View consolidated financial statements of CGI GROUP Inc. for the nine months ended June, 30, 2001
CGI Group Inc. (NYSE: GIB; TSE: GIB.A) today reported unaudited results for the third quarter and nine months ended June 30, 2001. All figures are in Canadian dollars unless otherwise indicated.
- Year-over-year growth of 22.2% for revenue and 114.9% for cash net earnings (earnings before amortization of goodwill)
- Sequential growth of 8.1% for revenue (8.0% organic) and 9.5% for cash net earnings compared with Q2 2001
- Earnings before interest, taxes, depreciation and amortization increased by 111.8% over one year ago and 13.2% over Q2 2001
- Announced acquisitions of two IT consulting firms, specializing respectively in US credit union solutions and systems integration services
- Announced 10 major or strategic outsourcing, systems integration and consulting contracts, as well as a contract renewal, collectively worth more than $1.9 billion over a period of up to 10 years
- CGI's backlog of signed contracts, with a weighted average remaining contract term of 7.2 years, totals $8.8 billion as at July 31, 2001.
"CGI's year-over-year and sequential growth in revenue, cash net earnings, and margins in the third quarter primarily reflects our strength in Canada where demand remains strong for our outsourcing, consulting and systems integration services," said Serge Godin, chairman, president and CEO."
Merger with IMRglobal will position CGI strongly going forward
On July 27, after the end of the quarter, CGI received IMRglobal shareholders' approval for the merger with IMRglobal, an established provider of IT solutions to US and international clients with a remote delivery capability for IT application maintenance and development through its operations in India.
The integration of IMRglobal positions CGI to become a major player in the US IT outsourcing services market, the largest and fastest growing outsourcing market in the world. The strengths of the combined CGI-IMRglobal include a highly competitive model, with on-site delivery capabilities, off-site delivery centers, near-shore data and data recovery centers in Canada, as well as offshore delivery centers in India. CGI has strongly enhanced its ability to support customers globally, and has a consistent track record of delivering high-quality, high value-added services on time and on budget, by leveraging its ISO 9001 certification.
CGI and IMRglobal both share a similar vertical market approach that focuses on establishing a thorough expertise of key industry markets and on understanding the strategic needs of their clients. IMRglobal has built a strong presence in financial services, healthcare and government, and commercial services (including utilities, retail and manufacturing/distribution). The six vertical sectors in which CGI will concentrate going forward are: financial services, telecommunications, government, healthcare, manufacturing/retail/distribution, and energy and utilities.
"IMRglobal's complementary operations and markets, and similar business development strategy will contribute to a smooth integration process and represent an extraordinary opportunity to cross-sell services," said Mr. Godin.
"CGI has acquired more than 30 IT services companies and developed well structured processes for successfully integrating companies and large IT outsourcing operations. We will extend these quality processes throughout our combined operations while leveraging the strengths of both organizations," continued Mr. Godin. "CGI expects to further enhance its competitiveness through economies of scale, focus on selected verticals and an expanded remote delivery model."
CGI creates Business Process Services unit
As announced on Friday, July 27, CGI has regrouped its Business Process Services into a separate unit to capitalize on this high growth area of the IT outsourcing market. This initiative was driven by a growing client demand for increased outsourcing services coupled with an opportunity to leverage its strong North American presence. Business Process Services encompasses the outsourced processing of a company's business processing functions and is a logical extension of CGI's full IT outsourcing offering. As part of this adjustment to its organizational structure, CGI's operations will be managed by three presidents, Michael Roach, president Canada and Europe; Satish Sanan, former chairman and CEO of IMRglobal, becomes president US and Asia Pacific; and Joseph Saliba, recently head of outsourcing for The Sabre Group, becomes president Business Processing Services. All CGI global and corporate functions remain the same.
Outlook
"Based on contracts announced to date, and two months of contribution from IMRglobal, we are maintaining our guidance for fiscal 2001 revenues and narrowing the range to between $1.58 billion and $1.6 billion," said Mr. Godin. "Additionally, we expect to generate cash net earnings (earnings before amortization of goodwill) of $0.29 to $0.30 for the year."
"Looking into fiscal 2002, we are very excited about the prospects," added Mr. Godin. "We expect that our unique value proposition of high quality, end-to-end IT services that meet the strategic business needs of our clients will position us as a highly competitive player in the US and enable us to gain a growing share of the large US and global IT outsourcing market."
Management's Discussion & Analysis (MD&A) of Results from Operations and Financial Position
For the third quarters ended June 30, 2001 and 2000
The following MD&A should be read in conjunction with financial statements for the third quarter of fiscal 2001 and 2000, with the MD&A and notes to the financial statements in the fiscal 2000 annual report, and with the notes to the financial statements for the nine months ended June 30, 2001. All amounts are in Canadian dollars unless otherwise indicated.
Revenue
The third quarter of fiscal 2001 marked the third consecutive quarter of sequential revenue growth, and a return to year-over-year revenue growth, following the industry-wide slowdown that began in the first quarter of calendar 2000. Revenue for the third quarter of fiscal 2001 totalled $404.1 million, an increase of 22.2% over the $330.7 million reported in the third quarter of last year and up 8.1% sequentially over the $374.0 million reported in this year's second fiscal quarter. The significant improvement in year-over-year revenue growth was due primarily to a number of acquisitions completed in the past year. On a sequential basis, revenue growth in the third quarter was a result of the signing of several large outsourcing contracts, notably the $1.2 billion, 10-year outsourcing partnership with La Confédération des Caisses Populaires et d'économie Desjardins du Québec ("Desjardins") effective May 1, 2001, and the $300 million, 10-year outsourcing agreement with Laurentian Bank of Canada ("Laurentian Bank") effective June 14, 2001. With these two contracts, financial services surpassed telecommunications as CGI's largest economic sector. Geographically, the mix was 83.6% Canada, 12.6% US, and 3.8% International. International business was below a year ago, reflecting the completion of a large contract in Brazil in fiscal 2000.
For the first nine months, revenue was essentially even with the same period of the prior fiscal year, as solid growth in the third quarter was offset by year-over-year declines in the first two quarters of fiscal 2001.
Note 1 - The financial statements, Annual Report and MD&A include non-US GAAP measures such as EBITDA, earnings before amortization of goodwill, earnings per share before amortization of goodwill and operating cash flow. These supplementary measures are permitted to be used in Canadian GAAP and in Canadian securities filings.
Operating Earnings
Earnings before interest, taxes, depreciation and amortization (EBITDA) in the third quarter of fiscal 2001 were $61.1 million, up 111.8% over the $28.9 million reported in the prior year quarter and up 13.2% over the $54.0 million reported in this year's second fiscal quarter. The significant improvement in earnings was due primarily to the strong revenue growth and good cost controls.
For the nine months of fiscal 2001, EBITDA was $157.0 million, up 6.9% from $146.9 million in the same period last year. The strong improvement in earnings stemmed primarily from the 1.4% reduction in operating costs, to $955.3 million from a year earlier. CGI continued to benefit from provincial refundable tax credits of $10,000 a year per eligible employee resulting from its participation in the Quebec government's program to establish E-Commerce Place in Montreal.
Depreciation and Amortization
On a year-over-year basis, the increase in depreciation and amortization of fixed assets reflects primarily business acquisitions. The increase in amortization of contract costs in the third quarter and nine months reflects primarily the Desjardins and Laurentian Bank contracts signed in the third quarter.
Income Taxes
The income tax rate in the third quarter was 44.4%, compared with 32.1% in the third quarter of fiscal 2000. The change reflects the impact from the non-recognition of tax benefits resulting from US losses. The tax rate for the nine months was 44.2%, compared with 39.5% for the same period the previous year.
Earnings before Amortization of Goodwill
Earnings before amortization of goodwill (also referred to as cash net earnings) increased sequentially for the third consecutive quarter in the three months ended June 30, 2001, and returned to strong year-over-year growth. Cash net earnings were $24.3 million, up 114.9% over the same period in the prior year and up 9.5% over the $22.2 million reported in this year's second fiscal quarter. For the nine months, cash earnings were $62.7 million, compared with $66.4 million reported in the same period of the prior year, reflecting a higher tax rate. The cash net earnings margin was 6.0%, compared with 5.9% in the second quarter, and 3.4% in the third quarter of fiscal 2000.
Amortization of Goodwill, Net of Income Taxes
Amortization of goodwill, net of income taxes, increased 57.2% to $7.0 million in the third quarter and 49.1% to $19.7 million for the first nine months of fiscal 2001, compared with year earlier. The increase reflects acquisitions during the year as outlined in note 3 to the financial statements.
Net Earnings
Net earnings in the third quarter of fiscal 2001 were $17.3 million, up 152.2% over the same period in the prior year, and up 14.0% sequentially over the $15.2 million reported in this year's second fiscal quarter. The net margin was 4.3%, compared with 4.1% in the second quarter and 2.1% in the third quarter of fiscal 2000. For the nine months, net earnings were $43.0 million, down 19.3% compared with the same period of the prior year, reflecting lower cash net earnings and increased amortization of goodwill net of income taxes.
Liquidity and Financial Resources
CGI maintains a strong balance sheet and cash position, which together with bank lines are sufficient to support the Company's growth strategy. The Company has a $250 million credit facility with four Canadian chartered banks available for acquisitions and general working capital purposes. As at June 30, 2001, the total credit facility available amounted to approximately $193 million.
The company, as at June 30, 2001, had cash and cash equivalents of $53.3 million, compared with $49.3 million as at September 30, 2000. Accounts receivable amounted to $236.0 million compared with $211.2 million as at the most recent fiscal year end, and day-sales outstanding (DSOs) improved to 63 days, from 75 days as at September 30, 2000.
Within current liabilities, the increase in deferred revenue to $121.1 million from $25.5 million reflects primarily the addition of the Desjardins and Laurentian Bank contracts.
The increase in long-term debt, which remains at a low level relative to shareholders' equity, reflects the financing of certain assets related to the Desjardins contract. Long-term debt increased to $67.7 million, from $43.4 million as at September 30, 2000.
Shareholders' equity includes warrants issued as part of the outsourcing agreements with Desjardins and Laurentian Bank. CGI issued a warrant to Desjardins, which is entitled to subscribe, until April 30, 2006, up to 4,000,000 Class A Subordinate Shares of CGI at a price of $6.55 per share. CGI's majority individual shareholders (Serge Godin, André Imbeau and Jean Brassard) have decided to exercise their preemptive rights pursuant to the articles of incorporation of CGI in respect of the issue of the warrant in order to maintain their Class B voting interests at current levels. BCE Inc. ("BCE") has decided to exercise its preemptive right in order to maintain its voting and equity interests at current levels. Pursuant to such exercise of preemptive rights, CGI will issue warrants with substantially similar terms and conditions. Such warrants may be exercised only to the extent that Desjardins exercises its warrant and that BCE and the majority shareholders elect to exercise their warrants.
Regarding the outsourcing agreement with Laurentian Bank, CGI issued a warrant to Laurentian Bank, which is entitled to subscribe, until June 12, 2006, up to 1,118,210 Class A Subordinate Shares of CGI at a price of $8.877 a share. CGI's majority individual shareholders have decided to exercise their preemptive rights pursuant to the articles of incorporation of CGI in respect of the issue of the warrant in order to maintain their Class B voting interests at current levels. BCE has decided to exercise its preemptive right in order to maintain its voting and equity interests at current levels. Pursuant to such exercise of preemptive rights, CGI will issue warrants with substantially similar terms and conditions. Such warrants may be exercised only and to the extent that Laurentian Bank exercises its warrant and that BCE and the majority shareholders elect to exercise their warrants.
Operating cash flows in the third quarter and in the first nine months of fiscal 2001 were higher than in the third quarter and first nine months of fiscal 2000, respectively. The increase in operating cash flow, despite a reduction in net earnings in the nine-month period, reflects higher depreciation and amortization amounts related to various fixed assets, contract costs, and goodwill from recent transactions. Additionally, there was a foreign exchange loss of $4.6 million in the latest nine-month period.
Operating cash flow in the third quarter amounted to $52.7 million, compared with $23.1 million in the third quarter a year ago. The variation in operating cash flow reflects mostly the variation in net earnings and future income taxes. As in the nine-month period, it also reflects increases in amortization and depreciation, and a foreign exchange loss. Cash provided by operating activities amounted to $101.9 million, a significant increase over $19.0 million in the third quarter a year ago, primarily reflecting improved cash management.
During the quarter, the Company invested $61.7 million in acquisitions and $25.9 million in new business contracts. Cash used for investing activities totalled $98.0 million, compared with $7.1 million in the same quarter a year ago. For the nine months, investments in business acquisitions totalled $108.8 million, compared with $2.9 million in the same period a year ago, and contract costs totalled $36.3 million, compared with $14.7 million the previous year.
The Company concluded the nine-month period with $53.3 million in cash and cash equivalents, compared with $33.3 million at June 30, 2000.
Acquisitions
Subsequent to the end of the third quarter, CGI acquired IMRglobal Corp. ("IMRglobal") following majority approval by IMRglobal shareholders at a special meeting held July 27, 2001. CGI is acquiring IMRglobal on the basis of 1.5974 CGI Class A Subordinate Share for each share of IMRglobal Common Stock. A total of approximately 70.8 million CGI Class A Subordinate Shares are being issued. In addition, outstanding IMRglobal stock options will become approximately 8.4 million options to acquire CGI Class A Subordinate Shares.
The Company will account for the merger in accordance with Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations, the conclusions of which are substantially similar to the new recommendations of the Canadian Institute of Chartered Accountants ("CICA") Handbook Section 1581, Business Combinations. As a result of adopting this standard, the purchase price will be determined using the weighted average trading price of the CGI Class A Subordinate Shares on the Toronto Stock Exchange for the twenty-one-day period starting ten days before and ending ten days after the announcement date of February 21, 2001 representing $7.58 per share. Under prior Canadian standards, the purchase price would have been determined based on a twenty-one-day period around the closing date rather than a twenty-one-day period around the announcement date.
Estimated professional fees and integration costs of $74.0 million will be included in the total purchase consideration, as well as a fair value of approximately $55.0 million for IMRglobal options.
Additionally, CGI's majority individual shareholders (Serge Godin and André Imbeau) are exercising their preemptive rights to maintain their Class B multiple voting interests at current levels and have committed up to a maximum aggregate of $60 million to acquire additional Class B Multiple Voting Shares at the weighted average trading price of CGI's Class A Subordinate Shares in the twenty-one-day period from July 13 through August 10, inclusively.
On a pro forma basis, reflecting the combined revenue of CGI and IMRglobal on a run-rate basis, the mix of revenue is as follows:
- by type of services, 61.0% IT outsourcing, and 39.0% consulting and systems integration.
- by geographic location of clients, 70.3% in Canada, 21.5% in the US, and 8.2% international;
- by economic sector, 44.9% financial services, 26.6% telecommunications, 15% manufacturing/retail/distribution chain, 9.4% government, 2.5% healthcare, and 1.6% energy and utilities.
Risks and Uncertainties
CGI reports its financial statements in Canadian dollars. Following the acquisition of IMRglobal and resulting increase in US and International business, the Company may incur additional foreign exchange risks which it intends to mitigate by implementing hedging and other capital management strategies.
Accounting Changes
Effective the first quarter of fiscal 2001, the Company adopted recommendations of the CICA Handbook sections 1751, regarding interim financial statements, and 3500, regarding earnings per share.
Section 1751 establishes standards for interim financial statements. In accordance with this section, CGI has provided disclosure on new or changed accounting policies or methods (i.e. the adoption of section 3500); included disclosure required in annual financial statements concerning business combinations (mostly C.U. Processing Inc., Star Data Systems Inc., AGTI Consulting Services Inc. and Desjardins); and provided a comparative balance sheet as at the end of the immediately preceding fiscal year instead of the same period of the previous year.
Section 3500 brings Canadian requirements in line with U.S. and international standards FASB Statement 128 and IAS 33. Presentation and disclosure requirements are aligned with those of FASB Statement 128. Under the revised standard, the treasury stock method is used instead of the current imputed earnings approach for determining the dilutive effect of options issued. Reconciliation of the numerator and denominator of both basic and diluted per share data is disclosed.
Quarterly Conference Call Notification
A conference call for the investment community will be held on Tuesday, July 31, 2001 at 11:00 am (Eastern Daylight Time). Participants may access the call by dialling (888) 209-3775. A live audio webcast of the conference call, with accompanying slides, will be available at CGI's website, www.cgi.ca. For those unable to participate, a replay will be available until August 7 by dialling (800) 558-5253 and quoting the access number 19 33 85 78.
About CGI
Founded in 1976, CGI is the fourth largest independent information technology services firm in North America, based on its headcount of more than 13,000 professionals. CGI's annualized revenue run-rate totals US$1.3 billion (CDN$2.0 billion). CGI's order backlog currently totals US$5.7 billion (CDN$8.8 billion). CGI provides end-to-end IT services and business solutions to more than 3,000 clients in the United States, Canada, the United Kingdom, France, India, Japan, and Australia from more than 60 offices in more than 20 countries. CGI's shares are listed on the NYSE (GIB) and the TSE (GIB.A). They are included in the TSE 300 Composite Index as well as the S&P/TSE Canadian Information Technology and Canadian MidCap Indices. Website: www.cgi.ca.
Forward-Looking Statements
All statements in this press release and MD&A that do not directly and exclusively relate to historical facts constitute "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements represent CGI Group Inc.'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.
These factors include and are not restricted to the timing and size of contracts, acquisitions and other corporate developments; the ability to attract and retain qualified employees; market competition in the rapidly-evolving information technology industry; general economic and business conditions, foreign exchange and other risks identified in the Management's Discussion and Analysis (MD&A) in CGI Group Inc.'s Annual Report or Form 40F filed with the SEC, the Company's Annual Information Form filed with the Canadian securities commissions, on the Registration Statement on Form F-4 filed with the SEC in connection with the acquisition of IMRglobal and with the Forms 10-K and 10-Q of IMRglobal filed with the SEC for the periods ended December 31, 2000 and March 31, 2001 respectively. All of the risk factors included in these filed documents are included here by reference. CGI disclaims any intention or obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
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For more information:
Investor Relations
CGI
Julie Creed - USA
Vice-president, investor relations
(312) 543-2942
Ronald White - Canada
Director, investor relations
(514) 841-3230
Media Relations
CGI
Eileen Murphy
Director, media relations
(514) 841-3430
