Exhibit 99.1
FOR FURTHER INFORMATION
Investors: | Media: | |
| James Trouba | Michelle Jones | |
| Tel: (248) 848-8896 | Tel: (248) 848-2269 | |
| jtrouba@covansys.com | mjones@covansys.com |
FOR IMMEDIATE RELEASE
COVANSYS REPORTS SOLID FOURTH QUARTER
AND FULL YEAR 2005 RESULTS
AND FULL YEAR 2005 RESULTS
Remediation of Previously Identified Material Weaknesses Completed
FARMINGTON HILLS, MI, March 8, 2006 – 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 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.
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 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 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, Inc (FIS,) 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, 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, 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: 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 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.
# # #
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 | ||||||||||||||||||||||||
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COVANSYS CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEET
(Unaudited, in thousands)
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)
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 | ||||
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COVANSYS CORPORATION
ADJUSTED STATEMENTS OF OPERATIONS ELIMINATING THE STATE AND LOCAL PRACTICE
(Unaudited, in thousands except per share amounts)
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)
ADJUSTED STATEMENTS OF OPERATIONS ELIMINATING THE STATE AND LOCAL PRACTICE
(Unaudited, in thousands except per share amounts)
| 4th Quarter | 4th Quarter | 3rd Quarter | ||||||||||||||||||||||||||||||||||
| 2005 | 2004 | 2005 | ||||||||||||||||||||||||||||||||||
| State & | State & | State & | ||||||||||||||||||||||||||||||||||
| Local | Local | Local | ||||||||||||||||||||||||||||||||||
| Actual | Practice | Adjusted | Actual | Practice | Adjusted | Actual | Practice | Adjusted | ||||||||||||||||||||||||||||
| (in thousands) | (in thousands) | (in thousands) | ||||||||||||||||||||||||||||||||||
| Revenue | $ | 109,961 | $ | 14,422 | $ | 95,539 | $ | 99,171 | $ | 14,480 | $ | 84,691 | $ | 111,178 | $ | 20,424 | $ | 90,754 | ||||||||||||||||||
| Cost of Revenue | 81,676 | 14,355 | 67,321 | 72,182 | 13,912 | 58,270 | 82,182 | 18,225 | 63,957 | |||||||||||||||||||||||||||
| Gross Profit | 28,285 | 67 | 28,218 | 26,989 | 568 | 26,421 | 28,996 | 2,199 | 26,797 | |||||||||||||||||||||||||||
Gross Profit % | 25.7 | % | 0.5 | % | 29.5 | % | 27.2 | % | 3.9 | % | 31.2 | % | 26.1 | % | 10.8 | % | 29.5 | % | ||||||||||||||||||
| Operating Expenses | 17,445 | 1,405 | 16,040 | 16,562 | 1,534 | 15,028 | 17,650 | 1,623 | 16,027 | |||||||||||||||||||||||||||
| Contribution Margin | 10,840 | (1,338 | ) | 12,178 | 10,427 | (966 | ) | 11,393 | 11,346 | 576 | 10,770 | |||||||||||||||||||||||||
Contribution Margin % | 9.9 | % | -9.3 | % | 12.7 | % | 10.5 | % | -6.7 | % | 13.5 | % | 10.2 | % | 2.8 | % | 11.9 | % | ||||||||||||||||||
| Interest Income and Other | 2,079 | — | 2,079 | (730 | ) | — | (730 | ) | 595 | — | 595 | |||||||||||||||||||||||||
| Income before provision for income taxes | 12,919 | (1,338 | ) | 14,257 | 9,697 | (966 | ) | 10,663 | 11,941 | 576 | 11,365 | |||||||||||||||||||||||||
| Tax Provision | 3,296 | (535 | ) | 3,831 | 473 | (386 | ) | 859 | 3,331 | 230 | 3,101 | |||||||||||||||||||||||||
| Net Income | 9,623 | (803 | ) | 10,426 | 9,224 | (580 | ) | 9,804 | 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 | $ | 9,623 | $ | (803 | ) | $ | 10,426 | $ | 9,224 | $ | (580 | ) | $ | 9,804 | $ | 8,610 | $ | 346 | $ | 8,264 | ||||||||||||||||
| Earnings Per Share | ||||||||||||||||||||||||||||||||||||
| Basic | $ | 0.26 | $ | 0.28 | $ | 0.25 | $ | 0.26 | $ | 0.23 | $ | 0.22 | ||||||||||||||||||||||||
| Fully Diluted | $ | 0.25 | $ | 0.27 | $ | 0.24 | $ | 0.26 | $ | 0.23 | $ | 0.22 | ||||||||||||||||||||||||
| Basic weighted average shares | 37,388 | 37,388 | 37,425 | 37,425 | 37,281 | 37,281 | ||||||||||||||||||||||||||||||
| Dilutive effect of options | 645 | 645 | 563 | 563 | 668 | 668 | ||||||||||||||||||||||||||||||
| Diluted weighted average shares | 38,033 | 38,033 | 37,988 | 37,988 | 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%. |