EX-99.1 2 q2-14mda.htm EXHIBIT Q2-14 MD&A











MANAGEMENT’S
DISCUSSION AND ANALYSIS

Q2 2014





April 30, 2014

Basis of Presentation
This Management’s Discussion and Analysis of the Financial Position and Results of Operations (“MD&A”) is the responsibility of management and has been reviewed and approved by the Board of Directors. This MD&A has been prepared in accordance with the requirements of the Canadian Securities Administrators. The Board of Directors is ultimately responsible for reviewing and approving the MD&A. The Board of Directors carries out this responsibility mainly through its Audit and Risk Management Committee, which is appointed by the Board of Directors and is comprised entirely of independent and financially literate directors.
Throughout this document, CGI Group Inc. is referred to as “CGI”, “we”, “our” or “Company”. This MD&A provides information management believes is relevant to an assessment and understanding of the consolidated results of operations and financial condition of the Company. This document should be read in conjunction with the interim condensed consolidated financial statements and the notes thereto for the three and six months ended March 31, 2014 and 2013. CGI’s accounting policies are in accordance with International Financial Reporting Standards (“IFRS”) issued by the International Accounting Standards Board (“IASB”). All dollar amounts are in Canadian dollars unless otherwise indicated.

Materiality of Disclosures
This MD&A includes information we believe is material to investors. We consider something to be material if it results in, or would reasonably be expected to result in, a significant change in the market price or value of our shares, or if it is likely that a reasonable investor would consider the information to be important in making an investment decision.

Forward-Looking Statements
All statements in this MD&A that do not directly and exclusively relate to historical facts constitute “forward-looking statements” within the meaning of that term in Section 27A of the United States Securities Act of 1933, as amended, and Section 21E of the United States Securities Exchange Act of 1934, as amended, and are “forward-looking information” within the meaning of Canadian securities laws. These statements and this information represent CGI’s intentions, plans, expectations and beliefs, and are subject to risks, uncertainties and other factors, of which many are beyond the control of the Company. These factors could cause actual results to differ materially from such forward-looking statements or forward-looking information. These factors include but are not restricted to: the timing and size of new contracts; acquisitions and other corporate developments; the ability to attract and retain qualified members; market competition in the rapidly evolving information technology industry; general economic and business conditions; foreign exchange and other risks identified in the MD&A, in CGI’s Annual Report on Form 40-F filed with the U.S. Securities and Exchange Commission (filed on EDGAR at www.sec.gov), the Company’s Annual Information Form filed with the Canadian securities authorities (filed on SEDAR at www.sedar.com), as well as assumptions regarding the foregoing. The words “believe,” “estimate,” “expect,” “intend,” “anticipate,” “foresee,” “plan,” and similar expressions and variations thereof, identify certain of such forward-looking statements or forward-looking information, which speak only as of the date on which they are made. In particular, statements relating to future performance are forward-looking statements and forward-looking information. CGI disclaims any intention or obligation to publicly update or revise any forward-looking statements or forward-looking information, whether as a result of new information, future events or otherwise, except as required by applicable law. Readers are cautioned not to place undue reliance on these forward-looking statements or on this forward-looking information. You will find more information about the risks that could cause our actual results to differ significantly from our current expectations in Section 8 – Risk Environment.


    
CGI Group Inc. - Management's Discussion and Analysis for the three and six months ended March 31, 2014
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Non-GAAP and Key Performance Measures
The reader should note that the Company reports its financial results in accordance with IFRS. However, we use a combination of financial measures, ratios, and non-GAAP measures to assess our Company’s performance. The non-GAAP measures used in this MD&A do not have any standardized meaning prescribed by IFRS and are therefore unlikely to be comparable to similar measures presented by other issuers. These measures should be considered as supplemental in nature and not as a substitute for the related financial information prepared in accordance with IFRS.
The table below summarizes our non-GAAP measures and most relevant key performance measures:
 
 
 
Profitability
•
Adjusted EBIT (non-GAAP) – is a measure of earnings before integration-related costs, financing costs, finance income and income tax expense as these items are not directly related to the cost of operations. Management uses this measure and believes that investors also use this measure as it best reflects the profitability of our operations and allows for better comparability from period to period as well as to analyze the trends in our operations. A reconciliation of adjusted EBIT to its closest IFRS measure can be found on page 22.
 
•
Net earnings excluding integration-related costs, adjustments related to tax and the resolution of acquisition-related provisions1 (non-GAAP) – is a measure of earnings before the integration-related costs, adjustments related to tax and the resolution of acquisition-related provisions. Management uses this measure and believes that investors also use this measure as it best reflects the Company's operating profitability and allows for better comparability from period to period. A reconciliation of net earnings excluding integration-related costs, adjustments related to tax and the resolution of acquisition-related provisions to its closest IFRS measure can be found on page 24.
 
•
Diluted earnings per share excluding integration-related costs, adjustments related to tax and the resolution of acquisition-related provisions (non-GAAP) – is defined as the net earnings excluding integration-related costs, adjustments related to tax and the resolution of acquisition-related provisions on a per share basis, assuming all dilutive elements are exercised. Management uses this measure and believes that investors also use this measure as it best reflects the Company's operating profitability on a per share basis and allows for better comparability from period to period. The diluted net earnings reported in accordance with the IFRS can be found on page 23 while the diluted net earnings excluding integration-related costs, adjustments related to tax and the resolution of acquisition-related provisions can be found on page 24.
 
•
Net earnings – is a measure of earnings generated for shareholders.
 
•
Diluted earnings per share – is a measure of earnings generated for shareholders on a per share basis, assuming all dilutive elements are exercised.
 
 
 
 
 
 
Liquidity
•
Cash provided by operating activities – is a measure of cash generated from managing our day-to-day business operations. We believe strong operating cash flow is indicative of financial flexibility, allowing us to execute our corporate strategy. 

 
•
Days sales outstanding ("DSO") (non-GAAP) – is the average number of days to convert our trade receivables and work in progress into cash. DSO are obtained by subtracting deferred revenue from trade accounts receivable and work in progress; the result is divided by the quarter’s revenue over 90 days. Deferred revenue is net of the fair value adjustments on revenue-generating contracts assumed through the Logica acquisition. Management tracks this metric closely to ensure timely collection, healthy liquidity, and is committed to a DSO target of 45 days. We believe this measure is useful to investors as it demonstrates the Company's ability to timely convert its trade receivables and work in progress into cash.
 
 
 

1    Adjustments related to the resolution of acquisition-related provisions are described on page 19 and 20.

    
CGI Group Inc. - Management's Discussion and Analysis for the three and six months ended March 31, 2014
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Growth
•
Constant currency growth (non-GAAP) – is a measure of revenue growth before foreign currency impacts. This growth is calculated by translating current period results in local currency using the conversion rates in the equivalent period from the prior year. Management believes that it is helpful to adjust revenue to exclude the impact of currency fluctuations to facilitate period-to-period comparisons of business performance. We believe that this measure is useful to investors for the same reason.
 
 
•
Backlog – represents management's best estimate of revenue to be realized in the future based on the terms of respective client agreements in effect at a point in time.
 
•
Book-to-bill ratio – is a measure of the proportion of the value of our contract wins to our revenue in the period. This metric allows management to monitor the Company’s business development efforts to ensure we grow our backlog and our business over time. Management remains committed to maintaining a target ratio greater than 100% over a trailing 12-month period. Management believes that the longer period is a more effective measure as the size and timing of bookings could cause this measurement to fluctuate significantly if taken for only a three-month period.
 
 
 
Capital Structure
•
Net debt (non-GAAP) – is obtained by subtracting our cash and cash equivalents, short-term investments and long-term investments from our debt. Management uses the net debt metric to monitor the Company's financial leverage. We believe that this metric is useful to investors as it provides insight into our financial strength. A reconciliation of net debt to its closest IFRS measure can be found on page 29. 
 
 
•
Net debt to capitalization ratio (non-GAAP) – is a measure of our level of financial leverage and is obtained by dividing the net debt by the sum of shareholder's equity and debt. Management uses the net debt to capitalization metric to monitor the proportion of debt versus capital used to finance our operations and to assess the Company's financial strength. We believe that this metric is useful to investors as it provides insight into our financial strength. .  
 
 
•
Return on equity (non-GAAP) – is a measure of the rate of return on the ownership interest of our shareholders and is calculated as the proportion of earnings for the last 12 months over the last four quarter's average equity. Management looks at ROE to measure its efficiency at generating profits for the Company’s shareholders and how well the Company uses the invested funds to generate earnings growth. We believe that this measure is useful to investors for the same reasons.
 
•
Return on invested capital (non-GAAP) – is a measure of the Company’s efficiency at allocating the capital under its control to profitable investments and is calculated as the proportion of the after-tax adjusted EBIT for the last 12 months, over the last four quarter's average invested capital, which is defined as the sum of equity and net debt. Management examines this ratio to assess how well it is using its funds to generate returns. We believe that this measure is useful to investors for the same reason.
 
 
 

Reporting Segments
The Company is managed through the following seven operating segments, namely: United States of America (“U.S.”); Nordics, Southern Europe and South America (“NSESA”); Canada; France (including Luxembourg and Morocco); United Kingdom (“U.K.”); Central and Eastern Europe (including the Netherlands, Germany, and Belgium) (“CEE”); and Asia Pacific (including Australia, India, the Philippines and the Middle East). Please refer to section 3.4 and 3.6 of the present document and to Note 11 of our interim condensed consolidated financial statements for additional information on our segments.
To assist in better understanding the operational performance of our company since the acquisition of Logica PLC (“Logica”) in 2012, we refer to our operations in two broad groupings. Our activities prior to Logica was predominantly comprised of the Canada and the U.S. segments which we refer to as our North American operations or segments. The acquired operations which we refer herein as our European operations or segments is comprised of the NSESA, France, U.K., CEE and Asia Pacific segments.

    
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MD&A Objectives and Contents

•
Provide a narrative explanation of the interim condensed consolidated financial statements through the eyes of management;
•
Provide the context within which the interim condensed consolidated financial statements should be analyzed, by giving enhanced disclosure about the dynamics and trends of the Company’s business; and
•
Provide information to assist the reader in ascertaining the likelihood that past performance is indicative of future performance.
In order to achieve these objectives, this MD&A is presented in the following main sections:
Section
 
Contents
Pages
 
 
 
 
1.      Corporate Overview
 
This includes a description of our business and how we generate revenue as well as the markets in which we operate.
 
 
 
 
 
 
 
1.1.     About CGI
 
 
1.2.     Vision and Strategy
 
 
1.3.     Competitive Environment
 
 
 
 
 
 
 
 
2.      Highlights and Key Performance Measures
 
A summary of key achievements during the quarter, the past eight quarter’s key performance measures, and CGI’s share performance.
 
 
 
2.1.     Q2 2014 Highlights
 
 
2.2.     Selected Quarterly Information & Key Performance Measures
 
 
2.3.     Stock Performance
 
 
 
 
 
 
 
 
3.      Financial Review
 
A discussion of year-over-year changes to operating results for the three and six months ended March 31, 2014 and 2013, describing the factors affecting revenue and adjusted EBIT on a consolidated and reportable segment basis, and also by describing the factors affecting changes in the major expense categories. Also discussed are bookings broken down by geography, by vertical market, by contract type and by service type.
 
 
 
 
 
 
 
3.1.     Bookings and Book-to-Bill Ratio
 
 
3.2.     Foreign Exchange
 
 
3.3.     Revenue Distribution
 
 
3.4.     Revenue Variation and Revenue by Segment
 
 
3.5.     Operating Expenses
 
 
3.6.     Adjusted EBIT by Segment
 
 
3.7.     Earnings before Income Taxes
 
 
3.8.     Net Earnings and Earnings Per Share (“EPS”)
 
 
 
 

    
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Section
 
Contents
Pages
 
 
 
 
4.      Liquidity
 
This includes a discussion of changes in cash flows from operating, investing and financing activities. This section also describes the Company’s available capital resources, financial instruments, and off-balance sheet financing and guarantees. Measures of liquidity (days sales outstanding) and capital structure (return on equity, net debt to capitalization, and return on invested capital) are analyzed on a year-over-year basis.
 
 
 
 
 
 
 
4.1.     Interim Condensed Consolidated Statements of Cash Flows
 
 
4.2.     Capital Resources
 
 
4.3.     Contractual Obligations
 
 
4.4.     Financial Instruments and Hedging Transactions
 
 
4.5.     Selected Measures of Liquidity and Capital Resources
 
 
4.6.     Off-Balance Sheet Financing and Guarantees
 
 
4.7.     Capability to Deliver Results
 
 
 
 
 
 
 
 
5.      Changes in Accounting Standards
 
A summary of the amended accounting standards adopted.
 
 
 
 
6.      Critical Accounting Estimates
 
A discussion of the estimates and judgements made in the preparation of the interim condensed consolidated financial statements.
 
 
 
 
7.      Integrity of Disclosure
 
A discussion of the existence of appropriate information systems, procedures and controls to ensure that information used internally and disclosed externally is complete and reliable.
 
 
 
 
8.      Risk Environment
 
A discussion of the risks affecting our business activities and what may be the impact if these risks are realized.
 
 
 
 
 
 
 
8.1     Risks and Uncertainties
 
 
8.2     Legal Proceedings
 
 
 
 

    
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1.
Corporate Overview
 
 
 
 
 
 
 
 
 
 
 
 

1.1. ABOUT CGI
Founded in 1976 and headquartered in Montreal, Canada, CGI is the fifth largest independent information technology and business process services firm in the world. CGI has approximately 68,000 employees, whom we refer to as members, worldwide. The Company’s client-proximity model provides for CGI services and solutions to be delivered in a number of ways and considering a number of factors: onsite at clients’ premises; or from any combination of onsite, near-shore and/or offshore delivery centers. We also have a number of leading business solutions that support long-term client relationships. Our services are broken down as:
•
Consulting – CGI provides a full range of IT and management consulting services, including business transformation, IT strategic planning, business process engineering and systems architecture.
•
Systems integration – CGI integrates and customizes leading technologies and software applications to create IT systems that respond to clients’ strategic needs.
•
Management of IT and business functions (“outsourcing”) – Clients delegate entire or partial responsibility for their IT or business functions to CGI to achieve significant savings and access the best suited technology, while retaining control over strategic IT and business functions. As part of such agreements, we implement our quality processes and practices to improve the efficiency of the clients’ operations. We also integrate clients’ operations into our technology network. Finally, we may take on specialized professionals from our clients, enabling our clients to focus on key operations. Services provided as part of an outsourcing contract may include development and integration of new projects and applications; applications maintenance and support; technology infrastructure management (enterprise and end-user computing and network services); transaction and business processing such as payroll, claims processing, and document management services. Outsourcing contracts typically have terms from five to ten years.
CGI offers its end-to-end services to a focused set of industry vertical markets where we have developed extensive and deep subject matter expertise. This allows us to fully understand our clients’ business realities and to have the knowledge and solutions needed to advance their business goals. Our targeted vertical markets include the following:
•
Financial services – Helping financial institutions, including most major banks and top insurers, to reduce costs, increase efficiency and improve customer service.
•
Government – Supporting over 2,000 government organizations in reducing costs and improving the efficiency, quality and accountability of public service organizations, all while increasing citizen engagement.
•
Health – Helping more than 1,000 healthcare facilities, hospitals and departments of health implement solutions for better care, better business and better outcomes.
•
Telecommunications and utilities – Helping six of the top ten largest global telecommunications providers and eight of the top ten largest European utilities deliver new revenue streams and improve productivity and service.
•
Manufacturing, retail and distribution (“MRD”) – Enabling business transformation for more than 2,000 clients by improving efficiency and loyalty, lowering costs and boosting sustainable growth.
CGI has a wide range of proprietary business solutions which help shape opportunities and drive value for our clients and shareholders. Examples of these include Enterprise Resource Planning solutions, energy management, credit and debt collections, tax management, claims auditing and fraud detection.
We take great pride in delivering high quality services to our clients. To do so consistently, we have implemented and continue to maintain the International Organization for Standardization (“ISO”) quality program. By designing and implementing rigorous service delivery and quality standards, followed by monitoring and measurement, we are better able to satisfy our clients’ needs. As a measure of the scope of our ISO program, all of the legacy CGI’s business units continue to be certified as well

    
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as most of the business units acquired through the acquisition of Logica. The work on harmonizing the remaining business units is in progress.

1.2. VISION AND STRATEGY
Our strategy has always been based on long-term fundamentals as highlighted in the September 30, 2013 annual report. Please refer to our 2013 Annual Report or visit www.cgi.com for further details.

1.3. COMPETITIVE ENVIRONMENT
There have been no significant changes to the description outlined in our 2013 Annual Report.

    
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 2.
Highlights and Key Performance Measures
 
 
 
 
 
 
 
 
 
 
 
 

2.1. Q2 2014 HIGHLIGHTS
Operational year-over-year highlights for the quarter include:
•
Revenue of $2.7 billion, up 7.0%;
•
Bookings of $2.9 billion, or 105.4% of revenue;
•
Backlog of $19.5 billion, up $1.5 billion;
•
Adjusted EBIT of $341.5 million, up 30.5%;
•
Adjusted EBIT margin of 12.6%, up 220 basis points;
•
Net earnings of $230.9 million or diluted EPS of $0.73;
•
Net earnings of $229.6 million or diluted EPS of $0.72 excluding specific items1;
•
Cash provided by operating activities of $350.7 million;
•
Repurchased 346,700 shares during the quarter; and
•
Return on invested capital of 13.4%.

2.1.1. Acquisition of Logica plc
On August 20, 2012, CGI completed its acquisition of Logica for 105 pence ($1.63) per ordinary share which is equivalent to a total purchase price of $2.7 billion plus the assumption of Logica’s net debt of $0.9 billion. Subsequent to August 20, 2012, our results incorporated the operations of Logica.
As announced in Q2 2013, the Company revised its integration goals increasing the annual savings target from $300 million to $375 million per year to drive additional long-term savings and EPS accretion. The one-time cost to accomplish the expanded plan had been increased from $400 million to $525 million; and the Company expects to complete the integration of Logica by the end of fiscal 2014, a year earlier than planned.
The following table provides a summary of the integration-related figures:
For the period/three months ended,
Aug. 20, 2012 to Sept. 30, 2013

Dec. 31, 2013

Mar. 31, 2014

To complete the program
(In millions of CAD)
 
 
 
 
Integration-related payable at the beginning of the period
—

135.8

110.1

90.5

Plus:
 
 
 
 
Integration-related expenses
448.1

22.6

26.0

28.3

Minus:
 
 
 
 
Integration-related payments a
314.6

53.3

49.8

118.8

Non-cash integration-related costs
7.2

—

—

—

FX impact b
9.5

5.0

4.2

—

Integration-related payable at the end of the period
135.8

110.1

90.5

—

a     The total future cash disbursements will cover the remaining integration-related activities under the Logica integration program.

b     These amounts were recorded in other comprehensive income.


1    Specific items include the integration-related costs, a tax benefit and the resolution of acquisition-related provisions.

    
CGI Group Inc. - Management's Discussion and Analysis for the three and six months ended March 31, 2014
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2.2. SELECTED QUARTERLY INFORMATION & KEY PERFORMANCE MEASURES
As at and for the three months ended,
Mar. 31, 2014
Dec. 31, 2013
Sept. 30, 2013
Jun. 30, 2013
Mar. 31, 2013
Dec. 31, 2012
Sept. 30, 2012
June 30, 2012
In millions of CAD unless otherwise noted
 
 
 
 
 
 
 
Growth
 
 
 
 
 
 
 
 
Backlog 1
19,476
19,253
18,677
18,747
18,019
18,281
17,647
13,610
Bookings
2,850
2,818
2,501
2,754
2,210
2,845
1,523
1,478
Book-to-bill ratio
105.4%
106.5%
101.7%
107.3%
87.5%
112.3%
94.6%
138.8%
Revenue
2,704.3
2,644.7
2,458.2
2,567.3
2,526.2
2,532.9
1,609.7
1,064.9
Year-over-year growth
7.0%
4.4%
52.7%
141.1%
137.0%
145.4%
60.1%
5.1%
Constant currency growth 2
(2.3%)
(1.9%)
48.2%
140.3%
137.1%
147.5%
59.6%
3.0%
Profitability
 
 
 
 
 
 
 
 
Adjusted EBIT 3
341.5
302.9
313.4
291.2
261.6
209.5
114.1
136.3
Adjusted EBIT margin
12.6%
11.5%
12.7%
11.3%
10.4%
8.3%
7.1%
12.8%
Net earnings
230.9
189.8
141.0
178.2
114.2
22.4
(168.0)
87.2
Net earnings margin
8.5%
7.2%
5.7%
6.9%
4.5%
0.9%
(10.4%)
8.2%
Basic EPS (in dollars)
0.75
0.62
0.46
0.58
0.37
0.07
(0.60)
0.34
Diluted EPS (in dollars)
0.73
0.60
0.44
0.56
0.36
0.07
(0.58)
0.33
Liquidity
 
 
 
 
 
 
 
 
Cash provided by operating activities
350.7
66.3
166.4
133.2
147.2
224.5
109.3
251.0
As a % of revenue
13.0%
2.5%
6.8%
5.2%
5.8%
8.9%
6.8%
23.6%
Days sales outstanding 4, 9
47
55
49
49
46
46
74
49
Capital structure
 
 
 
 
 
 
 
 
Net debt 5, 9
2,678.2
2,890.4
2,739.9
2,873.0
2,914.3
2,964.9
3,105.3
633.4
Net debt to capitalization ratio 6, 9
35.6%
38.9%
39.6%
41.1%
43.0%
44.7%
46.5%
19.4%
Return on equity 7
17.9%
16.0%
12.3%
4.3%
1.8%
1.7%
5.0%
15.4%
Return on invested capital 8
13.4%
12.7%
11.8%
12.3%
11.1%
10.9%
11.4%
11.8%
Balance sheet
 
 
 
 
 
 
 
 
Cash and cash equivalents, and short-term investments
133.8
206.5
106.3
165.3
167.7
161.6
127.6
82.3
Total assets 9
11,560.4
11,801.0
10,879.3
11,132.8
10,936.6
10,981.8
10,690.2
4,550.4
Long-term financial liabilities 9, 10
3,220.1
3,487.8
3,186.2
3,452.5
3,890.2
4,002.3
4,097.4
854.9
1  
Backlog includes new contract wins, extensions and renewals (“bookings”), partially offset by the backlog consumed during the quarter as a result of client work performed and adjustments related to the volume, cancellation and/or the impact of foreign currencies to our existing contracts. Backlog incorporates estimates from management that are subject to change.
2     Constant currency growth is adjusted to remove the impact of foreign currency exchange rate fluctuations. Please refer to page 15 for details.
3     Adjusted EBIT is a measure for which we provide the reconciliation to its closest IFRS measure on page 22.
4    DSO is a measure which is discussed on page 30.
5  
Net debt is a measure for which we provide the reconciliation to its closest IFRS measure on page 29.
6
The net debt to capitalization ratio is a measure which is discussed on page 29.
7     The return on equity ratio is a measure which is discussed on page 29.
8  
The return on invested capital ratio is a measure which is discussed on page 29 and 30.
9  
The reader should note that the figures for Q4 2012, Q1 2013 and Q2 2013 were finalized in Q4 2013 to reflect the final purchase price allocation adjustments made to the opening balance sheet of Logica.
10     Long-term financial liabilities include the long-term portion of debt, long-term provisions, retirement benefits obligations and other long-term liabilities.

    
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2.3. STOCK PERFORMANCE
 
*     On September 20, 2013, 17.7 million CGI shares were traded on the TSX, the day CGI was included in the S&P/TSX 60 Index.
2.3.1. Q2 2014 Trading Summary
CGI’s shares are listed on the Toronto Stock Exchange (“TSX”) (stock quote – GIB.A) and the New York Stock Exchange (“NYSE”) (stock quote – GIB) and are included in the S&P/TSX Composite Index, the S&P/TSX 60 Index, the S&P/TSX Capped Information Technology and Midcap Indices, and the Dow Jones Sustainability Index.
TSX
(CDN$)

 
NYSE
(US$)

Open:
35.50

 
Open:
33.50

High:
37.40

 
High:
33.69

Low:
32.71

 
Low:
29.40

Close:
34.13

 
Close:
30.92

CDN average daily trading volumes1:
1,934,611

 
U.S. average daily trading volumes:
399,681

1 Includes the average daily volumes of both the TSX and alternative trading systems.
2.3.2. Share Repurchase Program
On January 29, 2014, the Company’s Board of Directors authorized and subsequently received the approval from the TSX for the renewal of the Normal Course Issuer Bid (“NCIB”) to purchase up to 21,798,645 Class A subordinate shares for cancellation, representing approximately 10% of the Company’s public float as of the close of business on January 24, 2014. The Class A subordinate shares may be purchased under the NCIB commencing February 11, 2014 and ending on the earlier of February 10, 2015, or the date on which the Company has either acquired the maximum number of Class A subordinate shares allowable under the NCIB, or elects to terminate the NCIB.
During the second quarter of fiscal 2014, CGI repurchased 346,700 Class A subordinate shares for approximately $11.5 million at an average price of $33.08 under the previous NCIB. Since the beginning of the fiscal year, CGI repurchased 2,837,360

    
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Class A subordinate shares for approximately $111.5 million at an average price of $39.29 under the annual aggregate limit of the previous NCIB.
2.3.3. Capital Stock and Options Outstanding
The following table provides a summary of the Capital Stock and Options Outstanding as at April 28, 2014:
Capital Stock and Options Outstanding
As at April 28, 2014

Class A subordinate shares
276,282,368

Class B shares
33,272,767

Options to purchase Class A subordinate shares
21,986,784


    
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3.
Financial Review 
 
 
 
 
 
 
 
 
 
 
 
 
3.1. BOOKINGS AND BOOK-TO-BILL RATIO
Bookings for the quarter were $2.9 billion, representing a book-to-bill ratio of 105.4%, bringing the trailing twelve-month book-to-bill ratio to 105.3%. The breakdown of the new bookings signed during the quarter is as follow:
 
Contract Type
 
 
 
Service Type
 
 
 
Segment
 
 
 
Vertical Markets
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
A.
Extensions and
 
 
A.
Systems integration and
 
 
A.
NSESA
31
%
 
A.
Manufacturing, retail &
 
 
renewals
60%
 
 
consulting
52%
 
B.
Canada
18
%
 
 
distribution
37%
 
 
 
 
 
 
 
 
C.
France
14
%
 
B.
Financial services
27%
B.
New business
40%
 
B.
Management of IT and
 
 
D.
CEE
13
%
 
C.
Government
18%
 
 
 
 
 
business functions
 
 
E.
U.S.
12
%
 
D.
Telecommunications &
 
 
 
 
 
 
(outsourcing)
48%
 
F.
U.K.
11
%
 
 
utilities
13%
 
 
 
 
 
 
 
 
G.
Asia Pacific
1
%
 
E.
Health
5%

Information regarding our bookings is a key indicator of the volume of our business over time. However, due to the timing and transition period associated with outsourcing contracts, the realization of revenue related to these bookings may fluctuate from period to period. The values initially booked may change over time due to their variable attributes, including demand-driven usage, modifications in the scope of work to be performed caused by changes in client requirements as well as termination clauses at the option of the client. As such, information regarding our bookings is not comparable to, nor should it be substituted for an analysis of our revenue; it is instead a key indicator of our future revenue used by the Company’s management to measure growth. Management believes that using the trailing twelve-month period is a more effective measure as the size and timing of bookings could cause this measurement to fluctuate significantly if taken for only a three-month period. For the trailing twelve-month period ended March 31, 2014, the book-to-bill ratio of our North American operations was at 98.8% while it was at 110.2% for our European operations.
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 three months ended March 31, 2014

 
Bookings for the trailing twelve-month ended March 31, 2014

Book-to-bill ratio for the trailing twelve-month ended March 31, 2014

 
 
 
 
 
 
 
 
Total CGI bookings
2,850,301

 
10,922,853

105.3
%
 
 
 
 
 
 
 
North American bookings
862,633

 
4,398,149

98.8
%
 
 
 
 
 
 
 
U.S.
338,574

 
2,656,529

97.5
%
 
Canada
524,059

 
1,741,620

100.8
%
 
 
 
 
 
 
 
European bookings
1,987,668

 
6,524,704

110.2
%
 
 
 
 
 
 
 
NSESA
872,321

 
2,491,210

117.6
%
 
France
398,963

 
1,373,224

104.0
%
 
U.K.
318,278

 
1,367,554

104.7
%
 
CEE
371,071

 
1,170,000

116.7
%
 
Asia Pacific
27,035

 
122,716

69.8
%


    
CGI Group Inc. - Management's Discussion and Analysis for the three and six months ended March 31, 2014
Page
12


3.2. FOREIGN EXCHANGE
The Company operates globally and is exposed to changes in foreign currency rates. We report all dollar amounts in Canadian dollars. Accordingly, we value assets, liabilities and transactions that are measured in foreign currencies using various exchange rates as prescribed by IFRS.

Closing foreign exchange rates
As at March 31,
2014

2013

Change

U.S. dollar
1.1054

1.0156

8.8
%
Euro
1.5233

1.3042

16.8
%
Indian rupee
0.0184

0.0187

(1.6
%)
British pound
1.8431

1.5417

19.5
%
Swedish krona
0.1708

0.1562

9.3
%
Australian dollar
1.0256

1.0589

(3.1
%)
Average foreign exchange rates
 
For the three months ended March 31,
 
 
For the six months ended March 31,
 
 
2014

2013

Change

 
2014

2013

Change

U.S. dollar
1.1035

1.0089

9.4
%
 
1.0766

0.9997

7.7
%
Euro
1.5123

1.3319

13.5
%
 
1.4709

1.3083

12.4
%
Indian rupee
0.0179

0.0186

(3.8
%)
 
0.0174

0.0185

(5.9
%)
British pound
1.8267

1.5634

16.8
%
 
1.7634

1.5782

11.7
%
Swedish krona
0.1708

0.1568

8.9
%
 
0.1661

0.1529

8.6
%
Australian dollar
0.9903

1.0475

(5.5
%)
 
0.9818

1.0384

(5.5
%)

    
CGI Group Inc. - Management's Discussion and Analysis for the three and six months ended March 31, 2014
Page
13


3.3. REVENUE DISTRIBUTION
The following charts provide additional information regarding our revenue mix for the quarter:
Service Type
 
Client Geography          
 
Vertical Markets
 
 
 
 
 
 
 
 
 
 
 
 
A.
Systems integration and consulting
51%
 
A.
U.S.
25
%
 
A.
Government
33
%
 
 
 
 
B.
Canada
15
%
 
B.
Manufacturing,
 
B.
Management of IT and business
 
 
C.
U.K.
13
%
 
 
retail & distribution
26
%
 
functions (outsourcing)
49%
D.
France
13
%
 
C.
Financial services
18
%
 
1.
IT services
38%
 
 
E.
Sweden
9
%
 
D.
Telecommunications & utilities
15
%
 
2.
Business process services
11%
 
 
F.
Finland
7
%
 
E.
Health
8
%
 
 
 
 
G.
Rest of the world
18
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
3.3.1. Client Concentration
IFRS guidance on Segment Disclosures defines a single customer as a group of entities that are known to the reporting enterprise to be under common control. The Company considers the federal, regional or local governments each to be a single customer. Our work for the U.S. federal government including its various agencies represented 12.9% of our revenue for the second quarter of fiscal 2014 as compared to 13.9% in the same period for fiscal 2013. For the six months ended March 31, 2014 and 2013, we received 13.5% and 13.6%, respectively, of our revenue from the U.S. federal government including its various agencies.

    
CGI Group Inc. - Management's Discussion and Analysis for the three and six months ended March 31, 2014
Page
14


3.4. REVENUE VARIATION AND REVENUE BY SEGMENT
Our seven segments are based on our geographic delivery model: U.S., NSESA, Canada, France, U.K., CEE and Asia Pacific.
The following table provides a summary of the year-over-year changes in our revenue, in total and by segment, separately showing the impacts of foreign currency exchange rate variations between Q2 2014 and Q2 2013. The Q2 2013 revenue by segment was recorded reflecting the actual average foreign exchange rates for that period. The foreign exchange impact is the difference between the current period’s actual results and the current period’s results converted with the prior year’s average foreign exchange rates.
In thousands of CAD except for percentages
For the three months ended March 31,
 
 
For the six months ended March 31,
 
2014

2013

Change

 
2014

2013

Change

 
 
 
 
 
 
 
 
Total CGI revenue
2,704,266

2,526,225

7.0
%
 
5,348,976

5,059,154

5.7
 %
Variation prior to foreign currency impact
(2.3
%)
 
 
 
(2.1
%)
 
 
Foreign currency impact
9.3
%
 
 
 
7.8
%
 
 
Variation over previous period
7.0
%
 
 
 
5.7
%
 
 
 
 
 
 
 
 
 
 
U.S.
 
 
 
 
 
 
 
Revenue prior to foreign currency impact
588,303

621,245

(5.3
)%
 
1,234,777

1,198,573

3.0
%
Foreign currency impact
57,101

 
 
 
96,219

 
 
U.S. revenue
645,404

621,245

3.9
 %
 
1,330,996

1,198,573

11.0
 %
 
 
 
 
 
 
 
 
NSESA
 
 
 
 
 
 
 
Revenue prior to foreign currency impact
512,535

511,224

0.3
 %
 
1,017,747

1,044,875

(2.6
)%
Foreign currency impact
52,362

 
 
 
95,942

 
 
NSESA revenue
564,897

511,224

10.5
 %
 
1,113,689

1,044,875

6.6
 %
 
 
 
 
 
 
 
 
Canada
 
 
 
 
 
 
 
Revenue prior to foreign currency impact
419,853

420,431

(0.1
)%
 
839,620

848,135

(1.0
)%
Foreign currency impact
1,817

 
 
 
2,995

 
 
Canada revenue
421,670

420,431

0.3
 %
 
842,615

848,135

(0.7
)%
 
 
 
 
 
 
 
 
France
 
 
 
 
 
 
 
Revenue prior to foreign currency impact
315,943

329,647

(4.2
)%
 
614,085

651,087

(5.7
)%
Foreign currency impact
43,391

 
 
 
76,724

 
 
France revenue
359,334

329,647

9.0
 %
 
690,809

651,087

6.1
 %
 
 
 
 
 
 
 
 
U.K.
 
 
 
 
 
 
 
Revenue prior to foreign currency impact
284,883

277,898

2.5
 %
 
552,301

570,807

(3.2
)%
Foreign currency impact
52,084

 
 
 
71,902

 
 
U.K. revenue
336,967

277,898

21.3
 %
 
624,203

570,807

9.4
 %
 
 
 
 
 
 
 
 
CEE
 
 
 
 
 
 
 
Revenue prior to foreign currency impact
238,817

253,622

(5.8
)%
 
482,995

516,318

(6.5
)%
Foreign currency impact
30,789

 
 
 
56,049

 
 
CEE revenue
269,606

253,622

6.3
 %
 
539,044

516,318

4.4
 %
 
 
 
 
 
 
 
 
Asia Pacific
 
 
 
 
 
 
 
Revenue prior to foreign currency impact
108,205

112,158

(3.5
)%
 
211,227

229,359

(7.9
)%
Foreign currency impact
(1,817
)
 
 
 
(3,607
)
 
 
Asia Pacific revenue
106,388

112,158

(5.1
)%
 
207,620

229,359

(9.5
)%

    
CGI Group Inc. - Management's Discussion and Analysis for the three and six months ended March 31, 2014
Page
15


We ended the second quarter of fiscal 2014 with revenue of $2,704.3 million, an increase of $178.0 million or 7.0% over the same period of fiscal 2013. On a constant currency basis, revenue decreased by $57.7 million or 2.3%, as foreign currency rate fluctuations favourably impacted our revenue by $235.7 million or 9.3%. Year-over-year, our financial services vertical market grew the most.
For the six months ended March 31, 2014, revenue was $5,349.0 million, an increase of $289.8 million or 5.7% over the same period of fiscal 2013. On a constant currency basis, revenue decreased by $106.4 million or 2.1%, as foreign currency rate fluctuations favourably impacted our revenue by $396.2 million or 7.8%. Year-over-year, our healthcare vertical market grew the most, followed by our financial services vertical market.
As part of the Company’s strategic focus to continuously improve its revenue quality, and as previously disclosed, we have been exiting low margin business or loss making business as part of our integration activities. As a result, our year-to-date revenue has been reduced when compared to the six months ended March 31, 2013. Offsetting this, new higher quality revenue was booked or existing business expanded and/or extended across all geographies.
3.4.1. U.S.
Revenue in our U.S. segment was $645.4 million in Q2 2014, an increase of $24.2 million or 3.9% compared to the same period of fiscal 2013. On a constant currency basis, revenue decreased by $32.9 million or 5.3%. The decrease in revenue primarily reflects the impact of extra effort required to address commitments on some state projects as well as the run-off of a large government project acquired through the acquisition of Stanley Inc. in 2010 which consisted of mainly pass-through revenues at low margins.
For the six months ended March 31, 2014, revenue in our U.S. segment was $1,331.0 million, an increase of $132.4 million or 11.0% over the same period of fiscal 2013. On a constant currency basis revenue increased by $36.2 million or 3.0%. The increase in revenue mainly reflects the strong Q1 2014 performance in the healthcare vertical market, partly offset by the items noted above.
For the three and six months ended March 31, 2014, the top two U.S. vertical markets were government and healthcare, which together accounted for approximately 78% of its revenue in both periods.
3.4.2. NSESA
Revenue from our NSESA segment was $564.9 million in Q2 2014, an increase of $53.7 million or 10.5% compared to the same period of fiscal 2013. On a constant currency basis, revenue increased by $1.3 million or 0.3%. The increase in revenue for the three months ended March 31, 2014 was mainly the result of recent multi-year outsourcing wins that are coming on stream, mostly offset by the completion of smaller scope engagements within the telecommunication and utilities vertical market and the run-off of low margin business as previously described.
For the six months ended March 31, 2014, revenue in our NSESA segment was $1,113.7 million, an increase of $68.8 million or 6.6% over the same period of fiscal 2013. On a constant currency basis, revenue decreased by $27.1 million or 2.6% for the six months ended March 31, 2014. The decrease in revenue for the six months ended March 31, 2014 was mainly due to the run-off of low margin business as previously described, partially offset by recent multi-year outsourcing wins that are coming on stream.
Year-to-date, revenue coming from Sweden and Finland accounted for 74% of this segment. For the three and six months ended March 31, 2014, NSESA’s top two vertical markets were MRD and government, which together accounted for approximately 65% and 63% respectively of its revenue.
3.4.3. Canada
Revenue in our Canada segment for Q2 2014 was $421.7 million, an increase of $1.2 million or 0.3% compared to the same period of fiscal 2013. On a constant currency basis, revenue decreased by $0.6 million or 0.1%. For the six months ended March 31, 2014, revenue in our Canada segment was $842.6 million, a decrease of $5.5 million or 0.7% over the same period of fiscal 2013. On a constant currency basis, revenue decreased by $8.5 million or 1.0%.

    
CGI Group Inc. - Management's Discussion and Analysis for the three and six months ended March 31, 2014
Page
16


The revenue decrease for the three and six months ended March 31, 2014 was due to lower work volumes due to the completion of projects, and a cautionary spending pattern deferring the start-up of new projects. For the three and six months ended March 31, 2014, Canada’s top two vertical markets were financial services and MRD, which together accounted for approximately 58% of its revenue in both periods.
3.4.4. France
Revenue from our France segment was $359.3 million in Q2 2014, an increase of $29.7 million or 9.0% compared to the same period of fiscal 2013. On a constant currency basis, revenue decreased by $13.7 million or 4.2%. The decrease in revenue for the three months ended March 31, 2014 was due to the timing of project completions and start-ups as well as the run-off of low margin business when compared to the same period of last year.
For the six months ended March 31, 2014, revenue in our France segment was $690.8 million, an increase of $39.7 million or 6.1% over the same period of fiscal 2013. On a constant currency basis, revenue decreased by $37.0 million or 5.7% for the six months ended March 31, 2014. The decrease in revenue for the six months ended March 31, 2014 was due to the same items as identified for the quarter.
For the three and six months ended March 31, 2014, France’s top two vertical markets were MRD and financial services, which together accounted for approximately 63% and 64% respectively of its revenue.
3.4.5. U.K.
Revenue from our U.K. segment was $337.0 million in Q2 2014, an increase of $59.1 million or 21.3% compared to the same period of fiscal 2013. On a constant currency basis, revenue increased by $7.0 million or 2.5%. The increase in revenue was primarily due to new and extended contracts within the government vertical market, partially offset by the run-off of low-margin business when compared to the same period of last year.
For the six months ended March 31, 2014, revenue in our U.K. segment was $624.2 million, an increase of $53.4 million or 9.4% over the same period of fiscal 2013. On a constant currency basis, revenue decreased by $18.5 million or 3.2% for the six months ended March 31, 2014. The decrease in revenue for the six months ended March 31, 2014 was mainly due to the run-off of low-margin business, partly offset by new and extended contracts within the government vertical market.
For the three and six months ended March 31, 2014, U.K.’s top two vertical markets were government and MRD, which together accounted for approximately 70% of its revenue in both periods.
3.4.6. CEE
Revenue from our CEE segment was $269.6 million in Q2 2014, an increase of $16.0 million or 6.3% compared to the same period of fiscal 2013. On a constant currency basis, revenue decreased by $14.8 million or 5.8%. The decrease in revenue for the three months ended March 31, 2014 was mostly due to lower work volumes due to the completion of projects when compared to the same period of last year.
For the six months ended March 31, 2014, revenue in our CEE segment was $539.0 million, an increase of $22.7 million or 4.4% over the same period of fiscal 2013. On a constant currency basis, revenue decreased by $33.3 million or 6.5% for the six months ended March 31, 2014. The decrease in revenue for the six months ended March 31, 2014 was mostly due to lower work volumes due to the completion of projects and the run-off of low margin business when compared to the same periods of last year.
Year-to-date, revenue coming from the Netherlands and Germany accounted for 87% of this segment. For the three and six months ended March 31, 2014, CEE’s top two vertical markets were MRD and government, which together accounted for approximately 56% of its revenue in both periods.

    
CGI Group Inc. - Management's Discussion and Analysis for the three and six months ended March 31, 2014
Page
17


3.4.7. Asia Pacific
Revenue from our Asia Pacific segment was $106.4 million in Q2 2014, a decrease of $5.8 million or 5.1% compared to the same period of fiscal 2013. On a constant currency basis, revenue decreased by $4.0 million or 3.5% in Q2 2014. For the six months ended March 31, 2014, revenue in our Asia Pacific segment was $207.6 million, a decrease of $21.7 million or 9.5% over the same period of fiscal 2013. On a constant currency basis, revenue decreased by $18.1 million or 7.9% for the six months ended March 31, 2014.
The decrease in revenue for the three and six months ended March 31, 2014 was mainly due to the planned run-off of projects within the Middle East market as well as the completion of projects within the Australian MRD vertical markets, partly offset by the increased use of our Asian delivery centers. For the three and six months ended March 31, 2014, Asia Pacific’s top two vertical markets were telecommunications & utilities and MRD, which together accounted for approximately 80% of its revenue in both periods.
3.5. OPERATING EXPENSES
In thousands of CAD except for percentages
For the three months ended March 31,
 
For the six months ended March 31,
 
 
% of

 
% of

 
% of

 
% of

2014

Revenue

2013

Revenue

2014

Revenue

2013

Revenue

 
 
 
 
 
 
 
 
 
Costs of services, selling and administrative
2,362,774

87.4
%
2,265,999

89.7
%
4,704,088

87.9
%
4,586,921

90.7
%
Foreign exchange loss (gain)
28

0.0
%
(1,365
)
(0.1
%)
496

0.0
%
1,151

0.0
%
3.5.1. Costs of Services, Selling and Administrative
Costs of services, selling and administrative expenses amounted to $2,362.8 million in Q2 2014, an increase of $96.8 million or 4.3% compared to Q2 2013. The translation of the results of our foreign operations from their local currencies to the Canadian dollar unfavourably impacted costs by $217.9 million, substantially offsetting the favourable translation impact of $235.7 million on revenue. As a percentage of revenue, cost of services, selling and administrative expenses decreased from 89.7% in Q2 2013 to 87.4% in Q2 2014, mainly due to the business synergies achieved through the ongoing integration of Logica.
For the six months ended March 31, 2014, costs of services, selling and administrative expenses amounted to $4,704.1 million, an increase of $117.2 million or 2.6% compared to the same period of fiscal 2013. The translation of the results of our foreign operations from their local currencies to the Canadian dollar unfavourably impacted costs by $364.7 million, substantially offsetting the favourable translation impact of $396.2 million on revenue. As a percentage of revenue, cost of services, selling and administrative expenses decreased from 90.7% to 87.9%, mainly due to the business synergies achieved through the ongoing integration of Logica.
Sequentially our costs of services, as a percentage of revenue, increased mainly due to the impact of extra effort required to address commitments on some U.S. state projects while our selling and administrative expenses decreased as we continue to rationalize our facilities and other fixed costs.
The majority of our costs are denominated in currencies other than the Canadian dollar. The risk of foreign exchange fluctuation impacting the results is substantially mitigated by a natural hedge in matching our costs with revenue denominated in the same currency. In particular cases where the costs related to specific contracts are denominated in a different currency than the functional currency of its subsidiaries, the Company enters into foreign exchange forward contracts to hedge cash flows.
3.5.2. Foreign Exchange Loss
This line item includes the realized and unrealized foreign exchange impact on our earnings. The Company, in addition to its natural hedges, has a strategy in place to manage its exposure, to the extent possible, to exchange rate fluctuations through the effective use of derivatives.

    
CGI Group Inc. - Management's Discussion and Analysis for the three and six months ended March 31, 2014
Page
18


3.6. ADJUSTED EBIT BY SEGMENT
In thousands of CAD except for percentages
For the three months ended March 31,
 
 
For the six months ended March 31,
 
2014

2013

Change

 
2014

2013

Change

 
 
 
 
 
 
 
 
U.S.
39,819

61,973

(35.7
)%
 
107,158

122,377

(12.4
)%
As a percentage of U.S. revenue
6.2
%
10.0
%
 
 
8.1
%
10.2
%
 
 
 
 
 
 
 
 
 
NSESA
64,243

38,621

66.3
 %
 
113,389

55,866

103.0
 %
As a percentage of NSESA revenue
11.4
%
7.6
%
 
 
10.2
%
5.3
%
 
 
 
 
 
 
 
 
 
Canada
93,900

73,889

27.1
 %
 
184,014

157,515

16.8
 %
As a percentage of Canada revenue
22.3
%
17.6
%
 
 
21.8
%
18.6
%
 
 
 
 
 
 
 
 
 
France
62,672

31,522

98.8
 %
 
98,389

44,740

119.9
 %
As a percentage of France revenue
17.4
%
9.6
%
 
 
14.2
%
6.9
%
 
 
 
 
 
 
 
 
 
U.K.
38,811

29,433

31.9
 %
 
59,923

38,568

55.4
 %
As a percentage of U.K. revenue
11.5
%
10.6
%
 
 
9.6
%
6.8
%
 
 
 
 
 
 
 
 
 
CEE
26,592

12,799

107.8
 %
 
54,769

27,881

96.4
 %
As a percentage of CEE revenue
9.9
%
5.0
%
 
 
10.2
%
5.4
%
 
 
 
 
 
 
 
 
 
Asia Pacific
15,427

13,354

15.5
 %
 
26,750

24,135

10.8
 %
As a percentage of Asia Pacific revenue
14.5
%
11.9
%
 
 
12.9
%
10.5
%
 
 
 
 
 
 
 
 
 
Adjusted EBIT
341,464

261,591

30.5
 %
 
644,392

471,082

36.8
 %
Adjusted EBIT margin
12.6
%
10.4
%
 
 
12.0
%
9.3
%
 
Adjusted EBIT for the quarter was $341.5 million, an increase of $79.9 million or 30.5% from Q2 2013, while the margin increased from 10.4% to 12.6% over the same period last year. For the six months ended March 31, 2014, adjusted EBIT was $644.4 million, an increase of $173.3 million or 36.8% over the same period of fiscal 2013, while the margin increased from 9.3% to 12.0%. The growth in adjusted EBIT and margin was primarily due to the benefit of the Logica integration plan which focused on resource utilization and profitable revenue.
Our North American segments contributed $133.7 million in Q2 2014 compared to $135.9 million in Q2 2013, or a margin of 12.5% compared to the 13.0% margin last year. For the six months ended March 31, 2014, the contribution of our North American segments was $291.2 million compared to $279.9 million for the same period of fiscal 2013, or 13.4% of revenue compared to 13.7%.
Adjusted EBIT for the quarter from our European segments was $207.7 million or an adjusted EBIT margin of 12.7%, up from $125.7 million or 8.5% from the same period of fiscal 2013. For the six months ended March 31, 2014, adjusted EBIT from our European segments was $353.2 million or an adjusted EBIT margin of 11.1%, up from 6.3% over the same period of fiscal 2013. We are executing our integration plan to implement CGI’s business model to continue to improve the margins in these segments in the future periods through the improvement of resource utilization ratios, the reduction of overhead costs and the renegotiation of underperforming contracts as examples.
Included in these results for the three months ended March 31, 2014 is $11.7 million of non-recurring benefits related to the adjustments of acquisition-related provisions. These benefits came from the resolution of provision that were established as part of the purchase price allocation for the Logica acquisition. Subsequent to the finalization of the purchase price allocation such adjustments flow through the statement of earnings. To provide better visibility to our operating performance as well as to provide comparability to previous periods, these adjustments have been specifically segregated and disclosed. In addition, these benefits which are not the result of operating management's daily activities are excluded from their compensation arrangements.

    
CGI Group Inc. - Management's Discussion and Analysis for the three and six months ended March 31, 2014
Page
19


Examples of the items included in these benefits comprise the early termination of lease agreements as well as the settlement of long outstanding client contract disputes. The adjusted EBIT for the six months ended March 31, 2014 included a total of $20.1 million of such benefits.
When excluding the benefits of the adjustments to the acquisition-related provisions, the adjusted EBIT for the European segments was $196.1 million or an adjusted EBIT margin of 12.0% up from $125.7 million or 8.5% from the same period of fiscal 2013. For the six months ended March 31, 2014 the adjusted EBIT for the European segments would have been $333.2 million or an adjusted EBIT margin of 10.5% up from $191.2 million or 6.3% from the same period of fiscal 2013.
3.6.1. U.S.
Adjusted EBIT in the U.S. segment was $39.8 million for Q2 2014, a decrease of $22.2 million year-over-year, while the margin decreased from 10.0% to 6.2%. For the six months ended March 31, 2014, adjusted EBIT in the U.S. segment was $107.2 million, a decrease of $15.2 million, while the margin decreased from 10.2% to 8.1%. The decrease in adjusted EBIT and margin for the three and six months ended March 31, 2014 mainly came from the additional resources and expenses needed for some state-related projects. Actions have been taken to stabilize both the operating and financial exposures on these projects as key milestones have been met. Margin improvements are expected to occur in the back half of this year.
3.6.2. NSESA
Adjusted EBIT in the NSESA segment was $64.2 million for Q2 2014, an increase of $25.6 million year-over-year, while the margin increased from 7.6% to 11.4%. This increase in adjusted EBIT and margin for the three months ended March 31, 2014 was mainly the result of the cost synergies implemented as part of the integration plan such as a $6.8 million curtailment gain on a pension plan obligation, the implementation of the CGI management foundation as well as the benefits of running-off business that was not meeting our profitability standards.
For the six months ended March 31, 2014, adjusted EBIT in the NSESA segment was $113.4 million, an increase of $57.5 million, while the margin increased from 5.3% to 10.2%. This increase in adjusted EBIT and margin for the six months ended March 31, 2014 was due to the same factors as identified for the quarter. We are currently executing our integration plan and expect the margins to improve further as additional cost synergies are realized.
3.6.3. Canada
Adjusted EBIT in the Canada segment was $93.9 million for Q2 2014, an increase of $20.0 million year-over-year, while the margin increased from 17.6% to 22.3%. For the six months ended March 31, 2014, adjusted EBIT in the Canada segment was $184.0 million, an increase of $26.5 million, while the margin increased from 18.6% to 21.8%. The improvement in adjusted EBIT and margin for the three and six months ended March 31, 2014 reflects the focus on the management of resource utilization as well as cost reductions from additional real estate optimization initiatives.
3.6.4. France
Adjusted EBIT in the France segment was $62.7 million for Q2 2014, an increase of $31.2 million year-over-year, while the margin increased from 9.6% to 17.4%. This increase in adjusted EBIT and margin for the three months ended March 31, 2014 was primarily the result of the cost synergies implemented as part of the integration plan and the implementation of the CGI management foundation. In addition, the adjusted EBIT was positively impacted by $10.6 million coming from the renegotiation of a low margin contract, the additional tax credits on salaries and the favourable settlement of a long outstanding client contract dispute. This last item is part of the acquisition-related provisions adjustments previously highlighted.
For the six months ended March 31, 2014, adjusted EBIT in the France segment was $98.4 million, an increase of $53.6 million, while the margin increased from 6.9% to 14.2%. This increase in adjusted EBIT and margin for the six months ended March 31, 2014 was due to the same items as identified for the quarter and to a $6.4 million benefit coming from the settlement of tax credits.

    
CGI Group Inc. - Management's Discussion and Analysis for the three and six months ended March 31, 2014
Page
20


3.6.5. U.K.
The U.K. segment adjusted EBIT was $38.8 million for Q2 2014, an increase of $9.4 million year-over-year, while the margin increased from 10.6% to 11.5%. This increase in adjusted EBIT and margin for the three months ended March 31, 2014 was mainly the result of the costs synergies implemented as part of the integration plan as well as a favourable $4.0 million adjustment coming from the negotiation for the early termination of a lease. This last item is part of the acquisition-related provisions adjustments previously highlighted.
For the six months ended March 31, 2014, adjusted EBIT in the U.K. segment was $59.9 million, an increase of $21.4 million, while the margin increased from 6.8% to 9.6%. This increase in adjusted EBIT and margin for the six months ended March 31, 2014 was the result of the cost synergies implemented as part of the integration plan, the implementation of the CGI management foundation as well as the benefits of running-off business that was not meeting our profitability standards. We are currently executing our integration plan and expect the margins to improve further as additional cost synergies are realized.
3.6.6. CEE
The CEE segment adjusted EBIT was $26.6 million for Q2 2014, an increase of $13.8 million year-over-year, while the margin increased from 5.0% to 9.9%. This increase in adjusted EBIT and margin was the result of the cost synergies implemented as part of the integration plan and the implementation of the CGI management foundation.
For the six months ended March 31, 2014, adjusted EBIT in the CEE segment was $54.8 million, an increase of $26.9 million, while the margin increased from 5.4% to 10.2%. This increase in adjusted EBIT and margin was due to the same items as identified for the quarter as well as the benefits of running-off business that was not meeting our profitability standards. We are currently executing our integration plan and expect the margins to improve further as additional cost synergies are realized.
3.6.7. Asia Pacific
The Asia Pacific segment adjusted EBIT was $15.4 million for Q2 2014, an increase of $2.1 million year-over-year, while the margin increased from 11.9% to 14.5%. For the six months ended March 31, 2014, adjusted EBIT in the Asia Pacific segment was $26.8 million, an increase of $2.6 million, while the margin increased from 10.5% to 12.9%. This increase in adjusted EBIT and margin for the three and six months ended March 31, 2014 was the result of the cost synergies implemented as part of the integration plan and the implementation of the CGI management foundation. We are currently executing our integration plan and expect the margins to improve further as additional cost synergies are realized.

    
CGI Group Inc. - Management's Discussion and Analysis for the three and six months ended March 31, 2014
Page
21


3.7. EARNINGS BEFORE INCOME TAXES
The following table provides, for the periods indicated, a reconciliation between our adjusted EBIT and earnings before income taxes, which is reported in accordance with IFRS.
In thousands of CAD except for percentages
For the three months ended March 31,
 
 
For the six months ended March 31,
 
2014

% of
Revenue

2013

% of
Revenue

 
2014

% of
Revenue

2013

% of
Revenue

 
 
 
 
 
 
 
 
 
 
Adjusted EBIT
341,464

12.6
%
261,591

10.4
%
 
644,392

12.0
 %
471,082

9.3
%
Minus the following items:
 
 
 
 
 
 
 
 
 
Integration-related costs
25,964

1.0
%
81,367

3.2
%
 
48,579

0.9
 %
234,786

4.6
%
Finance costs
25,810

1.0
%
31,660

1.3
%
 
54,248

1.0
 %
58,857

1.2
%
Finance income
(793
)
0.0
%
(1,369
)
(0.1
%)
 
(1,873
)
0.0
 %
(3,030
)
(0.1
%)
Earnings before income taxes
290,483

10.7
%
149,933

5.9
%
 
543,438

10.2
%
180,469

3.6
%
3.7.1. Integration-related Costs
For the three and six months ended March 31, 2014, the Company incurred $26.0 million and $48.6 million of integration related costs compared to $81.4 million and $234.8 million over the same periods last year. These costs pertain to the transformation of Logica’s operations to the CGI operating model.
3.7.2. Finance Costs
Finance costs mainly includes the interest on our long-term debt used to finance the Logica acquisition. The decrease in finance costs for the three and and six months ended March 31, 2014 mainly came from the repayments made on our outstanding long-term debt.
3.7.3. Finance Income
Finance income includes interest and other investment income related to cash balances, investments, and tax assessments.

    
CGI Group Inc. - Management's Discussion and Analysis for the three and six months ended March 31, 2014
Page
22


3.8. NET EARNINGS AND EARNINGS PER SHARE
The following table sets out the information supporting the earnings per share calculations:
In thousands of CAD except for percentages
For the three months ended March 31,
 
 
For the six months ended March 31,
 
2014

2013

Change

 
2014

2013

Change

 
 
 
 
 
 
 
 
Earnings before income taxes
290,483

149,933

93.7
%
 
543,438

180,469

201.1
%
Income tax expense
59,632

35,745

66.8
%
 
122,797

43,836

180.1
%
Effective tax rate
20.5
%
23.8
%
 
 
22.6
%
24.3
%
 
Net earnings
230,851

114,188

102.2
%
 
420,641

136,633

207.9
%
Net earnings margin
8.5
%
4.5
%
 
 
7.9
%
2.7
%
 
 
 
 
 
 
 
 
 
Weighted average number of shares
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Class A subordinate shares and Class B shares (basic)
307,600,215
307,382,435
0.1
%
 
308,045,996
307,006,060
0.3
%
 
 
 
 
 
 
 
 
Class A subordinate shares and Class B shares (diluted)
316,695,250
315,760,249
0.3
%
 
317,773,590
315,509,180
0.7
%
 
 
 
 
 
 
 
 
Earnings per share (in dollars)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic EPS
0.75

0.37

102.7
%
 
1.37

0.45

204.4
%
Diluted EPS
0.73

0.36

102.8
%
 
1.32

0.43

207.0
%
3.8.1. Income Tax Expense
For Q2 2014, the income tax expense was $59.6 million, an increase of $23.9 million compared to $35.7 million in Q2 2013, while our effective income tax rate decreased from 23.8% to 20.5%. The increase in the income tax expense was mainly due to higher earnings before income taxes. The decrease in income tax rate was due to a favourable tax adjustment of $11.9 million mainly resulting from the settlement of tax liabilities from the legacy Logica European operations, partially offset by an increase coming from a different profit distribution in our various operations that were taxable at varying rates.
For the six months ended March 31, 2014, income tax expense was $122.8 million, an increase of $79.0 million compared to $43.8 million over the same period last year, while our effective tax rate decreased from 24.3% to 22.6%. The increase in income tax expense and the decrease in income tax rate for the six months ended March 31, 2014 are attributable to the same factors as identified for the quarter.
The table on page 24 shows the year-over-year comparison of the tax rate with the impact of integration-related costs removed.
Based on the enacted rates at the end of Q2 2014 and our current business mix, we expect our effective tax rate before any significant adjustments to be in the range of 24% to 26% in subsequent periods.
3.8.2. Weighted Average Number of Shares
For the three months ended March 31, 2014, CGI’s basic and diluted weighted average number of shares increased compared to the same period of fiscal 2013 due to the issuance of Class A subordinate shares upon the exercise of stock options. During the quarter, 346,700 shares were repurchased, while 404,224 options were exercised.

    
CGI Group Inc. - Management's Discussion and Analysis for the three and six months ended March 31, 2014
Page
23


3.8.3. Net Earnings and Earnings per Share Excluding Specific Items
Below is a table showing the year-over-year comparison excluding the integration-related costs, favourable tax adjustments and benefits related to the resolution of acquisition-related provisions:
In thousands of CAD except for percentages
For the three months ended March 31,
 
 
For the six months ended March 31,
 
2014

2013

Change

 
2014

2013

Change

 
 
 
 
 
 
 
 
Earnings before income taxes
290,483

149,933

93.7
%
 
543,438

180,469

201.1
%
Add back:
 
 
 
 
 
 
 
Integration-related costs 1
25,964

81,367

(68.1
%)
 
48,579

234,786

(79.3
%)
Remove:
 
 
 
 
 
 
 
Resolution of acquisition-related provisions 2
11,650

—

 
 
20,062

—

 
Earnings before income taxes prior to specific items
304,797

231,300

31.8
%
 
571,955

415,255

37.7
%
Margin
11.3
%
9.2
%
 
 
10.7
%
8.2
%
 
 
 
 
 
 
 
 
 
Income tax expense
59,632

35,745

66.8
%
 
122,797

43,836

180.1
%
Add back:
 
 
 
 
 
 
 
Tax adjustments
11,900

—



 
11,900

—



Tax deduction on integration-related costs
6,843

19,691

(65.2
%)
 
11,352

57,708

(80.3
%)
Remove:
 
 
 
 
 
 
 
Income taxes on the resolution of acquisition-related provisions
3,131

—

 
 
3,783

—

 
Income tax expense prior to specific items
75,244

55,436

35.7
%
 
142,266

101,544

40.1
%
Effective tax rate prior to specific items
24.7
%
24.0
%
 
 
24.9
%
24.5
%
 
 
 
 
 
 
 
 
 
Net earnings prior to specific items
229,553

175,864

30.5
%

429,689

313,711

37.0
%
Net earnings margin
8.5
%
7.0
%


8.0
%
6.2
%
 
 
 
 
 
 
 
 
 
Weighted average number of shares
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Class A subordinate shares and Class B shares (basic)
307,600,215
307,382,435
0.1
%
 
308,045,996
307,006,060
0.3
%
 
 
 
 
 
 
 
 
Class A subordinate shares and Class B shares (diluted)
316,695,250
315,760,249
0.3
%
 
317,773,590
315,509,180
0.7
%
 
 
 
 
 
 
 
 
Earnings per share prior to specific items (in dollars)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Basic EPS
0.75

0.57

31.6
%
 
1.39

1.02

36.3
%
Diluted EPS
0.72

0.56

28.6
%
 
1.35

0.99

36.4
%
1
Costs related to the integration of Logica.
2 
    Impact of adjustments related to the resolution of acquisition-related provisions subsequent to the finalization of the Logica purchase price allocation.

    
CGI Group Inc. - Management's Discussion and Analysis for the three and six months ended March 31, 2014
Page
24


 4.
Liquidity
 
 
 
 
 
 
 
 
 
 
 
 
4.1. INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
CGI’s growth is financed through a combination of our cash flow from operations, borrowing under our existing credit facilities, the issuance of long-term debt, and the issuance of equity. One of our primary financial goals 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 March 31, 2014, cash and cash equivalents were $133.4 million. The following table provides a summary of the generation and utilization of cash for the three and six months ended March 31, 2014 and 2013.
In thousands of CAD
For the three months ended March 31,
 
 
For the six months ended March 31,
 
2014

2013

Change

 
2014

2013

Change

 
 
 


 
 
 


Cash provided by operating activities
350,655

147,177

203,478

 
416,959

371,707

45,252

Cash used in investing activities
(83,802
)
(87,746
)
3,944

 
(169,031
)
(147,425
)
(21,606
)
Cash used in financing activities
(332,802
)
(65,256
)
(267,546
)
 
(208,169
)
(196,549
)
(11,620
)
Effect of foreign exchange rate changes on cash and cash equivalents
(6,759
)
13,234

(19,993
)
 
(12,522
)
13,597

(26,119
)
Net (decrease) increase in cash and cash equivalents
(72,708
)
7,409

(80,117
)

27,237

41,330

(14,093
)
4.1.1. Cash Provided by Operating Activities
For the three and six months ended March 31, 2014, cash provided by operating activities was $350.7 million and $417.0 million compared to $147.2 million and $371.7 million over the same periods of last year. The following table provides a summary of the generation and utilization of cash from operating activities.
In thousands of CAD
For the three months ended March 31,
 
 
For the six months ended March 31,
 
2014

2013

Change

 
2014

2013

Change

 
 
 
 
 
 
 
 
Net earnings
230,851

114,188

116,663

 
420,641

136,633

284,008

Amortization and depreciation
117,455

100,212

17,243

 
227,919

214,220

13,699

Other adjustments 1
1,968

13,410

(11,442
)
 
12,556

3,395

9,161

Cash flow from operating activities before changes in non-cash working capital items
350,274

227,810

122,464

 
661,116

354,248

306,868

Net change in non-cash working capital items:
 
 

 
 
 
 
Accounts receivable, work in progress and deferred revenue
309,166

(40,855
)
350,021

 
86,928

(33,584
)
120,512

Accounts payable and accrued liabilities, accrued compensation, other long-term liabilities and provisions
(303,562
)
(44,966
)
(258,596
)
 
(356,090
)
53,507

(409,597
)
Other 2
(5,223
)
5,188

(10,411
)
 
25,005

(2,464
)
27,469

Net change in non-cash working capital items
381

(80,633
)
81,014

 
(244,157
)
17,459

(261,616
)
Cash provided by operating activities
350,655

147,177

203,478

 
416,959

371,707

45,252

1
Other adjustments are comprised of deferred incomes taxes, foreign exchange loss and share-based payment costs.
2 
    Comprised of prepaid expenses and other assets and income taxes.
For the three and six months ended March 31, 2014, the Company's net earnings increased by $116.7 million and $284.0 million while the amortization and depreciation increased by $17.2 million and $13.7 million when compared to the same

    
CGI Group Inc. - Management's Discussion and Analysis for the three and six months ended March 31, 2014
Page
25


periods of last year. The increase in net earnings was primarily due to the result of the cost synergies implemented as part of the Logica integration plan and the implementation of the CGI management foundation.
For the three months ended March 31, 2014, the $309.2 million increase in cash coming from the accounts receivable, work in progress and deferred revenue was mainly due to a decrease in our DSO from 55 days in Q1 2014 to 47 days in Q2 2014. This decrease in the DSO was primarily the result of the completion and collection of billing milestones on certain large U.S. contracts and the catch up of the Q1 2014 system conversion impact on the France and Finland billings. We remain committed to our 45 day target for DSO. The collection of tax credits also contributed to the improvement.
For the three months ended March 31, 2014, the $303.6 million utilized for accounts payable and accrued liabilities, accrued compensation, other long-term liabilities and provisions was mostly due to the timing of the payroll payment calendar for approximately $58 million, the payment of approximately $50 million in integration-related costs, the payment of approximately $45 million of performance-based compensation to our members, the utilization of approximately $30 million of the provision for estimated losses on revenue-generating contracts and the net $137.6 million decrease in our accounts payable and accrued liabilities driven in part by the catch up on payments following the system migration in France, Finland and Sweden. These were partly offset by the $26.0 million of integration-related costs incurred for the quarter.
The $45.0 million decrease in cash in Q2 2013 coming from accounts payable and accrued liabilities, accrued compensation, other long-term liabilities and provisions was mainly driven by the net decrease of approximately $41.5 million in integration-related accruals.
For the six months ended March 31, 2014, the $86.9 million increase in cash coming from accounts receivable, work in progress and deferred revenue was mainly the result of an improved DSO and the collection of tax credits.
For the six months ended March 31, 2014, the $356.1 million decrease in cash coming from the accounts payable and accrued liabilities, accrued compensation, other long-term liabilities and provisions was mostly due to the payment of $103 million in integration-related costs, the payment of approximately $115 million of performance-based compensation to our members, the timing of payroll payment calendar for approximately $47 million, the utilization of approximately $40 million of the provision for estimated losses on revenue-generating contracts and the net $98.7 million decrease in our accounts payable and accrued liabilities driven in part by the catch up on payments following the system migration in France, Finland and Sweden. These were partly offset by the $48.6 million of integration-related costs incurred for the for the six months ended March 31, 2014.
The $53.5 million increase in cash for the six months ended March 31, 2013 coming from the accounts payable and accrued liabilities, accrued compensation, other long-term liabilities and provisions was mainly driven by the net increase of approximately $43.1 million in integration-related accruals.
For the three and six months ended March 31, 2014, cash provided by operating activities represented 13.0% of revenue and 7.8% of revenue compared to 5.8% and 7.3% over the same periods last year. The increase was mainly due to the above-mentioned items. The timing of our working capital inflows and outflows will always have an impact on the cash flow from operations. Over the last twelve months, excluding the integration-related cash disbursements, CGI has generated approximately $949 million or $2.98 in diluted cash per share.

    
CGI Group Inc. - Management's Discussion and Analysis for the three and six months ended March 31, 2014
Page
26


4.1.2. Cash Used in Investing Activities
For the three and six months ended March 31, 2014, $83.8 million and $169.0 million were used in investing activities compared to $87.7 million and $147.4 million over the same periods of last year. The following table provides a summary of the generation and utilization of cash from investing activities.
In thousands of CAD
For the three months ended March 31,
 
 
For the six months ended March 31,
 
2014

2013

Change

 
2014

2013

Change

 
 
 
 
 
 
 
 
Purchase of property, plant and equipment
(41,818
)
(44,327
)
2,509

 
(92,145
)
(84,184
)
(7,961
)
Additions to contract costs
(21,570
)
(16,406
)
(5,164
)
 
(34,334
)
(25,573
)
(8,761
)
Additions to intangible assets
(22,211
)
(32,627
)
10,416

 
(37,589
)
(42,534
)
4,945

Net change in other long-term assets
—

680

(680
)
 
—

(642
)
642

Net change in short-term investments and proceeds from sale (purchase) of long-term investments
5

1,190

(1,185
)
 
(8,597
)
1,764

(10,361
)
Payments received from long-term receivable
1,792

3,744

(1,952
)
 
3,634

3,744

(110
)
Cash used in investing activities
(83,802
)
(87,746
)
3,944

 
(169,031
)
(147,425
)
(21,606
)
For Q2 2014, we invested $85.6 million in the purchase of property, plant and equipment, the additions of intangible assets and contract costs compared to $93.4 million in Q2 2013 or a decrease of $7.8 million. This change was driven by a mix of more offshore delivery for the development of CGI IP.
For the six months ended March 31, 2014, we invested $164.1 million in the purchase of property, plant and equipment, the additions of intangible assets and contract costs compared to $152.3 million last year or an increase of $11.8 million which was mainly driven by the ramp-up of new long term contracts.
4.1.3. Cash Used in Financing Activities
For the three and six months ended March 31, 2014, $332.8 million and 208.2 million were used in financing activities while $65.3 million and $196.5 million were used over the same periods of last year. The following table provides a summary of the generation and utilization of cash from financing activities.
In thousands of CAD
For the three months ended March 31,
 
 
For the six months ended March 31,
 
2014
2013
Change
 
2014
2013
Change
 
 
 
 
 
 
 
 
Net change in credit facility
(322,942
)
(82,725
)
(240,217
)
 
(108,668
)
(201,820
)
93,152

Net change in long-term debt
(5,699
)
4,469

(10,168
)
 
6,184

(6,548
)
12,732

Purchase of Class A subordinate shares held in trust
—

—

—

 
(23,016
)
(7,663
)
(15,353
)
Resale of shares held in trust
—

—

—

 
1,390

—

1,390

Repurchase of Class A subordinate shares
(11,468
)
—

(11,468
)
 
(111,468
)
(112
)
(111,356
)
Issuance of Class A subordinate shares, net of transaction costs
7,307

13,000

(5,693
)
 
27,409

19,594

7,815

Cash used in financing activities
(332,802
)
(65,256
)
(267,546
)
 
(208,169
)
(196,549
)
(11,620
)
During the current quarter, the Company made net repayments of $322.9 million on its credit facilities and we decreased our outstanding long-term debt by $5.7 million, while in Q2 2013 the Company made net repayments of $82.7 million on its credit facilities and increased its long-term debt by $4.5 million. In Q2 2014, CGI repurchased 346,700 Class A subordinate shares for $11.5 million on the open market under the previous NCIB, while in Q2 2013 the Company did not repurchase any of its Class A subordinate shares under the NCIB then in effect. Finally, in Q2 2014 we received $7.3 million in proceeds from the exercise of stock options, compared to $13.0 million received in Q2 2013.

    
CGI Group Inc. - Management's Discussion and Analysis for the three and six months ended March 31, 2014
Page
27


For the six months ended March 31, 2014, the Company made net repayments of $108.7 million on its credit facilities and we increased our outstanding long-term debt by $6.2 million, while for the comparable period of last year the Company made net repayments of $201.8 million on its credit facilities and another $6.5 million on its outstanding long-term debt. In addition, CGI repurchased 2,837,360 Class A subordinate shares for $111.5 million under the annual aggregate limit of the previous NCIB, while $112,500 was used for the six months ended March 31, 2013 to purchase 5,000 Class A subordinate shares under the NCIB then in effect. For the current year-to-date period, a net of $21.6 million was used to purchase CGI shares under the PSU Plan which is part of the compensation package of various executive officers, while for the comparable period of last year, $7.7 million was used to purchase shares under the PSU Plan. Lastly, for the current six-month period, we received $27.4 million in proceeds from the exercise of stock options, compared to $19.6 million in the same period of fiscal 2013.
4.1.4. Effect of Foreign Exchange Rate Changes on Cash and Cash Equivalents
For Q2 2014 we had a $6.8 million decrease in cash coming from the effect of foreign exchange rate changes on cash and cash equivalents, while for Q2 2013 we had a $13.2 million increase. On a year-to-date basis, we had a $12.5 million decrease in cash coming from the effect of foreign exchange rate changes on cash and cash equivalents, while for the six months ended March 31, 2013 we had a $13.6 million increase. These amounts had no effect on net earnings as they were recorded in other comprehensive income.
4.2. CAPITAL RESOURCES 
In thousands of CAD
Total commitment

Available at March 31, 2014

Outstanding at March 31, 2014

 
 
 
 
Cash and cash equivalents
—

133,436

—

Short-term investments
—

316

—

Long-term marketable investments
—

30,479

—

Unsecured committed revolving facilities a
1,500,000

1,288,300

211,700

Total
1,500,000

1,452,531

211,700

a     Consists of drawn portion of $175.0 million and Letters of Credit for $36.7 million outstanding on March 31, 2014.
Our cash position and bank lines are sufficient to support our growth strategy. At March 31, 2014, cash and cash equivalents, short-term and long-term marketable investments represented $164.2 million.
Cash equivalents typically include term deposits, all with maturities of 90 days or less. Short-term investments include fixed deposits with initial maturities ranging from 91 days to 1 year. Long-term marketable investments include corporate and government bonds with maturities ranging from one to five years, rated “A+” or higher.
The amount of capital available was $1,452.5 million. The long-term debt agreements contain covenants, which require us to maintain certain financial ratios. At March 31, 2014, CGI was in compliance with these covenants.
Total debt decreased by $283.8 million to $2,842.5 million at March 31, 2014, compared to $3,126.2 million at December 31, 2013. The variation was mainly due to the net repayment of $322.9 million under the credit facilities partially offset by an unrealized loss of $38.9 million on foreign exchange translation.
On April 4th, 2014, CGI has repaid in advance, without penalty, the May 31st maturing Term Loan Tranche C for a total amount of $486.7 million. The repayment was funded by a Credit Facility draw of an equivalent amount. The remaining Term Loan maturities are May 2015 and May 2016.
As at March 31, 2014, the negative working capital1 was $661 million mainly caused by the short-term portion of our Term Loan facility repaid April 4th, 2014. The Company expects that the availability under the unsecured committed revolving facility and cash generated from operations will be adequate to meet its obligations and to finance the needs in the foreseeable future while maintaining adequate levels of liquidity.

1    Working capital is defined as total current assets minus total current liabilities.

    
CGI Group Inc. - Management's Discussion and Analysis for the three and six months ended March 31, 2014
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28


4.3. CONTRACTUAL OBLIGATIONS
We are committed under the terms of contractual obligations with various expiration dates, primarily for the rental of premises, computer equipment used in outsourcing contracts and long-term service agreements. There have been no material changes to these obligations since our year ended September 30, 2013.
4.4. FINANCIAL INSTRUMENTS AND HEDGING TRANSACTIONS
We use various financial instruments to manage our exposure to fluctuations of foreign currency exchange rates and interest rates. We do not hold or use any derivative instruments for trading purposes. Foreign exchange translation gains or losses on the net investments and the effective portions of gains or losses on instruments hedging the net investments are recorded in the consolidated statement of comprehensive income. Any realized or unrealized gains or losses on instruments covering the U.S. denominated debt are also recognized in the consolidated statement of comprehensive income.
The company has the following new financial instrument since our year ended September 30, 2013:
Cash flow hedges on future revenue
— €149,033 foreign currency forward contracts to hedge the variability in the expected foreign currency exchange rate between the Euro and the British pound (€nil as at September 30, 2013).
Please refer to Note 12 of the interim condensed consolidated financial statements as at and for the three and six months ended March 31, 2014 for a list of our outstanding hedging instruments.
4.5. SELECTED MEASURES OF LIQUIDITY AND CAPITAL RESOURCES 
As at March 31,
2014

2013

 
 
 
Reconciliation between net debt and long-term debt including the current portion:
 
 
Net debt
2,678,232

2,914,271

Add back:
 
 
Cash and cash equivalents
133,436

154,433

Short-term investments
316

13,275

Long-term investments
30,479

15,853

Long-term debt including the current portion
2,842,463

3,097,832

 
 
 
Net debt to capitalization ratio
35.6
%
43.0
%
Return on equity
17.9
%
1.8
%
Return on invested capital
13.4
%
11.1
%
Days sales outstanding (in days)
47

46

We use the net debt to capitalization ratio as an indication of our financial leverage in order to pursue any large outsourcing contracts, expand global delivery centers, or make acquisitions. On August 20, 2012, we acquired Logica using a combination of debt and stock, causing our net debt to capitalization ratio to increase significantly. The net debt to capitalization ratio decreased from 43.0% to 35.6% compared to Q2 2013 due to the increase in equity mainly driven by the net earnings and the net repayments made on the outstanding long-term debt.
Return on equity is a measure of the return we are generating for our shareholders. ROE increased from 1.8% in Q2 2013 to 17.9% at the end of Q2 2014. The increase was mainly due to the higher net earnings over the last four quarters as the benefits of the integration of Logica with CGI were being realized.
ROIC is a measure of the Company’s efficiency in allocating the capital under our control to profitable investments. The return on invested capital was 13.4% as at March 31, 2014, compared to 11.1% a year ago. The improvement in the ROIC was

    
CGI Group Inc. - Management's Discussion and Analysis for the three and six months ended March 31, 2014
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mainly the result of our higher after-tax adjusted EBIT for the last twelve months compared to last year as the benefits of the integration of Logica with CGI were being realized.
DSO increased from 46 days as at Q2 2013 to 47 days at the end of Q2 2014. In calculating the DSO, we subtract the deferred revenue balance from trade accounts receivable and work in progress; for that reason, the timing of payments received from outsourcing clients in advance of the work to be performed and the timing of payments related to project milestones can affect the DSO fluctuations. We remain committed to manage our DSO within our 45 day target.
4.6. OFF-BALANCE SHEET FINANCING AND GUARANTEES
CGI engages in the practice of off-balance sheet financing in the normal course of operations for a variety of transactions such as operating leases for office space, computer equipment and vehicles as well as accounts receivable factoring. In accordance with IFRS, neither the lease liability nor the underlying asset is carried on the balance sheet as the terms of the leases do not meet the criteria for capitalization. From time to time, we also enter into agreements to provide financial or performance assurances to third parties on the sale of assets, business divestitures, guarantees and U.S. Government contracts.
In connection with sales of assets and business divestitures, we may be required to pay counterparties for costs and losses incurred as the result of breaches in representations and warranties, intellectual property right infringement and litigation against counterparties. While some of the agreements specify a maximum potential exposure totalling $10.5 million, others do not specify a maximum amount or limited period. It is impossible to reasonably estimate the maximum amount that may have to be paid under such guarantees. The amounts are dependent upon the outcome of future contingent events, the nature and likelihood of which cannot be determined at this time. The Company does not expect to incur any potential payment in connection with these guarantees that could have a materially adverse effect on its consolidated financial statements.
We are also engaged to provide services under contracts with the U.S. Government. The contracts are subject to extensive legal and regulatory requirements and, from time to time, agencies of the U.S. Government investigate whether our operations are being conducted in accordance with these requirements. Generally, the Government has the right to change the scope of, or terminate, these projects at its convenience. The termination or a reduction in the scope of a major governm