FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the six months ended June 30, 2009
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File No. 1-12173
Navigant Consulting, Inc.
(Exact name of Registrant as specified in its charter)
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Delaware
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36-4094854 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
30 South Wacker Drive, Suite 3550, Chicago, Illinois 60606
(Address of principal executive offices, including zip code)
(312) 573-5600
(Registrants telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). YES o NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer o
(Do not check if a smaller reporting company)
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Smaller reporting company
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). YES o NO þ
As of July 27, 2009, 50.0 million shares of the Registrants common stock, par value $.001 per
share, were outstanding.
NAVIGANT CONSULTING, INC.
AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 2009
INDEX
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Page |
PART IFINANCIAL INFORMATION |
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Item 1. Financial Statements |
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3 |
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Notes to Unaudited Consolidated Financial Statements |
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7 |
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |
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20 |
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Item 3. Quantitative and Qualitative Disclosures About Market Risk |
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30 |
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Item 4. Controls and Procedures |
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31 |
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PART IIOTHER INFORMATION |
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Item 1. Legal Proceedings |
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32 |
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
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32 |
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Item 4. Submission of Matters to a Vote of Security Holders |
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32 |
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Item 6. Exhibits |
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32 |
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SIGNATURES |
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33 |
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Navigant is a service mark of Navigant International, Inc. Navigant Consulting, Inc. is not
affiliated, associated, or in any way connected with Navigant International, Inc. and the use of
Navigant is made under license from Navigant International, Inc.
2
PART IFINANCIAL INFORMATION
Item 1. Financial Statements
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
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June 30, |
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December 31, |
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2009 |
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2008 |
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(unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
5,132 |
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$ |
23,134 |
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Accounts receivable, net |
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187,201 |
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170,464 |
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Prepaid expenses and other current assets |
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15,617 |
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13,455 |
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Deferred income tax assets |
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19,367 |
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21,494 |
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Total current assets |
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227,317 |
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228,547 |
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Property and equipment, net |
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47,045 |
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45,151 |
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Intangible assets, net |
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33,956 |
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38,108 |
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Goodwill |
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475,777 |
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463,058 |
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Other assets |
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15,592 |
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17,529 |
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Total assets |
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$ |
799,687 |
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$ |
792,393 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
9,545 |
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$ |
8,511 |
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Accrued liabilities |
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9,404 |
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10,086 |
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Accrued compensation-related costs |
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43,602 |
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72,701 |
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Income taxes payable |
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557 |
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1,371 |
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Notes payable |
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4,170 |
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4,173 |
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Term loan current |
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2,250 |
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2,250 |
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Other current liabilities |
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37,106 |
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31,467 |
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Total current liabilities |
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106,634 |
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130,559 |
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Non-current liabilities: |
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Deferred income tax liabilities |
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30,121 |
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28,511 |
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Other non-current liabilities |
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25,022 |
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37,336 |
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Term loan non-current |
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218,250 |
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219,375 |
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Bank debt non-current |
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19,217 |
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10,854 |
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Total non-current liabilities |
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292,610 |
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296,076 |
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Total liabilities |
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399,244 |
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426,635 |
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Stockholders equity: |
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Preferred stock |
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Common stock |
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60 |
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59 |
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Additional paid-in capital |
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556,036 |
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555,737 |
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Deferred stock issuance, net |
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985 |
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Treasury stock |
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(218,798 |
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(231,071 |
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Retained earnings |
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78,057 |
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69,239 |
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Accumulated other comprehensive loss |
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(14,912 |
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(29,191 |
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Total stockholders equity |
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400,443 |
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365,758 |
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Total liabilities and stockholders equity |
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$ |
799,687 |
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$ |
792,393 |
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See accompanying notes to the unaudited consolidated financial statements.
3
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
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For the three months ended |
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June 30, |
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2009 |
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2008 |
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Revenues before reimbursements |
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$ |
157,332 |
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$ |
189,385 |
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Reimbursements |
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16,224 |
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22,023 |
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Total revenues |
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173,556 |
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211,408 |
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Cost of services before reimbursable expenses |
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101,967 |
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113,852 |
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Reimbursable expenses |
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16,224 |
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22,023 |
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Total costs of services |
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118,191 |
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135,875 |
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General and administrative expenses |
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33,513 |
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41,071 |
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Depreciation expense |
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4,320 |
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4,381 |
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Amortization expense |
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3,392 |
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4,597 |
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Other operating costs: |
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Office consolidation |
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4,612 |
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2,575 |
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Operating income |
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9,528 |
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22,909 |
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Interest expense |
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3,952 |
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5,618 |
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Interest income |
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(312 |
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(225 |
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Other income, net |
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(87 |
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(68 |
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Income before income tax expense |
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5,975 |
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17,584 |
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Income tax expense |
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2,590 |
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7,598 |
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Net income |
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$ |
3,385 |
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$ |
9,986 |
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Basic net income per share |
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$ |
0.07 |
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$ |
0.21 |
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Shares used in computing income per basic share |
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48,213 |
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46,511 |
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Diluted net income per share |
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$ |
0.07 |
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$ |
0.21 |
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Shares used in computing income per diluted share |
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49,756 |
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48,257 |
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See accompanying notes to the unaudited consolidated financial statements.
4
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
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For the six months ended |
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June 30, |
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2009 |
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2008 |
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Revenues before reimbursements |
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$ |
324,544 |
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$ |
373,679 |
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Reimbursements |
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31,374 |
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44,868 |
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Total revenues |
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355,918 |
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418,547 |
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Cost of services before reimbursable expenses |
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212,234 |
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226,925 |
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Reimbursable expenses |
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31,374 |
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44,868 |
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Total costs of services |
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243,608 |
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271,793 |
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General and administrative expenses |
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68,406 |
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79,084 |
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Depreciation expense |
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8,960 |
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8,546 |
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Amortization expense |
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7,012 |
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8,824 |
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Other operating costs: |
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Office consolidation |
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5,520 |
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4,093 |
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Operating income |
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22,412 |
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46,207 |
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Interest expense |
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7,920 |
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10,220 |
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Interest income |
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(608 |
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(497 |
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Other income, net |
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(408 |
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(63 |
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Income before income tax expense |
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15,508 |
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36,547 |
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Income tax expense |
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6,690 |
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15,655 |
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Net income |
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$ |
8,818 |
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$ |
20,892 |
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Basic net income per share |
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$ |
0.18 |
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$ |
0.45 |
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Shares used in computing income per basic share |
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47,828 |
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46,305 |
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Diluted net income per share |
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$ |
0.18 |
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$ |
0.44 |
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Shares used in computing income per diluted share |
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49,604 |
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47,548 |
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See accompanying notes to the unaudited consolidated financial statements.
5
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
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For the six months ended |
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June 30, |
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2009 |
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2008 |
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Cash flows from operating activities: |
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Net income |
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$ |
8,818 |
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$ |
20,892 |
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Adjustments to reconcile net income to
net cash
used in operating activities, net of acquisitions
of businesses: |
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Depreciation expense |
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8,960 |
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8,546 |
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Depreciation expense-office consolidation |
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995 |
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1,488 |
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Amortization expense |
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7,012 |
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8,824 |
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Share-based compensation expense |
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4,465 |
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6,577 |
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Accretion of interest expense |
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499 |
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343 |
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Allowance for doubtful accounts receivable |
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8,110 |
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9,470 |
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Deferred income taxes |
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1,472 |
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(4,579 |
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Other, net |
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(14 |
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Changes in assets and liabilities: |
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Accounts receivable |
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(21,358 |
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(24,325 |
) |
Prepaid expenses and other assets |
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(74 |
) |
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(19,017 |
) |
Accounts payable |
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932 |
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1,525 |
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Accrued liabilities |
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(591 |
) |
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2,246 |
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Accrued compensation-related costs |
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(29,523 |
) |
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(12,971 |
) |
Income taxes payable |
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|
902 |
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2,758 |
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Other current liabilities |
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2,147 |
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(2,331 |
) |
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Net cash used in operating activities |
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(7,234 |
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(568 |
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Cash flows from investing activities: |
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Purchases of property and equipment |
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(12,352 |
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(3,964 |
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Acquisitions of businesses |
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(1,875 |
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(50,000 |
) |
Payments of acquisition liabilities |
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(2,821 |
) |
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(3,154 |
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Other, net |
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(109 |
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(352 |
) |
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Net cash used in investing activities |
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(17,157 |
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(57,470 |
) |
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Cash flows from financing activities: |
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Issuances of common stock |
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2,317 |
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4,078 |
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Payments of notes payable |
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(355 |
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(499 |
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Borrowings from banks, net of repayments |
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6,113 |
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53,599 |
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Payments of term loan installments |
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(1,125 |
) |
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(1,125 |
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Other, net |
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(814 |
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649 |
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Net cash provided by financing activities |
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6,136 |
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56,702 |
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Effect of exchange rate changes on cash |
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253 |
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Net decrease in cash and cash equivalents |
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(18,002 |
) |
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(1,336 |
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Cash and cash equivalents at beginning of the period |
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23,134 |
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11,656 |
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Cash and cash equivalents at end of the period |
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$ |
5,132 |
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$ |
10,320 |
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See accompanying notes to the unaudited consolidated financial statements.
6
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
We are an independent specialty consulting firm combining deep industry expertise and
integrated solutions to assist companies and their legal counsel in addressing the challenges of
uncertainty and risk, and leveraging opportunities for overall business model improvement.
Professional services include dispute, investigative, financial, operational and business advisory,
risk management and regulatory advisory, strategy, economic analysis and transaction advisory
solutions. We provide our services to government agencies, legal counsel and large companies facing
the challenges of uncertainty, risk, distress and significant change. We focus on industries
undergoing substantial regulatory or structural change and on the issues driving these
transformations.
The accompanying unaudited interim consolidated financial statements have been prepared
pursuant to the rules of the Securities and Exchange Commission for quarterly reports on Form 10-Q
and do not include all of the information and note disclosures required by accounting principles
generally accepted in the United States of America. The information furnished herein includes all
adjustments, consisting of normal recurring adjustments except where indicated, which are, in the
opinion of management, necessary for a fair presentation of the results of operations for these
interim periods.
The results of operations for the six months ended June 30, 2009 are not necessarily
indicative of the results to be expected for the entire year ending December 31, 2009.
These financial statements should be read in conjunction with our audited consolidated
financial statements and notes thereto as of and for the year ended December 31, 2008 included in
the Annual Report on Form 10-K, as filed by us with the Securities and Exchange Commission on
February 25, 2009.
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and the related notes. Actual
results could differ from those estimates and may affect future results of operations and cash
flows.
Note 2. Acquisitions
On February 23, 2009, we acquired assets of Morse PLCs Investment Management Consulting
Business from Morse PLC located in the UK for $1.9 million in cash paid at closing. As part of the
purchase price allocation, we recorded $0.4 million in identifiable intangible assets and $1.6
million in goodwill, which includes a deferred tax adjustment of $0.1 million. This acquisition
consisted of 26 consulting professionals and has been included in the International Consulting
Operations segment.
On May 1, 2008, we acquired the assets of Chicago Partners, LLC (Chicago Partners) for
$73.0 million, which consisted of $50.0 million in cash paid at closing and $23.0 million in our
common stock (which was recorded at fair value for $21.0 million at closing). The common stock will
be paid in four equal installments of $5.8 million, the first and second of which have been paid
and the remaining two of which will be paid on each of the second and third year anniversaries of
the closing. We acquired assets of $16.7 million, including $15.8 million in accounts receivable,
net of an allowance for doubtful accounts, and assumed liabilities of $7.0 million. We paid
$0.5 million in acquisition-related costs. We recorded $2.8 million of liabilities for obligations
related to lease exit costs for office space assumed in the acquisition. The obligation recorded
for real estate lease exit costs is based on foregone rent payments for the remainder of the lease
term less assumed sublease income. As of June 30, 2009, we have not secured subtenants to occupy
the office space assumed in the acquisition. As part of the original purchase price allocation, we
recorded $4.3 million in identifiable intangible assets and $61.6 million in goodwill. The purchase
agreement provided for an adjustment of the purchase price for the difference in net assets
acquired compared to the target net assets. The purchase price paid in cash at closing was funded
under our credit facility.
Subsequent to the original acquisition date, we may pay up to $27.0 million of additional
purchase consideration based on the Chicago Partners business achieving certain post-closing
performance targets during the periods from closing to December 31, 2008 and in calendar years
2009, 2010 and 2011. If earned, the additional purchase consideration would be payable 75 percent
in cash and 25 percent in our common stock. The additional purchase price payments, if any, will be
payable in March of the year following the year such performance targets are attained. Any
additional purchase price consideration payments will be recorded as goodwill when the
contingencies regarding attainment of performance targets are resolved. As of December 31, 2008, we
recorded a liability for additional purchase price payments of approximately $3.0 million
associated with additional purchase consideration earned during
7
2008. During the three months ended March 31, 2009, we made an additional purchase price
payment of $2.3 million based on 2008 performance and accordingly adjusted the $3.0 million accrual
for earnout payments recorded at December 31, 2008 to $2.3 million at March 31, 2009, which also
impacted goodwill.
We acquired Chicago Partners to expand our product offerings to our clients. Chicago Partners
provides economic and financial analyses of legal and business issues principally for law firms,
corporations and government agencies. Chicago Partners had approximately 90 consultants at the time
of acquisition. Chicago Partners is managed and resources are allocated based on its results and as
such, in accordance with SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information, operates under a fourth operating segment referred to as Economic Consulting
Services.
Pro Forma Information
The following table summarizes certain supplemental unaudited pro forma financial information
which was prepared as if the first quarter 2009 acquisition noted above and the acquisitions
completed during 2008 had occurred at the beginning of the periods presented. The unaudited pro
forma financial information was prepared for comparative purposes only and does not purport to be
indicative of what would have occurred had the acquisitions been made at that time or of results
which may occur in the future.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
For the six months ended |
|
|
June 30, |
|
June 30, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
Total revenues |
|
$ |
173,556 |
|
|
$ |
219,694 |
|
|
$ |
356,965 |
|
|
$ |
444,128 |
|
Net income |
|
$ |
3,385 |
|
|
$ |
10,549 |
|
|
$ |
8,987 |
|
|
$ |
23,206 |
|
Basic net income per share |
|
$ |
0.07 |
|
|
$ |
0.22 |
|
|
$ |
0.19 |
|
|
$ |
0.49 |
|
Diluted net income per share |
|
$ |
0.07 |
|
|
$ |
0.22 |
|
|
$ |
0.18 |
|
|
$ |
0.48 |
|
Note 3. Segment Information
We manage our business in four segments North American Dispute and Investigative Services,
North American Business Consulting Services, International Consulting Operations, and Economic
Consulting Services. These segments are generally defined by the nature of their services and
geography. The business is managed and resources are allocated on the basis of the four operating
segments.
The North American Dispute and Investigative Services segment provides a wide range of
services to clients facing the challenges of disputes, litigation, forensic investigation,
discovery, and regulatory compliance. The clients of this segment are principally law firms,
corporate general counsels, and corporate boards.
The North American Business Consulting Services segment provides strategic, operational,
financial, regulatory and technical management consulting services to clients. Services are sold
principally through vertical industry practices such as energy, healthcare, financial and
insurance. The clients are principally C suite and corporate management, government entities, and
law firms.
The International Consulting Operations segment provides a mix of dispute and business
consulting services to clients predominately outside North America with headquarters in London,
England.
The Economic Consulting Services segment provides economic and financial analyses of complex
legal and business issues principally for law firms, corporations and government agencies.
Expertise includes areas such as antitrust, corporate finance and governance, bankruptcy,
intellectual property, investment banking, labor market discrimination and compensation, corporate
valuation, and securities litigation.
In accordance with the disclosure requirements of Statement of Financial Accounting Standards
No. 131, Disclosures about Segments of and Enterprise and Related Information, we identified the
above four operating segments as reportable segments.
8
Information on the segment operations have been summarized as follows (shown in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
|
For the six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Total revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American Dispute and Investigative Services |
|
$ |
72,225 |
|
|
$ |
88,602 |
|
|
$ |
144,855 |
|
|
$ |
179,604 |
|
North American Business Consulting Services |
|
|
69,356 |
|
|
|
92,045 |
|
|
|
148,995 |
|
|
|
188,386 |
|
International Consulting Operations |
|
|
17,820 |
|
|
|
23,098 |
|
|
|
33,866 |
|
|
|
42,894 |
|
Economic Consulting Services |
|
|
14,155 |
|
|
|
7,663 |
|
|
|
28,202 |
|
|
|
7,663 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
173,556 |
|
|
$ |
211,408 |
|
|
$ |
355,918 |
|
|
$ |
418,547 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating profit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American Dispute and Investigative Services |
|
$ |
25,681 |
|
|
$ |
33,753 |
|
|
$ |
51,131 |
|
|
$ |
68,776 |
|
North American Business Consulting Services |
|
|
23,356 |
|
|
|
33,993 |
|
|
|
49,747 |
|
|
|
67,323 |
|
International Consulting Operations |
|
|
4,070 |
|
|
|
8,179 |
|
|
|
8,091 |
|
|
|
13,562 |
|
Economic Consulting Services |
|
|
4,888 |
|
|
|
2,948 |
|
|
|
9,532 |
|
|
|
2,948 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total combined segment operating profit |
|
|
57,995 |
|
|
|
78,873 |
|
|
|
118,501 |
|
|
|
152,609 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating profit reconciliation to income
before income tax expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses |
|
|
33,513 |
|
|
|
41,071 |
|
|
|
68,406 |
|
|
|
79,084 |
|
Depreciation expense |
|
|
4,320 |
|
|
|
4,381 |
|
|
|
8,960 |
|
|
|
8,546 |
|
Amortization expense |
|
|
3,392 |
|
|
|
4,597 |
|
|
|
7,012 |
|
|
|
8,824 |
|
Long term compensation expense related to
consulting personnel (including share based
compensation expense) |
|
|
2,630 |
|
|
|
3,340 |
|
|
|
6,191 |
|
|
|
5,855 |
|
Other operating costs |
|
|
4,612 |
|
|
|
2,575 |
|
|
|
5,520 |
|
|
|
4,093 |
|
Other expense, net |
|
|
3,553 |
|
|
|
5,325 |
|
|
|
6,904 |
|
|
|
9,660 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unallocated expenses, net |
|
|
52,020 |
|
|
|
61,289 |
|
|
|
102,993 |
|
|
|
116,062 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense |
|
$ |
5,975 |
|
|
$ |
17,584 |
|
|
$ |
15,508 |
|
|
$ |
36,547 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long term compensation expense related to consulting personnel includes share based
compensation expense and compensation expense attributed to forgivable loans (see note 8 of the
unaudited consolidated financial statements).
During the three and six months ended June 30, 2009, we recorded $4.6 million and $5.5
million, respectively, in other operating costs compared to $2.6 million and $4.1 million for the
corresponding periods in 2008. These costs were not allocated to segment operating costs. See note 12-Other Operating Costs.
The information presented does not necessarily reflect the results of segment operations that
would have occurred had the segments been stand-alone businesses. Certain unallocated expense
amounts related to specific reporting segments have been excluded from the segment operating profit
to be consistent with the information used by management to evaluate segment performance. We record
accounts receivable, goodwill and intangible assets on a segment basis. Other balance sheet amounts
are not maintained on a segment basis.
Total assets by segment were as follows (shown in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
North American Dispute and Investigative Services |
|
$ |
303,752 |
|
|
$ |
287,225 |
|
North American Business Consulting Services |
|
|
230,756 |
|
|
|
236,419 |
|
International Consulting Operations |
|
|
85,858 |
|
|
|
73,897 |
|
Economic Consulting Services |
|
|
76,568 |
|
|
|
74,089 |
|
Unallocated assets |
|
|
102,753 |
|
|
|
120,763 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
799,687 |
|
|
$ |
792,393 |
|
|
|
|
|
|
|
|
9
Note 4. Goodwill and Intangible Assets
Goodwill and other intangible assets consisted of (shown in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Goodwill |
|
$ |
481,202 |
|
|
$ |
468,483 |
|
Lessaccumulated amortization |
|
|
(5,425 |
) |
|
|
(5,425 |
) |
|
|
|
|
|
|
|
Goodwill, net |
|
|
475,777 |
|
|
|
463,058 |
|
Intangible assets: |
|
|
|
|
|
|
|
|
Client lists and relationships |
|
|
62,471 |
|
|
|
58,834 |
|
Non-compete agreements |
|
|
19,362 |
|
|
|
18,878 |
|
Other |
|
|
18,225 |
|
|
|
17,470 |
|
|
|
|
|
|
|
|
Intangible assets, at cost |
|
|
100,058 |
|
|
|
95,182 |
|
Lessaccumulated amortization |
|
|
(66,102 |
) |
|
|
(57,074 |
) |
|
|
|
|
|
|
|
Intangible assets, net |
|
|
33,956 |
|
|
|
38,108 |
|
|
|
|
|
|
|
|
Goodwill and intangible assets, net |
|
$ |
509,733 |
|
|
$ |
501,166 |
|
|
|
|
|
|
|
|
In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, we are required to
perform an annual goodwill impairment test and more frequently if events or circumstances indicate
that goodwill may be impaired. Our annual test is completed in the second quarter of each year.
During the second quarter of 2009, we completed an annual impairment
test of our goodwill balances
as of May 31, 2009. There was no indication of impairment based on our analysis.
During our annual test of goodwill, we considered that each of the four reporting units has
significant goodwill and intangible assets and that the excess of estimated fair value over the net
asset carrying value for all reporting units decreased relative to the prior year test. As of date
of our analysis, the excess of estimated fair value over net asset carrying value of the North
American Business Consulting Services reporting unit and the North American Dispute and
Investigative Services reporting unit was approximately 40% and 25% of the estimated fair value,
respectively. The excess of estimated fair value over the net asset carrying value of the
International Consulting Operations and Economic Consulting Services reporting units were both
approximately 20% of the estimated fair value and given the smaller size of these reporting units
the relative dollars of the excess is substantially smaller than the other two reporting units.
Further, the estimated fair value of the International Consulting Operations and Economic Consulting
Services reporting units may be more volatile due to the reporting units smaller size and higher
expected earnings growth rates. Also, given the International Consulting Operations reporting
units geographic market, its excess may be more volatile. Additionally, the Economic Consulting
Services reporting unit was recently acquired as one acquisition and thus its excess is dependent
on the success of such acquisition.
In
accordance with SFAS No. 142, we will be required to consider whether or not the fair value of each of
the reporting units could have fallen below its carrying value. We will consider the elements
outlined in SFAS No. 142 and other factors including, but not limited to, changes in the business
climate in which we operate, recent disruptions in the financial markets, our market capitalization
in excess of our book value, our recent operating performance, and our financial projections. As a
result of this review we will be required to determine whether such an event or condition existed
that would require us to perform an interim goodwill impairment test prior to our next annual test
date. We will continue to monitor these factors and we may perform additional impairment tests as
appropriate in future periods.
As prescribed by SFAS No. 144, Accounting for the Impairment of Long-Lived Assets, we review
our intangible asset values on a periodic basis. We review long-lived assets, including
identifiable intangible assets, for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable or upon the occurrence of any
triggering event as defined in SFAS No. 144. As of June 30, 2009, there was no indication of
impairment related to our intangible assets. As summarized in the
table above, we had $34.0 million in intangible assets, net of
accumulated amortization, as of June 30, 2009. Of the $34.0 million balance, $26.0 million related
to customer lists and relationships, $4.4 million related to non-compete agreements and $3.6
million related to other intangible assets. As of June 30, 2009, the weighted average remaining
life for customer lists and relationships, non-compete agreements and other intangible assets was
4.6 years, 2.5 years and 4.3 years, respectively. We have reviewed the estimated period of
consumption for our intangible assets and the remaining useful lives appear reasonable. At June 30,
2009, the weighted average remaining life for our intangible assets in total was 4.3 years. Our
intangible assets have estimated useful lives which range up to nine years. We will amortize the
remaining net book values of intangible assets over their remaining useful lives.
On January 1, 2009, we adopted FSP FAS 157-2, Effective Date of FASB Statement No. 157 as it
relates to nonrecurring fair value measurement requirements for non-financial assets and
liabilities. Our adoption of SFAS No. 157 did not have a material impact on our financial
statements for the six months ended June 30, 2009. SFAS No. 157 emphasizes that fair value is a
market-based measurement, not an entity-specific measurement, and defines fair value as the price
that would be received to sell an asset or transfer
a liability in an orderly transaction between market participants at the measurement date.
SFAS 157 discusses valuation techniques,
10
such as the market approach (comparable market prices),
the income approach (present value of future income or cash flow), and the cost approach (cost to
replace the service capacity of an asset or replacement cost).
We use various methods to determine fair value, including market, income, and cost approaches.
With these approaches, we adopt certain assumptions that market participants would use in pricing
the asset or liability, including assumptions about risk or the risks inherent in the inputs to the
valuation. Inputs to valuation can be readily observable, market-corroborated, or unobservable. We
use valuation techniques that maximize the use of observable inputs and minimize the use of
unobservable inputs.
The fair value measurements used for our goodwill impairment testing uses significant
unobservable Level 3 inputs which reflect our own assumptions about the assumptions that market
participants would use in measuring fair value including assumptions about risk.
The changes in carrying values of goodwill and intangible assets were as follows (shown in
thousands):
|
|
|
|
|
|
|
|
|
|
|
For the six months ended |
|
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
Beginning of periodGoodwill, net |
|
$ |
463,058 |
|
|
$ |
430,768 |
|
Goodwill acquired during the period |
|
|
1,842 |
|
|
|
60,581 |
|
Adjustments to goodwill |
|
|
|
|
|
|
(6,905 |
) |
Foreign currency translation goodwill |
|
|
10,877 |
|
|
|
(1,101 |
) |
|
|
|
|
|
|
|
End of periodGoodwill, net |
|
$ |
475,777 |
|
|
$ |
483,343 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of periodIntangible assets, net |
|
$ |
38,108 |
|
|
$ |
57,755 |
|
Intangible assets acquired during the period |
|
|
261 |
|
|
|
4,312 |
|
Adjustments to intangible assets |
|
|
(270 |
) |
|
|
|
|
Foreign currency translationintangible assets, net |
|
|
2,869 |
|
|
|
(340 |
) |
Less amortization expense |
|
|
(7,012 |
) |
|
|
(8,824 |
) |
|
|
|
|
|
|
|
End of periodIntangible assets, net |
|
$ |
33,956 |
|
|
$ |
52,903 |
|
|
|
|
|
|
|
|
During the quarter ended March 31, 2008, we recorded a reduction to goodwill and a related
reduction to paid-in-capital of $6.8 million to reflect a discount for lack of marketability on
common stock with transfer restrictions issued in connection with acquisition purchase agreements.
The fair value of the discount for lack of marketability was determined using a protective put
approach that considered entity-specific assumptions, including the duration of the transfer
restriction periods for the share issuances and applicable volatility of our common stock for those
periods. In addition, we recorded a reduction to goodwill and a related reduction to deferred
income taxes of $0.5 million to reflect the tax impact of such adjustments. Also, we recorded $0.4
million of goodwill related to purchase price adjustments related to certain 2007 acquisitions.
During the six months ended June 30, 2009, we recorded $1.6 million in goodwill and $0.4
million in intangible assets as part of the purchase price allocation of a business that we
acquired during the first quarter 2009.
As of June 30, 2009, goodwill and intangible assets, net of amortization, was $218.9 million
for North American Dispute and Investigative Services, $168.9 million for North American Business
Consulting Services, $63.1 million for International Consulting Operations and $58.8 million for
Economic Consulting Services.
Below is the estimated annual aggregate amortization expense of intangible assets for each of
the five succeeding years and thereafter from December 31, 2008, based on intangible assets
recorded at June 30, 2009 (shown in thousands):
|
|
|
|
|
Year ending December 31, |
|
Amount |
|
2009 |
|
$ |
13,043 |
|
2010 |
|
|
10,120 |
|
2011 |
|
|
8,018 |
|
2012 |
|
|
4,598 |
|
2013 |
|
|
3,437 |
|
Thereafter |
|
|
1,752 |
|
|
|
|
|
Total |
|
$ |
40,968 |
|
|
|
|
|
11
Note 5. Net Income per Share (EPS)
Basic net income per share (EPS) is computed by dividing net income by the number of basic
shares. Basic shares are the total of the common stock outstanding and the equivalent shares from
obligations presumed payable in common stock, both weighted for the average days outstanding for
the period. Basic shares exclude the dilutive effect of common stock that could potentially be
issued due to the exercise of stock options, vesting of restricted shares, or satisfaction of
necessary conditions for contingently issuable shares. Diluted EPS is computed by dividing net
income by the number of diluted shares, which are the total of the basic shares outstanding and all
potentially issuable shares, based on the weighted average days outstanding for the period.
For the three and six months ended June 30, 2009 and 2008, the components of basic and diluted
shares (shown in thousands) (based on the weighted average days outstanding for the periods) are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
|
For the six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Common stock outstanding |
|
|
48,202 |
|
|
|
46,413 |
|
|
|
47,806 |
|
|
|
46,201 |
|
Business combination obligations
payable in a fixed number of
shares |
|
|
11 |
|
|
|
98 |
|
|
|
22 |
|
|
|
104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic shares |
|
|
48,213 |
|
|
|
46,511 |
|
|
|
47,828 |
|
|
|
46,305 |
|
Employee stock options |
|
|
349 |
|
|
|
500 |
|
|
|
350 |
|
|
|
471 |
|
Restricted shares and stock units |
|
|
100 |
|
|
|
417 |
|
|
|
180 |
|
|
|
319 |
|
Business combination obligations
payable in a fixed dollar amount
of shares |
|
|
1,056 |
|
|
|
824 |
|
|
|
1,201 |
|
|
|
450 |
|
Contingently issuable shares |
|
|
38 |
|
|
|
5 |
|
|
|
45 |
|
|
|
3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted shares |
|
|
49,756 |
|
|
|
48,257 |
|
|
|
49,604 |
|
|
|
47,548 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended June 30, 2009 and 2008, we had outstanding stock options for
approximately 350,000 and 318,000 shares, respectively, which were excluded from the computation of
diluted shares. For the six months ended June 30, 2009 and 2008, we had outstanding stock options
for approximately 356,000 and 400,000 shares, respectively, which were excluded from the
computation of diluted shares. The shares were excluded from the diluted share computation because
these shares had exercise prices greater than the average market price and the impact of including
these options in the diluted share calculation would have been antidilutive.
In connection with certain business acquisitions, we are obligated to issue a certain number
of shares of our common stock. Obligations to issue a fixed number of shares are included in the
basic earnings per share calculation. Obligations to issue a fixed dollar amount of shares where
the number of shares is based on the trading price of our shares at the time of issuance are
included in the diluted earnings per share calculation. As part of the Chicago Partners
acquisition, we are obligated to issue shares of our common stock based on a fixed dollar amount of
$5.8 million on May 1, 2010 and 2011. For the three and six months ended June 30, 2009, the diluted
share computation included 0.9 million shares related to the Chicago Partners deferred purchase
price obligations.
In accordance with SFAS No. 128, Earnings per Share, we use the treasury stock method to
calculate the dilutive effect of our common stock equivalents should they vest. The exercise of
stock options or vesting of restricted shares and restricted stock unit shares triggers excess tax
benefits or tax deficiencies that reduce or increase the dilutive effect of such shares being
issued. The excess tax benefits or deficiencies are based on the difference between the market
price of our common stock on the date the equity award is exercised or vested and the cumulative
compensation cost of the stock options, restricted shares and restricted stock units. These excess
tax benefits are recorded as a component of additional paid-in capital in the accompanying
consolidated balance sheets and as a component of financing cash flows in the accompanying
consolidated statements of cash flows.
12
Note 6. Stockholders Equity
The following summarizes the activity of stockholders equity during the six months ended June
30, 2009 (shown in thousands):
|
|
|
|
|
|
|
|
|
|
|
Dollars |
|
|
Shares |
|
Stockholders equity at January 1, 2009 |
|
$ |
365,758 |
|
|
|
47,319 |
|
Comprehensive income |
|
|
23,097 |
|
|
|
|
|
Stock issued in acquisition-related transactions |
|
|
6,992 |
|
|
|
596 |
|
Cash proceeds from employee stock option exercises and employee stock purchases |
|
|
2,317 |
|
|
|
242 |
|
Net settlement of employee taxes on taxable compensation related to the vesting of restricted stock |
|
|
(991 |
) |
|
|
(79 |
) |
Tax deficiencies on stock options exercised and restricted stock vested, net of tax benefits |
|
|
(1,195 |
) |
|
|
|
|
Vesting of restricted stock |
|
|
|
|
|
|
382 |
|
Share-based compensation expense |
|
|
4,465 |
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity at June 30, 2009 |
|
$ |
400,443 |
|
|
|
48,460 |
|
|
|
|
|
|
|
|
During the three months ended June 30, 2009, we issued approximately 441,000 shares of our
common stock in connection with the $5.75 million deferred purchase price obligation relating to
the Chicago Partners acquisition. In addition, during the three months ended June 30, 2009, we
issued 102,000 shares of our common stock as part of deferred purchase price payments related to an
acquisition from a prior year. The $7.0 million contribution to stockholders equity related to
stock issued in acquisition-related transactions had been recorded in current liabilities prior to
the issuance of the shares.
Note 7. Share-based Compensation Expense
Share-based Compensation Expense
Total share-based compensation expense consisted of the following (shown in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Amortization of restricted stock awards |
|
$ |
1,699 |
|
|
$ |
2,573 |
|
|
$ |
3,873 |
|
|
$ |
5,746 |
|
Amortization of stock option awards |
|
|
211 |
|
|
|
174 |
|
|
|
323 |
|
|
|
360 |
|
Fair value adjustment for variable accounting awards |
|
|
(5 |
) |
|
|
13 |
|
|
|
(45 |
) |
|
|
120 |
|
Discount given on employee stock purchase
transactions through our Employee Stock Purchase
Plan |
|
|
54 |
|
|
|
284 |
|
|
|
314 |
|
|
|
593 |
|
Other share-based compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(242 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation expense |
|
$ |
1,959 |
|
|
$ |
3,044 |
|
|
$ |
4,465 |
|
|
$ |
6,577 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense attributable to consultants was included in cost of services
before reimbursable expenses. Share-based compensation expense attributable to corporate management
and support personnel was included in general and administrative expenses. The following table
shows the amounts attributable to each category:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
Six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Cost of services |
|
$ |
1,333 |
|
|
$ |
2,399 |
|
|
$ |
3,259 |
|
|
$ |
4,914 |
|
General and administrative expenses |
|
|
626 |
|
|
|
645 |
|
|
|
1,206 |
|
|
|
1,663 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation expense |
|
$ |
1,959 |
|
|
$ |
3,044 |
|
|
$ |
4,465 |
|
|
$ |
6,577 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
Restricted Stock Outstanding
As of June 30, 2009, we had 1.6 million restricted stock awards and equivalent units
outstanding at a weighted average measurement price of $17.50 per share. The measurement price is
the market price of our common stock at the date of grant of the restricted stock awards and
equivalent units. The restricted stock and equivalent units were granted out of our long-term
incentive plan.
The following table summarizes restricted stock activity for the six months ended June 30,
2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
Number |
|
|
average |
|
|
Number |
|
|
average |
|
|
|
of shares |
|
|
measurement |
|
|
of shares |
|
|
measurement |
|
|
|
(000s) |
|
|
date price |
|
|
(000s) |
|
|
date price |
|
Restricted stock and equivalents outstanding at beginning of the period |
|
|
1,678 |
|
|
$ |
19.00 |
|
|
|
2,264 |
|
|
$ |
19.45 |
|
Granted |
|
|
308 |
|
|
|
12.63 |
|
|
|
66 |
|
|
|
19.32 |
|
Vested |
|
|
(382 |
) |
|
|
20.72 |
|
|
|
(321 |
) |
|
|
20.45 |
|
Forfeited |
|
|
(39 |
) |
|
|
19.81 |
|
|
|
(157 |
) |
|
|
20.04 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock and equivalents outstanding at end of the period |
|
|
1,565 |
|
|
$ |
17.50 |
|
|
|
1,852 |
|
|
$ |
19.45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2009, we had $19.0 million of total compensation costs related to the
outstanding or unvested restricted stock that have not been recognized as share-based compensation
expense. The compensation costs will be recognized as expense over the remaining vesting periods.
The weighted-average remaining vesting period is approximately four years.
On March 13, 2007 and April 30, 2007, we issued a total of 1.2 million shares of restricted
stock, with an aggregate market value of $22.6 million based on the market value of our common
stock price at the grant date, to key senior consultants and senior management as part of an
incentive program. The restricted stock awards will vest seven years from the grant date, with the
opportunity for accelerated vesting over five years based upon the achievement of certain targets
related to our consolidated operating performance. The compensation associated with these awards is
being recognized over the probable period in which the restricted stock awards will vest. We review
the likelihood of required performance achievements on a periodic basis and adjust compensation
expense on a prospective basis to reflect any changes in estimates to properly reflect compensation
expense over the remaining balance of the service or performance period. During the fourth quarter
of 2008, based on operating performance, we changed our estimate and lengthened the amount of time
expected for performance achievement of 20 percent of the awards outstanding. During the fourth
quarter 2008, the compensation committee of our board of directors approved a 20 percent
accelerated vest to occur in March 2009. As such, compensation expense was adjusted prospectively
to reflect these changes. For the 2009 performance period, which began January 2009, we have
recognized share based compensation expense for another 20 percent of the outstanding award over
the remaining five year period of the seven year service period. Compensation expense for the
remaining 40 percent restricted stock awards outstanding will commence once the explicit
performance period begins or the intrinsic service period starts. As of June 30, 2009,
approximately 0.7 million of these restricted stock awards remain outstanding and 0.2 million
shares have vested.
During the three months ended March 31, 2009, our compensation committee of the board of
directors approved a new long-term incentive performance program. The program provides for grants
of restricted stock awards and/or cash, based on individual employee elections, to key senior
practitioners and senior management, excluding named executive officers, for achievement of certain
targets related to our consolidated operating performance. These awards, if any, will be based on
the annual operating performance year of 2009 and will be granted in March of the following year.
Any awards made pursuant to this program will have a three year cliff vesting schedule from the
grant date. The program contemplates that the company would offer this opportunity on an annual
basis and that future awards, if any, would be based on the annual operating performance of each
subsequent annual performance year and be subject to the same eligibility criteria, employee
election relative to the vehicle and vesting terms. Compensation
expense related to this program for the six months ended June 30, 2009, is not material.
14
Note 8. Supplemental Consolidated Balance Sheet Information
Accounts Receivable:
The components of accounts receivable were as follows (shown in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Billed amounts |
|
$ |
156,576 |
|
|
$ |
142,503 |
|
Engagements in process |
|
|
55,678 |
|
|
|
49,319 |
|
Allowance for doubtful accounts |
|
|
(25,053 |
) |
|
|
(21,358 |
) |
|
|
|
|
|
|
|
Accounts receivable, net |
|
$ |
187,201 |
|
|
$ |
170,464 |
|
|
|
|
|
|
|
|
Receivables attributable to engagements in process represent balances for services that have
been performed and earned but have not been billed to the client. Billings are generally done on a
monthly basis for the prior months services. We provide services to and have receivables due from
many financial and insurance clients in all four of our segments. Our allowance for doubtful
accounts receivable includes balances related to the impact of recent disruptions in the financial
markets, including bankruptcies. 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.
Prepaid expenses and other current assets
The components of prepaid expenses and other current assets were as follows (shown in
thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Notes receivable current |
|
$ |
4,718 |
|
|
$ |
4,595 |
|
Other prepaid expenses and other current assets |
|
|
10,899 |
|
|
|
8,860 |
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets |
|
$ |
15,617 |
|
|
$ |
13,455 |
|
|
|
|
|
|
|
|
Other assets
The components of other assets were as follows (shown in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Notes receivable non-current |
|
$ |
12,553 |
|
|
$ |
13,905 |
|
Prepaid expenses and other non-current assets |
|
|
3,039 |
|
|
|
3,624 |
|
|
|
|
|
|
|
|
Other assets |
|
$ |
15,592 |
|
|
$ |
17,529 |
|
|
|
|
|
|
|
|
Notes receivable represent unsecured forgivable loans with terms of four to five years
issued to certain senior consultants for an aggregate of $22.8 million. The loans were issued to retain
and motivate highly-skilled professionals. The principal amount and accrued interest is expected to
be forgiven by us over the term of the loans, so long as the professionals continue employment and
comply with certain contractual requirements. Certain events such as death or disability,
termination by us for cause or voluntarily by the employee will result in earlier repayment of any
unforgiven loan amounts. The expense associated with the forgiveness of the principal amount of the
loan is recorded as compensation expense over the service period, which is consistent with the term
of the loans. The accrued interest is calculated based on the loans effective interest rate
(approximately 5.25 percent per year) and is recorded as interest income. The forgiveness of such
accrued interest is recorded as compensation expense, which aggregated $0.3 million and $0.6
million for the three months and six months ended June 30, 2009, respectively. During the three
months ended June 30, 2009, $3.2 million, in aggregate, of the principal amount of the loans were
forgiven as the service and contractual requirements had been performed up to the due dates of the
principal amounts payable.
15
Property and Equipment:
Property and equipment were comprised of the following (shown in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Furniture, fixtures and equipment |
|
$ |
51,070 |
|
|
$ |
49,668 |
|
Software |
|
|
25,363 |
|
|
|
24,056 |
|
Leasehold improvements |
|
|
41,329 |
|
|
|
40,159 |
|
|
|
|
|
|
|
|
|
|
|
117,762 |
|
|
|
113,883 |
|
Less: accumulated depreciation and amortization |
|
|
(70,717 |
) |
|
|
(68,732 |
) |
|
|
|
|
|
|
|
Property and equipment, net |
|
$ |
47,045 |
|
|
$ |
45,151 |
|
|
|
|
|
|
|
|
Other Current Liabilities:
The components of other current liabilities were as follows (shown in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Deferred business acquisition obligations |
|
$ |
6,465 |
|
|
$ |
10,899 |
|
Deferred revenue |
|
|
12,331 |
|
|
|
13,685 |
|
Deferred rent |
|
|
1,769 |
|
|
|
2,470 |
|
Commitments on abandoned real estate |
|
|
3,993 |
|
|
|
1,112 |
|
Interest rate swap liability (see note 10) |
|
|
7,256 |
|
|
|
|
|
Other liabilities |
|
|
5,292 |
|
|
|
3,301 |
|
|
|
|
|
|
|
|
Total other current liabilities |
|
$ |
37,106 |
|
|
$ |
31,467 |
|
|
|
|
|
|
|
|
The deferred business acquisition obligations of $6.5 million at June 30, 2009 consisted of
cash obligations and obligations to issue a fixed dollar amount of shares of our common stock. The
liability for deferred business acquisition obligations has been discounted to net present value.
The number of shares to be issued will be based on the trading price of our common stock for a
period of time prior to the issuance dates.
Other Non-Current Liabilities:
The components of other non-current liabilities were as follows (shown in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Deferred business acquisition obligations |
|
$ |
6,123 |
|
|
$ |
11,277 |
|
Deferred rent long term |
|
|
10,403 |
|
|
|
9,995 |
|
Commitments on abandoned real estate |
|
|
4,192 |
|
|
|
2,884 |
|
Interest rate swap liability (see note 10) |
|
|
|
|
|
|
9,585 |
|
Other non-current liabilities |
|
|
4,304 |
|
|
|
3,595 |
|
|
|
|
|
|
|
|
Total other non-current liabilities |
|
$ |
25,022 |
|
|
$ |
37,336 |
|
|
|
|
|
|
|
|
The deferred business acquisition obligations of $6.1 million at June 30, 2009 consisted of
cash obligations and obligations to issue a fixed dollar amount of shares of our common stock. The
liability amounts for deferred business acquisition obligations have been discounted to net present
value. The number of shares to be issued will be based on the trading price of our common stock for
a period of time prior to the issuance dates. The long-term portion of deferred rent is primarily
rent allowances and incentives related to leasehold improvements on lease arrangements for our
office facilities that expire at various dates through 2017.
16
Current Notes Payable:
As of June 30, 2009, as part of a purchase price agreement for an acquired business, we
recorded $4.2 million in current notes payable. As of June 30, 2009, there was no accrued
interest on the notes payable.
Current notes payable were as follows (shown in thousands):
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Note related to the Abros acquisition |
|
$ |
|
|
|
$ |
362 |
|
Note related to the Troika acquisition |
|
|
4,170 |
|
|
|
3,811 |
|
|
|
|
|
|
|
|
Total current notes payable |
|
$ |
4,170 |
|
|
$ |
4,173 |
|
|
|
|
|
|
|
|
Note 9. Supplemental Consolidated Cash Flow Information
Non
Cash Transactions:
During
the six months ended June 30, 2009 we issued $7.0 million of common stock
related to acquisition-related transactions which were recorded in
current liabilities.
Other
Information:
Total interest paid during the six months ended June 30, 2009 and 2008 was $7.3 million and
$10.2 million, respectively. Total income taxes paid were $4.3 million and $17.2 million during the
six months ended June 30, 2009 and 2008, respectively.
Note 10. Comprehensive Income
Comprehensive income, which consists of net income, foreign currency translation adjustments
and unrealized gain or loss on our interest rate swap agreement, was as follows (shown in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
|
For the six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Net income |
|
$ |
3,385 |
|
|
$ |
9,986 |
|
|
$ |
8,818 |
|
|
$ |
20,892 |
|
Foreign currency translation adjustment |
|
|
15,296 |
|
|
|
406 |
|
|
|
13,173 |
|
|
|
(1,521 |
) |
Unrealized gain on interest rate
derivative, net of income tax expense |
|
|
623 |
|
|
|
2,709 |
|
|
|
1,106 |
|
|
|
113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
19,304 |
|
|
$ |
13,101 |
|
|
$ |
23,097 |
|
|
$ |
19,484 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On July 2, 2007, we entered into an interest rate swap agreement with a bank for a notional
value of $165.0 million through June 30, 2010. This agreement effectively fixed our LIBOR base rate
for $165.0 million of our indebtedness at a rate of 5.30% during this period. We designated the
swap as a cash flow hedge to manage market risk from changes in interest rates on a portion of our
variable rate term loans. We recognize cash flow hedges as assets or liabilities at fair value,
with the related gain or loss reflected within stockholders equity as a component of accumulated
other comprehensive income to the extent of effectiveness. Any ineffectiveness on the swap would be
recognized in the consolidated statements of income. The differentials to be received or paid under
the instrument are recognized in income over the life of the contract as adjustments to interest
expense. The use of an interest rate swap exposes us to counterparty credit risk in the event of
non performance by counterparties. As of June 30, 2009, we were not exposed to significant
counterparty risk. During the three and six months ended June 30, 2009 there was no gain or loss
due to ineffectiveness and we recorded $1.7 million and $3.3 million in interest expense,
respectively, associated with differentials paid under the instrument. As of June 30, 2009, we had
a $7.3 million liability recorded in other current liabilities related to this interest rate
derivative. We recorded $0.6 million and $1.1 million in unrealized gain, net of taxes of $0.4
million and $1.2 million, respectively, to accumulated other comprehensive income for the three and
six months ended June 30, 2009, respectively.
As of June 30, 2009, accumulated other comprehensive income is comprised of foreign currency
translation loss of $10.6 million and unrealized net loss on interest rate swap of $4.3 million.
In September 2006, the FASB issued Statement No. 157, Fair Value Measurements (SFAS 157).
SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with
accounting principles generally accepted in the United States, and expands disclosures about fair
value measurements. We adopted SFAS 157 during the first quarter of 2008 and the implementation did
not have a material impact on our financial condition, results of operations, or cash flows. We
deferred the adoption of SFAS 157 with respect to non-financial assets and liabilities in
accordance with the provisions of FSP FAS 157-2, Effective Date of FASB Statement
17
No. 157. Items in this classification include goodwill, and intangible assets with indefinite
lives. Our adoption on January 1, 2009 of FSP FAS 157-2 did not have a material effect on our
financial condition, results of operations, or cash flows.
SFAS 157 defines fair value as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the measurement date
(exit price). SFAS 157 classifies the inputs used to measure fair value into the following
hierarchy:
|
|
|
Level 1
|
|
Unadjusted quoted prices in active markets for identical assets or liabilities |
|
|
|
Level 2
|
|
Unadjusted quoted prices in active markets for similar assets or liabilities,
or unadjusted quoted prices for identical or similar assets or liabilities in
markets that are not active, or inputs other than quoted prices that are
observable for the asset or liability |
|
|
|
Level 3
|
|
Unobservable inputs for the asset or liability |
We endeavor to utilize the best available information in measuring fair value. Financial
assets and liabilities are classified in their entirety based on the lowest level of input that is
significant to the fair value measurement. Our interest rate swap liability was valued using
counterparty quotations in over-the counter markets. In addition, we incorporate credit valuation
adjustments to appropriately reflect both our own nonperformance risk and the respective
counterpartys nonperformance risk. The credit valuation adjustments associated with our
derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the
likelihood of default by ourselves and our counterparties. However, as of June 30, 2009, we have
assessed the significance of the impact on the overall valuation and believe that these adjustments
are not significant. As such, our derivative instrument is classified within level 2.
Additionally, the value of our bank borrowing credit agreement (see note 11) was estimated to be 4%
below its carrying value based on unobservable Level 3 inputs such as estimates of current credit spreads to evaluate the likelihood of default by ourselves and our counterparties.
We consider the recorded value of our other financial assets and liabilities, which consist primarily of cash and cash equivalents, accounts receivable, and accounts payable,
to approximate the fair value of the respective assets and liabilities at June 30, 2009 and December 31, 2008 based upon the short-term nature of the assets and liabilities.
Note 11. Bank Borrowings
As of June 30, 2009, we maintained a bank borrowing credit agreement consisting of a $275
million revolving line of credit with the option to increase to $375.0 million and a $225.0 million
unsecured term loan facility. Borrowings under the revolving credit facility are payable in May
2012. Our credit agreement provides for borrowings in multiple currencies including US Dollars,
Canadian Dollars, UK Pound Sterling and Euro. As of June 30, 2009, we had aggregate borrowings of
$239.7 million compared to $232.5 million as of December 31, 2008. Based on our financial covenant restrictions under our line of credit agreement as of and at
June 30, 2009, a maximum of approximately $100 million would be available
in additional borrowings on our line of credit.
At our option borrowings under the revolving credit facility and the term loan facility bear
interest, in general, based on a variable rate equal to an applicable base rate or LIBOR, in each
case plus an applicable margin. For LIBOR loans, the applicable margin will vary depending upon our
consolidated leverage ratio (the ratio of total funded debt to adjusted EBITDA) and whether the
loan is made under the term loan facility or revolving credit facility. As of June 30, 2009, the
applicable margins on LIBOR loans under the term loan facility and revolving credit facility were
1.25% and 1.0%, respectively. As of June 30, 2009, the applicable margins for base rate loans under
the term loan facility and revolving credit facility were 0.25% and zero, respectively. For LIBOR
loans, the applicable margin will vary between 0.50% to 1.75% depending upon our performance and
financial condition. Our average borrowing rate under our credit agreement (including the impact
of our interest rate swap agreement see note 10) was 5.3% and
5.5% for the three and six months ended June 30, 2009 compared to 6.9% and 6.6% for the corresponding periods in 2008.
Our credit agreement also includes certain financial covenants, including covenants that
require that we maintain a consolidated leverage ratio of not greater than 3.25:1, and a
consolidated fixed charge coverage ratio (the ratio of the sum of adjusted EBITDA and rental
expense to the sum of cash interest expense and rental expense) of not less than 2.0:1. At June 30,
2009, under the definitions in the credit agreement, our consolidated leverage ratio was 2.3 and
our consolidated fixed charge coverage ratio was 3.5. In addition to the financial covenants, our
credit agreement contains customary affirmative and negative covenants and is subject to customary
exceptions. These covenants limit our ability to incur liens or other encumbrances or make
investments, incur indebtedness, enter into mergers, consolidations and asset sales, pay dividends
or other distributions, change the nature of our business and engage in transactions with
affiliates. We were in compliance with the terms of our credit agreement as of June 30, 2009 and
December 31, 2008; however there can be no assurances that we will remain in compliance in the
future.
18
Note 12. Other Operating Costs
Other operating costs consisted of the following (shown in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
|
For the six months ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
Adjustments to office closures
obligations, discounted and net of
expected sublease income |
|
|
4,225 |
|
|
|
1,955 |
|
|
|
4,525 |
|
|
|
2,105 |
|
Write down of leasehold improvements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
500 |
|
Accelerated depreciation on
leasehold improvements and
furniture due to expected office
closures |
|
|
387 |
|
|
|
620 |
|
|
|
995 |
|
|
|
1,488 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other operating costs |
|
$ |
4,612 |
|
|
$ |
2,575 |
|
|
$ |
5,520 |
|
|
$ |
4,093 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three and six months ended June 30, 2009, we recorded $4.6 million and $5.5
million, respectively of office closure related costs which consisted of adjustments to office
closure obligations and accelerated depreciation on leasehold improvements and furniture in offices
to be abandoned. During the three months ended June 30, 2009, we recorded $4.2 million for office
closure related costs. During the three months ended June 30, 2009, we vacated and relocated one
of our New York offices, which resulted in a $3.6 million charge, and we reduced office space in
other locations.
We continue to monitor our estimates for office closure obligations and related expected
sublease income which is estimated to begin for certain properties as early as January 2010. Such
estimates are subject to market conditions and may be adjusted in the future periods as necessary.
The office closure obligations have been discounted to net present value. In the next twelve months
we expect our cash expenditures to be $3.8 million relating to these obligations.
The current and non-current liability activity related to office closure obligations are as
follows:
|
|
|
|
|
|
|
Office |
|
|
|
Consolidation |
|
Balance at December 31, 2008 |
|
$ |
3,996 |
|
Charges to operations during the three months ended March 31, 2009 |
|
|
300 |
|
Utilized during the three months ended March 31, 2009 |
|
|
(506 |
) |
|
|
|
|
Balance at March 31, 2009 |
|
|
3,790 |
|
Charges to operations during the three months ended June 30, 2009 |
|
|
4,225 |
|
Utilized during the three months ended June 30, 2009 |
|
|
170 |
|
|
|
|
|
Balance at June 30, 2009 |
|
$ |
8,185 |
|
|
|
|
|
The amounts utilized during the three months ended June 30, 2009 included $0.7 million of rent
payments, net of sublease income, offset by $0.9 million of deferred rent credits attributable to
the New York exit. Office space reduction costs are not allocated to our business segments.
19
Item 2.
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Statements included in this Managements Discussion and Analysis of Financial Condition and
Results of Operations and elsewhere in this report, which are not historical in nature, are
intended to be, and are hereby identified as forward-looking statements for purposes of the
Private Securities Litigation Reform Act of 1995. Such statements appear in a number of places in
this report, including, without limitation, Item 2, Managements Discussion and Analysis of
Financial Condition and Results of Operations. When used in this report, the words anticipate,
believe, intend, estimate, expect, and similar expressions are intended to identify such
forward-looking statements. We caution readers that there may be events in the future that we are
not able to accurately predict or control and the information contained in the forward-looking
statements is inherently uncertain and subject to a number of risks that could cause actual results
to differ materially from those indicated in the forward-looking statements including, without
limitation: the success of the our strategy implementation following its strategic business
assessment; the success of our cost reduction actions; the success of our organizational changes;
risks inherent in international operations, including foreign currency fluctuations; ability to
make acquisitions; pace, timing and integration of acquisitions; impairment charges; management of
professional staff, including dependence on key personnel, recruiting, attrition and the ability to
successfully integrate new consultants into our practices; utilization rates; conflicts of
interest; potential loss of clients; our clients financial condition and their ability to make
payments to us; risks inherent with litigation; higher risk client assignments; professional
liability; potential legislative and regulatory changes; continued access to capital; and general
economic conditions. Further information on these and other potential factors that could affect our
financial results is included in our Annual Report on Form 10-K and other filings with the SEC
under the Risk Factors sections and elsewhere in those filings. We cannot guarantee any future
results, levels of activity, performance or achievement and we undertake no obligation to update
any of our forward-looking statements.
Overview
We are an independent specialty consulting firm combining deep industry expertise and
integrated solutions to assist companies and their legal counsel in addressing the challenges of
uncertainty and risk, and leveraging opportunities for overall business model improvement.
Professional services include dispute, investigative, financial, operational and business advisory,
risk management and regulatory advisory, strategy, economic analysis and transaction advisory
solutions. We provide our services to government agencies, legal counsel and large companies facing
the challenges of uncertainty, risk, distress and significant change. We focus on industries
undergoing substantial regulatory or structural change and on the issues driving these
transformations.
Our revenues, margins and profits have been and will likely continue to be impacted by a
significant decline in the United States and world economy. Examples of other impacting events that
may affect us both favorably and unfavorably are natural disasters, legislative and regulatory
changes, capital market disruptions, reductions in discretionary consulting spending, crises in the
energy, healthcare, financial services, insurance and other industries, and significant client
specific events.
We derive our revenues from fees and reimbursable expenses for professional services. A
majority of our revenues are generated under hourly or daily rates billed on a time and expense
basis. Clients are typically invoiced on a monthly basis, with revenue recognized as the services
are provided. There are also client engagements where we are paid a fixed amount for our services,
often referred to as fixed fee billings. This may be one single amount covering the whole
engagement or several amounts for various phases or functions. From time to time, we earn
incremental revenues, in addition to hourly or fixed fee billings, which are contingent on the
attainment of certain contractual milestones or objectives. Such incremental revenues may cause
variations in quarterly revenues and operating results if all other revenues and expenses during
the quarters remain the same.
Our most significant expense is cost of services before reimbursable expenses, which generally
relates to costs associated with generating revenues, and includes consultant compensation and
benefits, sales and marketing expenses, and the direct costs of recruiting and training the
consulting staff. Consultant compensation consists of salaries, incentive compensation, stock
compensation and benefits. Our most significant overhead expenses are administrative compensation
and benefits and office related expenses. Administrative compensation includes payroll costs,
incentive compensation, stock compensation and benefits for corporate management and administrative
personnel, which are used to indirectly support client projects. Office related expenses primarily
consist of rent for our offices.
20
Critical Accounting Policies
The preparation of the financial statements requires management to make estimates and
assumptions that affect amounts reported therein. We base our estimates on historical experience
and on various assumptions that are believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions. We believe the following critical accounting policies
affect our more significant judgments and estimates used in the preparation of our consolidated
financial statements:
Revenue Recognition
We recognize revenues as the related professional services are provided. In connection with
recording revenues, estimates and assumptions are required in determining the expected conversion
of the revenues to cash. We may provide multiple services under the terms of an arrangement and are
required to assess whether one or more units of accounting are present. There are also client
engagements where we are paid a fixed amount for our services. The recording of these fixed revenue
amounts requires us to make an estimate of the total amount of work to be performed and revenues
are then recognized as efforts are expended based on (i) objectively determinable output measures,
(ii) input measures if output measures are not reliable, or (iii) the straight-line method over the
term of the arrangement. From time to time, we also earn incremental revenues. These incremental
revenue amounts are generally contingent on a specific event and the incremental revenues are
recognized when the contingencies are resolved. Any taxes assessed on revenues relating to services
provided to our clients are recorded on a net basis.
Accounts Receivable Realization
We maintain allowances for doubtful accounts for estimated losses resulting from our review
and assessment of our clients ability to make required payments, and the estimated realization, in
cash, by us of amounts due from our clients. If our clients financial condition was to
deteriorate, resulting in an impairment of their ability to make payments, additional allowances
might be required.
Goodwill and Intangible Assets
Goodwill represents the difference between the purchase price of acquired companies and the
related fair value of the net assets acquired, which is accounted for by the purchase method of
accounting. Intangible assets consist of identifiable intangibles other than goodwill.
Identifiable intangible assets other than goodwill include customer lists and relationships,
employee non-compete agreements, employee training methodology and materials, backlog revenue and
trade names. Intangible assets, other than goodwill, are amortized based on the period of
consumption, ranging up to nine years. Our long term assets are subject to changes in events or
circumstances that could impact their carrying value.
We test goodwill annually for impairment. We also review long-lived assets, including
identifiable intangible assets and goodwill, for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. Our impairment
testing and reviews may be impacted by, among other things, our expected operating performance,
market valuation of comparable companies, ability to retain key personnel, changes in operating
segments and competitive environment. A decline in the estimated fair value of our reporting units
or other long term assets could result in impairment charges. We did not recognize any impairment
charges for goodwill, indefinite-lived intangible assets or identifiable intangible assets subject
to amortization during the periods presented.
In accordance with Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets (SFAS 142) goodwill is not amortized. Goodwill is subject to an impairment
test annually and more frequently if events and circumstances indicate that goodwill may be
impaired. The impairment test is performed using a two step, fair-value based test. The first step
compares the fair value of a reporting unit to its carrying value. The fair value is determined
using a discounted cash flow analysis and a comparable company analysis. The second step is
performed only if the carrying value exceeds the fair value determined in step one. The impairment
test is considered for each reporting unit as defined in SFAS No. 142 which equates to our
reporting segments.
Our test for goodwill impairment is based on the estimated fair value of our reporting units.
The estimated fair value of our reporting units is subject to, among other things, changes in our
estimated business future growth rate, profit margin, long term outlook and weighted average cost
of capital. Our International Consulting Operations and Economic Consulting Services reporting
units are most sensitive to those changes as the excess of their fair
values over their asset carrying values is generally lower. Considerable management judgment is required to estimate future cash flows. Assumptions used
in our impairment evaluations, such
21
as forecasted growth rates and cost of capital, are consistent
with internal projections and operating plans. The achievement of such internal projections and
operating plans will be impacted by the overall economic environment, among other factors.
We perform our annual test
in the second quarter of each year. As discussed, in accordance
with SFAS 142, we determined the fair value of each reporting unit. This test required us to
estimate future cash flows and termination value. The fair value
estimate also depended on, among other things, our weighted average cost of
capital and working capital requirements. Estimates can also be impacted by, among other
things, expected performance, market valuation of comparable companies, ability to retain key
personnel, changes in operating segments and competitive environment.
There was no indication of impairment based on our analysis.
During our annual test of goodwill, we considered that each of the four reporting units has
significant goodwill and intangible assets and that the excess of estimated fair value over the net
asset carrying value for each of our reporting units decreased relative to the prior year test. As of the
date of our analysis, the excess of estimated fair value over net asset carrying value of the North
American Business Consulting Services reporting unit and the North American Dispute and
Investigative Services reporting unit was approximately 40% and 25% of the estimated fair value,
respectively. The excess of estimated fair value over the net asset carrying value of the
International Consulting Operations and Economic Consulting Services reporting units were both
approximately 20% of the estimated fair value and given the smaller size of these reporting units
the relative dollars of the excess is substantially smaller than the
other two reporting units. Further, the estimated fair value of the International Consulting Operations and Economic Consulting
Services reporting units may be more volatile due to the reporting units smaller size and higher
expected earnings growth rates. Also, given the International Consulting Operations reporting
units geographic market, its excess may be more volatile. Additionally, the Economic Consulting
Services reporting unit was recently acquired as one acquisition and thus its excess is dependent
on the success of such acquisition.
In
accordance with SFAS No. 142, we will be required to consider whether or not the fair value of each of
the reporting units could have fallen below its carrying value. We will consider the elements
outlined in SFAS No. 142 and other factors including, but not limited to, changes in the business
climate in which we operate, recent disruptions in the financial markets, our market capitalization
in excess of our book value, our recent operating performance, and our financial projections. As a
result of this review we will be required to determine that no such event or condition existed that
would cause us to perform an interim goodwill impairment test prior to our next annual test date.
We will continue to monitor these factors and we may perform additional impairment tests as
appropriate in future interim periods.
As prescribed by SFAS No. 144, Accounting for the Impairment of Long-Lived Assets, we review
our intangible asset values on a periodic basis. We review long-lived assets, including
identifiable intangible assets, for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable or upon the occurrence of any
triggering event as defined in SFAS No. 144. Our intangible assets are subject to changes in
estimated fair market values which are determined in part based on our operating performance and
expectations for the future. As of June 30, 2009, there was no indication of impairment related to
our intangible assets.
Share-Based Payments
We recognize the cost resulting from all share-based compensation arrangements, such as our
stock option and restricted stock plans, in the financial statements based on their fair value.
Management judgment is required in order to (i) estimate the fair value of certain share based
payments, (ii) determine expected attribution period and (iii) assess expected future forfeitures.
We treat our employee stock purchase plan as compensatory and record the purchase discount from
market price of stock purchases by employees as share-based compensation expense.
Income Taxes
We account for deferred income taxes utilizing an asset and liability method, whereby deferred
tax assets and liabilities are recognized based on the tax effects of temporary differences between
the financial statements and the tax bases of assets and liabilities, as measured by current
enacted tax rates. When appropriate, we evaluate the need for a valuation allowance to reduce
deferred tax assets. The evaluation of the need for a valuation allowance requires management
judgment and could impact our effective tax rate.
We account for uncertainty in income taxes utilizing the Financial Accounting Standards
Boards Interpretation No. 48, Accounting for Uncertainty in Income Taxes an interpretation of
FAS Statement No. 109 (FIN 48). This interpretation clarifies
22
the accounting for uncertainty in
income taxes recognized in an entitys financial statements in accordance with SFAS 109. It
prescribes a recognition threshold and measurement attribute for financial statement disclosure of
tax positions taken or expected to be taken. This interpretation also provides guidance on
derecognition, classification, interest and penalties, accounting in interim periods, and
disclosures. The application of FIN 48 requires management judgment related to the uncertainty in
income taxes and could impact our effective tax rate.
Other Operating Costs
We recorded expense and related liabilities associated with office closings and excess space
reductions related to a plan to reduce office space as other operating costs. The expense consisted
of rent obligations for the offices, net of expected sublease income, and the write down and
accelerated depreciation of leasehold improvements reflecting the
changes in the estimated useful lives of our abandoned offices. The expected sublease income is subject to market conditions and may
be adjusted in future periods as necessary. The office closure obligations have been discounted to
net present value. The determination of the expense and related liabilities requires management
judgment and could impact our future financial results.
Recent Accounting Pronouncements
In September 2006, the FASB issued Statement No. 157, Fair Value Measurements (SFAS 157).
SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with
accounting principles generally accepted in the United States, and expands disclosures about fair
value measurements. We adopted SFAS 157 during the first quarter of 2008 and the implementation did
not have a material impact on our financial condition, results of operations, or cash flows. We
deferred the adoption of SFAS 157 with respect to non-financial assets and liabilities in
accordance with the provisions of FSP FAS 157-2, Effective Date of FASB Statement No. 157. Such
non financial assets and liabilities include goodwill and intangible assets with indefinite lives.
Fair value is measured on these assets on a non-recurring basis. Our adoption on January 1, 2009 of
FSP FAS 157-2 did not have a material effect on our financial condition, results of operations, or
cash flows.
In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (SFAS 159). SFAS 159 allows entities the option to measure
eligible financial instruments at fair value as of specified dates. Such election, which may be
applied on an instrument by instrument basis, is typically irrevocable once elected. SFAS 159 is
effective for fiscal years beginning after November 15, 2007. We adopted SFAS 159 during the first
quarter of 2008 and did not apply such election to any of our assets or liabilities.
In December 2007, the FASB issued Statement No. 141(R), Business Combinations (SFAS
141(R)). SFAS 141(R) establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the liabilities assumed, and
any noncontrolling interest in the acquiree and recognizes and measures the goodwill acquired in
the business combination or a gain from a bargain purchase. SFAS 141(R) also sets forth the
disclosures required to be made in the financial statements to evaluate the nature and financial
effects of the business combination. SFAS 141(R) applies prospectively to business combinations for
which the acquisition date is on or after the beginning of the first annual reporting period
beginning on or after December 15, 2008. Our adoption of SFAS 141(R) on January 1, 2009 will impact
all our acquisitions on or after that date.
In March 2008, the FASB issued Statement No. 161, Disclosures about Derivative Instruments
and Hedging Activities (SFAS 161) which amends and expands the disclosure requirements of SFAS
133 to provide an enhanced understanding of an entitys use of derivative instruments, how they are
accounted for and their effect on the entitys financial position, financial performance and cash
flows. We adopted the provisions of SFAS 161 as of January 1, 2009. Management is adhering to the
enhanced disclosure requirements.
In April 2009, the FASB issued FSP No. FAS 141(4)-1, Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from Contingencies (FSP 141(R)-1). FSP
141(R)-1 requires that assets acquired and liabilities assumed in a business combination that arise
from contingencies be recognized at fair value if fair value can be reasonably estimated. FSP FAS
141(R)-1 is effective for business combinations with an acquisition date on or after June 1, 2009.
Our adoption of FSP 141(R)-1 will impact our acquisitions after this date and did not have any
impact on our financial condition, results of operations, or cash flows.
In April 2009, the FASB issued FSP No. FAS 157-4, Determining Fair Value When the Volume and
Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That are Not Orderly (FSP 157-4). FSP 157-4
provides guidance on how to determine the fair value of assets and liabilities under SFAS No.
157 in the current economic environment and reemphasized that the objective of a fair value
measurement remains an exit price. If we were to conclude that there
23
has been a significant
decrease in the volume and level of activity of the asset or liability in relation to normal market
activities, quoted market values may not be representative of fair value and we may conclude that a
change in valuation technique or the use of the multiple valuation techniques may be appropriate.
FSP 157-4 is effective for interim and annual periods ending after June 15, 2009. Our adoption of
FSP 157-4 did not have a material impact on our financial condition, results of operations, or cash
flows.
In April 2009, the FASB issued FSP No. 107-1 and APB 28-1, Interim Disclosures about Fair
Value of Financial Instruments (FSP 107-1). FSP 107-1 amends SFAS No. 107, Disclosures about Fair
Value of Financial Instruments, to require disclosures about fair value of financial instruments in
interim as well as in annual financial statements. FSP No. 107-1 also amends APB Opinion 28,
Interim Financial Reporting, to require those disclosures in all interim financial statements.
FSB 107-1 is effective for all reporting periods ending after June 15, 2009. Adoption of FSP 107-1
provides additional disclosure included in Note 10.
In May 2009, the FASB issued SFAS No. 165, Subsequent Events (SFAS 165). SFAS 165
establishes general standards of accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued. SFAS 165 is effective for interim
or annual financial periods ending after June 15, 2009. As of this date we have adopted SFAS 165
and have evaluated subsequent events through the date of this filing. We do not believe there are
any material subsequent events which would require further disclosure.
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles- a replacement of FASB Statement No. 162
(SFAS 168). On the effective date of this Statement, the Codification will supersede all
then-existing non-SEC accounting and reporting standards. All other non-grandfathered, non-SEC
accounting literature not included in the Codification will become non-authoritative. SFAS 168 is
effective for financial statements issued for interim and annual periods ending after September 15,
2009. We do not expect this pronouncement to have a material impact on our financial condition,
results of operations, or cash flows.
24
Results of Operations
2009 compared to 2008 For the three and six month periods ended June 30
We manage our business in four operating segments North American Dispute and Investigative
Services, North American Business Consulting Services, International Consulting Operations, and
Economic Consulting Services. The Economic Consulting Services segment was added in 2008 in
connection with our acquisition of Chicago Partners on May 1, 2008. These segments are generally
defined by the nature of their services and geography. The business is managed and resources
allocated on the basis of the four operating segments.
The following table summarizes for comparative purposes certain financial and statistical data
for our four segments (Dollar amounts are thousands, except bill rate):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
|
|
|
|
For the six months ended |
|
|
|
|
June 30, |
|
% Increase |
|
June 30, |
|
% Increase |
|
|
2009 |
|
2008 |
|
(Decrease) |
|
2009 |
|
2008 |
|
(Decrease) |
Revenues Before Reimbursements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American Dispute and Investigative
Services |
|
$ |
65,810 |
|
|
$ |
79,305 |
|
|
|
(17.0 |
%) |
|
$ |
133,057 |
|
|
$ |
163,128 |
|
|
|
(18.4 |
%) |
North American Business Consulting Services |
|
|
63,566 |
|
|
|
82,030 |
|
|
|
(22.5 |
%) |
|
|
136,338 |
|
|
|
165,498 |
|
|
|
(17.6 |
%) |
International Consulting Operations |
|
|
14,698 |
|
|
|
20,701 |
|
|
|
(29.0 |
%) |
|
|
29,004 |
|
|
|
37,704 |
|
|
|
(23.1 |
%) |
Economic Consulting Services |
|
|
13,258 |
|
|
|
7,349 |
|
|
|
80.4 |
% |
|
|
26,145 |
|
|
|
7,349 |
|
|
|
255.8 |
% |
|
|
|
Total revenues before reimbursements |
|
$ |
157,332 |
|
|
$ |
189,385 |
|
|
|
(16.9 |
%) |
|
$ |
324,544 |
|
|
$ |
373,679 |
|
|
|
(13.1 |
%) |
|
|
|
Total Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American Dispute and Investigative
Services |
|
$ |
72,225 |
|
|
$ |
88,602 |
|
|
|
(18.5 |
%) |
|
$ |
144,855 |
|
|
$ |
179,604 |
|
|
|
(19.3 |
%) |
North American Business Consulting Services |
|
|
69,356 |
|
|
|
92,045 |
|
|
|
(24.6 |
%) |
|
|
148,995 |
|
|
|
188,386 |
|
|
|
(20.9 |
%) |
International Consulting Operations |
|
|
17,820 |
|
|
|
23,098 |
|
|
|
(22.9 |
%) |
|
|
33,866 |
|
|
|
42,894 |
|
|
|
(21.0 |
%) |
Economic Consulting Services |
|
|
14,155 |
|
|
|
7,663 |
|
|
|
84.7 |
% |
|
|
28,202 |
|
|
|
7,663 |
|
|
|
268.0 |
% |
|
|
|
Total revenues |
|
$ |
173,556 |
|
|
$ |
211,408 |
|
|
|
(17.9 |
%) |
|
$ |
355,918 |
|
|
$ |
418,547 |
|
|
|
(15.0 |
%) |
|
|
|
Segment Operating Profit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American Dispute and Investigative
Services |
|
$ |
25,681 |
|
|
$ |
33,753 |
|
|
|
(23.9 |
%) |
|
$ |
51,131 |
|
|
$ |
68,776 |
|
|
|
(25.7 |
%) |
North American Business Consulting Services |
|
|
23,356 |
|
|
|
33,993 |
|
|
|
(31.3 |
%) |
|
|
49,747 |
|
|
|
67,323 |
|
|
|
(26.1 |
%) |
International Consulting Operations |
|
|
4,070 |
|
|
|
8,179 |
|
|
|
(50.2 |
%) |
|
|
8,091 |
|
|
|
13,562 |
|
|
|
(40.3 |
%) |
Economic Consulting Services |
|
|
4,888 |
|
|
|
2,948 |
|
|
|
65.8 |
% |
|
|
9,532 |
|
|
|
2,948 |
|
|
|
223.3 |
% |
|
|
|
Segment Operating Profit |
|
$ |
57,995 |
|
|
$ |
78,873 |
|
|
|
(26.5 |
%) |
|
$ |
118,501 |
|
|
$ |
152,609 |
|
|
|
(22.3 |
%) |
|
|
|
Average Full Time Equivalent (FTE) consultants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American Dispute and Investigative
Services |
|
|
719 |
|
|
|
762 |
|
|
|
(5.6 |
%) |
|
|
742 |
|
|
|
779 |
|
|
|
(4.7 |
%) |
North American Business Consulting Services |
|
|
797 |
|
|
|
914 |
|
|
|
(12.8 |
%) |
|
|
832 |
|
|
|
927 |
|
|
|
(10.2 |
%) |
International Consulting Operations |
|
|
216 |
|
|
|
185 |
|
|
|
16.8 |
% |
|
|
212 |
|
|
|
181 |
|
|
|
17.1 |
% |
Economic Consulting Services |
|
|
100 |
|
|
|
55 |
|
|
|
81.8 |
% |
|
|
100 |
|
|
|
28 |
|
|
|
257.1 |
% |
|
|
|
Total |
|
|
1,832 |
|
|
|
1,916 |
|
|
|
(4.4 |
%) |
|
|
1,886 |
|
|
|
1,915 |
|
|
|
(1.5 |
%) |
|
|
|
Average Utilization rates based on 1,850 hours |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American Dispute and Investigative
Services |
|
|
71 |
% |
|
|
77 |
% |
|
|
(7.8 |
%) |
|
|
71 |
% |
|
|
81 |
% |
|
|
(12.3 |
%) |
North American Business Consulting Services |
|
|
75 |
% |
|
|
80 |
% |
|
|
(6.3 |
%) |
|
|
76 |
% |
|
|
82 |
% |
|
|
(7.3 |
%) |
International Consulting Operations |
|
|
62 |
% |
|
|
76 |
% |
|
|
(18.4 |
%) |
|
|
66 |
% |
|
|
74 |
% |
|
|
(10.8 |
%) |
Economic Consulting Services |
|
|
87 |
% |
|
|
88 |
% |
|
|
(1.1 |
%) |
|
|
86 |
% |
|
|
88 |
% |
|
|
(2.3 |
%) |
|
|
|
Total |
|
|
73 |
% |
|
|
79 |
% |
|
|
(7.6 |
%) |
|
|
74 |
% |
|
|
81 |
% |
|
|
(8.6 |
%) |
|
|
|
Bill Rate (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American Dispute and Investigative
Services |
|
$ |
281 |
|
|
$ |
299 |
|
|
|
(6.0 |
%) |
|
$ |
282 |
|
|
$ |
296 |
|
|
|
(4.7 |
%) |
North American Business Consulting Services |
|
|
212 |
|
|
|
227 |
|
|
|
(6.6 |
%) |
|
|
216 |
|
|
|
220 |
|
|
|
(1.8 |
%) |
International Consulting Operations |
|
|
230 |
|
|
|
294 |
|
|
|
(21.8 |
%) |
|
|
226 |
|
|
|
293 |
|
|
|
(22.9 |
%) |
Economic Consulting Services |
|
|
344 |
|
|
|
319 |
|
|
|
7.8 |
% |
|
|
344 |
|
|
|
319 |
|
|
|
7.8 |
% |
|
|
|
Total |
|
$ |
250 |
|
|
$ |
266 |
|
|
|
(6.0 |
%) |
|
$ |
251 |
|
|
$ |
260 |
|
|
|
(3.5 |
%) |
|
|
|
|
|
|
(1) |
|
Excludes the impact of performance based fees. |
25
Segment operating profit as a percentage of segment revenue before reimbursement for the three and
six months ended June 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months |
|
|
For the six months |
|
|
|
ended June 30, |
|
|
ended June 30, |
|
|
|
2009 |
|
|
2008 |
|
|
2009 |
|
|
2008 |
|
North American Dispute and Investigative Services |
|
|
39.0 |
% |
|
|
42.6 |
% |
|
|
38.4 |
% |
|
|
42.2 |
% |
North American Business Consulting Services |
|
|
36.7 |
% |
|
|
41.4 |
% |
|
|
36.5 |
% |
|
|
40.7 |
% |
International Consulting Operations |
|
|
27.7 |
% |
|
|
39.5 |
% |
|
|
27.9 |
% |
|
|
36.0 |
% |
Economic Consulting Services |
|
|
36.9 |
% |
|
|
40.1 |
% |
|
|
36.5 |
% |
|
|
40.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating profit |
|
|
36.9 |
% |
|
|
41.6 |
% |
|
|
36.5 |
% |
|
|
40.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings Summary. For the three and six months ended June 30, 2009, net income decreased 66
percent and 58 percent, respectively, compared to the corresponding periods in 2008, primarily as a
result of lower revenue. Revenue was negatively impacted by several factors including the weakened
economy, longer lead times for client spending decisions, and uncertainties surrounding the
regulatory environment and potential stimulus spending. The decrease in revenue was partially
offset by lower compensation expenses and lower general and administrative spending in 2009
compared to the corresponding periods in 2008. However, several factors resulted in higher expenses
including higher than normal severance-related expense of
$4.3 million related to approximately 230
employee reductions that occurred in the first and second quarters of 2009 as we continued to
align our staffing needs to the reduced demand for our services, higher office consolidation costs
primarily due to the planned relocation of our New York office, and unfavorable changes in the
foreign exchange rates relative to the US dollar, which negatively impacted our results, including
a $13.1 million negative impact on revenues before reimbursements for the six month period ended
June 30, 2009.
Outlook. We expect our revenue to continue to be challenged by the weakened economy as clients
continue to exercise caution in advancing large engagements and assess their own discretionary
spending. However, we continue to undertake expense management efforts and cost saving initiatives
begun during the first quarter of 2009. These initiatives include staffing reductions, holding base
salaries constant, closely managing employee benefits and tighter control over discretionary
spending. We also recently completed a strategic assessment of our overall portfolio of businesses
and services which will prioritize our capital and resources on large
and global opportunities and
talent development particularly in the Dispute and Forensic Services, Healthcare and Energy
markets.
Total Revenues before Reimbursements. Most revenues before reimbursements are earned from
consultants fee revenues that are primarily a function of billable hours, bill rates and
consultant headcount. For the three and six months ended June 30, 2009, revenues before
reimbursements decreased 16.9 percent and 13.1 percent, respectively, compared to the corresponding
periods in 2008. The decrease in headcount reflects, in part, the decreased demand for our
services and our corresponding staffing reductions in recent
quarters.
North American Dispute and Investigative Services. Total revenues for this segment decreased
18.5 percent and 19.3 percent for the three and six months ended June 30, 2009, respectively,
compared to the corresponding periods in 2008. The decrease was mainly a result of 6.0 percent and
4.7 percent decreased bill rates and 7.8 percent and 12.3 percent decreases in utilization for the
three and six months ended June 30, 2009, respectively, over the corresponding periods in 2008.
Uncertainty in the legal, economic and regulatory environments continues to impact demand, slow the
assignment award process, and delay the beginning of sold engagements negatively impacting
utilization and the resulting revenue. Additionally, the economic and demand environment have put
pressure on bill rates which has had a corresponding impact on revenues.
North American Business Consulting Services. Total revenues for this segment decreased by 24.6
percent and 20.9 percent for the three and six months ended June 30, 2009, respectively, compared
to the corresponding periods in 2008. The decrease was a result of decreased utilization of 6.3
percent and 7.3 percent and decreased bill rates of 6.6 percent and 1.8 percent during the three
and six months ended June 30, 2009, respectively, compared to the corresponding periods in 2008.
Headcount also decreased 12.8 and 10.2 percent during the three and six months ended June 30, 2009,
respectively, over the corresponding period in 2008 in response to the lower market demand.
Additionally, lower use of independent contractors contributed to a 3 and 4 percent decrease in
total revenues in the three and six months ended June 30, 2009, respectively, compared to the
corresponding periods in 2008. This segment had a significant decrease in demand during 2009 in
certain markets including the financial services market due to the recent market disruptions and
the healthcare market due to cost pressure on providers resulting from the economic crisis. The
segment continues to see a decrease in demand as clients lower their discretionary spending and are
deferring decisions related to strategic initiatives.
International Consulting Operations. Total revenues for this segment decreased 22.9 percent
and 21.0 percent for the three and six months ended June 30, 2009, respectively, compared to the
corresponding periods in 2008. The results were negatively impacted in part by unfavorable currency
fluctuations due to the weakening UK pound against the US dollar in the three and six months ended
26
June 30, 2009 compared to the corresponding periods in 2008, by $4.9 million and $11.1
million, respectively. Excluding the foreign exchange impact, total revenue was slightly down for
the quarter and increased 5 percent for the six months ended June 30, 2009 when compared to the
same periods in 2008. The year to date increase is primarily due the first quarter acquisition of
assets of Morse PLCs Investment Management Consulting Business.
Economic Consulting Services. This segment commenced operations with our acquisition of
Chicago Partners on May 1, 2008. The segment continues to see demand particularly related to
antitrust, valuation and structured finance matters.
Cost of Services before Reimbursable Expenses. Cost of services before reimbursable expenses
were $102.0 million and $212.2 million for the three and six months ended June 30, 2009,
respectively, compared to $113.9 million and $226.9 million for the corresponding periods in 2008,
which represented decreases in costs of services before reimbursable expenses of 10.4 percent and
6.5 percent, respectively. Cost of services before reimbursable expenses includes consultant
incentive compensation. Incentive compensation is structured to reward consultants based on the
achieved business performance under a compensation methodology approved by our management and the
compensation committee of our board of directors. Consultant compensation expense was lower in the
first and second quarters of 2009 compared to the first and second quarters of 2008, mainly due to
lower incentive compensation expense as a result of lower operating performance and profits and
wage savings as a result of recent reductions in headcount. This decrease was partially offset by
expense amortization relating to long-term incentive and retention agreements entered into during
the second and third quarters of 2008, our acquisition of Chicago Partners in May 2008, and
severance charges incurred primarily during the first quarter of 2009 as we aligned our resources to the decreased
demand. Excluding the impact of acquisitions on average full time equivalent headcount, the
decrease in headcount for the three and six months ended June 30, 2009 compared to the
corresponding periods in 2008 was 9 and 7 percent, respectively. Cost of services included
severance expense of $1.3 million and $3.9 million for the three months and six months ended June
30, 2009, respectively, compared to $1.2 million and $1.4 million for the corresponding periods of
2008.
As a percentage of revenues before reimbursements, costs of services before reimbursable
expenses was 65 percent for each of the three and six months ended June 30, 2009, compared to 60
percent and 61 percent for the three and six months ended June 30, 2008, respectively. The increase
in such costs as a percentage of revenue before reimbursements reflects the reduced consultant
utilization and severance expense associated with the recent headcount reduction actions. The
severance costs resulted in a 1% increase in cost of services as a percentage of revenues before
reimbursements for each of the three and six months ended June 30, 2009.
Segment Operating Profit Margin. For the three and six months ended June 30, 2009 compared to
the corresponding periods in 2008, segment operating profit margin decreased approximately 4
percentage points for North American Dispute and Investigative Services. The decrease was
primarily due to the decreased revenue and consultant utilization during 2009 compared to strong
utilization periods in 2008. Operating profit margin for the North American Business Consulting
Services segment decreased approximately 4.5 percentage points during each of the three and six
months ended June 30, 2009 compared to the corresponding periods in 2008. The decrease was
primarily due to the decreased revenue and consultant utilization. Both the North American Dispute
and Investigative Services and North American Business Consulting Services segment operating profit
margin were impacted by higher severance costs during the six months ended June 30, 2009 compared
to the same period in 2008. The decrease in Economic Consulting Services segment operating margin
during the three months ended June 30, 2009 was primarily associated with lower consultant
utilization in 2009 compared to a very strong partial quarter in the prior year. International
Consulting Operations segment operating profit decreased approximately 12 and 8 percentage points
for the three and six months ended June 30, 2009, respectively, when compared to the corresponding
periods in 2008. These decreases were the result of decreased revenue and consultant utilization
and higher severance expense and costs associated with the integration of its first quarter
acquisition of Morse PLCs Investment Management Consulting Business.
General and Administrative Expenses. General and administrative expenses include
facility-related costs, salaries and benefits of corporate management and support personnel,
allowances for doubtful accounts receivable, professional and administrative services costs and all
other support costs.
General and administrative expenses decreased $7.6 million and $10.7 million, or 18.4 percent
and 13.5 percent, for the three and six months ended June 30, 2009, respectively, when compared to
the corresponding periods in 2008. The decrease in general and administrative expenses was the
result of lower professional fees for legal matters and information technology costs, lower bad
debt charges and lower administrative personnel costs due to cost saving initiatives and headcount
reductions enacted during 2009. General and administrative expenses were 21 percent of revenues
before reimbursements for each of the three and six months ended June 30, 2009, respectively,
compared to 22 and 21 percent for each of the corresponding periods in 2008 as the expense
reductions were relatively consistent with the decreased revenue levels experienced in 2009.
While bad debt expense for the three and six months
27
ended June 30, 2009 was lower than the comparable periods during 2008, we continue to
experience higher bad debt expense as a percentage of revenue before reimbursement compared to our
recent historical levels.
Other Operating Costs. During the three and six months ended June 30, 2009, we recorded $4.6
million and $5.5 million, respectively, of office closure related costs, which consisted of
adjustments to office closure obligations, the write down of leasehold improvements and accelerated
depreciation on leasehold improvements in offices to be abandoned. During the second quarter of
2009, we vacated and relocated one of our New York offices, which resulted in a $3.6 million
charge, and we reduced office space in other locations.
We continue to monitor our estimates for office closure obligations and related expected
sublease income which is estimated to begin for certain properties as early as January 2010. Such
estimates are subject to market conditions and may be adjusted in the future periods as necessary.
The office closure obligations have been discounted to net present value. In the next twelve months
we expect our cash expenditures to be $3.8 million relating to these obligations.
Amortization Expense. Amortization expense includes primarily the amortization of intangible
assets such as customer lists and relationships, and non-compete agreements related to certain
business acquisitions.
For the three and six months ended June 30, 2009, amortization expense was $3.4 million and
$7.0 million, respectively, compared to $4.6 million and $8.8 million for the corresponding periods
in 2008. The decrease in amortization of intangible assets was primarily due to the lapse of
amortization for certain intangible assets as such assets useful lives came to term.
Interest Expense. Interest expense includes interest on borrowed amounts under our credit
agreement, amortization of debt refinancing costs, and accretion of interest related to deferred
purchase price obligations.
For the three and six months ended June 30, 2009, interest expense was $4.0 million and $7.9
million, respectively, compared to $5.6 million and $10.2 million for the corresponding periods in
2008. The decrease in interest expense for the periods in 2009 compared to 2008 was related to
lower borrowing balances under our Credit Agreement combined with lower average borrowing rates in
2009. We had higher borrowings in 2008 to finance an acquisition in May 2008. Our average
borrowing rate under our credit agreement (including the impact of our interest rate swap
agreement see note 10 to the Unaudited Consolidated Financial
Statements) was 5.3 percent and 5.5 percent for the three and six months ended June 30, 2009
compared to 6.9 percent and 6.6 percent for the corresponding periods in 2008.
Income tax expense. The effective income tax rate for the three and six months ended June 30,
2009 and 2008 was 43 percent. 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.
Human Capital Resources
Our human capital resources include consulting professionals and administrative and management
personnel. As a result of both recruiting activities and business acquisitions, we have a diverse
pool of consultants and administrative support staff with various skills and experience. The
following table shows the employee data for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
For the six months ended |
|
|
June 30, |
|
June 30, |
|
|
2009 |
|
2008 |
|
2009 |
|
2008 |
Number of FTE consultants as of June 30 |
|
|
1,778 |
|
|
|
1,928 |
|
|
|
1,778 |
|
|
|
1,928 |
|
Average number of FTE consultants |
|
|
1,832 |
|
|
|
1,916 |
|
|
|
1,886 |
|
|
|
1,915 |
|
Average utilization of consultants,
based on industry standard of 1,850
hours |
|
|
73 |
% |
|
|
79 |
% |
|
|
74 |
% |
|
|
81 |
% |
Number of FTE administrative and
management personnel as of June 30 |
|
|
535 |
|
|
|
571 |
|
|
|
535 |
|
|
|
571 |
|
The average number of FTE consultants is adjusted for part-time status and takes into
consideration hiring and attrition which occur during the period. The decrease in FTE consultants
for the three and six months ended June 30, 2009 compared to the corresponding periods in 2008
reflects headcount reductions.
In addition to our consultants and administrative personnel, we hire project employees on a
short-term basis or seasonal basis. We believe the practice of hiring these employees provides
greater flexibility in adjusting consulting and administrative personnel levels in response to
changes in demand for our professional services. The short-term or seasonal hires supplement
services on certain engagements or provide additional administrative support to our consultants.
28
In connection with certain recruiting activities and business acquisitions, our policy is to
obtain non-solicitation covenants from senior and mid-level consultants. Most of these covenants
have restrictions that extend 12 months beyond termination. We utilize these contractual agreements
and other agreements to reduce the risk of attrition and to safeguard our existing clients, staff
and projects.
Liquidity and Capital Resources
Summary
We had $5.1 million in cash and cash equivalents at June 30, 2009, compared to $23.1 million
at December 31, 2008. Our cash equivalents were primarily limited to money market accounts or A
rated securities, with maturity dates of 90 days or less. As of June 30, 2009, we had total bank
debt outstanding of $239.7 million under our credit agreement, compared to $232.5 million as of
December 31, 2008.
We calculate accounts receivable days sales outstanding (DSO) by dividing the accounts
receivable, net balance, net of deferred revenue credits, at the end of the quarter, by daily net
revenues. Daily net revenues are calculated by taking quarterly net revenues divided by 90 days,
approximately equal to the number of days in a quarter. Calculated as such, we had DSO of 91 days
at June 30, 2009, compared to 73 days at December 31, 2008 and 85 days at June 30, 2008. The
increase in DSO is attributable to slower client payments most likely associated with overall
economic conditions.
Operating Activities
Net cash used in operating activities was $7.2 million for the six months ended June 30, 2009,
compared to net cash used in operating activities of $0.6 million for the six months ended June 30,
2008. The increase in net cash used in operating activities resulted primarily from the lower net
income and increased investments in working capital, primarily associated with an increased
investment in accounts receivables as a result of the higher DSO.
Investing Activities
Net cash used in investing activities for the six months ended June 30, 2009 was $17.2
million, compared to $57.5 million for the six months ended June 30, 2008. During the six months
ended June 30, 2008 we paid $50.0 million for the cash portion of the purchase price for Chicago
Partners payable at closing. During the same period in 2009, we spent $1.9 million for the
acquisition of a business. During the six months ended June 30, 2009, we spent $12.4 million in
capital infrastructure, primarily related to leasehold improvements of a new office located in New
York and software license agreements. Purchases of property and
equipment are expected to be $16 to $19 million for 2009.
Financing Activities
Net cash provided by financing activities for the six months ended June 30, 2009 was $6.1
million, compared to $56.7 million for the six months ended June 30, 2008. During the six months
ended June 30, 2008, we had net borrowings of $52.5 million primarily to finance the cash
consideration for our acquisition of Chicago Partners.
Debt, Commitments and Capital
As of June 30, 2009, we maintained a bank borrowing credit agreement consisting of a $275.0
million revolving line of credit with the option to increase to $375.0 million and a $225.0 million
unsecured term loan facility. Borrowings under the revolving credit facility are payable in May
2012. Our credit agreement provides for borrowings in multiple currencies including US Dollars,
Canadian Dollars, UK Pound Sterling and Euro. As of June 30, 2009, we had aggregate borrowings of
$239.7 million, compared to $232.5 million as of
December 31, 2008. Based on our financial covenant
restrictions under our line of credit agreement as of and at
June 30, 2009, a maximum of approximately $100 million would be
available in additional borrowings on our line of credit.
At our option borrowings under the revolving credit facility and the term loan facility bear
interest, in general, based on a variable rate equal to an applicable base rate or LIBOR, in each
case plus an applicable margin. For LIBOR loans, the applicable margin will vary depending upon our
consolidated leverage ratio (the ratio of total funded debt to adjusted EBITDA) and whether the
loan is made under the term loan facility or revolving credit facility. As of June 30, 2008, the
applicable margins on LIBOR loans under the term loan facility and revolving credit facility were
1.25% and 1.0%, respectively. As of June 30, 2009, the applicable margins for base rate loans under
the term loan facility and revolving credit facility were 0.25% and zero, respectively. For LIBOR
loans, the applicable margin will vary between 0.50% to 1.75% depending upon our performance and
financial condition. Our average borrowing rate under our credit
agreement (including the impact of our interest rate swap agreement
see note 10 to the Unaudited Consolidated Financial Statements
was 5.3% and 5.5% for the three and six months ended June 30, 2009
compared to 6.9% and 6.6% for the corresponding periods in 2008.
29
Our credit agreement also includes certain financial covenants, including covenants that
require that we maintain a consolidated leverage ratio of not greater than 3.25:1 and a
consolidated fixed charge coverage ratio (the ratio of the sum of adjusted EBITDA and rental
expense to the sum of cash interest expense and rental expense) of not less than 2.0:1. At June 30,
2009, under the definitions in the credit agreement, our consolidated leverage ratio was 2.3 and
our consolidated fixed charge coverage ratio was 3.5. In addition to the financial covenants, the
credit agreement contains customary affirmative and negative covenants and is subject to customary
exceptions. These covenants limit our ability to incur liens or other encumbrances or make
investments, incur indebtedness, enter into mergers, consolidations and asset sales, pay dividends
or other distributions, change the nature of our business and engage in transactions with
affiliates. We were in compliance with the terms of our credit agreement as of June 30, 2009 and
December 31, 2008; however there can be no assurances that we will remain in compliance in the
future.
As of June 30, 2009, we had total commitments of $375.9 million, which included $12.6 million
in deferred business acquisition obligations, payable in cash and common stock, software license
agreements of $2.0 million, notes payable of $4.2 million, and $117.5 million in lease commitments.
As of June 30, 2009, we had no significant commitments for capital expenditures.
The following table shows the components of significant commitments as of June 30, 2009 and
the scheduled years of payments (shown in thousands):
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From July 1, |
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2009 to |
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December 31, |
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Contractual Obligations |
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Total |
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2009 |
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2010 to 2011 |
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2012 to 2013 |
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Thereafter |
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Deferred purchase price obligations |
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$ |
12,588 |
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$ |
978 |
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$ |
11,610 |
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|
$ |
|
|
|
$ |
|
|
Software license agreements |
|
|
1,968 |
|
|
|
480 |
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|
|
1,488 |
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|
|
|
|
|
|
|
Notes payable |
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|
4,170 |
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|
|
4,170 |
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|
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Line of credit |
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|
19,217 |
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|
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|
|
|
|
|
|
|
|
19,217 |
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|
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Term loan |
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220,500 |
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1,125 |
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|
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34,875 |
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184,500 |
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Lease commitments |
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117,476 |
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|
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14,306 |
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|
|
48,037 |
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|
|
29,400 |
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|
|
25,733 |
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Total |
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$ |
375,919 |
|
|
$ |
21,059 |
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|
$ |
96,010 |
|
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$ |
233,117 |
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$ |
25,733 |
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Subsequent to the original acquisition date, we may pay up to $27.0 million of additional
purchase consideration based on the Chicago Partners business achieving certain post-closing
performance targets during the periods from closing to December 31, 2008 and calendar years 2009,
2010 and 2011. If earned, the additional purchase consideration would be payable 75 percent in cash
and 25 percent in our common stock. The additional purchase price payments, if any, will be payable
in April of the year following the year such performance targets are attained. During the three
months ended March 31, 2009, we made an additional purchase price payment of $2.3 million based on
2008 performance.
Of the $117.5 million of lease commitments as of June 30, 2009, $25.1 million of such lease
commitments related to offices we have abandoned or reduced excess space within, which are
available for sublease. Such sublease income, if any, would offset the cash outlays.
We do not expect to significantly increase or reduce our reserve for uncertain tax positions
during the next twelve months.
We believe that our current cash and cash equivalents, the future cash flows from operations
and borrowings under our credit agreement will provide adequate cash to fund anticipated short-term and long-term
cash needs from normal operations. In the event we make significant cash expenditures in the future
for major acquisitions or other non-operating activities, we might need additional debt or equity
financing, as appropriate. Additionally, our credit agreement is with a syndicate of several banks.
These banks could be negatively impacted by the recent disruptions in the financial markets.
Off-Balance Sheet Arrangements
We do not maintain any off-balance sheet arrangements, transactions, obligations or other
relationships with unconsolidated entities that would be expected to have a material current or
future impact on our financial condition or results of operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our primary exposure to market risks relates to changes in interest rates and foreign
currencies. The interest rate risk is associated with our borrowings under the line of credit, and
our investment portfolio, classified as cash equivalents. Our general investment policy is to limit
the risk of principal loss by limiting market and credit risks. The foreign currency risk is
associated with our operations in foreign countries.
As of June 30, 2009, our investments were primarily limited to A rated securities, with
maturity dates of 90 days or less. These financial instruments are subject to interest rate risk
and will decline in value if interest rates rise. Because of the short periods to
30
maturity of these instruments, an increase in interest rates would not have a material effect
on our financial position or results of operations.
On July 2, 2007, we entered into an interest rate swap agreement with a bank for a notional
value of $165.0 million through June 30, 2010. This agreement effectively fixed our LIBOR base rate
for $165.0 million of our indebtedness at a rate of 5.30% during this period. We designated the
swap as a cash flow hedge to manage market risk from changes in interest rates on a portion of our
variable rate term loans. We recognize cash flow hedges as assets or liabilities at fair value,
with the related gain or loss reflected within stockholders equity as a component of accumulated
other comprehensive income to the extent of effectiveness. Any ineffectiveness on the swap would be
recognized in the consolidated statements of income. The differentials to be received or paid under
the instrument are recognized in income over the life of the contract as adjustments to interest
expense. The use of an interest rate swap exposes us to counterparty credit risk in the event of
non performance by counterparties. As of June 30, 2009, we were not exposed to significant
counterparty risk. During the three and six months ended June 30, 2009 there was no gain or loss
due to ineffectiveness and we recorded a $1.7 million and $3.3 million in interest expense
respectively associated with differentials paid under the instrument. As of June 30, 2009, we had a
$7.3 million liability recorded in other current liabilities related to this interest rate
derivative and we recorded a $1.1 million unrealized gain, net of taxes of $1.2 million, to
accumulated other comprehensive income for the six months ended June 30, 2009.
Other than our previously disclosed contractual obligations of $375.9 million and the $165.0
million interest rate swap agreement, we did not have, at June 30, 2009, any other short-term debt,
long-term debt, interest rate derivatives, forward exchange agreements, firmly committed foreign
currency sales transactions, or derivative commodity instruments.
Our market risk associated with the credit agreement relates to changes in interest rates. As
of June 30, 2009, borrowings under the credit agreement bear interest, in general, based on a
variable rate equal to an applicable base rate (equal to the higher of a reference prime rate or
one half of one percent above the federal funds rate) or LIBOR, in each case plus an applicable
margin. Based on borrowings under the credit agreement at June 30, 2009, each quarter point change
in market interest rates would result in approximately a $0.6 million change in annual interest
expense, after considering the impact of our interest rate swap agreement.
We operate in foreign countries, which expose us to market risk associated with foreign
currency exchange rate fluctuations. At June 30, 2009, we had net assets of approximately $128.3
million with a functional currency of the UK Pounds Sterling and $36.0 million with a functional
currency of the Canadian Dollar related to our operations in the United Kingdom and Canada,
respectively. At June 30, 2009, we had net assets denominated in the non functional currency of
approximately $0.9 million. As such, a ten percent change in the value of the local currency would
result in a $0.1 million currency transaction gain or loss in our results of operations.
Item 4. Controls and Procedures
Under the supervision of our management, including our principal executive officer and
principal financial officer, we evaluated the effectiveness of the design of our disclosure
controls and procedures as of June 30, 2009. Based on that evaluation, the principal executive
officer and principal financial officer concluded that our disclosure controls and procedures were
effective.
We maintain disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and
15d-15(e)) that are designed to ensure that information required to be disclosed in our reports
filed or submitted under the Exchange Act is recorded, processed, summarized and reported within
the time frames specified in SECs rules and forms, and that such information is accumulated and
communicated to our management, including our principal executive officer and principal financial
officer, as appropriate, to allow timely decisions regarding required disclosure. Any system of
controls and procedures, no matter how well designed and operated, can provide only reasonable
assurance of achieving the desired control objectives.
During the six months ended June 30, 2009, there have not been any changes in our internal
control over financial reporting that have materially affected or are reasonably likely to
materially affect our internal control over financial reporting as defined in Exchange Act Rule
13a-15(f).
31
PART IIOTHER INFORMATION
Item 1. Legal Proceedings
From time to time we are party to various other lawsuits and claims in the ordinary course of
business. While the outcome of those lawsuits or claims cannot be predicted with certainty, we do
not believe that any of those lawsuits or claims will have a material adverse effect on us.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the three months ended June 30, 2009, we issued the following unregistered securities:
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Number of |
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Type of |
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Shares in |
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Exemption |
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Purchaser or |
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Assets |
Date |
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Securities |
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Consideration (a) |
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Claimed (b) |
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Recipient |
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Purchased |
April 28, 2009 |
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Common Stock |
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440,849 |
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Section 4(2) |
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Chicago Partners, LLC |
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(c |
) |
May 15, 2009 |
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Common Stock |
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101,539 |
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Section 4(2) |
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Casas, Benjamin & White, LLC |
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(c |
) |
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(a) |
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Does not take into account additional cash or other consideration paid or payable as a part
of the transactions. |
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(b) |
|
The shares of common stock were issued to accredited investors without registration in
private placements in reliance on the exemption from registration under Section 4(2) of the
Securities Act. |
|
(c) |
|
Shares represent deferred payment consideration of the purchase agreement to purchase
substantially all of the assets of the recipient. |
Item 4. Submission of Matters to a Vote of Security Holders
Our 2009 Annual Meeting of Shareholders was held on May 6, 2009.
Two nominees, Mr. Thomas A. Gildehaus and Mr. Peter B. Pond were elected as Directors to the
board of directors for a term expiring at the Annual Meeting of Stockholders in 2012. The vote for
Mr. Gildehaus was 40,031,631 shares for and 4,613,204 shares to withhold authority. The vote for
Mr. Pond was 39,115,065 shares for and 5,529,770 shares to withhold authority. Messrs. Goodyear,
Thompson, James, and Skinners terms as Director continued.
KPMG LLP was ratified as our independent accountants for the year 2009. The vote for such
ratification was 43,308,565 shares for, 1,298,293 shares to withhold authority and 37,977 shares
abstained.
Item 6. Exhibits
The following exhibits are filed with the Form 10-Q:
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Exhibit 31.1
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Rule 13a14(a) Certification of the Chairman and Chief Executive Officer. |
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Exhibit 31.2
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Rule 13a14(a) Certification of the Executive Vice President and Chief Financial Officer. |
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Exhibit 32.1
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Section 1350 Certification |
32
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Navigant Consulting, Inc.
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By: |
/s/ WILLIAM M. GOODYEAR
|
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|
|
William M. Goodyear |
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|
|
Chairman and Chief Executive Officer |
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By: |
/s/ THOMAS A. NARDI
|
|
|
|
Thomas A. Nardi |
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|
|
Executive Vice President and Chief Financial Officer |
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|
Date: July 27, 2009
33