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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(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 March 31, 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 May 10, 2002, 39.0 million shares of the Registrant's common stock,
par value $.001 per share ("Common Stock"), were outstanding.
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NAVIGANT CONSULTING, INC.
PERIOD ENDED MARCH 31, 2002
INDEX
Page
----
PART I--FINANCIAL INFORMATION
Item 1. Financial Statements......................................................................... 3
Notes to Unaudited Consolidated Financial Statements......................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........ 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk................................... 15
PART II--OTHER INFORMATION
Item 1. Legal Proceedings............................................................................ 16
Item 4. Submission of Matters to a Vote.............................................................. 16
Item 6. Exhibits and Reports on Form 8-K............................................................. 16
SIGNATURES............................................................................................... 17
2
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, December 31,
ASSETS 2002 2001
------ ----------- ------------
(Unaudited)
Current assets:
Cash and cash equivalents..................... $ 24,432 $ 35,950
Accounts receivable, net...................... 56,699 52,412
Prepaid expenses and other current assets..... 7,232 4,804
Deferred income taxes......................... 5,611 5,611
--------- ---------
Total current assets...................... 93,974 98,777
Property and equipment, net...................... 19,773 20,648
Goodwill and intangible assets, net.............. 35,125 35,455
Deferred income taxes............................ 2,445 2,445
Other assets..................................... 1,426 1,501
--------- ---------
Total assets.............................. $ 152,743 $ 158,826
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable and accrued liabilities...... $ 14,640 $ 13,779
Accrued compensation related costs............ 6,273 14,798
Income taxes payable.......................... 8,685 8,191
Other current liabilities..................... 7,679 8,453
--------- ---------
Total current liabilities................. 37,277 45,221
Other non-current liabilities.................... -- 1,500
--------- ---------
Total liabilities......................... 37,277 46,721
Stockholders' equity:
Preferred stock............................... -- --
Common stock.................................. 45 44
Additional paid-in capital.................... 355,141 353,234
Deferred compensation--restricted stock....... (3,814) (4,504)
Treasury stock................................ (68,463) (67,394)
Accumulated deficit........................... (167,386) (169,214)
Accumulated other comprehensive loss.......... (57) (61)
--------- ---------
Total stockholders' equity................ 115,466 112,105
--------- ---------
Total liabilities and stockholders' equity $ 152,743 $ 158,826
========= =========
See accompanying notes to the unaudited consolidated financial statements.
3
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three months ended
March 31,
-----------------
2002 2001
------- --------
Financial & Claims Consulting revenues............. $45,326 $35,732
Energy & Water Consulting revenues................. 15,244 18,170
- ------- --------
Core revenues.............................. 60,570 53,902
Incremental revenues............................... -- 8,975
- ------- --------
Revenues................................................. 60,570 62,877
Consulting services expense........................ 39,075 39,533
VSRP cash compensation expense--consultants........ -- 4,402
Stock-based compensation expense--consultants (note 7) 1,456 1,866
------- --------
Gross margin............................................. 20,039 17,076
General and administrative expenses................ 14,374 14,001
Depreciation expense............................... 1,791 1,577
Amortization expense (notes 5 and 6)............... 338 1,270
VSRP cash compensation expense--other.............. -- 350
Stock-based compensation expense--other (note 7)... 486 552
------- --------
Operating income......................................... 3,050 (674)
Other income (loss), net........................... (28) 463
------- --------
Income (loss) before income taxes........................ 3,022 (211)
Income tax expense................................. 1,194 437
------- --------
Net income (loss).................................. $ 1,828 $ (648)
======= ========
Basic net income (loss) per share........................ $ 0.05 ($ 0.02)
Shares used in computing basic income (loss) per share... 38,723 38,441
Diluted net income (loss) per share...................... $ 0.04 ($ 0.02)
Shares used in computing diluted income (loss) per share. 40,905 38,441
Other comprehensive income (loss):
Foreign currency translation adjustment............ $ 60 $ (70)
Unrealized holding loss............................ $ (56) $ --
------- --------
Comprehensive income (loss)........................ $ 1,832 $ (718)
See accompanying notes to the unaudited consolidated financial statements.
4
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Three months ended
March 31,
------------------
2002 2001
-------- --------
Cash flows from operating activities:
Net income (loss).................................................................... $ 1,828 $ (648)
Adjustments to reconcile net income (loss) to net cash used in operating
activities, net of acquisitions:
Depreciation expense............................................................. 1,791 1,514
Amortization expense............................................................. 338 1,270
Stock-based compensation expense................................................. 1,943 2,394
Deferred income taxes............................................................ -- (225)
Changes in assets and liabilities:
Accounts receivable........................................................... (4,288) (609)
Prepaid expenses and other current assets..................................... (2,521) (1,681)
Accounts payable and accrued liabilities...................................... 861 (6,899)
Accrued compensation related costs............................................ (8,525) (3,435)
Income taxes.................................................................. 532 2,455
Other current liabilities..................................................... 1,176 (1,972)
-------- --------
Net cash used in operating activities................................................... (6,865) (7,836)
Cash flows from investing activities:
Purchases of property and equipment.................................................. (855) (1,518)
Acquisition of business.............................................................. -- (5,300)
Payment of contingent acquistion liabilities......................................... (2,146) (1,980)
Payment of note payable related to acquisition....................................... (1,500) --
Other, net........................................................................... 66 (220)
-------- --------
Net cash used in investing activities................................................... (4,435) (9,018)
Cash flows from financing activities:
Issuance of common stock............................................................. 893 362
Stock repurchases.................................................................... (1,111) (2,186)
-------- --------
Net cash used in financing activities................................................... (218) (1,824)
-------- --------
Net decrease in cash and cash equivalents............................................... (11,518) (18,678)
Cash and cash equivalents at beginning of the period.................................... 35,950 48,798
-------- --------
Cash and cash equivalents at end of the period.......................................... $ 24,432 $ 30,120
======== ========
See accompanying notes to the unaudited consolidated financial statements.
5
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 months ended March 31, 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 11,
2002.
"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.
Note 2. Basic and Diluted Shares
The components of the weighted-average basic and diluted shares (shown in
thousands) were as follows:
Three months ended
March 31,
------------------
2002 2001
------ ------
Basic shares outstanding.................... 38,723 38,441
Employee stock options and restricted shares 2,182 --
------ ------
Diluted shares outstanding.................. 40,905 38,441
====== ======
In January 2001, the Company issued 1.9 million restricted shares. As of
March 31, 2002, 1.2 million restricted shares were outstanding. These
restricted shares have voting rights but are not vested and, accordingly, are
excluded from the basic earnings per share calculation until vesting occurs.
For the three months ended March 31, 2001, the weighted-average effect of
employee stock options and restricted shares were 2.9 million. However, the
Company incurred a net loss in that period; therefore, those options were
excluded from the calculation of diluted per share amounts.
Note 3. Treasury Stock Repurchases
In October 2000, the Board of Directors authorized the repurchase of up to
5.0 million shares of the Company's common stock. In the first quarter 2002,
the Company repurchased 0.2 million shares for $1.1 million. The Company has
repurchased a total of 2.0 million shares for $8.6 million since October 2000.
6
Note 4. Segment Information
The Company is comprised of two business segments: Financial & Claims
Consulting and Energy & Water Consulting.
The Financial & Claims consulting business segment is comprised of advisors
and consultants who specialize in assisting clients with the financial,
economic, accounting and information aspects of its engagements. The business
segment provides consulting services such as data management, quality control,
business and property valuation, research and analysis, litigation support and
expert testimony, bankruptcy and solvency management, outsourcing and claims
management and processing.
The Energy & Water Consulting business segment is comprised of advisors and
consultants who provide services to all areas of the energy industry. The
business segment provides consulting and transaction support services to the
energy, network-based and regulatory industries. These services include, among
others, the areas of production, generation, transmission, distribution, and
retail supply. The business segment also provides planning and engineering
services to the water industry.
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. All intercompany
transactions between segments have been eliminated. Information on the
Company's continuing operations for the three months ended March 31, 2002 and
2001 have been summarized as follows (shown in thousands):
For the three months
ended March 31,
-------------------
2002 2001
------- -------
Revenues:
Financial & Claims Consulting............................ $45,326 $35,732
Energy & Water Consulting................................ 15,244 18,170
Energy & Water Consulting--Incremental revenues.......... -- 8,975
------- -------
Combined segment revenues............................ $60,570 $62,877
======= =======
Operating profit (loss):
Financial & Claims Consulting............................ $ 7,866 $ 5,042
Energy & Water Consulting................................ (745) 5,884
------- -------
Combined segment operating profit.................... $ 7,121 $10,926
======= =======
Operating Profit and Statement of Operations reconciliation:
Unallocated:
Other non-recurring general and administrative expenses.. -- 380
Acquisition-related compensation expense................. -- 1,203
VSRP cash compensation expense........................... -- 4,752
Depreciation expense..................................... 1,791 1,577
Amortization expense..................................... 338 1,270
Stock-based compensation expense......................... 1,942 2,418
Other expense (income)................................... 28 (463)
------- -------
Sub-total............................................ 4,099 11,137
------- -------
Income (loss) before income tax expense..................... 3,022 $ (211)
======= =======
The information presented does not necessarily reflect the results of
segment operations that would have occurred had the segments been stand-alone
businesses.
7
Certain general and administrative expenses, which relate to general
corporate costs, were allocated to operating segments on the basis of
consulting fee revenues.
VSRP cash compensation expense, acquisition-related compensation expense,
stock-based compensation expense and other non-recurring 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.
Note 5. Goodwill and Intangible Assets:
In accordance with SFAS 142, the Company tested for impairment the goodwill
assigned to each reporting unit. Any impairment loss is to be measured as of
the date of adoption and recognized as the cumulative effect of a change in
accounting principle in the first interim period. The Company used the
discounted cash flow valuation method to test for impairment. The Company
concluded there was no indication of goodwill impairment for either of the two
reporting units. If indicators of impairment are deemed to be present after the
date of adoption, 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.
Goodwill and other intangible assets consisted of (shown in thousands):
March 31, December 31,
2002 2001
--------- ------------
Goodwill............................... $36,766 $36,758
Less--accumulated amortization......... (5,425) (5,425)
------- -------
Goodwill, net....................... 31,341 31,333
Intangible assets:
Customer lists......................... 4,470 4,470
Non-compete agreements................. 5,200 5,200
------- -------
9,670 9,670
Less: accumulated amortization......... (5,886) (5,548)
------- -------
Intangible assets, net.............. 3,784 4,122
------- -------
Goodwill and intangible assets, net. $35,125 $35,455
======= =======
The carrying balances of goodwill and intangible assets by reporting
segments as of March 31, 2002 are as follows (shown in thousands):
Intangible
Goodwill Assets Total
-------- ---------- -------
Financial & Claims Consulting $30,631 $3,658 $34,289
Energy & Water Consulting.... $ 710 $ 126 $ 836
------- ------ -------
Total........................ $31,341 $3,784 $35,125
======= ====== =======
The Company made certain reclassifications of balances between goodwill and
intangible assets. In accordance with SFAS 141, the Company reclassified the
employee workforce account 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 respective 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 March 31, 2002, there was no impairment related to
the intangible assets. The Company will amortize the
8
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.
Total amortization expense for the three months ended March 31, 2002 was
$0.3 million. 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 March 31, 2002 (shown in
thousands):
Year ending December 31, Amount
------------------------ ------
2002............. $1,684
2003............. 1,491
2004............. 291
2005............. 263
2006............. 263
Thereafter....... 131
------
$4,123
======
Note 6. Pro forma Disclosure
As of January 1, 2002, the Company in accordance with SFAS 142 ceased the
amortization of goodwill. The following unaudited pro forma financial
information presents the combined results of operations for the three months
ended March 31, 2001 and 2002.
Three months ended
March 31,
-----------------
(In thousands, except earnings per share amounts) 2002 2001
------------------------------------------------- ------ ------
Net income (loss)....................... $1,828 $ (648)
Add back: Goodwill amortization......... -- $ 539
------ ------
Adjusted net income (loss).............. $1,828 $ (109)
====== ======
Diluted earnings per share:
Net income (loss)....................... $ 0.04 $(0.02)
Goodwill amortization................... $ 0.00 $ 0.02
------ ------
Adjusted net income..................... $ 0.04 $ 0.00
====== ======
Basic earnings per share:
Net income (loss)....................... $ 0.05 $(0.02)
Goodwill amortization................... $ 0.00 $ 0.02
------ ------
Adjusted net income..................... $ 0.05 $ 0.00
====== ======
Note 7. Stock-based Compensation Expense
Stock-based compensation expense related to Value Sharing Retention Program
("VSRP") stock options, exchanged stock options, restricted shares and stock
appreciation rights awarded to the Company's employees. As of March 31, 2002,
the Company had 9.0 million stock options and restricted shares outstanding. Of
the stock options outstanding, 1.7 million stock options are subject to
variable accounting and stock-based compensation expense has been recorded
accordingly. Stock-based compensation expense is recorded, on a cumulative
basis, for the increase in the Company's stock price above the grant or
exercise prices of the associated awards. The Company's stock price was $6.48
as of March 31, 2002, compared to $5.50 at December 31, 2001 and, accordingly,
the Company recorded stock-based compensation expense related to this increase
in stock price from period to period.
9
For the three months ended March 31, 2002, the Company recorded total
stock-based compensation of $1.9 million, of which $1.5 million related to
consultants. For the three months ended March 31, 2001, the Company recorded
total stock-based compensation expense of $2.4 million, of which $1.9 million
related to consultants, based on a stock-price of $6.66 at March 31, 2001 and
then-outstanding 2.1 million stock options subject to variable accounting.
Included in each of the periods is $0.7 million of stock-based compensation
expense for restricted shares that has been recorded on a straight-line basis
over the vesting term.
Note 8. Supplemental Consolidated Balance Sheet Information
Accounts Receivable:
The components of accounts receivable were as follows (shown in thousands):
March 31, December 31,
2002 2001
--------- ------------
Billed amounts...................... $ 41,611 $41,814
Engagements in process.............. 25,092 20,546
Allowance for uncollectible accounts (10,004) (9,948)
-------- -------
$ 56,699 $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
customer. Billings are generally done on a monthly basis for the prior month's
services.
Accounts Payable and Accrued Liabilities:
The components of accounts payable and accrued liabilities were as follows
(shown in thousands):
March 31, Dec. 31,
2002 2001
--------- --------
Accounts payable........... $ 5,690 $ 4,334
Accrued liabilities........ 3,570 3,562
Litigation settlement...... 2,000 2,000
Accrued restructuring costs 3,380 3,883
------- -------
$14,640 $13,779
======= =======
The litigation settlement of $2.0 million at March 31, 2002 and December 31,
2001 relates to the second annual installment of the Geo Data litigation
settlement and is due July 2002.
The activity affecting the accrued restructuring costs for the three months
ended March 31, 2002 consisted of $0.5 million utilized for facility closing
costs. The costs the Company may ultimately incur may change as the remainder
of the Company's restructuring plan is executed. The Company periodically
reviews the accrued restructuring costs account to determine if the accrual is
sufficient to cover the remaining costs of executing its restructuring plan.
Based on the information available at March 31, 2002, the restructuring accrual
is sufficient.
Note 9. Supplemental Consolidated Cash Flow Information
Total interest paid during the three months ended March 31, 2002 and 2001
was $0.07 million and $0.03 million, respectively. Total income taxes paid
during three months ended March 31, 2002 and 2001 were $1.0 million and $1.5
million, respectively. Total income tax refunds during the three months ended
March 31, 2002 and 2001 were $0.5 million and $3.7 million, respectively.
During the first quarter of 2001, the Company issued $3.0 million in notes
payable in the Barba-Arkhon acquisition.
For the three months ended March 31, 2002 and March 31, 2001, the Company
recorded, in each period, $0.7 million for deferred compensation related to
restricted stock.
10
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 revenues:
Three months
ended March 31,
-------------
2002 2001
----- -----
Revenues......................................... 100.0% 100.0%
Consulting services expense................... 64.5 62.9
VSRP cash compensation expense - consultants.. 0.0 7.0
Stock-based compensation expense--consultants. 2.4 3.0
----- -----
Gross margin..................................... 33.1 27.1
General and administrative expenses........... 23.7 22.3
Depreciation expense.......................... 3.0 2.5
Amortization expense.......................... 0.6 2.0
VSRP cash compensation expense - other........ 0.0 0.6
Stock-based compensation expense--other....... 0.8 0.9
----- -----
Operating income (loss).......................... 5.0 (1.2)
Other income, net............................. 0.0 0.7
----- -----
Income(loss) before income taxes................. 5.0 (0.5)
Income tax expense............................ 2.0 0.7
----- -----
Net income (loss)................................ 3.0% (1.2)%
===== =====
11
2002 Compared to 2001--For the three month period ended March 31.
Revenues. Revenues are primarily a function of billable hours and consultant
headcount. Revenues decreased $2.3 million, or 3.7%, to $60.6 million in 2002,
from $62.9 million in 2001. The revenues earned in the first quarter of 2001
included $9.0 million of incremental revenues. The Company did not have any
incremental revenues, commonly referred to as "success fees", during the first
quarter 2002. Excluding these incremental amounts, revenues increased $6.7
million, or 12.4%, from $53.9 million. The increase in the revenues is
primarily attributed to an increase in billable hours and the 11% headcount
increase in the consulting staff. The Company has increased its employee base
from a combination of new hires and business acquisitions. The average employee
utilization percentage and bill rates for the first quarter 2002 and 2001 were
generally comparable.
Consulting Services Expense. Consulting services expense includes consultant
wages and benefits, direct project-related expenses and client development
expenses. Consulting services expense decreased $0.4 million, or 1.0%, to $39.1
million in 2002, from $39.5 million in 2001. The first quarter 2001 expense had
certain charges that are not present in the first quarter 2002, including $1.2
million of acquisition compensation expense related to the employment
provisions of the Barrington purchase agreement, and $2.3 million in costs
associated with generating incremental fee revenues. When excluding those
charges for comparative purposes, consulting services expense for the first
quarter 2002 increased $3.1 million, or 8.6%, to $39.1 million, from $36.0
million, adjusted for those charges. The increase in consulting services
expense is primarily attributed to the increase in headcount.
VSRP Cash Compensation Expense--Consultants. VSRP ("Value Sharing Retention
Program") cash compensation expense is the cash compensation component of the
Value Sharing Retention Program. The cash compensation portion of Value Sharing
Retention Program was a one-year term that commenced in September 2000 and
ended in September 2001. The compensation expense was recorded on a
straight-line basis over the term. VSRP cash compensation expense for the first
quarter 2001 was $4.4 million.
Stock-based Compensation Expense--Consultants. Stock-based compensation
expense - 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, on a
cumulative basis, for the increase in the Company's stock price above the grant
or exercise prices of the associated awards. The Company's stock price was
$6.48 as of March 31, 2002, compared to $5.50 at December 31, 2001 and,
accordingly, the Company recorded stock-based compensation expense related to
this increase in stock price from period to period. For the three months ended
March 31, 2002, the Company recorded stock-based compensation of $1.5 million
related to consultants. For the three months ended March 31, 2001, the Company
recorded stock-based compensation expense of $1.9 million related to
consultants based on a stock-price of $6.66 at March 31, 2001 and the
then-outstanding options subject to variable accounting. Included in each of
the periods is $0.7 million of stock-based compensation expense for restricted
shares that have been recorded on a straight-line basis over the vesting term.
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. General and administrative
expenses increased $0.4 million, or 2.7%, to $14.4 million for the three months
ended March 31, 2002, from $14.0 million for the same three-month period in
2001. The net increase relate to increases in expenses for facility-related
costs and bad debt provisions, which have been partially offset by a decrease
in certain professional services expenses.
Depreciation Expense. For the three months ended March 31, 2002,
depreciation expense was $1.8 million, compared to $1.6 million for the first
quarter 2001, an increase of $0.2 million, or 13.6%. The increase in
depreciation expense is primarily attributed to depreciation recorded on new
capital purchases since March 31, 2001.
12
Amortization Expense. For the three months ended March 31, 2002,
amortization expense was $0.3 million compared to $1.3 million for the first
quarter of 2001, a decrease of $1.0 million. The Company adopted SFAS 142 in
the first quarter 2002. In accordance with SFAS 142, goodwill is no longer
subject to amortization but is subject to annual impairment testing. The
decrease in amortization expense relates to not having any goodwill
amortization for the first quarter 2002.
Other Expense (Income). Other expense (income) includes the net of interest
income, interest expense and other non-operating income and expenses. The
Company had a lower average cash balance and more interest bearing obligations
during the first quarter 2002 compared to the first quarter 2001.
Income Tax Expense. Income tax expense increased $0.8 million to $1.2
million for the three months ended March 31, 2002, from $0.4 million in the
first quarter 2001. The increase is primarily due to a higher pre-tax taxable
income in 2002 than 2001.
Liquidity and Capital Resources
Summary
The Company had approximately $24.4 million in cash and cash equivalents at
March 31, 2002, compared to $36.0 million at December 31, 2001. The Company's
cash equivalents were primarily limited to fully pledged commercial paper or
securities (rated A or better), with original maturity dates of 90 days or less.
Working capital, the excess of current assets over current liabilities, at
March 31, 2002 was $56.7 million compared to $53.6 million at December 31,
2001. The increase in working capital is primarily related to the increase in
accounts receivable.
The Company calculates accounts receivable days sales outstanding ("DSO") on
a gross basis by dividing the accounts receivable balance at the end of the
quarter by revenues recognized for the quarter multiplied by 90 days.
Calculated as such, DSO was 84 days at March 31, 2002 compared to 81 days at
December 31, 2001. The increase in DSO is primarily attributed to a 16%
increase in Financial & Claims' first quarter 2002 revenues over fourth quarter
2001 revenues. A portion of this increase in revenues has not been collected
yet and, accordingly accounts receivable increased $4.3 million during the
quarter.
Cash Flow
Net cash used in operating activities was $6.9 million for the quarter ended
March 31, 2002. During the first quarter of 2002, the Company distributed
accrued compensation amounts of $9.7 million, which was accrued as of December
31, 2001. This was offset by $2.8 million of cash provided from the other
operating activities.
Net cash used in investing activities was $4.4 million, primarily due to
acquisition-related transactions. The Company paid $2.1 million obligation
related to the PENTA purchase agreement and $1.5 million for the first
installment of the notes payable issued with respect to the Barba-Arkhon
purchase agreement. In addition, the Company used $0.8 million for capital
spending to support an increase in personnel and services.
Net cash used in financing activities was $0.2 million. The Company used
$1.1 million to purchase 0.2 million treasury shares. Also, the Company
received net cash and related tax benefits of $0.9 million from transactions
related to stock options exercised and stock purchased by employees.
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Debt, Commitments and Capital
The Company maintains a $35.0 million unsecured revolving line of credit
arrangement with LaSalle Bank that expires on May 31, 2003. The line of credit
bears interest at prime or LIBOR plus 1.0%. Under the agreement, the Company
may borrow a maximum amount of up to 85% of eligible accounts receivable. Based
on the balances at March 31, 2002, the Company may borrow a maximum amount of
up to $30.6 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 March 31, 2002 and December
31, 2001. The Company did not have a balance outstanding under the line of
credit at March 31, 2002 and December 31, 2001.
The Company issued a $3.0 million notes payable under the Barba-Arkhon
purchase agreement, which is due in two equal annual installments on the
anniversaries of the March 1, 2001 acquisition date. The Company paid the first
annual installment of $1.5 million on March 1, 2002. The second of the two
installments is due on March 1, 2003, and bears interest at a 6% annual
percentage rate. The interest is payable on a quarterly basis.
As of March 31, 2002, the Company had no significant commitments for capital
expenditures. In addition, as part of a litigation settlement, the Company has
a $2.0 million remaining obligation, plus accrued interest, in July 2002.
The Company believes that the current cash and cash equivalents, the future
cash flows from operations and the $35.0 million line of credit facility will
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 may seek additional debt or equity financing, as
appropriate. The Company had no plans or intentions for such expenditures as of
March 31, 2002.
Critical Accounting Policies
The preparation of the consolidated 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 Realizablity Determinations
The Company maintains allowances for doubtful accounts for estimated losses
resulting from 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.
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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 periods, 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 such determination was made.
Item 3. Quantitative and Qualitative Disclosures About Market Risks
The Company's primary exposure to market risks relates to changes in
interest rates associated with its investment portfolio, classified as cash
equivalents, and its borrowings under the line of credit. The Company's general
investment policy is to limit the risk of principal loss by limiting market and
credit risks. As of March 31, 2002, the Company's investments were primarily
limited to fully collateralized, A rated securities with maturity dates of 90
days or less. If interest rates average 25 basis points less in fiscal year
2002 than they did in 2001, the Company's interest income would be decreased 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 March 31, 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 line of
credit bear interest, at the Company's option, based on either the prime rate
or London Interbank Offered Rate (LIBOR), plus 1.0%. Other then the second
installment of the Barba-Arkhon notes payable, the Company does not currently
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 to the Company's consolidated financial statements.
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PART II--OTHER INFORMATION
Item 1. Legal Proceedings
As previously disclosed, in 2001 the Company agreed to settle an "opt-out"
lawsuit called Chandler et al. v. Navigant Consulting, Inc. for payments
totaling $5.0 million. The plaintiffs were former principal shareholders and
officers of a former subsidiary, who had opted out of the Consolidated Class
Actions. Also as previously disclosed, the Company has been seeking to recover
from one of its insurers a portion of these settlement payments, plus defense
costs, although the insurer has asserted certain policy defenses. In March 2002
the Company and the insurer agreed to settle this claim. Pursuant to this
settlement, the insurer paid the Company $1.25 million, subsequent to March 31,
2002. This amount was recorded as a receivable in the Company's other current
asset account as of March 31, 2002.
In addition to the settlement of the Consolidated Class Actions 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 4. Submission of Matters to a Vote of Security Holders
The 2002 Annual Meeting of Shareholders of the Company was held on April 25,
2002. The Company solicited proxies for the annual meeting pursuant to Section
14 of the Securities Exchange Act of 1934, as amended, and Regulation 14A
thereunder. Two nominees, Mr. William M. Goodyear and Ms. Valerie B. Jarret,
were elected for a term expiring at the Annual Meeting of Shareholders in 2005.
The vote for William M. Goodyear was 31,272,574 shares for and 2,038,068 shares
to withhold authority. The vote for Valerie B. Jarrett was 32,937,914 shares
for and 372,729 shares to withhold authority.
Item 6. Exhibits and Reports on Form 8-K.
On January 9, 2002, the Company filed a Current Report on Form 8-K in which
the Company announced that the Annual Meeting of Shareholders will be held on
April 25, 2002.
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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: May 10, 2002
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