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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
---------------
FORM 10-Q
[X] Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of
1934 for quarterly period ended September 30, 2001
[_] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period _________ to __________
Commission File Number 000-31351
KPMG CONSULTING, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 22-3680505
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification No.)
1676 International Drive, McLean, VA 22102
(Address of principal executive office) (Zip Code)
(703) 747-3000
(Registrant's telephone number, including area code)
(Former name, if changed since last report)
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 (or for such shorter period that the Registrant was
required to file reports), and (2) has been subject to such filing requirements
for the past 90 days.
YES X NO _________________
----------------
The number of shares of common stock of the Registrant outstanding as of October
31, 2001 was 156,779,722.
1
KPMG CONSULTING, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPEMBER 30, 2001
TABLE OF CONTENTS
PART I - FINANCIAL STATEMENTS
Item 1: Financial Statements (unaudited)
Consolidated Condensed Statements of Operations for the Three Months Ended September 30,
2001 and 2000.................................................................................... 3
Consolidated Condensed Balance Sheets as of September 30, 2001 and June 30, 2001................. 4
Consolidated Condensed Statements of Cash Flows for the Three Months Ended September 30,
2001 and 2000.................................................................................... 5
Notes to Consolidated Condensed Financial Statements............................................. 6
Item 2: Management's Discussion and Analysis of Financial Condition and Results of
Operations....................................................................................... 11
Item 3: Quantitative and Qualitative Disclosure about Market Risk................................ 15
PART II - OTHER INFORMATION:
Item 1: Legal Proceedings........................................................................ 15
Item 6: Exhibits................................................................................. 15
SIGNATURES....................................................................................... 17
2
PART I, ITEM 1. - FINANCIAL STATEMENTS
KPMG CONSULTING, INC.
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
(unaudited)
Three Months Three Months
Ended Ended
September 30, September 30,
2001 2000
--------------- --------------
Revenues $ 608,891 $ 679,436
Costs of Service:
Professional compensation 245,086 282,560
Other direct contract expenses 144,193 149,972
Other costs of service 55,648 68,141
-------------- ------------
Total costs of service 444,927 500,673
-------------- ------------
Gross margin 163,964 178,763
Amortization of goodwill - 3,912
Selling, general and administrative expenses 119,932 113,894
-------------- ------------
Operating income 44,032 60,957
Interest (income) expense, net (147) 4,619
Equity in losses of affiliate and other, net - 12,635
-------------- ------------
Income before taxes 44,179 43,703
Income tax expense 21,863 23,170
-------------- ------------
Income before cumulative effect of change
in accounting principle 22,316 20,533
Cumulative effect of change in accounting principle (79,960) -
-------------- ------------
Net income (loss) (57,644) 20,533
Dividend on Series A Preferred Stock - 15,836
-------------- ------------
Net income (loss) applicable to common stockholders $ (57,644) $ 4,697
============== ============
Earnings (loss) per share - basic and diluted:
Income before cumulative effect of change
in accounting principle applicable to common $ 0.14 $ 0.06
stockholders
Cumulative effect of change in accounting principle (0.50) -
-------------- ------------
Net income (loss) applicable to common stockholders $ (0.36) $ 0.06
============== ============
Weighted average shares - basic and diluted 158,331,525 75,831,700
============== ============
The accompanying notes are an integral part of these financial statements.
3
KPMG CONSULTING, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(in thousands, except share and per share amounts)
September 30, June 30,
2001 2001
-------------- --------------
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 40,354 $ 45,914
Accounts receivable, net 372,269 377,476
Unbilled revenues, net 186,285 180,355
Prepaid and other current assets 75,215 101,014
-------------- --------------
Total current assets 674,123 704,759
Property and equipment, net 68,131 66,947
Goodwill and other intangible assets, net 124,307 189,383
Other assets 31,412 38,546
-------------- --------------
Total assets $ 897,973 $ 999,635
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable $ 10,494 $ 11,594
Acquisition obligation 15,000 15,000
Accounts payable 62,757 65,632
Accrued payroll and related liabilities 129,390 174,884
Other current liabilities 106,563 86,999
-------------- --------------
Total current liabilities 324,204 354,109
Notes payable, less current portion 1,846 1,846
Other liabilities 10,269 11,568
-------------- --------------
Total liabilities 336,319 367,523
Stockholders' Equity:
Preferred Stock, $.01 par value 10,000,000 shares authorized - -
Common Stock, $.01 par value 1,000,000,000 shares authorized, 160,018,640
shares issued on September 30, 2001 and 158,568,922 shares issued on June
30, 2001 (including 999,006 shares reserved on September 30, 2001 and June
30, 2001, and 2,240,000 treasury shares on September 30, 2001) 1,590 1,576
Additional paid-in capital 668,971 656,293
Accumulated deficit (72,167) (14,523)
Notes receivable from stockholders (8,068) (7,950)
Accumulated other comprehensive loss (2,644) (3,284)
Common stock held in treasury, at cost (26,028) -
-------------- --------------
Total stockholders' equity 561,654 632,112
-------------- --------------
Total liabilities and stockholders' equity $ 897,973 $ 999,635
============== ==============
The accompanying notes are an integral part of these financial statements.
4
KPMG CONSULTING, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
Three Months Three Months
Ended Ended
September 30, September 30,
2001 2000
------------------- -------------------
Cash flows from operating activities:
Net income (loss) $ (57,644) $ 20,533
Adjustments to reconcile to net cash provided by (used in) operating
activities:
Cumulative effect of change in accounting principle 79,960 -
Deferred income taxes and other (159) (7,322)
Equity in losses of affiliate and other - 12,635
Depreciation and amortization 10,084 13,224
Changes in assets and liabilities:
Accounts receivable 6,577 (185,556)
Unbilled revenues (5,707) 67,845
Prepaid expenses and other current assets 7,941 372
Other assets 10,744 (2,147)
Accrued payroll and related liabilities (48,679) 7,663
Accounts payable and other current liabilities 27,815 50,602
Distribution payable to managing directors - (73,230)
------------------- -------------------
Net cash provided by (used in) operating activities 30,932 (95,381)
------------------- -------------------
Cash flows from investing activities:
Purchases of property and equipment (7,049) (8,766)
Businesses acquired, net of cash acquired (6,595) (1,271)
Purchases of other intangible assets (4,403) (123)
Investment in affiliate - (4,945)
Purchases of equity investments - (7,500)
------------------- -------------------
Net cash used in investing activities (18,047) (22,605)
------------------- -------------------
Cash flows from financing activities:
Proceeds from issuance of common stock 12,692 -
Purchase of treasury shares (26,028) -
Proceeds from notes payable - 165,060
Repayment of notes payable (3,017) (6,564)
Repayment of acquisition obligations - (34,380)
Repurchase of minority interest in subsidiary (2,092) -
Notes receivable from stockholders - (211)
Dividends paid on Series A Preferred Stock - (13,082)
------------------- -------------------
Net cash provided by (used in) financing activities (18,445) 110,823
------------------- -------------------
Net decrease in cash and cash equivalents (5,560) (7,163)
Cash and cash equivalents - beginning of period 45,914 26,991
------------------- -------------------
Cash and cash equivalents - end of period $ 40,354 $ 19,828
=================== ===================
Supplementary cash flow information:
Interest paid $ 222 $ 6,937
Taxes paid 5,815 18,021
The accompanying notes are an integral part of these financial statements.
5
KPMG Consulting, Inc.
Notes to Consolidated Condensed Financial Statements
(in thousands, except shares and per share amounts)
(Unaudited)
Note 1. Basis of Presentation
The accompanying unaudited interim consolidated condensed financial
statements of KPMG Consulting, Inc. (the "Company") have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission ("SEC")
for quarterly reports on Form 10-Q and do not include all of the information and
note disclosures required by generally accepted accounting principles, and
should be read in conjunction with our consolidated financial statements and
notes thereto for the fiscal year ended June 30, 2001, included in the Company's
Annual Report on Form 10-K filed with the SEC. The accompanying consolidated
condensed financial statements have been prepared in accordance with accounting
principles generally accepted in the United States and reflect all adjustments
(consisting solely of normal, recurring adjustments) which are, in the opinion
of management, necessary for a fair presentation of results for these interim
periods. The results of operations for the three months ended September 30, 2001
are not necessarily indicative of the results that may be expected for the
fiscal year ending June 30, 2002. Certain prior period amounts have been
reclassified to conform with the current period presentation.
On January 17, 2001, our board of directors and stockholders approved a
reverse stock split of approximately one share for every 5.045 shares effective
immediately prior to our initial public offering. All share and per share
amounts reflect this reverse stock split.
On August 29, 2001, the Board of Directors of the Company adopted a
shareholder rights plan. Under the plan, a dividend of one preferred share
purchase right (a "Right") was declared for each outstanding share of common
stock of the Company that was outstanding on October 2, 2001. Each Right
entitles the holder to purchase from the Company one one-thousandth of a share
of a new series of Series A Junior Participating Preferred Stock (the "Preferred
Shares") at a price of $90 per one one-thousandth of a Preferred Share, subject
to adjustment. The Rights are traded with the common stock and are not
exercisable until the occurrence of certain specified events (relating to
certain actual or prospective changes in ownership interests in the Company's
common stock of 15 percent or more). Until such specified events occur, the
Board of Directors may redeem the Rights for $0.01 per Right. The Rights will
expire on October 2, 2011.
Note 2. Segment Reporting
The Company discloses business segments under Statement of Financial
Accounting Standard ("SFAS") No. 131, "Disclosures About Segments of an
Enterprise and Related Information." SFAS No. 131 established standards for the
way public business enterprises report information about operating segments in
annual financial statements and required those enterprises to report selected
information about operating segments in interim financial statements.
Through fiscal 2001 the company provided consulting services through six
major industry groups in which it has significant industry-specific knowledge.
Effective July 1, 2001, the Company transferred the health care group's
businesses into high technology and public services; accordingly the company now
provides services through five major industry groups. Additionally, Canada was
transferred from International to the five industry groups, resulting in a North
American region. Prior year information has been reclassified to reflect these
changes.
6
Industry Results
Three Months Three Months
Ended Ended
September 30, 2001 September 30, 2000
-------------------------------- ------------------------------
Operating Operating
Revenue Income Revenue Income
------------- -------------- -------------- ---------------
Public Services $ 218,720 $ 70,649 $ 198,048 $ 55,217
Financial Services 67,705 8,136 138,701 26,396
Communications & Content 133,347 41,287 119,767 30,065
High Tech 62,588 12,496 99,445 24,175
Consumer & Industrial Markets 84,355 22,150 91,324 20,017
International/Corporate (1) 42,176 (110,686) 32,151 (94,913)
------------- -------------- -------------- ---------------
Total $ 608,891 $ 44,032 $ 679,436 $ 60,957
============= ============== ============== ===============
(1) International/Corporate revenues are primarily attributable to international
regions (Latin America, Asia Pacific and Ireland) for all periods.
International/Corporate operating loss is principally due to infrastructure and
shared services costs, as well as operating results of international regions.
Note 3. Comprehensive Income
The Company accounts for comprehensive income under SFAS No. 130,
"Reporting Comprehensive Income." SFAS No. 130 established standards for
reporting and displaying comprehensive income and its components in a financial
statement that is displayed with the same prominence as other financial
statements. The components of comprehensive income are as follows:
Three Months Three Months
Ended Ended
September 30, September 30,
2001 2000
---------------- ---------------
Income before cumulative effect of
change in accounting principle $ 22,316 $ 20,533
Cumulative effect of change in accounting
principle (79,960) -
---------------- ---------------
Net income (loss) (57,644) 20,533
Foreign currency translation adjustment,
net of tax 640 (1,401)
---------------- ---------------
Comprehensive income (loss) $ (57,004) $ 19,132
================ ===============
7
Note 4. Business Combinations
On August 2, 2001, the Company acquired a regional consulting practice
in Southeast Asia, consisting of businesses of KPMG International member firms
in Hong Kong, Malaysia, Singapore and Taiwan for $16.9 million ($6.8 million
cash was paid at closing). The preliminary allocation of the purchase price to
acquired assets and liabilities resulted in the allocation of $16.9 million to
goodwill. Any adjustment to the allocation of the purchase price for this
acquisition upon finalization of our valuation of these assets acquired and
liabilities assumed is not expected to have a significant effect on our balance
sheet.
The acquisition has been accounted for as a purchase. The Company is in
the process of allocating the purchase price to the assets acquired and
liabilities assumed based on their fair values at the date of acquisition, in
accordance with SFAS No. 141, "Business Combinations". The pro forma effects on
operations were not material.
Note 5. Adoption of SFAS No. 142, "Goodwill and Other Intangible Assets"
Effective July 1, 2001, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets," which establishes financial accounting and reporting
for acquired goodwill and other intangible assets and supersedes Accounting
Principles Board Opinion No. 17, "Intangible Assets". Under SFAS No. 142,
goodwill and indefinite-lived intangible assets are no longer amortized but are
reviewed at least annually for impairment. Separable intangible assets that
have finite useful lives, will continue to be amortized over their useful lives.
SFAS No. 142 requires that goodwill be tested for impairment at the
reporting unit level at adoption and at least annually thereafter, utilizing a
two step methodology. The initial step requires the Company to determine the
fair value of each reporting unit and compare it to the carrying value,
including goodwill, of such unit. If the fair value exceeds the carrying value,
no impairment loss would be recognized. However, if the carrying value of the
reporting unit exceeds its fair value, the goodwill of this unit may be
impaired. The amount, if any, of the impairment would then be measured in the
second step.
In connection with adopting this standard as of July 1, 2001, during the
first quarter the Company completed step one of the test for impairment, which
indicated that the carrying values of certain reporting units exceeded their
estimated fair values, as determined utilizing various evaluation techniques
including discounted cash flow and comparative market analysis. Thereafter,
given the indication of a potential impairment, the Company completed step two
of the test. Based on that analysis, a transitional impairment loss of $80.0
million, or $0.50 per basic and diluted earnings per share, was recognized as
the cumulative effect of an accounting change. The impairment charge resulted
from a change in the criteria for the measurement of the impairment loss from an
undiscounted cash flow, a method required by SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of," to
a discounted cash flow method as required by SFAS No. 142 as the measurement
technique resulted in the impairment charge.
The adjustment of previously reported net income and earnings per share
represents the recorded amortization of goodwill and other purchased intangibles
(assembled workforce). The impact on net income, and basic and diluted net
earnings per share for the quarter ended September 30, 2000 is set forth below:
8
Reconciliation of Net Income and Earnings Per Share
Three Months Ended
September 30,
-----------------------------
2001 2000
-----------------------------
Reported income before cumulative effect of change in accounting
principle $ 22,316 $ 20,533
Add back goodwill amortization, net of tax - 2,861
------------- -------------
Adjusted income before cumulative effect of change in accounting
principle 22,316 23,394
Cumulative effect of change in accounting principle (79,960) -
------------- -------------
Adjusted net income (loss) (57,644) 23,394
Series A Preferred Stock dividends - 15,836
------------- -------------
Adjusted income (loss) applicable to common stockholders $ (57,644) $ 7,558
============= =============
Basic and diluted earnings per share:
Reported income before cumulative effect of change in accounting
principle applicable to common stockholders $ 0.14 $ 0.06
Add back goodwill amortization, net of tax - 0.04
------------- -------------
Adjusted income before cumulative effect of change in accounting
principle applicable to common stockholders 0.14 0.10
Cumulative effect of change in accounting principle (0.50) -
------------- -------------
Adjusted income (loss) applicable to common stockholders $ (0.36) $ 0.10
============= =============
Weighted average shares - basic and diluted 158,331,525 75,831,700
============= =============
The changes in the carrying amount of goodwill for the quarter ended September
30, 2001 are as follows:
Transitional
Balance Impairment Balance
June 30, 2001 Additions(a) Charge Other(b) September 30, 2001
------------- ------------ ----------- ---------- ------------------
Public Services $ 12,616 $ - $ - $ (681) $ 11,935
Financial Services 3,028 - - (142) 2,886
Communications & Content 9,349 - - (1,107) 8,242
High Tech 2,488 - - (562) 1,926
Consumer & Industrial Markets 9,178 - - (908) 8,270
International/Corporate 99,118 16,930 (79,960) 744 36,832
------------- ------------ ----------- ---------- ------------------
Total (c) $ 135,777 $ 16,930 $ (79,960) $ (2,656) $ 70,091
============= ============ =========== ========== ==================
(a) Additions primarily related to the acquisition of a regional consulting
practice in Southeast Asia (see note 4).
(b) Other relates primarily to the reversal of deferred taxes no longer required
due to adoption of SFAS No. 142.
(c) After adopting SFAS No. 142, on July 1, 2001, goodwill had gross and net
carrying values of $92,565 and $52,417, respectively, all of which was no longer
subject to amortization. As described in Note 4, the Company has not yet
completed its allocation of the purchase price of the regional consulting
practice in Southeast Asia, and has not determined the amount of intangible
assets subject to amortization.
9
Note 6. Reduction in Workforce
In April 2001, the Company recorded a $19,968 charge for severance and
termination benefits related to a reduction in workforce of which an accrual of
$4,200 remained at June 30, 2001. At September 30, 2001, approximately $2,300
remains and will be paid in cash by February 2003.
On November 2, 2001 the Company announced an additional reduction in
workforce as described in Note 7.
Note 7. Subsequent Events
On October 3, 2001, the Company acquired the consulting unit of the KPMG
International member firm in Australia for approximately $29.0 million. The
Company is currently in the process of determining the allocation of the
purchase price to the acquired assets and liabilities.
On November 2, 2001, the Company announced a worldwide reduction in
workforce of between 300 and 400 personnel in order to balance workforce
capacity with market demand for services. This action impacted approximately
three percent of the Company's worldwide workforce. A pre-tax charge in the
range of $15.0 million to $20.0 million will be recorded in the second quarter
for severance and termination benefits.
* * * * * *
10
PART I, ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following information should be read in conjunction with the
information contained in the Consolidated Condensed Financial Statements and
notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q. This
Quarterly Report on Form 10-Q contains forward-looking statements that involve
risks and uncertainties. See the discussion relating to "Forward-Looking
Statements" below.
Company Overview
We are one of the world's largest consulting firms with nearly 10,000
employees. We serve over 2,500 clients, including global 2000 companies, Fortune
1000 companies, small and medium-sized businesses, government agencies and other
organizations. We provide our clients with a range of service offerings that
combine industry specific business strategy and operational improvements,
technology selection and implementation. Our service offerings are designed to
help our clients generate revenues, improve efficiency and contain costs.
These services include:
. business and technology strategy;
. process design and operations improvement;
. systems integration;
. network integration and infrastructure; and
. outsourcing.
We provided consulting services through six industry groups in which we
have specific industry knowledge through June 30, 2001. Effective July 1, 2001,
we transferred the health care group's businesses into high technology and
public services; accordingly, we now provide our services through five industry
groups. These groups are public services, financial services, communications and
content, high technology, and consumer and industrial markets. These groups
comprise the North American region. In addition, we have multi-national
operations covering Latin America, Asia Pacific, Ireland and Israel.
HISTORICAL RESULTS OF OPERATIONS OVERVIEW
The Company realized income before cumulative effect of change in
accounting principle of $22.3 million, or $0.14 per share and net loss
applicable to common stockholders of $57.6 million (after deducting an $80.0
million charge representing the cumulative effect of a change in accounting
principle), or $0.36 per share, for the three months ended September 30, 2001
compared to net income applicable to common stockholders of $4.7 million, or
$0.06 per share for the three months ended September 30, 2000.
Three Months Ended September 30, 2001 Compared to Three Months Ended September
30, 2000
Revenues. Revenues decreased $70.5 million, or 10.4%, from $679.4 million in the
three months ended September 30, 2000 to $608.9 million in the three months
ended September 30, 2001.
11
This overall decrease is primarily attributable to a slowing economy and to a
lesser extent the events of September 11th. The Public Services and
Communications & Content groups realized double-digit growth over the first
quarter of the prior year of 10.4% and 11.3%, respectively. However, this growth
was more than offset by declining revenue in the Financial Services and High
Technology groups of 51.2% and 37.1%, respectively. These decreases are a result
of weakening market demand in these industries coupled with the postponement and
cancellation of client projects. Additionally, International revenue grew $10.0
million or 31.2% over the three months ended September 30, 2000.
The Company expects this period of economic uncertainty may continue to impact
revenue growth for at least another quarter.
Gross Margin. Gross margin as a percentage of revenues was 26.9% for the three
months ended September 30, 2001. This reflects an increase from 26.3% for the
three months ended September 30, 2000. The 0.6% increase in gross margin
percentage was primarily due to a significant reduction in the Company's
expenses as a result of an increased focus on expense control.
In dollar terms, gross margin decreased by $14.8 million, or 8.3%, from $178.8
million for the three months ended September 30, 2000 to $164.0 million for the
three months ended September 30, 2001. The decrease in dollar terms was due to
the $70.5 million decrease in revenues described above, coupled with:
. A net decrease in professional compensation of $37.5 million, or 13.3%,
from $282.6 million to $245.1 million, partially due to the Company
reducing its North American workforce by 575 people in the fourth
quarter of fiscal 2001, as well as, lower levels of incentive
compensation accruals.
. A net decrease in other direct contract expense of approximately $5.8
million, or 3.9%, from $150.0 million to $144.2 million, primarily due
to a decrease in travel related expenses, due in part to the events of
September 11th. Subcontractor usage remained level as the Company
continued its practice of utilizing subcontractors to supplement our
existing consultants in order to manage through this period of economic
uncertainty.
. A net decrease in other costs of service of $12.5 million, or 18.3% from
$68.1 million to $55.6 million, primarily due to a decrease in training
and recruiting costs of $5.6 million and $2.3 million, respectively.
These costs have decreased as a result of the Company significantly
reducing costs due to reduced activity levels needed to sustain the
business. Additionally, bad debts expense decreased $1.7 million.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses were $119.9 million for the three months ended September
30, 2001. This reflects an increase of $6.0 million, or 5.3%, from $113.9
million which is primarily due to increased infrastructure costs of $14.2
million as a result of the Company's infrastructure build out. This increase is
partially offset by a $5.8 million decrease in practice development expenses as
a result of tighter expense control and the events of September 11th.
12
Interest (Income) Expense, Net. Interest (income) expense, net, decreased $4.8
million, or 103.2%, from $4.6 million to $(0.1) million for the three months
ended September 30, 2000 and 2001, respectively. This decrease was due to a
repayment of all outstanding borrowings under our credit facility of $205
million at September 30, 2000, resulting from the use of proceeds from our
initial public offering and improvements made in our management of client
billings and collections. This improvement is evidenced by the reduction in our
days sales outstanding from 94 days at September 30, 2000 to 70 days in the
current quarter.
Equity in Losses of Affiliates. Equity in losses of affiliates, which related to
our equity investment in Qwest Cyber.Solutions ("QCS") for the three months
ended September 30, 2000, decreased $12.7 million, or 100%. We incurred no
losses relating to QCS in the three months ended September 30, 2001, because we
redeemed our equity interest in QCS on December 27, 2000.
Income Tax Expense. For the three months ended September 30, 2001, the Company
earned operating income before taxes of $44.2 million and provided income taxes
of $21.9 million. There was no tax benefit taken for the Company's $80.0 million
charge for cumulative effect of change in accounting principle. For this period,
the Company's effective tax rate was 49.5%.
Income before Cumulative Effect of Change in Accounting Principle. Income before
cumulative effect of change in accounting principle increased by $1.8 million,
from $20.5 million for the three months ended September 30, 2000, to $22.3
million for the three months ended September 30, 2001. Improved profitability
reflects tighter expense control, elimination of goodwill amortization due to
early adoption of SFAS No. 142, reduced financing costs, redemption of our
equity interest in QCS, and a reduced effective tax rate. These factors were
partially offset by increased costs of building our infrastructure functions.
Cumulative Effect of Change in Accounting Principle. The Company adopted
SFAS No. 142 during the quarter ended September 30, 2001. This standard
eliminates goodwill amortization upon adoption and requires an assessment for
goodwill impairment upon adoption and at least annually thereafter. As a result
of adoption of this standard, the Company did not amortize goodwill during the
quarter ended September 30, 2001 and incurred a noncash transitional impairment
charge of $80.0 million. This transitional impairment charge is a result of the
change in accounting principles to measuring impairments on a discounted versus
an undiscounted cash flow basis.
Preferred Stock Dividends. Series A Preferred Stock dividends totaling $15.8
million were recognized in the three months ended September 30, 2000. After
December 31, 2000, the Company was no longer required to pay dividends on our
Series A Preferred Stock because it was redeemed and converted in connection
with our initial public offering.
Net (Loss) Income Applicable to Common Stockholders. Net loss applicable to
common stockholders for the three months ended September 30, 2001, was $57.6
million or $0.36 per share. For the comparable period of the prior year, net
income applicable to common stockholders was $4.7 million or $0.06 per share.
The per share amounts of the income (loss) were further affected by the
completion of our initial public offering on February 8, 2001, which increased
the number of common shares outstanding by 82 million.
13
LIQUIDITY AND CAPITAL RESOURCES
The Company has primarily funded its operations through cash generated
from operations. Additionally, the Company has borrowing arrangements available
including a revolving credit facility with no outstanding balance at September
30, 2001 (not to exceed $100 million), a revolving line of credit facility with
no outstanding balance at September 30, 2001 (not to exceed $100 million), as
well as a note payable related to an accounts receivable financing facility with
no outstanding balance at September 30, 2001 (not to exceed $200 million). The
revolving credit facility and revolving line of credit facility expire on May
24, 2004 and May 20, 2002, respectively, while the accounts receivable financing
facility permits "sales" of accounts receivable through May 21, 2003, subject to
annual renewal. The credit facilities described above include covenants relating
to the maintenance of certain financial ratios and restrictions on the Company's
ability to pay dividends.
Cash provided by operating activities during the three months ended
September 30, 2001 was $30.9 million, principally due to decreases in prepaid
expenses and other assets of $18.7 million, and cash operating results of $32.2
million offset by a net decrease in liabilities of $20.9 million.
Cash used in investing activities during the three months ended
September 30, 2001 was $18.0 million principally due to $7.0 million in
purchases of property and equipment, $6.6 million paid in acquisitions, and
$4.4 million of other intangible assets.
Cash used in financing activities for the three months ended September
30, 2001 was $18.4 million, principally due to the purchase of 2.2 million
treasury shares for $26.0 million, offset by proceeds of $12.7 million from the
issuance of common stock primarily from the Company's employee stock purchase
plan of $12.1 million.
The Company believes that the cash provided from operations, borrowings
available under the various facilities described above and existing cash and
cash equivalents should be sufficient to meet working capital and capital
expenditure needs.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In August 2001, the FASB issued SFAS No. 144 "Accounting for the
Impairment or Disposal of Long Lived Assets". This statement is effective for
fiscal years beginning after December 15, 2001. This supersedes SFAS No. 121,
while retaining many of the requirements of such statement. The Company is
currently evaluating the impact of the statement.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements relating to our
operations that are based on our current expectations, estimates and
projections. Words such as "expects," "intends," "plans," "projects,"
"believes," "estimates," and similar expressions are used to identify these
forward-looking statements. These statements are not guarantees of future
performance and involve risks, uncertainties and assumptions that are difficult
to predict. Forward-looking statements are based upon assumptions as to future
events that may not prove to be accurate. Actual outcomes and results may differ
materially from what is expressed or forecast in these forward-looking
statements. As a result, these statements speak only as of the date they were
made, and we undertake no obligation to
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publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise.
Our actual results may differ from the forward-looking statements for
many reasons, including:
. the business decisions of our clients regarding the use of our services;
. the timing of projects and their termination;
. the availability of talented professionals to provide our services;
. the pace of technological change;
. the strength of our joint marketing relationships;
. continuing limitations following our separation from KPMG LLP; and
. the actions of our competitors.
In addition, these statements could be affected by general domestic and
international economic and political conditions including slowdowns in the
economy, uncertainty as to the future direction of the economy and vulnerability
of the economy to domestic or international incidents. (For a more detailed
discussion of certain of these factors, see Exhibit 99.1 to this Form 10-Q.)
PART I, ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
We are exposed to a number of market risks in the ordinary course of
business. These risks, which include interest rate risk and foreign currency
exchange risk, arise in the normal course of business rather than from trading
activities. Our exposure to changes in interest rates arises primarily because
our indebtedness under our bank credit facilities carries variable interest
rates. Foreign currency exchange risk is not significant as foreign currency
transactions have not been significant and are not concentrated in a single
foreign currency.
In connection with our borrowings and as a result of continual
monitoring of interest rates, we may in the future enter into interest rate swap
agreements for purposes of managing our borrowing costs.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are from time to time the subject of lawsuits and other claims and
regulatory proceedings arising in the ordinary course of our business. We do not
expect that any of these matters, individually or in the aggregate, will have a
material impact on our financial condition or results of operations.
ITEMS 2-5. NONE
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Reference is made to the Exhibit Index.
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(b) The Company filed one report on Form 8-K during the period of July 1,
2001 through the date of this report. The Form 8-K was filed on October
3, 2001 and related to the adoption of a shareholder rights plan.
Exhibit Index
-------------
4.1 Rights Agreement, dated as of October 2, 2001, between KPMG Consulting and
EquiServe Trust Company, N.A., incorporated by reference from Exhibit 1.1
to the Company's Registration Statement on Form 8-A dated October 3, 2001.
4.2 Certificate of Designation of Series A Junior Participating Preferred
Stock, incorporated by reference to Exhibit 1.2 to the Company's
Registration Statement on Form 8-A dated October 3, 2001.
99.1 Factors Affecting Future Financial Results
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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.
KPMG Consulting, Inc.
By: /s/ Randolph C. Blazer By: /s/ Robert C. Lamb, Jr.
__________________________________ __________________________________
Randolph C. Blazer, Robert C. Lamb, Jr.,
Chairman of the Board, Chief Executive Vice President, Chief
Executive Officer and Financial Officer and
President Principal Financial and
Dated: November 14, 2001 Accounting Officer
Dated: November 14, 2001
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