CGI(GIB) - 2023 Q4 - Annual Report

Introduction and Basis of Presentation This section outlines the report's preparation basis, forward-looking statement caveats, key performance measures, and reporting segments Basis of Presentation This MD&A, prepared under Canadian securities rules, should be read with IFRS-compliant audited financial statements for fiscal years 2023 and 2022 - The MD&A is prepared under Canadian securities rules and should be read in conjunction with the IFRS-compliant audited financial statements for fiscal years 2023 and 2022[2][3] Forward-Looking Statements The report contains forward-looking statements subject to inherent risks and uncertainties that could cause actual results to differ materially - Forward-looking statements are based on current assumptions but are subject to significant risks and uncertainties, such as economic conditions, competition, and cybersecurity breaches, that could cause actual results to differ[5] - Readers are cautioned not to place undue reliance on these statements and are directed to Section 10 - Risk Environment for a more detailed discussion of potential risks[6] Key Performance Measures CGI uses IFRS and non-GAAP measures like constant currency revenue growth, adjusted EBIT, and net debt to assess core operating performance and financial strength - The company uses non-GAAP measures like constant currency revenue growth and adjusted EBIT to facilitate period-to-period comparisons by excluding impacts of currency fluctuations and non-operational items[8][9][10] - Key growth indicators include Bookings (new contracts), Backlog (contracted future revenue), and Book-to-bill ratio, which management targets to keep above 100% on a trailing twelve-month basis[9] - Liquidity and capital structure are monitored through metrics such as Days Sales Outstanding (DSO), Net Debt, Net Debt to Capitalization Ratio, and Return on Invested Capital (ROIC)[12] Reporting Segments CGI manages and reports results across nine geographic operating segments, including distinct U.S. government and commercial units, and an Asia Pacific global delivery center - CGI is organized into nine geographic operating segments, including distinct units for U.S. Commercial/State and U.S. Federal government clients, as well as an Asia Pacific segment for global delivery centers[14] Corporate Overview This section provides an overview of CGI's business, its strategic vision, and its competitive positioning in the global IT and business consulting market About CGI CGI is a global IT and business consulting firm with 91,500 professionals, offering end-to-end services and IP solutions across key industries - CGI is a leading IT and business consulting firm with 91,500 professionals worldwide, offering end-to-end services to help clients with their digital transformation[19] - The service portfolio includes: - Business and strategic IT consulting & systems integration - Managed IT and business process services - Intellectual property (IP) solutions[22] - Key target industries include financial services, government, manufacturing, retail, communications, utilities, and health[22] Vision and Strategy CGI's vision is to be a global IT and business consulting leader, pursued through a disciplined 'Build and Buy' profitable growth strategy with four key pillars - CGI's strategy is a 'Build and Buy' model focused on both profitable organic growth (Build) and accretive acquisitions (Buy)[29] - The four pillars of the strategy are: 1. Win, renew, and extend contracts 2. Secure new large managed IT and business process services contracts 3. Pursue metro market acquisitions 4. Execute large, transformational acquisitions[29][32] - The business model emphasizes local relationships and accountability, complemented by a global delivery network for scale and 24/7 access to capabilities[34][35] Competitive Environment CGI competes with diverse firms, differentiating through industry expertise, local presence, global delivery, and digital IP solutions to meet comprehensive client needs - The competitive landscape includes local specialists, government contractors, and global IT service providers[42] - Key competitive factors include: - Industry and technology expertise - Local client relationships - Flexible global delivery network - Digital IP solutions - Value and cost of services - Consistent on-time, within-budget delivery[43] Highlights and Key Performance Measures This section presents key financial highlights for fiscal year 2023, including revenue, earnings, bookings, and capital structure metrics, along with stock performance and a subsequent acquisition Selected Yearly Information & Key Performance Measures For FY2023, CGI reported $14.3 billion revenue, $1.63 billion net earnings, $16.3 billion bookings, and a 113.7% book-to-bill ratio, improving net debt and ROIC Fiscal Year 2023 vs. 2022 Performance | Metric | 2023 (CAD millions) | 2022 (CAD millions) | Change (CAD millions) | Change % | | :--- | :--- | :--- | :--- | :--- | | Revenue | $14,296.4M | $12,867.2M | +$1,429.2M | +11.1% | | Constant Currency Revenue Growth | 8.0% | 10.5% | - | - | | Bookings | $16,259M | $13,966M | +$2,293M | +16.4% | | Book-to-bill ratio | 113.7% | 108.5% | +5.2% | - | | Adjusted EBIT | $2,312.7M | $2,086.6M | +$226.1M | +10.8% | | Net earnings | $1,631.2M | $1,466.1M | +$165.1M | +11.3% | | Diluted EPS | $6.86 | $6.04 | +$0.82 | +13.6% | | Cash provided by operating activities | $2,112.2M | $1,865.0M | +$247.2M | +13.3% | | Net debt | $2,134.6M | $2,946.9M | -$812.3M | -27.6% | - The company's backlog as of September 30, 2023, stood at $26.1 billion, with approximately $10.0 billion expected to be converted into revenue within the next twelve months[44] Stock Performance CGI repurchased 6.2 million Class A Shares for $786.9 million in fiscal 2023, with approximately 205.9 million Class A and 26.4 million Class B shares outstanding - Under its Normal Course Issuer Bid (NCIB), the company purchased 6,202,546 Class A Shares for cancellation at a total cost of $786.9 million during fiscal 2023[50] - As of September 30, 2023, the company has authorization to purchase up to an additional 12,566,848 Class A Shares for cancellation under the current NCIB[51] Subsequent Event Post-fiscal year-end, CGI acquired Momentum Consulting Corp. for $50.5 million on October 10, 2023, adding 175 professionals - On October 10, 2023, CGI acquired Momentum Consulting Corp. for $50.5 million, adding 175 professionals specializing in digital transformation and data analytics[53] Financial Review (Fiscal Year 2023) This section details CGI's fiscal year 2023 financial performance, including bookings, revenue, operating expenses, adjusted EBIT, net earnings, and earnings per share Bookings and Book-to-Bill Ratio CGI achieved $16.3 billion in bookings for FY2023, with a strong 113.7% book-to-bill ratio, indicating robust future revenue potential across all segments FY2023 Bookings and Book-to-Bill Ratio by Segment | Segment | Bookings (CAD thousands) | Book-to-bill ratio % | | :--- | :--- | :--- | | Total CGI | 16,259,144 | 113.7% | | U.S. Federal | 2,878,094 | 148.1% | | Western and Southern Europe | 2,829,306 | 110.3% | | U.S. Commercial and State Government | 2,734,687 | 110.9% | | Canada | 2,518,745 | 112.7% | | Scandinavia and Central Europe | 1,831,999 | 105.3% | | U.K. and Australia | 1,763,767 | 105.2% | | Finland, Poland and Baltics | 883,321 | 101.7% | | Northwest and Central-East Europe | 819,224 | 102.4% | Revenue by Segment FY2023 total revenue increased 11.1% to $14.3 billion (8.0% constant currency), driven by organic growth and acquisitions, with strong performance in Western and Southern Europe and Asia Pacific - FY2023 revenue grew to $14.3 billion, an 11.1% increase YoY. Constant currency growth was 8.0%, driven by organic growth and acquisitions[63] FY2023 Revenue Growth by Segment (Constant Currency) | Segment | Revenue (CAD thousands) | Constant Currency Growth % | | :--- | :--- | :--- | | Western and Southern Europe | 2,605,926 | 16.7% | | Asia Pacific | 918,056 | 16.4% | | U.K. and Australia | 1,455,529 | 11.3% | | Finland, Poland and Baltics | 828,951 | 9.4% | | Scandinavia and Central Europe | 1,648,356 | 5.2% | | U.S. Federal | 1,935,238 | 4.6% | | Northwest and Central-East Europe | 755,901 | 4.4% | | Canada | 2,064,659 | 4.1% | | U.S. Commercial and State Government | 2,277,996 | 4.0% | - The U.S. federal government and its agencies represented 13.5% of total revenue for Fiscal 2023, up slightly from 13.3% in Fiscal 2022[58] Operating Expenses FY2023 operating expenses increased to $12.0 billion but remained stable at 83.8% of revenue, with cost of services slightly up and selling/administrative costs down as a percentage of revenue - Costs of services, selling and administrative expenses were $11,982.4 million, remaining stable at 83.8% of revenue compared to the prior year[81][84] - Cost of services as a percentage of revenue increased due to fewer billable days and higher travel expenses, while selling and administrative costs decreased due to lower performance-based compensation accruals[85][86] Adjusted EBIT by Segment FY2023 Adjusted EBIT rose 10.8% to $2.31 billion, with the margin stable at 16.2%, driven by profitable growth offsetting increased costs and project adjustments - Adjusted EBIT increased by $226.1 million to $2,312.7 million, while the adjusted EBIT margin remained stable at 16.2%[89] FY2023 Adjusted EBIT Margin by Segment | Segment | Adjusted EBIT (CAD thousands) | Adjusted EBIT Margin % | | :--- | :--- | :--- | | Asia Pacific | 277,598 | 30.2% | | Canada | 477,502 | 23.1% | | U.S. Federal | 306,362 | 15.8% | | U.S. Commercial and State Government | 339,410 | 14.9% | | U.K. and Australia | 216,517 | 14.9% | | Western and Southern Europe | 355,578 | 13.6% | | Northwest and Central East-Europe | 101,871 | 13.5% | | Finland, Poland and Baltics | 110,583 | 13.3% | | Scandinavia and Central Europe | 127,320 | 7.7% | Net Earnings and Earnings Per Share FY2023 net earnings increased 11.3% to $1.63 billion, with diluted EPS up 13.6% to $6.86, benefiting from higher earnings and share repurchases FY2023 Net Earnings and EPS Performance | Metric | 2023 (CAD millions) | 2022 (CAD millions) | Change % | | :--- | :--- | :--- | :--- | | Net earnings | $1,631.2M | $1,466.1M | +11.3% | | Diluted EPS | $6.86 | $6.04 | +13.6% | | Net earnings excluding specific items | $1,680.0M | $1,487.9M | +12.9% | | Diluted EPS excluding specific items | $7.07 | $6.13 | +15.3% | - The effective tax rate for FY2023 was 25.8%, a slight increase from 25.5% in FY2022. Excluding specific items, the rate was 25.7%[106][112] - The weighted average number of diluted shares outstanding decreased by 2.1% due to the company's share repurchase program[109] Liquidity This section reviews CGI's cash flow activities, capital resources, and key liquidity metrics for fiscal year 2023, highlighting improvements in financial position Consolidated Statements of Cash Flows FY2023 operating cash flow increased to $2.11 billion, while investing activities decreased due to lower acquisitions, and financing activities focused on share repurchases FY2023 Summary of Cash Flows (in millions CAD) | Cash Flow Activity | 2023 (CAD millions) | 2022 (CAD millions) | Change (CAD millions) | | :--- | :--- | :--- | :--- | | Cash provided by operating activities | 2,112.2 | 1,865.0 | 247.2 | | Cash used in investing activities | (561.9) | (911.9) | 350.1 | | Cash used in financing activities | (1,192.4) | (1,591.1) | 398.7 | - The increase in operating cash flow was mainly due to improved collections and higher net earnings[117] - Financing activities were dominated by the purchase and cancellation of Class A shares for $788.0 million[120] Capital Resources As of September 30, 2023, CGI had $3.1 billion in available capital, including $1.6 billion in cash and investments, deemed sufficient for operations and growth strategy Available Capital Resources as of Sep 30, 2023 (in thousands CAD) | Resource | Amount Available (CAD thousands) | | :--- | :--- | | Cash and cash equivalents | 1,568,291 | | Short-term investments | 7,332 | | Long-term investments | 17,113 | | Unsecured committed revolving credit facility | 1,495,858 | | Total | 3,088,594 | - The company was in compliance with all financial covenants related to its long-term debt agreements[125] Selected Measures of Capital Resources and Liquidity CGI improved its capital structure in FY2023, with net debt to capitalization decreasing to 20.4%, ROIC improving to 16.0%, and DSO reducing to 44 days Key Capital and Liquidity Ratios | Metric | As at Sep 30, 2023 | As at Sep 30, 2022 | | :--- | :--- | :--- | | Net debt | $2,134.6M | $2,946.9M | | Net debt to capitalization ratio | 20.4% | 28.8% | | Return on invested capital (ROIC) | 16.0% | 15.7% | | Days sales outstanding (DSO) | 44 days | 49 days | - The decrease in the net debt to capitalization ratio was primarily due to strong cash generation, partially offset by share repurchases[134] Fourth Quarter Results (Q4 2023) This section presents CGI's financial performance for Q4 2023, covering revenue, adjusted EBIT, net earnings, and cash flows, highlighting key drivers and segment contributions Revenue by Segment (Q4) Q4 2023 revenue increased 8.0% to $3.51 billion (2.2% constant currency), driven by organic expansion, with strong growth in Asia Pacific and Northwest and Central-East Europe - Q4 2023 revenue increased 8.0% to $3.5 billion; constant currency growth was 2.2%[155] - Growth was partially offset by the calendar impact of one less available billable day compared to Q4 2022[155] - The U.S. federal government represented 14.0% of revenue in Q4 2023[150] Adjusted EBIT by Segment (Q4) Q4 2023 Adjusted EBIT rose 9.8% to $573.0 million, with the margin expanding to 16.3%, driven by profitable organic growth despite project cost adjustments - Q4 Adjusted EBIT was $573.0 million, an increase of 9.8% YoY. The adjusted EBIT margin improved to 16.3% from 16.1%[173] - The margin increase was mainly due to profitable organic growth, partly offset by one less billable day and project cost reevaluations[173] Net Earnings and Earnings Per Share (Q4) Q4 2023 net earnings increased 14.4% to $414.5 million, with diluted EPS up 16.6% to $1.76, benefiting from higher earnings and a stable tax rate Q4 2023 Net Earnings and EPS Performance | Metric | Q4 2023 (CAD millions) | Q4 2022 (CAD millions) | Change % | | :--- | :--- | :--- | :--- | | Net earnings | $414.5M | $362.4M | +14.4% | | Diluted EPS | $1.76 | $1.51 | +16.6% | | Net earnings excluding specific items | $421.2M | $373.1M | +12.9% | | Diluted EPS excluding specific items | $1.79 | $1.56 | +14.7% | Consolidated Statements of Cash Flows (Q4) Q4 2023 operating cash flow was strong at $628.7 million (17.9% of revenue), driven by improved collections, while financing activities increased due to share repurchases - Cash from operating activities was $628.7 million (17.9% of revenue), up from $488.9 million in Q4 2022, mainly due to better collections[189][190] - Cash used in financing activities increased to $603.6 million, largely due to repurchasing 2.4 million Class A shares for $324.7 million[193] Eight Quarter Summary This section summarizes key performance trends over the past eight quarters, noting the impact of seasonality, billable days, client cycles, and foreign exchange on results Eight Quarter Summary Quarterly performance is influenced by seasonality, billable days, client business cycles, and foreign exchange, while cash flow varies due to payment and tax credit timing - Quarterly performance can be impacted by seasonality, the number of billable days, client business cycles, and foreign exchange fluctuations[198][201] - Cash flow from operations can vary significantly quarter-to-quarter due to the timing of client payments, acquisition costs, and tax credit reimbursements[200] Changes in Accounting Policies This section details the adoption of new accounting standard amendments, noting no significant impact on financial statements, and anticipates no future impact from upcoming changes Changes in Accounting Policies Adopted amendments to IAS 37, IAS 12, and IAS 1 had no significant financial statement impact, and future changes to IAS 8 and IAS 12 are also not expected to impact - Adopted amendments to IAS 37 (Onerous Contracts) and IAS 1 (Disclosure of Accounting Policy Information), which had no significant impact on the financial statements[203][206][207] - Adopted amendments to IAS 12 (Income Taxes) related to Pillar Two model rules, which introduced a temporary recognition exception for deferred taxes and had no impact as of September 30, 2023[204][205] - Future amendments to IAS 8 (Accounting Estimates) and IAS 12 (Deferred Tax) effective October 1, 2023, are not expected to impact the financial statements[208][209] Critical Accounting Estimates This section highlights critical accounting estimates requiring significant management judgment, including revenue recognition, goodwill impairment, lease liabilities, business combinations, and income taxes Critical Accounting Estimates Management makes subjective judgments for revenue recognition, goodwill impairment, right-of-use assets, business combinations, income taxes, and provisions for litigation and claims - Key areas requiring critical accounting estimates include: - Revenue recognition - Goodwill impairment - Right-of-use assets and lease liabilities - Business combinations - Income taxes - Litigation and claims[215] - For fixed-fee contracts, revenue is recognized using the percentage-of-completion method, primarily based on labor costs incurred versus total estimated costs. This requires ongoing monitoring and re-evaluation of project forecasts[217] - Goodwill is tested for impairment annually using a value-in-use calculation, which relies on estimates of future cash flows. Historically, no impairment charge on goodwill has been recorded[219][220] Integrity of Disclosure This section describes the oversight of disclosure integrity and internal controls by the Audit and Risk Management Committee, with CEO/CFO concluding effectiveness as of September 30, 2023 Integrity of Disclosure The Audit and Risk Management Committee oversees disclosure and controls, with the CEO and CFO affirming the effectiveness of disclosure controls and internal financial reporting as of September 30, 2023 - The Board of Directors' Audit and Risk Management Committee, comprised of independent directors, oversees financial reporting, risk management, and internal controls[230][231] - As of September 30, 2023, the CEO and CFO concluded that the Company's disclosure controls and procedures were effective[232] - Management also concluded that the Company's internal controls over financial reporting were effective as of September 30, 2023, based on the COSO 2013 framework[233] Risk Environment This section details the external, industry-related, and business-specific risks that could impact CGI's strategic objectives, including economic conditions, competition, and cybersecurity Risks and Uncertainties CGI faces external, industry, and business-specific risks, including economic volatility, intense competition, IP protection, strategy execution, cybersecurity, and talent retention External Risks External risks include volatile economic/political conditions, armed conflict, inflation, climate change, and pandemics, which can disrupt operations and client spending - Volatile economic and political conditions can negatively affect clients' business activity, leading to contract cancellations, reductions, or delays[236][237] - The company faces risks from armed conflict (e.g., in Ukraine), inflation, climate change, and health emergencies, which can disrupt operations and reduce demand[238][239] - Pandemics can cause significant disruptions, affect client financial viability, and increase the frequency of cybersecurity incidents due to widespread remote work[243][245] Risks Related to our Industry Industry risks include intense competition, the need for continuous service evolution, potential IP infringement, and challenges in protecting proprietary intellectual property - The IT services market is highly competitive, with pressure on pricing from global players, specialized niche firms, and competitors with large, low-cost offshore operations[251] - The rapid pace of technological change requires continuous development of service offerings; failure to keep pace could adversely affect client retention and new business[254] - The company faces risks of infringing on others' IP rights, which could lead to costly litigation, and challenges in protecting its own proprietary methodologies and solutions[255][257] Risks Related to our Business Business risks include challenges in executing the 'Build and Buy' strategy, cybersecurity threats, talent retention, and reliance on U.S. federal government revenue - Successful execution of the 'Build and Buy' strategy is not guaranteed and depends on identifying suitable acquisition targets and achieving organic growth[263][265] - The company faces significant cybersecurity risks from sophisticated threats, and a failure to protect client or company data could result in financial loss, litigation, and reputational damage[299][301][307] - Attracting and retaining qualified IT professionals is critical, and failure to do so could result in lost revenue or increased costs. The company also depends on key employees and senior management[286][287] - A significant portion of revenue is derived from the U.S. federal government, making the business vulnerable to changes in government spending policies or budget priorities[290][291] Legal Proceedings CGI is involved in various legal proceedings, but management does not anticipate any current matter will have a material adverse effect on the company's financial position or operations - CGI is involved in legal proceedings and claims in the ordinary course of business, but management does not expect any current matter to have a material adverse effect on the company[321]