EXHIBIT 99.1
NEWS BULLETIN FROM
(COVANSYS(R) LOGO)
FOR FURTHER INFORMATION
INVESTORS: MEDIA:
James Trouba Dorothy Chisholm
Tel: (248) 848-2267 Tel: (248) 848-2283
jtrouba@covansys.com dchisholm@covansys.com
FOR IMMEDIATE RELEASE
COVANSYS FILES THIRD QUARTER FORM 10-Q
THIRD QUARTER 2006 RESULTS HIGHLIGHTED BY SOLID EARNINGS,
MARGIN ENHANCEMENT AND EXPANSION IN KEY VERTICALS
FARMINGTON HILLS, MI, January 16, 2007 - Covansys Corporation (NASDAQ: CVNS), a
leading global provider of strategic outsourcing and integration services, today
announced that it has filed its third quarter Form 10-Q 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, 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 more than 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,
costs, 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.
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COVANSYS
ADD 4
COVANSYS CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED, IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
2006 2005 2006 2005
-------- -------- -------- --------
REVENUE $110,855 $111,178 $338,614 $324,159(A)
COST OF REVENUE 79,073 82,182 249,541 234,433
-------- -------- -------- --------
GROSS PROFIT 31,782 28,996 89,073 89,726
SELLING, GENERAL AND ADMINISTRATIVE 17,843 17,650 55,242 54,652
NET LOSS ON SALE OF BUSINESSES -- -- 218 --
-------- -------- -------- --------
INCOME FROM OPERATIONS 13,939 11,346 33,613 35,074
INTEREST EXPENSE 8 26 34 495
OTHER INCOME, NET (1,474) (621) (3,859) (1,428)
-------- -------- -------- --------
INCOME BEFORE PROVISION FOR INCOME TAXES 15,405 11,941 37,438 36,007
PROVISION FOR INCOME TAXES 5,068 3,331 11,805 8,092(B)
-------- -------- -------- --------
NET INCOME $ 10,337 $ 8,610 $ 25,633 $ 27,915
======== ======== ======== ========
EARNINGS PER SHARE:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------- -------------------------------------
2006 2005 2006 2005
----------------- ----------------- ----------------- -----------------
BASIC DILUTED BASIC DILUTED BASIC DILUTED BASIC DILUTED
------- ------- ------- ------- ------- ------- ------- -------
NET INCOME $ 0.28 $ 0.28 $ 0.23 $ 0.23 $ 0.69 $ 0.68 $ 0.75 $ 0.74
======= ======= ======= ======= ======= ======= ======= =======
WEIGHTED AVERAGE COMMON SHARES 36,456 36,856 37,281 37,949 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.
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COVANSYS
ADD 5
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
========= ========
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COVANSYS CORPORATION
CONDENSED CONSOLIDATED PROFORMA STATEMENT OF OPERATIONS
(Unaudited, in thousands except per share amounts)
9 Months Ended September 30,
-------------------------------------------------------------------------
2006 2005
----------------------------------- -----------------------------------
State and State and
Local Local
Consulting Consulting
As reported Practice Proforma As reported Practice Proforma
----------- ---------- -------- ----------- ---------- --------
Revenue $338,614 $21,905 $316,709 $324,159 $61,319 $262,840
Cost of revenue 249,541 22,231 227,310 234,433 51,173 183,260
-------- ------- -------- -------- ------- --------
Gross profit (loss) 89,073 (326) 89,399 89,726 10,146 79,580
Selling, general, and adminstrative
expenses 55,242 2,627 52,615 54,652 6,014 48,638
Loss (gain) on sale of businesses 218 285 (67) -- -- --
-------- ------- -------- -------- ------- --------
Income (loss) from operations 33,613 (3,238) 36,851 35,074 4,132 30,942
Interest income and other (3,825) -- (3,825) (933) -- (933)
-------- ------- -------- -------- ------- --------
Income (loss) before provision (benefit)
for income taxes 37,438 (3,238) 40,676 36,007 4,132 31,875
Provision (benefit) for income taxes 11,805 (1,295) 13,100 8,092 1,653 6,439
-------- ------- -------- -------- ------- --------
Net income (loss) $ 25,633 $(1,943) $ 27,576 $ 27,915 $ 2,479 $ 25,436
======== ======= ======== ======== ======= ========
Earnings per share:
Basic $ 0.69 $ 0.74 $ 0.75 $ 0.68
======== ======== ======== ========
Diluted $ 0.68 $ 0.74 $ 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.