Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
NCI > SEC Filings for NCI > Form 10-K on 14-Feb-2014All Recent SEC Filings

Show all filings for NAVIGANT CONSULTING INC

Form 10-K for NAVIGANT CONSULTING INC


14-Feb-2014

Annual Report


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 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. Costs relating to these employees are recorded as reimbursable expenses with the corresponding reimbursement from the client recorded as reimbursements. Margins associated with the use of these contractors are recorded as revenues before reimbursements. Consequently changes in the contractor usage levels will impact our segment operating profit margins from period to period.

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.


Table of Contents

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.

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.

Dispositions and Discontinued Operations

During the year ended December 31, 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 - Presentation of Financial Statements (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 as discontinued operations.

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 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.


Table of Contents
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.

Results of Operations

                                                                                        2013 over          2012 over
                                         For the Year Ended December 31,                  2012               2011
                                                                                        Increase           Increase
                                                                                       (Decrease)         (Decrease)
                                      2013               2012            2011          Percentage         Percentage
Key operating metrics:
Average FTE
- Consulting                            1,523              1,506          1,509                1.1               (0.2 )
- Technology, Data & Process              451                361            247               24.9               46.2
- Non-billable                            534                539            527               (0.9 )              2.3
Period end FTE
- Consulting                            1,516              1,560          1,513               (2.8 )              3.1
- Technology, Data & Process              524                400            304               31.0               31.6
- Non-billable                            534                546            527               (2.2 )              3.6
Average bill rate                  $      277         $      280        $   281               (1.1 )             (0.4 )
Utilization                                75 %               75 %           77 %                -               (2.6 )

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

Overview. We reported a $10.9 million, or 24.6%, increase in net income from continuing operations in 2013 compared to 2012. This increase was driven mainly by:

Revenue before reimbursements (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 detail).

Cost of services before reimbursable expenses increased 2.4% primarily due to higher wages mainly as a result of higher client servicing FTE levels and higher information technology related costs partially offset by lower 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).


Table of Contents

Revenues before Reimbursements. For 2013, RBR increased 1.7% compared to 2012. Including the impact of our acquisitions on a pro forma basis, RBR decreased 3.1% for 2013 compared to 2012. Our Healthcare segment's RBR increased 21.0% both organically and through acquisitions for 2013 compared to 2012 as a result of growing demand for services due to transformational changes in the healthcare industry. For the same period, our Energy segment's RBR grew 5.3% mainly due to growth in energy efficiency service offerings. The Financial, Risk & Compliance segment contributed an increase of 10.1% to RBR growth in 2013 compared to 2012 reflecting increased activity in regulatory compliance, including anti-money laundering consulting, partially offset by reduced RBR from the mortgage servicing review engagements during 2013. Our Disputes, Investigations & Economics segment's RBR decreased 11.3% mainly due to the January 2013 sale of a portion of the economics business partially offset by RBR contributions from our December 2012 AFE acquisition and overall lower demand for general litigation and forensic accounting. Further detail on RBR can be found in the segment results discussion below.

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

Utilization levels for 2013 were flat at 75% compared to 2012. Average bill rate decreased 1.1% to $277. Average FTE - Consulting for 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 outsourcing 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 related FTE's 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 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 related engagements also contributed to the increase. These were partially offset by lower training expenses and benefit expenses attributable to lower medical claims. Severance expense relating to client service FTE's for 2013 and 2012 was $4.1 million and $3.1 million, respectively.

General and Administrative Expenses. General and administrative expenses decreased 10.0% for 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. 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 2013 and 2012, respectively. Cost management and lower bad debt expense contributed to the year-over-year improvement. The decrease in bad debt expense was a result of collections of previously reserved accounts receivable balances. Bad debt expense was $0.1 million and $6.4 million for 2013 and 2012, respectively. Improved collections are reflected in our days sales outstanding (DSO) which improved to 65 days at December 31, 2013 compared to 72 days at December 31, 2012.

Depreciation Expense. The increase in depreciation expense of 8.0% for 2013 compared to 2012 was primarily due to increased technology infrastructure spending.

Amortization Expense. Amortization expense increased 0.9% for 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.


Table of Contents

Other Operating Costs (Benefit) -

Contingent acquisition liability adjustment. During 2013 and 2012, 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. During 2013 and 2012, we recorded a cost of $0.3 million and $0.6 million, respectively, as 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. In 2012, we recorded an expense relating to office space abandoned with our December 2012 AFE acquisition.

Gain on disposition of assets. During 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, $6.5 million of working capital and $7.4 million of goodwill.

Interest Expense. Interest expense decreased 18.7% for 2013 compared to 2012. This decrease was due to lower average borrowings for 2013 compared to 2012. In addition, our average borrowing rate was lower for 2013 compared to 2012. Our average borrowing rates under our credit facility, including the impact of our interest rate derivatives (see Note 11 - Derivatives and Hedging Activity to the notes to our consolidated financial statements), were 2.5% and 2.7% for 2013 and 2012, respectively. See Note 12 - 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.

(Loss) Income 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 consolidated financial statements for further details on our discontinued operations.

(Loss) income from discontinued operations, net of tax for 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.

Results for the year ended December 31, 2012 compared to the year ended December 31, 2011

Revenues before Reimbursements. For 2012, RBR increased 7.6% compared to 2011. Including the impact of our acquisitions on a pro forma basis, RBR increased 4.7% for 2012 compared to 2011, mainly due to large mortgage servicing review engagements and increased service demand related to changes relating to the U.S. healthcare market. The Financial, Risk & Compliance and Healthcare segment's RBR each increased by 26.2% and 12.2%, respectively, for 2012 compared to 2011. Our Energy segment also increased 4.7% for the same periods, mainly driven by our acquisition of Pike Research. RBR in our Disputes, Investigations & Economics segment remained virtually flat for 2012 compared to 2011 as significantly higher technology revenues were largely offset by weaker general litigation and forensic accounting revenues.


Table of Contents

RBR included performance-based fees of $10.7 million for 2012 compared to $17.7 million in 2011. The decrease was mainly a result of fewer restructuring related performance-based fees within our Financial, Risk & Compliance segment.

Utilization levels for 2012 ran at 75%, down from a 77% utilization rate in 2011. The decrease in utilization was offset by an increase in our utilization of independent contractor and project employee resources, whose billable hours contributed to the RBR increase but were not captured in our utilization metric. Average bill rate was relatively flat at $280 for 2012 compared to $281 in 2011. Average FTE - Consulting also remained flat as staffing reductions within our Disputes, Investigations & Economics segment were offset by increases within our remaining segments due to new hires and acquisitions. Average FTE - Technology, Data & Process increased 46.2% to support continued growth relating to:
technology solutions and financial services litigation related technology engagements within our Disputes, Investigations & Economics segment; claims and billing and technology solutions engagements within our Healthcare segment; and our acquisition of Pike Research within our Energy segment.

Cost of Services before Reimbursable Expenses. Cost of services before reimbursable expenses increased 6.0% in 2012 compared to 2011. The increased cost of services was mainly due to higher wages associated with increased FTE - client service, annual wage increases and increase in use of project based staffing levels offset by lower compensation relating to the departures in the economics business. In addition, medical expenses increased 23.0%. Higher training, practice development and information technology costs also contributed to the increase. Severance expense for 2012 compared to 2011 was $3.1 million and $2.6 million, respectively. These increases were partially offset by lower performance-based incentives mainly driven by our lower restructuring related performance-based fees.

General and Administrative Expenses. General and administrative expenses increased by 8.3% for 2012 compared to 2011. The increase was driven by increased wages and benefits and other operating costs primarily relating to employee development, communications and information technology. These increases were partially offset by lower bad debt expense, which decreased $0.6 million for 2012 compared to 2011. Our days sales outstanding at December 31, 2012 improved to 72 days from 76 at December 31, 2011 due to strong fourth quarter collections. Our allowance for doubtful accounts receivable is based on historical experience and management judgment and may change based on market conditions or specific client circumstances.

General and administrative expenses were 19.6% and 19.4% of RBR for 2012 and 2011, respectively.

Depreciation Expense. The increase in depreciation expense of 12.7% for 2012 compared to 2011 was primarily due to increased technology infrastructure spending.

Amortization Expense. Amortization expense decreased 21.8% for 2012 compared to 2011. The decrease was due mainly to reduced amortization associated with certain intangible assets which became fully amortized as their useful lives came to term, partially offset by amortization relating to recent acquisitions.

Other Operating Costs:

Contingent Acquisition Liability Adjustment. During 2012, we recorded a $1.1 million expense relating to a fair value adjustment for our deferred contingent acquisition liabilities (see Note 10 - Supplemental Consolidated Balance Sheet Information to the notes to our consolidated financial statements) based on the related businesses exceeding their original performance expectations.

Office Consolidation. During 2012, we recorded a $0.6 million expense relating to office space abandoned with our December 2012 AFE acquisition. The expense included assumptions of expected sublease income.

Interest Expense. Interest expense decreased 25.2% for 2012 compared to 2011 due primarily to lower average borrowings during the periods in addition to lower borrowing rates. Our average borrowing rate under our credit facility, including the impact of our interest rate swap agreements (see Note 11 - Derivatives and Hedging Activity to the notes to our consolidated financial statements), was 2.7% and 3.0% for 2012 and 2011, respectively. See Note 12 - Bank Debt to the notes to our consolidated financial statements for further information on borrowings under our credit facility.


Table of Contents

Income Tax Expense. Our effective income tax rate for 2012 and 2011 was 42.4% and 43.4% respectively. Our effective income tax rate is attributable to the mix of income earned in various tax jurisdictions, including state and foreign jurisdictions, which have different income tax rates, as well as various permanent book/tax differences.

Income from Discontinued Operations, net of tax. During 2013, we sold the United Kingdom financial services advisory business within our Financial, Risk & Compliance segment. Refer to Note 4 - Dispositions and Discontinued Operations to the notes to our consolidated financial statements for further details on our discontinued operations. Income from discontinued operations, net of tax was $1.9 million and $5.0 million in 2012 and 2011, respectively. The decrease was mainly a result of the departure of similar consulting professionals and a decrease in general demand for financial advisory services within our international market.

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 . . .

  Add NCI to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for NCI - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.