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COVANSYS FILES THIRD QUATER FORM 10-Q
Third Quarter 2006 Results
Highlighted by Solid Earnings, Margin Enhancement and Expansion in Key Verticals
FARMINGTON HILLS, Mich., (Jan 16, 2007)
/PRNewswire-FirstCall/ -- Covansys Corporation (Nasdaq:
CVNS), a global provider of strategic outsourcing and
integration services, today
announced that it has filed its third
quarter Form 10-Q and and issued its financial results for the quarter ended September 30, 2006.
Revenue Recognition Accounting Reassessment
As previously announced on November 9, 2006, Covansys postponed the release
of its third quarter results pending completion of a reassessment of the company's
revenue recognition-related accounting policies.
The reassessment did not result in any adjustments to previously reported financial statements;
however, Covansys has slightly revised the preliminary financial
information it provided on November 14, 2006. Specifically, Covansys'
income from operations in the third quarter of 2006 was $13.9 million, as compared to the
company's preliminary estimate of $15.0 million. Of this amount, $0.7 million
relates to deferral of gross margin ($1.6 million of revenue) that will be recognized in
future quarters and $0.4 million is due to adjustments to costs unrelated to the accounting reassessment.
Third Quarter Results
Covansys reported revenue of $110.9 million in the third quarter of 2006,
compared with $111.2 million in the third quarter of 2005. Revenue for the nine months
ended September 30, 2006 was $338.6 million, an increase of 4.5 % compared
with revenue of $324.2 million during the same period in 2005.
Gross profit in the third quarter of 2006 was $31.8 million, or 28.7% of
revenue, compared with $29.0 million or 26.1% of revenue in the same period last year.
Effective June 1, 2006, Covansys completed the sale of its state and local government
consulting practice to Saber Solutions, Inc. Pro-forma revenue, excluding the
state and local government consulting practice, was $110.9 million in the third quarter
of 2006, compared with $90.8 million in the third quarter of 2005, an increase
of 22.1%. Pro-forma gross profit in the third quarter of 2006 was $31.8 million,
or 28.7% of revenue, compared with $26.8 million or
29.5% of revenue in the comparable 2005 period.
The company reported net income of $10.3 million, up 20.0% from net income of $8.6 million
in the third quarter of 2005 and consistent with net income of $10.3 million
in the prior quarter. Net income for the nine months ended September 30,
2006 was $25.6 million, down 8.2%, compared with net income of $27.9 million during
the same period in 2005.
Additional financial information from the quarter includes:
-- Net income of $0.28 per share as compared with $0.23 per share (on a diluted
basis) in the same period last year;
-- Pretax income of $15.4 million as compared
with $11.9 million in the same period last year
-- Cash and short-term investments of $102.1 million;
-- Approximately 653,000 shares of Covansys common stock were repurchased
during the quarter at total price of $10.6 million. As of September 30,
2006, the company had approximately 36.2 million shares of common stock
outstanding; and
-- Cash from operations of $17.9 million for the nine months ended
September 30, 2006.
"The third quarter was another solid quarter for Covansys," stated
Raj Vattikuti, President and Chief Executive Officer of Covansys.
"Over the last several months, even as the reassessment was ongoing, we
made meaningful progress in implementing our strategic plan to create additional
value for Covansys shareholders. We have enhanced our presence in several key
verticals, further diversified our global client portfolio, and increased our
global headcount. As of September 30, 2006, Covansys had total headcount of approximately
8,400. Our total headcount was comprised of 2,100 domestically based employees
and consultants and 6,300 employees and consultants in Covansys' foreign operations. "
Domestic utilization was 85.9% in the third quarter of 2006, up from 85%
in the third quarter of 2005 and down from 87.7% in the prior quarter. Utilization
in India was 80.3% for the third quarter of 2006, up from 75.2% in the third
quarter of 2005 and up from 78.1% in the second quarter of 2006.
Selling, general and administrative expenses were $17.8 million,
or 16.1% of revenue in the third quarter of 2006, as compared to $17.7
million, or 15.9% of revenue in the third quarter of 2005.
The effective tax rate in the third quarter of 2006 was 32.9%. The third quarter
was impacted by a change in Covansys' estimates of the geographic mix of its
profits, offset by book to provision adjustments resulting in a reduction
to the tax provision of $0.3 million.
Nasdaq Update
As announced on November 16, 2006, Covansys received a Nasdaq Staff
Determination letter notifying the company that it has not complied
with Nasdaq Marketplace Rule 4310(c)(14) due to its failure to timely
file its Quarterly Report on Form 10-Q for the quarter ended September 30,
2006 with the Securities and Exchange Commission ("SEC").
Consequently, Covansys' common stock is subject to delisting from
the Nasdaq Global Select Market. This notification is customary when
a Nasdaq-listed company fails to complete a required SEC filing in a timely manner.
With the reassessment of revenue recognition policies concluded and the company's
third quarter Form 10-Q now on file with the SEC, Covansys expects that it will
be able to regain full compliance with Nasdaq rules.
Outlook
Jim Trouba, Chief Financial Officer of Covansys noted, "Covansys is dedicated to
driving enhanced profitability in 2007. We will continue to pursue
initiatives to improve gross margins and are confident that we can achieve
substantial margin growth over the long term. We also plan to continue
investing in our current businesses as we consider further opportunities to
repurchase shares and evaluate potential strategic growth opportunities. As we strive
to create additional value for shareholders, we will be disciplined in leveraging
the financial flexibility afforded by our strong balance sheet."
Mr. Vattikuti concluded, "We are focused on enhancing our already
strong presence in the financial services and healthcare verticals. Designated
teams will continue to focus on key industry verticals and we expect to make
great strides in expanding the scope of existing relationships while adding
major new accounts. With strong demand for our services and continued success
in executing on our strategy, we expect 2007 to be another solid year for our company,
our shareholders, clients and employees."
Conference Call
Covansys will host a conference call tomorrow; Wednesday, January 17, 2007
at 10:00 a.m. Eastern Time to discuss its financial results for the third quarter
ended September 30, 2006. Interested parties may access the call by dialing
866-203-2528 or 617-213-8847 from outside North America and entering the passcode 93391374.
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 January 17, 2007 through midnight on January 31, 2007 by dialing
888-286-8010 or 617-801-6888 and entering the passcode 18035428. 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 approximately 8,700 consultants and employees worldwide,
consisting of approximately 1,900 domestically and 6,800 in foreign operations.
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
Certain statements in this press release are "forward-looking statements "
under the federal securities laws.
These forward looking statements are subject to a number of substantial risks
and uncertainties and may be identified by the words "will," "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,osts, effects and risk related to the
delay associated with the company's reassessment of its accounting policies,
adverse effects of litigation or regulatory actions arising from the company's failure to
timely file its third quarter Form 10-Q, including the possible delisting of the company's securities
from the Nasdaq Global Select Market, 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.
You should not place undue reliance on any forward-looking statements contained herein.
Except as expressly required by the federal securities laws, we undertake no obligation
to update such factors or to publicly announce the results of any of the forward-looking statements
contained herein to reflect future events, developments, changed circumstances or for any other reason.
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 September 30,
2006 2005
Revenue $110,855 $111,178
Cost of revenue 79,073 82,182
Gross profit 31,782 28,996
Selling, general and administrative 17,843 17,650
Net loss on sale of businesses - -
Income from operations 13,939 11,346
Interest expense 8 26
Other income, net (1,474) (621)
Income before provision for income
taxes 15,405 11,941
Provision for income taxes 5,068 3,331
Net income $10,337 $8,610
Earnings Per Share:
Basic Diluted Basic Diluted
Net income $0.28 $0.28 $0.23 $0.23
Weighted average common shares 36,456 36,856 37,281 37,949
Nine Months Ended September 30,
2006 2005
Revenue $338,614 $324,159 (A)
Cost of revenue 249,541 234,433
Gross profit 89,073 89,726
Selling, general and administrative 55,242 54,652
Net loss on sale of businesses 218 -
Income from operations 33,613 35,074
Interest expense 34 495
Other income, net (3,859) (1,428)
Income before provision for income
taxes 37,438 36,007
Provision for income taxes 11,805 8,092 (B)
Net income $25,633 $27,915
Earnings Per Share:
Basic Diluted Basic Diluted
Net income $0.69 $0.68 $0.75 $0.74
Weighted average common shares 37,037 37,463 37,355 37,935
(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)
September 30, December 31,
2006 2005
Current Assets:
Cash and cash equivalents $71,283 $58,030
Short-term investments 30,831 23,332
102,114 81,362
Accounts receivable, net 94,216 82,526
Revenues earned in excess of billing 7,093 25,632
Prepaid expenses and other 14,858 15,117
Total current assets 218,281 204,637
Property and equipment, net 34,116 36,656
Goodwill, net 22,404 21,893
Other assets 8,466 8,075
Total Assets $283,267 $271,261
Current liabilities $60,544 $59,727
Other liabilities 6,961 3,674
Shareholders' equity 215,762 207,860
Total Liabilities and
Shareholders' Equity $283,267 $271,261
COVANSYS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
Nine Months Ended
September 30,
2006 2005
Net income $25,633 $27,915
Adjustments to reconcile net income to
net cash provided from operating
activities:
Depreciation and amortization 9,328 9,881
Loss on disposal of property and
equipment 571 302
Stock-based compensation cost 1,149 -
Provision for and write-off of
doubtful accounts 126 240
Gain from sale of short-term
investments (42) (48)
Net loss from sale of businesses 218 -
Provision for deferred income taxes (161) 12
Change in assets and liabilities (18,683) (10,951)
Other (270) 272
Net cash provided from operating
activities 17,869 27,623
Cash flows from investing activities:
Acquisition of business, net of cash
acquired - (3,027)
Investment in property, equipment
and other (12,122) (9,949)
Proceeds from sale of businesses 33,491 -
Proceeds from sale of available-for-
sale securities 103,186 102,494
Purchases of available-for-sale
securities (110,795) (94,225)
Proceeds from sale of property and
equipment 196 -
Investment in computer software (28) (43)
Net cash provided from investing
activities 13,928 (4,750)
Cash flows from financing activities:
Repayment of subordinated notes - (17,500)
Net proceeds from exercise of stock
options 3,871 2,916
Tax benefit from stock options
exercised 830 -
Repurchases of common stock (23,982) (4,803)
Net cash used in financing
activities (19,281) (19,387)
Effect of exchange rate changes on
cash 737 (388)
Increase in cash and cash equivalents 13,253 3,098
Cash and cash equivalents at beginning
of period 58,030 49,841
Cash and cash equivalents at end of
period $71,283 $52,939
COVANSYS CORPORATION
CONDENSED CONSOLIDATED PROFORMA STATEMENT OF OPERATIONS
(Unaudited, in thousands except per share amounts)
3 Months Ended September 30,
2006 2005
State and State and
Local Local
As Consulting As Consulting
reported Practice Proforma reported Practice Proforma
Revenue $110,855 $ - $110,855 $111,178 $20,424 $90,754
Cost of revenue 79,073 - 79,073 82,182 18,225 63,957
Gross profit (loss) 31,782 - 31,782 28,996 2,199 26,797
Selling, general,
and administrative
expenses 17,843 - 17,843 17,650 1,623 16,027
Loss (gain) on sale
of businesses - - - - - -
Income (loss) from
operations 13,939 - 13,939 11,346 576 10,770
Interest income and
other (1,466) - (1,466) (595) - (595)
Income (loss) before
provision (benefit)
for income taxes 15,405 - 15,405 11,941 576 11,365
Provision (benefit)
for income taxes 5,068 - 5,068 3,331 230 3,101
Net income (loss) $10,337 $ - $10,337 $8,610 $346 $8,264
Earnings per share:
Basic $0.28 $0.28 $0.23 $0.22
Diluted $0.28 $0.28 $0.23 $0.22
COVANSYS CORPORATION
CONDENSED CONSOLIDATED PROFORMA STATEMENT OF OPERATIONS
(Unaudited, in thousands except per share amounts)
9 Months Ended September 30,
2006
State and Local
Consulting
As reported Practice Proforma
Revenue $338,614 $21,905 $316,709
Cost of revenue 249,541 22,231 227,310
Gross profit (loss) 89,073 (326) 89,399
Selling, general, and
administrative expenses 55,242 2,627 52,615
Loss (gain) on sale of
businesses 218 285 (67)
Income (loss) from
operations 33,613 (3,238) 36,851
Interest income and other (3,825) - (3,825)
Income (loss) before
provision (benefit)
for income taxes 37,438 (3,238) 40,676
Provision (benefit) for
income taxes 11,805 (1,295) 13,100
Net income (loss) $25,633 $(1,943) $27,576
Earnings per share:
Basic $0.69 $0.74
Diluted $0.68 $0.74
9 Months Ended September 30,
2005
State and Local
Consulting
As reported Practice Proforma
Revenue $324,159 $61,319 $262,840
Cost of revenue 234,433 51,173 183,260
Gross profit (loss) 89,726 10,146 79,580
Selling, general, and
administrative expenses 54,652 6,014 48,638
Loss (gain) on sale of
businesses - - -
Income (loss) from operations 35,074 4,132 30,942
Interest income and other (933) - (933)
Income (loss) before provision
(benefit) for income taxes 36,007 4,132 31,875
Provision (benefit) for income
taxes 8,092 1,653 6,439
Net income (loss) $27,915 $2,479 $25,436
Earnings per share:
Basic $0.75 $0.68
Diluted $0.74 $0.67
The condensed consolidated proforma statements of operations are non- GAAP
financial measures. A non-GAAP financial measure is a numerical measure of a
company's performance, financial position, or cash flows that either excludes
or includes amounts that are not normally excluded or included in the most
directly comparable measure calculated and presented in accordance with
generally accepted accounting principles ("GAAP"). These measures are not in
accordance with or an alternative for GAAP. We believe that our presentation
of these non-GAAP measures provide useful information to investors regarding
certain financial and business trends relating to our results of operations.
The condensed consolidated proforma statements of operations for the three
months and nine months ended September 30, 2006 include the results of the
services provided to Saber Solutions, Inc, the entity which purchased the
state and local consulting practice on June 1, 2006.
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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