Covansys posts $98.1 M Q4 revenue
FARMINGTON HILLS: Net income before the non-cash convertible redeemable preferred stock dividends in the fourth quarter of 2002 was $1.3 million compared to $750,000 in third quarter 2002. Diluted EPS exclusive of the non-cash convertible redeemable preferred stock dividends was $0.04 in fourth quarter 2002 compared to $0.02 in third quarter 2002. In the fourth quarter 2001, net income was $1.7 million generating diluted EPS of $0.05 exclusive of the non-cash convertible preferred stock dividends.
Revenue for the full year was $382.8 million compared to $404.7 million for the same period in 2001. Net income before the non-cash convertible redeemable preferred stock dividends was $3.9 million for the fiscal year 2002 compared to a loss of $10.5 million in 2001. Diluted EPS for the fiscal year 2002 exclusive of the non-cash convertible redeemable preferred stock dividends was $0.11 in fiscal year 2002 compared to a loss of $0.37 in fiscal year 2001. Revenues declined quarter over quarter throughout calendar year 2001 and bottomed out in the first quarter of 2002. Revenue began to increase during the second quarter resulting in stronger revenue performance in the second half of the year.
"We continued to generate positive net income and improved our earnings per share," noted Martin C. Clague, president and CEO. "Our plan is to improve gross margins, lower our SG&A and enhance our cash position while providing value to our customers. Covansys will continue to focus on the Public Sector and Applications Maintenance and Development Outsourcing. We believe that IT budget pressures will play to our strengths in providing flexible global delivery and that our offshore services allow our middle market clients to achieve their goals for high quality, low cost solutions."
"Our current focus is to continue to grow our offshore headcount faster than the domestic workforce," Clague indicated. "During the year, domestic headcount remained flat with the exception of 100 IT professionals added from the acquisition of PDA. In India, headcount was up by 400 IT professionals during the same timeframe representing a 29 percent year over year increase. We have also reduced our global non-billable headcount by approximately 100 people during the past twelve months. These actions have reduced our ratio of non-billable personnel to total headcount from 13 percent in fourth quarter 2001 to 10 percent in fourth quarter 2002."
During the fourth quarter, Covansys added 20 new logos and announced new projects with both commercial and public sector clients. Within the public sector, Covansys is working on a contract for retirement systems with the State of Maine for $1.6 million and recently announced a contract win valued at over a million dollars to implement a web-enabled childcare system for the State of Alaska.
"In the commercial sector, we completed the implementation of a multi- million dollar SAP R/3 system for Trelleborg Automotive and announced that Covansys was selected by The Permanente Medical Group to integrate a patient referral and scheduling system under a two-year, multi-million dollar agreement" said Clague. "Recently, we announced the successful implementation of a Universal Product Code (UPC) system for Cabela's. In addition to increased efficiency, Cabela's new 24-digit standardized UPC system also allows the retailer to meet the Sunrise Date recommendations that go into effect on January 1, 2005.
Gross profit was $24.9 million yielding gross margin of 25.3 percent of revenue for the quarter ended December 31, 2002 compared to $23.8 million and gross margin of 24 percent of revenue in the third quarter 2002. "Improved bill rates in the U.S. this quarter contributed to improve sequential gross margin performance, while in India, we improved utilization by deploying the workforce that was hired during the third quarter," observed Mike Duffey, Covansys CFO. "We also experienced modest improvements in gross margin on new engagements that were announced during the third quarter 2002 as planned efficiencies were achieved." Gross profit was down $3.4 million and gross margin declined 4.3 percentage points from $28.3 million and 29.6 percent of revenue in fourth quarter 2001.
Domestic utilization was 77 percent in the fourth quarter 2002 compared to 78 percent for the third quarter 2002 and 79 percent for the fourth quarter 2001. Utilization in India was 72 percent for the fourth quarter, an improvement from 70 percent in the third quarter 2002 and 69 percent for the fourth quarter 2001. Utilization is a key driver of improving gross margin and will be a key focal point in 2003.
The percentage of revenue derived from India operations based on customer bill rate was 16.2 percent of total revenue in fourth quarter 2002 compared to 16 percent in third quarter 2002. Covansys expects to increase the revenue derived from India operations to 20 percent over the next several quarters.
Selling, general and administrative expenses totaled $24.5 million or 24.9 percent of revenue in the fourth quarter 2002. "Excluding one-time charges, the SG&A run rate was approximately $22 million or 22.5 percent of revenue and continued the trend of lower SG&A spending," Duffey indicated. SG&A expenditures of approximately $2.2 million recorded during the fourth quarter were for non-recurring expenses including a $1.2 million charge for an operating lease that was no longer required, $600,000 in severance associated with the elimination of certain senior positions and $400,000 for settlements and legal fees. Fourth quarter adjusted SG&A of $22 million was down from $23.6 million for third quarter 2002 and down $5.7 million from the fourth quarter 2001 level. "For the calendar year 2002, management actions resulted in year over year reductions in SG&A of $19 million," Duffey said. "Our goal remains to lower SG&A spending to 20 to 22 percent of revenue."
The effective tax rate for the fourth quarter was 33.4 percent and was approximately 18.5 percent for the full year 2002. This was based on the mix of taxable earnings between the U.S., Europe and India. In 2003, the effective rate is expected to be approximately 37 percent.
Cash provided from operations was approximately $7.8 million for the fourth quarter. The combination of cash and short-term investments at the end of the fourth quarter 2002 was $101 million, an increase of $3.1 million during the quarter.
"We will continue to focus on improving collections and reducing DSOs from the fourth quarter 2002 level of 66 days and intend to continue to generate positive cash from operating activities during 2003," Duffey indicated. "Revenue in excess of billing increased due to the greater number of fixed price projects and long-term outsourcing contracts. We have numerous contracts that will meet milestones in the first quarter of 2003 allowing us to invoice for work performed which will reduce revenue in excess of billing during the first quarter."
Covansys repurchased 366,000 shares of stock during the quarter. The total available for future repurchase is 3.4 million shares.
"We expect modest revenue growth in 2003," Clague added. "Revenue growth supported by expense reductions and continued emphasis on utilization rates is expected to generate continued improvement in earnings throughout 2003."
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