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EXCEL - IDEA: XBRL DOCUMENT - NAVIGANT CONSULTING INC | Financial_Report.xls |
EX-32.1 - EX-32.1 - NAVIGANT CONSULTING INC | c64330exv32w1.htm |
EX-31.1 - EX-31.1 - NAVIGANT CONSULTING INC | c64330exv31w1.htm |
EX-31.2 - EX-31.2 - NAVIGANT CONSULTING INC | c64330exv31w2.htm |
Table of Contents
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the three months ended March 31, 2011
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File No. 1-12173
Navigant Consulting, Inc.
(Exact name of Registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
36-4094854 (I.R.S. Employer Identification No.) |
|
30 South Wacker Drive, Suite 3550, Chicago, Illinois 60606
(Address of principal executive offices, including zip code)
(Address of principal executive offices, including zip code)
(312) 573-5600
(Registrants telephone number, including area code)
(Registrants 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 (or
for such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). YES
þ NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
Large accelerated filer þ | Accelerated filer o | Non-accelerated filer o | Smaller reporting company o | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). YES o NO þ
As
of April 22, 2011, 51,573,265 shares of the Registrants common stock, par value $.001 per
share, were outstanding.
NAVIGANT CONSULTING, INC.
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2011
INDEX
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30 | ||||||||
31 | ||||||||
31 | ||||||||
31 | ||||||||
31 | ||||||||
32 | ||||||||
32 | ||||||||
32 | ||||||||
33 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32.1 | ||||||||
EX-101 INSTANCE DOCUMENT | ||||||||
EX-101 SCHEMA DOCUMENT | ||||||||
EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
EX-101 LABELS LINKBASE DOCUMENT | ||||||||
EX-101 PRESENTATION LINKBASE DOCUMENT |
2
Table of Contents
Forward-Looking Statements
Statements included in this report which are not historical in nature are forward-looking
statements as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking
statements may generally be identified by words such as anticipate, believe, intend,
estimate, expect, plan, outlook and similar expressions. We caution readers that there may
be events in the future that we are not able to accurately predict or control and the information
contained in the forward-looking statements is inherently uncertain and subject to a number of
risks that could cause actual results to differ materially from those contained in or implied by
the forward-looking statements, including the factors described in the section entitled Risk
Factors in our Annual Report on Form 10-K for the year ended December 31, 2010 and in Item 2
Managements Discussion and Analysis of Financial Condition and Results of Operations in this
report. We cannot guarantee any future results, levels of activity, performance or achievement and
we undertake no obligation to update any of the forward-looking statements contained in this
report.
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Table of Contents
PART IFINANCIAL INFORMATION
Item 1. Financial Statements
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
CONSOLIDATED BALANCE SHEETS
(In thousands)
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
(unaudited) | ||||||||
ASSETS |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 1,632 | $ | 1,981 | ||||
Accounts receivable, net |
186,245 | 179,058 | ||||||
Prepaid expenses and other current assets |
26,430 | 19,697 | ||||||
Deferred income tax assets |
12,097 | 18,749 | ||||||
Total current assets |
226,404 | 219,485 | ||||||
Property and equipment, net |
37,343 | 38,903 | ||||||
Intangible assets, net |
21,360 | 23,194 | ||||||
Goodwill |
564,486 | 561,002 | ||||||
Other assets |
24,751 | 26,451 | ||||||
Total assets |
$ | 874,344 | $ | 869,035 | ||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Current liabilities: |
||||||||
Accounts payable |
$ | 11,760 | $ | 10,900 | ||||
Accrued liabilities |
7,795 | 7,936 | ||||||
Accrued compensation-related costs |
41,507 | 72,639 | ||||||
Income tax payable |
| 2,306 | ||||||
Term loan current |
18,397 | 18,397 | ||||||
Other current liabilities |
42,587 | 43,401 | ||||||
Total current liabilities |
122,046 | 155,579 | ||||||
Non-current liabilities: |
||||||||
Deferred income tax liabilities |
43,395 | 42,274 | ||||||
Other non-current liabilities |
24,206 | 25,907 | ||||||
Bank debt non-current |
63,961 | 33,695 | ||||||
Term loan non-current |
146,260 | 150,859 | ||||||
Total non-current liabilities |
277,822 | 252,735 | ||||||
Total liabilities |
399,868 | 408,314 | ||||||
Stockholders equity: |
||||||||
Common stock |
61 | 61 | ||||||
Additional paid-in capital |
565,466 | 564,214 | ||||||
Treasury stock |
(206,162 | ) | (206,162 | ) | ||||
Retained earnings |
124,021 | 115,243 | ||||||
Accumulated other comprehensive loss |
(8,910 | ) | (12,635 | ) | ||||
Total stockholders equity |
474,476 | 460,721 | ||||||
Total liabilities and stockholders equity |
$ | 874,344 | $ | 869,035 | ||||
See accompanying notes to the unaudited consolidated financial statements.
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Table of Contents
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
For the three months ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Revenues before reimbursements |
$ | 169,604 | $ | 153,870 | ||||
Reimbursements |
19,195 | 19,680 | ||||||
Total revenues |
188,799 | 173,550 | ||||||
Cost of services before reimbursable expenses |
114,815 | 102,230 | ||||||
Reimbursable expenses |
19,195 | 19,680 | ||||||
Total costs of services |
134,010 | 121,910 | ||||||
General and administrative expenses |
32,409 | 30,460 | ||||||
Depreciation expense |
3,377 | 3,801 | ||||||
Amortization expense |
2,301 | 2,796 | ||||||
Operating income |
16,702 | 14,583 | ||||||
Interest expense |
1,840 | 3,478 | ||||||
Interest income |
(367 | ) | (313 | ) | ||||
Other expense (income), net |
(36 | ) | 105 | |||||
Income before income tax expense |
15,265 | 11,313 | ||||||
Income tax expense |
6,487 | 4,866 | ||||||
Net income |
$ | 8,778 | $ | 6,447 | ||||
Basic net income per share |
$ | 0.17 | $ | 0.13 | ||||
Shares used in computing income per basic share |
50,176 | 48,691 | ||||||
Diluted net income per share |
$ | 0.17 | $ | 0.13 | ||||
Shares used in computing income per diluted share |
51,034 | 50,096 |
See accompanying notes to the unaudited consolidated financial statements.
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NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
For the three months ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 8,778 | $ | 6,447 | ||||
Adjustments to reconcile net income to net cash used in operating activities: |
||||||||
Depreciation expense |
3,377 | 3,801 | ||||||
Amortization expense |
2,301 | 2,796 | ||||||
Share-based compensation expense |
1,700 | 975 | ||||||
Accretion of interest expense |
308 | 205 | ||||||
Deferred income taxes |
7,156 | 5,319 | ||||||
Allowance for doubtful accounts receivable |
2,025 | 1,584 | ||||||
Changes in assets and liabilities: |
||||||||
Accounts receivable |
(8,373 | ) | (13,610 | ) | ||||
Prepaid expenses and other assets |
(4,884 | ) | (1,250 | ) | ||||
Accounts payable |
816 | 1,155 | ||||||
Accrued liabilities |
(191 | ) | 2,146 | |||||
Accrued compensation-related costs |
(31,263 | ) | (30,416 | ) | ||||
Income taxes payable |
(2,370 | ) | (609 | ) | ||||
Other liabilities |
(2,800 | ) | 500 | |||||
Net cash used in operating activities |
(23,420 | ) | (20,957 | ) | ||||
Cash flows from investing activities: |
||||||||
Purchases of property and equipment |
(1,724 | ) | (3,056 | ) | ||||
Acquisitions of businesses, net of cash acquired |
| (4,000 | ) | |||||
Payments of acquisition liabilities |
(217 | ) | | |||||
Other, net |
(225 | ) | | |||||
Net cash used in investing activities |
(2,166 | ) | (7,056 | ) | ||||
Cash flows from financing activities: |
||||||||
Issuances of common stock |
640 | 661 | ||||||
Borrowings from banks, net of repayments |
29,707 | 19,315 | ||||||
Payments of term loan |
(4,599 | ) | (40,460 | ) | ||||
Other, net |
(676 | ) | (390 | ) | ||||
Net cash provided by (used in) financing activities |
25,072 | (20,874 | ) | |||||
Effect of exchange rate changes on cash and cash equivalents |
165 | 104 | ||||||
Net decrease in cash and cash equivalents |
(349 | ) | (48,783 | ) | ||||
Cash and cash equivalents at beginning of the period |
1,981 | 49,144 | ||||||
Cash and cash equivalents at end of the period |
$ | 1,632 | $ | 361 | ||||
See accompanying notes to the unaudited consolidated financial statements.
6
Table of Contents
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
Navigant Consulting, Inc. (we, us or our) is an independent specialty consulting firm
that combines deep industry knowledge with technical expertise to enable companies to create and
protect value in the face of complex and critical business risks and opportunities. Professional
services include dispute, investigative, economic, operational, risk management and financial and
regulatory advisory solutions. We provide our services to governmental agencies, legal counsel and
large companies facing the challenges of uncertainty, risk, distress and significant change. We
focus on industries undergoing substantial regulatory or structural change and on the issues
driving these transformations.
The accompanying unaudited interim consolidated financial statements have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) for interim
reporting and do not include all of the information and footnote disclosures required by accounting
principles generally accepted in the United States of America (GAAP). The information furnished
herein includes all adjustments, consisting of normal and recurring adjustments except where
indicated, which are, in the opinion of management, necessary for a fair presentation of the
results of operations for the interim periods presented.
The results of operations for the three months ended March 31, 2011 are not necessarily
indicative of the results to be expected for the entire year ending December 31, 2011.
These financial statements should be read in conjunction with the audited consolidated
financial statements and related notes as of and for the year ended December 31, 2010 included in
our Annual Report on Form 10-K filed with the SEC on February 18, 2011.
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the amounts reported in the consolidated financial statements
and the related notes. Actual results could differ from those estimates and may affect future
results of operations and cash flows. We have evaluated subsequent events through the date of this
filing.
Note 2. Acquisitions
On October 1, 2010, we acquired the assets of EthosPartners Healthcare Management Group, Inc.
for approximately $37.0 million, which consisted of $28.0 million in cash paid at closing, $2.0
million in restricted common stock issued at closing and $7.0 million in deferred payments. The
restricted stock and deferred payments were recorded at fair value,
and the deferred payments were
recorded in other current and non-current liabilities. The deferred payments are payable in cash in
two equal installments on the first and second anniversaries of the closing date. In addition,
EthosPartners can earn up to a total of $8.0 million of additional payments based on the business
achieving certain performance targets during each of the three years after closing. Fair value of
the contingent consideration, recorded in other current and non-current liabilities, was estimated
to be $5.6 million and was determined based on level two observable inputs and will be recalculated
each reporting period with any resulting gains or losses being recorded in the income statement. No
such gains or losses were recorded during the three months ended March 31, 2011. The additional
purchase price payments, if earned, would be payable approximately 90 days after the end of the
annual period in which the performance targets were attained. As part of the purchase price
allocation, we recorded $6.4 million in identifiable intangible assets and $35.6 million in
goodwill. The purchase price paid in cash at closing was funded under our credit facility.
We acquired EthosPartners to enhance our Healthcare practice. EthosPartners is a national
healthcare consulting group specializing in physician and hospital alignment, physician practice
operations management, and physician revenue cycle management. This acquisition included 180
consulting professionals and has been integrated into our Business Consulting Services segment.
On May 14, 2010, we acquired the assets of Daylight Forensic & Advisory LLC, located in New
York, New York for approximately $40.0 million, which consisted of $29.9 million in cash paid at
closing and $10.0 million, recorded in other current liabilities, to be paid in cash on the first
anniversary of the closing date. As part of the purchase price allocation, we recorded $4.5 million
in identifiable intangible assets and $35.2 million in goodwill. The purchase price paid in cash at
closing was funded under our credit facility.
We acquired Daylight to enhance our investigative service offerings and to add significant
presence in the New York market. Daylight is a consulting and investigative firm specializing in
regulatory compliance and fraud risk management, with extensive
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capabilities in anti-money laundering and Foreign Corrupt Practices Act related matters. This
acquisition included 65 consulting professionals and has been integrated into our Dispute and
Investigative Services segment.
On January 20, 2010, we acquired the assets of Empiris, LLC, located in Washington, D.C. for
$5.5 million, which consisted of $4.0 million in cash paid at closing and $1.5 million, recorded in
other current and non-current liabilities, to be paid in cash in two equal installments on December
31, 2010 and January 3, 2012. On December 31, 2010, we paid the first cash installment of $0.8
million. In addition, the purchase agreement contains a provision for contingent consideration of
up to $2.0 million in cash. The contingent consideration is based on the business achieving certain
performance targets during the periods from closing to December 31, 2010 and in calendar years 2011
and 2012 and will be payable in March of the year following the year in which such performance
targets are attained. During the quarter ended March 31, 2011, we paid approximately $0.2 million
of this consideration. Fair value of the contingent consideration, recorded in other current and
non-current liabilities, was estimated to be $1.9 million and was determined based on level two
observable inputs and will be recalculated each reporting period with any resulting gains or losses
being recorded in the income statement. No such gains or losses were recorded during the three
months ended March 31, 2011 or 2010. As part of the purchase price allocation, we recorded $1.6
million in identifiable intangible assets and $5.8 million in goodwill. The purchase price paid in
cash at closing was funded with cash from operations.
We acquired Empiris to enhance our Economic Consulting segment. Empiris provides significant
expertise and growth opportunities in our Washington, D.C. market by servicing relevant
governmental agencies, corporations and law firms. This acquisition consisted of nine professionals
and has been integrated into our Economic Consulting segment.
Pro Forma Information
The following table summarizes certain supplemental unaudited pro forma financial information
which was prepared as if the 2010 acquisitions described above had occurred as of the beginning of
the periods presented. The unaudited pro forma financial information was prepared for comparative
purposes only and does not purport to be indicative of what would have occurred had the
acquisitions been made at that time or of results which may occur in the future.
For the three months ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Total revenues (in thousands) |
$ | 188,799 | $ | 191,052 | ||||
Net income (in thousands) |
$ | 8,778 | $ | 6,886 | ||||
Basic net income per share |
$ | 0.17 | $ | 0.14 | ||||
Diluted net income per share |
$ | 0.17 | $ | 0.14 |
Note 3. Segment Information
Our business is organized in four reporting segments Business Consulting Services, Dispute
and Investigative Services, Economic Consulting and International Consulting. These reporting
segments are generally defined by the nature of their services and geography and may be the
aggregation of multiple operating segments as indicated in the description below. We have two
additional operating segments within the Business Consulting Services segment. Our business is
managed and resources are allocated on the basis of the six operating segments.
The Business Consulting Services reporting segment provides strategic, operational, financial,
regulatory and technical management consulting services to clients, principally C suite and
corporate management, government entities and law firms. The reporting segment was comprised of
three operating segments, Energy, Healthcare and Other Business Consulting practices. The Energy
and Healthcare business units are defined as operating segments due to their size, importance and
organizational reporting relationships. The Energy and Healthcare operating segments provide
services to clients in those respective markets, and Other Business Consulting practices provides
operations advisory, valuation and restructuring services to financial services and other markets.
The Dispute and Investigative Services reporting segment provides a wide range of services to
clients facing the challenges of disputes, litigation, forensic investigation, discovery and
regulatory compliance. The clients of this segment are principally law firms, corporate general
counsel and corporate boards.
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The Economic Consulting reporting segment provides economic and financial analyses of complex
legal and business issues principally for law firms, corporations and governmental agencies.
Expertise includes areas such as antitrust, corporate finance and governance, bankruptcy,
intellectual property, investment banking, labor market discrimination and compensation, corporate
valuation and securities litigation.
The International Consulting reporting segment provides a mix of dispute and business
consulting services to clients predominately outside North America. The clients are principally C
suite and corporate management, governmental entities and law firms.
The following information includes segment revenues before reimbursements, segment total
revenues and segment operating profit. Certain unallocated expense amounts related to specific
reporting segments have been excluded from the segment operating profit to be consistent with the
information used by management to evaluate segment performance. Segment operating profit represents
total revenue less cost of services excluding long-term compensation expense related to consulting
personnel. The information presented does not necessarily reflect the results of segment operations
that would have occurred had the segments been stand-alone businesses. Long term compensation
expense related to consulting personnel includes share-based compensation expense and compensation
expense attributed to forgivable loans (see Note 8 Supplemental Consolidated Balance Sheet
Information).
For the three months ended | ||||||||
March 31, | ||||||||
(Amounts in Thousands) | 2011 | 2010 | ||||||
Revenues before reimbursements: |
||||||||
Business Consulting Services |
$ | 70,469 | $ | 57,399 | ||||
Dispute and Investigative Services |
65,753 | 63,338 | ||||||
Economic Consulting |
17,874 | 16,988 | ||||||
International Consulting |
15,508 | 16,145 | ||||||
Total revenues before reimbursements |
$ | 169,604 | $ | 153,870 | ||||
Total revenues: |
||||||||
Business Consulting Services |
$ | 79,627 | $ | 66,250 | ||||
Dispute and Investigative Services |
72,006 | 67,894 | ||||||
Economic Consulting |
18,539 | 18,609 | ||||||
International Consulting |
18,627 | 20,797 | ||||||
Total revenues |
$ | 188,799 | $ | 173,550 | ||||
Segment operating profit: |
||||||||
Business Consulting Services |
$ | 23,182 | $ | 19,017 | ||||
Dispute and Investigative Services |
25,777 | 25,408 | ||||||
Economic Consulting |
5,757 | 6,296 | ||||||
International Consulting |
3,282 | 3,740 | ||||||
Total combined segment operating profit |
57,998 | 54,461 | ||||||
Segment operating profit reconciliation to income before income tax expense: |
||||||||
Unallocated: |
||||||||
General and administrative expenses |
32,409 | 30,460 | ||||||
Depreciation expense |
3,377 | 3,801 | ||||||
Amortization expense |
2,301 | 2,796 | ||||||
Long-term compensation expense related to consulting personnel
(including share-based compensation) |
3,209 | 2,821 | ||||||
Operating income |
16,702 | 14,583 | ||||||
Other expense, net |
1,437 | 3,270 | ||||||
Income before income tax expense |
$ | 15,265 | $ | 11,313 | ||||
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Total assets by segment were as follows (shown in thousands):
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
Business Consulting Services |
$ | 262,792 | $ | 263,465 | ||||
Dispute and Investigative Services |
345,253 | 343,531 | ||||||
Economic Consulting |
88,064 | 86,719 | ||||||
International Consulting |
72,730 | 69,539 | ||||||
Unallocated assets |
105,505 | 105,781 | ||||||
Total assets |
$ | 874,344 | $ | 869,035 | ||||
Note 4. Goodwill and Intangible Assets, net
Goodwill and other intangible assets consisted of (shown in thousands):
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
Goodwill |
$ | 569,911 | $ | 566,427 | ||||
Less accumulated amortization |
(5,425 | ) | (5,425 | ) | ||||
Goodwill, net |
564,486 | 561,002 | ||||||
Intangible assets: |
||||||||
Customer lists and relationships |
72,196 | 71,153 | ||||||
Non-compete agreements |
21,266 | 20,994 | ||||||
Other |
24,043 | 23,521 | ||||||
Intangible assets, at cost |
117,505 | 115,668 | ||||||
Less accumulated amortization |
(96,145 | ) | (92,474 | ) | ||||
Intangible assets, net |
21,360 | 23,194 | ||||||
Goodwill and intangible assets, net |
$ | 585,846 | $ | 584,196 | ||||
On a periodic basis, we are required to consider whether it is more likely than not that the
fair value of each of the reporting units has fallen below its carrying value. We consider elements
and other factors including, but not limited to, adverse changes in the business climate in which
we operate, attrition of key personnel, unanticipated competition, our market capitalization in
excess of our book value, our recent operating performance and our financial projections. As a
result of this review we are required to determine whether such an event or condition existed that
would require us to perform an interim goodwill impairment test prior to our next annual test date.
During the first quarter of 2010, certain organizational changes were made which, along with
other factors, resulted in an increase in the number of our operating segments from four to six and
the repositioning of certain service offerings between the segments. In connection with these
changes during the first quarter of 2010, we completed an interim impairment test of our goodwill
balances. At that time, we completed the first step of the goodwill impairment test and determined
that the estimated fair value of each reporting unit exceeded its net asset carrying value.
Accordingly, there was no indication of impairment and the second step was not performed.
Our annual goodwill impairment test is completed in the second quarter of each year. In the
second quarter 2010, we completed the first step of the goodwill impairment test and determined
that the estimated fair value of each reporting unit exceeded its net asset carrying value.
Accordingly, there was no indication of impairment and the second step was not performed.
During the fourth quarter of 2010, our average stock price traded near or below our book value
for a prolonged period of time and we recorded an intangible assets impairment charge. As a result
of these factors, we completed an interim impairment test of our goodwill balances as of November
30, 2010. At that time, we completed the first step of the goodwill impairment test and determined
that the estimated fair value of each reporting unit exceeded its net asset carrying value.
Accordingly, there was no indication of impairment and the second step was not performed.
As of our November 30, 2010 analysis, the excess of estimated fair value over net asset
carrying value of our reporting units was lower than our previous goodwill analyses and
approximated 20% for Healthcare and Energy; 10% for Dispute and Investigative Services,
International Consulting and Economic Consulting; and 75% for Other Business Consulting Services.
In determining estimated fair value of our reporting units, we generally used internal projections
completed during our annual planning process. The key assumptions reflected profit margin
improvement that was generally consistent with our longer term historical performance, revenue
growth rates that were higher than our peer group in the near term, discount rates that were
determined based on comparables for our peer group and cost of capital that was based on company averages. In general, growth
rates used in our November 30, 2010
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analysis were lower than our prior goodwill analysis except for
the International Consulting and Economic Consulting reporting units, which have had recent
strategic senior practitioner additions, and the profit margin expectations used in our November
30, 2010 analysis for all reporting units were lower than those used in our prior goodwill
analysis, particularly in the International Consulting reporting unit. Our fair value estimates
were made as of the date of our analysis and are subject to change.
If the excess of estimated fair value over the net asset carrying value of our reporting units
decreases, there is increased risk that the second step of the goodwill impairment test will be
required, and that goodwill impairment could result. All of our reporting units experienced a
decrease in the estimated fair value over net asset carrying value with the Dispute and
Investigative Services, International Consulting and Economic Consulting segments having the
smallest excess at approximately 10%. Our International Consulting segment fair value is more
volatile due to its smaller size, assumed higher growth rates, involvement in emerging markets and
exposure to multiple markets outside the United States. The higher growth rates are based on our
ability to leverage current and future investments and other factors which may be beyond our
control. Additionally, certain markets within the reporting unit have been adversely impacted by
recent government spending reductions in the United Kingdom and aggressive recruiting of our
consultants, resulting in poor operating performance and the impairment of certain intangible
assets as described above. The Economic Consulting reporting unit is substantially comprised of
recent acquisitions and its estimated fair value depends on various factors including the success
of those acquisitions and the ability to leverage our recent investments. The Economic Consulting
reporting unit fair value also assumes higher growth rates and is subject to volatility due to its
smaller size. The Dispute and Investigative Services reporting unit is our largest and its fair
value will depend on its ability to achieve profitable growth.
As we review our portfolio of services in the future, we may exit certain markets or
reposition certain service offerings within our business. Consistent with past evaluations, further
evaluations may result in our redefining our operating segments and may impact a significant
portion of one or more of our reporting units. As noted above, if such actions occur, they may be
considered triggering events that would result in our performing an interim impairment test of our
goodwill and an impairment test of our intangible assets.
We use various methods to determine fair value, including market, income and cost approaches.
With these approaches, we adopt certain assumptions that market participants would use in pricing
the asset or liability, including assumptions about risk or the risks inherent in the inputs to the
valuation. Inputs to the valuation can be readily observable, market-corroborated, or unobservable.
We use valuation techniques that maximize the use of observable inputs and minimize the use of
unobservable inputs.
The fair value measurements used for our goodwill impairment testing use significant
unobservable inputs which reflect our own assumptions about the inputs that market participants
would use in measuring fair value including risk considerations. The fair value of our reporting
units is also impacted by our overall market capitalization and may be impacted by volatility in
our stock price and assumed control premium, among other things.
As of March 31, 2011, there was no indication of impairment related to our goodwill or other
intangible balances; however, there can be no assurance that these assets will not be impaired in
the future and we will continue to monitor the factors noted above.
Our intangible assets have estimated useful lives which range up to nine years. We will
amortize the remaining net book values of intangible assets over their remaining useful lives,
which approximate the estimated period of consumption. As of
March 31, 2011, our intangible assets
consisted of the following (amounts shown in thousands):
Category | Weighted Average Remaining Years | Amount | ||||||
Customer lists and relationships, net |
4.2 | $ | 15,757 | |||||
Non-compete agreements, net |
3.4 | 1,431 | ||||||
Other intangible assets, net |
3.8 | 4,172 | ||||||
Total intangible assets, net |
4.1 | 21,360 |
The changes in carrying values of goodwill and intangible assets (shown in thousands) are as
follows:
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For the three months ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Balance as of the beginning of the period Goodwill, net |
$ | 561,002 | $ | 485,101 | ||||
Goodwill acquired during the period |
195 | 5,807 | ||||||
Adjustments to goodwill |
(47 | ) | (44 | ) | ||||
Foreign currency translation Goodwill, net |
3,336 | (3,509 | ) | |||||
Balance as of the end of the period Goodwill, net |
$ | 564,486 | $ | 487,355 | ||||
Balance as of the beginning of the period Intangible assets, net |
$ | 23,194 | $ | 30,352 | ||||
Intangible assets acquired during the period |
225 | 1,572 | ||||||
Foreign currency translation Intangible assets, net |
242 | (723 | ) | |||||
Less amortization expense |
(2,301 | ) | (2,796 | ) | ||||
Balance as of the end of the period Intangible assets, net |
$ | 21,360 | $ | 28,405 | ||||
As of March 31, 2011, goodwill and intangible assets, net of amortization, by segment were as
follows (shown in thousands):
Segment | Amount | |||
Business Consulting Services |
$ | 200,962 | ||
Disputes and Investigative Services |
266,544 | |||
Economic Consulting |
63,914 | |||
International Consulting |
54,426 | |||
Total goodwill and intangible assets, net |
$ | 585,846 | ||
Total amortization expense for the three months ended March 31, 2011 and 2010 was $2.3 million
and $2.8 million, respectively. Below is the estimated aggregate amortization expense related to
the intangible assets as of March 31, 2011, to be recorded for the remainder of 2011 and the years
thereafter (shown in thousands):
For the period ending December 31, | Amount | |||
2011 (April December) |
$ | 5,570 | ||
2012 |
5,021 | |||
2013 |
4,163 | |||
2014 |
3,462 | |||
2015 |
1,554 | |||
2016 |
1,047 | |||
Thereafter |
543 | |||
Total |
$ | 21,360 | ||
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Note 5. Net Income per Share (EPS)
Basic net income per share (EPS) is computed by dividing net income by the number of basic
shares. Basic shares are the total of the common stock outstanding and the equivalent shares from
obligations presumed payable in common stock, both weighted for the average days outstanding for
the period. Basic shares exclude the dilutive effect of common stock that could potentially be
issued due to the exercise of stock options, vesting of restricted shares, or satisfaction of
necessary conditions for contingently issuable shares. Diluted EPS is computed by dividing net
income by the number of diluted shares, which are the total of the basic shares outstanding and all
potentially issuable shares, based on the weighted average days outstanding for the period.
The components of basic and diluted shares (shown in thousands and based on the weighted
average days outstanding for the periods) are as follows:
For the three months ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Basic shares |
50,176 | 48,691 | ||||||
Employee stock options |
93 | 329 | ||||||
Restricted stock and restricted stock units |
163 | 177 | ||||||
Business combination obligations payable in a fixed dollar amount of shares |
602 | 890 | ||||||
Contingently issuable shares |
| 9 | ||||||
Diluted shares |
51,034 | 50,096 | ||||||
For the three months ended March 31, 2011 and 2010, we had outstanding stock options of
approximately 960,000 and 318,000, respectively, which were excluded from the computation of
diluted shares because these options had exercise prices greater than the average market price, and
the impact of including these options in the diluted share calculation would have been
antidilutive.
In connection with certain business acquisitions, we are obligated to issue shares of our
common stock. Obligations to issue a fixed number of shares are included in the basic earnings per
share calculation. Obligations to issue a fixed dollar amount of shares where the number of shares
is based on the trading price of our shares at the time of issuance are included in the diluted
earnings per share calculation. For the three months ended March 31, 2011, the diluted share
computation included 0.6 million shares related to deferred purchase price obligations associated
with our acquisition of the Chicago Partners business.
We use the treasury stock method to calculate the dilutive effect of our common stock
equivalents should they vest. The exercise of stock options or the vesting of restricted stock and
restricted stock units triggers excess tax benefits or tax deficiencies that reduce or increase the
dilutive effect of such shares being issued. The excess tax benefits or deficiencies are based on
the difference between the market price of our common stock on the date the equity award is
exercised or vested and the cumulative compensation cost of the stock options, restricted stock and
restricted stock units. These excess tax benefits are recorded as a component of additional paid-in
capital in the accompanying consolidated balance sheets and as a component of financing cash flows
in the accompanying consolidated statements of cash flows. The excess tax deficiencies are recorded
as a component of additional paid-in capital in the accompanying consolidated balance sheets and as
a component of operating cash flows in the accompanying consolidated statements of cash flows.
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Note 6. Stockholders Equity
The following summarizes the activity of stockholders equity during the three months ended
March 31, 2011 (shown in thousands):
Dollars | Shares | |||||||
Stockholders equity at January 1, 2011 |
$ | 460,721 | 50,134 | |||||
Comprehensive income |
12,503 | | ||||||
Acquisition-related stock issuance adjustment |
264 | | ||||||
Other issuances of common stock |
640 | 71 | ||||||
Net settlement of employee taxes on taxable compensation related to the vesting of restricted stock |
(677 | ) | (73 | ) | ||||
Tax deficiencies on stock options exercised and restricted stock vested |
(675 | ) | | |||||
Issuances of restricted stock, net of forfeitures |
| 264 | ||||||
Share-based compensation expense |
1,700 | | ||||||
Stockholders equity at March 31, 2011 |
$ | 474,476 | 50,396 | |||||
During the three months ended March 31, 2011, 264,000 shares of restricted stock vested. We
recorded $675,000 related to tax deficiencies as the per share fair value amounts were less than
the per share measurement price. Also, during the three months ended March 31, 2011, we recorded a
fair value adjustment to the shares we issued as part of the
EthosPartners acquisition. The shares above do not
include unvested restricted stock (see Note 7 Share-Based
Compensation Expense).
Note 7. Share-Based Compensation Expense
Share-based Compensation Expense
Total share-based compensation expense consisted of the following (shown in thousands):
Three months ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Amortization of restricted stock awards |
$ | 1,364 | $ | 734 | ||||
Amortization of stock option awards |
265 | 209 | ||||||
Fair value adjustment for variable stock option accounting awards |
| (33 | ) | |||||
Discount given on employee stock purchase transactions through our Employee Stock Purchase Plan |
71 | 65 | ||||||
Total share-based compensation expense |
$ | 1,700 | $ | 975 | ||||
During the three months ended March 31, 2011 and 2010, share-based compensation expense
attributable to consultants was included in cost of services before reimbursable expenses and
share-based compensation expense attributable to corporate management and support personnel was
included in general and administrative expenses. The following table shows the amounts attributable
to each category (shown in thousands):
Three months ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Cost of services before reimbursable expenses |
$ | 870 | $ | 801 | ||||
General and administrative expenses |
830 | 174 | ||||||
Total share-based compensation expense |
$ | 1,700 | $ | 975 | ||||
During
the three months ended March 31, 2010, share-based compensation expense was impacted by a
modification of restricted stock terms (discussed below).
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Restricted Stock and Restricted Stock Units Outstanding
The measurement price for our restricted stock awards and restricted stock units is the fair
market value of our common stock at the date of grant. The restricted stock and restricted stock
units are granted under the Navigant Consulting, Inc. 2005 Long-Term Incentive Plan, as amended.
The following table summarizes restricted stock activity for the three months ended March 31:
2011 | 2010 | |||||||||||||||
Weighted | Weighted | |||||||||||||||
Number | average | Number | average | |||||||||||||
of shares | measurement | of shares | measurement | |||||||||||||
(000s) | date price | (000s) | date price | |||||||||||||
Restricted stock and restricted stock units outstanding at beginning of the period |
1,449 | $ | 15.52 | 1,356 | $ | 17.25 | ||||||||||
Granted |
73 | 9.27 | 163 | 12.36 | ||||||||||||
Vested |
(264 | ) | 15.70 | (152 | ) | 16.34 | ||||||||||
Forfeited |
(13 | ) | 18.04 | (37 | ) | 18.70 | ||||||||||
Restricted stock and restricted stock units outstanding at end of the period |
1,245 | $ | 15.09 | 1,330 | $ | 16.71 | ||||||||||
As of March 31, 2011, we had $13.7 million of total compensation costs related to the
outstanding or unvested restricted stock that have not been recognized as share-based compensation
expense. The compensation costs will be recognized as expense over the remaining vesting periods.
The weighted-average remaining vesting period is approximately
2 years. At March 31, 2011 and 2010 restricted stock units
outstanding were 66,718 and 55,558, respectively.
During March 2010, we modified the terms of the restricted stock awards granted on March 13,
2007 and April 30, 2007 to provide for 25% annual vesting starting March 13, 2011 and April 30,
2011, respectively. These awards originally vested seven years from the grant date, with the
vesting accelerating based upon the achievement of certain operating performance targets. We
modified the vesting terms of the restricted stock awards in order to improve the visibility of the
value the awards provide for certain key senior consultants and senior management. This
modification resulted in a one-time cumulative credit of $0.4 million in the first quarter of 2010
to share-based compensation expense to align the expense recognition with the amended vesting
terms. As of March 31, 2011, approximately 0.5 million of these restricted stock awards remain
outstanding and 0.3 million have vested.
During the three months ended March 31, 2011, the board of directors granted $0.9 million of
restricted stock and stock option awards to selected senior management. As part of these awards,
73,000 restricted shares were issued, which had a fair value of $0.7 million at grant date and
58,000 stock options were issued which had a fair value of $0.3 million at grant date. The
restricted stock and stock option awards vest ratably over three years.
Note 8. Supplemental Consolidated Balance Sheet Information
Accounts Receivable, net:
The components of accounts receivable were as follows (shown in thousands):
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
Billed amounts |
$ | 139,438 | $ | 144,686 | ||||
Engagements in process |
64,149 | 51,520 | ||||||
Allowance for doubtful accounts |
(17,342 | ) | (17,148 | ) | ||||
Accounts receivable, net |
$ | 186,245 | $ | 179,058 | ||||
Receivables attributable to engagements in process represent balances 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 months services. Our allowance for doubtful accounts receivable is
based on historical experience and management judgment and may change based on market conditions or
specific client circumstances.
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Prepaid expenses and other current assets:
The components of prepaid expenses and other current assets were as follows (shown in
thousands):
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
Notes receivable current |
$ | 6,934 | $ | 6,934 | ||||
Prepaid income taxes |
3,139 | | ||||||
Other prepaid expenses and other current assets |
16,357 | 12,763 | ||||||
Prepaid expenses and other current assets |
$ | 26,430 | $ | 19,697 | ||||
Other assets:
The components of other assets were as follows (shown in thousands):
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
Notes receivable non-current |
$ | 10,594 | $ | 12,328 | ||||
Prepaid expenses and other non-current assets |
14,157 | 14,123 | ||||||
Other assets |
$ | 24,751 | $ | 26,451 | ||||
Notes
receivable represent unsecured forgivable loans with terms of
generally three to five years. The
loans were issued to recruit and retain highly skilled professionals. No forgivable loans were
issued during the three months ended March 31, 2011 and we issued $0.9 million of forgivable loans
during the three months ended March 31, 2010. The principal amount and accrued interest is
expected to be forgiven by us over the term of the loans so long as the professionals continue
employment and comply with certain contractual requirements. The expense associated with the
forgiveness of the principal amount of the loans is recorded as compensation expense over the
service period which is consistent with the term of the loans. The accrued interest is calculated
based on the loans effective interest rate (approximately 5.0% per year) and is recorded as
interest income. The forgiveness of such accrued interest is recorded as compensation expense
which aggregated $0.4 million and $0.3 million for the three months ended March 31, 2011 and 2010,
respectively.
Prepaid expenses and other assets include signing and retention bonuses that are generally
recoverable from employees if such employees terminate their employment prior to fulfilling their
obligations to us. Such amounts are amortized as compensation expense over the period in which they
are recoverable from the employee in periods up to seven years. During the three months ended March
31, 2011 and 2010, we issued $4.2 million and $2.4 million, respectively, in signing and retention
bonuses.
Property and Equipment:
Property and equipment were comprised of the following (shown in thousands):
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
Furniture, fixtures and equipment |
$ | 58,285 | $ | 57,037 | ||||
Software |
32,244 | 31,693 | ||||||
Leasehold improvements |
37,804 | 37,644 | ||||||
Property and equipment, at cost |
128,333 | 126,374 | ||||||
Less: accumulated depreciation and amortization |
(90,990 | ) | (87,471 | ) | ||||
Property and equipment, net |
$ | 37,343 | $ | 38,903 | ||||
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Other Current Liabilities:
The components of other current liabilities were as follows (shown in thousands):
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
Deferred business acquisition obligations |
$ | 23,514 | $ | 22,208 | ||||
Deferred revenue |
12,759 | 14,200 | ||||||
Deferred rent |
2,131 | 2,144 | ||||||
Liabilities on abandoned real estate |
1,540 | 1,595 | ||||||
Other liabilities |
2,643 | 3,254 | ||||||
Total other current liabilities |
$ | 42,587 | $ | 43,401 | ||||
The deferred business acquisition obligations consisted of cash obligations and fixed monetary
obligations payable in shares of our common stock. The number of shares to be issued for
obligations payable in shares is based on the trading price of our common stock for a period of
time prior to the issuance dates.
The current portion of deferred rent relates to rent allowances and incentives on lease
arrangements for our office facilities that expire at various dates through 2020.
Deferred revenue represents advance billings to our clients, for services that have not been
performed and earned.
Other Non-current Liabilities:
The components of other non-current liabilities were as follows (shown in thousands):
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
Deferred business acquisition obligations |
$ | 8,594 | $ | 9,839 | ||||
Deferred rent long-term |
9,654 | 9,538 | ||||||
Liabilities on abandoned real estate |
2,558 | 2,833 | ||||||
Interest rate swap liabilities (see Note 10) |
1,248 | 1,471 | ||||||
Other non-current liabilities |
2,152 | 2,226 | ||||||
Total other liabilities |
$ | 24,206 | $ | 25,907 | ||||
The deferred business acquisition obligations consisted of cash obligations. The liability for
deferred business acquisition obligations has been discounted to net present value.
The long-term portion of deferred rent is primarily rent allowances and incentives related to
leasehold improvements on lease arrangements for our office facilities that expire at various dates
through 2020.
Our liability for abandoned real estate included future rent obligations, net of contracted
sublease and assumed sublease income. In addition to the amounts in the table above, we had a
liability for abandoned real estate of $1.1 million which was recorded in connection with prior
period acquisitions and included in other current and non-current liabilities above. In determining
our reserves for office consolidation costs at March 31, 2011, we estimated future sublease
proceeds based on market conditions of $0.5 million on one property for which we do not have a
contracted subtenant throughout the remaining lease term.
We continue to monitor our estimates for office closure obligations and related expected
sublease income. Additionally, we continue to consider all options with respect to the abandoned
offices, including settlements with the property owners and the timing of termination clauses under
the lease. Such estimates are subject to market conditions and have been adjusted and may be
adjusted in future periods as necessary. Of the $5.2 million liability recorded at March 31, 2011,
we expect to pay $2.4 million in cash relating to these obligations during the next twelve months.
The office closure obligations have been discounted to net present value.
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The activity for our long and short-term commitment on abandoned real estate for the three
months ended March 31, 2011 is as follows (shown in thousands):
Balance at December 31, 2010 |
$ | 4,428 | ||
Utilized during the three months ended March 31, 2011 |
(330 | ) | ||
Balance at March 31, 2011 |
$ | 4,098 | ||
Note 9. Supplemental Consolidated Cash Flow Information
Total interest paid during the three months ended March 31, 2011 and 2010 was $1.4 million and
$3.2 million, respectively. We paid $4.4 million in income taxes during the three months ended
March 31, 2011 and received $0.9 million in income tax refunds during the three months ended March
31, 2010.
Note 10. Comprehensive Income
Comprehensive income, which consists of net income, foreign currency translation adjustments
and unrealized gain or loss on our interest rate swap agreement (shown in thousands), was as
follows:
For the three months ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Net income |
$ | 8,778 | $ | 6,447 | ||||
Foreign currency translation adjustment |
3,593 | (3,476 | ) | |||||
Unrealized income on interest rate derivative, net of income tax costs or benefits |
132 | 794 | ||||||
Comprehensive income |
$ | 12,503 | $ | 3,765 | ||||
In December 2009, we entered into four interest rate swap agreements of equal amounts with
four different banks for an aggregate notional value of $60.0 million. These agreements effectively
fixed $60.0 million of our LIBOR base rate indebtedness at an average rate of 1.83% beginning July
1, 2010 through May 31, 2012. In March 2010, we entered into two interest rate swap agreements of
equal amounts with two different banks for an aggregate notional value of $30.0 million. These
agreements effectively fixed $30.0 million of our LIBOR base rate indebtedness at an average rate
of 1.45% beginning July 1, 2010 through May 31, 2012.
We expect the interest rate derivatives to be highly effective against changes in cash flows
related to changes in interest rates and have recorded the derivative as a hedge. As a result,
gains or losses related to fluctuations in fair value of the interest rate derivative are recorded
as a component of accumulated other comprehensive loss and reclassified into interest expense as
the variable interest expense on our indebtedness is recorded. There was no ineffectiveness related
to our hedges for the three months ended March 31, 2011 and 2010. During the three months ended
March 31, 2011 and 2010, we recorded $0.3 million and $2.1 million in interest expense,
respectively, associated with differentials to be received or paid under the instruments.
As of March 31, 2011, we have a $1.2 million net liability related to the interest rate
derivatives. During the three months ended March 31, 2011, we recorded $0.1 million of unrealized
gains related to our derivatives, which is net of income taxes of $0.1 million, to accumulated
other comprehensive loss. As of March 31, 2011, accumulated other comprehensive income is comprised
of foreign currency translation loss of $8.2 million and unrealized net loss on interest rate
derivatives of $0.7 million.
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Note 11. Fair Value
Fair value is defined as the price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants at the measurement date (exit
price). The inputs used to measure fair value are classified into the following hierarchy:
Level 1 | Unadjusted quoted prices in active markets for identical assets or liabilities. |
Level 2 | Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability. | |
Level 3 | Unobservable inputs for the asset or liability. |
We endeavor to utilize the best available information in measuring fair value. Financial
assets and liabilities are classified in their entirety based on the lowest level of input that is
significant to the fair value measurement. Our interest rate swaps (see Note 10 Comprehensive
Income) are valued using counterparty quotations in over-the-counter markets. In addition, we
incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk
and the respective counterpartys nonperformance risk. The credit valuation adjustments associated
with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads to
evaluate the likelihood of default by ourselves and our counterparties. However, as of March 31,
2011, we have assessed the significance of the impact on the overall valuation and believe that
these adjustments are not significant. As such, our derivative instruments are classified within
Level 2.
Additionally, the value of our bank borrowing credit agreement (see Note 12 Bank
Borrowings) was estimated to be 2.0% below its carrying value based on unobservable Level 3 inputs
such as estimates of current credit spreads to evaluate the likelihood of default by ourselves and
our counterparties. We consider the recorded value of our other financial assets and liabilities,
which consist primarily of cash and cash equivalents, accounts receivable and accounts payable, to
approximate the fair value of the respective assets and liabilities at March 31, 2011 based upon
the short-term nature of the assets and liabilities.
The following table summarizes the liability measured at fair value on a recurring basis as of
March 31, 2011 and December 31, 2010 (shown in thousands):
Quoted Prices in | ||||||||||||||||
Active Markets for | Significant Other | Significant | ||||||||||||||
Identical Assets | Observable Inputs | Unobservable Inputs | ||||||||||||||
(Level 1) | (Level 2) | (Level 3) | Total | |||||||||||||
March 31, 2011 |
||||||||||||||||
Interest rate swaps (recorded in other liabilities) |
| $ | 1,248 | | $ | 1,248 | ||||||||||
December 31, 2010 |
||||||||||||||||
Interest rate swap (recorded in other liabilities) |
| $ | 1,471 | | $ | 1,471 |
Note 12. Bank Borrowings
As of March 31, 2011, we maintained an unsecured credit agreement consisting of a $275.0
million revolving credit facility which, subject to certain bank approvals, includes an option to
increase to $375.0 million and a $225.0 million unsecured term loan facility. Borrowings under the
revolving credit facility are payable in May 2012. Our credit agreement provides for borrowings in
multiple currencies including U.S. Dollars, Canadian Dollars, UK Pound Sterling and Euro. As of
March 31, 2011, we had aggregate borrowings of $228.6 million, compared to $203.0 million as of
December 31, 2010. Based on our financial covenant restrictions under our credit facility as of
March 31, 2011, a maximum of approximately $60 million was available in additional borrowings under
our credit facility. In January 2010, we used a portion of our cash to prepay $40.0 million of our
term loan facility under our credit facility which reduced future required quarterly payments on a
pro rata basis.
At our option, borrowings under the revolving credit facility and the term loan facility bear
interest, in general, based on a variable rate equal to an applicable base rate or LIBOR, in each
case plus an applicable margin. For LIBOR loans, the applicable margin will vary depending upon our
consolidated leverage ratio (the ratio of total funded debt to adjusted EBITDA) and whether the
loan is made under the term loan facility or revolving credit facility. As of March 31, 2011, the
applicable margins on LIBOR loans under the term loan facility and revolving credit facility were
1.25% and 1.00%, respectively. As of March 31, 2011, the applicable margins for base rate loans
under the term loan facility and revolving credit facility were 0.25% and zero percent,
respectively. For LIBOR loans, the applicable margin will vary between 0.50% to 1.75% depending
upon our performance and financial condition. Our average
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borrowing rate under our credit agreement (including the impact of our interest rate swap
agreements; see Note 10 Comprehensive Income) was 2.7% and 6.1% for the three months ended March
31, 2011 and 2010, respectively.
Our credit agreement also includes certain financial covenants, including covenants that
require that we maintain a consolidated leverage ratio of not greater than 3.25:1 and a
consolidated fixed charge coverage ratio (the ratio of the sum of adjusted EBITDA and rental
expense to the sum of cash interest expense and rental expense) of not less than 2.0:1. At March
31, 2011, under the definitions in the credit agreement, our consolidated leverage ratio was 2.6
and our consolidated fixed charge coverage ratio was 3.5. In addition to the financial covenants,
our credit agreement contains customary affirmative and negative covenants and is subject to
customary exceptions. These covenants limit our ability to incur liens or other encumbrances or
make investments, incur indebtedness, enter into mergers, consolidations and asset sales, pay
dividends or other distributions, change the nature of our business and engage in transactions with
affiliates. We were in compliance with the terms of our credit agreement as of March 31, 2011 and
2010; however there can be no assurances that we will remain in compliance in the future.
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |
This Managements Discussion and Analysis of Financial Condition and Results of Operations
should be read in conjunction with our consolidated financial statements and related notes included
elsewhere in this report.
Overview
We market our services directly to corporate counsel, law firms, governmental entities,
corporate boards, corporate executives, other senior corporate employees and special committees. We
use a variety of business development and marketing channels to communicate directly with current
and prospective clients, including on-site presentations, industry seminars and industry-specific
articles. New engagements are sought and won by our senior and mid-level consultants working
together with our business development team that supports all segments. Our future performance will
continue to depend upon the ability of our consultants to win new engagements as well as our
ability to retain such consultants.
A significant portion of new business arises from prior client engagements. In addition, we
seek to leverage our client relationships in one business segment to cross sell existing services
provided by the other segments. Clients frequently expand the scope of engagements during delivery
to include follow-on or complementary activities. In addition, an on-site presence affords our
consultants the opportunity to become aware of, and to help define, additional project
opportunities as they are identified.
We derive our revenues from fees and reimbursable expenses for professional services. A
majority of our revenues are generated under hourly or daily rates typically invoiced to clients
monthly on a time and expense basis. We also have client engagements in which we are paid a fixed
amount for our services, often referred to as fixed fee billings; the majority of our healthcare
business consulting practice engagements utilize fixed billing arrangements. This may be one single
amount covering the whole engagement or several amounts for various phases or functions. From time
to time, we earn incremental revenues, in addition to hourly or fixed fee billings, which are
contingent on the attainment of certain contractual milestones or objectives. We also recognize
revenue from business referral fees or commissions on certain contractual outcomes. Timing of
recognition of these contingent revenues may cause unusual variations in quarterly revenues and
operating results.
Our most significant expense is cost of services before reimbursable expenses, which generally
relates to costs associated with generating revenues, and includes consultant compensation and
benefits, sales and marketing expenses and the direct costs of recruiting and training the
consulting staff. Consultant compensation consists of salaries, incentive compensation,
amortization of signing and retention incentive payments, stock compensation and benefits. Our most
significant overhead expenses are administrative compensation and benefits and office-related
expenses. Administrative compensation includes payroll costs, incentive compensation, stock
compensation and benefits for corporate management and administrative personnel, who are used to
indirectly support client projects. Office-related expenses primarily consist of rent for our
offices. Other administrative costs include bad debt expense, marketing, technology, finance and
human capital management.
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Human Capital Resources
Our human capital resources include consulting professionals and administrative and management
personnel. As a result of both recruiting activities and business acquisitions, we have a diverse
pool of consultants and administrative support staff with varied skills and experience.
The average number of full-time equivalent (FTE) consultants is adjusted for part-time status
and takes into consideration hiring and attrition which occurred during the reporting period.
Independent contractors supplement our consultants on certain engagements. We find that hiring
independent contractors on a per engagement basis from time to time allows us to adjust staffing in
response to changes in demand for our services.
In connection with recruiting activities and business acquisitions, our general policy is to
obtain non-solicitation covenants from senior and some mid-level consultants. Most of these
covenants have restrictions that extend 12 months beyond the termination of employment. We utilize
these contractual agreements and other agreements to reduce the risk of attrition and to safeguard
our existing clients, staff and projects.
We continually review and adjust, if needed, our consultants total compensation (including
salaries, annual cash incentive compensation, other cash and equity incentives, and benefits) to
ensure that it is competitive within the industry, is consistent with our performance, and provides
us with the ability to achieve target profitability levels.
Our bill rates or fees to clients are tiered in accordance with the experience levels of the
consulting staff on the engagement. We monitor and adjust those bill rates according to
then-current market conditions for our service offerings and within the various industries we
serve.
Key Operating Metrics
We include the following metrics in order to provide additional operating information related
to our business and reporting segments. These key operating metrics may not be comparable to
similarly-titled metrics used or disclosed by other companies.
| Average FTE consultants represent our average consultant headcount during the period adjusted for part-time status. | ||
| Period-end FTE consultants represent our consultant headcount at the last day of the reporting period adjusted for part-time status. | ||
| Average bill rate excluding performance based fees represents fee revenues before certain adjustments such as discounts and markups on non performance based services divided by the number of hours associated with the fee revenue. | ||
| Average utilization rate for our FTE consultants represents the number of hours all of our full-time billable consultants worked on client assignments during a period divided by the total available working hours for all of these consultants during the same period (1,850 annual hours). |
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Results of Operations
Results for the three months ended March 31, 2011 compared to the three months ended March 31, 2010
The following table summarizes for comparative purposes certain financial and key operating metrics
on a consolidated basis.
2011 over | ||||||||||||
2010 | ||||||||||||
For the three months ended | Increase | |||||||||||
March 31, | (Decrease) | |||||||||||
(Amounts in thousands, except per share data and metrics) | 2011 | 2010 | Percentage | |||||||||
Revenues before reimbursements |
$ | 169,604 | $ | 153,870 | 10.2 | |||||||
Reimbursements |
19,195 | 19,680 | (2.5 | ) | ||||||||
Total revenues |
188,799 | 173,550 | 8.8 | |||||||||
Cost of services before reimbursable expenses |
114,815 | 102,230 | 12.3 | |||||||||
Reimbursable expenses |
19,195 | 19,680 | (2.5 | ) | ||||||||
Total cost of services |
134,010 | 121,910 | 9.9 | |||||||||
General and administrative expenses |
32,409 | 30,460 | 6.4 | |||||||||
Depreciation expense |
3,377 | 3,801 | (11.2 | ) | ||||||||
Amortization expense |
2,301 | 2,796 | (17.7 | ) | ||||||||
Operating income |
16,702 | 14,583 | 14.5 | |||||||||
Interest expense |
1,840 | 3,478 | (47.1 | ) | ||||||||
Interest income |
(367 | ) | (313 | ) | 17.3 | |||||||
Other expense (income), net |
(36 | ) | 105 | (134.3 | ) | |||||||
Income before income tax expense |
15,265 | 11,313 | 34.9 | |||||||||
Income tax expense |
6,487 | 4,866 | 33.3 | |||||||||
Net income |
$ | 8,778 | $ | 6,447 | 36.2 | |||||||
Basic net income per share |
$ | 0.17 | $ | 0.13 | 30.8 | |||||||
Shares used in computing income per basic share |
50,176 | 48,691 | ||||||||||
Diluted net income per share |
$ | 0.17 | $ | 0.13 | 30.8 | |||||||
Shares used in computing income per diluted share |
51,034 | 50,096 | ||||||||||
Key operating metrics: |
||||||||||||
Average FTE |
||||||||||||
Billable |
1,782 | 1,679 | 6.1 | |||||||||
Non-billable |
527 | 517 | 1.9 | |||||||||
Period End FTE |
||||||||||||
Billable |
1,776 | 1,661 | 6.9 | |||||||||
Non-billable |
529 | 518 | 2.1 | |||||||||
Average bill rate (excluding performance based fees) |
$ | 274 | $ | 264 | 3.8 | |||||||
Average utilization rates based on 1,850 hours |
78 | % | 77 | % | 1.3 |
Earnings Summary. Net income for the three months ended March 31, 2011 increased
compared to the corresponding period in 2010, reflecting an increase in revenues
before reimbursements. The revenue increase is reflective of multiple factors including the full
impact of recent acquisitions and continued improvement in the market
for our services.
Higher costs of services and general and administrative expenses were the result of recent growth
investments, as well as higher employment taxes and benefit costs. Depreciation, amortization and
interest expense decreased during the three months ended March 31, 2011 compared to the
corresponding period in 2010.
Revenues before Reimbursements. For the three months ended March 31, 2011, revenues before
reimbursements increased compared to the corresponding period in 2010 primarily as a result of
increased demand in our energy markets and incremental revenue from the EthosPartners and Daylight
acquisitions completed in 2010. The increase in revenues before reimbursements was partially
offset by a decline in our International Consulting business as well as the departure of certain
senior practitioners during
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2010. On a pro forma basis including the impact of our recent acquisitions, our revenues
before reimbursements for the three months ended March 31, 2011 would have decreased slightly
compared to the corresponding period in 2010.
Cost of Services before Reimbursable Expenses. Cost of services before reimbursable expenses
increased for the three months ended March 31, 2011 compared to the corresponding period in 2010,
resulting from higher compensation and benefit expense, including the
reinstatement of our 401(k)
plan matching contributions in June 2010 and costs associated with new hires and recent
acquisitions. Throughout 2010, we increased our investments in recruiting new senior talent and, as
a result, the cost to amortize these investments increased during the three months ended March 31,
2011 compared to the corresponding period in 2010.
General and Administrative Expenses. General and administrative expenses increased 6.4% for
the three months ended March 31, 2011 compared to the corresponding period in 2010. The increase
was the result of a 1.9% increase in average FTE non-billable employees, a $0.5 million increase in
bad debt expense and higher comparable share-based compensation
expense due to a 2010 one-time credit
relating to the modification of restricted stock terms. General and administrative expenses were
19.1% and 19.8% as a percentage of revenues before reimbursements for the three months ended March
31, 2011 and 2010, respectively.
Depreciation Expense. Depreciation expense decreased 11.2% for the three months ended March
31, 2011, compared to the corresponding period in 2010 due to the full depreciation of certain
assets and relatively lower spending on property, plant and equipment in recent years.
Amortization Expense. Amortization expense decreased 17.7% for the three months ended March
31, 2011 compared to the corresponding period in 2010 due to an impairment recorded during the
three months ended December 31, 2010 relating to customer lists and relationships and non-compete
agreements in two markets within our International Consulting segment and the full amortization of
certain intangible assets as their useful lives came to term. This decrease was partially offset by
increased amortization relating to our recent acquisitions.
Interest Expense. Interest expense decreased 47.1% for the three months ended March 31, 2011,
compared to the corresponding period in 2010. The decrease related primarily to the expiration of
an unfavorable interest rate swap effective June 30, 2010 and lower average borrowing balances
under our credit agreement and our term loan. Our average borrowing rate under our credit agreement
(including the impact of our interest rate swap agreements) was 2.7% and 6.1% for the three months
ended March 31, 2011 and 2010, respectively.
Income Tax Expense. Our effective income tax rate for the three months ended March 31, 2011
and 2010 was 42.5% and 43.0%, respectively. The slight decrease was a result of the mix of income
earned in various tax jurisdictions, including state and foreign jurisdictions, which have
different income tax rates as well as lower rates in effect in certain jurisdictions in 2011.
Segment Results
Our business is organized in four reporting segments Business Consulting Services, Dispute
and Investigative Services, Economic Consulting and International Consulting. These reporting
segments are generally defined by the nature of their services and geography and may be the
aggregation of multiple operating segments as indicated in the description below. We have two
additional operating segments within the Business Consulting Services segment. Our business is
managed and resources are allocated on the basis of the six operating segments.
The Business Consulting Services reporting segment provides strategic, operational, financial,
regulatory and technical management consulting services to clients, principally C suite and
corporate management, government entities and law firms.
The reporting segment was comprised of three operating segments: Energy, Healthcare and Other
Business Consulting practices. The Energy and Healthcare business units are defined as operating
segments due to their size, importance and organizational reporting relationships. The Energy and
Healthcare operating segments provide services to clients in those respective markets, and the
Other Business Consulting practices provide operations advisory, valuation and restructuring
services to financial services and other markets.
The Dispute and Investigative Services reporting segment provides a wide range of services to
clients facing the challenges of disputes, litigation, forensic investigation, discovery and
regulatory compliance. The clients of this segment are principally law firms, corporate general
counsel and corporate boards.
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The Economic Consulting reporting segment provides economic and financial analyses of complex
legal and business issues principally for law firms, corporations and government agencies.
Expertise includes areas such as antitrust, corporate finance and governance, bankruptcy,
intellectual property, investment banking, labor market discrimination and compensation, corporate
valuation and securities litigation.
The International Consulting reporting segment provides a mix of dispute and business
consulting services to clients predominately outside North America. The clients are principally C
suite and corporate management, government entities and law firms.
The following discussion includes, for each of our reporting segments, segment revenues before
reimbursement, segment total revenues and segment operating profit. Certain unallocated expense
amounts related to specific reporting segments have been excluded from the segment operating profit
to be consistent with the information used by management to evaluate segment performance (see Note
3 Segment Information in the notes to the Consolidated Financial Statements). Segment operating
profit represents total revenue less cost of services excluding long-term compensation expense
related to consulting personnel. The information presented does not necessarily reflect the results
of segment operations that would have occurred had the segments been stand-alone businesses.
Business Consulting Services
For the three months ended March 31, |
2011 over 2010 Increase (Decrease) |
|||||||||||
2011 | 2010 | Percentage | ||||||||||
Revenues before reimbursements (in 000s) |
$ | 70,469 | $ | 57,399 | 22.8 | |||||||
Total revenues (in 000s) |
79,627 | 66,250 | 20.2 | |||||||||
Segment operating profit (in 000s) |
23,182 | 19,017 | 21.9 | |||||||||
Segment operating profit margin |
32.9 | % | 33.1 | % | (0.6 | ) | ||||||
Average FTE consultants |
899 | 706 | 27.3 | |||||||||
Average utilization rate based on 1,850 hours |
81 | % | 80 | % | 1.3 | |||||||
Average bill rate (excluding performance based fees) |
$ | 224 | $ | 218 | 2.8 |
Revenues before reimbursements for this segment increased 22.8% during the three months ended
March 31, 2011 compared to the corresponding period in 2010. Average FTE
consultants increased 27.3% mainly as a result of the EthosPartners acquisition in October 2010, in
which we added 180 consultants to our healthcare consulting business. The EthosPartners
acquisition added a performance based fee processing business consisting of
approximately 80 consultants, with significantly lower average bill rates,
which is excluded from the average bill rate above.
Average bill rate (excluding performance based fees) increased 2.8% for the three months ended
March 31, 2011 compared to the corresponding period in 2010, mainly due to increased demand and
modest bill rate increases in our healthcare practice. Success fees earned on contingent
arrangements (which are included in total performance based fees) for the
three months ended March 31, 2011 and 2010 were
$3.4 million and $0.4 million,
respectively. Including the impact of EthosPartners acquisition on a pro forma basis, revenues
before reimbursements would have increased 9.5%. The healthcare and energy business revenues before
reimbursements as a percentage of the segment revenues before reimbursements represented 76.3% and
72.2% for the three months ended March 31, 2011 and 2010, respectively. Segment operating profit
increased $4.2 million due to the higher revenues before
reimbursements as segment
operating profit margins were generally consistent for the three months ended March 31, 2011 and
2010.
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Dispute and Investigative Services
For the three months ended March 31, |
2011 over 2010 Increase (Decrease) |
|||||||||||
2011 | 2010 | Percentage | ||||||||||
Revenues before reimbursements (in 000s) |
$ | 65,753 | $ | 63,338 | 3.8 | |||||||
Total revenues (in 000s) |
72,006 | 67,894 | 6.1 | |||||||||
Segment operating profit (in 000s) |
25,777 | 25,408 | 1.5 | |||||||||
Segment operating profit margin |
39.2 | % | 40.1 | % | (2.2 | ) | ||||||
Average FTE consultants |
584 | 647 | (9.7 | ) | ||||||||
Average utilization rates based on 1,850 hours |
76 | % | 75 | % | 1.3 | |||||||
Average bill rate (excluding performance based fees) |
$ | 308 | $ | 292 | 5.5 |
Revenues before reimbursements for this segment increased 3.8% during the three months ended
March 31, 2011 compared to the corresponding period in 2010. Average FTE consultants decreased 9.7%
as a result of higher than normal voluntary attrition in 2010, particularly in our West region,
which was partially offset by the impact of the acquisition of Daylight. Average
bill rates increased 5.5% for the three months ended March 31, 2011 compared to the corresponding
period in 2010 mainly as a result of continued efforts to increase rates, and a change in
consultant mix. The increase in revenues due to average billing rates was more than offset by
decreased revenue due to lower headcount. Including the impact of the Daylight acquisition on a pro
forma basis, revenues before reimbursements would have decreased 8.5%, driven largely by the senior
departures. Operating profit was relatively consistent for the three months ended March 31, 2011
and 2010 and segment operating profit margin decreased slightly.
Economic Consulting
For the three months ended March 31, |
2011 over 2010 Increase (Decrease) |
|||||||||||
2011 | 2010 | Percentage | ||||||||||
Revenues before reimbursements (in 000s) |
$ | 17,874 | $ | 16,988 | 5.2 | |||||||
Total revenues (in 000s) |
18,539 | 18,609 | (0.4 | ) | ||||||||
Segment operating profit (in 000s) |
5,757 | 6,296 | (8.6 | ) | ||||||||
Segment operating profit margin |
32.2 | % | 37.1 | % | (13.2 | ) | ||||||
Average FTE consultants |
130 | 114 | 14.0 | |||||||||
Average utilization rates based on 1,850 hours |
79 | % | 90 | % | (12.2 | ) | ||||||
Average bill rate (excluding performance based fees) |
$ | 371 | $ | 367 | 1.1 |
Revenues before reimbursements for this segment increased 5.2% during the three months ended
March 31, 2011 compared to the corresponding period in 2010. The increase was mainly due to the
successful recruitment of several senior economists during 2010 and the new client projects they
generated. The new senior economists and related client projects resulted in a 14.0% increase in
average FTE for the three months ended March 31, 2011 compared to the corresponding period in 2010.
Utilization decreased for the three months ended March 31, 2011 compared to the corresponding
period in 2010 due to a few large projects ending during the second half of 2010. Average bill rate
increased 1.1% mainly due to recent hourly bill rate increases. Segment operating profit decreased $0.5 million
and segment operating profit margin decreased 4.9 percentage points for the three months ended
March 31, 2011 compared to the corresponding period in 2010, which was partially attributable to
the lower utilization and the full impact of the costs associated with the recent senior hires.
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International Consulting
For the three months ended March 31, |
2011 over 2010 Increase (Decrease) |
|||||||||||
2011 | 2010 | Percentage | ||||||||||
Revenues before reimbursements (in 000s) |
$ | 15,508 | $ | 16,145 | (3.9 | ) | ||||||
Total revenues (in 000s) |
18,627 | 20,797 | (10.4 | ) | ||||||||
Segment operating profit (in 000s) |
3,282 | 3,740 | (12.2 | ) | ||||||||
Segment operating profit margin |
21.2 | % | 23.2 | % | (8.6 | ) | ||||||
Average FTE consultants |
169 | 212 | (20.3 | ) | ||||||||
Average utilization rates based on 1,850 hours |
65 | % | 65 | % | 0.0 | |||||||
Average bill rate (excluding performance based fees) |
$ | 313 | $ | 263 | 19.0 |
Revenues before reimbursements for this segment decreased 3.9% during the three months ended
March 31, 2011 compared to the corresponding period in 2010. Average FTE consultants decreased
20.3% for the three months ended March 31, 2011, compared to the corresponding period in 2010. The
decrease in average FTE consultants was due primarily to planned headcount reductions over the
course of 2010 in response to lower demand in the construction dispute and public services area.
Severe reduction in government spending throughout 2010 contributed to the overall weakness in this
segment. Average bill rate increased 19.0% for the three months ended March 31, 2011 compared to
the corresponding period in 2010 due to a change in business mix.
Utilization was flat as the decrease in demand during 2010 was offset by lower
average FTE consultants. Segment operating profit decreased $0.5 million and segment operating
profit margin declined 2.0 percentage points for the three months ended March 31, 2011 compared to
the corresponding period in 2010, primarily related to the adverse market impacts described above.
Liquidity and Capital Resources
Summary
Borrowings
under our credit agreement increased $25.1 million from December 31,
2010 to March 31, 2011, due to higher seasonal working capital outflows mainly relating to
incentive bonus payments and higher accounts receivable associated with increased revenue.
Our cash equivalents were primarily limited to money market accounts or A rated securities,
with maturity dates of 90 days or less. We had days sales outstanding (DSO) of 83 days at March
31, 2011, compared to 81 days at December 31, 2010. We calculate accounts receivable DSO by
dividing the accounts receivable balance net of reserves and deferred revenue credits at the end of
the quarter by daily net revenues. Daily net revenues are calculated by taking quarterly net
revenues divided by 90 days, approximately equal to the number of days in a quarter.
Operating Activities
Net cash used in operating activities increased to $23.4 million for the three months ended
March 31, 2011, compared to $21.0 million used in operating activities for the three months ended
March 31, 2010. The increase in cash used in operating activities related mainly to higher working
capital requirements as described above.
Investing Activities
Net cash used in investing activities for the three months ended March 31, 2011 was $2.2
million, compared to $7.1 million for the three months ended March 31, 2010. The decrease in the
use of cash resulted primarily from our acquisition of Empiris in January 2010 and lower capital
spending on property and equipment expenditures during the three months ended March 31, 2011
compared to the corresponding period in the prior year.
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Financing Activities
Net cash provided by financing activities for the three months ended March 31, 2011 was $25.1
million, compared to net cash used in financing activities of $20.9 million for the three months
ended March 31, 2010. During the three months ended March 31, 2010, we used excess cash to prepay
$40.0 million of our term loan facility.
Debt, Commitments and Capital
As of March 31, 2011, we maintained an unsecured credit agreement consisting of a $275.0
million revolving credit facility which, subject to certain bank approvals, includes an option to
increase to $375.0 million and a $225.0 million unsecured term loan facility. Borrowings under the
revolving credit facility are payable in May 2012. Our credit agreement provides for borrowings in
multiple currencies including U.S. Dollars, Canadian Dollars, UK Pound Sterling and Euro. As of
March 31, 2011, we had aggregate borrowings of $228.6 million, compared to $203.0 million as of
December 31, 2010. Based on our financial covenant restrictions under our credit facility as of
March 31, 2011, a maximum of approximately $60 million was available in additional borrowings under
our credit facility. In January 2010, we used a portion of our cash to prepay $40.0 million of our
term loan facility under our credit facility which reduced future required quarterly payments on a
pro rata basis.
At our option, borrowings under the revolving credit facility and the term loan facility bear
interest, in general, based on a variable rate equal to an applicable base rate or LIBOR, in each
case plus an applicable margin. For LIBOR loans, the applicable margin will vary depending upon our
consolidated leverage ratio (the ratio of total funded debt to adjusted EBITDA) and whether the
loan is made under the term loan facility or revolving credit facility. As of March 31, 2011, the
applicable margins on LIBOR loans under the term loan facility and revolving credit facility were
1.25% and 1.00%, respectively. As of March 31, 2011, the applicable margins for base rate loans
under the term loan facility and revolving credit facility were 0.25% and zero percent,
respectively. For LIBOR loans, the applicable margin will vary between 0.50% to 1.75% depending
upon our performance and financial condition. Our average borrowing rate under our credit agreement
(including the impact of our interest rate swap agreements; see Note
10 Comprehensive Income) was
2.7% and 6.1% for the three months ended March 31, 2011 and 2010, respectively.
Our credit agreement also includes certain financial covenants, including covenants that
require that we maintain a consolidated leverage ratio of not greater than 3.25:1 and a
consolidated fixed charge coverage ratio (the ratio of the sum of adjusted EBITDA and rental
expense to the sum of cash interest expense and rental expense) of not less than 2.0:1. At March
31, 2011, under the definitions in the credit agreement, our consolidated leverage ratio was 2.6
and our consolidated fixed charge coverage ratio was 3.5. In addition to the financial covenants,
our credit agreement contains customary affirmative and negative covenants and is subject to
customary exceptions. These covenants limit our ability to incur liens or other encumbrances or
make investments, incur indebtedness, enter into mergers, consolidations and asset sales, pay
dividends or other distributions, change the nature of our business and engage in transactions with
affiliates. We were in compliance with the terms of our credit agreement as of March 31, 2011 and
2010; however there can be no assurances that we will remain in compliance in the future.
As of March 31, 2011, we had total commitments of $365.9 million, which included $32.1 million
in deferred business acquisition obligations, payable in cash and common stock, and $104.8 million
in lease commitments. As of March 31, 2011, we had no significant commitments for capital
expenditures or software license agreements.
The following table shows the components of our significant commitments as of March 31, 2011
and the scheduled years of payments (shown in thousands):
From April 1, | ||||||||||||||||||||
to | ||||||||||||||||||||
December 31, | ||||||||||||||||||||
Contractual Obligations | Total | 2011 | 2012 to 2013 | 2014 to 2015 | Thereafter | |||||||||||||||
Deferred purchase price obligations-cash |
$ | 26,384 | $ | 16,230 | $ | 10,154 | $ | | $ | | ||||||||||
Deferred purchase price obligations-stock |
5,724 | 5,724 | | | | |||||||||||||||
Employment agreements |
375 | 375 | | | | |||||||||||||||
Revolving loan |
63,961 | | 63,961 | | | |||||||||||||||
Term loan |
164,657 | 13,798 | 150,859 | | | |||||||||||||||
Lease commitments |
104,763 | 19,236 | 38,046 | 24,631 | 22,850 | |||||||||||||||
$ | 365,864 | $ | 55,363 | $ | 263,020 | $ | 24,631 | $ | 22,850 | |||||||||||
Of the $104.8 million lease commitments as of March 31, 2011, $10.8 million of the lease
commitments related to offices we have abandoned or in which we reduced excess space, which have
been subleased or are available for sublease. As of March 31, 2011, we
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had contractual subleases of
$6.7 million, which are not reflected in the commitment table above. Such sublease income would
offset the cash outlays of the lease commitments in the table above. Additionally, we intend to secure subtenants for the properties available
for sublease to offset the rent payments and will seek to exercise termination clauses, if any, to
shorten the term of the lease commitments. Such sublease income, if any, would offset the cash
outlays. The lease commitments for these offices extend through 2020.
We believe that our current cash and cash equivalents, the future cash flows from operations
and borrowings under our credit agreement will provide adequate cash to fund anticipated short-term
and long-term cash needs from normal operations; however, we are evaluating extending our current
credit agreement or entering into a new credit agreement as noted below. In the event we make
significant cash expenditures in the future for major acquisitions or other activities, we might
need additional debt or equity financing, as appropriate. Additionally, our credit agreement is
with a syndicate of several banks. These banks could be negatively impacted by the disruptions in
the financial markets.
We are in the process of renewing our credit agreement which expires in May 2012. Based on
current market conditions, we expect that borrowings under any new credit facility will be at a
higher cost of borrowing than our current borrowings.
There can be no assurance that we will be able to renegotiate the term of our current
credit agreement when it comes due or enter into a new credit agreement.
We do not expect to significantly increase or reduce our reserve for uncertain tax positions
during the next twelve months.
Off-balance Sheet Arrangements
We do not maintain any off-balance sheet arrangements, transactions, obligations or other
relationships with unconsolidated entities that would be expected to have a material current or
future impact on our financial condition or results of operations.
Critical Accounting Policies
There have been no material changes to our critical accounting policies and estimates from the
information provided in Item 7 Managements Discussion and Analysis of Financial Condition and
Results of Operations Critical Accounting Policies in our Annual Report on Form 10-K for the
year ended December 31, 2010.
Recently Issued Standards
In December 2010, the Financial Accounting Standards Board issued guidance to clarify the
acquisition date that should used for reporting the pro forma financial information disclosures
required by Topic 805 Business Combinations, when comparative financial statements are
presented. The update also requires additional disclosures of the nature and amount of material,
nonrecurring pro forma adjustments that are directly attributable to the business combination. This
update is effective for acquisitions made in the first fiscal year beginning after December 15,
2010. We will adjust our disclosures as necessary after adoption.
In March 2010, the Financial Accounting Standards Board issued guidance on milestone
accounting. The guidance applies to transactions involving research or development deliverables or
other units of accounting where a performance obligation is met over a period of time and a portion
or all of the consideration is contingent upon achievement of a milestone. After meeting specified
criteria, entities can make an accounting policy election to recognize arrangement consideration
received for achieving specified performance measures during the periods in which the milestones
are achieved. The update is effective for fiscal years beginning on or after June 15, 2010. We have
adopted this guidance effective January 1, 2011 and the impact on our statements of financial
position, results of operations and cash flow was not material.
In September 2009, the Financial Accounting Standards Board issued guidance on revenue
recognition which changes the criteria required to separate deliverables into separate units of
accounting when they are sold in bundled arrangements. Previously entities were required to have
vendor-specific objective evidence of fair value or other third-party evidence of fair value. The
elimination of these requirements to separate deliverables into separate units of accounting will
put more focus on a vendors assessment of whether delivered items in multiple element arrangements
have standalone value. The update is effective for arrangements entered into or materially modified
in fiscal years beginning on or after June 15, 2010. We have adopted this guidance effective
January 1, 2011 and the impact on our statements of financial position, results of operations and
cash flow was not material.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our primary exposure to market risks relates to changes in interest rates and foreign
currencies. The interest rate risk is associated with borrowings under our credit agreement and our
investment portfolio, classified as cash equivalents. The foreign currency risk is associated with
our operations in foreign countries.
As of March 31, 2011, borrowings under our credit agreement bear interest, in general, based
on a variable rate equal to an applicable base rate (equal to the higher of a reference prime rate
or one half of one percent above the federal funds rate) or LIBOR, in each case plus an applicable
margin. We are exposed to interest rate risk relating to the fluctuations in LIBOR. We use interest
rate swap agreements to manage our exposure to fluctuations in LIBOR. In December 2009, we entered
into four interest rate swap agreements of equal amounts with four different banks for an aggregate
notional value of $60.0 million. These agreements effectively fixed $60.0 million of our LIBOR base
rate indebtedness at an average rate of 1.83% beginning July 1, 2010 through May 31, 2012. In March
2010, we entered into two interest rate swap agreements of equal amounts with two different banks
for an aggregate notional value of $30.0 million. These agreements effectively fixed $30.0 million
of our LIBOR base rate indebtedness at an average rate of 1.45% beginning July 1, 2010 through May
31, 2012. On June 30, 2010 our $165 million notional amount interest rate swap matured. As of March
31, 2011 our interest rate swaps effectively fixed our LIBOR base rate on $90.0 million of our
debt. Based on borrowings under the credit agreement at March 31, 2011 and after giving effect to
the impact of our interest rate swap agreement, our interest rate exposure is limited to $138.6
million of debt, and each quarter point change in market interest rates would result in
approximately a $0.3 million change in annual interest expense.
At March 31, 2011, our 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. Because of the short periods to maturity of these
instruments, an increase in interest rates would not have a material effect on our financial
position or results of operations.
We operate in foreign countries, which expose us to market risk associated with foreign
currency exchange rate fluctuations. At March 31, 2011, we had net assets of approximately $76.8
million with a functional currency of the UK Pound Sterling and $31.0 million with a functional
currency of the Canadian Dollar related to our operations in the United Kingdom and Canada,
respectively. At March 31, 2011, we had net assets denominated in the non-functional currency of
approximately $1.8 million. As such, a ten percent change in the value of the local currency would
result in $0.2 million currency gain or loss in our results of operations.
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Item 4. Controls and Procedures
Under the supervision of our management, including our principal executive officer and
principal financial officer, we evaluated the effectiveness of the design of our disclosure
controls and procedures as of March 31, 2011. Based on that evaluation, the principal executive
officer and principal financial officer concluded that our disclosure controls and procedures were
effective.
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of
the Securities Exchange Act of 1934 (the Exchange Act)) that are designed to ensure that
information required to be disclosed in our reports filed or submitted under the Exchange Act is
recorded, processed, summarized and reported within the time frames specified in SEC rules and
forms, and that such information is accumulated and communicated to our management, including our
principal executive officer and principal financial officer, as appropriate, to allow timely
decisions regarding required disclosure. Any system of controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the desired control
objectives.
Except as described below, during the three months ended March 31, 2011, there have not been
any changes in our internal control over financial reporting that have materially affected or are
reasonably likely to materially affect our internal control over financial reporting as defined in
Exchange Act Rule 13a-15(f).
We are in the process of implementing a new ERP system. The first phase of the implementation
was completed in 2010 and included implementing new modules related to our general ledger, accounts
payable and human capital systems. We plan to continue to replace our legacy systems with the new
ERP system functionality over the next several years. We follow a system implementation life cycle
process that requires significant pre-implementation planning, design and testing. We also conduct
extensive post-implementation monitoring and testing to ensure the effectiveness of internal
controls over financial reporting, and we have not experienced any significant internal
control issues in connection with the implementation or operation of the new ERP system.
PART IIOTHER INFORMATION
Item 1. Legal Proceedings
We are not party to any legal proceedings, other than various lawsuits and claims in the
ordinary course of business.
Item 1A. Risk Factors
There have been no material changes from the risk factors previously disclosed in our Annual
Report on Form 10-K for the year ended December 31, 2010.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table sets forth repurchases of our common stock during the first quarter of
2011:
Total Number of | Approximate | |||||||||||||||
Shares Purchased as | Dollar Value of | |||||||||||||||
Part of Publicly | Shares That May Yet be | |||||||||||||||
Total Number of | Average Price | Announced Plans or | Purchased Under the | |||||||||||||
Period | Shares Purchased(a) | Paid per Share | Programs(b) | Plans or Programs(b) | ||||||||||||
January 1 31, 2011 |
5,832 | $ | 9.26 | | $ | 100,000,000 | ||||||||||
February 1 28, 2011 |
| | | $ | 100,000,000 | |||||||||||
March 1 - 31, 2011 |
67,103 | $ | 9.27 | | $ | 100,000,000 | ||||||||||
Total |
72,935 | $ | 9.27 | | $ | 100,000,000 |
(a) | Represents shares of our common stock withheld by us to satisfy individual tax withholding obligations in connection with the vesting of restricted stock during the period. |
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(b) | On February 23, 2009, our board of directors authorized the repurchase of up to $100 million shares of our common stock, in open market or private transactions, until December 31, 2011. As of the date of this report, we have not repurchased any shares of our common stock under that authorization. |
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits
The following exhibits are filed with this report:
Exhibit No. | Description | |
Exhibit 31.1
|
Certification of Chief Executive Officer required by Rule 13a-14 of the Securities Exchange Act. | |
Exhibit 31.2
|
Certification of Chief Financial Officer required by Rule 13a-14 of the Securities Exchange Act. | |
Exhibit 32.1
|
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code. | |
Exhibit 101*
|
Interactive Data File. |
* | As provided in Rule 406T of Regulation S-T, this information is furnished not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934. |
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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/ THOMAS A. NARDI | |||
Thomas A. Nardi | ||||
Executive Vice President and Chief Financial Officer |
||||
Date: April 28, 2011
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