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COVANSYS REPORTS SECOND QUARTER
2006 RESULTS
Strong Quarter Highlighted
by 26% Revenue Growth from Continuing Business and Improved
Gross Margins
FARMINGTON HILLS, Mich., (July 27, 2006)
/PRNewswire-FirstCall/ -- Covansys Corporation (Nasdaq:
CVNS), a global consulting and technology services company, today
announced its financial results for the second quarter and six
months ended June 30, 2006.
Covansys reported revenue of $118.0
million in the second quarter of 2006 compared with $108.7 million
in the second quarter of 2005, an increase of 8.5%. Revenue also
increased 7.5% over the first quarter of 2006, when Covansys
reported revenue of $109.8 million. Revenue for the six months
ended June 30, 2006 was $227.8 million, an increase of 6.9% compared
with revenue of $213.0 million during the same period in 2005.
Gross
profit in the second quarter of 2006 was $33.1 million or 28.1%
of revenue compared with $30.4 million or 28.0% of revenue in
the comparable 2005 period.
Effective June 1, 2006, Covansys completed
the sale of its state and local government consulting practice
to Saber Solutions, Inc. for $31.4 million in cash. The business
lines that Covansys acquired when it purchased PDA Software Services
(PDA) in 2002 were not part of this transaction.
Pro-forma revenue,
excluding the state and local government consulting practice,
was $108.5 million in the second quarter of 2006 compared with
$86.4 million in the second quarter of 2005, an increase of 25.6%.
Pro-forma revenue for the six months ended June 30, 2006 was
$205.9 million, an increase of 19.6% compared with $172.1 million
for the six months ended June 30, 2005. Pro-forma gross profit
in the second quarter of 2006 was $32.7 million or 30.1% of revenue
compared with $25.4 million or 29.4% of revenue in the comparable
2005 period, an increase of 28.4%.
The Company reported net income
of $10.3 million, down 8.1% from net income of $11.2 million
in the second quarter of 2005 and up 108.6% from net income of
$5.0 million in the prior quarter. Net income in the second quarter
of 2005 was impacted by the reversal of previously recorded tax
reserves of $3.2 million due to the expiration of the statute
of limitations for the years to which the recorded reserves related.
This was partially offset by a $0.5 million one-time adjustment
from the reversal of deferred tax assets due to an enacted law
change in the State of Ohio.
Additional financial information from the quarter includes:
-- Net income of $0.27 per share as compared with $0.30 per share (on a diluted
basis) in the same period last year;
-- Pretax income of $16.0 million as compared
with $12.2 million in the same period last year and $6.1 million in the first
quarter of 2006;
-- Cash and short-term investments of $114.6 million, compared
with $81.9 million at the end of the first quarter of 2006. This increase is
due in part to the sale of Covansys' state and local government consulting practice,
which was completed during the second quarter;
-- Cash from operations of $15.7
million; and
-- Approximately 1 million shares of Covansys common stock were
repurchased during the quarter.
Raj Vattikuti, President and Chief Executive Officer of Covansys, stated, "We
are pleased with Covansys' performance in the second quarter, particularly the
growth in our revenue and the return to our historical margin levels on a pro-forma
basis. Our results highlight the continued progress we have made in the growth
and profitability of our Commercial business. It also reflects the success of
our Business Process Outsourcing (BPO) services, which now generate approximately
10% of Covansys' revenue. We will continue to aggressively market our BPO services
and we are confident that this highly profitable business will be an increasingly
significant component of Covansys' growth going forward. Our strong second quarter
performance also demonstrates that Covansys is well-positioned for even greater
profitability as a pure-play global outsourcing solutions provider."
Covansys' operational highlights from the second quarter include:
-- Completion
of the divestiture of Covansys' state and local government practice for $31.4
million;
-- Higher growth across Covansys' many strategic accounts; and
-- Increased
total headcount in India to over 5,700 representing more than 71% of Covansys'
global workforce of approximately 8,000 consultants and employees.
Additional Financial Results
Domestic utilization was 87.7% in the second quarter of 2006, down
from 88.4% in the second quarter of 2005 and down from 88.5% in
the prior quarter. Utilization in India was 78.1% for the second
quarter of 2006, up from 73.8% in the second quarter of 2005 and
up from 70.7% in the first quarter of 2006.Selling, general and
administrative expenses were $18.7 million, or 15.9% of revenue
in the second quarter of 2006, as compared to $18.1 million, or
16.7% of revenue in the second quarter of 2005.
The effective tax
rate in the second quarter of 2006 was 35.3%. The tax provision
for the quarter ended June 30, 2006 includes a charge of $0.7 million
from the adjustment of recorded reserves based on the evaluation
of estimated tax exposures.Covansys repurchased approximately 1
million shares of its common stock during the second quarter of
2006. As of June 30, 2006, the Company had approximately 36.7 million
shares of common stock outstanding.
Outlook
Jim Trouba, Chief Financial Officer of Covansys, noted, "The
sale of our state and local government consulting practice added
a significant amount of cash to our balance sheet and considerably
reduced the amount of revenue earned in excess of billings from
$25.6 million at December 31, 2005 to $4.3 million at June 30,
2006. Covansys' strong balance sheet and strategic focus will enable
us to continue to repurchase shares and invest in our current businesses
while preserving the Company's ability to take advantage of strategic
opportunities as they arise. We will be disciplined and opportunistic
in reviewing potential acquisitions."Mr. Vattikuti concluded, "Covansys
is firmly committed to driving profitable growth and creating shareholder
value through the remainder of 2006. We expect that the sale of
our state and local government consulting practice, together with
several internal initiatives to enhance our operational efficiency,
will enable us to continue improving Covansys' margins. We have
a strong pipeline of new projects and will continue expanding upon
existing relationships while pursuing new accounts in key verticals
such as financial services and healthcare. We look forward to delivering
a continued strong financial performance in the remaining half
of 2006."
Conference Call
Covansys will host a conference call on Thursday, July 27, 2006
at 10:00 a.m. Eastern Time to discuss its financial results for
the second quarter ended June 30, 2006. Interested parties may
access the call by 866-825-1709 or 617-213-8060 from outside North
America and entering the passcode 94698075. The call may also be
accessed via the Internet on the company's website, http://www.covansys.com.
A
replay of the call will be available beginning at approximately
1:00 p.m. on July 27, 2006 through midnight on August 10, 2006
by dialing 888-286- 8010 or 617-801-6888 and entering the passcode
965666854. The replay will also be available on the company's website,
http://www.covansys.com, for 90 days.
About Covansys
Headquartered in Michigan, Covansys Corporation
(Nasdaq: CVNS) is a global consulting and technology services company
specializing in industry-specific solutions, strategic outsourcing
and integration services. Clients gain competitive advantage by
leveraging our unique global delivery capability to achieve rapid
deployment, world-class quality and reduced costs. Covansys is
known for strategic outsourcing and technology solutions in the
healthcare, financial services, retail and distribution, manufacturing,
telecommunications and high-tech industries. Founded in 1985, Covansys
now has approximately 8,000 consultants and employees worldwide.
Covansys was one of the first U.S.-based IT services companies
to establish offshore facilities in India, and is a pioneer in
seamlessly integrating offshore capabilities into its offerings.
Two of the company's three wholly owned development centers in
India are assessed at Level 5 in SEI CMM(R). All three are ISO
9001:2000 certified and assessed at Level 5 in PCMM(R), and five
global facilities are BS7799-2:2002 certified. For more information visit: http://www.covansys.com.
Safe Harbor Statement
With the exception of statements regarding historical matters
and statements concerning our current status, certain matters discussed
in this press release 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
internal control weaknesses, variability of operating results, failure
to recruit, train and retain skilled IT professionals, impact of
changes in estimates on fixed price projects, exposure to regulatory,
political and general economic conditions in India and Asia, short
term nature and termination provisions of contracts, competition
in the IT services industry, economic conditions unique to clients
in specific industries, the success of the Company to negotiate contract
renewals at comparable terms, limited protection of intellectual
property rights, infringement by our services on the property rights
of others, legal liability and damage to our professional reputation
from claims made against our work, and risks related to merger, acquisition
and strategic investment strategy.
FOR
FURTHER INFORMATION
Investors:
James S. Trouba
(248) 848-2267
jtrouba@covansys.com
Media:
Dorothy Chisholm
(248) 848-2283
dchisholm@covansys.com
COVANSYS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited, in thousands except per share amounts)
Three Months Ended June 30,
2006 2005
Revenue $117,981 $108,708
Cost of revenue 84,881 78,301
Gross profit 33,100 30,407
Selling, general and administrative 18,725 18,140
Net loss on sale of businesses 218 -
Income from operations 14,157 12,267
Interest expense 9 266
Other income, net (1,822) (217)
Income before provision for income taxes 15,970 12,218
Provision for income taxes 5,631 970(B)
Net income $10,339 $11,248
Earnings Per Share:
Basic Diluted Basic Diluted
Net income $0.28 $0.27 $0.30 $0.30
Weighted average common shares 37,222 37,639 37,359 37,827
Six Months Ended June 30,
2006 2005
Revenue $227,758 $212,981 (A)
Cost of revenue 170,468 152,251
Gross profit 57,290 60,730
Selling, general and administrative 37,399 37,001
Net loss on sale of businesses 218 -
Income from operations 19,673 23,729
Interest expense 26 469
Other income, net (2,386) (806)
Income before provision for income taxes 22,033 24,066
Provision for income taxes 6,737 4,761 (B)
Net income $15,296 $19,305
Earnings Per Share:
Basic Diluted Basic Diluted
Net income $0.41 $0.40 $0.52 $0.51
Weighted average common shares 37,333 37,771 37,394 37,930
(A) Includes $3,483 of revenue for work performed in 2004 but because the
Company had not yet received a contract for those services, revenue
could not be recognized until receipt of the contract in the first
quarter of 2005.
(B) Includes $3,200 reversal of previously recorded tax reserves due to
the expiration of the statute of limitations, partially offset by a
one-time charge of $500 from the reversal of deferred tax assets due
to an enacted law change in the State of Ohio.
COVANSYS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited, in thousands)
June 30, December 31,
2006 2005
Current Assets:
Cash and cash equivalents $87,129 $58,030
Short-term investments 27,442 23,332
114,571 81,362
Accounts receivable, net 79,262 82,526
Revenues earned in excess of billing 4,336 25,632
Prepaid expenses and other 14,624 15,117
Total current assets 212,793 204,637
Property and equipment, net 34,292 36,656
Goodwill, net 22,454 21,893
Other assets 8,695 8,075
Total Assets $278,234 $271,261
Current liabilities $59,607 $59,727
Other liabilities 5,042 3,674
Shareholders' equity 213,585 207,860
Total Liabilities and Shareholders' Equity $278,234 $271,261
COVANSYS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Six Months Ended
June 30,
2006 2005
Net income $15,296 $19,305
Adjustments to reconcile net income to
net cash provided from operating activities:
Depreciation and amortization 6,347 6,641
Loss on disposal of property and equipment 41 256
Stock-based compensation cost 817 -
Provision for and write-off of doubtful accounts (152) 345
Gain from sale of short-term investments (24) (35)
Net loss from sale of businesses 218 -
Provision for deferred income taxes (628) 86
Change in assets and liabilities (3,197) (8,845)
Net cash provided from operating activities 18,718 17,753
Cash flows from investing activities:
Investment in property, equipment and other (8,672) (5,061)
Proceeds from sale of businesses 33,491 -
Proceeds from sale of available-for-sale
securities 61,579 68,369
Purchases of available-for-sale securities (65,947) (62,296)
Proceeds from sale of property and equipment 112 -
Investment in computer software (125) (43)
Net cash provided from investing activities 20,438 969
Cash flows from financing activities:
Net proceeds from exercise of stock
options 2,122 1,847
Tax benefit from stock options exercised 310 -
Repurchases of common stock (13,341) (4,803)
Net cash used in financing activities (10,909) (2,956)
Effect of exchange rate changes on cash 852 (529)
Increase in cash and cash equivalents 29,099 15,237
Cash and cash equivalents at beginning of
period 58,030 49,841
Cash and cash equivalents at end of period $87,129 $65,078
COVANSYS CORPORATION
CONDENSED CONSOLIDATED PROFORMA STATEMENT OF OPERATIONS
(Unaudited, in thousands except per share amounts)
Three Months Ended June 30,
2006
State and
Local
Consulting
As reported Practice Proforma
Revenue $117,981 $9,469 $108,512
Cost of revenue 84,881 9,021 75,860
Gross profit (loss) 33,100 448 32,652
Selling, general, and administrative
expenses 18,725 1,079 17,646
Net loss (gain) on sale of businesses 218 285 (67)
Income (loss) from operations 14,157 (916) 15,073
Interest income and other (1,813) - (1,813)
Income (loss) before provision
(benefit) for income taxes 15,970 (916) 16,886
Provision (benefit) for income taxes 5,631 (366) 5,997
Net income (loss) $10,339 $(550) $10,889
Earnings per share:
Basic $0.28 $0.29
Diluted $0.27 $0.29
Three Months Ended June 30,
2005
State and
Local
Consulting
As reported Practice Proforma
Revenue $108,708 $22,298 $86,410
Cost of revenue 78,301 17,314 60,987
Gross profit (loss) 30,407 4,984 25,423
Selling, general, and administrative
expenses 18,140 2,399 15,741
Net loss (gain) on sale of businesses - - -
Income (loss) from operations 12,267 2,585 9,682
Interest income and other 49 - 49
Income (loss) before provision
(benefit) for income taxes 12,218 2,585 9,633
Provision (benefit) for income taxes 970 1,034 (64)
Net income (loss) $11,248 $1,551 $9,697
Earnings per share:
Basic $0.30 $0.26
Diluted $0.30 $0.26
COVANSYS CORPORATION
CONDENSED CONSOLIDATED PROFORMA STATEMENT OF OPERATIONS
(Unaudited, in thousands except per share amounts)
Six Months Ended June 30,
2006
State and
Local
Consulting
As reported Practice Proforma
Revenue $227,758 $21,905 $205,853
Cost of revenue 170,468 22,231 148,237
Gross profit (loss) 57,290 (326) 57,616
Selling, general, and administrative
expenses 37,399 2,627 34,772
Net loss (gain) on sale of businesses 218 285 (67)
Income (loss) from operations 19,673 (3,238) 22,911
Interest income and other (2,360) - (2,360)
Income (loss) before provision
(benefit) for income taxes 22,033 (3,238) 25,271
Provision (benefit) for income taxes 6,737 (1,295) 8,032
Net income (loss) $15,296 $(1,943) $17,239
Earnings per share:
Basic $0.41 $0.46
Diluted $0.40 $0.46
Six Months Ended June 30,
2005
State and
Local
Consulting
As reported Practice Proforma
Revenue $212,981 $40,895 $172,086
Cost of revenue 152,251 32,948 119,303
Gross profit (loss) 60,730 7,947 52,783
Selling, general, and administrative
expenses 37,001 4,392 32,609
Net loss (gain) on sale of businesses - - -
Income (loss) from operations 23,729 3,555 20,174
Interest income and other (337) - (337)
Income (loss) before provision
(benefit) for income taxes 24,066 3,555 20,511
Provision (benefit) for income taxes 4,761 1,422 3,339
Net income (loss) $19,305 $2,133 $17,172
Earnings per share:
Basic $0.52 $0.46
Diluted $0.51 $0.45
SOURCE Covansys Corporation
CONTACT: Investors: James Trouba, +1-248-848-8896, jtrouba@covansys.com;
or Media: Dorothy Chisholm, +1-248-848-2283, dchisholm@covansys.com,
both of
Covansys Corporation
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