CGI(GIB) - 2022 Q4 - Annual Report

Introduction and Basis of Presentation Basis of Presentation This section outlines the foundational elements of the Management's Discussion and Analysis (MD&A), clarifying that the report is management's responsibility, approved by the Board, and prepared under Canadian Securities Administrators requirements and IFRS accounting standards, including a forward-looking statements disclaimer - The MD&A is prepared under IFRS and all dollar amounts are in Canadian dollars unless otherwise noted[3] - The document contains forward-looking statements based on management's current assumptions, which are subject to inherent risks and uncertainties, including market conditions, industry competition, business growth strategy, foreign exchange, and cybersecurity[5] Key Performance Measures The company utilizes a combination of IFRS (GAAP) and non-GAAP measures to assess performance, defining key non-GAAP metrics like constant currency growth, adjusted EBIT, net earnings excluding specific items, and net debt to provide a clearer view of underlying business performance - The company uses non-GAAP measures like 'Revenue prior to foreign currency impact' and 'Adjusted EBIT' to facilitate period-to-period comparisons by excluding currency effects and specific costs like acquisition and integration expenses[8][9] - Key growth indicators tracked by management include Backlog (estimated future revenue from contracts) and Book-to-bill ratio, with a target of over 100% on a trailing twelve-month basis[10] - Capital structure is monitored using non-GAAP ratios such as Net debt to capitalization and Return on invested capital (ROIC)[11][13] Reporting Segments Effective April 1, 2022, the company realigned its management structure, creating two new operating segments and resulting in a total of nine reportable segments, with comparative period information restated to conform to this new structure - The company realigned its structure, resulting in nine operating segments: Western and Southern Europe; U.S. Commercial and State Government; Canada; U.S. Federal; Scandinavia and Central Europe; U.K. and Australia; Finland, Poland and Baltics; Northwest and Central-East Europe; and Asia Pacific[14] Corporate Overview About CGI Founded in 1976, CGI is a leading IT and business consulting firm with approximately 90,000 professionals globally, providing end-to-end services including consulting, systems integration, managed services, and intellectual property (IP) solutions to clients across key industries - CGI's service portfolio is categorized into three main areas: Business and strategic IT consulting & systems integration, Managed IT & business process services, and Intellectual property (IP) solutions[23] - The company has focused practices in industries including financial services, government, manufacturing, retail, communications, utilities, and health[22] Vision and Strategy CGI's strategy is a disciplined 'Build and Buy' approach focused on profitable growth, based on four pillars for organic and acquisitive growth, executed through a model combining local client proximity with a global delivery network - The 'Build and Buy' growth strategy comprises four pillars: 1) Win, renew, and extend contracts; 2) Secure new large managed IT and business process services contracts; 3) Make metro market acquisitions; 4) Execute large, transformational acquisitions[29][31] - The company's ESG strategy is a key part of its goal to be an engaged, ethical, and responsible corporate citizen, with priorities focused on people, communities, and climate[37][38] Competitive Environment CGI competes in a vigorous global marketplace against a range of firms, positioning itself as a leader by combining deep industry and technology expertise, local client relationships, an extensive global delivery network, a breadth of digital IP, and a consistent record of on-time, on-budget delivery - Key competitive differentiators include: depth of expertise, local presence, global delivery network, digital IP solutions, total cost and value, practical innovation, and consistent delivery[41] Yearly Overview Selected Yearly Information & Key Performance Measures Fiscal 2022 demonstrated strong growth, with revenue increasing by 6.1% to $12.9 billion and 10.5% on a constant currency basis, while profitability also improved, with net earnings rising to $1.47 billion and diluted EPS growing to $6.04, achieving a healthy book-to-bill ratio of 108.5% Fiscal Year 2022 vs. 2021 Performance Highlights | Metric | 2022 | 2021 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Revenue | $12,867.2M | $12,126.8M | +$740.4M | +6.1% | | Constant Currency Revenue Growth | 10.5% | 1.1% | +9.4% | N/A | | Net Earnings | $1,466.1M | $1,369.1M | +$97.0M | +7.1% | | Diluted EPS | $6.04 | $5.41 | +$0.63 | +11.6% | | Bookings | $13,966M | $13,843M | +$123M | +0.9% | | Backlog | $24,055M | $23,059M | +$996M | +4.3% | | Cash from Operating Activities | $1,865.0M | $2,115.9M | -$250.9M | -11.9% | Stock Performance This section details the company's stock trading activity on the TSX and NYSE for fiscal 2022 and outlines its share repurchase activities, including the purchase of 8.7 million Class A shares for $908.7 million under its Normal Course Issuer Bid (NCIB) - Under its NCIB, the company purchased for cancellation 8,689,439 Class A Shares for $908.7 million at a weighted average price of $104.57 during the year ended September 30, 2022[48] Investments in Subsidiaries CGI was active in its 'Buy' strategy during fiscal 2022, completing several acquisitions to enhance its capabilities and market presence, including Umanis in France for $420.3 million and Array, CMC, Unico, and Harwell for a combined $238.4 million - Acquired Umanis SA, a French digital company, for a transaction value of $420.3 million, adding approximately 3,000 professionals[59] - Completed four other acquisitions (Array, CMC, Unico, Harwell) for a total purchase price of $238.4 million, adding a combined total of over 2,000 professionals[56][57][58] Financial Review (Fiscal Year 2022) Bookings and Book-to-Bill Ratio For fiscal 2022, the company secured bookings of $14.0 billion, achieving a book-to-bill ratio of 108.5%, indicating that the company won more new business than the revenue it recognized during the period, supporting future growth, with strong ratios in Finland, Poland and Baltics (165.9%) and U.K. and Australia (131.8%) FY 2022 Bookings and Book-to-Bill Ratio | Metric | Value | | :--- | :--- | | Total Bookings | $13,966.0M | | Book-to-Bill Ratio | 108.5% | Revenue by Segment Total revenue for fiscal 2022 was $12.87 billion, a 6.1% increase as reported and a 10.5% increase on a constant currency basis, driven by organic expansion across all vertical markets and contributions from recent acquisitions, with Western and Southern Europe seeing the highest constant currency growth at 22.6% FY 2022 Revenue Growth vs. FY 2021 | Metric | Value | | :--- | :--- | | Total Revenue | $12,867.2M | | Y/Y Growth (Reported) | 6.1% | | Y/Y Growth (Constant Currency) | 10.5% | - The U.S. federal government and its agencies represented 13.3% of total revenue for Fiscal 2022, up from 12.8% in Fiscal 2021[66] - Revenue growth was driven by organic growth across all vertical markets and business acquisitions. Western and Southern Europe grew 22.6% in constant currency, U.S. Commercial and State Government grew 14.0%, and Canada grew 12.9%[71][72][74][76] Adjusted EBIT by Segment Adjusted EBIT for fiscal 2022 reached $2.09 billion, an increase of 6.9% from the prior year, with the adjusted EBIT margin improving slightly to 16.2% from 16.1% due to organic growth and a favorable mix of IP services, offsetting costs from new hires and acquisition impact, with Canada showing notable margin improvement to 23.4% FY 2022 Adjusted EBIT and Margin | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Adjusted EBIT | $2,086.6M | $1,952.2M | | Adjusted EBIT Margin | 16.2% | 16.1% | - The Canada segment's adjusted EBIT margin increased to 23.4% from 22.2% due to organic growth, a favourable supplier contract adjustment, and an increase in IP services[97] - Margin pressure was noted in some segments like U.S. Commercial and State Government (down to 14.7% from 15.6%) due to costs of assimilating new hires and prior year tax credits[95] Net Earnings and Earnings Per Share The company reported net earnings of $1.47 billion for fiscal 2022, a 7.1% increase year-over-year, with diluted earnings per share (EPS) growing by 11.6% to $6.04, benefiting from higher earnings and a lower share count due to buybacks, while the effective tax rate remained stable at 25.5% FY 2022 Net Earnings and EPS | Metric | 2022 | 2021 | % Change | | :--- | :--- | :--- | :--- | | Net Earnings | $1,466.1M | $1,369.1M | +7.1% | | Diluted EPS | $6.04 | $5.41 | +11.6% | | Net Earnings (Excluding Specific Items) | $1,487.9M | $1,374.9M | +8.2% | | Diluted EPS (Excluding Specific Items) | $6.13 | $5.43 | +12.9% | - The effective tax rate was stable at 25.5% for both fiscal 2022 and 2021[108][109] Liquidity Consolidated Statements of Cash Flows For fiscal 2022, cash provided by operating activities was a strong $1.86 billion, though down from $2.12 billion in the prior year mainly due to changes in non-cash working capital, while cash used in investing activities increased significantly to $911.9 million driven by business acquisitions, and financing activities used $1.59 billion primarily for share repurchases and debt repayment FY 2022 Summary of Cash Flows (in millions) | Activity | 2022 | 2021 | | :--- | :--- | :--- | | Cash from Operating Activities | $1,865.0 | $2,115.9 | | Cash used in Investing Activities | ($911.9) | ($388.5) | | Cash used in Financing Activities | ($1,591.1) | ($1,782.5) | - The decrease in operating cash flow was mainly due to a $325.8 million negative swing in the net change in non-cash working capital items[118][119] Capital Resources As of September 30, 2022, CGI maintained a strong liquidity position with total available capital resources of $2.49 billion, comprising $966.5 million in cash and $1.5 billion available under its unsecured committed revolving credit facility, which the company believes are sufficient to fund operations and its 'Build and Buy' growth strategy Available Capital Resources as of Sep 30, 2022 | Resource | Amount (CAD) | | :--- | :--- | | Cash and cash equivalents | $966.5M | | Unsecured committed revolving credit facility | $1,495.7M | | Total | $2,485.2M | Selected Measures of Capital Resources and Liquidity Key liquidity and capital metrics reflect a sound financial position, with the net debt to capitalization ratio increasing to 28.8% due to share repurchases and acquisitions, while profitability measures improved, with Return on Equity (ROE) rising to 20.9% and Return on Invested Capital (ROIC) increasing to 15.7%, though Days Sales Outstanding (DSO) increased to 49 days Key Capital and Liquidity Ratios | Metric | As of Sep 30, 2022 | As of Sep 30, 2021 | | :--- | :--- | :--- | | Net debt to capitalization ratio | 28.8% | 26.6% | | Return on equity (ROE) | 20.9% | 19.8% | | Return on invested capital (ROIC) | 15.7% | 14.9% | | Days sales outstanding (DSO) | 49 days | 45 days | Fourth Quarter Results Revenue by Segment (Q4 2022) In the fourth quarter of 2022, revenue was $3.25 billion, an 8.0% increase year-over-year (13.9% in constant currency), driven by both organic expansion and acquisitions, with Western and Southern Europe being a standout performer with 35.0% constant currency growth, and strong growth also seen in U.S. Commercial and State Government (10.9%) and Canada (13.2%) Q4 2022 Revenue Growth vs. Q4 2021 | Metric | Value | | :--- | :--- | | Total Revenue | $3,247.2M | | Y/Y Growth (Reported) | 8.0% | | Y/Y Growth (Constant Currency) | 13.9% | Adjusted EBIT by Segment (Q4 2022) Fourth quarter adjusted EBIT was $521.7 million, up 5.7% from the prior-year quarter, though the adjusted EBIT margin decreased slightly to 16.1% from 16.4% due to the temporary dilutive impact of recent acquisitions, costs of assimilating new hires, and increased travel expenses, while the Canada segment was a strong performer with its margin expanding to 24.6% Q4 2022 Adjusted EBIT and Margin | Metric | Q4 2022 | Q4 2021 | | :--- | :--- | :--- | | Adjusted EBIT | $521.7M | $493.3M | | Adjusted EBIT Margin | 16.1% | 16.4% | Net Earnings and Earnings Per Share (Q4 2022) For the fourth quarter, net earnings were $362.4 million, a 4.7% increase year-over-year, with diluted EPS growing 8.6% to $1.51, and excluding acquisition-related costs, diluted EPS was $1.56, an 11.4% increase, with EPS growth outpacing net earnings due to share repurchases Q4 2022 Net Earnings and EPS | Metric | Q4 2022 | Q4 2021 | % Change | | :--- | :--- | :--- | :--- | | Net Earnings | $362.4M | $345.9M | +4.7% | | Diluted EPS | $1.51 | $1.39 | +8.6% | | Diluted EPS (Excluding Specific Items) | $1.56 | $1.40 | +11.4% | Critical Accounting Estimates Summary of Critical Accounting Estimates Management identifies several areas requiring subjective and complex judgments that could materially impact financial results, including revenue recognition on fixed-fee projects, goodwill impairment testing, determining lease terms and discount rates for right-of-use assets, fair value allocation in business combinations, assessing deferred tax assets, and provisioning for litigation and claims - Key areas requiring management estimates are: Revenue recognition, Goodwill impairment, Right-of-use assets, Business combinations, Income taxes, and Litigation and claims[225] - For revenue on fixed-fee contracts, the company uses the percentage-of-completion method based on labor costs, which requires ongoing monitoring and re-evaluation of project forecasts[227] - Goodwill is tested for impairment annually, based on value-in-use calculations which rely on estimates of future financial performance. Historically, no impairment charge has been recorded[229][230] Risk Environment Risks and Uncertainties The company identifies a comprehensive set of risks that could affect its business, categorized as external, industry-related, and business-specific, encompassing economic and political volatility, intense competition, challenges in executing the 'Build and Buy' strategy, cybersecurity threats, data privacy regulations, and the ability to attract and retain talent External Risks CGI's performance is subject to external factors beyond its control, including volatile economic and political conditions that can reduce client spending, and additional risks from global events like armed conflict, inflation, pandemics (such as COVID-19), and climate change, all of which can disrupt operations and impact client viability - Economic and political uncertainty can negatively affect clients' business activity, leading to contract cancellations, reductions, or delays[248] - High levels of inflation could increase labor and operating costs, which the company may not be able to fully offset through price increases, potentially harming profitability[251][252] - Pandemics pose risks of business disruption for CGI, its clients, and partners, and can increase the frequency of cybersecurity incidents due to widespread remote work[253][255] Risks Related to our Industry The IT services industry is highly competitive, with pressure on pricing from both large global players and specialized niche firms, and the company faces risks from the rapid pace of technological change, requiring continuous adaptation of its services, and must manage intellectual property risks, including potential infringement of third-party rights and protecting its own IP - The company operates in a highly competitive market, facing pressure from competitors with greater financial resources, lower-cost delivery models, or specialized capabilities[260] - The rapid pace of technological change requires constant adaptation of services and solutions to remain competitive and meet evolving client needs[263] Risks Related to our Business Business-specific risks are numerous and include the ability to successfully execute the 'Build and Buy' growth strategy, particularly integrating new acquisitions, attracting and retaining qualified IT professionals, vulnerability to changes in government spending policies for U.S. federal contracts, and significant legal, reputational, and financial risks from cybersecurity incidents and data privacy laws like GDPR - Failure to successfully integrate acquisitions could detract management attention, result in unanticipated expenses, and hinder the achievement of growth and profitability objectives[276][278] - The company faces significant risk in attracting and retaining qualified IT professionals due to strong demand in the industry. Failure to do so could result in lost revenue or increased costs[298] - A significant portion of revenue is derived from U.S. federal government contracts, making the company vulnerable to changes in government spending policies, budget priorities, or contract terminations[301][302] - The company is subject to stringent data privacy laws (e.g., GDPR) and faces significant legal, reputational, and financial risks from security incidents or cyberattacks that could compromise client or company data[309][311][313] Legal Proceedings The company is involved in various legal proceedings, audits, and claims that arise in the ordinary course of business, and while some of these matters seek significant damages, management does not believe that their final disposition will have a material adverse effect on the company's financial position or operations - The Company is involved in legal proceedings in the ordinary course of business but does not expect any current matter to have a material adverse effect on its financial position or results[335]