e10vq
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the three months ended March 31, 2009
OR
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o |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission File No. 1-12173
Navigant Consulting, Inc.
(Exact name of Registrant as specified in its charter)
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Delaware
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36-4094854 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
30 South Wacker Drive, Suite 3550, Chicago, Illinois 60606
(Address of principal executive offices, including zip code)
(312) 573-5600
(Registrants telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES þ NO o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer
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Accelerated filer
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Non-accelerated filer o |
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Smaller reporting company o |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). YES o NO þ
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). YES
o NO o
As of May 7, 2009, 49.9 million shares of the Registrants common stock, par value $.001 per
share (Common Stock), were outstanding.
NAVIGANT CONSULTING, INC.
AS OF AND FOR THE THREE MONTHS ENDED MARCH 31, 2009
INDEX
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PART IFINANCIAL INFORMATION |
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Item 1. Financial Statements |
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3 |
Notes to Unaudited Consolidated Financial Statements |
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6 |
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |
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18 |
Item 3. Quantitative and Qualitative Disclosures About Market Risk |
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27 |
Item 4. Controls and Procedures |
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28 |
PART IIOTHER INFORMATION |
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Item 1. Legal Proceedings |
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29 |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds |
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29 |
Item 6. Exhibits |
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29 |
SIGNATURES |
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30 |
Navigant is a service mark of Navigant International, Inc. Navigant Consulting, Inc. is not
affiliated, associated, or in any way connected with Navigant International, Inc. and the use of
Navigant is made under license from Navigant International, Inc.
2
PART IFINANCIAL INFORMATION
Item 1. Financial Statements
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
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March 31, |
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December 31, |
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2009 |
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2008 |
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(unaudited) |
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ASSETS |
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Current assets: |
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Cash and cash equivalents |
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$ |
6,743 |
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$ |
23,134 |
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Accounts receivable, net |
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188,824 |
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170,464 |
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Prepaid expenses and other current assets |
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19,414 |
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13,455 |
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Deferred income tax assets |
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15,504 |
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21,494 |
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Total current assets |
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230,485 |
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228,547 |
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Property and equipment, net |
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45,532 |
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45,151 |
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Intangible assets, net |
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34,109 |
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38,108 |
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Goodwill |
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463,176 |
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463,058 |
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Other assets |
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16,095 |
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17,529 |
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Total assets |
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$ |
789,397 |
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$ |
792,393 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
10,634 |
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$ |
8,511 |
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Accrued liabilities |
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9,731 |
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10,086 |
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Accrued compensation-related costs |
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40,806 |
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72,701 |
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Income taxes payable |
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1,371 |
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Notes payable |
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3,587 |
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4,173 |
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Term loan current |
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2,250 |
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2,250 |
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Other current liabilities |
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28,601 |
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31,467 |
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Total current liabilities |
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95,609 |
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130,559 |
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Non-current liabilities: |
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Deferred income tax liabilities |
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26,687 |
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28,511 |
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Other non-current liabilities |
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36,589 |
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37,336 |
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Term loan non-current |
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218,813 |
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219,375 |
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Bank debt non-current |
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39,459 |
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10,854 |
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Total non-current liabilities |
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321,548 |
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296,076 |
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Total liabilities |
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417,157 |
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426,635 |
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Stockholders equity: |
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Preferred stock |
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Common stock |
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59 |
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59 |
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Additional paid-in capital |
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557,267 |
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555,737 |
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Deferred stock issuance, net |
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699 |
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985 |
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Treasury stock |
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(229,626 |
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(231,071 |
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Retained earnings |
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74,672 |
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69,239 |
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Accumulated other comprehensive loss |
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(30,831 |
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(29,191 |
) |
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Total stockholders equity |
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372,240 |
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365,758 |
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Total liabilities and stockholders equity |
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$ |
789,397 |
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$ |
792,393 |
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See accompanying notes to the unaudited consolidated financial statements.
3
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
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For the three months ended |
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March 31, |
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2009 |
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2008 |
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Revenues before reimbursements |
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$ |
167,212 |
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$ |
184,294 |
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Reimbursements |
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15,150 |
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22,845 |
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Total revenues |
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182,362 |
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207,139 |
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Cost of services before reimbursable expenses |
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110,267 |
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113,073 |
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Reimbursable expenses |
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15,150 |
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22,845 |
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Total costs of services |
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125,417 |
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135,918 |
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General and administrative expenses |
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34,893 |
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38,013 |
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Depreciation expense |
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4,640 |
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4,165 |
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Amortization expense |
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3,620 |
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4,227 |
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Other operating costs: |
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Office consolidation |
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908 |
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1,518 |
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Operating income |
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12,884 |
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23,298 |
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Interest expense |
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3,968 |
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4,602 |
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Interest income |
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(296 |
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(272 |
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Other income, net |
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(321 |
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5 |
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Income before income tax expense |
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9,533 |
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18,963 |
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Income tax expense |
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4,100 |
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8,057 |
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Net income |
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$ |
5,433 |
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$ |
10,906 |
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Basic income per share |
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$ |
0.11 |
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$ |
0.24 |
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Shares used in computing income per basic share |
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47,443 |
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46,099 |
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Diluted income per share |
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$ |
0.11 |
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$ |
0.23 |
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Shares used in computing income per diluted share |
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49,449 |
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46,838 |
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See accompanying notes to the unaudited consolidated financial statements.
4
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
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For the three months ended |
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March 31, |
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2009 |
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2008 |
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Cash flows from operating activities: |
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Net income |
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$ |
5,433 |
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$ |
10,906 |
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Adjustments to reconcile net income to net cash used in operating activities: |
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Depreciation expense |
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4,640 |
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4,165 |
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Depreciation expense office consolidation |
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608 |
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868 |
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Amortization expense |
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3,620 |
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4,227 |
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Share-based compensation expense |
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2,506 |
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3,533 |
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Accretion of interest expense |
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278 |
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176 |
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Allowance for doubtful accounts receivable |
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3,754 |
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2,071 |
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Deferred income taxes |
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2,778 |
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522 |
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Other, net |
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14 |
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Changes in assets and liabilities: |
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Accounts receivable |
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(22,652 |
) |
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(19,434 |
) |
Prepaid expenses and other assets |
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(2,270 |
) |
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(4,036 |
) |
Accounts payable |
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2,155 |
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|
985 |
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Accrued liabilities |
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(334 |
) |
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1,664 |
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Accrued compensation-related costs |
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(31,842 |
) |
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(19,948 |
) |
Income taxes payable |
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(1,821 |
) |
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4,374 |
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Other current liabilities |
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(1,464 |
) |
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(4,118 |
) |
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Net cash used in operating activities |
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(34,611 |
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(14,031 |
) |
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Cash flows from investing activities: |
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Purchases of property and equipment |
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(5,708 |
) |
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(2,531 |
) |
Acquisition of business |
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(1,875 |
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Payments of acquisition liabilities |
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(2,821 |
) |
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(1,154 |
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Other, net |
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(40 |
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Net cash used in investing activities |
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(10,444 |
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(3,685 |
) |
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Cash flows from financing activities: |
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Issuances of common stock |
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1,672 |
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2,563 |
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Payments of notes payable |
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(355 |
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(499 |
) |
Borrowings from banks, net of repayments |
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28,802 |
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11,752 |
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Payments of term loan installments |
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(562 |
) |
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(562 |
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Other, net |
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(706 |
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438 |
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Net cash provided by financing activities |
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28,851 |
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13,692 |
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Effect of exchange rate changes on cash |
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(187 |
) |
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Net decrease in cash and cash equivalents |
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(16,391 |
) |
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(4,024 |
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Cash and cash equivalents at beginning of the period |
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23,134 |
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11,656 |
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Cash and cash equivalents at end of the period |
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$ |
6,743 |
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$ |
7,632 |
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See accompanying notes to the unaudited consolidated financial statements.
5
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
We are an independent specialty consulting firm combining deep industry expertise and
integrated solutions to assist companies and their legal counsel in addressing the challenges of
uncertainty and risk, and leveraging opportunities for overall business model improvement.
Professional services include dispute, investigative, financial, operational and business advisory,
risk management and regulatory advisory, strategy, economic analysis and transaction advisory
solutions. We provide our services to government agencies, legal counsel and large companies facing
the challenges of uncertainty, risk, distress and significant change. We focus on industries
undergoing substantial regulatory or structural change and on the issues driving these
transformations.
The accompanying unaudited interim consolidated financial statements have been prepared
pursuant to the rules of the Securities and Exchange Commission for quarterly reports on Form 10-Q
and do not include all of the information and note disclosures required by accounting principles
generally accepted in the United States of America. The information furnished herein includes all
adjustments, consisting of normal recurring adjustments except where indicated, which are, in the
opinion of management, necessary for a fair presentation of the results of operations for these
interim periods.
The results of operations for the three months ended March 31, 2009 are not necessarily
indicative of the results to be expected for the entire year ending December 31, 2009.
These financial statements should be read in conjunction with our audited consolidated
financial statements and notes thereto as of and for the year ended December 31, 2008 included in
the Annual Report on Form 10-K, as filed by us with the Securities and Exchange Commission on
February 25, 2009.
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and the related notes. Actual
results could differ from those estimates and may affect future results of operations and cash
flows.
Note 2. Acquisitions
During
the quarter ended March 31, 2009, we acquired the assets of an Investment Management Consulting
business which consisted of 26 consulting professionals from Morse plc located in the UK for $1.9
million in cash paid at closing. As part of the purchase price allocation, we recorded $0.4
million in identifiable intangible assets and $1.5 million in goodwill. This acquisition has been
included in the International Consulting Operations segment.
6
Pro Forma Information
The following table summarizes certain supplemental unaudited pro forma financial information
which was prepared as if the first quarter 2009 acquisition noted above and the acquisitions
completed during 2008 had occurred as of the beginning of the periods presented. The unaudited pro
forma financial information was prepared for comparative purposes only and does not purport to be
indicative of what would have occurred had the acquisitions been made at that time or of results
which may occur in the future.
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For the three months ended |
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March 31, |
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2009 |
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2008 |
Total revenues |
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$ |
183,882 |
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$ |
225,304 |
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Net income |
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$ |
5,571 |
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$ |
11,775 |
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Basic net income per share |
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$ |
0.12 |
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$ |
0.25 |
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Diluted net income per share |
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$ |
0.11 |
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$ |
0.25 |
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Note 3. Segment Information
We manage our business in four segments North American Dispute and Investigative Services,
North American Business Consulting Services, International Consulting Operations, and Economic
Consulting Services. These segments are generally defined by the nature of their services and
geography. The business is managed and resources are allocated on the basis of the four operating
segments.
The North American Dispute and Investigative Services segment provides a wide range of
services to clients facing the challenges of disputes, litigation, forensic investigation,
discovery, and regulatory compliance. The clients of this segment are principally law firms,
corporate general counsels, and corporate boards.
The North American Business Consulting Services segment provides strategic, operational,
financial, regulatory and technical management consulting services to clients. Services are sold
principally through vertical industry practices such as energy, healthcare, financial and
insurance. The clients are principally C suite and corporate management, government entities, and
law firms.
The International Consulting Operations segment provides a mix of dispute and business
consulting services to clients predominately outside North America with headquarters in London,
England.
The Economic Consulting Services segment provides economic and financial analyses of complex
legal and business issues principally for law firms, corporations and government agencies.
Expertise includes areas such as antitrust, corporate finance and governance, bankruptcy,
intellectual property, investment banking, labor market discrimination and compensation, corporate
valuation, and securities litigation.
In accordance with the disclosure requirements of Statement of Financial Accounting Standards
No. 131, Disclosures about Segments of and Enterprise and Related Information, we identified the
above four operating segments as reportable segments.
7
Information on the segment operations have been summarized as follows (shown in thousands):
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For the three months ended |
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March 31, |
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|
2009 |
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|
2008 |
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Total revenues: |
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North American Dispute and Investigative Services |
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$ |
72,630 |
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$ |
91,002 |
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North American Business Consulting Services |
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|
79,639 |
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|
96,341 |
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International Consulting Operations |
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|
16,046 |
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|
19,796 |
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Economic Consulting Services |
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|
14,047 |
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Total revenues |
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$ |
182,362 |
|
|
$ |
207,139 |
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Segment operating profit: |
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North American Dispute and Investigative Services |
|
$ |
25,450 |
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$ |
35,023 |
|
North American Business Consulting Services |
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|
26,391 |
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|
33,330 |
|
International Consulting Operations |
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|
4,021 |
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|
5,383 |
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Economic Consulting Services |
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|
4,644 |
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Total combined segment operating profit |
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|
60,506 |
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|
73,736 |
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Segment operating profit reconciliation to income before income tax expense: |
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Unallocated: |
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|
|
|
General and administrative expenses |
|
|
34,893 |
|
|
|
38,013 |
|
Depreciation expense |
|
|
4,640 |
|
|
|
4,165 |
|
Amortization expense |
|
|
3,620 |
|
|
|
4,227 |
|
Long term compensation expense related to consulting personnel
(including share based compensation) |
|
|
3,561 |
|
|
|
2,515 |
|
Other operating expenses |
|
|
908 |
|
|
|
1,518 |
|
Other expense, net |
|
|
3,351 |
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|
|
4,335 |
|
|
|
|
|
|
|
|
Total unallocated expenses, net |
|
|
50,973 |
|
|
|
54,773 |
|
|
|
|
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|
|
Income before income tax expense |
|
$ |
9,533 |
|
|
$ |
18,963 |
|
|
|
|
|
|
|
|
During the three months ended March 31, 2009 and 2008, we recorded other operating costs of
$0.9 million and $1.5 million, respectively, which were not allocated to segment operating costs.
The information presented does not necessarily reflect the results of segment operations that
would have occurred had the segments been stand-alone businesses. Certain unallocated expense
amounts, related to specific reporting segments, have been excluded from the segment operating
profit to be consistent with the information used by management to evaluate segment performance. We
record accounts receivable, goodwill and intangible assets on a segment basis. Other
balance sheet amounts are not maintained on a segment basis.
Total assets by segment were as follows (shown in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
North American Dispute and Investigative Services |
|
$ |
297,743 |
|
|
$ |
287,225 |
|
North American Business Consulting Services |
|
|
236,359 |
|
|
|
236,419 |
|
International Consulting Operations |
|
|
75,120 |
|
|
|
73,897 |
|
Economic Consulting Services |
|
|
76,887 |
|
|
|
74,089 |
|
Unallocated assets |
|
|
103,288 |
|
|
|
120,763 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
789,397 |
|
|
$ |
792,393 |
|
|
|
|
|
|
|
|
8
Note 4. Goodwill and Intangible Assets
Goodwill and other intangible assets consisted of (shown in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Goodwill |
|
$ |
468,601 |
|
|
$ |
468,483 |
|
Lessaccumulated amortization |
|
|
(5,425 |
) |
|
|
(5,425 |
) |
|
|
|
|
|
|
|
Goodwill, net |
|
|
463,176 |
|
|
|
463,058 |
|
|
|
|
|
|
|
|
Intangible assets: |
|
|
|
|
|
|
|
|
Customer lists and relationships |
|
|
58,305 |
|
|
|
58,834 |
|
Non-compete agreements |
|
|
18,627 |
|
|
|
18,878 |
|
Other |
|
|
17,364 |
|
|
|
17,470 |
|
|
|
|
|
|
|
|
Intangible assets, at cost |
|
|
94,296 |
|
|
|
95,182 |
|
Lessaccumulated amortization |
|
|
(60,187 |
) |
|
|
(57,074 |
) |
|
|
|
|
|
|
|
Intangible assets, net |
|
|
34,109 |
|
|
|
38,108 |
|
|
|
|
|
|
|
|
Goodwill and intangible assets, net |
|
$ |
497,285 |
|
|
$ |
501,166 |
|
|
|
|
|
|
|
|
In accordance with SFAS No. 142, Goodwill and Other Intangible Assets, we are required to
perform an annual goodwill impairment test and more frequently if events or circumstances indicate
that goodwill may be impaired. Our annual test is completed in the second quarter of each year.
During the second quarter of 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 subsequently considered whether or not the fair value of each of the reporting units could
have fallen below its carrying value. We considered the elements outlined in SFAS No. 142 and other
factors including, but not limited to, changes in the business climate in which we operate, recent
disruptions in the financial markets, our market capitalization in excess of our book value, our
recent operating performance, the operating performance of the Economic Consulting Services
reporting unit relative to our expectations at the time of acquisition, and our annual budget for
2009. As a result of this review we determined that no such event or condition existed that would
cause us to perform an interim goodwill impairment test prior to our next annual test date. We
continue to monitor these factors and will perform additional impairment tests as appropriate in
future periods if our operating performance or the overall economic conditions significantly decline.
As prescribed by SFAS No. 144, Accounting for the Impairment of Long-Lived Assets, we review
our intangible asset values on a periodic basis. We had $34.1 million in intangible assets, net of
accumulated amortization, as of March 31, 2009. Of the $34.1 million balance, $25.4 million related
to customer lists and relationships, $4.8 million related to non-compete agreements and $3.9
million related to other intangible assets. As of March 31, 2009, the weighted average remaining
life for customer lists and relationships, non-compete agreements and other intangible assets was
4.6 years, 2.7 years and 3.8 years, respectively. We have reviewed the estimated period of
consumption for our intangible assets and the remaining useful lives appear reasonable. At March
31, 2009, the weighted average remaining life for our intangible assets in total was 4.3 years. As
of March 31, 2009, 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.
On January 1, 2009 we adopted FSP FAS 157-2, Effective Date of FASB Statement No. 157 as it
relates to nonrecurring fair value measurement requirements for nonfinancial assets and
liabilities. Our adoption of SFAS No. 157 did not have a material impact on our financial statements
for the quarter ended March 31, 2009.
9
The changes in carrying values of goodwill and intangible assets were as follows (shown in
thousands):
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
Beginning of periodGoodwill, net |
|
$ |
463,058 |
|
|
$ |
430,768 |
|
Goodwill acquired |
|
|
1,768 |
|
|
|
|
|
Adjustments to goodwill |
|
|
|
|
|
|
(6,905 |
) |
Foreign currency translationgoodwill |
|
|
(1,650 |
) |
|
|
(1,402 |
) |
|
|
|
End of period Goodwill, net |
|
$ |
463,176 |
|
|
$ |
422,461 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of periodIntangible assets, net |
|
$ |
38,108 |
|
|
$ |
57,755 |
|
Foreign currency translationintangible assets, net |
|
|
(335 |
) |
|
|
(432 |
) |
Other |
|
|
(44 |
) |
|
|
|
|
Lessamortization expense |
|
|
(3,620 |
) |
|
|
(4,227 |
) |
|
|
|
End of periodIntangible assets, net |
|
$ |
34,109 |
|
|
$ |
53,096 |
|
|
|
|
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 March 31, 2009, goodwill and intangible assets, net of amortization, was $212.6 million
for North American Dispute and Investigative Services, $170.0 million for North American Business
Consulting Services, $55.6 million for International Consulting Operations and $59.1 million for
Economic Consulting Services.
Below is the estimated annual aggregate amortization expense of intangible assets for each of
the five succeeding years and thereafter from December 31, 2008, based on intangible assets
recorded at March 31, 2009, and includes $3.6 million recorded in the three months ended March 31,
2009 (shown in thousands):
|
|
|
|
|
Year ending December 31, |
|
Amount |
|
2009 |
|
$ |
12,421 |
|
2010 |
|
|
9,318 |
|
2011 |
|
|
7,337 |
|
2012 |
|
|
4,081 |
|
2013 |
|
|
2,994 |
|
Thereafter |
|
|
1,578 |
|
|
|
|
|
Total |
|
$ |
37,729 |
|
|
|
|
|
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.
10
The components of basic and diluted shares (shown in thousands and based on the weighted
average days outstanding for the periods) are as follows:
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
|
March 31, |
|
|
2009 |
|
2008 |
Common shares outstanding |
|
|
47,410 |
|
|
|
45,990 |
|
Business combination obligations payable in a fixed number of shares |
|
|
33 |
|
|
|
109 |
|
|
|
|
|
|
|
|
|
|
Basic shares |
|
|
47,443 |
|
|
|
46,099 |
|
Employee stock options |
|
|
351 |
|
|
|
442 |
|
Restricted shares and stock units |
|
|
259 |
|
|
|
221 |
|
Business combination obligations payable in a fixed dollar amount of shares |
|
|
1,345 |
|
|
|
76 |
|
Contingently issuable shares |
|
|
51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted shares |
|
|
49,449 |
|
|
|
46,838 |
|
|
|
|
|
|
|
|
|
|
For the three months ended March 31, 2009 and 2008, we had outstanding stock options for
approximately 362,000 and 483,000 shares, respectively, which were excluded from the computation of
diluted shares because these shares had exercise prices greater than the average market price and
the impact of including these options in the diluted share calculation would have been
antidilutive.
In connection with certain business acquisitions, we are obligated to issue a certain number
of shares of our common stock. Obligations to issue a fixed number of shares are included in the
basic earnings per share calculation. Obligations to issue a fixed dollar amount of shares where
the number of shares is based on the trading price of our shares at the time of issuance are
included in the diluted earnings per share calculation. As part of the Chicago Partners
acquisition, we are obligated to issue shares based on a fixed dollar amount of $5.8 million on May
1, 2009, 2010 and 2011. For the three months ended March 31, 2009, the diluted share computation
included 1.3 million shares related to the Chicago Partners deferred purchase price obligations.
In accordance with SFAS No. 128, Earnings per Share, we use the treasury stock method to
calculate the dilutive effect of our common stock equivalents should they vest. The exercise of
stock options or vesting of restricted shares and restricted stock unit shares triggers excess tax
benefits or tax deficiencies that reduce or increase the dilutive effect of such shares being
issued. The excess tax benefits or deficiencies are based on the difference between the market
price of our common stock on the date the equity award is exercised or vested and the cumulative
compensation cost of the stock options, restricted shares and restricted stock units. These excess
tax benefits are recorded as a component of additional paid-in capital in the accompanying
consolidated balance sheets and as a component of financing cash flows in the accompanying
consolidated statements of cash flows.
Note 6. Stockholders Equity
The following summarizes the activity of stockholders equity during the three months ended
March 31, 2009 (shown in thousands):
|
|
|
|
|
|
|
|
|
|
|
Dollars |
|
|
Shares |
|
Stockholders equity at January 1, 2009 |
|
$ |
365,758 |
|
|
|
47,319 |
|
Comprehensive income |
|
|
3,793 |
|
|
|
|
|
Stock issued in acquisition-related transactions |
|
|
453 |
|
|
|
54 |
|
Cash proceeds from employee stock option exercises and employee stock purchases |
|
|
1,672 |
|
|
|
160 |
|
Vesting of restricted stock |
|
|
|
|
|
|
318 |
|
Net settlement of employee taxes on taxable compensation related to the vesting of restricted stock |
|
|
(808 |
) |
|
|
(65 |
) |
Tax benefits on stock options exercised and restricted stock vested, net of deficiencies |
|
|
(1,134 |
) |
|
|
|
|
Share-based compensation expense |
|
|
2,506 |
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity at March 31, 2009 |
|
$ |
372,240 |
|
|
|
47,786 |
|
|
|
|
|
|
|
|
11
Note 7. Share-based Compensation Expense
Share-based Compensation Expense
Total share-based compensation expense consisted of the following (shown in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
Amortization of restricted stock awards |
|
$ |
2,174 |
|
|
$ |
3,173 |
|
Amortization of stock option awards |
|
|
112 |
|
|
|
186 |
|
Fair value adjustment for variable accounting awards |
|
|
(40 |
) |
|
|
107 |
|
Discount given on employee stock purchase
transactions through our Employee Stock Purchase
Plan |
|
|
260 |
|
|
|
309 |
|
Other share-based compensation expense |
|
|
|
|
|
|
(242 |
) |
|
|
|
|
|
|
|
Total share-based compensation expense |
|
$ |
2,506 |
|
|
$ |
3,533 |
|
|
|
|
|
|
|
|
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 |
|
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
Cost of services |
|
$ |
1,926 |
|
|
$ |
2,515 |
|
General and administrative expenses |
|
|
580 |
|
|
|
1,018 |
|
|
|
|
|
|
|
|
Total share-based compensation expense |
|
$ |
2,506 |
|
|
$ |
3,533 |
|
|
|
|
|
|
|
|
Restricted Stock Outstanding
As of March 31, 2009, we had 1.4 million restricted stock awards and equivalent units
outstanding at a weighted average measurement price of $18.63 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 three months ended March 31,
2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Weighted |
|
|
|
Number |
|
|
average |
|
|
Number |
|
|
average |
|
|
|
of shares |
|
|
measurement |
|
|
of shares |
|
|
measurement |
|
|
|
(000s) |
|
|
date price |
|
|
(000s) |
|
|
date price |
|
Restricted stock
and equivalents
outstanding at
beginning of the
period |
|
|
1,678 |
|
|
$ |
19.00 |
|
|
|
2,264 |
|
|
$ |
19.45 |
|
Granted |
|
|
60 |
|
|
|
15.28 |
|
|
|
|
|
|
|
|
|
Exercised (vested) |
|
|
(318 |
) |
|
|
19.97 |
|
|
|
(270 |
) |
|
|
20.53 |
|
Forfeited |
|
|
(12 |
) |
|
|
20.32 |
|
|
|
(78 |
) |
|
|
21.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock
and equivalents
outstanding at end
of the period |
|
|
1,408 |
|
|
$ |
18.63 |
|
|
|
1,916 |
|
|
$ |
19.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2009, we had $17.4 million of total compensation costs related to the
outstanding or unvested restricted stock that have not been recognized as share-based compensation
expense. The compensation costs will be recognized as expense over the remaining vesting periods.
The weighted-average remaining vesting period is approximately four years.
On March 13, 2007 and April 30, 2007, we issued a total of 1.2 million shares of restricted stock,
with an aggregate market value of $22.6 million based on the market value of our common stock price
at the grant date, to key senior consultants and senior management as part of an incentive program.
The restricted stock awards will vest seven years from the grant date, with the opportunity for
accelerated vesting over five years based upon the achievement of certain targets related to our
consolidated operating performance. The compensation associated with these awards is being
recognized over the probable period in which the restricted stock awards will
12
vest. We review the
likelihood of required performance achievements on a periodic basis and 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. During the fourth quarter 2008,
based on operating performance, we changed our estimate and lengthened the amount of time expected
for performance achievement of 20 percent of the awards outstanding. During the fourth quarter
2008, the compensation committee of our board of directors approved a 20 percent accelerated vest
to occur in March 2009. As such, compensation expense was adjusted prospectively to reflect these
changes. For the 2009 performance period, which began January 2009, we have recognized share based compensation
expense for another 20 percent of the outstanding award over the remaining five year period of the seven year
service period. Compensation expense for the remaining 40 percent restricted stock awards outstanding will
commence once the explicit performance period begins or the intrinsic service period starts. As of
March 31, 2009, approximately 0.7 million of these restricted stock awards remain outstanding and
0.2 million shares have vested.
During the three months ended March 31, 2009, the compensation committee of the board of
directors of our company approved a new long-term incentive performance program. The program
provides for grants of restricted stock awards and/or cash, based on individual employee elections,
to key senior practitioners and senior management, excluding named executive officers, for
achievement of certain targets related to our consolidated operating performance. These awards, if
any, will be based on the annual operating performance year of 2009 and will be granted in March of
the following year. Any awards made pursuant to this program will have a three year cliff vesting
schedule from the grant date. The program contemplates that the company would offer this
opportunity on an annual basis and that future awards, if any, would be based on the annual
operating performance of each subsequent
annual performance year and be subject to the same eligibility criteria, employee election
relative to the vehicle and vesting terms.
Note 8. Supplemental Consolidated Balance Sheet Information
Accounts Receivable:
The components of accounts receivable were as follows (shown in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Billed amounts |
|
$ |
148,343 |
|
|
$ |
142,503 |
|
Engagements in process |
|
|
62,706 |
|
|
|
49,319 |
|
Allowance for doubtful accounts |
|
|
(22,225 |
) |
|
|
(21,358 |
) |
|
|
|
|
|
|
|
|
|
$ |
188,824 |
|
|
$ |
170,464 |
|
|
|
|
|
|
|
|
Receivables attributable to engagements in process represent balances for services that have
been performed and earned but have not been billed to the client. Billings are generally done on a
monthly basis for the prior months services. We provide services to and have receivables due from
many financial and insurance clients in all four of our segments. Our allowance for doubtful
accounts receivable includes balances related to the impact of recent disruptions in the financial
markets, including bankruptcies. Our allowance for doubtful accounts receivable is based on
historical experience and management judgment and may change based on market conditions or specific
client circumstances.
Prepaid expenses and other current assets:
The components of prepaid expenses and other current assets were as follows (shown in
thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Notes receivable current |
|
$ |
5,317 |
|
|
$ |
4,595 |
|
Prepaid income taxes |
|
|
2,276 |
|
|
|
|
|
Other prepaid expenses and other current assets |
|
|
11,821 |
|
|
|
8,860 |
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets |
|
$ |
19,414 |
|
|
$ |
13,455 |
|
|
|
|
|
|
|
|
13
Other assets
The components of other assets were as follows (shown in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Notes receivable non-current |
|
$ |
12,756 |
|
|
$ |
13,905 |
|
Prepaid expenses and other non-current assets |
|
|
3,339 |
|
|
|
3,624 |
|
|
|
|
|
|
|
|
Other assets |
|
$ |
16,095 |
|
|
$ |
17,529 |
|
|
|
|
|
|
|
|
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 $0.3 million for the three
months ended March 31, 2009.
Property and Equipment:
Property and equipment were comprised of the following (shown in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Furniture, fixtures and equipment |
|
$ |
50,629 |
|
|
$ |
49,668 |
|
Software |
|
|
23,855 |
|
|
|
24,056 |
|
Leasehold improvements |
|
|
43,783 |
|
|
|
40,159 |
|
|
|
|
|
|
|
|
|
|
|
118,267 |
|
|
|
113,883 |
|
Less: accumulated depreciation and amortization |
|
|
(72,735 |
) |
|
|
(68,732 |
) |
|
|
|
|
|
|
|
Property and equipment, net |
|
$ |
45,532 |
|
|
$ |
45,151 |
|
|
|
|
|
|
|
|
Other Current Liabilities:
The components of other current liabilities were as follows (shown in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Deferred business acquisition obligations |
|
$ |
7,480 |
|
|
$ |
10,899 |
|
Deferred revenue |
|
|
11,920 |
|
|
|
13,685 |
|
Deferred rent |
|
|
3,061 |
|
|
|
2,470 |
|
Commitments on abandoned real estate |
|
|
1,511 |
|
|
|
1,112 |
|
Other liabilities |
|
|
4,629 |
|
|
|
3,301 |
|
|
|
|
|
|
|
|
|
|
$ |
28,601 |
|
|
$ |
31,467 |
|
|
|
|
|
|
|
|
The deferred business acquisition obligations of $7.5 million at March 31, 2009 consisted of
obligations to issue a fixed dollar amount of shares of our common stock. The liability for
deferred business acquisition obligations has been discounted to net present value. The number of
shares to be issued will be based on the trading price of our common stock for a period of time
prior to the issuance dates.
14
Other Non-Current Liabilities:
The components of other non-current liabilities were as follows (shown in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Deferred business acquisition obligations |
|
$ |
11,443 |
|
|
$ |
11,277 |
|
Deferred rent long term |
|
|
10,309 |
|
|
|
9,995 |
|
Commitments on abandoned real estate |
|
|
2,279 |
|
|
|
2,884 |
|
Interest rate swap liability (see note 10) |
|
|
8,298 |
|
|
|
9,585 |
|
Other non-current liabilities |
|
|
4,260 |
|
|
|
3,595 |
|
|
|
|
|
|
|
|
|
|
$ |
36,589 |
|
|
$ |
37,336 |
|
|
|
|
|
|
|
|
The deferred business acquisition obligations of $11.4 million at March 31, 2009 consisted
primarily of obligations to issue a fixed dollar amount of shares of our common stock. The
liability amounts for deferred business acquisition obligations have been discounted to net present
value. The number of shares to be issued will be based on the trading price of our common stock for
a period of time prior to the issuance dates. The long-term portion of deferred rent is primarily
rent allowances and incentives related to leasehold improvements on lease arrangements for our
office facilities that expire at various dates through 2017.
Current Notes Payable
As
of March 31, 2009, as part of a purchase price agreement for an acquired business, we
recorded $3.6 million in current notes payable. The notes bear interest at annual interest rates of
5.7 percent to 7.2 percent. As of March 31, 2009, there was no accrued interest on the notes
payable.
Current notes payable were as follows (shown in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2009 |
|
|
2008 |
|
Note related to the Abros acquisition |
|
$ |
|
|
|
$ |
362 |
|
Note related to the Troika acquisition |
|
|
3,587 |
|
|
|
3,811 |
|
|
|
|
|
|
|
|
Total current notes payable |
|
$ |
3,587 |
|
|
$ |
4,173 |
|
|
|
|
|
|
|
|
Note 9. Supplemental Consolidated Cash Flow Information
Total interest paid during the three months ended March 31, 2009 and 2008 was $3.4 million and
$5.3 million, respectively. Total income taxes paid were $2.5 million and $3.0 million during the
three months ended March 31, 2009 and 2008, respectively.
Note 10. Comprehensive Income
Comprehensive income, which consists of net income, foreign currency translation adjustments
and unrealized gain or loss on our interest rate swap agreement, was as follows (shown in
thousands):
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
Net income |
|
$ |
5,433 |
|
|
$ |
10,906 |
|
Foreign currency translation adjustment |
|
|
(2,123 |
) |
|
|
(1,927 |
) |
Unrealized net income (loss) on interest
rate derivative, net of income tax
benefits or expense |
|
|
483 |
|
|
|
(2,596 |
) |
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
3,793 |
|
|
$ |
6,383 |
|
|
|
|
|
|
|
|
On July 2, 2007, we entered into an interest rate swap agreement with a bank for a notional
value of $165.0 million through June 30, 2010. This agreement effectively fixed our LIBOR base rate
for $165.0 million of our indebtedness at a rate of 5.30% during this period. We designated the
swap as a cash flow hedge to manage market risk from changes in interest rates on a portion of our
variable rate term loans. We recognize cash flow hedges as assets or liabilities at fair value,
with the related gain or loss reflected within
15
stockholders equity as a component of accumulated
other comprehensive income to the extent of effectiveness. Any ineffectiveness on the swap would
be recognized in the consolidated statements of income. The differentials to be received or paid
under the instrument are recognized in income over the life of the contract as adjustments to
interest expense. The use of an interest rate swap exposes us to counterparty credit risk
in the event of non performance by counterparties. As of March 31, 2009, we were not exposed to significant counterparty risk. During the three months ended March 31, 2009 there was no gain or loss due to
ineffectiveness and we recorded a $1.6 million in interest expense associated with
differentials paid under the instrument. As of March 31, 2009, we had an $8.3 million
liability recorded in other non-current liabilities related to this interest rate derivative and we
recorded a $0.5 million unrealized gain, net of taxes of $0.8 million, to accumulated other
comprehensive income for the three months ended March 31, 2009.
As of March 31, 2009, accumulated other comprehensive income is comprised of foreign currency
translation loss of $25.8 million and unrealized net loss on interest rate swap of $5.0 million.
In September 2006, the FASB issued Statement No. 157, Fair Value Measurements (SFAS 157).
SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with
accounting principles generally accepted in the United States, and expands disclosures about fair
value measurements. We adopted SFAS 157 during the first quarter of 2008 and the implementation did
not have a material impact on our financial condition, results of operations, or cash flows. We
deferred the adoption of SFAS 157 with respect to non-financial assets and liabilities in
accordance with the provisions of FSP FAS 157-2, Effective Date of FASB Statement No. 157. Items
in this classification include goodwill, and intangible assets with indefinite lives. Our adoption
on January 1, 2009 of FSP FAS 157-2 did not have a material effect on our financial condition,
results of operations, or cash flows.
SFAS 157 defines fair value as the price that would be received to sell an asset or paid to
transfer a liability in an orderly transaction between market participants at the measurement date
(exit price). SFAS 157 classifies the inputs used to measure fair value into the following
hierarchy:
|
|
|
Level 1
|
|
Unadjusted quoted prices in active markets for identical assets or liabilities |
|
|
|
Level 2
|
|
Unadjusted quoted prices in active markets for similar assets or liabilities, or |
|
|
Unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or |
|
|
Inputs other than quoted prices that are observable for the asset or liability |
|
|
|
Level 3
|
|
Unobservable inputs for the asset or liability |
We endeavor to utilize the best available information in measuring fair value. Financial
assets and liabilities are classified in their entirety based on the lowest level of input that is
significant to the fair value measurement. Our interest rate swap liability was valued using
counterparty quotations in over-the counter markets. In addition, we incorporate credit valuation
adjustments to appropriately reflect both our own nonperformance risk and the respective
counterpartys nonperformance risk. The credit valuation adjustments associated with our
derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the
likelihood of default by ourselves and our counterparties. However, as of March 31, 2009, we have
assessed the significance of the impact on the overall valuation and believe that these adjustments
are not significant. As such, our derivative instrument is classified within level 2.
Note 11. Bank Borrowings
As of March 31, 2009, we maintained a bank borrowing credit agreement consisting of a $275
million revolving line of credit with the option to increase to $375.0 million and a $225.0 million
unsecured term loan facility. Borrowings under the revolving credit facility are payable in May
2012. Our credit agreement provides for borrowings in multiple currencies including US Dollars,
Canadian Dollars, UK Pound Sterling and Euro. As of March 31, 2009, we had aggregate borrowings of
$260.5 million compared to $232.5 million as of December 31, 2008. As of March 31, 2009 we had
$228.2 million available to borrow under our credit agreement.
At our option borrowings under the revolving credit facility and the term loan facility bear
interest, in general, based on a variable rate equal to an applicable base rate or LIBOR, in each
case plus an applicable margin. For LIBOR loans, the applicable margin will vary depending upon our
consolidated leverage ratio (the ratio of total funded debt to adjusted EBITDA) and whether the
loan is made under the term loan facility or revolving credit facility. As of March 31, 2009, the
applicable margins on LIBOR loans under the term loan facility and revolving credit facility were
1.25% and 1.0%, respectively. As of March 31, 2009, the applicable margins for base rate loans
under the term loan facility and revolving credit facility were 0.25% and zero, respectively. For
LIBOR loans, the applicable margin will vary between 0.50% to 1.75% depending upon our performance
and financial condition. For the quarters ended March 31, 2009 and 2008, our average borrowing rate
under our credit agreement was 5.7% and 6.5%, respectively.
16
Our credit agreement also includes certain financial covenants, including covenants that
require that we maintain a consolidated leverage ratio of not greater than 3.25:1, and a
consolidated fixed charge coverage ratio (the ratio of the sum of adjusted EBITDA and rental
expense to the sum of cash interest expense and rental expense) of not less than 2.0:1. At March
31, 2009, under the definitions in the credit agreement, our consolidated leverage ratio was 2.2
and our consolidated fixed charge coverage ratio was 3.8. In addition to the financial covenants,
our credit agreement contains customary affirmative and negative covenants and is subject to
customary exceptions. These covenants limit our ability to incur liens or other encumbrances or
make investments, incur indebtedness, enter into mergers, consolidations and asset sales, pay
dividends or other distributions, change the nature of our business and engage in transactions with
affiliates. We were in compliance with the terms of our credit agreement as of March 31, 2009 and
December 31, 2008.
Note 12. Other Operating Costs
Other operating costs consisted of the following (shown in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the three |
|
|
|
months ended |
|
|
|
March 31, |
|
|
|
2009 |
|
|
2008 |
|
Adjustments to office closures obligations,
discounted and net of expected sublease income |
|
$ |
300 |
|
|
$ |
150 |
|
Write down of leasehold improvements |
|
|
|
|
|
|
500 |
|
Accelerated depreciation on leasehold
improvements and furniture due to expected
office closures |
|
|
608 |
|
|
|
868 |
|
|
|
|
|
|
|
|
Other operating costs |
|
$ |
908 |
|
|
$ |
1,518 |
|
|
|
|
|
|
|
|
During the three months ended March 31, 2009, we recorded $0.9 million of office closure
related costs which consisted of adjustments to office closure obligations and accelerated
depreciation on leasehold improvements and furniture in offices to be abandoned.
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 the future
periods as necessary. The office closure obligations have been discounted to net present value.
In the next twelve months we expect our cash expenditures to be $1.5 million relating to these
obligations.
We expect to record additional restructuring charges for real estate lease terminations as
other initiatives are completed throughout 2009 including the relocation of our New York office
that is expected to occur in the second quarter of 2009 and result in office closure related costs
of $3.0 to $4.0 million.
The current and non-current liability activity related to office closure obligations are as
follows:
|
|
|
|
|
|
|
Office |
|
|
|
Consolidation |
|
Balance at December 31, 2008 |
|
|
3,996 |
|
Charges to operations during the quarter ended March 31, 2009 |
|
|
300 |
|
Utilized during the quarter ended March 31, 2009 |
|
|
(506 |
) |
|
|
|
|
Balance at March 31, 2009 |
|
$ |
3,790 |
|
|
|
|
|
Office space reduction costs are not allocated to our business segments.
17
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 cost reduction actions; the success of our organizational changes; risks inherent in international operations,
including foreign currency fluctuations; ability to make acquisitions; pace, timing and integration
of acquisitions; impairment charges; management of professional staff, including dependence on key
personnel, recruiting, attrition and the ability to successfully integrate new consultants into our
practices; utilization rates; conflicts of interest; potential loss of clients; our clients
financial condition and their ability to make payments to us; risks inherent with litigation;
higher risk client assignments; professional liability; potential legislative and regulatory
changes; continued access to capital; and general economic conditions. Further information on these
and other potential factors that could affect our financial results is included in our Annual
Report on Form 10-K and other filings with the SEC under the Risk Factors sections and elsewhere
in those filings. We cannot guarantee any future results, levels of activity, performance or
achievement and we undertake no obligation to update any of our forward-looking statements.
Overview
We are an independent specialty consulting firm combining deep industry expertise and
integrated solutions to assist companies and their legal counsel in addressing the challenges of
uncertainty and risk, and leveraging opportunities for overall business model improvement.
Professional services include dispute, investigative, financial, operational and business advisory,
risk management and regulatory advisory, strategy, economic analysis and transaction advisory
solutions. We provide our services to government agencies, legal counsel and large companies facing
the challenges of uncertainty, risk, distress and significant change. We focus on industries
undergoing substantial regulatory or structural change and on the issues driving these
transformations.
Our revenues, margins and profits have been and will likely be impacted by a significant
decline in the United States or world economy. Examples of other impacting events that may affect
us both favorably and unfavorably are natural disasters, legislative and regulatory changes,
capital market disruptions, reductions in discretionary consulting spending, crises in the energy,
healthcare, financial services, insurance and other industries, and significant client specific
events.
We derive our revenues from fees and reimbursable expenses for professional services. A
majority of our revenues are generated under hourly or daily rates billed on a time and expense
basis. Clients are typically invoiced on a monthly basis, with revenue recognized as the services
are provided. There are also client engagements where we are paid a fixed amount for our services,
often referred to as fixed fee billings. This may be one single amount covering the whole
engagement or several amounts for various phases or functions. From time to time, we earn
incremental revenues, in addition to hourly or fixed fee billings, which are contingent on the
attainment of certain contractual milestones or objectives. Such incremental revenues may cause
variations in quarterly revenues and operating results if all other revenues and expenses during
the quarters remain the same.
Our most significant expense is cost of services before reimbursable expenses, which generally
relates to costs associated with generating revenues, and includes consultant compensation and
benefits, sales and marketing expenses, and the direct costs of recruiting and training the
consulting staff. Consultant compensation consists of salaries, incentive compensation, stock
compensation and benefits. Our most significant overhead expenses are administrative compensation
and benefits and office related expenses. Administrative compensation includes payroll costs,
incentive compensation, stock compensation and benefits for corporate management and administrative
personnel, which are used to indirectly support client projects. Office related expenses primarily
consist of rent for our offices.
18
Critical Accounting Policies
The preparation of the financial statements requires management to make estimates and
assumptions that affect amounts reported therein. We base our estimates on historical experience
and on various assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or conditions. We believe the following
critical accounting policies affect our more significant judgments and estimates used in the
preparation of our consolidated financial statements:
Revenue Recognition
We recognize revenues as the related professional services are provided. In connection with
recording revenues, estimates and assumptions are required in determining the expected conversion
of the revenues to cash. We may provide multiple services under the terms of an arrangement and are
required to assess whether one or more units of accounting are present. There are also client engagements where we are paid a fixed amount for our services.
The recording of these fixed revenue amounts requires us to make an estimate of the total amount of
work to be performed and revenues are then recognized as efforts are expended based on (i)
objectively determinable output measures, (ii) input measures if output measures are not reliable,
or (iii) the straight-line method over the term of the arrangement. From time to time, we also earn
incremental revenues. These incremental revenue amounts are generally contingent on a specific
event and the incremental revenues are recognized when the contingencies are resolved. Any taxes
assessed on revenues relating to services provided to our clients are recorded on a net basis.
Accounts Receivable Realization
We maintain allowances for doubtful accounts for estimated losses resulting from our review
and assessment of our clients ability to make required payments, and the estimated realization, in
cash, by us of amounts due from our clients. If our clients financial condition was to
deteriorate, resulting in an impairment of their ability to make payments, additional allowances
might be required.
Goodwill and Intangible Assets
Goodwill represents the difference between the purchase price of acquired companies and the
related fair value of the net assets acquired, which is accounted for by the purchase method of
accounting. We test goodwill annually for impairment. We also review long-lived assets, including
identifiable intangible assets and goodwill, for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. Our impairment
testing and reviews may be impacted by, among other things, our expected operating performance,
market valuation of comparable companies, ability to retain key personnel, changes in operating
segments and competitive environment.
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.
In accordance with Statement of Financial Accounting Standards No. 142 Goodwill and Other
Intangible Assets (SFAS 142) goodwill is not amortized. Goodwill is subject to an impairment
test annually and more frequently if events and circumstances indicate that goodwill may be
impaired. The impairment test is performed using a two step, fair-value based test. The first step
compares the fair value of a reporting unit to its carrying value. The fair value is determined
using a discounted cash flow analysis and a comparable company analysis. The second step is
performed only if the carrying value exceeds the fair value determined in step one. The impairment
test is considered for each reporting unit as defined in SFAS 142 which equates to our reporting
segments.
We perform our annual test in the second quarter of each year. As discussed, in accordance
with SFAS 142, we determined the fair value of each reporting unit. This test required us to
estimate future cash flows and termination value. The fair value estimate also
19
depended on interest
rate, debt, and working capital requirements. Estimates can also be impacted by, among other
things, expected performance, market valuation of comparable companies, ability to retain key
personnel, changes in operating segments and competitive environment. Based on these results we did
not recognize any impairment of goodwill and, as such, did not complete step two of the impairment
test.
During our annual test of goodwill, we considered that each of the four reporting units has
significant goodwill and intangible assets. The estimated fair value of the North American Business
Consulting reporting unit and the North American Dispute and Investigative reporting unit were
significantly in excess of their net asset carrying value by approximately 50% and 40%,
respectively. The estimated fair value of the International Consulting Operations reporting unit
exceeded its net asset carrying value by approximately 20%. Given the International Consulting
Operations segments smaller size and higher expected growth rates, this
excess may be more volatile. The Economic Consulting Services reporting unit was acquired
concurrently with the annual test and thus its estimated value approximated the carrying value of
its net assets.
We subsequently considered whether or not the fair value of each of the reporting units could
have fallen below its carrying value. We considered the elements outlined in SFAS No. 142 and other
factors including, but not limited to, changes in the business climate in which we operate, recent
disruptions in the financial markets, our market capitalization in excess of our book value, our
recent operating performance, the operating performance of the Economic Consulting Services
reporting unit relative to our expectations at the time of acquisition, and our annual budget for
2009. As a result of this review we determined that no such event or condition existed that would
cause us to perform an interim goodwill impairment test prior to our next annual test date. We
continue to monitor these factors and we may perform additional impairment tests as appropriate in
future periods if our operating performance or the overall economic conditions significantly decline.
Our intangible assets are subject to changes in estimated fair market values which are
determined in part based on our operating performance and expectations for the future. Our test for
goodwill impairment is based on the estimated fair value of our reporting units. The estimated fair
value of our reporting units is subject to, among other things, changes in our estimated business
future growth rate, profit margin, long term outlook and weighted average cost of capital. Our
International Consulting Operations and Economic Consulting Services segments are most sensitive to
those changes as the excess of their fair value over their asset carrying value is generally lower.
Additionally, our long term assets are subject to changes in events or circumstances that could
impact their carrying value. A decline in the estimated fair value of our reporting units or other
long term assets could result in impairment charges.
Share-Based Payments
We recognize the cost resulting from all share-based compensation arrangements, such as our
stock option and restricted stock plans, in the financial statements based on their fair value.
Management judgment is required in order to (i) estimate the fair value of certain share based
payments, (ii) determine expected attribution period and (iii) assess expected future forfeitures.
We treat our employee stock purchase plan as compensatory and record the purchase discount from
market price of stock purchases by employees as share-based compensation expense.
Income Taxes
We account for deferred income taxes utilizing an asset and liability method, whereby deferred
tax assets and liabilities are recognized based on the tax effects of temporary differences between
the financial statements and the tax bases of assets and liabilities, as measured by current
enacted tax rates. When appropriate, we evaluate the need for a valuation allowance to reduce
deferred tax assets. The evaluation of the need for a valuation allowance requires management
judgment and could impact our effective tax rate.
We account for uncertainty in income taxes utilizing the Financial Accounting Standards
Boards Interpretation No. 48, Accounting for Uncertainty in Income Taxes an interpretation of
FAS Statement No. 109 (FIN 48). This interpretation clarifies the accounting for uncertainty in
income taxes recognized in an entitys financial statements in accordance with SFAS 109. It
prescribes a recognition threshold and measurement attribute for financial statement disclosure of
tax positions taken or expected to be taken. This interpretation also provides guidance on
derecognition, classification, interest and penalties, accounting in interim periods, and
disclosures. The application of FIN 48 requires management judgment related to the uncertainty in
income taxes and could impact our effective tax rate.
20
Other Operating Costs
We recorded expense and related liabilities associated with office closings and excess space
reductions related to a plan to reduce office space as other operating costs. The expense consisted
of rent obligations for the offices, net of expected sublease income, and the write down and
accelerated depreciation of leasehold improvements reflecting the 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. The determination of the expense and related liabilities requires management
judgment and could impact our future financial results.
Recent Accounting Pronouncements
In September 2006, the FASB issued Statement No. 157, Fair Value Measurements (SFAS 157).
SFAS 157 defines fair value, establishes a framework for measuring fair value in accordance with
accounting principles generally accepted in the United States, and expands disclosures about fair
value measurements. We adopted SFAS 157 during the first quarter of 2008 and the implementation did
not have a material impact on our financial condition, results of operations, or cash flows. We
deferred the adoption of SFAS 157 with
respect to non-financial assets and liabilities in accordance with the provisions of FSP FAS
157-2, Effective Date of FASB Statement No. 157. Such non financial assets and liabilities
include goodwill and intangible assets with indefinite lives. Fair value is measured on these
assets on a non-recurring basis. Our adoption on January 1, 2009 of FSP FAS 157-2 did not have a
material effect on our financial condition, results of operations, or cash flows.
In February 2007, the FASB issued Statement No. 159, The Fair Value Option for Financial
Assets and Financial Liabilities (SFAS 159). SFAS 159 allows entities the option to measure
eligible financial instruments at fair value as of specified dates. Such election, which may be
applied on an instrument by instrument basis, is typically irrevocable once elected. SFAS 159 is
effective for fiscal years beginning after November 15, 2007. We adopted SFAS 159 during the first
quarter of 2008 and did not apply such election to any of our assets or liabilities.
In December 2007, the FASB issued Statement No. 141(R), Business Combinations (SFAS
141(R)). SFAS 141(R) establishes principles and requirements for how an acquirer recognizes and
measures in its financial statements the identifiable assets acquired, the liabilities assumed, and
any noncontrolling interest in the acquiree and recognizes and measures the goodwill acquired in
the business combination or a gain from a bargain purchase. SFAS 141(R) also sets forth the
disclosures required to be made in the financial statements to evaluate the nature and financial
effects of the business combination. SFAS 141(R) applies prospectively to business combinations for
which the acquisition date is on or after the beginning of the first annual reporting period
beginning on or after December 15, 2008. Our adoption of SFAS 141(R) on January 1, 2009 will impact
all our acquisitions on or after that date.
In March 2008, the FASB issued Statement No. 161, Disclosures about Derivative Instruments
and Hedging Activities (SFAS 161) which amends and expands the disclosure requirements of SFAS
133 to provide an enhanced understanding of an entitys use of derivative instruments, how they are
accounted for and their effect on the entitys financial position, financial performance and cash
flows. We adopted the provisions of SFAS 161 as of January 1, 2009. Management is adhering to the
enhanced disclosure requirements.
21
Results of Operations
2009 compared to 2008 For the three month periods ended March 31
We manage our business in four operating segments North American Dispute and Investigative
Services, North American Business Consulting Services, International Consulting Operations, and
Economic Consulting Services. The Economic Consulting Services segment was added in 2008 in
connection with our acquisition of Chicago Partners on May 1, 2008. These segments are generally
defined by the nature of their services and geography. The business is managed and resources
allocated on the basis of the four operating segments.
The following table summarizes for comparative purposes certain financial and statistical data
for the four segments (dollar amounts are thousands, except
bill rate).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
|
Percent |
|
|
|
March 31, |
|
|
Change |
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
2009 |
|
|
2008 |
|
|
(Decrease) |
|
Revenues before reimbursements |
|
| |
|
|
| |
|
|
|
| |
North American Dispute and Investigative Services |
|
$ |
67,247 |
|
|
$ |
83,823 |
|
|
|
(19.8 |
%) |
North American Business Consulting Services |
|
|
72,772 |
|
|
|
83,468 |
|
|
|
(12.8 |
%) |
International Consulting Operations |
|
|
14,306 |
|
|
|
17,003 |
|
|
|
(15.9 |
%) |
Economic Consulting Services |
|
|
12,887 |
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues before reimbursements |
|
$ |
167,212 |
|
|
$ |
184,294 |
|
|
|
(9.3 |
%) |
|
|
|
Total Revenues |
|
| |
|
|
| |
|
|
|
| |
North American Dispute and Investigative Services |
|
$ |
72,630 |
|
|
$ |
91,002 |
|
|
|
(20.2 |
%) |
North American Business Consulting Services |
|
|
79,639 |
|
|
|
96,341 |
|
|
|
(17.3 |
%) |
International Consulting Operations |
|
|
16,046 |
|
|
|
19,796 |
|
|
|
(18.9 |
%) |
Economic Consulting Services |
|
|
14,047 |
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
182,362 |
|
|
$ |
207,139 |
|
|
|
(12.0 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment Operating Profit |
|
| |
|
|
| |
|
|
|
| |
North American Dispute and Investigative Services |
|
$ |
25,450 |
|
|
$ |
35,023 |
|
|
|
(27.3 |
%) |
North American Business Consulting Services |
|
|
26,391 |
|
|
|
33,330 |
|
|
|
(20.8 |
%) |
International Consulting Operations |
|
|
4,021 |
|
|
|
5,383 |
|
|
|
(25.3 |
%) |
Economic Consulting Services |
|
|
4,644 |
|
|
|
|
|
|
|
|
|
|
|
|
Segment Operating Profit |
|
$ |
60,506 |
|
|
$ |
73,736 |
|
|
|
(17.9 |
%) |
|
|
|
Average Full Time Equivalent (FTE) consultants |
|
|
|
|
|
|
|
|
|
|
| |
North American Dispute and Investigative Services |
|
|
765 |
|
|
|
796 |
|
|
|
(3.9 |
%) |
North American Business Consulting Services |
|
|
868 |
|
|
|
940 |
|
|
|
(7.7 |
%) |
International Consulting Operations |
|
|
207 |
|
|
|
177 |
|
|
|
16.9 |
% |
Economic Consulting Services |
|
|
101 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,941 |
|
|
|
1,913 |
|
|
|
1.5 |
% |
|
|
|
Average Utilization Rate based on 1,850 hours |
|
|
| |
|
|
| |
|
|
| |
North American Dispute and Investigative Services |
|
|
72 |
% |
|
|
84 |
% |
|
|
(14.3 |
%) |
North American Business Consulting Services |
|
|
77 |
% |
|
|
84 |
% |
|
|
(8.3 |
%) |
International Consulting Operations |
|
|
69 |
% |
|
|
73 |
% |
|
|
(5.5 |
%) |
Economic Consulting Services |
|
|
85 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
75 |
% |
|
|
83 |
% |
|
|
(9.6 |
%) |
|
|
|
Bill Rate (1) |
|
| |
|
|
| |
|
|
|
| |
North American Dispute and Investigative Services |
|
$ |
283 |
|
|
$ |
292 |
|
|
|
(3.1 |
%) |
North American Business Consulting Services |
|
$ |
221 |
|
|
$ |
213 |
|
|
|
3.8 |
% |
International Consulting Operations |
|
$ |
223 |
|
|
$ |
293 |
|
|
|
(23.9 |
%) |
Economic Consulting Services |
|
$ |
343 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
252 |
|
|
$ |
254 |
|
|
|
(0.8 |
%) |
|
|
|
|
|
|
(1) |
|
Excludes the impact of performance based fees |
22
Segment operating profit as a percentage of segment revenue before reimbursement for the three
months ended March 31:
|
|
|
|
|
|
|
|
|
|
|
For the three months |
|
|
ended March 31, |
|
|
2009 |
|
2008 |
North American Dispute and Investigative Services |
|
|
37.8 |
% |
|
|
41.8 |
% |
North American Business Consulting Services |
|
|
36.3 |
% |
|
|
39.9 |
% |
International Consulting Operations |
|
|
28.1 |
% |
|
|
31.7 |
% |
Economic Consulting Services |
|
|
36.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating profit |
|
|
36.2 |
% |
|
|
40.0 |
% |
|
|
|
|
|
|
|
|
|
Earnings Summary. Net income decreased 50 percent in the three months ended March 31, 2009
compared to the corresponding period in 2008. Revenue was negatively impacted by several factors
including the weakened economy, longer lead times for client spending decisions, and uncertainties
surrounding the regulatory environment and potential stimulus spending. The decrease in revenue was
partially offset by lower incentive related compensation in 2009 compared to the same period in
2008 and lower general and administrative spending. However, these cost reductions were partially
offset by higher than normal severance related expense of $3.0 million related to approximately 200
employee reductions that will occur in the first and second quarters of 2009 as we align our staffing needs to the reduced demand for our
services. Finally, unfavorable changes in the foreign exchange rates relative to the US dollar
between the first quarter 2009 and the first quarter 2008 negatively impacted our results,
including an $8.5 million negative impact on total revenues.
Outlook. We expect our revenue to continue to be challenged by the weakened economy as
clients asses their own discretionary spending. However, potential declines in revenue are expected to be partially offset by the cost saving initiatives enacted during the first quarter of 2009.
These initiatives include staffing reductions, holding base salaries constant and tighter control
over discretionary spending.
Total Revenues before Reimbursements. Most revenues before reimbursements are earned from
consultants fee revenues that are primarily a function of billable hours, bill rates and
consultant headcount. Revenues before reimbursements for the three months ended March 31, 2009
decreased 9 percent over the corresponding period in 2008 due to decreases in consultant
utilization. The consultant utilization rate was 75 percent for the three months ended March 31,
2009, compared to one of our highest quarterly utilization of 83 percent for the corresponding
period in 2008. Assuming our 2008 acquisitions operated at historic run rates our decrease quarter
over quarter in revenue would have been 18 percent. The decreased utilization was primarily the
result of decreased demand due, in part, to the reduced discretionary spending on consulting
services caused by the recent economic crisis.
North American Dispute and Investigative Services. Total revenues for this segment decreased
20 percent for the three months ended March 31, 2009 compared to a very strong first quarter in
2008. The decrease was the result of a 14 percent decreased utilization rate combined with a
decreased bill rate of 3 percent. Uncertainty in the legal, economic and regulatory environments
continued to slow the assignment award process and delay the beginning of sold engagements.
North American Business Consulting Services. Total revenues for this segment decreased 17
percent for the three months ended March 31, 2009 compared to the corresponding period in 2008. The
decrease was the result of an 8 percent decreased utilization rate partially offset by an increased
bill rate of 4 percent. This segment had a significant decrease in demand during 2009 in certain
markets including financial services due to the recent market disruptions and healthcare due to
cost pressure on providers resulting from the economic crisis. Additionally, total revenues were
negatively impacted 6 percent by a decrease in revenues from reimbursable expenses due to reduced
use of independent contractors. Headcount decreased 8 percent during the first quarter of 2009 in
response to the lower market demand. The segments bill rate increased slightly as a result of a
greater mix of higher-rate projects.
International Consulting Operations. Total revenues for this segment decreased 19 percent for
the three months ended March 31, 2009 compared to the corresponding period in 2008. The decrease
resulted from unfavorable currency fluctuations as the segment revenues and related bill rates were
negatively impacted by the weakening UK pound against the US dollar in the first quarter of 2009
compared to 2008. Excluding the foreign exchange impact of approximately $6.0 million this segment
experienced a 12 percent increase in total revenues for the three months ended March 31, 2009 over
the corresponding period in 2008, primarily related to increased engagements in the financial
services markets.
Economic Consulting Services. This segment commenced operations with our acquisition of
Chicago Partners on May 1, 2008.
23
Cost of Services before Reimbursable Expenses. Cost of services before reimbursable expenses
decreased for the three months ended March 31, 2009, from the corresponding period in 2008. Cost
of services before reimbursable expenses includes consultant incentive compensation. Incentive
compensation is structured to reward consultants based on the achieved business performance under a
compensation methodology approved by our management and the compensation committee of our board of
directors. Consultant compensation expense decreased in the first quarter of 2009 compared to the
first quarter of 2008, due primarily to decreased incentive compensation expense as a result of
decreased operating performance. This decrease was partially offset by expense amortization
relating to long-term incentive and retention agreements entered into during the second and third
quarters of
2008. Additionally, we incurred significant severance charges during the first quarter of
2009 as we aligned our resources to the decreased demand. The severance actions were primarily
taken near the end of the quarter and, as such, average headcount for the quarter did not fully
reflect the full impact of the actions. Cost of services included severance expense of $2.6
million during the first quarter of 2009 compared to $0.2 million during the first quarter of 2008.
As a percentage of revenues before reimbursements, cost of services before reimbursable
expenses was 66 percent and 61 percent for the three months ended March 31, 2009 and 2008,
respectively. The increase in such costs as a percentage of revenue before reimbursements reflects
the reduced consultant utilization and severance expense associated with the recent headcount
reduction actions. The severance costs resulted in a 2% increase in cost of services as a
percentage of revenues before reimbursements, while the cost savings impact of the reduced
headcount actions taken in the first quarter of 2009 will not be fully realized until future
quarters.
Segment Operating Profit Margin. Segment operating profit margin decreased 3 to 4 percentage
points for North American Dispute and Investigative Services, North American Business Consulting
Services and International Consulting Operations resulting from decreased revenue and utilization
and severance expense in the first quarter of 2009.
General and Administrative Expenses. General and administrative expenses include
facility-related costs, compensation and benefits of corporate management and support personnel,
allowances for doubtful accounts receivable, professional administrative services and all other
support costs. General and administrative expenses decreased $3.1 million, or 8 percent, to $34.9
million in the three months ended March 31, 2009, compared to the corresponding period in 2008. The
decrease in general and administrative expenses was a result of lower professional fees including
legal and information technology costs. The decreased costs were partially offset by
severance costs of $0.4 million during the first quarter of 2009. General and administrative
expenses as a percentage of revenues before reimbursements was consistent at 21 percent for the
three months ended March 31, 2009 and 2008.
Other Operating Costs. During the three months ended March 31, 2009, we recorded $0.9 million
of office closure related costs, which consisted of adjustments to office closure obligations and
accelerated depreciation on leasehold improvements in offices to be abandoned. During the three
months ended March 31, 2008, we recorded $1.5 million 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.
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. In the next twelve months we expect our cash expenditures to be $1.5 million
relating to these obligations. The office closure obligations have been discounted to net present
value.
We expect to record additional restructuring charges for real estate lease terminations as
other initiatives are completed throughout 2009, including the relocation of our New York office
that is expected to occur in the second quarter of 2009 and result in office closure related costs
of $3.0 to $4.0 million.
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 months ended March 31, 2009, amortization expense was $3.6
million, compared to $4.2 million for the corresponding period in 2008. The decrease of $0.6
million was primarily due to assets becoming fully amortized in 2008.
Interest Expense. Interest expense includes interest on borrowed amounts under our credit
agreement, interest on notes payable, amortization of debt refinancing costs, and accretion of
imputed interest related to deferred purchase price obligations. For the three months ended March
31, 2009 and 2008, interest expense was $4.0 million and $4.6 million, respectively. The decrease
in interest
24
expense for the first quarter of 2009 was related to the decreased interest rates and a
lower average debt balance for the first quarter of 2009. Our average borrowing rate under our
credit agreement (including the impact of our interest rate swap agreement) was 5.7 percent and 6.5
percent during the three months ended March 31, 2009 and 2008, respectively.
Income tax expense. The effective income tax rate for the three months ended March 31, 2009
and 2008 was 43.0 and 42.5 percent, respectively.
Human Capital Resources
Our human capital resources include consulting professionals and administrative and management
personnel. As a result of both recruiting activities and business acquisitions, we have a diverse
pool of consultants and administrative support staff with various skills and experience. The
following table shows the employee data for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
Number of FTE consultants as of March 31 |
|
|
1,920 |
|
|
|
1,896 |
|
Average number of FTE consultants for the quarter ended March 31 |
|
|
1,941 |
|
|
|
1,913 |
|
Average utilization of consultants, based on industry standard
of 1,850 hours for the quarter ended March 31 |
|
|
75 |
% |
|
|
83 |
% |
Number of administrative and management personnel as of March 31 |
|
|
573 |
|
|
|
547 |
|
The average number of FTE consultants is adjusted for part-time status and takes into
consideration hiring and attrition which occur during the period. The increase in FTE consultants
for the three months ended March 31, 2009 compared to the corresponding period in 2008 reflects our
business acquisitions during 2008 and 2009 and is partially offset by
headcount reductions made in
the first quarter 2009.
In addition to our consultants and administrative personnel, we hire project employees on a
short-term basis or seasonal basis. We believe the practice of hiring these employees provides
greater flexibility in adjusting consulting and administrative personnel levels in response to
changes in demand for our professional services. The short-term or seasonal hires supplement
services on certain engagements or provide additional administrative support to our consultants.
In connection with certain recruiting activities and business acquisitions, our policy is to
obtain non-solicitation covenants from senior and mid-level consultants. Most of these covenants
have restrictions that extend 12 months beyond termination. We utilize these contractual agreements
and other agreements to reduce the risk of attrition and to safeguard our existing clients, staff
and projects.
Liquidity and Capital Resources
Summary
We had $6.7 million in cash and cash equivalents at March 31, 2009, compared to $23.1 million
at December 31, 2008. Our cash equivalents were primarily limited to money market accounts or A
rated securities, with maturity dates of 90 days or less. As of March 31, 2009 we had total bank
debt outstanding of $260.5 million under our credit agreement, compared to $232.5 million as of
December 31, 2008 reflecting seasonal increases in cash payments related to incentive compensation.
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 net
revenues. Daily net revenues are calculated by taking quarterly net revenues divided by 90 days,
approximately equal to the number of days in a quarter. Calculated as such, we had DSO of 87 days
at March 31, 2009, compared to 73 days at December 31, 2008. The increase in DSO is attributable
to slower client payments.
Operating Activities
Net cash used by operating activities was $34.6 million for the three months ended March 31,
2009, compared to $14.0 million used for the three months ended March 31, 2008. The increase in net
cash used by operating activities resulted primarily from the reduced net income and increased
investments in working capital, primarily associated with lower accruals for incentive compensation
and income taxes.
25
Investing Activities
Net cash used in investing activities for the three months ended March 31, 2009 was $10.4
million compared to $3.7 million for the three months ended March 31, 2008. The increase in the use
of cash resulted primarily from higher investment spending on acquisitions and higher property and
equipment expenditures during the first quarter of 2009 compared to the corresponding period in
2008. During the three months ended March 31, 2009 we acquired one business and purchased
leasehold improvements and software licenses.
Financing Activities
Net cash provided by financing activities for the three months ended March 31, 2009 was $28.9
million, compared to $13.7 million for the three months ended March 31, 2008. The increase was
primarily attributable to higher borrowings under our credit agreement during the first quarter of
2009 as a result of higher capital expenditures and compensation payments.
Debt, Commitments and Capital
As of March 31, 2009, we maintained a bank borrowing credit agreement our credit agreement
consisting of a $275.0 million revolving line of credit with the option to increase to $375.0
million and a $225.0 million unsecured term loan facility. Borrowings under the revolving credit
facility are payable in May 2012. Our credit agreement provides for borrowings in multiple
currencies including US Dollars, Canadian Dollars, UK Pound Sterling and Euro. As of March 31,
2009, we had aggregate borrowings of $260.5 million compared to $232.5 million as of December 31,
2008. As of March 31, 2009 we had $228.2 million available to borrow under our credit agreement.
At our option borrowings under the revolving credit facility and the term loan facility bear
interest, in general, based on a variable rate equal to an applicable base rate or LIBOR, in each
case plus an applicable margin. For LIBOR loans, the applicable margin will vary depending upon our
consolidated leverage ratio (the ratio of total funded debt to adjusted EBITDA) and whether the
loan is made under the term loan facility or revolving credit facility. As of March 31, 2008, the
applicable margins on LIBOR loans under the term loan facility and revolving credit facility were
1.25% and 1.0%, respectively. As of March 31, 2009, the applicable margins for base rate loans
under the term loan facility and revolving credit facility were 0.25% and zero, respectively. For
LIBOR loans, the applicable margin will vary between 0.50% to 1.75% depending upon our performance
and financial condition. For the quarter ended March 31, 2009 and 2008, our average borrowing rate
under our credit agreement was 5.7% and 6.5%, respectively.
Our credit agreement also includes certain financial covenants, including covenants that
require that we maintain a consolidated leverage ratio of not greater than 3.25:1 and a
consolidated fixed charge coverage ratio (the ratio of the sum of adjusted EBITDA and rental
expense to the sum of cash interest expense and rental expense) of not less than 2.0:1. At March
31, 2009, under the definitions in the credit agreement, our consolidated leverage ratio was 2.2
and our consolidated fixed charge coverage ratio was 3.8. In addition to the financial covenants,
the credit agreement contains customary affirmative and negative covenants and is subject to
customary exceptions. These covenants limit our ability to incur liens or other encumbrances or
make investments, incur indebtedness, enter into mergers, consolidations and asset sales, pay
dividends or other distributions, change the nature of our business and engage in transactions with
affiliates. We were in compliance with the terms of our credit agreement as of March 31, 2009 and
December 31, 2008.
As of March 31, 2009, we had total commitments of $410.3 million, which included $19.6 million
in deferred business acquisition obligations, payable in cash and common stock, software license agreements of $2.0 million, notes payable of
$3.6 million, and $124.6 million in lease commitments. As of March 31, 2009,
we had no significant
commitments for capital expenditures.
26
The following table shows the components of significant commitments as of March 31, 2009 and
the scheduled years of payments (shown in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From April 1, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 to |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
|
|
|
|
Contractual Obligations |
|
Total |
|
|
2009 |
|
|
2010 to 2011 |
|
|
2012 to 2013 |
|
|
Thereafter |
|
Deferred purchase price obligations |
|
$ |
19,623 |
|
|
$ |
8,180 |
|
|
$ |
11,443 |
|
|
$ |
|
|
|
$ |
|
|
Software license agreements |
|
|
1,968 |
|
|
|
480 |
|
|
|
1,488 |
|
|
|
|
|
|
|
|
|
Notes payable |
|
|
3,587 |
|
|
|
3,587 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Line of credit |
|
|
39,459 |
|
|
|
|
|
|
|
|
|
|
|
39,459 |
|
|
|
|
|
Term loan |
|
|
221,063 |
|
|
|
1,688 |
|
|
|
34,875 |
|
|
|
184,500 |
|
|
|
|
|
Lease commitments |
|
|
124,598 |
|
|
|
21,432 |
|
|
|
48,039 |
|
|
|
29,394 |
|
|
|
25,733 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
410,298 |
|
|
$ |
35,367 |
|
|
$ |
95,845 |
|
|
$ |
253,353 |
|
|
$ |
25,733 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We may pay up to $27.0 million of additional purchase consideration based on the Chicago
Partners business achieving certain post-closing performance targets during the periods from
closing to December 31, 2008 and calendar years 2009, 2010 and 2011. If earned, the additional
purchase consideration would be payable 75 percent in cash and 25 percent in our common stock. The
additional purchase price payments, if any, will be payable in April of the year following the year
such performance targets are attained. During the first quarter of 2009, we made an additional
purchase price payment of $2.3 million based on 2008 performance.
During 2007, we began to eliminate duplicate facilities, consolidate and close certain
offices. Of the $124.6 million of lease commitments as of March 31, 2009, $10.4 million of such
lease commitments related to offices we have abandoned or reduced excess space within, which are
available for sublease. Such sublease income, if any, would offset the cash outlays.
We do not expect to significantly increase or reduce our reserve for uncertain tax positions
during the next twelve months.
We believe that our current cash and cash equivalents, the future cash flows from operations
and our credit agreement will provide adequate cash to fund anticipated short-term and long-term
cash needs from normal operations. In the event we make significant cash expenditures in the future
for major acquisitions or other non-operating activities, we might need additional debt or equity
financing, as appropriate. Additionally, our credit agreement is with a syndicate of several banks.
These banks could be negatively impacted by the recent disruptions in the financial markets.
Off-Balance Sheet Arrangements
We do not maintain any off-balance sheet arrangements, transactions, obligations or other
relationships with unconsolidated entities that would be expected to have a material current or
future impact on our financial condition or results of operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Our primary exposure to market risks relates to changes in interest rates and foreign
currencies. The interest rate risk is associated with our borrowings under the line of credit, and
our investment portfolio, classified as cash equivalents. Our general investment policy is to limit
the risk of principal loss by limiting market and credit risks. The foreign currency risk is
associated with our operations in foreign countries.
At March 31, 2009, our investments were primarily limited to A rated securities, with
maturity dates of 90 days or less. These financial instruments are subject to interest rate risk
and will decline in value if interest rates rise. Because of the short periods to maturity of these
instruments, an increase in interest rates would not have a material effect on our financial
position or results of operations.
On July 2, 2007, we entered into an interest rate swap agreement with a bank for a notional
value of $165.0 million through June 30, 2010. This agreement effectively fixed our LIBOR base rate
for $165.0 million of our indebtedness at a rate of 5.30% during this period. We designated the
swap as a cash flow hedge to manage market risk from changes in interest rates on a portion of our
variable rate term loans. We recognize cash flow hedges as assets or liabilities at fair value,
with the related gain or loss reflected within stockholders equity as a component of accumulated
other comprehensive income to the extent of effectiveness. Any ineffectiveness on the swap would
be recognized in the consolidated statements of income. The differentials to be received or paid
under the
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instrument are recognized in income over the life of the contract as adjustments to
interest expense. The use of an interest rate swap exposes us to counterparty credit risk
in the event of non performance by counterparties. As of March 31, 2009, we were not exposed to significant counterparty risk. During the three months ended March 31, 2009 there was no gain or loss due to
ineffectiveness and we recorded a $1.6 million in interest expense associated with differentials
paid under the instrument. As of March 31, 2009, we had an $8.3 million liability recorded in
other non-current liabilities related to this interest rate derivative and we recorded a $0.5
million unrealized gain, net of taxes of $0.8 million, to accumulated other comprehensive income
for the three months ended March 31, 2009.
Other than our previously disclosed contractual obligations of $410.3 million and the $165.0
million interest rate swap agreement, we did not have, at March 31, 2009, any other short-term
debt, long-term debt, interest rate derivatives, forward exchange agreements, firmly committed
foreign currency sales transactions, or derivative commodity instruments.
Our market risk associated with the credit agreement relates to changes in interest rates. As
of March 31, 2009, borrowings under the credit agreement bear interest, in general, based on a
variable rate equal to an applicable base rate (equal to the higher of a reference prime rate or
one half of one percent above the federal funds rate) or LIBOR, in each case plus an applicable
margin. Based on borrowings under the credit agreement at March 31, 2009, each quarter point change
in market interest rates would result in approximately a $0.2 million change in annual interest
expense, after considering the impact of our interest rate swap agreement.
We operate in foreign countries, which expose us to market risk associated with foreign
currency exchange rate fluctuations. At March 31, 2009, we had net assets of approximately $81.7
million with a functional currency of the UK Pounds Sterling and $28.1 million with a functional
currency of the Canadian Dollar related to our operations in the United Kingdom and Canada,
respectively. At March 31, 2009, we had net assets denominated in the non functional currency of
approximately $0.7 million. As such, a ten percent change in the value of the local currency would
result in a $0.1 million currency transaction gain or loss in our results of operations.
Item 4. Controls and Procedures
Under the supervision of our management, including our principal executive officer and
principal financial officer, we evaluated the effectiveness of the design of our disclosure
controls and procedures as of March 31, 2009. Based on that evaluation, the principal executive
officer and principal financial officer concluded that our disclosure controls and procedures were
effective.
We maintain disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e) and
15d-15(e)) that are designed to ensure that information required to be disclosed in our reports
filed or submitted under the Exchange Act is recorded, processed, summarized and reported within
the time frames specified in SECs rules and forms, and that such information is accumulated and
communicated to our management, including our principal executive officer and principal financial
officer, as appropriate, to allow timely decisions regarding required disclosure. Any system of
controls and procedures, no matter how well designed and operated, can provide only reasonable
assurance of achieving the desired control objectives.
During the three months ended March 31, 2009, 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).
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PART IIOTHER INFORMATION
Item 1. Legal Proceedings
From time to time we are party to various other lawsuits and claims in the ordinary course of
business. While the outcome of those lawsuits or claims cannot be predicted with certainty, we do
not believe that any of those lawsuits or claims will have a material adverse effect on us.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the three months ended March 31, 2009, we issued the following unregistered securities:
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Number of |
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Type of |
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Shares in |
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Exemption |
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Purchaser or |
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Assets |
Date |
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Securities |
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Consideration (a) |
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Claimed (b) |
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Recipient |
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Purchased |
January 24, 2009
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Common Stock
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14,865 |
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Section 4(2)
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Tedd Avey & Associates Ltd.
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(c) |
March 16, 2009
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Common Stock
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47,018 |
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Section 4(2)
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Chicago Partners, LLC
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(d) |
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(a) |
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Does not take into account additional cash or other consideration paid or payable as a part
of the transactions. |
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(b) |
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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. |
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(c) |
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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. |
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(d) |
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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:
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Exhibit 31.1
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Rule 13a14(a) Certification of the Chairman and Chief Executive Officer. |
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Exhibit 31.2
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Rule 13a14(a) Certification of the Executive Vice President and Chief Financial Officer. |
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Exhibit 32.1
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Section 1350 Certification |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Navigant Consulting, Inc.
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By: |
/S/ WILLIAM M. GOODYEAR
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William M. Goodyear |
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Chairman and Chief Executive Officer |
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By: |
/S/ THOMAS A. NARDI
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Thomas A. Nardi |
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Executive Vice President and Chief Financial Officer |
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Date: May 7, 2009
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