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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-K

 

 

(Mark One)

 

  þ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
       OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2014

OR

 

  ¨ 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   36-4094854

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

30 South Wacker Drive, Suite 3550, Chicago, Illinois 60606

(Address of principal executive offices, including zip code)

(312) 573-5600

(Registrant’s telephone number, including area code)

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of Each Class

 

Name of Each Exchange on Which Registered

Common Stock, par value $0.001 per share

  New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:

None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  YES  þ      NO  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  YES  ¨      NO  þ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.  YES  þ      NO  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, 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  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    þ

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  ¨    Non-accelerated filer  ¨   Smaller reporting company  ¨
  (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  ¨      NO  þ

As of February 9, 2015, 48,086,915 shares of the registrant’s common stock, par value $0.001 per share (“Common Stock”), were outstanding. The aggregate market value of shares of the Common Stock held by non-affiliates, based upon the closing sale price per share of the Common Stock on the New York Stock Exchange on June 30, 2014, was approximately $846.0 million.

DOCUMENTS INCORPORATED BY REFERENCE

Certain information from the registrant’s definitive Proxy Statement for its Annual Meeting of Shareholders, scheduled to be held on May 14, 2015, is incorporated by reference into Part III of this report. The registrant intends to file the Proxy Statement with the Securities and Exchange Commission within 120 days of December 31, 2014.

 

 

 


Table of Contents

NAVIGANT CONSULTING, INC. AND SUBSIDIARIES

FORM 10-K

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2014

TABLE OF CONTENTS

 

          Page  
PART I   

Item 1.

  

Business

     4   

Item 1A.

  

Risk Factors

     9   

Item 1B.

  

Unresolved Staff Comments

     17   

Item 2.

  

Properties

     17   

Item 3.

  

Legal Proceedings

     17   

Item 4.

  

Mine Safety Disclosures

     17   
  

Executive Officers of the Registrant

     18   
PART II   

Item 5.

   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities      19   

Item 6.

  

Selected Financial Data

     22   

Item 7.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     24   

Item 7A.

  

Quantitative and Qualitative Disclosures About Market Risk

     43   

Item 8.

  

Financial Statements and Supplementary Data

     44   

Item 9.

  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     44   

Item 9A.

  

Controls and Procedures

     44   

Item 9B.

  

Other Information

     44   
PART III   

Item 10.

  

Directors, Executive Officers and Corporate Governance

     46   

Item 11.

  

Executive Compensation

     46   

Item 12.

   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters      46   

Item 13.

  

Certain Relationships and Related Transactions, and Director Independence

     46   

Item 14.

  

Principal Accountant Fees and Services

     46   
PART IV   

Item 15.

  

Exhibits and Financial Statement Schedules

     47   
  

Report of Independent Registered Public Accounting Firm

     F-2   
  

Consolidated Balance Sheets

     F-3   
  

Consolidated Statements of Comprehensive Income (Loss)

     F-4   
  

Consolidated Statements of Stockholders’ Equity

     F-5   
  

Consolidated Statements of Cash Flows

     F-6   
  

Notes to Consolidated Financial Statements

     F-7   

Schedule II Valuation and Qualifying Accounts

     S-1   

 

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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” and Item 7 — Management’s 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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PART I

 

Item 1. Business.

Navigant Consulting, Inc. (“we,” “us,” or “our”) is an independent specialized, global professional services firm that combines deep industry knowledge with technical expertise to enable companies to defend, protect and create value. We focus on industries and clients facing transformational change and significant regulatory and legal issues. We serve clients primarily in the healthcare, energy and financial services sectors which represent highly complex market and regulatory environments. Our professional service offerings include strategic, financial, operational, technology, risk management, compliance, investigative solutions, dispute resolution services and business process management services. We provide our services to companies, legal counsel and governmental agencies. Our business is organized in four reporting segments — Disputes, Investigations & Economics; Financial, Risk & Compliance; Healthcare; and Energy.

We are a Delaware corporation incorporated in 1996 and headquartered in Chicago, Illinois. Our executive office is located at 30 South Wacker Drive, Suite 3550, Chicago, Illinois 60606. Our telephone number is (312) 573-5600. Our common stock is traded on the New York Stock Exchange under the symbol “NCI.”

General Development of the Business

Development of the Business — Reporting Segments

Our business is organized in four reporting segments — Disputes, Investigations & Economics; Financial, Risk & Compliance; Healthcare; and Energy. Within these segments we deliver consulting services as well as offerings that include providing technology-based solutions, data hosting or processing, and business process management services (which we refer to as Technology, Data & Process services herein). In addition, we conduct business across our segments through operations in various countries outside the United States. Since our inception, we have grown through selective acquisitions of businesses (which we consider inorganic growth), recruitment of employees and investments in technology to complement our consulting skills and enhance our service offerings (which we consider organic growth). These investments have enhanced or expanded existing expertise, added new services, broadened our geographic reach, and enhanced our market share.

Our Disputes, Investigations & Economics segment provides accounting, financial and economic analysis, discovery support, and data management and analytics services across a wide range of legal and business issues and industries. We have established and maintained dispute services (including commercial litigation, financial services disputes, construction-related disputes, insurance and environmental disputes, and international arbitration) and investigative and compliance-related services (forensic investigations, information security investigations), including services specific to the healthcare and life sciences industries, and economic consulting through investments in acquisitions, recruitment of senior hires and technology. These investments have added to our suite of services and expanded those services to offices across the United States and outside the United States. In addition, we have recently expanded our global presence in the construction disputes market through a combination of acquisitions and recruitment of senior hires. Our continued senior hiring in this segment has been focused on adding broad industry expertise in our key markets, in addition to maintaining presence in key geographic markets around the globe. We have also grown our e-discovery and dispute related analytics services through a combination of senior hires, investment in technology, and acquisitions. In doing so, we have migrated the business from what was once locally managed data centers to centralized management. We have also developed technology tools that aid our client-facing employees in delivering value to our clients.

Within our Financial, Risk & Compliance segment, a substantial portion of our growth has been organic. The strategic, operational, valuation, and risk management services within this segment were largely developed over time through the recruitment of senior hires. Within this segment, we have supplemented our organic growth through acquisitions, adding anti-money laundering and anti-fraud related services. The combination of senior hiring and acquisitions has also helped establish a more formidable presence in New York. New York is home to a large portion of the financial services market in the US, which is one of our key industry focus areas, particularly for this segment. We believe building a larger presence in New York creates more opportunities to

 

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remain connected with clients in the industry, as well as to have capacity to serve those clients locally. Senior hiring remains a key growth driver for this segment, as we continue to add capacity to provide services, while further broadening our expertise in the continuously changing regulatory environment around the financial services industry. Services in this segment have the potential to escalate into large scale compliance oriented engagements. We have developed technology tools that complement our consulting base by helping our client-facing employees and clients more efficiently identify compliance risks, and to streamline operational activities.

Our Energy segment has grown through a combination of employee and solution development, recruiting and acquisitions. These investments have expanded our operations in markets and geographies with significant utility, government and commercial client presence in the energy sector. We have further expanded our consulting offerings to assist clients in their implementation of strategy and new business models and creating sustainable excellence in areas such as investment management, integrated resource planning, renewables, distributed energy resources, energy efficiency and demand response, and transmission and distribution operations. We believe our Energy segment has created an organization that combines market insights and business strategy knowledge with exceptional operational and technical experience to deliver financially viable and sustainable solutions for our clients on a global basis. We have grown our benchmarking and research services through acquisitions that now enable a broad array of market research capabilities (included in our Technology, Data & Process services).

We have focused significant investment resources on our Healthcare segment. We continue to recruit senior hires to build a multi-functional consulting team that spans the spectrum of the healthcare landscape including health systems, physician practice groups, health insurance providers, government agencies and life sciences companies. In addition, we’ve broadened our services to include strategic, operational, performance improvement, and revenue cycle consulting offerings. Largely through acquisitions, and including our most recent addition of Cymetrix, we have further complemented our consulting breadth and depth with business process management services (included in our Technology, Data, and Process services). The Cymetrix acquisition greatly expanded our business process management services, extending those services to hospitals, which are in addition to similar services we have been offering to physician groups. Our investment in business process management services is unique compared to most of our other investments in that the services offered establish long standing engagements through multi-year service agreements. These acquisitions and related hiring fully align with our growth strategy of combining our traditional expert-based consulting services, which are often event driven, with complementary solutions that deliver on-going value to our clients while incorporating more recurring revenue streams for us where there is a clear synergy between the two. Contracts in this business are generally multi-year engagements compared to other areas of our business where contracts typically run less than a year. These business process management services are enabled by systems and technology developed by Cymetrix, which we hope to leverage across our other Healthcare offerings. In addition to these technology investments, the Healthcare segment continues to invest in analytical tools that help our clients manage resources and processes to improve their operations, patient care, and financial performance.

Development of the Business — International Presence

Through acquisitions and senior hires in multiple locations outside of the United States, we have established a base upon which we expect to be able to attract additional senior experts to further our reach globally. Through building a multi-faceted presence in the UK that provides Disputes, Investigations & Economics, Healthcare, and Energy related services, we have developed a UK base that facilitates services we provide to clients across the globe outside of the US. We have leveraged the UK as a hub to support the establishment of operations in the Middle East and Asia to further facilitate services to clients across the globe. Within the UK, we have also invested in a technology infrastructure that supports our Technology, Data & Process services within our Disputes, Investigations & Economics segment beyond US borders.

Development of the Business — Through Technology and Employee Initiatives

As our business has matured, we have also continued to invest in technology infrastructure to support our evolving service offerings, including investment in more sophisticated operating systems to enable our

 

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technology-based services as they expand and change over time and to assist us in managing our broadening employee base. As part of these technology investments, we have built a private cloud environment that provides a more scalable operation, allowing us to more efficiently leverage resources within and across our data centers and across client requirements and more easily provide customizable client solutions.

We have supplemented our investments with employee-related initiatives to promote innovation and collaboration. In addition, we have focused efforts on development programs for our professionals designed to improve sales effectiveness and their ability to deliver the capabilities we have across the organization. We have also focused on other aspects of employee development, which include talent management and mentoring programs. Collectively, these innovation, collaboration, development and sales initiatives are intended to contribute to the growth of our people while enhancing our ability to grow the business organically.

While investing in recruitment, acquisitions, technology, and employee development programs, we have at the same time maintained strong cash flows which have contributed to strengthening our financial position. Over the past five years, we have reduced our bank debt balance from $207.0 million as of December 31, 2009 to $109.8 million as of December 31, 2014. In addition, in 2011 we began a stock repurchase program and through December 31, 2014 have repurchased 5.5 million shares at an average cost of $13.88 per share, effectively returning capital to our shareholders.

Human Capital Resources

At December 31, 2014, we had 3,559 employees. After adjusting total employees for part-time status and excluding project employees, we had 3,382 full-time equivalent (FTE) employees. These FTEs were comprised of the following:

 

   

Client-service employees (Client-Service FTE)

 

   

1,573 consulting employees (Consulting FTE) in businesses that deliver professional services. These individuals record time to client engagements.

 

   

1,201 Technology, Data & Process employees (Technology, Data & Process FTE) in businesses that are comprised of technology-enabled professional services, including e-discovery services and data analytics, business process management services, technology solutions, invoice and insurance claims processing, market research and benchmarking. While some of these individuals may record time to client engagements (in professional services engagements), many do not record time to specific engagements. During the year we added 640 Technology, Data & Process FTE in connection with our acquisition of Cymetrix.

The majority of costs related to these employees is recorded in costs of services before reimbursements.

 

   

Non-billable employees (Non-Billable FTE)

 

   

608 non-billable employees who are assigned to administrative and support functions, including office services, corporate functions, and certain practice support functions. The majority of costs related to these employees is recorded in general and administrative expense while the costs directly relating to practice support functions are recorded as costs of services before reimbursements.

We also had 87 project employees who perform client services on a contractual basis. Project employee levels vary from period to period based on staffing and resource requirements. The majority of costs related to these employees is recorded in costs of services before reimbursements.

Our revenues are primarily generated from services performed by our client-service employees; therefore, our success depends in large part on attracting, retaining and motivating talented, creative and experienced client-service employees at all levels and across various geographies. In connection with recruiting, we employ internal recruiters, retain executive search firms, and utilize personal and business contacts. Our client-service employees are drawn from a variety of sources, including the industries we serve, accounting and other consulting organizations, and top rated colleges and universities. Our client-service employees include, but are not limited to, PhDs, MDs, MBAs, JDs, CPAs, CFEs (certified fraud examiners), ASAs (accredited senior appraisers), engineers, nurses and former government officials.

 

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In developing and growing our Technology, Data, & Process services, we have also added employees aligned to these businesses. We recruit, retain, and manage many of our Technology, Data & Process employees differently from our client-service employees. Particularly, in our business process management services, we add Technology, Data & Process employees through traditional recruitment, by transitioning client employees to become Navigant employees, or subcontracting services from our clients. Our demand for these resources, whether recruited, transitioned, or subcontracted from our clients, increases as we continue to expand this business. By managing these employees with our processes, centralizing their functions in our business centers, and leveraging technology to enable work streams, we are able to more efficiently and effectively deliver services. We leverage our business centers not only to help us better manage employee work forces across work streams and projects but also to create opportunities for these employees to develop professionally by exposing them to new service areas and possibilities for promotion within the management teams in these businesses.

We seek to retain our employees by offering competitive compensation packages of base and incentive compensation (and in certain instances share-based compensation and retention incentives), attractive benefits and rewarding careers. We periodically review and adjust, if needed, our employees’ total compensation (including salaries, annual cash incentive compensation, other cash and equity incentives, and benefits) to ensure that it is competitive within the industry and is consistent with our level of performance. In addition to compensation, we promote numerous charitable, philanthropic, and social awareness programs that not only support our community, but also provide experiences for our employees to promote a collaborative and rewarding environment.

We regularly evaluate employees and their productivity against future demand expectations and historical trends. From time to time, we may reduce or add resources in certain areas in an effort to align with changing demands. In connection with these changing demands, we also utilize project employees and engage independent contractors on certain engagements, which allow us to quickly adjust staffing in response to changing 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 employees. Most of these covenants have restrictions that extend 12 months or more beyond the termination of employment. We utilize these contractual agreements and other agreements to protect our business interests, which also can reduce the risk of attrition and provide stability to our existing clients, staff and projects.

In our consulting businesses, our bill rates or fees charged to clients are tiered in accordance with the experience and position. We monitor and adjust those bill rates or fees according to then-current market conditions for our service offerings and within the various industries we serve. Similarly, pricing for our Technology, Data, & Process services is based upon the complexity of services delivered and markets served.

Industry Sectors

We provide services to clients in industries undergoing substantial regulatory or structural change. Our legal and compliance based service offerings are relevant to law firms and clients in most industries including federal and state agencies within the public sector. We also have significant industry-specific knowledge and a large client base in the energy, healthcare and financial services industries.

Competition

The market for our services is highly competitive, highly fragmented and subject to rapid change. The market includes a large number of participants with a variety of skills and industry expertise, including general management and information technology consulting firms, strategy firms, global accounting firms, and other local, regional, national and international consulting firms. Many of these companies are international in scope and have larger teams of personnel and greater financial, technical and marketing resources than we do. In particular, the Big Four accounting firms (PwC, Deloitte, EY and KPMG) are highly competitive in the consulting industry. However, we believe that our industry focus, deep industry and operational expertise, reputation, global business model and broad range of service offerings enable us to compete effectively in the marketplace. Additionally, with the acquisition of Cymetrix we have increased our ability to offer business

 

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process management services which, when combined with our existing consulting businesses, creates an opportunity to differentiate ourselves from other firms, as most participants in the market provide primarily business process management services without the complement of our consulting capabilities.

Developing Client Relationships

We market our services directly to corporate executives and senior management, corporate counsel, law firms, corporate boards, special committees, and governmental agencies. 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. In addition, we have strengthened our market presence by developing our brand name and go-to-market strategy. New engagements are sought and won by our senior and mid-level employees working together across our business segments. We seek to leverage our client relationships in one business segment to cross-sell service offerings provided by other business segments. Clients frequently expand the scope of engagements during delivery to include follow-on or complementary services. Our future performance will continue to depend upon our ability to win new engagements, attract and retain employees, develop and continue client relationships and maintain our reputation.

We believe our unique mix of deep industry expertise, combined with our scale, broad geographic presence, multi-disciplinary professionals and specialized service offerings, positions us to address the majority of our clients’ critical business needs. We continue to establish programs to facilitate collaborative product development and marketing efforts, and also to develop new, innovative and repeatable solutions for our clients.

Financial Information about our Business Segments

During the year ended December 31, 2013, we disposed of a portion of our Financial, Risk & Compliance segment and the results of operations from the disposed business have been classified as discontinued operations. As such, the segment information reflects results of segment operations on a continuing basis (see Note 4 — Dispositions and Discontinued Operations to the notes to our consolidated financial statements). See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and Note 5 — Segmented Information to the notes to our Consolidated Financial Statements for discussion of total revenues, revenues before reimbursements, segment operating profit and total assets by business segment. Certain areas within our segments operate globally for information regarding our total revenues and total assets by geographic region (see Note 5 — Segment Information to the notes to our consolidated financial statements). For information regarding risks related to our international operations see “Risk Factors”.

How Our Income is Derived

Our clients’ demand for our services ultimately drives our revenues and expenses. We derive our revenues from fees on services provided. The majority of our revenues is generated on a time and materials basis, though we also have engagements where fees are a fixed amount (either in total or for a period of time) or are on a per unit or subscription basis. We may also earn incremental revenues, in addition to hourly or fixed fees, that are contingent on the attainment of certain contractual milestones or outcomes. Variations in our quarterly or yearly revenues and resulting operating profit margins may occur depending on the timing of such contractual outcomes and our ability to consider these revenues earned and realized. Regardless of the terms of our engagements, our ability to earn fees is reliant on experience and expertise of our client-service employees.

Our most significant expense is client-service employee compensation, which includes salaries, incentive compensation, and amortization of sign-on and retention incentive payments, share-based compensation and benefits. Client-service employee compensation is included in cost of services before reimbursable expenses, in addition to sales and marketing expenses and the direct costs of recruiting and training client-service employees.

Our most significant overhead expenses are administrative compensation and benefits and office-related expenses. Administrative compensation includes salaries, incentive compensation, share-based compensation and benefits for corporate management and administrative personnel that indirectly support client engagements. 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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Concentration of Revenues

Revenues earned from our top 20 clients amounted to 27%, 30% and 31% of our total revenues for 2014, 2013 and 2012, respectively. Revenues earned from our top 10 clients amounted to 20%, 23% and 24% of our total revenues for 2014, 2013 and 2012, respectively. No single client accounted for more than 10% of our total revenues during 2014, 2013 or 2012. The mix of our largest clients typically changes from year to year. For further information on segment concentration see Item 7 — Management, Discussion and Analysis of Financial condition and Results of Operations — Segment Results below.

Non-U.S. Operations

We have offices in the United Kingdom, Canada, China, Singapore, United Arab Emirates and other countries outside the U.S. and conduct business in several other countries. The United Kingdom accounted for 7%, 5% and 6% of our total revenues for 2014, 2013, and 2012, respectively. No country, other than the United States, accounted for more than 10% of our total revenues during 2014, 2013 or 2012. Our non-U.S. subsidiaries, in the aggregate, represented approximately 8%, or $71.2 million, of our total revenues in 2014 compared to 7%, or $58.5 million, in 2013 and 8%, or $63.3 million, in 2012. These percentages are calculated based on the country of the entity the engagement does business in. For further geographic information see Note 5 — Segment Information to the notes to our financial statements.

Available Information

We maintain a corporate website at www.navigant.com. The content of our website is not incorporated by reference into this report or any other reports we file with, or furnish to, the SEC. Investors may access our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K free of charge (as soon as reasonably practicable after these materials are electronically filed with, or furnished to, the SEC) by going to the Investor Relations section of our website (www.navigant.com/investor_relations) and searching under “SEC Filings.” These materials are also available in printed form free of charge upon request. Requests should be submitted to: Navigant Consulting, Inc., 30 South Wacker Drive, Suite 3550, Chicago, Illinois 60606, Attention: Investor Relations.

 

Item 1A. Risk Factors

In addition to other information contained in this report and in the documents incorporated by reference herein, the following factors should be considered carefully in evaluating us and our business. These factors could materially affect our business, financial condition, results of operations and/or stock price in future periods. Additional risks not currently known to us or that we currently deem to be immaterial also could materially affect our business, financial condition, results of operations or stock price in future periods.

Risks Related to the Market

Our business, results of operations and financial condition could be adversely affected by disruptions in the marketplace caused by economic and political conditions.

Economic and political conditions affect our clients’ businesses and the markets they serve. A severe and/or prolonged economic downturn or a negative or uncertain political climate could adversely affect our clients’ financial condition and the levels and types of business activity engaged in by our clients and the industries we serve. Clients could determine that discretionary projects are no longer viable or that new projects are not advisable. This may reduce demand for our services, depress pricing for our services or render certain of our services obsolete, all of which could have a material adverse effect on our business, results of operations and financial condition. Changes in economic conditions could drive changes to the regulatory or legislative landscape and consequently shift demand to services that we do not offer or for which we do not have competitive advantages, and this could negatively affect the amount of new business that we are able to obtain. If we are unable to appropriately manage costs or if we are unable to successfully anticipate changing economic and political conditions, we may be unable to effectively plan for and respond to those changes, and our business could be adversely affected. Additionally, significant economic turmoil or financial market disruptions could

 

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adversely impact the availability of financing to our clients and in turn may adversely impact our ability to collect amounts due from our clients or cause them to terminate their contracts with us, each of which could adversely affect our results of operations.

Our business could be adversely impacted by competition and regulatory and legislative changes.

The market for our services is highly competitive, highly fragmented, and subject to rapid change. The market includes a large number of participants with a variety of skills and industry expertise, including general management and information technology consulting firms, strategy firms, the global accounting firms and other local, regional, national, and international consulting firms. Many of these firms are international in scope and have larger teams of personnel and greater financial, technical and marketing resources than we do. Some firms may have lower overhead and other operating costs and, therefore, may be able to more effectively compete through lower cost service offerings. Many of our clients operate in highly regulated industries such as healthcare, energy, financial services and insurance. Regulatory and legislative changes in these industries could potentially render certain of our service offerings obsolete and decrease our competitive position. If we cannot compete effectively, our results of operations and financial condition could be adversely impacted.

Our inability to successfully recruit, retain and incentivize our senior-level employees will affect our ability to win new client engagements and compete effectively.

We rely heavily on a group of senior-level employees and business development professionals. We believe our future success is dependent on our ability to successfully recruit and retain their services. Competition for skilled employees is intense, and compensation and retention related issues are a continuing challenge. The consulting industry has low barriers to entry making it easy for employees to start their own businesses or work independently. In addition, it is relatively easy for employees to change employers. Although we offer various incentive compensation programs, including share-based compensation designed to retain and incentivize our senior-level employees, there can be no assurance that these programs will be effective. Further, limitations on available shares under our equity compensation plans or a sustained decline in our stock price could also affect our ability to offer adequate share-based compensation as incentives to our senior-level employees.

Our inability to successfully recruit, retain and incentivize our senior-level employees could have an adverse effect on our ability to win new client engagements or meet client needs in our current engagements, and our results of operations could be adversely affected. Further, our failure to realize the expected financial returns from our recruiting or incentive investments could adversely impact our results of operations.

Risks Related to Capital and Financing

We cannot be assured that we will have access to sufficient sources of capital to meet our cash needs.

We rely on our current cash and cash equivalents, cash flows from operations and borrowings under our credit agreement to fund our short-term and anticipated long-term operating and investing activities. Our credit agreement provides a $400.0 million revolving credit facility. At our option, subject to the terms and conditions in the credit agreement, we may elect to increase commitments under the credit facility up to an aggregate amount of $500.0 million. The credit facility becomes due and payable in full upon maturity in September 2018. At December 31, 2014, we had $109.8 million in borrowings outstanding under the credit facility and approximately $275 million available. There can be no assurance that the credit facility will continue to be sufficient to meet the future needs of our business, particularly if a decline in our financial performance occurs. If this occurs, and we are unable to otherwise increase our operating cash flows or raise additional capital or obtain other debt financing, we may be unable to meet our future cash needs, including, for example, funding our acquisitions. Furthermore, if our clients’ financial condition were to deteriorate, impairing their ability to make payments due to us, our operating cash flows would be adversely impacted which could require us to fund a greater portion of our working capital needs with borrowings under our credit facility. Lastly, certain financial institutions that are lenders under our credit facility could be adversely impacted by significant economic turmoil or financial market disruptions and therefore could become unable to meet their commitments under our credit facility, which in turn would reduce the amounts available to us under that facility.

 

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Our failure to comply with the covenants in our credit agreement could have a material adverse effect on our financial condition and liquidity.

Our credit agreement contains financial covenants requiring that we maintain, among other things, certain levels of fixed charge and debt coverage. Poor financial performance could cause us to be in default of these covenants. While we were in compliance with these covenants at December 31, 2014, there can be no assurance that we will remain in compliance in the future. Our borrowings under the credit facility tend to be higher during the first half of the year to fund annual incentive payments, and as a result, our consolidated leverage ratio is expected to increase from December 31, 2014 levels. If we fail to comply with the covenants in our credit agreement, this could result in our having to seek an amendment or waiver from our lenders to avoid the termination of their commitments and/or the acceleration of the maturity of outstanding amounts under the credit facility. The cost of our obtaining an amendment or waiver could be significant, and further, there can be no assurance that we would be able to obtain an amendment or waiver. If our lenders were unwilling to enter into an amendment or provide a waiver, all amounts outstanding under our credit facility would become immediately due and payable.

We have variable rate indebtedness which subjects us to interest rate risk and may cause our annual debt service obligations to increase significantly.

Borrowings under our credit facility are based on short term variable rates of interest which expose us to interest rate risk. While market interest rates have remained low for some time, these rates could increase, adversely impacting our interest expense, cash outflows and results of operations. From time to time, we use derivative instruments for non-trading purposes, primarily consisting of interest rate swap agreements, to manage our interest rate exposure by achieving a desired proportion of fixed rate versus variable rate borrowings. There can be no assurance, however, that our derivative instruments will be successful in reducing the risks inherent in exposure to interest rate fluctuations.

Risks Related to our Business Operations

Our results of operations and consequently our business may suffer if we are not able to maintain current pricing, compensation costs and productivity levels.

Our revenues and profitability are largely based on the pricing of our services, compensation costs and the number of hours our client-service employees work on client engagements. Accordingly, if we are not able to maintain adequate pricing for our services, maintain compensation costs or appropriately manage productivity levels, our results of operations may suffer. Pricing, compensation costs and productivity levels are affected by a number of factors, including:

 

   

Our ability to predict future demand for our services and maintain the appropriate staffing levels without significant underutilized Consulting employees and significant lack of productivity from our Technology, Data & Process employees;

 

   

Our ability to transition client-service employees from completed client engagements to new client engagements;

 

   

Our clients’ perceptions of our ability to add value through our services;

 

   

Our competitors’ pricing of services and compensation levels;

 

   

The market demand for our services;

 

   

The market rate for employee compensation costs;

 

   

Our ability to manage our human capital resources particularly as we increase the size and diversity of our workforce and expand into new service offerings as part of our growth strategies;

 

   

The economic, political and regulatory environment as noted above; and

 

   

Our ability to accurately estimate and appropriately manage the costs of fixed-fee client engagements.

 

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Some of the work we do involves greater risk than ordinary engagements which could negatively impact our business.

We do work for clients that for financial, legal, reputational or other reasons may present higher than normal risks. While we attempt to identify and mitigate our exposure with respect to higher-risk engagements and higher-risk clients, these efforts may be ineffective and an actual or alleged error or omission on our part or the part of our client or other third parties on one or more of these higher-risk engagements could have a material adverse impact on our business and financial condition. Examples of higher-risk engagements include, but are not limited to:

 

   

Interim management engagements, including those for hospitals and other healthcare providers;

 

   

Engagements where we assist clients in complying with healthcare-related regulatory requirements;

 

   

Corporate restructuring engagements, both inside and outside of bankruptcy proceedings;

 

   

Engagements where we provide transactional or a valuation advisory service;

 

   

Engagements where we deliver a fairness opinion;

 

   

Engagements where we deliver project management services for large construction projects;

 

   

Engagements where we receive or process or host sensitive data, including personal consumer or private health information;

 

   

Engagements where we deliver a compliance effectiveness opinion;

 

   

Engagements involving independent consultants’ reports in support of financings; and

 

   

Engagements for governmental clients.

Our international operations create special risks that could negatively impact our business.

We have offices in the United Kingdom, Canada, China, Singapore, United Arab Emirates and other countries outside of the U.S. and conduct business in several other countries. We expect to continue to expand globally and our international revenues may account for an increasing portion of our revenues in the future. Our international operations carry special financial, business, legal and reputational risks, including:

 

   

Cultural and language difference in conducting business;

 

   

Employment laws and related factors that could result in lower utilization, higher compensation costs and cyclical fluctuations of utilization and revenues;

 

   

Currency fluctuations that could adversely affect our financial position and operating results;

 

   

Compliance with varying legal and regulatory requirements, and other barriers to conducting business;

 

   

Impact on consulting spend from international firms and global economies effected by the European sovereign debt crisis and related government and economic responses;

 

   

Risks associated with engagements performed by employees and independent contractors with governmental officials and agencies, including the risks arising from the anti-bribery and corruption regulations;

 

   

Greater difficulties in managing and staffing foreign operations, including in higher risk geographies;

 

   

Successful entry and execution in new markets;

 

   

Restrictions on the repatriation of earnings; and

 

   

Potentially adverse tax consequences, such as net operating loss carry forwards that cannot be realized or higher effective tax rates.

If we are not able to successfully mitigate the special risks associated with our international operations, our business prospects and results of operations could be negatively impacted.

 

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Our inability to effectively execute on long-term growth objectives could adversely affect our results of operations and our share value.

Achievement of our long-term growth objectives may require additional investments in technology, people and acquisitions. These investments may be significantly different in size, nature and complexity in comparison to those we have made in the past, which could inherently create more risk around those investment decisions than would otherwise be the case. Specifically:

 

   

Incentive compensation programs designed to motivate growth may result in innovation or investments that drive near-term growth, but that do not achieve longer-term growth and profitability objectives, or may incentivize an increase in risk compared to our current risk tolerance.

 

   

Investments in acquisitions may result in growth in businesses that may add to near-term revenues and earnings, but may negatively impact shareholder return over the long-term if they do not perform as expected, or may otherwise create higher longer-term risks, including new legal, compliance, or regulatory implications.

 

   

The businesses and services added through these investments may extend beyond the knowledge, expertise or resources of our current management team, which could result in unintended risks.

Our inability to successfully maintain a sales pipeline and to attract business from new or existing clients could have a material adverse effect on our results of operations.

Many of our client engagement agreements are short term in nature (less than one year) or can be terminated by our clients with little or no notice and without penalty. For example, in our litigation-related engagements, if the litigation is settled, our services usually are no longer necessary and our engagement is promptly terminated. Some of our services involve multiple engagements or stages. In those engagements, there is a risk that a client may choose not to retain us for the additional stages of an engagement or that a client will cancel or delay additional planned engagements. Our client engagements are usually relatively short term in comparison to our office-related expenses and other infrastructure commitments. Therefore, we rely heavily on our senior-level employees’ ability to develop new business opportunities for our services.

In the past, we have derived significant revenues from events as inherently unpredictable as the Dodd-Frank Act, healthcare reform, the credit crisis and significant natural disasters including major hurricanes and earthquakes. Those events, in addition to being unpredictable, often have impacts that decline over time as clients adjust to and compensate for the challenges they face. These factors also limit our ability to predict future revenues and human capital resource needs especially for large engagements that may end abruptly due to factors beyond our control which in turn could adversely impact our results of operations.

Unsuccessful client engagements could result in damage to our professional reputation or legal liability which could have a material adverse effect on our business.

Our professional reputation and that of our client-service employees is critical to our ability to successfully compete for new client engagements and attract and retain employees. In addition, our client engagements subject us to the risk of legal liability. Any public assertion or litigation alleging that our services were deficient or that we breached any of our obligations to a client could expose us to significant legal liabilities, distract our management and damage our reputation. Our professional liability insurance may not cover every type of claim or liability that could potentially arise from our client engagements. In addition, the limits of our insurance coverage may not be enough to cover a particular claim or a group of claims and the costs of defense. Any factors that damage our professional reputation could have a material adverse effect on our business.

We may not be able to maintain the equity in our brand name.

We believe that the Navigant brand is an important part of our overall effort to attract and retain clients and that the importance of brand recognition will increase as competition for our services increases. We may expand our marketing activities to promote and strengthen our brand and may need to increase our marketing budget,

 

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hire additional marketing personnel or expend additional amounts to protect our brand and otherwise to create and maintain client brand loyalty. If we fail to effectively promote and maintain the Navigant brand, or incur excessive expenses in doing so, our business and results of operations could be adversely impacted.

We encounter professional conflicts of interest.

If we are unable to accept new client engagements for any reason, including business and legal conflicts, our client-service employees may become underutilized or discontented, which may adversely affect our future results of operations, as well as our ability to retain these consultants. In addition, although we have systems and procedures to identify potential conflicts of interest prior to accepting a new client engagement, there is no guarantee that all potential conflicts of interest will be identified, and undetected conflicts may result in damage to our professional reputation and result in legal liability which may adversely impact our business.

We may be exposed to potential risks if we are unable to achieve and maintain effective internal controls.

If we fail to achieve and maintain adequate internal control over financial reporting or fail to implement necessary new or improved controls that provide reasonable assurance of the reliability of our financial reporting and the preparation of our financial statements for external purposes, we may fail to meet our public reporting requirements on a timely basis, and may be unable to adequately or accurately report on our business and our results of operations. Even with adequate internal controls, we may not prevent or detect all misstatements or fraud. Also, internal controls that are currently adequate may in the future become inadequate because of changes in conditions or changes in regulatory standards, and the degree of compliance with our policies or procedures may deteriorate. This could have a material adverse effect on our business and our results of operations.

Acquired businesses may not achieve expected results which could adversely affect our results of operations.

We have grown our business, in part, through the acquisition of complementary businesses. The substantial majority of the purchase price we pay for acquired businesses is related to goodwill and intangible assets. We may not be able to realize the value of those assets or otherwise realize anticipated synergies unless we are able to effectively integrate the businesses we acquire. We face multiple challenges in integrating acquired businesses and their personnel, including differences in corporate cultures and management styles, retention of personnel, conflict issues with clients, and the need to divert managerial resources that would otherwise be dedicated to our current businesses. Additionally, certain senior-level consultants, as sellers of the acquired businesses, are bound by non-competition covenants that expire after a specific amount of time from the date of acquisition. When these covenants expire, our inability to retain these senior-level consultants could significantly impact the acquired businesses and their successful integration. Any failure to successfully integrate acquired businesses and retain personnel could cause the acquired businesses to fail to achieve their expected results, which would in turn adversely affect our financial performance and may require a possible impairment of the acquired assets. Additionally, the financing of acquisitions through cash, borrowings or common stock could also impair our liquidity or cause significant dilution of our shareholders.

Goodwill and other intangible assets represent a significant portion of our assets, and an impairment of these assets could have a material adverse effect on our financial condition and results of operations.

Because we have acquired a significant number of businesses, goodwill and other intangible assets represent a significant portion of our total assets. Under generally accepted accounting principles, we are required to perform an annual impairment test at the reporting unit level on our goodwill and, on a quarterly basis, we are required to assess the recoverability of both our goodwill and long-lived intangible assets. We consider our operating segments to be our reporting units. We may need to perform an impairment test more frequently if events occur or circumstances indicate that the carrying amount of these assets may not be recoverable. These events or circumstances could include a significant change in the business climate, attrition of key personnel, a prolonged decline in our stock price and market capitalization, legal factors, operating performance indicators, competition, sale or disposition of a significant portion of one of our businesses, and other factors. If the fair

 

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market value of one of our reporting units or other long-lived intangible assets is less than the carrying amount of the related assets, we could be required to record an impairment charge in the future. The valuation of our reporting units requires judgment in estimating future cash flows, discount rates and other factors. In making these judgments, we evaluate the financial health of our reporting units, including such factors as market performance, changes in our client base and projected growth rates. Because these factors are ever changing, due to market and general business conditions, we cannot predict whether, and to what extent, our goodwill and long-lived intangible assets may be impaired in future periods. During the second quarter 2014, in conjunction with our annual goodwill impairment test, we recorded a $122.0 million goodwill impairment related to our Disputes, Investigations, & Economics segment. At December 31, 2014, we had goodwill of $568.1 million and net intangible assets of $26.5 million. The amount of any future impairment could be significant and could have a material adverse effect on our financial results. See Note 6 — Goodwill and Intangible Assets, Net to the notes to our consolidated financial statements.

We are subject to unpredictable risks of litigation.

Although we seek to avoid litigation whenever possible, from time to time we are party to various lawsuits and claims. Disputes may arise, for example, from client engagements, employment issues, regulatory actions, business acquisitions and real estate and other commercial transactions. There can be no assurances that any lawsuits or claims will be immaterial in the future. Any material lawsuits or claims could adversely affect our business and reputation.

Our work with governmental clients has inherent risks related to the governmental contracting process.

We work for various U.S., state, local and foreign governmental entities and agencies. These engagements have special risks that include, but are not limited to, the following:

 

   

Governmental agencies generally reserve the right to audit our contract costs, including allocated indirect costs, and conduct inquiries and investigations of our business practices with respect to governmental contracts. If the governmental entity finds that the costs are not reimbursable, then we will not be allowed to bill for them or the cost must be refunded to the governmental entity if it has already been paid to us. Findings from an audit also may result in our being required to prospectively adjust previously agreed rates for work which would affect our future profit margins.

 

   

If a governmental client discovers improper or illegal activities in the course of its audits or investigations, we may become subject to various civil and criminal penalties and administrative sanctions, which may include termination of contracts, forfeiture of profits, suspension of payments, fines and suspensions or debarment from doing business with other agencies of that government.

 

   

Governmental contracts, and the proceedings surrounding them, are often subject to political sensitivities and more extensive scrutiny and publicity than other commercial contracts. Negative publicity related to our governmental contracts, regardless of whether it is accurate, may damage our business by impairing our professional reputation and our ability to compete for new client engagements.

The impact of any of the occurrences or conditions described above could affect not only our relationship with the particular governmental agency involved, but also other agencies of the same or other governmental entities as well as other non-governmental clients. Depending on the size of the engagement or the magnitude of the potential costs, penalties or negative publicity involved, any of these occurrences or conditions could have a material adverse effect on our business or results of operations.

Our revenues, operating income and cash flows are likely to fluctuate.

We experience periodic fluctuations in our revenues, operating income and cash flows and expect that this will continue to occur in the future due to timing and duration of our client engagements, utilization of our consultants, the types of engagements we are working on at different times, the geographic locations of our clients or where the services are rendered, the length of billing and collection cycles, hiring, business and asset acquisitions including the integration of those acquired businesses into our firm, and general economic factors

beyond our control. We may also experience future fluctuations in our cash flows because of increases in

 

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employee compensation, including changes to our incentive compensation structure and the timing of incentive payments, which we generally pay during the first quarter of each year, or hiring or retention payments or bonuses which are paid throughout the year.

The expansion and growth of our business process management services and the evolution of our service offerings into new areas subject us to different operational risks than our traditional consulting and expert businesses.

With the acquisition of Cymetrix in May 2014, a higher percentage of our net revenues is derived from our Technology, Data & Process businesses, as compared to prior periods. These businesses, in particular, our business process management services, present different operational risks when compared to our traditional consulting and expert businesses. For example, our business process management services involve managing the revenue cycle function for all or certain portions of our physician and hospital clients’ businesses, including the operation, management or oversight of billing, coding and accounts receivable departments that are critical to our clients’ financial performance. In addition, our business process management services business utilizes offshore personnel, including subcontracted personnel in India, which exposes us to additional operational risks, including special risks associated with conducting business internationally. Disruptions in service delivery, regulatory compliance concerns, data privacy and security concerns, particularly in the billing and coding areas, labor disputes, technology issues or other performance problems could damage our clients’ businesses, expose us to enhanced regulatory scrutiny and claims, and harm our reputation and our business.

As part of our long-term strategy, we plan to continue to expand our services and solutions into new areas. Expanding into new areas, and providing services to new types of clients may expose us to additional operational, regulatory or other risks specific to these new areas. We could also incur liability if we fail to comply with laws or regulations applicable to the services we provide to our clients.

If our pricing estimates do not accurately anticipate the cost, risk and complexity of performing our work, our contracts could have delivery inefficiencies or be unprofitable.

Our pricing for our fixed fee engagements, particularly in connection with our business process management services engagements that have multi-year pricing agreements, is highly dependent on our forecasts and predictions about the level of effort and cost necessary to deliver the applicable services and solutions. Our estimates are based on available data at the time the fees are set, and could turn out to be materially inaccurate. If we do not accurately estimate the effort, costs or timing for meeting our contractual commitments and/or completing projects to a client’s satisfaction, our contracts could yield lower margins than planned, or be unprofitable. In addition, we may fail to accurately assess the risks associated with potential contracts. This could result in existing contracts and contracts entered into in the future being less profitable than expected or unprofitable, which could have an adverse effect on our overall profitability.

Risks Related to Technology

We have invested in specialized technology and other intellectual property for which we may fail to fully recover our investment or which may become obsolete.

We have invested in developing specialized technology and intellectual property, including proprietary systems, processes and methodologies, that we believe provide us a competitive advantage in serving our current clients and winning new client engagements. Many of our service offerings rely on specialized technology or intellectual property that is subject to rapid change, and to the extent that this technology and intellectual property is rendered obsolete and of no further use to us or our clients, our ability to continue offering these services, and grow our revenues, could be adversely affected. There is no assurance that we will be able to develop new, innovative or improved technology or technology and intellectual property or that our technology and intellectual property will effectively compete with the intellectual property developed by our competitors. If we are unable to develop new technology and intellectual property or if our competitors develop better technology or intellectual property, our revenues and results of operations could be adversely affected.

 

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In addition, the scale and complexity of our business and new service offerings may require additional information systems that we may not be able to implement in a timely or cost effective manner. This may impair our ability to achieve our operating objectives and retain our competitive position, which in turn could adversely affect our results of operations.

Information system failures or service interruptions could affect our ability to provide services to our clients.

We may be subject to disruption to our operating systems, technology or ability to communicate with our workforce and clients as a result of events that are beyond our control, including but not limited to the possibility of failures at third-party data centers, worker strikes, disruptions to the internet, political instability, natural disasters, malicious attacks, or other conditions. While we have taken steps to prevent such events and have developed disaster recovery processes, there can be no assurance that these steps will be effective in every situation. Such disruptions could adversely affect our ability to fulfill client engagements and as a result may damage our reputation and adversely affect our business and results of operations.

If the integrity of our information systems is compromised or our information systems are inadequate to keep up with the needs of our business, our reputation, business and results of operations could be adversely affected.

We depend on information systems to manage and run our business. Additionally, certain services we provide require us to store, transmit or process sensitive or confidential client information, including personal consumer information and health or other personally identifiable information. If any person, including any of our employees or third-party vendors with whom we contract for data hosting services, negligently disregards or intentionally breaches the information security controls we have implemented to protect our clients’ data, or our own data or those security controls prove to be ineffective against intrusion, we could incur legal liability and may also be subject to regulatory enforcement actions, fines and/or criminal prosecution in multiple jurisdictions. Our potential liability in the event of a security breach of client data or our own data could be significant and depending on the circumstances giving rise to the breach, this liability may not be subject to a contractual limit of liability or an exclusion of consequential or indirect damages. Any unauthorized disclosure of sensitive, personal or confidential client information, whether through systems failure, employee negligence, fraud or misappropriation, could damage our reputation and cause us to lose clients. Similarly, unauthorized access to or through our information systems, including an intentional attack by any person who may develop and deploy viruses, worms or other malicious software programs, could result in negative publicity, legal liability and damage to our reputation and could have a material adverse effect on our business and results of operations.

 

Item 1B. Unresolved Staff Comments.

None.

 

Item 2. Properties.

Our principal executive offices are leased and are located in Chicago, Illinois. We have approximately 70 other operating leases for office facilities, principally in the United States. Our office space needs in certain geographic areas may change as our business expands or contracts in those areas. Due to the nature of consulting work, we strive to keep our office workspace flexible and promote a virtual work environment, where appropriate in order to minimize office facility costs.

 

Item 3. Legal Proceedings.

We are not party to any material legal proceedings.

 

Item 4. Mine Safety Disclosures.

Not applicable.

 

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Executive Officers of the Registrant

The following are our executive officers at February 13, 2015:

 

Name

  

Title

   Age  

Julie M. Howard

   Chairman and Chief Executive Officer      52   

Lee A. Spirer

   Executive Vice President and Global Business Leader      48   

Lucinda M. Baier

   Executive Vice President and Chief Financial Officer      50   

Monica M. Weed

   Executive Vice President, General Counsel and Secretary      54   

Julie M. Howard, 52, has served as our Chairman and Chief Executive Officer since May 2014 and Chief Executive Officer and a member of our board of directors since March 2012. Ms. Howard served as our President from 2006 to March 2012 and our Chief Operating Officer from 2003 to March 2012. From 2001 to 2003, Ms. Howard was our Vice President and Human Capital Officer. Prior to 2001, Ms. Howard held a variety of consulting and operational positions with several professional services firms, including the Company. Ms. Howard is currently a member of the board of directors of Kemper Corporation (formerly Unitrin, Inc.) and Innerworkings Inc. and a member of the Foundation Board for Lurie Children’s Hospital of Chicago. Ms. Howard is a founding member of the Women’s Leadership and Mentoring Alliance (WLMA). Ms. Howard is a graduate of the University of Wisconsin, with a Bachelor of Science degree in Finance. She has also completed several post-graduate courses within the Harvard Business School Executive Education program, focusing in finance and management.

Lee A. Spirer, 48, has served as our Executive Vice President and Global Business Leader since November 2012. Mr. Spirer has served in a variety of strategic and operational roles in a range of professional and business services organizations. From April 2009 to May 2012, Mr. Spirer served as Senior Vice President and Global Business Head of Kroll Risk & Compliance Solutions, and prior to that, from September 2005 to February 2008, Mr. Spirer served as Senior Vice President and Global Leader of Corporate Strategy and Development for Dun & Bradstreet Corporation. From June 2001 to September 2005, Mr. Spirer held several senior management roles at IBM Business Consulting Services, last serving as General Manager, Global Financial Markets. In addition, from March 2008 to April 2009 and again from June 2012 to October 2012, Mr. Spirer served as Managing Partner of LAS Advisory Services, advising private equity and venture capital firms on a variety of strategic and operational issues. Mr. Spirer is a graduate of The Wharton School with a Masters of Business Administration and Brandeis University with a Bachelor’s degree in Economics, with high honors and Phi Beta Kappa.

Lucinda M. Baier, 50, has served as our Executive Vice President since February 2013 and Chief Financial Officer since March 2013. Previously, Ms. Baier served as Executive Vice President, Chief Financial Officer and Chief Administrative Officer of Central Parking System, Inc., a leading firm in parking management and marketing, from August 2011 to October 2012, having previously served as Senior Vice President and Chief Financial Officer since September 2010. Ms. Baier is a member of the Board of Directors and Audit Committee of The Bon-Ton Stores, Inc. Ms. Baier is a graduate of Illinois State University, with Bachelor and Master of Science degrees in Accounting and is a Certified Public Accountant.

Monica M. Weed, 54, has served as our Executive Vice President since October 2013 and General Counsel and Secretary since November 2008. Previously, Ms. Weed served as Associate General Counsel for Baxter Healthcare Corporation from March 2006 to October 2008. From March 2004 to March 2006, Ms. Weed served as Special Counsel, Rights Agent and Litigation Trustee to Information Resources, Inc. Litigation Contingent Payment Rights Trust, a publicly traded litigation trust. From 1991 through 2004, Ms. Weed served in a variety of legal roles, including Executive Vice President, General Counsel and Corporate Secretary, for Information Resources, Inc., an international market research provider to the consumer packaged goods industry. She started her legal career at the law firm of Sonnenschein Nath & Rosenthal (now Dentons). Ms. Weed received a Bachelor of Arts in Classics from Northwestern University, a law degree from the Northwestern University School of Law and a Master’s degree in Business Administration from the Kellogg Graduate School of Management, Northwestern University.

 

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PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information

Our common stock is traded on the New York Stock Exchange under the symbol “NCI.” The following table sets forth, for the periods indicated, the high and low closing sale prices per share of our common stock.

 

     High      Low  

2014

     

Fourth quarter

   $ 15.85       $ 12.39   

Third quarter

   $ 18.19       $ 13.87   

Second quarter

   $ 19.00       $ 16.08   

First quarter

   $ 19.41       $ 16.55   

2013

     

Fourth quarter

   $ 19.78       $ 15.07   

Third quarter

   $ 15.91       $ 12.00   

Second quarter

   $ 14.00       $ 10.91   

First quarter

   $ 13.60       $ 10.84   

Holders

At February 9, 2015, there were 183 holders of record of our shares of our common stock.

Shares of our common stock that are registered in the name of a broker or other nominee are listed as a single shareholder on our record listing, even though they are held on behalf of a number of individual shareholders. As such, our actual number of shareholders is higher than the number of our shareholders of record.

Dividends

We did not declare or pay any dividends during the years ended December 31, 2014 or December 31, 2013. Dividend and other capital structure policy issues are reviewed on a periodic basis by our board of directors. In addition, the covenants in our credit agreement may limit our ability to pay dividends in the future.

 

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Shareholder Return Performance Graph

The following graph compares the yearly percentage change in the cumulative total shareholder return on our common stock against the New York Stock Exchange Market Index (the “NYSE Index”) and the peer group described below. The graph assumes that $100 was invested on December 31, 2009 in each of our common stock, the NYSE Index and the peer group. The graph also assumes that all dividends, if paid, were reinvested.

Note: The stock price performance shown below is not necessarily indicative of future price performance.

 

 

LOGO

 

Measurement Period   Navigant
Consulting
Inc.
    NYSE
Index
    Peer
Group(a)
 

FYE 12/31/09

  $ 100.00      $ 100.00      $ 100.00   

FYE 12/31/10

    61.91        113.76        124.30   

FYE 12/31/11

    76.78        109.70        129.91   

FYE 12/31/12

    75.10        127.53        144.94   

FYE 12/31/13

    129.21        161.20        202.89   

FYE 12/31/14

    103.43        172.27        217.90   

 

a) The Peer Group consists of the following companies: The Advisory Board Company, CBIZ Inc., The Corporate Executive Board Company, CRA International Inc. (formerly known as Charles River Associates, Inc.), Exponent, Inc., FTI Consulting, Inc., Gartner Group, Inc., Heidrick & Struggles International Inc., Hill International, Inc., Huron Consulting Group Inc., ICF International, Inc., IHS, Inc., Korn/Ferry International, MAXIMUS, Inc., Resources Connection, Inc., Sapient Corporation, Tetra Tech, Inc., TRC Companies and VSE Corporation. The Peer Group is weighted by market capitalization. The Peer Group is the same as the current peer group used by the compensation committee of our board of directors (except for Duff & Phelps Corporation which is no longer part of the peer group as a result of delisting) to make executive compensation decisions. The peer group is reviewed and modified, if necessary, on an annual basis.

 

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Issuance of Unregistered Securities

None.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

The following table sets forth repurchases of our common stock during the fourth quarter of 2014:

 

Period

   Total Number of
Shares Purchased(a)
     Average Price
Paid per Share
     Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs(b)
     Approximate
Dollar Value of
Shares That May Yet be
Purchased Under the
Plans or Programs(b)
 

Oct 1 - 31, 2014

     175,003       $ 13.79         169,291       $ 76,866,446   

Nov 1 - 30, 2014

     127,400       $ 14.96         127,400       $ 74,960,349   

Dec 1 - 31, 2014

     155,969       $ 14.72         152,500       $ 72,715,927   
  

 

 

       

 

 

    

Total

     458,372       $ 14.43         449,191       $ 72,715,927   
  

 

 

       

 

 

    

 

 

(a) Includes 9,181 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.

 

(b) On October 25, 2011, our board of directors extended until December 31, 2014 its previous authorization to repurchase up to $100 million of our common stock in open market or private transactions. On February 11, 2014, our board of directors increased the share repurchase authorization by approximately $50 million and extended the authorization to December 31, 2015. As increased and extended, we are authorized to repurchase up to $100 million in shares of our common stock during the two year period ending December 31, 2015.

Securities Authorized for Issuance Under Equity Compensation Plans

The following table provides information with respect to shares of our common stock that may be issued under our equity compensation plans as of December 31, 2014:

 

Plan Category

   Number of Securities to
be Issued upon Exercise
of  Outstanding Options,
Warrants and Rights
     Weighted Average
Exercise Price of
Outstanding Options,
Warrants and Rights
     Number of Securities
Remaining Available for
Further Issuance Under
Equity Compensation
Plans (Excluding
Securities Reflected in
the First Column)
 

Equity compensation plans approved by security holders

     818,363       $ 12.89         3,023,921   
  

 

 

    

 

 

    

 

 

 

 

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Item 6. Selected Financial Data.

The following five year financial and operating data should be read in conjunction with the information set forth under “Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes thereto appearing elsewhere in this report. During the year ended December 31, 2013, we sold the United Kingdom financial services advisory business and, as such, the results have been reclassified to discontinued operations to reflect this transaction. The amounts are shown in thousands, except for per share data.

 

    For the year ended December 31,  
    2014     2013     2012     2011     2010  

Revenues before reimbursements

  $ 766,552      $ 734,433      $ 722,190      $ 671,289      $ 604,273   

Reimbursements

    93,065        101,152        96,007        83,425        75,860   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    859,617        835,585        818,197        754,714        680,133   

Cost of services before reimbursable expenses

    519,157        487,967        476,344        449,417        404,603   

Reimbursable expenses

    93,065        101,152        96,007        83,425        75,860   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs of services

    612,222        589,119        572,351        532,842        480,463   

General and administrative expenses

    136,057        127,079        141,195        130,430        121,568   

Depreciation expense

    19,580        16,180        14,986        13,303        14,457   

Amortization expense

    5,959        6,826        6,767        8,658        6,125   

Other operating costs (benefit):

         

Intangible assets impairment

                                7,307   

Contingent acquisition liability adjustments, net

    (4,992     (5,399     1,065                 

Office consolidation, net

    725        348        580               (900

Gain on disposition of assets

    (541     (1,715                     

Goodwill impairment

    122,045                               

Other impairment

    1,343                               
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    (32,781     103,147        81,253        69,481        51,113   

Interest expense

    5,918        4,433        5,453        7,292        10,704   

Interest income

    (274     (463     (872     (1,447     (1,309

Other (income) expense, net

    (167     175        (78     (279     (567
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income tax (benefit) expense

    (38,258     99,002        76,750        63,915        42,285   

Income tax (benefit) expense

    (1,351     43,890        32,518        27,770        17,433   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

    (36,907     55,112        44,232        36,145        24,852   

Income (loss) from discontinued operations, net of tax

    509        (2,919     1,937        4,985        (795
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (36,398   $ 52,193      $ 46,169      $ 41,130      $ 24,057   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic per share data

         

Net income (loss) from continuing operations

  $ (0.76   $ 1.11      $ 0.87      $ 0.71      $ 0.50   

Income (loss) from discontinued operations, net of tax

    0.01        (0.06     0.04        0.10        (0.02

Net income (loss)

    (0.75     1.05        0.91        0.81        0.49   

Shares used in computing per basic share data

    48,741        49,771        50,894        50,820        49,405   

Diluted per share data

         

Net income (loss) from continuing operations

  $ (0.76   $ 1.08      $ 0.86      $ 0.70      $ 0.49   

Income (loss) from discontinued operations, net of tax

    0.01        (0.06     0.04        0.10        (0.02

Net income (loss)

    (0.75     1.02        0.90        0.80        0.48   

Shares used in computing per diluted share data

    48,741        50,951        51,572        51,371        50,447   

 

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     At December 31,  
     2014      2013      2012      2011      2010  

Balance Sheet Data

              

Cash and cash equivalents

   $ 2,648       $ 1,968       $ 1,052       $ 2,969       $ 1,981   

Working capital

     70,501         73,040         85,341         64,681         63,906   

Total assets

     903,493         904,197         954,450         875,201         869,035   

Total non-current liabilities

     200,506         169,260         237,412         205,199         252,735   

Total stockholders’ equity

     542,591         597,075         559,743         513,678         460,721   

 

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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations relates to, and should be read in conjunction with, our consolidated financial statements included elsewhere in this report.

Overview

We are an independent specialized, global professional services firm that combines deep industry knowledge with broad technical expertise. We focus on industries and clients facing transformational change and significant regulatory and legal issues. We serve clients primarily in the healthcare, energy and financial services sectors which represent highly complex market and regulatory environments. Our professional service offerings include strategic, financial, operational, technology, risk management, compliance, investigative solutions, dispute resolution services and business process management services. The nature of our services, as well as our clients’ demand for our services, are impacted not only by these regulatory and structural changes, but also by the United States and global economies and other significant events specific to our clients.

Our clients’ demand for our services ultimately drives our revenues and expenses. We derive our revenues from fees on services provided. The majority of our revenues are generated on a time and materials basis, though we also have engagements where fees are a fixed amount (either in total or for a period of time). We may also earn incremental revenues, in addition to hourly or fixed fees, which are contingent on the attainment of certain contractual milestones or outcomes. Variations in our quarterly or yearly revenues and resulting operating profit margins may occur depending on the timing of such contractual outcomes and our ability to consider these revenues earned and realized. Revenue is also earned on a per unit or subscription basis. Regardless of the terms of our engagements, our ability to earn those fees is reliant on experience and expertise of our client-service employees.

Our most significant expense is client-service employee compensation, which includes salaries, incentive compensation, amortization of sign-on and retention incentive payments, share-based compensation and benefits. Client-service employee compensation is included in cost of services before reimbursable expenses, in addition to sales and marketing expenses and the direct costs of recruiting and training client-service employees.

Our most significant overhead expenses are administrative compensation and benefits and office-related expenses. Administrative compensation includes salaries, incentive compensation, share-based compensation and benefits for corporate management and non-billable employees that indirectly support client engagements. Office-related expenses primarily consist of rent for our offices. Other administrative costs include bad debt expense, marketing, technology, finance and human capital management.

Because our ability to derive fees is largely reliant on the hiring and retention of employees, the average number of full-time employees (FTE) and our ability to keep consultants utilized are important drivers of the business. The number of FTE is adjusted for part-time status and takes into account hiring and attrition which occurred during the reporting period. Our average utilization rate as defined below provides a benchmark for how well we are managing our consulting FTE levels in response to changing demand.

While hiring and retention of personnel are key to driving revenues, client-service employee levels and related compensation in excess of demand drive additional costs that can negatively impact margin. From time to time, we hire independent contractors and project employees to supplement our client-service employees on certain engagements, which allows us to adjust staffing in response to changes in demand for our services, and manage our costs accordingly.

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, employees and projects.

We periodically review and adjust our employees’ total compensation (including salaries, annual cash incentive compensation, other cash and share-based compensation, and benefits) to ensure that it is competitive within the industry and is consistent with our performance. We also monitor and adjust our bill rates according to then-current market conditions for our service offerings and within the various industries we serve.

 

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In addition to investing in human capital resources, we invest in technology infrastructure to derive services to provide further value to current and future clients as our business models change.

Additional information about our operations is included in Item 1 — Business of this report.

Acquisitions

For details of our acquisitions, see Note 3 — Acquisitions to the notes to our consolidated financial statements. Any material impact our acquisitions may have had on our results from operations or segment results for the periods presented have been included in our discussion below.

Dispositions and Discontinued Operations

During the year ended December 31, 2014, we had one disposition. We sold a portion of our healthcare technology practice within our Healthcare segment. In accordance with ASC Topic 205 — Presentation of Financial Statements (ASC 205), we consider the healthcare technology business within this segment to be continuing.

During the year ended December 31, 2013, we had two dispositions. We sold the United Kingdom financial services advisory business within our Financial, Risk & Compliance segment. All significant cash flows from this business were eliminated, and we have no continuing involvement in the operations of this business. As such, in accordance with ASC Topic 205, all operations of this disposed business were reflected as discontinued operations. In addition, we sold a portion of the economics business within our Disputes, Investigations & Economics segment. In accordance with ASC Topic 205, we consider the economics business within this segment to be continuing.

Additional information regarding these dispositions, including the required disclosures under ASC Topic 205, may be found in Note 4 — Dispositions and Discontinued Operations to the notes to our consolidated financial statements.

Prior period results have been reclassified to reflect continuing operations only unless otherwise stated.

Key Operating Metrics

The following key operating metrics provide additional operating information related to our continuing business and reporting segments. These key operating metrics may not be comparable to similarly-titled metrics at other companies. Our Technology, Data & Process businesses are comprised of technology enabled professional services, including e-discovery services, business process management services and data analytics, technology solutions and data services and insurance claims processing, market research and benchmarking businesses.

 

   

Average FTE is our average headcount during the reporting period adjusted for part-time status. Average FTE is further split between the following categories:

 

   

Client-Service FTE — combination of Consulting FTE and Technology, Data & Process FTE defined as follows:

 

   

Consulting FTE — individuals assigned to client services who record time to client engagements; and

 

   

Technology, Data & Process FTE — individuals in businesses primarily dedicated to maintaining and delivering the services described above and are not included in average bill rate and average utilization metrics described below.

 

   

Non-billable FTE — individuals assigned to administrative and support functions, including office services, corporate functions and certain practice support functions.

 

   

Period-end FTE — represents our headcount at the last day of the reporting period adjusted for part-time status. Consulting, Technology, Data & Process and Non-billable criteria also apply to period-end FTE.

 

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Average bill rate is calculated by dividing fee revenues before certain adjustments such as discounts and markups, by the number of hours associated with the fee revenues. Fee revenues and hours billed on performance-based services and related to Technology, Data & Process FTE are excluded from average bill rate.

 

   

Average utilization rate is calculated by dividing the number of hours of our Consulting FTE who recorded time to client engagements during a period, by the total available working hours for these consultants during the same period (1,850 hours annually). Hours related to Technology, Data & Process FTE are excluded from average utilization rate.

 

   

Billable hours are the number of hours our Consulting FTE recorded time to client engagements during the reporting period. Recorded hours related to Technology, Data & Process FTE are excluded from billable hours.

 

   

Segment operating profit represents total revenues less costs of services excluding long-term compensation expense attributable to consultants. Long-term compensation expense attributable to consultants includes share-based compensation expense and compensation expense attributable to retention incentives.

 

   

Organic basis — represents revenues before reimbursements growth calculated on a pro forma basis including the impact of our acquisitions as if we owned them from the beginning of each comparable period similar to our pro forma information included in Note 3 — Acquisitions to the notes to our consolidated financial statements.

All FTE, utilization and average bill rate metric data provided in this report exclude the impact of independent contractors and project employees.

Results of Operations

 

    

 

For the Year Ended December 31,

    2014 over
2013
Increase
(Decrease)

Percentage
     2013 over
2012
Increase
(Decrease)

Percentage
 
     2014     2013     2012       

Key operating metrics:

           

Average FTE

           

— Consulting

     1,565       1,523       1,506       2.8        1.1  

— Technology, Data & Process

     939       451       361       108.2        24.9  

— Non-billable

     581       534       539       8.8        (0.9

Period end FTE

           

— Consulting

     1,573       1,516       1,560       3.8        (2.8

— Technology, Data & Process

     1,201       524       400       129.2        31.0  

— Non-billable

     608       534       546       13.9        (2.2

Average bill rate

   $ 282     $ 277     $ 280       1.8        (1.1

Utilization

     75     75     75               

Results for the year ended December 31, 2014 compared to the year ended December 31, 2013

Overview.    During the years ended December 31, 2014 and 2013, we reported a $36.9 million net loss from continuing operations and $55.1 million in net income from continuing operations, respectively. The main drivers in the year over year variance were:

 

   

A non-cash goodwill impairment recorded in the second quarter of 2014 in other operating costs (benefit) of $122.0 million relating to our Disputes, Investigations & Economics segment. For further discussion regarding the impairment, see our segment discussion below and Note 6 — Goodwill and Intangible Assets, Net to the notes to our consolidated financial statements.

 

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Acquired Cymetrix which drove a significant amount of revenues before reimbursements (RBR) within the Healthcare segment in 2014.

 

   

RBR increased 4.4% for the period as increases within our Healthcare, Energy and Disputes, Investigations & Economics segments were partially offset by lower RBR from our Financial, Risk & Compliance segment (see segment results below for further detail).

 

   

Cost of services before reimbursable expenses increased 6.4% primarily due to the Cymetrix acquisition and higher wages mainly due to client-service FTE hires within our Healthcare and Energy segments. In addition, training and recruiting costs were higher in 2014, partially offset by lower incentive and performance-based compensation expense and lower share-based compensation expense.

 

   

General and administrative expenses increased 7.1% due to higher bad debt expense and wages. The higher wages in 2014 were due to an increase in average non-billable FTE. These increases in the year were partially offset by lower incentive and share-based compensation expense.

 

   

Income tax benefit of $1.4 million in 2014 compared to $43.9 million income tax expense in 2013 due to a partial tax benefit from goodwill impairment and higher earnings in lower tax rate jurisdictions.

Revenues before Reimbursements.    For the year ended December 31, 2014, RBR increased 4.4% compared to 2013. On an organic basis, RBR decreased 2.0% for the year ended December 31, 2014 compared to 2013. For further discussion of RBR, see segment results below.

RBR included $2.2 million of performance-based fees for the year ended December 31, 2014, compared to $7.2 million in 2013. The decrease was primarily associated with our Healthcare and Financial, Risk & Compliance segments partially offset by an increase within our Disputes, Investigations & Economics segment.

Utilization levels were flat at 75% for the year ended December 31, 2014 compared to 2013 and Average bill rate increased 1.8% to $282 during the same periods. Average FTE — Consulting increased 2.8% for the year ended December 31, 2014 compared to 2013 mainly due to hiring within the Financial, Risk & Compliance and Energy segments offset by planned and unplanned attrition within the Disputes, Investigations & Economics segment. Average FTE — Technology, Data & Process increased 108.2% for the year ended December 31, 2014 compared to 2013 mainly due to the acquisition of Cymetrix, which added 381 (due to partial period employment over the 12 month period) average FTE.

Cost of Services before Reimbursable Expenses.    Cost of services before reimbursable expenses increased 6.4% for the year ended December 31, 2014 compared to 2013. The increase was mainly due to the acquisition of Cymetrix, an increase in wages and benefits relating to client-service FTE hires within the Healthcare and Energy segments, higher recruiting related costs and increased training costs. These increases were partially offset by lower compensation costs associated with the Financial, Risk & Compliance segment, lower performance-based and retention-based incentive compensation expense and lower share-based compensation expense (see Note 9 — Share-Based Compensation Expense to the notes to our consolidated financial statements). Severance expense relating to client-service FTE for the year ended December 31, 2014 and 2013 was $4.2 million and $4.1 million, respectively.

General and Administrative Expenses.    General and administrative expenses increased 7.1% for the year ended December 31, 2014 compared to 2013. The increase was mainly a result of incremental general and administrative costs attributable to our acquisition of Cymetrix and higher bad debt expense. Bad debt expense for the year ended December 31, 2014 and 2013 was $5.0 million and $0.1 million, respectively, mainly due to stronger collections in 2013 and collection of amounts previously reserved in 2012. In addition, we had higher acquisition-related costs which were $2.1 million and $0.6 million for the year ended December 31, 2014 and 2013, respectively; and higher wages, recruiting costs and audit expenses. These increases were partially offset by a decrease in facilities expense mainly due to an operating cost abatement in 2014, lower meeting expense, lower legal expense and lower incentive compensation expense. The year ended December 31, 2013 also benefited from a large collection of previously reserved accounts receivable balances. Average non-billable FTE related to general and administrative expenses for the year ended December 31, 2014 compared to 2013 was 527 and 479, respectively. General and administrative expenses were 17.7% and 17.3% of RBR for the year ended December 31, 2014 and 2013, respectively.

 

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Depreciation Expense.    The increase in depreciation expense of 21.0% for the year ended December 31, 2014 compared to 2013 was primarily due to increased technology infrastructure spending and recent acquisitions.

Amortization Expense.    Amortization expense decreased 12.7% for the year ended December 31, 2014 compared to 2013. The decrease was due to reduced amortization associated with certain intangible assets which became fully amortized as their useful lives came to term partially offset by additional amortization relating to the recent acquisitions. We expect that the impact of recent acquisitions will increase amortization expense in the future.

Other Operating Costs (Benefit):

Contingent acquisition liability adjustment, net.    During the year ended December 31, 2014 and 2013, we recorded benefits of $5.0 million and $5.4 million, respectively, relating to fair value adjustments to our estimated deferred contingent acquisition liabilities (see Note 17 — Fair Value to the notes to our consolidated financial statements).

Office consolidation, net.    During the year ended December 31, 2014, we recorded a cost of $0.7 million related to rent expense for our new office space located in New York, New York which we took possession of on October 1, 2014. For a period of time we will have duplicate rent as we continue to occupy the existing offices which are to be consolidated into the new space upon completion of the build-out. During the year ended December 31, 2013, we recorded a $0.5 million of additional depreciation expense relating to the consolidation of two office spaces and a benefit of $0.2 million for earlier-than-anticipated sublease income related to one previously vacated office space in 2013.

Gain on disposition of assets.    During the year ended December 31, 2014, we recorded a $0.5 million gain relating to the October 1, 2014 sale of certain software within our Healthcare segment (see Note 4 — Dispositions and Discontinued Operations to the notes to our consolidated financial statements for further information on our dispositions).

During the year ended December 31, 2013, we recorded a $1.7 million gain relating to the January 31, 2013 sale of a portion of the economics business within our Disputes, Investigations & Economics segment.

Goodwill impairment.    During the year ended December 31, 2014, we performed our annual goodwill impairment test. Based upon the results of the two-step test, a pretax goodwill impairment of $122.0 million was recorded (see Note 6 — Goodwill and Intangible Assets, Net to the notes to our consolidated financial statements).

Other impairment.    During the year ended December 31, 2014, we recorded a $1.3 million impairment on software that is no longer being utilized by our consultants for client engagements.

Interest Expense.    Interest expense increased 33.5% or $1.5 million for the year ended December 31, 2014 compared to 2013. The increase was mainly due to the incremental imputed interest relating to the contingent acquisition liability for Cymetrix recorded at net present value.

Income Tax (Benefit) Expense.    Our effective income tax rate fluctuates based on the mix of income earned in various tax jurisdictions, including U.S. state and federal and foreign jurisdictions, which have different income tax rates as well as various permanent book to tax differences. It is also affected by discrete items which may not be consistent from year to year.

Our effective income tax rate for the year ended December 31, 2014 is not comparable to the prior period due to the impact of a goodwill impairment of approximately $122.0 million related to both tax deductible and non-tax deductible components of goodwill. The impairment reduced income tax expense for the year ended December 31, 2014 by approximately $35.1 million.

The effective tax rate excluding the goodwill impairment charge from continuing operations for the year ended December 31, 2014 and 2013 would have been 40.3% and 44.3%, respectively. The decrease in rates between periods is attributable to improved earnings in certain foreign jurisdictions, including the reversal of foreign deferred income tax valuation allowances, which reduced tax expense by approximately $0.6 million.

 

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Income (Loss) from Discontinued Operations, net of tax.    Income from discontinued operations, net of tax was $0.5 million for the year ended December 31, 2014 compared to a loss of $2.9 million for 2013. During the year ended December 31, 2013, we sold the United Kingdom financial services advisory business within our Financial, Risk & Compliance segment. In connection with the sale, during the year ended December 31, 2014, we received payment in full for a holdback receivable which we had partially reserved for possible working capital adjustments (see Note 4 — Dispositions and Discontinued Operations to the notes to our consolidated financial statements for further details on our discontinued operations).

Results for the year ended December 31, 2013 compared to the year ended December 31, 2012

Overview.    During the years ended December 31, 2013 and 2012, we reported $55.1 million and $44.2 million in net income from continuing operations, respectively. The main drivers in the year-over-year variance were:

 

   

RBR increased 1.7% for the period as increases within our Healthcare, Energy and Financial, Risk & Compliance segments were partially offset by lower RBR from our Disputes, Investigations & Economics segment (see segment results below for further details).

 

   

Cost of services before reimbursable expenses increased 2.4% primarily due to higher wages mainly as a result of higher client-service FTE levels and higher information technology related costs partially offset by lower overall retention-based incentive compensation expense and lower training costs.

 

   

General and administrative expenses decreased 10.0% due to lower bad debt expense, information technology and facilities expenses partially offset by higher performance-based incentive compensation expense and wages expense.

 

   

A $5.4 million other operating benefit in 2013 compared to a $1.1 million other operating cost in 2012 relating to fair value adjustments to our estimated deferred contingent acquisition liabilities.

 

   

A $1.7 million gain on disposition of assets relating to the sale of a portion of our economics business within our Disputes, Investigations & Economics segment (see Note 4 — Dispositions and Discontinued Operations to the notes to our consolidated financial statements for further information on the sale).

Revenues before Reimbursements.    For the year ended December 31, 2013, RBR increased 1.7% compared to 2012. On an organic basis, RBR decreased 3.1% for the year ended December 31, 2013 compared to 2012. For further discussion on RBR see segment results below.

RBR included performance-based fees of $7.2 million and $10.7 million for the year ended December 31, 2013 and 2012, respectively. The year-over-year decrease was primarily associated with our Healthcare segment.

Utilization levels for the year ended December 31, 2013 were flat at 75% compared to 2012. Average bill rate decreased 1.1% to $277. Average FTE — Consulting for the year ended December 31, 2013 increased 1.1% compared to 2012 reflecting an increase within the Healthcare segment, partially a result of the Easton acquisition, offset by a decrease in our Disputes, Investigations & Economics FTE, which was mainly a result of the disposition of a portion of the economics business. Average FTE — Technology, Data & Process increased 24.9% to support technology-related engagements including: technology solutions and financial services engagements within our Disputes, Investigations & Economics segment and technology solutions engagements and revenue cycle management engagements within our Healthcare segment. In addition, our acquisition of Pike Research in July 2012 added additional FTE. These additions were offset by a decrease in claims and billing related FTE levels within our Disputes, Investigations & Economics segment due to a decrease in demand.

Cost of Services before Reimbursable Expenses.    Cost of services before reimbursable expenses increased 2.4% for the year ended December 31, 2013 compared to 2012. The increase in cost of services was mainly due to higher wages associated with the increase in FTE levels, annual wage increases and higher severance partially offset by lower compensation as a result of the sale of a portion of the economics business and lower retention-based incentive compensation. Higher information technology expenses as a result of the increase in Technology, Data & Process engagements also contributed to the increase. These were partially offset by lower training

 

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expenses and benefit expenses attributable to lower medical claims. Severance expense relating to client-service FTE for the year ended December 31, 2013 and 2012 was $4.1 million and $3.1 million, respectively.

General and Administrative Expenses.    General and administrative expenses decreased 10.0% for the year ended December 31, 2013 compared to 2012. The decrease was driven by significantly lower bad debt expense, lower facilities expense, lower technology expense and lower training costs due to a reduction in programs in 2013. Bad debt expense was $0.1 million and $6.4 million for the year ended December 31, 2013 and 2012 respectively. These decreases were partially offset by higher performance-based incentive compensation and share-based compensation expense due to new hires and 2012 grants. General and administrative expenses were 17.3% and 19.6% of RBR for the year ended December 31, 2013 and 2012, respectively. Cost management and lower bad debt expense contributed to the year-over-year improvement.

Depreciation Expense.    The increase in depreciation expense of 8.0% for the year ended December 31, 2013 compared to 2012 was primarily due to increased technology infrastructure spending.

Amortization Expense.    Amortization expense increased 0.9% for the year ended December 31, 2013 compared to 2012. The increase was due mainly to amortization relating to recent acquisitions partially offset by reduced amortization associated with certain intangible assets which became fully amortized as their useful lives came to term.

Other Operating Costs (Benefit):

Contingent acquisition liability adjustment.    During the year ended December 31, 2013, we recorded a benefit of $5.4 million and an expense of $1.1 million, respectively, relating to fair value adjustments to our estimated deferred contingent acquisition liabilities.

Office consolidation, net.    During the year ended December 31, 2013, we recorded a $0.5 million of additional depreciation expense relating to the consolidation of two office spaces and a benefit of $0.2 million for earlier-than-anticipated sublease income related to one previously vacated office space in 2013.

During the year ended December 31, 2012, we recorded a $0.6 million liability related to a New York office lease acquired with our AFE acquisition which was abandoned as acquired employees assumed space at our existing New York office.

Gain on disposition of assets.    During the year ended December 31, 2013, we recorded a $1.7 million gain relating to the January 31, 2013 sale of a portion of the economics business within our Disputes, Investigations & Economics segment (see Note 4 — Dispositions and Discontinued Operations to the notes to our consolidated financial statements).

Interest Expense.    Interest expense decreased 18.7% for the year ended December 31, 2013 compared to 2012. This decrease was due to lower average borrowings during the year ended December 31, 2013 compared to 2012. In addition, our average borrowing rate was lower for the year ended December 31, 2013 compared to 2012. Our average borrowing rates under our credit facility, including the impact of our interest rate derivatives (see Note 12 — Derivatives and Hedging Activity to the notes to our consolidated financial statements), were 2.5% and 2.7% for year ended December 31, 2013 and 2012 respectively. See Note 13 — Bank Debt to the notes to our consolidated financial statements for further information on borrowings under our credit facility.

Income Tax Expense.    Our effective income tax rate fluctuates based on the mix of income earned in various tax jurisdictions, including U.S. state and federal and foreign jurisdictions, which have different income tax rates as well as various permanent book to tax differences. It is also affected by discrete items which may not be consistent from year to year.

Our effective income tax rate for 2013 and 2012 was 44.3% and 42.4%, respectively. In comparison to our 2012 effective tax rate, we generated net losses from continuing operations in certain foreign jurisdictions, and based on management’s judgment of future earnings in these respective jurisdictions, it was determined that the tax benefit associated with these losses from continuing operations are currently unrealizable, resulting in the recording of a valuation allowance against the losses of approximately $2.1 million.

 

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Income (Loss) from Discontinued Operations, net of tax.    During 2013, we sold the United Kingdom financial services advisory business within our Financial, Risk & Compliance segment. In connection with the sale, we recorded a loss of $3.7 million in discontinued operations. We did not realize any tax benefit from the loss generated on the sale. Refer to Note 4 — Dispositions and Discontinued Operations to the notes to our audited consolidated financial statements for further details on our discontinued operations.

Income (loss) from discontinued operations, net of tax for the year ended December 31, 2013 excluding the loss on sale discussed above, was income of $0.8 million compared to income of $1.9 million in 2012. The decrease was mainly a result of the departure of similar consulting professionals and a decrease in general demand for financial advisory services within the international retail banking sector.

Segment Results

Based on their size and importance, our operating segments are the same as our reporting segments. Our performance is assessed and resources are allocated based on the following four reporting segments:

 

   

Disputes, Investigations & Economics

 

   

Financial, Risk & Compliance

 

   

Healthcare

 

   

Energy

The following information includes segment RBR, segment total revenues and segment operating profit all on a continuing basis. Certain unallocated expense amounts related to specific reporting segments have been excluded from the calculation of segment operating profit to be consistent with the information used by management to evaluate segment performance (see Note 5 — Segment Information to the notes to our consolidated financial statements). Segment operating profit represents total revenues less cost of services excluding long-term compensation expense related to consultants. Long-term compensation expense attributable to consultants includes share-based compensation expense and compensation expense attributed to retention incentives (see Note 10 — Supplemental Consolidated Balance Sheet Information to the notes to our consolidated financial statements). Key operating metric definitions are provided above.

The information presented does not necessarily reflect the results of segment operations that would have occurred had the segments been stand-alone businesses. Prior year segment data has been reclassified to be consistent with the presentation in the current year.

 

Disputes, Investigations & Economics

 
   

 

 

For the Year Ended December 31,

    2014 over
2013
Increase
(Decrease)

Percentage
    2013 over
2012
Increase
(Decrease)

Percentage
 
    2014     2013     2012      

Revenues before reimbursements (in 000s)

  $ 309,570      $ 301,545      $ 340,036        2.7        (11.3

Total revenues (in 000s)

  $ 333,273      $ 326,130      $ 364,426        2.2        (10.5

Segment operating profit (in 000s)

  $ 104,466      $ 99,828      $ 123,288        4.6        (19.0

Key segment operating metrics:

         

Segment operating profit margin

    33.7     33.1     36.3     1.8        (8.8

Average FTE — Consulting

    519        548        611        (5.3     (10.3

Average FTE — Technology, Data & Process

    199        192        181        3.6        6.1   

Average utilization rates based on 1,850 hours

    71     71     74            (4.1

Average bill rate

  $ 368      $ 351      $ 343        4.8        2.3   

 

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The Disputes, Investigations & Economics segment provides accounting, financial and economic analysis, as well as discovery support, data management and analytics, on a wide range of legal and business issues including disputes, investigations and regulatory matters. The clients of this segment are principally companies, along with their in-house counsel and law firms, as well as accounting firms, corporate boards and government agencies.

RBR for this segment increased 2.7% for the year ended December 31, 2014 compared to 2013. The increase in RBR was mainly a result of higher demand for financial services dispute engagements, international arbitration, data breach and tax controversy engagements, increased activity in global construction, technology and new business from a third quarter 2013 acquisition in healthcare disputes (see Note 3 — Acquisitions to the notes to our consolidated financial statements), partially offset by a decline in economics and the completion of certain large dispute engagements. On an organic basis, RBR increased 0.3% for the year ended December 31, 2014 compared to 2013. In addition, 2014 benefited from a performance-based fee of $1.9 million in our global construction business compared to $0.2 million in 2013. Average FTE — Consulting decreased 5.3% for the year ended December 31, 2014 compared to 2013, due to planned and unplanned attrition, and average FTE — Technology, Data & Process increased 3.6%. Average bill rate increased 4.8% to $368 for the year ended December 31, 2014 compared to 2013 reflecting improved bill rates in the segment. Utilization was relatively flat for the same period. For the year ended December 31, 2014, segment operating profit increased $4.6 million and segment operating profit margin improved slightly due to the increase in RBR.

RBR decreased 11.3% for the year ended December 31, 2013 compared to 2012. The decrease in RBR was partially driven by the January 2013 sale of a portion of the economics business within the segment (see Note 4 — Dispositions and Discontinued Operations to the notes to our consolidated financial statements for further information on the sale). In addition, lower demand for our general litigation and forensic accounting services and a general decline in our international businesses within this segment contributed to the decrease in RBR. The decrease was partially offset by new business from our December 2012 acquisition of AFE and increased activity in healthcare disputes partially driven by a third quarter 2013 acquisition (see Note 3 — Acquisitions to the notes to our consolidated financial statements). On an organic basis, RBR decreased 17.1% for the year ended December 31, 2013 compared to 2012. Average FTE — Consulting decreased 10.3% for the year ended December 31, 2013 compared to 2012, mainly due to planned and unplanned attrition. For the same period average FTE —Technology, Data & Process increased 6.1% due to the increased staffing associated with technology-related services. Average bill rate increased 2.3% to $351 and utilization decreased 4.1% for the year ended December 31, 2013 compared to 2012. For the year ended December 31, 2013, segment operating profit decreased $23.5 million and segment operating profit margins decreased 3.2 percentage points compared to 2012. Margins for the year ended December 31, 2013 compared to 2012 were impacted in part by the decreased utilization across the segment. In addition, slightly higher severance costs which were $2.4 million and $1.9 million for the year ended December 31, 2013 and 2012, respectively, contributed to the lower margin. Our Technology, Data & Process business also had lower margins due to lower contract rates for certain high volume customers, higher wages and incremental data storage costs. In addition, we have incurred certain costs relating to projects for which revenues may be recorded in future periods as contingencies are resolved.

 

Financial, Risk & Compliance

 
   

 

 

For the Year Ended December 31,

    2014 over
2013
Increase
(Decrease)

Percentage
    2013 over
2012
Increase
(Decrease)

Percentage
 
    2014     2013     2012      

Revenues before reimbursements (in 000s)

  $ 135,498      $ 155,656      $ 141,421        (13.0     10.1   

Total revenues (in 000s)

  $ 162,637      $ 190,116      $ 177,722        (14.5     7.0   

Segment operating profit (in 000s)

  $ 58,929      $ 62,487      $ 55,926        (5.7     11.7   

Key segment operating metrics:

         

Segment operating profit margin

    43.5     40.1     39.5     8.5        1.5   

Average FTE — Consulting

    273        226        212        20.8        6.6   

Average utilization rates based on 1,850 hours

    80     82     71     (2.4     15.5   

Average bill rate

  $ 275      $ 271      $ 292        1.5        (7.2

 

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The Financial, Risk & Compliance segment provides strategic, operational, valuation, risk management, investigative and compliance consulting to clients in the highly regulated financial services industry, including major financial and insurance institutions. This segment also provides anti-corruption solutions and anti-money laundering, valuation and restructuring consulting, litigation support and tax compliance services to clients in a broad variety of industries.

RBR for this segment decreased 13.0% for the year ended December 31, 2014 compared to 2013. RBR decreased due to lower RBR from mortgage servicing review engagements and restructuring-related services partially offset by new compliance work. Demand for new compliance work was driven by major financial institutions, of which one client contributed a significant portion of the RBR of the segment. There were no performance-based fees for the year ended December 31, 2014 compared to $4.6 million in 2013 due mainly from the decrease in restructuring-related services mentioned above. Average FTE — Consulting increased 20.8% for the year ended December 31, 2014 compared to 2013 due to on-going demand for anti-money laundering and compliance work which drove the conversion of certain project employees to FTE status in 2014 partially offset by fewer restructuring-related professionals. Average bill rate increased 1.5% to $275 for the year ended December 31, 2014 compared to 2013. Utilization decreased 2.4% for the year ended December 31, 2014 compared to 2013. Segment operating profit decreased $3.6 million and segment operating profit margins increased 3.4 percentage points mainly as a result of improved project mix partly due to the reduction in restructuring related services with relatively lower leverage and margin projects.

RBR for this segment increased 10.1% for the year ended December 31, 2013 compared to 2012. RBR reflected increased activity in regulatory compliance, including a large anti-money laundering engagement and financial services engagements partially offset by lower RBR for restructuring-related services and mortgage servicing review engagements. The United Kingdom financial services advisory business was sold on July 8, 2013 (see Note 4 — Dispositions and Discontinued Operations to the notes to our consolidated financial statements), and as such, the results of this disposed business are presented as discontinued operations. This segment had $4.6 million of performance-based fees for the year ended December 31, 2013 compared to $5.9 million for 2012. Average FTE — Consulting increased 6.6% for the year ended December 31, 2013 compared to 2012 due to increased demand for the financial services engagements and the conversion of certain project employees to FTE status. Average bill rate decreased 7.2% to $271 and utilization increased 15.5% for the year ended December 31, 2013 compared to 2012, which reflected the impact of a recent increase in regulatory compliance activity, including a large anti-money laundering engagement, and activity relating to financial services engagements offset by lower restructuring-related advisory services. Segment operating profit increased $6.6 million and segment operating profit margins increased 0.6 percentage points mainly reflecting the increase in utilization and lower performance-based incentive compensation expense offset by an increase in commissions expense.

 

Healthcare

 
   

 

 

For the Year Ended December 31,

    2014 over
2013
Increase
(Decrease)

Percentage
    2013 over
2012
Increase
(Decrease)

Percentage
 
    2014     2013     2012      

Revenues before reimbursements (in 000s)

  $ 223,817      $ 182,783      $ 151,065        22.4        21.0   

Total revenues (in 000s)

  $ 248,095      $ 205,215      $ 170,150        20.9        20.6   

Segment operating profit (in 000s)

  $ 65,104      $ 67,696      $ 50,959        (3.8     32.8   

Key segment operating metrics:

         

Segment operating profit margin

    29.1     37.0     33.7     (21.4     9.8   

Average FTE — Consulting

    443        435        376        1.8        15.7   

Average FTE — Technology, Data & Process

    688        212        155        224.5        36.8   

Average utilization rates based on 1,850 hours

    75     76     79     (1.3     (3.8

Average bill rate

  $ 258      $ 257      $ 247        0.4        4.0   

 

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The Healthcare segment provides strategic, operational, performance improvement and business process management services which includes solutions to clients across the healthcare landscape including revenue cycle management, health systems, physician practice groups, health insurance providers, government and life sciences companies. We assist clients on issues such as the shift to an outcomes and value-based reimbursements model, ongoing industry consolidation and reorganization, and the required implementation of a new medical coding system.

RBR for this segment increased 22.4% for the year ended December 31, 2014 compared to 2013. RBR for the current period reflected the May acquisition of Cymetrix (see Note 3 — Acquisitions to the notes to our consolidated financial statements). On an organic basis, RBR was flat for the year ended December 31, 2014 compared to 2013. In addition, RBR benefited from an increase in physician revenue cycle and life sciences business which was partially offset by lower RBR within the performance improvement area due to competitive challenges as well as the delay in anticipated project work relating to the implementation of ICD10 (regulatory codification update). Performance-based fees were $0.3 million and $2.4 million for the year ended December 31, 2014 and 2013, respectively. Average FTE — Consulting increased 1.8% for the year ended December 31, 2014 compared to 2013, while utilization decreased 1.3% for the same period, due in part to delayed start up of certain projects and acquisition integration for Cymetrix. Average FTE — Technology, Data & Process increased 224.5% for the year ended December 31, 2014 compared to 2013 due to the acquisition of Cymetrix which added 381 Average FTE (reflecting partial period employment over the 12 month period) as well as hires relating to our physician revenue cycle management group. For the year ended December 31, 2014, segment operating profit decreased $2.6 million and segment operating profit margin decreased 7.9 percentage points compared to 2013 due to mix of engagements and increased costs relating to acquisitions, training, strategic investments and segment meetings. In addition, severance expense for the year ended December 31, 2014 and 2013 was $1.6 million and $0.3 million, respectively, resulting in further decline of segment operating profit margin.

RBR increased 21.0% for the year ended December 31, 2013 compared to 2012. In 2013, demand was strong for our service offerings in helping clients address ongoing changes in the U.S. healthcare landscape. Higher demand for revenue cycle management services contributed to the increase. In addition, the life sciences team performed well with the 2012 acquisition of Easton. Utilization decreased 3.8% for the year ended December 31, 2013 compared to 2012 due to changes in project mix and new hiring. Average FTE — Consulting increased 15.7% for the year ended December 31, 2013 compared to 2012 due to new hires and acquisitions. Average bill rate increased 4.0% to $257 for the same period due to rate increases and change in project mix. On an organic basis, RBR increased 13.6% for the year ended December 31, 2013 compared to 2012. For the year ended December 31, 2013, segment operating profit increased $16.7 million, and segment operating profit margin increased 3.3 percentage points compared to 2012 due to high RBR growth and cost benefits of scaling the business.

 

Energy

 
   

 

 

For the Year Ended December 31,

    2014 over
2013
Increase
(Decrease)

Percentage
    2013 over
2012
Increase
(Decrease)

Percentage
 
    2014     2013     2012      

Revenues before reimbursements (in 000s)

  $ 97,667      $ 94,449      $ 89,668        3.4        5.3   

Total revenues (in 000s)

  $ 115,612      $ 114,124      $ 105,899        1.3        7.8   

Segment operating profit (in 000s)

  $ 30,507      $ 31,280      $ 31,721        (2.5     (1.4

Key segment operating metrics:

         

Segment operating profit margin

    31.2     33.1     35.4     (5.7     (6.5

Average FTE — Consulting

    330        314        307        5.1        2.3   

Average FTE — Technology, Data & Process

    52        47        25        10.6        88.0   

Average utilization rates based on 1,850 hours

    74     75     77     (1.3     (2.6

Average bill rate

  $ 191      $ 190      $ 190        0.5          

 

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Table of Contents

The Energy segment provides management advisory services to utility, government and commercial clients. We focus on creating value for our clients by assisting in their implementation of new business models and creating sustainable excellence on issues ranging from asset investment management, integrated resource planning, renewables, distributed generation, energy efficiency and outage management and restoration.

RBR for this segment increased 3.4%, on an organic basis, for the year ended December 31, 2014 compared to 2013. The increase was due to governmental policy engagements, oil and gas related engagements and custom research reports. In 2014 federal government engagements accounted for approximately one-third of this segment’s RBR. These increases were partially offset by a decrease relating to fewer engagements in market analysis and pricing services. Utilization decreased 1.3% for the year ended December 31, 2014 compared to 2013. Average FTE — Consulting increased 5.1% relating to hires within energy efficiency, business strategy and oil and gas offset by attrition within the market analysis and pricing business. Average FTE — Technology, Data & Process increased 10.6% for the year ended December 31, 2014 compared to 2013 as demand for the segment’s benchmarking and research services strengthened. For the year ended December 31, 2014 compared to 2013, segment operating profit and segment operating profit margin decreased $0.8 million and 1.9 percentage points, respectively, due to costs associated with strategic hires and the delay of renewing certain engagements. Severance expense for the year ended December 31, 2014 and 2013 was $1.0 million and $1.3 million, respectively.

RBR for this segment increased 5.3% for the year ended December 31, 2013 compared to 2012. The increase was partially driven by our acquisition of Pike Research in July 2012. Additionally, RBR increased due to demand for energy efficiency and smart meter related engagements. These increases were partially offset by the negative impact resulting from a report issued by the Moreland Commission in New York State in late June 2013. On November 27, 2013, we reported that the United States Attorney’s Office closed its investigation into the issues raised by the Moreland Commission Report with no indication of wrongdoing by us or any of our employees. Utilization decreased 2.6% for the year ended December 31, 2013 compared to 2012. Average FTE — Consulting increased 2.3% for the year ended December 31, 2013 compared to 2012 mainly due to new hires to support the increase in energy efficiency demand we experienced while average FTE — Technology, Data & Process increased mainly due to the acquisition of Pike Research. On an organic basis, RBR increased 3.4% for the year ended December 31, 2013 compared to 2012. For the year ended December 31, 2013, segment operating profit decreased $0.4 million, and segment operating profit margin decreased 2.3 percentage points compared to 2012. Margins decreased due to additional investments we made in the energy market research area, decrease in utilization as a result of the Moreland Commission Report mentioned above, and severance expenses which were $1.3 million for the year ended December 31, 2013 compared to nominal severance expenses for 2012.

Unaudited Quarterly Results

The following table sets forth certain unaudited quarterly financial information. The unaudited quarterly financial information was prepared on the same basis as the audited consolidated financial statements contained elsewhere in this report. The data includes all normal recurring adjustments necessary for the fair presentation of the information for the periods presented, when read in conjunction with our consolidated financial statements and related notes thereto. Results for any quarter are not necessarily indicative of results for the full year or for any future quarter. Discontinued operations have been reclassified to income (loss) from discontinued operations, net of tax for all periods (see Note 4 — Dispositions and Discontinued Operations to the notes to our consolidated financial statements).

 

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Table of Contents

The amounts in the following table are in thousands, except for per share data:

 

    Dec. 31,
2014
    Sep. 30,
2014
    June 30,
2014
    Mar. 31,
2014
    Dec. 31,
2013
    Sep. 30,
2013
    June 30,
2013
    Mar. 31,
2013
 

Revenues before reimbursements

  $ 199,458     $ 205,534     $ 186,504     $ 175,056     $ 177,789     $ 186,444     $ 187,066     $ 183,134  

Reimbursements

    24,175       24,605       21,593       22,692       27,035       25,163       22,589       26,365  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    223,633       230,139       208,097       197,748       204,824       211,607       209,655       209,499  

Cost of services before reimbursable expenses

    136,378       135,859       126,792       120,128       120,390       122,165       122,360       123,052  

Reimbursable expenses

    24,175       24,605       21,593       22,692       27,035       25,163       22,589       26,365  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs of services

    160,553       160,464       148,385       142,820       147,425       147,328       144,949       149,417  

General and administrative expenses

    34,651       34,067       34,237       33,102       28,043       33,914       32,556       32,566  

Depreciation expense

    5,202       5,116       4,953       4,309       4,228       4,122       4,100       3,730  

Amortization expense

    1,291       1,673       1,633       1,362       1,600       1,815       1,713       1,698  

Other operating costs (benefit):

               

Contingent acquisition liability adjustment, net

    (554     (834     (2,444     (1,160     (3,399     (2,000              

Office consolidation, net

    725                                   (150     290       208  

Gain on disposition of assets

    (541                                               (1,715

Goodwill impairment

                  122,045                                     

Other impairment

    1,139              204                                     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    21,167       29,653       (100,916     17,315       26,927       26,578       26,047       23,595  

Interest expense

    1,741       1,942       1,397       838       942       1,094       1,172       1,225  

Interest income

    (58     (56     (71     (89     (92     (96     (112     (163

Other (income) expense, net

    (378     (57     186       82       218       99       6       (148
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income tax (benefit) expense

    19,862       27,824       (102,428     16,484       25,859       25,481       24,981       22,681  

Income tax (benefit) expense

    7,541       11,563       (26,569     6,114       11,640       11,952       10,732       9,566  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

    12,321       16,261       (75,859     10,370       14,219       13,529       14,249       13,115  

Income (loss) from discontinued operations, net of tax

                         509              (3,303     (299     683  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ 12,321     $ 16,261     $ (75,859   $ 10,879     $ 14,219     $ 10,226     $ 13,950     $ 13,798  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Basic per share data

               

Net income (loss) from continuing operations

  $ 0.25     $ 0.33     $ (1.55   $ 0.21     $ 0.29     $ 0.27     $ 0.28     $ 0.26  

Income (loss) from discontinued operations, net of tax

                         0.01              (0.07     (0.01     0.01  

Net income (loss)(1)

    0.25       0.33       (1.55     0.22       0.29       0.21       0.28       0.27  

Shares used in computing per basic share data

    48,393       48,736       48,971       48,906       49,174       49,573       50,041       50,295  

Diluted per share data

               

Net income (loss) from continuing operations

  $ 0.25     $ 0.33     $ (1.55   $ 0.21     $ 0.28     $ 0.27     $ 0.28     $ 0.26  

Income (loss) from discontinued operations, net of tax

                         0.01              (0.07     (0.01     0.01  

Net income (loss)

    0.25       0.33       (1.55     0.22       0.28       0.20       0.27       0.27  

Shares used in computing per diluted share data

    49,542       49,827       48,971       50,477       50,603       50,762       51,022       51,360  

 

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(1) Basic net income per share for the quarters ended June 30, 2013 and September 30, 2013 do not sum due to rounding.

Operating results fluctuate from quarter to quarter as a result of a number of factors, including the significance of client engagements commenced and completed during a quarter, timing of acquisitions, the number of business days in a quarter, employee hiring and utilization rates. The timing of revenues varies from quarter to quarter due to various factors, including the ability of clients to terminate engagements without penalty, attaining certain contractual outcomes, the size and scope of assignments, and general economic conditions. Because a significant percentage of our expenses are relatively fixed, a variation in the number of client assignments, or the timing of the initiation or the completion of client assignments, can cause significant variations in operating results from quarter to quarter. Operating results are also impacted by other operating costs. In addition, interest expense and interest income fluctuate from quarter to quarter as a result of balance changes in cash and debt.

Liquidity and Capital Resources

Our cash flow activities were as follows (in thousands) for the year ended December 31:

 

     2014     2013     2012  

Net cash provided by operating activities

   $ 90,097      $ 119,769      $ 75,962   

Net cash used in investing activities

   $ (116,203   $ (10,384   $ (54,621

Net cash (used in) provided by financing activities

   $ 26,882      $ (108,437   $ (23,386

Generally, our net cash provided by operating activities is used to fund our day to day operating activities, augmented by borrowings under our credit facility. First quarter operating cash requirements are generally higher due to payment of our annual incentive bonuses while subsequent quarters’ cash requirements are generally lower. During the year ended December 31, 2014, we continued our share repurchase program initiated in the fourth quarter of 2011, and received proceeds of $2.3 million, net of selling costs related to two dispositions (see Note 4 — Dispositions and Discontinued Operations to the notes to our consolidated financial statements). Our cash equivalents are primarily limited to money market accounts or ‘A’ rated securities, with maturity dates of 90 days or less.

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 revenue. Daily revenues are calculated by taking quarterly revenue divided by 90 days, approximately equal to the number of days in a quarter. DSO was 69 days at December 31, 2014, compared to 65 days at December 31, 2013. DSO is reported on a historical basis and is inclusive of discontinued operations.

Operating Activities

Net cash provided by operating activities was $90.1 million for the year ended December 31, 2014 compared to $119.8 million and $76.0 million in 2013 and 2012, respectively. The decrease in cash provided by operating activities for 2014 compared to 2013 was primarily due to lower accounts receivable collections in 2014 due in part to a large performance-based fee recognized at the end of December 2014 as well as increased accounts receivable relating to Cymetrix work. As noted above, DSO at December 31, 2014 was slightly higher than the prior year. The increase in net cash provided by operating activities for 2013 compared to 2012 was primarily due to lower incentive bonus payments for the 2012 performance year paid in 2013 compared to the incentive bonus payments for the 2011 performance year paid in 2012, higher net income, increased accounts receivable collections and a decrease in cash used for incentive loans.

Investing Activities

Net cash used in investing activities was $116.2 million for the year ended December 31, 2014 compared to $10.4 million and $54.6 million in 2013 and 2012, respectively. Cash used in investing activities was higher in 2014 compared to 2013 due in part to an increase in acquisitions (see Note 3 — Acquisitions to the notes to our

 

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consolidated financial statements) in 2014 and higher capital expenditures associated with office facilities and technology infrastructure primarily associated with the growth of our technology, data and process business. Cash used in investing activities was lower in 2013 compared to 2012 due in part to proceeds of $17.0 million from two dispositions in 2013 (see Note 4 — Dispositions and Discontinued Operations to the notes to our consolidated financial statements). In addition, lower capital expenditures primarily associated with reduced technology infrastructure spending, lower investments in office facilities and lower acquisition spending during 2013 compared to 2012 contributed to the decrease in cash used in investing activities.

Financing Activities

Net cash provided by financing activities was $26.9 million for the year ended December 31, 2014 compared to net cash used in financing activities of $108.4 million and $23.4 million in 2013 and 2012, respectively. The cash provided by financing activities was primarily due to borrowings related to our higher payments for 2014 acquisitions and property and equipment compared to 2013. The increase in cash used in financing activities was primarily due to higher debt repayments, net of borrowings, as a result of higher cash provided by operations and lower investing activity in 2013 compared to 2012. In addition, during the year ended December 31, 2014, we purchased 1,653,315 shares of our common stock in the open market for $27.3 million compared to 2,059,220 shares for $28.3 million and 1,601,906 shares of our common stock for $18.9 million during the year ended December 31, 2013 and 2012, respectively.

Debt, Commitments and Capital

For further information regarding our debt, see Note 13 — Bank Debt to the notes to our consolidated financial statements.

At December 31, 2014, we had total contractual obligations of $268.2 million. The following table shows the components of our significant commitments at December 31, 2014 by the scheduled years of payments (in thousands):

 

Contractual Obligations

   Total      2015      2016 to 2017      2018 to 2019      Thereafter  

Deferred acquisition liabilities(a)

   $ 27,962       $ 26,202       $ 1,760       $       $   

Purchase agreements(b)

     2,356         2,356                           

Revolving credit facility(c)(d)

     109,790                         109,790           

Lease commitments(e)

     128,120         23,064         39,419         27,979         37,658   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total contractual obligations

   $ 268,228       $ 51,622       $ 41,179       $ 137,769       $ 37,658   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

a) At December 31, 2014, we had $28.0 million in liabilities relating to deferred acquisition liability obligations (reflected in the table above). Of this balance, $23.3 million is in the form of contingent acquisition liability obligations which were recorded at estimated fair value and discounted to present value. Settlement of the liabilities is contingent upon certain acquisitions meeting performance targets. Assuming each of these acquisitions reach their maximum target, our maximum deferred acquisition liability would have been $47.5 million at December 31, 2014.

 

b) We have obligations recorded in other current liabilities and other non-current liabilities of approximately $2.4 million (reflected in the table above) primarily relating to costs associated with information technology purchases associated with our technology, data & process businesses.

 

c) Interest incurred on amounts we borrow under the credit facility varies based on relative borrowing levels, fluctuations in the variable interest rates and the spread we pay over those interest rates. As such, we are unable to quantify our future obligations relating to interest on the credit facility. See Note 13 — Bank Debt to the notes to our consolidated financial statements for further information on our credit facility.

 

d) At December 31, 2014, we had $8.1 million of unused letters of credit under our credit facility, which have been included as a reduction in the available borrowings. The letters of credit are primarily related to the requirements of certain lease agreements for office space.

 

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e) During the year ended December 31, 2014, we entered into a new lease for office space located in New York, New York which increased our contractual obligations relating to lease commitments by $40.9 million. We are in the process of consolidating our existing offices into the new space upon completion of the build-out of the new space. For further information regarding our office consolidation see Note 14 — Other Operating Costs (Benefit) to the notes to our consolidated financial statements.

On February 11, 2014, our board of directors increased its share repurchase authorization to $100 million and extended the authorization by one year to December 31, 2015. During the year ended December 31, 2014, we repurchased 1,653,315 shares for $27.3 million. Through December 31, 2014, we have repurchased an aggregate of 5,548,741 shares for approximately $77.0 million under this program.

We believe that our current cash and cash equivalents, future cash flows from operations and borrowings under our credit facility will provide adequate liquidity to fund anticipated short-term and long-term operating activities. However, in the event we make significant cash expenditures in the future for major acquisitions or other unanticipated activities, we may require more liquidity than is currently available to us under our credit facility and may need to raise additional funds through debt or equity financing, as appropriate. In addition, if our lenders are not able to fund their commitments due to disruptions in the financial markets or otherwise, our liquidity could be negatively impacted.

As we further develop our strategic goals, we anticipate taking certain actions which may include compensation and staffing alignment, improved practice cost management and targeted general and administrative cost reductions. Such actions may result in additional severance expense. We continue to evaluate under-performing practice areas and are considering various options to improve our overall financial results.

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

The preparation of the financial statements requires management to make estimates and assumptions that affect amounts reported therein. We base our estimates on historical experience and on various assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements:

Revenue Recognition

We recognize revenues when evidence of an arrangement exists, the price of work is fixed or determinable, work is performed and collectability is reasonably assured. We generate the majority of our revenues from providing services under the following types of arrangements: time and material (including units of production), fixed-fee and milestone based.

For our time and material arrangements, revenue is recognized based on the number of hours worked by our client-service employees at the contracted bill rates or units of service delivered, which are reviewed on a periodic basis. Additionally, revenue is recognized on our units of production arrangements in a similar manner based on measures such as the number of items processed at agreed-upon rates.

With our fixed-fee arrangements, we are contracted to complete a pre-determined set of professional services for a pre-determined fee. However, the fee and engagement scope can be adjusted based on a mutual agreement between us and the client. In many cases, the recording of fixed revenue amounts requires us to make

 

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an estimate of the total amount of work to be performed, and revenues are then recognized as efforts are expended based on (i) objectively determinable output measures, (ii) input measures if output measures are not reliable or (iii) the straight-line method over the term of the arrangement.

In milestone-based arrangements, fees are tied to the completion of contractually defined outcomes. In many cases, this fee is earned in addition to an hourly or fixed-fee, but is not recognized until certain contractual milestones or outcomes are met. Variations in our quarterly or yearly revenues and resulting operating profit margins may occur depending on the timing of such contractual outcomes and our ability to consider these revenues earned and realized.

In connection with recording revenues, estimates and assumptions are required in determining the expected conversion of the revenues to cash. We may provide multiple services under the terms of an arrangement and are required to assess whether one or more units of accounting are present.

Reimbursable expenses for our engagements include travel, out-of-pocket and independent contractor costs. Such expenses are included in our revenue as applicable and are passed through to other cost of services. Typically, reimbursable expenses are recognized as revenue during the period in which the expenses are incurred.

Revenues recognized for services performed but not yet billed are recorded as unbilled receivables on our consolidated balance sheet. Advance payments and retainers are recorded as deferred revenue and are recognized as services are provided. Any taxes assessed on revenues relating to services provided to our clients are recorded on a net basis.

Accounts Receivable Realization

We maintain allowances for doubtful accounts for estimated losses resulting from our clients’ inability to make required cash payments of amounts due to us or for disputes that affect our ability to fully collect our billed accounts receivable or for potential fee reductions negotiated by clients. Our estimation is based on historical collection and our review and assessment of our clients’ likelihood to make required cash payments of amounts due to us. Estimated losses may vary from actual results. If our clients’ financial condition were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances might be required.

Notes Receivable and Prepaid Sign-on and Retention Bonuses

We grant and pay sign-on and retention bonuses to attract and retain certain senior-level consultants and administrative personnel. Generally, we require grantees to sign incentive recovery agreements, which obligate the grantees to fulfill a service term, typically between one to five years. If this service term is not fulfilled, the monetary equivalent of the uncompleted service term is required to be paid back to us. We record paid sign-on and retention bonuses to current and non-current other assets, and the bonuses are amortized as compensation expense over the service period as defined by the incentive recovery agreements. Certain sign-on and retention bonuses of relatively low amounts are expensed to compensation expense when paid.

We also issue notes receivable in the form of unsecured employee loans with terms generally three to five years. These loans were issued to recruit and retain certain senior-level consultants. The principal amount and accrued interest is either paid by the consultant or forgiven by us over the term of the loans, so long as the consultants continue employment and complies with certain contractual requirements. The expense associated with the forgiveness of the principal amount of the loans and accrued interest 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 loan’s effective interest rate and is recorded as interest income.

We maintain a reserve based on our historical forfeiture rate of our sign-on and retention bonuses. The collectability of the incentive loans is reviewed on a quarterly basis based on our assessment of the employee’s ability to repay the loan should the contractual requirements of the loan not be fulfilled.

 

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Business Combinations

We recognize and measure identifiable assets acquired, liabilities assumed and any non-controlling interest in the acquiree as of the acquisition date at fair value. Fair value measurements require extensive use of estimates and assumptions, including estimates of future cash flows to be generated by the acquired assets. In addition, we recognize and measure contingent consideration at fair value as of the acquisition date. Contingent consideration obligations that are classified as liabilities are remeasured at fair value each reporting period with the changes in fair value resulting from either the passage of time, revisions, or ultimate settlement to the amount or timing of the initial measurement recognized in income.

Goodwill and Intangible Assets

Goodwill represents the difference between the purchase price of the acquired business and the related fair value of the net assets acquired, which is accounted for by the acquisition method of accounting. Intangible assets consist of identifiable intangibles other than goodwill. Identifiable intangible assets other than goodwill include customer lists and relationships, employee non-compete agreements, backlog revenue and trade names. These assets are subject to changes in events or circumstances that could impact their carrying value.

Goodwill is tested for impairment annually during the second quarter. In addition to our annual goodwill test, on a periodic basis, we are required to consider whether it is more likely than not that the fair value has fallen below the carrying amount of an asset, thus requiring us to perform an interim goodwill impairment test. 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/or

 

   

our financial projections.

The goodwill impairment test is performed at a reporting unit level. A reporting unit, as defined by Accounting Standards Codification 350 (ASC 350), is an operating segment of a business or one level below if discrete financial information is available and regularly reviewed by segment management. At December 31, 2014, we had four operating segments which are also considered to be our reporting units, as follows: Disputes, Investigations & Economics, Financial, Risk & Compliance, Healthcare and Energy.

We make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying a two-step goodwill impairment test. This step is referred to as “step zero.” If an entity concludes that it is not likely that the fair value of the reporting unit is less than its carrying amount, we would not be required to perform a two-step impairment test for that reporting unit. The guidance lists certain factors to consider when making the qualitative assessment. In the event that the conclusion requires the two-step test, the first step compares the fair value of a reporting unit to its carrying value. The fair value is determined using a discounted cash flow analysis (income approach) and a comparable company analysis (market approach). The second step is performed only if the carrying value exceeds the fair value determined in step one.

We determine the fair value of a reporting unit by using an equal weighting of estimated fair value using the income and market approaches. The income approach uses estimated future cash flows and terminal values. Assumptions used to determine future cash flows include: forecasted growth rates; profit margins; longer-term historical performance and cost of capital. Our assumptions are consistent with our internal projections and operating plans. Our internal projections and operating plans and thus our estimated fair value may be impacted by the overall economic environment. Our assumptions may change as a result of, among other things: changes in our estimated business future growth rate; profit margin; long-term outlook; market valuations of comparable

 

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companies; the ability to retain key personnel; changes in operating segments; competitive environment and weighted average cost of capital. Under the market approach for determining fair value, 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. Wherever possible, we use valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs; however, due to the use of our own assumptions about the inputs in measuring fair value, our goodwill impairment testing also makes use of significant unobservable inputs. 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.

If the carrying value exceeds the fair value determined in step one, step two is performed. Step two requires us to calculate the implied fair value of a reporting unit’s goodwill. This is accomplished by performing a hypothetical purchase price allocation for the reporting unit as of the measurement date, similar to the purchase price allocation used when purchasing a new business. We estimate the fair value of the reporting unit’s assets and liabilities and deem the residual fair value of the reporting unit as the implied fair value of the reporting unit’s goodwill. To the extent that the implied fair value of goodwill is below our carrying value, an impairment charge is recorded to reduce the carrying value to the implied fair value. The resulting impairment charge may be significantly higher than the difference between the carrying value and fair value determined in step one as a result of fair value assigned to other assets and liabilities in the hypothetical purchase price allocation completed in step two.

Intangible assets with definite lives are amortized based on the estimated period of consumption. Changes in these estimations may result in additional or accelerated amortization expense. We review these assets for impairment whenever events or changes in circumstances indicate an asset’s carrying value may not be recoverable.

Further information regarding our goodwill balances and current year impairment testing and review can be found in Note 6 — Goodwill and Intangible Assets, Net to the notes to our consolidated financial statements.

Share-Based Compensation

We recognize the cost resulting from all share-based compensation arrangements, including stock options, restricted stock and restricted stock units that we grant under our long-term incentive plans in the financial statements based on their grant date fair value. Management judgment is required in order to (i) estimate the fair value of certain share-based payments, (ii) determine the expected attribution period and (iii) assess expected future forfeitures. Additionally, certain share-based awards are granted and vest based on the achievement of certain performance goals, or share price targets which requires us to estimate the probability of whether or not the goals will be achieved.

Income Taxes

Our income tax expense, deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect management’s best assessment of estimated tax obligations. We are subject to income taxes in the United States and a number of foreign jurisdictions. Significant judgments and estimates are required in determining the consolidated income tax expense.

Deferred income taxes arise from temporary differences between the tax and financial statement recognition of revenue and expense. In evaluating our ability to recover our deferred tax assets within the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. When appropriate, we evaluate the need for a valuation allowance to reduce deferred tax assets. The determination of the need for a valuation allowance requires management judgment and could impact our financial results and effective tax rate.

 

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Recent Accounting Pronouncements

In April 2014, the FASB issued ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360) — Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This update includes amendments that change the requirements for reporting discontinued operations and require additional disclosures about discontinued operations. Under the new guidance, only disposals representing a strategic shift in operations that has (or will have) a major effect on the entity’s operations and financial results should be presented as discontinued operations. Examples include a disposal of a major geographic area, a major line of business, a major equity method investment, or other major parts of an entity. Additionally, the revised guidance requires expanded disclosures in the financial statements for discontinued operations as well as for disposals of significant components of an entity that do not qualify for discontinued operations presentation. This guidance is effective for financial statements issued by public companies for annual reporting periods beginning after December 15, 2014. We do not expect this to have a material impact on our consolidated financial statements.

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09-Revenue from Contracts with Customers (Topic 606). This update is intended to improve the financial reporting requirements for revenue from contracts with customers by providing a principle based approach. The core principle of the standard is that revenue should be recognized when the transfer of promised goods or services is made in an amount that the entity expects to be entitled to in exchange for the transfer of goods and services. The update also requires disclosures enabling users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. This standard will be effective for financial statements issued by public companies for annual reporting periods beginning after December 15, 2016. Early adoption is not permitted. We are currently evaluating the potential impact of this guidance on our consolidated financial statements.

 

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Our primary exposure to market risk relates to changes in interest rates and foreign currencies. The interest rate risk is associated with borrowings under our credit facility and our investment portfolio, classified as cash equivalents. The foreign currency risk is associated with our operations in foreign countries.

At December 31, 2014, borrowings under our credit facility 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.

At December 31, 2014, our interest rate derivatives effectively fixed our LIBOR base rate on $60.0 million of our debt. Based on borrowings under the credit facility at December 31, 2014 and after giving effect to the impact of our interest rate derivatives, our interest rate exposure was limited to $49.8 million of debt, and each quarter point change in market interest rates would result in approximately a $0.1 million change in annual interest expense.

At December 31, 2014, our cash equivalents were primarily limited to money market accounts or ‘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 various foreign countries, which exposes us to market risk associated with foreign currency exchange rate fluctuations. At December 31, 2014, we had net assets of approximately $39.0 million with a functional currency of the United Kingdom Pound Sterling and $12.8 million with a functional currency of the Canadian Dollar related to our operations in the United Kingdom and Canada, respectively. At December 31, 2014, we had net liabilities denominated in the non-functional currency of approximately $5.4 million. As such, a ten percent change in the value of the local currency would result in $0.5 million foreign currency gain or loss in our results of operations. Excess cash balances held outside the United States are immaterial to our overall financial position, and therefore, we have limited exposure to repatriating funds back to the United States.

 

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Item 8. Financial Statements and Supplementary Data.

Our consolidated financial statements are in this report as pages F-3 through F-38. An index to such information appears on page F-1.

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

 

Item 9A. Controls and Procedures.

 

(1) Evaluation of Disclosure Controls and Procedures

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.

An evaluation of the effectiveness of the design and operation of the disclosure controls and procedures, as of the end of the period covered by this report, was made under the supervision and with the participation of our management including our principal executive officer and principal financial officer. Based upon this evaluation, our principal executive officer and principal financial officer have concluded that our disclosure controls and procedures were effective.

 

(2) Management’s Annual Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)). Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management conducted an evaluation of the effectiveness of our internal control over financial reporting at December 31, 2014 based on the framework published by the Committee of Sponsoring Organizations of the Treadway Commission, Internal Control — Integrated Framework (2013). In the course of its evaluation, management concluded that we maintained effective control over financial reporting at December 31, 2014.

KPMG LLP, the independent registered public accounting firm that audited our consolidated financial statements included in this report, has issued an attestation report on our internal control over financial reporting. See “Report of Independent Registered Public Accounting Firm” on page F-2.

 

(3) Changes in Internal Control over Financial Reporting

There has been no change in our internal control over financial reporting during the fourth quarter of 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

Item 9B. Other Information.

None.

 

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Navigant Consulting, Inc.:

We have audited Navigant Consulting, Inc. and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Navigant Consulting, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control —Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Navigant Consulting, Inc. and subsidiaries as of December 31, 2014 and 2013, and the related consolidated statements of comprehensive income (loss), stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2014, and the financial statement schedule as listed in the accompanying index, and our report dated February 13, 2015 expressed an unqualified opinion on those consolidated financial statements and accompanying schedule.

/s/    KPMG LLP

Chicago, Illinois

February 13, 2015

 

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PART III

 

Item 10. Directors, Executive Officers and Corporate Governance.

Certain information required by this Item will be included under the headings “Election of Directors”, “Corporate Governance” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the definitive proxy statement for our annual meeting of shareholders scheduled to be held on May 14, 2015 (the “2015 Proxy Statement”) and is incorporated herein by reference.

See “Executive Officers of the Registrant” in Part I of this report for information regarding our executive officers.

 

Item 11. Executive Compensation.

The information under the headings “Compensation Discussion and Analysis”, “Compensation Committee Report”, “Executive Compensation”, “Director Compensation” and “Compensation Committee Interlocks and Insider Participation” in the 2015 Proxy Statement is incorporated herein by reference.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Certain information required by this Item will be included under the headings “Stock Ownership of Directors, Executive Officers and Principal Holders” in the 2015 Proxy Statement and is incorporated herein by reference.

See “Securities Authorized for Issuance Under Equity Compensation Plans” in Item 5 of this report for information regarding securities authorized for issuance under our equity compensation plans.

 

Item 13. Certain Relationships and Related Transactions, and Director Independence.

The information under the headings “Corporate Governance” and “Certain Relationships and Related Party Transactions” in the 2015 Proxy Statement is incorporated herein by reference.

 

Item 14. Principal Accountant Fees and Services.

The information under the heading “Independent Registered Public Accounting Firm” in the 2015 Proxy Statement is incorporated herein by reference.

 

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Item 15. Exhibits and Financial Statement Schedules

(a) The consolidated financial statements and financial statement schedule filed as part of this report are listed in the accompanying Index to the Consolidated Financial Statements.

(b) The exhibits filed as part of this report are listed below:

Exhibits:

 

Exhibit

No.

  

Description

  2.1    Agreement and Plan of Merger, dated as of May 14, 2014, among Navigant Consulting, Inc., Bobcat Acquisition Corporation, Cymetrix Corporation and certain securityholders of Cymetrix Corporation (incorporated by reference to Exhibit 2.1 to our Current Report on Form 8-K filed with the SEC on May 16, 2014). (Schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. A copy of any omitted schedule or exhibit will be furnished supplementally to the SEC upon request.)
  3.1    Restated Certificate of Incorporation of Navigant Consulting, Inc. (incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K filed with the SEC on May 23, 2012).
  3.2    Amendment to Restated Certificate of Incorporation of Navigant Consulting, Inc. (incorporated by reference to Exhibit 3.1 to our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2014).
  3.2    By-Laws of Navigant Consulting, Inc., as amended on July 25, 2007 (incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K filed with the SEC on July 26, 2007).
  3.3    Amendment to By-Laws of Navigant Consulting, Inc., effective as of December 16, 2010 (incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K filed with the SEC on December 21, 2010).
10.1†    Navigant Consulting, Inc. 2005 Long-Term Incentive Plan, as amended (incorporated by reference to Appendix C to our Definitive Notice and Proxy Statement filed with the SEC on March 28, 2007).
10.2†    First Amendment to the Navigant Consulting, Inc. 2005 Long-Term Incentive Plan, as amended, effective as of April 22, 2008 (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on April 24, 2008).
10.3†    Second Amendment to the Navigant Consulting, Inc. 2005 Long-Term Incentive Plan, as amended, effective as of December 18, 2009 (incorporated by reference to Exhibit 10.4 to our Annual Report on Form 10-K for the year ended December 31, 2009).
10.4†    Navigant Consulting, Inc. 2001 Supplemental Equity Incentive Plan (incorporated by reference to Exhibit 4.6 to our Registration Statement on Form S-8 (Registration No. 333-81680) filed with the SEC on January 30, 2002).
10.5†    First Amendment of the Navigant Consulting, Inc. 2001 Supplemental Equity Incentive Plan, effective as of April 16, 2007 (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on April 17, 2007).
10.6†    Navigant Consulting, Inc. 2012 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on May 23, 2012).
10.7†    Navigant Consulting, Inc. Annual Incentive Plan (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed with the SEC on May 23, 2012).
10.8†    Navigant Consulting, Inc. Employee Stock Purchase Plan, effective January 1, 2007 (incorporated by reference to Exhibit A to our Definitive Notice and Proxy Statement filed with the SEC on March 27, 2006).

 

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Table of Contents

Exhibit

No.

  

Description

10.9†    First Amendment to the Navigant Consulting, Inc. Employee Stock Purchase Plan, effective as of April 1, 2009 (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on December 24, 2008).
10.10†    Second Amendment to the Navigant Consulting, Inc. Employee Stock Purchase Plan, effective as of December 31, 2009 (incorporated by reference to Exhibit 10.15 to our Annual Report on Form 10-K for the year ended December 31, 2009).
10.11†    Form of Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on March 15, 2007).
10.12†    Form of Amendment No. 1 to Restricted Stock Award Agreement (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on September 1, 2011).
10.13†    Form of Non-Qualified Stock Option Award (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed with the SEC on March 15, 2007).
10.14†    Form of Non-Qualified Stock Option Award Agreement (March 2012 Grants) (incorporated by reference to Exhibit 10.5 to our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2012).
10.15†    Form of Performance-Based Restricted Stock Unit Agreement (2005 Long-Term Incentive Plan) (incorporated by reference to Exhibit 10.6 to our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2012).
10.16†    Form of Non-Employee Director Stock Option Award Agreement (2012 Long-Term Incentive Plan) (incorporated by reference to Exhibit 10.6 to our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2012).
10.17†    Form of Non-Employee Director Restricted Stock Unit Award Agreement (2012 Long-Term Incentive Plan) (incorporated by reference to Exhibit 10.7 to our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2012).
10.18†    Form of Restricted Stock Unit Award Agreement (2012 Long-Term Incentive Plan) (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed with the SEC on October 26, 2012).
10.19†    Form of Executive Officer Stock Option Agreement (2012 Long-Term Incentive Plan) (incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2013).
10.20†    Form of Performance-Based Restricted Stock Unit Award Agreement (2012 Long-Term Incentive Plan) (incorporated by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2013).
10.21†    Form of Non-Employee Director Restricted Stock Unit Award Agreement (Settlement Upon Vesting) (incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2013).
10.22†    Form of Non-Employee Director Restricted Stock Unit Award Agreement (Settlement Upon Separation From Service) (incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2013).
10.23†    Form of Non-Employee Director Restricted Stock Unit Award Agreement (Settlement Upon Vesting) (incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2014).

 

48


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Exhibit

No.

  

Description

10.24†    Form of Non-Employee Director Restricted Stock Unit Award Agreement (Settlement Upon Separation From Service) (incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2014).
10.25†    Form of Restricted Stock Unit Award Agreement (2012 Long-Term Incentive Plan) (incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2014).
10.26†    Form of Stock Option Award Agreement (2012 Long-Term Incentive Plan) (incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2014).
10.27†    Form of Performance-Based Restricted Stock Unit Award Agreement (2012 Long-Term Incentive Plan) (incorporated by reference to Exhibit 10.3 to our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2014).
10.28†    Form of Stock Option Award Agreement (2012 Long-Term Incentive Plan) (incorporated by reference to Exhibit 10.4 to our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2014).
10.29†    Navigant Consulting, Inc. Directors’ Deferred Fees Plan (incorporated by reference to Exhibit 10.3 to our Current Report on Form 8-K filed with the SEC on March 15, 2007).
10.30†    Amendment Number One to the Navigant Consulting, Inc. Directors’ Deferred Fees Plan (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed with the SEC on December 24, 2008).
10.31†    Amended and Restated Employment Agreement, effective as of January 1, 2009, between Navigant Consulting, Inc. and William M. Goodyear (incorporated by reference to Exhibit 10.4 to our Current Report on Form 8-K filed with the SEC on December 24, 2008).
10.32†    First Amendment to Amended and Restated Employment Agreement, effective as of March 1, 2012, between Navigant Consulting, Inc. and William M. Goodyear (incorporated by reference to Exhibit 10.2 to our Current Report on Form 8-K filed with the SEC on February 28, 2012).
10.33†    Second Amendment to Employment Agreement, effective as of May 11, 2012, between Navigant Consulting, Inc. and William M. Goodyear (incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2012).
10.34†    Letter Agreement, dated June 28, 2012, between Navigant Consulting, Inc. and William M. Goodyear Regarding Grants of Restricted Stock Units (incorporated by reference to Exhibit 10.2 to our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2012).
10.35†    Amended and Restated Employment Agreement, effective as of March 1, 2012, between Navigant Consulting, Inc. and Julie M. Howard (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on February 28, 2012).
10.36†    Amended and Restated Employment Agreement, effective as of October 1, 2013, between Navigant Consulting, Inc. and Monica M. Weed (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on October 4, 2013).
10.37†    Employment Agreement, dated as of October 23, 2012, between Navigant Consulting, Inc. and Lee A. Spirer (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on October 26, 2012).
10.38†    Employment Agreement, dated as of February 22, 2013, between Navigant Consulting, Inc. and Lucinda M. Baier (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on February 28, 2013).

 

49


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Exhibit

No.

  

Description

10.39    Credit Agreement, dated as of May 27, 2011, among Navigant Consulting, Inc., the other Borrowers party thereto, the Guarantors party thereto, the lenders from time to time party thereto and Bank of America, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2011).
10.40    First Amendment to Credit Agreement, dated as of September 19, 2013, among Navigant Consulting, Inc., the other Borrowers party thereto, the Guarantors party thereto and the Lenders from time to time party thereto, including Bank of America, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed with the SEC on September 24, 2013).
10.41    Second Amendment to Credit Agreement, dated as of February 19, 2014, among Navigant Consulting, Inc., the other Borrowers party thereto, the Guarantors party thereto and the Lenders from time to time party thereto, including Bank of America, N.A., as Administrative Agent (incorporated by reference to Exhibit 10.1 to our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2014).
21.1    Significant Subsidiaries of Navigant Consulting, Inc.
23.1    Consent of Independent Registered Public Accounting Firm.
31.1    Certification of Chief Executive Officer required by Rule 13a-14(a) of the Exchange Act.
31.2    Certification of Chief Financial Officer required by Rule 13a-14(a) of the Exchange Act.
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.
101    Interactive Data File.

 

 

Indicates a management contract or compensatory plan or arrangement.

 

50


Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

/s/    JULIE M. HOWARD

Julie M. Howard
Chairman and Chief Executive Officer

Date: February 13, 2015

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacity and on the dates indicated.

 

Signature

  

Title

 

Date

/s/    JULIE M. HOWARD

Julie M. Howard

  

Chairman and Chief Executive Officer and

Director (Principal Executive Officer)

  February 13, 2015

/s/    LUCINDA M. BAIER

Lucinda M. Baier

  

Executive Vice President and Chief Financial

Officer (Principal Financial Officer)

  February 13, 2015

/s/    SCOTT S. HARPER

Scott S. Harper

  

Executive Director and Controller (Principal

Accounting Officer)

  February 13, 2015

/s/    LLOYD H. DEAN

Lloyd H. Dean

   Director   February 13, 2015

/s/    CYNTHIA A. GLASSMAN

Hon. Cynthia A. Glassman

   Director   February 13, 2015

/s/    STEPHAN A. JAMES

Stephan A. James

   Director   February 13, 2015

/s/    SAMUEL K. SKINNER

Samuel K. Skinner

   Director   February 13, 2015

/s/    GOVERNOR JAMES R. THOMPSON

Governor James R. Thompson

   Director   February 13, 2015

/s/    MICHAEL L. TIPSORD

Michael L. Tipsord

   Director   February 13, 2015

/s/ RANDY H. ZWIRN

Randy H. Zwirn

   Director   February 13, 2015

 

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NAVIGANT CONSULTING, INC. AND SUBSIDIARIES

INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS

 

     Page  

Report of Independent Registered Public Accounting Firm

     F-2   

Consolidated Financial Statements at December  31, 2014 and 2013, and for each of the years in the three-year period ended December 31, 2014:

  

Consolidated Balance Sheets

     F-3   

Consolidated Statements of Comprehensive Income (Loss)

     F-4   

Consolidated Statements of Stockholders’ Equity

     F-5   

Consolidated Statements of Cash Flows

     F-6   

Notes to Consolidated Financial Statements

     F-7   

1. Description of Business and Basis of Presentation

     F-7   

2. Summary of Significant Accounting Policies

     F-7   

3. Acquisitions

     F-13   

4. Dispositions and Discontinued Operations

     F-16   

5. Segment Information

     F-17   

6. Goodwill and Intangible Assets, Net

     F-19   

7. Net Income (Loss) per Share (EPS)

     F-22   

8. Stockholders’ Equity

     F-23   

9. Share-based Compensation Expense

     F-23   

10. Supplemental Consolidated Balance Sheet Information

     F-27   

11. Accumulated Other Comprehensive Loss

     F-30   

12. Derivatives and Hedging Activity

     F-31   

13. Bank Debt

     F-31   

14. Other Operating Costs (Benefit)

     F-32   

15. Lease Commitments

     F-33   

16. Income Taxes

     F-34   

17. Fair Value

     F-36   

18. Employee Benefit Plans

     F-38   

19. Litigation and Settlements

     F-38   

Financial Statement Schedule —

  

Schedule II — Valuation and Qualifying Accounts

     S-1   

 

F-1


Table of Contents

Report of Independent Registered Public Accounting Firm

The Board of Directors and Stockholders

Navigant Consulting, Inc.:

We have audited the accompanying consolidated balance sheets of Navigant Consulting, Inc. and subsidiaries (the Company) as of December 31, 2014 and 2013, and the related consolidated statements of comprehensive income (loss), stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2014. In connection with our audits of the consolidated financial statements, we have audited the financial statement schedule as listed in the accompanying index. These consolidated financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Navigant Consulting, Inc. and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 13, 2015 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

/s/    KPMG LLP

Chicago, Illinois

February 13, 2015

 

F-2


Table of Contents

NAVIGANT CONSULTING, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

 

    December 31,
2014
    December 31,
2013
 

ASSETS

  

Current assets:

   

Cash and cash equivalents

  $ 2,648      $ 1,968   

Accounts receivable, net

    187,652        167,066   

Prepaid expenses and other current assets

    27,142        24,554   

Deferred income tax assets

    13,455        17,314   
 

 

 

   

 

 

 

Total current assets

    230,897        210,902   

Non-current assets:

   

Property and equipment, net

    60,617        44,338   

Intangible assets, net

    26,502        10,778   

Goodwill

    568,091        615,343   

Other assets

    17,386        22,836   
 

 

 

   

 

 

 

Total assets

  $ 903,493      $ 904,197   
 

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

  

Current liabilities:

   

Accounts payable

  $ 11,735      $ 13,415   

Accrued liabilities

    11,311        12,691   

Accrued compensation-related costs

    83,061        78,610   

Income tax payable

    1,763        1,137   

Other current liabilities

    52,526        32,009   
 

 

 

   

 

 

 

Total current liabilities

    160,396        137,862   

Non-current liabilities:

   

Deferred income tax liabilities

    76,329        86,571   

Other non-current liabilities

    14,387        26,016   

Bank debt non-current

    109,790        56,673   
 

 

 

   

 

 

 

Total non-current liabilities

    200,506        169,260   
 

 

 

   

 

 

 

Total liabilities

    360,902        307,122   
 

 

 

   

 

 

 

Stockholders’ equity:

   

Common stock, $0.001 par value per share; 150,000 shares authorized; 63,708 and 62,802 issued as of December 31, 2014 and 2013, respectively

    64        63   

Additional paid-in capital

    611,882        598,724   

Treasury stock, 15,491 and 13,770 shares as of December 31, 2014 and 2013, respectively

    (275,608     (247,106

Retained earnings

    218,337        254,735   

Accumulated other comprehensive loss

    (12,084     (9,341
 

 

 

   

 

 

 

Total stockholders’ equity

    542,591        597,075   
 

 

 

   

 

 

 

Total liabilities and stockholders’ equity

  $ 903,493      $ 904,197   
 

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

F-3


Table of Contents

NAVIGANT CONSULTING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands, except per share data)

 

     For the year ended December 31,  
     2014     2013     2012  

Revenues before reimbursements

   $ 766,552      $ 734,433      $ 722,190   

Reimbursements

     93,065        101,152        96,007   
  

 

 

   

 

 

   

 

 

 

Total revenues

     859,617        835,585        818,197   

Cost of services before reimbursable expenses

     519,157        487,967        476,344   

Reimbursable expenses

     93,065        101,152        96,007   
  

 

 

   

 

 

   

 

 

 

Total costs of services

     612,222        589,119        572,351   

General and administrative expenses

     136,057        127,079        141,195   

Depreciation expense

     19,580        16,180        14,986   

Amortization expense

     5,959        6,826        6,767   

Other operating costs (benefit):

      

Contingent acquisition liability adjustments, net

     (4,992     (5,399     1,065   

Office consolidation, net

     725        348        580   

Gain on disposition of assets

     (541     (1,715       

Goodwill impairment

     122,045                 

Other impairment

     1,343                 
  

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (32,781     103,147        81,253   

Interest expense

     5,918        4,433        5,453   

Interest income

     (274     (463     (872

Other (income) expense, net

     (167     175        (78
  

 

 

   

 

 

   

 

 

 

Income (loss) from continuing operations before income tax (benefit) expense

     (38,258     99,002        76,750   

Income tax (benefit) expense

     (1,351     43,890        32,518   
  

 

 

   

 

 

   

 

 

 

Net income (loss) from continuing operations

     (36,907     55,112        44,232   

Income (loss) from discontinued operations, net of tax

     509        (2,919     1,937   
  

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (36,398   $ 52,193      $ 46,169   
  

 

 

   

 

 

   

 

 

 

Basic per share data

      

Net income (loss) from continuing operations

   $ (0.76   $ 1.11      $ 0.87   

Income (loss) from discontinued operations, net of tax

     0.01        (0.06     0.04   
  

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (0.75   $ 1.05      $ 0.91   
  

 

 

   

 

 

   

 

 

 

Shares used in computing basic per share data

     48,741        49,771        50,894   

Diluted per share data

      

Net income (loss) from continuing operations

   $ (0.76   $ 1.08      $ 0.86   

Income (loss) from discontinued operations, net of tax

     0.01        (0.06     0.04   
  

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (0.75   $ 1.02      $ 0.90   
  

 

 

   

 

 

   

 

 

 

Shares used in computing diluted per share data

     48,741        50,951        51,572   

Net income (loss)

   $ (36,398   $ 52,193      $ 46,169   

Other comprehensive income (loss), net of tax

      

Unrealized net gain (loss), foreign currency translation

     (2,844     (711     4,088   

Unrealized net loss on interest rate derivatives

     (127     (39     (339

Reclassification adjustment on interest rate derivatives included in interest expense and income tax expense

     228        133        308   
  

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     (2,743     (617     4,057   
  

 

 

   

 

 

   

 

 

 

Total comprehensive income (loss), net of tax

   $ (39,141   $ 51,576      $ 50,226   
  

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

 

F-4


Table of Contents

NAVIGANT CONSULTING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

 

    Common
Stock
Shares
    Treasury
Stock
Shares
    Common
Stock
Par
Value
    Additional
Paid-In
Capital
    Treasury
Stock
Cost
    Accumulated
Other
Comprehensive
Loss
    Retained
Earnings
    Total Stock-
holders’
Equity
 

Balance at December 31, 2011

    61,232       (10,138   $ 61     $ 567,627     $ (197,602   $ (12,781   $ 156,373     $ 513,678  

Comprehensive income

                                       4,057       46,169       50,226  

Issuances of common stock related to business combinations

           289                     2,551                     2,551  

Other issuances of common stock

    385       14       1       3,001       281                     3,283  

Tax deficits on stock options exercised and restricted stock vested

                         (99                          (99

Vesting of restricted stock, net of forfeitures and tax withholdings

    458       (121            503       (2,306                   (1,803

Share-based compensation expense

    29       (29            10,581       (554                   10,027  

Additional paid-in capital recorded through compensation expense

                         750                            750  

Repurchases of common stock

           (1,602                   (18,870                   (18,870
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2012

    62,104       (11,587   $ 62     $ 582,363     $ (216,500   $ (8,724   $ 202,542     $ 559,743  

Comprehensive income (loss)

                                       (617     52,193       51,576  

Other issuances of common stock

    244       5       1       3,049       94                     3,144  

Tax deficits on stock options exercised and restricted stock units vested

                         (438                          (438

Vesting of restricted stock and restricted stock units, net of forfeitures and tax withholdings

    422       (97            (261     (1,783                   (2,044

Share-based compensation expense

    32       (32            11,671       (592                   11,079  

Additional paid-in capital recorded through compensation expense

                         2,340                            2,340  

Repurchases of common stock

           (2,059                   (28,325                   (28,325
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2013

    62,802       (13,770     63       598,724       (247,106     (9,341     254,735       597,075  

Comprehensive loss

                                       (2,743     (36,398     (39,141

Other issuances of common stock

    195                     2,833                            2,833  

Tax benefits on stock options exercised and restricted stock units vested

                         2,069                            2,069  

Vesting of restricted stock and restricted stock units, net of forfeitures and tax withholdings

    701       (58     1       (3,816     (1,045                   (4,860

Share-based compensation expense

    10       (10            9,489       (173                   9,316  

Additional paid-in capital recorded through compensation expense

                         2,583                            2,583  

Repurchases of common stock

           (1,653                   (27,284                   (27,284
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at December 31, 2014

    63,708       (15,491   $ 64     $ 611,882     $ (275,608   $ (12,084   $ 218,337     $ 542,591  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to consolidated financial statements

 

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NAVIGANT CONSULTING, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

     For the year ended December 31,  
     2014     2013     2012  

Cash flows from operating activities:

      

Net income (loss)

   $ (36,398   $ 52,193     $ 46,169  

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

      

Depreciation expense

     19,580       16,180       14,986  

Accelerated depreciation — office consolidation

            498         

Amortization expense

     5,959       6,826       6,767  

Amortization expense — client-facing software

     1,218       459         

Share-based compensation expense

     9,316       11,079       10,027  

Accretion of interest expense

     2,351       942       630  

Deferred income taxes

     (18,052     18,421       11,123  

Allowance for doubtful accounts receivable

     5,009       (107     6,329  

Contingent acquisition liability adjustments, net

     (4,992     (5,399     1,065  

Gain on disposition of assets

     (541     (1,715       

(Gain) loss on disposition of discontinued operations

     (509     3,675         

Goodwill impairment

     122,045                

Other impairment

     1,343                

Changes in assets and liabilities (net of acquisitions and dispositions):

      

Accounts receivable

     (14,844     19,604       (22,821

Prepaid expenses and other assets

     (303     12,260       (2,668

Accounts payable

     (2,123     (4,623     1,754  

Accrued liabilities

     (1,316     (382     2,879  

Accrued compensation-related costs

     2,712       (3,470     (10,794

Income taxes payable

     2,185       (6,386     4,385  

Other liabilities

     (2,543     (286     6,131  
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     90,097       119,769       75,962  

Cash flows from investing activities:

      

Purchases of property and equipment

     (23,506     (14,217     (20,052

Acquisitions of businesses, net of cash acquired

     (89,180     (2,989     (27,479

Proceeds from dispositions, net of selling costs

     2,324       16,973         

Payments of acquisition liabilities

     (4,960     (6,866     (4,856

Capitalized client-facing software

     (881     (3,285     (1,934

Other, net

                   (300
  

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (116,203     (10,384     (54,621

Cash flows from financing activities:

      

Issuances of common stock

     2,833       3,144       3,283  

Repurchases of common stock

     (27,284     (28,325     (18,870

Payments of contingent acquisition liabilities

     (464     (3,287     (8,580

Repayments to banks

     (323,374     (382,045     (347,877

Borrowings from banks

     377,839       304,499       349,729  

Payments of debt issuance costs

            (731       

Other, net

     (2,668     (1,692     (1,071
  

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     26,882       (108,437     (23,386
  

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (96     (32     128  
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     680       916       (1,917

Cash and cash equivalents at beginning of the period

     1,968       1,052       2,969  
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents at end of the period

   $ 2,648     $ 1,968      $ 1,052   
  

 

 

   

 

 

   

 

 

 

Supplemental Consolidated Cash Flow Information

 

     For the year ended December 31,  
         2014              2013              2012      

Interest paid

   $ 2,841      $ 2,912      $ 4,149   

Income taxes paid, net of refunds

   $ 12,307      $ 30,782      $ 15,935   

See accompanying notes to consolidated financial statements.

 

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NAVIGANT CONSULTING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Navigant Consulting, Inc. (“we,” “us,” or “our”) is an independent specialized, global professional services firm that combines deep industry knowledge with technical expertise to enable companies to defend, protect and create value. We focus on industries and clients facing transformational change and significant regulatory and legal issues. We serve clients primarily in the healthcare, energy and financial services sectors which represent highly complex market and regulatory environments. Our professional service offerings include strategic, financial, operational, technology, risk management, compliance, investigative solutions, dispute resolution services and business process management services. We provide our services to companies, legal counsel and governmental agencies. Our business is organized in four reporting segments — Disputes, Investigations & Economics; Financial, Risk & Compliance; Healthcare; and Energy.

We do not believe that any material subsequent events occurred during this period that requires disclosure in the notes to the consolidated financial statements.

We are headquartered in Chicago, Illinois and have offices in various cities within the United States, as well as offices in the United Kingdom, Canada, China, Singapore, and United Arab Emirates and other countries outside the U.S. Our non-U.S. subsidiaries, in the aggregate, represented approximately 8%, 7% and 8% of our total revenues in 2014, 2013 and 2012, respectively.

 

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The consolidated financial statements include our accounts and those of our subsidiaries. All significant intercompany transactions have been eliminated in consolidation.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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. Examples include: determination of the allowance for doubtful accounts, accruals for incentive compensation, the fair value of acquisition-related contingent consideration, revenue-related percentage of completion estimates, the measurement of deferred tax assets, estimating future performance for recording expense associated with our performance based long-term incentive plan, and the assessment of recoverability of intangible assets and goodwill. We base our estimates on historical trends, current experience and other assumptions that we believe are reasonable.

Cash and Cash Equivalents

Cash equivalents are comprised of liquid instruments with original maturity dates of 90 days or less.

Fair Value of Financial Instruments

We consider the recorded value of our 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 December 31, 2014 and 2013 based upon the short-term nature of the assets and liabilities. In addition, the fair value of our bank debt considers counterparty credit risk and as of December 31, 2014, approximated carrying value as it bears interest at variable rates. As noted below, we maintain interest rate derivatives which are recorded at fair value (see Note 17 — Fair Value).

 

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NAVIGANT CONSULTING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

Accounts Receivable Realization

We maintain allowances for doubtful accounts for estimated losses resulting from our clients’ inability to make required cash payments of amounts due to us or for disputes that affect our ability to fully collect our billed accounts receivable or for potential fee reductions negotiated by clients. Our estimation is based on historical collection and our review and assessment of our clients’ likelihood to make required cash payments of amounts due to us. Estimated losses may vary from actual results. If our clients’ financial condition were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. If the collectability of billed amounts is not assured, an allowance is recorded to general and administrative expense. If the collectability of unbilled amounts is not assured or certain pricing adjustments are made, an allowance is recorded as a reduction to revenue.

Property and Equipment, Net

We record property and equipment at cost. We compute depreciation using the straight-line method based on the estimated useful lives of the assets, ranging from three to seven years for software, furniture, fixtures and equipment. We compute amortization of leasehold improvements over the shorter of the remaining lease term or the estimated useful life of the asset. The lease term of our leaseholds expire at various dates through 2025. During the years ended December 31, 2014, 2013 and 2012, we capitalized compensation costs related to internally developed software for internal use of $1.6 million, $0.9 million and $0.9 million, respectively. We capitalize internally developed software costs during the development stage.

Client-Facing Software

Prepaid expenses and other assets also include investments in capitalized client-facing software which is utilized to deliver services to or licensed to our clients. These amounts are amortized into cost of services before reimbursable expenses over their estimated remaining useful life.

Operating Leases

We lease office space under operating leases. Some of the lease agreements contain one or more of the following provisions or clauses: tenant allowances, rent holidays, lease premiums, and rent escalation clauses. For the purpose of recognizing these provisions on a straight-line basis over the terms of the leases, we use the date of initial possession to begin amortization, which is generally when we enter the space and begin to make improvements in preparation of intended use.

For tenant allowances and rent holidays, we record a deferred rent liability and amortize the deferred rent over the terms of the leases as reductions to rent expense. For scheduled rent escalation clauses during the lease term or for rental payments commencing at a date other than the date of initial occupancy, we record minimum rental expenses on a straight-line basis over the terms of the leases.

In addition, some of our operating leases contain exit clauses, which include termination fees associated with exiting a lease prior to the expiration of the lease term. We record termination obligations when we give notice to the landlord that we have elected to exercise the early termination clause of such agreement.

Notes Receivable, Prepaid Sign-on and Retention Bonuses

We grant and pay sign-on and retention bonuses to attract and retain certain senior-level consultants and administrative personnel. Generally, we require grantees to sign incentive recovery agreements, which obligate the grantees to fulfill a service term, typically between one to five years. If such service term is not fulfilled, the monetary equivalent of the uncompleted service term is required to be paid back to us. We record paid sign-on and retention bonuses to current and non-current other assets and the bonuses are amortized as compensation expense over the service period as defined by the incentive recovery agreements. Certain sign-on and retention bonuses of relatively low amounts are expensed to compensation expense when paid.

 

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NAVIGANT CONSULTING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

We also issue notes receivable in the form of unsecured employee loans with terms that are generally three to five years. These loans are issued to recruit and retain certain senior-level consultants. The principal amount and accrued interest is either paid by the consultant or forgiven by us over the terms of the loans, so long as the consultant continues employment and complies with certain contractual requirements. The expense associated with the forgiveness of the principal amount of the loans and accrued interest 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 loan’s effective interest rate and is recorded as interest income.

Goodwill and Intangible Assets

Goodwill represents the difference between the purchase price of the acquired business and the related fair value of the net assets acquired, which is accounted for by the acquisition method of accounting. Intangible assets consist of identifiable intangibles other than goodwill. Identifiable intangible assets, other than goodwill, include customer lists and relationships, employee non-compete agreements, backlog revenue and trade names. These assets are subject to changes in events or circumstances that could impact their carrying value.

Goodwill is tested for impairment annually during the second quarter. In addition to our annual goodwill test, on a periodic basis, we are required to consider whether it is more likely than not that the fair value has fallen below the carrying amount of an asset and thus requiring us to perform an interim goodwill impairment test. 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/or

 

   

our financial projections.

The goodwill impairment test is performed at a reporting unit level. A reporting unit, as defined by Accounting Standard Codification (ASC) 350, is an operating segment of a business or one level below an operating segment if discrete financial information is available and regularly reviewed by segment management. At December 31, 2014, we had four operating segments which were also considered to be our reporting units, as follows: Disputes, Investigations & Economics, Financial, Risk & Compliance, Healthcare and Energy.

Financial Accounting Standards Board Accounting Standards Update (ASU) No. 2011-08, “Intangibles — Goodwill and Other (Topic 350): Testing Goodwill for Impairment” (“ASU Topic 350”) permits an entity to make a qualitative assessment of whether it is more likely than not that a reporting unit’s fair value is less than its carrying amount before applying a two-step goodwill impairment test. This step is referred to as “step zero.” If an entity concludes that it is not likely that the fair value of the reporting unit is less than its carrying amount, it would not be required to perform a two-step impairment test for that reporting unit. The guidance lists certain factors to consider when making the qualitative assessment. In the event that the conclusion requires the two-step test, the first step compares the fair value of a reporting unit to its carrying value. The fair value is determined using a discounted cash flow analysis (income approach) and a comparable company analysis (market approach). The second step is performed only if the carrying value exceeds the fair value determined in step one.

We determine the fair value of a reporting unit by using an equal weighting of estimated fair value using the income and market approaches. The income approach uses estimated future cash flows and terminal values. Assumptions used to determine future cash flows include: forecasted growth rates; profit margins; longer-term historical performance and cost of capital. Our assumptions are consistent with our internal projections and operating plans. Our internal projections and operating plans and thus our estimated fair value may be impacted

 

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NAVIGANT CONSULTING, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)

 

by the overall economic environment. Our assumptions may change as a result of, among other things: changes in our estimated business future growth rate; profit margin; long-term outlook; market valuations of comparable companies; the ability to retain key personnel; changes in operating segments; competitive environment and weighted average cost of capital. Under the market approach for determining fair value, 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. Wherever possible, we use valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs; however, due to the use of our own assumptions about the inputs in measuring fair value, our goodwill impairment testing also makes use of significant unobservable inputs. 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.

If the carrying value exceeds the fair value determined