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COVANSYS REPORTS FIRST QUARTER 2006 RESULTS
Board
of Directors Authorizes the Repurchase
of an Additional Two Million Shares of Covansys Common Stock
FARMINGTON HILLS, Mich., May 4 /PRNewswire-FirstCall/
-- Covansys Corporation (Nasdaq: CVNS), a global consulting
and technology services company, today announced its financial
results for the first quarter ended March 31, 2006.
Covansys reported revenue of $109.8 million in the first quarter
compared with $104.3 million in the first quarter of 2005, an increase
of 5.3%.
Gross profit in the first quarter of 2006 was $24.2 million or
22.0% of revenue compared with $30.3 million or 29.1% of revenue
in the comparable 2005 period. Gross profit in the first quarter
of 2005 included $3.5 million from work performed in 2004. In addition,
the first quarter of 2005 included gross profit related to the
Oracle Development Center, which was purchased by Oracle in November
2005.
Covansys' gross profit declined in the first quarter of 2006 due
to losses in the state and local government practice, the sale
of which Covansys expects to complete in May 2006, as well as start-up
expenses associated with new commercial sector projects, continued
investment in Covansys' Business Process Outsourcing (BPO) capabilities
and several new statements of work from Fidelity National Financial,
Inc. In connection with these new projects, Covansys incurred expenses
related to investments in technology, knowledge acquisition and
the hiring of additional personnel.
The Company reported net income of $5.0 million, down 38.3% from
net income of $8.1 million in the first quarter of 2005 and down
from $9.6 million in the prior quarter.
Additional financial information from the quarter includes:
-- Net income available to common shareholders of $0.13 per share as
compared with $0.21 per share (on a diluted basis) in the same period
last year and net income available to common shareholders of $0.25 per
share (on a diluted basis) in the fourth quarter of 2005;
-- Cash and short-term investments of $81.9 million, compared
with $81.4
million at the end of the fourth quarter of 2005; and
-- Cash from operations of $3.0 million.
Raj Vattikuti, President and Chief Executive Officer of Covansys,
stated, "Our first quarter performance, while disappointing
from an earnings perspective, reflects our success in extending
our relationship with Fidelity and commencing other client relationships.
While we incurred significant costs in the quarter related primarily
to the ramp-up of new projects, we remain committed to enhancing
margins in fiscal 2006 and are confident that these initiatives
will enhance shareholder value and increase Covansys' long- term
profitability."
Covansys' operational highlights from the first quarter include:
-- Continued progress toward completing the divestiture of Covansys' state
and local government practice; and
-- Increased total headcount in India to over 5,500 representing
more than
68% of Covansys' global workforce of approximately 8,000 consultants
and employees, including approximately 900 at Fortune Infotech.
Covansys currently has approximately 700 IT services employees and
consultants and approximately 300 BPO services consultants working
on Fidelity projects.
Additional Financial Results
Domestic utilization was 88.5% in the first quarter of 2006, down
from 89.0% the first quarter of 2005 and up from 84.1% in the fourth
quarter of 2005. Utilization in India was 70.7% for the first quarter
of 2006, down from 74.9% in the first quarter of 2005 and down
from 72.9% in the fourth quarter of 2005.
Selling, general and administrative expenses were $18.7 million,
or 17.0% of revenue in the first quarter of 2006, down from $18.9
million, or 18.1% of revenue in the first quarter of 2005.
Although Covansys' margins and profit in the first quarter were
adversely affected by start-up costs including knowledge acquisition
and the hiring of additional resources, new commercial sector projects
and Covansys' expanding relationship with Fidelity and other clients
are expected to contribute to Covansys' profitability going forward.
Covansys anticipates that margins will improve.
The effective tax rate in the first quarter of 2006 was 18.2%.
The tax provision for the quarter ended March 31, 2006 includes
a net credit of $.8 million from the adjustment of recorded reserves
based on the evaluation of estimated tax exposures.
Update on the Pending Sale of Covansys' State and Local Government
Practice
As previously announced on March 8, 2006, Covansys has entered
into a definitive agreement with Saber Consulting, Inc. to sell
its state and local government practice for up to $40 million in
cash. PDA Software Services, a company Covansys acquired in 2002,
is not part of this transaction. The state and local government
practice had revenue and income (loss) from operations of $75.7
million and $2.8 million, respectively, for the year ended December
31, 2005 and $12.4 million and ($2.3 million), respectively, for
the three months ended March 31, 2006.
The closing of the transaction is contingent on the Company's
ability to meet certain closing conditions and Covansys expects
the sale to be completed in May 2006. Consistent with the decline
in the operating results of the state and local government practice,
Covansys currently expects to receive between $30 million and $35
million in cash upon closing.
Covansys Announces Stock Buyback Program to Increase Shareholder
Value
The total amount of share repurchases now authorized by the Board
represents approximately 4.2 million of the Company's total outstanding
shares. As of April 28, 2006, the Company had approximately 37.6
million shares of common stock outstanding.
"We are committed to investing for growth and enhancing value
for Covansys shareholders, and we believe that this additional
stock repurchase program clearly demonstrates our confidence in
the Company's long-term prospects," said Mr. Vattikuti. "The
expected sale of the state and local government practice, together
with the prudent management of Covansys' resources, will give the
Company the financial flexibility to simultaneously invest in the
business and repurchase shares while preserving our ability to
take advantage of strategic opportunities as they arise."
Covansys may repurchase the shares from time to time for cash
in open market transactions or in privately negotiated transactions
in accordance with applicable federal securities laws. The timing
and amount of the repurchases will be determined by the Company's
management based on their ongoing assessments of capital needs
of the business, the market price of its stock, general market
conditions, and other factors. No time limit has been set for the
completion of the repurchase program and it may be suspended or
discontinued at any time.
Outlook
Jim Trouba, Chief Financial Officer of
Covansys, noted, "We
expect that the pending sale of our state and local government
consulting practice will be a significant catalyst in driving improved
profitability. The divestiture will allow us to concentrate on
what we do best - providing value-added global outsourcing solutions
- and focus our efforts on improving our gross margin performance."
Mr. Vattikuti concluded, "We remain
firmly committed to driving profitable growth and creating shareholder
value through the remainder
of 2006. Once the sale of the state and local government practice
is complete, Covansys will be entirely focused on global IT and
BPO outsourcing solutions - our core competency. We are successfully
gaining new accounts in key verticals while expanding upon existing
relationships. In addition, our BPO capabilities are highly scalable
and present an outstanding opportunity for Covansys. We look forward
to continued growth and improved financial performance in the remaining
quarters of 2006."
Conference Call
Covansys will host a conference call on Thursday, May 4, 2006
at 10:00 a.m. Eastern Time to discuss its financial results for
the first quarter ended March 31, 2006. Interested parties may
access the call by dialing 800- 265-0241 or 617-847-8704 from outside
North America and entering the passcode 37643638. The call may
also be accessed via the Internet on the company's website, www.covansys.com.
A replay of the call will be available beginning at approximately
1:00 p.m. on May 4, 2006 through midnight on May 18, 2006 by dialing
888-286-8010 or 617-801-6888 and entering the passcode 19963595.
The replay will also be available on the company's website, 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 more
than 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: 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 Further Information:
Investors:
James S. Trouba
(248) 848-2267
email: jtrouba@covansys.com
Media:
Dorothy Chisholm,
(248) 848-2283
email: Dchisholm@covansys.com
COVANSYS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands except per share amounts)
Three Months Ended March 31,
2006 2005
Revenue $109,776 $104,273
Cost of Revenue 85,586 73,950
Gross Profit 24,190 30,323
Selling, general and administrative 18,674 18,861
Income from operations 5,516 11,462
Interest expense 17 203
Other income, net (563) (589)
Income from operations before income taxes 6,062 11,848
Provision for income taxes 1,105 3,791
Net income $4,957 $8,057
Earnings Per Share:
Basic Diluted Basic Diluted
Net income $0.13 $0.13 $0.22 $0.21
Weighted average common shares 37,444 37,903 37,429 38,033
COVANSYS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited, in thousands)
March 31, December 31,
2006 2005
Current Assets:
Cash and cash equivalents $61,492 $58,030
Short-term investments 20,414 23,332
Accounts receivable, net 78,906 82,526
Revenues earned in excess of billing, net 3,679 25,632
Prepaid expenses and other 13,681 15,117
Assets held for sale 32,005 -
Total current assets 210,177 204,637
Property and equipment, net 35,252 36,656
Goodwill, net 22,056 21,893
Other assets 8,615 8,075
Total Assets $276,100 $271,261
Current liabilities $51,907 $59,727
Liabilities held for sale 5,036 -
Other liabilities 3,388 3,674
Shareholders' equity 215,769 207,860
Total Liabilities and
Shareholders' Equity $276,100 $271,261
COVANSYS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Three Months Ended
March 31,
2006 2005
Net income $4,957 $8,057
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,380 3,218
Loss on disposal of property and equipment 177 158
Stock-based compensation cost 397 -
Provision for and write-off of
doubtful accounts 3 150
Provision for deferred taxes (450) (381)
Gain from sale of short-term investments (13) (43)
Change in assets and liabilities (5,413) (1,781)
Net cash provided by operating activities 3,038 9,378
Cash flows from investing activities:
Investment in property, equipment and other (4,366) (2,608)
Proceeds from sale of available-for-
sale securities 33,107 29,972
Purchases of available-for-sale securities (29,997) (30,047)
Investment in computer software (15) (43)
Net cash used in investing activities (1,271) (2,726)
Cash flows from financing activities:
Net proceeds from exercise of stock options 1,305 876
Tax benefit from stock options exercised 187 -
Net cash provided by financing activities 1,492 876
Effect of exchange rate changes on cash 203 (128)
Increase in cash and cash equivalents 3,462 7,400
Cash and cash equivalents at beginning
of period 58,030 71,250
Cash and cash equivalents at end of period $61,492 $78,650
COVANSYS CORPORATION
CONDENSED CONSOLIDATED PROFORMA STATEMENT OF OPERATIONS
(Unaudited, in thousands except per share amounts)
Three Months Ended March 31,
2006
State and
Local
Consulting
As reported Practice Proforma
Revenue $109,776 $12,436 $97,340
Cost of revenue 85,586 13,210 72,376
Gross profit (loss) 24,190 (774) 24,964
Selling, general, and administrative
expenses 18,674 1,548 17,126
Income (loss) from operations 5,516 (2,322) 7,838
Interest income and other (546) - (546)
Income (loss) before provision
(benefit) for income taxes 6,062 (2,322) 8,384
Provision (benefit) for income taxes 1,105 (929) 2,034
Net income (loss) $4,957 $(1,393) $6,350
Earnings per share:
Basic $0.13 $0.17
Diluted $0.13 $0.17
COVANSYS CORPORATION
CONDENSED CONSOLIDATED PROFORMA STATEMENT OF OPERATIONS
(Unaudited, in thousands except per share amounts)
Three Months Ended March 31,
2005
State and
Local
Consulting
As reported Practice Proforma
Revenue $104,273 $18,597 $85,676
Cost of revenue 73,950 15,634 58,316
Gross profit (loss) 30,323 2,963 27,360
Selling, general, and administrative
expenses 18,861 1,993 16,868
Income (loss) from operations 11,462 970 10,492
Interest income and other (386) - (386)
Income (loss) before provision
(benefit) for income taxes 11,848 970 10,878
Provision (benefit) for income taxes 3,791 388 3,403
Net income (loss) $8,057 $582 $7,475
Earnings per share:
Basic $0.22 $0.20
Diluted $0.21 $0.20
SOURCE Covansys Corporation
-0- 05/04/2006
/CONTACT: Investors: James Trouba, +1-248-848-8896, or
jtrouba@covansys.com, or Media: Dorothy Chisholm, +1-248-848-2283, or
dchisholm@covansys.com /
/Web site: http://www.covansys.com /
(CVNS)
CO: Covansys Corporation
ST: Michigan
IN: CPR
SU: ERN
JC-MV
-- NYTH071 --
3327 05/04/2006 08:57 EDT http://www.prnewswire.com
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