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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
As of and for the quarterly period ended September 30, 2002
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File No. 0-28830
Navigant Consulting, Inc.
(Exact name of Registrant as specified in its charter)
Delaware 36-4094854
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
615 North Wabash Avenue, Chicago, Illinois 60611
(Address of principal executive offices, including zip code)
(312) 573-5600
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [_]
As of November 14, 2002, 42.7 million shares of the Registrant's common stock,
par value $.001 per share ("Common Stock"), were outstanding.
1
PERIOD ENDED SEPTEMBER 30, 2002
INDEX
Page
----
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements ..................................................................... 3
Notes to Unaudited Consolidated Financial Statements ..................................... 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations .... 18
Item 3. Quantitative and Qualitative Disclosures About Market Risk ............................... 24
Item 4. Controls and Procedures .................................................................. 24
PART II--OTHER INFORMATION
Item 1. Legal Proceedings ........................................................................ 25
Item 2. Change in Securities ..................................................................... 25
Item 3. Defaults Upon Senior Securities .......................................................... 25
Item 4. Submission of Matters to a Vote of Security Holders ...................................... 25
Item 5. Other Events ............................................................................. 25
Item 6. Exhibits and Reports on Form 8-K ......................................................... 26
SIGNATURES .......................................................................................... 27
CERTIFICATIONS ...................................................................................... 28
"Navigant" is a service mark of Navigant International, Inc. The Company is not
affiliated, associated, or in any way connected with Navigant International,
Inc. and the Company's use of "Navigant" is made under license from Navigant
International, Inc.
2
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
September 30, December 31,
2002 2001
------------------------------------
ASSETS (Unaudited)
Current assets:
Cash and cash equivalents $ 6,607 $ 35,950
Accounts receivable, net 66,037 52,412
Prepaid expenses and other current assets 3,862 4,804
Deferred income taxes 6,790 5,611
------------------------------------
Total current assets 83,296 98,777
Property and equipment, net 19,881 20,648
Goodwill and intangible assets, net 92,800 35,455
Deferred income taxes 2,913 2,445
Other assets 1,367 1,501
------------------------------------
Total assets $ 200,257 $ 158,826
====================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank borrowings $ 11,100 $ -
Accounts payable and accrued liabilities 11,434 13,779
Accrued compensation related costs 12,528 14,798
Income taxes payable 8,738 8,191
Other current liabilities 11,673 8,453
------------------------------------
Total current liabilities 55,473 45,221
Other non-current liabilities 2,178 1,500
------------------------------------
Total liabilities 57,651 46,721
------------------------------------
Stockholders' equity:
Preferred stock - -
Common stock 47 44
Additional paid-in capital 366,792 353,234
Deferred stock issuance (Note 7) 2,145 -
Deferred compensation - restricted stock (1,865) (4,504)
Treasury stock (62,284) (67,394)
Accumulated deficit (162,155) (169,214)
Accumulated other comprehensive loss (74) (61)
------------------------------------
Total stockholders' equity 142,606 112,105
------------------------------------
Total liabilities and stockholders' equity $ 200,257 $ 158,826
====================================
See accompanying notes to the unaudited consolidated financial statements.
3
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three months ended September 30,
2002 2001
-------------------------------
Revenues:
Financial & Claims Consulting revenues $ 46,187 $ 38,511
Energy & Water Consulting revenues 20,414 18,317
------------------------------
Core revenues 66,601 56,828
Energy & Water Consulting - incremental revenues - 300
------------------------------
Total revenues 66,601 57,128
Cost of services:
Consulting services expense 43,395 37,903
VSRP cash compensation expense - consultants - 2,704
Stock-based compensation credit - consultants (note 8) (1,148) (2,180)
------------------------------
Total cost of services 42,247 38,427
------------------------------
Gross margin 24,354 18,701
General and administrative expenses 15,794 13,925
Depreciation expense 1,916 1,871
Amortization expense (notes 4 and 5) 449 1,476
VSRP cash compensation expense - other - 403
Stock-based compensation credit - other (note 8) (379) (771)
------------------------------
Operating income 6,574 1,797
Other income (expense), net (43) 171
------------------------------
Income before income taxes 6,531 1,968
Income tax expense 2,592 1,019
------------------------------
Net income $ 3,939 $ 949
==============================
Basic net income per share: $ 0.10 $ 0.02
Shares used in computing basic net income per share 40,774 38,466
Diluted net income per share: $ 0.09 $ 0.02
Shares used in computing diluted net income per share 42,583 40,952
Other comprehensive income:
Net income $ 3,939 $ 949
Foreign currency translation adjustment (59) 118
------------------------------
Comprehensive income $ 3,880 $ 1,067
==============================
See accompanying notes to the unaudited consolidated financial statements.
4
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Nine months ended September 30,
2002 2001
---------------------------------
Revenues:
Financial & Claims Consulting revenues $ 133,519 $ 109,635
Energy & Water Consulting revenues 54,667 58,188
---------------------------------
Core revenues 188,186 167,823
Energy & Water Consulting - incremental revenues - 9,560
---------------------------------
Total revenues 188,186 177,383
Cost of services:
Consulting services expense 122,984 114,406
VSRP cash compensation expense - consultants - 11,296
Stock-based compensation expense - consultants (note 8) 1,313 2,095
---------------------------------
Total cost of services 124,297 127,797
---------------------------------
Gross margin 63,889 49,586
General and administrative expenses 44,827 42,372
Depreciation expense 5,754 5,229
Amortization expense (notes 4 and 5) 1,235 4,218
VSRP cash compensation expense - other - 1,103
Stock-based compensation expense - other (note 8) 356 333
Restructuring costs - 1,900
Litigation and settlement provisions - 5,700
---------------------------------
Operating income (loss) 11,717 (11,269)
Other income, net 63 794
---------------------------------
Income (loss) before income taxes 11,780 (10,475)
Income tax expense (benefit) 4,721 (3,526)
---------------------------------
Net income (loss) $ 7,059 $ (6,949)
=================================
Basic net income (loss) per share: $ 0.18 ($0.18)
Shares used in computing basic net income (loss) per share 39,535 38,375
Diluted net income (loss) per share: $ 0.17 ($0.18)
Shares used in computing diluted net income (loss) per share 41,690 38,375
Other comprehensive income (loss):
Net income (loss) $ 7,059 $ (6,949)
Unrealized holding loss on securities:
Unrealized holding loss arising during period (108) -
Less: reclassification adjustment for gains included in net income (100) -
---------------------------------
Total unrealized holding loss on securities (208) -
Foreign currency translation adjustment 195 98
---------------------------------
Comprehensive income (loss) $ 7,046 $ (6,851)
=================================
See accompanying notes to the unaudited consolidated financial statements.
5
NAVIGANT CONSULTING, INC AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands)
Preferred Stock Common Stock Treasury Stock
Shares Shares Shares
Balance at January 1, 2002 - 44,458 (5,758)
Comprehensive income (loss) - - -
Issuance of common stock as part of purchase price of acquired businesses - 1,465 1,404
Issuance of common stock under Employee Stock Purchase Plan - 88 -
Exercise of stock options to purchase to common stock, including
tax benefit of $0.4 million - 644 39
Purchase of common stock - - (289)
Vesting of restricted shares - 479 -
Amortization of restricted stock - - -
Forfeitures of restricted stock grants - - -
Stock-based compensation expense - stock options - - -
---------------------------------------------
Balance at September 30, 2002 - 47,134 (4,604)
=============================================
Preferred Common
Stock Par Stock Par Additional Paid in
Value Value Capital
Balance at January 1, 2002 $ - $ 44 $ 353,234
Comprehensive income (loss) - - -
Issuance of common stock as part of purchase price of acquired businesses - 1 10,868
Issuance of common stock under Employee Stock Purchase Plan - 386
Exercise of stock options to purchase to common stock, including
tax benefit of $0.4 million - 1 3,279
Purchase of common stock - - -
Vesting of restricted shares - 1 (1)
Amortization of restricted stock - - -
Forfeitures of restricted stock grants - - (1,332)
Stock-based compensation expense - stock options - - 358
----------------------------------------------
Balance at September 30, 2002 $ - $ 47 $ 366,792
===============================================
Deferred
Deferred Compensation
Stock Restricted Treasury
Issuance Stock Stock Cost
Balance at January 1, 2002 $ - $ (4,504) $ (67,394)
Comprehensive income (loss) - - -
Issuance of common stock as part of purchase price of acquired businesses 2,145 - 6,630
Issuance of common stock under Employee Stock Purchase Plan - - -
Exercise of stock options to purchase to common stock, includin
tax benefit of $0.4 million - - 140
Purchase of common stock - - (1,660)
Vesting of restricted shares - - -
Amortization of restricted stock - 1,307 -
Forfeitures of restricted stock grants - 1,332 -
Stock-based compensation expense - stock options - - -
---------------------------------------------
Balance at September 30, 2002 $ 2,145 $ (1,865) $ (62,284)
=============================================
Accumulated
Other Total
Comprehensive Accumulated Stockholders'
Loss Deficit Equity
Balance at January 1, 2002 $ (61) $ (169,214) $ 112,105
Comprehensive income (loss) (13) 7,059 7,046
Issuance of common stock as part of purchase price of acquired businesses - - 19,644
Issuance of common stock under Employee Stock Purchase Plan - - 386
Exercise of stock options to purchase to common stock, including
tax benefit of $0.4 million - - 3,420
Purchase of common stock - - (1,660)
Vesting of restricted shares - - -
Amortization of restricted stock - - 1,307
Forfeitures of restricted stock grants - - -
Stock-based compensation expense - stock options - - 358
----------------------------------------------
Balance at September 30, 2002 $ (74) $ (162,155) $ 142,606
==============================================
See accompanying notes to the unaudited consolidated financial statements.
6
NAVIGANT CONSULTING, INC AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Nine months ended September 30,
----------------------------------------
2002 2001
----------------------------------------
Cash flows from operating activities:
Net income (loss) $ 7,059 $ (6,949)
Adjustments to reconcile net income (loss) to net cash used in
operating activities, net of acquisitions:
Depreciation expense 5,754 5,229
Amortization expense 1,235 4,218
Stock-based compensation expense 1,669 2,429
Deferred income taxes (1,648) (225)
Changes in assets and liabilities:
Accounts receivable (10,390) (3,089)
Prepaid expenses and other current assets 1,011 (1,756)
Accounts payable and accrued liabilities (2,041) (3,053)
Accrued compensation-related costs (2,368) (2,808)
Income taxes 548 (2,146)
Other current liabilities (2,443) (2,680)
----------------------------------
Net cash used in operating activities (1,614) (10,830)
Cash flows from investing activities:
Purchases of property and equipment (4,686) (5,560)
Acquisitions of businesses (32,655) (7,335)
Contingent acquistion payments (2,146) (1,980)
Payment of notes payable related to acquisition (1,500) -
Other, net 11 (254)
----------------------------------
Net cash used in investing activities (40,976) (15,129)
Cash flows from financing activities:
Issuance of common stock 3,807 902
Stock repurchases (1,660) (3,360)
Borrowings from bank 11,100 -
----------------------------------
Net cash provided by (used in) financing activities 13,247 (2,458)
----------------------------------
Net decrease in cash and cash equivalents (29,343) (28,417)
Cash and cash equivalents at beginning of the period 35,950 48,798
----------------------------------
Cash and cash equivalents at end of the period $ 6,607 $ 20,381
==================================
See accompanying notes to the unaudited consolidated financial statements.
7
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The accompanying unaudited interim consolidated financial statements of Navigant
Consulting, Inc. (the "Company") have been prepared pursuant to the rules of the
Securities and Exchange Commission for quarterly reports on Form 10-Q and do not
include all of the information and note disclosures required by accounting
principles generally accepted in the United States of America. The information
furnished herein includes all adjustments, consisting of normal recurring
adjustments except where indicated, which are, in the opinion of management,
necessary for a fair presentation of the results of operations for these interim
periods.
The results of operations for the three and nine months ended September 30, 2002
are not necessarily indicative of the results to be expected for the entire year
ending December 31, 2002.
These financial statements should be read in conjunction with the Company's
audited consolidated financial statements and notes thereto as of and for the
year ended December 31, 2001 included in the Annual Report on Form 10-K, as
filed by the Company with the Securities and Exchange Commission on March 22,
2002.
Note 2. Acquisitions
Effective as of April 5, 2002, the Company acquired portions of Arthur D.
Little, Inc.'s ("ADL") assets for $6.1 million cash at closing. The acquisition
consisted of two consulting units, with approximately 30 consulting and
administrative professionals that serve the energy industry.
On May 24, 2002, the Company acquired the assets of Financial Analytics
Consulting Group, LLC ("FACG") for $6.3 million, which included $4.5 million
cash at closing and 0.3 million shares of its common stock valued at $1.8
million at closing. In addition to the initial consideration value, the purchase
agreements for FACG provide for additional payments in cash over the next two
calendar years that are contingent on revenues generated and the attainment of
certain gross margin targets. Any additional payments related to this
contingency will be accounted for as goodwill. FACG was a management buyout from
Arthur Andersen, LLP and consisted of 90 consulting and administrative
professionals from five different Arthur Andersen practices. FACG has been
acquired primarily to augment the Company's Financial & Claims Consulting
business segment.
On June 19, 2002, the Company acquired the assets of Keevan Consulting, LLC
("Keevan") for $7.2 million, which included $4.0 million cash at closing, 0.4
million shares of its common stock valued at $2.7 million at closing, and $0.5
million cash payable in April 2003. In addition to the initial consideration
value, the purchase agreement for Keevan provides for additional payments in
cash and the Company's common stock over the next two and one half years from
closing that are contingent on revenues generated and the attainment of certain
gross margin targets. Any additional payments related to this contingency will
be accounted for as goodwill. Keevan was a management buyout from Arthur
Anderson, LLP and consisted of 38 consulting and administrative professionals.
Keevan was acquired to enhance the construction and government contracts
practice within the Company's Financial & Claims Consulting business segment.
On July 15, 2002, the Company acquired the assets of Barrington Energy Partners,
LLC ("Barrington Energy") for $11.1 million, which included $4.8 million cash at
closing, 0.7 million shares of its common stock valued at $4.8 million at
closing, and $1.5 million cash payable on the first anniversary of the closing
date. In addition to the initial consideration value, the purchase agreement for
Barrington Energy provides for additional payments in cash and the Company's
common stock over the next two and one half years from closing that are
contingent on the attainment of certain performance targets. Any additional
payments related to this contingency will be accounted for as goodwill.
Barrington Energy consisted of 8 senior-level professionals and 6 other staff
who complement the Company's Energy & Water Consulting unit. Barrington Energy
Partners, LLC is not associated with the Company's 1999 acquisition of the
Barrington Consulting Group, Inc.
8
Effective September 17, 2002, the Company acquired the assets of The Hunter
Group ("Hunter") for $25.4 million, which included $10.2 million cash at
closing, 1.5 million shares of its common stock valued at $8.2 million at
closing, $0.5 million cash payable on April 1, 2003, and $6.5 million in its
common stock payable in two equal installments on the first and second
anniversary of the closing. If either seller or buyer elects, up to 67 percent
of the $6.5 million deferred payment commitment is payable in cash and the
remainder is payable in the Company's common stock. Accordingly, the Company
accounted for this $6.5 million deferred payment as 67 percent liabilities and
33 percent deferred stock issuance. In addition to the initial consideration
value, the purchase agreement for Hunter provides for additional payments in
cash and the Company's stock over the next three years from closing that are
contingent on the attainment of certain performance targets. Any additional
payments related to this contingency will be accounted for as goodwill. Hunter
consisted of 20 senior-level professionals and 40 additional staff that provide
interim management and performance improvement consulting services to hospitals
and healthcare systems. Hunter was acquired to significantly expand the
Company's Financial & Claims' healthcare practice into additional sectors.
The following unaudited pro forma financial information presents the combined
results of operations as if the acquisition of Hunter had occurred as of January
1, 2001, after giving effect to certain adjustments. The adjustments include the
amortization, net of the related income tax, of goodwill and other intangibles
related to the purchase price allocation, income tax provisions to convert
Hunter's S-corporation status financial statements to C-corporation status, and
the adjustment to shares for the shares issued in connection with the
acquisition. As of January 1, 2002, the Company in accordance with SFAS 142
ceased the amortization of goodwill. As such, this unaudited pro forma
information excludes any goodwill amortization expense for the periods in 2002.
The information presented does not necessarily reflect the results of operations
that would have occurred if the acquisition had been completed as of January 1,
2001, nor is it necessarily indicative of future results. The information is
shown in thousands, except per share information.
Three months ended Nine months ended
September 30, September 30,
------------------ ------------------
2002 2001 2002 2001
------------------ ------------------
Total revenues .......................................... $72,353 $63,119 $208,256 $196,524
Gross margin ............................................ 26,700 20,725 69,973 55,933
Net income (loss) ....................................... 5,118 1,584 9,974 (4,923)
Net income (loss) per diluted share ..................... $ 0.12 $ 0.04 $ 0.23 $ (0.12)
Note 3. Segment Information
The Company is comprised of two business segments: Financial & Claims Consulting
and Energy & Water Consulting.
The Financial & Claims Consulting business segment provides consulting and
advisory services to clients facing the challenges of dispute, litigation,
bankruptcy, regulation and change. Its services include analyzing complex
accounting, finance, economic, operations and information management issues.
The Energy & Water business segment provides a wide range of management
consulting services to companies facing the challenges of the deregulating
energy and water industries. Its services include strategy development,
financial transaction support, operations support, regulatory advisement,
technical analysis and engineering support.
The Company currently evaluates segment performance and allocates resources
based upon revenues and operating results. The basis of measurement of segment
operating results is consistent between the periods. Transactions between
segments have been eliminated. Information on the Company's operations for the
three months and nine months ended September 30, 2002 and 2001 have been
summarized as follows (shown in thousands):
9
Three months Nine months
ended September 30, ended September 30,
-------------------- --------------------
2002 2001 2002 2001
--------- -------- --------------------
Revenues:
Financial & Claims Consulting ........................................ $ 46,187 $ 38,511 $133,519 $109,635
Energy & Water Consulting ............................................ 20,414 18,317 54,667 58,188
-------- -------- ------- -------
Core revenues ........................................................ 66,601 56,828 188,186 167,823
Energy & Water Consulting - incremental revenues - 300 - 9,560
-------- ------- ------- -------
Combined segment revenues .......................................... $ 66,601 $ 57,128 $188,186 $177,383
======== ======= ======= =======
Operating profit:
Financial & Claims Consulting ........................................ $ 5,441 $ 4,654 $ 19,527 $ 13,360
Energy & Water Consulting ............................................ 1,971 1,849 2,165 11,234
-------- ------- ------- -------
Combined segment operating profit .................................. $ 7,412 $ 6,503 $ 21,692 $ 24,594
-------- ------- ------- -------
Operating Profit and Statement of Operations reconciliation:
Unallocated:
Other non-recurring general and
administrative expenses ............................................. $ - $ - $ - $ 380
Acquisition-related compensation expense ............................. - 1,203 - 3,609
VSRP cash compensation expense ....................................... - 3,107 - 12,399
Depreciation expense ................................................. 1,916 1,871 5,754 5,229
Amortization expense ................................................. 449 1,476 1,235 4,218
Acquisition/integration costs ........................................ - - 1,317 -
Restructuring costs .................................................. - - - 1,900
Litigation and settlement provisions ................................. - - - 5,700
Stock-based compensation expense ..................................... (1,527) (2,951) 1,669 2,428
Other expense (income) ............................................... 43 (171) (63) (794)
-------- ------- ------- -------
Sub-total .......................................................... 881 4,535 9,912 35,069
-------- ------- ------- -------
Income (loss) before income tax expense ................................ $ 6,531 $ 1,968 $ 11,780 $(10,475)
======== ======= ======= =======
The information presented does not necessarily reflect the results of segment
operations that would have occurred had the segments been stand-alone
businesses.
Certain general and administrative expenses, which relate to general corporate
costs, were allocated to operating segments on the basis of consulting fee
revenues. Certain cost of services and general and administrative expenses,
which primarily relate to operating segments, have been excluded from the
segment operating profit amounts, and included in the costs not allocated to
segments, for comparative purposes.
For the nine months ended September 30, 2002, the Company incurred $1.3 million
of costs related to the strategic review and integration of certain business
acquisitions, which were not allocated to either operating segment.
For the nine months ended September 30, 2001, the Company incurred $0.4 million
of personnel related costs, which were not allocated to either operating
segment.
10
The following unaudited pro forma financial information presents the combined
revenues and operating profits for each segment as if Hunter was acquired on
January 1, 2001. Accordingly, the Financial & Claims Consulting segment includes
Hunter. The pro forma financial information includes the reallocation of certain
corporate costs, which have been reallocated based on the combined consulting
fee revenues, including Hunter's revenues. The information presented does not
necessarily reflect the segment revenues and operating profits that would have
occurred had the acquisition been completed as of January 1, 2001, nor is it
indicative of future results. The pro forma information for the three months and
nine months ended September 30, 2002 and 2001 have been summarized as follows
(shown in thousands):
Three months Nine months
ended September 30, ended September 30,
-------------------- --------------------
2002 2001 2002 2001
--------- --------- -------- --------
Pro forma revenues:
Financial & Claims Consulting ....................................... $ 51,939 $ 44,502 $153,589 $128,776
Energy & Water Consulting ........................................... 20,414 18,317 54,667 58,188
--------- --------- -------- --------
Pro forma core revenues ............................................. 72,353 62,819 208,256 186,964
Energy & Water Consulting - incremental revenues .................... - 300 - 9,560
--------- --------- -------- --------
Pro forma combined segment revenues ............................... $ 72,353 $ 63,119 $208,256 $196,524
========= ========= ======== ========
Pro forma operating profit:
Financial & Claims Consulting ....................................... $ 7,285 $ 6,224 $ 23,986 $ 18,333
Energy & Water Consulting ........................................... 2,102 1,978 2,602 11,624
--------- --------- -------- --------
Pro forma combined segment
operating profit ............................................. $ 9,387 $ 8,202 $ 26,588 $ 29,957
========= ========= ======== ========
Note 4. Goodwill and Intangible Assets
Goodwill and other intangible assets consisted of (shown in thousands):
September 30, December 31,
2002 2001
------------- ------------
Goodwill ................................................................................. $ 94,838 $ 36,758
Less - accumulated amortization .......................................................... (5,425) (5,425)
------------ -----------
Goodwill, net ...................................................................... 89,413 31,333
Intangible assets:
Customer lists ........................................................................... 4,470 4,470
Non-compete agreements ................................................................... 5,200 5,200
Other .................................................................................... 500 -
------------ -----------
Intangible assets, at cost ............................................................... 10,170 9,670
Less: accumulated amortization ........................................................... (6,783) (5,548)
------------ -----------
Intangible assets, net ............................................................ 3,387 4,122
------------ -----------
Goodwill and intangible assets, net ............................................... $ 92,800 $ 35,455
============ ===========
11
In accordance with SFAS 142, the Company evaluated the goodwill assigned to each
reporting unit for impairment, using the discounted cash flow valuation method.
The Company concluded that there was no indication of goodwill impairment for
either of the two reporting units. If indicators of impairment are deemed to be
present, and future cash flows are not expected to be sufficient to recover the
assets' carrying amounts, an impairment loss would be charged to expense in the
period identified.
The Company made certain reclassifications of balances between goodwill and
intangible assets. In accordance with SFAS 141, the Company reclassified the
amounts previously allocated to employee workforce from intangible assets to
goodwill. Previously, the Company amortized goodwill and intangible assets at a
composite rate of seven years. The Company recalculated the accumulated
amortization of goodwill and intangible assets using the specific amortization
rates per class. Accordingly, the Company reclassified the specific accumulated
amortization balances at December 31, 2001 for goodwill and intangible assets.
The Company reviewed the intangible assets' net book values and estimated useful
lives by class. As of September 30, 2002, there was no impairment related to the
intangible assets. The Company will amortize the remaining net book values of
intangible assets over their remaining useful lives. The weighted average
remaining lives of customer lists and non-compete agreements are approximately
three and two years, respectively.
The changes in carrying balances of goodwill and intangible assets by reporting
segment during the period ended September 30, 2002 are as follows (shown in
thousands):
Financial Energy
& Claims & Water
Consulting Consulting Total
---------- ---------- ---------
Balance as of January 1, 2002 - Goodwill .............................. $ 30,631 $ 702 $ 31,333
Balance as of January 1, 2002 - Intangibles ........................... 3,983 139 4,122
---------- ---------- ---------
Balance as of January 1, 2002 - Total ................................. 34,614 841 35,455
Goodwill acquired during year ......................................... 41,031 17,049 58,080
Intangible assets acquired during year ................................ 500 - 500
Less - amortization expense ........................................... (1,186) ( 49) (1,235)
---------- ---------- ---------
Balance as of September 30, 2002 - Total .............................. $ 74,959 $ 17,841 $ 92,800
========== ========== =========
Goodwill and intangible assets:
Balance as of September 30, 2002 - Goodwill ........................... $ 71,662 $ 17,751 $ 89,413
Balance as of September 30, 2002 - Intangibles ........................ 3,297 90 3,387
---------- ---------- ---------
Balance as of September 30, 2002 - Total .............................. $ 74,959 $ 17,841 $ 92,800
========== ========== =========
During the nine months ended September 30, 2002, the excess of the costs over
the net assets of businesses acquired was $58.6 million, of which $58.1 million
has been identified as goodwill. The Hunter acquisition, which occurred in
September 2002, included $24.7 million in goodwill and $0.5 million in other
intangibles. The purchase price allocation of goodwill and intangible assets for
the Hunter acquisition was based upon a preliminary appraisal, as were the
related estimated useful lives. The composite of the Barrington Energy, Keevan,
FACG, ADL and other acquisition-related payments included $33.4 million in
goodwill. The allocation of goodwill and intangible assets for these
acquisition-related payments was based on management's judgment, as were the
related estimated useful lives.
In connection with the acquisition of businesses acquired during the nine months
ended September 30, 2002, the Company obtained non-competition and
non-solicitation agreements from the newly-employed senior consultants as part
of the consultants' employment agreements. For purchase price allocation
purposes, the value of these non-competition and non-solicitation agreements is
immaterial. The retention of the newly-employed senior consultants has been
reasonably assured given their importance in achieving the contingency earn-out
provisions of the
12
purchase agreements. The contingency earn-out payments, if any, will be
accounted for as goodwill when earned.
Total amortization expense for the three months and nine months ended September
30, 2002 was $0.4 million and $1.2 million, respectively. Below is the estimated
annual aggregate amortization expense of intangible assets for each of the five
succeeding years and thereafter from December 31, 2001 based on intangible
assets at September 30, 2002 (shown in thousands):
Year ending December 31, Amount
- ------------------------ ------------
2002 ...................................................... $ 2,183
2003 ...................................................... 1,491
2004 ...................................................... 291
2005 ...................................................... 263
2006 ...................................................... 263
Thereafter ................................................ 131
---------
Total $ 4,622
=========
Note 5. Recent Accounting Pronouncements
As of January 1, 2002, the Company in accordance with SFAS 142 ceased the
amortization of goodwill. Under SFAS 142, goodwill and certain other intangible
assets deemed to have indefinite lives are no longer amortized, but subject to
annual impairment tests. Other intangible assets with definite lives will
continue to be amortized over their useful lives. The following unaudited
financial information presents the combined results of operations for the three
months and nine months ended September 30, 2002 and 2001 after the elimination
of goodwill amortization expense, net of related income taxes (shown in
thousands, except per share amounts):
Three months ended Nine months ended
September 30, September 30,
------------------- -----------------
2002 2001 2002 2001
-------- -------- -----------------
Net income (loss) ..................................................... $ 3,939 $ 949 $ 7,059 $(6,949)
Elimination of goodwill amortization
expense, net of income taxes ....................................... - 681 - 1,916
-------- -------- ------- -------
Adjusted net income (loss) ............................................ $ 3,939 $ 1,630 $ 7,059 $(5,033)
======== ======== ======= =======
Basic earnings per share:
Net income (loss) ..................................................... $ 0.10 $ 0.02 $ 0.18 $ (0.18)
Elimination of goodwill amortization
expense, net of income tax ......................................... - 0.02 - 0.05
-------- -------- ------- -------
Adjusted basic net income (loss) per share. ........................... $ 0.10 $ 0.04 $ 0.18 $ (0.13)
======== ======== ======= =======
Diluted earnings per share:
Net income (loss) ..................................................... $ 0.09 $ 0.02 $ 0.17 $ (0.18)
Elimination of goodwill amortization
expense, net of income tax ......................................... - 0.02 - 0.05
-------- -------- ------- -------
Adjusted diluted net income (loss) per share .......................... $ 0.09 $ 0.04 $ 0.17 $ (0.13)
======== ======== ======= =======
13
The following unaudited pro forma financial information for the three and nine
months ended September 30, 2002 and 2001 presents the combined results of
operations as if Hunter had been acquired on January 1, 2001, after the
elimination of goodwill amortization expense, net of related income taxes (shown
in thousands, except per share amounts):
Three months ended Nine months ended
September 30, September 30,
-------------------- -----------------
2002 2001 2002 2001
---------- --------- -----------------
Pro forma net income (loss) ...................... $ 5,118 $ 1,584 $ 9,974 $(4,923)
Elimination of goodwill amortization
expense, net of income taxes .................. - 1,056 - 3,041
------- -------- ------- -------
Pro forma net income (loss) ...................... $ 5,118 $ 2,640 $ 9,974 $(1,882)
======= ======== ======= ========
Pro forma basic earnings per share:
Pro forma net income (loss) ...................... $ 0.12 $ 0.04 $ 0.24 $ (0.12)
Elimination of goodwill amortization
expense, net of income tax ................... - 0.03 - 0.07
------- -------- ------- -------
Adjusted pro forma basic
net income (loss) per share ............... $ 0.12 $ 0.07 $ 0.24 $ (0.05)
======= ======== ======= ========
Pro forma diluted earnings per share:
Pro forma net income (loss) ...................... $ 0.12 $ 0.04 $ 0.23 $ (0.12)
Elimination of goodwill amortization
expense, net of income tax ................... - 0.02 - 0.07
------- -------- ------- -------
Adjusted pro forma diluted
net income (loss) per share ............... $ 0.12 $ 0.06 $ 0.23 $ (0.05)
======= ======== ======= ========
Note 6. Basic and Diluted Shares
The components of the weighted average basic and diluted shares (shown in
thousands) were as follows:
Three months ended Nine months ended
September 30, September 30,
-------------------------------------------------------
2002 2001 2002 2001
-------------------------------------------------------
Basic weighted average shares outstanding ........................... 40,774 38,466 39,535 38,375
Employee stock options and restricted shares ........................ 1,809 2,486 2,155 -
------- ------- ------- ------
Diluted weighted average shares outstanding ......................... 42,583 40,952 41,690 38,375
======= ======= ======= ======
In January 2001, the Company issued 1.9 million restricted shares of common
stock. As of September 30, 2002, 0.5 million restricted shares were still
unvested and outstanding. These unvested restricted shares have voting rights
but are excluded from the basic earnings per share calculation until vesting
occurs.
14
For the nine months ended September 30, 2001, the weighted average effect of
employee stock options and restricted shares was 3.0 million. However, the
Company incurred a net loss in the period; therefore, those options were
excluded from the calculation of diluted per share amounts.
Note 7. Stockholders' equity
As part of the purchase price for the Hunter acquisition, the Company issued 1.5
million shares of its common stock valued at $8.2 million at closing. Also as
part of the Hunter acquisition, the Company has a $6.5 million deferred stock
payment payable in two equal installments on the first and second anniversary of
the closing. If either seller or buyer elects, up to 67 percent of the $6.5
million deferred payment commitment is payable in cash and the remainder is
payable in the Company's common stock. Accordingly, the Company accounted for
this $6.5 million deferred payment as $4.4 million in liabilities and $2.1
million in deferred stock issuance.
During the nine months ended September 30, 2002, the Company issued a total of
0.7 million shares of its Company's common stock related to exercises of stock
options and stock purchased under the Employee Stock Purchase Plan for $3.8
million, including tax benefits of $0.4 million.
In September 2002, 0.5 million shares of restricted stock vested. As of
September 30, 2002, the balance in deferred compensation - restricted stock
represents the 0.5 million shares outstanding as of September 30, 2002, and is
scheduled to vest, subject to forfeiture, in September 2003. During the nine
months ended September 30, 2002, the Company recorded $1.3 million related to
restricted stock compensation.
In October 2000, the Board of Directors authorized the repurchase of up to 5.0
million shares of the Company's common stock. During the nine months ended
September 30, 2002, the Company repurchased 0.3 million shares for $1.7 million.
The Company has repurchased a total of 2.1 million shares for $9.1 million since
October 2000.
As part of consideration for certain acquisitions, the Company issued a total of
1.4 million shares (valued at $9.3 million at closing) out of treasury stock
during the nine months ended September 30, 2002.
Note 8. Stock-based Compensation Expense (Credit)
Stock-based compensation expense (credit) is recorded for certain Value Sharing
Retention Program ("VSRP") stock options, exchanged stock options and stock
appreciation rights ("awards") that have been awarded to the Company's employees
and are subject to variable accounting. Compensation expense (or credit) for
these awards is recorded, on a cumulative basis, for the increase (or decrease)
in the Company's stock price above the grant prices. In addition, stock-based
compensation expense includes the fixed compensation expense of restricted stock
awards, in which expense is recorded on a straight-line basis over the vesting
term for the valuation amount at grant date.
Total stock-based compensation expense (credit) consisted of the following
(shown in thousands):
Three months Nine months
ended September 30, ended September 30,
------------------- --------------------
2002 2001 2002 2001
--------- --------- -------- ---------
VSRP stock options ........................ $ ( 535) $ (1,582) $ 240 $ 245
Exchanged stock options ................... ( 625) (1,347) 118 29
Stock appreciation rights ................. ( 294) ( 640) 4 -
Restricted stock .......................... ( 73) 618 1,307 2,083
Other ..................................... - - - 71
------- -------- ------- --------
Total expense (credit) ................ $ (1,527) $ (2,951) $ 1,669 $ 2,428
======= ======== ======= ========
15
The following table shows the Company's beginning and ending stock prices used
to compute the market valuation adjustment for variable accounting stock awards.
Stock prices
during period
-----------------
Beg. End.
-----------------
Three months ended September 30, 2002 ......... $6.99 $5.52
Three months ended September 30, 2001 ......... $8.20 $3.71
Nine months ended September 30, 2002 .......... $5.50 $5.52
Nine months ended September 30, 2001 .......... $3.81 $3.71
For the three months ended September 30, 2002 and 2001, the Company recorded
total stock-based compensation credit of $1.5 million and $3.0 million,
respectively, which is primarily related to the valuation decrease of the stock
awards as the Company's stock price decreased $1.47 per share and $4.49 per
share, respectively. The second installment of the restricted stock grants
vested on September 1, 2002, and the cumulative restricted stock vested is 1.1
million shares, with 0.5 million shares scheduled to vest, subject to
forfeiture, on September 1, 2003.
For the nine months ended September 30, 2002 and 2001, the Company record total
stock-based compensation expense of $1.7 million and $2.4 million, respectively,
which is primarily related to compensation expense for restricted stock.
Note 9. Supplemental Consolidated Balance Sheet Information
Accounts Receivable:
The components of accounts receivable were as follows (shown in thousands):
September 30, December 31,
2002 2001
------------- ------------
Billed amounts ................................ $ 53,854 $ 41,814
Engagements in process ........................ 22,486 20,546
Allowance for uncollectible accounts .......... (10,303) (9,948)
------------- ------------
$ 66,037 $ 52,412
============= ============
Engagements in process represent balances accrued by the Company for services
that have been performed and earned but have not been billed to the client.
Billings are generally done on a monthly basis for the prior month's services.
Note 10. Supplemental Consolidated Cash Flow Information
Total interest paid during the nine months ended September 30, 2002 and 2001 was
$0.4 million and $0.2 million, respectively. Total income taxes paid during the
nine months ended September 30, 2002 and 2001 were $5.8 million and $2.5
million, respectively.
The Company had non-cash investing activities during the nine months ended
September 30, 2002. The Company entered into deferred cash payment commitments
as part of the purchase price for certain acquisitions. These deferred cash
payments consist of $1.5 million for the Barrington Energy acquisition, $0.5
million for the Keevan acquisition, and $0.5 million for the Hunter acquisition.
16
In addition, as part of the purchase price for the Hunter acquisition, the
Company entered into a $6.5 million deferred payment payable, wherein up to 67
percent of the obligation is payable in cash and the remainder is payable in the
Company's common stock. Accordingly, the Company accounted for this deferred
payment as 67 percent liabilities and 33 percent deferred stock issuance. The
Company issued a total of 2.8 million shares of its common stock, valued at
$17.5 million, in conjunction with the acquisitions of Keevan, FACG, Barrington
Energy and Hunter. (See Note 2, "Acquisitions"). The Company also incurred a
$0.4 million obligation for the purchase of computer software.
The Company had non-cash investing activities during the nine months ended
September 30, 2001. The Company issued $3.0 million in notes payable in the
Barba-Arkhon acquisition and had a $0.6 million deferred purchase price payment
obligation related to the Chambers acquisition. The Company incurred $0.7
million of capital lease obligations for the purchase of new computer equipment.
For the nine months ended September 30, 2002 and 2001, the Company recorded $1.3
million and $2.1 million, respectively, for deferred compensation expense
related to restricted stock.
17
Item 2.
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Statements included in Management's Discussion and Analysis of Financial
Condition and Results of Operations which are not historical in nature are
intended to be, and are hereby identified as, "forward-looking statements" for
purposes of the safe harbor provided by Section 21E of the Securities Exchange
Act of 1934, as amended by Public Law 104-67. Forward-looking statements may be
identified by words including "anticipate," "believe," "intends," "estimates,"
"expect" and similar expressions. The Company cautions readers that
forward-looking statements, including without limitation, those relating to the
Company's future business prospects, revenues, working capital, liquidity and
income, are subject to risks and uncertainties that could cause actual results
to differ materially from those indicated in the forward-looking statements, due
to important risks and factors herein identified or identified from time to time
in the Company's reports filed with the Securities and Exchange Commission.
Results of Continuing Operations
The following table sets forth, for the periods indicated, selected statement of
operations data as a percentage of total revenues:
Three months ended Nine months ended
September 30, September 30,
------------------- ------------------
2002 2001 2002 2001
------------------- ------------------
Revenues:
Financial & Claims Consulting revenues ........................... 69.4% 67.4% 71.0% 61.8%
Energy & Water Consulting revenues ............................... 30.6 32.1 29.0 32.8
----- ----- ----- -----
Core revenues .................................................... 100.0 99.5 100.0 94.6
Energy & Water Consulting - incremental revenues ................. - 0.5 - 5.4
----- ----- ----- -----
Total revenues ..................................................... 100.0% 100.0% 100.0% 100.0%
Cost of services:
Consulting services expense ...................................... 65.1 66.4 65.3 64.5
VSRP cash compensation expense - consultants ..................... - 4.7 - 6.4
Stock-based compensation expense (credit) - consultants .......... (1.7) (3.8) 0.7 1.2
----- ----- ----- -----
Total cost of services ...................................... 63.4 67.3 66.0 72.1
----- ----- ----- -----
Gross margin ....................................................... 36.6 32.7 34.0 27.9
General and administrative expenses .............................. 23.7 24.4 23.8 23.9
Depreciation expense ............................................. 2.9 3.3 3.1 2.9
Amortization expense ............................................. 0.7 2.6 0.7 2.4
VSRP cash compensation expense - other ........................... - 0.7 0.0 0.6
Stock-based compensation expense (credit) - other ................ (0.6) (1.4) 0.2 0.2
Restructuring costs .............................................. - - - 1.1
Litigation and settlement provision .............................. - - - 3.2
----- ----- ----- -----
Operating income (loss) ............................................ 9.9 3.1 6.2 (6.4)
Other income (loss), net ......................................... (0.1) 0.3 - 0.5
----- ----- ----- -----
Income (loss) before income taxes .................................. 9.8 3.4 6.2 (5.9)
Income tax expense (benefit) ..................................... 3.9 1.7 2.5 (2.0)
----- ----- ----- -----
Net income (loss) .................................................. 5.9% 1.7% 3.7% (3.9)%
===== ===== ===== =====
18
2002 Compared to 2001 - For the three months and nine months ended September 30,
2002 and 2001.
Revenues. Total revenues consist of core revenues and success fee revenues. Core
revenues are primarily a function of billable hours, consultant headcount and
billable project-related expenses, that are primarily billed on a time and
material basis. Billable project-related expenses include travel costs,
subcontractor services and materials recoverable under the terms of contracts.
Success fees revenues are incremental revenues, which are earned once a certain
contractual objective, if any, has been attained on the closing of an engagement
and are recorded on a percentage of completion basis.
For the three months and nine months ended September 30, 2002, total revenues
were $66.6 million and $188.2 million, respectively, compared to $57.1 million
and $177.4 million for the comparable periods in 2001, which represent increases
in total revenues of 16.6 percent and 6.1 percent, respectively. For the three
months and nine months ended September 30, 2002, core revenues increased 17.2
percent and 12.1 percent, respectively, from the $56.8 million and $167.8
million recorded in the comparable periods in 2001. The Company posted an upward
trend in quarterly total revenues for the three quarters ended September 30,
2002, whereas for the same quarterly period in 2001 there was a downward trend
in quarterly total revenues. The increases in total revenues and upward trend in
quarterly total revenues for the year 2002 are primarily attributed to an
increase in the consulting staff, billable hours and billable project-related
expenses. The Company has increased its employee base from a combination of new
hires and business acquisitions. For the three months and nine months ended
September 30, 2002, billable hours increased 4.9 percent and 9.9 percent,
respectively, when compared to the comparable periods in 2001. Another factor in
the increase in total revenues is the increase in average total revenue per
consultant, which is reflective of bill rate increases, the higher bill rates
related to consultants of certain recent acquired businesses and the increase in
billable project-related expenses. Certain recent acquired businesses employ
senior level professionals, whose specialties merit higher bill rates than the
Company's average bill rates.
Consulting Services Expense. Consulting services expense includes consultant
wages and benefits, direct project-related expenses and client development
expenses.
For the three months and nine months ended September 30, 2002, consulting
services expense was $43.4 million and $123.0 million, respectively, compared to
$37.9 million and $114.4 million, respectively, for the comparable periods in
2001, which represents increases in consulting service expense of 14.5 percent
and 7.5 percent, respectively. The increases are primarily attributed to an
increase in consultant payroll expense, which is related to an increase in
headcount due to new hires and acquisitions. In addition, the Company had an
increase in billable project-related material costs.
For the nine months ended September 30, 2002, consulting services expense
included $0.8 million in costs associated with the acquisition and integration
of acquired businesses during the second quarter 2002. For the three and nine
months ended September 30, 2001, consulting service expense included $1.2
million and $3.6 million, respectively, of acquisition compensation expense
related to the employment provisions of the Barrington Consulting Group, Inc.
purchase agreement. When excluding the aforementioned expense in the periods
discussed, consulting services expense would have been $43.4 million and $122.2
million for the three months and nine months ended September 30, 2002,
respectively, compared to $36.7 million and $110.8 million, respectively, for
the comparable periods in 2001, which represent increases in adjusted consulting
services expense of 18.3 percent and 10.3 percent, respectively.
VSRP Cash Compensation Expense - Consultants. VSRP ("Value Sharing Retention
Program") cash compensation expense is the cash compensation component of the
Value Sharing Retention Program that was adopted in September 2000. The cash
compensation portion of Value Sharing Retention Program was paid out over a
one-year term that commenced in September 2000 and ended in September 2001, and
the expense was recorded over that period. For the three months and nine months
ended September 30, 2001, VSRP cash compensation expense was $2.7 million and
$11.3 million, respectively. There was no expense for the three months and nine
months ended September 30, 2002.
Stock-based Compensation Expense (Credit) - Consultants. Stock-based
compensation expense (credit)- consultants includes non-cash compensation
expense related to restricted shares, exchanged stock options and VSRP stock
options awarded to the Company's consultants. Stock-based compensation expense
is recorded for VSRP stock options and exchanged stock options that are
subjected to variable accounting. Compensation expense (credit) for these awards
19
is recorded, on a cumulative basis, for the increase (decrease) in the Company's
stock price above the exercise prices. Similarly, stock-based compensation
expense (credit) is recorded for stock appreciation rights for the cumulative
valuation increase (decrease) from the Company's stock price above the grant
price. In addition, stock-based compensation expense is recorded for restricted
shares, in which the fixed compensation expense is recorded on a straight-line
basis over the vesting term for the valuation at grant date. Due to the
Company's stock price volatility, the measurement of compensation expense for
variable accounting awards causes stock-based compensation to fluctuate from
period to period. In addition, forfeiture of certain awards distorts
comparability of periods.
For the three months and nine months ended September 30, 2002, the Company
recorded stock-based compensation credit of $1.1 million and an expense of $1.3
million, respectively, compared to a credit of $2.2 million and an expense of
$2.1 million for the comparable periods in 2001.
General and Administrative Expenses. General and administrative expenses include
corporate management and administrative wages and benefits, facility-related
costs, bad debt provisions, corporate professional fees, and all other corporate
and business support costs.
For the three months and nine months ended September 30, 2002, general and
administrative expenses were $15.8 million and $44.8 million, respectively,
compared to $13.9 million and $42.4 million for the comparable periods in 2001.
General and administrative expenses increased for these periods primarily due to
additional facility-related costs to support the headcount growth and to support
the geographic reach of the Company. As of September 30, 2002, the Company had
approximately 50 offices compared to about 40 offices a year ago. Some of these
offices were added through the acquisition of businesses. The Company believes
it can consolidate certain offices and may choose not to renew certain leases in
the future in order to reduce costs. For all periods compared, general and
administrative expenses were approximately 23 percent to 24 percent of total
revenues. These percentages are above the Company's target of 20 percent to 21
percent of total revenues. The Company believes that it will benefit from
economies of scale as recent acquisitions become fully integrated and revenues
increase.
Depreciation Expense. For the three months and nine months ended September 30,
2002, depreciation expense was $1.9 million and $5.8 million, respectively,
compared to $1.9 million and $5.2 million for the comparable periods in 2001.
The increase in depreciation expense is primarily attributed to depreciation
recorded on new capital purchases consisting of computer equipment and costs
related to configuration of certain offices to accommodate newly acquired
businesses.
Amortization Expense. For the three months and nine months ended September 30,
2002, amortization expense was $0.5 million and $1.2 million, respectively,
compared to $1.5 million and $4.2 million for the comparable periods in 2001.
The Company adopted SFAS 142 in 2002. In accordance with SFAS 142, goodwill is
no longer subject to amortization but subject to annual impairment testing. The
decrease in amortization expense from 2001 to 2002 results from not having any
goodwill amortization for 2002.
Other Income (Expense), Net. Other income (expense) includes the net of interest
income, interest expense and other non-operating income and expenses. With the
exception of the nine month period ended September 30, 2001, other income for
the periods compared was nil. For the nine months ended September 30, 2001,
other income was $0.8 million and consisted primarily of interest income
realized for the cash holdings obtained from sales proceeds of several
dispositions in 2000. The Company expects other income, net, to result in an
expense in the short-term future as the Company pays interest expense on its
bank borrowings.
Income Tax Expense (Benefit). The Company's income tax rate for the three months
and nine months ended September 30, 2002 was 39.7 percent and 40.0 percent,
respectively. These rates differ from the effective rates of the three months
and nine months ended September 30, 2001, primarily because portions of the
goodwill amortization recorded in 2001 were not deductible for income tax
purposes.
20
Human Capital
The Company had 1,047 consultants as of September 30, 2002, a net increase of 55
consultants since the beginning of year. The increase includes approximately 230
consultants from business acquisitions, which was offset by higher than normal
attrition principally related to the termination of personnel in underperforming
practices.
In the normal course of business, the Company needs to retain highly skilled
professionals, particularly those not bound by non-compete or non-solicitation
agreements. Senior and mid-level consultants hired in 2000 and thereafter are
subject to non-solicitation covenants that are consistent with standard industry
practices, which provide for non-solicitation arrangements that extend beyond
the employee's separation date. A significant number of senior and mid-level
consultants hired prior to 2000, however, are subject to non-solicitation
agreements that expire in November 2002. The Company's inability to retain
highly skilled professionals, coupled with departures of a significant number of
senior employees, could have a material effect on the Company's business.
In order to secure new non-solicitation agreements for those consultants who
have agreements that expire in November 2002, the Company has implemented a
predominantly stock-based retention program ("leadership program") for key
leaders in both of the Company's business segments, using the Company's existing
Long-Term Incentive Program authorization. The program provides for individual
purchases over five years of up to 1.2 million restricted stock units with an
equal accompanying match of 1.2 million restricted stock units, as well as
additional cash compensation of up to $4.5 million over three years, in return
for the adoption of industry standard non-solicitation.
In the Financial & Claims business segment, the Company has been successful in
securing participation in the leadership program and has obtained
non-solicitation restrictions from over 90% of the key leaders that were offered
participation The Company expects similar acceptance in the Energy & Water
segment.
Liquidity and Capital Resources
Summary
The Company had approximately $6.6 million in cash and cash equivalents at
September 30, 2002, compared to $36.0 million at December 31, 2001. The
Company's cash equivalents were primarily limited to commercial paper or
securities (rated A or better), with maturities of 90 days or less.
Working capital, the excess of current assets over current liabilities, at
September 30, 2002 was $27.8 million, compared to $53.6 million at December 31,
2001. The decrease in working capital is primarily related to the use of cash to
finance business acquisitions during the nine months ended September 30, 2002,
and to pay for other acquisition-related obligations.
The Company calculates accounts receivable days sales outstanding ("DSO") on a
gross basis by dividing the net accounts receivable balance at the end of the
quarter by daily net revenues. Daily net revenues are calculated by taking net
quarter revenues divided by 90 days, approximately equal to the number of days
in a quarter. Calculated as such, DSO was 89 days at September 30, 2002,
compared to 81 days at December 31, 2001. The Company's DSO target is 80 days or
lower. The Company is exploring changes in certain billing and collection
methodologies to lower DSO.
Cash Flow
Net cash used by operating activities was $1.6 million for the nine months ended
September 30, 2002. The primary reason for the operating cash outflow is related
to the increase in DSO. This increase in DSO from the beginning of the year is
primarily attributed to the increase in accounts receivable caused by the
increase in revenues for the quarter ended September 30, 2002 over the fourth
quarter ended December 31, 2001. Additionally, certain recent acquisitions have
projects that have not completed their initial sales turnover cycle as of
September 30, 2002, thereby creating increasing working capital needs within the
quarter.
Net cash used in investing activities was $40.9 million, primarily due
to acquisition-related transactions. The Company paid $32.7 million in cash for
businesses acquired during the nine months ended September 30, 2002. The Company
paid a $2.1 million obligation related to the PENTA purchase agreement and $1.5
million as the first installment of notes payable issued with respect to the
Barba-Arkhon purchase agreement.
21
In addition, the Company used $4.7 million for capital spending to support
personnel and services and to configure certain offices to accommodate newly
acquired businesses and other new hires.
Net cash provided by financing activities was $13.2 million. The Company
borrowed $11.1 million from its line of credit facility and received net cash
and related tax benefits of $3.8 million as a result of stock options exercised
and stock purchased by employees. The Company used $1.7 million to purchase 0.3
million shares of its common stock.
Debt, Commitments and Capital Expenditures
As of September 30, 2002, the Company maintained a $35.0 million unsecured
revolving line of credit arrangement with LaSalle Bank. The line of credit bore
interest at prime or LIBOR plus an additional percentage based on the latest
covenant ratios. Under the agreement, the Company may borrow a maximum amount of
up to 85 percent of eligible accounts receivable. Based on the balances at
September 30, 2002, the Company may borrow a maximum amount of up to $35.0
million. The agreement contains certain covenants, the most restrictive of which
require the Company to maintain a minimum level of earnings before interest,
taxes, depreciation and amortization. The Company was in compliance with the
terms of the agreement as of September 30, 2002 and December 31, 2001. As of
September 30, 2002, the Company had a balance outstanding of $11.1 million under
its line of credit facility. The Company did not have a balance outstanding
under the line of credit at December 31, 2001.
In November 2002, the Company entered into a new revolving line of credit
agreement for $50.0 million, with the ability to increase the amount up to $75.0
million over the term of the three year agreement. A consortium between the
LaSalle Bank, N.A., the Company's primary banker, and US Bank, N.A. agreed to
finance the new revolving line of credit agreement. The revolving line of credit
agreement expires on October 31, 2005 and the Company has the option to extend
the agreement for an additional two years from the expiration date. Borrowings
under the new revolving line of credit agreement bear interest based, at the
Company's option, on either (1) the higher of the prime rate or the federal
funds rate plus 0.5 percent, or (2) London Interbank Offered Rate (LIBOR). The
new agreement contains similar covenants as the former agreement, which require
the Company to maintain a minimum level of earnings before interest, taxes,
depreciation and amortization. There were no other substantive changes in the
terms and conditions in the new agreement. The Company entered into the new line
of credit agreement primarily to extend the expiration date and to maintain
flexibility for potential acquisitions of businesses and general business needs.
The Company had $3.0 million in notes payable under the Barba-Arkhon purchase
agreement due in two equal annual installments on March 1, 2002 and 2003. The
Company paid the first annual installment of $1.5 million on March 1, 2002. The
second installment is due on March 1, 2003 and bears interest at a 6 percent
annual percentage rate payable on a quarterly basis.
As of September 30, 2002, the Company had a total of $9.2 million in deferred
purchase price obligation payable in cash and its common stock. As of September
30, 2002, the Company had no significant commitments for capital expenditures,
except for those related to rental expense under operating leases.
The Company believes that the current cash and cash equivalents, the future cash
flows from operations and the $50.0 million line of credit facility provide
adequate cash to fund anticipated short-term and long-term cash needs from
normal operations. In the event the Company were to make significant cash
expenditures in the future for major acquisitions or other non-operating
activities, the Company might need additional debt or equity financing, as
appropriate.
Contingencies
During the next three years, the Company is subject to pay additional purchase
price amounts that are part of the consideration for certain purchase
agreements. The payments, if any, are contingent on the achievement of certain
revenue and gross margin targets reached by the consultants of the acquired
businesses. The Company believes that it will have sufficient funds to satisfy
obligations, if any, related to the contingent consideration. The Company
expects to fund these contingent payments, if any, from the cash generated from
the operations of these acquired businesses.
22
Critical Accounting Policies
The preparation of the financial statements requires management to make
estimates and assumptions that affect amounts reported therein. The Company
bases its estimates on historical experience and on various assumptions that are
believed to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from
these estimates under different assumptions or conditions.
The Company believes the following critical accounting policies affect its more
significant judgments and estimates used in the preparation of its consolidated
financial statements:
Revenue Recognition Policies
The Company recognizes revenues as the related professional services are
provided. In connection with recording revenues, estimates and assumptions are
required in determining the expected conversion of the revenues to cash. From
time to time, the Company also earns incremental revenues, commonly referred to
as "success fees" based on the successful closing of client asset sales. These
success fee amounts are generally contingent on a specific event, after which
revenue is recognized on the percentage of completion method.
Accounts Receivable Realizability Determinations
The Company maintains allowances for doubtful accounts for estimated losses
based on the Company's review and assessment of its clients' ability to make
required payments, and the estimated realization, in cash, by the Company of
amounts due from its clients. If the financial condition of the Company's
clients were to deteriorate resulting in an impairment of their ability to make
payments, additional allowances might be required.
Valuation of Net Deferred Tax Assets
The Company has recorded net deferred tax assets as it expects to realize future
tax benefits related to the utilization of these assets. Although the Company
has experienced net losses in recent fiscal years, no valuation allowance has
been recorded related to these deferred tax assets because management believes
that it is more likely than not that future taxable income will be sufficient to
realize the future tax benefits. Should the Company determine that it would not
be able to realize all or part of its net deferred tax assets in the future, it
would need to establish an allowance which would be recorded as a charge to
income in the period in which such determination was made.
23
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company's primary exposure to market risks relates to changes in interest
rates associated with its borrowings under the line of credit, and its
investment portfolio, classified as cash equivalents. The Company's general
investment policy is to limit the risk of principal loss by limiting market and
credit risks.
As of September 30, 2002, the Company's investments were primarily limited to
`A' rated securities with maturity dates of 90 days or less. These financial
instruments are subject to interest rate risk and will decline in value if
interest rates rise. Due to these instruments being readily marketable, an
immediate rise in interest rates would not have a material effect on the Company
financial position or operating results. If interest rates average 25 basis
points less in fiscal year 2002 than they did in 2001, the Company's interest
income will decrease by $0.1 million on an annualized basis. This amount is
determined by considering the impact of this hypothetical interest rate on the
Company's investment portfolio at September 30, 2002. The Company does not
expect any loss with respect to its investment portfolio.
The Company's market risk associated with its line of credit relates to changes
in interest rates. Borrowings under the new line of credit agreement bear
interest based, at the Company's option, on either the higher of the prime rate
or the federal fund rate plus 0.5 percent, or London Interbank Offered Rate
(LIBOR). Based on the line of credit balance as of September 30, 2002, a
substantial rise in interest rates would have a material effect on the Company's
financial position and operating results. The Company does not anticipate any
material changes in interest rates in the short-term future.
Other than the second installment of the Barba-Arkhon notes payable, the line of
credit obligation and certain deferred purchase price obligations, the Company
does not have any short-term debt, long-term debt, interest rate derivatives,
forward exchange agreements, firmly committed foreign currency sales
transactions, or derivative commodity instruments.
The Company operates in foreign countries which exposes it to market risk
associated with foreign currency exchange rate fluctuations; however, such risk
is immaterial at this time in relation to the Company's consolidated financial
statements.
Item 4. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Within 90 days prior to the date of this report, the registrants carried out an
evaluation, under the supervision and with the participation of the registrants'
management, including the registrants' Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
registrants' disclosure controls and procedures pursuant to Rule 12a-14(c) and
15d-14(c) of the Securities Exchange Act of 1934. Based upon that evaluation,
the Chief Executive Officer and Chief Financial Officer concluded that the
registrants' disclosure controls and procedures are effective in timely alerting
them to material information relating to the registrants required to be included
in the registrants' periodic SEC filings.
(b) Change in internal controls.
There were no significant changes in the registrants' internal controls or in
other factors that could significantly affect these controls subsequent to the
date of their evaluation. There were no significant deficiencies or material
weaknesses, and therefore there were no corrective actions taken.
24
PART II--OTHER INFORMATION
Item 1. Legal Proceedings
As previously disclosed, in 2000 the Company and two former officers were named
as defendants in a complaint entitled Klein v. Navigant Consulting, Inc. et al.
This action is now pending in California state court. The plaintiffs, a former
employee and shareholder, his wife and their family trust, allege that in 1999
the defendants improperly prevented them from hedging approximately 40,000
shares of the Company's stock. They seek compensatory and punitive damages from
defendants based on various theories. The Company is vigorously defending this
action, which is currently scheduled for mediation in December 2002 and trial in
May 2003.
In October 2002, the Company filed a complaint against two former employees in
the United States District Court for the Northern District of Texas entitled,
Navigant Consulting Inc. v. Wilkinson et al. This complaint was amended in
November 2002 to include another former employee. The complaint seeks to protect
the Company's intellectual property rights in certain proprietary software and
to enforce certain provisions of its former employees' confidentiality and
non-solicitation agreements. The Company is seeking declaratory and injunctive
relief, compensatory and punitive damages and attorneys' fees on various legal
theories, including misappropriation of trade secrets, conversion, breach of
contract, and breach of fiduciary duties. In November, defendant filed an answer
and a counterclaim for defamation. The Company believes that the counterclaim is
without merit.
In addition to the settlement of the consolidated securities law class action
and the other legal proceedings discussed in Item 3 of the Company's most recent
Annual Report on SEC Form 10-K, from time to time the Company is party to
various other lawsuits and claims in the ordinary course of business. While the
outcome of those lawsuits or claims cannot be predicted with certainty, the
Company does not believe that any of those lawsuits or claims will have a
material adverse effect on the Company.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Events
The Company has extended two tender offers to its employees, which includes the
exchange of options subject to variable accounting for restricted stock and the
purchase of options with exercise prices significantly above the Company's stock
market price, for cash. The offers are expected to reduce the open-ended effects
of variable accounting and the volatile impact on the Company's statement of
operations, as well as provide the Company additional flexibility under its
existing Long-Term Incentive Plan (LTIP). Both tender offers commenced on
October 4, 2002 and the expiration date was extended to November 4, 2002. As a
part of the purchase offer, 0.1 million options were repurchased for an amount
of $0.2 million. The exchange offer recovered 1.1 million options that were
replaced by 0.8 million restricted shares with a value of $4.0 million at the
date of grant.
25
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits. The following exhibits are filed with the Form 10-Q:
Exhibit 99.1 - Certification of Chief Executive Officer Pursuant
to Section 1350 of Chapter 63 of Title 18 of the United States
Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
Exhibit 99.2 - Certification of Chief Financial Officer Pursuant
to Section 1350 of Chapter 63 of Title 18 of the United States
Code, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) Reports on Form 8-K
(1) A Form 8-K dated September 23, 2002 and filed October 7, 2002
reporting under Item 2 of Form 8-K the acquisition of The Hunter Group
and reporting under Item 7 of Form 8-K the financial statements of the
business acquired.
26
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Navigant Consulting, Inc.
By: /s/ William M. Goodyear
-----------------------------------
William M. Goodyear
Chairman and Chief Executive
Officer
By: /s/ Ben W. Perks
-----------------------------------
Ben W. Perks
Executive Vice President and Chief
Financial Officer
Date: November 14, 2002
27
CERTIFICATIONS
I, William M. Goodyear, Chairman and Chief Executive Officer of Navigant
Consulting, Inc. (the "Company"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of the Company;
2. Based on my knowledge, the quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present, in all material
respects, the financial condition, results of operations and cash flows of the
Company as of, and for, the periods presented in this quarterly report;
4. The Company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Company and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the Company, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period
in which this quarterly report is being prepared;
b) evaluated the effectiveness of the Company's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The Company's other certifying officer and I have disclosed, based on our
most recent evaluation, to the Company's auditors and the Audit Committee of the
Company's Board of Directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to record, process,
summarize and report financial data and have identified for the Company's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal controls; and
6. The Company's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ William M. Goodyear
- -----------------------------------------------
William M. Goodyear
Chairman and Chief Executive Officer
28
I, Ben W. Perks, Chairman and Chief Executive Officer of Navigant Consulting,
Inc. (the "Company"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of the Company;
2. Based on my knowledge, the quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present, in all material
respects, the financial condition, results of operations and cash flows of the
Company as of, and for, the periods presented in this quarterly report;
4. The Company's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Company and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the Company, including its consolidated subsidiaries, is
made known to us by others within those entities, particularly during the period
in which this quarterly report is being prepared;
b) evaluated the effectiveness of the Company's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The Company's other certifying officer and I have disclosed, based on our
most recent evaluation, to the Company's auditors and the Audit Committee of the
Company's Board of Directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the Company's ability to record, process,
summarize and report financial data and have identified for the Company's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the Company's internal controls; and
6. The Company's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Ben W. Perks
- ---------------------------------------------------------------
Ben W. Perks
Executive Vice President and Chief Financial Officer
29