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COVANSYS REPORTS FIRST AND SECOND QUARTER
AND FIRST HALF 2004 EARNINGS RESULTS
Company Also Announces Restated Financials
to Reflect Charges
Associated with Conclusion of Fixed Asset Inventory Process and Assessment
See First Quarter Financial Tables here or
Download Excel Sheet
See Second Quarter Financial Tables here or
Download Excel Sheet
Click here to listen to a replay of the financial results call.
FARMINGTON HILLS, Mich., August 5, 2004 – Covansys Corporation
(Nasdaq: CVNSE), a leading global provider of strategic outsourcing
and integration services, today announced its first quarter, second
quarter and first half 2004 earnings results.
As previously announced, the Company recently completed a physical
inventory process and assessment of its fixed assets. As a result
of this physical inventory process, the Company determined that
it would take a non-cash charge of $2.6 million related to the
net book value of missing equipment and furniture, obsolete equipment
and certain maintenance contracts that were appropriately capitalized
but were assigned a useful life in excess of the maintenance period.
As discussed later in this release, Covansys has restated previously
issued financial statements to account for the portion of the charge
that could be attributed to prior periods, with the balance of
the charge being reflected in the first quarter of 2004.
First Half Highlights
Despite mixed operating results, Covansys made significant strides
in executing on its business strategy in the first half of 2004.
Highlights of the Company’s achievements include:
- Execution of a Master Services Agreement with Fidelity
Information Services, Inc. (“FIS”), a subsidiary
of Fidelity National Financial, Inc.;
- Execution of a Stock Purchase Agreement with FIS;
- A directive from People Soft, Inc. to expand the Company’s
India Development Center;
- An agreement with BearingPoint to assist with the
opening and operation of BearingPoint’s first Global Development
Center in India;
- Continued strong year-over-year revenue growth in
India, accounting for 26% of Covansys’ total revenues in
the first half of 2004 compared with 16% in the first quarter
of 2003 and 18% in the second quarter of 2003;
- An increase of 2.6% in hours billed in India in the
second quarter over the first quarter of 2004 and a 4.5% improvement
in India time and material billing rates from the first to the
second quarter;
- A rise in billable headcount in India to nearly 3,100
employees at the end of the second quarter, 450 of which were
added in India in 2004; and
- A reduction in SG&A and a leaner operating structure
that will position Covansys to realize estimated annual savings
of over $10 million.
Second Quarter and First Half 2004 Results
For the quarter ended June 30, 2004, the Company reported revenue
of $94.1 million compared with $96.2 million in the second quarter
of 2003. Revenue for the first six months of 2004 was $184.5 million
compared with $192.8 million for the first six months of 2003.
In accordance with recent guidance regarding the computation of
earnings per share by the Emerging Issues Taskforce (EITF 03-06, “Participating
Security and the Two Class Method Under FASB Statement No 128”),
the Company’s undistributed net income is allocated between
net income available for common shareholders and the outstanding
convertible redeemable preferred stock. This new guidance results
in lower earnings per share available for common shareholders in
periods where the Company has net income available to common shareholders
and has no impact in periods where the Company has a loss. Following
this guidance, net income available to common shareholders in the
second quarter of 2004 was $0.09 per share (on a diluted basis)
as compared to a loss of $0.04 per share in the second quarter
of 2003. For the first six months of 2004, net income available
to common shareholders was a loss of $0.02 per share compared to
a loss of $0.08 per share in the first half of 2003. Application
of EITF 03-06 reduced earnings per share by $0.034 (on a diluted
basis) in second quarter of 2004.
Excluding the impact of the issuance of non-cash convertible redeemable
preferred stock dividends, the Company generated net income of
$4.5 million for the quarter ended June 30, 2004 compared with
a loss of $2.9 million for the quarter ended March 31, 2004 and
net income of $1.6 million in the first half of 2004 compared to
$0.2 million for the same period in 2003.
Covansys’ second quarter 2004 net income and earnings per
share results include charges of approximately $0.7 million, $0.7
million, and $1.1 million related to employee severance, professional
fees associated with the fixed asset analysis, and lease terminations,
respectively, as compared to severance charges of $2.5 million
in the second quarter of 2003.
Additional Financial Results
Domestic utilization was 84% and 86% in the first and second quarters
of 2004, respectively, up from 80% in the fourth quarter of 2003.
Utilization in India was 71% and 67% for the first and second quarters,
down from 76% in the fourth quarter of 2003, as a result of the
Company’s aggressive hiring effort to meet expected 2004-2005
demand. Jim Trouba, Covansys’ Chief Financial Officer, noted, “Based
on current market demand, we are confident that we can meet and
maintain our targeted domestic utilization rate of 85% and are
moving toward Indian utilization rates of 75%.”
The percentage of revenue derived from operations in India was
26% of total revenue in the first half of 2004 compared with 25%
in the fourth quarter 2003. “We anticipate maintaining revenue
generated by Indian operations in a range of 27-30% for the remainder
of 2004 and continuing to drive to higher levels throughout 2005,” commented
Mr. Trouba. Billing headcount in India increased in the first half
of 2004 by approximately 450 consultants, or over 17%, since December
2003. Covansys expects to continue to increase the size of its
global workforce, including in India.
Covansys’ effective tax rate was 34% for the first and second
quarters of 2004. The Company estimates that its effective tax
rate in 2004 will be approximately 34%.
The Company’s combination of cash and short-term investments
at the end of the second quarter 2004 was $129.0 million, an increase
of approximately $1.6 million from the end of 2003.
First Quarter 2004 Results
For the quarter ended March 31, 2004, Covansys reported revenue
of $90.4 million compared with $96.6 million generated in the first
quarter of 2003. Revenue for the first quarter was adversely affected
by changed circumstances in various public sector projects as noted
below. Net income available to common shareholders was a loss of
$0.15 per share compared to a loss of $0.03 per share in the first
quarter of 2003. Excluding the distribution of non-cash convertible
redeemable preferred stock dividends, the Company reported a loss
of $2.9 million in the first quarter of 2004 compared to net income
of $0.2 million for the same period in 2003.
Covansys’ first quarter 2004 net income and earnings per
share results were negatively impacted by approximately $1.1 million
related to the previously announced fixed asset charge and approximately
$9.4 million related to adjustments in cost estimates and collection
assumptions attributable to various fixed price projects, primarily
in the public sector. Included in the $1.1 million charge related
to the fixed asset process and assessment recorded in the first
quarter was $0.7 related to missing equipment which could not be
identified to a specific prior period. The adjustments attributable
to the fixed price projects were due to changes in circumstances
that occurred in the second quarter of 2004. Covansys determined
it was appropriate to write down the amount it believes it will
collect without dispute, although the Company continues to actively
review its collection options. Of the total $9.4 million, approximately
$8.2 million is attributable to three of the four fixed price contracts
that the Company previously identified as troubled.
As part of its ongoing effort to improve the management oversight
of its fixed price contracts, Covansys has implemented new monitoring
and execution measures, including tighter requirements definitions
at the outset of each contract, weekly review of significant fixed
price engagements by an inter-departmental management team, and
increased senior and executive management attention to both initial
contract terms and execution milestones once engagements are underway.
Restated Financial Statements
The Company will also amend its previously filed Form 10-K for
the year ended December 31, 2003 and its Forms 10-Q for the periods
ended March 31, 2003, June 30, 2003 and September 30, 2003. The
adjustments giving rise to the Company's need to restate its financial
statements relate primarily to missing or obsolete equipment that
came to light as a result of a physical inventory process that
the Company completed in June 2004 in order to facilitate the conversion
of its property and equipment data into a new property and equipment
accounting system. As a result of those efforts, the Company determined
that assets having a net book value of approximately $2.6 million
were either missing, obsolete or had been appropriately capitalized
but were assigned too long a useful life. Of this amount, $0.4
million related to equipment that was determined to have become
obsolete in the quarter ended March 31, 2004 and $1.5 million was
attributed to prior years. The remaining balance of $0.7 million
related to missing equipment which could not be identified with
any particular period and was recorded as an additional charge
in the first quarter of 2004. In addition, the Company also recorded
other corrections resulting in additional pre-tax charges of $0.7
million in 2003 and pre-tax credits of $0.7 million in 2002. The
Company’s first quarter 2004 Form 10-Q filing was delayed
pending determination of the proper accounting for these adjustments.
Martin Clague, President and Chief Executive Officer of Covansys,
said, “We have taken a number of steps over the past few
months to enhance our financial reporting process, including putting
in place a dedicated team of senior managers to oversee our continued
compliance with Sarbanes-Oxley. At the same time, as part of our
ongoing effort to ensure that we are positioned to take full advantage
of the growth opportunities that lie ahead, we have rationalized
our operating infrastructure and sharpened our focus on our core
strengths. As a result of the cost savings measures we undertook
in the first half of 2004, we expect to achieve annual savings
of more than $10 million. Going forward, we are confident that
our improved oversight procedures will allow us to more accurately
project anticipated quarterly revenues from fixed price contracts.”
Second Half Outlook
Raj Vattikuti, Covansys Founder and Co-Chairman of the Board,
said, “Since announcing our strategic partnership with FIS
in April, we have begun servicing 29 statements of work utilizing
over 160 billable employees and we expect to initiate at least
16 new projects in the next 60 days. These opportunities are helping
us strengthen our presence in the financial services sector and
accelerate our offshore growth strategy, and we are excited about
the important financial and strategic benefits our partnership
with FIS will enable us to achieve in the quarters ahead.”
Mr. Vattikuti continued, “We are confident that our efforts
to build on our relationships with key existing clients and develop
additional strategic anchor accounts, particularly in the financial
services sector, will drive improved financial results across our
business lines. We expect the expansion of our offshore talent
base and our strength in modernizing legacy systems, in particular,
to become increasingly important competitive differentiators for
us as the need for these capabilities continues to grow. Based
on our growing relationships with BearingPoint, PeopleSoft and
FIS, we anticipate expanding our workforce in India by over 400
additional billable resources by year end. We will also focus on
providing enhanced delivery and execution in our public sector
business and on securing several new opportunities in this sector,
which we believe we are well-positioned to win. With our strategic
priorities clearly in place, together with the cost savings we
implemented in the second quarter and the increase in our billable
resources in India, we believe that we can generate improved revenue
growth and profitability going forward.”
Covansys has not repurchased any of its common stock during the
first half of 2004, but it retains the ability to repurchase up
to 2.8 million shares of its common stock and will continue to
do so as it deems appropriate and in accordance with applicable
guidelines.
Covansys will host a conference call to discuss its first and
second quarter 2004 financial results on Thursday, August 5, 2004
at 10:00 a.m. Eastern Time. Interested parties may access the call
by dialing 877-407-8982, or 201-689-8338 from outside North America.
The call may also be accessed via the Internet at the Company's
website, www.covansys.com.
A replay of the call will be available beginning at approximately
1:00 p.m. on August 5th through midnight on August 12th by dialing
877-660-6853 or 201-612-7415 and referencing account number 1628
and conference ID 113633. The replay will also be available on
the Company's website, www.covansys.com, for 90 days.
About Covansys
Covansys Corporation, (NASDAQ: CVNS), is a global consulting and
technology services company specializing in industry-specific solutions,
strategic outsourcing and integration services through a unique
onsite, off-site, offshore delivery model that helps clients achieve
rapid deployment, world-class quality and reduced costs. Founded
in 1985, Covansys has successfully delivered an array of innovative
and cost-effective business and technical solutions to leaders
in the private and public sectors. With one of the largest offshore
capabilities of any technology services provider based in the United
States, Covansys has achieved the SEI’s CMM Level 5 quality
ratings at two of its offshore development centers in India.
Safe Harbor Statement
With the exception of statements regarding historical matters
and statements concerning our current status, certain matters discussed
herein are forward-looking statements that involve substantial
risks and uncertainties. Such forward-looking statements may be
identified by the words "anticipate," "believe," "estimate," "expect" or "intend" and
similar expressions. Our actual results, performance or achievements
could differ materially from these forward-looking statements.
Factors that could cause or contribute to such material differences
include general economic conditions and conditions in the IT industry
such as the demand for IT services, public sector government budgetary
constraints, potential cost overruns on fixed-price projects, effective
application of the percentage of completion method of accounting
for fixed priced contracts, risks related to merger, acquisition
and strategic investment strategy, variability of operating results,
government regulation of immigration, exposure to regulatory, political
and economic conditions in India and Asia, competition in the IT
services industry, the short-term nature and termination provisions
of contracts, economic conditions unique to clients in specific
industries and limited protection of intellectual property rights.
These and other factors are described in the Company’s filings
with the U.S. Securities and Exchange Commission.
AT THE COMPANY:
David Roady
(248) 848-2221
droady@covansys.com
AT JOELE FRANK, WILKINSON BRIMMER KATCHER:
Eden Abrahams / Andrew Siegel
(212) 355-4449
ea@joelefrank.com / abs@joelefrank.com
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