Umanis

Nov 9, 2022

11/09/2022 | 07:41am EST Message : BASIS OF PRESENTATION This Management's Discussion and Analysis of the Financial Position and Results of Operations (MD&A) is a 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 Inc. is referred to as "CGI", "we", "us", "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, 2022 and 2021. 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 noted. 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 This MD&A contains "forward-looking information" within the meaning of Canadian securities laws and "forward-looking statements" within the meaning of the United States Private Securities Litigation Reform Act of 1995 and other applicable United States safe harbours. All such forward-looking information and statements are made and disclosed in reliance upon the safe harbour provisions of applicable Canadian and United States securities laws. Forward-looking information and statements include all information and statements regarding CGI's intentions, plans, expectations, beliefs, objectives, future performance, and strategy, as well as any other information or statements that relate to future events or circumstances and which do not directly and exclusively relate to historical facts. Forward-looking information and statements often but not always use words such as "believe", "estimate", "expect", "intend", "anticipate", "foresee", "plan", "predict", "project", "aim", "seek", "strive", "potential", "continue", "target", "may", "might", "could", "should", and similar expressions and variations thereof. These information and statements are based on our perception of historic trends, current conditions and expected future developments, as well as other assumptions, both general and specific, that we believe are appropriate in the circumstances. Such information and statements are, however, by their very nature, subject to inherent risks and uncertainties, of which many are beyond the control of the Company, and which give rise to the possibility that actual results could differ materially from our expectations expressed in, or implied by, such forward-looking information or forward-looking statements. These risks and uncertainties include but are not restricted to: risks related to the market such as the level of business activity of our clients, which is affected by economic and political conditions, additional external risks (such as pandemics, armed conflict, climate-related issues and inflation) and our ability to negotiate new contracts; risks related to our industry such as competition and our ability to develop and expand our services, to penetrate new markets, and to protect our intellectual property rights; risks related to our business such as risks associated with our growth strategy, including the integration of new operations, financial and operational risks inherent in worldwide operations, foreign exchange risks, income tax laws and other tax programs, our ability to attract and retain qualified employees, to negotiate favourable contractual terms, to deliver our services and to collect receivables, to disclose, manage and implement environmental, social and governance (ESG) initiatives and standards, as well as the reputational and financial risks attendant to cybersecurity breaches and other incidents, and financial risks such as liquidity needs and requirements, maintenance of financial ratios, interest rate fluctuations and the discontinuation of major interest rate benchmarks and changes in creditworthiness and credit ratings; as well as other risks identified or incorporated by reference in this MD&A and in other documents that we make public, including our filings with the Canadian Securities © 2022 CGI Inc. Management's Discussion and Analysis | For the years ended September 30, 2022 and 2021 Administrators (on SEDAR at www.sedar.com) and the U.S. Securities and Exchange Commission (on EDGAR at www.sec.gov). For a discussion of risks in response to the coronavirus (COVID-19) pandemic, see Pandemic risks in section 10.1.1. of the present document. Unless otherwise stated, the forward-looking information and statements contained in this MD&A are made as of the date hereof and CGI disclaims any intention or obligation to publicly update or revise any forward-looking information or forward-looking statements, whether as a result of new information, future events or otherwise, except as required by applicable law. While we believe that our assumptions on which these forward-looking information and forward-looking statements are based were reasonable as at the date of this MD&A, readers are cautioned not to place undue reliance on these forward-looking information or statements. Furthermore, readers are reminded that forward-looking information and statements are presented for the sole purpose of assisting investors and others in understanding our objectives, strategic priorities and business outlook as well as our anticipated operating environment. Readers are cautioned that such information may not be appropriate for other purposes. Further information on the risks that could cause our actual results to differ significantly from our current expectations may be found in section 10 - Risk Environment, which is incorporated by reference in this cautionary statement. We also caution readers that the risks described in the previously mentioned section and in other sections of this MD&A are not the only ones that could affect us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial could also have a material adverse effect on our financial position, financial performance, cash flows, business or reputation. © 2022 CGI Inc. KEY PERFORMANCE MEASURES The reader should note that the Company reports its financial results in accordance with IFRS. However, we use a combination of GAAP, non-GAAP and supplementary financial measures and ratios to assess the 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 most relevant key performance measures : Profitability Revenue prior to foreign currency impact(non-GAAP) - is a measure of revenue before foreign currency translation impacts. This 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 and that this measure is useful to investors for the same reason. A reconciliation of the revenue prior to foreign currency impact to its closest IFRS measure can be found in section 3.4. and 5.4. of the present document. Adjusted EBIT(non-GAAP) - is a measure of earnings excluding acquisition-related and integration costs, net finance costs and income tax expense. Management believes this measure is useful to investors as it best reflects the performance of the Company's activities and allows for better comparability from period to period as well as to trend analysis. A reconciliation of the adjusted EBIT to its closest IFRS measure can be found in section 3.7. and 5.6. of the present document. Adjusted EBIT margin(non-GAAP) - is obtained by dividing our adjusted EBIT by our revenue. Management believes this measure is useful to investors as it best reflects the performance of its activities and allows for better comparability from period to period as well as to trend analysis. A reconciliation of the adjusted EBIT to its closest IFRS measure can be found in section 3.7. of the present document. Net earnings - is a measure of earnings generated for shareholders. Net earnings margin - is obtained by dividing our net earnings by our revenues. Management believes a percentage of revenue measure is meaningful for better comparability from period to period. Diluted earnings per share (diluted EPS) - is a measure of net earnings generated for shareholders on a per share basis, assuming all dilutive elements are exercised. Please refer to note 21 of our audited consolidated financial statements for additional information on earnings per share. Net earnings excluding specific items (non-GAAP) - is a measure of net earnings excluding acquisition-related and integration costs. Management believes this measure is useful to investors as it best reflects the Company's performance and allows for better comparability from period to period. A reconciliation of the net earnings excluding specific items to its closest IFRS measure can be found in section 3.8.3. and 5.6.1. of the present document. Net earnings margin excluding specific items(non-GAAP) - is obtained by dividing our net earnings excluding acquisition-related and integration costs by our revenues. Management believes this measure is useful to investors as it best reflects the Company's performance and allows for better comparability from period to period. A reconciliation of the net earnings excluding specific items to its closest IFRS measure can be found in section 3.8.3. and 5.6.1 of the present document. © 2022 CGI Inc. Management's Discussion and Analysis | For the years ended September 30, 2022 and 2021 Diluted earnings per share excluding specific items(non-GAAP) - is defined as the net earnings excluding specific items on a per share basis. Management believes that this measure is useful to investors as it best reflects the Company's performance on a per share basis and allows for better comparability from period to period. The diluted earnings per share reported in accordance with IFRS can be found in section 3.8. and 5.6. of the present document while the basic and diluted earnings per share excluding specific items can be found in section 3.8.3. and 5.6.1. of the present document. Effective tax rate excluding specific items(non-GAAP) - is obtained by dividing income tax expense, excluding tax deductions on acquisition-related and integration costs, by earnings before income taxes excluding specific items. Management believes that this measure allows for better comparability from period to period. A reconciliation of the effective tax rate excluding specific items to its closest IFRS measure can be found in section 3.8.3. and 5.6.1. of the present document. Liquidity Cash provided by operating activities - is a measure of cash generated from managing our day-to-day business operations. Management believes strong operating cash flow is indicative of financial flexibility, allowing us to execute the Company's strategy. Days sales outstanding (DSO) - 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 our most recent quarter's revenue over 90 days. Management tracks this metric closely to ensure timely collection and healthy liquidity. Management believes 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 translation 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 and that this measure is useful to investors for the same reason. Backlog - includes new contract wins, extensions and renewals (bookings), backlog acquired through business acquisitions and adjusted for the backlog consumed during the period as a result of client work performed, cancellation and the impact of foreign currencies to our existing contracts. Bookings and backlog incorporate estimates from management that are subject to change. Management tracks this measure as it is a key indicator of our best estimate of contracted revenue to be realized in the future and believes that this measure is useful to investors for the same reason. Book-to-bill ratio - is a measure of the proportion of the value of our bookings 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 and management believes that this measure is useful to investors for the same reason. Management's objective is to maintain a target ratio greater than 100% over a trailing twelve-month period. Management believes that monitoring the Company's bookings over a longer period is a more representative measure as the services and contract type, 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 from our debt and lease liabilities, our cash and cash equivalents, short-term investments, long-term investments and adjusting for fair value of foreign currency derivative financial instruments related to debt. Management uses the net debt metric to monitor the Company's financial leverage and believes that this metric is useful to investors as it provides insight into its financial strength. A reconciliation of net debt to its closest IFRS measure can be found in section 4.5. of the present document. © 2022 CGI Inc. Management's Discussion and Analysis | For the years ended September 30, 2022 and 2021 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 net debt. Management uses the net debt to capitalization ratio to monitor the proportion of debt versus capital used to finance the Company's operations and to assess its financial strength. Management believes that this metric is useful to investors for the same reasons. Return on equity (ROE) - is a measure of the rate of return on the ownership interest of our shareholders and is calculated as the proportion of net earnings for the last twelve months over the last four quarters' average shareholder's equity. Management looks at ROE to measure its efficiency at generating net earnings for the Company's shareholders and how well the Company uses the invested funds to generate net earnings growth and believes 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 net earnings excluding net finance costs after-tax for the last twelve months, over the last four quarters' average invested capital, which is defined as the sum of shareholder's' equity and net debt. Management examines this ratio to assess how well it is using its funds to generate returns and believes that this measure is useful to investors for the same reason. REPORTING SEGMENTS Effective April 1, 2022, the Company realigned its management structure, resulting in a reorganization and the creation of two new operating segments, namely Scandinavia and Central Europe (Germany, Sweden and Norway) and Northwest and Central-East Europe (primarily Netherlands, Denmark and Czech Republic) collectively formerly known as Scandinavia and Central and Eastern Europe in the prior fiscal year, and, less significantly, the transfer of our Belgium operations from Western and Southern Europe operating segment to the Northwest and Central-East Europe operating segment. As a result, the Company is managed through the following nine operating segments: Western and Southern Europe (primarily France, Spain and Portugal); United States (U.S.) Commercial and State Government; Canada; U.S. Federal; Scandinavia and Central Europe; United Kingdom (U.K.) and Australia; Finland, Poland and Baltics; Northwest and Central-East Europe; and Asia Pacific Global Delivery Centers of Excellence (mainly India and Philippines) (Asia Pacific). The Company has restated the segmented information for the comparative periods to conform to the new segmented information structure. Please refer to sections 3.4, 3.6, 5.4 and 5.5 of the present document and to note 28 of our audited consolidated financial statements for additional information on our segments. © 2022 CGI Inc. 1.1. ABOUT CGI Founded in 1976 and headquartered in Montréal, Canada, CGI is a leading IT and business consulting services firm with approximately 90,000 consultants and professionals worldwide, whom are called members as they are also owners through our Share Purchase Plan. We use the power of technology to help clients accelerate their holistic digital transformation. CGI has a people-centered culture, operating where our clients live and work to build trusted relationships and to advance our shared communities. Our consultants are committed to providing actionable insights that help clients achieve business outcomes. They leverage global delivery centers that deliver scale, innovation and delivery excellence for every engagement. End-to-end services and solutions CGI delivers end-to-end services that help clients achieve the digital transformation of their value chains. Together, our end-to-end services and solutions help clients design, implement, run and operate the technology critical to achieving their business strategies. Our portfolio encompasses: i. Business and strategic IT consulting and systems integration services: CGI helps clients create a path for future growth and sustainable value through business and strategic IT consulting services such as business strategy, business and operating model design, human-centered experience, customer value and operational excellence, organizational change management, sustainability and digital transformation. In the area of systems integration, we help clients accelerate the enterprise modernization of their legacy systems and adopt new technologies to drive innovation and deliver real-time and insight-driven customer and citizen services. ii. Managed IT and business process services: Working as an extension of our clients' organizations, we take on full or partial responsibility for managing their IT functions, freeing them up to focus on their strategic business direction. Our services enable clients to reinvest, alongside CGI, in the successful execution of their digital transformation roadmaps. We help them increase agility, scalability and resilience; deliver operational efficiencies, innovations and reduced costs; and embed security and data privacy controls. Typical services include: application development, modernization and maintenance; holistic enterprise digitization, automation, hybrid and cloud management; and business process services. iii. Intellectual property (IP): CGI's portfolio of IP solutions are highly configurable "business platforms as a service" that are embedded within our end-to-end service offerings and utilize integrated security, data privacy practices and provider-neutral cloud approaches. We invest in, and deliver, market-leading IP to drive business outcomes within each of our target industries. We also collaborate with clients to build and evolve IP-based solutions while enabling a higher degree of flexibility and customization for their unique modernization and digitization needs. Deep industry and technology expertise CGI has long-standing and focused practices in all of its core industries, providing clients with a partner that is not only an expert in IT, but also an expert in their respective industries. This combination of business knowledge and digital technology expertise allows us to help our clients navigate complex challenges and focus on value creation. In the process, we evolve the services and solutions we deliver within our targeted industries and provide thought leadership, blueprints, frameworks and technical accelerators that help client evolve their ecosystems. Our targeted industries include financial services (including banking and insurance), government (including space), manufacturing, retail and distribution (including consumer services, transportation and logistics), communications and utilities (including energy and media), and health (including life sciences). To help orchestrate our global posture across these industries, our leaders regularly participate in cabinet meetings and councils to advance the strategies, services and solutions we deliver to our clients. © 2022 CGI Inc. Helping clients leverage technology to its fullest Macro trends such as supply chain reconfiguration, climate change and energy transition, and demographic shifts including aging populations and talent shortages require new business models and ways of working. At the same time, technology is reshaping our future and creating new opportunities. Accelerating digitization provides the inclusive, economically vibrant, and sustainable future our clients' customers and citizens demand. Leveraging technology to its fullest helps clients to lead within their industries. Our end-to-end digital services, industry and technology expertise, and operational excellence combine to help clients advance their holistic digital transformation. Through our proprietary Voice of Our Clients research, we analyzed the characteristics of leading digital organizations and found three common attributes: • They have highly agile business models and are better at operating as aligned teams between business and IT. • They have been faster in modernizing the entire IT environment-including through automation-while assuring security and data privacy. • They are addressing business transformation holistically, including culture change, ecosystem touchpoints, and the integration of sustainability objectives. Digital leaders across industries seek new ways to evolve their strategy and operational models and use technology and information to improve how they operate, deliver products and services, and create value. CGI helps clients adopt leading digital attributes and design, manage, protect and evolve their digital value chains to accelerate business outcomes. Quality processes Our clients expect consistent service wherever and whenever they engage us. We have an outstanding track record of on-time, within-budget delivery as a result of our commitment to excellence and our robust governance model-CGI's Management Foundation. Our Management Foundation provides a common business language, frameworks and practices for managing operations consistently across the globe, driving continuous improvement. We also invest in rigorous quality and service delivery standards including the International Organization for Standardization (ISO) and Capability Maturity Model Integration (CMMI) certification programs, as well as a comprehensive Client Satisfaction Assessment Program, with signed client assessments, to ensure high satisfaction on an ongoing basis. 1.2. VISION AND STRATEGY CGI is unique compared to most companies, as our vision is based on a dream: "To create an environment in which we enjoy working together and, as owners, contribute to building a company we can be proud of." This dream has motivated us since our founding in 1976 and drives our vision: "To be a global, world-class end-to-end IT and business consulting services leader helping our clients succeed." In pursuing our dream and vision, CGI has been highly disciplined throughout its history in executing a Build and Buy profitable growth strategy comprised of four pillars that combine profitable organic growth (Build) and accretive acquisitions (Buy): Pillar 1: Win, renew and extend contracts Pillar 2: New large managed IT and business process services contracts These first two pillars relate to driving profitable organic growth through the pursuit of contracts with new and existing clients in our targeted industries. As such, CGI engages with new and existing clients on four levers in our portfolio of end-to-end services and solutions: Business and Strategic IT Consulting, Systems Integration, Managed Services and IP-based services. Successes in these pillars reflect the strength of our end-to-end portfolio of capabilities, the depth of expertise of our consultants in business and IT, client satisfaction in our delivery excellence, and the appreciation of the proximity model by our clients, both existing and potential. © 2022 CGI Inc. Pillar 3: Metro market acquisitions Pillar 4: Large, transformational acquisitions The third and fourth pillars focus on growth through accretive acquisitions. The third pillar for metro market acquisitions complements the proximity model, and helps to provide a fuller range of end-to-end services. The fourth pillar for large transformational acquisitions helps to further expand our geographic footprint and reach the critical mass required to compete for large managed IT and business process services contracts and broaden our client relationships. Both the third and fourth pillars are supported by three levers. First, our range of end-to-end services which allows us to consider a broad range of acquisitions. A second lever is CGI's industry sector mix, which helps us mirror the IT spend of each metro market over time. A final lever across pillars three and four focuses on IP-based services firms which offer consulting services and managed services that leverage their solutions. CGI will continue to be a consolidator in the IT and business consulting services industry by being active across these four pillars. Executing our strategy CGI's strategy is executed through a business model that combines client proximity with an extensive global delivery network to deliver the following benefits: • Local relationships and accountability: We live and work near our clients to provide a high level of responsiveness, partnership, and innovation. Our local CGI members speak our clients' language, understand their business and industries, and collaborate to meet their goals and advance their business. • Global reach: Our local presence is complemented by an expansive global delivery network that ensures our clients have 24/7 access to best-fit digital capabilities and resources to meet their end-to-end needs. In addition, clients benefit from our unique combination of industry domain and technology expertise within our global delivery model. • Committed experts: One of our key strategic goals is to be our clients' partner and expert of choice. To achieve this, we invest in developing and recruiting professionals with extensive industry, business and in-demand technology expertise. In addition, a majority of CGI consultants and professionals are also owners through our Share Purchase Plan, which, combined with the Profit Participation Plan, provide an added level of commitment to the success of our clients. • Comprehensive quality processes: CGI's investment in quality frameworks and rigorous client satisfaction assessments has resulted in a consistent track record of on-time and within-budget project delivery. With regular reviews of engagements and transparency at all levels, the Company ensures that client objectives and its own quality objectives are consistently followed at all times. This thorough process enables CGI to generate continuous improvements for all stakeholders by applying corrective measures as soon as they are required. • Environmental, Social and Governance (ESG) strategy: At CGI, our ESG strategy is key to contributing to our strategic goal to be recognized by our stakeholders as an engaged, ethical and responsible corporate citizen within our communities. Our commitments align with the United Nations (UN) Global Compact's 10 principles and we are recognized by leading international indices, including EcoVadis, Carbon Disclosure Project (CDP) and Dow Jones Sustainability Indices (DJSI). We prioritize partnerships with clients, while also collaborating with educational institutions and local organizations, on three global priorities: people, communities and © 2022 CGI Inc. Management's Discussion and Analysis | For the years ended September 30, 2022 and 2021 climate. We demonstrate our commitment to a sustainable world through projects delivered in collaboration with clients and through operating practices, supply chain management, and community service activities. 1.3. COMPETITIVE ENVIRONMENT As the market dynamics and industry trends continue to increase client demand for digitization, CGI is well-positioned to serve as a digital partner and expert of choice. We work with clients across the globe to implement digital strategies, roadmaps and solutions that help clients transform the customer/citizen experience, drive the launch of new products and services, and deliver efficiencies and cost savings. CGI's competition is comprised of a variety of firms, from local companies providing specialized services and software, government pure-plays to global business consulting and IT services providers. All of these players are competing to deliver some or all of the services we provide. Many factors distinguish the industry leaders, including the following: • Depth and breadth of industry and technology expertise; • Local presence and strength of client relationships; • Extensive and flexible global delivery network, including onshore, nearshore and offshore options; • Breadth of digital IP solutions; • Total cost of services and value delivered; • Ability to deliver practical innovation for measurable results; and • Consistent, on-time, within-budget delivery everywhere the client operates. CGI is one of the leaders in the industry with respect to the combination of these factors. CGI is one of few firms with the scale, reach, and capabilities to meet clients' enterprise business and technology needs. © 2022 CGI Inc. 2.2.2. Normal Course Issuer Bid (NCIB) On February 1, 2022, the Company's Board of Directors authorized and subsequently received regulatory approval from the TSX for the renewal of CGI's NCIB which allows for the purchase for cancellation of up to 18,781,981 Class A subordinate voting shares (Class A Shares) representing 10% of the Company's public float as of the close of business on January 24, 2022. Class A Shares may be purchased for cancellation under the NCIB commencing on February 6, 2022 until no later than February 5, 2023, or on such earlier date when the Company has either acquired the maximum number of Class A Shares allowable under the NCIB or elects to terminate the bid. During the year ended September 30, 2022, the Company purchased for cancellation 8,689,439 Class A Shares for $908.7 million at a weighted average price of $104.57 under the previous and current NCIB. The purchased shares included 3,968,159 and 938,914 Class A Shares purchased for cancellation on March 1, 2022, and August 1, 2022 respectively, each from Caisse de dépôt et de placement du Québec, for total aggregate cash consideration of $500.0 million. The purchases were made pursuant to two exemption orders issued by the Autorité des marchés financiers and are considered within the annual aggregate limit that the Company is entitled to purchase under its current NCIB. As at September 30, 2022, of the 8,689,439 Class A Shares purchased for cancellation, 113,405 Class A Shares remain unpaid for $11.7 million. As at September 30, 2022, the Company could purchase up to 12,403,308 Class A Shares for cancellation under the current NCIB. 2.2.3. Capital Stock and Options Outstanding The following table provides a summary of the Capital Stock and Options Outstanding as at November 4, 2022: Capital Stock and Options Outstanding As at November 4, 2022 Class A subordinate voting shares 211,383,087 6,697,421 2.3. COVID-19 At the onset of the COVID-19 pandemic, we established an executive crisis management team and a network of local crisis management teams to closely monitor the evolving COVID-19 pandemic, and to ensure that we were executing on our business continuity plan and working collaboratively with our clients. We established key guidelines and procedures to ensure that our workplace practices are in line with local government recommendations and requirements and are compliant with workplace readiness certifications. Our executive crisis management team and our network of local crisis management teams have downgraded our pandemic posture, but we continue monitoring of World Health Organization COVID-19 alerts and changes to local health and government COVID-19 guidance/rules that may impact CGI members or CGI's business. We have defined triggers to re-establish our active crisis management governance if the situation changes. 2.4. UKRAINE CONFLICT We are closely monitoring the evolving conflict in Ukraine. CGI does not have any established operations in Ukraine, Russia or Belarus. All of our operations in countries in geographic proximity to Ukraine or Russia are being closely monitored. None of the entities in CGI group are subject to any sanctions or related restrictions. After internal review, it is our belief that we do not have any material supply chain, customer base and/or business reliance in Russia or Belarus. Additionally, none of our directors, officers or our principal shareholders are based out of Russia or Belarus. © 2022 CGI Inc. 2.5. INVESTMENT IN SUBSIDIARIES On October 1, 2021, the Company acquired Array Holding Company, Inc. (Array) a leading digital services provider that optimizes mission performance for the U.S. Department of Defense and other government organizations, based in the United States and headquartered in Greenbelt, Maryland. The acquisition added approximately 275 professionals to the Company. On October 28, 2021, the Company acquired Cognicase Management Consulting (CMC), a leading provider of technology and management consulting services and solutions, headquartered in Madrid, Spain. The acquisition added approximately 1,500 professionals to the Company. On February 28, 2022, the Company acquired Unico Computer Systems Pty Ltd (Unico), a technology consultancy and systems integrator, headquartered in Melbourne, Australia. The acquisition added approximately 130 professionals to the Company. On May 25, 2022, the Company acquired all of the outstanding shares of Harwell Management (Harwell). Based in France, Harwell is a management consulting firm specializing in the financial services industry, headquartered in Paris, France. The acquisition added approximately 150 professionals to the Company. The Company completed these acquisitions for a total purchase price of $238.4 million. On March 11, 2022, the Company announced that it had entered into an agreement for the acquisition of all of the shares of Umanis SA (Umanis), a digital company specializing in data, digital and business solutions, headquartered in Paris, France. On May 31, 2022, the Company announced that it had acquired control of Umanis by completing a block purchase representing 72.4% of Umanis' share capital (excluding treasury shares) and that it had filed with the French financial markets authority (Autorité des Marchés Financiers) the draft mandatory tender offer to purchase the remaining outstanding shares. By July 18, 2022, the Company acquired an aggregate total interest of more than 90.0% of the outstanding shares (excluding treasury shares) and launched a statutory squeeze-out process through which the remaining shares were acquired on July 29, 2022. The transaction values the entire share capital of Umanis at $420.3 million, on a fully diluted basis. This acquisition added approximately 3,000 professionals to the Company. © 2022 CGI Inc. 3.1. BOOKINGS AND BOOK-TO-BILL RATIO Bookings for the year were $14.0 billion representing a book-to-bill ratio of 108.5%. The breakdown of the new bookings signed during the year is as follows: 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 managed IT and business process services 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. Management however believes that it is a key indicator of potential future revenue. 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, 2022 3.4. REVENUE BY SEGMENT Our segments are reported based on where the client's work is delivered from within our geographic delivery model. The table below provides a summary of the year-over-year changes in our revenue, in total and by segment before eliminations, separately showing the impacts of foreign currency exchange rate variations between Fiscal 2022 and Fiscal 2021. The Fiscal 2021 revenue by segment was recorded reflecting the actual foreign exchange rates for that period. The foreign exchange impact is the difference between the current period's actual results and the same period's results converted with the prior year's foreign exchange rates. For the year ended September 30, Change 26.2% For the year ended September 30, 2022, revenue was $12,867.2 million, an increase of $740.4 million or 6.1% over the same period last year. On a constant currency basis, revenue increased by $1,276.7 million or 10.5%. The increase was mainly due to organic growth across all vertical markets, as well as recent business acquisitions. 3.4.1. Western and Southern Europe For the year ended September 30, 2022, revenue in our Western and Southern Europe segment was $2,152.1 million, an increase of $234.4 million or 12.2% over the same period last year. On a constant currency basis, revenue increased by $433.9 million or 22.6%. The increase in revenue was mainly due to recent business acquisitions, as well as the result of organic growth across all vertical markets, predominantly within the MRD vertical market. On a client geographic basis, the top two Western and Southern Europe vertical markets were MRD and financial services, generating combined revenues of approximately $1,319 million for the year ended September 30, 2022. 3.4.2. U.S. Commercial and State Government For the year ended September 30, 2022, revenue in our U.S. Commercial and State Government segment was $2,075.3 million, an increase of $274.6 million or 15.2% over the same period last year. On a constant currency basis, revenue increased by $252.7 million or 14.0%. The increase in revenue was mainly the result of organic growth across all vertical markets, predominantly within financial services with additional IP solutions, and business acquisitions. On a client geographic basis, the top two U.S. Commercial and State Government vertical markets were financial services and government, generating combined revenues of approximately $1,306 million for the year ended September 30, 2022. 3.4.3. Canada For the year ended September 30, 2022, revenue in our Canada segment was $1,981.4 million, an increase of $225.6 million or 12.8% compared to the same period last year. On a constant currency basis, revenue increased by $225.8 million or 12.9%. The increase was due to organic growth across all vertical markets, mainly in financial services including an increase in IP services and solutions. On a client geographic basis, the top two Canada vertical markets were financial services, and communications and utilities, generating combined revenues of approximately $1,382 million for the year ended September 30, 2022. 3.4.4. U.S. Federal For the year ended September 30, 2022, revenue in our U.S. Federal segment was $1,750.9 million, an increase of $143.5 million or 8.9% over the same period last year. On a constant currency basis, revenue increased by $124.8 million or 7.8%. The increase in revenue was mainly due to managed services expansion, higher transaction volumes related to our IP business process services, and the Array acquisition. This was partially offset by the completion of contracts and an adjustment due to a reevaluation of cost to complete on a project. For the year ended September 30, 2022, 88% of revenues within the U.S. Federal segment were federal civilian based. © 2022 CGI Inc. 3.4.5. Scandinavia and Central Europe For the year ended September 30, 2022, revenue in our Scandinavia and Central Europe segment was $1,571.1 million, a decrease of $92.4 million or 5.6% over the same period last year. On a constant currency basis, revenue increased by $64.9 million or 3.9%. The increase was largely driven by the organic growth in government and MRD vertical markets, and a favourable contract settlement. On a client geographic basis, the top two Scandinavia and Central Europe vertical markets were MRD and government, generating combined revenues of approximately $1,135 million for the year ended September 30, 2022. 3.4.6. U.K. and Australia For the year ended September 30, 2022, revenue in our U.K. and Australia segment was $1,291.1 million, a decrease of $64.5 million or 4.8% over the same period last year. On a constant currency basis, revenue increased by $14.7 million or 1.1%. The increase in revenue was due to the Unico acquisition, organic growth within the government, and communications and utilities vertical markets. This was in part offset by the successful completion and related ramp down of projects within the MRD vertical market. On a client geographic basis, the top two U.K. and Australia vertical markets were government and communications and utilities, generating combined revenues of $1,051 million for the year ended September 30, 2022. 3.4.7. Finland, Poland and Baltics For the year ended September 30, 2022, revenue in our Finland, Poland and Baltics segment was $729.0 million, a decrease of $40.0 million or 5.2% over the same period last year. On a constant currency basis, revenue increased by $28.0 million or 3.6%. The increase was driven by organic growth across most vertical markets, largely within government including higher transaction volumes and related IP services. On a client geographic basis, the top two Finland, Poland and Baltics vertical markets were government and financial services, generating combined revenues of approximately $442 million for the year ended September 30, 2022. 3.4.8. Northwest and Central-East Europe For the year ended September 30, 2022, revenue in our Northwest and Central-East Europe segment was $692.9 million, a decrease of $23.3 million or 3.3% over the same period last year. On a constant currency basis, revenue increased by $36.1 million or 5.0%. The increase in revenue was primarily due to the organic growth within financial services, including higher IP service and solutions, government and MRD vertical markets. This was in part offset by successful projects completion within the health vertical market. On a client geographic basis, the top two Northwest and Central-East Europe vertical markets were MRD and government, generating combined revenues of approximately $450 million for the year ended September 30, 2022. 3.4.9. Asia Pacific For the year ended September 30, 2022, revenue in our Asia Pacific segment was $799.7 million, an increase of $119.1 million or 17.5% over the same period last year. On a constant currency basis, revenue increased by $146.0 million or 21.5%. This growth was mainly driven by the increasing demand for our offshore delivery centers, predominantly within the financial services, communications and utilities, and MRD vertical markets. © 2022 CGI Inc. 3.5.1. Costs of Services, Selling and Administrative For the year ended September 30, 2022, costs of services, selling and administrative expenses amounted to $10,776.6 million, an increase of $598.4 million over the same period last year. As a percentage of revenue, costs of services, selling and administrative expenses decreased to 83.8% from 83.9%. As a percentage of revenue, costs of services decreased compared to the same period last year primarily due to IP services and solutions and the growth in managed services in Asia Pacific. As a percentage of revenue, selling and administrative expenses increased compared to the same period last year mainly due to the Umanis acquisition, which is in the process of being integrated to achieve planned synergies, and the expected increase of travel costs in support of business development. During the year ended September 30, 2022, the translation of the results of our foreign operations from their local currencies to the Canadian dollar favourably impacted costs by $465.6 million, which was offset by the unfavourable translation impact of $536.3 million on our revenue. 3.5.2. Foreign Exchange Loss During the year ended September 30, 2022, CGI incurred $4.0 million of foreign exchange losses, mainly driven by the timing of payments combined with the volatility of foreign exchange rates. The Company, in addition to its natural hedges, uses derivatives as a strategy to manage its exposure, to the extent possible. © 2022 CGI Inc. % Adjusted EBIT for the year was $2,086.6 million, an increase of $134.5 million from 2021. The adjusted EBIT margin increased to 16.2% from 16.1% for the same period last year. The increase in adjusted EBIT margin was primarily due to organic growth in all vertical markets and in IP services and solutions. This was partially offset by costs of assimilating new hires, the dilutive impacts of the recent acquisitions, which are in the process of being integrated to achieve its planned synergies and the expected increase of travel costs in support of business development. 3.6.1. Western and Southern Europe For the year ended September 30, 2022, adjusted EBIT in the Western and Southern Europe segment was $289.7 million, an increase of $20.4 million when compared to the same period last year. Adjusted EBIT margin decreased to 13.5% from 14.0%. The change in adjusted EBIT margin was primarily due to the temporary dilutive impact of the recent business acquisitions which are in the process of being integrated to achieve planned synergies, as well as additional tax credits in the prior year. This was partially offset by the organic growth across all vertical markets. 3.6.2. U.S. Commercial and State Government For the year ended September 30, 2022, adjusted EBIT in the U.S. Commercial and State Government segment was $304.8 million, an increase of $23.6 million when compared to the same period last year. Adjusted EBIT margin decreased to 14.7% from 15.6%. The change in adjusted EBIT was mainly due to additional R&D tax credits in the prior year, combined with costs of assimilating new hires in response to high demand. This was partially offset by organic growth within the financial services vertical market including IP solutions. © 2022 CGI Inc. 3.6.3. Canada For the year ended September 30, 2022, adjusted EBIT in the Canada segment was $463.3 million, an increase of $72.9 million when compared to the same period last year. Adjusted EBIT margin increased to 23.4% from 22.2%. The increase was primarily due to organic growth across most vertical markets mainly in MRD vertical market, an impact of a favourable supplier contract adjustment, and an increase in IP services and solutions. This was offset in part by costs of assimilating new hires in response to high demand, mainly within the financial services vertical market. 3.6.4. U.S. Federal For the year ended September 30, 2022, adjusted EBIT in the U.S. Federal segment was $276.4 million, an increase of $23.7 million when compared to the same period last year. Adjusted EBIT margin increased to 15.8% from 15.7%. The increase was primarily due to the same factors as revenue offset by higher performance based compensation and additional tax credits in the prior year. 3.6.5. Scandinavia and Central Europe For the year ended September 30, 2022, adjusted EBIT in the Scandinavia and Central Europe segment was $125.7 million, a decrease of $12.5 million when compared to the same period last year. Adjusted EBIT margin decreased to 8.0% from 8.3%. The change was primarily due to the optimization of our infrastructure business, partially offset by a favourable contract settlement. 3.6.6. U.K. and Australia For the year ended September 30, 2022, adjusted EBIT in the U.K. and Australia segment was $200.1 million, a decrease of $18.5 million when compared to the same period last year. Adjusted EBIT margin decreased to 15.5% from 16.1%. This change was mainly due to the successful completion of projects within the MRD vertical market, and the temporary dilutive impact of the Unico acquisition, which is in the process of being integrated to achieve its planned synergies. 3.6.7. Finland, Poland and Baltics For the year ended September 30, 2022 adjusted EBIT in our Finland, Poland and Baltics segment was $96.7 million, a decrease of $17.7 million, when compared to the same period last year. Adjusted EBIT margin decreased to 13.3% from 14.9%. The decrease in adjusted EBIT margin was mainly due to the costs associated with the start up of a large new managed IT services contract and the prior year payroll tax relief. This was partially offset by a prior year asset impairment. 3.6.8. Northwest and Central-East Europe For the year ended September 30, 2022, adjusted EBIT in the Northwest and Central-East Europe segment was $88.3 million, an increase of $8.4 million when compared to the same period last year. Adjusted EBIT margin increased to 12.7% from 11.2%. The increase in adjusted EBIT margin was primarily due to the same factors as revenue. 3.6.9. Asia Pacific For the year ended September 30, 2022, adjusted EBIT in the Asia Pacific segment was $241.7 million, an increase of $34.2 million when compared to the same period last year. Adjusted EBIT margin decreased to 30.2% from 30.5%. The change in adjusted EBIT margin was mostly due to temporary lower billable utilization, related to the costs of assimilating new hires in response to high demand. This was partially offset by increasing demand for our offshore delivery centers, predominantly within the financial services, communications and utilities, and MRD vertical markets, and facility optimization. © 2022 CGI Inc. 3.7.1. Acquisition-Related and Integration Costs For the years ended September 30, 2022 and 2021, the Company incurred $27.7 million and $7.4 million, respectively, of acquisition-related and integration costs for the integration towards the CGI operating model. These costs are mainly related to professional fees incurred for the acquisitions, terminations of employment, leases of vacated premises, training and integration costs. 3.7.2. Net Finance Costs Net finance costs mainly include interest on our long-term debt and lease liabilities. For the year ended September 30, 2022, the net finance costs decreased by $14.8 million, mainly due to lower interest charges related to our unsecured notes, primarily as a result of the scheduled repayments. © 2022 CGI Inc. 3.8.1. Income Tax Expense For the year ended September 30, 2022, income tax expense was $500.8 million compared to $468.9 million over the same period last year, while our effective tax rate remained at 25.5%. When excluding tax effects from acquisition-related and integration costs, the effective tax rate decreased from 25.5% to 25.4% for the year ended September 30, 2022 compared to the year ended September 30, 2021. The decrease is mainly attributable to a tax rate decrease in France, partly offset by a different profitability mix in certain geographies. The table in section 3.8.3. shows the year-over-year comparison of the tax rate with the impact of specific items removed. Based on the enacted rates at the end of Fiscal 2022 and our current profitability mix, we expect our effective tax rate before specific items to be in the range of 24.5% to 26.5% in subsequent periods. 3.8.2. Weighted Average Number of Shares For Fiscal 2022, CGI's basic and diluted weighted average number of shares decreased compared to Fiscal 2021 due to the impact of the purchase for cancellation of Class A Shares, partly offset by the grant and the exercise of stock options. Please refer to notes 19, 20 and 21 of our audited consolidated financial statements for additional information. © 2022 CGI Inc. 4.1. CONSOLIDATED STATEMENTS OF CASH FLOWS CGI's growth is financed through a combination of cash flow from operations, drawing on our unsecured committed revolving credit facility, 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, 2022, cash and cash equivalents were $966.5 million. Cash included in funds held for clients was $504.7 million. The following table provides a summary of the generation and use of cash for the years ended September 30, 2022 and 2021. For the year ended September 30, 2022 1 Comprised of deferred income tax recovery, foreign exchange (gain) loss, share-based payment costs and gain on lease terminations and sale of property, plant and equipment. 2 Comprised of prepaid expenses and other assets, long-term financial assets, income taxes, derivative financial instruments and retirement benefits obligations. For the year ended September 30, 2022, cash provided by operating activities was $1,865.0 million, down $250.9 million for the same period last year, mainly due to the net change in non-cash working capital items. The net change in non-cash working capital items of $110.9 million for the year ended September 30, 2022 was mostly due to the increase in our DSO. The timing of our working capital inflows and outflows will always have an impact on the cash flow from operations. © 2022 CGI Inc. 191,399 For the year ended September 30, 2022, we repaid $401.7 million of our long-term debt, mainly driven by the scheduled repayments of senior unsecured notes in the amount of $384.6 million (US$300.0 million). In addition, we paid $154.0 million of lease liabilities and used $113.0 million to repay debt assumed from business acquisitions. For the year ended September 30, 2021, we increased our long-term debt by $1,885.3 million, mainly driven by the issuance of senior unsecured notes for the amount of $1,847.3 million and repaid $1,888.8 million of our long-term debt mainly driven by the repayment in full of the 2020 Term Loan in the amount of $1,583.5 million (US$1,250.0 million), and the scheduled repayments of senior unsecured notes in the amount of $259.7 million. We also paid $169.7 million of lease liabilities. For the year ended September 30, 2022, $70.3 million was used to purchase Class A Shares in connection with the Performance Share Unit Plans (PSU Plans) compared to $31.4 million during the year ended September 30, 2021. More © 2022 CGI Inc. Management's Discussion and Analysis | For the years ended September 30, 2022 and 2021 information concerning the PSU Plans can be found in note 20 of the Company's audited consolidated financial statements for the year ended September 30, 2022 and 2021. For the year ended September 30, 2022, $913.4 million was used for the purchase for cancellation of 8,809,839 Class A Shares, compared to $1,502.8 million for the purchase for cancellation of 15,310,465 Class A Shares over the same period last year. For the year ended September 30, 2022, we received $41.7 million in proceeds from the exercise of stock options, compared to $61.1 million during the year ended September 30, 2021. In addition, for the year ended September 30, 2022, the increase in net change in client's funds obligation of $13.0 million and the decrease of $129.2 million for the year ended September 30, 2021 was due to the timing of inflows from our clients and related payments to our clients' employees and other payees. 4.1.4. Effect of Foreign Exchange Rate Changes on Cash and Cash Equivalents For the year ended September 30, 2022, the effect of foreign exchange rate changes on cash and cash equivalents had an unfavourable impact of $46.5 million. This amount had no effect on net earnings as it was recorded in other comprehensive income. 4.2. CAPITAL RESOURCES 1 As at September 30, 2022, letters of credit in the amount of $4.3 million were outstanding against the $1.5 billion unsecured committed revolving credit facility. 2 Excludes cash and long-term bonds included in funds held for clients for $504.7 million and $94.1 million, respectively. As at September 30, 2022, cash and cash equivalents and investments represented $989.5 million. Cash equivalents include term deposits, all with maturities of 90 days or less. Short-term and long-term investments include corporate bonds with maturities ranging from 91 days to five years, with a credit rating of A- or higher. As at September 30, 2022, the aggregate amount of the capital resources available to the Company was $2,485.2 million. Certain long-term debt agreements contain covenants, which require us to maintain certain financial ratios. As at September 30, 2022, CGI was in compliance with these covenants. Total debt decreased by $134.7 million to $3,267.0 million as at September 30, 2022 compared to $3,401.7 million as at September 30, 2021. The variance was mainly due to the scheduled repayments of senior unsecured notes in the amount of $384.6 million (US$300.0 million), partially offset by a foreign exchange translation impact of $207.6 million and debt assumed from business acquisitions for $36.0 million. On November 1, 2022, the unsecured committed revolving credit facility was extended by one year to November 2027 and can be further extended. There were no material changes in the terms and conditions including interest rates and banking covenants. As at September 30, 2022, CGI was showing a positive working capital (total current assets minus total current liabilities) of $699.7 million. The Company also had $1,495.7 million available under its unsecured committed revolving credit facility and © 2022 CGI Inc. Management's Discussion and Analysis | For the years ended September 30, 2022 and 2021 is generating a significant level of cash, which CGI's management currently considers will allow the Company to fund its operations while maintaining adequate levels of liquidity. The tax implications and impact related to the repatriation of cash will not materially affect the Company's liquidity. 4.3. CONTRACTUAL OBLIGATIONS We are committed under the terms of contractual obligations which have various expiration dates, primarily related to long-term debt and the rental of premises, computer equipment used in outsourcing contracts and long-term service agreements. Commitment type 1 As at September 30, 2022, long-term debt and lease liabilities were $3,267.0 million ($3,401.7 million as at September 30, 2021) and $709.2 million ($776.9 million as at September 30, 2021), respectively, including their current portions. We use the net debt to capitalization ratio as an indication of our financial leverage in order to realize our Build and Buy strategy (please refer to section 1.2. of the present document for additional information on our Build and Buy strategy). The net debt to capitalization ratio increased to 28.8% in Fiscal 2022 from 26.6% in Fiscal 2021 mostly due by the repurchase of shares and investments in our business acquisitions, partially offset by our cash generation during the last four quarters. ROE is a measure of the return we are generating for our shareholders. ROE increased to 20.9% in Fiscal 2022 from 19.8% in Fiscal 2021. The increase was mainly due to higher net earnings and, to a lesser extent, the impact of repurchased shares and the impact of translating financial statements of our foreign operations over the last four quarters. ROIC is a measure of the Company's efficiency in allocating the capital under our control to profitable investments. The return on invested capital ratio increased to 15.7% in Fiscal 2022 from 14.9% in Fiscal 2021. The increase in ROIC was mainly the result of higher net earnings excluding net finance costs after-tax over the last four quarters. DSO increased to 49 days at the end of Fiscal 2022 when compared to 45 days in Fiscal 2021. This increase is mainly due to the impacts from recent acquisitions which are in the process of being integrated and foreign exchange fluctuations. The Company maintains a target DSO of 45 days. © 2022 CGI Inc. 4.6. GUARANTEES In the normal course of operations, we may enter into agreements to provide financial or performance assurances to third parties on the sale of assets, business divestitures and guarantees on government and commercial contracts. In connection with sales of assets and business divestitures, the Company may be required to pay counterparties for costs and losses incurred as a result of breaches in our contractual obligations, representations and warranties, intellectual property right infringement and litigation against counterparties, among others. While some of the agreements specify a maximum potential exposure, others do not specify a maximum amount or a maturity date. 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, 2022. The Company does not expect to incur any potential payment in connection with these guarantees that could have a materially adverse effect on its audited consolidated financial statements. 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 we are awarded the bid. We would also be liable for the performance bonds in the event of a default in the performance of our obligations. As at September 30, 2022, we had committed a total of $19.3 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 bid or performance 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 CGI's management believes that the Company has sufficient capital resources to support ongoing business operations and execute our Build and Buy growth strategy. Our principal and most accretive uses of cash are: to invest in our business (procuring new large managed IT and business process services contracts and developing business and IP solutions); to pursue accretive acquisitions; to purchase for cancellation Class A Shares and pay down debt. In terms of financing, we are well positioned to continue executing our four-pillar growth strategy in Fiscal 2023. To suc