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NCI > SEC Filings for NCI > Form 10-Q on 30-Oct-2013All Recent SEC Filings

Show all filings for NAVIGANT CONSULTING INC

Form 10-Q for NAVIGANT CONSULTING INC


30-Oct-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

During the nine months ended September 30, 2013 and the 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 during these periods 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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Dispositions and Discontinued Operations

During the nine months ended September 30, 2013 we had two dispositions. 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. In addition, we sold the United Kingdom financial services advisory business within our Financial, Risk & Compliance segment. All significant cash flows from this business have been eliminated, and we will have no continuing involvement in the operations of this business. As such, in accordance with ASC Topic 205, all operations of this disposed business have been reclassified into discontinued operations.

Additional information regarding these dispositions, including the required disclosures under ASC Topic 205, may be found in Note 3 - Dispositions and Discontinued Operations to the notes to our unaudited 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 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 nine months ended September 30, 2013 compared to the
three and nine months ended September 30, 2012



                                                                                    2013 over                                                  2013 over
                                                                                       2012                                                       2012
                                              For the three months ended             Increase             For the nine months ended             Increase
                                                     September 30,                  (Decrease)                  September 30,                  (Decrease)
                                               2013                 2012            Percentage            2013                 2012            Percentage
Key operating metrics:
Average FTE
-Consulting                                       1,522                1,484                2.6              1,517                1,493                1.6
-Technology, Data & Process                         477                  379               25.9                432                  349               23.8
-Non-billable                                       529                  551               (4.0 )              534                  535               (0.2 )
Period end FTE
-Consulting                                       1,534                1,501                2.2              1,534                1,501                2.2
-Technology, Data & Process                         489                  387               26.4                489                  387               26.4
-Non-billable                                       529                  548               (3.5 )              529                  548               (3.5 )
Average bill rate                          $        278         $        279               (0.4 )     $        277         $        282               (1.8 )
Utilization                                          73 %                 74 %             (1.4 )               76 %                 75 %              1.3

Overview. During the three months ended September 30, 2013 compared to the corresponding period in 2012, we reported a $2.3 million, or 20.7%, increase in net income from continuing operations.

During the three months ended September 30, 2013 we recorded a $2.0 million benefit relating to a contingent acquisition liability adjustment relating to lower estimated potential earnings estimates for our AFE acquisition.

Revenues before reimbursements (RBR) increased 5.7% for the period as increases within our Healthcare and Financial, Risk & Compliance segments were partially offset by lower RBR from our Disputes, Investigations & Economics segment. RBR for our Energy segment remained consistent (see segment results below for further detail).

Cost of services before reimbursable expenses increased 3.6% for the period 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 training expenses.

General and administrative expenses increased 2.5% due to higher legal fees, performance-based incentive compensation and marketing expense offset by lower information technology and facilities expenses.

During the nine months ended September 30, 2013 compared to the corresponding period in 2012, we reported a $9.8 million, or 31.6%, increase in net income from continuing operations.

During the nine months ended September 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 - Dispositions and Discontinued Operations to the notes to our unaudited consolidated financial statements for further information on the sale). In addition, we recorded a $2.0 million benefit relating to the contingent acquisition liability adjustment discussed above.

RBR increased 4.5% 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 before reimbursable expenses increased 3.7% 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 5.3% due to lower bad debt expense and information technology and facilities expenses partially offset by higher performance-based incentive compensation expense and wages expense.


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Revenues before Reimbursements. For the three months ended September 30, 2013, RBR increased 5.7% compared to the corresponding period in 2012. Including the impact of our acquisitions on a pro forma basis, RBR decreased 0.4% for the three months ended September 30, 2013 compared to the corresponding period in 2012. Our Healthcare segment's RBR increased 31.0% both organically and through acquisitions for the three months ended September 30, 2013 over the corresponding period in 2012 (see segment results below for further detail). In addition, our Financial, Risk & Compliance segment's RBR for the three months ended September 30, 2013 increased 16.8% compared with the corresponding period in 2012 due to increased activity in regulatory compliance, including a large anti-money laundering engagement offset by lower performance-based fees within the restructuring business in this segment. For the same period, our Energy segment's RBR decreased 0.6% mainly due to the impact of the Moreland Commission Report. Our Disputes, Investigations & Economics segment's RBR decreased 8.5% compared to the corresponding period in 2012 mainly due to the January 2013 sale of a portion of our economics business (see Note 3 - Dispositions and Discontinued Operations to the notes to our unaudited consolidated financial statements) partially 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 $1.2 million for the three months ended September 30, 2013, compared to $2.5 million in the corresponding period in 2012. The decrease was primarily associated with our Healthcare segment and our restructuring business within our Financial, Risk & Compliance segment.

Utilization levels for the three months ended September 30, 2013 and 2012 were 73% and 74%, respectively. Average bill rate decreased 0.4% to $278. Average FTE-Consulting increased 2.6% for the three months ended September 30, 2013 compared to the corresponding period in 2012 and average FTE - Technology, Data & Process increased 25.9% to support technology related engagements including technology solutions and financial services engagements within our Disputes, Investigations & Economics segment and technology solutions engagements within our Healthcare segment. These additions were offset by a decrease in claims and processing engagements within our Disputes, Investigations & Economics segment.

For the nine months ended September 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 1.1% for the nine months ended September 30, 2013 compared to the corresponding period in 2012. Our Healthcare segment's RBR increased 26.7% both organically and through acquisitions for the nine months ended September 30, 2013 over the corresponding period in 2012. For the same period, our Energy segment's RBR grew 8.9% 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 14.5% reflecting increased activity in regulatory compliance, including a large anti-money laundering engagement partially offset by decreases related to the mortgage servicing review engagements which ramped up during 2012 and have since wound down. 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 10.3% mainly due to the January 2013 sale of a portion of the economics business partially offset by RBR contributions from the AFE acquisition.

RBR included performance-based fees of $3.3 million and $9.1 million for the nine months ended September 30, 2013 and 2012, respectively. The decrease was primarily associated with the restructuring business in our Financial, Risk & Compliance segment and our Healthcare segment.

Utilization levels for the nine months ended September 30, 2013 were 76% compared to 75% in the corresponding period in 2012. Average bill rate decreased 1.8% to $277. Average FTE-Consulting for the nine months ended September 30, 2013 increased 1.6% compared to the corresponding period in 2012 while average FTE - Technology, Data & Process increased 23.8% to support technology related engagements including: technology solutions and financial services engagements within our Disputes, Investigations & Economics segment and technology solutions engagements within our Healthcare segment. In addition, our acquisition of Pike Research in July 2012 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 3.6% for the three months ended September 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, and information technology expenses partially offset by lower training expenses. Severance expense relating to client service FTE's for the three months ended September 30, 2013 and 2012 was $0.3 million and $0.6 million, respectively.

Cost of services before reimbursable expenses increased 3.7% for the nine months ended September 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 nine months ended September 30, 2013 and 2012 was $3.7 million and $1.7 million, respectively.

General and Administrative Expenses. General and administrative expenses increased 2.5% for the three months ended September 30, 2013. The increase was mainly a result of higher performance-based incentive compensation. In addition, in connection with the Moreland Commission Report, legal fees were higher during the three months ended September 30, 2013 compared to the corresponding period in 2012. These increases were partially offset by lower facilities expense, information technology costs and bad debt expense. For the nine months ended September 30, 2013, general and administrative expenses decreased 5.3% compared to the corresponding period in 2012. The decrease was driven by lower facilities expense, 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.


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General and administrative expenses were 18.2% and 18.8% of RBR for the three months ended September 30, 2013 and 2012, respectively, and 17.8% and 19.6% of RBR for the nine months ended September 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. Bad debt expense was $0.8 million and $1.1 million for the three months ended September 30, 2013 and 2012, respectively, and $2.1 million and $4.2 million for the nine months ended September 30, 2013 and 2012, respectively. Improved collections are reflected in our days sales outstanding (DSO) which improved to 81 days at September 30, 2013 compared to 85 days at September 30, 2012.

Depreciation Expense. The increase in depreciation expense of 13.9% and 9.9% for the three and nine months ended September 30, 2013 compared to the corresponding periods in 2012 was primarily due to increased technology infrastructure spending.

Amortization Expense. Amortization expense increased 20.7% and 7.1% for the three and nine months ended September 30, 2013 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 (Benefit) - Office consolidation. During nine months ended September 30, 2013, we recorded a benefit of $0.2 million and a cost of $0.5 million, respectively, as we recorded the benefit of earlier-than-anticipated sublease income related to one previously vacated office space, and additional depreciation expense relating to the consolidation of two office spaces.

Other Operating Costs (Benefit) - Gain on disposition of assets. During the nine months ended September 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 (Benefit) - Contingent acquisition liability adjustment. During the nine months ended September 30, 2013 and 2012, we recorded a benefit of $2.0 million and a $0.6 million expense, respectively, relating to fair value adjustments to our previously estimated deferred contingent acquisition liabilities.

Interest Expense. Interest expense decreased 15.7% and 16.6% for the three and nine months ended September 30, 2013 compared to the corresponding periods in 2012. This decrease was due to lower average borrowings for the three and nine months ended September 30, 2013 compared to the corresponding periods in 2012. In addition our average borrowing rate was lower for the nine months ended September 30, 2013 compared to the corresponding period 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 2.6% and 2.4% for the three months ended September 30, 2013 and 2012, respectively, and 2.5% and 2.8% for the nine months ended September 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. It is also affected by discrete items which may not be consistent from year to year.

Our effective income tax rate on income from continuing operations was 46.9% and 41.0% for the three months ended September 30, 2013 and 2012, respectively and 44.1% and 42.3% for the nine months ended September 30, 2013 and 2012, respectively. The increase in rates between periods is mainly a result of a change in the mix of our pre-tax income from lower tax rate jurisdictions to higher rate U.S. jurisdictions as well as the recording of $0.7 million of valuation allowances during the three months ended September 30, 2013. The valuation allowances related to losses generated in foreign jurisdictions for which we do not anticipate realizing a benefit in future periods.

(Loss) Income from Discontinued Operations, net of tax. (Loss) income from discontinued operations, net of tax was a loss of $3.3 million for the three months ended September 30, 2013 compared to income of $0.2 million for the corresponding period in 2012. During the three months ended September 30, 2013, we sold the United Kingdom financial services advisory business within our Financial, Risk & Compliance segment. In connection with the sale, during the three months ended September 30, 2013, 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 3 - Dispositions and Discontinued Operations to the notes to our unaudited financial statements for further details on our discontinued operations.


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(Loss) income from discontinued operations, net of tax for the nine months ended September 30, 2013 was a loss of $2.9 million and excluding the loss on sale discussed above was income of $0.8 million compared to income of $1.6 million for the corresponding period in 2012. The decrease was mainly a result of the departure of key 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 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 . . .

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