subcontractors or transfers of staff to fill resulting gaps. This might result in lost revenue or increased costs, thereby putting pressure on our earnings. | ||
The ability to continue developing and expanding service offerings to address emerging business demands and technology trends — The rapid pace of change in all aspects of information technology and the continually declining costs of acquiring and maintaining information technology infrastructure mean that we must anticipate changes in our clients’ needs. To do so, we must adapt our services and our solutions so that we maintain and improve our |
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competitive advantage and remain able to provide cost effective services. The market for the services and solutions we offer is extremely competitive and there can be no assurance that we will succeed in developing and adapting our business in a timely manner. If we do not keep pace, our ability to retain existing clients and gain new business may be adversely affected. This may result in pressure on our revenue, profit margin and resulting cash flows from operations. | ||
Infringing on the intellectual property rights of others — Despite our efforts, the steps we take to ensure that our services and offerings do not infringe on the intellectual property rights of third parties may not be adequate to prevent infringement and, as a result, claims may be asserted against us or our clients. We enter into licensing agreements for the right to use intellectual property and may otherwise offer indemnities against liability and damages arising from third-party claims of patent, copyright, trademark or trade secret infringement in respect of our own intellectual property or software or other solutions developed for our clients. In some instances, the amount of these indemnity claims could be greater than the revenue we receive from the client. Intellectual property claims or litigation could be time-consuming and costly, harm our reputation, require us to enter into additional royalty or licensing arrangements, or prevent us from providing some solutions or services. Any limitation on our ability to sell or use solutions or services that incorporate software or technologies that are the subject of a claim could cause us to lose revenue-generating opportunities or require us to incur additional expenses to modify solutions for future projects. | ||
Benchmarking provisions within certain contracts — Some of our outsourcing contracts contain clauses allowing our clients to externally benchmark the pricing of agreed upon services against those offered by other providers in an appropriate peer comparison group. The uniqueness of the client environment is factored in and, if results indicate a difference outside the agreed upon tolerance, we may be required to work with clients to reset the pricing for their services. | ||
Protecting our intellectual property rights — Our success depends, in part, on our ability to protect our proprietary methodologies, processes, know-how, tools, techniques and other intellectual property that we use to provide our services. CGI’s business solutions will generally benefit from available copyright protection and, in some cases, patent protection. Although CGI takes reasonable steps to protect and enforce its intellectual property rights, there is no assurance that such measures will be enforceable or adequate. The cost of enforcing our rights can be substantial and, in certain cases, may prove to be uneconomic. In addition, the laws of some countries in which we conduct business may offer only limited intellectual property rights protection. Despite our efforts, the steps taken to protect our intellectual property may not be adequate to prevent or deter infringement or other misappropriation of intellectual property, and we may not be able to detect unauthorized use of our intellectual property, or take appropriate steps to enforce our intellectual property rights. |
9.1.3. | Risks Related to our Business |
Business mix variations — The proportion of revenue that we generate from shorter-term systems integration and consulting (“SI&C”) projects, versus revenue from long-term outsourcing contracts, will fluctuate at times, affected by acquisitions or other transactions. An increased exposure to revenue from SI&C projects may result in greater quarterly revenue variations. | ||
The financial and operational risks inherent in worldwide operations — We manage operations in numerous countries around the world. The scope of our operations makes us subject to currency fluctuations; the burden of complying with a wide variety of national and local laws; differences in and uncertainties arising from local business culture and practices; multiple and sometimes conflicting laws and regulations, including tax laws; changes to tax laws including the availability of tax credits and other incentives that may adversely impact the cost of the services we provide; operating losses incurred in certain countries as we develop our international service delivery capabilities and the non-deductibility of these losses for tax purposes; the absence in some jurisdictions of effective laws to protect our intellectual property rights; restrictions on the movement of cash and other assets; restrictions on the import and export of certain technologies; restrictions on the repatriation of earnings; and political, social and economic |
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instability including the threats of terrorism and pandemic illnesses. We have a hedging strategy in place to mitigate foreign currency exposure; but, other than the use of financial products to deliver on our hedging strategy, we do not trade derivative financial instruments. Any or all of these risks could impact our global business operations and cause our profitability to decline. | ||
Credit risk with respect to accounts receivable — In order to sustain our cash flows and net earnings from operations, we must collect the amounts owed to us in an efficient and timely manner. Although we maintain provisions to account for anticipated shortfalls in amounts collected, the provisions we take are based on management estimates and on our assessment of our clients’ creditworthiness which may prove to be inadequate in the light of actual results. To the extent that we fail to perform our services in accordance with our contracts and our clients’ reasonable expectations, and to the extent that we fail to invoice clients for our services correctly in a timely manner, our collections could suffer resulting in a direct and adverse impact to our revenue, net earnings and cash flows. In addition, a prolonged economic downturn may cause clients to curtail or defer projects, impair their ability to pay for services already provided, and ultimately cause them to default on existing contracts, in each case, causing a shortfall in revenue and impairing our future prospects. | ||
Material developments regarding major commercial clients resulting from such causes as changes in financial condition, mergers or business acquisitions — Consolidation among our clients resulting from mergers and acquisitions may result in loss or reduction of business when the successor business’ information technology needs are served by another service provider or are provided by the successor company’s own personnel. Growth in a client’s information technology needs resulting from acquisitions or operations may mean that we no longer have a sufficient geographic scope or the critical mass to serve the client’s needs efficiently, resulting in the loss of the client’s business and impairing our future prospects. There can be no assurance that we will be able to achieve the objectives of our growth strategy in order to maintain and increase our geographic scope and critical mass in our targeted markets. | ||
Early termination risk — If we should fail to deliver our services according to contractual agreements, some of our clients could elect to terminate contracts before their agreed expiry date, which would result in a reduction of our earnings and cash flow and may impact the value of our backlog. In addition, a number of our outsourcing contractual agreements have termination for convenience and change of control clauses according to which a change in the client’s intentions or a change in control of CGI could lead to a termination of the said agreements. Early contract termination can also result from the exercise of a legal right or when circumstances that are beyond our control or beyond the control of our client prevent the contract from continuing. In cases of early termination, we may not be able to recover capitalized contract costs and we may not be able to eliminate ongoing costs incurred to support the contract. | ||
Cost estimation risks — In order to generate acceptable margins, our pricing for services is dependent on our ability to accurately estimate the costs and timing for completing projects or long-term outsourcing contracts. In addition, a significant portion of our project-oriented contracts are performed on a fixed-price basis. Billing for fixed-price engagements is carried out in accordance with the contract terms agreed upon with our client, and revenue is recognized based on the percentage of effort incurred to date in relation to the total estimated costs to be incurred over the duration of the respective contract. These estimates reflect our best judgment regarding the efficiencies of our methodologies and professionals as we plan to apply them to the contracts in accordance with the CGI Client Partnership Management Framework (“CPMF”), a process framework which helps ensure that all contracts are managed according to the same high standards throughout the organization. If we fail to apply the CPMF correctly or if we are unsuccessful in accurately estimating the time or resources required to fulfil our obligations under a contract, or if unexpected factors, including those outside of our control, arise, there may be an impact on costs or the delivery schedule which could have an adverse impact on our expected profit margins. | ||
Risks related to teaming agreements and subcontracts — We derive substantial revenues from contracts where we enter into teaming agreements with other providers. In some teaming agreements we are the prime contractor whereas in others we act as a subcontractor. In both cases, we rely on our relationships with other providers to generate business and we expect to do so in the foreseeable future. Where we act as prime contractor, if we fail to maintain our relationships with other providers, we may have difficulty attracting suitable participants in our teaming agreements. |
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Similarly, where we act as subcontractor, if our relationships are impaired, other providers might reduce the work they award to us, award that work to our competitors, or choose to offer the services directly to the client in order to compete with our business. In either case, our business, prospects, financial condition and operating results could be harmed. | ||
Our partners’ ability to deliver on their commitments — Increasingly large and complex contracts may require that we rely on third party subcontractors including software and hardware vendors to help us fulfil our commitments. Under such circumstances, our success depends on the ability of the third parties to perform their obligations within agreed upon budgets and timeframes. If our partners fail to deliver, our ability to complete the contract may be adversely affected, which may have an unfavourable impact on our profitability. | ||
Guarantees risk — In the normal course of business, we enter into agreements that may provide for indemnification and guarantees to counterparties in transactions such as consulting and outsourcing services, business divestitures, lease agreements and financial obligations. These indemnification undertakings and guarantees may require us to compensate counterparties for costs and losses incurred as a result of various events, including breaches of representations and warranties, intellectual property right infringement, claims that may arise while providing services or as a result of litigation that may be suffered by counterparties. | ||
Risk related to human resources utilization rates — In order to maintain our profit margin, it is important that we maintain the appropriate availability of professional resources by having a high utilization rate while still being able to assign additional resources to new work. Maintaining an efficient utilization rate requires us to forecast our need for professional resources accurately and to manage professional training programs and attrition rates among our personnel appropriately. To the extent that we fail to do so, our utilization rates may be reduced, thereby having an impact on our revenue and profitability. Conversely, we may find that we do not have sufficient resources to deploy against new business opportunities in which case our ability to grow our revenue would suffer. | ||
Client concentration risk — We derive a substantial portion of our revenue from the services we provide to the U.S. federal government and its agencies, and we expect that this will continue for the foreseeable future. In the event that a major U.S. federal government agency were to limit, reduce, or eliminate the business it awards to us, we might be unable to recover the lost revenue with work from other agencies or other clients, and our business, prospects, financial condition and operating results could be materially and adversely affected. | ||
Government business risk — Changes in federal, provincial or state government spending policies or budget priorities could directly affect our financial performance. Among the factors that could harm our government contracting business are the curtailment of governments’ use of consulting and IT services firms; a significant decline in spending by governments in general, or by specific departments or agencies in particular; the adoption of new legislation and/or actions affecting companies that provide services to governments; delays in the payment of our invoices by government payment offices; and general economic and political conditions. These or other factors could cause government agencies and departments to reduce their purchases under contracts, to exercise their right to terminate contracts, to issue temporary stop work orders, or not to exercise options to renew contracts, any of which would cause us to lose future revenue. Although Canadian GAAP considers a national government and its agencies as a single client, our client base in the government economic sector is in fact diversified with contracts from many different departments and agencies in the U.S. and Canada; nevertheless, government spending reductions or budget cutbacks at these departments or agencies could materially harm our continued performance under these contracts, or limit the awarding of additional contracts from these agencies. | ||
Regulatory risk — Our business with the US federal government and its agencies requires that we comply with complex laws and regulations relating to government contracts. These laws relate to the integrity of the procurement process, impose disclosure requirements, and address national security concerns, among others matters. For instance, we are routinely subject to audits by U.S. government agencies with respect to compliance with these rules. If we fail to comply with these requirements we may incur penalties and sanctions, including contract termination, suspension of payments, suspension or debarment from doing business with the federal government, and fines. |
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Legal claims made against our work — We create, implement and maintain IT solutions that are often critical to the operations of our clients’ business. Our ability to complete large projects as expected could be adversely affected by unanticipated delays, renegotiations, and changing client requirements or project delays. Also, our solutions may suffer from defects that adversely affect their performance; they may not meet our clients’ requirements or may fail to perform in accordance with applicable service levels. Such problems could subject us to legal liability, which could adversely impact our business, operating results and financial condition, and may negatively affect our professional reputation. We typically include provisions in our contracts which are designed to limit our exposure to legal claims relating to our services and the applications we develop. These provisions may not protect us adequately or may not be enforceable under some circumstances or under the laws of some jurisdictions. | ||
Information and infrastructure risks — Our business often requires that our clients’ applications and information, which may include their proprietary information, be processed and stored on our networks and systems, and in data centres that we manage. Digital information and equipment is subject to loss, theft or destruction, and services that we provide may become temporarily unavailable as a result thereof or upon an equipment or system malfunction. Failures can arise from human error in the course of normal operations, maintenance and upgrading activities, or from hacking, vandalism (including denial of service attacks and computer viruses), theft and unauthorized access by third parties, as well as from power outages or surges, floods, fires, natural disasters or from any other causes. The measures that we take to protect information and software, including both physical and logical controls on access to premises and information and backup systems may prove in some circumstances to be inadequate to prevent the loss, theft or destruction of client information or service interruptions. Such events may expose the Company to financial loss or damages. | ||
Risk of harm to our reputation — CGI’s reputation as a capable and trustworthy service provider and long term business partner is key to our ability to compete effectively in the market for information technology services. The nature of our operations exposes us to the potential loss, unauthorized access to, or destruction of our clients’ information, as well as temporary service interruptions. Depending on the nature of the information or services, such events may have a negative impact on how the Company is perceived in the marketplace. Under such circumstances, our ability to obtain new clients and retain existing clients could suffer with a resulting impact on our revenue and profit. | ||
Risks associated with acquisitions — A significant part of our growth strategy is dependent on our ability to continue making large acquisitions to increase our critical mass in selected geographic areas, as well as niche acquisitions to increase the breadth and depth of our service offerings. The successful execution of our strategy requires that we identify suitable acquisition targets and that we correctly evaluate their potential as transactions that will meet our financial and operational objectives. There can be no assurance that we will be able to identify suitable acquisition candidates and consummate additional acquisitions that meet our economic thresholds, or that future acquisitions will be successfully integrated into our operations and yield the tangible accretive value that had been expected. Without additional acquisitions, we are unlikely to maintain our historic or expected growth rates. | ||
Risks associated with the integration of new operations — The successful integration of new operations that arise from our acquisitions strategy or from large outsourcing contracts requires that a substantial amount of management time and attention be focused on integration tasks. Management time that is devoted to integration activities may detract from management’s normal operations focus with resulting pressure on the revenues and earnings from our existing operations. In addition, we may face complex and potentially time-consuming challenges in implementing the uniform standards, controls, procedures and policies across new operations to harmonize their activities with those of our existing business units. Integration activities can result in unanticipated operational problems, expenses and liabilities. If we are not successful in executing our integration strategies in a timely and cost-effective manner, we will have difficulty achieving our growth and profitability objectives. | ||
Liquidity and funding risks — The Company’s future growth is contingent on the execution of its business strategy, which, in turn, is dependent on its ability to conclude large outsourcing contracts and business acquisitions. By its nature, our growth strategy requires us to fund the investments required to be made using a mix of cash generated from our existing operations, money borrowed under our existing or future credit agreements, and equity funding |
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generated by the issuance of shares of our capital stock to counterparties in transactions, or to the general public. Our ability to raise the required funding depends on the capacity of the capital markets to meet our financing needs in a timely fashion and on the basis of interest rates and share prices that are reasonable in the context of profitability objectives. Increasing interest rates, volatility in our share price, and the capacity of our current lenders to meet our liquidity requirements are all factors that may have an adverse impact on our access to the funding we require. If we are unable to obtain the necessary funding, we may be unable to achieve our growth objectives. |
9.2. | Legal Proceedings |
The Company is involved in legal proceedings, audits, claims and litigation arising in the ordinary course of its business. Certain of these matters seek damages in significant amounts. Although, the outcome of such matters is not predictable with assurance, the Company has no reason to believe that the disposition of any such current matter could reasonably be expected to have a materially adverse impact on the Company’s financial position, results of operations or the ability to carry on any of its business activities. |
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