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NCI > SEC Filings for NCI > Form 10-Q on 31-Jul-2014All Recent SEC Filings

Show all filings for NAVIGANT CONSULTING INC

Form 10-Q for NAVIGANT CONSULTING INC


31-Jul-2014

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 unaudited 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, construction and financial services sectors which represent highly complex regulatory environments. Our professional service offerings include strategic, financial, operational, technology, risk management, compliance, investigative solutions, dispute resolution services and revenue cycle management. 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 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.

We periodically 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.

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

Acquisitions

On May 14, 2014, we acquired Cymetrix, a privately held revenue cycle management firm that specialized in providing services to hospital and healthcare networks. The acquisition added approximately 600 employees mainly to the Technology, Data & Process FTE within our Healthcare segment.


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Further information regarding the purchase price, purchase price allocation and other details of significant businesses acquired can be found in Note 2 - Acquisitions to the notes to our unaudited 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, 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 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, revenue cycle management 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, 2014 compared to the three
and six months ended June 30, 2013




                                                                    2014 over                                      2014 over
                                      For the three months             2013            For the six months             2013
                                         ended June 30,              Increase            ended June 30,             Increase
                                                                    (Decrease)                                     (Decrease)
                                       2014            2013         Percentage         2014           2013         Percentage
Key operating metrics:
Average FTE
-Consulting                              1,563          1,506               3.8          1,552         1,517               2.3
-Technology, Data & Process                843            413             104.1            693           410              69.0
-Non-billable                              574            534               7.5            558           537               3.9
Period end FTE
-Consulting                              1,566          1,493               4.9          1,566         1,493               4.9
-Technology, Data & Process              1,113            471             136.3          1,113           471             136.3
-Non-billable                              599            538              11.3            599           538              11.3
Average bill rate                   $      282        $   278               1.4      $     281       $   276               1.8
Utilization                                 74 %           76 %            (2.6 )           75 %          77 %            (2.6 )

Overview. During the three months ended June 30, 2014 and 2013, we reported $75.9 million net loss from continuing operations and $14.2 million net income from continuing operations, respectively. During the three months ended June 30, 2014, we recorded a goodwill impairment in other operating cost (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 5 - Goodwill and Intangible Assets, Net to the notes to our unaudited consolidated financial statements. Partially offsetting this impairment was a benefit from a fair value adjustment of $2.4 million to our deferred contingent acquisition liabilities during the three months ended June 30, 2014, also recorded in other operating cost (benefit). Revenues before reimbursements (RBR) decreased 0.3% for the three months ended June 30, 2014 compared to the corresponding period in 2013. The decrease was mainly a result of a year-over-year decline in our Financial, Risk & Compliance segment which was mostly offset by contributions from the acquisition of Cymetrix in May 2014 within our Healthcare segment (see Note 2 - Acquisitions to the notes to our unaudited consolidated financial statements). In addition, depreciation expense increased 20.8% for the three months ended June 30, 2014 compared to the corresponding period in 2013.

During the six months ended June 30, 2014 and 2013, we reported $65.5 million net loss from continuing operations and $27.4 million net income from continuing operations, respectively. In addition to the goodwill impairment discussed above, general and administrative expenses increased 3.4% during the six months ended June 30, 2014 compared to the corresponding period in 2013. The six months ended June 30, 2014 benefited from a $3.6 million adjustment to our deferred contingent acquisition liabilities while the corresponding period in 2013 benefited from a $1.7 million gain from the sale of a portion of our economics business within our Disputes, Investigations & Economics segment (see Note 3 - Dispositions and Discontinued Operations to the notes to our unaudited consolidated financial statements). RBR decreased 2.3% for the six months ended June 30, 2014 compared to the corresponding period in 2013 for reasons discussed above. In addition, depreciation expense increased 18.3% while amortization expense decreased 12.2% for the six months ended June 30, 2014 compared to the corresponding period in 2013.

Operating results and segment information are discussed in further detail below.

Revenues before Reimbursements. For the three months ended June 30, 2014, RBR decreased 0.3% compared to the corresponding period in 2013. During the three months ended June 30, 2014, we acquired Cymetrix (see Note 2 - Acquisitions to the notes to our unaudited consolidated financial statements). Including the impact of our acquisitions on a pro forma basis, RBR decreased 5.7% for the three months ended June 30, 2014 compared to the corresponding period in 2013. Our Financial, Risk & Compliance segment's RBR for the three months ended June 30, 2014 decreased 19.7% compared with the corresponding period in 2013 due to the wind-down of the significant mortgage servicing review engagements in 2013 and lower restructuring related revenue in 2014 partially offset by increased activity in consent order-related work in 2014. Our Healthcare segment's RBR increased 16.3% for the three months ended June 30, 2014 over the corresponding period in 2013, mainly as a result of our acquisition of Cymetrix (see Note 2 - Acquisitions to the notes to our unaudited consolidated financial statements). For the same period, our Energy segment's RBR decreased 1.0%. Our Disputes, Investigations & Economics segment's RBR was relatively flat for the three months ended June 30, 2014 compared to the corresponding period in 2013 mainly due to the prior year departure of senior personnel within our economics business offset by increases in technology related services and global construction. For further discussion of segment results see below.


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RBR included no performance-based fees for the three months ended June 30, 2014, compared to $1.3 million in the corresponding period in 2013.

Utilization levels for the three months ended June 30, 2014 and 2013 were 74% and 76%, respectively. Average bill rate increased 1.4% to $282. Average FTE - Consulting increased 3.8% for the three months ended June 30, 2014 compared to the corresponding period in 2013 mainly due to hiring within the Healthcare, Financial, Risk & Compliance and Energy segments offset by planned and unplanned attrition within the Disputes, Investigations & Economics segment. Average FTE - Technology, Data & Process increased 104.1% mainly due to our May 2014 acquisition of Cymetrix, which added 288 (due to partial period of ownership averaged over the 3 month period) Average FTE during the current period. We also made additional technology-related FTE to support physician revenue cycle management engagements.

For the six months ended June 30, 2014, RBR decreased 2.3% compared to the corresponding period in 2013. Including the impact of our acquisitions on a pro forma basis, RBR decreased 5.4% for the six months ended June 30, 2014 compared to the corresponding period in 2013. Our Healthcare segment's RBR increased 9.7% for the six months ended June 30, 2014 over the corresponding period in 2013, and our Financial, Risk & Compliance segment's RBR decreased 18.2% for the same period, mainly due to reasons discussed above. For the same period, our Energy segment's RBR decreased 4.7% mainly due to fewer engagements relating to market analysis and pricing services. Our Disputes, Investigations & Economics segment's RBR decreased 0.7% for the six months ended June 30, 2014 compared to the corresponding period in 2013 mainly due to the prior year departure of senior personnel within the economics business offset by an increase in technology related services and global construction.

RBR included no performance-based fees for the six months ended June 30, 2014, compared to $2.1 million in the corresponding period in 2013. The decrease was primarily associated with our Healthcare and Financial, Risk & Compliance segments.

Utilization levels for the six months ended June 30, 2014 and 2013 were 75% and 77%, respectively. Average bill rate increased 1.8% to $281. Average FTE - Consulting increased 2.3% for the six months ended June 30, 2014 compared to the corresponding period in 2013 mainly due to hiring within the Healthcare segment offset by planned and unplanned attrition within the Disputes, Investigations & Economics segment. Average FTE - Technology, Data & Process increased 69.0% mainly due to the acquisition of Cymetrix. Cymetrix added 144 (due to partial period of ownership averaged over the 6 month period) Average FTE during the current period.

Cost of Services before Reimbursable Expenses. Cost of services before reimbursable expenses increased 3.6% for the three months ended June 30, 2014 compared to the corresponding period in 2013. The increase was mainly due to the acquisition of Cymetrix, an increase in wages relating to FTE hires within the Healthcare segment, medical and recruiting costs. These increases were partially offset by lower compensation costs associated with the Financial, Risk & Compliance segment, lower performance-based incentive compensation and lower share-based compensation (see Note 7 - Share-based Compensation to the notes to the unaudited consolidated financial statements). Severance expense relating to client service FTE's for the three months ended June 30, 2014 and 2013 was $1.7 million and $2.1 million, respectively.

Cost of services before reimbursable expenses increased 0.6% for the six months ended June 30, 2014 compared to the corresponding period in 2013. The increase was mainly due to reasons discussed above. Severance expense relating to client service FTE's for the six months ended June 30, 2014 and 2013 was $2.2 million and $3.4 million, respectively.

General and Administrative Expenses. General and administrative expenses increased 5.2% for the three months ended June 30, 2014. The increase was mainly a result of our acquisition of Cymetrix, higher settlement costs, higher compensation costs due to an increase in FTE, higher bad debt expense and information technology costs. These increases were partially offset by lower facilities expense and meeting expenses. Bad debt expense for the three months ended June 30, 2014 compared to the corresponding period in 2013 was $1.9 million and $1.0 million, respectively. The three months ended June 30, 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 three months ended June 30, 2014 compared to the corresponding period in 2013 was 521 and 478, respectively, due, in part to Cymetrix which added 23 non-billable FTE's. General and administrative expenses were 18.4% and 17.4% of RBR for the three months ended June 30, 2014 and 2013, respectively, for the reasons discussed above.

General and administrative expenses increased 3.4% for the six months ended June 30, 2014. The increase was mainly a result of higher acquisition-related costs which were $1.7 million and $0.3 million for the six months ended June 30, 2014 and 2013, respectively, incremental costs as a result of our acquisition of Cymetrix, and higher information technology costs, marketing and bad debt expense, which were partially offset by a decrease in facilities expense, meeting expense and lower compensation expense due to the departure of certain senior corporate management personnel in 2013. Bad debt expense for the six months ended June 30, 2014 and 2013 was $2.8 million and $1.3 million, respectively. The six months ended June 30, 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 six months ended June 30, 2014 compared to the corresponding period in 2013 was 506 and 481, respectively. General and administrative expenses were 18.6% and 17.6% of RBR for the six months ended June 30, 2014 and 2013, respectively, for the reasons discussed above.


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Days sales outstanding (DSO) was 82 days at June 30, 2014 compared to 79 days at June 30, 2013.

Depreciation Expense. The increase in depreciation expense was 20.8% and 18.3% for the three and six months ended June 30, 2014, respectively, compared to the corresponding periods in 2013 was primarily due to acquisitions and increased technology infrastructure spending.

Amortization Expense. Amortization expense decreased 4.7% and 12.2% for the three and six months ended June 30, 2014, respectively, compared to the corresponding periods in 2013. The decrease was due mainly to reduced amortization associated with certain intangible assets which became fully amortized as their useful lives came to term. Amortization expense for the three months ended June 30, 2014 compared to the corresponding period in 2013 was also impacted by the acquisition of Cymetrix.

Other Operating Costs - Goodwill impairment. During the three months ended June 30, 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. For further details see Note 5 - Goodwill and Intangible Assets, net to the notes to our unaudited consolidated financial statements.

Other Operating Costs - Other impairment. During the three months ended June 30, 2014, we recorded a $0.2 million impairment on software that is no longer being utilized by our consultants for client engagements.

Other Operating Benefit - Contingent acquisition liability adjustment. During the three and six months ended June 30, 2014, we recorded benefits of $2.4 million and $3.6 million, respectively, relating to fair value adjustments to our deferred contingent acquisition liabilities (see Note 12 - Fair Value to the notes to the unaudited consolidated financial statements). No such benefit was recorded during the three and six months ended June 30, 2013.

Other Operating Costs - Office consolidation. During the three and six months ended June 30, 2013, we recorded accelerated depreciation of $0.3 million and $0.5 million, respectively in connection with the consolidation of two of our office locations.

Other Operating Benefit - 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 a reduction of $6.5 million of working capital and $7.4 million of goodwill. No such gain was recorded during the three and six months ended June 30, 2014. See Note 3 - Disposition and Discontinued Operations to the notes to our unaudited consolidated financial statements.

Interest Expense. Interest expense increased 19.2% or $0.2 million for the three months ended June 30, 2014 compared to the corresponding period in 2013. The increase was mainly due to the incremental imputed interest relating to the contingent acquisition liability for Cymetrix recorded at net present value and higher average borrowings for the three months ended June 30, 2014 compared to the corresponding period in 2013, partially offset by lower average borrowing rate for the same period.

Interest expense decreased 6.8% or $0.2 million for the six months ended June 30, 2014 compared to the corresponding period in 2013. This decrease was due to lower average borrowings for the six months ended June 30, 2014 compared to the corresponding period in 2013 partially offset by a slightly higher weighted average interest rate and incremental imputed interest as discussed above.

Our average borrowing rates under our credit facility, including the impact of our interest rate derivatives (see Note 10 - Derivatives and Hedging Activity to the notes to our unaudited consolidated financial statements), were 2.0% and 2.4% for the three months ended June 30, 2014 and 2013, respectively, and 2.4% and 2.5% for the six months ended June 30, 2014 and 2013, respectively. See Note
11 - 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 book-to-tax permanent differences. It is also affected by discrete items which may not be consistent from year to year.

The effective tax rate for the six months ended June 30, 2014 is not comparable 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 by approximately $35.1 million.


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The effective tax rate excluding the goodwill impairment from continuing operations for the three months ended June 30, 2014 and 2013 would have been 43.5% and 43.0%, respectively. The increase in rates between periods is due to discrete items recorded that primarily relate to state enacted legislative changes and non-deductible acquisition costs.

The effective tax rate excluding the goodwill impairment from continuing operations for the six months ended June 30, 2014 and 2013 would have been 40.6% and 42.6%, 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.

Income (loss) from Discontinued Operations, net of tax. Income from discontinued operations, net of tax was zero for the three months ended June 30, 2014 compared to a loss of $0.3 million for the corresponding period in 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 six months ended June 30, 2014, we received payment in . . .

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