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NCI > SEC Filings for NCI > Form 10-Q on 31-Jul-2013All Recent SEC Filings

Show all filings for NAVIGANT CONSULTING INC

Form 10-Q for NAVIGANT CONSULTING INC


31-Jul-2013

Quarterly Report


Item 2. 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 specialty consulting firm that combines deep industry knowledge with broad technical expertise. We focus on industries that typically undergo substantial regulatory or structural change and provide services to enable clients to manage the uncertainty, risk and distress caused by those changes. 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). From time to 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 objectives. We also recognize revenues from business referral fees or commissions on certain contractual outcomes. These performance-based and referral revenues may cause unusual variations in our quarterly revenues and results of operations. Revenue is also earned on a per unit or subscription basis. Regardless of the terms of our fee arrangements, our ability to earn those fees is reliant on deploying consultants with the experience and expertise to deliver services.

Our most significant expense is consultant compensation, which includes salaries, incentive compensation, amortization of sign-on and retention incentive payments, share-based compensation and benefits. Consultant 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 consultants.

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.

Because our ability to derive fees is largely reliant on the hiring and retention of personnel, the average number of full-time equivalents (FTE) and our ability to keep consultants utilized are important drivers of the business. The average 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 FTE's in response to changing demand.

While hiring and retention of personnel are key to driving revenues, FTE levels and related consultant compensation in excess of demand drive additional costs that can negatively impact margin. From time to time, we hire independent contractors to supplement our consultants 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, staff and projects.

In addition to managing the number of employees and utilization of consultants, we also continually review and adjust our consultants' 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.

Acquisitions

We did not acquire any businesses during the six months ended June 30, 2013. During the full year ended December 31, 2012 we acquired the assets of several businesses. Additional information regarding the purchase price, purchase price allocation and other details of the businesses acquired in 2012 can be found in Note 2 - Acquisitions to the notes to our unaudited consolidated financial statements. Any material impact these acquisitions may have had on our results from operations or segment results for the periods presented have been included in our discussions below.


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Disposition

On January 31, 2013, we sold a portion of our economics business within our Disputes, Investigations & Economics segment. This disposition facilitated the early transition of four experts whose departures were anticipated in the current quarter. The transaction also included the transition of certain engagements and approximately 40 other employees to the purchaser. We received $15.6 million in cash, net of selling costs, for the sale. As part of the transaction, we recorded a $1.7 million gain in other operating benefit, which reflected a reduction of $7.4 million in goodwill and $6.5 million relating to working capital.

Key Operating Metrics

The following key operating metrics provide additional operating information related to our 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 and data analytics, technology solutions and data services, invoice 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.

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).

Billable hours are the number of hours our consulting FTE recorded time to client engagements during the reporting period.

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.

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


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Results of Operations

Results for the three and six months ended June 30, 2013 compared to the three
and six months ended June 30, 2012



                                                                                   2013 over                                             2013 over
                                                                                     2012                                                  2012
                                              For the three months ended           Increase           For the six months ended           Increase
                                                       June 30,                   (Decrease)                  June 30,                  (Decrease)
                                               2013                 2012          Percentage          2013                2012          Percentage
Key operating metrics:
Average FTE
-Consulting                                       1,549                1,550             (0.1 )          1,562               1,560              0.1
-Technology, Data & Process                         413                  342             20.8              410                 334             22.8
-Non-billable                                       534                  532              0.4              537                 528              1.7
Period end FTE
-Consulting                                       1,533                1,522              0.7            1,533               1,522              0.7
-Technology, Data & Process                         471                  351             34.2              471                 351             34.2
-Non-billable                                       538                  542             (0.7 )            538                 542             (0.7 )
Average bill rate                          $        278         $        281             (1.1 )    $       277         $       285             (2.8 )
Utilization                                          75 %                 73 %            2.7               76 %                75 %            1.3

Overview. During the three months ended June 30, 2013 compared to the corresponding period in 2012, we reported a $4.4 million, or 46.0%, increase in net income.

Revenues before reimbursements (RBR) increased 4.5% for the period as increases within our Healthcare and Energy segments were partially offset by lower RBR from our Disputes, Investigations & Economics segment. RBR for the Financial, Risk & Compliance segment remained consistent (see segment results below for further detail).

Cost of services increased mainly due to higher wages as a result of higher FTE levels, higher information technology related costs and higher performance-based incentive compensation expense partially offset by lower medical benefits expenses.

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

During the six months ended June 30, 2013 compared to the corresponding period in 2012, we reported a $6.6 million, or 30.9%, increase in net income.

During the six months ended June 30, 2013, we recorded a $1.7 million gain on disposition of assets relating to the sale of a portion of our Disputes, Investigations & Economics segment (see Note 3 - Disposition to the notes to our unaudited consolidated financial statements for further information on the sale).

RBR increased 2.5% 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 detail).

Cost of services increased mainly due to higher wages as a result of higher FTE levels, higher information technology related costs and performance-based incentive compensation expense partially offset by lower medical benefits expense and lower training costs.

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

Revenues before Reimbursements. For the three months ended June 30, 2013, RBR increased 4.5% compared to the corresponding period in 2012. Including the impact of our acquisitions on a pro forma basis, RBR decreased 0.9% for the three months ended June 30, 2013 compared to the corresponding period in 2012. Our Healthcare segment's RBR increased 30.0% both organically and through acquisitions for the three months ended June 30, 2013 over the corresponding period in 2012 (see segment results below for further detail). For the same period, our Energy segment's RBR grew 11.5% mainly due to growth in energy efficiency service offerings and the acquisition of Pike Research in July 2012. In addition, our Financial, Risk & Compliance segment's RBR for the three months ended June 30, 2013 was consistent with the corresponding period in 2012 due to increased


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activity on regulatory compliance, including anti-money laundering engagements offset by lower performance-based fees in the restructuring area and lower revenues related to a portion of our financial services business based in the United Kingdom, which was subsequently sold early in the third quarter of 2013 (see Note 13 - Subsequent Events to the notes to our unaudited consolidated financial statements). Our Disputes, Investigations & Economics segment's RBR decreased 6.1% mainly due to the January 2013 sale of a portion of our economics business (see Note 3 - Disposition to the notes to our unaudited consolidated financial statements) offset by RBR contributions from the December 2012 acquisition of AFE (see Note 2 - Acquisitions to the notes to our unaudited consolidated financial statements).

RBR included performance-based fees of $1.1 million for the three months ended June 30, 2013, compared to $4.8 million in the corresponding period in 2012. The decrease was primarily associated with lower activity within our restructuring business in our Financial, Risk & Compliance segment.

Utilization levels for the three months ended June 30, 2013 and 2012 were 75% and 73%, respectively. Average bill rate decreased 1.1% to $278. Average FTE - Consulting was relatively consistent with the corresponding period in 2012 and average FTE - Technology, Data & Process increased 20.8% to support technology related engagements including: technology solutions and financial services engagements within our Disputes, Investigations & Economics segment; technology solutions engagements within our Healthcare segment; and finally our acquisition of Pike Research in July 2012 within our Energy segment added additional headcount in this area. These additions were offset by a decrease in claims and billing engagements within our Disputes, Investigations & Economics segment due to a decrease in demand.

For the six months ended June 30, 2013, RBR increased 2.5% compared to the corresponding period in 2012. Including the impact of our acquisitions on a pro forma basis, RBR decreased 2.8% for the six months ended June 30, 2013 compared to the corresponding period in 2012. Our Healthcare segment's RBR increased 24.6% both organically and through acquisitions for the six months ended June 30, 2013 over the corresponding period in 2012. For the same period, our Energy segment's RBR grew 14.0% mainly due to growth in energy efficiency service offerings and the acquisition of Pike Research in July 2012. In addition, our Financial, Risk & Compliance segment's RBR increased 5.6% reflecting increased activity on regulatory compliance, including anti-money laundering engagements as well as large mortgage servicing review engagements which ramped up during 2012. In addition, lower activity within our restructuring business in this segment partially offset the increase as the economic environment continued to improve. Our Disputes, Investigations & Economics segment's RBR decreased 11.2% mainly due to the January 2013 sale of a portion of our economics business partially offset by RBR contributions from the December 2012 acquisition of AFE.

RBR included performance-based fees for the six months ended June 30, 2013 and 2012 of $2.1 million and $6.7 million, respectively. The decrease was primarily associated with our restructuring business in our Financial, Risk & Compliance segment.

Utilization levels for the six months ended June 30, 2013 were 76% compared to 75% in the corresponding period in 2012. Average bill rate decreased 2.8% to $277. Average FTE - Consulting for the six months ended June 30, 2013 was consistent with the corresponding period in 2012 while average FTE - Technology, Data & Process increased 22.8% to support technology related engagements including: technology solutions and financial services engagements within our Disputes, Investigations & Economics segment; technology solutions engagements within our Healthcare segment; and finally our acquisition of Pike Research in July 2012 within our Energy segment added additional headcount. These additions were offset by a decrease in claims and billing engagements 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 2.6% for the three months ended June 30, 2013 compared to the corresponding period in 2012. The increase in cost of services was mainly due to higher wages associated with the increase in FTE levels and higher performance-based incentive compensation, severance and information technology expenses partially offset by lower practice development expenses and benefit expenses attributable to lower medical claims. Severance expense relating to client service FTE's for the three months ended June 30, 2013 and 2012 was $2.1 million and $0.9 million, respectively.

Cost of services before reimbursable expenses increased 2.2% for the six months ended June 30, 2013 compared to the corresponding period in 2012. The increase in cost of services was mainly due to higher wages associated with the increase in FTE levels and higher severance and information technology expenses partially offset by lower performance-based incentive compensation, practice development expenses and benefit expenses attributable to lower medical claims. Severance expense relating to client service FTE's for the six months ended June 30, 2013 and 2012 was $3.4 million and $1.6 million, respectively.

General and Administrative Expenses. General and administrative expenses decreased 9.1% and 8.9% for the three and six months ended June 30, 2013, respectively, compared to the corresponding periods in 2012. The decrease was driven by lower facilities expense, legal fees, bad debt expense, benefit expenses and information technology costs partially offset by higher performance-based incentive compensation and stock-based compensation expense due to new hires and 2012 grants. Bad debt expense was $1.0 million and $1.9 million for the three months ended June 30, 2013 and 2012, respectively, and $1.2 million and $3.1 million for the six months ended June 30, 2013 and 2012, respectively.


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General and administrative expenses were 17.2% and 19.7% of RBR for the three months ended June 30, 2013 and 2012, respectively, and 17.3% and 19.4% of RBR for the six months ended June 30, 2013 and 2012, respectively. Cost management and lower bad debt expense as discussed above contributed to the improvement. The decrease in bad debt expense was a result of collections of previously reserved accounts receivable balances. Improved collections are reflected in our days sales outstanding (DSO) which improved to 79 days at June 30, 2013 compared to 84 days at June 30, 2012.

Depreciation Expense. The increase in depreciation expense of 9.6% and 7.9% for the three and six months ended June 30, 2013, respectively, compared to the corresponding periods in 2012 was primarily due to technology infrastructure spending.

Amortization Expense. Amortization expense increased 3.8% and 1.1% for the three and six months ended June 30, 2013, respectively, compared to the corresponding periods in 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 - Office consolidation. During the three and six months ended June 30, 2013, we recorded $0.3 million and $0.5 million, respectively, for additional depreciation expense relating to the consolidation of two office spaces.

Other Operating Costs - Gain on disposition of assets. During the six months ended June 30, 2013, we recorded a $1.7 million gain relating to the January 31, 2013 sale of a portion of our economics business within our Disputes, Investigations & Economics segment. The gain reflected proceeds of $15.6 million in cash, net of selling expenses and net of $6.5 million of working capital and $7.4 million of goodwill.

Other Operating Costs - Contingent acquisition liability adjustment. During the six months ended June 30, 2012, we recorded a $0.6 million expense relating to a fair value adjustment to our deferred contingent acquisition liabilities. The acquired businesses exceeded their original performance expectations.

Interest Expense. Interest expense decreased 17.8% and 17.0% for the three and six months ended June 30, 2013, respectively, compared to the corresponding periods in 2012. This decrease was due to lower average borrowings and average borrowing rates for the three and six months ended June 30, 2013 compared to the corresponding periods in 2012. Our average borrowing rates under our credit facility, including the impact of our interest rate derivatives (see Note 9 - Derivatives and Hedging Activity to the notes to our unaudited consolidated financial statements), were 2.4% and 2.6% for the three months ended June 30, 2013 and 2012, respectively, and 2.5% and 2.9% for the six months ended June 30, 2013 and 2012, respectively. See Note 10 - Bank Debt to the notes to our unaudited 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. Our effective income tax rate was 43.3% and 41.5% for the three months ended June 30, 2013 and 2012, respectively. The increase in rates between periods is mainly a result of higher losses in foreign jurisdictions that have lower income tax rates.

Our effective income tax rate for the six months ended June 30, 2013 and 2012 was 42.4% and 42.1%, respectively. Our tax rate is affected by recurring items, such as tax rates in foreign and state jurisdictions and the relative amount of income we earn in jurisdictions, which we anticipate will be fairly consistent during the year. It is also affected by discrete items that may occur in any given year, but may not be consistent from year to year.

The increase in rates between periods is mainly the result of certain foreign net operating losses (NOL) for which we believe it is more likely than not that we will not realize the benefit. In recognition of this risk, we have provided a valuation allowance on the deferred tax assets relating to these foreign NOLs.


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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 revenues before reimbursements, segment total revenues and segment operating profit. 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 4 - Segment Information to the notes to our unaudited 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 8 - Supplemental Consolidated Balance Sheet Information to the notes to our unaudited 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 recast to be consistent with the current presentation.

                                                     Disputes, Investigations & Economics
                                                                                2013 over                                           2013 over
                                                                                  2012                                                2012
                                            For the three months ended          Increase          For the six months ended          Increase
                                                     June 30,                  (Decrease)                 June 30,                 (Decrease)
                                              2013                2012         Percentage           2013              2012         Percentage
Revenues before reimbursements (in
000's)                                    $      76,352         $  81,350             (6.1 )    $    153,327        $ 172,569            (11.2 )
Total revenues (in 000's)                 $      82,828         $  86,894             (4.7 )    $    166,286        $ 183,983             (9.6 )
Segment operating profit (in 000's)       $      25,393         $  27,995             (9.3 )    $     51,210        $  62,163            (17.6 )
Key segment operating metrics:
Segment operating profit margin                    33.3 %            34.4 %           (3.2 )            33.4 %           36.0 %           (7.2 )
Average FTE - Consulting                            543               617            (12.0 )             556              625            (11.0 )
Average FTE - Technology, Data &
Process                                             190               177              7.3               191              169             13.0
Average utilization rates based on
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