e10vq
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
|
|
|
þ |
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the nine months ended September 30, 2008
OR
|
|
|
o |
|
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)
|
|
|
Delaware
|
|
36-4094854 |
(State or other jurisdiction of
|
|
(I.R.S. Employer |
incorporation or organization)
|
|
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 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):
|
|
|
|
|
|
|
Large accelerated filer þ
|
|
Accelerated filer o
|
|
Non-accelerated filer o
|
|
Smaller reporting company o |
|
|
|
|
(Do not check if a smaller reporting company) |
|
|
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 October 31, 2008, 48.5 million shares of the Registrants common stock, par value $.001
per share, were outstanding.
NAVIGANT CONSULTING, INC.
AS OF AND FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008
INDEX
|
|
|
|
|
|
|
Page |
|
|
|
|
|
|
|
|
|
3 |
|
|
|
|
7 |
|
|
|
|
21 |
|
|
|
|
29 |
|
|
|
|
29 |
|
|
|
|
|
|
|
|
|
30 |
|
|
|
|
30 |
|
|
|
|
30 |
|
|
|
|
31 |
|
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)
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
|
|
(unaudited) |
|
|
|
|
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
10,530 |
|
|
$ |
11,656 |
|
Accounts receivable, net |
|
|
197,877 |
|
|
|
189,616 |
|
Prepaid expenses and other current assets |
|
|
18,599 |
|
|
|
11,827 |
|
Deferred income tax assets |
|
|
20,950 |
|
|
|
15,460 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
247,956 |
|
|
|
228,559 |
|
Property and equipment, net |
|
|
45,391 |
|
|
|
54,687 |
|
Intangible assets, net |
|
|
46,203 |
|
|
|
57,755 |
|
Goodwill |
|
|
475,058 |
|
|
|
430,768 |
|
Other assets |
|
|
19,444 |
|
|
|
6,928 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
834,052 |
|
|
$ |
778,697 |
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
9,782 |
|
|
$ |
7,547 |
|
Accrued liabilities |
|
|
9,364 |
|
|
|
9,771 |
|
Accrued compensation-related costs |
|
|
69,519 |
|
|
|
62,150 |
|
Income taxes payable |
|
|
|
|
|
|
5,904 |
|
Notes payable |
|
|
6,239 |
|
|
|
6,348 |
|
Bank debt |
|
|
2,250 |
|
|
|
2,250 |
|
Other current liabilities |
|
|
36,348 |
|
|
|
32,549 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
133,502 |
|
|
|
126,519 |
|
Non-current liabilities: |
|
|
|
|
|
|
|
|
Deferred income tax liabilities |
|
|
29,427 |
|
|
|
29,756 |
|
Notes payable |
|
|
|
|
|
|
5,348 |
|
Other non-current liabilities |
|
|
30,254 |
|
|
|
19,955 |
|
Term loan non-current |
|
|
219,938 |
|
|
|
221,625 |
|
Bank borrowings non-current |
|
|
50,791 |
|
|
|
32,741 |
|
|
|
|
|
|
|
|
Total non-current liabilities |
|
|
330,410 |
|
|
|
309,425 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
463,912 |
|
|
|
435,944 |
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Preferred stock |
|
|
|
|
|
|
|
|
Common stock |
|
|
59 |
|
|
|
58 |
|
Additional paid-in capital |
|
|
553,666 |
|
|
|
546,870 |
|
Deferred stock issuance |
|
|
985 |
|
|
|
2,847 |
|
Treasury stock |
|
|
(238,696 |
) |
|
|
(242,302 |
) |
Retained earnings |
|
|
57,910 |
|
|
|
29,182 |
|
Accumulated other comprehensive income (loss) |
|
|
(3,784 |
) |
|
|
6,098 |
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
370,140 |
|
|
|
342,753 |
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
834,052 |
|
|
$ |
778,697 |
|
|
|
|
|
|
|
|
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)
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
Revenues before reimbursements |
|
$ |
178,908 |
|
|
$ |
167,057 |
|
Reimbursements |
|
|
19,184 |
|
|
|
23,790 |
|
|
|
|
|
|
|
|
Total revenues |
|
|
198,092 |
|
|
|
190,847 |
|
Cost of services before reimbursable expenses |
|
|
110,083 |
|
|
|
104,405 |
|
Reimbursable expenses |
|
|
19,184 |
|
|
|
23,790 |
|
|
|
|
|
|
|
|
Total costs of services |
|
|
129,267 |
|
|
|
128,195 |
|
General and administrative expenses |
|
|
41,417 |
|
|
|
35,680 |
|
Depreciation expense |
|
|
4,330 |
|
|
|
4,189 |
|
Amortization expense |
|
|
3,955 |
|
|
|
5,378 |
|
Other operating costs: |
|
|
|
|
|
|
|
|
Separation
and severance costs |
|
|
|
|
|
|
3,348 |
|
Office consolidation |
|
|
553 |
|
|
|
2,150 |
|
Gain on sale of property |
|
|
|
|
|
|
(2,201 |
) |
|
|
|
|
|
|
|
Operating income |
|
|
18,570 |
|
|
|
14,108 |
|
Interest expense |
|
|
5,170 |
|
|
|
6,021 |
|
Interest income |
|
|
(380 |
) |
|
|
(158 |
) |
Other income, net |
|
|
93 |
|
|
|
58 |
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
13,687 |
|
|
|
8,187 |
|
Income tax expense |
|
|
5,851 |
|
|
|
3,454 |
|
|
|
|
|
|
|
|
Net income |
|
$ |
7,836 |
|
|
$ |
4,733 |
|
|
|
|
|
|
|
|
Basic net income per share |
|
$ |
0.17 |
|
|
$ |
0.10 |
|
Shares used in computing basic net income per share |
|
|
46,707 |
|
|
|
45,263 |
|
Diluted net income per share |
|
$ |
0.16 |
|
|
$ |
0.10 |
|
Shares used in computing diluted net income per share |
|
|
48,895 |
|
|
|
46,462 |
|
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)
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended |
|
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
Revenues before reimbursements |
|
$ |
552,587 |
|
|
$ |
501,545 |
|
Reimbursements |
|
|
64,052 |
|
|
|
62,225 |
|
|
|
|
|
|
|
|
Total revenues |
|
|
616,639 |
|
|
|
563,770 |
|
Cost of services before reimbursable expenses |
|
|
337,008 |
|
|
|
311,488 |
|
Reimbursable expenses |
|
|
64,052 |
|
|
|
62,225 |
|
|
|
|
|
|
|
|
Total costs of services |
|
|
401,060 |
|
|
|
373,713 |
|
General and administrative expenses |
|
|
120,501 |
|
|
|
104,227 |
|
Depreciation expense |
|
|
12,876 |
|
|
|
11,905 |
|
Amortization expense |
|
|
12,779 |
|
|
|
12,798 |
|
Other operating costs: |
|
|
|
|
|
|
|
|
Separation and severance costs |
|
|
|
|
|
|
4,625 |
|
Office consolidation |
|
|
4,646 |
|
|
|
2,150 |
|
Gain on sale of property |
|
|
|
|
|
|
(2,201 |
) |
|
|
|
|
|
|
|
Operating income |
|
|
64,777 |
|
|
|
56,553 |
|
Interest expense |
|
|
15,390 |
|
|
|
9,461 |
|
Interest income |
|
|
(877 |
) |
|
|
(431 |
) |
Other income, net |
|
|
30 |
|
|
|
(50 |
) |
|
|
|
|
|
|
|
Income before income taxes |
|
|
50,234 |
|
|
|
47,573 |
|
Income tax expense |
|
|
21,506 |
|
|
|
20,153 |
|
|
|
|
|
|
|
|
Net income |
|
$ |
28,728 |
|
|
$ |
27,420 |
|
|
|
|
|
|
|
|
Basic net income per share |
|
$ |
0.62 |
|
|
$ |
0.54 |
|
Shares used in computing basic net income per share |
|
|
46,439 |
|
|
|
50,744 |
|
Diluted net income per share |
|
$ |
0.60 |
|
|
$ |
0.53 |
|
Shares used in computing diluted net income per share |
|
|
47,997 |
|
|
|
52,165 |
|
See accompanying notes to the unaudited consolidated financial statements.
5
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended |
|
|
|
September 30 |
|
|
|
2008 |
|
|
2007 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
28,728 |
|
|
$ |
27,420 |
|
Adjustments to reconcile net income to net cash provided by operating activities, net of acquisitions: |
|
|
|
|
|
|
|
|
Depreciation expense |
|
|
12,876 |
|
|
|
11,905 |
|
Depreciation expense-office consolidation |
|
|
2,041 |
|
|
|
|
|
Amortization expense |
|
|
12,779 |
|
|
|
12,798 |
|
Share-based compensation expense |
|
|
9,632 |
|
|
|
13,378 |
|
Accretion of interest expense |
|
|
704 |
|
|
|
572 |
|
Deferred income taxes |
|
|
(5,830 |
) |
|
|
2,044 |
|
Allowance for doubtful accounts receivable |
|
|
17,201 |
|
|
|
8,081 |
|
Gain on sale of property |
|
|
|
|
|
|
(2,201 |
) |
Other, net |
|
|
(273 |
) |
|
|
730 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
(14,058 |
) |
|
|
(30,441 |
) |
Prepaid expenses and other assets |
|
|
(15,966 |
) |
|
|
(8,177 |
) |
Accounts payable |
|
|
2,186 |
|
|
|
(4,635 |
) |
Accrued liabilities |
|
|
(500 |
) |
|
|
3,135 |
|
Accrued compensation-related costs |
|
|
1,820 |
|
|
|
9,267 |
|
Income taxes payable |
|
|
(6,498 |
) |
|
|
(5,919 |
) |
Other current liabilities |
|
|
(6,289 |
) |
|
|
4,062 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
38,553 |
|
|
|
42,019 |
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Purchases of property and equipment |
|
|
(5,055 |
) |
|
|
(18,648 |
) |
Acquisitions of businesses, net of cash acquired |
|
|
(50,000 |
) |
|
|
(65,250 |
) |
Payments of acquisition liabilities |
|
|
(3,154 |
) |
|
|
(4,465 |
) |
Proceeds from sale of property |
|
|
|
|
|
|
4,028 |
|
Other, net |
|
|
(863 |
) |
|
|
(1,916 |
) |
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(59,072 |
) |
|
|
(86,251 |
) |
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Issuances of common stock |
|
|
5,298 |
|
|
|
6,795 |
|
Payments of notes payable |
|
|
(4,976 |
) |
|
|
(5,967 |
) |
Borrowings from banks, net |
|
|
20,995 |
|
|
|
49,176 |
|
(Payments of) proceeds from term loan from banks |
|
|
(1,687 |
) |
|
|
224,437 |
|
Payments of bank borrowings assumed from business acquisition |
|
|
|
|
|
|
(2,420 |
) |
Repurchases of common stock |
|
|
|
|
|
|
(218,429 |
) |
Other, net |
|
|
(237 |
) |
|
|
44 |
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
19,393 |
|
|
|
53,636 |
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
(1,126 |
) |
|
|
9,404 |
|
Cash and cash equivalents at beginning of the period |
|
|
11,656 |
|
|
|
11,745 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of the period |
|
$ |
10,530 |
|
|
$ |
21,149 |
|
|
|
|
|
|
|
|
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 a specialized independent consulting firm providing dispute, investigative, financial,
operational and business advisory, risk management and regulatory advisory, and transaction
advisory solution 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 nine months ended September 30, 2008 are not necessarily
indicative of the results to be expected for the entire year ending December 31, 2008.
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, 2007 included in
the Annual Report on Form 10-K, as filed by us with the Securities and Exchange Commission on
February 28, 2008.
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
2008 Acquisitions
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 on the six month anniversary of the closing and
each of the first, second and third year anniversaries of the closing. We acquired assets of $16.7
million, including $15.8 million in accounts receivable, net of allowance for doubtful accounts,
and assumed liabilities of $7.1 million. Through September 30, 2008, we paid $0.5 million in
acquisition-related costs. We recorded $2.1 million to goodwill and liabilities for obligations
related to lease exit costs for office space assumed in the acquisition. As part of the purchase
price allocation, we recorded $4.3 million in identifiable intangible assets and $61.1 million in
goodwill. The purchase agreement provides for an adjustment of the purchase price for the
difference in net assets acquired compared to the target net assets. Additionally, 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 April 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. The
purchase price paid in cash at closing was funded under our credit facility. The allocation of
purchase price for Chicago Partners is preliminary, as the valuation of certain identifiable
intangible assets has not been finalized. We expect to complete the allocation of purchase price by
the end of 2008. The obligation recorded for real estate lease exit costs is based on foregone
rent payments for the remainder of the lease terms less assumed sublease income recovery. As of
September 30, 2008, we have not secured subtenants to occupy the office space assumed in the
acquisition.
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 (SFAS 131), operates under a fourth operating segment referred to as
Economic Consulting Services.
7
2007 Acquisitions
On January 5, 2007, we acquired Abros Enterprise Limited (Abros) for $11.9 million, which
consisted of $9.9 million in cash, $1.0 million of our common stock paid at closing, and notes
payable totaling $1.0 million (payable in two equal installments on the first and second
anniversaries of the closing date). We acquired assets of $3.3 million, including $1.8 million in
cash, and assumed liabilities of $1.4 million. As part of the purchase price allocation, we
recorded $4.0 million in identifiable intangible assets and $8.1 million in goodwill, which
included $1.2 million of deferred income taxes. Additionally, we paid $0.4 million of
acquisition-related costs. As part of the purchase agreement, we acquired an office lease agreement
which we terminated. We recorded $0.2 million to goodwill and accrued liabilities for the
additional acquisition-related costs to exit the lease of the acquired business. In addition, we
paid $0.4 million related to adjustments to the net asset value acquired from Abros. Abros offered
strategic planning, financial analysis and implementation advice for public sector infrastructure
projects. We acquired Abros to strengthen our presence in the United Kingdom public sector markets.
Abros was comprised of 15 consulting professionals located in the United Kingdom at the time of
acquisition and was included in the International Consulting Operations segment.
On June 8, 2007, we acquired Bluepress Limited, a holding company which conducts business
through its wholly-owned subsidiary, Augmentis PLC (Augmentis), for $16.2 million, which
consisted of $15.3 million in cash paid at closing and $0.8 million of our common stock paid in
July 2007. We acquired assets of $3.1 million and assumed liabilities of $7.0 million. In June
2007, as part of the purchase agreement, we received $4.0 million in cash as an adjustment to the
purchase price consideration related to the assumption of debt at the closing date, which was paid
off shortly thereafter. As part of the purchase price allocation, we recorded $6.8 million in
identifiable intangible assets and $11.8 million in goodwill, which included $2.0 million of
deferred income taxes. Additionally, we paid $0.4 million in acquisition-related costs. Augmentis
provided program management consulting services to support public sector infrastructure projects.
We acquired Augmentis to strengthen our presence in the United Kingdom public sector markets.
Augmentis was comprised of 24 consulting professionals located in the United Kingdom at the time of
acquisition and was included in the International Consulting Operations Segment.
On June 19, 2007, we acquired the assets of AMDC Corporation (AMDC) for $16.6 million, which
consisted of $13.0 million in cash and $1.6 million of our common stock paid at closing, and $2.0
million paid in cash on the first anniversary of the closing date. As part of the purchase price
allocation, we recorded $4.9 million in identifiable intangible assets and $12.2 million in
goodwill. We assumed certain liabilities aggregating $1.1 million including deferred revenue and
acquisition costs related to exiting an office lease acquired as part of the acquisition. AMDC
provided strategy and implementation consulting services in relation to the development of hospital
and healthcare facilities. We acquired AMDC to strengthen our healthcare business and leverage our
construction consulting capabilities. AMDC was included in the North American Business Consulting
Services segment and included 23 consulting professionals at the time of acquisition.
On July 30, 2007, we acquired Troika (UK) Limited (Troika) for $43.9 million, which
consisted of $30.8 million in cash paid at closing, $3.3 million of our common stock paid in
September 2007, and notes payable totaling $9.8 million (payable in two equal installments on the
first and second anniversaries of the closing date). We acquired assets of $10.3 million, including
$3.4 million in cash, and assumed liabilities of $5.9 million. As part of the purchase price
allocation, we recorded $14.2 million in identifiable intangible assets and $30.7 million in
goodwill, which included $4.0 million of deferred income taxes. We paid $1.0 million related to
adjustments to the net asset value acquired from Troika. Additionally, we paid $0.4 million of
acquisition-related costs. Troika provided consultancy services to the financial services and
insurance industry covering operations performance improvement; product and distribution
strategies; organization, people and change; and IT effectiveness and transaction support. Troika
was included in the International Consulting Operations Segment and included 42 consulting
professionals located in the United Kingdom at the time of acquisition.
We acquired other businesses during the nine months ended September 30, 2007 for an aggregate
purchase price of approximately $8.1 million. As part of the purchase price allocations for these
acquisitions, we recorded $3.9 million in identifiable intangible assets and $4.9 million in
goodwill, which included $1.5 million of deferred income taxes. These acquisitions included 25
consulting professionals, most of whom were located in Canada.
All of our business acquisitions described above have been accounted for by the purchase
method of accounting for business combinations and, accordingly, the results of operations have
been included in the consolidated financial statements since the dates of the acquisition.
8
Pro Forma Information
The following table summarizes certain supplemental unaudited pro forma financial information
which was prepared as if the acquisitions noted above had occurred as of 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 nine months ended |
|
|
September 30, |
|
September 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Total revenues |
|
$ |
198,092 |
|
|
$ |
204,650 |
|
|
$ |
634,323 |
|
|
$ |
623,665 |
|
Net income |
|
$ |
7,836 |
|
|
$ |
4,536 |
|
|
$ |
30,204 |
|
|
$ |
27,213 |
|
Basic net income per share |
|
$ |
0.17 |
|
|
$ |
0.10 |
|
|
$ |
0.63 |
|
|
$ |
0.52 |
|
Diluted net income per share |
|
$ |
0.16 |
|
|
$ |
0.10 |
|
|
$ |
0.62 |
|
|
$ |
0.51 |
|
3. Segment Information
We are organized 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 as a result of our
acquisition of Chicago Partners on May 1, 2008 (see note 2). These segments are predominately
defined by their services and geographic markets. The business is managed and resources 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. 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.
The Economic Consulting Services segment provides economic and financial analyses of legal and
business issues principally for law firms, corporations and government agencies.
In accordance with the disclosure requirements of SFAS No. 131, Disclosures about Segments of
an Enterprise and Related Information, we identified the above four operating segments as
reportable segments.
9
Segment information for the three and nine months ended September 30, 2008 and 2007 has been
summarized and is presented in the table below (shown in thousands). Transactions between segments
have been eliminated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
|
For the nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Total revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American Dispute and Investigative Services |
|
$ |
79,836 |
|
|
$ |
81,633 |
|
|
$ |
259,440 |
|
|
$ |
239,114 |
|
North American Business Consulting Services |
|
|
82,902 |
|
|
|
91,244 |
|
|
|
271,288 |
|
|
|
280,822 |
|
International Consulting Operations |
|
|
20,828 |
|
|
|
17,970 |
|
|
|
63,722 |
|
|
|
43,834 |
|
Economic Consulting Services |
|
|
14,526 |
|
|
|
|
|
|
|
22,189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
198,092 |
|
|
$ |
190,847 |
|
|
$ |
616,639 |
|
|
$ |
563,770 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American Dispute and Investigative Services |
|
$ |
32,558 |
|
|
$ |
31,809 |
|
|
$ |
101,334 |
|
|
$ |
93,863 |
|
North American Business Consulting Services |
|
|
28,047 |
|
|
|
29,629 |
|
|
|
95,370 |
|
|
|
90,734 |
|
International Consulting Operations |
|
|
6,127 |
|
|
|
4,883 |
|
|
|
19,689 |
|
|
|
16,282 |
|
Economic Consulting Services |
|
|
5,954 |
|
|
|
|
|
|
|
8,902 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total combined segment operating profit |
|
|
72,686 |
|
|
|
66,321 |
|
|
|
225,295 |
|
|
|
200,879 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment reconciliation to income before income taxes: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses |
|
|
41,417 |
|
|
|
35,680 |
|
|
|
120,501 |
|
|
|
104,227 |
|
Depreciation expense |
|
|
4,330 |
|
|
|
4,189 |
|
|
|
12,876 |
|
|
|
11,905 |
|
Amortization expense |
|
|
3,955 |
|
|
|
5,378 |
|
|
|
12,779 |
|
|
|
12,798 |
|
Long term compensation expense related to
consulting personnel (including share based
compensation) |
|
|
3,861 |
|
|
|
3,669 |
|
|
|
9,716 |
|
|
|
10,822 |
|
Other operating costs |
|
|
553 |
|
|
|
3,297 |
|
|
|
4,646 |
|
|
|
4,574 |
|
Other expense, net |
|
|
4,883 |
|
|
|
5,921 |
|
|
|
14,543 |
|
|
|
8,980 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total unallocated expenses, net |
|
|
58,999 |
|
|
|
58,134 |
|
|
|
175,061 |
|
|
|
153,306 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
$ |
13,687 |
|
|
$ |
8,187 |
|
|
$ |
50,234 |
|
|
$ |
47,573 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The other operating costs recorded during the three and nine months ended September 30, 2008
and 2007 were not allocated to segment operating costs (see note 12).
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):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
North American Dispute and Investigative Services |
|
$ |
314,753 |
|
|
$ |
325,426 |
|
North American Business Consulting Services |
|
|
237,793 |
|
|
|
246,656 |
|
International Consulting Operations |
|
|
94,405 |
|
|
|
106,058 |
|
Economic Consulting Services |
|
|
72,167 |
|
|
|
|
|
Unallocated assets |
|
|
114,934 |
|
|
|
100,557 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
834,052 |
|
|
$ |
778,697 |
|
|
|
|
|
|
|
|
10
Note 4. Goodwill and Intangible Assets
Goodwill and other intangible assets consisted of (shown in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Goodwill |
|
$ |
480,483 |
|
|
$ |
436,193 |
|
Lessaccumulated amortization |
|
|
(5,425 |
) |
|
|
(5,425 |
) |
|
|
|
|
|
|
|
Goodwill, net |
|
|
475,058 |
|
|
|
430,768 |
|
Intangible assets: |
|
|
|
|
|
|
|
|
Client lists and relationships |
|
|
64,368 |
|
|
|
65,705 |
|
Non-compete agreements |
|
|
20,593 |
|
|
|
21,082 |
|
Other |
|
|
18,469 |
|
|
|
16,840 |
|
|
|
|
|
|
|
|
Intangible assets, at cost |
|
|
103,430 |
|
|
|
103,627 |
|
Lessaccumulated amortization |
|
|
(57,227 |
) |
|
|
(45,872 |
) |
|
|
|
|
|
|
|
Intangible assets, net |
|
|
46,203 |
|
|
|
57,755 |
|
|
|
|
|
|
|
|
Goodwill and intangible assets, net |
|
$ |
521,261 |
|
|
$ |
488,523 |
|
|
|
|
|
|
|
|
In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, we are required to
perform an annual goodwill impairment test. During the second quarter of 2008, we completed an
annual impairment test for our goodwill balances as of May 31, 2008. There was no indication of
impairment based on our analysis. We reviewed the net book values and estimated useful lives by
class of our intangible assets and considered facts and circumstances that could be an indication
of impairment. As of September 30, 2008, there was no indication of impairment related to our
intangible assets. 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. At September 30, 2008, the weighted average remaining life for our intangible assets was 4.6
years.
The changes in carrying values of goodwill and intangible assets during the nine months ended
September 30, 2008 and 2007 are as follows (shown in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the nine months ended |
|
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
Beginning of periodGoodwill, net |
|
$ |
430,768 |
|
|
$ |
359,705 |
|
Goodwill acquired during the period |
|
|
61,184 |
|
|
|
66,386 |
|
Adjustments to goodwill |
|
|
(6,905 |
) |
|
|
|
|
Foreign currency translation goodwill |
|
|
(9,989 |
) |
|
|
7,253 |
|
|
|
|
|
|
|
|
End of periodGoodwill, net |
|
$ |
475,058 |
|
|
$ |
433,344 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of periodIntangible assets, net |
|
$ |
57,755 |
|
|
$ |
38,416 |
|
Intangible assets acquired during the period |
|
|
4,311 |
|
|
|
35,828 |
|
Foreign currency translationintangible assets, net |
|
|
(3,084 |
) |
|
|
3,144 |
|
Less amortization expense |
|
|
(12,779 |
) |
|
|
(12,798 |
) |
|
|
|
|
|
|
|
End of periodIntangible assets, net |
|
$ |
46,203 |
|
|
$ |
64,590 |
|
|
|
|
|
|
|
|
We have allocated the purchase price of the Chicago Partners acquisition, including amounts
assigned to goodwill and intangible assets, and made estimates of their related useful lives. The
amounts assigned to intangible assets for the businesses acquired include non-compete agreements,
client lists and relationships, backlog revenue and a trade name.
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.
As of September 30, 2008, goodwill and intangible assets, net of amortization, was $227.9
million for North American Dispute and Investigative Services, $165.7 million for North American
Business Consulting Services, $71.0 million for International Consulting Operations and $56.7
million for Economic Consulting Services.
11
Below is the estimated annual aggregate amortization expense of intangible assets for each of
the five succeeding years and thereafter from December 31, 2007, based on intangible assets
recorded at September 30, 2008, and includes $12.8 million recorded in the nine months ended
September 30, 2008 (shown in thousands):
|
|
|
|
|
Year ending December 31, |
|
Amount |
|
2008 |
|
$ |
16,634 |
|
2009 |
|
|
13,725 |
|
2010 |
|
|
9,709 |
|
2011 |
|
|
8,258 |
|
2012 |
|
|
5,002 |
|
Thereafter |
|
|
5,654 |
|
|
|
|
|
Total |
|
$ |
58,982 |
|
|
|
|
|
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 nine months ended September 30, 2008 and 2007, 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 nine months ended |
|
|
September 30, |
|
September 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Common stock outstanding |
|
|
46,647 |
|
|
|
44,915 |
|
|
|
46,350 |
|
|
|
50,425 |
|
Business combination obligations payable in a fixed
number of shares |
|
|
60 |
|
|
|
348 |
|
|
|
89 |
|
|
|
319 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic shares |
|
|
46,707 |
|
|
|
45,263 |
|
|
|
46,439 |
|
|
|
50,744 |
|
Employee stock options |
|
|
432 |
|
|
|
556 |
|
|
|
458 |
|
|
|
620 |
|
Restricted shares and stock units |
|
|
426 |
|
|
|
427 |
|
|
|
355 |
|
|
|
571 |
|
Business combination obligations payable in a
fixed dollar amount of shares |
|
|
1,309 |
|
|
|
119 |
|
|
|
736 |
|
|
|
131 |
|
Contingently issuable shares |
|
|
21 |
|
|
|
97 |
|
|
|
9 |
|
|
|
99 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted shares |
|
|
48,895 |
|
|
|
46,462 |
|
|
|
47,997 |
|
|
|
52,165 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12
For the three months ended September 30, 2008 and 2007, we had outstanding stock options for
approximately 420,000 and 500,000 shares, respectively, which were excluded from the computation of
diluted shares. For the nine months ended September 30, 2008 and 2007, we had outstanding stock
options for approximately 410,000 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.
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.
Note 6. Stockholders Equity
The following summarizes the activity of stockholders equity during the nine months ended
September 30, 2008 (shown in thousands):
|
|
|
|
|
|
|
|
|
|
|
Dollars |
|
|
Shares |
|
Stockholders equity at January 1, 2008 |
|
$ |
342,753 |
|
|
|
45,800 |
|
Comprehensive income |
|
|
18,846 |
|
|
|
|
|
Stock issued in acquisition-related transactions |
|
|
892 |
|
|
|
174 |
|
Fair value adjustment of shares issued in acquisitions |
|
|
(6,844 |
) |
|
|
|
|
Cash proceeds from employee stock option exercises and employee stock purchases |
|
|
5,298 |
|
|
|
441 |
|
Net settlement of employee taxes on the vesting of restricted stock |
|
|
(1,131 |
) |
|
|
(65 |
) |
Tax benefits on stock options exercised and restricted stock vested, net of deficiencies |
|
|
452 |
|
|
|
|
|
Vesting of restricted stock |
|
|
|
|
|
|
423 |
|
Amortization of restricted stock awards |
|
|
8,441 |
|
|
|
|
|
Amortization of stock option awards |
|
|
534 |
|
|
|
|
|
Fair value adjustment for variable accounting awards |
|
|
125 |
|
|
|
|
|
Discount given on employee stock purchase transactions through our Employee Stock Purchase Plan |
|
|
774 |
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity at September 30, 2008 |
|
$ |
370,140 |
|
|
|
46,773 |
|
|
|
|
|
|
|
|
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 |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Amortization of restricted stock awards |
|
$ |
2,695 |
|
|
$ |
4,573 |
|
|
$ |
8,441 |
|
|
$ |
11,649 |
|
Amortization of stock option awards |
|
|
175 |
|
|
|
225 |
|
|
|
534 |
|
|
|
624 |
|
Fair value adjustment for variable accounting awards |
|
|
5 |
|
|
|
(125 |
) |
|
|
125 |
|
|
|
(151 |
) |
Discount given on employee stock purchase
transactions through our Employee Stock Purchase
Plan |
|
|
180 |
|
|
|
194 |
|
|
|
774 |
|
|
|
832 |
|
Other share-based compensation expense |
|
|
|
|
|
|
(199 |
) |
|
|
(242 |
) |
|
|
424 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation expense |
|
$ |
3,055 |
|
|
$ |
4,668 |
|
|
$ |
9,632 |
|
|
$ |
13,378 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
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 |
|
|
Nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Cost of services |
|
$ |
2,476 |
|
|
$ |
3,669 |
|
|
$ |
7,390 |
|
|
$ |
10,822 |
|
General and administrative expenses |
|
|
579 |
|
|
|
999 |
|
|
|
2,242 |
|
|
|
2,556 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation expense |
|
$ |
3,055 |
|
|
$ |
4,668 |
|
|
$ |
9,632 |
|
|
$ |
13,378 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Outstanding
As of September 30, 2008, we had 1.7 million restricted stock awards and equivalent units
outstanding at a weighted average measurement price of $19.08 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 nine months ended September
30, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
Number |
|
|
average |
|
|
Number |
|
|
average |
|
|
|
of shares |
|
|
measurement |
|
|
of shares |
|
|
measurement |
|
|
|
(000s) |
|
|
date price |
|
|
(000s) |
|
|
date price |
|
Restricted stock outstanding at beginning of the period |
|
|
2,264 |
|
|
$ |
19.45 |
|
|
|
1,963 |
|
|
$ |
19.07 |
|
Granted |
|
|
109 |
|
|
|
18.17 |
|
|
|
1,983 |
|
|
|
18.71 |
|
Vested |
|
|
(423 |
) |
|
|
20.13 |
|
|
|
(993 |
) |
|
|
17.34 |
|
Forfeited |
|
|
(253 |
) |
|
|
19.46 |
|
|
|
(211 |
) |
|
|
18.97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock outstanding at end of the period |
|
|
1,697 |
|
|
$ |
19.08 |
|
|
|
2,742 |
|
|
$ |
19.44 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of September 30, 2008, we had $21.5 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 three years. During the first
quarter of 2008, the compensation committee of the board of directors suspended, for 2008, the
policy to grant shares of the restricted stock in lieu of cash bonus to our employees. Accordingly,
2007 bonus incentive compensation was paid in cash.
During the nine months ended September 30, 2007, we issued 2.0 million shares of restricted
stock related to annual bonus incentive compensation, performance incentive initiatives, and
recruiting efforts. During the first quarter of 2007, as part of the annual bonus incentive
compensation, we granted approximately 310,000 shares of restricted stock, in lieu of cash bonus,
to our employees. We also granted approximately 110,000 shares of restricted stock to our employees
as a match for the annual bonus received in shares of restricted stock in lieu of cash. These
shares vest in three equal installments over 18 months from the grant dates. Also on March 13, 2007
and April 30, 2007, we issued 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
within five years based upon the achievement of certain targets related to our consolidated
operating performance. The compensation associated with these awards is being recognized within
five years through 2012. We review the likelihood of required performance achievements on a
periodic basis and will adjust compensation expense on a prospective basis to reflect any change in
estimate to properly reflect compensation expense over the remaining balance of the service or
performance period. As of September 30, 2008, approximately 0.9 million of these restricted stock
awards remain outstanding and no shares have vested.
14
Note 8. Supplemental Consolidated Balance Sheet Information
Accounts Receivable:
The components of accounts receivable were as follows (shown in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Billed amounts |
|
$ |
161,686 |
|
|
$ |
150,792 |
|
Engagements in process |
|
|
60,793 |
|
|
|
51,498 |
|
Allowance for doubtful accounts |
|
|
(24,602 |
) |
|
|
(12,674 |
) |
|
|
|
|
|
|
|
Accounts receivable net |
|
$ |
197,877 |
|
|
$ |
189,616 |
|
|
|
|
|
|
|
|
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. The increase in the allowance
for doubtful accounts receivable during 2008 was primarily attributable to the impact of recent
disruptions in the financial markets. The increase in the allowance for doubtful accounts over our
prior periods primarily reflects managements view of the likelihood of collection of receivables
due from certain of our financial industry clients as well as the impact of the financial market
disruptions on a broad range of clients. 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):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Notes receivable current |
|
$ |
5,345 |
|
|
$ |
|
|
Prepaid income taxes |
|
|
2,134 |
|
|
|
|
|
Other prepaid expenses and other current assets |
|
|
11,120 |
|
|
|
11,827 |
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets |
|
$ |
18,599 |
|
|
$ |
11,827 |
|
|
|
|
|
|
|
|
Other assets
The components of other assets were as follows (shown in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Notes receivable non-current |
|
$ |
15,054 |
|
|
$ |
|
|
Prepaid expenses and other non-current assets |
|
|
4,390 |
|
|
|
6,928 |
|
|
|
|
|
|
|
|
Other assets |
|
$ |
19,444 |
|
|
$ |
6,928 |
|
|
|
|
|
|
|
|
During 2008, we issued unsecured forgivable loans with terms of four to five years aggregating
$21.6 million to certain senior consultants. 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 $0.5 million for the nine
months ended September 30, 2008.
15
Property and Equipment:
Property and equipment were as follows (shown in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Furniture, fixtures and equipment |
|
$ |
48,728 |
|
|
$ |
52,994 |
|
Software |
|
|
21,375 |
|
|
|
20,754 |
|
Leasehold improvements |
|
|
40,007 |
|
|
|
39,510 |
|
|
|
|
|
|
|
|
|
|
|
110,110 |
|
|
|
113,258 |
|
Less: accumulated depreciation and amortization |
|
|
(64,719 |
) |
|
|
(58,571 |
) |
|
|
|
|
|
|
|
Property and equipment, net |
|
$ |
45,391 |
|
|
$ |
54,687 |
|
|
|
|
|
|
|
|
Other Current Liabilities:
The components of other current liabilities were as follows (shown in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Deferred business acquisition obligations |
|
$ |
12,645 |
|
|
$ |
5,132 |
|
Deferred revenue |
|
|
12,707 |
|
|
|
16,521 |
|
Deferred rent |
|
|
2,003 |
|
|
|
2,136 |
|
Commitments on abandoned real estate |
|
|
2,328 |
|
|
|
3,445 |
|
Other liabilities |
|
|
6,665 |
|
|
|
5,315 |
|
|
|
|
|
|
|
|
Total other current liabilities |
|
$ |
36,348 |
|
|
$ |
32,549 |
|
|
|
|
|
|
|
|
The deferred business acquisition obligations of $12.6 million at September 30, 2008 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. Included in the $12.6 million balance of deferred business acquisition obligations
at September 30, 2008 were obligations totaling $12.5 million, which will be settled by the
issuances of shares of our common stock. 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):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Deferred business acquisition obligations |
|
$ |
10,205 |
|
|
$ |
465 |
|
Deferred rent |
|
|
10,744 |
|
|
|
10,873 |
|
Commitments on abandoned real estate |
|
|
2,121 |
|
|
|
1,767 |
|
Interest rate swap liability |
|
|
5,547 |
|
|
|
6,030 |
|
Other non-current liabilities |
|
|
1,637 |
|
|
|
820 |
|
|
|
|
|
|
|
|
Total other non-current liabilities |
|
$ |
30,254 |
|
|
$ |
19,955 |
|
|
|
|
|
|
|
|
The deferred business acquisition obligations of $10.2 million at September 30, 2008 will be
settled by the issuance of shares of our common stock and 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 on lease arrangements for our office facilities that expire at various dates
through 2017. See discussion of the interest rate swap liability in Note 10, Comprehensive Income.
Notes PayableCurrent and Non-Current
As of September 30, 2008, as part of the purchase price agreements for acquired businesses, we
had $6.2 million in notes payable which were due within one year subsequent to September 30, 2008.
The notes bear interest at annual interest rates of 5.7 percent to 7.2 percent. As of September 30,
2008, accrued interest on the notes payable was $53,000, primarily relating to the note related to
the acquisition of HP3.
Current notes payable were as follows (shown in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Note related to the HP3 acquisition |
|
$ |
1,000 |
|
|
$ |
1,000 |
|
Note related to the Abros acquisition |
|
|
454 |
|
|
|
499 |
|
Note related to the Troika acquisition |
|
|
4,785 |
|
|
|
4,849 |
|
|
|
|
|
|
|
|
Total current notes payable |
|
$ |
6,239 |
|
|
$ |
6,348 |
|
|
|
|
|
|
|
|
Non-current notes payable were as follows (shown in thousands):
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
|
December 31, |
|
|
|
2008 |
|
|
2007 |
|
Note related to the Abros acquisition |
|
$ |
|
|
|
$ |
499 |
|
Note related to the Troika acquisition |
|
|
|
|
|
|
4,849 |
|
|
|
|
|
|
|
|
Total non-current notes payable |
|
$ |
|
|
|
$ |
5,348 |
|
|
|
|
|
|
|
|
16
Note 9. Supplemental Consolidated Cash Flow Information
Non-Cash Transactions
During the nine months ended September 30, 2008, as part of the purchase price agreements for
acquired businesses during the period, we entered into commitments to pay $21.0 million of deferred
purchase price obligations relating to our Chicago Partners acquisition (see Note 2).
Other Information
Total interest paid during the nine months ended September 30, 2008 and 2007 was $15.2 million
and $7.7 million, respectively. Total income taxes paid were $30.7 million and $22.9 million during
the nine months ended September 30, 2008 and 2007, respectively.
Note
10. Comprehensive Income (Loss)
Comprehensive
income (loss) consists of net income, foreign currency translation adjustments and the
unrealized gains or losses on our interest rate swap agreement as follows (shown in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
|
For the nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Net income |
|
$ |
7,836 |
|
|
$ |
4,733 |
|
|
$ |
28,728 |
|
|
$ |
27,420 |
|
Foreign currency translation adjustment |
|
|
(8,683 |
) |
|
|
2,792 |
|
|
|
(10,204 |
) |
|
|
7,436 |
|
Unrealized net gain (loss) on interest rate derivative, net of tax |
|
|
209 |
|
|
|
(1,754 |
) |
|
|
322 |
|
|
|
(1,754 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
income (loss) |
|
$ |
(638 |
) |
|
$ |
5,771 |
|
|
$ |
18,846 |
|
|
$ |
33,102 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 London
Interbank Offered Rate (LIBOR) base rate for $165.0 million of our indebtedness at a rate of 5.30
percent during this period. We expect the interest rate derivative to be highly effective against
changes in cash flows related to changes in interest rates and have recorded the derivative as a
hedge. As a result, gains or losses related to fluctuations in the fair value of the interest rate
derivative are recorded as a component of accumulated other comprehensive income and reclassified
into interest expense as the variable interest expense on our indebtedness is recorded. There was
no ineffectiveness related to this hedge for the nine months ended September 30, 2008. As of
September 30, 2008, we had a $5.5 million liability related to this interest rate derivative.
As of September 30, 2008, accumulated other comprehensive loss is comprised of foreign
currency translation losses of $0.6 million and an unrealized net loss on the interest rate swap of
$3.2 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
have deferred the adoption of SFAS No. 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.
17
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. As such, these derivative instruments are
classified within level 2.
Note 11. Bank Borrowings
As of September 30, 2008, we maintained a bank borrowing credit agreement (the Credit
Agreement) consisting of a $275.0 million revolving line of credit with the option to increase to
$375.0 million (Revolving Credit Facility) and a $225.0 million unsecured term loan facility
(Term Loan Facility). Borrowings under the Revolving Credit Facility are payable in May 2012. The
Credit Agreement provides for borrowings in multiple currencies including US Dollars, Canadian
Dollars, UK Pound Sterling and Euro. As of September 30, 2008, we had aggregate borrowings of
$273.0 million, compared to $256.6 million as of December 31, 2007.
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 the Revolving Credit Facility. As of September 30,
2008, the applicable margins on LIBOR loans under the Term Loan Facility and the Revolving Credit
Facility were 1.25% and 1.0%, respectively. As of September 30, 2008, the applicable margins for
base rate loans under the Term Loan Facility and the 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. For the nine months ended September 30, 2008 and
2007, our average borrowing rates under the Credit Agreement were 6.5% and 6.1%, respectively.
The 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
September 30, 2008, under the definitions in the Credit Agreement, our consolidated leverage ratio
was 2.1 and our consolidated fixed charge coverage ratio was 3.4. In addition to the financial
covenants, the Credit Agreement contains customary affirmative and negative covenants and is
subject to customary exceptions. These covenants will 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 the Credit Agreement as of
September 30, 2008 and December 31, 2007.
18
Note 12. Other Operating Costs
Other operating costs for the three and nine months ended September 30, 2008 and 2007
consisted of the following (shown in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
|
For the nine months ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
Separation costs and severance |
|
$ |
|
|
|
$ |
3,348 |
|
|
$ |
|
|
|
$ |
4,625 |
|
Adjustments to office closures
obligations, discounted and net of
expected sublease income |
|
|
|
|
|
|
658 |
|
|
|
2,105 |
|
|
|
658 |
|
Write down of leasehold improvements |
|
|
|
|
|
|
1,492 |
|
|
|
500 |
|
|
|
1,492 |
|
Gain on Sale of property |
|
|
|
|
|
|
(2,201 |
) |
|
|
|
|
|
|
(2,201 |
) |
Accelerated depreciation on
leasehold improvements due to
expected office closures |
|
|
553 |
|
|
|
|
|
|
|
2,041 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other operating costs |
|
$ |
553 |
|
|
$ |
3,297 |
|
|
$ |
4,646 |
|
|
$ |
4,574 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the three and nine months ended September 30, 2008, we recorded $0.6 million and $4.6
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 three months ended September 30, 2007, we began to eliminate duplicate facilities
and consolidate and close certain offices. We recorded $2.2 million of expense associated with the
office closings and excess space reductions completed during the three months ended September 30,
2007. The expense consisted of rent obligations for the offices, net of expected sublease income,
of $0.7 million and a $1.5 million write down of leasehold improvements, reflecting their estimated
fair value. The office closure obligations have been discounted to net present value.
We continue to monitor our estimates for office closure obligations and related expected
sublease income. Such estimates are subject to market conditions and may be adjusted in future
periods as necessary. We expect to pay $2.3 million in cash relating to these obligations during
the next twelve months. We expect to record additional restructuring charges for real estate lease
terminations as other initiatives are completed throughout 2008 and 2009.
On September 28, 2007, we sold the property where our principal executive office was located
for an aggregate gross purchase price of $4.5 million and recorded a $2.2 million gain on the sale
of property.
During the three months ended September 30, 2007, we recorded $3.3 million in separation and
severance costs in connection with a plan to restructure our operations as part of a cost savings
initiative. The restructuring of our operations included involuntary professional consulting and
administrative staff headcount reductions. We offered severance packages to approximately 60
consulting and administrative employees to reduce the capacity of our underperforming practices and
to reduce the headcount of our administrative support staff. All severance and separation
obligations have been completed. During the quarter ended March 31, 2007, we recorded $1.3 million
of realignment costs, which consisted of separation costs and severance.
19
The current and non-current liability activity related to the above, excluding accelerated
depreciation on leasehold improvements, are as follows:
|
|
|
|
|
|
|
|
|
|
|
Office |
|
|
Workforce |
|
|
|
Space |
|
|
Reductions |
|
|
|
Reductions |
|
|
|
|
|
Charges to operations during the year ended December 31, 2007 |
|
$ |
6,750 |
|
|
$ |
7,288 |
|
Utilized during the year ended December 31, 2007 |
|
|
(1,538 |
) |
|
|
(6,089 |
) |
|
|
|
|
|
|
|
Balance at December 31, 2007 |
|
|
5,212 |
|
|
|
1,199 |
|
Charges to operations during the quarter ended March 31, 2008 |
|
|
650 |
|
|
|
|
|
Utilized during the quarter ended March 31, 2008 |
|
|
(1,636 |
) |
|
|
(1,011 |
) |
|
|
|
|
|
|
|
Balance at March 31, 2008 |
|
|
4,226 |
|
|
|
188 |
|
Charges to operations during the quarter ended June 30, 2008 |
|
|
1,955 |
|
|
|
|
|
Utilized during the quarter ended June 30, 2008 |
|
|
(1,106 |
) |
|
|
(188 |
) |
|
|
|
|
|
|
|
Balance at June 30, 2008 |
|
|
5,075 |
|
|
|
|
|
Charges to operations during the quarter ended September 30, 2008 |
|
|
|
|
|
|
|
|
Utilized during the quarter ended September 30, 2008 |
|
|
(626 |
) |
|
|
|
|
|
|
|
|
|
|
|
Balance at September 30, 2008 |
|
$ |
4,449 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Office space reduction is not allocated to our individual business segments. As of September
30, 2008 had we allocated cumulative amounts relating to workforce reduction costs recorded in 2007
and 2008 to our segments, we would have recorded $2.6 million to our North American Dispute and
Investigative Services segment, $2.9 million to our North American Business Consulting Services
segment, zero to our International Consulting Operations segment, and zero to our Economic
Consulting Services segment.
20
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 our organizational changes; risks inherent in international operations,
including foreign currency fluctuations; pace, timing and integration of acquisitions; management
of professional staff, including dependence on key personnel, recruiting, attrition and the ability
to successfully integrate new consultants into our practices; utilization rates; dependence on the
expansion of and the increase in our service offerings and staff; conflicts of interest; potential
loss of clients; our clients financial condition, which could result in an impairment of their
ability to make payments to us; risks inherent with litigation; significant client assignments;
professional liability; potential legislative and regulatory changes; 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 prior 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 a specialized independent consulting firm providing dispute, investigative, financial,
operational and business advisory, risk management and regulatory advisory, and transaction
advisory solution 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 are generally not materially impacted by macro economic
business trends, although a long term decline in the U.S. economy would likely impact our business.
Examples of impacting events that may affect us are natural disasters, legislative and regulatory
changes, capital market disruptions, 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 primary offices.
21
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. 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. We test goodwill and intangible assets annually for impairment. This annual test is
performed in the second quarter of each year by comparing the financial statement carrying value of
each reporting unit to its fair value. 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.
Considerable management judgment is required to estimate future cash flows. Assumptions used
in our impairment evaluations, such as forecasted growth rates and cost of capital, are consistent
with internal projections and operating plans. We did not recognize any impairment charges for
goodwill, indefinite-lived intangible assets or identifiable intangible assets subject to
amortization during the periods presented.
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.
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 Statement of Financial Accounting Standards No.
109, Accounting for Income Taxes (SFAS 109), as amended. SFAS 109 requires application of 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, in accordance with
SFAS 109, we evaluate the need for a valuation allowance to reduce deferred tax assets.
22
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 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 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 the office closings and excess
space reductions. 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 change in the estimated useful life 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.
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
have deferred the adoption of SFAS No. 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.
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. Accordingly, SFAS 141(R) will be applied by us to business
combinations occurring on or after January 1, 2009.
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 under SFAS 133 and their effect on the entitys financial position, financial
performance and cash flows. The provisions of SFAS 161 are effective as of the beginning of our
2009 fiscal year. We are currently evaluating the impact of adopting SFAS 161 on our financial
statements.
23
Results of Operations
2008 compared to 2007 For the three and nine month periods ended September 30
Our operations are organized in four operating segments North American Dispute and
Investigative Services, North American Business Consulting Services, International Consulting
Operations and Economic Consulting Services. These segments are predominately defined by their
services and geographic markets. 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 for the three and nine months ended September 30, 2008 and 2007 (dollar
amounts are thousands, except bill rate).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
|
|
|
|
For the nine months ended |
|
|
|
|
September 30, |
|
% Increase/ |
|
September 30, |
|
% Increase/ |
|
|
2008 |
|
2007 |
|
(Decrease) |
|
2008 |
|
2007 |
|
(Decrease) |
Revenues before reimbursements |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American Dispute and
Investigative Services |
|
$ |
72,363 |
|
|
$ |
74,149 |
|
|
|
-2.4 |
% |
|
$ |
235,492 |
|
|
$ |
220,244 |
|
|
|
6.9 |
% |
North American Business Consulting
Services |
|
|
74,048 |
|
|
|
78,252 |
|
|
|
-5.4 |
% |
|
|
239,545 |
|
|
|
243,598 |
|
|
|
-1.7 |
% |
International Consulting Operations |
|
|
18,311 |
|
|
|
14,656 |
|
|
|
24.9 |
% |
|
|
56,015 |
|
|
|
37,703 |
|
|
|
48.6 |
% |
Economic Consulting Services |
|
|
14,186 |
|
|
|
|
|
|
|
|
|
|
|
21,535 |
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues before reimbursements |
|
$ |
178,908 |
|
|
$ |
167,057 |
|
|
|
7.1 |
% |
|
$ |
552,587 |
|
|
$ |
501,545 |
|
|
|
10.2 |
% |
|
|
|
Total Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American Dispute and
Investigative Services |
|
$ |
79,836 |
|
|
$ |
81,633 |
|
|
|
-2.2 |
% |
|
$ |
259,440 |
|
|
$ |
239,114 |
|
|
|
8.5 |
% |
North American Business Consulting
Services |
|
|
82,902 |
|
|
|
91,244 |
|
|
|
-9.1 |
% |
|
|
271,288 |
|
|
|
280,822 |
|
|
|
-3.4 |
% |
International Consulting Operations |
|
|
20,828 |
|
|
|
17,970 |
|
|
|
15.9 |
% |
|
|
63,722 |
|
|
|
43,834 |
|
|
|
45.4 |
% |
Economic Consulting Services |
|
|
14,526 |
|
|
|
|
|
|
|
|
|
|
|
22,189 |
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
198,092 |
|
|
$ |
190,847 |
|
|
|
3.8 |
% |
|
$ |
616,639 |
|
|
$ |
563,770 |
|
|
|
9.4 |
% |
|
|
|
Average Full Time Equivalent (FTE)
consultants |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American Dispute and
Investigative Services |
|
|
761 |
|
|
|
804 |
|
|
|
-5.3 |
% |
|
|
773 |
|
|
|
782 |
|
|
|
-1.2 |
% |
North American Business Consulting
Services |
|
|
886 |
|
|
|
1,001 |
|
|
|
-11.5 |
% |
|
|
913 |
|
|
|
1,023 |
|
|
|
-10.8 |
% |
International Consulting Operations |
|
|
189 |
|
|
|
157 |
|
|
|
20.4 |
% |
|
|
183 |
|
|
|
147 |
|
|
|
24.5 |
% |
Economic Consulting Services |
|
|
91 |
|
|
|
|
|
|
|
|
|
|
|
49 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,927 |
|
|
|
1,962 |
|
|
|
-1.8 |
% |
|
|
1,918 |
|
|
|
1,952 |
|
|
|
-1.7 |
% |
|
|
|
Average Utilization rates based on
1,850 hours |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American Dispute and
Investigative Services |
|
|
73 |
% |
|
|
75 |
% |
|
|
-2.7 |
% |
|
|
78 |
% |
|
|
76 |
% |
|
|
2.6 |
% |
North American Business Consulting
Services |
|
|
78 |
% |
|
|
79 |
% |
|
|
-1.3 |
% |
|
|
81 |
% |
|
|
78 |
% |
|
|
3.8 |
% |
International Consulting Operations |
|
|
72 |
% |
|
|
71 |
% |
|
|
1.4 |
% |
|
|
73 |
% |
|
|
79 |
% |
|
|
-7.6 |
% |
Economic Consulting Services |
|
|
99 |
% |
|
|
|
|
|
|
|
|
|
|
95 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
76 |
% |
|
|
77 |
% |
|
|
-1.3 |
% |
|
|
79 |
% |
|
|
77 |
% |
|
|
2.6 |
% |
|
|
|
Bill Rate (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North American Dispute and
Investigative Services |
|
$ |
291 |
|
|
$ |
282 |
|
|
|
3.2 |
% |
|
$ |
295 |
|
|
$ |
274 |
|
|
|
7.7 |
% |
North American Business Consulting
Services |
|
$ |
227 |
|
|
$ |
200 |
|
|
|
13.5 |
% |
|
$ |
222 |
|
|
$ |
201 |
|
|
|
10.4 |
% |
International Consulting Operations |
|
$ |
292 |
|
|
$ |
267 |
|
|
|
9.4 |
% |
|
$ |
290 |
|
|
$ |
259 |
|
|
|
12.0 |
% |
Economic Consulting Services |
|
$ |
337 |
|
|
$ |
|
|
|
|
|
|
|
$ |
330 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
265 |
|
|
$ |
238 |
|
|
|
11.3 |
% |
|
$ |
262 |
|
|
$ |
235 |
|
|
|
11.5 |
% |
|
|
|
|
|
|
(1) |
|
Excludes the impact of performance based fee engagements. |
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 months ended September 30, 2008 revenues before reimbursements
increased 7.1 percent compared to the corresponding period in 2007. For the nine months ended
September 30, 2008 revenues before reimbursements increased 10.2 percent compared to the
corresponding period in 2007.
24
Revenues before reimbursements for the three months ended September 30, 2008 increased over
the corresponding period in 2007 mainly due to the increase in international consulting, the
Chicago Partners acquisition and increased bill rates. Revenue before reimbursements for the nine
months ended September 30, 2008 increased over the corresponding period in 2007 mainly due to the
combination of recent acquisitions, increased bill rates, and increased utilization. In both the
three and nine months periods in 2008, the headcount decreased from the prior year reflecting
realignment initiatives in the segments partially offset by increased headcount from acquisitions.
The consultant utilization rates were 76 percent and 79 percent for the three and nine months ended
September 30, 2008, respectively, compared to 77 percent for the corresponding periods in 2007. The
decreased headcount and increased utilization rates during the nine months period reflected, in
part, our realignment efforts during the third and fourth quarters of 2007. We calculate our
utilization rate assuming a 1,850 hour base.
North American Dispute and Investigative Services. Total revenues for this segment decreased 2
percent and increased 9 percent for the three and nine months ended September 30, 2008,
respectively, over the corresponding periods in 2007. Utilization decreased 3 percent and increased
3 percent for the three and nine months ended September 30, 2008, respectively, over the
corresponding periods last year. The decrease for the three months period partially resulted from
delays in the timing of certain project activity during the third quarter, due, in part, to the
recent disruptions in the financial markets. The increase in utilization during the nine months
period resulted from strong demand during the first and second quarters of 2008. Bill rates
increased 3 percent and 8 percent during the three and nine months ended September 30, 2008,
respectively, over the corresponding periods in 2007. The bill rate increase was a result of a
higher mix of more senior consultants and efforts to increase billing rates.
North American Business Consulting Services. Total revenues for this segment decreased by 9
percent and 3 percent for the three and nine months ended September 30, 2008, respectively, over
the corresponding periods in 2007. Utilization decreased 1 percent and increased 4 percent during
the three and nine months ended September 30, 2008, respectively, over the corresponding periods
last year. Utilization decreased 1 percent for the three months period as a result of the recent
disruption in the financial markets, including decreased demand for our consulting services in the
financial and insurance markets, as clients in these markets have limited discretionary consulting
spending. Utilization increased 4 percent for the nine months period ended September 30, 2008
primarily as a result of workforce reductions occurring in the third and fourth quarters of 2007.
Bill rates increased 14 percent and 10 percent for the three and nine months ending September 30,
2008, respectively over the corresponding periods in 2007. The bill rate increase was attributable
to rate increases and a higher mix of more senior consultants.
International Consulting Operations. Total revenues for this segment increased 16 percent and
45 percent for the three and nine months ended September 30, 2008, respectively, over the
corresponding periods in 2007, mainly due to our 2007 acquisitions. During the three months ended
September 30, 2008, the increase in segment revenues was partially offset by negative currency
exchange rate impacts of 6 percent. Utilization increased 1 percent and decreased 8 percent during
the three and nine months ended September 30, 2008, respectively, over the corresponding periods in
2007. The decrease in utilization for the nine months was a result of our acquisitions during 2007
having a greater mix of senior consultants resulting in lower utilization which was offset by
higher bill rates. Bill rates increased 9 percent and 12 percent during the three and nine months
ended September 30, 2008, respectively, over the corresponding period last year.
Economic Consulting Services. This segment commenced operations with our acquisition of
Chicago Partners on May 1, 2008.
Cost of Services before Reimbursable Expenses. Cost of services before reimbursable expenses
were $110.1 million and $337.0 million for the three and nine months ended September 30, 2008,
respectively, compared to $104.4 million and $311.5 million for the corresponding periods in 2007,
which represented increases in costs of services before reimbursable expenses of 5 percent and 8
percent, respectively.
Cost of services before reimbursable expenses increased primarily because of higher consultant
compensation and benefits, which was primarily attributable to enhanced performance and favorable
results in 2008 compared to 2007. As a percentage of revenues before reimbursements, costs of
services before reimbursable expenses were 62 percent and 61 percent for the three and nine months
ended September 30, 2008, respectively, compared to 62 percent in both the three and nine months
ended September 30, 2007.
Cost of services before reimbursable expenses includes amounts related to consultant incentive
compensation. Incentive compensation is structured to reward consultants based on the achieved
business performance and under a compensation methodology as approved by our management and the
compensation committee of our board of directors. The amount of expense recorded for consultant
incentive compensation during the nine months ended September 30, 2008 was higher than the
corresponding period in 2007 primarily as a result of the improved operating performance. In
addition, we entered into long-term incentive and retention agreements during the second and third
quarters of 2008 (see discussion of unsecured forgiveable loans in Note 8), the amortization of
which is included in consultant compensation. The increase in compensation expense related to
the issuance of these long-term and retention agreements was partially offset by reduced share
based compensation expense.
25
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 increased $5.7 million and $16.2 million, or 16 percent,
for the three and nine months ended September 30, 2008, respectively, when compared to the
corresponding periods in 2007. The increase in general and administrative expenses was primarily
the result of an increase in allowances for doubtful accounts receivable of $4.3 million and $9.1
million for the three and nine months ended September 30, 2008, respectively. We provide services
to and have receivables due from many financial and insurance clients in all four of our segments.
The increase in the allowance for doubtful accounts receivable during 2008 was primarily
attributable to the impact of recent disruptions in the financial markets. The increase in the
allowance for doubtful accounts over our prior periods primarily reflects managements view of the
likelihood of collection of receivables due from certain of our financial industry clients as well
as the impact of the financial market disruptions on a broad range of clients. 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. In addition, we incurred
incremental overhead costs related to professional fees including legal and information technology
costs. General and administrative expenses were 23 percent and 22 percent of revenues before
reimbursements for the three and nine months ended September 30, 2008, respectively, compared to 21
percent for each of the corresponding periods in 2007. The increase in general and administrative
expenses as a percent of revenues before reimbursements during 2008 is primarily due to the
increased allowance for doubtful accounts.
Other Operating Costs. During the three and nine months ended September 30, 2008, we recorded
$0.6 million and $4.6 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 three months ended September 30, 2007, we began to eliminate duplicate facilities
and consolidate and close certain offices. We recorded $2.2 million of expense associated with the
office closings and excess space reductions completed during the three months ended September 30,
2007. The expense consisted of rent obligations for the offices, net of expected sublease income,
of $0.7 million and approximately $1.5 million write down of leasehold improvements reflecting
their estimated fair value. The office closure obligations have been discounted to net present
value.
We continue to monitor our estimates for office closure obligations and related expected
sublease income. Such estimates are subject to market conditions and may be adjusted in future
periods as necessary. We expect to pay $2.3 million in cash relating to these obligations during
the next twelve months. We expect to record additional restructuring charges for real estate lease
terminations as other initiatives are completed throughout 2008 and 2009.
On September 28, 2007, we sold the property where our principal executive office was located
for an aggregate gross purchase price of $4.5 million and recorded a $2.2 million gain on the sale
of property.
During the three months ended September 30, 2007, we recorded $3.3 million in separation and
severance costs in connection with a plan to restructure our operations as part of a cost savings
initiative. The restructuring of our operations included involuntary professional consulting and
administrative staff headcount reductions. We offered severance packages to approximately 60
consulting and administrative employees to reduce the capacity of our underperforming practices and
to reduce the headcount of our administrative support staff. All severance and separation
obligations have been completed. During the first quarter ended March 31, 2007, we recorded $1.3
million of realignment costs, which consisted of separation costs and severance.
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 nine months ended September 30, 2008, amortization expense was $4.0 million
and $12.8 million, respectively, compared to $5.4 million and $12.8 million for the corresponding
periods in 2007. The decrease in amortization of intangible assets during the three months ended
September 30, 2008 was primarily related to reduced amortization of backlog intangible assets
related to acquisitions completed during the second and third quarters of 2007.
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.
26
For the three and nine months ended September 30, 2008, interest expense was $5.2 million and
$15.4 million, respectively, compared to $6.0 million and $9.5 million for the corresponding
periods in 2007. The increase in interest expense in the nine month period was related to the
increase in borrowings under our Credit Agreement. We increased borrowings to finance certain
acquisitions and, in the second quarter of 2007, to purchase shares of our common stock. The
decrease in interest expense in the three month period resulted from lower interest rates and
average borrowings for the three month period in 2008 compared to the corresponding period in 2007.
Income tax expense. The effective income tax rate for both the three and nine months ended
September 30, 2008 was 43 percent, compared to 42 percent for both the three and nine months ended
September 30, 2007. The slight increase in effective income tax rate was primarily attributable to
an increased mix of income earned in higher tax jurisdictions.
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. Recent
acquisitions have broadened our international presence. The following table shows the employee data
for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
For the nine months ended |
|
|
September 30, |
|
September 30, |
|
|
2008 |
|
2007 |
|
2008 |
|
2007 |
Number of FTE consultants as of September 30 |
|
|
1,952 |
|
|
|
2,009 |
|
|
|
1,952 |
|
|
|
2,009 |
|
Average number of FTE consultants |
|
|
1,927 |
|
|
|
1,962 |
|
|
|
1,918 |
|
|
|
1,952 |
|
Average utilization of consultants, based
on industry standard of 1,850 hours |
|
|
76 |
% |
|
|
77 |
% |
|
|
79 |
% |
|
|
77 |
% |
Number of administrative and management
personnel as of September 30 |
|
|
589 |
|
|
|
557 |
|
|
|
589 |
|
|
|
557 |
|
The number of FTE consultants is adjusted for part-time status and takes into consideration
hiring and attrition during the periods. The decrease during 2008 compared to the prior year
reflects realignment initiatives in all segments partially offset by acquisitions.
Liquidity and Capital Resources
Summary
We had $10.5 million in cash and cash equivalents at September 30, 2008, compared to $11.7
million at December 31, 2007. Our cash equivalents were primarily limited to fully pledged
commercial paper or securities (rated A or better), with maturity dates of 90 days or less. As of
September 30, 2008 we had total bank debt outstanding of $273.0 million under our Credit Agreement,
compared to $256.6 million as of December 31, 2007.
We calculate accounts receivable days sales outstanding (DSO) by dividing the accounts
receivable balance, net of deferred revenue credits, at the end of the quarter, by daily revenues.
Daily revenues are calculated by dividing quarterly revenues by 90 days, approximately equal to the
number of days in a quarter. Calculated as such, DSO was 84 days at September 30, 2008, compared to
77 days at December 31, 2007 and 90 days at September 30, 2007.
Operating Activities
Net cash provided by operating activities was $38.6 million for the nine months ended
September 30, 2008, compared to net cash provided by operating activities of $42.0 million for the
nine months ended September 30, 2007. The decrease in net cash from operating activities was
primarily associated with the issuance of certain unsecured forgivable loans to retain and motivate
highly skilled senior consultants aggregating $21.6 million, partially offset by a lower increase
in our investment in accounts receivable.
Investing Activities
Net cash used in investing activities for the nine months ended September 30, 2008 was $59.1
million, compared to $86.3 million for the nine months ended September 30, 2007. During the nine
months ended September 30, 2008 we paid $50.0 million for the cash portion of the purchase price
for Chicago Partners payable at closing. During the corresponding period in 2007, we spent $65.3
million for various acquisitions (see note 2), partially offset by proceeds of $4.1 million from
the sale of a property. The decrease in purchases of property and
equipment of approximately $13.6
million reflects reduced investment in leasehold improvements.
27
Financing Activities
Net cash provided by financing activities for the nine months ended September 30, 2008 was
$19.4 million, compared to $53.6 million for the nine months ended September 30, 2007. During the
nine months ended September 30, 2008, we had net borrowings of $21.0 million primarily to finance
the cash consideration for our acquisition of Chicago Partners. During the nine months ended
September 30, 2007, we had net cash proceeds of $49.2 million primarily from the Revolving Credit
Facility and $225.0 million from the Term Loan Facility, of which $218.4 million was used to
purchase shares of our common stock.
Debt, Commitments and Capital
As of September 30, 2008, we maintained the Credit Agreement consisting of the Revolving
Credit Facility of $275.0 million with the option to increase to $375.0 million, and the Term Loan
Facility of $225.0 million consisting of unsecured term loans. Borrowings under the Revolving
Credit Facility are payable in May 2012. The Credit Agreement provides for borrowings in multiple
currencies including US Dollars, Canadian Dollars, UK Pound Sterling and Euro. As of September 30,
2008, we had aggregate borrowings of $273.0 million, compared to $256.6 million as of December 31,
2007.
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 the Revolving Credit Facility. As of September 30,
2008, the applicable margins on LIBOR loans under the Term Loan Facility and the Revolving Credit
Facility were 1.25% and 1.0%, respectively. As of September 30, 2008, the applicable margins for
base rate loans under the Term Loan Facility and the 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. For the nine months ended September 30, 2008 and
2007, our average borrowing rates under the Credit Agreement were 6.5% and 6.1%, respectively.
The 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
September 30, 2008, under the definitions in the Credit Agreement, our consolidated leverage ratio
was 2.1 and our consolidated fixed charge coverage ratio was 3.4. In addition to the financial
covenants, the Credit Agreement contains customary affirmative and negative covenants and is
subject to customary exceptions. These covenants will 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 the Credit Agreement as of
September 30, 2008 and December 31, 2007.
As of September 30, 2008, we had total commitments of $435.2 million, which included $23.8
million in deferred business acquisition obligations, payable in cash and common stock, notes
payable of $6.2 million, debt of $273.0 million, and $132.2 million in lease commitments. As of
September 30, 2008, we had no significant commitments for capital expenditures.
The following table shows the components of significant commitments as of September 30, 2008
and the scheduled years of payments (shown in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From Oct 1, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 to |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
|
|
|
|
Contractual Obligations |
|
Total |
|
|
2008 |
|
|
2009 to 2010 |
|
|
2011 to 2012 |
|
|
Thereafter |
|
Deferred purchase price obligations |
|
$ |
23,835 |
|
|
$ |
5,826 |
|
|
$ |
13,053 |
|
|
$ |
4,956 |
|
|
$ |
|
|
Notes payable |
|
|
6,239 |
|
|
|
1,000 |
|
|
|
5,239 |
|
|
|
|
|
|
|
|
|
Line of credit |
|
|
50,791 |
|
|
|
|
|
|
|
|
|
|
|
50,791 |
|
|
|
|
|
Bank debt |
|
|
222,188 |
|
|
|
563 |
|
|
|
14,625 |
|
|
|
207,000 |
|
|
|
|
|
Lease commitments |
|
|
132,166 |
|
|
|
6,807 |
|
|
|
53,212 |
|
|
|
36,422 |
|
|
|
35,725 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
435,219 |
|
|
$ |
14,196 |
|
|
$ |
86,129 |
|
|
$ |
299,169 |
|
|
$ |
35,725 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
We do not expect to significantly increase or reduce our reserve for uncertain tax positions
during the next twelve months.
28
We believe that our current cash and cash equivalents, the future cash flows from operations
and 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.
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 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.
At September 30, 2008, 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 maturity of these
instruments, an increase in interest rates would not have a material effect on our financial
position or operating results.
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 percent during this period. We expect the
interest rate derivative to be highly effective against changes in cash flows related to changes in
interest rates and have recorded the derivative as a hedge. As a result, gains or losses related to
fluctuations in the fair value of the interest rate derivative are recorded as a component of
accumulated other comprehensive income (loss) and reclassified into interest expense as the
variable interest expense on our indebtedness is recorded. There was no ineffectiveness related to
this hedge for the nine months ended September 30, 2008. As of September 30, 2008, we had a $5.5
million liability related to this interest rate derivative and we recorded a $0.3 million
unrealized gain, net of tax of $0.2 million, to accumulated other comprehensive income (loss) for
the nine months ended September 30, 2008.
Other than the deferred purchase price obligations, notes payable, borrowings under the Credit
Agreement, and the $165.0 million interest rate swap agreement, we did not have, at September 30,
2008, 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 September 30, 2008, borrowings under the Credit Agreement bore 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 September 30, 2008, each quarter point
change in market interest rates would result in approximately a $0.3 million change in annual
interest expense, after considering the impact of our interest rate swap agreement entered into on
July 2, 2007.
We operate in foreign countries, which exposes us to market risk associated with foreign
currency exchange rate fluctuations. At September 30, 2008, we had net assets of approximately
$78.1 million with a functional currency of the United Kingdom Pounds Sterling and $36.1 million
with a functional currency of the Canadian Dollar related to our operations in the United Kingdom
and Canada, respectively.
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 September 30, 2008. 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))
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 the rules of the Securities and Exchange Commission, 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. In designing and evaluating the disclosure controls and procedures, management
recognized that controls and procedures, no matter how well designed and operated, can provide only
reasonable assurance of achieving the desired control objectives.
During the three months ended September 30, 2008, there has 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).
29
PART IIOTHER INFORMATION
Item 1. Legal Proceedings
From time to time we are party to various 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 nine months ended September 30, 2008, we issued the following unregistered
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
|
|
Type of |
|
Shares in |
|
Exemption |
|
Purchaser or |
|
Assets |
Date |
|
Securities |
|
Consideration (a) |
|
Claimed (b) |
|
Recipient |
|
Purchased |
January 24, 2008
|
|
Common Stock
|
|
|
14,866 |
|
|
Section 4(2)
|
|
Tedd Avey & Associates Ltd.
|
|
(c) |
January 31, 2008
|
|
Common Stock
|
|
|
8,159 |
|
|
Section 4(2)
|
|
Devito Consulting, Inc
|
|
(d) |
February 8, 2008
|
|
Common Stock
|
|
|
100,539 |
|
|
Section 4(2)
|
|
Casas, Benjamin & White, LLC
|
|
(d) |
July 1, 2008
|
|
Common Stock
|
|
|
12,458 |
|
|
Section 4(2)
|
|
Architech Corporation
|
|
(d) |
August 1, 2008
|
|
Common Stock
|
|
|
37,860 |
|
|
Section 4(2)
|
|
LAC, Limited
|
|
(c) |
|
|
|
(a) |
|
Does not take into account additional cash or other consideration paid or payable as a part
of the transactions. |
|
(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 equity interests of the entity and, as such, these shares were issued
to the owner(s) of the entity. |
|
(d) |
|
Shares represent deferred payment consideration of the purchase agreement to purchase
substantially all of the assets of the recipient. |
Item 6. Exhibits-
The following exhibits are filed with the Form 10-Q:
|
|
|
|
|
Exhibit 31.1
|
|
|
|
Rule 13a14(a) Certification of the Chairman and Chief Executive Officer. |
|
|
|
|
|
Exhibit 31.2
|
|
|
|
Rule 13a14(a) Certification of the Executive Vice President and Chief Financial Officer. |
|
|
|
|
|
Exhibit 32.1
|
|
|
|
Section 1350 Certification |
30
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.
|
|
|
|
|
|
|
|
|
Navigant Consulting, Inc. |
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ WILLIAM M. GOODYEAR
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William M. Goodyear |
|
|
|
|
|
|
Chairman and Chief Executive Officer |
|
|
|
|
|
|
|
|
|
|
|
By:
|
|
/s/ DAVID E. WARTNER |
|
|
|
|
|
|
|
|
|
|
|
|
|
David E. Wartner |
|
|
|
|
|
|
Interim Chief Financial Officer, Vice President and Controller |
|
|
Date: October 31, 2008
31