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COVANSYS REPORTS SOLID FOURTH QUARTER AND FULL YEAR 2005
RESULTS
Remediation
of Previously Identified Material Weaknesses Completed
FARMINGTON HILLS, Mich. (March
8, 2006) /PRNewswire-FirstCall/ – Covansys
Corporation (Nasdaq: CVNS), a global consulting and technology
services company, today announced its financial results for the
fourth quarter and fiscal year ended December 31, 2005. The Company
also announced the remediation of all material weaknesses identified
in the Company's assessment of internal controls for 2004.
Separately, Covansys today announced that
it has reached a definitive agreement with Saber Consulting,
Inc., a privately-held, leading
provider of software and services to state and local governments,
to sell its state and local government practice for up to $40 million
in cash. Saber Consulting is a portfolio company of Accel-KKR,
a leading technology-focused private equity firm. The practice
that Saber is acquiring from Covansys provides technology solutions
and consulting services to dozens of states and local governments
and employs approximately 350 individuals. PDA Software Services,
which was acquired by Covansys in 2002 and generated revenues of
$30.5 million in 2005, is not included in the sale. The transaction
is contingent on the Company's ability to meet certain closing
conditions. The Company believes that this transaction will result
in improved gross profit, reduced SG&A costs and improved operating
income in the future, as well as reduced volatility of its earnings.
Covansys reported revenue of $110.0 million in the fourth quarter
compared with $99.2 million in the fourth quarter of 2004 and $111.2
million in the prior quarter. For the full fiscal year of 2005,
revenue was $434.1 million, an increase of 16% compared with revenue
of $374.4 in fiscal year 2004. This is the first year Covansys
has had revenue over $400 million since fiscal year 2001, a significant
achievement for the Company.
The Company generated net income of $9.6 million for the quarter
ended December 31, 2005, up from $8.6 million in the prior quarter
and up from $9.2 million in the fourth quarter of 2004. For the
full year 2005, net income available for shareholders was $37.5
million compared with $17.5 million in 2004.
Gross profit for 2005 was $118.0 million or 27.2% of revenue compared
with $93.3 million or 24.9% of revenue for 2004. Gross profit increased
both in terms of dollars and as a percent of revenue in 2005 primarily
due to higher utilization, a reduction in the amount of adjustments
to fixed price projects and the revenue recognized in 2005 for
work performed in 2004, offset by price adjustments.
Net income available to common shareholders in the fourth quarter
of 2005 was $0.25 per share (on a diluted basis), compared with
$0.24 per share (on a diluted basis) for the same period in 2004.
For the full year of 2005, net income available to common shareholders
was $0.99 per share (on a diluted basis) compared to a loss of
$0.48 per share (on a diluted basis) in 2004.
Raj Vattikuti, Covansys' President and
Chief Executive Officer, said, "Covansys' solid fourth quarter
and full year performance demonstrates our continued success
in executing on our business
plan. Our focus on leveraging our existing relationships with key
strategic clients to drive growth is now yielding tangible returns.
As the company that pioneered global outsourcing in 1992, Covansys
remains well-positioned to continue building market share and creating
value for shareholders through our unique blended delivery model
that combines our offshore expertise with dedicated local project
management."
Highlights of Covansys' fiscal 2005 include:
- Completed the remediation of all material weaknesses identified
in 2004;
- Added five new strategic accounts to our client portfolio from
the life sciences and financial services industries, all with
the potential for significant growth; and
- Successfully completed the sale and transfer of the PeopleSoft
development center in Bangalore, India to Oracle Corporation.
Additional Financial Results
Domestic utilization was 84.1% in the fourth quarter of 2005,
up from 78.9% in the fourth quarter of 2004 and a slight decline
over last quarter when domestic utilization was 85.0%. Utilization
in India was 72.9% for the fourth quarter, down from 75.1% in the
fourth quarter of 2004 and down from 75.2% in the third quarter
of 2005.
Covansys' effective tax rate was 25.5% for the fourth quarter
of 2005 and 23.3% for the full year. The tax provision for the
quarter ended December 31, 2005 includes a net credit of $0.6 million
from the adjustment of recorded reserves and valuation allowances
based on the evaluation of estimated tax exposures.
The Company had $81.4 million in cash and short-term investments
at the end of the fourth quarter of 2005. Cash from operations
for the fourth quarter of 2005 was $24.1 million. Cash from operations
for 2005 was $51.7 million.
Management's Report on Internal Control over Financial Reporting
In accordance with Section 404 of the Sarbanes-Oxley Act, management
has completed its assessment of the effectiveness of its internal
control over financial reporting and has concluded that the Company's
internal control over financial reporting was effective as of December
31, 2005.
Outlook
Jim Trouba, Covansys' Chief Financial Officer,
noted, "We
worked extremely hard in 2005 to improve our internal control environment
and are pleased with the results. We plan to work just as diligently
in 2006 to continue to strengthen our control and reporting capabilities."
Mr.Vattikuti concluded, "Covansys
is poised to build on our recent success in 2006. In addition
to our solid full year results,
the completion of our material weakness remediation process and
the sale of our state and local consulting practice position Covansys
for strong revenue growth and improved profitability. Once the
transaction is completed, Covansys will be a 'pure play' provider
of global outsourcing solutions. We expect that our continued growth
will be driven by expanding our existing relationships with key
accounts such as Fidelity Information Services, by our focus on
expanding relationships with newly added strategic accounts and
by our efforts to aggressively target new accounts in the healthcare,
financial services, retail and distribution, manufacturing, telecommunications
and high-tech industries. We are confident that in 2006 Covansys
can improve financial performance and create significant value
for its shareholders."
Conference Call
Covansys will host a conference call on Wednesday, March 8, 2006
at 11:00 a.m. Eastern Time to discuss its financial results for
the fourth quarter and full year ended December 31, 2005. Interested
parties may access the call by dialing 800-659-2056 or 617-614-2714
from outside North America and entering the passcode 21073030.
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 March 8, 2006 through midnight on March 22, 2006 by
dialing 888- 286-8010 or 617-801-6888 and entering the passcode
36577256. 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, with 7,300 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.
Visit our web site: 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 impact of changes in estimates on fixed price projects,
internal control weaknesses, variability of operating results,
failure to recruit, train and retain skilled IT professionals,
the failure of our agreement to sell the state and local practice
of our Public Sector business to close, 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, public sector budget constraints,
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 More Information, Contact:
Investors:
James S. Trouba
(248) 848-2267
jtrouba@covansys.com
Media:
Michelle Jones,
(248) 848-2269
email: mjones@covansys.com
COVANSYS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands except per share amounts)
Three Months Ended December 31, Year Ended December 31,
2005 2004 2005 2004
Revenue $109,961 $99,171 $434,120 $374,373
Cost of revenue 81,676 72,182 316,109 281,114
Gross profit 28,285 26,989 118,011 93,259
Selling, general and
administrative 17,445 16,562 72,097 72,342
Income from operations 10,840 10,427 45,914 20,917
Interest expense - 245 495 245
Other income (expense),
net 2,079 (485) 3,507 1,317
Income before income
taxes 12,919 9,697 48,926 21,989
Provision for income
taxes 3,296 473 11,388 4,485
Net income available
for shareholders 9,623 9,224 37,538 17,504
Convertible redeemable
preferred stock dividends - - - 3,221
Redemption of convertible
redeemable preferred stock - - - 28,674
Net income (loss)
available to common
shareholders 9,623 $9,224 $37,538 ($14,391)
Earnings Per Share:
Basic Diluted Basic Diluted Basic Diluted Basic Diluted
Net income
(loss)
available
to common
shareholders $0.26 $0.25 $0.25 $0.24 $1.00 $0.99 ($0.48) ($0.48)
Weighted
average
common
shares 37,388 38,033 37,425 37,988 37,364 37,960 29,971 29,971
COVANSYS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited, in thousands)
December 31, December 31,
2005 2004
Current Assets:
Cash and cash equivalents $58,030 $49,841
Short-term investments 23,332 21,409
81,362 71,250
Accounts receivable, net 82,526 75,388
Revenues earned in excess of billing, net 25,632 24,613
Prepaid expenses and other 15,117 12,331
Total current assets 204,637 183,582
Property and equipment, net 36,656 33,468
Goodwill, net 21,893 19,148
Other assets 8,075 12,604
Total Assets $271,261 $248,802
Current liabilities $59,727 $71,149
Other liabilities 3,674 3,462
Shareholders' equity 207,860 174,191
Total Liabilities and
Shareholders' Equity $271,261 $248,802
COVANSYS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Year Ended December 31,
2005 2004
Net income $37,538 $17,504
Adjustments to reconcile net income to
net cash used by operating activities:
Depreciation and amortization 13,145 13,391
Loss on disposal and obsolescence of
property and equipment 155 1,395
Provision for and write-off of doubtful accounts 63 892
Provision for deferred income taxes 1,316 770
Impairment of long-lived assets 52 1,225
Gain from sale of development center (1,000) -
Loss(gain) from sale of short-term investments 5 (153)
Other (6) 271
Change in assets and liabilities 421 4,096
Net cash provided by operating activities 51,689 39,391
Cash flows from investing activities:
Investment in property, equipment and other (16,991) (10,167)
Proceeds from sale of development center 800 -
Proceeds from sale of available-for-sale
securities 130,642 112,750
Purchases of available-for-sale securities (131,833) (95,427)
Investment in computer software (83) (208)
Business acquisitions net of cash acquired (7,022) -
Net cash provided by (used in) investing
activities (24,487) 6,948
Cash flows from financing activities:
Repayment of subordinated notes (17,500) -
Net proceeds from issuance of common stock - 93,906
Net proceeds from exercise of stock options
and other, net 3,509 1,385
Redemption of convertible redeemable preferred
stock - (179,139)
Repurchases of common stock (4,803) (2,408)
Net cash (used in) financing activities (18,794) (86,256)
Effect of exchange rate changes on cash (219) 87
Increase (decrease) in cash and cash equivalents 8,189 (39,830)
Cash and cash equivalents at beginning of period 49,841 89,671
Cash and cash equivalents at end of period $58,030 $49,841
COVANSYS CORPORATION
ADJUSTED STATEMENTS OF OPERATIONS ELIMINATING THE STATE AND LOCAL PRACTICE
(Unaudited, in thousands, except per share amounts)
Year Ended December 31 Year Ended December 31
2005 2004
State & State &
Local Local
Actual Practice Adjusted Actual Practice Adjusted
(in thousands) (in thousands)
Revenue $434,120 $75,741 $358,379 $374,373 $62,994 $311,379
Cost of
Revenue 316,109 65,529 250,580 281,114 59,605 221,509
Gross
Profit 118,011 10,212 107,799 93,259 3,389 89,870
Gross
Profit % 27.2% 13.5% 30.1% 24.9% 5.4% 28.9%
Operating
Expenses 72,097 7,419 64,678 72,342 10,186 62,156
Contribution
Margin 45,914 2,793 43,121 20,917 (6,797) 27,714
Contribution
Margin % 10.6% 3.7% 12.0% 5.6% -10.8% 8.9%
Interest
Income and
Other 3,012 - 3,012 1,072 - 1,072
Income
before
provision
for income
taxes 48,926 2,793 46,133 21,989 (6,797) 28,786
Tax
Provision 11,388 1,117 10,271 4,485 (2,719) 7,204
Net Income 37,538 1,676 35,862 17,504 (4,078) 21,582
Convertible
redeemable
preferred
stock
dividends - - - (3,221) - (3,221)
Loss on
redemption of
convertible
redeemable
preferred
stock - - - 28,674 - 28,674
Net income
(loss)
available to
common
shareholders $37,538 $1,676 $35,862 $(14,391) $(4,078) $(10,313)
Earnings Per Share
Basic $1.00 $0.96 $(0.48) $(0.34)
Fully
Diluted $0.99 $0.94 $(0.48) $(0.34)
Basic weighted
average
shares 37,364 37,364 29,971 29,971
Dilutive effect
of options 596 596
Diluted weighted
average shares 37,960 37,960 29,971 29,971
Notes:
(1) The income (loss) for the state and local practice, which is included
in the Public Sector segment for reporting purposes, includes costs
directly attributable to the business. Certain operating expenses
which are indirectly attributable to the business are centrally
managed at the corporate level and have not been allocated.
(2) The tax rate assumed for the state & local practice is 40%.
COVANSYS CORPORATION
ADJUSTED STATEMENTS OF OPERATIONS ELIMINATING THE STATE AND LOCAL PRACTICE
(Unaudited, in thousands, except per share amounts)
4th Quarter
2005
State &
Local
Actual Practice Adjusted
(in thousands)
Revenue $109,961 $14,422 $95,539
Cost of Revenue 81,676 14,355 67,321
Gross Profit 28,285 67 28,218
Gross Profit % 25.7% 0.5% 29.5%
Operating Expenses 17,445 1,405 16,040
Contribution Margin 10,840 (1,338) 12,178
Contribution Margin % 9.9% -9.3% 12.7%
Interest Income and Other 2,079 - 2,079
Income before provision for
income taxes 12,919 (1,338) 14,258
Tax Provision 3,296 (535) 3,831
Net Income 9,623 (803) 10,427
Convertible redeemable
preferred stock dividends - - -
Loss on redemption of
convertible redeemable
preferred stock - - -
Net income (loss) available to
common shareholders $9,623 $(803) $10,427
Earnings Per Share
Basic $0.26 $0.28
Fully Diluted $0.25 $0.27
Basic weighted average shares 37,388 37,388
Dilutive effect of options 645 645
Diluted weighted average shares 38,033 38,033
4th Quarter
2004
State &
Local
Actual Practice Adjusted
(in thousands)
Revenue $99,171 $14,480 $84,691
Cost of Revenue 72,182 13,912 58,270
Gross Profit 26,989 568 26,421
Gross Profit % 27.2% 3.9% 31.2%
Operating Expenses 16,562 1,534 15,028
Contribution Margin 10,427 (966) 11,393
Contribution Margin % 10.5% -6.7% 13.5%
Interest Income and Other (730) - (730)
Income before provision for
income taxes 9,697 (966) 10,663
Tax Provision 473 (386) 859
Net Income 9,224 (580) 9,804
Convertible redeemable
preferred stock dividends - -
Loss on redemption of
convertible redeemable
preferred stock - -
Net income (loss) available to
common shareholders $9,224 $(580) $9,804
Earnings Per Share
Basic $0.25 $0.26
Fully Diluted $0.24 $0.26
Basic weighted average shares 37,425 37,425
Dilutive effect of options 563 563
Diluted weighted average shares 37,988 37,988
3rd Quarter
2005
State &
Local
Actual Practice Adjusted
(in thousands)
Revenue $111,178 $20,424 $90,754
Cost of Revenue 82,182 18,225 63,957
Gross Profit 28,996 2,199 26,797
Gross Profit % 26.1% 10.8% 29.5%
Operating Expenses 17,650 1,623 16,027
Contribution Margin 11,346 576 10,770
Contribution Margin % 10.2% 2.8% 11.9%
Interest Income and Other 595 - 595
Income before provision for
income taxes 11,941 576 11,365
Tax Provision 3,331 230 3,101
Net Income 8,610 346 8,264
Convertible redeemable
preferred stock dividends - -
Loss on redemption of
convertible redeemable
preferred stock - -
Net income (loss) available to
common shareholders $8,610 $346 $8,264
Earnings Per Share
Basic $0.23 $0.22
Fully Diluted $0.23 $0.22
Basic weighted average shares 37,281 37,281
Dilutive effect of options 668 668
Diluted weighted average shares 37,949 37,949
Notes:
(1) The income (loss) for the state and local practice, which is
included in the Public Sector segment for reporting purposes,
includes costs directly attributable to the business. Certain
operating expenses which are indirectly attributable to the business
are centrally managed at the corporate level and have not been
allocated.
(2) The tax rate assumed for the state & local practice is 40%.
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