40-F

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 40-F

(Check one)

¨ Registration statement pursuant to Section 12 of the Securities Exchange Act of 1934

or

þ Annual report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934

For the fiscal year ended September 30, 2014

Commission file number 1-14858

GROUPE CGI INC./CGI GROUP INC.

(Exact name of Registrant as Specified in Its Charter)

CGI Group Inc.

(Translation of Registrant’s Name Into English)

Québec, Canada

(Province or Other Jurisdiction of Incorporation or Organization)

7374

(Primary Standard Industrial Classification Code Number)

[Not Applicable]

(I.R.S. Employer Identification Number)

1350 René-Lévesque Boulevard West, 15th Floor

Montréal, Québec

Canada H3G 1T4

(514) 841-3200

(Address and Telephone Number of Registrant’s Principal Executive Offices)

CGI Technologies and Solutions Inc.

11325 Random Hills

Fairfax, VA22030

(703) 267-8679

(Name, Address and Telephone Number of Agent For Service in the United States)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title Of Each Class    Name Of Each Exchange On Which Registered
Class A Subordinate Voting Shares    New York Stock Exchange

Securities registered or to be registered pursuant to Section 12(g) of the Act:

None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

None

For annual reports, indicate by check mark the information filed with this form:

þ Annual Information Form             þ Audited Annual Financial Statements

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report: 279,311,564 Class A Subordinate Shares, 33,272,767 Class B Shares

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports); and (2) has been subject to such filing requirements for the past 90 days.         Yes X  No        

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or such shorter period that the Registrant was required to submit and post such files). Yes         No          


Undertaking

Registrant undertakes to make available, in person or by telephone, representatives to respond to inquiries made by the Commission staff, and to furnish promptly, when requested to do so by the Commission staff, information relating to: the securities registered pursuant to Form 40-F; the securities in relation to which the obligation to file an annual report on Form 40-F arises; or transactions in said securities.

Controls and Procedures

The Registrant has established a system of controls and other procedures designed to ensure that information required to be disclosed in its periodic reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. These disclosure controls and procedures have been evaluated under the direction of the Registrant’s Chief Executive Officer and Chief Financial Officer as of the end of the Registrant’s most recently completed fiscal year on September 30, 2014. Based on such evaluations, the Chief Executive Officer and Chief Financial Officer have concluded that the disclosure controls and procedures are effective. No change was made in the Registrant’s internal controls over financial reporting during the fiscal year ended September 30, 2014 that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting. No significant changes were made in the Registrant’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

Audit Committee

The Audit and Risk Management Committee of the Board of Directors is composed entirely of unrelated directors who meet the independence and experience requirements of the New York Stock Exchange, the Toronto Stock Exchange, the U.S. Securities and Exchange Commission rules and National Instrument 52-110, as amended.

The Audit and Risk Management Committee is composed of Mr. Gilles Labbé, Chair of the committee, and Messrs. Jean Brassard, Richard B. Evans and Joakim Westh.

The Registrant’s Board of Directors has determined that the following members of the Audit and Risk Management Committee of the Board of Directors are “audit committee financial experts” within the meaning of paragraph (8) of General Instruction B to Form 40-F:

–     Gilles Labbé

Principal Accountant Fees and Services

In order to satisfy itself as to the independence of the external auditors, the Audit and Risk Management Committee has adopted an auditor independence policy which covers (a) the services that may and may not be performed by the external auditors, (b) the governance procedures to be followed prior to retaining services from the external auditors, and (c) the responsibilities of the key participants. The following is a summary of the material provisions of the policy.

Performance of Services

Services are either acceptable services or prohibited services.

The acceptable services are (a) audit and review of financial statements, (b) prospectus work, (c) audit of pension plans, (d) special audits on control procedures, (e) tax planning services on mergers and acquisitions activities, (f) due diligence relating to mergers and acquisitions, (g) tax services related to transfer pricing, (h) sales tax planning, (i) research and interpretation related to taxation, (j) research relating to accounting issues, (k) proposals and related services for financial structures and large tax planning projects, (l) preparation of tax returns and (m) all other services that are not prohibited services.

 

- 2 -


The prohibited services are (a) bookkeeping services, (b) design and implementation of financial information systems, (c) appraisal or valuation services or fairness opinions, (d) actuarial services, (e) internal audit services, (f) management functions, (g) human resources functions, (h) broker-dealer services, (i) legal services, (j) services based on contingency fees and (k) expert services.

Governance Procedures

The following control procedures are applicable when considering whether to retain the external auditors’ services:

For all services falling within the permitted services category, whether they are audit or non-audit services, a request for approval must be submitted to the Audit and Risk Management Committee through the Executive Vice-President and Chief Financial Officer prior to engaging the auditors to perform the services.

In the interests of efficiency, certain permitted services are pre-approved quarterly by the Audit and Risk Management Committee and thereafter only require approval by the Executive Vice-President and Chief Financial Officer as follows:

 

   

The Audit and Risk Management Committee can pre-approve envelopes for certain services to pre-determined dollar limits on a quarterly basis;

   

Once pre-approved by the Audit and Risk Management Committee, the Executive Vice-President and Chief Financial Officer may approve the services prior to the engagement;

   

For services not captured within the pre-approved envelopes and for costs in excess of the pre-approved amounts, separate requests for approval must be submitted to the Audit and Risk Management Committee;

   

At each meeting of the Audit and Risk Management Committee a consolidated summary of all fees by service type is presented including a breakdown of fees incurred within each of the pre-approved envelopes.

Fees Billed by the External Auditors

During the years ended September 30, 2014 and September 30, 2013, CGI’s external auditors billed the following fees for their services:

 

Service retained   

Fees billed

 

  

 

2014

 

  

2013

 

 

Audit fees

 

  

$7,946,682

 

  

 

$8,442,468

 

 

Audit related fees(a)

 

  

 

$1,055,796

 

  

 

$1,144,061

 

 

Tax fees(b)

 

  

$596,072

 

  

 

$2,282,078

 

 

All other fees(c)

 

  

 

-

 

  

 

$249,629

 

 

Total fees billed

 

  

 

$9,598,550

 

  

 

$12,118,236

 

 

  (a) The audit related fees billed by the external auditors for the years ended September 30, 2014 and 2013 were in relation to service organization control procedures audits and assistance, information technology assistance services, and 401(k) and special audits.  

 

  (b) The tax fees billed by the external auditors for the years ended September 30, 2014 and 2013 were in relation to tax compliance, advisory services and human capital services.  

 

  (c) The other fees billed by the external auditors for the year ended September 30, 2013 were in relation to other advisory services.  

 

- 3 -


Code of Ethics

In addition to its Code of Ethics and Business Conduct (including the CGI Anti-Corruption Policy) that applies to all the Registrant’s employees, officers and directors, the Registrant has adopted an Executive Code of Conduct that applies specifically to the Registrant’s principal executive officer, principal financial officer, principal accounting officer or controller, or other persons performing similar functions (collectively, the “Officers”). The Executive Code of Conduct is designed to deter wrongdoing and to promote:

 

    Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;
    Full, fair, accurate, timely, and understandable disclosure in reports and documents that the Registrant files with, or submits to, the Securities and Exchange Commission and in other public communications made by the Registrant;
    Compliance with applicable governmental laws, rules and regulations;
    The prompt internal reporting of violations of the Executive Code of Conduct to an appropriate person or persons identified in the Executive Code of Conduct; and
    Accountability for adherence to the Executive Code of Conduct.

The Registrant’s Executive Code of Conduct, its Code of Ethics and Business Conduct (including the CGI Anti-Corruption Policy) have been posted on the Registrant’s website at http://www.cgi.com.

The Board of Directors monitors compliance with the Executive Code of Conduct and the Code of Ethics and Business Conduct (including the CGI Anti-Corruption Policy) and, under the Board of Directors charter, is responsible for any waivers of such codes’ provisions granted to directors or officers. No such waivers have been granted to date.

Corporate Governance Practices

CGI’s corporate governance practices conform to those followed by U.S. domestic companies under the New York Stock Exchange listing standards.

Off-balance sheet arrangements

The Registrant does not enter into off-balance sheet financing as a matter of practice except for the use of operating leases for office space, computer equipment and vehicles as well as accounts receivable factoring, none of which are off-balance sheet arrangements within the meaning of paragraph (11) of General Instruction B to Form 40-F.

As disclosed in Note 30 to the Registrant’s Consolidated Financial Statements, in the normal course of business, the Registrant enters 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 the Company 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. The nature of most indemnification undertakings prevent the Registrant from making a reasonable estimate of the maximum potential amount the Registrant could be required to pay counterparties, as the agreements do not specify a maximum amount and the amounts are dependent upon the outcome of future contingent events, the nature and likelihood of which cannot be determined at this time. The Registrant does not expect that any sum it may have to pay in connection with these guarantees will have a materially adverse effect on its Consolidated Financial Statements.

 

- 4 -


Tabular Presentation of Contractual Obligations

As of September 30, 2014, the Registrant’s commitments under the terms of contractual obligations with various expiration dates, primarily for the rental of premises, computer equipment used in outsourcing contracts and long-term service agreements, were as follows:

 

 

 Commitment type

 

    

 

Total

 

   

 

Less than 1 year

 

   

 

2nd and 3rd
years

 

   

 

4th and 5th
years

 

   

 

After 5 years

 

 

 In thousands of CAD

            

 Long-term debt

       2,632,873        48,048        1,162,658        337,010        1,085,157   

 Estimated interests on long-term debt

       477,658        89,709        137,788        105,742        144,419   

 Finance lease obligations

       61,698        32,319        28,506        873          

 Estimated interests on finance lease obligations

       2,699        1,494        1,184        21          

 Operating leases

            

    Rental of office space

       1,287,438        278,159        459,651        326,096        223,532   

    Computer equipment

       42,153        21,349        17,223        3,427        154   

    Automobiles

       84,091        36,862        33,250        10,151        3,828   

 Long-term service agreements and other

       190,083        74,291        92,875        22,917          

 Total contractual obligations

       4,778,693        582,231        1,933,135        806,237        1,457,090   

Our required benefit plan contributions have not been included in this table as such contributions depend on periodic actuarial valuations for funding purposes. Our contributions to defined benefit plans are estimated at $20.1 million for fiscal 2015 as described in note 17 to the financial statements.

Information to be Filed on This Form

The following materials are filed as a part of this Annual Report:

 

1. Annual Information Form for the fiscal year ended September 30, 2014

 

2. Audited Annual Financial Statements for the fiscal year ended September 30, 2014

 

3. Management’s Discussion and Analysis of Financial Position and Results of Operations

The following documents are filed as exhibits to this Annual Report:

 

23.1 Consent of Ernst & Young LLP

 

99.1 Certification of the Registrant’s Chief Executive Officer required pursuant to Rule 13a-14(a).

 

99.2 Certification of the Registrant’s Chief Financial Officer required pursuant to Rule 13a-14(a).

 

99.3 Certification of the Registrant’s Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

99.4 Certification of the Registrant’s Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

- 5 -


 

 

LOGO

 

 

 

ANNUAL INFORMATION FORM

For the fiscal year ended

September 30, 2014

 

 

 

 

December 12, 2014


TABLE OF CONTENTS

 

INCORPORATION AND DESCRIPTION OF CAPITAL STOCK

     1   

Corporate Structure

     1   

Capital Structure

     2   

Stock Splits

     2   

Market for Securities, Trading Price and Volume

     2   

Normal Course Issuer Bid and Share Repurchases

     3   

CORPORATE GOVERNANCE

     3   

Board and Standing Committee Charters and Codes of Ethics

     3   

Audit Committee Information

     3   

Directors and Officers

     3   

Directors

     3   

Officers

     3   

Ownership of Securities on the Part of Directors and Officers

     6   

DESCRIPTION OF CGI’S BUSINESS

     6   

Mission and Vision

     6   

Business Structure

     7   

Services Offered by CGI

     7   

Markets for CGI’s services

     8   

Human Resources

     8   

CGI Offices and Global Delivery Model

     9   

Commercial Alliances

     10   

Quality Processes

     10   

The IT Services Industry

     11   

Industry Trends and Outlook

     11   

Vision and Strategy

     11   

Competitive Environment

     12   

Significant Developments of the Three Most Recent Fiscal Years

     13   

Key Performance Measures

     13   

Fiscal Year ended September 30, 2014

     15   

Fiscal Year ended September 30, 2013

     17   

Fiscal Year ended September 30, 2012

     18   

FORWARD LOOKING INFORMATION AND RISKS AND UNCERTAINTIES

     21   

Forward-Looking Information

     21   

Risks and Uncertainties

     21   

Risks Related to the Market

     21   

Risks Related to our Industry

     22   

Risks Related to our Business

     23   

LEGAL PROCEEDINGS

     29   

TRANSFER AGENT AND REGISTRAR

     29   

AUDITORS

     29   

ADDITIONAL INFORMATION

     29   

APPENDIX A

     30   

Fundamental Texts

     30   

 

i

 


This Annual Information Form is dated December 12, 2014 and, unless specifically stated otherwise, all information disclosed in this form is provided as at September 30, 2014, the end of CGI’s most recently completed fiscal year. All dollar amounts are in Canadian dollars, unless otherwise stated.

INCORPORATION AND DESCRIPTION OF CAPITAL STOCK

Corporate Structure

CGI Group Inc. (the “Company”, “CGI”, “we”, “us” or “our”) was incorporated on September 29, 1981 under Part IA of the Companies Act (Quebec), predecessor to the Business Corporations Act (Quebec), which came into force on February 14, 2011 and which now governs the Company. The Company continued the activities of Conseillers en gestion et informatique CGI Inc., which was originally founded in 1976. The executive and registered offices of the Company are situated at 1350 boul. René-Lévesque Blvd. West, 15th Floor, Montreal, Quebec Canada H3G 1T4. CGI became a public company on December 17, 1986, upon completing an initial public offering of its Class A subordinate voting shares (“Class A subordinate voting shares”).

The activities of the Company are conducted either directly or through subsidiaries. The table below lists the principal subsidiaries of each reportable segment of the Company as at September 30, 2014, each of which is directly or indirectly wholly-owned by the Company. Certain subsidiaries whose total assets did not represent more than 10% of the Company’s consolidated assets or whose revenues did not represent more than 10% of the Company’s consolidated revenues as at September 30, 2014, have been omitted. The subsidiaries that have been omitted represent, as a group, less than 20% of the consolidated assets and revenues of the Company as at September 30, 2014. This table omits subsidiaries whose primary role is to hold investments in other CGI subsidiary entities.

 

  Canada

  Conseillers en Gestion et Informatique CGI Inc.
  CGI Information Systems and Management Consultants Inc.

  United States of America

  CGI Technologies and Solutions Inc.
  CGI Federal Inc.
  Stanley Associates, Inc.

  Nordics, Southern Europe and South America

  CGI Sverige AB
  CGI Suomi Oy

  Central and Eastern Europe (including the Netherlands, Germany and Belgium)

  CGI Nederland B.V.
  CGI (Germany) GmbH & Co. KG1

  United Kingdom

  CGI IT UK Limited

  Asia Pacific (including Australia, India, the Philippines and the Middle East)

  CGI Information Systems and Management Consultants Private Limited

  France (including Luxembourg and Morocco)

  CGI France SAS

 

1 

On December 1, 2014, CGI (Germany) GmbH & Co. KG merged into CGI Deutschland Ltd. & Co. KG

In addition to its principal operating subsidiaries, CGI has a number of other subsidiaries that serve specific markets, serve as holding companies, or serve other corporate purposes.

 

1

 


Capital Structure

The Company’s authorized share capital consists of an unlimited number of Class A subordinate voting shares carrying one vote per share and an unlimited number of Class B shares (multiple voting) (“Class B shares”) carrying 10 votes per share, all without par value, of which, as of December 12, 2014, 280,336,500 Class A subordinate voting shares and 33,272,767 Class B shares, were issued and outstanding. These shares represent respectively 45.7% and 54.3% of the aggregate voting rights attached to the outstanding Class A subordinate voting shares and Class B shares. Two classes of preferred shares also form part of CGI’s authorized capital: an unlimited number of First Preferred Shares, issuable in series, and an unlimited number of Second Preferred Shares, also issuable in series. As of December 12, 2014 there were no preferred shares outstanding.

The Company incorporates by reference the disclosure contained under the headings Class A Subordinate Voting Shares and Class B Shares on page 3, and First Preferred Shares and Second Preferred Shares on page 5 of CGI’s Management Proxy Circular dated December 12, 2014 which was filed with Canadian securities regulatory authorities and which is available at www.sedar.com and on CGI’s web site at www.cgi.com. A copy of the Management Proxy Circular will be provided promptly to shareholders upon request.

Stock Splits

As of December 12, 2014, the Company had proceeded with four subdivisions of its issued and outstanding Class A subordinate voting shares as follows:

 

   

August 12, 1997 on a two for one basis;

   

December 15, 1997 on a two for one basis;

   

May 21, 1998 on a two for one basis; and

   

January 7, 2000 on a two for one basis.

Market for Securities, Trading Price and Volume

CGI’s Class A subordinate voting shares are listed for trading on the Toronto Stock Exchange (“TSX”) under the symbol GIB.A and on the New York Stock Exchange, under the symbol GIB. A total of 235,407,599 Class A subordinate voting shares were traded on the TSX during the year ended September 30, 2014 as follows:

 

Month  

 

High(a)

($)

 

 

Low(a)

($)

  Volume

October 2013

  38.66   34.66   23,797,427

November 2013

  41.47   34.36   22,718,118

December 2013

  39.24   35.35   28,036,045

January 2014

  35.84   32.71   37,592,451

February 2014

  37.40   32.81   19,850,061

March 2014

  36.76   33.76   17,145,067

April 2014

  40.93   33.98   19,836,536

May 2014

  40.21   35.42   16,529,824

June 2014

  38.73   36.08   12,477,732

July 2014

  39.89   36.76   13,339,257

August 2014

  39.83   36.52   12,254,080

 

2

 


Month  

High(a)

($)

 

Low(a)

($)

  Volume

September 2014

  40.17   37.15   11,831,001

 

  (a) The high and low prices reflect the highest and lowest prices at which a board lot trade was executed in a trading session during the month.  

Normal Course Issuer Bid and Share Repurchases

On January 29, 2014, CGI announced that it was renewing its normal course issuer bid to repurchase up to 10% of the Company’s public float of its issued and outstanding Class A subordinate voting shares during the normal course issuer bid term that commenced on February 11, 2014 and will expire on February 10, 2015 at the latest. See Description of CGI’s Business – Significant developments of the Three Most Recent Fiscal Years – Fiscal Year ended September 30, 2014 – Share Repurchase Program later in this document.

CORPORATE GOVERNANCE

Board and Standing Committee Charters and Codes of Ethics

CGI’s Code of Ethics and Business Conduct, its Executive Code of Conduct, the charter of the Board of Directors and the charters of the standing committees of the Board of Directors, including the charter of the Audit and Risk Management Committee, are set out in CGI’s Fundamental Texts which are annexed as Appendix A to this Annual Information Form.

Audit Committee Information

The Company incorporates by reference the disclosure contained under the heading Expertise and financial and operational literacy on page 43 and following and the disclosure under the heading Report of the Audit and Risk Management Committee on page 52 and following of CGI’s Management Proxy Circular dated December 12, 2014 which was filed with Canadian securities regulatory authorities and which is available at www.sedar.com and on CGI’s web site at www.cgi.com. A copy of the Management Proxy Circular will be provided promptly to shareholders upon request to the Company.

Directors and Officers

Directors

The Company incorporates by reference the disclosure under the heading Nominees for Election as Directors relating to the Company’s directors contained on pages 9 to 16, and the table on Board of Directors committee membership on page 41 of CGI’s Management Proxy Circular dated December 12, 2014 which was filed with Canadian securities regulatory authorities and which is available at www.sedar.com and on CGI’s web site at www.cgi.com. A copy of the Management Proxy Circular will be provided promptly to shareholders upon request to the Company.

Officers

The following table states the names of CGI’s senior officers, their place of residence and their principal occupation as at December 12, 2014:

 

 

Name and place of residence

  

 

Principal occupation

João Baptista

London, United Kingdom

   President, Nordics, Southern Europe and South America

 

3

 


 

Name and place of residence

  

 

Principal occupation

Jean-Michel Baticle

Precy sur Oise, France

   President, France (including Luxembourg and Morocco)

François Boulanger

Brossard, Quebec

Canada

   Executive Vice-President and Chief Financial Officer1

Jame Cofran

Annapolis, Maryland

USA

   Senior Vice-President and Chief Marketing Officer

Benoit Dubé

St-Lambert, Quebec

Canada

   Executive Vice-President, Chief Legal Officer and Deputy Corporate Secretary

Serge Dubrana

Asnières sur Seine

France

   President, Central and Eastern Europe

Julie Godin

Verdun (Nuns’ Island), Quebec

Canada

   Executive Vice-President, Global Human Resources and Strategic Planning

Serge Godin

Westmount, Quebec

Canada

   Founder and Executive Chairman of the Board

Lorne Gorber

Longueuil, Quebec

Canada

   Senior Vice-President, Global Communications and Investors Relations

Timothy W. Gregory

Chislehurst, Kent

United Kingdom

   President, United Kingdom

Colin Holgate

Pymble, Sydney

Australia

   President, Asia Pacific

André Imbeau

Beloeil, Quebec

Canada

   Founder, Vice-Chairman of the Board and Corporate Secretary

Kevin Linder

Montreal, Quebec

Canada

   Senior Vice-President and Corporate Controller2

Eva Maglis

Montreal, Quebec

Canada

   Executive Vice-President and Global Chief Information Officer

Claude Marcoux

Sainte-Foy, Quebec

Canada

   Chief Operating Officer, Canada

Douglas McCuaig

Toronto, Ontario

Canada

   Executive Vice-President, Global Client Transformation Services

Luc Pinard

St-Lambert, Quebec

Canada

   Executive Vice-President, Corporate Performance

Michael E. Roach

Outremont, Quebec

Canada

   President and Chief Executive Officer

Daniel Rocheleau

Longueuil, Quebec

Canada

   Executive Vice-President and Chief Business Engineering Officer

 

4

 


 

Name and place of residence

  

 

Principal occupation

Jacques Roy

Boucherville, Quebec

Canada

   Senior Vice-President, Finance and Treasury

George Schindler

Fairfax, Virginia

USA

   President, United States

Claude Séguin

Montreal, Quebec

Canada

   Senior Vice-President, Corporate Development and Strategic Investments

 

  1. As at September 30, 2014, R. David Anderson was the Executive Vice-President and Chief Financial Officer of the Company. Mr. François Boulanger succeeded Mr. Anderson in such function effective October 1, 2014.
  2. As at September 30, 2014, François Boulanger was the Senior Vice-President and Corporate Controller of the Company. Mr. Kevin Linder was appointed Senior Vice-President and Corporate Controller, effective October 1, 2014.

Except as noted below, all of the officers named in the table have either held the position set out opposite their name, or other executive or equivalent management functions in the Company or its subsidiaries during the last five years.

João Baptista was appointed President, Nordics, Southern Europe and South America on August 20, 2012. Prior to his appointment as President, Nordics, Southern Europe and South America with the Company, Mr. Baptista was Chief Executive Officer Northern and Central Europe (2010-2012) and Chief Executive of International (2008-2009) with Logica plc (“Logica”).

Jean-Michel Baticle was appointed President, France (including Luxembourg and Morocco) on June 18, 2013. Mr. Baticle joined the Company in 1989 as Oracle Offerings Leader and occupied various positions before becoming Vice President, Regions in 2011. In 2012 M. Baticle was promoted to Senior Vice-President, Regions.

François Boulanger was appointed Senior Vice-President and Corporate Controller on October 1, 2008. Mr. Boulanger was appointed Executive Vice-President and Chief Financial Officer effective October 1, 2014.

Jame Cofran was appointed as Senior Vice-President and Chief Marketing Officer on May 4, 2012. Prior to this appointment, he served as the Company’s Global Marketing Lead for the Financial Services industry since 2009. Mr. Cofran was the U.S. Banking & Investments Industry Lead from 2007 and before that he lead the global Credit Solutions Group.

Benoit Dubé was appointed Executive Vice-President, Chief Legal Officer and Deputy Corporate Secretary on June 4, 2010 and prior to his appointment was a Vice-President in the Company’s Legal Department.

Serge Dubrana was appointed President, Central and Eastern Europe on August 20, 2012 and prior to his appointment was Chief Executive Officer Technology & Alliances (2008-2009), Chief Executive Officer Global operations & International (2010-2011) and Group Chief Operating Officer (2012) at Logica.

Julie Godin was appointed Executive Vice-President, Global Human Resources and Strategic Planning, on September 1, 2012. Ms. Godin joined CGI as Administrative Vice-President and was appointed Senior Vice-President, Human Resources and Strategic Planning on July 26, 2010.

Lorne Gorber was appointed Senior Vice-President, Global Communications and Investor Relations on October 1, 2010. Mr. Gorber previously served the Company as Vice-President, Global Communications and Investor Relations since October 2006.

 

5

 


Timothy W. Gregory was appointed President, United Kingdom on August 20, 2012 and prior to his appointment was President, Europe and Australia with the Company (2011-2012) and Business Unit Leader UK (2009-2011).

Colin Holgate was appointed President, Asia-Pacific on August 20, 2012 and prior to his appointment was Chief Executive Officer Australia at CGI Technologies and Solutions Australia Pty Limited (formerly known as Logica Australia Pty Ltd) (2007-2010), Chief Executive officer Asia Pacific (2010-2011) and Managing Director, Asia Pacific, Middle East and Africa (2011-2012) at Logica.

Kevin Linder was appointed as Senior Vice-President and Corporate Controller on October 1, 2014. Prior to this appointment, he served as Vice-President Financial Business Services (2013–2014), Vice-President Finance, Canada (2011–2013), and Vice-President Corporate Reporting (2006–2011).

Eva Maglis was appointed Executive Vice-President and Global Information Officer on June 1, 2012. Prior to her appointment, Ms. Maglis served as President, Global Infrastructure Services (since May 27, 2011) and was previously Senior Vice-President and General Manager responsible for CGI’s global infrastructure services, solutions and consulting (since October 1, 2008). She has been an officer of the Company since July 26, 2010.

Doug McCuaig was appointed Executive Vice-President, Global Client Transformation Services on January 30, 2013. Prior to his appointment, Mr. McCuaig served as President, Canada (since June 4, 2010) and was previously a Senior Vice-President of the Company.

Luc Pinard was appointed Executive Vice-President, Corporate Performance on August 3, 2011. Prior to such appointment, Mr. Pinard was Executive Vice-President, Chief Technology and Quality Officer of the Company.

Prior to his appointment as Chief Operating Officer, Canada on January 30, 2013, Mr. Marcoux was Chief Operations Officer (since August 17, 2012) and Senior Vice-President and General Manager (since July 26, 2010) of the Company.

George Schindler was appointed President, United States on September 22, 2014. Previously, he served as President, United States and Canada (since January 30, 2013), President, United States (since September 28, 2011) and President, CGI Federal (from 2006).

Ownership of Securities on the Part of Directors and Officers

The Company incorporates by reference the disclosure under the heading Principal Holders of Class A Subordinate Voting Shares and Class B Shares on page 6 of CGI’s Management Proxy Circular dated December 12, 2014 which was filed with Canadian securities regulatory authorities and which is available at www.sedar.com and on CGI’s web site at www.cgi.com. A copy of the Management Proxy Circular will be provided promptly to shareholders upon request to the Company.

DESCRIPTION OF CGI’S BUSINESS

Mission and Vision

The mission of CGI is to help its clients with professional services of outstanding quality, competence and objectivity, delivering the best solutions to fully satisfy client objectives in information technology (“IT”), business processes and management. In all we do, we foster a culture of partnership, intrapreneurship and integrity, building a global IT and business process services (“BPS”) company. CGI’s vision is to be a global world-class IT and BPS leader helping our clients succeed.

 

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CGI’s Mission, Vision, Dream and Values are explained in the Company’s Fundamental Texts, which are annexed as Appendix A, and are posted on the Company’s web site at www.cgi.com.

Business Structure

The Company is managed through the following seven operating segments, namely: United States of America (“U.S.”); Nordics, Southern Europe and South America (“NSESA”); Canada; France (including Luxembourg and Morocco) (“France”); United Kingdom (“U.K.”); Central and Eastern Europe (primarily the Netherlands and Germany) (“CEE”); and Asia Pacific (including Australia, India and the Philippines) (“Asia Pacific”). Please refer to section 3.4 and 3.6 of CGI’s Management’s Discussion and Analysis for Fiscal Year 2014 and to Note 28 of our audited consolidated financial statements for additional information on our segments.

To assist in better understanding the operational performance of our Company since the acquisition of Logica plc (“Logica”) in 2012, we refer to our operations in two broad groupings. Our activities prior to Logica were predominantly comprised of the Canada and the U.S. segments which we refer to as our North American operations or segments. The acquired operations, which we refer herein as our European operations or segments, is comprised of the NSESA, France, U.K., CEE and Asia Pacific segments.

The following table provides a summary of the year-over-year changes in our revenue, in total and by segment, in fiscal 2014 and 2013:

 

Segment      2014          2013    

In thousands of CAD

             

U.S. revenue

         2,664,876                     2,512,530       

NSESA revenue

         2,090,240                     2,010,693       

Canada revenue

     1,638,320                    1,685,723       

France revenue

     1,333,792                    1,273,604       

U.K. revenue

     1,283,847                    1,158,520       

CEE revenue

     1,063,533                    1,003,950       

Asia Pacific revenue

     425,084                    439,604       

Total

     10,499,692                    10,084,624       

Services Offered by CGI

CGI provides high-end IT and management consulting services, systems integration and management of IT and business functions (outsourcing). The Company’s client-proximity model provides for CGI services and solutions to be delivered in a number of ways and considering a number of factors: onsite at client premises; or from any combination of onsite, near-shore and/or offshore delivery centers located throughout the world.

We offer the following services:

 

   

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

 

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these agreements, we implement our quality processes and practices to improve the efficiency of the clients’ operations. We may 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, claims processing, and document management services. Outsourcing contracts typically have terms from five to ten years.

CGI has a wide range of proprietary business solutions that help shape opportunities and drive value for our clients and shareholders, including the following:

 

   

Momentum™ is an integrated enterprise resource planning suite in use by over 85 federal organizations across the three branches of the U.S. federal government, including 16 agencies subject to the Chief Financial Officer and Federal Financial Reform Act of 1990. Momentum™ is provided as an on-premises implementation, as a managed service hosted in CGI’s data center, or as “software as a service” (subscription based offering for the software).

 

   

CGI’s leading enterprise resource planning solution, CGI Advantage®, helps state and local governments improve their back office operations and better serve their citizens with a full suite of built-for-government tools, including financial management, payroll, budgeting, human resources management, procurement, permitting, case management and business intelligence. CGI Advantage® supports operations across 400+ implementations spanning states, cities and counties. Our clients include 23 state governments, the two largest US cities by population and four of the six largest counties by population, including the largest. CGI Advantage® is provided as an on-premise implementation, as a managed service hosted in CGI’s data center or as a Software as a Service (SaaS) hosted in CGI’s secure community cloud.

 

   

CGI’s Credit Services Solutions, including Collections360®, Gateway360®, CACS™, CACS-G™, ACAPS™, Bureaulink™, Strata™ and other components, are in use by hundreds of businesses around the world to improve their consumer and small business credit operations.

Markets for CGI’s Services

CGI offers its end-to-end services to a focused set of industry vertical markets where we have developed extensive and deep subject matter expertise. This allows us to fully understand our clients’ business realities and to have the knowledge and solutions needed to advance their business goals. Our targeted vertical markets include: financial services, government, health, telecommunications & utilities, manufacturing, retail and distribution (“MRD”), which together account for more than 90% of global IT spend.

In addition, CGI’s proprietary business solutions include Enterprise Resource Planning solutions, energy management, credit and debt collections, tax management, claims auditing and fraud detection.

Human Resources

As of September 30, 2014, CGI had approximately 68,000 employees, whom we refer to as members.

In order to encourage the high degree of commitment necessary to ensure the quality and continuity of client service, CGI, for several years, has offered its members the right to acquire Class A subordinate voting shares pursuant to a Share Purchase Plan. Among the countries in which we currently offer the Share Purchase Plan, approximately 70% of our employees were also owners of CGI through our Share Purchase Plan. Also, from the beginning, the Company has had a Profit Participation Plan which, from 1990 onwards, has been based on the performance of its business units and overall corporate results.

 

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CGI Offices and Global Delivery Model

CGI and its affiliated companies operate from more than 400 offices. CGI also serves its clients from global delivery centers located on four continents. These delivery centers enable CGI to provide its clients with the right mix of onsite, nearshore and offshore IT services that best suits their business needs.

CGI’s delivery centers and its main offices are listed below:

 

Canada

Burnaby, BC

  Laval, QC   Ottawa, ON   Sherbrooke, QC

Calgary, AB

  Markham, ON   Quebec City, QC   Stratford, PEI

Edmonton, AB

  Mississauga, ON   Regina, SK   Toronto, ON

Fredericton, NB

  Moncton, NB   Saguenay, QC   Victoria, BC

Halifax, NS

  Montréal, QC   Saskatoon, SK  
United States

Albany, NY

  Columbus, OH   Lawton, OK   Sacramento, CA

Alexandria, VA

  Dallas / Fort Worth, TX   Lebanon, VA   San Angelo, TX

Andover, MA

  Dumfries, VA   Los Angeles, CA   San Antonio, TX

Annapolis Junction, MD

  Durham, VA   Manassas, VA   San Diego, CA

Atlanta, GA

  Fairfax, VA   New York, NY   Sierra Vista, AZ

Baltimore, MD

  Houston, TX   Norfolk, VA   Somersworth, NH

Belton, TX

  Huntsville, AL   North Charleston, SC   Troy, AL

Cleveland, OH

  Lafayette, LA   Phoenix, AZ   Washington, DC

Columbia, SC

  Lakewood, CO    
Europe, Asia Pacific and Africa

Aarhus, Denmark

  Düsseldorf, Germany   Leinfelden-Echterdingen, Germany   Paris, France

Amiens, France

  Edinburgh, U.K.   Lille, France   Porto, Portugal

Arnhem, Netherlands

  Eindhoven, Netherlands   Lima, Peru   Prague, Czech Republic

Ballerup, Denmark

  Espoo, Finland   Linköping, Sweden   Rabat, Morocco

Bangalore, India

  Frankfurt, Germany   Lisbon, Portugal   Reading, U.K.

Bertrange, Luxembourg

  Gävle, Sweden   London, U.K.   Rennes, France

Birmingham, U.K.

  Gloucester, U.K.   Lyon, France   Riihimäki, Finland

Bordeaux, France

  Göteborg, Sweden   Madrid, Spain   Rotterdam, Netherlands

Borlänge, Sweden

  Grenoble, France   Málaga, Spain   Sacavém, Portugal

Bratislava, Slovakia

  Groningen, Netherlands   Malmö, Sweden   Santiago, Chile

Bremen, Germany

  Hamburg, Germany   Manila, Philippines   São Paulo, Brazil

Bridgend, U.K.

  Heerlen, Netherlands   Melbourne, Australia   Sintra, Portugal

Bristol, U.K.

  Helsinki, Finland   Milton Keynes, U.K.   St. Albans, U.K.

Brno, Czech Republic

  Hobart, Australia   Mogi das Cruzes, Brazil   Stavanger, Norway

Bromölla, Sweden

  Hoofddorp, Netherlands   Montpellier, France   Stockholm, Sweden

Caracas, Venezuela

  Hyderabad, India   Mumbai, India   Strasbourg, France

Casablanca, Morocco

  Karlstad, Sweden   Munich, Germany   Sundsvall, Sweden

Chennai, India

  Köln / Bonn, Germany   Nantes, France   Sydney, Australia

Clermont-Ferrand, France

  Krakow, Poland   Nice, France   Tampere, Finland

Darmstadt, Germany

  Kuala Lumpur, Malaysia   Oslo, Norway   Toulouse, France

Didsbury, U.K.

  Lahti, Finland   Östersund, Sweden   Turku, Finland

Diegem, Belgium

  Leatherhead, U.K.   Oulu, Finland   Warsaw, Poland

‡ indicates cities where CGI operates global delivery centres.

All of CGI’s offices are located in rented premises with the exception of the following properties, which are owned by CGI: one property in Belton, Texas; one property in Lebanon, Virginia where the Land is leased with a right to acquire; one property in Montreal, Quebec where one of our data centres is located; two properties in Mississauga, Ontario, one of which is a data centre and the other of which is an adjacent

 

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office building; one property in Santiago, Chile; one property in Riihimäki, Finland; one property in Mumbai, India consisting of an office building, but that is built on land that we lease; two properties in Odivelas, Portugal; one property in Bromölla, Sweden; two properties in Bridgend, United Kingdom, one of which is an office building and the other of which is a parcel of land; and one property in Caracas, Venezuela.

Commercial Alliances

CGI currently has commercial alliance agreements with various business partners. These non-exclusive commercial agreements with hardware and software providers allow the Company to provide its clients with high quality technology, often on advantageous commercial terms. CGI’s business partners include prominent hardware and software providers.

Quality Processes

CGI’s ISO 9001 certified operations that are reflected in its management frameworks ensure that its clients’ objectives are clearly defined, that projects are properly scoped and that the necessary resources are applied to meet objectives. These processes ensure that clients’ requirements drive CGI’s solutions. Clients are constantly kept informed; their degree of satisfaction is regularly measured and part of the incentive remuneration of CGI managers is linked to the results.

In 1993, the Company began working towards obtaining ISO 9001 certification for the portion of its operations covered by its Project Management Framework. CGI’s Quebec City office was granted ISO 9001 certification in June 1994, which allowed CGI to become North America’s first organization in the IT consulting field to receive ISO 9001 certification for the way in which it managed projects. Since 1995, CGI expanded the ISO 9001 certification throughout its Canadian, U.S. and international offices as well as its corporate headquarters. Over the past several years, in the context of CGI’s high growth rate, its ISO certified quality system has been a key ingredient in spreading its culture, in part because it helps to integrate new members successfully. As part of the Logica integration completed on September 30th, 2014, we implemented the necessary changes to integrate Logica’s members and operations under the ISO 9001 certified processes described in the CGI Management Foundation (as defined on p. 12 of this Annual Information Form).

Our ongoing efforts to extend the ISO 9001 certification to the operations resulting from the Logica acquisition is a key ingredient in CGI’s integration program.

As clients grow and IT projects become increasingly complex, CGI strives to further refine its quality processes while allowing them to branch out across all its activities. CGI’s enhanced quality system of which the Client Partnership Management Framework (“CPMF”) forms part, is simpler and provides the Company’s business units with greater autonomy in a context of decentralized activities. One of CGI’s key focus areas remains the successful management of client relationships, leading to long-term partnerships. CGI applications development centres in Mumbai, Hyderabad, Chennai and Bangalore in India, have achieved SEI CMMi DEV Level 5 quality certification and ISO 27001 security management system certification.

CGI also obtained ISO 9001 certification for the application of its Member Partnership Management Framework in its operations and, in 2004, we similarly obtained ISO 9001 certification for the portion of our operations covered by our Shareholder Partnership Management Framework (“SPMF”). The SPMF structures the processes and information flows between CGI and its shareholders as well as with the investment community.

CGI now holds ISO quality certification for the management of its partnerships with each of its three major stakeholder groups, namely clients, members and shareholders.

 

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The IT Services Industry

Trends and Outlook

Although the current state of the economy makes it difficult to predict future trends in IT spending, CGI intends to continue its “build and buy” growth strategy, expanding both through organic growth (“build”) and through acquisition (“buy”). Today more than ever, IT services are essential in both businesses and governments. Any new service, program or efficiency improvement brings a need for additional IT.

As part of our annual strategic planning activities in 2014, we held more than 800 face-to-face interviews with our clients. A few key trends and priorities, common across industries and geographies emerged from these conversations: the need for digital transformation brought about by an increasingly mobile and digital world; the ever increasing regulatory compliance requirements not only in finance but in a broad range of domains; and the growth in cybersecurity threats.

These trends, along with the rise of the Internet of Everything, combine to create a need to ensure that IT infrastructures are more secure than ever. Achieving this requires significant investments and understanding that IT infrastructures are not a commodity but a crucial asset to be protected.

Budget pressures and the need to improve performance remain an ongoing trend across industries, thereby presenting opportunities that the Company has successfully exploited in the past. We believe that the potential in IT and business process services outsourcing remains enormous. CGI has from time to time commissioned a study from International Data Corp. (“IDC”) which provides CGI with insight as to spending on IT and business process services in Canada, the United States and Europe.

According to IDC’s research conducted in 2013, the IT domain spending was estimated to be US$757 billion in the U.S., US$693 billion in Europe and US$65 billion in Canada. These numbers exclude the value of services already outsourced and indicate a large untapped potential market for outsourcing services.

Vision and Strategy

At CGI, we have a vision of being a global world-class IT and BPS leader, who helps its clients succeed. This business vision begins with our dream, which is “to create an environment in which we enjoy working together and, as owners, contribute to building a company we can be proud of.” From this dream we developed our build and buy strategy, comprised of four pillars that combine organic growth (“build”) and acquisitions (“buy”).

The first two pillars of our strategy focus on organic growth. The first pillar focuses on smaller contract wins, renewals and extensions. The second involves the pursuit of new large, long-term outsourcing contracts, leveraging our end-to-end services, global delivery model and critical mass.

The third pillar of our growth strategy focuses on the acquisition of smaller firms or niche players. We identify niche acquisitions through a strategic mapping program that systematically searches for targets that will strengthen our vertical market knowledge or increase the richness of our service offerings.

The fourth pillar involves the pursuit of transformational acquisitions focused on expanding our geographic presence and critical mass. This approach further enables us to strengthen our qualifications to compete for large outsourcing contracts. CGI continues to be a consolidator in the IT services industry.

This four-pillar growth strategy has resulted in our ability to build critical mass in key client geographies, gain a deep knowledge of clients’ business sectors and develop specialized practices and innovative solutions.

 

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This four-pillar growth strategy has resulted in our ability to build critical mass in key client geographies, gain a deep knowledge of clients’ business sectors and develop specialized practices and innovative solutions.

CGI remains committed to profitable growth and the fundamentals that help all of CGI’s stakeholders succeed, while fulfilling CGI’s strategic objective of doubling the size of the Company.

Today, with a presence in 40 countries, strong expertise in all of our target markets and a complete range of IT services, CGI is able to meet our clients’ business needs anywhere, anytime. While remaining true to our constitution, CGI continues to adapt to best respond to changes in the IT market, the local and global business climate of clients, and to our professionals’ and shareholders’ expectations.

Competitive Environment

As a global provider of end-to-end information technology and business process services, CGI operates in a highly competitive and rapidly evolving global industry. Our competition comprises a variety of global players, from niche companies providing specialized services to other end-to-end service providers, mainly in the U.S., Europe and India, all of whom are competing to deliver some or all of the services we provide.

Recent merger and acquisition activity has resulted in CGI being positioned as one of the few remaining IT services firms that operates independently of any hardware or software vendor. Our independence allows CGI to deliver the best-suited technology available to our clients.

CGI offers its end-to-end services to a select set of targeted vertical markets in which we have deep business and technical expertise. To compete effectively, CGI focuses on high-end systems integration, consulting and outsourcing where vertical market industry knowledge and expertise are required.

Our business model is designed to listen to the needs of our clients and adapt our offerings to provide the best solutions to meet each client’s unique needs. Our client approach focuses on:

 

   

Local accountability: We live and work near our clients to provide a high level of responsiveness. We speak our clients’ language, understand their business environment, and collaborate with them to meet their goals and advance their business.

 

   

Global capabilities: Our local presence is backed by an expansive global delivery network that ensures our clients have access to resources that best fit their needs and offer proximity.

 

   

Quality processes: Our investment in quality frameworks and rigorous client satisfaction assessments provides for a consistent track record of on-time and on-budget project delivery, enabling our clients to focus on their business objectives.

 

   

Committed experts: Our professionals have vast industry, business and technology expertise to help our clients. In addition, a majority of our professionals are shareholders of the Company, providing an added level of commitment to our clients’ success.

 

   

Practical innovation: We provide a full set of innovative solutions in areas of big data, predictive analytics and mobility, which are complemented by our expertise in business consulting, systems integration and outsourcing services to offer creative business strategies to our clients.

CGI’s business operations are based on the Management Foundation (the “Management Foundation”), encompassing governance policies, sophisticated management frameworks and an organizational model for its business units and corporate processes. This foundation, along with our appropriate internal systems is followed by all our business units and helps in providing a disciplined high standard of quality service to our clients across all of our operations, and additional value to our stakeholders.

 

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There are many factors involved in winning and retaining IT and BPS contracts, including the following: total cost of services; ability to deliver; track record; vertical market expertise; investment in business solutions; local presence; global delivery capability; and the strength of client relationships. CGI compares favourably with its competition with respect to all of these factors.

In summary, CGI’s competitive value proposition encompasses the following: end-to-end IT and BPS capability; expertise and proprietary business solutions in our targeted vertical markets covering the majority of global IT spending; a unique global delivery model, which includes industry leading delivery capabilities; a disciplined Management Foundation; and our focus on client satisfaction which is supported by our client proximity business model.

Significant Developments of the Three Most Recent Fiscal Years

Key Performance Measures

The Company reports its financial results in accordance with International Financial Reporting Standards (“IFRS”). However, we use a combination of financial measures, ratios, and non-GAAP measures to assess our Company’s performance. The non-GAAP measures used to report our financial results do not have any standardized meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other issuers. These measures should be considered as supplemental in nature and not as a substitute for the related financial information prepared in accordance with IFRS.

The table below summarizes our non-GAAP measures and most relevant key performance measures:

 

Profitability    Adjusted EBIT (non-GAAP) – is a measure of earnings before integration-related costs, finance costs, finance income and income tax expense as these items are not directly related to the cost of operations. Management believes this measure is useful to investors as it best reflects the profitability of our operations and allows for better comparability from period to period as well as to analyze the trends in our operations. A reconciliation of the yearly and current quarter’s adjusted EBIT to its closest IFRS measure can be found on pages 22 and 38 of CGI’s Management’s Discussion and Analysis for Fiscal Year 2014.
   Net earnings prior to specific items (non-GAAP) – is a measure of earnings before the integration-related costs, adjustments related to tax and the resolution of acquisition-related provisions. Management believes that this measure is useful to investors as it best reflects the Company’s operating profitability and allows for better comparability from period to period. A reconciliation of the yearly and current quarter’s net earnings prior to specific items to its closest IFRS measure can be found on pages 24 and 39 CGI’s Management’s Discussion and Analysis for Fiscal Year 2014. Specific items related to the resolution of acquisition-related provisions are described on page 20 of CGI’s Management’s Discussion and Analysis for Fiscal Year 2014.
   Basic and diluted earnings per share prior to specific items (non-GAAP) – is defined as the net earnings excluding integration-related costs, adjustments related to tax and the resolution of acquisition-related provisions on a per share basis, assuming all dilutive elements are exercised. Management believes that this measure is useful to investors as it best reflects the Company’s operating profitability on a per share basis and allows for better comparability from period to period. The yearly and current quarter’s diluted net earnings reported in accordance with IFRS can be found on pages 23 and 38 while the yearly and current quarter’s diluted net earnings prior to specific items can be found on pages 24 and 39 of CGI’s Management’s Discussion and Analysis for Fiscal Year 2014. Specific items related to the resolution of

 

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   acquisition-related provisions are described on page 20 of CGI’s Management’s Discussion and Analysis for Fiscal Year 2014.
   Net earnings – is a measure of earnings generated for shareholders.
   Diluted earnings per share – 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 (“DSO”) (non-GAAP) – is the average number of days needed to convert our trade receivables and work in progress into cash. DSO 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. Deferred revenue is net of the fair value adjustments on revenue-generating contracts. Management tracks this metric closely to ensure timely collection, healthy liquidity, and is committed to a DSO target of 45 days or less. We believe this measure is useful to investors as it demonstrates the Company’s ability to timely convert its trade receivables and work in progress into cash.
Growth    Constant currency growth (non-GAAP) – 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. Management believes that it is helpful to adjust revenue to exclude the impact of currency fluctuations to facilitate period-to-period comparisons of business performance. We believe that this measure is useful to investors for the same reason.
   Backlog (non-GAAP) – Backlog includes new contract wins, extensions and renewals (“bookings” (non-GAAP)), partially offset by the backlog consumed during the year 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. Management tracks this measure as it is a key indicator of management’s best estimate of revenue to be realized in the future and believes that this measure is useful to investors for the same reason.
   Book-to-bill ratio (non-GAAP) – 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 (non-GAAP) – is obtained by subtracting our cash and cash equivalents, short-term investments and long-term investments from our debt. Management uses the net debt metric to monitor the Company’s financial leverage. We believe that this metric is useful to investors as it provides insight into our financial strength. A reconciliation of net debt to its closest IFRS measure can be found on page 30 of CGI’s Management’s Discussion and Analysis for Fiscal Year 2014.
   Net debt to capitalization ratio (non-GAAP) – is a measure of our level of financial leverage and is obtained by dividing the net debt by the sum of shareholder’s equity

 

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  and debt. Management uses the net debt to capitalization metric to monitor the proportion of debt versus capital used to finance our operations and to assess the Company’s financial strength. We believe that this metric is useful to investors as it provides insight into our financial strength.
  Return on equity (“ROE”) (non-GAAP) – is a measure of the rate of return on the ownership interest of our shareholders and is calculated as the proportion of earnings for the last 12 months over the last four quarter’s average equity. 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. We believe that this measure is useful to investors for the same reasons.
  Return on invested capital (“ROIC”) (non-GAAP) – is a measure of the Company’s efficiency at allocating the capital under its control to profitable investments and is calculated as the proportion of the after-tax adjusted EBIT for the last 12 months, over the last four quarter’s average invested capital, which is defined as the sum of equity and net debt. Management examines this ratio to assess how well it is using its funds to generate returns. We believe that this measure is useful to investors for the same reasons.

Fiscal Year ended September 30, 2014

Significant Developments

Key performance figures for the year include:

 

   

Revenue of $10,499.7 million, up 4.1%;

   

Adjusted EBIT of $1,356.9 million, up 26.1%;

   

Adjusted EBIT margin of 12.9%, up 220 basis points;

   

Net earnings prior to specific items1 of $893.5 million, or diluted EPS of $2.80, up 22.8%;

   

Net earnings of $859.4 million, or diluted EPS of $2.69, up 88.5%;

   

Cash provided by operating activities of $1,174.8 million, up 75.0%;

   

Bookings of $10.2 billion and backlog of $18.2 billion;

   

Net debt reduced by $626.6 million;

   

Return on invested capital of 14.5%;

   

Return on equity of 18.8%.

 

  1

Specific items include the integration costs related to the acquisition of Logica, the tax adjustments and the resolution of acquisition-related provisions which are discussed on page 20 of CGI’s Management’s Discussion and Analysis for Fiscal Year 2014.

Acquisition of Logica plc

On August 20, 2012, CGI completed its acquisition of Logica for 105 pence ($1.63) per ordinary share which is equivalent to a total purchase price of $2.7 billion plus the assumption of Logica’s net debt of $0.9 billion. Subsequent to August 20, 2012, our results incorporated the operations of Logica.

As of September 30, 2014, we completed the integration of Logica, a full year earlier than planned. In addition to the previously announced $525 million program, we actioned an incremental $26.5 million of new opportunities while foreign currency fluctuations unfavorably impacted the program by approximately $24.0 million over the two-year period. In summary, a total of $575.5 million in one-time costs were spent to drive annual savings in excess of $400 million and EPS accretion to CGI.

 

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Long-term Debt

In the first quarter of Fiscal Year 2014, the unsecured revolving credit facility of $1,500.0 million was extended by one year to December 2017. On July 25, 2014, the facility was further extended by another year to December 2018 and can be further extended annually. All other terms and conditions including interest rates and banking covenants remain unchanged.

In April 2014, we repaid the first maturing tranche of the term loan credit facility of $486.7 million using the proceeds from our credit facilities.

In September 2014, the Company entered into a $955 million debt private placement comprised of four tranches of Senior U.S. unsecured notes for US$745 million, and one tranche of Senior euro unsecured note for 85 million, with a weighted average maturity of 7.9 years and a weighted average fixed coupon of 3.62%. The Company used the proceeds of the issuance of the new private placement notes to repay the May 2015 maturing tranche of the term loan credit facility of $494.7 million and the outstanding balance of the credit facilities. Further details are provided in section 4.1.3 of CGI’s Management’s Discussion and Analysis for Fiscal Year 2014.

Share Repurchase Program

On January 29, 2014, the Company’s Board of Directors authorized and subsequently received the approval from the TSX for the renewal of the normal course issuer bid (“NCIB”) to purchase up to 21,798,645 Class A subordinate shares for cancellation, representing 10% of the Company’s public float as of the close of business on January 24, 2014. The Class A subordinate shares may be purchased under the NCIB commencing February 11, 2014 and ending on the earlier of February 10, 2015, or the date on which the Company has either acquired the maximum number of Class A subordinate shares allowable under the NCIB, or elects to terminate the NCIB.

During fiscal 2014, the Company repurchased 2,837,360 Class A subordinate shares for $111.5 million at an average price of $39.29 under the annual aggregate limit of the previous NCIB. Included in this number are 2,490,660 Class A subordinate voting shares sold by the Caisse dépôt et placement du Québec (the “Caisse”) and purchased by the Company for cancellation on November 29, 2013. In accordance with Toronto Stock Exchange rules, the repurchase by the Company of the shares held by the Caisse are taken into account when calculating the annual aggregate limit that the Company is entitled to repurchase under its current NCIB. As at September 30, 2014, the Company could purchase up to 21.8 million shares under the current NCIB.

Significant Share Transactions

On November 29, 2013, the Caisse reduced its holding in the Company by 9,962,660 Class A subordinate voting shares. The reduction was in accordance with the Caisse’s portfolio rebalancing policy based on the increase in the share price for the Company’s Class A subordinate voting shares that nearly doubled since the private placement by the Caisse in May of 2012. As indicated in the above paragraph, 25% of the shares sold by the Caisse were purchased by the Company for cancellation under its current NCIB at a price per share of $40.15 corresponding to the net price that the Caisse obtained from the broker who acquired the remaining 75% of the shares.

Bookings and Book-To-Bill Ratio

Bookings for the year were $10.2 billion, representing a book-to-bill ratio of 96.8%. Of the $10.2 billion in bookings signed during this year, 39% came from new business, while 61% came from extensions and renewals.

Our largest verticals for bookings were Manufacturing, retail and distribution, Government and Financial services, making up approximately 28%, 28% and 20% of total bookings, respectively. From a

 

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geographical perspective, NSESA accounted for 26% of total bookings, followed by the U.S. at 19% and France at 15%.

Information regarding our bookings is a key indicator of the volume of our business over time. However, due to the timing and transition period associated with outsourcing contracts, the realization of revenue related to these bookings may fluctuate from period to period. The values initially booked may change over time due to their variable attributes, including demand-driven usage, modifications in the scope of work to be performed caused by changes in client requirements as well as termination clauses at the option of the client. As such, information regarding our bookings is not comparable to, nor should it be substituted for an analysis of our revenue; it is instead a key indicator of our future revenue used by the Company’s management to measure growth. For the year ended September 30, 2014, the book-to-bill ratio of our North American operations was at 76.0% while it was at 112.2% for our European operations for a total book-to-bill ratio of 96.8%.

Foreign currency impact

Foreign currency rate fluctuations favourably impacted our revenue by 7.0%. This compares with a favourable impact of 1.2% in fiscal 2013, and a favourable impact of 0.9% in fiscal 2012. The foreign currency impact in 2014 was mainly due to the strengthening of the euro, U.S. dollar and British pound.

Fiscal Year ended September 30, 2013

Significant Developments

Fiscal 2013 marks the first full year of results from Logica’s businesses. Operational highlights for the year include:

 

   

Revenue of $10.1 billion, up 111.3%;

   

Bookings of $10.3 billion, up 99.0%;

   

Backlog of $18.7 billion, up more than $1 billion;

   

Adjusted EBIT of $1,075.6 million, up 96.7%;

   

Adjusted EBIT margin of 10.7%;

   

Net earnings of $727.7 million, or diluted EPS of $2.30, excluding acquisition-related and integration costs and net unfavourable tax adjustments;

   

Net earnings of $455.8 million, or diluted EPS of $1.44 on a GAAP basis, including acquisition-related and integration costs and net unfavourable tax adjustments;

   

Cash provided by operating activities of $671.3 million, or $2.12 per diluted share;

   

Net debt reduced by $365.4 million and repurchased 723,100 shares during the year; and

   

Return on invested capital of 11.8%.

Integration of Logica plc

On August 20, 2012, CGI completed its acquisition of Logica for 105 pence ($1.63) per ordinary share which is equivalent to a total purchase price of $2.7 billion plus the assumption of Logica’s net debt of $0.9 billion. Subsequent to August 20, 2012, our results incorporated the operations of Logica.

As announced in Q2 2013, the Company decided to stretch its integration goals increasing the annual savings target from $300 million to $375 million per year to drive additional long-term savings and EPS accretion. The one-time cost to accomplish the expanded plan had been increased from $400 million to $525 million.

Of the announced integration costs of $525.0 million, $109.7 million was expensed in fiscal 2012 while $338.4 million was expensed in fiscal 2013 for a total of $448.2 million since the beginning of the program.

 

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For the first full year of results following the transaction, the Company exceeded its accretion target and realized an EPS before acquisition-related and integration costs and other adjustments of $2.30 per diluted share compared to $1.50 for the previous year.

Share Repurchase Program

On January 30, 2013, the Company’s Board of Directors authorized and subsequently received the approval from the TSX for the renewal of the Normal Course Issuer Bid (“NCIB”) to purchase up to 10% of the public float of the Company’s Class A subordinate voting shares as of the close of business on January 25, 2013. The NCIB enables CGI to purchase, on the open market, up to 20,685,976 Class A subordinate voting shares for cancellation. The Class A subordinate voting shares may be purchased under the NCIB commencing February 11, 2013 and ending on the earlier of February 10, 2014, or the date on which the Company has either acquired the maximum number of Class A subordinate voting shares allowable under the NCIB, or elects to terminate the NCIB.

During fiscal 2013, the Company repurchased for cancellation 723,100 of its Class A subordinate voting shares for $22.9 million at an average price of $31.63 under the current and previous NCIB. As at September 30, 2013, the company may purchase up to an additional 20.0 million shares under the current NCIB.

Bookings and Book-to-Bill Ratio

Bookings for the year were $10.3 billion, representing a book-to-bill ratio of 102.2%. Of the $10.3 billion in bookings signed during this year, 46% came from new business, while 54% came from extensions and renewals.

Our largest verticals for bookings were Manufacturing, retail and distribution, Government and Financial services, making up approximately 27%, 26% and 23% of total bookings, respectively. From a geographical perspective, the U.S. accounted for 27% of total bookings, followed by NSESA at 21% and Canada at 17%.

Foreign Currency Impact

Foreign currency rate fluctuations favourably impacted our revenue by 1.2%. This compares with a favourable impact of 0.9% in fiscal 2012, and an unfavourable impact of 3.1% in fiscal 2011. The foreign currency impact in 2013 was mainly due to the strengthening of the euro.

Fiscal Year ended September 30, 2012

Significant Developments

The Company continued to grow year-over-year and our adjusted EBIT margin continues to remain strong, providing necessary cash from operations to pay down our long-term debt and to increase the return to our shareholders. The highlights are below:

 

   

Revenue of $4.8 billion, increase of 12.1% year-over-year on a constant currency basis;

   

Bookings of $5.2 billion resulting in a book-to-bill ratio of 109%;

   

Backlog of $17.6 billion;

   

Strong underlying profitability delivered across legacy CGI operations;

   

Accelerating profitable growth and bookings in U.S. operations; and

   

Cash from operations of $613.3 million, or $2.24 per share.

 

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Acquisition of Logica plc

On August 20, 2012, CGI completed the recommended cash acquisition of Logica for 105 pence (C$1.63) per ordinary share, equivalent to a total purchase price of £1.7 billion (C$2.7 billion as at August 20, 2012) plus the assumption of Logica’s net debt of £571.0 million (C$866.7 million). The cash acquisition of all the issued and to be issued ordinary shares of Logica was effected by means of a Court-sanctioned scheme of arrangement in the United Kingdom. Our results for the year ended September 30, 2012 incorporated the operations of Logica subsequent to August 20, 2012. CGI had incurred $255.0 million in acquisition-related and integration costs over the last half of fiscal 2012.

Logica was a business and technology services company, employing 41,000 people. It provided business consulting, systems integration and outsourcing services to clients around the world, including many of Europe’s largest business.

The consideration paid under the Logica acquisition was funded through a combination of:

 

   

cash proceeds of C$1.0 billion from the issuance of 46,707,146 subscription receipts exchangeable for new Class A subordinate voting shares in the Company to the Caisse at $21.41 per subscription receipt pursuant to a subscription agreement entered into by the Caisse and the Company on May 31, 2012 (the “Subscription Agreement”), a subscription receipt agreement entered into by the Caisse, the Company and Computershare Trust Company of Canada as subscription receipt agent, on May 31, 2012 (the “Subscription Receipt Agreement”);

 

   

debt funding from a syndicate of lenders pursuant to £1.245 billion (C$1.9 billion) senior unsecured term loan credit facilities under a credit agreement dated May 31, 2012 (the “Term Loan Credit Agreement”), a fee letter dated May 31, 2012 (the “Fee Letter”) and a syndication letter dated May 31, 2012 (the “Syndication Letter”); and

 

   

debt funding from a syndicate of lenders pursuant to a revolving credit facility under the Company’s existing $1.5 billion credit agreement.

Under the Subscription Receipt Agreement, the 46,707,146 subscription receipts that were issued to the Caisse on May 31, 2012 were automatically exchanged into new Class A subordinate voting shares as a result of the completion of the Logica acquisition on August 20, 2012. The Subscription Agreement contains, among its terms and conditions, customary representations and warranties and indemnities by the Company to the Caisse, which were in effect until August 20, 2014, except for customary exceptions for tax matters and in the case of fraud.

As contemplated in the Subscription Agreement, the Company and the Caisse entered into a registration rights agreement dated August 20, 2012 (the “Registration Rights Agreement”) which provides, among other terms and conditions:

 

   

The Caisse will have the right, as long as it beneficially owns or exercises control or direction over 15% or more of the outstanding Class A subordinate voting shares, to recommend to the Company one nominee to be part of any slate proposed by the Company and included in a proxy circular relating to the election of directors of the Company, provided that the nominee shall have no material relationship with the Company or the Caisse, shall be eligible to serve as a director under the Company’s articles and laws of incorporation and that the nomination shall be subject to a favourable recommendation of the Company’s Corporate Governance Committee. CGI has no shareholder’s agreement with the Caisse and the Caisse has not yet exercised its board nomination right;

 

   

The Registration Rights Agreement also provides that the Caisse is entitled, at any time and from time to time, as long as it beneficially owns or exercises control or direction over 20% or more of all outstanding Class A subordinate voting shares, to require CGI to file a Canadian prospectus and take such other steps as may be reasonably necessary to facilitate a secondary offering in

 

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Canada, at the Caisse’s expense, on the terms and conditions set out in the Registration Rights Agreement;

 

   

In addition, if the Company proposes to make a distribution in Canada for its own account or if an existing shareholder proposes to make a distribution in Canada through a secondary offering, the Company will be required, at that time, upon request by the Caisse, provided that it beneficially owns or exercises control or direction over 15% of the outstanding Class A subordinate voting shares, use commercially reasonable efforts to cause to be included in the distribution the shares that the Caisse has requested to be included, up to a maximum of 15% of the shares to be offered in the distribution, with expenses to be shared on a pro rata basis, and otherwise upon the terms and conditions set out in the Registration Rights Agreement;

 

   

In connection with any prospectus-exempt sale by the Caisse in Canada or in the U.S., the Company will be required to use commercially reasonable efforts, at the Caisse’s expense, to assist the Caisse and its representatives in the preparation of the required documentation and to allow any prospective buyer to conduct reasonable due diligence on the Company. If the Company proposes to file a registration statement for the distribution of shares to the public in the U.S., the Caisse and the Company will, prior to such distribution taking place, supplement the Registration Rights Agreement so as to provide the Caisse with registration rights enabling the distribution of shares to the public in the U.S. that are substantially equivalent to the registration rights provided under the Registration Rights Agreement.

We filed a Business Acquisition Report in relation to our acquisition of Logica on November 5, 2012.

Credit Facility and Private Debt Placement

On December 7, 2011, the Company renewed its unsecured revolving credit facility of $1.5 billion for an additional five years, through December 2016. The facility, which can be extended annually, includes an accordion feature in support of acquisitions providing for an additional $750.0 million, bringing the facility’s potential capacity to $2.25 billion. In addition, during the first quarter of fiscal 2012, the Company received the proceeds of the US$475.0 million private debt placement with US institutional investors that was entered into during the fourth quarter of fiscal 2011.

Share Repurchase Program

On February 1, 2012, the Company’s Board of Directors authorized and received the approval from the TSX for the renewal of the NCIB to purchase up to 10% of the public float of the Company’s Class A subordinate voting shares over the next twelve months. The NCIB enables CGI to purchase, on the open market, up to 22,064,163 Class A subordinate voting shares for cancellation. The Class A subordinate voting shares may be purchased under the NCIB commencing February 9, 2012 and ending on the earlier of February 8, 2013, or the date on which the Company either acquired the maximum number of Class A subordinate voting shares allowable under the NCIB, or elected to terminate the NCIB.

During fiscal 2012, the Company repurchased 5,368,000 of its Class A subordinate voting shares for $102.8 million at an average price of $19.16, under the current and previous NCIB. As at September 30, 2012, the Company could purchase up to an additional 21.0 million shares under the current NCIB.

Bookings and Book-to-Bill Ratio

The Company achieved a book-to-bill ratio of 109% for the year. Of the $5.2 billion in bookings signed during the year, 56% came from new business, while 44% came from extensions and renewals.

Our largest verticals for bookings were government and financial services, making up approximately 45% and 22% of total bookings, respectively. From a geographical perspective, the U.S. accounted for 58% of total bookings, followed by Canada at 27% and Europe at 15%.

 

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Foreign Currency Impact

Foreign currency rate fluctuations favourably impacted our revenue by 0.9%. This compared with an unfavourable impact of 3.1% in fiscal 2011, and a favourable impact of 5.8% in fiscal 2010. The foreign currency impact in 2012 was mainly due to the strengthening of the U.S. dollar.

FORWARD LOOKING INFORMATION AND RISKS AND UNCERTAINTIES

Forward-Looking Information

All statements in this Annual Information Form that do not directly and exclusively relate to historical facts constitute “forward-looking statements” within the meaning of that term in Section 27A of the United States Securities Act of 1933, as amended, and Section 21E of the United States Securities Exchange Act of 1934, as amended, and are “forward-looking information” within the meaning of Canadian securities laws. These statements and this information represent CGI’s intentions, plans, expectations and beliefs, and are subject to risks, uncertainties and other factors, of which many are beyond the control of the Company. These factors could cause actual results to differ materially from such forward-looking statements or forward-looking information. These factors include but are not restricted to: the timing and size of new contracts, acquisitions and other corporate developments; the ability to attract and retain qualified members; market competition in the rapidly evolving information technology industry; general economic and business conditions, foreign exchange and other risks identified in this Annual Information Form, in the Management’s Discussion & Analysis filed with Canadian securities authorities (filed on SEDAR at www.sedar.com), and in CGI’s Annual Report on Form 40-F filed with the U.S. Securities and Exchange Commission (filed on EDGAR at www.sec.gov) as well as assumptions regarding the foregoing.

The words “believe,” “estimate,” “expect,” “intend,” “anticipate,” “foresee,” “plan,” and similar expressions and variations thereof, identify certain of such forward-looking statements or forward-looking information, which speak only as of the date on which they are made. In particular, statements relating to future performance are forward-looking statements and forward-looking information. CGI disclaims any intention or obligation to publicly update or revise any forward-looking statements or forward-looking information, whether as a result of new information, future events or otherwise, except as required by applicable law. Readers are cautioned not to place undue reliance on these forward-looking statements or on this forward-looking information.

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.

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.

 

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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 availability and retention of qualified IT professionals

There is strong demand for qualified individuals in the IT industry. Hiring and retaining a sufficient amount of individuals with the desired knowledge and skill set may be difficult. Therefore, it is important that we remain able to successfully attract and retain highly qualified professionals and establish an effective succession plan. 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. If our succession plan fails to identify those with potential or to develop these key individuals, we may lose key members and be required to recruit and train these new resources. 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 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.

 

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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.

Risks Related to our Business

Risks associated with our growth strategy

CGI’s Build and Buy strategy is founded on four pillars of growth: first, organic growth through contract wins, renewals and extensions in the areas of outsourcing and system integration; second, the pursuit of new large outsourcing contracts; third, acquisitions of smaller firms or niche players; and fourth, transformational acquisitions.

Our ability to grow through organic growth and new large outsourcing transactions is affected by a number of factors outside of our control, including a lengthening of our sales cycle for major outsourcing contracts.

Our ability to grow through niche and transformational acquisitions 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.

If we are unable to implement our Build and Buy strategy, we will likely be unable to maintain our historic or expected growth rates.

The variability of financial results

Our ability to maintain and increase our revenues is affected not only by our success in implementing our Build and Buy strategy, but also by a number of other factors, including: our ability to introduce and deliver new services and products; a lengthened sales cycle; the cyclicality of purchases of technology services and products; the nature of a customer’s business; and the structure of agreements with customers. These, and other factors, make it difficult to predict financial results for any given period.

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

 

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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 subjects us to various issues that can negatively impact our operations: the fluctuations of currency (see foreign exchange risk); the burden of complying with a wide variety of national and local laws (see regulatory risk); the differences in and uncertainties arising from local business culture and practices; political, social and economic instability including the threats of terrorism, civil unrest, war, natural disasters and pandemic illnesses. Any or all of these risks could impact our global business operations and cause our profitability to decline.

Organizational challenges associated with our size

With the acquisition of Logica, our organization has more than doubled in size with expanded operations in both Europe and Asia. Our culture, standards, core values, internal controls and our policies need to be instilled across the newly acquired businesses as well as maintained within our existing operations. To effectively communicate and manage these standards throughout a large global organization is both challenging and time consuming. Newly acquired businesses may be resistant to change and may remain attached to past methods, standards and practices which may compromise our business agility in pursuing opportunities. Cultural differences in various countries may also present barriers to introducing new ideas or aligning our vision and strategy with the rest of the organization. If we cannot overcome these obstacles in maintaining a strategic bond throughout the Company worldwide, we may not be able to achieve our growth and profitability objectives.

Taxes

In estimating our income tax payable, management uses accounting principles to determine income tax positions that are likely to be sustained by applicable tax authorities. However, there is no assurance that our tax benefits or tax liability will not materially differ from our estimates or expectations. The tax legislation, regulation and interpretation that apply to our operations are continually changing. In addition, future tax benefits and liabilities are dependent on factors that are inherently uncertain and subject to change, including future earnings, future tax rates, and anticipated business mix in the various jurisdictions in which we operate. Moreover, our tax returns are continually subject to review by applicable tax authorities; it is these tax authorities that will make the final determination of the actual amounts of taxes payable or receivable, of any future tax benefits or liabilities and of income tax expense that we may ultimately recognize. Any of the above factors could have a material adverse effect on our net income or cash flows by affecting our operations and profitability, the availability of tax credits, the cost of the services we provide, and the availability of deductions for operating losses as we develop our international service delivery capabilities.

Credit risk with respect to accounts receivable and work in progress

In order to sustain our cash flows and net earnings from operations, we must invoice and 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 effect 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.

 

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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 effect 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. 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.

 

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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 in each of our geographies 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 recruitment activities, professional training programs, attrition rates and restructuring programs appropriately. To the extent that we fail to do so, or to the extent that laws and regulations, particularly those in Europe, restrict our ability 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 significant 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. Although IFRS considers a national government and its agencies as a single client, our client base in the U.S. government economic sector is in fact diversified with contracts from many different departments and agencies.

Government business risk

Changes in 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. 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.

 

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Regulatory risk

Our global operations require us to be compliant with laws in many jurisdictions on matters such as: anticorruption, trade restrictions, immigration, taxation, securities regulation, anti-competition, data privacy and labour relations, amongst others. Complying with these diverse requirements worldwide is a challenge and consumes significant resources. Some of these laws may impose conflicting requirements; we may face the absence in some jurisdictions of effective laws to protect our intellectual property rights; there may be restrictions on the movement of cash and other assets; or restrictions on the import and export of certain technologies; or restrictions on the repatriation of earnings and reduce our earnings, all of which may expose us to penalties for non-compliance and harm our reputation.

Our business with the U.S. 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.

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 affect our business, operating results and financial condition, and may negatively affect our professional reputation. We typically use reasonable efforts to include provisions in our contracts which are designed to limit our exposure to legal claims relating to our services and the applications we develop. We may not always be able to include such provisions and, where we are successful, they 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.

 

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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 the integration of new operations

The successful integration of new operations arising from our acquisition 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.

Internal controls risks

Due to the inherent limitations of internal controls including the circumvention or overriding of controls, or fraud, there can only be reasonable assurance that the Company’s internal controls will detect and prevent a misstatement. If the Company is unable to design, implement, monitor and maintain effective internal controls throughout its different business environments, the efficiency of our operations might suffer, resulting in a decline in revenue and profitability, and the accuracy of our financial reporting could be impaired.

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 grow the business organically as well as conclude 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 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 effect 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.

Foreign exchange risk

The majority of our revenue and costs are denominated in currencies other than the Canadian dollar. Foreign exchange fluctuations impact the results of our operations as they are reported in Canadian dollars. This risk is partially mitigated by a natural hedge in matching our costs with revenue denominated in the same currency and through the use of derivatives in our hedging strategy. As we continue our global expansion, natural hedges may begin to diminish and the use of hedging contracts exposes us to the risk that financial institutions will fail to perform their obligations under our hedging instruments. Other than the use of financial products to deliver on our hedging strategy, we do not trade derivative financial instruments.

Our functional and reporting currency is the Canadian dollar. As such, our American, European and Asian investments, operations and assets are exposed to net change in currency exchange rates. Volatility in exchange rates could have an adverse effect on our business, financial condition and results of our operations.

 

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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 material adverse effect on the Company’s financial position, results of operations or the ability to carry on any of its business activities. Please refer to Notes 13 and 30 to the audited consolidated financial statements for more detailed information for legal proceedings.

TRANSFER AGENT AND REGISTRAR

The Company’s transfer agent for the Company’s Class A subordinate voting shares and Class B shares is Computershare Investor Services Inc. whose head office is situated in Toronto, Ontario. Share transfer service is available at Computershare’s Montreal, Quebec, and Toronto, Ontario, offices as well as at the principal office of Computershare Trust Company, N.A. in Highlands Ranch, Colorado.

AUDITORS

The auditors of the Company are Ernst & Young LLP. They have confirmed their independence to the Company’s Audit and Risk Management Committee.

ADDITIONAL INFORMATION

The Company will provide to any person, upon request to the Company, (i) a copy of this Annual Information Form of the Company, together with a copy of any document incorporated by reference therein, (ii) a copy of the consolidated financial statements of the Company for the year ended September 30, 2014 together with the accompanying report of the auditor and a copy of any subsequent interim financial statements, (iii) a copy of the Management Proxy Circular dated December 12, 2014 and (iv) a copy of the Management’s Discussion & Analysis of the Company for the year ended September 30, 2014.

Additional information, including directors’ and officers’ remuneration and indebtedness, securities authorized for issuance under equity compensation plans and principal holders of the Company’s shares, is included in the Management Proxy Circular dated December 12, 2014.

Additional financial information in relation to the last fiscal year ended September 30, 2014 is presented in the audited consolidated financial statements of the Company and in the related Management’s Discussion & Analysis of the Company.

The documents mentioned above are available on SEDAR at www.sedar.com and on the Company’s web site at www.cgi.com. You can also obtain a copy of such documents by contacting Investor Relations by sending an e-mail to ir@cgi.com, by visiting the Investors section on the Company’s Web site at www.cgi.com or by contacting us by mail or telephone:

Investor Relations

1350 René-Lévesque Blvd. West

15th Floor

Montreal, Quebec

H3G 1T4

Canada

Telephone: (514) 841-3200

 

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APPENDIX A

CGI GROUP INC.

Fundamental Texts

The following documents form part of CGI’s Fundamental Texts and may be found on the pages indicated below:

 

Dream, Vision, Mission and Values

     2   

CGI Management Foundation

     10   

Documents and Policies Pertaining to Corporate Governance

  

       Charter of the Board of Directors      15   

       Charter of the Corporate Governance Committee      23   

       Charter of the Human Resources Committee      29   

       Charter of the Audit and Risk Management Committee      34   

Codes of Ethics

  

       Code of Ethics and Business Conduct      44   

       Executive Code of Conduct      61   

       CGI Anti-Corruption Policy      64   

 

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Presentation

This set of documents presents the fundamental texts that define CGI and its management approach. The fundamental texts address not only members of the board of directors, CGI’s executive team and the company’s shareholders, but also all CGI members as well as anyone who wishes to consult them. Their main objective is to provide a better understanding of the most essential aspects of the company. It is our hope that this understanding will generate a shared vision of what constitutes CGI and of the community of thought that is essential to the company’s success. The document will also provide all CGI members with an understanding that will allow them to participate fully in the life of the company and to better represent CGI.

THE FUNDAMENTAL TEXTS INCLUDE:

 

Presentation

     1   

1.   Dream, Vision, Mission, and Values

     1   

2.   CGI Management Foundation

     9   

3.   Documents and Policies Pertaining to Corporate Governance

     14   

  3.1   Charter of the Board of Directors

     15   

  3.2   Charter of the Corporate Governance Committee

     23   

  3.3   Charter of the Human Resources Committee

     29   

  3.4   Charter of the Audit and Risk Management Committee

     34   

4.   Codes of Ethics

     43   

5.   Appendices

     74   

 

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Dream, Vision, Mission and Values

This document constitutes Chapter 1 of the Fundamental Texts of CGI Group Inc. It begins with the mission statement of the company and is followed by the vision, the dream and the values of CGI. By “dream,” we essentially mean the intent or initial desire that led to the creation of our company and continues to drive its operation and growth. It also extends to the main principles and governing ideas that define the company’s philosophy in its important cultural and organic aspects. This presentation of CGI’s dream and values is therefore intended to impart in a succinct manner the company’s character, essence, dynamism, values and culture, and the creative impulse that culminated in its creation and of which it is an extension.

 

A.

THE CGI DREAM

A number of governing ideas inspired the creation of CGI and continue to drive its development. These ideas constitute what we call the CGI “dream.” It is a dream based on a set of values to which we are profoundly attached.

The dream has allowed us to assemble, all around the world, a team of extraordinary men and women who share it and are building a company that reflects their aspirations - who are, in fact, building their “own” company. Over the years, our team has built a clientele we are extremely proud of and whom we are dedicated to serving with the utmost skill.

This dream has its roots in the original and simple idea that first motivated CGI’s founders when they created the company:

“To create an environment in which we enjoy working together and, as owners, contribute to building a company we can be proud of.”

From this very basic idea grew an entire business philosophy.

It goes without saying that creating this type of environment is particularly challenging in consulting companies such as ours. Personnel generally work at client locations, making it difficult to develop a sense of belonging through a shared workplace. There is the risk of certain people being “forgotten” when they spend long periods at a client site, and this risk is amplified when these individuals have few CGI colleagues working on the same engagement.

 

B.

THE CGI VISION AND MISSION

Our vision is to be a global world class information technology and business process services leader helping our clients succeed.

 

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The mission of CGI is to help our clients succeed through outstanding quality, competence and objectivity, providing thought leadership and delivering the best services and solutions to fully satisfy client objectives in information technology, business processes and management.

In all we do, we foster a culture of partnership, intrapreneurship, teamwork and integrity, building a global world class information technology and business process services company.

With this mission statement, we are endeavouring to describe not only the company’s purpose, but also our ambition and values. In doing so, we hope, in a few words, to advance an overall understanding of these essential aspects of CGI.

The following section will foster a more thorough comprehension of the dream associated with this mission and the values referred to in the mission statement.

 

C.

THE CGI CULTURE AND VALUES

To succeed in creating a highly favourable environment within such a context, CGI has fostered a corporate culture rooted in participation in the company and focused on each of its members. Developing a corporate culture, despite members often working at a distance, began with explicitly defining and then sharing common values. Our fundamental belief is that a company with an inspiring dream, unparalleled integrity, a caring, humane management philosophy and solid values is better able to attract and respond to the profound aspirations of remarkably high-calibre, competent people. These people in turn will seek out a select clientele, one aware of the company’s values, and will deliver high-quality services at a competitive price, while meeting the company’s profitability objectives. The growth and profitability generated as a result will allow CGI to offer its shareholders a superior and sustained return on their investment.

To support our dream and to create such an environment, we have adhered to a number of principles or governing ideas:

 

  1. Sharing the same values

 

  2. Embracing the objectives of our clients

 

  3. Adopting a caring, humane approach towards our members

 

  4. Focusing on synergy and the strength of teamwork

 

  5. Participating in the development of our company as its owner-shareholders, and sharing in its wealth

 

  6. Promoting robust, healthy and sustainable growth to the benefit of all stakeholders

 

  7. Implementing a management model aligned with our dream and values

 

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1.

Sharing the same values

Sharing the same values allows us to enjoy considerable autonomy and swiftness of action without compromising our cohesiveness. It also allows us to mobilize teams more rapidly and bring together the most experienced individuals from across the company, who are able to quickly work as one to address a given challenge. And, of course, these values also guide our decisions and actions.

PARTNERSHIP AND QUALITY

For us, partnership and quality are both a philosophy and a way of life. We constantly deepen our understanding of our clients’ business and we develop and follow the best management practices. We entrench these approaches into client relationship and service delivery frameworks in order to foster long term and strong partnerships with our clients. We listen to our clients and we are committed to their total satisfaction in everything we do.

OBJECTIVITY AND INTEGRITY

We exercise the highest degree of independent thinking in selecting the products, services and solutions we recommend to clients. In doing so, we adhere to the highest values of quality, objectivity and integrity. We do not accept any remuneration from suppliers. We always act honestly and ethically. We never seek to gain undue advantages and we avoid conflicts of interest, whether real or perceived.

INTRAPRENEURSHIP AND SHARING

Our collective success is based on our competence, commitment and enthusiasm. We promote a culture of innovation and initiative where we are empowered with a sense of ownership in supporting clients, thus ensuring our profitable growth. Through teamwork, sharing our know-how and expertise across our global operations, we bring the best of CGI to our clients. As members, we share in the value we create through equity ownership and profit participation.

RESPECT

In all we do, we are respectful of our fellow members, clients, business partners and competitors. As a global company, we recognize the richness that diversity brings to the company and welcome this diversity while embracing the overall CGI business culture.

FINANCIAL STRENGTH

We strive to deliver strong, consistent financial performance which sustains long term growth and benefits both members and shareholders. Financial strength enables us to continuously invest in our members’ capabilities, our services and our business solutions to the benefit of our clients. To this end, we manage our business to generate industry superior returns.

 

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CORPORATE SOCIAL RESPONSIBILITY

Our business model is designed to ensure that we are close to our clients and communities. As members, we embrace our social responsibilities and contribute to the continuous development of the communities in which we live and work.

 

2.

Embracing the objectives of our clients

At CGI, we believe that accomplishing outstanding work provides one with a strong sense of fulfilment. Our high-quality work allows us to forge rewarding relationships with our colleagues and clients and to experience the pleasure of our own creativity when we find an ideal solution to address our clients’ needs.

To this end, we strongly encourage our members to develop a listening attitude to ensure that an understanding of the client’s particular situation and needs takes priority in all that we do. For this reason, we foster a culture of independence, objectivity and integrity. We want our clients to know that we understand their objectives and are committed to finding the solution that is right for them. Our flexibility in establishing customized business relationships demonstrates our keen interest in our clients’ objectives, cultural environment and values.

This in-depth understanding of our clients’ objectives is one of the keys to our success and is as present in our short-term engagements as it is in our outsourcing contracts extending over multiple years.

However, embracing the objectives of our clients goes far beyond simply understanding them. It demands, for example, that we sincerely commit to offering the very best of ourselves in order to demonstrate to clients that we support them as completely as if we were their own employees. It is essential that they “experience our commitment.”

 

3.

Adopting a caring, humane approach towards our members

Although the demands of our industry are considerable, CGI has always believed that this in no way conflicts with the very humane and caring approach we take in all of the relationships we foster. And while our human resources policies and Member Partnership Management Framework embody this concern and commitment, for CGI, this is also an issue of maturity and genuine leadership. It is a question of the quality of “being.” To foster this attitude of caring and sensitivity towards others, CGI has led by example. Since the inception of the company, this approach has been transmitted, most notably through the example set by our founders as well as by teamwork and the CGI Leadership Institute, and is today an integral component of CGI’s spirit and culture.

 

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4.

Focusing on synergy and the strength of teamwork

CGI favours the accomplishment of work through synergy, which refers to the pooling of our members’ skills, experience and creative abilities in all aspects of corporate life. Whether deciding on the direction to take in a service proposal or determining the best solution for a client, we incorporate synergy into everything we do.

Normally, a synergy group will hold meetings at key milestones throughout the entire lifespan of a given engagement. The group not only includes subject matter experts, but also less experienced members, who gain knowledge from their colleagues and are therefore able to more rapidly hone their own expertise. The objective is always to find appropriate and proven solutions for our clients. This practice is entrenched in our Quality System, which has earned ISO 9001 certification.

The practice of synergy underscores an outstanding cultural trait: at CGI, we believe that we are stronger and that everyone benefits when we work as a team. Our clients receive services of higher quality, and our members constantly learn from one another through concrete achievements.

 

5.

Participating in the development of our company as its owner-shareholders, and sharing in its wealth

It is important that our members consider CGI as “their” company and that they participate in its growth and development. Involvement in professional groups that help maintain CGI’s leadership position is just one of the many such forms of participation.

However, for this involvement in the company to be complete and rewarding, we feel it necessary that all CGI members be able to also share in the benefits generated by their activities. For this reason, since its founding, CGI has offered all of its members the opportunity to be shareholders and owners of their company. To this end, CGI has implemented a Share Purchase Plan, through which it pays half the cost of shares up to a certain amount. Members also qualify for a portion of the company’s annual profits when objectives are met (Profit Participation Plan). This capital sharing opportunity has existed since CGI was established.

It is an approach that incorporates many advantages:

FOR OUR CLIENTS

Because of this approach, CGI has very few freelance or contract employees. This helps assure our clients that the experience we acquire through working with them is more likely to remain in the company. Moreover, the people they deal with at CGI are also owners of the company and are therefore completely committed to producing high-quality, dependable work in order to strengthen the client relationship.

 

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FOR OUR SHAREHOLDERS

Our external shareholders can rest assured that, as fellow owners, all of CGI’s members have their mutual interests at heart, i.e. a desire to see the company grow and the drive to execute each contract in a way that will yield the targeted profit margin. This also impacts business development, for, as shareholders, our members strive to promote the company’s growth, but will not sacrifice profitability by submitting counter-productive bids. And finally, shareholders are also assured that all of our members will manage the company’s costs as if they were their own.

FOR OUR MEMBERS

As members and shareholders, we feel above all that the growth in value, which we are contributing to, does provide us with a lucrative return over the long term. It is indeed more stimulating to work for a company that values the sharing of wealth. This also guarantees greater transparency in the management of the company. Because we must communicate our financial results to everyone, all of CGI’s managers are more accountable to the people they lead and are more likely to involve them in the decision process. We believe that our approach to corporate ownership fosters greater overall dynamism and cohesiveness of action. This also allows us to attract and retain individuals with a genuine desire to build and develop the company.

 

6.

Promoting robust, healthy and sustainable growth to the benefit of all stakeholders

Robust, healthy and sustained growth is vital to the company’s success. Much of our clientele consists of large companies with operations extending over many countries. We are committed to serving these clients well, often through long-term relationships that require us to deploy professionals in sufficient numbers where clients operate. The growth of our clients’ business requires that we grow with them. Also, as a result of our success, an increasing number of clients call upon us to provide them with services. Robust growth is therefore intrinsic to the nature of the business we are in.

Growth is not only a vital component of our activities and essential to our clients, it also benefits our members. It provides them with an opportunity to embark upon new and stimulating challenges and develop their own potential. And growth, when financially healthy and profitable, clearly benefits all of our shareholders (including our member shareholders) through the value it generates.

To maintain healthy and sustained growth, it is important that the companies or groups that join our ranks be welcomed and well integrated into our operations. In order to succeed in its growth strategy, CGI has developed its integration capability into a core competency. This capacity to integrate is based on three main axes. The first axis is aimed primarily at welcoming newcomers, answering their legitimate questions, confirming their new conditions of employment and, above all, allowing them to discover CGI by sharing its dream and values. The second axis is directed towards establishing the various synergy goals linked to an acquisition or an outsourcing deal. This encourages all parties to understand that this combination of strengths offers new, stimulating opportunities. The third axis is aimed at assuring the organizational transition and a rapid transfer to the CGI Management Foundation, especially with regards to the Quality System.

 

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It follows that there ought to be an equilibrium of interests among all of the company’s core stakeholders: clients, members and shareholders.

 

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It is of course also essential that, as it grows, our company continues to act as a responsible corporate citizen by respecting and supporting the communities in which it operates and by respecting the environment.

The following are a few concrete examples of how this balanced approach promotes the healthy and sustained growth of CGI:

 

    We must ensure, at every step of our growth that we preserve the quality of the services we offer to our current and future clients.

 

    We must also ensure that our members are adequately prepared to face the new challenges we offer them and that they have the resources needed to accomplish their work.

 

    Growth must not come at the expense of the communities where we do business, or of the environment in general. In fact, we are committed to participating in the development of these communities and the protection of the environment.

 

    We strive to ensure that our growth and development efforts provide short-term benefits without negatively impacting our long-term performance. We believe this also to be in the best interests of our shareholders.

When the above conditions are met, robust, healthy, balanced and sustainable growth will follow.

 

7.

Implementing a management model aligned with our dream and values

When the above conditions are met, robust, healthy, balanced and sustainable growth will follow.

 

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2. CGI Management Foundation

 

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CGI Management Foundation

INTRODUCTION

 

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In the above diagram, we have assembled the key elements that define and guide the management of CGI. For this reason, these elements have been called the CGI Management “Foundation.” They reflect our collective experience and have been developed to make our actions as efficient as possible. This efficiency must first and foremost respect a number of principles, which are themselves integrated into the CGI Management Foundation and deserve to be emphasized:

 

  1) the primacy of the dream, the vision, the mission and the values of the company;

 

  2) the equilibrium between the legitimate interests of our clients, members and shareholders;

 

  3) the balance between the need to assure cohesiveness and rigour in the management of the company and the commitment to promote autonomy, initiative and entrepreneurship.

The CGI Management Foundation intends to guide rather than prescribe.

Thus, it offers a certain amount of freedom in order to remain focused on our essential goal: to provide high-quality services truly adapted to our clients’ needs.

We will now examine the individual elements of the Foundation.

 

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DREAM, VISION, MISSION, VALUES, QUALITY POLICY, STRATEGIC DIRECTIONS AND PLANS

The first section of the diagram aims at ensuring that all decisions are well aligned on the dream, vision, mission, and values of the company. These are described in the first section of this document.

The next component is our Quality Policy. It has earned ISO 9001 certification, which requires that CGI demonstrate every year to external evaluators that its Quality Policy is applied across all of its operations.

The final component of this uppermost section focuses on Strategic Directions and Plans. These are established on an annual and triennial basis according to a rigorous process that includes extensive participation from within the company as well as from our clients and our shareholders. The emphasis placed on involving all business units and corporate services in the planning process helps ensure that the objectives established and methods selected are shared by all to the fullest extent possible and that they generate enthusiastic commitment in their implementation.

GOVERNANCE POLICIES AND FRAMEWORKS, HUMAN RESOURCES POLICIES, FINANCIAL POLICIES AND ORGANIZATIONAL MODEL

The first component of the second section refers to the company’s governance policies and frameworks. These policies and frameworks are comprised of the following documents:

 

  1) the Charters of the Board of Directors and its standing committees;

 

  2) the Codes of Ethics, to which members, officers and directors of the company must adhere;

 

  3) the Operations Management Framework, which outlines the delegation framework with respect to decision making (e.g. who may authorize and sign a million dollar proposal; who may authorize promotion to a vice-president’s position).

The second component involves human resources policies. CGI members can access all of the company’s human resources policies, from compensation and training to career development, on CGI’s internal portal.

The third component focuses on financial policies. It covers how we determine our profitability objectives, target ratios (e.g. profit margins, maximum percentage allotted to certain expenses), how and when our financial results are prepared, the rules governing disclosure of results, etc. These policies and rules are outlined in a document under the responsibility of the Chief Financial Officer, and the most pertinent elements are communicated to all of our members.

Finally, the organizational model favoured by CGI is one that provides considerable autonomy to our business units. This model consists of creating business units in major cities in the regions that we serve. We also put a high priority on establishing solid business relationships within these regions, particularly with the decision makers from the companies operating in these cities. Each of these “metropolitan” business units is structured according to the key economic sectors served by CGI (finance, telecommunications, etc.). The implementation of a service offering for clients which have operations in multiple regions or countries is achieved through collaboration among business units, which, in the case of large contracts and particularly those involving outsourcing, can result in entire business units being dedicated to our major clients or to

 

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groups of clients who share the same needs. Consulting services and centres of expertise throughout CGI ensure that knowledge, strategies and leading-edge solutions are shared within the entire company.

BUSINESS UNIT PROCESSES AND PARTNERSHIP MANAGEMENT FRAMEWORKS

 

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The Business Unit Processes explain how the Client Partnership Management Framework and the Member Partnership Management Framework are applied locally in each business unit. They also describe how business development activities and other initiatives crucial to the smooth operation of each business unit should be managed.

The activities at the core of the operational management of CGI are aligned onto three management frameworks: the Client Partnership Management Framework, the Member Partnership Management Framework and the Shareholder Partnership Management Framework. These frameworks are the cornerstones of a continuous improvement process that is supported by the documentation and the systematic, audited application of our best practices. The process is also constantly fuelled by client, member and shareholder evaluations of our activities and performance.

The first is the Client Partnership Management Framework. CGI’s leadership position in its industry is contingent upon its ability to deliver services of the highest quality to its clients at competitive prices and within the established time frames. The Client Partnership Management Framework is the basis of how we manage our relationships with our clients. For each of type of mandates (outsourcing, projects, and consulting services), this framework guides our teams in the achievement of all phases of their work, from the proposal to its completion of the mandate. It is based not only on our best practices, but also relies on the industry’s best standards and practices. A rigorous, regular program to evaluate the satisfaction of our clients allows us to measure our progress and continuously improve our practices. This evaluation is conducted on a face-to-face basis with the client, who must sign the evaluation. Each year, CGI establishes improvement objectives based on the results obtained the previous year.

The Member Partnership Management Framework guides all of our managers through the communications and dialogue activities they have with their teams. This cycle begins with welcoming activities and is followed by informal meetings, team meetings at various levels, career planning and performance reviews. We measure the satisfaction of our members annually through a survey conducted by an outside firm. Members

 

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can also use the survey to communicate their observations and suggestions to the head of their business unit or the CGI executive team. The results are published, and commitments are made by the leaders of both the business units and the company itself to address the comments submitted and make needed improvements.

The Shareholder Partnership Management Framework describes our information and relationship program with our investors beyond the prescribed activities associated with corporate governance, transparency and the disclosure of results.

 

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The final section refers to the way we measure our results. First and foremost, we systematically measure the satisfaction levels of active clients regularly. We also measure member satisfaction annually, and we are currently developing a shareholder satisfaction measurement tool.

 

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3. Documents and Policies Pertaining to Corporate Governance

 

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Documents and Policies Pertaining to Corporate Governance

3.1    Charter of the Board of Directors

Important note

Chapter 1, Dream, Vision, Mission, and Values of the CGI Group Inc. Fundamental Texts constitutes the fundamental principles of this Charter. This Charter should therefore be read in conjunction with Chapter 1.

 

  1. INTERPRETATION

“Financially Literate” means the ability to read and understand a set of financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of the issues that can reasonably be expected to be raised by the Company’s financial statements.

“Independent Director” means a director who meets the independence criteria set out in section 1.4 of Multilateral Instrument 52-110 Audit Committees adopted by the Canadian Securities Administrators and as amended and in effect as of June 30, 2005, which is reproduced in Appendix A.

 

  2. OBJECTIVES

CGI’s shareholders are the first and most important element in the Company’s governance structures and processes. At each annual general meeting, the Company’s shareholders elect the members of the Company’s Board of Directors and give them a mandate to manage and oversee the management of the Company’s affairs for the coming year.

In the normal course of operations, certain corporate actions which may be material to CGI are initiated from time to time by the Company’s senior management and, at the appropriate time, are submitted to CGI’s Board of Directors for consideration and approval. When appropriate, such matters are also submitted for consideration and approval by CGI’s shareholders. All such approvals are sought in accordance with the charters of the Board of Directors and standing committees, CGI’s corporate governance practices and applicable corporate and securities legislation.

The overall stewardship of the Company is the responsibility of the Board of Directors. In accomplishing the mandate it receives from the Company’s shareholders, the Board of Directors

 

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may delegate certain of its authority and responsibilities to committees and management and reserve certain powers to itself. Nonetheless, it will retain full effective control over the Company.

 

  3. COMPOSITION

 

  3.1 The majority of the Board of Directors shall be comprised of Independent Directors. The application of the definition of Independent Director to the circumstances of each individual director is the responsibility of the Board of Directors which will disclose on an annual basis whether it is constituted with the appropriate number of directors which are Independent Directors and the basis for its analysis. The Board of Directors will also disclose which directors are Independent Directors or not and provide a description of the business, family, direct and indirect shareholding or other relationship between each director and the Company.

 

  3.2 The Company expects and requires directors to be and remain free of conflictual interests or relationships and to refrain from acting in ways which are actually or potentially harmful, conflictual or detrimental to the Company’s best interests. Each director shall comply with the Company’s formal code of ethics and business conduct that governs the behaviour of members, directors and officers and shall complete and file annually with the Company any and all documents required pursuant to such formal code of ethics and business conduct with respect to conflict of interests. This matter will also be reviewed annually by the Corporate Governance Committee. The Board of Directors will monitor compliance with said code as well as with the Company’s executive code of conduct applicable to its principal executive officer, principal financial officer, principal accounting officer or controller, or other persons performing similar functions within the Company. The Board will also be responsible for the granting of any waivers from compliance with the codes for directors and officers. The Board of Directors will disclose in due time the adoption of such codes as well as all waivers and specify the circumstances and rationale for granting the waiver.

 

  3.3 The Board of Directors, following advice of its Corporate Governance Committee, is responsible for evaluating its size and composition and establishing a Board comprised of members who facilitate effective decision-making. The Board of Directors has the ability to increase or decrease its size.

 

  3.4 It is a general requirement under the Company’s corporate governance practices that all directors possess both financial and operational literacy. In addition, the membership of the Board of Directors will include a sufficient number of directors who are Financially Literate and at least one director who qualifies as a financial expert as defined in the applicable corporate governance rules imposed by regulatory bodies in order to ensure that the Audit and Risk Management Committee membership complies with those rules.

 

  3.5

A director who makes a major change in principal occupation will forthwith disclose this fact to the Board of Directors and will offer his or her resignation to the Board of Directors for consideration. It is not intended that directors who retire or whose professional positions

 

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change should necessarily leave the Board of Directors. However, there should be an opportunity for the Board of Directors to review the continued appropriateness of the Board of Directors membership under such circumstances.

 

  3.6 The Board of Directors is responsible for approving new nominees to the Board. New directors will be provided with an orientation and education program which will include written information about the duties and obligations of directors, the business and operations of the Company, documents from recent Board of Directors meetings and opportunities for meetings and discussion with senior management and other directors. The details of the orientation of each new director will be tailored to that director’s individual needs and areas of interest. The prospective candidates should fully understand the role of the Board of Directors and its committees and the contribution expected from individual directors and the Board of Directors will ensure that they are provided with the appropriate information to that effect. In addition, the Board of Directors will ascertain and make available to its members, when required, continuing education as per the business and operations of the Company.

 

  4. RESOURCES

 

  4.1 The Board of Directors will implement structures and procedures to ensure that it functions independently of management.

 

  4.2 The Board of Directors appreciates the value of having certain members of senior management attend each Board of Directors meeting to provide information and opinion to assist the directors in their deliberations. The Executive Chairman of the Board will seek the Board of Directors’ concurrence in the event of any proposed change to the management attendees at Board of Directors meetings. Management attendees will be excused for any agenda items which are reserved for discussion among directors only.

 

  5. RESPONSIBILITIES AND DUTIES

The principal responsibilities and duties of the Board of Directors include the following, it being understood that in carrying out their responsibilities and duties, directors may consult with management and may retain external advisors at the expense of the Company in appropriate circumstances. Any engagement of external advisors shall be subject to the approval of the Chair of the Corporate Governance Committee.

 

  5.1 General Responsibilities

 

  5.1.1 The Board of Directors will oversee the management of the Company. In doing so, the Board of Directors will establish a productive working relationship with the Executive Chairman of the Board and the Chief Executive Officer and other members of senior management.

 

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  5.1.2 The Board of Directors will oversee the formulation of long-term strategic, financial and organizational goals for the Company. It shall approve the Company’s strategic plan and review same on at least an annual basis. This plan will take into account the opportunity and risks of the Company’s business.

 

  5.1.3 As part of the responsibility of the Board of Directors to oversee management of the Company, the Board of Directors will engage in active monitoring of the Company and its affairs in its stewardship capacity.
  5.1.4 The Board of Directors will engage in a review of short and long-term performance of the Company in accordance with approved plans.

 

  5.1.5 The officers of the Company, headed by the Executive Chairman of the Board and the Chief Executive Officer, shall be responsible for general day to day management of the Company and for making recommendations to the Board of Directors with respect to long term strategic, financial, organizational and related objectives.

 

  5.1.6 The Board of Directors will periodically review the significant risks and opportunities affecting the Company and its business and oversee the actions, systems and controls in place to manage and monitor risks and opportunities. The Board of Directors may impose such limits as may be in the interests of the Company and its shareholders.

 

  5.1.7 The Board of Directors will oversee how the Company communicates its goals and objectives to its shareholders and other relevant constituencies.

 

  5.1.8 The Board of Directors will oversee the succession planning including appointing, training and monitoring senior management and the Executive Chairman of the Board in particular.

 

  5.1.9 The Board of Directors is responsible for overseeing a Communication Policy for the Company. In doing so, the Board of Directors will ensure that the policy (i) addresses how the Company interacts with analysts, investors, other key stakeholders and the public, (ii) contains measures for the Company to comply with its continuous and timely disclosure obligations and to avoid selective disclosure, and (iii) is reviewed at least annually.

 

  5.1.10 The Board of Directors will oversee the integrity of the Company’s internal control and management information systems.

 

  5.1.11 The Board of Directors will make sure that the Company adopt prudent financial standards with respect to the business of the Company and prudent levels of debt in relation to the Company’s consolidated capitalization.

 

  5.1.12 The Board of Directors will also consider and approve:

 

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  i) transactions out of the ordinary course of business including, without limitation, proposals on mergers, acquisitions or other major investments or divestitures;

 

  ii) all matters that would be expected to have a major impact on shareholders;

 

  iii) the appointment of any person to any position that would qualify such person as an officer of the Company; and

 

  iv) any proposed changes in compensation to be paid to members of the Board of Directors on the recommendation of the Human Resources Committee.

 

  5.1.13 The Board of Directors will also receive reports and consider:

 

  i) The quality of relationships between the Company and its key customers;

 

  ii) Changes in the shareholder base of the Company from time to time and relationships between the Company and its significant shareholders;

 

  iii) Periodic reports from Board of Directors’ committees with respect to matters considered by such committees;

 

  iv) Health, safety and environmental matters as they affect the Company and its business; and

 

  v) Such other matters as the Board of Directors may, from time to time, determine.

 

  5.1.14 The Board of Directors will oversee management through an ongoing review process.

 

  5.1.15 The Board of Directors will, together with the Executive Chairman of the Board develop a position descriptions for the Executive Chairman of the Board and the Chief Executive Officer. The Board of Directors will also approve the corporate objectives that the Executive Chairman of the Board is responsible for meeting and assess management’s performance in relation to such objectives. The Board of Directors will raise any concerns related to the performance of the Chief Executive Officer with the Executive Chairman of the Board as appropriate.

 

  5.1.16 The Board of Directors will receive a report from its Human Resources Committee on succession planning as set forth in such committee’s mandate.

 

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  5.2 Annual Assessment of the Board of Directors

The Board of Directors will annually review the assessment of the Board of Directors’ performance and recommendation provided by the Corporate Governance Committee. The objective of this review is to increase the effectiveness of the Board of Directors and contribute to a process of continuous improvement in the Board of Directors’ execution of its responsibilities. It is expected that the result of such reviews will be to identify any areas where the directors and/or management believe that the Board of Directors and/or the directors individually could make a better contribution to the affairs of the Company. The Board of Directors will take appropriate action based upon the results of the review process.

 

  5.3 Committees

 

  5.3.1 The Board of Directors shall appoint committees to assist it in performing its duties and processing the quantity of information it receives.

 

  5.3.2 Each committee operates according to a Board of Directors approved written mandate outlining its duties and responsibilities. This structure may be subject to change as the Board of Directors considers from time to time which of its responsibilities can best be fulfilled through more detailed review of matters in committee.

 

  5.3.3 The Board of Directors will review annually the work undertaken by each committee and the responsibilities thereof.

 

  5.3.4 The Board of Directors will annually evaluate the performance and review the work of its committees, including their respective mandates and the sufficiency of such mandates.

 

  5.3.5 The Board of Directors will annually appoint a Lead Director as well as a member of each of its committees to act as Chair of the committee.

 

  5.3.6 Subject to subsection 5.3.8, committees of the Board of Directors shall be composed of a majority of Independent Directors.

 

  5.3.7 The Board of Directors shall appoint members of committees after considering the recommendations of the Corporate Governance Committee and the Executive Chairman of the Board as well as the skills and desires of individual Board members, all in accordance with the mandates of such committees approved by the Board.

 

  5.3.8 The Audit Committee shall be composed only of Independent Directors. All members of the Audit Committee shall be Financially Literate and at least one member shall be a financial expert within the meaning of applicable regulatory requirements.

 

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  5.4 Lead Director

 

  5.4.1 The Lead Director shall be an Independent Director. He will oversee that the Board of Directors discharges its responsibilities, ensure that the Board of Directors evaluates the performance of management objectively and that the Board of Directors understands the boundaries between the Board of Directors and management responsibilities.

 

  5.4.2 The Lead Director will chair periodic meetings of the Independent Directors and assume other responsibilities which the Independent Directors as a whole might designate from time to time.

 

  5.4.3 The Lead Director should be able to stand sufficiently back from the day-to-day running of the business to ensure that the Board of Directors is in full control of the Company’s affairs and alert to its obligations to the shareholders.

 

  5.4.4 The Lead Director shall provide input to the Executive Chairman of the Board on preparation of agendas for Board and committee meetings.

 

  5.4.5 The Lead Director shall chair Board meetings when the Executive Chairman of the Board is not in attendance, subject to the provisions of the by-laws of the Company.

 

  5.4.6 The Lead Director shall provide leadership for the independent directors and ensure that the effectiveness of the Board is assessed on a regular basis.

 

  5.4.7 The Lead Director shall set the agenda for the meetings of the Independent Directors.

 

  5.4.8 The Lead Director shall report to the Board concerning the deliberations of the independent directors as required.

 

  5.4.9 The Lead Director shall, in conjunction with the Executive Chairman of the Board, facilitate the effective and transparent interaction of Board members and management;

 

  5.4.10 The Lead Director shall provide feedback to the Executive Chairman of the Board and act as a sounding board with respect to strategies, accountability, relationships and other issues.

 

  5.5 Review of the Board Mandate

In order to ensure that this mandate is kept current in the light of changes which may occur in corporate practice or the structure of the Company, the Board of Directors will annually reconfirm this mandate or initiate a review to revise it.

 

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  5.6 Board of Directors Compensation

The Human Resources Committee will review the adequacy and form of compensation of the senior management and directors each year. The Committee shall make recommendations to the Board of Directors for consideration when it believes changes in compensation are warranted. Furthermore, the Board of Directors will ensure the compensation realistically reflects the responsibility and risk involved in being a director.

 

  6. COMMUNICATIONS POLICY

 

  6.1 The Board of Directors will consider and review the means by which shareholders can communicate with the Company including the opportunity to do so at the annual meeting, communications interfaces through the Company’s website and the adequacy of resources available within the Company to respond to shareholders through the office of the Corporate Secretary and otherwise. However, the Board of Directors believes that it is the function of the management to speak for the Company in its communications with the investment community, the media, customers, suppliers, employees, governments and the general public. It is understood that individual directors may from time to time be requested by management to assist with such communications. It is expected, if communications from stakeholders are made to individual directors, management will be informed and consulted to determine any appropriate response.

 

  6.2 The Board of Directors has the responsibility for monitoring compliance by the Company with the corporate governance requirements and guidelines of the Toronto Stock Exchange and the New York Stock Exchange. The Board of Directors will approve the disclosure of the Company’s system of governance and the operation of such system.

 

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3.2     Charter of the Corporate Governance Committee

Important note

Chapter 1, Dream, Vision, Mission, and Values of the CGI Group Inc. Fundamental Texts constitutes the fundamental principles of this Charter. This Charter should therefore be read in conjunction with Chapter 1.

 

  1. INTERPRETATION

“Committee” means the Corporate Governance Committee of the Board of Directors of the Company.

“Independent Director” means a director who meets the independence criteria set out in section 1.4 of Multilateral Instrument 52-110 Audit Committees adopted by the Canadian Securities Administrators and as amended and in effect as of June 30, 2005, which is reproduced in Appendix A.

 

  2. OBJECTIVES

The Committee is responsible for: (a) developing the Company’s approach to Board governance issues and the Company’s response to the corporate governance guidelines; (b) reviewing the composition and contribution of the Board and its members and recommending Board nominees; (c) overseeing the orientation program for new directors; and (d) helping to maintain an effective working relationship between the Board of Directors of the Company and management.

 

  3. COMPOSITION

 

  3.1 The Committee shall be composed of a majority of Independent Directors.

 

  3.2 The Board of Directors shall appoint an independent director as the Chair of the Committee. If the Chair is absent from a meeting, the members shall select a Chair from those in attendance to act as Chair of the meeting.

 

  4. MEETINGS

 

  4.1 Meetings of the Committee shall be held at the call of the Chair, but not less than twice annually. Meetings of the Committee may be called by the Chair of the Committee, the Executive Chairman of the Board or the Chief Executive Officer.

 

  4.2

The powers of the Committee shall be exercisable by a meeting at which a quorum is present. A quorum shall be not less than two members of the Committee from time to time. Subject to

 

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the foregoing requirement, unless otherwise determined by the Board of Directors, the Committee shall have the power to fix its quorum and to regulate its procedure. Matters decided by the Committee shall be decided by majority vote.

 

  4.3 Notice of each meeting shall be given to each member, to the Executive Chairman of the Board, to the Chief Executive Officer and to the Corporate Secretary of the Company.

 

  4.4 The Committee may invite from time to time such persons as it may see fit to attend its meetings and to take part in discussion and consideration of the affairs of the Committee, including in particular the Chief Executive Officer.

 

  4.5 The Committee shall appoint a secretary to be the secretary of all meetings of the Committee and to maintain minutes of all meetings and deliberations of the Committee.

 

  5. RESPONSIBILITIES AND DUTIES

 

  5.1 Role and responsibilities of the Committee Chair:

 

  5.1.1 The Chair of the Committee:

 

  5.1.1.1 Provides leadership for the committee by ensuring that:

 

  (i) The responsibilities of the committee are well understood by committee members and management.

 

  (ii) The committee works as a cohesive team.

 

  (iii) Adequate resources and timely and relevant information are available to the committee to support its work.

 

  (iv) The effectiveness of the committee is assessed on a regular basis.

 

  (v) The committee’s structure and mandate is appropriate and adequate to support the discharge of the committee’s responsibilities.

 

  (vi) The scheduling, organization and procedures of committee meetings provide adequate time for the consideration and discussion of relevant issues.

 

  5.1.1.2 Works with the Executive Chairman of the Board and Corporate Secretary to set the calendar of the committee’s regular meetings.

 

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  5.1.1.3 Has the authority to convene special meetings as required.

 

  5.1.1.4 Sets the agenda in collaboration with the Executive Chairman of the Board and the Corporate Secretary.

 

  5.1.1.5 Presides at meetings.

 

  5.1.1.6 Acts as liaison with management with regard to the work of the committee.

 

  5.1.1.7 Reports to the Board concerning the work of the committee.

 

  5.1.1.8 Exercises the authority specifically delegated to the Chair by the Committee, if any.

 

  5.2 General Responsibilities

BOARD MEMBERS

 

  5.2.1 Review criteria regarding the composition of the Board of Directors and committees of the Board of Directors, such as size, proportion of Independent Directors and as to criteria to determine “relatedness” as well as profile of the Board of Directors (age, geographical representation, disciplines, etc.) and establish a Board of Directors comprised of members who facilitate effective decision-making.

 

  5.2.2 Review criteria relating to tenure as a director, such as limitations on the number of times a director may stand for re-election, and the continuation of directors in an honorary or similar capacity.

 

  5.2.3 Review criteria for retention of directors unrelated to age or tenure, such as attendance at Board of Directors and committee meetings, health or the assumption of responsibilities which are incompatible with effective Board of Directors membership; and assess the effectiveness of the Board of Directors as a whole, the committees of the Board of Directors, the contribution of individual directors on an ongoing basis and establish in light of the opportunities and risks facing the Company, what competencies, skills and personal qualities it seeks in new Board members in order to add value to the Company.

 

  5.2.4 Recommend to the Board of Directors the list of candidates for directors to be nominated for election by shareholders at annual meetings of shareholders.

 

  5.2.5 Recommend to the Board of Directors candidates to fill vacancies on the Board of Directors occurring between annual meetings of shareholders.

 

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  5.2.6 Recommend to the Board of Directors the removal of a director in exceptional circumstances, for example (a) such director is in a position of conflict of interest or (b) the criteria underlying the appointment of such director change.

 

  5.2.7 Ensure that the Board of Directors can function independently of management. To this end, arrange for meetings on a regular basis of the Independent Directors without management present. In such cases, meetings will be chaired by the Lead Director.

DIRECTOR ORIENTATION

 

  5.2.8 As an integral element of the process for appointing new directors, put in place an orientation and education program for new recruits to the Board of Directors and review from time to time the value and benefit of such program.

COMPLIANCE

 

  5.2.9 Ensure corporate compliance with applicable legislation including director and officer compliance.

 

  5.2.10 Review proposed amendments to the Company’s by-laws before making recommendations to the Board of Directors.

CODES OF BUSINESS CONDUCT

 

  5.2.11 Periodically review and make recommendations to the Board of Directors with respect to the Company’s formal code of ethics and business conduct for its members, directors and officers and its executive code of conduct applicable to the Company’s principal executive officer, principal financing officer, principal accounting officer or controller, or other persons performing similar functions within the Company; including the disclosure of the adoption of such codes.

 

  5.2.12 Monitor adherence to the codes and review potential situations related thereto brought to the attention of the Committee by the Corporate Secretary of the Company in order to recommend or not in certain circumstances to the Board of Directors to grant or not waivers from compliance with the codes for directors and officers. The Committee shall also ensure that when such waivers are granted, the Board of Directors shall disclose same in due time and specify the circumstances and rationale for granting the waiver.

CORPORATE GOVERNANCE PRINCIPLES

 

  5.2.13 Make recommendations to the Board of Directors as deemed appropriate in the context of adherence to corporate governance guidelines in effect from time to time.

 

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  5.2.14 In conjunction with the Executive Chairman of the Board of Directors, recommend to the Board of Directors the membership and chairs of the committees of the Board of Directors.

 

  5.2.15 Review annually the Board/management relationship.

 

  5.2.16 Advise the Board of Directors on the disclosure to be contained in the Company’s public disclosure documents, such as the Company’s annual management proxy circular or annual report, on matters of corporate governance as required by the Toronto Stock Exchange, the New York Stock Exchange or any other applicable exchange or regulator.

 

  5.2.17 Generally advise the Board of Directors on all other matters of corporate governance.

EXTERNAL AND INTERNAL RESOURCES

 

  5.2.18 Retain such independent external advisors as it may deem necessary and advisable for its purposes.

 

  5.2.19 Report to the Board of Directors on its proceedings, reviews undertaken, and any associated recommendations.

 

  5.2.20 Have adequate resources to discharge its responsibilities;

 

  5.2.21 Have the right, for the purposes of discharging the powers and responsibilities of the Committee, to inspect any relevant records of the Company and its subsidiaries.

 

  5.2.22 The Chair of the Committee shall review the opportunity for the Board of Directors of the Company or individual directors to retain external advisors at the expense of the Company in certain appropriate circumstances in carrying out their responsibilities.

SHAREHOLDER PROPOSALS

 

  5.2.23 Review and make recommendations on shareholder proposals to the Board of Directors or refer them to the Executive Chairman of the Board as appropriate.

 

  5.3 Other Responsibilities

 

    The Committee shall carry out such other mandates as the Board of Directors may request from time to time.

 

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  5.4 Review of Mandate of the Committee

The Board of Directors should review and reassess the adequacy of the mandate on an annual basis.

 

  5.5 Compensation

Members of the Committee shall be entitled to receive such remuneration for acting as members of the Committee as the Board of Directors may determine from time to time.

 

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3.3    Charter of the Human Resources Committee

Important note

Chapter 1, Dream, Vision, Mission, and Values of the CGI Group Inc. Fundamental Texts constitutes the fundamental principles of this Charter. This Charter should therefore be read in conjunction with Chapter 1.

 

  1. INTERPRETATION

“Committee” means the Human Resources Committee of the Board of Directors of the Company.

“Independent Director” means a director who meets the independence criteria set out in section 1.4 of Multilateral Instrument 52-110 Audit Committees adopted by the Canadian Securities Administrators and as amended and in effect as of June 30, 2005, which is reproduced in Appendix A.

 

  2. OBJECTIVES

The Committee is responsible for reviewing and making recommendations to the Board of Directors of the Company for the appointment of Officers of the Company and for determining terms of employment of senior executives whose remuneration must be disclosed as per applicable legislation, and such other senior executives as may be proposed by the Executive Chairman of the Board and the Chief Executive Officer. It shall also perform functions such as reviewing succession planning and matters of compensation as well as such other matters the Committee may consider suitable with respect to compensation or as may be specifically directed by the Board of Directors of the Company from time to time.

 

  3. COMPOSITION

 

  3.1 The Committee shall be composed of a majority of Independent Directors.

 

  3.2 The Board of Directors shall appoint one of the Independent Directors as the Chair of the Committee. If the Chair is absent from a meeting, the members shall select a Chair from those in attendance to act as Chair of the meeting.

 

  4. MEETINGS

 

  4.1 Meetings of the Committee shall be held at the call of the Chair, but not less than three times annually. Meetings of the Committee may be called by the Chair of the Committee, the Executive Chairman of the Board or the Chief Executive Officer.

 

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  4.2 The powers of the Committee shall be exercisable by a meeting at which a quorum is present. A quorum shall be not less than two members of the Committee from time to time. Subject to the foregoing requirement, unless otherwise determined by the Board of Directors, the Committee shall have the power to fix its quorum and to regulate its procedure. Matters decided by the Committee shall be decided by majority vote.

 

  4.3 Notice of each meeting shall be given to each member, to the Executive Chairman of the Board, to the Chief Executive Officer and to the Corporate Secretary of the Company.

 

  4.4 The Committee may invite from time to time such persons as it may see fit to attend its meetings and to take part in discussion and consideration of the affairs of the Committee, including in particular the Executive Chairman of the Board.

 

  4.5 The Committee shall appoint a secretary to be the secretary of all meetings of the Committee and to maintain minutes of all meetings and deliberations of the Committee.

 

  5. RESPONSIBILITIES AND DUTIES

 

  5.1 Role and responsibilities of the Committee Chair:

 

  5.1.1 The Chair of the Committee:

 

  5.1.1.1 Provides leadership for the committee by ensuring that:

 

  (i) The responsibilities of the committee are well understood by committee members and management.

 

  (ii) The committee works as a cohesive team.

 

  (iii) Adequate resources and timely and relevant information are available to the committee to support its work.

 

  (iv) The effectiveness of the committee is assessed on a regular basis.

 

  (v) The committee’s structure and mandate is appropriate and adequate to support the discharge of the committee’s responsibilities.

 

  (vi) The scheduling, organization and procedures of committee meetings provide adequate time for the consideration and discussion of relevant issues.

 

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  5.1.1.2 Works with the Executive Chairman of the Board and Corporate Secretary to set the calendar of the committee’s regular meetings.

 

  5.1.1.3 Has the authority to convene special meetings as required.

 

  5.1.1.4 Sets the agenda in collaboration with the Executive Chairman of the Board and the Corporate Secretary.

 

  5.1.1.5 Presides at meetings.

 

  5.1.1.6 Acts as liaison with management with regard to the work of the committee.

 

  5.1.1.7 Reports to the Board concerning the work of the committee.

 

  5.1.1.8 Exercises the authority specifically delegated to the Chair by the Committee, if any.

 

  5.2 General Responsibilities

 

  5.2.1 The Committee shall, among other things, have responsibility to advise the Board of Directors on human resources planning, compensation of members of the Board of Directors, Executive Officers and other employees, short and long-term incentive plans, benefit plans, and Executive Officer appointments.

 

  5.2.2 The Committee shall review and report to the Board of Directors on:

 

  5.2.2.1 Management’s succession plans for Executive Officers, with special emphasis on the Executive Chairman of the Board and Chief Executive Officer succession;

 

  5.2.2.2 Compensation philosophy of the organization, including a remuneration strategy and remuneration policies for the Executive Officer level, as proposed by the Executive Chairman of the Board and the Chief Executive Officer;

 

  5.2.2.3 Recommendations to the Board of Directors for the appointment of the Executive Chairman of the Board, the Chief Executive Officer and other Executive Officers, corporate objectives which the Executive Chairman of the Board and such other Executive Officers, as the case may be, are responsible for meeting, assessment of the Executive Chairman of the Board and of the Chief Executive Officer against these objectives, monitoring of the Executive Chairman of the Board’s performance and providing advice and counsel in the execution of his duties;

 

  5.2.2.4

Total remuneration plan including adequacy and form of compensation realistically reflecting the responsibilities and risks of the position for the Executive Chairman of the Board and for

 

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the Chief Executive Officer of the Company and, in connection therewith, consider appropriate information, including information from the Board of Directors with respect to the overall performance of the Executive Chairman of the Board and of the Chief Executive Officer;

 

  5.2.2.5 Remuneration for Executive Officers, annual adjustment to executive salaries, and the design and administration of short and long-term incentive plans, stock options, benefits and perquisites as proposed by the Executive Chairman of the Board and the Chief Executive Officer;

 

  5.2.2.6 Employment and termination arrangements for senior management;

 

  5.2.2.7 Adoption of new, or significant modifications to, pay and benefit plans;

 

  5.2.2.8 Appointment of new officers as appropriate;

 

  5.2.2.9 Significant organizational changes;

 

  5.2.2.10 The Committee’s proposed executive compensation report to be contained in the Company’s annual proxy circular;

 

  5.2.2.11 Management development programs for the Company;

 

  5.2.2.12 Any special employment contracts or arrangements with officers of the Company including any contracts relating to change of control; and

 

  5.2.2.13 Remuneration for members of the Board of Directors and committees thereof, including adequacy and form of compensation realistically reflecting the responsibilities and risks of the positions and recommend changes where applicable.

 

  5.2.3 The Committee shall perform such other duties as may from time to time be assigned to it by the Board of Directors including those relating to compensation of officers and senior employees and the manpower resources of the Company.

 

  5.3 Other Responsibilities

 

  5.3.1 The Committee shall have the right to retain such independent external advisors as it may deem necessary and advisable for its purposes and to assess and review, on an annual basis or as deemed appropriate, the independence of such external advisors.

 

  5.3.2 The Committee shall report to the Board of Directors on its proceedings, reviews undertaken, and any associated recommendations.

 

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  5.3.3 The Committee shall have adequate resources to discharge its responsibilities.

 

  5.3.4 The Committee shall have the right, for the purposes of discharging the powers and responsibilities of the Committee, to inspect any relevant records of the Company and its subsidiaries.

 

  5.4 Review of Mandate of the Committee

The Board of Directors should review and reassess the adequacy of this mandate on an annual basis.

 

  5.5 Compensation

Members of the Committee shall be entitled to receive such remuneration for acting as members of the Committee as the Board of Directors may determine from time to time.

 

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3.4    Charter of the Audit and Risk Management Committee

Important note

Chapter 1, Dream, Vision, Mission, and Values of the CGI Group Inc. Fundamental Texts constitutes the fundamental principles of this Charter. This Charter should therefore be read in conjunction with Chapter 1.

 

  1. INTERPRETATION

“Committee” means the Audit and Risk Management Committee of the Board of Directors of the Company.

“Financially Literate” means the ability to read and understand a set of financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of the issues that can reasonably be expected to be raised by the Company’s financial statements.

“Independent Director” means a director who meets the independence criteria set out in section 1.4 of Multilateral Instrument 52-110 Audit Committees adopted by the Canadian Securities Administrators and as amended and in effect as of June 30, 2005, which is reproduced in Appendix A.

 

  2. OBJECTIVES

The Committee will assist the Board of Directors in fulfilling its oversight responsibilities. In performing its duties, the Committee will maintain effective working relationships with the Board of Directors, management, the internal auditors and the external auditors.

 

  3. COMPOSITION

 

  3.1 The Committee shall consist solely of Independent Directors, all of whom shall be Financially Literate and at least one of whom shall be a financial expert as defined in the applicable corporate governance rules imposed by regulatory bodies.

 

  3.2 Following each annual meeting of shareholders, the Board of Directors shall elect three or more directors, who shall meet the independence and experience requirements of the New York Stock Exchange and the Toronto Stock Exchange as well as the other similar requirements under applicable securities regulations, to serve on the Committee until the close of the next annual meeting of shareholders of the Company or until the member ceases to be a director, resigns or is replaced, whichever first occurs. Any member may be removed from office or replaced at any time by the Board of Directors.

 

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  3.3 The Board of Directors shall appoint one of the members of the Committee as the Chair of the Committee. If the Chair is absent from a meeting, the members shall select a Chair from those in attendance to act as Chair of the meeting.

 

  4. MEETINGS AND RESOURCES

 

  4.1 Regular meetings of the Committee shall be held quarterly. Special meetings of the Committee may be called by the Chair of the Committee, the external auditors, the Executive Chairman of the Board, the Chief Executive Officer or the Chief Financial Officer of the Company.

 

  4.2 The powers of the Committee shall be exercisable by a meeting at which a quorum is present. A quorum shall be not less than two members of the Committee from time to time. Subject to the foregoing requirement, unless otherwise determined by the Board of Directors, the Committee shall have the power to fix its quorum and to regulate its procedure. Matters decided by the Committee shall be decided by majority vote.

 

  4.3 Notice of each meeting shall be given to each member, the external auditors, the Executive Chairman of the Board, the Chief Executive Officer and the Chief Financial Officer of the Company, any or all of whom shall be entitled to attend. Notice of each meeting shall also be given, as the case may be, to the internal auditor who shall also attend whenever requested to do so by the Chair of the Committee or the Corporate Secretary.

 

  4.4 Notice of meeting may be given orally or by letter, telephone facsimile transmission, telephone or electronic device not less than 24 hours before the time fixed for the meeting. Members may waive notice of any meeting. The notice need not state the purpose or purposes for which the meeting is being held.

 

  4.5 Opportunities should be afforded periodically to the external auditors and, as the case may be, to the internal auditor and the senior management to meet separately with the Committee. In addition, the Committee may meet in camera, with only members of the Committee present, whenever the Committee determines that it is appropriate to do so.

 

  4.6 The Committee shall have the authority to retain special legal counselling, accounting or other consultants as it may see fit to attend its meetings and to take part in discussion and consideration of the affairs of the Committee at the Company’s expense.

 

  4.7 The Corporate Secretary of the Company or designate of the Corporate Secretary shall be the Secretary of all meetings of the Committee and shall maintain minutes of all meetings and deliberations of the Committee.

 

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  5. RESPONSIBILITIES AND DUTIES

 

  5.1 Role and responsibilities of the Committee Chair:

 

  5.1.1 The Chair of the Committee:

 

  5.1.1.1 Provides leadership for the committee by ensuring that:

 

  (i) The responsibilities of the committee are well understood by committee members and management.

 

  (ii) The committee works as a cohesive team.

 

  (iii) Adequate resources and timely and relevant information are available to the committee to support its work.

 

  (iv) The effectiveness of the committee is assessed on a regular basis.

 

  (v) The committee’s structure and mandate is appropriate and adequate to support the discharge of the committee’s responsibilities.

 

  (vi) The scheduling, organization and procedures of committee meetings provide adequate time for the consideration and discussion of relevant issues.

 

  5.1.1.2 Works with the Executive Chairman of the Board, the Chief Financial Officer and the Corporate Secretary to set the calendar of the committee’s regular meetings.

 

  5.1.1.3 Has the authority to convene special meetings as required.

 

  5.1.1.4 Sets the agenda in collaboration with the Executive Chairman of the Board, the Chief Financial Officer and the Corporate Secretary.

 

  5.1.1.5 Presides at meetings.

 

  5.1.1.6 Acts as liaison with management with regard to the work of the committee.

 

  5.1.1.7 Reports to the Board concerning the work of the committee.

 

  5.1.1.8 Exercises the authority specifically delegated to the Chair by the Committee, if any.

 

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  5.2 General responsibilities

While the Committee has the responsibilities and powers set forth below, it is not the duty of the Committee to plan or conduct audits or to determine that the Company’s financial statements are complete and accurate. This is the responsibility of management and the external auditors. Nor is it the duty of the Committee to conduct investigations, or to assure compliance with laws and regulations. The Committee shall review disagreements, if any, between management and the external auditors and shall make recommendations to resolve such disagreements. In the event that any such disagreement persists, the matter will be referred by the Committee to the Board of Directors for a final determination.

 

  5.3 Review of mandate of the committee

The Board of Directors and the Committee shall review and reassess the adequacy of this mandate on an annual basis.

 

  5.4 Publicly disclosed financial information

 

  5.4.1 The Committee shall review and recommend for approval by the Board of Directors, before release to the public:

 

  5.4.1.1 interim unaudited financial statements;

 

  5.4.1.2 audited annual financial statements, in conjunction with the report of the external auditors;

 

  5.4.1.3 all public disclosure documents containing audited or unaudited financial information, including any prospectus, the annual information form and management’s discussion and analysis of financial condition and results of operations, as well as related press releases, including earnings guidance; and

 

  5.4.1.4 the compliance of management certification of financial reports with applicable legislation and attestation of the Company’s disclosure controls and procedures.

 

  5.4.2 The Committee shall review any report which accompanies published financial statements (to the extent such a report discusses financial condition or operating results) for consistency of disclosure with the financial statements themselves.

 

  5.4.3 In its review of financial statements, the Committee should obtain an explanation from management of all significant variances between comparative reporting periods and an explanation from management for items which vary from expected or budgeted amounts as well as from previous reporting periods.

 

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  5.4.4 In its review of financial statements, the Committee should review unusual or extraordinary items, transactions with related parties, and adequacy of disclosures, asset and liability carrying values, income tax status and related reserves, qualifications, if any, contained in letters of representation and business risks, uncertainties, commitments and contingent liabilities.

 

  5.4.5 In its review of financial statements, the Committee shall review the appropriateness of the Company’s significant accounting principles and practices, including acceptable alternatives, and the appropriateness of any significant changes in accounting principles and practices.

 

  5.4.6 The Committee shall satisfy itself that adequate procedures are in place for the review of the Company’s public disclosure of financial information extracted or derived from the Company’s financial statements, and shall periodically assess the adequacy of those procedures.

 

  5.5 Financial reporting and accounting trends

The Committee shall:

 

  5.5.1 Review and assess the effectiveness of accounting policies and practices concerning financial reporting;

 

  5.5.2 Review with management and with the external auditors any proposed changes in major accounting policies, the presentation and impact of significant risks and uncertainties, and key estimates and judgments of management that may be material to financial reporting;

 

  5.5.3 Question management and the external auditors regarding significant financial reporting issues discussed and the method of resolution; and

 

  5.5.4 Review general accounting trends and issues of accounting policy, standards and practices which affect or may affect the Company.

 

  5.6 Internal controls

 

  5.6.1 The Committee shall review and monitor the Company’s internal control procedures, programs and policies, and assess the adequacy and effectiveness of internal controls over the accounting and financial reporting systems, with particular emphasis on controls over computerized systems.

 

  5.6.2 The Committee shall review:

 

  5.6.2.1 The evaluation of internal controls by the external auditors, together with management’s response;

 

 

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  5.6.2.2 The working relationship between management and external auditors;

 

  5.6.2.3 The appointments of the Chief Financial Officer and any key financial executives involved in the financial reporting process;

 

  5.6.2.4 The review and approval of the Company’s hiring policies regarding partners, employees and former partners and employees of the present and former external auditor of the Company;

 

  5.6.2.5 Any decisions related to the need for internal auditing, including whether this function should be outsourced and, in such case, approving the supplier which shall not be the external auditors; and

 

  5.6.2.6 Internal control procedures to ensure compliance with the law and avoidance of conflicts of interest.

 

  5.6.3 The Committee shall undertake private discussions with staff of the internal audit function to establish internal audit independence, the level of co-operation received from management, the degree of interaction with the external auditors, and any unresolved material differences of opinion or disputes.

 

  5.7 Internal Auditor

The Committee shall:

 

  5.7.1 Review the mandate and annual objectives of the internal auditor, if the appointment of an internal auditor is deemed appropriate;

 

  5.7.2 Review the adequacy of the Company’s internal audit resources; and

 

  5.7.3 Ensure the internal auditor has ongoing access to the Chair of the Committee as well as all officers of the Company, particularly the Executive Chairman of the Board and the Chief Executive Officer.

 

  5.7.4 Review the audit plans, performance and summaries of the reports of the internal audit function as well as management’s response including follow-up to any identified weakness.

 

  5.8 External Auditors

 

  5.8.1 The Committee shall recommend to the Board of Directors the appointment of the external auditors, which firm is ultimately accountable to the Committee and the Board of Directors.

 

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  5.8.2 The Committee shall i) receive periodic reports from the external auditors regarding the auditors independence, the performance of the auditors, the qualifications of the key audit partner and audit managers, a periodic review of the auditors’ quality control procedures, material issues arising from the periodic quality control review and the steps taken by the auditors to address such findings, ii) discuss such reports with the auditors, and if so determined by the Committee, iii) recommend that the Board of Directors take appropriate action to satisfy itself as to the independence of the auditors and the quality of their performance.

 

  5.8.3 The Committee shall take appropriate steps to assure itself that the external auditors are satisfied with the quality of the Company’s accounting principles and that the accounting estimates and judgments made by management reflect an appropriate application of generally accepted accounting principles.

 

  5.8.4 The Committee shall undertake private discussions on a regular basis with the external auditors to review, among other matters, the quality of financial personnel, the level of co-operation received from management, any unresolved material differences of opinion or disputes with management regarding financial reporting and the effectiveness of the work of the internal audit function.

 

  5.8.5 The Committee shall review the terms of the external auditors’ engagement and the appropriateness and reasonableness of the proposed audit fees as well as the compensation of any advisors retained by the Committee.

 

  5.8.6 The Committee shall review and pre-approve any engagements for non-audit services provided by the external auditors or their affiliates to the Company or its subsidiaries, together with the fees for such services, and consider the impact of this on the independence of the external auditors. The Committee shall determine which non-audit services the external auditors are prohibited from providing.

 

  5.8.7 When a change of auditors is proposed, the Committee shall review all issues related to the change, including the information required to be disclosed by regulations and the planned steps for an orderly transition.

 

  5.8.8 The Committee shall review all reportable events, including disagreements, unresolved issues and consultations on a routine basis whether or not there is to be a change of auditors.

 

  5.8.9 When discussing auditor independence, the Committee will consider both rotating the lead audit partner or audit partner responsible for reviewing the audit after a number of years and establishing hiring policies for employees or former employees of its external auditor.

 

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  5.9 Audit Procedures

 

  5.9.1 The Committee shall review the audit plans of the internal and external audits, including the degree of co-ordination in those plans, and shall inquire as to the extent to which the planned audit scope can be relied upon to detect weaknesses in internal control or fraud or other illegal acts. The audit plans should be reviewed with the external auditors and with management, and the Committee should recommend to the Board of Directors the scope of the external audit as stated in the audit plan.

 

  5.9.2 The Committee shall review any problems experienced by the external auditors in performing the audit, including any restrictions imposed by management or significant accounting issues on which there was a disagreement with management.

 

  5.9.3 The Committee shall review the post-audit or management letter containing the recommendations of the external auditors, and management’s response and subsequent follow-up to any identified weakness.

 

  5.10 Risk management and other responsibilities

 

  5.10.1 The Committee shall put in place procedures to receive and handle complaints or concerns received by the Company about accounting or audit matters including the anonymous submission by employees of concerns respecting accounting or auditing matters.

 

  5.10.2 The Committee shall review such litigation, claims, transactions or other contingencies as the internal auditor, external auditors or any officer of the Company may bring to its attention, and shall periodically review the Company’s risk management programs. In that regard the Committee shall review the Company’s major risk exposures and the steps taken by management to monitor, control and report such exposures.

 

  5.10.3 The Committee shall review the policy on use of derivatives and monitor the risk.

 

  5.10.4 The Committee shall review the related party transactions in line with the New York Stock Exchange rules and regulations and those of any other applicable exchange or regulator.

 

  5.10.5 The Committee shall review assurances of compliance with covenants in trust deeds or loan agreements.

 

  5.10.6 The Committee shall review business risks that could affect the ability of the Company to achieve its business plan.

 

  5.10.7 The Committee shall review uncertainties, commitments, and contingent liabilities material to financial reporting.

 

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  5.10.8 The Committee shall review the effectiveness of control and control systems utilized by the Company in connection with financial reporting and other identified business risks.

 

  5.10.9 The Committee shall review incidents of fraud, illegal acts, conflicts of interest and related-party transactions.

 

  5.10.10 The Committee shall review material valuation issues.

 

  5.10.11 The Committee shall review the quality and accuracy of computerized accounting systems, the adequacy of the protections against damage and disruption, and security of confidential information through information systems reporting.

 

  5.10.12 The Committee shall review material matters relating to audits of subsidiaries.

 

  5.10.13 The Committee shall review cases where management has sought accounting advice on a specific issue from an accounting firm other than the one appointed as auditor.

 

  5.10.14 The Committee shall review any legal matters that could have a significant impact on the financial statements.

 

  5.10.15 The Committee shall consider other matters of a financial nature it feels are important to its mandate or as directed by the Board of Directors.

 

  5.10.16 The Committee shall report regularly to the Board of Directors on its proceedings, reviews undertaken and any associated recommendations.

 

  5.10.17 The Committee shall have the right, for the purpose of discharging the powers and responsibilities of the Committee, to inspect any relevant records of the Company and its subsidiaries.

 

  5.11 Compensation

Members of the Committee shall be entitled to receive such remuneration for acting as members of the Committee as the Board of Directors may determine from time to time.

 

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4. Codes of Ethics

 

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Codes of Ethics

4.1 Code of Ethics and Business Conduct

for members, officers and directors of CGI

To the CGI Team

This Code of Ethics and Business Conduct is based on the values and philosophy that have guided CGI successfully since the Company’s inception in 1976. It constitutes a unique repository where the combination of CGI policies, guidelines, principles of conduct and best practices have been regrouped under one umbrella document, for the benefit of our members, officers and directors.

CGI’s operations have grown significantly and now extend worldwide, and our business environment has become increasingly competitive and complex. The scope and pace of our business requires us to make quick and informed decisions, in a manner consistent with our values.

This Code provides guidance - and a global view - for CGI members, officers and directors to consistently achieve the professionalism that has earned our Company an enviable reputation among our clients and within our industry. It also provides guidance for CGI directors when acting for the Company.

This Code is not meant to be a complete list of ethics and business conduct covering every eventuality. It highlights situations that CGI’s members, officers and directors may face in their duties and provides the basic principles to guide their actions. CGI recognizes the importance of supporting these individuals as ethical issues arise, and has an open door policy for resolving such issues with integrity.

Upon joining CGI, all members, as part of their employment contract, undertake to observe this Code in all aspects of their work. Furthermore, annually, all members shall renew such undertaking.

We must always behave responsibly and in line with the Company’s core values when working on behalf of CGI for its clients and other stakeholders. By preserving our personal integrity and the professional reputation of CGI, I am confident that together we will succeed in achieving the Company’s mission and vision.

Serge Godin

Founder and Executive Chairman of the Board

 

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Important note

Chapter 1, Dream, Vision, Mission, and Values of the CGI Group Inc. Fundamental Texts constitutes the fundamental principles of this Code of Ethics and Business Conduct. This Code should therefore be read in conjunction with Chapter 1.

 

  1. VALUES, PHILOSOPHY, VISION AND MISSION

Values

CGI has always believed in investing in the future to ensure continued success. From the beginning, the Company has invested in developing a strong corporate culture, based on six core values that reflect its approach to business. These values are: quality and partnership, intrapreneurship and sharing, respect, objectivity and integrity, financial strength and corporate social responsibility. These values are at the heart of CGI’s success. They ensure that CGI takes a long-term view on business issues, and builds long-lasting partnerships with its clients.

Philosophy

The success of CGI Group Inc. and its subsidiaries is based on the knowledge, creativity and commitment of its members. CGI ensures this success by recruiting the most qualified people available. CGI’s members share in the risks and rewards of CGI’s business as partners of CGI and are committed to its objectives. They take a disciplined approach to their work and constantly strive for excellence to achieve the best results for every client. In exchange, CGI strives to recognize the value of its members by offering them a stimulating work environment that fosters their personal and professional development.

Vision

To be a global world class information technology and business process services leader helping our clients succeed.

Mission

To help our clients succeed through outstanding quality, competence and objectivity, providing thought leadership and delivering the best services and solutions to fully satisfy client objectives in information technology, business processes and management.

In all we do, we foster a culture of partnership, intrapreneurship, teamwork and integrity, building a global world class information technology and business process services company

 

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  2. PURPOSE AND SCOPE OF THE CODE

This Code of Ethics and Business Conduct (the “Code”) defines CGI’s character and guides the actions and decisions of the salaried employees (“members”), officers and directors of CGI. Compliance with the Code is essential for many reasons and notably to preserve and enhance CGI’s reputation and maximize shareholder value. In keeping with CGI’s values, the Code outlines the essential rules and guidelines necessary to preserve CGI’s enviable reputation among its clients and within its industry. The Code is not meant to be a complete list of ethics and business conduct covering every eventuality. It highlights situations that CGI members, officers and directors may face in their duties. The code is meant to give them a broad and clear understanding of the conduct expected of them, wherever CGI does business. While the specific illustrations are primarily addressed to members, they should be read as being equally applicable to the members of CGI’s Board of Directors to the extent that they may be applicable in the circumstances.

Should a member be confronted with a situation where further guidance is required, the matter should be discussed with the member’s manager. CGI recognizes its obligation to support its members, officers and directors as ethical issues arise.

 

  3. MEMBER’S CONDUCT AND BEHAVIOUR

General conduct

Upon joining CGI and annually thereafter, all members are by virtue of the “Member Commitment to the Code of Ethics and Business Conduct”, which must be signed where permitted locally, subject to the Company Code of Ethics and Business Conduct and related policies and guidelines.

If a member ceases to be employed by CGI for any reason, the Member Commitment specifies which elements continue to apply, namely those related to the confidentiality obligations.

Respect and integrity

All members of CGI support the Company’s philosophy and contribute to CGI’s development and good reputation by promoting synergy and teamwork, by expressing their ideas and by adopting the highest standards of service quality and integrity. The members of CGI are its ambassadors. They must always behave responsibly and demonstrate courtesy, honesty, civility and respect for other members of CGI, for its clients and for its suppliers.

Loyalty

Members are expected to act at all times with diligence and loyalty towards CGI and in such a way as to safeguard CGI’s interests. Members should not act in a way or publicly hold a position that might harm the image or reputation of CGI.

 

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Relations with clients

CGI’s services often involve visiting or working at a client’s place of business. A member working at a client’s site must comply with the client’s practices and procedures and treat the client’s facilities with respect. The member must work as efficiently and meticulously as possible and leave the client’s premises and property as he or she found them. As well, members must use the client’s information and systems infrastructures for the sole purpose of the client’s contract and protect those infrastructures and information at all times.

Relations with competitors

If a member is working with a competitor of CGI on a joint project for a client, the member must avoid any situations that could cause conflicts. The member must respect the roles that the client has assigned to each party and work as a team in the client’s best interests. CGI’s members also have both an ethical and a legal responsibility to portray the Company’s competitors fairly and accurately. CGI does not tolerate its members using improper means for gathering information about its competitors.

Maintenance of assets

All members of CGI have a responsibility to protect CGI’s assets against loss, theft, abuse and unauthorized use or disposal. If, in the course of his or her work, a member of CGI is supplied with any property belonging to CGI or to a third party, the member must use said property in accordance with CGI’s Security and acceptable use policy, and as may otherwise be specified in the binding agreement he or she signed with CGI the member must use said property solely for work-related purposes as specified in the binding agreement he or she signed upon joining CGI. . More specifically, the members must use CGI’s systems infrastructures in a manner consistent with legal requirements, professional ethics, the policies established by the administrators of CGI’s network and of any external networks that the member uses, and must respect the copyrights protecting any software that the member also uses. As well, members must never use the clients’ systems infrastructures, including the clients’ software, for any purpose that is not work-related. CGI applies a zero-tolerance policy to any abuse of its systems infrastructures or those of its clients.

At the end of employment, members are required to return all CGI property and assets in their possession to their manager or to a designated CGI representative.

 

  4. INTEGRITY OF BOOKS AND RECORDS AND COMPLIANCE WITH SOUND ACCOUNTING PRACTICES

Preparation of books and records

Accuracy and reliability in the preparation of all business records is of critical importance to the decision-making process and to the proper discharge of financial, legal and reporting obligations. All business records, expense accounts, invoices, bills, payroll and member records and other reports are to be prepared with care and honesty. False or misleading entries are not permitted in CGI’s books and records.

 

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Financial transactions

All financial transactions are to be properly recorded in the books of account and accounting procedures are to be supported by the necessary internal controls. In turn, all books and records of CGI must be available for audit.

Member responsibilities

CGI is committed to providing a safe and healthy work environment for all members.

Accordingly, members are expected to observe the following policies:

Drug-Free Workplace

CGI maintains a drug-free workplace. Accordingly, in the workplace, members may not:

 

  Use, sell, or possess illegal drugs;

 

  Abuse or misuse controlled substances, prescription drugs, or over-the-counter medications; or

 

  Abuse alcohol.

Restrictions on Alcohol Use

With the exception of specially-authorized CGI functions, no member may consume, serve, or be under the influence of alcohol while on CGI property or while performing CGI business.

Alcohol may be served at CGI functions only with the prior approval of a Senior Vice President. In such circumstances, CGI strongly encourages members to use discretion, act responsibly, and behave in a manner becoming to the Company. When working in parts of the world where alcohol use or possession is prohibited, CGI members must comply with local laws.

In relation to CGI’s books and records, members must:

 

  i) not intentionally cause Company documents to be incorrect in any way;

 

  ii) not create or participate in the creation of any records that are intended to conceal anything that is improper;

 

  iii) properly and promptly record all disbursements of funds;

 

  iv) co-operate with internal and external auditors;

 

  v) report any knowledge of any untruthful or inaccurate statements or records or transactions that do not seem to serve a legitimate commercial purpose; and

 

  vi) not make unusual financial arrangements with a client or a supplier (such as, over-invoicing or under-invoicing) for payments on their behalf to a party not related to the transaction.

 

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The nature of CGI’s business places special importance on the accuracy of time keeping and expense reporting.

Accurate Timekeeping

Client billing, member compensation, and cost estimating depends on CGI’s ability to record and account for member time worked accurately.

Accordingly, CGI is committed to accurate total time accounting and reporting within all of its subsidiaries.

All members are required to comply with CGI’s timekeeping policy and procedures and any applicable contract requirements. Members must record all time worked daily and submit reports weekly, accurately reflecting all time worked on both direct and indirect projects. Managers are responsible for ensuring that members know the correct project code for each project assignment

Knowingly mischarging your time or falsifying time records violates CGI policy and may also violate the law. No member may knowingly charge time inaccurately or knowingly approve mischarging. Similarly, shifting time worked on one project to another project also is strictly prohibited.

To ensure accurate time reporting, members must be sure that they understand and carefully follow CGI’s timekeeping policy and procedures. Members must obtain the correct charge code before starting work on any new direct or indirect project. If a member has any questions regarding time charging, the question should be raised with their manager. In all cases, members must take the steps necessary to ensure that their time records are current, accurate, and complete.

Expense Reimbursement

Members must honestly and accurately report their business-related expenses for reimbursement. A member’s signature on an expense report certifies that the information provided is complete and accurate and represents a valid business expense.

Breaches

Suspected breaches of the Code which directly or indirectly affect CGI’s business must be reported to the Chief Financial Officer, the Chief Executive Officer or the Chief Legal Officer, or alternatively to the Chair of the Audit and Risk Management Committee and CGI’s Corporate Secretary.

In addition, CGI has established a policy for incident reporting (often referred to as a “whistleblower policy”) as well as a process under that policy which allows any person who has direct knowledge of specific facts to report incidents where the Company is exposed to a serious risk in matters of accounting, auditing, internal accounting controls, finance, banking or financial corruption. The process in place protects the incident reporter and ensures the confidentiality of the report. See the heading “Compliance with the Code” below.

 

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  5. CONFIDENTIAL INFORMATION AND INTELLECTUAL PROPERTY

Definitions

Confidential Information

“Confidential Information” means information about the Company’s business dealings, development strategies and financial results; products or processes; client lists; vendor lists or purchase prices; cost, pricing, marketing or service strategies; results of research and development work, technical know-how, manufacturing processes, computer software; reports and information related to mergers, acquisitions and divestitures. “Confidential Information” also includes information that relates to intellectual property and may include, but is not limited to: business strategies, product marketing and costing information and information provided by suppliers and competitors. In addition, the way the Company puts publicly-known information together, to achieve a particular result, is often a valuable trade secret.

The following information and documents constitute confidential information or documents of CGI or its clients, as the case may be:

 

  i) methodologies;

 

  ii) all information related to: processes, formulas, research and development, products, financials, marketing; names and lists of customers, employees and suppliers as well as related data; computer programs, all software developed or to be developed including flow charts, source and object codes;

 

  iii) all information related to projects undertaken by the Company whether they are merger and acquisition or divestiture projects or projects related to large client contracts, including all information obtained in due diligence initiatives, whether such information pertains to CGI or to any third party; and

 

  iv) all other information or documents that, if disclosed, could be prejudicial to CGI or its clients.

Intellectual Property

“Intellectual Property” (IP) means patents, copyrights, trademarks, trade secrets and industrial designs of CGI.

Non-disclosure undertaking

CGI Confidential Information

During the normal course of business, members will have access to confidential information about CGI. In some cases, the information may affect the value of CGI shares. Each member must protect the confidentiality of all confidential CGI information and documents. Members cannot discuss them away from work, and cannot divulge any confidential CGI information or any information that could harm CGI.

 

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Confidential CGI information could include information from other members or information acquired from outside sources, sometimes under obligations of secrecy. Members are expected to use such information exclusively for business purposes and this information must not be disclosed externally without the approval of a member’s manager.

Third Party Agreements

In cases where information or records are obtained under an agreement with a third party, such as software licenses or technology purchases, members must ensure that the provisions of such agreements are strictly adhered to so that CGI will not be deemed to be in default. Unauthorized disclosure or use of information or records associated with these agreements could expose the member involved and/or CGI to serious consequences.

Disclosure guidelines

Insider Information

Confidential information about CGI or other public companies may not be used as a basis for trading in CGI securities, or the securities of any other company in respect of which CGI or its members, consultants or advisers are in possession of insider information. For this purpose, CGI has an established policy regarding the use of insider information and trading in securities. This policy is entitled “Guidelines on Timely Disclosure of Material Information and Transactions in Securities by Insiders” which extends to all directors, officers and, when in possession of Confidential Information, members, those authorized to speak on behalf of CGI and all other insiders. It is designed to protect the integrity of the Company and its directors, officers and members while ensuring compliance with all applicable securities legislation in Canada, the United States and other countries. The law stipulates that insiders may not take advantage of inside information to trade in the securities of a company. Likewise, employees must not provide third parties with any information that would give them an unfair advantage when trading in securities of the company, including client companies or any other company that is the subject of an acquisition, divestiture or client related project.

Material Information

CGI’s guidelines on disclosure also cover the disclosure of information with a material impact, defined as any information that, if disclosed to a potential investor, could affect his or her perception of the value of the Company as an investment. Because CGI is a publicly traded company, any information that may have a material impact on CGI’s results or on the perception of the value of the stock must be communicated in accordance with CGI’s “Guidelines on Timely Disclosure of Material Information and Transactions in Securities of CGI by Insiders.” If a member thinks that he or she is in possession of a piece of information that is not known to management and may have a material impact on the Company, the member must communicate it immediately to either the Executive Chairman of the Board, the Chief Executive Officer, the Chief Legal Officer, or the Chief Financial Officer, without divulging it to anyone else.

 

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Client Information

Just as CGI’s members must protect confidential information about CGI, they must also show discretion at all times with regard to the client’s business affairs. Unless a member has the client’s express authorization, he or she should never reveal any information that could harm the client’s interests and should never use any information that he or she obtains in the course of a project or assignment for any purpose other than that project or assignment. If the client restricts the distribution of certain information within its own organization, the member must comply with those restrictions as well.

Member Information

Subject to applicable law, CGI collects and maintains personal information relating to its members, including medical and benefits information. Access to such information is restricted to CGI personnel on a need-to-know basis. They must ensure that this information is not disclosed in violation of CGI’s policies and practices. Personal information is released to outside parties only with the member’s approval, except to satisfy the requirements considered by CGI to be appropriate for legal reasons.

Intellectual Property

In the course of their duties, members may develop or create new designs, inventions, systems or processes, products or documents. When these achievements have been made as a direct result of a member’s employment with the Company and through use of CGI’s resources, they belong to CGI. Moreover, CGI is free to use this work as it so wishes and members cannot use nor divulge, publish or otherwise disseminate it without prior written consent from CGI. Upon request, members will execute documents made necessary to confirm or complete the assignment of rights to CGI.

Suppliers and Partners Information

All information on CGI suppliers and partners is also confidential and must not be disclosed without the express consent of the persons concerned.

 

  6. CONFLICTS OF INTEREST

Definitions

The members of CGI must avoid any actual or apparent conflicts of interest and should never engage in any conduct which is, or could potentially be, harmful to CGI or its reputation. A conflict of interest exists when a member favours his or her personal interests over those of CGI or its clients or when an obligation or situation arising from a member’s personal activities or financial affairs may adversely influence the member’s judgement in the performance of his or her duties at CGI.

 

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Particular caution should be taken when dealing with initiatives involving contracts with any governmental or quasi-governmental agency.

Guidelines

The following guidelines provide guidance for members to avoid situations which are or may appear to be in conflict with their responsibility to act in the best interest of the Company.

Financial Interests - A conflict of interest exists when a member who is able to influence business with CGI owns, directly or indirectly, a beneficial interest in an organization which is a competitor of CGI, or which has current or prospective business as a supplier, customer or contractor with CGI. This does not include the situation where the financial interest in question consists of shares, bonds or other securities of a company listed on a securities exchange and where the amount of this interest is less than one percent of the value of the class of security involved.

Outside Work - When a member, directly or indirectly, acts as a director, officer, employee, consultant or agent of an organization that is a competitor of CGI, or which has current or prospective business as a supplier, customer or contractor with CGI, there is a conflict of interest. Similarly, a conflict of interest may exist when a member undertakes to engage in an independent business venture or to perform work or services for another entity should that activity prevent such member from devoting the time and effort to the conduct of CGI’s business, which his or her position requires.

Gifts or Favours - A conflict of interest will arise when a member, either directly or indirectly, solicits or accepts any gift or favour from any person or organization which is a competitor of CGI, or which has current or prospective business with CGI as a customer, supplier, partner or contractor.

For this purpose, a “gift” or “favour” includes any gratuitous service, loan, discount, money or article of value. It does not include articles of nominal value normally used for sales promotion purposes, ordinary business meals or reasonable entertainment consistent with local, social or business customs if received in a sporadic manner. Refer to CGI’s Anti-Corruption Policy under Section 4.3 below for further information on this topic.

Commissions - CGI or its members will never accept any commissions from a third-party vendor when recommending software, hardware or any equipment to a client as part of a service agreement.

Trading with CGI - A conflict of interest may exist when a member is directly or indirectly a party to a transaction with CGI.

Misappropriation of Business Opportunities - A conflict of interest will exist when a member, without the knowledge and consent of CGI, appropriates for his or her own use, or that of another person or organization, the benefit of any business venture, opportunity or potential opportunity about which the member may have learned or that he or she may have developed during the course of his or her employment.

 

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Bribes - Neither CGI nor its members will pay bribes to clients or client representatives to obtain business from them. Refer to CGI’s Anti-Corruption Policy under Section 4.3 below for further information on this topic.

Former Employees of Customers – Hiring or retaining the services of former employees of customers, whether in the private or public sector (including quasi-government agencies), may result in actual or perceived conflicts of interest. Accordingly, any such person may not: (i) for a period of two years from the termination of his or her employment with a former customer be assigned to work on, or in any way contribute to, a CGI project or contract that is linked to his or her former functions, unless the customer’s prior written consent is obtained and the hire is not prohibited by any code of ethics or other restrictions or undertakings applicable to such person; and (ii) disclose to any CGI member any confidential information such person obtained during the course of his or her former functions with the customer.

Reporting

If a member thinks that he or she has been placed in a conflict of interest, the member must inform his or her manager and work with him or her to determine how the situation may be corrected.

 

  7. LAWS, STATUTES AND REGULATIONS

Compliance with the law

It is CGI’s policy to comply, not merely with the letter, but also with the spirit of the law. CGI is required to maintain compliance with various acts, statutes and regulations governing activities in the jurisdictions in which it carries on business and expects members acting on its behalf to do likewise. Members are also expected to report any situation of concern to ethics.crp@cgi.com or to the CGI Legal Department.

Guidelines for compliance

This Code does not seek to provide legal guidance for all laws, statutes and regulations that impact CGI’s activities. Specialized resources - legal, tax, environmental, government relations, personnel - are available within CGI for that purpose. There are, however, several items of legislation that warrant specific mention. These are listed below along with some general guidelines for compliance.

Health and safety laws

CGI is committed to creating and maintaining healthy and safe workplaces for its members. Members are expected to comply with all safety laws, regulations and directives from their managers (which may not necessarily be a law or regulation).

 

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Environmental laws

CGI is committed to preserving and enhancing the environment in the communities where its various businesses operate through responsible and environmentally-oriented operating practices. Members are encouraged to participate in undertakings geared to improving the environment in both their workplace and their community.

Human rights legislation

Every person has the right to equal treatment with respect to employment and the right to be free of discrimination because of race, ancestry, place of origin, colour, ethnic origin, citizenship, religion, sex, sexual orientation, age, pregnancy, record of offences, marital status, social conditions, political beliefs, language, veteran status (U.S. only), family status, disability or means used to overcome a disability. The following are CGI’s policies on equal employment opportunity, anti-discrimination and anti-harassment as well as the procedure for reporting any breach or violation of these policies:

 

  i) Equal Employment Opportunity - CGI is committed to treating all people fairly and equitably, without discrimination. The company has established a program to ensure that groups which are often subject to discrimination are equitably represented within CGI and to eliminate any employment rules and practices that could be discriminatory. CGI regards diversity among its members as a priceless resource and one which enables the Company to work harmoniously with clients from around the world.

 

  ii) Anti-Harassment and Anti-Discrimination Policies - CGI recognizes that everyone has the right to work in an environment free of sexual, psychological and racial harassment. CGI will do everything in its power to prevent its members from becoming victims of such harassment. CGI defines sexual, psychological or racial harassment as any behaviour, in the form of words, gestures, or actions, generally repeated, that has undesired sexual, psychological or racial connotations, that has a negative impact on a person’s dignity or physical or psychological integrity, or that results in that person being subjected to unfavourable working conditions or dismissal.

CGI will prevent any form of harassment or discrimination against job candidates and members on any of the grounds mentioned above, whether during the hiring process or during employment. This commitment applies to such areas as training, performance assessment, promotions, transfers, layoffs, remuneration and all other employment practices and working conditions.

All CGI managers are personally accountable for enforcing this policy and must make every effort to prevent discriminatory or harassing behaviour and to intervene immediately if they observe a problem or if a problem is reported to them.

CGI requires that all members refrain from any form of harassment or discrimination against anyone else. CGI will not tolerate any violations of this policy whatsoever.

 

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  iii) Procedure for Reporting Discrimination or Harassment - Any member of CGI who feels discriminated against or harassed can and should, in all confidence and without fear of reprisal, personally report the facts to the vice-president of his or her business unit and to the human resources leader either in that business unit, in the country or at the corporate head office. The facts will be examined carefully by these two individuals. Neither the name of the person reporting the facts nor the circumstances surrounding them will be disclosed to anyone whatsoever, unless such disclosure is necessary for an investigation or disciplinary action. Any disciplinary action will be determined by these same two people and will be proportional to the seriousness of the behaviour concerned. CGI will also provide appropriate assistance to any member who is a victim of discrimination or harassment. In addition, retaliation against persons who make complaints of harassment, witness harassment, offer testimony or are otherwise involved in the investigation of harassment complaints will not be tolerated.

Competition act

CGI is required to make its own decisions on the basis of its best interest and must do so independent of agreements or understandings with competitors. The Competition Act (Canada) or corresponding provisions of foreign legislation in matters of competition prohibit certain arrangements or agreements with others regarding product prices, terms of sale, division of markets, allocation of customers or other practices that restrain competition. It is the responsibility of each manager to comply with the letter and spirit of all competition laws as they apply to CGI.

Questions concerning competition-sensitive issues must be addressed to ethics.crp@cgi.com or the CGI Legal Department.

Securities laws and insider trading

Members who possess material non-public information may not buy or sell CGI securities while such information remains non-public and must refrain from passing such information on to others, including family and friends. These trading prohibitions apply to members at all levels - not just officers or managers. The prohibition on such trading is based on such information potentially providing an unfair advantage to the member.

“Material non-public information” is non-public information that is significant enough that, if publicly known, is likely to affect the market price of any of CGI’s securities. CGI has adopted “Guidelines on Timely Disclosure of Material Information and Transactions in Securities of CGI by Insiders”. Each member, officer and director must abide by the provisions of these guidelines, when applicable.

Export and import laws

CGI members may find themselves dealing with goods or services that are the subject of export or import restrictions, such as, for example, information or technology that has military or state security applications.

 

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Members who deal with controlled goods and services must comply with the CGI policies and procedures that are designed to ensure that the controls are respected.

Laws that protect classified information

In the normal course of CGI’s business with government clients, our members may be required to hold government security clearances and they may have access to information that is classified or facilities that are restricted. Members must comply with the letter and with the spirit of the laws, rules and regulations that apply to classified information and facilities that are restricted.

Whether a member holds a security clearance or not, members must not seek access to classified information or restricted facilities unless that access is required in order to allow them to carry out their assigned tasks. Members must not accept access to, retain, or otherwise deal with classified information, or enter restricted facilities, unless they hold a current and valid security clearance that entitles them to have the appropriate degree of access. If there is any doubt about whether information is classified or whether facilities are restricted, about the restrictions that may apply to information or facilities, or whether the member’s security clearance is adequate in the circumstances, the member must first consult with the CGI security officer who has the authority to advise the member.

 

  8. INVESTOR AND MEDIA RELATIONS

Authorized Spokespersons

Initiatives relating to investor and media communications are the responsibility of CGI’s authorized spokespersons. Therefore, members are not allowed to make any public statement about CGI without first obtaining the authorization of such authorized spokespersons.

 

  9. COMMUNITY ACTIVITIES AND POLITICAL AND PUBLIC CONTRIBUTIONS

As a global organization conducting business throughout the world, CGI is committed to the charitable donation of funds and services for humanitarian and other social needs, particularly in cases of emergencies or disasters. Monetary and other contributions to charities, social projects and funds, including schools, educational funds and infrastructure projects, should occur outside of work hours and be handled with caution as they can be conduits for corrupt payments. In order to minimize this risk, CGI requires appropriate due diligence be conducted into such charities and projects prior to the approval of any charitable contributions made on its behalf. No contributions of any kind may be made on CGI’s behalf to any political party, candidate or campaign. In no event shall any charitable or political donations be made for the purpose of gaining any improper business advantage.

Questions to consider when making charitable payments:

 

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  1. Is the organization or body receiving the payment duly registered and does it otherwise comply with applicable law?

 

  2. Is the organization or body, including its board of directors and other representatives, free of any political or other undue influence?

 

  3. What is the purpose of the payment?

 

  4. Is the payment consistent with CGI’s internal guidelines on charitable giving?

 

  5. Is the payment at the request of a foreign official?

 

  6. Is a foreign official associated with the charity and, if so, can the foreign official make decisions regarding CGI’s business in that country?

 

  7. Is the payment conditioned on receiving business or other benefits?

 

  10. COMPLIANCE WITH THE CODE

Management responsibilities

CGI’s managers have a special duty to be role models of appropriate business conduct and to see that the principles and policies of this Code and of other CGI guidelines and policies referred to in this Code are upheld. This means:

 

  i) Copy of the Code - Ensuring that all members have a copy of the Code, and that they understand and comply with its provisions.

 

  ii) Assistance - Offering assistance and explanations to any member who has questions, doubts or is in a difficult situation. Managers are also required to counsel members promptly when their conduct or behaviour is inconsistent with the Code.

 

  iii) Enforcement - Taking prompt and decisive action when a violation of the Code has occurred, in consultation with the CGI Legal Department. If a manager knows a member is contemplating a prohibited action and does nothing, the manager will be held responsible along with the member.

Member responsibilities

Each member is accountable for observing the rules of conduct that are normally accepted as standard in a business enterprise. In addition they must abide by the following:

 

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  i) Compliance - CGI’s members are expected to comply with the Code and all policies and procedures of the company as well as to actively promote and support CGI’s values.

 

  ii) Preventing - Members should take all necessary steps to prevent a Code violation.

 

  iii) Reporting - Subject to applicable law, members must immediately report to their manager (i) situations of non-compliance with respect to this Code of which they become aware and (ii) suspected violations of the Code. All information will, to the extent possible, be received in confidence. It is corporate policy not to take action against a member who reports in good faith unless unusual circumstances warrant such action.

In addition, CGI has established a policy for incident reporting (often referred to as a “whistleblower policy”) as well as a process under that policy which allows any person who has direct knowledge of specific facts to report incidents in which the Company is exposed to a serious risk in matters of accounting, auditing, internal accounting controls, finance, banking or financial corruption. The process in place protects the incident reporter and ensures the confidentiality of the report.

Incident reports may be submitted either by telephone by dialing 1 800 422 3076 toll free, by dialing (503) 748-0564 and reversing the long distance charges, or by submitting an incident report online. For telephone reports, all long distances charges will be at the expense of CGI. For those who wish to submit incident reports online, a link to the incident reporting web site is provided on CGI’s Enterprise Portal or members may access the incident reporting system directly at https://ethicspoint.com or such other site as is communicated by CGI from time to time.

CGI’s incident reporting system is managed by EthicsPoint, Inc., a company unrelated to CGI which has undertaken to ensure the confidentiality of all incident reporters as well as the confidentiality of the reports they submit.

CGI’s policy on incident reporting is entitled the Serious Ethical Incidents Reporting Policy and is available on the CGI Enterprise Portal.

 

  iv) Consequences - Unethical behaviour, violations of this Code and of CGI’s other guidelines and policies, as well as withholding information during the course of an investigation regarding a possible violation of the Code, may result in disciplinary action which will be commensurate with the seriousness of the behaviour. Such action could include termination as well as civil or criminal action.

 

  11. ADMINISTRATION OF THE CODE

Periodic review

 

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Responsibility for the periodic review and revision of the Code lies with CGI’s Corporate Governance Committee.

Monitoring compliance

The Board of Directors of CGI will monitor compliance with the Code and will be responsible for the granting of any waivers from compliance with the Code for directors and officers of CGI. The Corporate Secretary of CGI shall, when deemed appropriate, make reports to the Board of Directors of CGI with respect to compliance with this Code.

Questions

Questions concerning this Code should be referred to a member’s manager who, when warranted, shall report to CGI’s Corporate Secretary.

 

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4.2         Executive Code of Conduct

Important note

Chapter 1, Dream, Vision, Mission, and Values of the CGI Group Inc. Fundamental Texts constitutes the fundamental principles of this Executive Code of Conduct. This Code should therefore be read in conjunction with Chapter 1.

This Executive Code of Conduct (the “Code”) is part of the commitment of CGI Group Inc. (“CGI”) to ethical business conduct and practices. This Code reflects CGI’s firm commitment, not only to adherence to the law, but also to the highest standards of ethical conduct.

This Code specifically covers CGI’s principal executive officer, principal financial officer, principal accounting officer or controller, or other persons performing similar functions (collectively, the “officers”).

 

  1. HONEST AND ETHICAL CONDUCT

Respect and integrity

The officers of CGI are its ambassadors. They must always behave responsibly and demonstrate courtesy, honesty, civility and respect for all other employees of CGI, for its clients and for its suppliers.

Ethics

Supporting CGI’s objectives, officers in performing their duties will carry out their responsibilities at all times in a way that promotes ethics in their leadership. The officers will:

 

  (i) Undertake their responsibilities in a vigilant manner in the interests of CGI and to avoid any real or perceived impression of personal advantage;

 

  (ii) Advance CGI’s legitimate interests when the opportunity arises at all times ahead of their own interests;

 

  (iii) Proactively promote ethical behavior among subordinates and peers; and

 

  (iv) Use corporate assets and resources in a responsible and fair manner, having regard for the interests of CGI.

 

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Avoidance of conflict of interest

Officers must avoid any actual or apparent conflicts of interest and should never engage in any conduct that is harmful to CGI or its reputation. Such a conflict would exist when an officer favours his or her personal interests over those of CGI or its clients or when an obligation or situation arising from an officer’s personal activities or financial affairs may adversely influence the officer’s judgment in the performance of his or her duties to CGI.

Officers will not knowingly do business with any parties related to CGI, any of CGI’s clients or any firms with which CGI does business if such business would be material or would be outside of normal client related activity.

Officers shall not solicit or accept gifts or favours from related parties, clients or firms with which CGI does business beyond customary courtesies. For this purpose, a “gift” or “favour” includes any gratuitous service, loan, discount, money or article of value. It does not include articles of nominal value normally used for sales promotion purposes, ordinary business meals or reasonable entertainment consistent with local, social or business customs if received in a sporadic manner.

Officers will not perform work or render services for, or knowingly make a material investment in, organizations that compete with CGI or with which CGI does business without appropriate approval from CGI’s Executive Chairman of the Board, Chief Executive Officer, Chief Financial Officer or Chief Legal Officer.

If an officer thinks that he has been placed in a conflict of interest, the Officer must inform one of the officers identified in the preceding paragraph.

 

  2. FULL, FAIR, ACCURATE, TIMELY AND UNDERSTANDABLE DISCLOSURE

Annual and quarterly reports

Each officer shall read each annual or quarterly report filed or submitted under the applicable securities laws and satisfy himself or herself that the report does not contain any untrue statement of a material fact or omit to state a material fact that is necessary in order for the statements made not to be misleading, in light of the circumstances in which such statements were made.

Financial statements

Each officer shall satisfy himself or herself that the financial statements, and other financial information included in the report, fairly present in all material respects the financial condition and results of operations of CGI as of, and for, the periods presented in the report.

 

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Reports to securities regulators

Officers shall perform their responsibilities with a view to causing periodic reports filed with securities regulators to contain information which is accurate, complete, fair and understandable and to be filed in a timely fashion.

Reporting concerns and complaints

An officer who believes it is necessary or appropriate to do so can refer concerns about the quality and scope of financial or related reporting requirements to the Chair of the Audit Committee. Any officer who receives a bona fide material complaint about financial reporting from any employee shall report such complaints to the Audit Committee. Any officer who has disclosed such concerns in good faith shall not face any form of retribution.

 

  3. COMPLIANCE WITH LAWS, RULES AND REGULATIONS

The officers are cognizant of their leadership roles within the organization and the importance of compliance with the letter and spirit of applicable laws, rules and regulations relating to financial and related reporting.

 

  4. COMPLIANCE WITH THE CODE

General responsibilities

Officers have a special duty to be role models of appropriate business conduct and see that the principles and policies of this Code and other CGI guidelines and policies are upheld.

Reporting

Any violation or suspected violation of the Code should be personally reported by an officer to CGI’s Executive Chairman of the Board, Chief Executive Officer, Chief Financial Officer or Chief Legal Officer.

Accountability

Non-compliance with this Code in every respect by an officer will be a matter for consideration and review by the Board of Directors of CGI.

 

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4.3         CGI Anti-Corruption Policy

Policy statement

CGI is committed to conducting its activities free from the illegal and improper influence of bribery and to ensuring compliance with all anti-bribery and anti-corruption laws and regulations that may be applicable to its business world-wide (collectively, “Anti-Corruption Laws”). It is essential that our members, officers, and directors, as well as all third parties who act on behalf of CGI, comply at all times with the letter and the spirit of all Anti-Corruption Laws.

Overview

Bribery is offering, giving, receiving, or soliciting any item of value to improperly influence the actions of a person in order to obtain or retain business or an unfair advantage in the conduct of business; or to induce or reward improper conduct. “Kickback” is another term for bribery. Bribery can arise in both the public and the private sphere. It can take place directly or indirectly (e.g. through a Third Party). It can take many forms. Anti-Corruption Laws require companies like CGI to have proactive measures to prevent, detect, and address bribery and corrupt practices.

There are many reasons to care about bribery and corruption.

Bribery and corruption are crimes punishable by fines and/or imprisonment. CGI officers, directors and members, as well as Third Parties, must not engage in any form of bribery or corruption. Whenever members are asked to approve or make a payment, they must ensure that they fully understand the reason for the payment and that the payment is legitimate. If in doubt, they should not make or agree to make the payment and contact the CGI Legal Department or ethics.crp@cgi.com for guidance.

Bribery and corruption have been identified as key factors that limit economic growth and contribute to inequality. By wrongfully benefiting a few individuals, they limit competition, undermine innovation, and corrupt societies. Bribery is also detrimental to our business – studies show that companies where bribery is condoned have lower levels of productivity and lower employee morale. Put simply, it is unethical and against CGI’s values.

Individuals and companies can face civil and criminal charges resulting in large fines, imprisonment, and suspension or debarment from government contract processes. Failure to comply puts members, their colleagues, and CGI at risk. This could have a very serious impact on members, and CGI’s business.

 

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Key principles

 

  1. BRIBES MUST NOT BE OFFERED OR ACCEPTED

CGI prohibits the offering, giving, receiving, or soliciting of any item of value to improperly influence the actions of a person in order to obtain or retain business or an unfair advantage in the conduct of business; or to induce or reward improper conduct. “Items of value” can include:

 

    payments of money;

 

    extension of credit or loans;

 

    travel and accommodations expenses;

 

    gifts, meals, and entertainment;

 

    political contributions and charitable donations;

 

    free use of company services, facilities or property;

 

    favors that are of value to a recipient (e.g., offering a job to a member of a person’s family); or

 

    anything else of value.

Bribery and corruption can take many forms. Red flags can include cash payments or gifts to individuals or family members; inflated commissions; inflated invoices; fake consultancy agreements; unauthorized rebates; political or charitable donations; and excessive payment of travel expenses for inappropriate non-business related travel. In some cases, simply offering an inducement is unlawful, even if not accepted. This Policy is intended to help you understand how to apply this prohibition in our business. It explores the areas identified above in more depth.

 

  2. UNDERSTANDING CGI POLICIES AND IDENTIFYING RISKS

The first step in compliance is to understand our Code of Ethics, including this Policy, and how it impacts your responsibilities on a day-to-day basis. Knowing what steps to take to prevent risk and to ensure the proper handling of any issues relating to bribery and corruption is essential to compliance.

 

  3. RESPOND

CGI will assess bribery and corruption risks on an ongoing basis within each Strategic Business Unit. CGI will implement mitigation plans and training programs as part of its system of internal controls. CGI will also monitor compliance at the local level to ensure that this Policy is being followed by all members. You should always complete all required training and cooperate with ongoing monitoring.

 

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  4. DOCUMENT AND REPORT

All documentation of financial transactions must be accurate and complete. You should always document your transactions in compliance with the Code of Ethics, and report any issues arising under this Policy that you become aware of as required by CGI’s Serious Ethical Incidents Reporting Policy. Questions under this Policy can be addressed to ethics.crp@cgi.com.

Areas of Focus

CGI has established procedures and guidelines to translate this Policy and our principles into practice. This section outlines the general requirements and procedures for the following risk areas:

 

  1. Gifts

Policy

Though gifts are recognized as appropriate ways of developing business relationships and promoting the CGI brand, we must ensure that the offering, solicitation and receipt of gifts does not give rise to even an appearance of impropriety. Particular vigilance must be exercised where gifts are extended to Government Officials.

Gifts Offered by CGI

All gifts offered by CGI must:

 

  (i) be permitted under local law and the Anti-Corruption Laws and conform to generally accepted local customs;

 

  (ii) have a clear business purpose which is directly related to CGI’s commercial objectives;

 

  (iii) be reasonable in value and not appear lavish or extravagant; and

 

  (iv) not be intended to create any obligation on behalf of the recipient or to result in CGI receiving any favour or advantage in return.

Typically, small gifts containing the CGI logo (such as coffee mugs, t-shirts, pens, and the like) offered sporadically to persons at CGI promotional events (such as trade shows) will not violate this Policy as long as they are not excessive.

A chart attached as Appendix B to this Policy provides limits on gifts to Government Officials allowed under the laws of various jurisdictions. All Members must adhere to these limits when offering gifts to Government

 

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Officials. When dealing with private parties, these limits should also be used as guidelines for determining if the value of a gift is reasonable. You should consult with the CGI Legal Department if you have any questions related to offering any gifts to Government Officials to ensure that they comply with local laws and the Anti-Corruption Laws. You can also direct inquiries to ethics.crp@cgi.com.

Gifts Offered to CGI Members by Third Parties

The CGI Code of Ethics specifically states that a conflict of interest will arise when a CGI member, either directly or indirectly, solicits or accepts any gifts from any person or organization which is a competitor to CGI, or which has current or prospective business with CGI as a customer, supplier, partner, or contractor. The Code of Ethics prohibits the solicitation or acceptance of such gifts unless they are:

 

  (i) of nominal value normally used for sales promotion purposes, or are ordinary and reasonable business meals or travel expenses with a clear business purpose;

 

  (ii) permitted under the Anti-Corruption Laws and local laws and conform to generally accepted local customs; and

 

  (iii) received in a sporadic manner.

Full Transparency Required

If offering or accepting a gift meets these standards, it must be made or accepted in a fully transparent way. Gifts which are excessive, frequent, or intended to create an obligation on the part of the recipient are strictly prohibited.

How we ensure compliance

No reimbursement or payment for any gifts offered by a CGI member that otherwise comply with this Policy will be made without adequate approvals in compliance with the Operations Management Framework and supporting documentation / receipts.

Red flags

Examples of common “red flags” that could indicate bribery or corruption include the following:

 

    Gifts that would be illegal under local or Anti-Corruption Laws;

 

    Gifts to or from parties engaged in a public tender or competitive bidding process;

 

    Any gift of cash or cash equivalents, or securities;

 

    Any gift where something is expected in return;

 

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    Any gift that appears excessive based on common sense standards or local custom;

 

    Any gift that is paid for personally.

 

  2. Hospitality, travel, entertainment and meals

Policy

As with gifts, providing hospitality, travel, entertainment, and meals (collectively, “Hospitality”) to any person may be a violation of the law if they are excessive, unreasonable, or do not have a valid business purpose. The same principle applies to soliciting or receiving Hospitality from existing or potential clients. CGI prohibits payment or reimbursement of expenses for any person to attend site visits or other CGI business events unless the expenses are reasonable, reflect actual costs incurred, directly relate to CGI business, and are permissible under local law and custom. CGI discourages the providing of Hospitality to the family members or guests of clients unless a clear business purpose for the Hospitality can be demonstrated.

Hospitality Offered by or to CGI Members

All Hospitality offered by or to CGI members must meet these requirements:

 

  (i) The Hospitality must be permitted under local law and the Anti-Corruption Laws and conform to generally accepted local customs;

 

  (ii) The host offering the Hospitality must be present;

 

  (iii) The purpose is to hold a genuine business discussion or foster better business relations and do not develop any form of obligation;

 

  (iv) The Hospitality is openly offered and not solicited; and

 

  (v) The Hospitality is not frequent or excessive, and is reasonable in value, so as to not raise questions of impropriety.

As with gifts, the chart in Appendix B identifies permissible limits on Hospitality for Government Officials in specific jurisdictions. All Members must adhere to these guidelines when providing Hospitality to Government Officials. When dealing with private parties, these limits should also be used as guidelines for determining if the value of any Hospitality.

 

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Full Transparency Required

If offering or receiving Hospitality meets these standards, it must be made or accepted in a fully transparent way. Hospitality which is excessive, frequent, or intended to create an obligation on the part of the recipient is strictly prohibited.

How we ensure compliance

Approval for the payment or reimbursement of bona fide and actual Hospitality expenses for clients, potential clients, and Government Officials must be obtained from the Legal Department prior to offering such a payment or reimbursement. All travel expenses must comply with the CGI Travel Policy. Expenses related to Hospitality offered by CGI must be submitted and approved in accordance with CGI expense reporting guidelines so that the expenses are properly categorized and auditable.

Red flags

Examples of common “red flags” that could indicate bribery or corruption include the following:

 

    Hospitality expenses for persons for which there is not a legitimate business purpose;

 

    Hospitality expenses for family members of any person;

 

    Hospitality expenses submitted on behalf of non-CGI members (as opposed to being paid by CGI directly);

 

    Payment for flights and accommodations for potential or existing CGI clients to meet with CGI representatives when the CGI representatives could just as easily have met with the clients at the client’s site;

 

    Use of travel agencies not approved by CGI for arranging or paying for Hospitality of Government Officials.

 

  3. Third parties

Policy

Most Anti-Corruption Laws impose liability on companies which become involved in direct or indirect bribery. This means that CGI may incur liability where a Third Party engaged to represent or provide a service to, or on behalf of, CGI makes an improper payment or otherwise engages in improper conduct in the course of its work for CGI. This exposure may arise notwithstanding that the payment or conduct in question is prohibited by CGI and/or that CGI had no knowledge of this payment. All CGI dealings with Third Parties must be carried out with the highest degree of integrity, visibility, and in compliance with all relevant laws and regulations.

 

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How we ensure compliance

Professional integrity is a prerequisite for the selection and retention of Third Parties by CGI. Prior to the retention of any Third Party, the CGI member responsible for such retention must ensure that appropriate due diligence is conducted on such Third Party and any compliance “red flags” that are identified are properly addressed. In certain circumstances, Third Parties will receive compliance training, and all Third Parties are subject to CGI’s monitoring requirements and audit to ensure compliance with Anti-Corruption Laws and this Policy. Contracts with Third Parties must, where appropriate, contain appropriate terms to mitigate corruption risks.

CGI’s approach to retaining, training and monitoring Third Parties is “risk-based”, which takes into account a number of factors, including the corruption risk in the country in which the Third Party conducts its activities for CGI, the nature of CGI’s relationship with the Third Party, the reputation and notoriety of the Third Party and the value and prospects of CGI’s relationship with the Third Party. In higher risk situations, enhanced due diligence, training and monitoring, including the Third Party’s agreement to comply with CGI’s Third-Party Code of Ethics, will be required in accordance with procedures and protocols to be issued by the CGI Legal Department.

Red flags

Examples of common “red flags” that could indicate bribery or corruption include the following:

 

    Excessive commissions to third-party representatives or consultants;

 

    Third-party “consulting agreements” that include only vaguely described services;

 

    Family, business, or other “special” ties with government or political officials;

 

    Reputation for violating local law or company policy;

 

    Negative press, rumors, allegations or sanctions;

 

    Requests from government officials or clients to engage or hire specific Third Parties;

 

    Lack of credentials for the nature of the work being performed by the Third Party;

 

    Request to make payment to an entity located in an off-shore tax haven;

 

    Lack of an office or established place of business, or a shell-company incorporated in an offshore jurisdiction;

 

    Requests for payment of non-contracted amounts, or lack of documentation for services performed;

 

    Convoluted or complex payment requests (such as payments to third parties or to accounts in other countries, requests for payments in cash, or requests for up-front payments);

 

    Requests for political or charitable contributions or other favors as a way of influencing official action;

 

    Requests for specific sums of money to “fix” problems or “make them go away.”

 

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  4. Facilitation payments

Policy

Facilitation Payments” are payments made to secure, facilitate or speed-up routine, non-discretionary government actions (e.g. payments for speeding up customs clearance, loading and unloading cargo or scheduling government inspections or issuing government licenses or port documentation). CGI regards Facilitation Payments to be a form of corruption and strictly prohibits them.

How we ensure compliance

CGI members who are requested to make a facilitation payment should make a report to ethics.crp@cgi.com immediately. In addition, any CGI member that makes a payment that could reasonably be misunderstood as a Facilitation Payment should make a report to ethics.crp@cgi.com and ensure that the payment transaction is completely and accurately documented in CGI’s books and records.

Red flags

Examples of common “red flags” that could indicate bribery or corruption include the following:

 

    Payments to obtain permits, licenses, or work orders to which you are already entitled;

 

    Payments to receive police protection or mail pickup/delivery;

 

    Payments to receive phone service or water/power supply;

 

    Payments to schedule inspections or transit of goods across border controls.

 

  5. Anti-money laundering

Money laundering is the process by which one conceals the existence of an illegal source of income and then disguises that income to make it appear legitimate. Use by CGI of proceeds tainted by illegality can give rise to liability in the countries in which CGI operates. CGI members should make a report pursuant to the Serious Ethical Incidents Reporting Policy or to ethics.crp@cgi.com if they become aware of suspicious circumstances leading them to believe that any transaction might involve the payment or the receipt of proceeds of any unlawful activity.

Red flags

Examples of common “red flags” that could indicate money laundering include the following:

 

    Refusal to disclose the source of funds or the beneficial ownership of funds;

 

    Uncertain qualifications of a participant for a proposed transaction; for example, if the principal business of such participant appears to be unrelated to such transaction;

 

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    Cash payments;

 

    Payments to and from tax haven jurisdictions;

 

    Complicated payment and transaction structures, including the use of multiple parties in transactions where payments and shipments are made to or from third parties which are not parties to the underlying contract;

 

    Criminal connections of transaction participants.

Training and Monitoring

In furtherance of CGI’s commitment to compliance with the law, this Anti-Corruption Policy is communicated to all CGI directors, officers, members and Third Parties, and is available on the CGI Enterprise Portal. Responsibility for compliance with this Policy, including the duty to seek guidance when in doubt, rests with the members or relevant Third Parties.

CGI will provide regular training on this Policy. When necessary, specialized training will be provided to members, directors and/or officers with significant compliance responsibilities or in high risk functions.

CGI will audit and monitor compliance with this Policy on an ongoing basis.

Reporting of Suspected Violations

Subject to applicable law, any suspected breaches of this Policy which directly or indirectly affect CGI’s business must be reported consistent with CGI’s Serious Ethical Incidents Reporting Policy. The process in place protects the incident reporter and ensures the confidentiality of the report. There will be no retaliation for making a report. According to our Serious Ethical Incidents Reporting Policy, you can make confidential reports of misconduct by calling a toll-free hotline number (see policy for numbers to call) or online (at ethicspoint.com).

Consequences of Misconduct

The consequences of violating applicable Anti-Corruption Laws are potentially very serious for CGI and individual members. CGI will vigorously enforce compliance with this Policy. Violations may result in disciplinary action, including in serious cases, termination of employment. Violations may also result in criminal and civil exposure for CGI and any individuals involved, including imprisonment, fines and damages actions, and can cause significant damage to CGI’s reputation in the market place. CGI may also face suspension and disbarment from public sector contracts as a result of violations by CGI members.

Third Parties who breach the CGI Third Party Code of Ethics may also be subject to prosecution and severe penalties, including the termination of their contract with CGI.

 

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Questions about this Policy

Questions about the application of this Policy to specific circumstances can be directed to ethics.crp@cgi.com. Questions can also be directed to your local CGI Legal Department or Human Resources representative.

 

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5. Appendices

 

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APPENDIX A

Definition of Independence in effect as of June 30, 2005 under CSA Multilateral Instrument 52 110

 

1.4 Meaning of independence

 

  (1) An audit committee member is independent if he or she has no direct or indirect material relationship with the issuer.

 

  (2) For the purposes of subsection (1), a “material relationship” is a relationship which could, in the view of the issuer’s board of directors, be reasonably expected to interfere with the exercise of a member’s independent judgement.

 

  (3) Despite subsection (2), the following individuals are considered to have a material relationship with an issuer:

 

  (a) an individual who is, or has been within the last three years, an employee or executive officer of the issuer;

 

  (b) an individual whose immediate family member is, or has been within the last three years, an executive officer of the issuer;

 

  (c) an individual who:

 

  (i) is a partner of a firm that is the issuer’s internal or external auditor,

 

  (ii) is an employee of that firm, or

 

  (iii) was within the last three years a partner or employee of that firm and personally worked on the issuer’s audit within that time;

 

  (d) an individual whose spouse, minor child or stepchild, or child or stepchild who shares a home with the individual:

 

  (i) is a partner of a firm that is the issuer’s internal or external auditor,

 

  (ii) is an employee of that firm and participates in its audit, assurance or tax compliance (but not tax planning) practice, or

 

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  (iii) was within the last three years a partner or employee of that firm and personally worked on the issuer’s audit within that time;

 

  (e) an individual who, or whose immediate family member, is or has been within the last three years, an executive officer of an entity if any of the issuer’s current executive officers serves or served at that same time on the entity’s compensation committee; and

 

  (f) an individual who received, or whose immediate family member who is employed as an executive officer of the issuer received, more than $75,000 in direct compensation from the issuer during any 12 month period within the last three years.

 

  (4) Despite subsection (3), an individual will not be considered to have a material relationship with the issuer solely because

 

  (a) he or she had a relationship identified in subsection (3) if that relationship ended before March 30, 2004; or

 

  (b) he or she had a relationship identified in subsection (3) by virtue of subsection (8) if that relationship ended before June 30, 2005.

 

  (5) For the purposes of clauses (3)(c) and (3)(d), a partner does not include a fixed income partner whose interest in the firm that is the internal or external auditor is limited to the receipt of fixed amounts of compensation (including deferred compensation) for prior service with that firm if the compensation is not contingent in any way on continued service.

 

  (a) remuneration for acting as a member of the board of directors or of any board committee of the issuer, and

 

  (b) the receipt of fixed amounts of compensation under a retirement plan (including deferred compensation) for prior service with the issuer if the compensation is not contingent in any way on continued service.

 

  (7) Despite subsection (3), an individual will not be considered to have a material relationship with the issuer solely because the individual or his or her immediate family member

 

  (a) has previously acted as an interim chief executive officer of the issuer, or

 

  (b) acts, or has previously acted, as a chair or vice-chair of the board of directors or of any board committee of the issuer on a part-time basis.

 

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  (8) For the purpose of section 1.4, an issuer includes a subsidiary entity of the issuer and a parent of the issuer.

 

1.5 additional independence requirements

 

  (1) Despite any determination made under section 1.4, an individual who

 

  (a) accepts, directly or indirectly, any consulting, advisory or other compensatory fee from the issuer or any subsidiary entity of the issuer, other than as remuneration for acting in his or her capacity as a member of the board of directors or any board committee, or as a part time chair or vice-chair of the board or any board committee; or

 

  (b) is an affiliated entity of the issuer or any of its subsidiary entities, is considered to have a material relationship with the issuer.

 

  (2) For the purposes of subsection (1), the indirect acceptance by an individual of any consulting, advisory or other compensatory fee includes acceptance of a fee by

 

  (a) an individual’s spouse, minor child or stepchild, or a child or stepchild who shares the individual’s home; or

 

  (b) an entity in which such individual is a partner, member, an officer such as a managing director occupying a comparable position or executive officer, or occupies a similar position (except limited partners, non-managing members and those occupying similar positions who, in each case, have no active role in providing services to the entity) and which provides accounting, consulting, legal, investment banking or financial advisory services to the issuer or any subsidiary entity of the issuer.

 

  (3) For the purposes of subsection (1), compensatory fees do not include the receipt of fixed amounts of compensation under a retirement plan (including deferred compensation) for prior service with the issuer if the compensation is not contingent in any way on continued service.

 

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Appendix B:

Limits on Permissible Gifts and Hospitalities for Government Officials

The following table sets forth guidelines contained in applicable local law for permissible limits on Gifts and Hospitalities being offered or made by CGI members to Government Officials in select jurisdictions where CGI operates its business:

 

Country   

 

Limit for Gifts

 

        Limits for Hospitality
Australia    AUD 38 (approximately CAD 30)        

AUD 125 (approximately CAD 100)

 

Austria   

requires opinion of local counsel, except for items of symbolic value, such as pens, calendars and other items with the Company logo

 

        requires opinion of local counsel
Brazil    BRL 100 (CAD 55)        

BRL 100 (approximately CAD 55) recommended

 

Canada    CAD 24        

CAD 47 breakfast; CAD 70 lunch; CAD 95 dinner; CAD 29 refreshments

 

China   

RMB 200 (approximately CAD 29)

 

       

RMB 515 (approximately CAD 75)

 

France   

EUR 21 (approximately CAD 30)

 

       

EUR 65 (approximately CAD 100)

 

Germany   

items of symbolic value EUR 35 (approximately CAD 50), such as pens, calendars and other items with the Company logo

 

        EUR 65 (approximately CAD 100), opinion of local counsel recommended
India    INR 1,000 (approximately CAD 22)        

INR 1,000 (approximately CAD 22) recommended

 

Ireland   

EUR 30 (approximately CAD 42)

 

       

EUR 100 (approximately CAD 141)

 

Japan   

requires opinion of local counsel, except gift items distributed widely for commemorative purposes, and commemorative gifts at a buffet party where more than 20 guests are in attendance

 

        requires opinion of local counsel, except refreshments at Company premises, e.g., cup of coffee
Netherlands    EUR 50 (approximately CAD 70), with prior approval of recipient’s supervisor        

meals not permissible, except as part of a seminar, fair or similar event with prior approval of recipient’s supervisor

 

 

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Country   

 

Limit for Gifts

 

        Limits for Hospitality
New Zealand   

NZD 30 (approximately CAD 19)

 

       

NZD 80 (approximately CAD 52)*

 

Philippines   

gifts, such as Company souvenirs of minor value, e.g., PHP 1,500 (approximately CAD 30)

 

        PHP 1,500 (approximately CAD 30)
Poland   

Requires opinion of local counsel, except for small Company souvenirs of minor value, e.g., pen

 

        PLN 240 (approximately CAD 100)
Russia   

RUB 500 (approximately CAD 20

 

       

RUB 2,500 (approximately CAD 100)

 

Singapore   

requires opinion of local counsel, except for items of symbolic value, such as pens, calendars and other items with the Company logo

 

        requires opinion of local counsel, except for modest working lunch/refreshments at Company premises
South Africa   

ZAR 350 (approximately CAD 44)

 

       

ZAR 815 (approximately CAD 75)

 

Spain   

EUR 21 (approximately CAD 30)

 

       

EUR 65 (approximately CAD 100)

 

United Kingdom   

requires opinion of CGI Legal Department

 

       

requires opinion of CGI Legal Department

 

United States   

Requires opinion of CGI Legal Department

 

       

requires opinion of CGI Legal Department

 

 

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Consolidated Financial Statements

 

 

Management’s and Auditors’ reports

MANAGEMENT’S STATEMENT OF RESPONSIBILITY FOR FINANCIAL REPORTING

The management of CGI Group Inc. (“the Company”) is responsible for the preparation and integrity of the consolidated financial statements and the Management’s Discussion and Analysis (“MD&A”). The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards and necessarily include some amounts that are based on management’s best estimates and judgement. Financial and operating data elsewhere in the MD&A are consistent with that contained in the accompanying consolidated financial statements.

To fulfill its responsibility, management has developed, and continues to maintain, systems of internal controls reinforced by the Company’s standards of conduct and ethics, as set out in written policies to ensure the reliability of the financial information and to safeguard its assets. The Company’s internal control over financial reporting and consolidated financial statements are subject to audit by the independent auditors, Ernst & Young LLP, whose report follows. They were appointed as independent auditors, by a vote of the Company’s shareholders, to conduct an integrated audit of the Company’s consolidated financial statements and of the Company’s internal control over financial reporting. In addition, the Executive Committee of the Company reviews the disclosure of corporate information and oversees the functioning of the Company’s disclosure controls and procedures.

Members of the Audit and Risk Management Committee of the Board of Directors, all of whom are independent of the Company, meet regularly with the independent auditors and with management to discuss internal controls in the financial reporting process, auditing matters and financial reporting issues and formulates the appropriate recommendations to the Board of Directors. The independent auditors have unrestricted access to the Audit and Risk Management Committee. The consolidated financial statements and MD&A have been reviewed and approved by the Board of Directors.

 

 

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Michael E. Roach

   François Boulanger   
President and Chief Executive Officer    Executive Vice-President and Chief Financial Officer

 

November 12, 2014

     


FISCAL 2014 RESULTS

 

 

Management’s and Auditors’ reports

MANAGEMENT REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s consolidated financial statements for external reporting purposes in accordance with accounting principles generally accepted in Canada.

The Company’s internal control over financial reporting includes policies and procedures that:

- Pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions and dispositions of the assets of the Company;

- Provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with accounting principles generally accepted in Canada, and that receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and,

- Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the Company’s consolidated financial statements.

All internal control systems have inherent limitations; therefore, even where internal control over financial reporting is determined to be effective, it can provide only reasonable assurance. Projections of any evaluation of effectiveness to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

As of the end of the Company’s 2014 fiscal year, management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting based on the framework established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 Framework). Based on this assessment, management has determined the Company’s internal control over financial reporting as at September 30, 2014, was effective.

The effectiveness of the Company’s internal control over financial reporting as at September 30, 2014, has been audited by the Company’s independent auditors, as stated in their report appearing on page 58.

 

 

LOGO    LOGO   

 

Michael E. Roach

   François Boulanger   
President and Chief Executive Officer    Executive Vice-President and Chief Financial Officer

 

November 12, 2014

     


Consolidated Financial Statements

 

 

Management’s and Auditors’ reports

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING

To the Board of Directors and Shareholders of CGI Group Inc.

We have audited CGI Group Inc.’s (the “Company”) internal control over financial reporting as of September 30, 2014, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 Framework) (“the COSO criteria”). The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records, that in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2014 based on the COSO criteria.

We also have audited, in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of the Company as at and for the year ended September 30, 2014, and our report dated November 12, 2014 expressed an unqualified opinion thereon.

 

/s/ Ernst & Young LLP1

Ernst & Young LLP

Montréal, Canada

November 12, 2014

 

 

1. CPA auditor, CA, public accountancy permit No. A112431


FISCAL 2014 RESULTS

 

 

Management’s and Auditors’ reports

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON FINANCIAL STATEMENTS

To the Board of Directors and Shareholders of CGI Group Inc.

We have audited the accompanying consolidated financial statements of CGI Group Inc. (the “Company”), which comprise the consolidated balance sheets as of September 30, 2014 and 2013 and the consolidated statements of earnings, comprehensive income, changes in equity and cash flows for the years ended September 30, 2014 and 2013, and a summary of significant accounting policies and other explanatory information.

Management’s responsibility for the consolidated financial statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditors’ responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditors’ judgement, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditors consider internal control relevant to the entity’s preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of CGI Group Inc. as at September 30, 2014 and 2013, and its financial performance and its cash flows for the years ended September 30, 2014 and 2013, in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.


Consolidated Financial Statements

 

 

Management’s and Auditors’ reports

Other matter

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), CGI Group Inc.’s internal control over financial reporting as of September 30, 2014, based on the criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 Framework) and our report dated November 12, 2014 expressed an unqualified opinion on the Company’s internal control over financial reporting.

 

/s/ Ernst & Young LLP1

Ernst & Young LLP

Montréal, Canada

November 12, 2014

 

 

1. CPA auditor, CA, public accountancy permit No. A112431


FISCAL 2014 RESULTS

 

 

Consolidated Statements of Earnings

For the years ended September 30

(in thousands of Canadian dollars, except per share data)

 

      2014            2013  
     $           $  

 Revenue

     10,499,692              10,084,624   

 Operating expenses

        

 Costs of services, selling and administrative (Note 23)

     9,129,791            9,012,310   

 Integration-related costs (Note 26b)

     127,341            338,439   

 Finance costs (Note 25)

     101,278            113,931   

 Finance income

     (2,010)            (4,362)   

 Foreign exchange loss (gain)

     13,042              (3,316)   
       9,369,442              9,457,002   

 Earnings before income taxes

     1,130,250            627,622   

 Income tax expense (Note 16)

     270,807              171,802   

 Net earnings

     859,443              455,820   

 Earnings per share (Note 21)

        

 Basic earnings per share

     2.78            1.48   

 Diluted earnings per share

     2.69              1.44   

See Notes to the Consolidated Financial Statements.


Consolidated Financial Statements

 

 

Consolidated Statements of Comprehensive Income

For the years ended September 30

(in thousands of Canadian dollars)

 

      2014            2013  
     $           $  

  Net earnings

     859,443              455,820   

 Items that will be reclassified subsequently to net earnings (net of income taxes):

        

 Net unrealized gains on translating financial statements of foreign operations

     221,279            297,761   

 Net losses on derivative financial instruments and on translating long-term debt designated as hedges of net investments in foreign operations

     (100,869)            (143,785)   

 Net unrealized gains on cash flow hedges

     20,729            134   

 Net unrealized gains (losses) on investments available for sale

     941            (1,704)   

 Items that will not be reclassified subsequently to net earnings (net of income taxes):

        

 Net remeasurement losses

     (35,311)              (30,845)   

  Other comprehensive income

     106,769              121,561   

  Comprehensive income

     966,212              577,381   

See Notes to the Consolidated Financial Statements.


FISCAL 2014 RESULTS

 

 

Consolidated Balance Sheets

As at September 30

(in thousands of Canadian dollars)

 

      2014            2013  
     $           $  

 Assets

        

 Current assets

        

 Cash and cash equivalents (Note 4)

     535,715            106,199   

 Current derivative financial instruments (Note 31)

     9,397            1,344   

 Accounts receivable (Note 5)

     1,036,068            1,205,625   

 Work in progress

     807,989            911,848   

 Prepaid expenses and other current assets

     174,137            218,446   

 Income taxes

     8,524              17,233   

 Total current assets before funds held for clients

     2,571,830            2,460,695   

 Funds held for clients (Note 6)

     295,754              222,469   

 Total current assets

     2,867,584            2,683,164   

 Property, plant and equipment (Note 7)

     486,880            475,143   

 Contract costs (Note 8)

     156,540            140,472   

 Intangible assets (Note 9)

     630,074            708,165   

 Other long-term assets (Note 10)

     74,158            58,429   

 Long-term financial assets (Note 11)

     84,077            51,892   

 Deferred tax assets (Note 16)

     323,416            368,217   

 Goodwill (Note 12)

     6,611,323              6,393,790   
       11,234,052              10,879,272   

 Liabilities

        

 Current liabilities

        

 Accounts payable and accrued liabilities

     1,060,380            1,119,034   

 Current derivative financial instruments (Note 31)

     4,588            6,882   

 Accrued compensation

     583,979            713,933   

 Deferred revenue

     457,056            508,267   

 Income taxes

     156,283            156,358   

 Provisions (Note 13)

     143,309            223,074   

 Current portion of long-term debt (Note 14)

     80,367              534,173   

 Total current liabilities before clients’ funds obligations

     2,485,962            3,261,721   

 Clients’ funds obligations

     292,257              220,279   

 Total current liabilities

     2,778,219            3,482,000   

 Long-term provisions (Note 13)

     70,586            109,011   

 Long-term debt (Note 14)

     2,599,336            2,332,377   

 Other long-term liabilities (Note 15)

     308,387            434,653   

 Long-term derivative financial instruments (Note 31)

     149,074            157,110   

 Deferred tax liabilities (Note 16)

     155,972            155,329   

 Retirement benefits obligations (Note 17)

     183,753              153,095   
       6,245,327              6,823,575   

 Equity

        

 Retained earnings

     2,356,008            1,551,956   

 Accumulated other comprehensive income (Note 18)

     228,624            121,855   

 Capital stock (Note 19)

     2,246,197            2,240,494   

 Contributed surplus

     157,896              141,392   
       4,988,725              4,055,697   
       11,234,052              10,879,272   

See Notes to the Consolidated Financial Statements.

 

Approved by the Board   

LOGO

 

  

LOGO

 

  
   Michael E. Roach    Serge Godin   
  

Director

  

Director

  


Consolidated Financial Statements

 

 

Consolidated Statements of Changes in Equity

For the years ended September 30

(in thousands of Canadian dollars)

 

      Retained
earnings
    

Accumulated

other

comprehensive
income

    

Capital

stock

     Contributed
surplus
    

Total

equity

 
     $      $      $      $      $  

 Balance as at September 30, 2013

     1,551,956         121,855         2,240,494         141,392         4,055,697   

 Net earnings

     859,443                                 859,443   

 Other comprehensive income

             106,769                         106,769   

 Comprehensive income

     859,443         106,769                         966,212   

 Share-based payment costs

                             31,716         31,716   

 Income tax impact associated with stock options

                             3,269         3,269   

 Exercise of stock options (Note 19)

                     83,305         (18,380)         64,925   

 Exercise of performance share units (“PSUs”) (Note 19)

                     583         (583)           

 Repurchase of Class A subordinate shares (Note 19)

     (55,391)                 (56,077)                 (111,468)   

 Purchase of Class A subordinate shares held in trust (Note 19)

                     (23,016)                 (23,016)   

 Resale of Class A subordinate shares held in trust (Note 19)

                     908         482         1,390   

 Balance as at September 30, 2014

     2,356,008         228,624         2,246,197         157,896         4,988,725   
      Retained
earnings
     Accumulated
other
comprehensive
income
    

Capital

stock

     Contributed
surplus
    

Total

equity

 
     $      $      $      $      $  

 Balance as at September 30, 2012

     1,113,225         294         2,201,694         107,690         3,422,903   

 Net earnings

     455,820                                 455,820   

 Other comprehensive income

             121,561                         121,561   

 Comprehensive income

     455,820         121,561                         577,381   

 Share-based payment costs

                             31,273         31,273   

 Income tax impact associated with stock options

                             15,232         15,232   

 Exercise of stock options (Note 19)

                     51,971         (12,531)         39,440   

 Exercise of performance share units (“PSUs”) (Note 19)

                     272         (272)           

 Repurchase of Class A subordinate shares (Note 19)

     (17,089)                 (5,780)                 (22,869)   

 Purchase of Class A subordinate shares held in trust (Note 19)

                     (7,663)                 (7,663)   

 Balance as at September 30, 2013

     1,551,956         121,855         2,240,494         141,392         4,055,697   

See Notes to the Consolidated Financial Statements.


FISCAL 2014 RESULTS

 

 

Consolidated Statements of Cash Flows

For the years ended September 30

(in thousands of Canadian dollars)

 

      2014        2013  
     $        $  

 Operating activities

       

 Net earnings

     859,443           455,820   

 Adjustments for:

       

Amortization and depreciation (Note 24)

     444,232           435,944   

Deferred income taxes (Note 16)

     54,360           34,714   

Foreign exchange loss (gain)

     17,751           (4,938)   

Share-based payment costs

     31,716           31,273   

 Net change in non-cash working capital items (Note 27)

     (232,667)           (281,556)   

 Cash provided by operating activities

     1,174,835           671,257   

 Investing activities

       

 Net change in short-term investments

     73           11,843   

 Business acquisition

               (5,140)   

 Purchase of property, plant and equipment

     (181,471)           (141,965)   

 Proceeds from sale of property, plant and equipment

     13,673             

 Additions to contract costs

     (73,900)           (31,207)   

 Additions to intangible assets

     (77,726)           (71,447)   

 Purchase of long-term investments

     (15,059)           (10,518)   

 Proceeds from sale of long-term investments

     6,880           6,402   

 Payments received from long-term receivable

     6,377           8,177   

 Cash used in investing activities

     (321,153)           (233,855)   

 Financing activities

       

 Net change in unsecured committed revolving credit facility

     (283,049)           (467,027)   

 Increase of long-term debt

     1,021,918           80,333   

 Repayment of long-term debt

     (1,047,261)           (68,057)   

 Settlement of derivative financial instruments (Note 31)

     (37,716)             

 Purchase of Class A subordinate shares held in trust (Note 19)

     (23,016)           (7,663)   

 Resale of Class A subordinate shares held in trust

     1,390             

 Repurchase of Class A subordinate shares (Note 19)

     (111,468)           (22,869)   

 Issuance of Class A subordinate shares

     65,138           39,312   

 Cash used in financing activities

     (414,064)           (445,971)   

 Effect of foreign exchange rate changes on cash and cash equivalents

     (10,102)           1,665   

 Net increase (decrease) in cash and cash equivalents

     429,516           (6,904)   

 Cash and cash equivalents, beginning of year

     106,199           113,103   

 Cash and cash equivalents, end of year (Note 4)

     535,715           106,199   

Supplementary cash flow information (Note 27).

See Notes to the Consolidated Financial Statements.


Consolidated Financial Statements

 

 

Notes to the Consolidated Financial Statements

For the years ended September 30, 2014 and 2013

(tabular amounts only are in thousands of Canadian dollars, except per share data)

 

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 consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) and the International Financial Reporting Interpretations Committee interpretations as issued by the International Accounting Standards Board (“IASB”). The accounting policies were consistently applied to all periods presented.

The Company’s consolidated financial statements for the years ended September 30, 2014 and 2013 were authorized for issue by the Board of Directors on November 12, 2014.

 

3. Summary of significant accounting policies

BASIS OF CONSOLIDATION

The consolidated financial statements include the accounts of the Company and its subsidiaries. All intercompany transactions and balances have been eliminated on consolidation.

Subsidiaries are entities controlled by the Company. The Company controls an entity when it is exposed or has right, to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the relevant activities of the entity. Subsidiaries are fully consolidated from the date of acquisition and continue to be consolidated until the date control over the subsidiaries ceases.

BASIS OF MEASUREMENT

The consolidated financial statements have been prepared on a historical cost basis, except for certain financial assets and liabilities, which have been measured at fair value as described below.


FISCAL 2014 RESULTS

 

Notes to the Consolidated Financial Statements

For the years ended September 30, 2014 and 2013

(tabular amounts only are in thousands of Canadian dollars, except per share data)

 

 

 

3. Summary of significant accounting policies (continued)

 

USE OF JUDGEMENTS AND ESTIMATES

The preparation of the consolidated financial statements requires management to make judgements and estimates that affect the reported amounts of assets, liabilities, equity, the accompanying disclosures at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Because the use of judgements and estimates is inherent in the financial reporting process, actual results could differ.

Significant judgements and estimates about the future and other major sources of estimation uncertainty at the end of the reporting period could have a significant risk of causing a material adjustment to the carrying amounts of the following: deferred tax assets, revenue recognition, estimated losses on revenue-generating contracts, goodwill impairment, business combinations, provisions for income tax uncertainties and litigations and claims.

The use of judgments, apart from those involving estimations, that have the most significant effect on the amounts recognized in the financial statements are:

Multiple component arrangements

Assessing whether the deliverables within an arrangement are separately identifiable components requires judgement by management. A component is considered as separately identifiable if it has value to the client on a stand-alone basis. The Company first reviews the contract clauses to evaluate if the deliverable is accepted separately by the client. Then, the Company assesses if the deliverable could have been provided by another vendor and if it would have been possible for the client to decide to not purchase the deliverable.

Deferred tax assets

Deferred tax assets are recognized for unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilized. Management judgment is required concerning uncertainties that exist with respect to the timing of future taxable income required to recognize a deferred tax asset. The Company recognizes an income tax benefit only when it is probable that the tax benefit will be realized in the future. In making this judgement, the Company assesses forecast and the availability of future tax planning strategies.

A description of estimations is included in the respective sections within the Notes to the Consolidated Financial Statements and in Note 3, “Summary of significant accounting policies”.


Consolidated Financial Statements

 

Notes to the Consolidated Financial Statements

For the years ended September 30, 2014 and 2013

(tabular amounts only are in thousands of Canadian dollars, except per share data)

 

3. Summary of significant accounting policies (continued)

 

 

REVENUE RECOGNITION, WORK IN PROGRESS AND DEFERRED REVENUE

The Company generates revenue principally through the provision of IT services and BPS as described in Note 1.

The Company provides services and products under arrangements that contain various pricing mechanisms. The Company recognizes revenue when the following criteria are met: there is clear evidence that an arrangement exists, the amount of revenue and related costs can be measured reliably, it is probable that future economic benefits will flow to the Company, the stage of completion can be measured reliably where services are delivered and the significant risks and rewards of ownership, including effective control, are transferred to clients where products are sold. Revenue is measured at the fair value of the consideration received or receivable net of discounts, volume rebates and sales related taxes.

Some of the Company’s arrangements may include client acceptance clauses. Each clause is analyzed to determine whether the earnings process is complete when the service is performed. Formal client sign-off is not always necessary to recognize revenue provided that the Company objectively demonstrates that the criteria specified in the acceptance provisions are satisfied. Some of the criteria reviewed include historical experience with similar types of arrangements, whether the acceptance provisions are specific to the client or are included in all arrangements, the length of the acceptance term and historical experience with the specific client.

Revenue from sales of third party vendor products, such as software licenses, hardware, or services is recorded gross when the Company is a principal to the transaction and is recorded net of costs when the Company is acting as an agent between the client and vendor. Factors generally considered to determine whether the Company is a principal or an agent are if the Company is the primary obligor to the client, if it adds meaningful value to the vendor’s product or service and if it assumes delivery and credit risks.

Relative selling price

The Company’s arrangements often include a mix of the services and products listed below. If an arrangement involves the provision of multiple components, the total arrangement value is allocated to each separately identifiable component based on its relative selling price. When estimating selling price of each component, the Company maximizes the use of observable prices which are established using the Company’s prices for same or similar components. When observable prices are not available, the Company estimates selling prices based on its best estimate. The best estimate of selling price is the price at which the Company would normally expect to offer the services or products and is established by considering a number of internal and external factors including, but not limited to, geographies, the Company’s pricing policies, internal costs and margins. The appropriate revenue recognition method is applied for each separately identifiable component as described below.

Outsourcing

Revenue from outsourcing and BPS arrangements is generally recognized as the services are provided at the contractually stated price, unless there is a better measure of performance or delivery.

Systems integration and consulting services

Revenue from systems integration and consulting services under time and material arrangements is recognized as the services are rendered, and revenue under cost-based arrangements is recognized as reimbursable costs are incurred.

Revenue from systems integration and consulting services under fixed-fee arrangements where the outcome of the arrangements can be estimated reliably is recognized using the percentage-of-completion method over the service periods. The Company uses the labour costs or labour hours to measure the progress towards completion. This method relies on estimates of total expected labour costs or total expected labour hours to complete the service, which are compared to labour costs or labour hours incurred to date, to arrive at an estimate of the percentage of revenue earned to date. Management regularly reviews underlying estimates of total expected labour costs or hours. If the outcome of an arrangement cannot be estimated reliably, revenue is recognized to the extent of arrangement costs incurred that are likely to be recoverable.

Revenue from benefits-funded arrangements is recognized only to the extent that it is probable that the benefit stream associated with the transaction will generate amounts sufficient to fund the value on which revenue recognition is based.


FISCAL 2014 RESULTS

 

Notes to the Consolidated Financial Statements

For the years ended September 30, 2014 and 2013

(tabular amounts only are in thousands of Canadian dollars, except per share data)

 

3. Summary of significant accounting policies (continued)

 

REVENUE RECOGNITION, WORK IN PROGRESS AND DEFERRED REVENUE (CONTINUED)

 

 

Software licenses

Most of the Company’s software license arrangements include other services such as implementation, customization and maintenance. For these types of arrangements, revenue from a software license is recognized upon delivery if it has been identified as a separately identifiable component. Otherwise, it is combined with the implementation and customization services and is accounted for as described in “Systems integration and consulting services” above. Revenue from maintenance services for software licenses sold and implemented is recognized ratably over the term of the maintenance period.

Work in progress and deferred revenue

Amounts recognized as revenue in excess of billings are classified as work in progress. Amounts received in advance of the delivery of products or performance of services are classified as deferred revenue.

Estimated losses on revenue-generating contracts

Estimated losses on revenue-generating contracts may occur due to additional contract costs which were not foreseen at inception of the contract. Contract losses are measured at the amount by which the estimated total costs exceed the estimated total revenue from the contract. The estimated losses on revenue-generating contracts are recognized in the period when it is determined that a loss is probable. The expected loss is first applied to impair the related capitalized contract costs with the excess recorded in accounts payable and accrued liabilities and in other long-term liabilities. Management regularly reviews arrangement profitability and the underlying estimates.

CASH AND CASH EQUIVALENTS

Cash and cash equivalents consist of unrestricted cash and short-term investments having an initial maturity of three months or less.

FUNDS HELD FOR CLIENTS AND CLIENTS’ FUNDS OBLIGATIONS

In connection with the Company’s payroll, tax filing and claims services, the Company collects funds for payment of payroll, taxes and claims, temporarily holds such funds until payment is due, remits the funds to the clients’ employees, appropriate tax authorities or claim holders, and files federal and local tax returns and handles related regulatory correspondence and amendments. The funds held for clients include cash and long-term bonds. The Company presents the funds held for clients and related obligations separately. Funds held for clients are classified as current assets since, based upon management’s intentions, these funds are held solely for the purpose of satisfying the clients’ funds obligations, which will be repaid within one year of the consolidated balance sheets date.

Interest income earned and realized gains and losses on the disposal of bonds are recorded in revenue in the period that the income is earned, since the collecting, holding and remitting of these funds are critical components of providing these services.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment (“PP&E”), including those under finance leases, are recorded at cost and are depreciated over their estimated useful lives using the straight-line method.

 

 Buildings

   10 to 40 years 

 Leasehold improvements

   Lesser of the useful life or lease term 

 Furniture, fixtures and equipment

   3 to 20 years 

 Computer equipment

   3 to 5 years 


Consolidated Financial Statements

 

Notes to the Consolidated Financial Statements

For the years ended September 30, 2014 and 2013

(tabular amounts only are in thousands of Canadian dollars, except per share data)

 

3. Summary of significant accounting policies (continued)

 

 

LEASES

Leases are classified as finance leases whenever the terms of the lease transfer substantially all the risks and rewards of ownership to the lessee. All other leases are classified as operating leases.

Assets held under finance leases are initially recognized in PP&E at an amount equal to the fair value of the leased assets or, if lower, the present value of minimum lease payments at the inception of the lease, and then depreciated over the economic useful life of the asset or term of the lease, whichever is shorter. The capital element of future lease payments is included in the consolidated balance sheets within long-term debt. Interest is charged to the consolidated statements of earnings so as to achieve a constant rate of interest on the remaining balance of the liability.

Lease payments under operating leases are charged to the consolidated statements of earnings on a straight-line basis over the lease term. Operating lease incentives are recognized as a reduction in the rental expense over the lease term.

CONTRACT COSTS

Contract costs are mainly incurred when acquiring or implementing long-term outsourcing contracts. Contract costs are comprised primarily of transition costs and incentives.

Transition costs

Transition costs consist of costs associated with the installation of systems and processes incurred after the award of outsourcing contracts, relocation of transitioned employees and exit from client facilities. Under BPS contracts, the costs consist primarily of costs related to activities such as the conversion of the client’s applications to the Company’s platforms. Transition costs are comprised essentially of labour costs, including compensation and related fringe benefits, as well as subcontractor costs.

Incentives

Occasionally, incentives are granted to clients upon the signing of outsourcing contracts. These incentives are granted in the form of cash payments.

Pre-contract costs

Pre-contract costs associated with acquiring or implementing long-term outsourcing contracts are expensed as incurred except where it is virtually certain that the contracts will be awarded and the costs are directly related to the acquisition of the contract. For outsourcing contracts, the Company is virtually certain that a contract will be awarded when the Company is selected by the client following a tender process but the contract has not yet been signed.

Amortization of contract costs

Contract costs are amortized as services are provided. Amortization of transition costs and pre-contract costs is included in costs of services, selling and administrative and amortization of incentives is recorded as a reduction of revenue.

Impairment of contract costs

When a contract is not expected to be profitable, the expected loss is first applied to impair the related capitalized contract costs. The excess of the expected loss over the capitalized contract costs is recorded as estimated losses on revenue-generating contracts in accounts payable and accrued liabilities and in other long-term liabilities. If at a future date the contract returns to profitability, the previously recognized impairment loss must be reversed. First the estimated losses on revenue-generating contracts must be reversed, and if there is still additional projected profitability then any capitalized contract costs that were impaired must be reversed. The reversal of the impairment loss is limited so that the carrying amount does not exceed its recoverable amount, nor exceed the carrying amount that would have been determined, net of amortization, had no impairment loss been recognized for the contract costs in prior years.


FISCAL 2014 RESULTS

 

Notes to the Consolidated Financial Statements

For the years ended September 30, 2014 and 2013

(tabular amounts only are in thousands of Canadian dollars, except per share data)

 

3. Summary of significant accounting policies (continued)

 

 

INTANGIBLE ASSETS

Intangible assets consist mainly of internal-use software, business solutions, software licenses and client relationships. Internal-use software, business solutions and software licenses are recorded at cost. Business solutions developed internally and marketed are capitalized when they meet specific capitalization criteria related to technical, market and financial feasibility. Internal-use software developed internally is capitalized when it meets specific capitalization criteria related to technical and financial feasibility and when the Company demonstrates its ability and intention to use it. Internal-use software, business solutions, software licenses and client relationships acquired through business combinations are initially recorded at their fair value based on the present value of expected future cash flows, which involve making estimates about the future cash flows, as well as discount rates.

Amortization of intangible assets

The Company amortizes its intangible assets using the straight-line method over the following estimated useful lives:

 

 Internal-use software

   2 to 7 years 

 Business solutions

   2 to 10 years 

 Software licenses

   3 to 8 years 

 Client relationships and other

   2 to 10 years 

IMPAIRMENT OF PP&E, INTANGIBLE ASSETS AND GOODWILL

Timing of impairment testing

The carrying values of PP&E, intangible assets and goodwill are reviewed for impairment when events or changes in circumstances indicate that the carrying value may be impaired. The Company assesses at each reporting date whether any such events or changes in circumstances exist. The carrying value of PP&E and intangible assets not available for use and goodwill is tested for impairment annually as at September 30.

Impairment testing

If any indication of impairment exists or when annual impairment testing for an asset is required, the Company estimates the recoverable amount of the asset or cash-generating unit (“CGU”) to which the asset relates to determine the extent of any impairment loss. The recoverable amount is the higher of an asset’s or CGU’s fair value less costs of disposal and its value in use (“VIU”) to the Company. The Company mainly uses the VIU. In assessing VIU, estimated future cash flows are discounted to their present value using a discount rate that reflects current market assessments of the time value of money and the risks specific to the asset or CGU. In determining fair value less costs of disposal, recent market transactions are taken into account, if available. If the recoverable amount of an asset or a CGU is estimated to be less than its carrying amount, the carrying amount is reduced to its recoverable amount. An impairment loss is recognized immediately in the consolidated statements of earnings.

Goodwill acquired through business combinations is allocated to the CGU or group of CGUs that are expected to benefit from synergies of the related business combination. The group of CGUs that benefit from the synergies correspond to the Company’s operating segments. For goodwill impairment testing purposes, the group of CGUs that represent the lowest level within the Company at which management monitors goodwill is the operating segment level.

The recoverable amount of each segment has been determined based on the VIU calculation which includes estimates about their future financial performance based on cash flows approved by management covering a period of five years as the Company generates revenue mainly through long-term contracts. Key assumptions used in the VIU calculations are the discount rate applied and the long-term growth rate of net operating cash flows. In determining these assumptions, management has taken into consideration the current economic environment and its resulting impact on expected growth and discount rates. The cash flow projections reflect management’s expectations of the segment’s operating performance and growth prospects in the operating segment’s market. The discount rate applied to an operating segment is the weighted average cost of capital (“WACC”). Management considers factors such as country risk premium, risk-free rate, size premium and cost of debt to derive the WACC. Impairment losses relating to goodwill cannot be reversed in future periods.


Consolidated Financial Statements

 

Notes to the Consolidated Financial Statements

For the years ended September 30, 2014 and 2013

(tabular amounts only are in thousands of Canadian dollars, except per share data)

 

3. Summary of significant accounting policies (continued)

 

IMPAIRMENT OF PP&E, INTANGIBLE ASSETS AND GOODWILL (CONTINUED)

 

Impairment testing (continued)

 

 

For impaired assets, other than goodwill, an assessment is made at each reporting date as to whether there is any indication that previously recognized impairment losses may no longer exist or may have decreased. If such indication exists, the Company estimates the asset’s recoverable amount. A previously recognized impairment loss is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment loss was recognized. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor exceed the carrying amount that would have been determined, net of amortization, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in the consolidated statements of earnings.

LONG-TERM FINANCIAL ASSETS

Long-term investments presented in long-term financial assets are comprised of bonds which are classified as long-term based on management’s intentions.

BUSINESS COMBINATIONS

The Company accounts for its business combinations using the acquisition method. Under this method the consideration transferred is measured at fair value. Acquisition-related and integration costs associated with the business combination are expensed as incurred. The Company recognizes goodwill as the excess of the cost of the acquisition over the net identifiable tangible and intangible assets acquired and liabilities assumed at their acquisition-date fair values. The fair value allocated to tangible and intangible assets acquired and liabilities assumed are based on assumptions of management. These assumptions include the future expected cash flows arising from the intangible assets identified as client relationships, business solutions, and trademarks. The preliminary goodwill recognized is composed of the future economic value associated to acquired work force and synergies with the Company’s operations which are primarily due to reduction of costs and new business opportunities. The determination of fair value involves making estimates relating to acquired intangible assets, PP&E, litigation, provision for estimated losses on revenue-generating contracts, other onerous contracts and contingency reserves. Estimates include the forecasting of future cash flows and discount rates. Subsequent changes in fair values are adjusted against the cost of acquisition if they qualify as measurement period adjustments. The measurement period is the period between the date of acquisition and the date where all significant information necessary to determine the fair values is available, not to exceed 12 months. All other subsequent changes are recognized in the consolidated statements of earnings.

EARNINGS PER SHARE

Basic earnings per share is based on the weighted average number of shares outstanding during the period. Diluted earnings per share is determined using the treasury stock method to evaluate the dilutive effect of stock options and PSUs.

RESEARCH AND SOFTWARE DEVELOPMENT COSTS

Research costs are charged to earnings in the period in which they are incurred, net of related tax credits. Software development costs are charged to earnings in the year they are incurred, net of related tax credits, unless they meet specific capitalization criteria related to technical, market and financial feasibility.

TAX CREDITS

The Company follows the income approach to account for tax credits, whereby investment tax credits are recorded when there is a reasonable assurance that the assistance will be received and that the Company will comply with all relevant conditions. Under this method, tax credits related to operating expenditures are recorded as a reduction of the related expense and recognized in the period in which the related expenditures are charged to operations. Tax credits related to capital expenditures are recorded as a reduction of the cost of the related asset. The tax credits recorded are based on management’s best estimates of amounts expected to be received and are subject to audit by the taxation authorities.


FISCAL 2014 RESULTS

 

Notes to the Consolidated Financial Statements

For the years ended September 30, 2014 and 2013

(tabular amounts only are in thousands of Canadian dollars, except per share data)

 

3. Summary of significant accounting policies (continued)

 

 

INCOME TAXES

Income taxes are accounted for using the liability method of accounting.

Current income taxes are recognized with respect to the amounts expected to be paid or recovered under the tax rates and laws that have been enacted or substantively enacted at the balance sheet date.

Deferred income tax assets and liabilities are determined based on deductible or taxable temporary differences between the amounts reported for financial statement purposes and tax values of the assets and liabilities using enacted or substantively enacted tax rates that will be in effect for the year in which the differences are expected to be recovered or settled. Deferred income tax assets and liabilities are recognized in earnings, other comprehensive income or in equity based on the classification of the item to which they relate.

Deferred tax assets are recognized for unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilized. Once this assessment is made, the Company considers the analysis of forecast and future tax planning strategies. Such estimates are made based on the forecast by jurisdiction on an undiscounted basis. Management considers factors such as the number of years to include in the forecast period, the history of the taxable profits and availability of tax strategies.

The Company is subject to taxation in numerous jurisdictions and there are transactions and calculations for which the ultimate tax determination is uncertain. When a tax position is uncertain, the Company recognizes an income tax benefit or reduces an income tax liability only when it is probable that the tax benefit will be realized in the future or that the income tax liability is no longer probable. The provision for uncertain tax positions is made using the best estimate of the amount expected to be paid based on qualitative assessment of all relevant factors.

PROVISIONS

Provisions are recognized when the Company has a present legal or constructive obligation as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. The Company’s provisions consist of liabilities for leases of premises that the Company has vacated, litigation and claim provisions arising in the ordinary course of business and decommissioning liabilities for operating leases of office buildings. The Company also records restructuring provisions mainly related to business acquisitions.

The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation. Provisions are discounted using a current pre-tax rate when the impact of the time value of money is material. The increase in the provision due to the passage of time is recognized as finance cost.

The Company accrues provisions for onerous leases which consist of estimated costs associated with vacated premises. The provisions reflect the present value of lease payments in excess of the expected sublease proceeds on the remaining term of the lease.

The accrued litigation and legal claim provisions are based on historical experience, current trends and other assumptions that are believed to be reasonable under the circumstances. Estimates include the period in which the underlying cause of the claim occurred and the degree of probability of an unfavourable outcome.

Decommissioning liabilities pertain to operating leases of office buildings where certain arrangements require premises to be returned to their original state at the end of the lease term. The provision is determined using the present value of the estimated future cash outflows.

Restructuring provisions, consisting of severances, are recognized when a detailed formal plan identifies the business or part of the business concerned, the location and number of employees affected, a detailed estimate of the associated costs, an appropriate timeline and has been communicated.


Consolidated Financial Statements

 

Notes to the Consolidated Financial Statements

For the years ended September 30, 2014 and 2013

(tabular amounts only are in thousands of Canadian dollars, except per share data)

 

3. Summary of significant accounting policies (continued)

 

 

TRANSLATION OF FOREIGN CURRENCIES

The Company’s consolidated financial statements are presented in Canadian dollars, which is also the parent company’s functional currency. Each entity in the Company determines its own functional currency and items included in the financial statements of each entity are measured using that functional currency. Functional currency is the currency of the primary economic environment in which the entity operates.

Foreign currency transactions and balances

Revenue, expenses and non-monetary assets and liabilities denominated in foreign currencies are recorded at the rate of exchange prevailing at the transaction date. Monetary assets and liabilities denominated in foreign currencies are translated at exchange rates prevailing at the balance sheet date. Unrealized and realized translation gains and losses are reflected in the consolidated statements of earnings.

Foreign operations

For foreign operations that have functional currencies different from the Company, assets and liabilities denominated in a foreign currency are translated into Canadian dollars at exchange rates in effect at the balance sheet date. Revenue and expenses are translated at average exchange rates prevailing during the period. Resulting unrealized gains or losses on translating financial statements of foreign operations are reported in other comprehensive income.

For foreign operations with the same functional currency as the Company, monetary assets and liabilities are translated at the exchange rates in effect at the balance sheet date and non-monetary assets and liabilities are translated at historical exchange rates. Revenue and expenses are translated at average exchange rates for the period. Translation exchange gains or losses of such operations are reflected in the consolidated statements of earnings.

SHARE-BASED PAYMENTS

Equity-settled plans

The Company operates equity-settled stock option and PSU plans under which the Company receives services from employees and others as consideration for equity instruments.

The fair value of those share-based payments is established on the grant date using the Black-Scholes option pricing model for the stock options and the closing price of Class A subordinate shares of the Company on the Toronto Stock Exchange (“TSX”) for the PSUs. The number of stock options and PSUs expected to vest are estimated on the grant date and subsequently revised on each reporting date. For stock options, the estimation of fair value requires making assumptions for the most appropriate inputs to the valuation model including the expected life of the option and expected stock price volatility. The fair values, adjusted for expectations related to performance conditions and for expected forfeitures, are recognized as share-based payment costs in earnings with a corresponding credit to contributed surplus on a graded-vesting basis over the vesting period.

When stock options are exercised, any consideration paid is credited to capital stock and the recorded fair value of the stock option is removed from contributed surplus and credited to capital stock. When PSUs are exercised, the recorded fair value of PSUs is removed from contributed surplus and credited to capital stock.

Share purchase plan

The Company operates a share purchase plan for eligible employees. Under this plan, the Company matches the contributions made by employees up to a maximum percentage of the employee’s salary. The Company contributions to the plan are recognized in salaries and other member costs within cost of services, selling and administrative.

Cash-settled deferred share units

The Company operates a deferred share unit (“DSU”) plan to compensate the members of the Board of Directors.

The Company measures the compensation granted at the fair value of the liability. The fair value of the liability is established by dividing the total fee payable by the closing price of Class A subordinate shares of the Company on the TSX on the day immediately preceding the fee payment date. Until the liability is settled, the Company remeasures the fair value of the liability at each reporting date using the market value of the shares issued. The DSU liability is presented in accrued compensation and fluctuations in fair value are recognized in salaries and other member costs within cost of services, selling and administrative.


FISCAL 2014 RESULTS

 

Notes to the Consolidated Financial Statements

For the years ended September 30, 2014 and 2013

(tabular amounts only are in thousands of Canadian dollars, except per share data)

 

3. Summary of significant accounting policies (continued)

 

 

FINANCIAL INSTRUMENTS

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.

Financial instruments may be designated on initial recognition as FVTE if any of the following criteria are met: i) the financial instrument contains one or more embedded derivatives that otherwise would have to be accounted for separately; ii) the designation eliminates or significantly reduces a measurement or recognition inconsistency that would otherwise arise from measuring the financial asset or liability or recognizing the gains and losses on them on a different basis; or iii) the financial asset and financial liability are part of a group of financial assets or liabilities that is managed and its performance evaluated on a fair value basis, in accordance with a documented risk management or investment strategy. Gains and losses related to periodic revaluations of financial assets and liabilities designated as FVTE are recorded in the consolidated statements of earnings.

The unrealized gains and losses, net of applicable income taxes, on available for sale assets are reported in other comprehensive income. Interest income earned and realized gains and losses on the sale of available for sale assets are recorded in the consolidated statements of earnings.

Transaction costs are comprised primarily of legal, accounting and other costs directly attributable to the issuance of the respective financial assets and liabilities. Transaction costs are capitalized to the cost of financial assets and liabilities classified as other than FVTE.

Financial assets are derecognized if the contractual rights to the cash flows from the financial asset expire or the asset is transferred and the transfer qualifies for derecognition. The transfer qualifies for derecognition if substantially all the risks and rewards of ownership of the financial asset are transferred.

The Company has made the following classifications:

FVTE

Cash and cash equivalents and derivative financial instruments (unless they qualify for hedge accounting, refer to “Derivative Financial Instruments and Hedging Transactions”). In addition, deferred compensation plan 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.

Available for sale

Long-term bonds included in funds held for clients and in long-term investments.

Other liabilities

Accounts payable and accrued liabilities, accrued compensation, long-term debt and clients’ funds obligations.


Consolidated Financial Statements

 

Notes to the Consolidated Financial Statements

For the years ended September 30, 2014 and 2013

(tabular amounts only are in thousands of Canadian dollars, except per share data)

 

3. Summary of significant accounting policies (continued)

 

FINANCIAL INSTRUMENTS (CONTINUED)

 

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.

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING TRANSACTIONS

The Company enters into a variety of derivative financial instruments to manage its exposure to interest rate and foreign currency exchange risks.

Derivative financial instruments are initially recognized at fair value at the date the derivative contracts are entered into and are subsequently remeasured to their fair value at the end of each reporting date. The resulting gain or loss is recognized in the consolidated statements of earnings unless the derivative is designated and is effective as a hedging instrument, in which event the timing of the recognition in the consolidated statements of earnings depends on the nature of the hedge relationship.

At the inception of a hedge relationship, the Company formally designates and documents the hedge relationship to which the Company wishes to apply hedge accounting and the risk management objective and strategy for undertaking the hedge. The documentation includes identification of the hedging instrument, the hedged item or transaction, the nature of the risk being hedged and how the Company will assess the effectiveness of changes in the hedging instrument’s fair value in offsetting the exposure to changes in the hedged item’s fair value or cash flows attributable to the hedged risk. Such hedges are expected to be highly effective in achieving offsetting changes in fair value or cash flows and are assessed on an ongoing basis to determine that they actually have been highly effective throughout the financial reporting periods for which they were designated.

The cash flows of the hedging transactions are classified in the same manner as the cash flows of the position being hedged.

NET INVESTMENT HEDGES

Hedges on net investments in foreign operations

The Company uses cross-currency swaps and foreign currency denominated long-term debt to hedge portions of the Company’s net investments in its U.S. and European operations. Foreign exchange translation gains or losses on the net investments and the effective portions of gains or losses on instruments hedging the net investments are recorded in other comprehensive income. To the extent that the hedge is ineffective, such differences are recognized in consolidated statements of earnings. When the hedged net investment is disposed of, the relevant amount in other comprehensive income is transferred to earnings as part of the gain or loss on disposal.


FISCAL 2014 RESULTS

 

Notes to the Consolidated Financial Statements

For the years ended September 30, 2014 and 2013

(tabular amounts only are in thousands of Canadian dollars, except per share data)

 

3. Summary of significant accounting policies (continued)

 

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING TRANSACTIONS (CONTINUED)

 

CASH FLOW HEDGES

Cash flow hedges on future revenue

The Company has entered into various foreign currency forward contracts to hedge the variability in the foreign currency exchange rates.

Cash flow hedge on unsecured committed term loan credit facility

The Company has entered into interest rate swaps to hedge the cash flow exposure of the issued variable rate unsecured committed term loan credit facility. Under the interest rate swaps, the Company receives a variable rate of interest and pays interest at a fixed rate on the notional amount.

The above hedges were documented as cash flow hedges and no component of the derivative contracts’ fair value are excluded from the assessment and measurement of hedge effectiveness. The effective portion of the change in fair value of the derivative financial instruments is recognized in other comprehensive income and the ineffective portion, if any, in the consolidated statements of earnings. The effective portion of the change in fair value of the derivatives is reclassified out of other comprehensive income into the consolidated statements of earnings when the hedged element is recognized in the consolidated statements of earnings.

FAIR VALUE HEDGES

Fair value hedges on Senior U.S. unsecured notes

The Company entered into interest rate swaps to hedge the fair value exposure of the issued fixed rate Senior U.S. unsecured notes. Under the interest rate swaps, the Company receives a fixed rate of interest and pays interest at a variable rate on the notional amount.

The changes in the fair value of the interest rate swaps are recognized in the consolidated statements of earnings as finance costs. The changes in the fair value of the hedged items attributable to the risk hedged is recorded as part of the carrying value of the Senior U.S. unsecured notes and are also recognized in the consolidated statements of earnings as finance costs. If the hedged items are derecognized, the unamortized fair value is recognized immediately in the consolidated statements of earnings.

Derivative financial instruments used as hedging items are recorded at fair value in the consolidated balance sheets under current derivative financial instruments, long-term financial assets or long-term derivative financial instruments. Valuation models, such as discounted cash flow analysis using observable market inputs, are utilized to determine the fair values of the derivative financial instruments.


Consolidated Financial Statements

 

Notes to the Consolidated Financial Statements

For the years ended September 30, 2014 and 2013

(tabular amounts only are in thousands of Canadian dollars, except per share data)

 

3. Summary of significant accounting policies (continued)

 

 

EMPLOYEE BENEFITS

The Company operates post-employment benefit plans of both a defined contribution and defined benefit nature.

The cost of defined contribution plans is charged to the consolidated statements of earnings on the basis of contributions payable by the Company during the year.

For defined benefits plans, the defined benefit obligations are calculated by independent actuaries using the projected unit credit method. The retirement benefits obligations in the consolidated balance sheets represent the present value of the defined benefit obligation as reduced by the fair value of plan assets. The retirement benefits assets are recognized to the extent that the Company can benefit from refunds or a reduction in future contributions. Retirement benefit plans that are funded by the payment of insurance premiums are treated as defined contribution plans unless the Company has an obligation either to pay the benefits directly when they fall due or to pay further amounts if assets accumulated with the insurer do not cover all future employee benefits. In such circumstances, the plan is treated as a defined benefit plan.

Insurance policies are treated as plan assets of a defined benefit plan if the proceeds of the policy:

 

  -

Can only be used to fund employee benefits;

 

  -

Are not available to the Company’s creditors; and

 

  -

Either cannot be paid to the Company unless the proceeds represent surplus assets not needed to meet all the benefit obligations or are a reimbursement for benefits already paid by the Company.

Insurance policies that do not meet the above criteria are treated as non-current investments and are held at fair value as long-term financial assets in the consolidated balance sheets.

The actuarial valuations used to determine the cost of defined benefit pension plans and their present value involve making assumptions about discount rates, future salary and pension increases, inflation rates and mortality. Any changes in these assumptions will impact the carrying amount of pension obligations. In determining the appropriate discount rate management considers the interest rates of high quality corporate bonds that are denominated in the currency in which the benefits will be paid, and that have terms to maturity approximating the terms of the related pension liability.

The current service cost is recognized in the consolidated statements of earnings as an employee benefit expense. The net interest cost calculated by applying the discount rate to the net defined benefit liability or asset is recognized as net finance cost or income. When the benefits of a plan are changed or when a plan is curtailed, the resulting change in benefit that relates to past service or the gain or loss on curtailment is recognized immediately in the consolidated statements of earnings. The gains or losses on the settlement of a defined benefit plan are recognized when the settlement occurs.

Remeasurements include actuarial gains and losses, changes in the effect of the asset ceiling and the return on plan assets, excluding the amount included in net interest on the net defined liability or assets. Remeasurements are charged or credited to other comprehensive income in the period in which they arise.


FISCAL 2014 RESULTS

 

Notes to the Consolidated Financial Statements

For the years ended September 30, 2014 and 2013

(tabular amounts only are in thousands of Canadian dollars, except per share data)

 

3. Summary of significant accounting policies (continued)

 

 

 

A) NEW STANDARDS AND AMENDMENTS ADOPTED

The following new and amended standards have been adopted by the Company effective October 1, 2013:

IFRS 10 - Consolidated Financial Statements

The new standard builds on existing principles by identifying the concept of control as the determining factor in whether an entity should be included in a company’s consolidated financial statements. The adoption of IFRS 10 did not result in any significant impact on the Company’s consolidated financial statements.

IFRS 12 - Disclosure of Interests in Other Entities

The new standard provides guidance on disclosure requirements for all forms of interests in other entities, including subsidiaries, joint arrangements, associates and structured entities. The standard requires disclosure of the nature and risks associated with the Company’s interests in other entities and the effects of those interests on its financial position, financial performance and cash flows. The adoption of IFRS 12 did not result in any significant impact on the Company’s consolidated financial statements.

IFRS 13 - Fair Value Measurement

The new standard provides guidance for fair value measurements by providing a definition of fair value and a single source of fair value measurement and disclosure requirements. IFRS 13 applies when other IFRS standards require or permit fair value measurements. The adoption of IFRS 13 did not result in any significant impact on the Company’s consolidated financial statements other than to give rise to additional disclosures.

IAS 1 - Presentation of Financial Statements

The amendment requires grouping together items within the statement of comprehensive income that may be reclassified to the statement of earnings. As a result, the Company has grouped items within its consolidated statements of comprehensive income and accumulated other comprehensive income by items that will and will not be reclassified subsequently to the consolidated statements of earnings.

IAS 19 - Employee Benefits

Two amendments of IAS 19 have been adopted by the Company.

The first amendment requires to adjust the calculation of the financing cost component of defined benefit plans and to enhance disclosure requirements. As a result, the Company calculated a net interest expense or income on the net defined benefit liability or asset. The net interest on the defined benefit liability or asset replaces the interest cost on the defined benefit obligation and the expected return on plan assets. The adoption of IAS 19 did not result in any significant impact on the Company’s consolidated financial statements, other than to give rise to additional disclosures.

The second amendment permits the recognition of certain contributions from employees as a reduction of the service cost in the period in which the related service is rendered. The amendment applies to contributions from employees set out in the formal terms of the plan, linked to service and independent of the number of years of service. The Company has early adopted the amendment of IAS 19 which is effective on or after July 1, 2014. The amendment did not result in any significant impact on the Company’s consolidated financial statements.


Consolidated Financial Statements

 

Notes to the Consolidated Financial Statements

For the years ended September 30, 2014 and 2013

(tabular amounts only are in thousands of Canadian dollars, except per share data)

 

3. Summary of significant accounting policies (continued)

 

 

 

B) 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. IFRS 15 supersedes IAS 18, “Revenue”, IAS 11, “Construction Contracts”, and other revenue related interpretations. The standard will be effective on October 1, 2017 for the Company with earlier adoption 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.


FISCAL 2014 RESULTS

 

Notes to the Consolidated Financial Statements

For the years ended September 30, 2014 and 2013

(tabular amounts only are in thousands of Canadian dollars, except per share data)

 

 

 

4. Cash and cash equivalents

 

     

As at

September 30, 2014

    

As at

September 30, 2013

 
     $      $  

 Cash

     265,715         105,677   

 Cash equivalents

     270,000         522   
       535,715         106,199   

 

5. Accounts receivable

 

     

As at

September 30, 2014

    

As at

September 30, 2013

 
     $      $  

 Trade

     873,466         1,018,990   

 Other1

     162,602         186,635   
       1,036,068         1,205,625   

 

1 

Other accounts receivable include refundable tax credits on salaries related to the Québec Development of E-Business program, research and development tax credits and other job and economic growth creation programs available. The tax credits represent approximately $113,511,000 and $110,615,000 of other accounts receivable in 2014 and 2013, respectively.

The fiscal measures under the Québec Development of E-Business program enable corporations with an establishment in the province of Québec that carry out eligible activities in the technology sector to obtain a refundable tax credit equal to 30% of eligible salaries, up to a maximum of $20,000 per year per eligible employee until December 31, 2015. For all eligible salaries incurred after June 4, 2014, the refundable tax credit was reduced to 24% and the maximum of $20,000 per year was maintained until December 31, 2025.

 

6. Funds held for clients

 

     

As at

September 30, 2014

    

As at

September 30, 2013

 
     $      $  

 Cash

     97,577         34,653   

 Long-term bonds

     198,177         187,816   
       295,754         222,469   


Consolidated Financial Statements

 

Notes to the Consolidated Financial Statements

For the years ended September 30, 2014 and 2013

(tabular amounts only are in thousands of Canadian dollars, except per share data)

 

 

 

7. Property, plant and equipment

 

     

Land and

buildings

    

Leasehold

improvements

    

Furniture,

fixtures and

equipment

    

Computer

equipment

     Total  
     $      $      $      $      $  

 Cost

              

 As at September 30, 2013

     62,077         193,221         140,970         485,736         882,004   

 Additions/transfers

     8,962         10,630         19,926         155,939         195,457   

 Disposals/transfers

             (6,932)         (38,420)         (34,984)         (80,336)   

 Foreign currency translation adjustment

     1,318         8,323         8,757         16,141         34,539   

 As at September 30, 2014

     72,357         205,242         131,233         622,832         1,031,664   

 Accumulated depreciation

              

 As at September 30, 2013

     6,670         99,015         56,272         244,904         406,861   

 Depreciation expense (Note 24)

     3,275         29,669         26,811         127,131         186,886   

 Disposals/transfers

             (6,920)         (35,105)         (24,077)         (66,102)   

 Foreign currency translation adjustment

     197         3,617         5,626         7,699         17,139   

 As at September 30, 2014

     10,142         125,381         53,604         355,657         544,784   

 Net carrying amount as at September 30, 2014

     62,215         79,861         77,629         267,175         486,880   
     

Land and

buildings

    

Leasehold

improvements

    

Furniture,

fixtures and

equipment

    

Computer

equipment

     Total  
     $      $      $      $      $  

 Cost

              

 As at September 30, 2012

     56,638         182,553         134,071         413,613         786,875   

 Additions/transfers

     4,038         16,197         18,570         121,060         159,865   

 Disposals/transfers

             (8,276)         (13,941)         (60,767)         (82,984)   

 Foreign currency translation adjustment

     1,401         2,747         2,270         11,830         18,248   

 As at September 30, 2013

     62,077         193,221         140,970         485,736         882,004   

 Accumulated depreciation

              

 As at September 30, 2012

     5,240         76,431         40,992         182,732         305,395   

 Depreciation expense (Note 24)

     1,467         28,299         27,788         118,133         175,687   

 Disposals/transfers

             (6,393)         (12,730)         (58,871)         (77,994)   

 Foreign currency translation adjustment

     (37)         678         222         2,910         3,773   

 As at September 30, 2013

     6,670         99,015         56,272         244,904         406,861   

 Net carrying amount as at September 30, 2013

     55,407         94,206         84,698         240,832         475,143   


FISCAL 2014 RESULTS

 

Notes to the Consolidated Financial Statements

For the years ended September 30, 2014 and 2013

(tabular amounts only are in thousands of Canadian dollars, except per share data)

 

 

 

7. Property, plant and equipment (continued)

 

Property, plant and equipment include the following assets acquired under finance leases:

 

      As at September 30, 2014      As at September 30, 2013  
      Cost     

Accumulated

depreciation

    

Net

carrying

amount

     Cost     

Accumulated

depreciation

    

Net carrying

amount

 
     $      $      $      $      $      $  

 Furniture, fixtures and equipment

     15,522         8,744         6,778         15,762         7,218         8,544   

 Computer equipment

     93,375         61,783         31,592         105,112         66,117         38,995   
       108,897         70,527         38,370         120,874         73,335         47,539   

 

8. Contract costs

 

      As at September 30, 2014      As at September 30, 2013  
      Cost      Accumulated
amortization
     Net
carrying
amount
     Cost      Accumulated
amortization
     Net
carrying
amount
 
     $      $      $      $      $      $  

 Transition costs

     356,704         209,186         147,518         291,305         165,705         125,600   

 Incentives

     101,291         92,269         9,022         103,058         88,186         14,872   
       457,995         301,455         156,540         394,363         253,891         140,472   


Consolidated Financial Statements

 

Notes to the Consolidated Financial Statements

For the years ended September 30, 2014 and 2013

(tabular amounts only are in thousands of Canadian dollars, except per share data)

 

9. Intangible assets

 

      Internal-use
software
acquired
     Internal-use
software
internally
developed
     Business
solutions
acquired
     Business
solutions
internally
developed
     Software
licenses
     Client
relationships
and other
     Total  
     $      $      $      $      $      $      $  

 Cost

                    

 As at September 30, 2013

     105,002         45,371         123,850         260,072         130,448         862,004         1,526,747   

 Additions/transfers

     4,226         6,499         114         34,759         41,790                 87,388   

 Disposals/transfers

     (12,170)         (1,307)         (603)         (1,984)         (12,449)                 (28,513)   

 Foreign currency translation adjustment

     5,628         173         3,354         17,639         4,672         34,355         65,821   

 As at September 30, 2014

     102,686         50,736         126,715         310,486         164,461         896,359         1,651,443   

 Accumulated amortization

                    

 As at September 30, 2013

     63,211         40,184         84,644         164,963         82,885         382,695         818,582   

 Amortization expense (Note 24)

     14,264         2,996         12,568         21,467         26,874         114,523         192,692   

 Disposals/transfers

     (12,170)         (1,118)         (121)         (1,980)         (12,197)                 (27,586)   

 Foreign currency translation adjustment

     4,142         81         2,687         10,635         3,358         16,778         37,681   

 As at September 30, 2014

     69,447         42,143         99,778         195,085         100,920         513,996         1,021,369   

 Net carrying amount as at September 30, 2014

     33,239         8,593         26,937         115,401         63,541         382,363         630,074   
      Internal-use
software
acquired
     Internal-use
software
internally
developed
     Business
solutions
acquired
     Business
solutions
internally
developed
     Software
licenses
     Client
relationships
and other
     Total  
     $      $      $      $      $      $      $  

 Cost

                    

 As at September 30, 2012

     87,282         43,237         118,094         233,261         175,932         819,596         1,477,402   

 Additions/transfers

     20,898         2,134         4,826         23,781         27,008                 78,647   

 Disposals/transfers

     (5,824)                 (237)         (4,404)         (74,329)         (1,382)         (86,176)   

 Foreign currency translation adjustment

     2,646                 1,167         7,434         1,837         43,790         56,874   

 As at September 30, 2013

     105,002         45,371         123,850         260,072         130,448         862,004         1,526,747   

 Accumulated amortization

                    

 As at September 30, 2012

     42,117         36,100         72,977         147,340         132,629         258,460         689,623   

 Amortization expense (Note 24)

     25,134         4,084         11,097         18,205         20,956         114,505         193,981   

 Disposals/transfers

     (5,608)                 (493)         (4,396)         (72,241)         (1,382)         (84,120)   

 Foreign currency translation adjustment

     1,568                 1,063         3,814         1,541         11,112         19,098   

 As at September 30, 2013

     63,211         40,184         84,644         164,963         82,885         382,695         818,582   

 Net carrying amount as at September 30, 2013

     41,791         5,187         39,206         95,109         47,563         479,309         708,165   

All intangible assets are subject to amortization.


FISCAL 2014 RESULTS

 

Notes to the Consolidated Financial Statements

For the years ended September 30, 2014 and 2013

(tabular amounts only are in thousands of Canadian dollars, except per share data)

 

10. Other long-term assets

 

      As at
September 30, 2014
     As at
September 30, 2013
 
     $      $  

 Insurance contracts held to fund defined benefit pension and life assurance arrangements - reimbursement rights (Note 17)

     22,415         20,856   

 Retirement benefits assets (Note 17)

     8,737         9,175   

 Deferred financing fees

     4,474         3,856   

 Long-term maintenance agreements

     15,004         6,653   

 Deposits

     11,773         9,960   

 Other

     11,755         7,929   

    

     74,158         58,429   

 

11. Long-term financial assets

 

      As at
September 30, 2014
     As at
September 30, 2013
 
     $      $  

 Deferred compensation plan assets (Note 31)

     31,151         24,752   

 Long-term investments

     30,689         20,333   

 Long-term receivables

     7,403         4,289   

 Derivative financial assets (Note 31)

     14,834         2,518   

    

     84,077         51,892   

 

12. Goodwill

The Company completed the annual impairment test as at September 30, 2014 and did not identify any impairment.

The variations in goodwill were as follows:

 

      U.S.      NSESA      Canada      France      U.K.      CEE      Asia Pacific      Total  
     $      $      $      $      $      $      $      $  

 As at September 30, 2013

     1,370,399         1,274,667         1,111,702         805,891         827,291         715,011         288,829         6,393,790   

 Foreign currency translation adjustment

     121,513         (1,844)                 14,328         64,599         7,985         10,952         217,533   

 As at September 30, 2014

     1,491,912         1,272,823         1,111,702         820,219         891,890         722,996         299,781         6,611,323   


Consolidated Financial Statements

 

Notes to the Consolidated Financial Statements

For the years ended September 30, 2014 and 2013

(tabular amounts only are in thousands of Canadian dollars, except per share data)

 

 

 

12. Goodwill  (continued)

 

Key assumptions in goodwill impairment testing

The key assumptions for the CGUs are disclosed in the following table:

 

 As at September 30, 2014    U.S.      NSESA      Canada      France      U.K.      CEE      Asia Pacific  
     %      %      %      %      %      %      %  

 Assumptions

                    

 Pre-tax WACC

     11.2         12.2         9.0         10.6         10.2         10.6         21.7   

 Long-term growth rate of net operating cash flows1

     2.0         1.9         2.0         1.9         1.8         1.6         2.0   
 As at September 30, 2013    U.S.      NSESA      Canada      France      U.K.      CEE      Asia Pacific  
     %      %      %      %      %      %      %  

 Assumptions

                    

 Pre-tax WACC

     10.0         12.5         7.6         10.8         10.7         10.5         20.1   

 Long-term growth rate of net operating cash flows1

     2.0         2.0         2.0         2.0         2.0         2.0         2.0   

 

1 The long-term growth rate is based on published industry research.


FISCAL 2014 RESULTS

 

Notes to the Consolidated Financial Statements

For the years ended September 30, 2014 and 2013

(tabular amounts only are in thousands of Canadian dollars, except per share data)

 

 

 

13. Provisions

 

     

Onerous

leases1

    

Litigations

and claims2

    

Decommissioning

liabilities3

     Restructuring4      Total   
     $      $      $      $       

  As at September 30, 2013

     94,022         65,418         54,256         118,389         332,085    

  Additional provisions

     14,118         3,351         1,770         100,354         119,593    

  Utilized amounts

     (44,174)         (14,133)         (1,560)         (122,130)         (181,997)    

  Reversals of unused amounts

     (24,275)         (24,984)         (12,574)         (6,081)         (67,914)    

  Discount rate adjustment and imputed interest

     605                 525                 1,130    

  Foreign currency translation adjustment

     5,353         1,941         2,364         1,340         10,998    

  As at September 30, 2014

     45,649         31,593         44,781         91,872         213,895    

  Current portion

     17,203         31,593         8,542         85,971         143,309    

  Non-current portion

     28,446                 36,239         5,901         70,586    
     

Onerous

leases1

     Litigations
and claims2
    

Decommissioning

liabilities3

     Restructuring4      Total   
     $      $      $      $       

  As at September 30, 2012

     88,670         91,669         53,366         143,120         376,825    

  Additional provisions

     36,687                 1,722         249,799         288,208    

  Utilized amounts

     (34,490)         (31,332)         (2,375)         (284,106)         (352,303)    

  Reversals of unused amounts

     (1,683)                 (1,958)                 (3,641)   

  Discount rate adjustment and imputed interest

     646                 572                 1,218    

  Foreign currency translation adjustment

     4,192         5,081         2,929         9,576         21,778    

  As at September 30, 2013

     94,022         65,418         54,256         118,389         332,085    

  Current portion

     41,668         65,418         7,735         108,253         223,074    

  Non-current portion

     52,354                 46,521         10,136         109,011    

 

1 

As at September 30, 2014, the timing of cash outflows relating to these provisions ranges between one and nine years (one and ten years as at September 30, 2013) and was discounted at a weighted average rate of 1.35% (1.15% as at September 30, 2013). For the year ended September 30, 2014, a net amount of $1,503,000 of integration costs ($31,899,000 for the year ended September 30, 2013) was accounted for in the provision for onerous leases (Note 26b). The reversals of unused amounts are mostly due to the sublease in the period of previously vacated premises, as well as favorable lease terminations.

 

2 

As at September 30, 2014, litigations and claims include provisions related to tax exposure (other than those related to income tax), contractual disputes, employee claims and other of $15,661,000, $7,433,000 and $8,499,000, respectively (as at September 30, 2013, $34,409,000, $15,434,000 and $15,575,000, respectively). The reversals of unused amounts are mostly due to the favorable settlement of tax exposures and contractual disputes.

 

3 

As at September 30, 2014, the decommissioning liability was based on the expected cash flows of $45,834,000 ($56,454,000 as at September 30, 2013) and was discounted at a weighted average rate of 0.94% (0.93% as at September 30, 2013). The timing of the settlement of these obligations ranges between one and nine years as at September 30, 2014 (one and ten years as at September 30, 2013).

 

4 

For the year ended September 30, 2014, a net amount of $94,273,000 of integration costs ($249,799,000 for the year ended September 30, 2013) was accounted for in the provision for restructuring (Note 26b).


Consolidated Financial Statements

 

Notes to the Consolidated Financial Statements

For the years ended September 30, 2014 and 2013

(tabular amounts only are in thousands of Canadian dollars, except per share data)

 

14. Long-term debt

 

      As at
September 30, 2014
     As at  
September 30, 2013  
 
     $      $    

  Senior U.S. unsecured notes repayable by tranches of $95,277 (U.S.$85,000) in 2016, $156,926 (U.S.$140,000) in 2018 and $280,225 (U.S.$250,000) in 20211

     522,220         475,787   

  Senior unsecured notes repayable by tranches of $44,836 (U.S.$40,000) in 2019, $61,650 (U.S.$55,000) in 2021, $336,270 (U.S.$300,000) in 2024, $392,315 (U.S. $350,000) in 7 yearly payments of U.S.$50,000 from 2018 to 2024 and $120,326, (85,000) in 20212

     954,317           

  Unsecured committed revolving credit facility3

             254,818   

  Unsecured committed term loan credit facility4

     1,001,752         1,974,490   

  Obligations repayable in blended monthly installments maturing at various dates until 2019, bearing a weighted average interest rate of 3.01% (3.27% in 2013)

     117,680         79,446   

  Obligations under finance leases repayable in blended monthly installments maturing at various dates until 2019, bearing a weighted average interest rate of 3.66% (3.46% in 2013)

     61,698         67,928   

  Other long-term debt

     22,036         14,081   
     2,679,703         2,866,550   

  Current portion

     80,367         534,173   
       2,599,336         2,332,377   

 

1 

As at September 30, 2014, an amount of $532,428,000 was drawn, less fair value adjustments relating to interest rate swaps designated as fair value hedges and financing fees for a total of $10,208,000. The private placement financing with U.S. institutional investors is comprised of three tranches of Senior U.S. unsecured notes, with a weighted average maturity of 5.4 years and a weighted average interest rate of 4.57%. The Senior U.S. unsecured notes contain covenants that require the Company to maintain certain financial ratios (Note 32). As at September 30, 2014, the Company was in compliance with these covenants.

 

2 

During the year ended September 30, 2014, the Company signed a private placement financing. As at September 30, 2014, an amount of $955,397,000 was drawn, less financing fees of $1,080,000. The private placement is comprised of four tranches of Senior U.S. unsecured notes and one tranche of Senior euro unsecured note, with a weighted average maturity of 7.9 years and a weighted average interest rate of 3.62%. The Senior unsecured notes contain covenants that require the Company to maintain certain financial ratios (Note 32). As at September 30, 2014, the Company was in compliance with these covenants.

 

3 

In the first quarter of 2014, the unsecured committed revolving credit facility of $1,500,000,000 was extended by one year to December 2017. On July 25, 2014, the facility was further extended by another year to December 2018 and can be further extended annually. All other terms and conditions including interest rates and banking covenants remain unchanged.

Under the four-year unsecured committed revolving credit facility, amounts can be drawn at banker’s acceptance, LIBOR or Canadian prime; plus a variable margin that is determined based on the Company’s leverage ratio. As at September 30, 2014, no amount was drawn upon this facility. Also, an amount of $36,720,000 has been committed against this facility to cover various letters of credit issued for clients and other parties. The revolving credit facility contains covenants that require the Company to maintain certain financial ratios (Note 32). As at September 30, 2014, the Company was in compliance with these covenants.

 

4 

As at September 30, 2014, an amount of $1,005,332,000 was drawn, less financing fees of $3,580,000. The term loan credit expires on May 2016. The term loan credit facility bears interest at Bankers’ acceptance, LIBOR or to a lesser extent, Canadian prime; plus a variable margin that is determined based on the Company’s leverage ratio. As at September 30, 2014, the margin paid was 1.5% for LIBOR and Banker’s acceptance and 0.50% for the Canadian prime portion. The term loan credit facility contains covenants that require the Company to maintain certain financial ratios (Note 32). As at September 30, 2014, the Company was in compliance with these covenants.

During the year ended September 30, 2014, the Company repaid in advance, without penalty, the May 2014 and the May 2015 maturing tranches of the unsecured committed term loan credit facility for a total amount of $486,745,000 and $494,712,000, respectively. Following these repayments, the Company settled related floating-to-fixed interest rate swaps with notional amounts of $450,000,000 and $300,000,000 and related floating-to-floating cross currency swap with a notional amount of $184,900,000 (Note 31).


FISCAL 2014 RESULTS

 

Notes to the Consolidated Financial Statements

For the years ended September 30, 2014 and 2013

(tabular amounts only are in thousands of Canadian dollars, except per share data)

 

 

 

14. Long-term debt (continued)

 

Principal repayments on long-term debt, excluding fair value hedges and financing fees, over the forthcoming years are as follows:

                          
            $  

  Less than one year

        48,048   

  Between one and two years

        1,043,394   

  Between two and five years

        456,274   

  Beyond five years

              1,085,157   

  Total principal payments on long-term debt

              2,632,873   

  Minimum finance lease payments are as follows:

 

   Principal      Interest      Payment  
     $      $      $  

  Less than one year

     32,319         1,494         33,813   

  Between one and two years

     20,477         846         21,323   

  Between two and five years

     8,902         359         9,261   

  Beyond five years

                       

  Total minimum finance lease payments

     61,698         2,699         64,397   

 

15. Other long-term liabilities

 

      As at
September 30, 2014
     As at
September 30, 2013
 
     $      $  

  Deferred revenue

     151,989         225,482   

  Estimated losses on revenue-generating contracts1

     42,804         78,390   

  Deferred compensation plan liabilities (Note 17)

     31,633         25,253   

  Deferred rent

     67,169         85,858   

  Other

     14,792         19,670   
       308,387         434,653   

 

1 

The current portion of estimated losses on revenue-generating contracts included in accounts payable and accrued liabilities is $84,747,000 as at September 30, 2014 ($138,700,000 at September 30, 2013).


Consolidated Financial Statements

 

Notes to the Consolidated Financial Statements

For the years ended September 30, 2014 and 2013

(tabular amounts only are in thousands of Canadian dollars, except per share data)

 

16. Income taxes

 

     Year ended September 30  
     

 

2014

       2013  
     $        $  

 Current income tax expense

       

 Current income tax expense in respect of the current year

     250,403           157,822   

 Adjustments recognized in the current year in relation to the income tax expense of prior years

     (33,956        (20,734)   

 Total current income tax expense

     216,447           137,088   

 Deferred income tax expense

       

 Deferred income tax expense relating to the origination and reversal of temporary differences

     60,488           36,253   

 Deferred income tax expense relating to changes in tax rates

     (1,520        27,708   

 Adjustments recognized in the current year in relation to the deferred income tax expense of prior years

     23,948           (818)   

 Recognition of previously unrecognized temporary differences

     (28,556        (28,429)   

 Total deferred income tax expense

     54,360           34,714   

 Total income tax expense

     270,807           171,802   

The Company’s effective income tax rate on income from continuing operations differs from the combined Federal and Provincial Canadian statutory tax rate as follows:

 

     Year ended September 30  
     

 

2014

       2013  
     %        %  

 Company’s statutory tax rate

     26.9           26.9   

 Effect of foreign tax rate differences

     (0.3)           (1.5)   

 Final determination from agreements with tax authorities and expirations of statutes of limitations

     (0.9)           (3.4)   

 Non-deductible and tax exempt items

     0.2           1.0   

 Recognition of previously unrecognized temporary differences

     (2.5)           (4.5)   

 Effect of integration-related costs

     (0.1)           2.9   

 Minimum income tax charge

     0.8           1.6   

 Impact on future tax assets and liabilities resulting from tax rate changes

     (0.1)           4.4   

 Effective income tax rate

           24.0                 27.4   


FISCAL 2014 RESULTS

 

Notes to the Consolidated Financial Statements

For the years ended September 30, 2014 and 2013

(tabular amounts only are in thousands of Canadian dollars, except per share data)

 

 

 

16. Income taxes (continued)

 

The continuity of deferred income tax balances is as follows:

 

     

As at

September 30,

2013

    

Recognized in

earnings

    

Recognized

in other

comprehensive

income

    

Recognized in

equity

    

Foreign currency

translation

adjustment and
other

    

As at

September 30,

2014

 
            $      $      $      $      $  

 Accounts payable, accrued liabilities and other long-term liabilities

     69,497         6,685                         3,789         79,971   

 Tax benefits on losses carried forward

     300,536         (44,065)                         12,663         269,134   

 Accrued compensation

     68,908         (5,356)                 (9,542)         3,396         57,406   

 Retirement benefits obligations

     21,958         726         12,940                 (309)         35,315   

 Allowance for doubtful accounts

     5,274         (1,445)                         (2)         3,827   

 PP&E, contract costs, intangible assets and other long-term assets

     (150,418)         (2,432)                         (7,742)         (160,592)   

 Work in progress

     (43,217)         (9,762)                         (3,089)         (56,068)   

 Goodwill

     (41,326)         (2,798)                         (2,633)         (46,757)   

 Refundable tax credits on salaries

     (21,821)         3,855                                 (17,966)   

 Cash flow hedges

     4,173         (1,424)         (5,247)                 81         (2,417)   

 Other liabilities

     (676)         1,656         2,182                 2,429         5,591   

 Deferred income taxes, net

     212,888         (54,360)         9,875         (9,542)         8,583         167,444   
      As at
September 30,
2012
     Recognized in
earnings
     Recognized
in other
comprehensive
income
     Recognized in
equity
     Foreign currency
translation
adjustment and
other
     As at
September 30,
2013
 
     $      $      $      $      $      $  

 Accounts payable, accrued liabilities and other long-term liabilities

     96,992         (27,724)                         229         69,497   

 Tax benefits on losses carried forward

     289,323         (10,920)                         22,133         300,536   

 Accrued compensation

     38,518         12,992                 15,232         2,166         68,908   

 Retirement benefits obligations

     17,448         (2,750)         7,749                 (489)         21,958   

 Allowance for doubtful accounts

     2,046         3,228                                 5,274   

 PP&E, contract costs, intangible assets and other long-term assets

     (162,950)         17,932                         (5,400)         (150,418)   

 Work in progress

     (25,382)         (17,107)                         (728)         (43,217)   

 Goodwill

     (35,244)         (4,644)                         (1,438)         (41,326)   

 Refundable tax credits on salaries

     (17,783)         (4,038)                                 (21,821)   

 Cash flow hedges

     4,379         (696)         (217)                 707         4,173   

 Other liabilities

     (6,110)         (987)         4,479                 1,942         (676)   

 Deferred income taxes, net

     201,237         (34,714)         12,011         15,232         19,122         212,888   

The deferred income taxes are presented as follows in the consolidated balance sheets:

 

      As at
September 30, 2014
    As at
September 30, 2013
 
     $     $  

 Deferred tax assets

     323,416        368,217   

 Deferred tax liabilities

     (155,972     (155,329)   

 Deferred income taxes, net

     167,444        212,888   


Consolidated Financial Statements

 

Notes to the Consolidated Financial Statements

For the years ended September 30, 2014 and 2013

(tabular amounts only are in thousands of Canadian dollars, except per share data)

 

 

 

16. Income taxes (continued)

 

As at September 30, 2014, the Company had $1,718,494,000 ($1,920,600,000 as at September 30, 2013) in tax losses carried forward and other temporary differences, of which $152,700,000 ($231,199,000 as at September 30, 2013) expire at various dates up to 2032 and $1,565,794,000 ($1,689,401,000 as at September 30, 2013) have no expiry dates. The Company recognized a deferred tax asset of $413,134,000 ($460,800,000 as at September 30, 2013) on the losses carried forward and other temporary differences and recognized a valuation allowance of $144,000,000 ($160,264,000 as at September 30, 2013). The resulting net deferred tax asset of $269,134,000 ($300,536,000 as at September 30, 2013) is the amount that is more likely than not to be realized, based on deferred tax liabilities reversal and future taxable profits.

As at September 30, 2014, the Company has not recorded deferred tax liabilities on undistributed earnings of its foreign subsidiaries when they are considered indefinitely reinvested, unless it is probable that these temporary differences will reverse. Upon distribution of these earnings in the form of dividends or otherwise, the Company may be subject to taxes. The temporary differences associated with investments in subsidiaries for which a deferred tax liability has not been recognized amount to $1,434,101,000 ($934,176,000 as at September 30, 2013).

The cash and cash equivalents held by foreign subsidiaries were $356,147,000 as at September 30, 2014 ($16,400,000 as at September 30, 2013). The tax implications and impact on the Company’s liquidities related to its repatriation will not affect the Company’s liquidity.

 

17. Employee benefits

The Company operates various post-employment plans, including defined benefit and defined contribution pension plans as well as other benefit plans for its employees.

DEFINED BENEFIT PLANS

The Company operates defined benefit pension plans primarily for the benefit of employees in U.K., Germany, France, with smaller plans in other countries. The benefits are based on pensionable salary and years of service. U.K. and Germany plans are funded with the assets held in separate funds. The plan in France is unfunded.

The defined benefit plans expose the Company to interest risk, inflation risk, longevity risk, currency risk and market investment risk.

The following description focuses mainly on plans registered in U.K., Germany and France.

U.K.

In U.K., the Company has three defined benefit pension plans, CMG U.K. Pension Scheme, Logica U.K. Pension & Life Assurance Scheme and Logica Defined Benefit Pension Plan.

The CMG U.K. Pension scheme is closed to new members and for accrual. The Logica U.K. Pension & Life Assurance Scheme is still open but only for employees who come from the civil service with protected pensions. Logica Defined Benefit Pension Plan was created to mirror the Electricity Industry pension scheme and was created for employees that worked for National Grid and Welsh Water with protected benefits.

Both the Logica U.K. Pension & Life Assurance Scheme and Logica Defined Benefit Pension Plan are employer and employee based contribution plans.


FISCAL 2014 RESULTS

 

Notes to the Consolidated Financial Statements

For the years ended September 30, 2014 and 2013

(tabular amounts only are in thousands of Canadian dollars, except per share data)

 

 

 

17. Employee benefits (continued)

 

DEFINED BENEFIT PLANS (CONTINUED)

 

U.K. (CONTINUED)

 

The trustees are the custodians of the defined benefit pension plans and are responsible for the plan administration, including investment strategies. The trustees review periodically the investment and the asset allocation policies. As such, CMG U.K. Pension Scheme policy is to target an allocation of 45% to return-seeking assets such as equities and 55% to matching assets such as bonds; Logica Defined Benefit Pension plan policy is to invest 25% of the Plan’s assets in equities and 75% in bonds; Logica U.K. Pension & Life Assurance Scheme target is to invest 20% of the Scheme’s assets in equities and 80% in bonds. CMG U.K. Pension Scheme investment policy is currently being revised.

U.K. Pensions Act 2004 requires that full formal actuarial valuations are carried out at least every three years to determine the contributions that the Company should pay in order for the plan to meet its statutory objective, taking into account the assets already held. In the interim years, the trustees need to obtain estimated funding updates unless the scheme has less than 100 members in total.

The latest funding actuarial valuations of the CMG U.K. Pension Scheme as well as the Logica U.K. Pension & Life Assurance Scheme were performed in September 2012 and reported a deficit of $112,209,000 for the CMG U.K. Pension Scheme and $4,000 for the Logica U.K. Pension & Life Assurance Scheme. A recovery plan was proposed for the CMG U.K. Pension Scheme reflecting contributions of $12,926,000 per year (plus $1,436,000 per year for expenses) for 9 years ending in August 2023.

The next funding actuarial valuation for the Logica Defined Benefit Pension Plan will be available in 2015. In the meantime, the Company continues to contribute to the plan, in line with the last actuarial valuation, the monthly payments of $108,000 to cover for the deficit and about $9,000 to cover administrative fees.

Germany

In Germany, the Company is a participating employer in numerous defined benefit pension plans which are all closed to new members. In the majority of the plans, upon retirement of employees, the benefits are in the form of a monthly pension and in a few plans, the employees will receive an indemnity in the form of a lump-sum payment. Half of the plans are bound by collective bargaining agreements. There are no mandatory funding requirements. The plans are funded by the contributions made by the Company. In some plans, insurance policies are taken out to fund retirement benefit plans that do not qualify as plan assets and that are presented as reimbursement rights.

France

In France, the retirement indemnities are provided in accordance with the Labor Code. Upon retirement, employees will receive an indemnity (depending on the salary and seniority in the Company) in the form of a lump-sum payment.


Consolidated Financial Statements

 

Notes to the Consolidated Financial Statements

For the years ended September 30, 2014 and 2013

(tabular amounts only are in thousands of Canadian dollars, except per share data)

 

 

 

17. Employee benefits (continued)

 

DEFINED BENEFIT PLANS (CONTINUED)

 

The following table presents amounts for post-employment benefits plans included in the consolidated balance sheets:

 

 As at September 30, 2014    U.K.        Germany        France        Other        Total  
     $        $        $        $        $  

 Defined benefit obligations

     (643,857)           (78,035)           (42,540)           (49,370)           (813,802)   

 Fair value of plan assets

     601,313           11,582                     25,891           638,786   
     (42,544)           (66,453)           (42,540)           (23,479)           (175,016)   

 Fair value of reimbursement rights

               21,418                     997           22,415   

 Net liability recognized in the balance sheet

     (42,544)           (45,035)           (42,540)           (22,482)           (152,601)   

 Presented as:

                      

 Other long-term assets (Note 10)

                      

 Insurance contracts held to fund defined benefit pension and life assurance arrangements - reimbursement rights

               21,418                     997           22,415   

 Retirement benefits assets

     8,737                                         8,737   

 Retirement benefits obligations

     (51,281)           (66,453)           (42,540)           (23,479)           (183,753)   
       (42,544)           (45,035)           (42,540)           (22,482)           (152,601)   
 As at September 30, 2013    U.K.        Germany        France        Other        Total  
     $        $        $        $        $  

 Defined benefit obligations

     (521,505)           (64,655)           (29,970)           (434,783)           (1,050,913)   

 Fair value of plan assets

     491,717           10,539                     404,737           906,993   
     (29,788)           (54,116)           (29,970)           (30,046)           (143,920)   

 Fair value of reimbursement rights

               20,234                     622           20,856   

 Net liability recognized in the balance sheet

     (29,788)           (33,882)           (29,970)           (29,424)           (123,064)   

 Presented as:

                      

 Other long-term assets (Note 10)

                      

 Insurance contracts held to fund defined benefit pension and life assurance arrangements - reimbursement rights

               20,234                     622           20,856   

 Retirement benefits assets

     8,813                               362           9,175   

 Retirement benefits obligations

     (38,601)           (54,116)           (29,970)           (30,408)           (153,095)   
       (29,788)           (33,882)           (29,970)           (29,424)           (123,064)   


FISCAL 2014 RESULTS

 

Notes to the Consolidated Financial Statements

For the years ended September 30, 2014 and 2013

(tabular amounts only are in thousands of Canadian dollars, except per share data)

 

 

 

17. Employee benefits (continued)

 

DEFINED BENEFIT PLANS (CONTINUED)

 

  Defined benefit obligations    U.K.        Germany        France        Other        Total  
     $        $        $        $        $  

  As at September 30, 2013

     521,505           64,655           29,970           434,783           1,050,913   

  Obligations extinguished on settlement

                                   (383,816)           (383,816)   

  Settlement gain

                                   (8,449)           (8,449)   

  Current service cost

     1,103           864           2,805           2,998           7,770   

  Interest cost

     24,495           2,336           1,099           2,541           30,471   

  Actuarial losses due to change in financial assumptions1

     42,766           11,491           6,929           3,304           64,490   

  Actuarial gains due to change in demographic assumptions1

                                   (48)           (48)   

  Actuarial losses (gains) due to experience1

     16,531           (194)           2,211           (1,117)           17,431   

  Past service cost

                         (128)                     (128)   

  Plan participant contributions

     228           52                     245           525   

  Benefits paid from the plan

     (11,789)           (403)                     (2,147)           (14,339)   

  Benefits paid directly by employer

               (1,427)           (495)           (974)           (2,896)   

  Foreign currency translation adjustment1

     49,018           661           149           2,050           51,878   

  As at September 30, 2014

     643,857           78,035           42,540           49,370           813,802   

  Defined benefit obligation of unfunded plans

                         42,540           18,736           61,276   

  Defined benefit obligation of funded plans

     643,857           78,035                     30,634           752,526   

  As at September 30, 2014

     643,857           78,035           42,540           49,370           813,802   

 

1 Amounts recognized in other comprehensive income.

Settlement

During the year ended September 30, 2014, the defined benefit pension plan Stichting Pensioenfonds CMG in Netherlands was settled as the Company signed an agreement with an insurance company to cover residual benefits and was no longer exposed to risks in respect of this plan. The obligations and assets extinguished on settlement amounted to $366,311,000.

In Norway, a defined benefit plan was terminated and replaced by a defined contribution plan in 2014. The plan settled when each member received an individual insurance paid up policy. The obligations and assets extinguished on settlement amounted to $17,505,000 and the Company recorded a settlement gain of $8,449,000.


Consolidated Financial Statements

 

Notes to the Consolidated Financial Statements

For the years ended September 30, 2014 and 2013

(tabular amounts only are in thousands of Canadian dollars, except per share data)

 

 

 

17. Employee benefits (continued)

 

DEFINED BENEFIT PLANS (CONTINUED)

 

  Defined benefit obligations    U.K.        Germany        France        Other        Total  
     $        $        $        $        $  

  As at September 30, 2012

     437,585           58,314           27,092           392,041           915,032   

  Current service cost

     1,096           1,060           2,943           3,422           8,521   

  Interest cost

     20,335           2,232           912           14,888           38,367   

  Curtailment gain

                         (4,371)                     (4,371)   

  Actuarial losses (gains) due to change in financial assumptions1

     53,236           (910)           (262)           (1,654)           50,410   

  Actuarial losses due to change in demographic assumptions1

                                   2,281           2,281   

  Actuarial losses (gains) due to experience1

     141           (405)           974           (764)           (54)   

  Termination benefits

     310                                         310   

  Plan participant contributions

     271                               288           559   

  Benefits paid from the plan

     (13,509)           (429)                     (11,143)           (25,081)   

  Benefits paid directly by employer

               (1,084)           (88)           (1,409)           (2,581)   

  Foreign currency translation adjustment1

     22,040           5,877           2,770           36,833           67,520   

  As at September 30, 2013

     521,505           64,655           29,970           434,783           1,050,913   

  Defined benefit obligation of unfunded plans

                         29,970           11,302           41,272   

  Defined benefit obligation of funded plans

     521,505           64,655                     423,481           1,009,641   

  As at September 30, 2013

     521,505           64,655           29,970           434,783           1,050,913   

 

1 Amounts recognized in other comprehensive income.


FISCAL 2014 RESULTS

 

Notes to the Consolidated Financial Statements

For the years ended September 30, 2014 and 2013

(tabular amounts only are in thousands of Canadian dollars, except per share data)

 

 

 

17. Employee benefits (continued)

 

DEFINED BENEFIT PLANS (CONTINUED)

 

 Plan assets and reimbursement rights    U.K.        Germany        France        Other            Total  
     $        $        $        $        $  

 As at September 30, 2013

     491,717           30,773                     405,359           927,849   

 Assets distributed on settlement

                                   (383,816)           (383,816)   

 Interest income on plan assets

     23,430           1,123                     1,635           26,188   

 Employer contributions

     17,396           2,031           495           4,251           24,173   

 Return on assets excluding interest income1

     35,646           597                     (521)           35,722   

 Plan participants contributions

     228           52                     245           525   

 Benefits paid from the plan

     (11,789)           (403)                     (2,147)           (14,339)   

 Benefits paid directly by employer

               (1,427)           (495)           (457)           (2,379)   

 Administration expenses paid from the plan

     (1,566)                               (6)           (1,572)   

 Foreign currency translation adjustment1

     46,251           254                     2,345           48,850   

 As at September 30, 2014

     601,313           33,000                     26,888           661,201   

 Plan assets

     601,313           11,582                     25,891           638,786   

 Reimbursement rights

               21,418                     997           22,415   

 As at September 30, 2014

     601,313           33,000                     26,888           661,201   
 Plan assets and reimbursement rights    U.K.        Germany        France        Other        Total  
     $        $        $        $        $  

 As at September 30, 2012

     433,727           27,480                     364,034           825,241   

 Interest income on plan assets

     20,504           1,087                     14,228           35,819   

 Employer contributions

     16,937           1,992           88           3,584           22,601   

 Return on assets excluding interest income1

     13,885           (461)                     619           14,043   

 Plan participants contributions

     271                               288           559   

 Benefits paid from the plan

     (13,509)           (1,014)                     (11,143)           (25,666)   

 Benefits paid directly by employer

               (1,084)           (88)           (1,409)           (2,581)   

 Administration expenses paid from the plan

     (1,619)                               (238)           (1,857)   

 Foreign currency translation adjustment1

     21,521           2,773                     35,396           59,690   

 As at September 30, 2013

     491,717           30,773                     405,359           927,849   

 Plan assets

     491,717           10,539                     404,737           906,993   

 Reimbursement rights

               20,234                     622           20,856   

 As at September 30, 2013

     491,717           30,773                     405,359           927,849   

 

1 

Amounts recognized in other comprehensive income.


Consolidated Financial Statements

 

Notes to the Consolidated Financial Statements

For the years ended September 30, 2014 and 2013

(tabular amounts only are in thousands of Canadian dollars, except per share data)

 

 

17. Employee benefits (continued)

 

DEFINED BENEFIT PLANS (CONTINUED)

 

The plan assets at the end of the year consist of:

 

 As at September 30, 2014      U.K.        Germany        France        Other        Total  
       $        $        $        $        $  

 Quoted equities

       216,044                               190           216,234   

 Quoted bonds

       352,305                               9,543           361,848   

 Property

       29,897                               1,371           31,268   

 Cash

       3,067                               215           3,282   

 Other1

                 11,582                     14,572           26,154   
         601,313           11,582                     25,891           638,786   
 As at September 30, 2013      U.K.        Germany        France        Other        Total  
       $        $        $        $        $  

 Quoted equities

       181,463                               2,214           183,677   

 Quoted bonds

       283,186                               20,805           303,991   

 Property

       23,529                               4,936           28,465   

 Cash

       3,539                               2,948           6,487   

 Other1

                 10,539                     373,834           384,373   
         491,717           10,539                     404,737           906,993   

 

1

Other is mainly composed of various insurance policies to cover some of the defined benefit obligations.

Plan assets do not include any ordinary shares of the Company, property occupied by the Company or any other assets used by the Company.

The following table summarizes the expense1 recognized in the consolidated statements of earnings:

 

     Year ended September 30  
      2014        2013  
     $        $  

 Current service cost

     7,770           8,521   

 Curtailment gain

               (4,371)   

 Settlement gain

     (8,449          

 Past service cost

     (128          

 Termination benefits

               310   

 Net interest on net defined benefit liability or asset

     4,283           2,548   

 Administration expenses

     1,572           1,857   
       5,048           8,865   

 

1 

The expense was presented as a recovery of costs of services, selling and administrative for an amount of $807,000 and as finance costs for an amount of $5,855,000 ($5,981,000 and $4,405,000, respectively for the year ended September 30, 2013), with a curtailment gain of nil presented in integration-related costs ($1,521,000 for the year ended September 30, 2013).


FISCAL 2014 RESULTS

 

Notes to the Consolidated Financial Statements

For the years ended September 30, 2014 and 2013

(tabular amounts only are in thousands of Canadian dollars, except per share data)

 

 

17. Employee benefits (continued)

 

DEFINED BENEFIT PLANS (CONTINUED)

 

Actuarial assumptions

The following are the principal actuarial assumptions at the reporting date (expressed as weighted averages). The assumed discount rates, future salary and pension increases, inflation rates and mortality all have a significant effect on the accounting valuation.

 

 As at September 30, 2014      U.K.        Germany        France        Other  
       %        %        %        %  

 Discount rate

       3.85           2.50           2.50           4.20   

 Future salary increases

       3.25           2.50           2.00           5.50   

 Future pension increases

       3.10           1.80                       

 Inflation

       3.25           2.00           2.00           2.90   
 As at September 30, 2013      U.K.        Germany        France        Other  
       %        %        %        %  

 Discount rate

       4.40           3.60           3.60           3.70   

 Future salary increases

       3.35           2.50           2.00           5.30   

 Future pension increases

       3.19           1.75                       

 Inflation

       3.35           2.00           2.00           2.10   
The average longevity over 65 of a member presently at age 45 and 65 are as follows:             
 As at September 30, 2014                          U.K.        Germany  
                         (in years)      

 Longevity at age 65 for current members

                   

 Males

                 22.4           19.0   

 Females

                 23.8           23.0   

 Longevity at age 45 for current members

                   

 Males

                 24.4           22.0   

 Females

                             25.9           25.4   
 As at September 30, 2013                          U.K.        Germany  
                         (in years)      

 Longevity at age 65 for current members

                   

 Males

                 22.4           19.0   

 Females

                 23.8           23.0   

 Longevity at age 45 for current members

                   

 Males

                 24.3           21.4   

 Females

                             25.9           25.4   


Consolidated Financial Statements

 

Notes to the Consolidated Financial Statements

For the years ended September 30, 2014 and 2013

(tabular amounts only are in thousands of Canadian dollars, except per share data)

 

 

17. Employee benefits (continued)

 

DEFINED BENEFIT PLANS (CONTINUED)

 

Actuarial assumptions (continued)

 

Assumptions regarding future mortality are set based on actuarial advice in accordance with published statistics and experience in each countries. Mortality assumptions for the most significant countries are based on the following post-retirement mortality tables for the years ended September 30, 2014 and 2013: (1) U.K.: 110% PNXA00 (year of birth) plus CMI_2011 projections with 1% p.a. minimum long term improvement rate and (2) Germany: Heubeck RT2005G.

The following table shows the sensitivity of the defined benefit obligations to changes in these assumptions, all other actuarial assumptions remaining unchanged:

 

 As at September 30, 2014      U.K.        Germany        France  
       $        $        $  

 Increase of 0.25% in the discount rate

       (28,480)           (2,757)           (1,849)   

 Decrease of 0.25% in the discount rate

       30,292           2,913           1,952   

 Salary increase of 0.25%

       931           642           1,999   

 Salary decrease of 0.25%

       (913)           (568)           (1,900)   

 Pension increase of 0.25%

       8,759           1,120             

 Pension decrease of 0.25%

       (9,248)           (1,081)             

 Increase of 0.25% in inflation

       22,873           1,152           1,999   

 Decrease of 0.25% in inflation

       (21,707)           (1,098)           (1,900)   

 Increase of one year in life expectancy

       15,039           2,482             

 Decrease of one year in life expectancy

       (15,124)           (2,517)             
 As at September 30, 2013      U.K.        Germany        France  
       $           $          $    

 Increase of 0.25% in the discount rate

       (21,118)           (2,674)           (1,286)   

 Decrease of 0.25% in the discount rate

       23,052           1,784           1,357   

 Salary increase of 0.25%

       715           528           1,390   

 Salary decrease of 0.25%

       (700)           (468)           (1,322)   

 Pension increase of 0.25%

       7,095           928             

 Pension decrease of 0.25%

       (7,490)           (896)             

 Increase of 0.25% in inflation

       16,235           1,440           1,390   

 Decrease of 0.25% in inflation

       (14,107)           (632)           (1,322)   

 Increase of one year in life expectancy

       10,504           1,673             

 Decrease of one year in life expectancy

       (10,626)           (1,719)             

The sensitivity analysis above have been based on a method that extrapolates the impact on the defined benefit obligation as a result of reasonable changes in key assumptions occurring at the end of the year.

The weighted average durations of the defined benefit obligations are as follows:

            Year ended September 30  
              2014     2013  
                    (in years)  

 U.K.

          19        17   

 Germany

          15        17   

 France

          18        18   

 Other

            14        17   


FISCAL 2014 RESULTS

 

Notes to the Consolidated Financial Statements

For the years ended September 30, 2014 and 2013

(tabular amounts only are in thousands of Canadian dollars, except per share data)

 

 

17. Employee benefits (continued)

 

DEFINED BENEFIT PLANS (CONTINUED)

 

The Company expects to contribute $20,140,000 to defined benefit plans during the next year, of which $17,217,000 relates to the U.K. plans, and $2,923,000 relating to the other plans. The contributions will include new benefit accruals and deficit recovery payments.

DEFINED CONTRIBUTION PLANS

The Company also operates defined contribution retirement plans. In some countries, contributions are made into state pension plans. The pension cost expense for defined contribution plans amounted to $217,980,000 in 2014 ($207,616,000 in 2013).

In addition, in Sweden the Company contributes to a multi-employer plan, Alecta SE pension plan, which is a defined benefit pension plan. This pension plan is classified as a defined contribution plan as sufficient information is not available to use defined benefit accounting. Alecta lacks the possibility of establishing an exact distribution of assets and provisions to the respective employers. The Company’s proportion of the total contributions to the plan is 0.87% and the Company’s proportion of the total number of active members in the plan is 0.64%.

Alecta uses a collective funding ratio to determine the surplus or deficit in the pension plan. Any surplus or deficit in the plan will affect the amount of future contributions payable. The collective funding is the difference between Alecta’s assets and the commitments to the policyholders and insured individuals. The collective solvency is normally allowed to vary between 125% and 155%, with the target being 140%. At September 30, 2014, Alecta’s collective funding ratio was 146% (145% in 2013). The plan expense was $45,044,000 in 2014 ($38,598,000 in 2013). The Company expects to contribute $43,707,000 to the plan during the next year.

OTHER BENEFIT PLANS

The Company maintains two non-qualified deferred compensation plans covering some of its U.S. management. One of these plans is an unfunded plan and the deferred compensation liability totaled $482,000 as at September 30, 2014 ($501,000 as at September 30, 2013). The other plan is a funded plan for which a trust was established so that the plan assets could be segregated; however, the assets are subject to the Company’s general creditors in the case of bankruptcy. The assets composed of investments vary with employees’ contributions and changes in the value of the investments. The change in liability associated with the plan is equal to the change of the assets. The assets in the trust and the associated liabilities totaled $31,151,000 as at September 30, 2014 ($24,752,000 as at September 30, 2013).

The deferred compensation plans assets and liabilities are presented in long-term financial assets and other long-term liabilities, respectively.


Consolidated Financial Statements

 

Notes to the Consolidated Financial Statements

For the years ended September 30, 2014 and 2013

(tabular amounts only are in thousands of Canadian dollars, except per share data)

 

 

18. Accumulated other comprehensive income

 

      As at
September 30, 2014
     As at
September 30, 2013
 
     $      $  

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 $31,986 as at September 30, 2014 ($18,818 as at September 30, 2013)

     511,689         290,410   

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 $37,024 as at September 30, 2014 ($21,349 as at September 30, 2013)

     (238,583)         (137,714)   

Net unrealized gains (losses) on cash flow hedges, net of accumulated income tax expense of $2,162 as at September 30, 2014 (net of accumulated income tax recovery of $3,085 as at September 30, 2013)

     14,520         (6,209)   

Net unrealized gains on investments available for sale, net of accumulated income tax expense of $942 as at September 30, 2014 ($617 as at September 30, 2013)

     2,576         1,635   

Items that will not be reclassified subsequently to net earnings:

     

Net remeasurement losses, net of accumulated income tax recovery of $18,728 as at September 30, 2014 ($5,788 as at September 30, 2013)

     (61,578)         (26,267)   
       228,624         121,855   

For the year ended September 30, 2014, $22,000 of the net unrealized gains previously recognized in other comprehensive income, net of income tax expense of $133,000, were reclassified to net earnings for derivative financial instruments designated as cash flow hedges ($1,967,000 of the net unrealized losses net of income tax recovery of $1,601,000 for the year ended September 30, 2013).


FISCAL 2014 RESULTS

 

Notes to the Consolidated Financial Statements

For the years ended September 30, 2014 and 2013

(tabular amounts only are in thousands of Canadian dollars, except per share data)

 

 

 

19. Capital stock

Authorized, an unlimited number without par value:

First preferred shares, carrying one vote per share, ranking prior to second preferred shares, Class A subordinate shares and Class B shares with respect to the payment of dividends;

Second preferred shares, non-voting, ranking prior to Class A subordinate shares and Class B shares with respect to the payment of dividends;

Class A subordinate shares, carrying one vote per share, participating equally with Class B shares with respect to the payment of dividends and convertible into Class B shares under certain conditions in the event of certain takeover bids on Class B shares;

Class B shares, carrying ten votes per share, participating equally with Class A subordinate shares with respect to the payment of dividends and convertible at any time at the option of the holder into Class A subordinate shares.

For 2014 and 2013, the Class A subordinate and the Class B shares varied as follows:

 

     

Class A subordinate shares

 

    

Class B shares

 

    

Total

 

 
     

 

Number

    

 

Carrying value

    

 

Number

    

 

Carrying value

    

 

Number

    

 

Carrying value

 
            $             $             $  

 As at September 30, 2012

     273,771,106         2,154,807         33,608,159         46,887         307,379,265         2,201,694   

 Issued upon exercise of stock options1

     3,765,982         51,971                         3,765,982         51,971   

 Repurchased and cancelled2

     (723,100)         (5,780)                         (723,100)         (5,780)   

 Purchased and held in trust3

             (7,663)                                 (7,663)   

 PSUs exercised4

             272                                 272   

 Conversion of shares5

     335,392         468         (335,392)         (468)                   

 As at September 30, 2013

     277,149,380         2,194,075         33,272,767         46,419         310,422,147         2,240,494   

 Issued upon exercise of stock options1

     4,999,544         83,305                         4,999,544         83,305   

 Repurchased and cancelled2

     (2,837,360)         (56,077)                         (2,837,360)         (56,077)   

 Purchased and held in trust3

             (23,016)                                 (23,016)   

 Resale of shares held in trust3

             908                                 908   

 PSUs exercised4

             583                                 583   

 As at September 30, 2014

     279,311,564         2,199,778         33,272,767         46,419         312,584,331         2,246,197   

 

1  The carrying value of Class A subordinate shares includes $18,380,000 ($12,531,000 in 2013), which corresponds to a reduction in contributed surplus representing the value of accumulated compensation costs associated with the stock options exercised during the year.

 

2 

On January 29, 2014, the Company’s Board of Directors authorized the renewal of a Normal Course Issuer Bid (“NCIB”) for the purchase of up to 21,798,645 Class A subordinate shares during the next year (20,685,976 in 2013) for cancellation on the open market through the TSX. The Class A subordinate shares were available for purchase commencing February 11, 2014, until no later than February 10, 2015, or on such earlier date when the Company completes its purchases or elects to terminate the NCIB. During the year ended September 30, 2014, the Company repurchased 2,490,660 Class A subordinate shares from the Caisse de dépôt et placement du Québec for a cash consideration of $100,000,000. The excess of the purchase price over the carrying value in the amount of $46,675,000 was charged to retained earnings. In accordance with the requirements of TSX, the repurchased shares have been taken into account in calculating the annual aggregate limit that the Company is entitled to repurchase under its previous NCIB. In addition, during the year ended September 30, 2014, the Company repurchased 346,700 Class A subordinate shares under the previous NCIB (723,100 in 2013) for a cash consideration of $11,468,000 ($22,869,000 in 2013). The excess of the purchase price over the carrying value, in the amount of $8,716,000 ($17,089,000 in 2013), was charged to retained earnings.

 

3 

The trustee, in accordance with the terms of the PSU plan and a Trust Agreement, purchased 619,888 Class A subordinate shares of the Company on the open market for $23,016,000 during the year ended September 30, 2014 (336,849 Class A subordinate shares for $7,663,000 during the year ended September 30, 2013). During the year ended September 30, 2014, the trustee sold 35,576 Class A subordinate shares that were held in trust on the open market in accordance with the terms of the PSU plan. The excess of proceeds over the carrying value of the Class A subordinate shares, in the amount of $482,000, resulted in an increase of contributed surplus. For the year ended September 30, 2013, the trustee did not sell any Class A subordinate shares.

 

4 

During the year ended September 30, 2014, 22,858 PSUs were exercised (14,020 during the year ended September 30, 2013) with a recorded average fair value of $583,000 ($272,000 as at September 30, 2013) that was removed from contributed surplus. As at September 30, 2014, 1,748,149 Class A subordinate shares were held in trust under the PSU plan (1,186,695 as at September 30, 2013) (Note 20b).

 

5 

During the year ended September 30, 2013, a shareholder converted 335,392 Class B shares into 335,392 Class A subordinate shares. No class B shares were converted during the year ended September 30, 2014.


Consolidated Financial Statements

 

Notes to the Consolidated Financial Statements

For the years ended September 30, 2014 and 2013

(tabular amounts only are in thousands of Canadian dollars, except per share data)

 

 

20. Share-based payments

 

a) 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, directors and consultants of the Company and its subsidiaries. The exercise price is established by the Board of Directors and is equal to the closing price of the Class A subordinate shares on the 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. As at September 30, 2014, 43,616,083 Class A subordinate shares have been reserved for issuance under the stock option plan.

The following table presents information concerning all outstanding stock options granted by the Company:

 

                2014                  2013   
       Number of options        
 
 
Weighted
average exercise
price per share
  
  
  
     Number of options        
 
 
Weighted
average exercise
price per share
  
  
  
            $             $  

 Outstanding, beginning of year

     20,209,569         16.45         18,617,230         12.69   

 Granted

     5,973,451         37.15         7,196,903         23.89   

 Exercised

     (4,999,544)         12.99         (3,765,982)         10.47   

 Forfeited

     (1,438,920)         26.45         (1,825,447)         19.77   

 Expired

     (16,450)         7.85         (13,135)         11.42   

 Outstanding, end of year

     19,728,106         22.88         20,209,569         16.45   

 Exercisable, end of year

     8,890,504         14.13         10,955,235         11.70   

The weighted average share price at the date of exercise for share options exercised in 2014 was $37.78 ($29.47 in 2013).

The following table summarizes information about outstanding stock options granted by the Company as at September 30, 2014:

 

                   Options outstanding     Options exercisable  
     Range of
exercise price
    Number of
options
   

Weighted
average
remaining

contractual life

(years)

    Weighted
average
exercise price
    Number of
options
   

Weighted

average
exercise price

 
    $                 $           $  
    7.00 to 8.55        490,915        1.66        8.08        490,915        8.08   
    9.05 to 10.05        1,634,331        4.00        9.31        1,634,331        9.31   
    10.11 to 11.80        993,269        3.03        11.38        993,269        11.38   
    12.54 to 13.26        2,282,150        5.00        12.56        2,282,150        12.56   
    14.48 to 15.96        2,631,359        6.00        15.48        1,880,357        15.48   
    19.28 to 22.52        830,466        7.00        19.79        436,086        19.83   
    23.65 to 32.57        5,192,158        8.22        23.91        1,126,898        23.99   
      34.68 to 38.79        5,673,458        9.28        37.17        46,498        36.60   
              19,728,106        7.03        22.88        8,890,504        14.13   


FISCAL 2014 RESULTS

 

Notes to the Consolidated Financial Statements

For the years ended September 30, 2014 and 2013

(tabular amounts only are in thousands of Canadian dollars, except per share data)

 

 

20. Share-based payments (continued)

 

a) Stock options (continued)

 

The fair value of stock options granted in the year 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:

 

     Year ended September 30  
      2014      2013  

Grant date fair value ($)

     7.98         4.98   

Dividend yield (%)

     0.00         0.00   

Expected volatility (%)1

     23.92         23.67   

Risk-free interest rate (%)

     1.53         1.29   

Expected life (years)

     4.00         4.00   

Exercise price ($)

     37.15         23.89   

Share price ($)

     37.15         23.89   

 

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.

 

b) 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 19).

The following table presents information concerning the number of outstanding PSUs granted by the Company:

 

 Outstanding as at September 30, 2012

     863,866   

 Granted1

     805,921   

 Exercised

     (14,020)   

 Forfeited

     (469,072)   

 Outstanding as at September 30, 2013

     1,186,695   

 Granted1

     619,888   

 Exercised

     (22,858)   

 Forfeited

     (35,576)   

 Outstanding as at September 30, 2014

     1,748,149   

 

1  The PSUs granted in 2014 had a grant date fair value of $36.15 per unit ($23.65 in 2013).


Consolidated Financial Statements

 

Notes to the Consolidated Financial Statements

For the years ended September 30, 2014 and 2013

(tabular amounts only are in thousands of Canadian dollars, except per share data)

 

 

20. Share-based payments (continued)

 

c) Share Purchase plan

Under the Share purchase plan, the Company contributes to the Share purchase plan an amount equal to a percentage of the employee’s basic contribution, up to a maximum of 3.5%. An employee may make additional contributions in excess of the basic contribution however the Company does not match contributions in the case of such additional contributions. The employee and Company contributions are remitted to an independent plan administrator who purchases Class A subordinate shares on the open market on behalf of the employee through either the TSX or New York Stock Exchange.

 

d) Deferred share unit plan

Under the DSU plan, the Board of Directors may grant DSUs to members of the Board of Directors (“participants”). DSUs are granted with immediate vesting and must be exercised no later than December 15 of the calendar year immediately following the calendar year during which the participant ceases to act as a Director. Each DSU entitles the holder to receive a cash payment equal to the closing price of Class A subordinate shares on the TSX on the payment date.

 

e) Share-based payment costs

The share-based payment expense recorded in cost of services, selling and administrative expenses is as follows:

 

     Year ended September 30  
     

2014

 

    

2013

 

 
     $         $   

  Stock options

     18,383         19,631   

  PSUs

     13,333         11,642   

  Share purchase plan

     69,500         52,542   

  DSUs

     1,109         2,205   
       102,325         86,020   

 

21. Earnings per share

The following table sets forth the computation of basic and diluted earnings per share for the year ended September 30:

 

                      2014                      2013  
      Net earnings      Weighted average
number of shares
outstanding1
     Earnings per
share
     Net earnings      Weighted average
number of shares
outstanding1
     Earnings per
share
 
     $            $         $            $   

Basic

     859,443         308,743,126         2.78         455,820         307,900,034         1.48   

Dilutive stock options and PSUs2

              10,184,611                           9,074,145            
       859,443         318,927,737         2.69         455,820         316,974,179         1.44   

 

1  The 2,837,360 Class A subordinate shares repurchased and 1,748,149 Class A subordinate shares held in trust during the year ended September 30, 2014 (723,100 and 1,186,695, respectively, during year ended September 30, 2013), were excluded from the calculation of weighted average number of shares outstanding as of the date of transaction.

 

2  The calculation of the diluted earnings per share excluded 5,648,757 stock options for the year ended September 30, 2014 (19,994 for the year ended September 30, 2013), as they were anti-dilutive.


FISCAL 2014 RESULTS

 

Notes to the Consolidated Financial Statements

For the years ended September 30, 2014 and 2013

(tabular amounts only are in thousands of Canadian dollars, except per share data)

 

 

22. Construction contracts in progress

Revenue from systems integration and consulting services under fixed-fee arrangements where the outcome of the arrangements can be estimated reliably is recognized using the percentage-of-completion method over the service periods. The Company uses the labour costs or labour hours to measure the progress towards completion. If the outcome of an arrangement cannot be estimated reliably, revenue is recognized to the extent of arrangement costs incurred that are likely to be recoverable.

Amounts recognized as revenue in excess of billings are classified as work in progress. Amounts received in advance of the delivery of products or performances of services are classified as deferred revenue.

The status of the Company’s construction contracts still in progress at the end of the reporting period was as follows:

 

     As at      As at  
      September 30, 2014      September 30, 2013  
     $         $   

Recognized as:

     

Revenue in the respective year

     1,575,593         1,634,739   

Recognized as:

     

Amounts due from customers under construction contracts1

     289,838         311,733   

Amounts due to customers under construction contracts

     (153,962)         (209,890)   

 

1  As at September 30, 2014, retentions held by customers for contract work in progress amounted to $50,425,000 ($38,133,000 as at September 30, 2013).

 

23. Costs of services, selling and administrative

 

                         Year ended September 30  
      2014      2013  
     $         $   

Salaries and other member costs1

     6,215,991         5,954,032   

Hardware, software and data center related costs

     786,360         864,687   

Professional fees and other contracted labour

     1,260,955         1,311,323   

Property costs

     398,560         410,197   

Amortization and depreciation (Note 24)

     435,775         416,889   

Other operating expenses

     32,150         55,182   
       9,129,791                 9,012,310   

 

1  Net of tax credits of $121,114,000 in 2014 ($95,911,000 in 2013).


Consolidated Financial Statements

 

Notes to the Consolidated Financial Statements

For the years ended September 30, 2014 and 2013

(tabular amounts only are in thousands of Canadian dollars, except per share data)

 

 

24. Amortization and depreciation

 

    

Year ended September 30

 

 
     

2014

 

    

2013

 

 
     $         $   

Depreciation of PP&E1

     186,886         175,687   

Amortization of intangible assets

     192,692         185,309   

Amortization of contract costs related to transition costs

 

    

 

56,197

 

  

 

    

 

55,893

 

  

 

Included in costs of services, selling and administrative (Note 23)

     435,775         416,889   

Amortization of contract costs related to incentives (presented as a reduction of revenue)

     5,889         8,151   

Amortization of internal-use software (presented in integration-related costs)

             8,672   

Amortization of deferred financing fees (presented in finance costs)

     1,185         1,186   

Amortization of premiums and discounts on investments related to funds held for clients
(presented net as a reduction of revenue)

 

    

 

1,383

 

  

 

    

 

1,046

 

  

 

      

 

444,232

 

  

 

    

 

435,944

 

  

 

 

1  Depreciation of PP&E acquired under finance leases was $23,822,000 in 2014 ($21,102,000 in 2013).

 

25. Finance costs

 

     Year ended September 30  
      2014      2013  
     $         $   

Interest on long-term debt

     92,581         104,502   

Net interest cost on the net defined benefit plans (Note 17)

     5,855         4,405   

Other finance costs

 

    

 

2,842

 

  

 

    

 

5,024

 

  

 

      

 

101,278

 

  

 

    

 

113,931

 

  

 

 

26. Investments in subsidiaries

2014 TRANSACTIONS

There were no acquisitions or significant disposals for the year ended September 30, 2014.

2013 TRANSACTIONS

There were no acquisitions or significant disposals for the year ended September 30, 2013.


FISCAL 2014 RESULTS

 

Notes to the Consolidated Financial Statements

For the years ended September 30, 2014 and 2013

(tabular amounts only are in thousands of Canadian dollars, except per share data)

 

 

26. Investments in subsidiaries (continued)

 

2012 TRANSACTIONS

 

a) Modifications to purchase price allocation

During the year ended September 30, 2013, the Company finalized the purchase price allocation and made adjustments relating to the acquisition of Logica. The prior period figures had been retrospectively revised in 2013 as follows:

 

     

Purchase price allocation, as
originally reported

 

    

Adjustments and
reclassifications

 

    

Final purchase price
allocation

 

 
     $         $         $   

Assets

        

Current assets1

     1,374,838         (72,333)         1,302,505   

Property, plant and equipment

     250,808         (19,169)         231,639   

Contract costs

     71,697         948         72,645   

Intangible assets

     603,683         (68,620)         535,063   

Other long-term assets

     87,789         (1,667)         86,122   

Deferred tax assets

     197,210         126,571         323,781   

Goodwill

 

    

 

3,276,172

 

  

 

    

 

265,324

 

  

 

    

 

3,541,496

 

  

 

      

 

5,862,197

 

  

 

    

 

231,054

 

  

 

    

 

6,093,251

 

  

 

Liabilities

        

Current liabilities

     (1,546,273)         (285,657)         (1,831,930)   

Debt2

     (808,775)                 (808,775)   

Deferred tax liabilities

     (43,616)         22,472         (21,144)   

Long-term provisions

     (182,880)         86,570         (96,310)   

Retirement benefits obligations

     (113,526)                 (113,526)   

Other long-term liabilities

 

    

 

(426,864)

 

  

 

    

 

(54,439)

 

  

 

    

 

(481,303)

 

  

 

      

 

(3,121,934)

 

  

 

    

 

(231,054)

 

  

 

    

 

(3,352,988)

 

  

 

Bank overdraft assumed, net

 

    

 

(57,883)

 

  

 

    

 

 

  

 

    

 

(57,883)

 

  

 

Net assets acquired

 

    

 

2,682,380

 

  

 

    

 

 

  

 

    

 

2,682,380

 

  

 

                            

Cash consideration

     2,676,912            2,676,912   

Consideration payable3

 

    

 

5,468

 

  

 

              5,468   

 

1 

The current assets include accounts receivable with a fair value of $866,816,000 which approximates the gross amount due under the contracts.

 

2

The fair value of the assumed debt in the business acquisition at August 20, 2012 was $808,775,000. In 2012, the Company repaid Logica’s debt for an amount of $891,354,000, less settlement of foreign currency forward contracts of $50,171,000 resulting in a loss of $83,632,000, which was recorded in acquisition-related and integration costs.

 

3

Paid during the year ended September 30, 2013.


Consolidated Financial Statements

 

Notes to the Consolidated Financial Statements

For the years ended September 30, 2014 and 2013

(tabular amounts only are in thousands of Canadian dollars, except per share data)

 

 

26. Investments in subsidiaries (continued)

 

2012 TRANSACTIONS (CONTINUED)

 

a) Modifications to purchase price allocation (continued)

 

IMPACT ON CONSOLIDATED BALANCE SHEET AS AT SEPTEMBER 30, 2012

The following represents the revised consolidated balance sheet as at September 30, 2012 which reflects the final purchase price allocation adjustments and the related additional reclassifications applied to the consolidated balance sheet as at September 30, 2012. A discussion of the adjustments and resulting impact for year ended September 30, 2012 are presented further below.

 

     

As originally
reported

 

            

Adjustments and
reclassifications

 

    

Foreign exchange on
adjustments

 

    

Final

 

 
     $            $         $         $   

Assets

              

Current assets

              

Cash and cash equivalents

     113,103                            113,103   

Short-term investments

     14,459                            14,459   

Accounts receivable

     1,446,149         A         (32,273)         (941)         1,412,935   

Work in progress

     744,482         A         (45,819)         (1,531)         697,132   

Prepaid expenses and other current assets

     244,805         A         (8,840)         (3)         235,962   

Income taxes

 

    

 

24,650

 

  

 

     I        

 

14,599

 

  

 

    

 

628

 

  

 

    

 

39,877

 

  

 

Total current assets before funds held for clients

     2,587,648            (72,333)         (1,847)         2,513,468   

Funds held for clients

 

    

 

202,407

 

  

 

             

 

 

  

 

    

 

 

  

 

    

 

202,407

 

  

 

Total current assets

     2,790,055            (72,333)         (1,847)         2,715,875   

Property, plant and equipment

     500,995         A, B, F         (19,169)         (346)         481,480   

Contract costs

     167,742         A         948         (40)         168,650   

Intangible assets

     858,892         C         (68,620)         (2,493)         787,779   

Other long-term assets

     96,351         A         (1,667)         (59)         94,625   

Deferred tax assets

     219,590         I         126,571         2,528         348,689   

Goodwill

 

    

 

5,819,817

 

  

 

             

 

265,324

 

  

 

    

 

7,993

 

  

 

    

 

6,093,134

 

  

 

      

 

10,453,442

 

  

 

             

 

231,054

 

  

 

    

 

5,736

 

  

 

    

 

10,690,232

 

  

 

Liabilities

              

Current liabilities

              

Accounts payable and accrued liabilities

     1,156,737         A, H         124,680         4,614         1,286,031   

Accrued compensation

     539,779         D         (16,695)         (520)         522,564   

Deferred revenue

     443,596         A         90,792         1,514         535,902   

Income taxes

     177,030         I         (58)         (10)         176,962   

Provisions

     160,625         E, F, J         86,938         3,124         250,687   

Current portion of long-term debt

 

    

 

52,347

 

  

 

             

 

 

  

 

    

 

 

  

 

    

 

52,347

 

  

 

Total current liabilities before clients’ funds obligations

     2,530,114            285,657         8,722         2,824,493   

Clients’ funds obligations

 

    

 

197,986

 

  

 

             

 

 

  

 

    

 

 

  

 

    

 

197,986

 

  

 

Total current liabilities

     2,728,100            285,657         8,722         3,022,479   

Long-term provisions

     216,507         E, F         (86,570)         (3,799)         126,138   

Long-term debt

     3,196,061                            3,196,061   

Other long-term liabilities

     601,232         A, D, G, H         54,439         1,450         657,121   

Deferred tax liabilities

     171,130         I         (22,472)         (1,206)         147,452   

Retirement benefits obligations

 

    

 

118,078

 

  

 

             

 

 

  

 

    

 

 

  

 

    

 

118,078

 

  

 

       7,031,108                  231,054         5,167         7,267,329   

Equity

              

Retained earnings

     1,113,225                            1,113,225   

Accumulated other comprehensive (loss) income

     (275)                    569         294   

Capital stock

     2,201,694                            2,201,694   

Contributed surplus

 

    

 

107,690

 

  

 

             

 

 

  

 

    

 

 

  

 

    

 

107,690

 

  

 

      

 

3,422,334

 

  

 

             

 

 

  

 

    

 

569

 

  

 

    

 

3,422,903

 

  

 

      

 

10,453,442

 

  

 

             

 

231,054

 

  

 

    

 

5,736

 

  

 

    

 

10,690,232

 

  

 


FISCAL 2014 RESULTS

 

Notes to the Consolidated Financial Statements

For the years ended September 30, 2014 and 2013

(tabular amounts only are in thousands of Canadian dollars, except per share data)

 

26. Investments in subsidiaries (continued)

 

2012 TRANSACTIONS (CONTINUED)

 

a) Modifications to purchase price allocation (continued)

 

IMPACT ON CONSOLIDATED BALANCE SHEET AS AT SEPTEMBER 30, 2012 (CONTINUED)

 

A. Contract accounting

The Company obtained supplementary information and reviewed estimates related to client contracts and made reclassifications. As a result, accounts receivable, work in progress, prepaid expenses and other current assets, property, plant and equipment and other long-term assets decreased by an amount of $32,273,000, $13,663,000, $8,840,000, $8,947,000, $1,667,000, respectively while contract costs, accounts payable and accrued liabilities as well as long-term deferred revenue, estimated losses on revenue-generating contracts and other within other long-term liabilities increased by an amount of $948,000, $4,482,000, $29,638,000, $142,173,000 and $8,514,000, respectively.

In addition, certain reclassifications for presentation purposes were done. As a result, accounts payable and accrued liabilities and current deferred revenue increased by an amount of $114,253,000 and $90,792,000, respectively while work in progress, long-term deferred revenue and estimated losses on revenue-generating contracts within other long-term liabilities decreased by an amount of $32,156,000, $131,751,000 and $105,450,000, respectively.

 

B. Buildings

The Company refined the assumptions related to the fair value of buildings acquired. As a result, property, plant and equipment decreased by an amount of $2,377,000.

 

C. Intangible assets

The Company refined the assumptions related to cash flows. As a result, internal-use software increased by an amount of $5,918,000 while business solutions and client relationships decreased by an amount of $3,966,000 and $70,572,000, respectively.

 

D. Accrued compensation

The Company adjusted the accrued compensation provision. As a result, accrued compensation decreased by an amount of $16,695,000 while other within other long-term liabilities increased by an amount of $5,488,000.

 

E. Litigations and claims

The Company obtained supplementary information, reviewed estimates and settled claims that have been agreed upon by both parties for a social security and contractual dispute claim against the Company. As a result, current and non-current provisions for litigations decreased by an amount of $708,000 and $18,144,000, respectively.

In addition, the Company made certain reclassifications from non-current provisions to current provisions for an amount of $86,884,000.

 

F. Lease provisions

The Company refined the assumptions related to the discount rate, sublease rental cash flows and costs to restore premises at the end of the lease period. As a result, onerous leases within current provisions decreased by an amount of $3,704,000 while onerous lease and decommissioning liabilities within non-current provisions and decommissioning liabilities within current provisions increased by an amount of $9,681,000, $13,777,000 and $1,405,000. Additionally, leasehold improvements within property, plant and equipment decreased by an amount of $7,845,000.

 

G. Fair value of client contracts

The Company refined the assumptions related to the discount rate and the expected amount and timing of future cash flows related to client contracts. As a result, long-term deferred revenue within other long-term liabilities increased by an amount of $67,507,000.


Consolidated Financial Statements

 

Notes to the Consolidated Financial Statements

For the years ended September 30, 2014 and 2013

(tabular amounts only are in thousands of Canadian dollars, except per share data)

 

26. Investments in subsidiaries (continued)

 

2012 TRANSACTIONS (CONTINUED)

 

a) Modifications to purchase price allocation (continued)

 

IMPACT ON CONSOLIDATED BALANCE SHEET AS AT SEPTEMBER 30, 2012 (CONTINUED)

 

H. Fair value of lease contracts

The Company refined the assumptions related to the discount rate and rental rates in effect at the acquisition date of lease contracts. As a result, deferred rent within accounts payable and accrued liabilities and within other long-term liabilities increased by an amount of $5,945,000 and $38,320,000.

 

I. Income taxes

The Company obtained supplementary information concerning income tax provisions. As a result, income taxes payable decreased by an amount of $28,280,000. The related income tax impact of the adjustments to purchase price allocation on income taxes receivable and deferred tax liabilities was a decrease by an amount of $7,501,000 and $6,972,000, respectively while deferred tax assets and income taxes payable increased by an amount of $142,071,000 and $6,122,000, respectively.

In addition, for presentation purposes, reclassifications were made from income taxes payable to income taxes receivable for an amount of $22,100,000 and from deferred tax assets to deferred tax liabilities for an amount of $15,500,000.

 

J. Restructuring

The Company refined the assumptions related to restructuring provisions assumed in the acquisition. As a result, expected restructuring costs within current and non-current provisions increased by an amount of $3,061,000 and decreased by an amount of $5,000,000, respectively.

 

b) Integration-related costs

During the year ended September 30, 2014, the previously announced integration program of $525,000,000 was increased by $26,500,000 to include new opportunities and by $24,000,000 to consider foreign currency impact.

During the year ended September 30, 2014, the Company expensed $127,341,000 ($338,439,000 during the year ended September 30, 2013) of the announced program. This amount included net integration costs for the termination of employees to transform the operations of Logica to the Company’s operating model of $94,273,000 ($249,799,000 during the year ended September 30, 2013) (Note 13), costs related to onerous leases of $1,503,000 ($31,899,000 during the year ended September 30, 2013) (Note 13) and other integration costs of $31,565,000 ($56,741,000 during the year ended September 30, 2013).

During the year ended September 30, 2014, the Company paid in total $157,998,000 ($306,433,000 during the year ended September 30, 2013) related to the integration program and $4,537,000 ($37,937,000 during the year ended September 30, 2013), related to the restructuring program of Logica announced before the acquisition, on December 14, 2011. During the year ended September 30, 2014, the non-cash integration costs of $nil ($7,151,000 during the year ended September 30, 2013) included amortization expense of $nil ($8,672,000 during the year ended September 30, 2013) and curtailment gain of $nil ($1,521,000 during the year ended September 30, 2013).


FISCAL 2014 RESULTS

 

Notes to the Consolidated Financial Statements

For the years ended September 30, 2014 and 2013

(tabular amounts only are in thousands of Canadian dollars, except per share data)

 

27. Supplementary cash flow information

a)   Net change in non-cash working capital items is as follows for the years ended September 30:

 

      2014      2013  
     $      $  

Accounts receivable

     205,945         280,146   

Work in progress

     161,270         (169,035)   

Prepaid expenses and other assets

     42,555         17,499   

Long-term financial assets

     (4,230)         (2,742)   

Accounts payable and accrued liabilities

     (113,537)         (231,169)   

Accrued compensation

     (151,573)         164,166   

Deferred revenue

     (158,026)         (163,941)   

Provisions

     (132,735)         (67,055)   

Other long-term liabilities

     (65,840)         (99,573)   

Retirement benefits obligations

     (17,181)         (7,646)   

Derivative financial instruments

     (650)         966   

Income taxes

     1,335         (3,172)   
       (232,667)         (281,556)   

b)   Non-cash operating, investing and financing activities related to operations are as follows for the years ended September 30:

  
      2014      2013  
     $      $  

Operating activities

     

Accounts receivable

     (199)         (412)   

Prepaid expenses and other assets

     (3,792)         (4,180)   
       (3,991)         (4,592)   

Investing activities

     

Purchase of property, plant and equipment

     (12,878)         (12,909)   

Additions of intangible assets

     (1,074)         (4,948)   

Additions of long-term financial assets

     (7,788)         (1,852)   
       (21,740)         (19,709)   

Financing activities

     

Increase in obligations under finance leases

     24,458         11,745   

Increase in obligations other than finance leases

     1,074         12,144   

Issuance of shares

     199         412   
       25,731         24,301   

c)   Interest paid and received and income taxes paid are classified within operating activities and are as follows for the years ended September 30:

   
      2014      2013  
     $      $  

Interest paid

     103,127         104,981   

Interest received

     903         3,550   

Income taxes paid

     182,531         131,552   


Consolidated Financial Statements

 

Notes to the Consolidated Financial Statements

For the years ended September 30, 2014 and 2013

(tabular amounts only are in thousands of Canadian dollars, except per share data)

 

28. Segmented information

The following presents information on the Company’s operations based on its current management structure managed through seven operating segments which are based on the geographic delivery model, namely: United States of America (“U.S.”); Nordics, Southern Europe and South America (“NSESA”); Canada; France (including Luxembourg and Morocco); United Kingdom (“U.K.”); Central and Eastern Europe (primarily the Netherlands and Germany) (“CEE”); the Asia Pacific (including Australia, India, Philippines and the Middle east).

 

                                              Year ended September 30, 2014  
      U.S.      NSESA      Canada      France      U.K.      CEE      Asia Pacific      Total  
     $      $      $      $      $      $      $      $  

 Segment revenue

     2,664,876         2,090,240         1,638,320         1,333,792         1,283,847         1,063,533         425,084         10,499,692   

 Earnings before integration- related costs, finance costs, finance income and income tax expense1

     303,515         195,400         361,136         155,695         164,977         107,977         68,159         1,356,859   

 Integration-related costs

                          (127,341)   

 Finance costs

                          (101,278)   

 Finance income

                                                                    2,010   

 Earnings before income taxes

                                                                    1,130,250   

 

1  Total amortization and depreciation of $443,047,000 included in the U.S., NSESA, Canada, France, U.K., CEE and Asia Pacific operating segments was $114,106,000, $81,793,000, $84,403,000, $34,575,000, $75,853,000, $29,314,000 and $23,003,000, respectively for the year ended September 30, 2014.

 

                                              Year ended September 30, 2013  
      U.S.      NSESA      Canada      France      U.K.      CEE      Asia Pacific      Total  
     $      $      $      $      $      $      $      $  

 Segment revenue

     2,512,530         2,010,693         1,685,723         1,273,604         1,158,520         1,003,950         439,604         10,084,624   

 Earnings before integration- related costs, finance costs, finance income and income tax expense1

     283,690         139,418         320,306         109,760         102,820         67,341         52,295         1,075,630   

 Integration-related costs

                          (338,439)   

 Finance costs

                          (113,931)   

 Finance income

                                                                    4,362   

 Earnings before income taxes

                                                                    627,622   

 

1  Total amortization and depreciation of $426,086,000 included in the U.S., NSESA, Canada, France, U.K., CEE and Asia Pacific operating segments was $103,520,000, $78,095,000, $99,899,000, $30,855,000, $52,417,000, $34,899,000 and $26,401,000, respectively for the year ended September 30, 2013.

The accounting policies of each operating segment are the same as those described in the summary of significant accounting policies (Note 3). Intersegment revenue is priced as if the revenue was from third parties.


FISCAL 2014 RESULTS

 

Notes to the Consolidated Financial Statements

For the years ended September 30, 2014 and 2013

(tabular amounts only are in thousands of Canadian dollars, except per share data)

 

28. Segmented information (continued)

 

GEOGRAPHIC INFORMATION

The following table provides information for PP&E, contract costs and intangible assets based on their location:

 

      As at
September 30, 2014
   As at
September 30, 2013
     $    $

U.S.

   296,587    288,307

Canada

   254,240    289,248

U.K.

   240,455    210,089

France

   101,477    125,056

Sweden

   98,496    96,608

Finland

   58,245    66,408

Germany

   56,958    55,786

Netherlands

   44,454    50,016

Rest of the world

   122,582    142,262
     1,273,494    1,323,780

The following table provides revenue information based on the client’s location:

 

      2014    2013
     $    $

U.S.

   2,803,326    2,650,540

Canada

   1,614,511    1,670,190

U.K.

   1,391,943    1,271,405

France

   1,309,568    1,257,473

Sweden

   913,110    909,977

Finland

   665,845    571,682

Netherlands

   527,010    507,638

Germany

   384,765    353,967

Rest of the world

   889,614    891,752
     10,499,692    10,084,624

INFORMATION ABOUT SERVICES

The following table provides revenue information based on services provided by the Company:

 

      2014    2013
     $    $

Outsourcing

     

IT Services

   4,342,370    4,474,203

BPS

   1,118,117    1,143,069

Systems integration and consulting

   5,039,205    4,467,352
     10,499,692    10,084,624

MAJOR CLIENT INFORMATION

Contracts with the U.S. federal government and its various agencies accounted for $1,404,093,000 (13.4%) of revenues included within the U.S. segment for the year ended September 30, 2014 ($1,392,286,000 (13.8%) for the year ended September 30, 2013).


Consolidated Financial Statements

 

Notes to the Consolidated Financial Statements

For the years ended September 30, 2014 and 2013

(tabular amounts only are in thousands of Canadian dollars, except per share data)

 

29. Related party transactions

 

a) Transactions with subsidiaries

Balances and transactions between the Company and its subsidiaries have been eliminated on consolidation. The Company owns 100% of the equity interests of its principal subsidiaries.

The Company’s principal subsidiaries whose revenues, based on the geographic delivery model, represent more than 3% of the consolidated revenues are as follows:

 

  Name of subsidiary    Country of incorporation  

  Conseillers en gestion et informatique CGI Inc.

   Canada  

  CGI Information Systems and Management Consultants Inc.

   Canada  

  CGI Technologies and Solutions Inc.

   United States  

  Stanley Associates, Inc.

   United States  

  CGI Federal Inc.

   United States  

  CGI Information Systems and Management Consultants Private Limited

   India  

  CGI France SAS

   France  

  CGI Nederland BV

   Netherlands  

  CGI (Germany) GmbH & Co KG

   Germany  

  CGI Suomi Oy

   Finland  

  CGI Sverige AB

   Sweden  

  CGI IT UK Limited

   United Kingdom  

 

b) Compensation of key management personnel

Compensation of key management personnel, defined as the Board of Directors and the Executive Vice-President and Chief Financial Officer, was as follows:

 

      2014      2013  
     $      $  

  Short-term employee benefits

     4,972         8,940   

  Share-based payments

     15,609         13,715   


FISCAL 2014 RESULTS

 

Notes to the Consolidated Financial Statements

For the years ended September 30, 2014 and 2013

(tabular amounts only are in thousands of Canadian dollars, except per share data)

 

30. Commitments, contingencies and guarantees

 

a) Commitments

At September 30, 2014, the Company is committed under the terms of operating leases with various expiration dates up to 2023, primarily for the rental of premises and computer equipment used in outsourcing contracts, in the aggregate amount of approximately $1,413,682,000. The future minimum lease payments under non-cancellable operating leases are due as follows:

 

      $  

  Less than one year

     336,370   

  Between one and two years

     273,707   

  Between two and five years

     576,091   

  Beyond five years

     227,514   

The majority of the lease agreements are renewable at the end of the lease period at market rates. The lease expenditure charged to the earnings, during the year was $306,428,000 ($326,140,000 in 2013), net of sublease income of $26,128,000 ($25,851,000 in 2013). As at September 30, 2014, the total future minimum sublease payments expected to be received under non-cancellable sublease were $100,745,000 ($110,823,000 as at September 30, 2013).

The Company entered into long-term service and other agreements representing a total commitment of $190,083,000. Minimum payments under these agreements are due as follows:

 

      $  

  Less than one year

     74,291   

  Between one and two years

     62,372   

  Between two and five years

     53,420   

  Beyond five years

       

 

b) Contingencies

From time to time, the Company is involved in legal proceedings, audits, claims and litigation which primarily relate to tax exposure, contractual disputes and employee claims arising in the ordinary course of its business. Certain of these matters seek damages in significant amounts and will ultimately be resolved when one or more future events occur or fail to occur. 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. Claims for which there is a probable unfavourable outcome are recorded in provisions (Note 13).

In addition, the Company is engaged to provide services under contracts with the U.S. Government. The contracts are subject to extensive legal and regulatory requirements and, from time to time, agencies of the U.S. Government investigate whether the Company’s operations are being conducted in accordance with these requirements. Generally, the Government has the right to change the scope of, or terminate, these projects at its convenience. The termination or reduction in the scope, of a major government project could have a materially adverse effect on the results of operations and financial condition of the Company.


Consolidated Financial Statements

 

Notes to the Consolidated Financial Statements

For the years ended September 30, 2014 and 2013

(tabular amounts only are in thousands of Canadian dollars, except per share data)

 

30. Commitments, contingencies and guarantees (continued)

 

c) Guarantees

Sale of assets and business divestitures

In connection with the sale of assets and business divestitures, the Company may be required to pay counterparties for costs and losses incurred as the result of breaches in representations and warranties, intellectual property right infringement and litigation against counterparties. While some of the agreements specify a maximum potential exposure of approximately $10,411,000 in total, others do not specify a maximum amount or limited period. It is not possible to reasonably estimate the maximum amount that may have to be paid under such guarantees. The amounts are dependent upon the outcome of future contingent events, the nature and likelihood of which cannot be determined at this time. No amount has been accrued in the consolidated balance sheets relating to this type of indemnification as at September 30, 2014. The Company does not expect to incur any potential payment in connection with these guarantees that could have a materially adverse effect on its consolidated financial statements.

Other transactions

In the normal course of business, the Company may provide certain clients, principally governmental entities, with bid and performance bonds. In general, the Company would only be liable for the amount of the bid bonds if the Company refuses to perform the project once the bid is awarded. The Company would also be liable for the performance bonds in the event of default in the performance of its obligations. As at September 30, 2014, the Company provided for a total of $55,911,000 of these bonds. To the best of its knowledge, the Company is in compliance with its performance obligations under all service contracts for which there is a performance or bid bond, and the ultimate liability, if any, incurred in connection with these guarantees would not have a materially adverse effect on the Company’s consolidated results of operations or financial condition.

Moreover, the Company has letters of credit for a total of $85,959,000 in addition to the letters of credit covered by the unsecured committed revolving credit facility (Note 14). These guarantees are required in some of the Company’s contracts with customers.


FISCAL 2014 RESULTS

 

Notes to the Consolidated Financial Statements

For the years ended September 30, 2014 and 2013

(tabular amounts only are in thousands of Canadian dollars, except per share data)

 

31. Financial instruments

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.

The following table presents financial liabilities measured at amortized cost categorized using the fair value hierarchy:

 

          As at September 30, 2014     As at September 30, 2013  
     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        1,476,537        1,528,724        475,787        510,667   

Unsecured committed revolving credit facility

    Level 2                      254,818        254,162   

Unsecured committed term loan credit facility

    Level 2        1,001,752        1,005,792        1,974,490        1,984,773   

Other long-term debt

    Level 2        22,036        20,276        14,081        12,269   
              2,500,325        2,554,792        2,719,176        2,761,871   

 

The following table presents financial assets and liabilities measured at fair value categorized using the fair value hierarchy:

 

 
     Level     As at September 30, 2014     As at September 30, 2013  
                $           $  

Financial assets

         

Financial assets at fair value through earnings

         

Cash and cash equivalents

    Level 2          535,715          106,199   

Deferred compensation plan assets

    Level 1                31,151                24,752   
                      566,866                130,951   

Derivative financial instruments designated as hedging instruments

         

Current derivative financial instruments

    Level 2          9,397          1,344   

Long-term derivative financial instruments

    Level 2                14,834                2,518   
                      24,231                3,862   

Available for sale

         

Long-term bonds included in funds held for clients

    Level 2          198,177          187,816   

Long-term investments

    Level 2                30,689                20,333   
                      228,866                208,149   

Financial liabilities

         

Derivative financial instruments designated as hedging instruments

         

Current derivative financial instruments

    Level 2          4,588          6,882   

Long-term derivative financial instruments

    Level 2                149,074                157,110   
                      153,662                163,992   

There have been no transfers between Level 1 and Level 2 for the years ended September 30, 2014 and 2013.


Consolidated Financial Statements

 

Notes to the Consolidated Financial Statements

For the years ended September 30, 2014 and 2013

(tabular amounts only are in thousands of Canadian dollars, except per share data)

 

31. Financial instruments (continued)

 

FAIR VALUE MEASUREMENTS (CONTINUED)

 

 

The following table summarizes the fair value of outstanding derivative financial instruments:

 

            As at September      As at September  
      Recorded in derivative financial instruments      30, 2014      30, 2013  
            $      $  

Hedges on net investments in foreign operations

        

$968,800 cross-currency swaps in euro designated as a hedging instrument of the Company’s net investment in European operations ($1,153,700 as at September 30, 2013)

     Long-term liabilities         136,203         137,795   

Cash flow hedges on future revenue

        

U.S.$32,000 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. $56,800 as at September 30, 2013)

     Current assets                 1,078   
     Long-term assets                 300   
     Current liabilities         1,651           
     Long-term liabilities         605           

U.S.$75,216 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.$94,436 as at September 30, 2013)

     Current assets         1,226           
     Long-term assets         1,586           
     Current liabilities         1,963         3,705   
     Long-term liabilities         1,153         4,079   

$94,600 foreign currency forward contracts to hedge the variability in the expected foreign currency exchange rate between the Canadian dollar and the Indian rupee ($142,528 as at September 30, 2013)

     Current assets         4,276         266   
     Long-term assets         5,937         838   
     Current liabilities         475         2,605   
     Long-term liabilities         45         1,549   

Kr142,600 foreign currency forward contracts to hedge the variability in the expected foreign currency exchange rate between the Swedish krona and the Indian rupee (kr nil as at September 30, 2013)

     Current assets         1           
     Current liabilities         16           
     Long-term liabilities         32           

121,100 foreign currency forward contracts to hedge the variability in the expected foreign currency rate between the euro and the British pound (nil as at September 30, 2013)

     Current assets         3,894           
     Long-term assets         7,311           
        

15,000 foreign currency forward contracts to hedge the variability in the expected foreign currency exchange rate between the euro and the Swedish krona (31,000 as at September 30, 2013)

     Current liabilities         483         11   
     Long-term liabilities         183         52   
        

nil foreign currency forward contracts to hedge the variability in the expected foreign currency exchange rate between the euro and the Moroccan dirham (17,000 as at September 30, 2013)

     Long-term assets                 26   
     Current liabilities                 149   
     Long-term liabilities                 54   

Cash flow hedges on unsecured committed term loan credit facility

        

$484,400 interest rate swaps floating-to-fixed ($1,234,400 as at September 30, 2013)

     Long-term assets                 1,354   
     Current liabilities                 412   
     Long-term liabilities         943         537   

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, 2013)

     Long-term liabilities         9,910         13,044   


FISCAL 2014 RESULTS

 

Notes to the Consolidated Financial Statements

For the years ended September 30, 2014 and 2013

(tabular amounts only are in thousands of Canadian dollars, except per share data)

 

 

 

31. Financial instruments (continued)

 

FAIR VALUE MEASUREMENTS (CONTINUED)

 

Valuation techniques used to value financial instruments are as follows:

 

  -

The fair value of Senior U.S. and euro unsecured notes, the unsecured committed revolving credit facility, the unsecured committed term loan 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.

As at September 30, 2014, there were no changes in valuation techniques.

The Company expects that approximately $4,928,000 of the accumulated net unrealized gain on derivative financial instruments designated as cash flow hedges as at September 30, 2014 will be reclassified in the consolidated statements of earnings in the next 12 months.

During the year ended September 30, 2014, the Company’s hedging relationships were effective.

MARKET RISK

Market risk incorporates a range of risks. Movements in risk factors, such as interest rate risk and currency risk, affect the fair values of financial assets and liabilities.

Interest rate risk

The Company is exposed to interest rate risk on a portion of its long-term debt (Note 14) and holds interest rate swaps that mitigate this risk on the unsecured committed term loan credit facility. Under the interest rate swaps, the Company receives a variable rate of interest and pays interest at a fixed rate on the notional amount.

The Company also has interest rate swaps whereby the Company receives a fixed rate of interest and pays interest at a variable rate on the notional amount of its Senior U.S. unsecured notes. These swaps are being used to hedge the exposure to changes in the fair value of the debt.

The Company analyzes its interest rate risk exposure on an ongoing basis using various scenarios to simulate refinancing or the renewal of existing positions. Based on these scenarios, a change in the interest rate of 1% would not have had a significant impact on net earnings and comprehensive income.

Currency risk

The Company operates internationally and is exposed to risk from changes in foreign currency exchange rates. The Company mitigates this risk principally through foreign currency denominated debt and use of derivative financial instruments. The Company enters into foreign currency forward contracts to hedge forecasted cash flows or contractual cash flows in currencies other than the functional currency of its subsidiaries. The Company has entered into foreign currency forward contracts to hedge the variability in various foreign currency exchange rates on future U.S. dollar, Canadian dollar, euro and Swedish krona revenues.

The Company hedges a portion of the translation of the Company’s net investments in its U.S. and European operations into Canadian dollar with unsecured committed revolving credit facility, Senior U.S. and euro unsecured notes.


Consolidated Financial Statements

 

Notes to the Consolidated Financial Statements

For the years ended September 30, 2014 and 2013

(tabular amounts only are in thousands of Canadian dollars, except per share data)

 

 

 

31. Financial instruments (continued)

 

MARKET RISK (CONTINUED)

 

The Company also hedges a portion of the translation of the Company’s net investments in its European operations with fixed-to-fixed and floating-to-floating cross-currency swaps. These swaps convert Canadian dollar based fixed and variable interest payments to euro based fixed and variable interest payments associated with the notional amount. During the year ended September 30, 2014, the Company settled a floating-to-floating cross-currency swap for a net amount of $28,924,000. The loss on settlement was recognized in other comprehensive income and will be transferred to earnings when the net investment is disposed of.

During the year ended September 30, 2014, the Company entered into a foreign currency forward contract to hedge the net investment in its U.S. operations. The foreign currency forward contract was subsequently settled for an amount of $8,792,000. The loss on settlement was recognized in other comprehensive income and will be transferred to earnings when the net investment is disposed of.

Hedging relationships are designated and documented at inception and quarterly effectiveness assessments are performed during the year.

In addition, to mitigate foreign exchange risk arising from transactions denominated in currencies other than the Company’s functional currency, assets and liabilities not denominated in the functional currencies are hedged economically. During the year ended September 30, 2013, a fair value gain on the cross-currency swap amounted to $21,325,000 and was offsetting a translation exchange loss on the unsecured committed term loan credit facility of $21,600,000. A fair value loss of $6,992,000 on the foreign currency forward contracts was also offsetting a translation exchange gain. The gains and losses on the economic hedges and the hedged instruments were recorded in foreign exchange gain in the consolidated statements of earnings. As at September 30, 2013, these contracts were terminated, and no such transactions occurred for the year ended September 30, 2014.

The Company is mainly exposed to fluctuations in the Swedish krona, U.S. dollar, the euro and the British pound. The following table details the Company’s sensitivity to a 10% strengthening of the Swedish krona, U.S. dollar, the euro and the British pound foreign currency rates on net earnings and comprehensive income against the Canadian dollar. The sensitivity analysis on net earnings presents the impact of foreign currency denominated financial instruments and adjusts their translation at period end for a 10% strengthening in foreign currency rates. The sensitivity analysis on other comprehensive income presents the impact of a 10% strengthening in foreign currency rates on the fair value of foreign currency forward contracts designated as cash flow hedges and on net investment hedges.

 

                              2014                             2013  
      Swedish
krona impact
     U.S.
dollar
impact
     euro
impact
     British
pound
impact
    Swedish
krona impact
     U.S. dollar
impact
     euro
impact
     British
pound
impact
 

(Decrease) increase in net earnings

     (402)         (1,178)         7,787         (73     11,548         6,682         5,921         55   

Decrease in other comprehensive income

     (2,171)         (149,474)         (143,468)                        (71,751)         (150,066)           


FISCAL 2014 RESULTS

 

Notes to the Consolidated Financial Statements

For the years ended September 30, 2014 and 2013

(tabular amounts only are in thousands of Canadian dollars, except per share data)

 

 

 

31. Financial instruments (continued)

 

LIQUIDITY RISK

Liquidity risk is the risk that the Company is not able to meet its financial obligations as they fall due or can do so only at excessive cost. The Company’s activities are financed through a combination of the cash flows from operations, borrowing under existing credit facilities, the issuance of debt and the issuance of equity. One of management’s primary goals is to maintain an optimal level of liquidity through the active management of the assets and liabilities as well as the cash flows.

The following table summarizes the carrying amount and the contractual maturities of both the interest and principal portion of significant financial liabilities. All amounts contractually denominated in foreign currency are presented in Canadian dollar equivalent amounts using the period-end spot rate.

 

 As at September 30, 2014   

Carrying

amount

    

Contractual

cash flows

    

Less than one  

year  

    

Between one

and

two years

    

Between

two and five

years

    

Beyond

five years

 
     $        $      $        $      $      $  

 Non-derivative financial liabilities

                 

Accounts payable and accrued liabilities

     1,060,380         1,060,380         1,060,380                           

Accrued compensation

     583,979         583,879         583,879                           

Senior U.S. & euro unsecured notes

     1,476,537         1,912,490         58,900         58,900         571,595         1,223,095   

Unsecured committed term loan credit facility

     1,001,752         1,051,603         27,732         1,023,871                   

Obligations other than finance leases

     117,680         124,475         42,838         36,394         45,243           

Obligations under finance leases

     61,698         64,397         33,813         21,323         9,261           

Other long-term debt

     22,036         22,036         8,286         3,726         3,562         6,462   

Clients’ funds obligations

     292,257         292,257         292,257                           

 Derivative financial liabilities

                 

Cash flow hedges on future revenue

     (17,625)                  

Outflow

        6,959         4,731         2,113         115           

(Inflow)

        (26,041)         (9,658)         (9,415)         (6,968)           

Cross-currency swaps

     136,203                  

Outflow

        1,140,662         21,686         1,118,976                   

(Inflow)

        (1,023,136)         (32,566)         (990,570)                   

Interest rate swaps

     10,853                  

Outflow

        848,249         16,687         498,726         28,697         304,139   

(Inflow)

              (879,626)         (20,053)         (502,440)         (41,950)         (315,183)   
       4,745,750         5,178,584         2,088,912         1,261,604         609,555         1,218,513   


Consolidated Financial Statements

 

Notes to the Consolidated Financial Statements

For the years ended September 30, 2014 and 2013

(tabular amounts only are in thousands of Canadian dollars, except per share data)

 

 

 

31. Financial instruments (continued)

 

LIQUIDITY RISK (CONTINUED)

 

 As at September 30, 2013

 

  

Carrying

amount

 

    

Contractual

cash flows

 

    

Less than one  

year  

 

    

Between one

and

two years

 

    

Between

two and five

years

 

    

Beyond

five years

 

 
     $        $      $        $      $      $  

 Non-derivative financial liabilities

                 

Accounts payable and accrued liabilities

     1,119,034         1,119,034         1,119,034                           

Accrued compensation

     713,933         713,933         713,933                           

Senior U.S. unsecured notes

     475,787         643,324         22,308         22,308         149,547         449,161   

Unsecured committed revolving credit facility

     254,818         273,935         6,000         6,000         261,935           

Unsecured committed term loan credit facility

     1,974,490         2,105,910         544,955         536,547         1,024,408           

Obligations other than finance leases

     79,446         84,392         21,940         24,861         37,449         142   

Obligations under finance leases

     67,928         71,200         23,870         24,459         22,470         401   

Other long-term debt

     14,081         14,081         5,023         1,129         2,972         4,957   

Clients’ funds obligations

     220,279         220,279         220,279                           

Derivative financial liabilities

                 

Cash flow hedges on future revenue

     9,696                  

Outflow

        13,523         6,740         4,679         2,104           

(Inflow)

        (2,746)         (1,367)         (631)         (748)           

Cross-currency swaps

     137,795                  

Outflow

        1,356,654         25,153         231,178         1,100,323           

(Inflow)

        (1,248,720)         (37,835)         (220,777)         (990,108)           

Interest rate swaps

     12,639                  

Outflow

        1,596,637         474,184         318,714         515,635         288,104   

(Inflow)

              (1,625,755)         (475,879)         (321,066)         (526,778)         (302,032)   
       5,079,926         5,335,681         2,668,338         627,401         1,599,209         440,733   

As at September 30, 2014, the Company holds cash and cash equivalents, short-term investments and long-term investments of $566,404,000 ($126,601,000 as at September 30, 2013). The Company also has available $1,463,280,000 in unsecured committed revolving credit facility ($1,210,630,000 as at September 30, 2013). The funds held for clients of $295,754,000 ($222,469,000 as at September 30, 2013) fully cover the clients’ funds obligations. As at September 30, 2014, accounts receivable amount to $1,036,068,000 ($1,205,625,000 as at September 30, 2013). Given the Company’s available liquid resources as compared to the timing of the payments of liabilities, management assesses the Company’s liquidity risk to be low.


FISCAL 2014 RESULTS

 

Notes to the Consolidated Financial Statements

For the years ended September 30, 2014 and 2013

(tabular amounts only are in thousands of Canadian dollars, except per share data)

 

31. Financial instruments (continued)

 

CREDIT RISK

The Company takes on exposure to credit risk, which is the risk that a counterparty will be unable to pay amounts in full when due. Financial instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents, short-term investments, accounts receivable and long-term investments. The maximum exposure of credit risk is generally represented by the carrying amount of these items reported on the consolidated balance sheets.

Cash equivalents consist mainly of highly liquid investments, such as money market funds and term deposits, as well as bankers’ acceptances and bearer deposit notes issued by major banks (Note 4). The Company has deposited its cash and cash equivalents with reputable financial institutions, from which management believes the risk of loss to be remote.

The Company is exposed to credit risk in connection with short-term investments, long-term investments through the possible inability of borrowers to meet the terms of their obligations. The Company mitigates this risk by investing primarily in high credit quality corporate and government bonds with a credit rating of A or higher.

The Company has accounts receivable derived from clients engaged in various industries including governmental agencies, finance, telecommunications, manufacturing and utilities that are not concentrated in any specific geographic area. These specific industries may be affected by economic factors that may impact accounts receivable. However, management does not believe that the Company is subject to any significant credit risk in view of the Company’s large and diversified client base. Overall, management does not believe that any single industry or geographic region represents a significant credit risk to the Company. The following table sets forth details of the age of accounts receivable that are past due:

 

      2014      2013  
     $         $   

Not past due

     716,435         814,054   

Past due 1-30 days

     86,796         109,942   

Past due 31-60 days

     29,133         43,909   

Past due 61-90 days

     15,012         32,309   

Past due more than 90 days

     30,982         21,022   
     878,358         1,021,236   

Allowance for doubtful accounts

     (4,892)         (2,246)   
       873,466         1,018,990   

The carrying amount of accounts receivable is reduced by an allowance account and the amount of the loss is recognized in the consolidated statements of earnings within costs of services, selling and administrative. When a receivable balance is considered uncollectible, it is written off against the allowance for doubtful accounts. Subsequent recoveries of amounts previously written off are credited against costs of services, selling and administrative in the consolidated statements of earnings.


Consolidated Financial Statements

 

Notes to the Consolidated Financial Statements

For the years ended September 30, 2014 and 2013

(tabular amounts only are in thousands of Canadian dollars, except per share data)

 

32. Capital risk management

The Company is exposed to risks of varying degrees of significance which could affect its ability to achieve its strategic objectives for growth. The main objectives of the Company’s risk management process are to ensure that risks are properly identified and that the capital base is adequate in relation to these risks.

The Company manages its capital to ensure that there are adequate capital resources while maximizing the return to shareholders through the optimization of the debt and equity balance. As at September 30, 2014, total managed capital was $8,234,832 ($7,048,848 as at September 30, 2013). Managed capital consists of long-term debt, including the current portion (Note 14), cash and cash equivalents (Note 4), short-term investments, long-term investments (Note 11) and shareholders’ equity. The basis for the Company’s capital structure is dependent on the Company’s expected business growth and changes in the business environment. When capital needs have been specified, the Company’s management proposes capital transactions for the approval of the Company’s Audit and Risk Management Committee and Board of Directors. The capital risk policy remains unchanged from prior periods.

The Company monitors its capital by reviewing various financial metrics, including the following:

 

- Debt/Capitalization

 

- Net Debt/Capitalization

 

- Debt/EBITDA

Debt represents long-term debt, including the current portion. Net debt, capitalization and EBITDA are additional measures. Net debt represents debt (including the impact of the fair value of derivative financial instruments) less cash and cash equivalents, short-term investments and long-term investments. Capitalization is shareholders’ equity plus debt. EBITDA is calculated as earnings from continuing operations before income taxes, interest expense on long-term debt, depreciation, amortization and integration-related costs. The Company believes that the results of the current internal ratios are consistent with its capital management objectives.

The Company is subject to external covenants on its Senior U.S. and euro unsecured notes and unsecured committed term loan credit facility. The ratios are as follows:

 

- A leverage ratio, which is the ratio of total debt to EBITDA for the four most recent quarters1.

 

- An interest and rent coverage ratio, which is the ratio of the EBITDAR for the four most recent quarters to the total interest expense and the operating rentals in the same periods. EBITDAR, a non-GAAP measure, is calculated as EBITDA before rent expense1.

 

- In the case of the Senior U.S. and euro unsecured notes, a minimum net worth is required, whereby shareholders’ equity, excluding foreign exchange translation adjustments included in accumulated other comprehensive income, cannot be less than a specified threshold.

These ratios are calculated on a consolidated basis.

The Company is in compliance with these covenants and monitors them on an ongoing basis. The ratios are also reviewed quarterly by the Company’s Audit and Risk Management Committee. The Company is not subject to any other externally imposed capital requirements.

 

1  In the event of an acquisition, the available historical financial information of the acquired Company will be used in the computation of the ratios.


FISCAL 2014 RESULTS

 

 

Management’s Discussion and Analysis of Financial

Position and Results of Operations

November 13, 2014

Basis of Presentation

This Management’s Discussion and Analysis of the Financial Position and Results of Operations (“MD&A”) is the responsibility of management and has been reviewed and approved by the Board of Directors. This MD&A has been prepared in accordance with the requirements of the Canadian Securities Administrators. The Board of Directors is ultimately responsible for reviewing and approving the MD&A. The Board of Directors carries out this responsibility mainly through its Audit and Risk Management Committee, which is appointed by the Board of Directors and is comprised entirely of independent and financially literate directors.

Throughout this document, CGI Group Inc. is referred to as “CGI”, “we”, “our” or “Company”. This MD&A provides information management believes is relevant to an assessment and understanding of the consolidated results of operations and financial condition of the Company. This document should be read in conjunction with the audited consolidated financial statements and the notes thereto for the years ended September 30, 2014 and 2013. CGI’s accounting policies are in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). All dollar amounts are in Canadian dollars unless otherwise indicated.

Materiality of Disclosures

This MD&A includes information we believe is material to investors. We consider something to be material if it results in, or would reasonably be expected to result in, a significant change in the market price or value of our shares, or if it is likely that a reasonable investor would consider the information to be important in making an investment decision.

Forward-Looking Statements

All statements in this MD&A that do not directly and exclusively relate to historical facts constitute “forward-looking statements” within the meaning of that term in Section 27A of the United States Securities Act of 1933, as amended, and Section 21E of the United States Securities Exchange Act of 1934, as amended, and are “forward-looking information” within the meaning of Canadian securities laws. These statements and this information represent CGI’s intentions, plans, expectations and beliefs, and are subject to risks, uncertainties and other factors, of which many are beyond the control of the Company. These factors could cause actual results to differ materially from such forward-looking statements or forward-looking information. These factors include but are not restricted to: the timing and size of new contracts; acquisitions and other corporate developments; the ability to attract and retain qualified members; market competition in the rapidly evolving information technology industry; general economic and business conditions; foreign exchange and other risks identified in the MD&A, in CGI’s Annual Report on Form 40-F filed with the U.S. Securities and Exchange Commission (filed on EDGAR at www.sec.gov), the Company’s Annual Information Form filed with the Canadian securities authorities (filed on SEDAR at www.sedar.com), as well as assumptions regarding the foregoing. The words “believe”, “estimate”, “expect”, “intend”, “anticipate”, “foresee”, “plan”, and similar expressions and variations thereof, identify certain of such forward-looking statements or forward-looking information, which speak only as of the date on which they are made. In particular, statements relating to future performance are forward-looking statements and forward-looking information. CGI disclaims any intention or obligation to publicly update or revise any forward-looking statements or forward-looking information, whether as a result of new information, future events or otherwise, except as required by applicable law. Readers are cautioned not to place undue reliance on these forward-looking statements or on this forward-looking information. You will find more information about the risks that could cause our actual results to differ significantly from our current expectations in Section 10 – Risk Environment.


Management’s Discussion and Analysis

 

 

Non-GAAP and Key Performance Measures

The reader should note that the Company reports its financial results in accordance with IFRS. However, we use a combination of financial measures, ratios, and non-GAAP measures to assess our Company’s performance. The non-GAAP measures used in this MD&A do not have any standardized meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other issuers. These measures should be considered as supplemental in nature and not as a substitute for the related financial information prepared in accordance with IFRS.

The table below summarizes our non-GAAP measures and most relevant key performance measures:

 

     

Profitability

  

  

Adjusted EBIT (non-GAAP) – is a measure of earnings before integration-related costs, finance costs, finance income and income tax expense as these items are not directly related to the cost of operations. Management believes this measure is useful to investors as it best reflects the profitability of our operations and allows for better comparability from period to period as well as to analyze the trends in our operations. A reconciliation of the yearly and current quarter’s adjusted EBIT to its closest IFRS measure can be found on pages 22 and 38.

   
    

  

Net earnings prior to specific items1 (non-GAAP) – is a measure of earnings before the integration-related costs, adjustments related to tax and the resolution of acquisition-related provisions. Management believes that this measure is useful to investors as it best reflects the Company’s operating profitability and allows for better comparability from period to period. A reconciliation of the yearly and current quarter’s net earnings prior to specific items to its closest IFRS measure can be found on pages 24 and 39.

   
    

 

  

Basic and diluted earnings per share prior to specific items1 (non-GAAP) – is defined as the net earnings excluding integration-related costs, adjustments related to tax and the resolution of acquisition-related provisions on a per share basis, assuming all dilutive elements are exercised. Management believes that this measure is useful to investors as it best reflects the Company’s operating profitability on a per share basis and allows for better comparability from period to period. The yearly and current quarter’s diluted net earnings reported in accordance with IFRS can be found on pages 23 and 38 while the yearly and current quarter’s diluted net earnings prior to specific items can be found on pages 24 and 39.

 

    

 

  

Net earnings – is a measure of earnings generated for shareholders.

 

   
    

 

  

Diluted earnings per share – 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 (“DSO”) (non-GAAP) – is the average number of days needed to convert our trade receivables and work in progress into cash. DSO 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. Deferred revenue is net of the fair value adjustments on revenue-generating contracts. Management tracks this metric closely to ensure timely collection, healthy liquidity, and is committed to a DSO target of 45 days or less. We believe this measure is useful to investors as it demonstrates the Company’s ability to timely convert its trade receivables and work in progress into cash.

 

 

 

1 Specific items related to the resolution of acquisition-related provisions are described on page 20.


FISCAL 2014 RESULTS

 

 

 

 

Growth

  

• 

  

 

Constant currency growth (non-GAAP) – 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. Management believes that it is helpful to adjust revenue to exclude the impact of currency fluctuations to facilitate period-to-period comparisons of business performance. We believe that this measure is useful to investors for the same reason.

   
    

• 

  

Backlog (non-GAAP) – Backlog includes new contract wins, extensions and renewals (“bookings”(non- GAAP)), partially offset by the backlog consumed during the year 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. Management tracks this measure as it is a key indicator of management’s best estimate of revenue to be realized in the future and believes that this measure is useful to investors for the same reason.

   
    

• 

 

  

Book-to-bill ratio (non-GAAP) – is a measure of the proportion of the value of our 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 trailing 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 (non-GAAP) – is obtained by subtracting our cash and cash equivalents, short-term investments and long-term investments from our debt. Management uses the net debt metric to monitor the Company’s financial leverage. We believe that this metric is useful to investors as it provides insight into our financial strength. A reconciliation of net debt to its closest IFRS measure can be found on page 30.

   
    

• 

  

Net debt to capitalization ratio (non-GAAP) – is a measure of our level of financial leverage and is obtained by dividing the net debt by the sum of shareholder’s equity and debt. Management uses the net debt to capitalization metric to monitor the proportion of debt versus capital used to finance our operations and to assess the Company’s financial strength. We believe that this metric is useful to investors as it provides insight into our financial strength.

   
    

• 

  

Return on equity (“ROE”) (non-GAAP) – is a measure of the rate of return on the ownership interest of our shareholders and is calculated as the proportion of earnings for the last 12 months over the last four quarter’s average equity. 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. We believe that this measure is useful to investors for the same reasons.

   
    

• 

 

  

Return on invested capital (“ROIC”) (non-GAAP) – is a measure of the Company’s efficiency at allocating the capital under its control to profitable investments and is calculated as the proportion of the after-tax adjusted EBIT for the last 12 months, over the last four quarter’s average invested capital, which is defined as the sum of equity and net debt. Management examines this ratio to assess how well it is using its funds to generate returns. We believe that this measure is useful to investors for the same reason.

 

Reporting Segments

The Company is managed through the following seven operating segments, namely: United States of America (“U.S.”); Nordics, Southern Europe and South America (“NSESA”); Canada; France (including Luxembourg and Morocco) (“France”); United Kingdom (“U.K.”); Central and Eastern Europe (primarily the Netherlands and Germany) (“CEE”); and Asia Pacific (including Australia, India and the Philippines) (“Asia Pacific”). Please refer to section 3.4 and 3.6 of the present document and to Note 28 of our audited consolidated financial statements for additional information on our segments.

To assist in better understanding the operational performance of our company since the acquisition of Logica plc (“Logica”) in 2012, we refer to our operations in two broad groupings. Our activities prior to Logica were predominantly comprised of the Canada and the U.S. segments which we refer to as our North American operations or segments. The acquired operations which we refer herein as our European operations or segments is comprised of the NSESA, France, U.K., CEE and Asia Pacific segments.


Management’s Discussion and Analysis

 

 

MD&A Objectives and Contents

 

  Provide a narrative explanation of the audited consolidated financial statements through the eyes of management;

 

  Provide the context within which the audited 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.

In order to achieve these objectives, this MD&A is presented in the following main sections:

 

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

    6
    

1.3.      Competitive Environment

 

     

7

 

 

2.     Highlights and Key  Performance
 Measures

  

 

A summary of key achievements during the year and past three years’ key performance measures as well as CGI’s share performance.

     
  

 

2.1.      Fiscal 2014 Highlights

    9
    

2.2.      Selected Yearly Information & Key Performance Measures

    11
    

2.3.      Stock Performance

 

     

12

 

 

3.     Financial Review

  

 

A discussion of year-over-year changes to operating results between the years ended September 30, 2014 and 2013, describing the factors affecting revenue and adjusted EBIT 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, by vertical market, by contract type and by service type.

     
   
    

3.1.      Bookings and Book-to-Bill Ratio

    14
    

3.2.      Foreign Exchange

    15
    

3.3.      Revenue Distribution

    16
    

3.4.      Revenue Variation and Revenue by Segment

    17
    

3.5.      Operating Expenses

    19
    

3.6.      Adjusted EBIT by Segment

    20
    

3.7.      Earnings before Income Taxes

    22
    

3.8.      Net Earnings and Earnings Per Share (“EPS”)

 

     

23

 


FISCAL 2014 RESULTS

 

 

 

Section

 

  

 

Contents

 

      

Pages

 

 

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 sales 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.      Consolidated Statements of Cash Flows

    25
    

4.2.      Capital Resources

    28
    

4.3.      Contractual Obligations

    29
    

4.4.      Financial Instruments and Hedging Transactions

    29
    

4.5.      Selected Measures of Liquidity and Capital Resources

    30
    

4.6.      Off-Balance Sheet Financing and Guarantees

    31
    

4.7.      Capability to Deliver Results

 

    31

 

5.     Fourth Quarter
 Results

  

 

A discussion of year-over-year changes to operating results between the three months ended September 30, 2014 and 2013, describing the factors affecting revenue, adjusted EBIT earnings on a consolidated and reportable segment basis as well as cash from operating activities. Also discussed are bookings for the three months ended September 30, 2014.

       
   
    

5.1.      Foreign Exchange

    33
    

5.2.      Revenue Variation and Revenue by Segment

    34
    

5.3.      Adjusted EBIT by Segment

    36
    

5.4.      Net Earnings and Earnings Per Share

    38
    

5.5.      Consolidated Statements of Cash Flows

 

    40

 

6.     Eight Quarter
 Summary

 

  

 

A summary of the past eight quarters’ key performance measures and a discussion of the factors that could impact our quarterly results.

 

      41

 

7.     Changes in
 Accounting Policies

 

  

 

A summary of the new and amended accounting standards adopted and the future accounting standard changes.

 

    42

 

8.     Critical Accounting  Estimates and  Judgements

 

 

  

 

A discussion of the estimates and judgements made in the preparation of the audited consolidated financial statements.

      44

 

9.     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.

    47

 

 

10.   Risk Environment

  

 

 

A discussion of the risks affecting our business activities and what may be the impact if these risks are realized.

       
   
    

10.1.   Risks and Uncertainties

 

    48
    

10.2.   Legal Proceedings

 

      54


Management’s Discussion and Analysis

 

 

 

1.

Corporate Overview

 

LOGO

1.1. ABOUT CGI

Founded in 1976 and headquartered in Montreal, Canada, CGI is the fifth largest independent information technology (“IT”) and business process services (“BPS”) firm in the world. CGI has approximately 68,000 employees, whom we refer to as members, worldwide. The Company’s client-proximity model provides for CGI services and solutions to be delivered in a number of ways and considering a number of factors: onsite at clients’ premises; or from any combination of onsite, near-shore and/or offshore delivery centers. We also have a number of leading business solutions that support long-term client relationships. Our services are broken down as:

 

   

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 these agreements, we implement our quality processes and practices to improve the efficiency of the clients’ operations. We may 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, claims processing, and document management services. Outsourcing contracts typically have terms from five to ten years.

CGI offers its end-to-end services to a focused set of industry vertical markets where we have developed extensive and deep subject matter expertise. This allows us to fully understand our clients’ business realities and to have the knowledge and solutions needed to advance their business goals. Our targeted vertical markets include: financial services, government, health, telecommunications & utilities, manufacturing, retail and distribution (“MRD”), which together account for more than 90% of global IT spend.

CGI has a wide range of proprietary business solutions that help shape opportunities and drive value for our clients and shareholders. Examples of these include Enterprise Resource Planning solutions, energy management, credit and debt collections, tax management, claims auditing and fraud detection.

We take great pride in delivering high quality services to our clients. To do so consistently, we have implemented and continue to maintain the International Organization for Standardization (“ISO”) quality program. By designing and implementing rigorous service delivery and quality standards, followed by monitoring and measurement, we are better able to satisfy our clients’ needs. As a measure of the scope of our ISO program, all of CGI’s legacy business units continue to be certified and most of the business units acquired through the acquisition of Logica are certified as well. The work on certifying the remaining business units is in progress.

1.2. VISION AND STRATEGY

At CGI, we have a vision of being a global world-class IT and BPS leader, who helps its clients succeed. This business vision begins with our dream, which is “to create an environment in which we enjoy working together and, as owners, contribute to building a Company we can be proud of.” From this dream we developed our build and buy strategy, comprised of four pillars that combine organic growth (“build”) and acquisitions (“buy”).


FISCAL 2014 RESULTS

 

 

The first two pillars of our strategy focus on organic growth. The first pillar focuses on smaller contract wins, renewals and extensions. The second involves the pursuit of new large, long-term outsourcing contracts, leveraging our end-to-end services, global delivery model and critical mass.

The third pillar of our growth strategy focuses on the acquisition of smaller firms or niche players. We identify niche acquisitions through a strategic mapping program that systematically searches for targets that will strengthen our vertical market knowledge or increase the richness of our service offerings.

The fourth pillar involves the pursuit of transformational acquisitions focused on expanding our geographic presence and critical mass. This approach further enables us to strengthen our qualifications to compete for large outsourcing contracts. CGI continues to be a consolidator in the IT services industry.

This four-pillar growth strategy has resulted in our ability to build critical mass in key client geographies, gain a deep knowledge of clients’ business sectors and develop specialized practices and innovative solutions.

CGI remains committed to profitable growth and the fundamentals that help all of CGI’s stakeholders succeed; while fulfilling CGI’s strategic objective of doubling the size of the Company.

Today, with a presence in 40 countries, strong expertise in all of our target markets and a complete range of IT services, CGI is able to meet our clients’ business needs anywhere, anytime. While remaining true to our Constitution, CGI continues to adapt to best respond to changes in the IT market, the local and global business climate of clients, and to our professionals’ and shareholders’ expectations.

1.3. COMPETITIVE ENVIRONMENT

As a global provider of end-to-end information technology and business process services, CGI operates in a highly competitive and rapidly evolving global industry. Our competition comprises a variety of global players, from niche companies providing specialized services to other end-to-end service providers, mainly in the U.S., Europe and India, all of whom are competing to deliver some or all of the services we provide.

Recent mergers and acquisition activity has resulted in CGI being positioned as one of the few remaining IT services firms that operates independently of any hardware or software vendor. Our independence allows CGI to deliver the best-suited technology available to our clients.

CGI offers its end-to-end services to a select set of targeted vertical markets in which we have deep business and technical expertise. To compete effectively, CGI focuses on high-end systems integration, consulting and outsourcing where vertical market industry knowledge and expertise are required.

Our business model is designed to listen to the needs of our clients and adapt our offerings to provide the best solutions to meet each client’s unique needs. Our client approach focuses on:

Local accountability: We live and work near our clients to provide a high level of responsiveness. We speak our clients’ language, understand their business environment, and collaborate with them to meet their goals and advance their business.

Global capabilities: Our local presence is backed by an expansive global delivery network that ensures our clients have access to resources that best fit their needs and offer proximity.

Quality processes: Our investment in quality frameworks and rigorous client satisfaction assessments provides for a consistent track record of on-time and on-budget project delivery, enabling our clients to focus on their business objectives.

Committed experts: Our professionals have vast industry, business and technology expertise to help our clients. In addition, a majority of our professionals are shareholders of the Company, providing an added level of commitment to our clients’ success.

Practical innovation: We provide a full set of innovative solutions in areas of big data, predictive analytics and mobility, which are complemented by our expertise in business consulting, systems integration and outsourcing services to offer creative business strategies to our clients.


Management’s Discussion and Analysis

 

 

CGI’s business operations are based on the Management Foundation (the “Management Foundation”), encompassing governance policies, sophisticated management frameworks and an organizational model for its business units and corporate processes. This foundation, along with our appropriate internal systems is followed by all our business units and helps in providing a disciplined high standard of quality service to our clients across all of our operations, and additional value to our stakeholders.

There are many factors involved in winning and retaining IT and BPS contracts, including the following: total cost of services; ability to deliver; track record; vertical market expertise; investment in business solutions; local presence; global delivery capability; and the strength of client relationships. CGI compares favourably with its competition with respect to all of these factors.

In summary, CGI’s competitive value proposition encompasses the following: end-to-end IT and BPS capability; expertise and proprietary business solutions in our targeted vertical markets covering the majority of global IT spending; a unique global delivery model, which includes industry leading delivery capabilities; a disciplined Management Foundation; and our focus on client satisfaction which is supported by our client proximity business model.


FISCAL 2014 RESULTS

 

 

 

2.

Highlights and Key Performance Measures

 

LOGO

2.1. FISCAL 2014 HIGHLIGHTS

Key performance figures for the year include:

 

   

Revenue of $10,499.7 million, up 4.1%;

 

   

Adjusted EBIT of $1,356.9 million, up 26.1%;

 

   

Adjusted EBIT margin of 12.9%, up 220 basis points;

 

   

Net earnings prior to specific items1 of $893.5 million, or diluted EPS of $2.80, up 22.8%;

 

   

Net earnings of $859.4 million, or diluted EPS of $2.69, up 88.5%;

 

   

Cash provided by operating activities of $1,174.8 million, up 75.0%;

 

   

Bookings of $10.2 billion and backlog of $18.2 billion;

 

   

Net debt reduced by $626.6 million;

 

   

Return on invested capital of 14.5%;

 

   

Return on equity of 18.8%.

1 Specific items include the integration costs related to the acquisition of Logica, the tax adjustments and the resolution of acquisition-related provisions which are discussed on page 20.

2.1.1. Acquisition of Logica plc

On August 20, 2012, CGI completed its acquisition of Logica for 105 pence ($1.63) per ordinary share which is equivalent to a total purchase price of $2.7 billion plus the assumption of Logica’s net debt of $0.9 billion. Subsequent to August 20, 2012, our results incorporated the operations of Logica.

As of September 30, 2014, we completed the integration of Logica, a full year earlier than planned. In addition to the previously announced $525 million program, we actioned an incremental $26.5 million of new opportunities while foreign currency fluctuations unfavorably impacted the program by approximately $24.0 million over the two-year period. In summary, a total of $575.5 million in one-time costs were spent to drive annual savings in excess of $400 million and EPS accretion to CGI.

The following table provides a summary of the integration program:

 

Summary of the integration program   

 

Total program   
as of Q4 2014   

 

 

(In millions of CAD)

  

 

 

Integration-related provision at the beginning of the program

  

 

—   

 

Plus:

  

 

Integration-related expenses

  

 

575.5   

 

Minus:

  

 

Integration-related payments

  

 

472.7   

 

Non-cash integration-related costs

  

 

7.2   

 

Plus : FX impact a

 

  

 

10.0   

 

Integration-related provision at the end of the year

   105.6   

a This amount was recorded in other comprehensive income.


Management’s Discussion and Analysis

 

 

2.1.2. Long-term Debt

In the first quarter of fiscal 2014, the unsecured revolving credit facility of $1,500.0 million was extended by one year to December 2017. On July 25, 2014, the facility was further extended by another year to December 2018 and can be further extended annually. All other terms and conditions including interest rates and banking covenants remain unchanged.

In April 2014, we repaid the first maturing tranche of the term loan credit facility of $486.7 million using the proceeds from our credit facilities.

In September 2014, the Company entered into a $955 million debt private placement comprised of four tranches of Senior U.S. unsecured notes for US$745 million, and one tranche of Senior euro unsecured note for 85 million, with a weighted average maturity of 7.9 years and a weighted average fixed coupon of 3.62%. The Company used the proceeds of the issuance of the new private placement notes to repay the May 2015 maturing tranche of the term loan credit facility of $494.7 million and the outstanding balance of the credit facilities. Further details are provided in section 4.1.3 of the present document.


FISCAL 2014 RESULTS

 

 

2.2. SELECTED YEARLY INFORMATION & KEY PERFORMANCE MEASURES

Fiscal 2014 marks the second full year incorporating Logica’s results. Planned as part of our integration activities we have been exiting low margin business to improve our revenue quality. In addition, we have been restructuring the prior Logica operations to align their cost structures to appropriate levels. As a result, our profitability and cash from operating activities have improved. The acquisition of Logica was completed on August 20, 2012, six weeks prior to the end of fiscal 2012. The significant year-over-year changes for fiscal 2012 through fiscal 2013 are primarily attributable to this acquisition.

 

As at and for the years ended September 30,    2014      2013      2012     

 

Change
2014 / 2013

 

    

 

Change
2013 / 2012

 

 
In millions of CAD unless otherwise noted                                 

Growth

              

Backlog

   18,237         18,677         17,647         (440)         1,030   

Bookings

   10,169         10,310         5,180         (141)         5,130   

Book-to-bill ratio

   96.8%         102.2%         108.5%         (5.4%)         (6.3)%   

Revenue

   10,499.7         10,084.6         4,772.5         415.1         5,312.1   

Year-over-year growth

   4.1%         111.3%         13.0%         (107.2%)         98.3%   

Constant currency growth 1

 

  

(2.9%)   

 

    

 

110.1%

 

  

 

    

 

12.1%

 

  

 

    

 

(113.0%)

 

  

 

     98.0%   

Profitability

              

Adjusted EBIT 2

   1,356.9         1,075.6         546.7         281.3         528.9   

Adjusted EBIT margin

   12.9%         10.7%         11.5%         2.2%         (0.8%)   

Net earnings

   859.4         455.8         131.5         403.6         324.3   

Net earnings margin

   8.2%         4.5%         2.8%         3.7%         1.7%   

Basic EPS (in dollars)

   2.78         1.48         0.50         1.30         0.98   

Diluted EPS (in dollars)

 

  

2.69   

 

    

 

1.44

 

  

 

    

 

0.48

 

  

 

    

 

1.25

 

  

 

    

 

0.96

 

  

 

Liquidity

              

Cash provided by operating activities

   1,174.8         671.3         613.3         503.5         58.0   

As a % of revenue

   11.2%         6.7%         12.9%         4.5%         (6.2%)   

Days sales outstanding 3, 8

 

  

43   

 

    

 

49

 

  

 

    

 

74

 

  

 

    

 

(6)

 

  

 

    

 

(25)

 

  

 

Capital structure

              

Net debt 4, 8

   2,113.3         2,739.9         3,105.3         (626.6)         (365.4)   

Net debt to capitalization ratio 5, 8

   27.6%         39.6%         46.5%         (12.0%)         (6.9%)   

Return on equity 6

   18.8%         12.3%         5.0%         6.5%         7.3%   

Return on invested capital 7

 

  

14.5%   

 

    

 

11.8%

 

  

 

    

 

11.4%

 

  

 

    

 

2.7%

 

  

 

    

 

0.4%

 

  

 

Balance sheet

              

Cash and cash equivalents, and short-term investments

   535.7         106.2         127.6         429.5         (21.4)   

Total assets 8

   11,234.1         10,879.3         10,690.2         354.8         189.1   

Long-term financial liabilities 8, 9

 

  

2,748.4   

 

    

 

2,489.5

 

  

 

    

 

3,228.9

 

  

 

    

 

258.9

 

  

 

    

 

(739.4)

 

  

 

 

  1 

Constant currency growth is adjusted to remove the impact of foreign currency exchange rate fluctuations. Please refer to page 17 for details.

 

  2 

Adjusted EBIT is a measure for which we provide the reconciliation to its closest IFRS measure on page 22.

 

  3 

Days sales outstanding (“DSO”) is a measure which is discussed on page 31.

 

  4

Net debt is a measure for which we provide the reconciliation to its closest IFRS measure on page 30.

 

  5

The net debt to capitalization ratio is a measure which is discussed on page 30.

 

  6 

The return on equity ratio is a measure which is discussed on page 30.

 

  7 

The return on invested capital ratio is a measure which is discussed on page 31.

 

  8 

The reader should note that the figures for fiscal 2012 were restated to reflect the final purchase price allocation adjustments made in fiscal 2013 to the opening balance sheet of Logica.

 

  9 

Long-term financial liabilities include the long-term portion of the debt and the long-term derivative financial instruments.


Management’s Discussion and Analysis

 

 

2.3. STOCK PERFORMANCE

 

LOGO

2.3.1. Fiscal 2014 Trading Summary

CGI’s shares are listed on the Toronto Stock Exchange (“TSX”) (stock quote – GIB.A) and the New York Stock Exchange (“NYSE”) (stock quote – GIB) and are included in the S&P/TSX Composite Index, the S&P/TSX 60 Index, the S&P/TSX Capped Information Technology and Midcap Indices, and the Dow Jones Sustainability Index.

 

TSX    (CDN$)           NYSE    (US$)  

Open:

     35.84          Open:      34.83   

High:

     41.47          High:      39.47   

Low:

     32.71          Low:      29.40   

Close:

     37.84          Close:      33.77   

CDN average daily trading volumes1:

     1,545,689          U.S. average daily trading volumes:      267,355   

1 Includes the average daily volumes of both the TSX and alternative trading systems.

2.3.2. Share Repurchase Program

On January 29, 2014, the Company’s Board of Directors authorized and subsequently received the approval from the TSX for the renewal of the Normal Course Issuer Bid (“NCIB”) to purchase up to 21,798,645 Class A subordinate shares for cancellation, representing 10% of the Company’s public float as of the close of business on January 24, 2014. The Class A subordinate shares may be purchased under the NCIB commencing February 11, 2014 and ending on the earlier of February 10, 2015, or the date on which the Company has either acquired the maximum number of Class A subordinate shares allowable under the NCIB, or elects to terminate the NCIB.


FISCAL 2014 RESULTS

 

 

During fiscal 2014, the Company repurchased 2,837,360 Class A subordinate shares for $111.5 million at an average price of $39.29 under the annual aggregate limit of the previous NCIB. As at September 30, 2014, the Company may purchase up to 21.8 million shares under the current NCIB.

2.3.3. Capital Stock and Options Outstanding

The following table provides a summary of the Capital Stock and Options Outstanding as at November 7, 2014:

 

 

Capital Stock and Options Outstanding

 

 

As at November 7, 2014  

Class A subordinate shares

  279,479,153  

Class B shares

  33,272,767  

Options to purchase Class A subordinate shares

 

 

19,510,102  

 


Management’s Discussion and Analysis

 

 

3.

Financial Review

 

LOGO

3.1. BOOKINGS AND BOOK-TO-BILL RATIO

Bookings for the year were $10.2 billion, representing a book-to-bill ratio of 96.8%. The breakdown of the new bookings signed during the year is as follows:

 

   

LOGO  

 

  

 

  Contract Type   
  A.  

Extensions and

renewals

    61
  B.   New business     39

 

 

 

LOGO  

 

 

  

 

 

  Service Type   
  A.     

Management of IT and

business functions

(outsourcing)

    50
  B.     

Systems integration and

consulting

    50

 

 

 

LOGO  

 

 

  

 

 

  Segment   
  A.      NSESA     26
  B.      U.S     19
  C.      France     15
  D.      Canada     14
  E.      U.K     14
  F.      CEE     11
  G.      Asia Pacific     1

 

 

LOGO  

 

  

 

  Vertical Markets   
  A.     

Manufacturing, retail &

distribution

    28
  B.      Government     28
  D.      Financial services     20
  C.     

Telecommunications &

utilities

    16
  E.      Health     8
 

Information regarding our bookings is a key indicator of the volume of our business over time. However, due to the timing and transition period associated with outsourcing contracts, the realization of revenue related to these bookings may fluctuate from period to period. The values initially booked may change over time due to their variable attributes, including demand-driven usage, modifications in the scope of work to be performed caused by changes in client requirements as well as termination clauses at the option of the client. As such, information regarding our bookings is not comparable to, nor should it be substituted for an analysis of our revenue; it is instead a key indicator of our future revenue used by the Company’s management to measure growth. For the year ended September 30, 2014, the book-to-bill ratio of our North American operations was at 76.0% while it was at 112.2% for our European operations for a total book-to-bill ratio of 96.8%.

The following table provides a summary of the bookings and book-to-bill ratio by segment:

 

 

In thousands of CAD except for percentages

 

 

 

Bookings for the
year ended
September 30,
2014

 

  

 

Book-to-bill ratio  
for the year ended  
September 30,  
2014  

 

    

Total CGI bookings

  10,168,998    96.8%  
    

North American bookings

  3,371,848    76.0%  

 

   U.S.

 

 

1,916,498

  

 

69.9%  

   Canada

 

 

1,455,350

 

  

85.7%  

 

 

European bookings

 

 

6,797,150

  

 

112.2%  

 

   NSESA

 

 

2,610,607

  

 

122.4%  

   France

  1,467,329    109.7%  

   U.K.

  1,437,209    104.0%  

   CEE

  1,142,889    109.9%  

   Asia Pacific

  139,116    82.4%  


FISCAL 2014 RESULTS

 

 

3.2. FOREIGN EXCHANGE

The Company operates globally and is exposed to changes in foreign currency rates. We report all dollar amounts in Canadian dollars. Accordingly, we value assets, liabilities and transactions that are measured in foreign currencies using various exchange rates as prescribed by IFRS.

Closing foreign exchange rates

 

       

As at September 30,

 

  

2014  

 

  

2013  

 

  

Change   

 

U.S. dollar

   1.1209      1.0285      9.0%   

Euro

   1.4156      1.3920      1.7%   

Indian rupee

   0.0181      0.0164      10.4%   

British pound

   1.8182      1.6639      9.3%   

Swedish krona

   0.1554      0.1604      (3.1%)  

Australian dollar

   0.9791      0.9607      1.9%   

Average foreign exchange rates

 

        
       

For the years ended September 30,

 

  

2014  

 

  

2013  

 

  

Change   

 

U.S. dollar

   1.0833      1.0155      6.7%   

Euro

   1.4700      1.3326      10.3%   

Indian rupee

   0.0178      0.0180      (1.1%)  

British pound

   1.7953      1.5846      13.3%   

Swedish krona

   0.1635      0.1551      5.4%   

Australian dollar

   0.9971      1.0105      (1.3%)   


Management’s Discussion and Analysis

 

 

3.3. REVENUE DISTRIBUTION

The following charts provide additional information regarding our revenue mix for the year:

 

LOGO                  LOGO                        LOGO     

 

   

 

   

 

Service Type     Client Geography         Vertical Markets  
  A.     Management of IT and business           A.     U.S    27%       A.     Government   33%
    functions (outsourcing)   52%       B.     Canada    15%       B.     Manufacturing,  
   

1.      IT services

  41%         C.     U.K    13%         retail & distribution   24%
   

2.      Business process services

  11%         D.     France    12%       C.     Financial services   18%
              E.     Sweden      9%       D.     Telecommunications & utilities   15%
  B.     Systems integration and consulting   48%       F.     Finland      6%       E.     Health   10%
              G.     Rest of the world    18%          

3.3.1. Client Concentration

IFRS guidance on Segment Disclosures defines a single customer as a group of entities that are known to the reporting enterprise to be under common control. The Company considers the federal, regional or local governments each to be a single customer. Our work for the U.S. federal government including its various agencies represented 13.4% of our revenue for fiscal 2014 as compared to 13.8% in fiscal 2013.


FISCAL 2014 RESULTS

 

 

3.4. REVENUE VARIATION AND REVENUE BY SEGMENT

Our seven segments are based on our geographic delivery model: U.S., NSESA, Canada, France, U.K., CEE and Asia Pacific.

The following table provides a summary of the year-over-year changes in our revenue, in total and by segment, separately showing the impacts of foreign currency exchange rate variations between fiscal 2014 and fiscal 2013. The fiscal 2013 revenue by segment was recorded reflecting the actual average foreign exchange rates for that period. The foreign exchange impact is the difference between the current period’s actual results and the current period’s results converted with the prior year’s average foreign exchange rates.

 

For the years ended September 30,                  

Change

 

 
   2014     2013      $     %  

In thousands of CAD except for percentages

         

Total CGI revenue

     10,499,692        10,084,624         415,068        4.1%   

Variation prior to foreign currency impact

     (2.9%       

Foreign currency impact

     7.0%          

Variation over previous period

     4.1%          

U.S.

         

Revenue prior to foreign currency impact

     2,493,426        2,512,530         (19,104     (0.8%

Foreign currency impact

     171,450          

U.S. revenue

     2,664,876        2,512,530         152,346        6.1%   

NSESA

         

Revenue prior to foreign currency impact

     1,944,864        2,010,693         (65,829     (3.3%

Foreign currency impact

     145,376          

NSESA revenue

     2,090,240        2,010,693         79,547        4.0%   

Canada

         

Revenue prior to foreign currency impact

     1,632,794        1,685,723         (52,929     (3.1%

Foreign currency impact

     5,526          

Canada revenue

     1,638,320        1,685,723         (47,403     (2.8%

France

         

Revenue prior to foreign currency impact

     1,207,907        1,273,604         (65,697     (5.2%

Foreign currency impact

     125,885          

France revenue

     1,333,792        1,273,604         60,188        4.7%   

U.K.

         

Revenue prior to foreign currency impact

     1,121,213        1,158,520         (37,307     (3.2%

Foreign currency impact

     162,634          

U.K. revenue

     1,283,847        1,158,520         125,327        10.8%   

CEE

         

Revenue prior to foreign currency impact

     968,727        1,003,950         (35,223     (3.5%

Foreign currency impact

     94,806          

CEE revenue

     1,063,533        1,003,950         59,583        5.9%   

Asia Pacific

         

Revenue prior to foreign currency impact

     425,676        439,604         (13,928     (3.2%

Foreign currency impact

     (592       

Asia Pacific revenue

     425,084        439,604         (14,520     (3.3%


Management’s Discussion and Analysis

 

 

We ended fiscal 2014 with revenue of $10,499.7 million, an increase of $415.1 million or 4.1% over fiscal 2013. On a constant currency basis, revenue decreased by $290.0 million or 2.9%, as foreign currency rate fluctuations favourably impacted our revenue by $705.1 million or 7.0%. For the current year, the top two vertical markets were government and MRD, which together accounted for approximately 56% of our revenue.

As part of the Company’s strategic focus to continuously improve its revenue quality, and as previously disclosed, we have been exiting low margin business as part of our integration activities. As a result, our yearly revenue has been reduced. Partially offsetting this, new higher quality revenue was booked or existing business expanded and/or extended across the geographies.

3.4.1. U.S.

Revenue in our U.S. segment was $2,664.9 million in fiscal 2014, an increase of $152.3 million or 6.1% over fiscal 2013. On a constant currency basis, revenue decreased by $19.1 million or 0.8%. The decrease in revenue reflects the run-off of a large low margin government project and the ramp down of Federal and state health projects partly offset by the ramp up of work within the financial services vertical markets and the increased sales of IP based business solutions.

For the current year, the top two U.S. vertical markets were government and health, which together accounted for approximately 77% of its revenue.

3.4.2. NSESA

Revenue in our NSESA segment was $2,090.2 million, an increase of $79.5 million or 4.0% over fiscal 2013. On a constant currency basis, revenue decreased by $65.8 million or 3.3%. The decrease in revenue was mainly due to project completions and the run-off of low margin business as previously described, partially offset by the recently awarded multi-year outsourcing contracts.

For fiscal 2014, revenue coming from Sweden and Finland accounted for 74% of this segment while NSESA’s top two vertical markets were MRD and government, which together accounted for approximately 58% of its revenue.

3.4.3. Canada

Revenue in our Canada segment was $1,638.3 million, a decrease of $47.4 million or 2.8% over fiscal 2013. On a constant currency basis, revenue decreased by $52.9 million or 3.1%. The revenue decrease was mainly due to lower work volumes as a result of the expiration of contracts that were partially offset by the start-up of new contracts.

For the current year, Canada’s top two vertical markets were financial services and telecommunication and utilities, which together accounted for approximately 57% of its revenue.

3.4.4. France

Revenue in our France segment was $1,333.8 million, an increase of $60.2 million or 4.7% over fiscal 2013. On a constant currency basis, revenue decreased by $65.7 million or 5.2%. The decrease in revenue was primarily the result of lower work volumes due to the completion of projects and the run-off of low margin business partly offset by the start-up of new contracts.

For the current year, France’s top two vertical markets were MRD and financial services, which together accounted for approximately 65% of its revenue.

3.4.5. U.K.

Revenue in our U.K. segment was $1,283.8 million, an increase of $125.3 million or 10.8% over fiscal 2013. On a constant currency basis, revenue decreased by $37.3 million or 3.2%. The decrease in revenue was due to the run-off of low margin business, partly offset by new and extended contracts within the government vertical market.

For the current year, U.K.’s top two vertical markets were government and MRD, which together accounted for approximately 69% of its revenue.


FISCAL 2014 RESULTS

 

 

3.4.6. CEE

Revenue in our CEE segment was $1,063.5 million, an increase of $59.6 million or 5.9% over fiscal 2013. On a constant currency basis, revenue decreased by $35.2 million or 3.5%. The decrease in revenue was mostly due to lower work volumes due to the completion of projects within the telecommunication and utilities vertical market as well as the run-off of low margin business as previously described.

For fiscal 2014, revenue coming from the Netherlands and Germany accounted for 87% of this segment while CEE’s top two vertical markets were MRD and government, which together accounted for approximately 57% of its revenue.

3.4.7. Asia Pacific

Revenue in our Asia Pacific segment was $425.1 million, a decrease of $14.5 million or 3.3% over fiscal 2013. On a constant currency basis, revenue decreased by $13.9 million or 3.2%. The decrease in revenue was mainly due to the completion of projects within the Australian MRD vertical markets and the planned run-off of projects within the Middle East, partly offset by the increased use of our Asian delivery centers.

For the current year, Asia Pacific’s top two vertical markets were telecommunications & utilities and MRD, which together accounted for approximately 79% of its revenue.

3.5. OPERATING EXPENSES

 

 For the years ended September 30,    % of      % of            Change      
   2014      Revenue      2013     Revenue      $      %  

 In thousands of CAD except for percentages

                

 Costs of services, selling and administrative

     9,129,791         87.0%         9,012,310        89.4%          117,481         1.3

 Foreign exchange loss (gain)

     13,042         0.1%         (3,316     (0.0%)         16,358         (493.3 )% 

3.5.1. Costs of Services, Selling and Administrative

For the year ended September 30, 2014, costs of services, selling and administrative expenses amounted to $9,129.8 million, an increase of $117.5 million or 1.3% compared to fiscal 2013. The translation of the results of our foreign operations from their local currencies to the Canadian dollar unfavourably impacted costs by $650.4 million, substantially offsetting the favourable translation impact of $705.1 million on revenue. As a percentage of revenue, cost of services, selling and administrative expenses decreased from 89.4% to 87.0%, mainly due to the business synergies achieved through the ongoing integration of Logica.

Compared to fiscal 2013 our costs of services, as a percentage of revenue, remained relatively stable while our selling and administrative expenses decreased as a result of the business synergies achieved through the integration of Logica.

The majority of our costs are denominated in currencies other than the Canadian dollar. The risk of foreign exchange fluctuation impacting the results is substantially mitigated by a natural hedge in matching our costs with revenue denominated in the same currency. In certain cases where there is a substantial imbalance between the costs incurred and the revenue earned in a specific currency, the Company may enter into foreign exchange forward contracts to hedge cash flows.

3.5.2. Foreign Exchange Loss (gain)

The Company, in addition to its natural hedges, has a strategy in place to manage its exposure, to the extent possible, to exchange rate fluctuations through the effective use of derivatives. In fiscal 2014, the foreign exchange loss was mainly attributable to the higher volatility of the exchange rates in Q4 2014, causing losses in the settlement of day-to-day transactions.


Management’s Discussion and Analysis

 

 

 

3.6. ADJUSTED EBIT BY SEGMENT

 

                      Change  
For the years ended September 30,                            
     2014      2013      $      %  

In thousands of CAD except for percentages

           

U.S.

     303,515         283,690         19,825         7.0%   

  As a percentage of U.S. revenue

     11.4%         11.3%         

NSESA

     195,400         139,418         55,982         40.2%   

  As a percentage of NSESA revenue

     9.3%         6.9%         

Canada

     361,136         320,306         40,830         12.7%   

  As a percentage of Canada revenue

     22.0%         19.0%         

France

     155,695         109,760         45,935         41.9%   

  As a percentage of France revenue

     11.7%         8.6%         

U.K.

     164,977         102,820         62,157         60.5%   

  As a percentage of U.K. revenue

     12.9%         8.9%         

CEE

     107,977         67,341         40,636         60.3%   

  As a percentage of CEE revenue

     10.2%         6.7%         

Asia Pacific

     68,159         52,295         15,864         30.3%   

  As a percentage of Asia Pacific revenue

 

    

 

16.0%

 

  

 

    

 

11.9%

 

  

 

     

Adjusted EBIT

     1,356,859           1,075,630             281,229                 26.1%   

  Adjusted EBIT margin

     12.9%         10.7%                     

Adjusted EBIT for the year was $1,356.9 million, an increase of $281.2 million or 26.1% from the previous year, while the margin increased from 10.7% to 12.9% over the same period. The growth in adjusted EBIT and margin was primarily due to the benefits of the Logica integration program, which focused on resource utilization, profitable revenue and optimizing selling, general and administrative expenses. Adjusted EBIT from our European segments was $692.2 million or an adjusted EBIT margin of 11.2%, up from $471.6 million or 8.0% over the same period of fiscal 2013. Our North American segments contributed $664.7 million in fiscal 2014 compared to $604.0 million for fiscal 2013, or 15.4% of revenue compared to 14.4% over the same period.

Included in these results for fiscal 2014 is $62.1 million of non-recurring benefits related to the resolution of acquisition-related provisions. When excluding the benefits of the adjustments to the acquisition-related provisions, the fiscal 2014 adjusted EBIT for the European segments would have been $630.1 million or an adjusted EBIT margin of 10.2% up from $471.6 million or 8.0% from fiscal 2013.

These benefits came from the adjustment of provisions that were established as part of the purchase price allocation for the Logica acquisition. Subsequent to the finalization of the purchase price allocation such adjustments flow through the statement of earnings. To provide better visibility to our operating performance as well as to provide comparability to previous periods, these adjustments have been specifically segregated and disclosed. In addition, these benefits which are not the result of operating management’s daily activities are excluded from any compensation arrangements.

Examples of the items included in these benefits comprise the resolution of provisions on client contracts, the settlement of tax credits and the early termination of lease agreements.


FISCAL 2014 RESULTS

 

 

3.6.1. U.S.

Adjusted EBIT in the U.S. segment was $303.5 million for fiscal 2014, an increase of $19.8 million compared to fiscal 2013, while the margin increased from 11.3% to 11.4% over the same period. The increase in adjusted EBIT mainly came from the growth in revenue.

3.6.2. NSESA

Adjusted EBIT in the NSESA segment was $195.4 million for fiscal 2014, an increase of $56.0 million compared to fiscal 2013, while the margin increased from 6.9% to 9.3% over the same period. This increase in adjusted EBIT and margin was mainly the result of the cost synergies realized from the integration program, the implementation of the CGI Management Foundation, the run-off of low margin business as previously described as well as the positive impact coming from a $8.5 million settlement gain on a pension plan obligation. Included in the $56.0 million increase in adjusted EBIT was $15.0 million of non-recurring benefits related to the resolution of acquisition-related provisions mainly for the renegotiation of office leases and client contracts.

3.6.3. Canada

Adjusted EBIT in the Canada segment was $361.1 million for fiscal 2014, an increase of $40.8 million compared to fiscal 2013, while the margin increased from 19.0% to 22.0% over the same period. The improvement in adjusted EBIT and margin reflects the focus on the management of resource utilization over the fiscal year, the improved execution on in-flight projects and some further cost reduction from additional real estate optimization.

3.6.4. France

Adjusted EBIT in the France segment was $155.7 million for fiscal 2014, an increase of $45.9 million compared to fiscal 2013, while the margin increased from 8.6% to 11.7% over the same period. This increase in adjusted EBIT and margin was primarily the result of the cost synergies realized from the integration program, the implementation of the CGI Management Foundation and the run-off of low margin business. France’s adjusted EBIT was also positively impacted by $14.7 million, coming from the non-recurring benefits related to the resolution of acquisition-related provisions mainly for client contracts and the settlement of tax credits.

3.6.5. U.K.

Adjusted EBIT in the U.K. segment was $165.0 million for fiscal 2014, an increase of $62.2 million compared to fiscal 2013, while the margin increased from 8.9% to 12.9%. This increase in adjusted EBIT and margin was mainly the result of the cost synergies realized from the integration program, the implementation of the CGI Management Foundation and the benefits of running-off business that was not meeting our profitability standards. The U.K. adjusted EBIT for fiscal 2014 was also positively impacted by $17.1 million of non-recurring benefits related to the resolution of acquisition-related provisions mainly for the renegotiation of office leases and the settlement of tax credits.

3.6.6. CEE

Adjusted EBIT in the CEE segment was $108.0 million for fiscal 2014, an increase of $40.6 million compared to fiscal 2013, while the margin increased from 6.7% to 10.2% over the same period. This increase in adjusted EBIT and margin was primarily the result of the cost synergies realized from the integration program, the implementation of the CGI Management Foundation as well as the benefits of running-off business that was not meeting our profitability standards. In addition, our year-to-date adjusted EBIT was positively impacted by $14.3 million of non-recurring benefits related to the resolution of acquisition-related provisions mainly for client contracts.

3.6.7. Asia Pacific

Adjusted EBIT in the Asia Pacific segment was $68.2 million for fiscal 2014, an increase of $15.9 million compared to fiscal 2013, while the margin increased from 11.9% to 16.0% over the same period. This increase in adjusted EBIT and margin was mainly the result of the costs synergies realized from the integration program, the implementation of the CGI Management Foundation and the implementation of certain productivity improvements in the global delivery centers.


Management’s Discussion and Analysis

 

 

3.7. EARNINGS BEFORE INCOME TAXES

The following table provides a reconciliation between our adjusted EBIT and earnings before income taxes, which is reported in accordance with IFRS.

 

For the years ended September 30,

                               Change  
   2014     % of
Revenue
    2013     % of
Revenue
    $     %  

In thousands of CAD except for percentages

            

Adjusted EBIT

     1,356,859        12.9%        1,075,630        10.7%        281,229        26.1%   

Minus the following items:

            

Integration-related costs

     127,341        1.2%        338,439        3.4%        (211,098     (62.4%

Finance costs

     101,278        1.0%        113,931        1.1%        (12,653     (11.1%

Finance income

     (2,010     (0.0%     (4,362     (0.0%     2,352        (53.9%

Earnings before income taxes

     1,130,250        10.8%        627,622        6.2%        502,628        80.1%   

3.7.1. Integration-Related Costs

For the years ended September 30, 2014 and 2013 the Company incurred $127.3 million and $338.4 million respectively of integration-related costs. These costs pertain to the restructuring and transformation of Logica’s operations to the CGI operating model.

3.7.2. Finance Costs

Finance costs mainly include the interest on our long-term debt used to finance the Logica acquisition. The decrease in finance costs for the year ended September 30, 2014 mainly came as a result of the repayments made on our outstanding long-term debt.

3.7.3. Finance Income

Finance income includes interest and other investment income related to cash balances, investments, and tax assessments.


FISCAL 2014 RESULTS

 

 

3.8. NET EARNINGS AND EARNINGS PER SHARE

The following table sets out the information supporting the earnings per share calculations:

 

For the years ended September 30,

                  

Change

 

 
  

2014

 

    

2013

 

    

    $

 

    

%

 

 

In thousands of CAD except for percentages

           

Earnings before income taxes

     1,130,250         627,622         502,628         80.1%   

Income tax expense

     270,807         171,802         99,005         57.6%   

Effective tax rate

     24.0%         27.4%         

Net earnings

     859,443         455,820         403,623         88.5%   

Net earnings margin

     8.2%         4.5%         

Weighted average number of shares outstanding

           

Class A subordinate shares and Class B shares (basic)

     308,743,126         307,900,034            0.3%   

Class A subordinate shares and Class B shares (diluted)

     318,927,737         316,974,179            0.6%   

Earnings per share (in dollars)

           

Basic EPS

     2.78         1.48         1.30         87.8%   

Diluted EPS

 

    

 

2.69

 

  

 

    

 

1.44

 

  

 

    

 

1.25

 

  

 

    

 

86.8%

 

  

 

3.8.1. Income Tax Expense

For the year ended September 30, 2014, the income tax expense was $270.8 million, an increase of $99.0 million compared to $171.8 million in fiscal 2013, while our effective tax rate decreased from 27.4% to 24.0%. The increase in income tax expense was mainly due to the higher earnings before income taxes. The decrease in the income tax rate for fiscal 2014 was due to favourable tax adjustments of $11.9 million mainly resulting from the settlement of tax liabilities from the legacy Logica European operations. The decrease in the income tax rate for fiscal 2014 was also attributable to net unfavorable tax adjustments of $11.1 million in fiscal 2013 which were comprised of a $18.4 million expense resulting from the revaluation of deferred tax assets following the enactment of a future rate reduction in the U.K., of taxes paid on the repatriation of funds from the legacy Logica Indian operations of $7.6 million partly offset by a favorable adjustment of $14.9 million in the U.S. resulting from the expiration of a statute of limitation period.

The table on page 24 shows the year-over-year comparison of the tax rate with the impact of integration-related costs, tax adjustments and benefits related to the resolution of acquisition-related provisions removed.

Based on the enacted rates at the end of fiscal 2014 and our current business mix, we expect our effective tax rate before any significant adjustments to be in the range of 25% to 27% in subsequent periods.

3.8.2. Weighted Average Number of Shares

For fiscal 2014, CGI’s basic and diluted weighted average number of shares increased compared to fiscal 2013 due to the issuance of Class A subordinate shares upon the exercise of stock options, partly offset by the repurchase of 2,837,360 Class A subordinate shares. During the year, 4,999,544 options were exercised.


Management’s Discussion and Analysis

 

 

3.8.3. Net Earnings and Earnings per Share Prior to Specific Items

Below is a table showing the year-over-year comparison prior to specific items such as the integration-related costs, favourable tax adjustments and benefits related to the resolution of acquisition-related provisions:

 

                     Change  
For the years ended September 30,                          
     2014      2013     $     %  

In thousands of CAD except for percentages

         

Earnings before income taxes

     1,130,250         627,622        502,628        80.1%   

Add back:

         

Integration-related costs

     127,341         338,439        (211,098     (62.4%)   

Remove:

         

Resolution of acquisition-related provisions 1

     62,075                62,075          

Earnings before income taxes prior to specific items

     1,195,516         966,061        229,455        23.8%   

Margin

     11.4%         9.6%       

Income tax expense

     270,807         171,802        99,005        57.6%   

Add back:

         

Tax adjustments 2

     11,900         (11,113     23,013        (207.1%)   

Tax deduction on integration-related costs

     29,430         77,707        (48,277     (62.1%)   

Remove:

         

Income taxes on the resolution of acquisition-related provisions

     10,097                10,097          

Income tax expense prior to specific items

     302,040         238,396        63,644        26.7%   

Effective tax rate prior to specific items

     25.3%         24.7%       
         

Net earnings prior to specific items

     893,476         727,665        165,811        22.8%   

Net earnings margin

     8.5%         7.2%       

Weighted average number of shares outstanding

         

Class A subordinate shares and Class B shares (basic)

     308,743,126         307,900,034          0.3%   

Class A subordinate shares and Class B shares (diluted)

     318,927,737         316,974,179          0.6%   

Earnings per share prior to specific items (in dollars)

         

Basic EPS

     2.89         2.36        0.53        22.5%   

Diluted EPS

 

    

 

2.80

 

  

 

    

 

2.30

 

  

 

   

 

0.50

 

  

 

   

 

21.7%

 

  

 

 

  1 

The resolution of acquisition-related provisions is discussed on page 20.

 

  2 

The tax adjustments are discussed on page 23.


FISCAL 2014 RESULTS

 

 

 

4.

Liquidity

 

LOGO

4.1. CONSOLIDATED STATEMENTS OF CASH FLOWS

CGI’s growth is financed through a combination of our cash flow from operations, borrowing under our existing credit facilities, the issuance of long-term debt, and the issuance of equity. One of our financial priorities is to maintain an optimal level of liquidity through the active management of our assets and liabilities as well as our cash flows.

As at September 30, 2014, cash and cash equivalents were $535.7 million. The following table provides a summary of the generation and use of cash for the years ended September 30, 2014 and 2013.

 

 

 For the years ended September 30,

 

  

 

2014   

 

    

 

2013   

 

    

 

Change   

 

 

 In thousands of CAD

        

 Cash provided by operating activities

             1,174,835            671,257            503,578      

 Cash used in investing activities

     (321,153)                   (233,855)           (87,298)     

 Cash used in financing activities

     (414,064)           (445,971)           31,907      

 Effect of foreign exchange rate changes on cash and cash equivalents

 

    

 

(10,102)  

 

  

 

    

 

1,665   

 

  

 

    

 

        (11,767)  

 

  

 

 

 Net increase (decrease) in cash and cash equivalents

 

  

 

 

 

 

429,516   

 

 

  

 

  

 

 

 

 

(6,904)  

 

 

  

 

  

 

 

 

 

436,420   

 

 

  

 

4.1.1. Cash Provided by Operating Activities

For the years ended September 30, 2014, and 2013, cash provided by operating activities was $1,174.8 million compared to $671.3 million, or 11.2% of revenue compared to 6.7% last year. The increase was mainly due to the ongoing improvement in profitability as a result of the integration program being realized and the implementation of the CGI Management Foundation in the European operations. The year-over-year reduction of the integration-related payments in fiscal 2014 also contributed to the increase in cash provided by operating activities. The timing of our working capital inflows and outflows will always have an impact on the cash flow from operations. Excluding the integration-related cash disbursements, the cash provided by operating activities would have been $1,332.8 million in fiscal 2014, representing 12.7% of revenue compared to $977.7 million or 9.7% of revenue last year.

The following table provides a summary of the generation and use of cash from operating activities.

 

 

 For the years ended September 30,

 

  

 

2014   

 

    

 

2013  

 

    

 

Change  

 

 

 In thousands of CAD

        

 Net earnings

     859,443            455,820            403,623      

 Amortization and depreciation

     444,232            435,944            8,288      

 Other adjustments 1

     103,827            61,049            42,778      

 Cash flow from operating activities before net change in non-cash working

 capital items

             1,407,502            952,813            454,689      

 Net change in non-cash working capital items:

        

 Accounts receivable, work in progress and deferred revenue

     209,189            (52,830)           262,019      

 Accounts payable and accrued liabilities, accrued compensation, provisions and
 other long-term liabilities

     (463,685)                   (233,631)                   (230,054)     

 Other 2

     21,829            4,905            16,924      

 Net change in non-cash working capital items

 

    

 

(232,667)  

 

  

 

    

 

(281,556)  

 

  

 

    

 

48,889   

 

  

 

 

 Cash provided by operating activities

 

  

 

 

 

 

1,174,835   

 

 

  

 

  

 

 

 

 

671,257   

 

 

  

 

  

 

 

 

 

503,578   

 

 

  

 

 

  1

Other adjustments are comprised of deferred income taxes, foreign exchange loss (gain) and share-based payment costs.

 

  2 

Comprised of prepaid expenses and other assets, long-term financial assets, retirement benefits obligations, derivative financial instruments and income taxes.


Management’s Discussion and Analysis

 

 

For the current year, the Company’s net earnings increased by $403.6 million when compared to fiscal 2013. The increase in net earnings was primarily due to the reduction in integration-related costs, the result of the cost synergies realized as part of the Logica integration program and the implementation of the CGI Management Foundation in the European operations.

The $42.8 million increase coming from the other adjustments was due to the higher deferred income taxes expense as a result of the utilization of previously recognized tax losses due to the increased profitability of our European operations and to the higher volatility of the foreign exchange rates, causing losses in the settlement of day-to-day transactions.

For fiscal 2014, the $209.2 million of cash coming from the accounts receivable, work in progress and deferred revenue was mainly due to a decrease of 6 days in our DSO from 49 days in fiscal 2013 to 43 days this year.

The $52.8 million of cash used in fiscal 2013 for the accounts receivable, work in progress and deferred revenue was mainly the result of the timing of billing milestones on certain large U.S. contracts.

For the current year, the $463.7 million used in cash for the accounts payable and accrued liabilities, accrued compensation, provisions and other long-term liabilities was mostly due to the utilization of $102.6 million for the provision for estimated losses on revenue-generating contracts, the net decrease of $65.0 million for performance-based compensation accruals to our members, the net utilization of $53.7 million for provisions for onerous leases, the net decrease of $35.7 million for provisions for litigation and claims mainly driven by the reversal of unused amounts due to the favorable settlement of claims and finally from the net payments of $30.7 million for integration-related items.

The $233.6 million of cash used in fiscal 2013 for the accounts payable and accrued liabilities, accrued compensation, provisions and other long-term liabilities was due to the utilization of $94.0 million for the estimated losses on revenue-generating contracts, payments of $37.9 million in regards to the legacy Logica restructuring program, payments in connection with the settlement of inherited claims for $31.3 million, payments of $27.0 million for acquisition-related items, partly offset by the net increase of $32.0 million in integration-related provisions. To a lesser extent, the decrease in accounts payable and accrued liabilities came from the transition and transformation of our business practices related to the acquired Logica operations in areas such as the reduction of subcontractors and the implementation of spend management practices.

The following table provides a summary of the movements in the integration-related provision:

 

 

 For the years ended September 30,

 

   2014      2013  

 In millions of CAD

 

     

 Integration-related provision at the beginning of the year

     135.8         101.9   

 

 Integration-related expenses

  

 

 

 

127.3

 

  

  

 

 

 

338.4

 

  

 

 Integration-related payments

 

    

 

(158.0)

 

  

 

    

 

(306.4)

 

  

 

 Net impact on non-cash working capital

     (30.7)         32.0   

 

 Plus: FX impact 1

     0.5         9.1   

 

 Minus: Non-cash integration-related costs

 

    

 

 

  

 

    

 

7.2

 

  

 

 

 Integration-related provision at the end of the year

 

  

 

 

 

 

105.6

 

 

  

 

  

 

 

 

 

135.8

 

 

  

 

 

  1 

The foreign currency translation was recorded in other comprehensive income.


FISCAL 2014 RESULTS

 

 

4.1.2. Cash Used in Investing Activities

For the years ended September 30, 2014, and 2013, $321.2 million were used in investing activities compared to $233.9 million respectively. The following table provides a summary of the generation and use of cash from investing activities.

 

 

 For the years ended September 30,

 

   2014     2013     Change  

 In thousands of CAD

      

 Business acquisition

            (5,140     5,140   

 Proceeds from sale of property, plant and equipment

     13,673               13,673   

 Purchase of property, plant and equipment

     (181,471     (141,965     (39,506

 Additions to contract costs

     (73,900     (31,207     (42,693

 Additions to intangible assets

     (77,726     (71,447     (6,279

 Net change in short-term investments and (purchase) proceeds from sale of long-term investments

     (8,106     7,727        (15,833

 Payments received from long-term receivable

     6,377        8,177        (1,800

 

 Cash used in investing activities

 

    

 

(321,153

 

 

   

 

(233,855

 

 

   

 

(87,298

 

 

For the current year, we invested $333.1 million in the purchase of property, plant and equipment, the additions of intangible assets and contract costs compared to $244.6 million last year or an increase of $88.5 million which was mostly driven by the ramp-up of new long term contracts.

4.1.3. Cash Used in Financing Activities

For the year ended September 30, 2014, $414.1 million was used in financing activities compared to $446.0 million in fiscal 2013. The following table provides a summary of the generation and use of cash from financing activities.

 

 

 For the years ended September 30,

 

   2014     2013     Change  

 In thousands of CAD

      

 Net change in unsecured committed revolving credit facility

     (283,049     (467,027     183,978   

 Net change in long-term debt

     (25,343 )      12,276        (37,619 ) 
     (308,392     (454,751     146,359   

 Settlement of derivative financial instruments

     (37,716            (37,716

 Purchase of Class A subordinate shares held in trust

     (23,016     (7,663     (15,353

 Resale of Class A subordinate shares held in trust

     1,390               1,390   

 Repurchase of Class A subordinate shares

     (111,468     (22,869     (88,599

 Issuance of Class A subordinate shares

     65,138        39,312        25,826   

 

 Cash used in financing activities

 

    

 

(414,064

 

 

   

 

(445,971

 

 

   

 

31,907

 

  

 

During 2014, the Company repaid the first maturing tranche of the term loan credit facility of $486.7 million using the proceeds from the credit facilities. The Company also entered into a $955 million debt private placement comprised of four tranches of Senior U.S. unsecured notes for US$745 million, and one tranche of Senior euro unsecured note for 85 million, with a weighted average maturity of 7.9 years and a weighted average fixed coupon of 3.62%. The Company used the proceeds of the issuance of the new private placement notes to repay the May 2015 maturing tranche of the term loan credit facility of $494.7 million and the outstanding balance of the credit facilities. Following these repayments, the Company used $37.7 million to settle the related floating-to-fixed interest rate swap contracts and the related cross-currency swap contract. During the year, we reduced our long-term debt by $308.4 million while in fiscal 2013, we made net payments of $454.8 million.

For 2014, we repurchased 2,837,360 Class A subordinate shares for $111.5 million under the annual aggregate limit of the previous NCIB, while for fiscal 2013, $22.9 million was used to purchase 723,100 Class A subordinate shares under the NCIB then in effect.


Management’s Discussion and Analysis

 

 

For fiscal 2014, a net amount of $21.6 million was used to purchase CGI shares under the Company’s Performance Share Unit Plan (the “PSU” Plan) which is part of the compensation package of certain senior executive officers, while for the comparable period of last year, $7.7 million was used to purchase shares under the PSU Plan.

For 2014, we received $65.1 million in proceeds from the exercise of stock options, compared to $39.3 million in fiscal 2013.

4.1.4. Effect of Foreign Exchange Rate Changes on Cash and Cash Equivalents

For fiscal 2014, we had a $10.1 million decrease in cash coming from the effect of foreign exchange rate changes on cash and cash equivalents, while for fiscal 2013 we had a $1.7 million increase. These amounts had no effect on net earnings as they were recorded in other comprehensive income.

4.2. CAPITAL RESOURCES

 

In thousands of CAD   Total commitment      Available at
September 30, 2014
     Outstanding at
September 30, 2014
 

Cash and cash equivalents

            535,715           

Long-term investments

            30,689           

Unsecured committed revolving facilities a

    1,500,000         1,463,280         36,720   

Total

    1,500,000         2,029,684         36,720   

a Consists of Letters of Credit for $36.7 million outstanding on September 30, 2014.

Our cash position and bank lines are sufficient to support our growth strategy. At September 30, 2014, cash and cash equivalents and long-term marketable investments represented $566.4 million.

Cash equivalents typically include term deposits, all with maturities of 90 days or less. Long-term marketable investments include corporate and government bonds with maturities ranging from one to five years, rated “A” or higher.

The amount of capital readily available was $2,029.7 million. The long-term debt agreements contain covenants which require us to maintain certain financial ratios. At September 30, 2014, CGI was in compliance with these covenants.

Total debt decreased by $186.8 million to $2,679.7 million at September 30, 2014, compared to $2,866.6 million at September 30, 2013. The variation was mainly due to the reimbursement of $281.2 million and $981.5 million under the unsecured revolving credit facility and term loan credit facility respectively partially offset by the proceeds of a private placement of US $745 million and EUR85 million for a total of $955 million and an unrealized loss of $87.1 million on foreign exchange translation.

In the first quarter of 2014, the unsecured committed revolving credit facility of $1,500.0 million was extended by one year to December 2017. On July 25, 2014, the facility was further extended by another year to December 2018 and can be further extended annually. All terms and conditions including interest rates and banking covenants remain unchanged.

As at September 30, 2014, CGI had a positive working capital1 of $89.4 million. The Company has also $1.5 billion available under its unsecured committed revolving facility and is generating a significant level of cash that will allow it to fund its operations and further decrease the amount of debt outstanding in the foreseeable future while maintaining adequate levels of liquidity.

 

1  Working capital is defined as total current assets minus total current liabilities.


FISCAL 2014 RESULTS

 

 

4.3. CONTRACTUAL OBLIGATIONS

We are committed under the terms of contractual obligations with various expiration dates, primarily for the rental of premises, computer equipment used in outsourcing contracts and long-term service agreements. For the year ended September 30, 2014, the Company decreased its commitments by $130.4 million due to real estate optimization, the renegotiation of office leases and the reduction of the long-term debt taken on to acquire Logica in fiscal 2012. These were partly offset by the increase in estimated interest on our long-term debt as a result of the new debt private placement and from the new long-term service agreements signed during the year.

 

Commitment type   

 

Total

 

    

 

Less than 1
year

 

    

 

2nd and 3rd
years

 

    

 

4th and 5th
years

 

    

 

After 5
years

 

 

In thousands of CAD

              

Long-term debt

     2,632,873         48,048         1,162,658         337,010         1,085,157   

Estimated interests on long-term debt

     477,658         89,709         137,788         105,742         144,419   

Finance lease obligations

     61,698         32,319         28,506         873           

Estimated interests on finance lease obligations

     2,699         1,494         1,184         21           

Operating leases

              

Rental of office space

     1,287,438         278,159         459,651         326,096         223,532   

Computer equipment

     42,153         21,349         17,223         3,427         154   

Automobiles

     84,091         36,862         33,250         10,151         3,828   

Long-term service agreements and other

     190,083         74,291         92,875         22,917           

Total contractual obligations

     4,778,693         582,231         1,933,135         806,237         1,457,090   

Our required benefit plan contributions have not been included in this table as such contributions depend on periodic actuarial valuations for funding purposes. Our contributions to defined benefit plans are estimated at $20.1 million for fiscal 2015 as described in note 17 to the financial statements.

4.4. FINANCIAL INSTRUMENTS AND HEDGING TRANSACTIONS

We use various financial instruments to manage our exposure to fluctuations of foreign currency exchange rates and interest rates. We do not hold or use any derivative instruments for trading purposes. Foreign exchange translation gains or losses on the net investments and the effective portions of gains or losses on instruments hedging the net investments are recorded in the consolidated statement of comprehensive income. Any realized or unrealized gains or losses on instruments covering the U.S. denominated debt are also recognized in the consolidated statement of comprehensive income.

We have the following outstanding derivative financial instruments:

Hedges on net investments in foreign operations

— $968.8 million cross-currency swaps in Euro designated as a hedging instrument of the Company’s net investment in European operations ($1,153.7 million as at September 30, 2013)

Cash flow hedges on future revenue

— U.S.$32.0 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 (U.S.$56.8 million as at September 30, 2013)

— U.S.$75.2 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 (U.S.$94.4 million as at September 30, 2013)

— $94.6 million foreign currency forward contracts to hedge the variability in the expected foreign currency exchange rate between the Canadian dollar and the Indian rupee ($142.5 million as at September 30, 2013)

— Kr142.6 million foreign currency forward contracts to hedge the variability in the expected foreign currency exchange rate between the Swedish krona and the Indian rupee (kr nil as at September 30, 2013)


Management’s Discussion and Analysis

 

 

121.1 million foreign currency forward contracts to hedge the variability in the expected foreign currency rate between the euro and the British pound ( nil as at September 30, 2013)

15.0 million foreign currency forward contracts to hedge the variability in the expected foreign currency exchange rate between the euro and the Swedish krona (31.0 million as at September 30, 2013)

Cash flow hedges on unsecured committed term loan credit facility

— $484.4 million interest rate swaps floating-to-fixed ($1,234.4 million as at September 30, 2013)

Fair value hedges on Senior U.S. unsecured notes

— U.S.$250.0 million interest rate swaps fixed-to-floating (U.S.$250.0 million as at September 30, 2013)

Derivatives not designated as hedges

The Company does not have any derivatives not designated as hedges as at September 30, 2014.

The effective portion of the change in the fair value of the derivative instruments is recognized in other comprehensive income and the ineffective portion, if any, in net earnings. During the year ended September 30, 2014, the Company’s hedging relationships were effective.

The Company expects that approximately $4.9 million of the accumulated net gain on all derivative financial instruments designated as cash flow hedges as at September 30, 2014 will be reclassified in the consolidated statements of earnings in the next 12 months.

4.5. SELECTED MEASURES OF LIQUIDITY AND CAPITAL RESOURCES

 

 

 As at September 30,

 

  

 

2014

 

    

 

2013

 

 

 In thousands of CAD except for percentages

 

     

 Reconciliation between net debt and long-term debt including the current portion:

 

     

 Net debt

 

    

 

2,113,299

 

  

 

    

 

2,739,949

 

  

 

 Add back:

 

     

 Cash and cash equivalents

 

    

 

535,715

 

  

 

    

 

106,199

 

  

 

 Short-term investments

 

    

 

 

  

 

    

 

69

 

  

 

 Long-term investments

 

    

 

30,689

 

  

 

    

 

20,333

 

  

 

 Long-term debt including the current portion

     2,679,703         2,866,550   

 Net debt to capitalization ratio

 

    

 

27.6%

 

  

 

    

 

39.6%

 

  

 

 Return on equity

 

    

 

18.8%

 

  

 

    

 

12.3%

 

  

 

 Return on invested capital

 

    

 

14.5%

 

  

 

    

 

11.8%

 

  

 

 Days sales outstanding (in days)

 

    

 

43

 

  

 

    

 

49

 

  

 

We use the net debt to capitalization ratio as an indication of our financial leverage in order to pursue any large outsourcing contracts, expand global delivery centers, or make acquisitions. On August 20, 2012, we acquired Logica using a combination of debt and stock, causing our net debt to capitalization ratio to increase significantly. At the end of fiscal 2012, our net debt to capitalization ratio was 46.5%, while subsequent repayments resulted in a ratio of 39.6% for fiscal 2013. The net debt to capitalization ratio decreased further to 27.6% for fiscal 2014 due to the increase in equity mainly driven by the net earnings and the net debt repayments as a result of the improved cash generation.

Return on equity is a measure of the return we are generating for our shareholders. ROE increased from 12.3% in fiscal 2013 to 18.8% in fiscal 2014. The increase was mainly due to the higher net earnings over the last four quarters as the benefits of the integration of Logica with CGI were being realized.


FISCAL 2014 RESULTS

 

 

ROIC is a measure of the Company’s efficiency in allocating the capital under our control to profitable investments. The return on invested capital was 14.5% as at September 30, 2014, compared to 11.8% a year ago. The improvement in the ROIC was mainly the result of our higher after-tax adjusted EBIT compared to last year as the benefits of the integration of Logica with CGI were being realized.

DSO decreased from 49 days as at September 30, 2013 to 43 days at the end of fiscal 2014. In calculating the DSO, we subtract the deferred revenue balance from trade accounts receivable and work in progress; for that reason, the timing of payments received from outsourcing clients in advance of the work to be performed and the timing of payments related to project milestones can affect the DSO fluctuations. We remain committed to manage our DSO within our 45 day target or less.

4.6. OFF-BALANCE SHEET FINANCING AND GUARANTEES

CGI engages in the practice of off-balance sheet financing in the normal course of operations for a variety of transactions such as operating leases for office space, computer equipment and vehicles as well as accounts receivable factoring. From time to time, we also enter into agreements to provide financial or performance assurances to third parties on the sale of assets, business divestitures, guarantees and U.S. Government contracts.

In connection with sales of assets and business divestitures, we may be required to pay counterparties for costs and losses incurred as the result of breaches in representations and warranties, intellectual property right infringement and litigation against counterparties. While some of the agreements specify a maximum potential exposure totalling $10.4 million, others do not specify a maximum amount or limited period. It is impossible to reasonably estimate the maximum amount that may have to be paid under such guarantees. The amounts are dependent upon the outcome of future contingent events, the nature and likelihood of which cannot be determined at this time. The Company does not expect to incur any potential payment in connection with these guarantees that could have a materially adverse effect on its consolidated financial statements.

We are also engaged to provide services under contracts with the U.S. Government. The contracts are subject to extensive legal and regulatory requirements and, from time to time, agencies of the U.S. Government investigate whether our operations are being conducted in accordance with these requirements. Generally, the Government has the right to change the scope of, or terminate, these projects at its convenience. The termination or a reduction in the scope of a major government project could have a material adverse effect on our results of operations and financial condition.

In the normal course of business, we may provide certain clients, principally governmental entities, with bid and performance bonds. In general, we would only be liable for the amount of the bid bonds if we refuse to perform the project once the bid is awarded. We would also be liable for the performance bonds in the event of default in the performance of our obligations. As at September 30, 2014, we had committed for a total of $55.9 million for these bonds. To the best of our knowledge, we complied with our performance obligations under all service contracts for which there was a performance or bid bond, and the ultimate liability, if any, incurred in connection with these guarantees would not have a material adverse effect on our consolidated results of operations or financial condition.

4.7. CAPABILITY TO DELIVER RESULTS

Sufficient capital resources and liquidity are required for supporting ongoing business operations and to execute our build and buy growth strategy. The Company has sufficient capital resources coming from the cash generated from operations, credit facilities, long-term debt agreements and invested capital from shareholders. Our principal uses of cash are for procuring new large outsourcing and managed services contracts; investing in our business solutions; pursuing accretive acquisitions; buying back CGI shares and paying down debt. Funds were also used to expand our global delivery network as more and more of our clients demand lower cost alternatives. In terms of financing, we are well positioned to continue executing our four-pillar growth strategy in fiscal 2015.

Strong and experienced leadership is essential to successfully implement our corporate strategy. CGI has a strong leadership team with members who are highly knowledgeable and have gained a significant amount of experience within the IT industry via various career paths and leadership roles. CGI fosters leadership development to ensure a continuous flow of knowledge and strength is maintained throughout the organization. As part of our succession planning in key positions, we established the Leadership Institute, our own corporate university, to develop leadership, technical and managerial skills inspired by CGI’s roots and traditions.


Management’s Discussion and Analysis

 

 

As a Company built on human capital, our professionals and their knowledge are critical to delivering quality service to our clients. Our human resources program provides competitive compensation and benefits, a favourable working environment, and our training and career development programs combine to allow us to attract and retain the best talent. Employee satisfaction is monitored regularly through a Company-wide survey and issues are addressed immediately. Approximately 45,000 of our members or 70% were also owners of CGI through our Share Purchase Plan. The Share Purchase Plan, along with the Profit Participation Program, allows members to share in the success of the Company and aligns member objectives with our strategic goals.

In addition to our capital resources and the talent of our human capital, CGI has established a Management Foundation encompassing governance policies, sophisticated management frameworks and an organizational model for its business units and corporate processes. This foundation, along with our appropriate internal systems, helps in providing a disciplined high standard of quality service to our clients across all of our operations, and additional value to our stakeholders. CGI’s operations maintain appropriate certifications in accordance with service requirements such as the ISO and Capability Maturity Model Integration quality programs.


FISCAL 2014 RESULTS

 

 

 

5.

Fourth Quarter Results

 

LOGO

5.1. FOREIGN EXCHANGE

The Company operates globally and is exposed to changes in foreign currency rates. We report all dollar amounts in Canadian dollars. Accordingly, we value assets, liabilities and transactions that are measured in foreign currencies using various exchange rates as prescribed by IFRS.

Average foreign exchange rates

 

 

 For the three months ended September 30,

 

  

 

2014  

 

    

 

2013

 

    

 

Change

 

 

 U.S. dollar

     1.0894           1.0385         4.9%   

 Euro

     1.4427           1.3762         4.8%   

 Indian rupee

     0.0180           0.0167         7.8%   

 British pound

     1.8175           1.6117         12.8%   

 Swedish krona

     0.1568           0.1586         (1.1%

 Australian dollar

     1.0070           0.9517         5.8%   


Management’s Discussion and Analysis

 

 

5.2. REVENUE VARIATION AND REVENUE BY SEGMENT

The following table provides a summary of the year-over-year changes in our revenue, in total and by segment, separately showing the impacts of foreign currency exchange rate variations between the Q4 2014 and Q4 2013 periods. The Q4 2013 revenue by segment was recorded reflecting the actual average foreign exchange rates for that period. The foreign exchange impact is the difference between the current period’s actual results and the current period’s results converted with the prior year’s average foreign exchange rates.

 

                   Change  
For the three months ended September 30,                            
    

2014

 

    

2013

 

    

$

 

    

%

 

 

In thousands of CAD except for percentages

           

Total CGI revenue

     2,483,669          2,458,207         25,462          1.0%    

Variation prior to foreign currency impact

     (3.4%)            

Foreign currency impact

     4.4%             

Variation over previous period

     1.0%             

U.S.

           

Revenue prior to foreign currency impact

     623,231          679,255         (56,024)         (8.2%)   

Foreign currency impact

     31,864             

U.S. revenue

     655,095          679,255         (24,160)         (3.6%)   

NSESA

           

Revenue prior to foreign currency impact

     438,278          436,905         1,373          0.3%    

Foreign currency impact

     7,868             

NSESA revenue

     446,146          436,905         9,241          2.1%    

Canada

           

Revenue prior to foreign currency impact

     381,780          407,751         (25,971)         (6.4%)   

Foreign currency impact

     1,107             

Canada revenue

     382,887          407,751         (24,864)         (6.1%)   

France

           

Revenue prior to foreign currency impact

     297,925          285,414         12,511          4.4%    

Foreign currency impact

     14,074             

France revenue

     311,999          285,414         26,585          9.3%    

U.K.

           

Revenue prior to foreign currency impact

     282,821          304,334         (21,513)         (7.1%)   

Foreign currency impact

     38,861             

U.K. revenue

     321,682          304,334         17,348          5.7%    

CEE

           

Revenue prior to foreign currency impact

     243,803          245,683         (1,880)         (0.8%)   

Foreign currency impact

     11,008             

CEE revenue

     254,811          245,683         9,128          3.7%    

Asia Pacific

           

Revenue prior to foreign currency impact

     108,311          98,865         9,446          9.6%    

Foreign currency impact

     2,738             

Asia Pacific revenue

     111,049          98,865         12,184          12.3%    

We ended the fourth quarter of fiscal 2014 with revenue of $2,483.7 million, an increase of $25.5 million or 1.0% over the same period of fiscal 2013. On a constant currency basis, revenue decreased by $82.1 million or 3.4%, as foreign currency rate fluctuations favourably impacted our revenue by $107.5 million or 4.4%. For the current quarter, the top two vertical


FISCAL 2014 RESULTS

 

 

markets were government and MRD, which together accounted for approximately 56% of our revenue. Compared to Q3 2014, revenue from the current quarter has decreased by $183.4 million, mainly due to the expected impact of the vacation period and the unfavourable impact of foreign currency rate fluctuations.

As part of the Company’s strategic focus to continuously improve its revenue quality, and as previously disclosed, we have been exiting low margin business as part of our integration activities. As a result, our quarterly year-over-year revenue has been reduced. Partially offsetting this, new higher quality revenue was booked or existing business expanded and/or extended across the geographies.

5.2.1. U.S.

Revenue in our U.S. segment was $655.1 million in Q4 2014, a decrease of $24.2 million or 3.6% compared to the same period of fiscal 2013. On a constant currency basis, revenue decreased by $56.0 million or 8.2%. The change in revenue reflects the ramp down of Federal and state health projects and the run-off of a large low margin government project partly offset by the increased sales of IP based business solutions.

For the current quarter, the top two U.S. vertical markets were government and health, which together accounted for approximately 77% of its revenue.

5.2.2. NSESA

Revenue from our NSESA segment was $446.1 million in Q4 2014, an increase of $9.2 million compared to the same period of fiscal 2013 while on a constant currency basis, revenue remained relatively stable.

For the current quarter, revenue coming from Sweden and Finland accounted for 73% of this segment while the NSESA’s top two vertical markets were MRD and financial services, which together accounted for approximately 55% of its revenue.

5.2.3. Canada

Revenue in our Canada segment for Q4 2014 was $382.9 million, a decrease of $24.9 million or 6.1% compared to the same period of fiscal 2013. On a constant currency basis, revenue decreased by $26.0 million or 6.4%. The revenue decrease was mainly due to lower work volumes as a result of the expiration of contracts that were partially offset by the start-up of new contracts.

For the current quarter, Canada’s top two vertical markets were financial services and telecommunication and utilities, which together accounted for approximately 57% of its revenue.

5.2.4. France

Revenue from our France segment was $312.0 million in Q4 2014, an increase of $26.6 million or 9.3% compared to the same period of fiscal 2013. On a constant currency basis, revenue increased by $12.5 million or 4.4%. The increase in revenue reflects the bookings in the previous quarters that are now coming on stream and the ramp up of existing engagements, primarily in the MRD and telecommunication & utilities vertical markets.

For the current quarter, France’s top two vertical markets were MRD and financial services, which together accounted for approximately 64% of its revenue.

5.2.5. U.K.

Revenue from our U.K. segment was $321.7 million in Q4 2014, an increase of $17.3 million or 5.7% compared to the same period of fiscal 2013. On a constant currency basis, revenue decreased by $21.5 million or 7.1%. The decrease in revenue mainly reflects the completion of projects within the MRD vertical market and to a lesser extent the run-off of low margin business.

For the current quarter, U.K.’s top two vertical markets were government and MRD, which together accounted for approximately 69% of its revenue.


Management’s Discussion and Analysis

 

 

5.2.6. CEE

Revenue from our CEE segment was $254.8 million in Q4 2014, an increase of $9.1 million or 3.7% compared to the same period of fiscal 2013 while on a constant currency basis, revenue remained relatively stable.

For the current quarter, revenue coming from the Netherlands and Germany accounted for 87% of this segment while CEE’s top two vertical markets were MRD and government, which together accounted for approximately 58% of its revenue.

5.2.7. Asia Pacific

Revenue from our Asia Pacific segment was $111.0 million in Q4 2014, an increase of $12.2 million or 12.3% compared to the same period of fiscal 2013. On a constant currency basis, revenue increased by $9.4 million or 9.6%. The change in revenue was mainly due to the increased use of our Asian delivery centers, partly offset by the completion of projects within the Australian MRD vertical markets and the planned run-off of projects within the Middle East.

For the current quarter, Asia Pacific’s top two vertical markets were telecommunications & utilities and MRD, which together accounted for approximately 78% of its revenue.

5.3. ADJUSTED EBIT BY SEGMENT

 

For the three months ended September 30,                   

  Change

 

 
  

    2014

 

    

    2013

 

    

 $

 

    

  %

 

 

In thousands of CAD except for percentages

           

U.S.

     97,575         82,965         14,610         17.6

As a percentage of U.S. revenue

     14.9%         12.2%         

NSESA

     33,539         43,526         (9,987      (22.9 %) 

As a percentage of NSESA revenue

     7.5%         10.0%         

Canada

     87,060         80,419         6,641         8.3

As a percentage of Canada revenue

     22.7%         19.7%         

France

     39,143         34,974         4,169         11.9

As a percentage of France revenue

     12.5%         12.3%         

U.K.

     60,665         35,826         24,839         69.3

As a percentage of U.K. revenue

     18.9%         11.8%         

CEE

     26,564         21,697         4,867         22.4

As a percentage of CEE revenue

     10.4%         8.8%         

Asia Pacific

     25,678         13,985         11,693         83.6

As a percentage of Asia Pacific revenue

 

    

 

23.1%

 

  

 

    

 

14.1%

 

  

 

     

Adjusted EBIT

     370,224         313,392         56,832         18.1

Adjusted EBIT margin

     14.9%         12.7%                     

Adjusted EBIT for the quarter was $370.2 million, an increase of $56.8 million or 18.1% from Q4 2013, while the margin increased from 12.7% to 14.9% over the same period last year. The adjusted EBIT of our European segments was $185.6 million or a margin of 12.8%, up from $150.0 million or 10.9% from the same period of fiscal 2013. Our North American segments contributed $184.6 million in Q4 2014 compared to $163.4 million in Q4 2013, or a margin of 17.8% compared to the 15.0% margin last year.

Included in these results for the three months ended September 30, 2014 is $34.0 million of non-recurring benefits related to the adjustments of acquisition-related provisions. When excluding the benefits of the adjustments to the acquisition-related provisions, the Q4 2014 adjusted EBIT for the European segments was $151.6 million or an adjusted EBIT margin of 10.5% compared with $150.0 million or 10.9% from the same period of fiscal 2013.


FISCAL 2014 RESULTS

 

 

These benefits came from the resolution of provisions that were established as part of the purchase price allocation for the Logica acquisition. Subsequent to the finalization of the purchase price allocation such adjustments flow through the statement of earnings. To provide better visibility to our operating performance as well as to provide comparability to previous periods, these adjustments have been specifically segregated and disclosed. In addition, these benefits which are not the result of operating management’s daily activities are excluded from any compensation arrangements.

The items included in these benefits are similar to those described in section 3.6 of the present document.

5.3.1. U.S.

Adjusted EBIT in the U.S. segment was $97.6 million for Q4 2014, an increase of $14.6 million year-over-year, while the margin increased from 12.2% to 14.9%. The increase in adjusted EBIT and margin came primarily from additional sales of IP based solutions and the run-off of a large low margin government project.

5.3.2. NSESA

Adjusted EBIT in the NSESA segment was $33.5 million for Q4 2014, a decrease of $10.0 million year-over-year, while the margin decreased from 10.0% to 7.5%. The decrease in adjusted EBIT and margin primarily reflected the previous year’s positive impact from the reduction of the 2013 performance based compensation accruals in the amount of $16.0 million and, to a lesser extent, the result of the temporary lower utilization rates in Q4 2014 due to the timing of projects completion and the start-up of new contracts. The Q4 2014 adjusted EBIT was also positively impacted by $8.7 million coming from the non-recurring benefits related to the resolution of acquisition-related provisions mainly for the renegotiation of office leases and client contracts.

5.3.3. Canada

Adjusted EBIT in the Canada segment was $87.1 million for Q4 2014, an increase of $6.6 million year-over-year, while the margin increased from 19.7% to 22.7%. The improvement in adjusted EBIT and margin reflects the focus on the management of resource utilization and improved project execution.

5.3.4. France

Adjusted EBIT in the France segment was $39.1 million for Q4 2014, an increase of $4.2 million year-over-year, while the margin increased from 12.3% to 12.5%. This increase in adjusted EBIT and margin was primarily the result of a favorable impact of $7.6 million coming from the non-recurring benefits related to the resolution of acquisition-related provisions mainly for client contracts and the renegotiation of office leases, offset by the unfavorable impact of $4.3 million due to one less working day in Q4 2014.

5.3.5. U.K.

Adjusted EBIT in the U.K. segment was $60.7 million for Q4 2014, an increase of $24.8 million year-over-year, while the margin increased from 11.8% to 18.9%. This increase in adjusted EBIT and margin was mainly the result of the non-recurring benefits related to the resolution of acquisition-related provisions for $11.2 million mainly for the renegotiation of office leases, the additional tax credits on salaries of $4.9 million and to a lesser extent the costs synergies realized from the integration program and the implementation of the CGI Management Foundation.

5.3.6. CEE

Adjusted EBIT in the CEE segment was $26.6 million for Q4 2014, an increase of $4.9 million year-over-year, while the margin increased from 8.8% to 10.4%. This increase in adjusted EBIT and margin was primarily the result of the cost synergies realized from the integration program and the implementation of the CGI Management Foundation. The CEE adjusted EBIT and margin was also positively impacted by a $2.0 million impact coming from the non-recurring benefits related to the resolution of acquisition-related provisions mainly for client contracts and the renegotiation of office leases.

5.3.7. Asia Pacific

Adjusted EBIT in the Asia Pacific segment was $25.7 million for Q4 2014, an increase of $11.7 million year-over-year, while the margin increased from 14.1% to 23.1%. This increase in adjusted EBIT and margin was mainly the result of the costs synergies realized from the integration program and the implementation of the CGI Management Foundation as well as a $4.5 million favourable impact coming from the non-recurring benefits related to the resolution of acquisition-related provisions mainly for client contracts.


Management’s Discussion and Analysis

 

 

5.4. NET EARNINGS AND EARNINGS PER SHARE

The following table sets out the information supporting the earnings per share calculations:

 

                     Change         

For the three months ended September 30,

 

  

2014

 

    

2013

 

    $                

%            

 

 

 

In thousands of CAD except for percentages

         

Adjusted EBIT

     370,224         313,392        56,832        18.1%   

Minus the following items:

         

Integration-related costs

     64,259         50,184        14,075        28.0%   

Finance costs

     22,485         28,184        (5,699     (20.2%

Finance expense (income)

 

    

 

302

 

  

 

    

 

(576

 

 

   

 

878

 

  

 

   

 

(152.4%

 

 

Earnings before income taxes

     283,178         235,600        47,578        20.2%   

 

Income tax expense

     69,470         94,578        (25,108     (26.5%

Effective tax rate

 

    

 

24.5%

 

  

 

    

 

40.1%

 

  

 

     

 

(38.9%

 

 

Net earnings

     213,708         141,022        72,686        51.5%   

 

Margin

  

 

 

 

8.6%

 

  

  

 

 

 

5.7%

 

  

   

 

 

 

50.9%

 

  

Weighted average number of shares

         

Class A subordinate shares and Class B shares (basic)

     310,320,352         309,046,350          0.4%   

Class A subordinate shares and Class B shares (diluted)

     319,540,764         319,114,642          0.1%   

Earnings per share (in dollars)

         

Basic EPS

     0.69         0.46        0.23        50.0%   

Diluted EPS

 

    

 

0.67

 

  

 

    

 

0.44

 

  

 

   

 

0.23

 

  

 

   

 

52.3%

 

  

 

For the current quarter, the $47.6 million increase in earnings before income taxes was mainly coming from the $56.8 million increase in adjusted EBIT as described in section 5.3 of the present document and a decrease of $5.7 million in finance costs, partly offset by an increase of $14.1 million in the integration-related costs.

In Q4 2014, the income tax expense was $69.5 million, a decrease of $25.1 million compared to $94.6 million in Q4 2013, while our effective income tax rate decreased from 40.1% to 24.5%. The decrease in the income tax expense and rate was mainly due to $26.0 million of unfavorable adjustments in fiscal 2013 that are comprised of a $18.4 million expense resulting from the revaluation of deferred tax assets following the enactment of a future rate reduction in the U.K. and from taxes paid on the repatriation of funds from the legacy Logica Indian operations of $7.6 million.

As a result of the above-mentioned items, the net earnings were $213.7 million, an increase of $72.7 million compared to $141.0 million last year.

The table on page 39 shows the quarterly year-over-year comparison of the tax rate with the impact of integration-related costs, tax adjustments and benefits related to the resolution of acquisition-related provisions removed.

During the quarter, no Class A subordinate shares were repurchased while 1,002,533 options were exercised.


FISCAL 2014 RESULTS

 

 

5.4.1. Net Earnings and Earnings per Share Prior to Specific Items

The following table sets out the information supporting the net earnings and earnings per share prior to specific items such as the integration-related costs, adjustments related to tax and the resolution of acquisition-related provisions:

 

                        Change         
For the three months ended September 30,                         
   

2014

 

    

2013

 

   

$        

 

   

%        

 

 

Earnings before income taxes

    283,178         235,600        47,578        20.2%   

Add back:

        

Integration-related costs

    64,259         50,184        14,075        28.0%   

Remove:

        

Resolution of acquisition-related provisions 1

    33,991                33,991          

Earnings before income taxes prior to specific items

    313,446         285,784        27,662        9.7%   

Margin

    12.6%         11.6%       

Income tax expense

    69,470         94,578        (25,108     (26.5%

Add back:

        

Tax adjustments 2

            (26,013     26,013        (100.0%

Tax deduction on integration-related costs

    15,075         3,619        11,456        316.6%   

Remove:

        

Income taxes on the resolution of acquisition-related provisions

    5,091                5,091          

Income tax expense prior to specific items

    79,454         72,184        7,270        10.1%   

Effective tax rate prior to specific items

    25.3%         25.3%       
        

Net earnings prior to specific items

    233,992         213,600        20,392        9.5%   

Net earnings margin

    9.4%         8.7%       

Weighted average number of shares outstanding

        

Class A subordinate shares and Class B shares (basic)

    310,320,352         309,046,350          0.4%   

Class A subordinate shares and Class B shares (diluted)

    319,540,764         319,114,642          0.1%   

Earnings per share prior to specific items (in dollars)

        

Basic EPS

    0.75         0.69        0.06        8.7%   

 

Diluted EPS

 

 

 

 

 

 

0.73

 

 

  

 

  

 

 

 

 

0.67

 

 

  

 

 

 

 

 

 

0.06

 

 

  

 

 

 

 

 

 

9.0%

 

 

  

 

 

  1 

The resolution of acquisition-related provisions is discussed on pages 36 and 37.

 

  2 

The tax adjustments are discussed on page 38.


Management’s Discussion and Analysis

 

 

5.5. CONSOLIDATED STATEMENTS OF CASH FLOWS

As at September 30, 2014, cash and cash equivalents were $535.7 million. The following table provides a summary of the generation and use of cash for the quarters ended September 30, 2014 and 2013.

 

 

For the three months ended September 30,

 

  

 

2014

 

    

 

2013

 

    

 

Change

 

 

In thousands of CAD

        

Cash provided by operating activities

     412,000         166,350         245,650   

Cash used in investing activities

     (66,439)         (27,062)         (39,377)   

Cash provided by (used in) financing activities

     47,138         (155,689)         202,827   

Effect of foreign exchange rate changes on cash and cash equivalents

     11,724         (17,340)         29,064   

Net increase (decrease) in cash and cash equivalents

     404,423         (33,741)         438,164   

5.5.1. Cash Provided by Operating Activities

For Q4 2014, cash provided by operating activities was $412.0 million compared to $166.4 million in Q4 2013, or 16.6% of revenue compared to 6.8% last year. The increase in cash from operating activities was mainly due to an improved DSO and to the growth in net earnings as described in section 5.4 of the present document. The timing of our working capital inflows and outflows will always have an impact on the cash flow from operations. Excluding the $19 million integration-related cash disbursements, the cash provided by operating activities would have been $431 million in Q4 2014, representing 17.4% of revenue compared to $204 million or 8.3% of revenue in Q4 2013.

The following table provides a summary of the generation and use of cash from operating activities.

 

 

For the three months ended September 30,

 

  

 

2014

 

    

 

2013

 

    

 

Change

 

 

In thousands of CAD

        

Net earnings

     213,708         141,022         72,686   

Amortization and depreciation

     107,877         117,292         (9,415)   

Other adjustments 1

     37,156         36,224         932   

Cash flow from operating activities before net change in non-cash working capital items

     358,741         294,538         64,203   

Net change in non-cash working capital items:

        

Accounts receivable, work in progress and deferred revenue

     177,898         36,206         141,692   

Accounts payable and accrued liabilities, accrued compensation, provisions and

     (143,327)         (166,086)         22,759   

other long-term liabilities

        

Other 2

     18,688         1,692         16,996   

Net change in non-cash working capital items

     53,259         (128,188)         181,447   

Cash provided by operating activities

     412,000         166,350         245,650   

 

  1 

Other adjustments are comprised of deferred income taxes, foreign exchange loss (gain) and share-based payment costs.

 

  2 

Comprised of prepaid expenses and other assets, long-term financial assets, retirement benefits obligations, derivative financial instruments and income taxes.

For the current quarter, as described in section 5.4 of the present document, the Company’s net earnings increased by $72.7 million when compared to Q4 2013.

For Q4 2014, the $177.9 million of cash coming from the accounts receivable, work in progress and deferred revenue was mainly due to a decrease of 4 days in our DSO from 47 days in Q3 2014 to 43 in Q4 2014.

For the current quarter, the $143.3 million used in cash for the accounts payable and accrued liabilities, accrued compensation, provisions and other long-term liabilities was mostly due to the net $85.0 million decrease in accounts payable and accrued liabilities and the net decrease of $47.5 million in accrued compensation that were mainly driven by the reduction in the vacation accruals. These were partly offset by the net increase of $45.2 million in integration-related accruals.


FISCAL 2014 RESULTS

 

 

 

6.

Eight Quarter Summary

 

LOGO

 

 

As at and for the three months

 

 

Sept. 30,

 

 

June 30,

  Mar. 31,   Dec. 31,   Sept. 30,   June 30,   Mar. 31,   Dec. 31,

ended,

 

 

2014

 

 

2014

 

 

2014

 

 

2013

 

 

2013

 

 

2013

 

 

2013

 

 

2012

 

In millions of CAD unless otherwise noted                            

Growth

               

Backlog

  18,237   18,781   19,476   19,253   18,677   18,747   18,019   18,281

Bookings

  2,049   2,451   2,850   2,818   2,501   2,754   2,210   2,845

Book-to-bill ratio

  82.5%   91.9%   105.4%   106.5%   101.7%   107.3%   87.5%   112.3%

Revenue

  2,483.7   2,667.0   2,704.3   2,644.7   2,458.2   2,567.3   2,526.2   2,532.9

Year-over-year growth

  1.0%   3.9%   7.0%   4.4%   52.7%   141.1%   137.0%   145.4%

Constant currency growth

  (3.4%)   (3.9%)   (2.3%)   (1.9%)   48.2%   140.3%   137.1%   147.5%

Profitability

               

Adjusted EBIT

  370.2   342.2   341.5   302.9   313.4   291.2   261.6   209.5

Adjusted EBIT margin

  14.9%   12.8%   12.6%   11.5%   12.7%   11.3%   10.4%   8.3%

Net earnings

  213.7   225.1   230.9   189.8   141.0   178.2   114.2   22.4

Net earnings margin

  8.6%   8.4%   8.5%   7.2%   5.7%   6.9%   4.5%   0.9%

Basic EPS (in dollars)

  0.69   0.73   0.75   0.62   0.46   0.58   0.37   0.07

Diluted EPS (in dollars)

  0.67   0.71   0.73   0.60   0.44   0.56   0.36   0.07

Liquidity

               

Cash provided by operating activities

  412.0   345.9   350.7   66.3   166.4   133.2   147.2   224.5

As a % of revenue

  16.6%   13.0%   13.0%   2.5%   6.8%   5.2%   5.8%   8.9%

Days sales outstanding

  43   47   47   55   49   49   46   46

Capital structure

               

Net debt

  2,113.3   2,389.0   2,678.2   2,890.4   2,739.9   2,873.0   2,914.3   2,964.9

Net debt to capitalization ratio

  27.6%   32.6%   35.6%   38.9%   39.6%   41.1%   43.0%   44.7%

Return on equity

  18.8%   18.1%   17.9%   16.0%   12.3%   4.3%   1.8%   1.7%

Return on invested capital

  14.5%   13.3%   13.4%   12.7%   11.8%   12.3%   11.1%   10.9%

Balance sheet

               
Cash and cash equivalents, and short- term investments   535.7   131.3   133.8   206.5   106.2   165.3   167.7   161.6

Total assets

  11,234.1   11,162.2   11,560.4   11,801.0   10,879.3   11,132.8   10,936.6   10,981.8

Long-term financial liabilities

  2,748.4   2,164.8   2,562.4   2,796.6   2,489.5   2,648.2   3,093.5   3,162.6

There are factors causing quarterly variances which may not be reflective of the Company’s future performance. First, there is seasonality in SI&C work, and the quarterly performance of these operations is impacted by occurrences such as vacations and the number of statutory holidays in any given quarter. Outsourcing contracts including BPS contracts are affected to a lesser extent by seasonality. Second, the workflow from some clients may fluctuate from quarter to quarter based on their business cycle and the seasonality of their own operations. Third, the savings that we generate for a client on a given outsourcing contract may temporarily reduce our revenue stream from this client, as these savings may not be immediately offset by additional work performed for this client.

In general, cash flow from operating activities could vary significantly from quarter to quarter depending on the timing of monthly payments received from large clients, cash requirements associated with large acquisitions, outsourcing contracts and projects, the timing of the reimbursements for various tax credits as well as profit sharing payments to members and the timing of restructuring cost payments.

Foreign exchange fluctuations can also contribute to quarterly variances as our percentage of operations in foreign countries evolves. The effect from these variances is primarily on our revenue and to a much less extent, on our net margin as we benefit from natural hedges.


Management’s Discussion and Analysis

 

 

 

7.

Changes in Accounting Policies

 

LOGO

The audited consolidated financial statements for the year ended September 30, 2014 include all adjustments that CGI’s management considers necessary for the fair presentation of its financial position, results of operations, and cash flows.

a) NEW STANDARDS AND AMENDMENTS ADOPTED

The following new and amended standards have been adopted by the Company effective October 1, 2013:

IFRS 10 – Consolidated Financial Statements

The new standard builds on existing principles by identifying the concept of control as the determining factor in whether an entity should be included in a company’s consolidated financial statements. The adoption of IFRS 10 did not result in any significant impact on the Company’s consolidated financial statements.

IFRS 12 – Disclosure of Interests in Other Entities

The new standard provides guidance on disclosure requirements for all forms of interests in other entities, including subsidiaries, joint arrangements, associates and structured entities. The standard requires disclosure of the nature and risks associated with the Company’s interests in other entities and the effects of those interests on its financial position, financial performance and cash flows. The adoption of IFRS 12 did not result in any significant impact on the Company’s consolidated financial statements.

IFRS 13 – Fair Value Measurement

The new standard provides guidance for fair value measurements by providing a definition of fair value and a single source of fair value measurement and disclosure requirements. IFRS 13 applies when other IFRS standards require or permit fair value measurements. The adoption of IFRS 13 did not result in any significant impact on the Company’s consolidated financial statements other than to give rise to additional disclosures.

IAS 1 – Presentation of Financial Statements

The amendment requires grouping together items within the statement of comprehensive income that may be reclassified to the statement of earnings. As a result, the Company has grouped items within its consolidated statements of comprehensive income and accumulated other comprehensive income by items that will and will not be reclassified subsequently to the consolidated statements of earnings.

IAS 19 – Employee Benefits

Two amendments of IAS 19 have been adopted by the Company.

The first amendment requires to adjust the calculation of the financing cost component of defined benefit plans and to enhance disclosure requirements. As a result, the Company calculated a net interest expense or income on the net defined benefit liability or asset. The net interest on the defined benefit liability or asset replaces the interest cost on the defined benefit obligation and the expected return on plan assets. The adoption of IAS 19 did not result in any significant impact on the Company’s consolidated financial statements, other than to give rise to additional disclosures.

The second amendment permits the recognition of certain contributions from employees as a reduction of the service cost in the period in which the related service is rendered. The amendment applies to contributions from employees set out in the formal terms of the plan, linked to service and independent of the number of years of service. The Company has early adopted the amendment of IAS 19 which is effective on or after July 1, 2014. The amendment did not result in any significant impact on the Company’s consolidated financial statements.


FISCAL 2014 RESULTS

 

 

b) 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. IFRS 15 supersedes IAS 18, “Revenue”, IAS 11, “Construction Contracts”, and other revenue related interpretations. The standard will be effective on October 1, 2017 for the Company with earlier adoption 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.


Management’s Discussion and Analysis

 

 

 

8.

Critical Accounting Estimates and Judgements

 

LOGO

The Company’s significant accounting policies are described in Note 3 of the audited consolidated financial statements for the year ended September 30, 2014. The preparation of the consolidated financial statements requires management to make judgements and estimates that affect the reported amounts of assets, liabilities and equity and the accompanying disclosures at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Because the use of judgements and estimates is inherent in the financial reporting process, actual results could differ.

An accounting estimate is considered critical if the estimate requires management to make assumptions about matters that were highly uncertain at the time the estimate was made, if different estimates could reasonably have been used in the period, or changes in the accounting estimates that are reasonably likely to occur, could have a material impact on the presentation of our financial condition, changes in financial condition or results of operations.

 

Areas impacted by estimates

 

 

Consolidated

balance sheets

 

 

Consolidated statements of earnings

 

          Revenue   Cost of
services, selling
and
administrative
 

Income

taxes

Revenue recognition 1

 

  ü   ü   ü    

Estimated losses on revenue-generating contracts

 

  ü       ü    

Goodwill impairment

 

  ü       ü    

Business combinations

 

  ü   ü   ü   ü

Income taxes

 

  ü           ü

Litigations and claims

 

  ü   ü   ü    

 

  1 

Affects the balance sheet through accounts receivable, work in progress and deferred revenue.

The use of judgments, apart from those involving estimations, that have the most significant effect on the amounts recognized in the financial statements are:

Multiple component arrangements

Assessing whether the deliverables within an arrangement are separately identifiable components requires judgement by management. A component is considered as separately identifiable if it has value to the client on a stand-alone basis. The Company first reviews the contract clauses to evaluate if the deliverable is accepted separately by the client. Then, the Company assesses if the deliverable could have been provided by another vendor and if it would have been possible for the client to decide to not purchase the deliverable.

Deferred tax assets

Deferred tax assets are recognized for unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilized. Management judgment is required concerning uncertainties that exist with respect to the timing of future taxable income required to recognize a deferred tax asset. The Company recognizes an income tax benefit only when it is probable that the tax benefit will be realized in the future. In making this judgement, the Company assesses forecast and the availability of future tax planning strategies.


FISCAL 2014 RESULTS

 

 

Significant estimates about the future and other major sources of estimation uncertainty at the end of the reporting period could have a significant risk of causing a material adjustment to the carrying amounts of the following:

Revenue recognition

Revenue is measured at the fair value of the consideration received or receivable net of discounts, volume rebates and sales related taxes.

The Company’s arrangements often include a mix of the services and products. If an arrangement involves the provision of multiple components, the total arrangement value is allocated to each separately identifiable component based on its relative selling price. When estimating selling price of each component, the Company maximizes the use of observable prices which are established using the Company’s prices for same or similar components. When observable prices are not available, the Company estimates selling prices based on its best estimate. The best estimate of selling price is the price at which the Company would normally expect to offer the services or products and is established by considering a number of internal and external factors including, but not limited to, geographies, the Company’s pricing policies, internal costs and margins.

Revenue from systems integration and consulting services under fixed-fee arrangements where the outcome of the arrangements can be estimated reliably is recognized using the percentage-of-completion method over the service periods. The Company uses the labour costs or labour hours to measure the progress towards completion. This method relies on estimates of total expected labour costs or total expected labour hours to complete the service, which are compared to labour costs or labour hours incurred to date, to arrive at an estimate of the percentage of revenue earned to date. Management regularly reviews underlying estimates of total expected labour costs or hours. If the outcome of an arrangement cannot be estimated reliably, revenue is recognized to the extent of arrangement costs incurred that are likely to be recoverable.

Estimated losses on revenue-generating contracts

Estimated losses on revenue-generating contracts may occur due to additional contract costs which were not foreseen at inception of the contract. Contract losses are measured at the amount by which the estimated total costs exceed the estimated total revenue from the contract. The estimated losses on revenue-generating contracts are recognized in the period when it is determined that a loss is probable. Management regularly reviews arrangement profitability and the underlying estimates.

Goodwill impairment

The carrying value of goodwill is tested for impairment annually on September 30, or earlier if events or changes in circumstances indicate that the carrying value may be impaired.

The recoverable amount of each segment has been allocated has been determined based on the its value in use (“VIU”) calculation which includes estimates about their future financial performance based on cash flows approved by management covering a period of five years as the Company generates revenue mainly through long-term contracts. Key assumptions used in the VIU calculations are the discount rate applied and the long-term growth rate of net operating cash flows. In determining these assumptions, management has taken into consideration the current economic environment and its resulting impact on expected growth and discount rates. The cash flow projections reflect management’s expectations of the operating segment’s operating performance and growth prospects in the operating segment’s market. The discount rate applied to an operating segment is the weighted average cost of capital (“WACC”). Management considers factors such as country risk premium, risk-free rate, size premium and cost of debt to derive the WACC.

For goodwill impairment testing purposes, the group of CGUs that represent the lowest level within the Company at which management monitors goodwill is the operating segment level.

Business combinations

Management makes assumptions when allocating the fair value of the consideration to tangible and intangible assets acquired and liabilities assumed. The goodwill recognized is composed of the future economic value associated to acquire work force and synergies with the Company’s operations which are primarily due to reduction of costs and new business opportunities.

The determination of fair value involves making estimates relating to acquired intangible assets, PP&E, litigation, provision for estimated losses on revenue-generating contracts, other onerous contracts and contingency reserves. Estimates include the forecasting of future cash flows and discount rates.


Management’s Discussion and Analysis

 

 

Income taxes

Deferred tax assets are recognized for unused tax losses to the extent that it is probable that taxable profit will be available against which the losses can be utilized. Once this assessment is made, the Company considers the analysis of forecast and future tax planning strategies. Such estimates are made based on the forecast by jurisdiction on an undiscounted basis. Management considers factors such as the number of years to include in the forecast period, the history of the taxable profits and availability of tax strategies.

The Company is subject to taxation in numerous jurisdictions and there are transactions and calculations for which the ultimate tax determination is uncertain. When a tax position is uncertain, the Company recognizes an income tax benefit or reduces an income tax liability only when it is probable that the tax benefit will be realized in the future or that the income tax liability is no longer probable. The provision for uncertain tax position is made using the best estimate of the amount expected to be paid based on qualitative assessment of all relevant factors.

Litigations and claims

Provisions are recognized when the Company has a present legal or constructive obligation as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. The amount recognized as a provision is the best estimate of the consideration required to settle the present obligation at the end of the reporting period, taking into account the risks and uncertainties surrounding the obligation. Provisions are discounted using a current pre-tax rate when the impact of the time value of money is material.

The accrued litigation and legal claim provisions are based on historical experience, current trends and other assumptions that are believed to be reasonable under the circumstances. Estimates include the period in which the underlying cause of the claim occurred and the degree of probability of an unfavourable outcome.


FISCAL 2014 RESULTS

 

 

 

9.

Integrity of Disclosure

 

LOGO

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.

CGI has a formal corporate disclosure policy whose goal is to raise awareness of the Company’s approach to disclosure among the members of the Board of Directors, senior management and employees.

The Board of Directors has the responsibility under its charter and under the securities laws that govern CGI’s continuous disclosure obligations to oversee CGI’s compliance with its continuous and timely disclosure obligations as well as the integrity of the Company’s internal controls and management information systems. The Board of Directors carries out this responsibility mainly through its Audit and Risk Management Committee.

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) reviewing of all our public disclosure documents containing audited or unaudited financial information; b) identifying and examining all risks to which we are exposed and reviewing the various policies and practices that are intended to manage those risks; c) reviewing and assessing of the effectiveness of our accounting policies and practices concerning financial reporting; d) reviewing and monitoring our internal control procedures, programs and policies and assessing 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) recommending 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) reviewing of the audit procedures; h) reviewing of related party transactions; and i) carrying out such other responsibilities usually attributed to audit and risk committees or as directed by our Board of Directors. In making its recommendation to the Board of Directors in relation to the annual appointment of the external auditor, the Audit and Risk Management Committee will conduct an annual assessment of the external auditor in keeping with the recommendations of the Chartered Professional Accountants of Canada. The initial formal assessment will be concluded in advance of our upcoming Annual General Meeting of shareholders and will be conducted with the assistance of key CGI personnel.

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, 2014. The Chief Executive Officer and Chief Financial Officer 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.


Management’s Discussion and Analysis

 

 

 

10.

Risk Environment

 

LOGO

10.1. 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.

10.1.1. 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.

10.1.2. 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 availability and retention of qualified IT professionals

There is strong demand for qualified individuals in the IT industry. Hiring and retaining a sufficient amount of individuals with the desired knowledge and skill set may be difficult. Therefore, it is important that we remain able to successfully attract and retain highly qualified professionals and establish an effective succession plan. 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. If our succession plan fails to identify those with potential or to develop these key individuals, we may lose key members and be required to recruit and train these new resources. 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 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


FISCAL 2014 RESULTS

 

 

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.

10.1.3. Risks Related to our Business

Risks associated with our growth strategy

CGI’s Build and Buy strategy is founded on four pillars of growth: first, organic growth through contract wins, renewals and extensions in the areas of outsourcing and system integration; second, the pursuit of new large outsourcing contracts; third, acquisitions of smaller firms or niche players; and fourth, transformational acquisitions.

Our ability to grow through organic growth and new large outsourcing transactions is affected by a number of factors outside of our control, including a lengthening of our sales cycle for major outsourcing contracts.

Our ability to grow through niche and transformational acquisitions 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.

If we are unable to implement our Build and Buy strategy, we will likely be unable to maintain our historic or expected growth rates.

The variability of financial results

Our ability to maintain and increase our revenues is affected not only by our success in implementing our Build and Buy strategy, but also by a number of other factors, including: our ability to introduce and deliver new services and products; a lengthened sales cycle; the cyclicality of purchases of technology services and products; the nature of a customer’s


Management’s Discussion and Analysis

 

 

business; and the structure of agreements with customers. These, and other factors, make it difficult to predict financial results for any given period.

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 subjects us to various issues that can negatively impact our operations: the fluctuations of currency (see foreign exchange risk); the burden of complying with a wide variety of national and local laws (see regulatory risk); the differences in and uncertainties arising from local business culture and practices; political, social and economic instability including the threats of terrorism, civil unrest, war, natural disasters and pandemic illnesses. Any or all of these risks could impact our global business operations and cause our profitability to decline.

Organizational challenges associated with our size

With the acquisition of Logica, our organization has more than doubled in size with expanded operations in both Europe and Asia. Our culture, standards, core values, internal controls and our policies need to be instilled across the newly acquired businesses as well as maintained within our existing operations. To effectively communicate and manage these standards throughout a large global organization is both challenging and time consuming. Newly acquired businesses may be resistant to change and may remain attached to past methods, standards and practices which may compromise our business agility in pursuing opportunities. Cultural differences in various countries may also present barriers to introducing new ideas or aligning our vision and strategy with the rest of the organization. If we cannot overcome these obstacles in maintaining a strategic bond throughout the Company worldwide, we may not be able to achieve our growth and profitability objectives.

Taxes

In estimating our income tax payable, management uses accounting principles to determine income tax positions that are likely to be sustained by applicable tax authorities. However, there is no assurance that our tax benefits or tax liability will not materially differ from our estimates or expectations. The tax legislation, regulation and interpretation that apply to our operations are continually changing. In addition, future tax benefits and liabilities are dependent on factors that are inherently uncertain and subject to change, including future earnings, future tax rates, and anticipated business mix in the various jurisdictions in which we operate. Moreover, our tax returns are continually subject to review by applicable tax authorities; it is these tax authorities that will make the final determination of the actual amounts of taxes payable or receivable, of any future tax benefits or liabilities and of income tax expense that we may ultimately recognize. Any of the above factors could have a material adverse effect on our net income or cash flows by affecting our operations and profitability, the availability of tax credits, the cost of the services we provide, and the availability of deductions for operating losses as we develop our international service delivery capabilities.

Credit risk with respect to accounts receivable and work in progress

In order to sustain our cash flows and net earnings from operations, we must invoice and 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 effect 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.


FISCAL 2014 RESULTS

 

 

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 effect 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. 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


Management’s Discussion and Analysis

 

 

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 in each of our geographies 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 recruitment activities, professional training programs, attrition rates and restructuring programs appropriately. To the extent that we fail to do so, or to the extent that laws and regulations, particularly those in Europe, restrict our ability 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 significant 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. Although IFRS considers a national government and its agencies as a single client, our client base in the U.S. government economic sector is in fact diversified with contracts from many different departments and agencies.

Government business risk

Changes in 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. 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 global operations require us to be compliant with laws in many jurisdictions on matters such as: anticorruption, trade restrictions, immigration, taxation, securities regulation, anti-competition, data privacy and labour relations, amongst others. Complying with these diverse requirements worldwide is a challenge and consumes significant resources. Some of these laws may impose conflicting requirements; we may face the absence in some jurisdictions of effective laws to protect our intellectual property rights; there may be restrictions on the movement of cash and other assets; or restrictions on the import and export of certain technologies; or restrictions on the repatriation of earnings and reduce our earnings, all of which may expose us to penalties for non-compliance and harm our reputation.

Our business with the U.S. 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.


FISCAL 2014 RESULTS

 

 

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 affect our business, operating results and financial condition, and may negatively affect our professional reputation. We typically use reasonable efforts to include provisions in our contracts which are designed to limit our exposure to legal claims relating to our services and the applications we develop. We may not always be able to include such provisions and, where we are successful, they 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 the integration of new operations

The successful integration of new operations arising from our acquisition 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.

Internal controls risks

Due to the inherent limitations of internal controls including the circumvention or overriding of controls, or fraud, there can only be reasonable assurance that the Company’s internal controls will detect and prevent a misstatement. If the Company is unable to design, implement, monitor and maintain effective internal controls throughout its different business environments, the efficiency of our operations might suffer, resulting in a decline in revenue and profitability, and the accuracy of our financial reporting could be impaired.

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 grow the business organically as well as conclude 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


Management’s Discussion and Analysis

 

 

under our existing or future credit agreements, and equity funding 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 effect 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.

Foreign exchange risk

The majority of our revenue and costs are denominated in currencies other than the Canadian dollar. Foreign exchange fluctuations impact the results of our operations as they are reported in Canadian dollars. This risk is partially mitigated by a natural hedge in matching our costs with revenue denominated in the same currency and through the use of derivatives in our hedging strategy. As we continue our global expansion, natural hedges may begin to diminish and the use of hedging contracts exposes us to the risk that financial institutions will fail to perform their obligations under our hedging instruments. Other than the use of financial products to deliver on our hedging strategy, we do not trade derivative financial instruments.

With our expanded presence in Europe, if uncertainty regarding the ability of certain European countries to continue servicing their sovereign debt or if austerity measures persist, the euro may weaken against the Canadian dollar. Similarly, if other currencies of countries where we operate weaken against the Canadian dollar, our consolidated financial results could be materially adversely impaired.

10.2. 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 material adverse effect on the Company’s financial position, results of operations or the ability to carry on any of its business activities. Please refer to Note 13 and 30 to the audited consolidated financial statements for more detailed information for legal proceedings.

 

 

 

 

 

Transfer Agent

Computershare Investor Services Inc.

(800) 564-6253

Investor Relations

Lorne Gorber

Senior Vice-President, Global Communications & Investor Relations

Telephone: (514) 841-3355

lorne.gorber@cgi.com

1350 René-Lévesque Boulevard West

15th Floor

Montreal, Quebec

H3G 1T4

Canada


SIGNATURES

Pursuant to the requirements of the Exchange Act, the Registrant certifies that it meets all of the requirements for filing on Form 40-F and has duly caused this annual report to be signed on its behalf by the undersigned, thereto duly authorized.

 

   Groupe CGI Inc./CGI Group Inc.   
   By:        /s/ Benoit Dubé   
Date:   December 22, 2014       Name:   Benoit Dubé   
      Title:   Executive Vice-President and   
        Chief Legal Officer   


EXHIBIT INDEX

 

23.1 Consent of Ernst & Young LLP

 

99.1 Certification of the Registrant’s Chief Executive Officer required pursuant to Rule 13a-14(a).

 

99.2 Certification of the Registrant’s Chief Financial Officer required pursuant to Rule 13a-14(a).

 

99.3 Certification of the Registrant’s Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

99.4 Certification of the Registrant’s Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.