Interim Condensed Consolidated Financial Statements of
CGI GROUP INC.
For the three and six months ended March 31, 2016 and 2015
(unaudited)
Interim Consolidated Statements of Earnings
For the three and six months ended March 31
(in thousands of Canadian dollars, except per share data) (unaudited)
Three months ended March 31 | Six months ended March 31 | ||||||||
2016 | 2015 | 2016 | 2015 | ||||||
$ | $ | $ | $ | ||||||
Revenue | 2,750,049 | 2,601,208 | 5,433,726 | 5,142,463 | |||||
Operating expenses | |||||||||
Costs of services, selling and administrative | 2,357,827 | 2,231,436 | 4,655,854 | 4,426,821 | |||||
Restructuring costs (Note 4) | — | — | 29,100 | — | |||||
Net finance costs | 22,631 | 24,471 | 42,744 | 48,051 | |||||
Foreign exchange loss | 1,606 | 6,656 | 3,132 | 8,477 | |||||
2,382,064 | 2,262,563 | 4,730,830 | 4,483,349 | ||||||
Earnings before income taxes | 367,985 | 338,645 | 702,896 | 659,114 | |||||
Income tax expense (Note 5) | 85,250 | 87,471 | 182,448 | 171,684 | |||||
Net earnings | 282,735 | 251,174 | 520,448 | 487,430 | |||||
Earnings per share (Note 7C) | |||||||||
Basic earnings per share | 0.92 | 0.80 | 1.70 | 1.56 | |||||
Diluted earnings per share | 0.90 | 0.78 | 1.65 | 1.52 |
CGI Group Inc. – Interim Condensed Consolidated Financial Statements for the three and six months ended March 31, 2016 and 2015 1
Interim Consolidated Statements of Comprehensive Income
For the three and six months ended March 31
(in thousands of Canadian dollars) (unaudited)
(in thousands of Canadian dollars) (unaudited)
Three months ended March 31 | Six months ended March 31 | |||||||
2016 | 2015 | 2016 | 2015 | |||||
$ | $ | $ | $ | |||||
Net earnings | 282,735 | 251,174 | 520,448 | 487,430 | ||||
Items that will be reclassified subsequently to net earnings (net of income taxes): | ||||||||
Net unrealized (losses) gains on translating financial statements of foreign operations | (299,456 | ) | 132,369 | (182,477 | ) | 124,949 | ||
Net gains (losses) on derivative financial instruments and on translating long-term debt designated as hedges of net investments in foreign operations | 76,962 | (103,671 | ) | 28,774 | (139,983 | ) | ||
Net unrealized (losses) gains on cash flow hedges | (16,235 | ) | 20,677 | (14,910 | ) | 22,891 | ||
Net unrealized gains (losses) on available-for-sale investments | 320 | 1,679 | (104 | ) | 1,917 | |||
Items that will not be reclassified subsequently to net earnings (net of income taxes): | ||||||||
Net remeasurement (losses) gains on defined benefit plans | (12,204 | ) | (31,462 | ) | 3,269 | (25,839 | ) | |
Other comprehensive (loss) income | (250,613 | ) | 19,592 | (165,448 | ) | (16,065 | ) | |
Comprehensive income | 32,122 | 270,766 | 355,000 | 471,365 |
CGI Group Inc. – Interim Condensed Consolidated Financial Statements for the three and six months ended March 31, 2016 and 2015 2
Interim Consolidated Balance Sheets
(in thousands of Canadian dollars) (unaudited)
As at March 31, 2016 | As at September 30, 2015 | |
$ | $ | |
Assets | ||
Current assets | ||
Cash and cash equivalents | 168,919 | 305,262 |
Accounts receivable | 1,097,418 | 1,097,863 |
Work in progress | 941,080 | 873,099 |
Current derivative financial instruments (Note 10) | 22,348 | 26,567 |
Prepaid expenses and other current assets | 188,649 | 160,638 |
Income taxes | 5,176 | 5,702 |
Total current assets before funds held for clients | 2,423,590 | 2,469,131 |
Funds held for clients | 362,638 | 496,397 |
Total current assets | 2,786,228 | 2,965,528 |
Property, plant and equipment | 462,609 | 473,109 |
Contract costs | 195,999 | 189,235 |
Intangible assets | 524,304 | 568,811 |
Other long-term assets | 81,807 | 69,353 |
Long-term financial assets | 132,796 | 122,820 |
Deferred tax assets | 223,831 | 261,431 |
Goodwill | 7,010,298 | 7,136,983 |
11,417,872 | 11,787,270 | |
Liabilities | ||
Current liabilities | ||
Accounts payable and accrued liabilities | 1,074,046 | 1,113,636 |
Accrued compensation | 529,272 | 571,883 |
Current derivative financial instruments (Note 10) | 7,394 | 28,106 |
Deferred revenue | 487,144 | 416,329 |
Income taxes | 147,480 | 159,562 |
Provisions | 52,297 | 94,398 |
Current portion of long-term debt | 193,744 | 230,906 |
Total current liabilities before clients’ funds obligations | 2,491,377 | 2,614,820 |
Clients’ funds obligations | 359,420 | 492,965 |
Total current liabilities | 2,850,797 | 3,107,785 |
Long-term provisions | 52,657 | 62,637 |
Long-term debt | 1,872,515 | 1,896,181 |
Other long-term liabilities | 265,372 | 277,223 |
Long-term derivative financial instruments (Note 10) | 55,996 | 225 |
Deferred tax liabilities | 152,333 | 170,987 |
Retirement benefits obligations | 183,046 | 190,063 |
5,432,716 | 5,705,101 | |
Equity | ||
Retained earnings | 3,230,580 | 3,057,578 |
Accumulated other comprehensive income (Note 6) | 432,778 | 598,226 |
Capital stock (Note 7A) | 2,150,943 | 2,254,245 |
Contributed surplus | 170,855 | 172,120 |
5,985,156 | 6,082,169 | |
11,417,872 | 11,787,270 |
CGI Group Inc. – Interim Condensed Consolidated Financial Statements for the three and six months ended March 31, 2016 and 2015 3
Interim Consolidated Statements of Changes in Equity
For the six months ended March 31
(in thousands of Canadian dollars) (unaudited)
(in thousands of Canadian dollars) (unaudited)
Retained earnings | Accumulated other comprehensive income | Capital stock | Contributed surplus | Total equity | ||||||
$ | $ | $ | $ | $ | ||||||
Balance as at September 30, 2015 | 3,057,578 | 598,226 | 2,254,245 | 172,120 | 6,082,169 | |||||
Net earnings | 520,448 | — | — | — | 520,448 | |||||
Other comprehensive income | — | (165,448 | ) | — | — | (165,448 | ) | |||
Comprehensive income | 520,448 | (165,448 | ) | — | — | 355,000 | ||||
Share-based payment costs | — | — | — | 17,730 | 17,730 | |||||
Income tax impact associated with stock options | — | — | — | 15,225 | 15,225 | |||||
Exercise of stock options (Note 7A) | — | — | 67,617 | (12,970 | ) | 54,647 | ||||
Exercise of performance share units (“PSUs”) (Note 7A) | — | — | 21,250 | (21,250 | ) | — | ||||
Repurchase of Class A subordinate shares (Note 7A) | (347,446 | ) | — | (170,374 | ) | — | (517,820 | ) | ||
Purchase of Class A subordinate shares held in trust (Note 7A) | — | — | (21,795 | ) | — | (21,795 | ) | |||
Balance as at March 31, 2016 | 3,230,580 | 432,778 | 2,150,943 | 170,855 | 5,985,156 | |||||
Retained earnings | Accumulated other comprehensive income | Capital stock | Contributed surplus | Total equity | ||||||
$ | $ | $ | $ | $ | ||||||
Balance as at September 30, 2014 | 2,356,008 | 228,624 | 2,246,197 | 157,896 | 4,988,725 | |||||
Net earnings | 487,430 | — | — | — | 487,430 | |||||
Other comprehensive income | — | (16,065 | ) | — | — | (16,065 | ) | |||
Comprehensive income | 487,430 | (16,065 | ) | — | — | 471,365 | ||||
Share-based payment costs | — | — | — | 17,126 | 17,126 | |||||
Income tax impact associated with stock options | — | — | — | 9,907 | 9,907 | |||||
Exercise of stock options (Note 7A) | — | — | 52,811 | (10,388 | ) | 42,423 | ||||
Exercise of PSUs (Note 7A) | — | — | 8,668 | (8,668 | ) | — | ||||
Purchase of Class A subordinate shares held in trust (Note 7A) | — | — | (11,099 | ) | — | (11,099 | ) | |||
Balance as at March 31, 2015 | 2,843,438 | 212,559 | 2,296,577 | 165,873 | 5,518,447 |
CGI Group Inc. – Interim Condensed Consolidated Financial Statements for the three and six months ended March 31, 2016 and 2015 4
Interim Consolidated Statements of Cash Flows
For the three and six months ended March 31
(in thousands of Canadian dollars) (unaudited)
(in thousands of Canadian dollars) (unaudited)
Three months ended March 31 | Six months ended March 31 | ||||||||
2016 | 2015 | 2016 | 2015 | ||||||
$ | $ | $ | $ | ||||||
Operating activities | |||||||||
Net earnings | 282,735 | 251,174 | 520,448 | 487,430 | |||||
Adjustments for: | |||||||||
Amortization and depreciation | 100,962 | 108,210 | 202,821 | 214,101 | |||||
Deferred income taxes | (10,188 | ) | (6,083 | ) | 25,208 | 11,149 | |||
Foreign exchange (gain) loss | (870 | ) | 562 | 274 | (875 | ) | |||
Share-based payment costs | 4,343 | 6,211 | 17,730 | 17,126 | |||||
Net change in non-cash working capital items (Note 8) | (125,601 | ) | (75,369 | ) | (186,891 | ) | (105,021 | ) | |
Cash provided by operating activities | 251,381 | 284,705 | 579,590 | 623,910 | |||||
Investing activities | |||||||||
Business acquisitions | (34,442 | ) | — | (38,442 | ) | — | |||
Purchase of property, plant and equipment | (52,190 | ) | (21,960 | ) | (83,227 | ) | (67,779 | ) | |
Proceeds from sale of property, plant and equipment | 1,788 | — | 1,788 | 15,255 | |||||
Additions to contract costs | (25,586 | ) | (16,769 | ) | (43,989 | ) | (31,446 | ) | |
Additions to intangible assets | (22,887 | ) | (19,330 | ) | (45,401 | ) | (34,987 | ) | |
Purchase of long-term investments | — | (1,261 | ) | (9,940 | ) | (5,510 | ) | ||
Proceeds from sale of long-term investments | 25,544 | 2,764 | 27,543 | 3,719 | |||||
Payments received from long-term receivables | — | 901 | 164 | 2,027 | |||||
Cash used in investing activities | (107,773 | ) | (55,655 | ) | (191,504 | ) | (118,721 | ) | |
Financing activities | |||||||||
Net change in unsecured committed revolving credit facility | 150,000 | — | 150,000 | — | |||||
Increase of long-term debt | 4,345 | 7,725 | 22,347 | 34,644 | |||||
Repayment of long-term debt | (157,282 | ) | (481,266 | ) | (178,296 | ) | (799,101 | ) | |
Settlement of derivative financial instruments | (24,057 | ) | (55,350 | ) | (24,057 | ) | (98,322 | ) | |
Purchase of Class A subordinate shares held in trust (Note 7A) | — | — | (21,795 | ) | (11,099 | ) | |||
Repurchase of Class A subordinate shares (Note 7A) | (508,688 | ) | — | (527,286 | ) | — | |||
Issuance of Class A subordinate shares | 11,157 | 20,465 | 53,022 | 41,993 | |||||
Cash used in financing activities | (524,525 | ) | (508,426 | ) | (526,065 | ) | (831,885 | ) | |
Effect of foreign exchange rate changes on cash and cash equivalents | (2,518 | ) | 13,305 | 1,636 | 14,487 | ||||
Net decrease in cash and cash equivalents | (383,435 | ) | (266,071 | ) | (136,343 | ) | (312,209 | ) | |
Cash and cash equivalents, beginning of period | 552,354 | 489,577 | 305,262 | 535,715 | |||||
Cash and cash equivalents, end of period | 168,919 | 223,506 | 168,919 | 223,506 |
Supplementary cash flow information (Note 8).
CGI Group Inc. – Interim Condensed Consolidated Financial Statements for the three and six months ended March 31, 2016 and 2015 5
Notes to the Interim Condensed Consolidated Financial Statements
For the three and six months ended March 31, 2016 and 2015
(tabular amounts only are in thousands of Canadian dollars, except per share data) (unaudited)
1.Description of business
CGI Group Inc. (the “Company”), directly or through its subsidiaries, manages information technology (“IT”) services as well as business process services (“BPS”) to help clients effectively realize their strategies and create added value. The Company’s services include the management of IT and business functions (“outsourcing”), systems integration and consulting, as well as the sale of software solutions. The Company was incorporated under Part IA of the Companies Act (Québec) predecessor to the Business Corporations Act (Québec) which came into force on February 14, 2011 and its shares are publicly traded. The executive and registered office of the Company is situated at 1350 René-Lévesque Blvd. West, Montréal, Québec, Canada, H3G 1T4.
2.Basis of preparation
These interim condensed consolidated financial statements have been prepared in accordance with International Accounting Standard 34 “Interim Financial Reporting” as issued by the International Accounting Standards Board (“IASB”). In addition, the interim condensed consolidated financial statements have been prepared in accordance with the accounting policies set out in Note 3, “Summary of significant accounting policies”, of the Company’s consolidated financial statements for the year ended September 30, 2015. The accounting policies were consistently applied to all periods.
These interim condensed consolidated financial statements should be read in conjunction with the annual consolidated financial statements of the Company for the year ended September 30, 2015.
The Company’s interim condensed consolidated financial statements for the three and six months ended March 31, 2016 and 2015 were authorized for issue by the Board of Directors on April 26, 2016.
3.Changes in accounting policies
FUTURE ACCOUNTING STANDARD CHANGES
The following standards have been issued but are not yet effective:
IFRS 15 - Revenue from Contracts with Customers
In May 2014, the IASB issued IFRS 15, “Revenue from Contracts with Customers”, to specify how and when to recognize revenue as well as requiring the provision of more informative and relevant disclosures. The standard supersedes IAS 18, “Revenue”, IAS 11, “Construction Contracts”, and other revenue related Interpretations. The standard will be effective on October 1, 2018 for the Company, with earlier application permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements.
IFRS 9 - Financial Instruments
In July 2014, the IASB amended IFRS 9, “Financial Instruments”, to bring together the classification and measurement, impairment and hedge accounting phases of the IASB's project to replace IAS 39, “Financial Instruments: Recognition and Measurement”. The standard supersedes all previous versions of IFRS 9 and will be effective on October 1, 2018 for the Company, with earlier application permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements.
IFRS 16 - Leases
In January 2016, the IASB issued IFRS 16, “Leases”, to set out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a lease contract. The standard supersedes IAS 17, "Leases", and other lease related Interpretations. The standard will be effective on October 1, 2019 for the Company with earlier application permitted only if IFRS 15 “Revenue from Contracts with Customers” is also applied.
CGI Group Inc. – Interim Condensed Consolidated Financial Statements for the three and six months ended March 31, 2016 and 2015 6
Notes to the Interim Condensed Consolidated Financial Statements
For the three and six months ended March 31, 2016 and 2015
(tabular amounts only are in thousands of Canadian dollars, except per share data) (unaudited)
4.Restructuring costs
During the year ended September 30, 2015, the Company announced a restructuring program of approximately $60,000,000 for productivity improvement initiatives, which was completed during the period ended December 31, 2015. During the three and six months ended March 31, 2016, the Company incurred nil and $29,100,000 respectively of restructuring costs.
5. | Income taxes |
The Company’s effective income tax rates for the three and six months ended March 31, 2016 were 23.2% and 26.0%, respectively (25.8% and 26.0% for the three and six months ended March 31, 2015, respectively).
For the three and six months ended March 31, 2016, the income tax expense contained a favorable tax adjustment of $14,400,000 attributable to the recognition of deferred tax assets following an agreement with a tax authority. In addition, during the six months ended March 31, 2016, the Company incurred an additional income tax expense of $5,900,000 due to the United Kingdom Finance Bill 2015-16 that was enacted on November 18, 2015, which reduces the U.K. corporate tax rate from 20% to 19%, effective April 1, 2017 and from 19% to 18%, effective April 1, 2020. The effective income tax rates before the net favorable tax adjustments for the three and six months ended March 31, 2016 were 27.1% and 27.2%, respectively (25.8% and 26.0% for the three and six months ended March 31, 2015, respectively).
6.Accumulated other comprehensive income
As at March 31, 2016 | As at September 30, 2015 | |||
$ | $ | |||
Items that will be reclassified subsequently to net earnings: | ||||
Net unrealized gains on translating financial statements of foreign operations, net of accumulated income tax expense of $68,000 as at March 31, 2016 ($72,873 as at September 30, 2015) | 928,862 | 1,111,339 | ||
Net losses on derivative financial instruments and on translating long-term debt designated as hedges of net investments in foreign operations, net of accumulated income tax recovery of $70,885 as at March 31, 2016 ($75,316 as at September 30, 2015) | (456,471 | ) | (485,245 | ) |
Net unrealized gains on cash flow hedges, net of accumulated income tax expense of $9,371 as at March 31, 2016 ($13,732 as at September 30, 2015) | 17,318 | 32,228 | ||
Net unrealized gains on available-for-sale investments, net of accumulated income tax expense of $868 as at March 31, 2016 ($925 as at September 30, 2015) | 2,614 | 2,718 | ||
Items that will not be reclassified subsequently to net earnings: | ||||
Net remeasurement losses on defined benefit plans, net of accumulated income tax recovery of $20,273 as at March 31, 2016 ($19,820 as at September 30, 2015) | (59,545 | ) | (62,814 | ) |
432,778 | 598,226 |
For the six months ended March 31, 2016, $6,076,000 of the net unrealized gains previously recognized in other comprehensive income, net of income tax expense of $2,971,000, were reclassified to net earnings for derivative financial instruments designated as cash flow hedges.
CGI Group Inc. – Interim Condensed Consolidated Financial Statements for the three and six months ended March 31, 2016 and 2015 7
Notes to the Interim Condensed Consolidated Financial Statements
For the three and six months ended March 31, 2016 and 2015
(tabular amounts only are in thousands of Canadian dollars, except per share data) (unaudited)
7.Capital stock, share-based payments and earnings per share
A) | CAPITAL STOCK |
Class A subordinate shares | Class B shares | Total | ||||||||||
Number | Carrying value | Number | Carrying value | Number | Carrying value | |||||||
$ | $ | $ | ||||||||||
As at September 30, 2015 | 275,773,284 | 2,207,826 | 33,272,767 | 46,419 | 309,046,051 | 2,254,245 | ||||||
Issued upon exercise of stock options1 | 3,139,801 | 67,617 | — | — | 3,139,801 | 67,617 | ||||||
PSUs exercised2 | — | 21,250 | — | — | — | 21,250 | ||||||
Repurchased and cancelled3 | (9,519,875 | ) | (170,374 | ) | — | — | (9,519,875 | ) | (170,374 | ) | ||
Purchased and held in trust4 | — | (21,795 | ) | — | — | — | (21,795 | ) | ||||
Conversion of shares5 | 420,019 | 586 | (420,019 | ) | (586 | ) | — | — | ||||
As at March 31, 2016 | 269,813,229 | 2,105,110 | 32,852,748 | 45,833 | 302,665,977 | 2,150,943 |
1 | The carrying value of Class A subordinate shares includes $12,970,000 ($10,388,000 as at March 31, 2015), which corresponds to a reduction in contributed surplus representing the value of accumulated compensation costs associated with the stock options exercised during the period. |
2 | During the six months ended March 31, 2016, 969,241 PSUs (316,857 during the six months ended March 31, 2015) were exercised with a recorded value of $21,250,000 ($8,668,000 as at March 31, 2015) that was removed from contributed surplus. As at March 31, 2016, 1,192,308 Class A subordinate shares were held in trust under the PSU plan (1,719,827 as at March 31, 2015) (Note 7B). |
3 | On January 27, 2016, the Company’s Board of Directors authorized the renewal of the Normal Course Issuer Bid (“NCIB”) for the purchase of up to 21,425,992 Class A subordinate shares for cancellation on the open market through the Toronto Stock Exchange (“TSX”). The Class A subordinate shares are available for purchase commencing February 11, 2016 until no later than February 3, 2017, or on such earlier date when the Company completes its purchases or elects to terminate the bid. |
During the six months ended March 31, 2016, the Company repurchased 7,112,375 Class A subordinate shares from the Caisse de dépôt et placement du Québec for a cash consideration of $400,000,000. The excess of the purchase price over the carrying value in the amount of $247,893,000 was charged to retained earnings. In accordance with the requirements of TSX, the repurchase is considered in the annual aggregate limit that the Company is entitled to repurchase under its current NCIB. In addition, during the six months ended March 31, 2016, the Company repurchased 2,207,500 Class A subordinate shares under the previous NCIB for cash consideration of $117,820,000 and the excess of the purchase price over the carrying value in the amount of $99,553,000 was charged to retained earnings. During the six months ended March 31, 2015 the Company did not repurchase any Class A subordinate shares.
As of September 30, 2015, 200,000 of repurchased Class A subordinate shares with a carrying value of $1,631,000 and a purchase value of $9,466,000 were held by the Company and were paid and cancelled during the six months ended March 31, 2016 under the previous NCIB.
4 | The trustee, in accordance with the terms of the PSU plan and a Trust Agreement, purchased 441,722 Class A subordinate shares of the Company on the open market for $21,795,000 during the six months ended March 31, 2016 (288,535 Class A subordinate shares for $11,099,000 during the six months ended March 31, 2015). |
5 | During the six months ended March 31, 2016, a shareholder converted 420,019 Class B shares into 420,019 Class A subordinate shares. |
CGI Group Inc. – Interim Condensed Consolidated Financial Statements for the three and six months ended March 31, 2016 and 2015 8
Notes to the Interim Condensed Consolidated Financial Statements
For the three and six months ended March 31, 2016 and 2015
(tabular amounts only are in thousands of Canadian dollars, except per share data) (unaudited)
7.Capital stock, share-based payments and earnings per share (continued)
B) SHARE-BASED PAYMENTS
i) | Stock options |
Under the Company’s stock option plan, the Board of Directors may grant, at its discretion, stock options to purchase Class A subordinate shares to certain employees, officers and directors of the Company and its subsidiaries. The exercise price is established by the Board of Directors and is equal to the closing price of the Class A subordinate shares on the TSX on the day preceding the date of the grant. Stock options generally vest over four years from the date of grant conditionally upon achievement of objectives and must be exercised within a ten-year period, except in the event of retirement, termination of employment or death.
The following table presents information concerning the number of outstanding stock options granted by the Company:
Outstanding as at September 30, 2015 | 20,629,392 | ||
Granted | 263,977 | ||
Exercised | (3,139,801 | ) | |
Forfeited | (2,354,073 | ) | |
Outstanding as at March 31, 2016 | 15,399,495 |
The weighted average fair value of stock options granted during the six months ended March 31 and the weighted average assumptions used in the calculation of their fair value on the date of grant using the Black-Scholes option pricing model were as follows:
2016 | 2015 | |||||
Grant date fair value ($) | 11.16 | 8.60 | ||||
Dividend yield (%) | 0.00 | 0.00 | ||||
Expected volatility (%)1 | 24.97 | 24.70 | ||||
Risk-free interest rate (%) | 0.83 | 1.33 | ||||
Expected life (years) | 4.00 | 4.00 | ||||
Exercise price ($) | 52.97 | 39.64 | ||||
Share price ($) | 52.97 | 39.64 |
1 | Expected volatility was determined using statistical formulas and based on the weekly historical average of closing daily share prices over the period of the expected life of stock option. |
CGI Group Inc. – Interim Condensed Consolidated Financial Statements for the three and six months ended March 31, 2016 and 2015 9
Notes to the Interim Condensed Consolidated Financial Statements
For the three and six months ended March 31, 2016 and 2015
(tabular amounts only are in thousands of Canadian dollars, except per share data) (unaudited)
7.Capital stock, share-based payments and earnings per share (continued)
B) SHARE-BASED PAYMENTS (CONTINUED)
ii) | Performance share units |
Under the PSU plan, the Board of Directors may grant PSUs to senior executives and other key employees (“participants”) which entitle them to receive one Class A subordinate share for each PSU. The vesting performance conditions are determined by the Board of Directors at the time of each grant. PSUs expire on the business day preceding December 31 of the third calendar year following the end of the fiscal year during which the PSU award was made, except in the event of retirement, termination of employment or death. Granted PSUs vest annually over a period of four years from the date of grant conditionally upon achievement of objectives.
Class A subordinate shares purchased in connection with the PSU plan are held in trust for the benefit of the participants. The trust, considered as a structured entity, is consolidated in the Company’s consolidated financial statements with the cost of the purchased shares recorded as a reduction of capital stock (Note 7A).
The following table presents information concerning the number of outstanding PSUs granted by the Company:
Outstanding as at September 30, 2015 | 1,719,827 | |
Granted1 | 570,000 | |
Exercised | (969,241 | ) |
Forfeited | (128,278 | ) |
Outstanding as at March 31, 2016 | 1,192,308 |
C) EARNINGS PER SHARE
The following tables set forth the computation of basic and diluted earnings per share for the three and six months ended March 31:
Three months ended March 31 | |||||||||||||
2016 | 2015 | ||||||||||||
Net earnings | Weighted average number of shares outstanding1 | Earnings per share | Net earnings | Weighted average number of shares outstanding1 | Earnings per share | ||||||||
$ | $ | $ | $ | ||||||||||
Basic | 282,735 | 306,358,432 | 0.92 | 251,174 | 312,711,663 | 0.80 | |||||||
Net effect of dilutive stock options and PSUs2 | 7,252,147 | 10,203,708 | |||||||||||
282,735 | 313,610,579 | 0.90 | 251,174 | 322,915,371 | 0.78 | ||||||||
Six months ended March 31 | |||||||||||||
2016 | 2015 | ||||||||||||
Net earnings | Weighted average number of shares outstanding1 | Earnings per share | Net earnings | Weighted average number of shares outstanding1 | Earnings per share | ||||||||
$ | $ | $ | $ | ||||||||||
Basic | 520,448 | 307,040,218 | 1.70 | 487,430 | 311,912,349 | 1.56 | |||||||
Net effect of dilutive stock options and PSUs2 | 8,325,142 | 9,538,504 | |||||||||||
520,448 | 315,365,360 | 1.65 | 487,430 | 321,450,853 | 1.52 |
1 | During the three months ended March 31, 2016, 9,127,375 Class A subordinate shares repurchased and 1,192,308 Class A subordinate shares held in trust were excluded from the calculation of weighted average number of shares outstanding as of the date of transaction (nil and 1,719,827, respectively, during the three months ended March 31, 2015). During the six months ended March 31, 2016, 9,519,875 Class A subordinate shares repurchased and 1,192,308 Class A subordinate shares held in trust were excluded from the calculation of weighted average number of shares outstanding as of the date of transaction (nil and 1,719,827, respectively, during the six months ended March 31, 2015). |
2 | The calculation of the diluted earnings per share excluded respectively 251,300 and 3,969,494 stock options for the three and six months ended March 31, 2016 (34,000 and 3,269,000 for the three and six months ended March 31, 2015), as they were anti-dilutive. |
CGI Group Inc. – Interim Condensed Consolidated Financial Statements for the three and six months ended March 31, 2016 and 2015 10
Notes to the Interim Condensed Consolidated Financial Statements
For the three and six months ended March 31, 2016 and 2015
(tabular amounts only are in thousands of Canadian dollars, except per share data) (unaudited)
8.Supplementary cash flow information
a)Net change in non-cash working capital items is as follows for the three and six months ended March 31:
Three months ended March 31 | Six months ended March 31 | |||||||
2016 | 2015 | 2016 | 2015 | |||||
$ | $ | $ | $ | |||||
Accounts receivable | 31,301 | 128,243 | (23,729 | ) | 58,231 | |||
Work in progress | (74,021 | ) | (43,203 | ) | (97,409 | ) | (6,966 | ) |
Prepaid expenses and other assets | (35,030 | ) | (32,964 | ) | (40,639 | ) | (7,666 | ) |
Long-term financial assets | 979 | (1,003 | ) | (1,997 | ) | (3,044 | ) | |
Accounts payable and accrued liabilities | (64,084 | ) | (90,379 | ) | (17,777 | ) | (17,747 | ) |
Accrued compensation | 10,210 | 42,714 | (39,021 | ) | (23,827 | ) | ||
Deferred revenue | 67,741 | (1,270 | ) | 87,967 | (13,803 | ) | ||
Provisions | (35,803 | ) | (33,377 | ) | (49,122 | ) | (61,759 | ) |
Long-term liabilities | (112 | ) | (17,869 | ) | 1,722 | (32,332 | ) | |
Retirement benefits obligations | (2,759 | ) | (2,058 | ) | (4,075 | ) | (3,303 | ) |
Derivative financial instruments | 1,809 | 141 | 76 | 112 | ||||
Income taxes | (25,832 | ) | (24,344 | ) | (2,887 | ) | 7,083 | |
(125,601 | ) | (75,369 | ) | (186,891 | ) | (105,021 | ) |
b)Net interest paid and income taxes paid are classified within operating activities and are as follows for the three and six months ended March 31:
Three months ended March 31 | Six months ended March 31 | |||
2016 | 2015 | 2016 | 2015 | |
$ | $ | $ | $ | |
Net interest paid | 22,807 | 24,920 | 40,497 | 45,377 |
Income taxes paid | 112,401 | 109,673 | 148,492 | 146,699 |
CGI Group Inc. – Interim Condensed Consolidated Financial Statements for the three and six months ended March 31, 2016 and 2015 11
Notes to the Interim Condensed Consolidated Financial Statements
For the three and six months ended March 31, 2016 and 2015
(tabular amounts only are in thousands of Canadian dollars, except per share data) (unaudited)
9.Segmented information
The following tables present information on the Company’s operations based on its current management structure managed through seven operating segments which are based on where the client's work is delivered from – the geographic delivery model, namely: United States of America (“U.S.”); Nordics; Canada; France (including Luxembourg and Morocco) (“France”); United Kingdom (“U.K.”); Eastern, Central and Southern Europe (primarily Netherlands and Germany) (“ECS”); and Asia Pacific (including Australia, India and the Philippines) (“Asia Pacific”).
The Company has retrospectively revised the segmented information for the comparative period to conform to the segmented information structure in effect as of July 1, 2015.
For the three months ended March 31, 2016 | |||||||||
U.S. | Nordics | Canada | France | U.K. | ECS | Asia Pacific | Total | ||
$ | $ | $ | $ | $ | $ | $ | $ | ||
Segment revenue | 747,572 | 436,251 | 381,071 | 378,954 | 360,506 | 310,219 | 135,476 | 2,750,049 | |
Earnings before net finance costs and income tax expense1 | 121,730 | 46,374 | 81,636 | 43,440 | 43,103 | 29,183 | 25,150 | 390,616 | |
Net finance costs | (22,631 | ) | |||||||
Earnings before income taxes | 367,985 |
1 | Total amortization and depreciation of $100,580,000 included in the U.S., Nordics, Canada, France, U.K., ECS and Asia Pacific operating segments is $23,697,000, $18,301,000, $14,957,000, $8,920,000, $19,603,000, $9,658,000 and $5,444,000, respectively, for the three months ended March 31, 2016. |
For the three months ended March 31, 2015 | ||||||||||||||||
U.S. | Nordics | Canada | France | U.K. | ECS | Asia Pacific | Total | |||||||||
$ | $ | $ | $ | $ | $ | $ | $ | |||||||||
Segment revenue | 698,659 | 424,926 | 385,972 | 330,597 | 333,730 | 308,381 | 118,943 | 2,601,208 | ||||||||
Earnings before net finance costs and income tax expense1 | 108,502 | 49,943 | 77,143 | 40,895 | 37,583 | 30,050 | 19,000 | 363,116 | ||||||||
Net finance costs | (24,471 | ) | ||||||||||||||
Earnings before income taxes | 338,645 |
1 | Total amortization and depreciation of $107,912,000 included in the U.S., Nordics, Canada, France, U.K., ECS and Asia Pacific operating segments is $27,529,000, $16,336,000, $17,550,000, $7,995,000, $20,279,000, $10,590,000 and $7,633,000, respectively, for the three months ended March 31, 2015. |
CGI Group Inc. – Interim Condensed Consolidated Financial Statements for the three and six months ended March 31, 2016 and 2015 12
Notes to the Interim Condensed Consolidated Financial Statements
For the three and six months ended March 31, 2016 and 2015
(tabular amounts only are in thousands of Canadian dollars, except per share data) (unaudited)
9.Segmented information (continued)
For the six months ended March 31, 2016 | |||||||||
U.S. | Nordics | Canada | France | U.K. | ECS | Asia Pacific | Total | ||
$ | $ | $ | $ | $ | $ | $ | $ | ||
Segment revenue | 1,463,580 | 873,064 | 763,970 | 723,774 | 725,834 | 618,981 | 264,523 | 5,433,726 | |
Earnings before restructuring costs, net finance costs and income tax expense1 | 231,458 | 95,349 | 161,768 | 89,069 | 87,894 | 63,199 | 46,003 | 774,740 | |
Restructuring costs | (29,100 | ) | |||||||
Net finance costs | (42,744 | ) | |||||||
Earnings before income taxes | 702,896 |
1 | Total amortization and depreciation of $202,244,000 included in the U.S., Nordics, Canada, France, U.K., ECS and Asia Pacific operating segments is $46,909,000, $36,034,000, $30,442,000, $17,244,000, $39,815,000, $21,157,000 and $10,643,000, respectively, for the six months ended March 31, 2016. |
For the six months ended March 31, 2015 | ||||||||||||||||
U.S. | Nordics | Canada | France | U.K. | ECS | Asia Pacific | Total | |||||||||
$ | $ | $ | $ | $ | $ | $ | $ | |||||||||
Segment revenue | 1,353,243 | 867,766 | 768,121 | 655,902 | 644,428 | 625,383 | 227,620 | 5,142,463 | ||||||||
Earnings before net finance costs and income tax expense1 | 203,629 | 89,168 | 157,883 | 81,772 | 72,756 | 62,785 | 39,172 | 707,165 | ||||||||
Net finance costs | (48,051 | ) | ||||||||||||||
Earnings before income taxes | 659,114 |
1 | Total amortization and depreciation of $213,506,000 included in the U.S., Nordics, Canada, France, U.K., ECS and Asia Pacific operating segments is $55,831,000, $33,024,000, $35,576,000, $16,042,000, $38,853,000, $21,043,000 and $13,137,000, respectively, for the six months ended March 31, 2015. |
The accounting policies of each operating segment are the same as those described in the summary of significant accounting policies (Note 3) of the Company’s consolidated financial statements for the year ended September 30, 2015. Intersegment revenue is priced as if the revenue was from third parties.
CGI Group Inc. – Interim Condensed Consolidated Financial Statements for the three and six months ended March 31, 2016 and 2015 13
Notes to the Interim Condensed Consolidated Financial Statements
For the three and six months ended March 31, 2016 and 2015
(tabular amounts only are in thousands of Canadian dollars, except per share data) (unaudited)
10.Financial instruments
FAIR VALUE
All financial instruments are initially measured at their fair values. Subsequently, financial assets classified as loans and receivables and financial liabilities classified as other liabilities are measured at their amortized cost using the effective interest rate method. Financial assets and liabilities classified as fair value through earnings (“FVTE”) and classified as available-for-sale are measured subsequently at their fair values.
The Company has made the following classifications:
FVTE
Cash and cash equivalents and derivative financial instruments (unless they qualify for hedge accounting). In addition, deferred compensation plan assets within long-term financial assets were designated by management as FVTE upon initial recognition as this reflected management's investment strategy.
Loans and receivables
Trade accounts receivable, cash included in funds held for clients and long-term receivables within long-term financial assets.
Available-for-sale
Long-term bonds included in funds held for clients and in long-term investments within long-term financial assets.
Other liabilities
Accounts payable and accrued liabilities, accrued compensation, long-term debt and clients’ funds obligations.
FAIR VALUE HIERARCHY
Fair value measurements recognized in the balance sheet are categorized in accordance with the following levels:
Level 1: quoted prices (unadjusted) in active markets for identical assets or liabilities;
Level 2: inputs other than quoted prices included in Level 1, but that are observable for the asset or liability, either directly or indirectly; and
Level 3: inputs for the asset or liability that are not based on observable market data.
FAIR VALUE MEASUREMENTS
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
Valuation techniques used to value financial instruments are as follows:
- | The fair value of Senior U.S. and euro unsecured notes, the unsecured committed term loan credit facility, the unsecured committed revolving credit facility and the other long-term debt is estimated by discounting expected cash flows at rates currently offered to the Company for debts of the same remaining maturities and conditions; |
- | The fair value of long-term bonds included in funds held for clients and in long-term investments is determined by discounting the future cash flows using observable inputs, such as interest rate yield curves or credit spreads, or according to similar transactions on an arm's-length basis; |
- | The fair value of foreign currency forward contracts is determined using forward exchange rates at the end of the reporting period; |
- | The fair value of cross-currency swaps and interest rate swaps is determined based on market data (primarily yield curves, exchange rates and interest rates) to calculate the present value of all estimated flows; |
- | The fair value of cash and cash equivalents is determined using observable quotes. |
There were no changes in valuation techniques during the six months ended March 31, 2016.
CGI Group Inc. – Interim Condensed Consolidated Financial Statements for the three and six months ended March 31, 2016 and 2015 14
Notes to the Interim Condensed Consolidated Financial Statements
For the three and six months ended March 31, 2016 and 2015
(tabular amounts only are in thousands of Canadian dollars, except per share data) (unaudited)
10.Financial instruments (continued)
FAIR VALUE MEASUREMENTS (CONTINUED)
The following table presents financial liabilities measured at amortized cost categorized using the fair value hierarchy:
As at March 31, 2016 | As at September 30, 2015 | ||||||||
Level | Carrying amount | Fair value | Carrying amount | Fair value | |||||
$ | $ | $ | $ | ||||||
Financial liabilities for which fair value is disclosed | |||||||||
Other liabilities | |||||||||
Senior U.S. and euro unsecured notes | Level 2 | 1,716,091 | 1,805,379 | 1,765,180 | 1,839,478 | ||||
Unsecured committed revolving credit facility | Level 2 | 150,000 | 150,000 | — | — | ||||
Unsecured committed term loan credit facility | Level 2 | — | — | 129,222 | 129,385 | ||||
Other long-term debt | Level 2 | 24,577 | 23,786 | 23,437 | 22,049 | ||||
1,890,668 | 1,979,165 | 1,917,839 | 1,990,912 |
The following table presents financial assets and liabilities measured at fair value categorized using the fair value hierarchy:
Level | As at March 31, 2016 | As at September 30, 2015 | ||||
$ | $ | |||||
Financial assets | ||||||
Financial assets at fair value through earnings | ||||||
Cash and cash equivalents | Level 2 | 168,919 | 305,262 | |||
Deferred compensation plan assets | Level 1 | 38,110 | 38,238 | |||
207,029 | 343,500 | |||||
Derivative financial instruments designated as hedging instruments | ||||||
Current derivative financial instruments | Level 2 | 22,348 | 26,567 | |||
Long-term derivative financial instruments | Level 2 | 58,686 | 30,771 | |||
81,034 | 57,338 | |||||
Available-for-sale | ||||||
Long-term bonds included in funds held for clients | Level 2 | 196,063 | 196,964 | |||
Long-term investments | Level 2 | 24,219 | 42,202 | |||
220,282 | 239,166 | |||||
Financial liabilities | ||||||
Derivative financial instruments designated as hedging instruments | ||||||
Current derivative financial instruments | Level 2 | 7,394 | 28,106 | |||
Long-term derivative financial instruments | Level 2 | 55,996 | 225 | |||
63,390 | 28,331 |
There were no transfers between Level 1 and Level 2 during the six months ended March 31, 2016.
CGI Group Inc. – Interim Condensed Consolidated Financial Statements for the three and six months ended March 31, 2016 and 2015 ��15
Notes to the Interim Condensed Consolidated Financial Statements
For the three and six months ended March 31, 2016 and 2015
(tabular amounts only are in thousands of Canadian dollars, except per share data) (unaudited)
10.Financial instruments (continued)
FAIR VALUE MEASUREMENTS (CONTINUED)
The following table summarizes the fair value of outstanding derivative financial instruments:
Recorded in | As at March 31, 2016 | As at September 30, 2015 | |
$ | $ | ||
Hedges on net investments in foreign operations | |||
$831,400 cross-currency swap in euro designated as a fixed-to-fixed hedging instrument of the Company’s net investment in European operations ($109,730 as at September 30, 2015) | Long-term assets Current liabilities | 34,606 — | — 22,297 |
Cash flow hedges on future revenue | |||
U.S.$4,500 foreign currency forward contracts to hedge the variability in the expected foreign currency exchange rate between the U.S. dollar and the Canadian dollar (U.S.$9,000 as at September 30, 2015) | Current liabilities | 1,043 | 2,478 |
U.S.$71,131 foreign currency forward contracts to hedge the variability in the expected foreign currency exchange rate between the U.S. dollar and the Indian rupee (U.S.$42,296 as at September 30, 2015) | Current assets Long-term assets Current liabilities Long-term liabilities | 2,880 1,063 680 — | 1,388 1,284 1,220 86 |
$155,250 foreign currency forward contracts to hedge the variability in the expected foreign currency exchange rate between the Canadian dollar and the Indian rupee ($151,916 as at September 30, 2015) | Current assets Long-term assets Current liabilities Long-term liabilities | 11,938 9,519 3 637 | 14,795 16,212 — — |
kr120,350 foreign currency forward contracts to hedge the variability in the expected foreign currency exchange rate between the Swedish krona and the Indian rupee (kr77,100 as at September 30, 2015) | Current assets Long-term assets Current liabilities Long-term liabilities | 979 396 408 89 | 1,279 879 — — |
€19,300 foreign currency forward contracts to hedge the variability in the expected foreign currency exchange rate between the euro and the Indian rupee (€7,300 as at September 30, 2015) | Current liabilities Long-term liabilities | 485 111 | 441 — |
£31,550 foreign currency forward contracts to hedge the variability in the expected foreign currency exchange rate between the British pound and the Indian rupee (£25,200 as at September 30, 2015) | Current assets Long-term assets Current liabilities Long-term liabilities | 3,139 958 — — | 59 12 47 139 |
€90,550 foreign currency forward contracts to hedge the variability in the expected foreign currency exchange rate between the euro and the British pound (€84,000 as at September 30, 2015) | Current assets Long-term assets Current liabilities Long-term liabilities | 3,412 2,709 3,638 941 | 9,044 8,254 — — |
€2,500 foreign currency forward contracts to hedge the variability in the expected foreign currency exchange rate between the euro and the Swedish krona (€5,000 as at September 30, 2015) | Current liabilities | 102 | 339 |
€17,700 foreign currency forward contracts to hedge the variability in the expected foreign currency exchange rate between the euro and the Moroccan dirham (€7,000 as at September 30, 2015) | Current assets Current liabilities Long-term liabilities | — 917 578 | 2 198 — |
€16,650 foreign currency forward contracts to hedge the variability in the expected foreign currency exchange rate between the euro and the Czech koruna (€nil as at September 30, 2015) | Current liabilities Long-term liabilities | 118 55 | — — |
Cash flow hedges on unsecured committed term loan credit facility | |||
$nil interest rate swap floating-to-fixed ($109,730 as at September 30, 2015) | Current liabilities | — | 1,086 |
CGI Group Inc. – Interim Condensed Consolidated Financial Statements for the three and six months ended March 31, 2016 and 2015 16
Notes to the Interim Condensed Consolidated Financial Statements
For the three and six months ended March 31, 2016 and 2015
(tabular amounts only are in thousands of Canadian dollars, except per share data) (unaudited)
10.Financial instruments (continued)
Recorded in | As at March 31, 2016 | As at September 30, 2015 | |
$ | $ | ||
Cash flow hedges on Senior U.S. unsecured notes | |||
U.S.$600,000 cross-currency swaps to Canadian dollar fixed-to-fixed (U.S.$nil as at September 30, 2015) | Long-term liabilities | 53,585 | — |
Fair value hedges on Senior U.S. unsecured notes | |||
U.S.$250,000 interest rate swaps fixed-to-floating (U.S.$250,000 as at September 30, 2015) | Long-term assets | 9,435 | 4,130 |
During the three and six months ended March 31, 2016, the Company repaid in advance, without penalty, the remaining portion of the May 2016 maturing tranche of unsecured committed term loan credit facility for a total amount of $129,736,000. Following the debt repayment, the Company settled, during the three and six months ended March 31, 2016, the related floating-to-fixed interest rate swap with a notional amount of $109,730,000 with no material impact, and settled the related cross-currency swap with a notional amount of $109,730,000.
Also, during the three and six months ended March 31, 2016, the Company entered into cross-currency swap agreements, for a notional amount of U.S.$600,000,000, related to its Senior U.S. unsecured notes and the U.S. tranches of the Senior unsecured notes which have maturity dates ranging between September, 2018 and September, 2024. The cross-currency swaps are designated as cash flow hedges to offset the variability in the exchange rate between the U.S. and Canadian dollar. During the three and six months ended March 31, 2016, the Company also entered into Canadian dollar to euro cross-currency swap agreements for a notional amount of $831,400,000 designated as hedging instruments of the Company’s net investment in European operations.
CGI Group Inc. – Interim Condensed Consolidated Financial Statements for the three and six months ended March 31, 2016 and 2015 17