e10vq
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(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, 2010
OR
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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.) |
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30 South Wacker Drive, Suite 3550, Chicago, Illinois 60606
(Address of principal executive offices, including zip code)
(312) 573-5600
(Registrants telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). YES
o NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act. (Check one):
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Large accelerated filer þ
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Accelerated filer o
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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
As of May 5, 2010, 50.6 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, 2010
INDEX
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Page |
PART IFINANCIAL INFORMATION |
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Item 1. Financial Statements |
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3 |
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Notes to Unaudited Consolidated Financial Statements |
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6 |
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations |
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17 |
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Item 3. Quantitative and Qualitative Disclosures About Market Risk . |
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25 |
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Item 4. Controls and Procedures |
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25 |
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PART IIOTHER INFORMATION |
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Item 1. Legal Proceedings |
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26 |
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Item 6. Exhibits |
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26 |
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SIGNATURES |
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27 |
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Navigant is a service mark of Navigant International, Inc. Navigant Consulting, Inc. is not
affiliated, associated, or in any way connected with Navigant International, Inc. and the use of
Navigant is made under license from Navigant International, Inc.
2
PART IFINANCIAL INFORMATION
Item 1. Financial Statements
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
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March 31, |
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December 31, |
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2010 |
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2009 |
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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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$ |
361 |
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$ |
49,144 |
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Accounts receivable, net |
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174,690 |
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163,608 |
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Prepaid expenses and other current
assets |
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18,306 |
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16,374 |
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Deferred income tax
assets |
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13,930 |
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19,052 |
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Total current assets |
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207,287 |
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248,178 |
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Property and equipment, net |
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41,592 |
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42,975 |
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Intangible assets, net |
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28,405 |
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30,352 |
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Goodwill |
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487,355 |
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485,101 |
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Other assets |
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13,378 |
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13,639 |
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Total assets |
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$ |
778,017 |
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$ |
820,245 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Current liabilities: |
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Accounts payable |
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$ |
9,267 |
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$ |
8,203 |
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Accrued liabilities |
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10,130 |
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8,664 |
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Accrued compensation-related
costs |
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39,100 |
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69,751 |
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Term loan current |
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14,258 |
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12,375 |
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Other current liabilities |
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35,595 |
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34,441 |
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Total current
liabilities |
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108,350 |
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133,434 |
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Non-current liabilities: |
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Deferred income tax liabilities |
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38,016 |
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37,096 |
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Other non-current
liabilities |
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25,069 |
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23,923 |
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Term loan non-current |
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164,657 |
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207,000 |
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Bank debt non-current |
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18,360 |
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Total non-current
liabilities |
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246,102 |
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268,019 |
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Total liabilities |
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354,452 |
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401,453 |
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Stockholders equity: |
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Common stock |
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60 |
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60 |
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Additional paid-in capital |
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560,278 |
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559,368 |
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Treasury stock |
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(218,700 |
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(218,798 |
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Retained earnings |
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97,633 |
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91,186 |
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Accumulated other comprehensive
loss |
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(15,706 |
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(13,024 |
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Total stockholders
equity |
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423,565 |
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418,792 |
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Total liabilities and stockholders
equity |
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$ |
778,017 |
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$ |
820,245 |
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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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2010 |
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2009 |
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Revenues before
reimbursements |
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$ |
153,870 |
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$ |
167,212 |
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Reimbursements |
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19,680 |
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15,150 |
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Total
revenues |
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173,550 |
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182,362 |
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Cost of services before reimbursable
expenses |
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102,230 |
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110,267 |
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Reimbursable
expenses |
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19,680 |
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15,150 |
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Total costs of
services |
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121,910 |
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125,417 |
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General and administrative
expenses |
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30,460 |
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34,893 |
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Depreciation
expense |
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3,801 |
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4,640 |
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Amortization
expense |
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2,796 |
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3,620 |
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Other operating costs: |
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Office
consolidation |
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908 |
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Operating
income |
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14,583 |
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12,884 |
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Interest
expense |
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3,478 |
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3,968 |
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Interest
income |
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(313 |
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(296 |
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Other expense (income),
net |
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105 |
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(321 |
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Income before income tax
expense |
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11,313 |
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9,533 |
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Income tax
expense |
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4,866 |
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4,100 |
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Net income |
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$ |
6,447 |
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$ |
5,433 |
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Basic net income per
share |
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$ |
0.13 |
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$ |
0.11 |
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Shares used in computing income per basic
share |
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48,691 |
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47,443 |
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Diluted net income per
share |
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$ |
0.13 |
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$ |
0.11 |
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Shares used in computing income per diluted
share |
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50,096 |
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49,449 |
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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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2010 |
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2009 |
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Cash flows from operating activities: |
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Net income |
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$ |
6,447 |
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$ |
5,433 |
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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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3,801 |
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4,640 |
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Depreciation expense office consolidation |
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608 |
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Amortization expense |
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2,796 |
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3,620 |
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Share-based compensation expense |
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975 |
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2,506 |
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Accretion of interest expense |
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205 |
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278 |
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Deferred income taxes |
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5,319 |
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2,778 |
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Allowance for doubtful accounts receivable |
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1,584 |
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3,754 |
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Changes in assets and liabilities: |
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Accounts receivable |
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(13,610 |
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(22,652 |
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Prepaid expenses and other assets |
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(1,250 |
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(2,270 |
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Accounts payable |
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1,155 |
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2,155 |
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Accrued liabilities |
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2,146 |
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(334 |
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Accrued compensation-related costs |
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(30,416 |
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(31,842 |
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Income taxes payable |
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(609 |
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(1,821 |
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Other liabilities |
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500 |
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(1,464 |
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Net cash used in operating activities |
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(20,957 |
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(34,611 |
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Cash flows from investing activities: |
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Purchases of property and equipment |
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(3,056 |
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(5,708 |
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Acquisition of business |
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(4,000 |
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(1,875 |
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Payments of acquisition liabilities |
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(2,821 |
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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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(7,056 |
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(10,444 |
) |
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Cash flows from financing activities: |
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Issuances of common stock |
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661 |
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1,672 |
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Payments of notes payable |
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(355 |
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Borrowings from banks, net of repayments |
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19,315 |
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28,802 |
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Payments of term loan |
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(40,460 |
) |
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(562 |
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Other, net |
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(390 |
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(706 |
) |
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Net cash (used in) provided by financing activities |
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(20,874 |
) |
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28,851 |
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Effect of exchange rate changes on cash |
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104 |
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(187 |
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Net decrease in cash and cash equivalents |
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(48,783 |
) |
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(16,391 |
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Cash and cash equivalents at beginning of the period |
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49,144 |
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23,134 |
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Cash and cash equivalents at end of the period |
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$ |
361 |
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$ |
6,743 |
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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 that combines deep industry knowledge with
technical expertise to enable companies to create and protect value in the face of complex and
critical business risks and opportunities. 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, 2010 are not necessarily
indicative of the results to be expected for the entire year ending December 31, 2010.
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, 2009 included in
the Annual Report on Form 10-K, as filed by us with the Securities and Exchange Commission on
February 19, 2010. Certain amounts in prior years consolidated financial statements have been
reclassified to conform to the current years presentation including the reclassification of the
prior year segment information (see Note 3 Segment Information).
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. We have evaluated subsequent events through the date of this filing. We do not believe
there are any material subsequent events which would require further disclosure.
Note 2. Acquisitions
On January 20, 2010, we acquired the assets of Empiris, LLC, located in Washington, D.C. for
$5.5 million, which consisted of $4.0 million in cash paid at closing and $1.5 million, recorded in
other liabilities, to be paid in cash in two equal installments on December 31, 2010 and January 3,
2012. In addition, the purchase agreement contains a provision for contingent consideration of up
to $2.0 million in cash. The contingent consideration is based on the business achieving certain
performance targets during the periods from closing to December 31, 2010 and in calendar years 2011
and 2012 and will be payable in March of the year following the year such performance targets are
attained. Fair value of the contingent consideration, recorded in other liabilities, was estimated
to be $1.9 million and was determined based on level two observable inputs (see Note 11 Fair
Value) and will be recalculated each reporting period with any resulting gains or losses being
recorded in the income statement. As part of the purchase price allocation, we recorded $1.6
million in identifiable intangible assets and $5.8 million in goodwill. This acquisition consisted
of nine consulting professionals and has been included in the Economic Consulting segment.
On December 31, 2009, we acquired the assets of Summit Blue Consulting, LLC for $13.0 million,
which consisted of $11.0 million in cash paid at closing and two deferred cash payments of
$1.0 million each, due on the first and second anniversaries of the closing. As part of the
purchase price allocation, we recorded $2.6 million in identifiable intangible assets and
$10.4 million in goodwill. The purchase price paid in cash at closing was funded with cash from
operations.
We acquired Summit Blue to expand and complement our energy practice with new service lines to
our clients. Summit Blue specializes in resource planning, energy efficiency, demand response, and
renewable energy consulting services for utilities, public agencies, and other clients. Summit
Blue, headquartered in Boulder, Colorado, had approximately 60 consultants at the time of
acquisition and has been included in our Business Consulting Services segment.
6
Note 3. Segment Information
Our business is organized in four reportable segments Dispute and Investigative Services,
Business Consulting Services, International Consulting and Economic Consulting. These reportable
segments are generally defined by the nature of their services and geography and may be the
aggregation of multiple operating segments as indicated in the description below. During the
first quarter of 2010, certain organizational changes were made, which along with other factors,
resulted in the identification of two additional operating segments and the repositioning of
certain service offerings between the segments. Prior year comparative segment data has been
restated to be consistent with the current presentation.
The Dispute and Investigative Services reporting 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
counsel and corporate boards.
The Business Consulting Services reporting segment provides strategic, operational, financial,
regulatory and technical management consulting services to clients. Beginning with the first
quarter of 2010, the Energy and Healthcare business units are now defined as operating segments due
to their size, importance and organizational reporting relationships. The reporting segment is
comprised of three operating segments, Energy, Healthcare and other business consulting practices,
which is primarily associated with providing operations advisory, valuation and restructuring
services to financial services and other markets. The clients are principally C suite and
corporate management, government entities and law firms.
The International Consulting reporting segment provides a mix of dispute and business
consulting services to clients predominately outside North America. The clients are principally C
suite and corporate management, government entities, and law firms
The Economic Consulting reporting 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.
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For the three months ended |
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March 31, |
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2010 |
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2009 |
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Revenues before reimbursements: |
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Dispute and Investigative Services |
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$ |
63,338 |
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$ |
71,903 |
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Business Consulting Services |
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57,399 |
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|
66,906 |
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International Consulting |
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16,145 |
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15,516 |
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Economic Consulting |
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|
16,988 |
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|
12,887 |
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Total revenues before reimbursements |
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$ |
153,870 |
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$ |
167,212 |
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Total revenues: |
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Dispute and Investigative Services |
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$ |
67,894 |
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$ |
77,496 |
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Business Consulting Services |
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66,250 |
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73,516 |
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International Consulting |
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20,797 |
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17,303 |
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Economic Consulting |
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18,609 |
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|
14,047 |
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Total revenues |
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$ |
173,550 |
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$ |
182,362 |
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Segment operating profit: |
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Dispute and Investigative Services |
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$ |
25,408 |
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$ |
28,234 |
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Business Consulting Services |
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|
19,017 |
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|
23,452 |
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International Consulting |
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3,740 |
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|
4,176 |
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Economic Consulting |
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6,296 |
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|
4,644 |
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Total combined segment operating profit |
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54,461 |
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|
60,506 |
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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 |
|
|
30,460 |
|
|
|
34,893 |
|
Depreciation expense |
|
|
3,801 |
|
|
|
4,640 |
|
Amortization expense |
|
|
2,796 |
|
|
|
3,620 |
|
Long term compensation expense related to consulting personnel
(including share based compensation) |
|
|
2,821 |
|
|
|
3,561 |
|
Other operating expenses |
|
|
|
|
|
|
908 |
|
|
|
|
|
|
|
|
Operating income |
|
|
14,583 |
|
|
|
12,884 |
|
Other expense, net |
|
|
3,270 |
|
|
|
3,351 |
|
|
|
|
|
|
|
|
Income before income tax expense |
|
$ |
11,313 |
|
|
$ |
9,533 |
|
|
|
|
|
|
|
|
7
Long term compensation expense related to consulting personnel includes share based
compensation expense and compensation expense attributed to forgivable loans (see note 8
Supplemental Consolidated Balance Sheet Information).
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, |
|
|
|
2010 |
|
|
2009 |
|
Dispute and Investigative Services |
|
$ |
307,410 |
|
|
$ |
304,744 |
|
Business Consulting Services |
|
|
217,382 |
|
|
|
212,975 |
|
International Consulting |
|
|
78,983 |
|
|
|
86,195 |
|
Economic Consulting |
|
|
86,675 |
|
|
|
75,147 |
|
Unallocated assets |
|
|
87,567 |
|
|
|
141,184 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
778,017 |
|
|
$ |
820,245 |
|
|
|
|
|
|
|
|
Note 4. Goodwill and Intangible Assets
Goodwill and other intangible assets consisted of (shown in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Goodwill |
|
$ |
492,780 |
|
|
$ |
490,526 |
|
Lessaccumulated amortization |
|
|
(5,425 |
) |
|
|
(5,425 |
) |
|
|
|
|
|
|
|
Goodwill, net |
|
|
487,355 |
|
|
|
485,101 |
|
Intangible assets: |
|
|
|
|
|
|
|
|
Customer lists and relationships |
|
|
63,790 |
|
|
|
63,697 |
|
Non-compete agreements |
|
|
19,688 |
|
|
|
19,701 |
|
Other |
|
|
19,851 |
|
|
|
19,589 |
|
|
|
|
|
|
|
|
Intangible assets, at cost |
|
|
103,329 |
|
|
|
102,987 |
|
Lessaccumulated amortization |
|
|
(74,924 |
) |
|
|
(72,635 |
) |
|
|
|
|
|
|
|
Intangible assets, net |
|
|
28,405 |
|
|
|
30,352 |
|
|
|
|
|
|
|
|
Goodwill and intangible assets, net |
|
$ |
515,760 |
|
|
$ |
515,453 |
|
|
|
|
|
|
|
|
On a periodic basis, we are required to consider whether or not the fair value of each of the
reporting units could have fallen below its carrying value. We consider elements and other factors
including, but not limited to, changes in the business climate in which we operate, attrition of
key personnel, unanticipated competition, our market capitalization in excess of our book value,
our recent operating performance and our financial projections. As a result of this review we are
required to determine whether such an event or condition existed that would require us to perform
an interim goodwill impairment test prior to our next annual test date. We continue to monitor
these factors and we may perform additional impairment tests as appropriate in future periods.
Our annual test is completed in the second quarter of each year. During the first quarter of
2010, in connection with recent organizational changes and the repositioning of certain service
offerings between our reporting units, we completed an interim impairment test of our goodwill
balances as of February 28, 2010. The impairment test was completed based on our historical
reporting units prior to the repositioning of certain service offerings in the first quarter of
2010. There was no indication of impairment based on our analysis. We will complete the
impairment analysis again in the second quarter of 2010, which will reflect the updated segment
financial results.
As of our February 28, 2010 analysis, the excess of estimated fair value over net
asset carrying value of the Business Consulting Services reporting unit and the Dispute and
Investigative Services reporting unit were approximately 30% and 40% of estimated fair value,
respectively. The excess of estimated fair value over the net asset carrying value of the
International Consulting and Economic Consulting reporting units were approximately 30% and 20% of
estimated fair value, respectively, and given the
8
smaller size of these reporting units the relative dollars of the excess are substantially
smaller than for the other two reporting units. Further, the estimated fair value of the
International Consulting and Economic Consulting reporting units may be more volatile due to the
reporting units smaller size and higher expected earnings growth rates. Also, given the
International Consulting reporting units involvement in emerging markets, its estimated fair value
may be more volatile. Additionally, the Economic Consulting reporting unit is substantially
comprised of recent acquisitions and its estimated fair value is dependent on the success of such
acquisitions. The key assumptions used in our February 28, 2010 analysis included profit margin
improvement to be generally consistent with our longer term historical performance, revenue growth
rates ahead of the industry in the near term and discount rates determined based on comparables for
our peer group. Our fair value estimates were made as of the date of our analysis and are subject
to change.
We review our intangible asset values on a periodic basis. We had $28.4 million in intangible
assets, net of accumulated amortization as of March 31, 2010. Of the $28.4 million balance,
$21.3 million related to customer lists and relationships, $3.0 million related to non-compete
agreements and $4.1 million related to other intangible assets. As of March 31, 2010, the weighted
average remaining life for customer lists and relationships, non-compete agreements and other
intangible assets was 4.2 years, 2.1 years and 3.4 years, respectively. We have reviewed the
estimated period of consumption for our intangible assets. As of March 31, 2010, there was no
indication of impairment related to our intangible assets. Our intangible assets have estimated
useful lives which range up to seven years. We will amortize the remaining net book values of
intangible assets over their remaining useful lives.
During 2009, we completed a strategic review. As a result, we repositioned and wound-down
several service lines which resulted in a narrower focus on certain strategic businesses on a
global basis disputes, economics, healthcare and energy. On an ongoing basis, we expect to
continue to evaluate our strategic and competitive position. As we review our portfolio of services
in the future, we may exit certain markets or reposition certain service offerings within our
business. Consistent with past evaluations, this evaluation may result in our redefining our
operating segments and may impact a significant portion of one or more of our reporting units. As
noted above, if such actions occur, they may be considered triggering events that would result in
our performing an interim impairment test of our goodwill and an impairment test of our intangible
assets.
We use various methods to determine fair value, including market, income and cost approaches.
With these approaches, we adopt certain assumptions that market participants would use in pricing
the asset or liability, including assumptions about risk or the risks inherent in the inputs to the
valuation. Inputs to valuation can be readily observable, market-corroborated, or unobservable. We
use valuation techniques that maximize the use of observable inputs and minimize the use of
unobservable inputs.
The fair value measurements used for our goodwill impairment testing use significant
unobservable inputs which reflect our own assumptions about the inputs that market participants
would use in measuring fair value including risk considerations.
The changes in carrying values of goodwill and intangible assets (shown in thousands) are as
follows:
|
|
|
|
|
|
|
|
|
|
|
For the three months ended |
|
|
|
March 31, |
|
|
|
2010 |
|
|
2009 |
|
Beginning of periodGoodwill, net |
|
$ |
485,101 |
|
|
$ |
463,058 |
|
Goodwill acquired |
|
|
5,807 |
|
|
|
1,768 |
|
Adjustments to goodwill |
|
|
(44 |
) |
|
|
|
|
Foreign currency translationgoodwill |
|
|
(3,509 |
) |
|
|
(1,650 |
) |
|
|
|
|
|
|
|
End of period Goodwill, net |
|
$ |
487,355 |
|
|
$ |
463,176 |
|
|
|
|
|
|
|
|
Beginning of periodIntangible assets, net |
|
$ |
30,352 |
|
|
$ |
38,108 |
|
Intangible assets acquired |
|
|
1,572 |
|
|
|
(44 |
) |
Foreign currency translationintangible assets, net |
|
|
(723 |
) |
|
|
(335 |
) |
Lessamortization expense |
|
|
(2,796 |
) |
|
|
(3,620 |
) |
|
|
|
|
|
|
|
End of periodIntangible assets, net |
|
$ |
28,405 |
|
|
$ |
34,109 |
|
|
|
|
|
|
|
|
As of March 31, 2010, goodwill and intangible assets, net of amortization, was $225.5 million
for Dispute and Investigative Services, $163.9 million for Business Consulting Services, $61.0
million for International Consulting and $65.4 million for Economic Consulting.
9
Total amortization expense for the three months ended March 31, 2010 and 2009 was $2.8 million
and $3.6 million, respectively. Below is the estimated aggregate amortization expense to be
recorded for the remainder of 2010 and for each of the four years following related to intangible
assets at March 31, 2010 (shown in thousands):
|
|
|
|
|
For the period ending December 31, |
|
Amount |
|
2010 |
|
$ |
7,489 |
|
2011 |
|
|
7,711 |
|
2012 |
|
|
5,229 |
|
2013 |
|
|
4,160 |
|
2014 |
|
|
2,680 |
|
Thereafter |
|
|
1,136 |
|
|
|
|
|
Total |
|
$ |
28,405 |
|
|
|
|
|
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.
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, |
|
|
|
2010 |
|
|
2009 |
|
Common shares outstanding |
|
|
48,691 |
|
|
|
47,410 |
|
Business combination obligations payable in a fixed number of shares |
|
|
|
|
|
|
33 |
|
|
|
|
|
|
|
|
Basic shares |
|
|
48,691 |
|
|
|
47,443 |
|
Employee stock options |
|
|
329 |
|
|
|
351 |
|
Restricted shares and stock units |
|
|
177 |
|
|
|
259 |
|
Business combination obligations payable in a fixed dollar amount of shares |
|
|
890 |
|
|
|
1,345 |
|
Contingently issuable shares |
|
|
9 |
|
|
|
51 |
|
|
|
|
|
|
|
|
Diluted shares |
|
|
50,096 |
|
|
|
49,449 |
|
|
|
|
|
|
|
|
For the three months ended March 31, 2010 and 2009, we had outstanding stock options for
approximately 318,000 and 362,000 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 issued approximately 450,000 shares of our common stock on April 30, 2010 and are
obligated to issue shares based on a fixed dollar amount of $5.8 million on May 1, 2011. For the
three months ended March 31, 2010, the diluted share computation included 0.9 million shares
related to the Chicago Partners deferred purchase price obligations.
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
10
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, 2010 (shown in thousands):
|
|
|
|
|
|
|
|
|
|
|
Dollars |
|
|
Shares |
|
Stockholders equity at January 1, 2010 |
|
$ |
418,792 |
|
|
|
48,651 |
|
Comprehensive income |
|
|
3,765 |
|
|
|
|
|
Other issuances of common stock |
|
|
661 |
|
|
|
69 |
|
Net settlement of employee taxes on taxable compensation related to the vesting of restricted stock |
|
|
(428 |
) |
|
|
(34 |
) |
Tax benefits on stock options exercised and restricted stock vested |
|
|
(200 |
) |
|
|
|
|
Issuances of restricted stock, net of forfeitures |
|
|
|
|
|
|
152 |
|
Share-based compensation expense |
|
|
975 |
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity at March 31, 2010 |
|
$ |
423,565 |
|
|
|
48,838 |
|
|
|
|
|
|
|
|
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, |
|
|
|
2010 |
|
|
2009 |
|
Amortization of restricted stock awards |
|
$ |
734 |
|
|
$ |
2,174 |
|
Amortization of stock option awards |
|
|
209 |
|
|
|
112 |
|
Fair value adjustment for variable stock option accounting awards |
|
|
(33 |
) |
|
|
(40 |
) |
Discount given on employee stock purchase transactions through
our Employee Stock Purchase Plan |
|
|
65 |
|
|
|
260 |
|
|
|
|
|
|
|
|
Total share-based compensation expense |
|
$ |
975 |
|
|
$ |
2,506 |
|
|
|
|
|
|
|
|
During the three months ended March 31, 2010 and 2009, share-based compensation expense
attributable to consultants was included in cost of services before reimbursable expenses and
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 (shown in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three months ended |
|
|
|
March 31, |
|
|
|
2010 |
|
|
2009 |
|
Cost of services |
|
$ |
801 |
|
|
$ |
1,926 |
|
General and administrative expenses |
|
|
174 |
|
|
|
580 |
|
|
|
|
|
|
|
|
Total share-based compensation expense |
|
$ |
975 |
|
|
$ |
2,506 |
|
|
|
|
|
|
|
|
Restricted Stock Outstanding
As of March 31, 2010, 1.3 million restricted stock awards and equivalent units were
outstanding at a weighted average measurement price of $16.71 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.
11
The following table summarizes restricted stock activity for the three months ended March 31,
2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
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 |
|
|
1,356 |
|
|
$ |
17.25 |
|
|
|
1,678 |
|
|
$ |
19.00 |
|
Granted |
|
|
163 |
|
|
|
12.36 |
|
|
|
60 |
|
|
|
15.28 |
|
Vested |
|
|
(152 |
) |
|
|
16.34 |
|
|
|
(318 |
) |
|
|
19.97 |
|
Forfeited |
|
|
(37 |
) |
|
|
18.70 |
|
|
|
(12 |
) |
|
|
20.32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock and equivalents outstanding at end of the period |
|
|
1,330 |
|
|
$ |
16.71 |
|
|
|
1,408 |
|
|
$ |
18.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2010, we had $15.9 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 2.6 years.
During March 2010, we modified the vesting terms of the restricted stock awards granted on
March 13, 2007 and April 30, 2007 to provide for 25% vest annually starting March 2011 and April
2011, respectively. The original vesting term was 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. We modified the vesting terms of the restricted
stock awards in order to improve the visibility of the value the awards provide for certain key
senior consultants and senior management. This modification resulted in a one-time cumulative
credit of $0.4 million in the first quarter of 2010 to share-based compensation expense to align
the expense recognition with the amended vesting terms. As of March 31, 2010, approximately 0.7
million of these restricted stock awards remain outstanding and 0.2 million have vested since the
grant date.
During March 2010, the board of directors granted $3.0 million of restricted stock and stock
option awards to selected senior management. As part of this award, 163,000 restricted shares were
issued, which had a fair value of $2.0 million at grant date. The restricted stock and stock
option awards vest 33% annually over three years.
Note 8. Supplemental Consolidated Balance Sheet Information
Accounts Receivable:
The components of accounts receivable were as follows (shown in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Billed amounts |
|
$ |
138,405 |
|
|
$ |
138,114 |
|
Engagements in process |
|
|
54,822 |
|
|
|
45,291 |
|
Allowance for doubtful accounts |
|
|
(18,537 |
) |
|
|
(19,797 |
) |
|
|
|
|
|
|
|
|
|
$ |
174,690 |
|
|
$ |
163,608 |
|
|
|
|
|
|
|
|
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. 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, |
|
|
|
2010 |
|
|
2009 |
|
Notes receivable current |
|
$ |
5,145 |
|
|
$ |
4,845 |
|
Prepaid income taxes |
|
|
2,686 |
|
|
|
3,174 |
|
Other prepaid expenses and other current assets |
|
|
10,475 |
|
|
|
8,355 |
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets |
|
$ |
18,306 |
|
|
$ |
16,374 |
|
|
|
|
|
|
|
|
12
Other assets:
The components of other assets were as follows (shown in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Notes receivable non-current |
|
$ |
9,506 |
|
|
$ |
10,131 |
|
Prepaid expenses and other non-current assets |
|
|
3,872 |
|
|
|
3,508 |
|
|
|
|
|
|
|
|
Other assets |
|
$ |
13,378 |
|
|
$ |
13,639 |
|
|
|
|
|
|
|
|
Notes receivable represent unsecured forgivable loans with terms of three to five years. The
loans were issued to retain and motivate highly-skilled professionals. During the quarter ended
March 31, 2010, we issued $0.9 million in forgivable loans. 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 5.0% 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, 2010 and 2009. As of March 31, 2010,
$3.2 million, in aggregate, of the principal amount of the loans were forgiven as the services and
contractual requirements had been performed up to the due dates of the principal amounts payable.
Property and Equipment:
Property and equipment were comprised of the following (shown in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Furniture, fixtures and equipment |
|
$ |
54,932 |
|
|
$ |
54,169 |
|
Software |
|
|
28,527 |
|
|
|
27,308 |
|
Leasehold improvements |
|
|
39,740 |
|
|
|
39,587 |
|
|
|
|
|
|
|
|
Property and equipment, at cost |
|
|
123,199 |
|
|
|
121,064 |
|
Less: accumulated depreciation and amortization |
|
|
(81,607 |
) |
|
|
(78,089 |
) |
|
|
|
|
|
|
|
Property and equipment, net |
|
$ |
41,592 |
|
|
$ |
42,975 |
|
|
|
|
|
|
|
|
Other Current Liabilities:
The components of other current liabilities were as follows (shown in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Deferred business acquisition obligations |
|
$ |
8,878 |
|
|
$ |
7,588 |
|
Deferred revenue |
|
|
15,095 |
|
|
|
13,039 |
|
Deferred rent |
|
|
1,782 |
|
|
|
1,401 |
|
Commitments on abandoned real estate (see Note 13) |
|
|
3,615 |
|
|
|
4,141 |
|
Interest rate swap liability (see Note 10) |
|
|
2,082 |
|
|
|
4,116 |
|
Other liabilities |
|
|
4,143 |
|
|
|
4,156 |
|
|
|
|
|
|
|
|
Total other current liabilities |
|
$ |
35,595 |
|
|
$ |
34,441 |
|
|
|
|
|
|
|
|
The deferred business acquisition obligations of $8.9 million at March 31, 2010 consisted of
cash obligations and fixed monetary obligations payable in shares of our common stock. On April 30,
2010, we issued approximately 450,000 shares of our common stock to settle $5.8 million of this
obligation. The number of shares to be issued is based on the trading price of our common stock for
a period of time prior to the issuance dates.
The current portion of deferred rent relates to rent allowances and incentives on lease
arrangements for our office facilities that expire at various dates through 2020. The expected
sublease income is subject to market conditions and may be adjusted in future periods as necessary.
Deferred revenue represents advance billings to our clients, for services that have not been
performed and earned.
13
Other Non-Current Liabilities:
The components of other non-current liabilities were as follows (shown in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, |
|
|
December 31, |
|
|
|
2010 |
|
|
2009 |
|
Deferred business acquisition obligations |
|
$ |
8,584 |
|
|
$ |
6,311 |
|
Deferred rent long term |
|
|
9,274 |
|
|
|
9,740 |
|
Commitments on abandoned real estate(see Note 13) |
|
|
3,925 |
|
|
|
4,660 |
|
Interest rate swap liability(asset) (see Note 10) |
|
|
535 |
|
|
|
(168 |
) |
Other non-current liabilities |
|
|
2,751 |
|
|
|
3,380 |
|
|
|
|
|
|
|
|
Total other liabilities |
|
$ |
25,069 |
|
|
$ |
23,923 |
|
|
|
|
|
|
|
|
The deferred business acquisition obligations of $8.6 million at March 31, 2010 consisted of
cash obligations and fixed monetary obligations payable in shares of our common stock. As of
March 31, 2010, we were obligated to issue shares of common stock amounting to $5.4 million in
periods subsequent to March 31, 2011. The number of shares to be issued is based on the trading
price of our common stock for a period of time prior to the issuance dates. The liability for
deferred business acquisition obligations has been discounted to net present value.
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 2020.
Note 9. Supplemental Consolidated Cash Flow Information
During the three months ended March 31, 2010, as part of the purchase price agreement for
Empiris, we entered into commitments totaling $3.5 million of deferred cash payments, of which $2.0
million is contingent upon certain performance achievements.
Total interest paid during the three months ended March 31, 2010 and 2009 was $3.2 million and
$3.4 million, respectively. We received $0.9 million in income tax refunds during the three months
ended March 31, 2010 and paid $2.5 million in total income taxes during the three months ended
March 31, 2009.
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, |
|
|
|
2010 |
|
|
2009 |
|
Net income |
|
$ |
6,447 |
|
|
$ |
5,433 |
|
Foreign currency translation adjustment |
|
|
(3,476 |
) |
|
|
(2,123 |
) |
Unrealized net income on interest rate derivative, net of income tax benefits |
|
|
794 |
|
|
|
483 |
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
3,765 |
|
|
$ |
3,793 |
|
|
|
|
|
|
|
|
In July 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. In December 2009, we
entered into four interest rate swap agreements of equal amounts with four different banks for an
aggregate notional value of $60.0 million. These agreements effectively fixed $60.0 million of our
LIBOR base rate indebtedness at an average rate of 1.83% beginning July 1, 2010 through May 31,
2012. In March 2010, we entered into two interest rate swap agreements of equal amounts with two
different banks for an aggregate notional value of $30.0 million. These agreements effectively
fixed $30.0 million of our LIBOR base rate indebtedness at an average rate of 1.45% beginning July
1, 2010 through May 31, 2012.
We expect the interest rate derivatives to be highly effective against changes in cash flows
related to changes in interest rates and have recorded the derivative as a hedge. As a result,
gains or losses related to fluctuations in fair value of the interest rate derivative are recorded
as a component of accumulated other comprehensive income and reclassified into interest expense as
the variable interest expense on our indebtedness is recorded. There was no ineffectiveness related
to our hedges for the three months ended March 31,
2010 and 2009. During the three months ended March 31, 2010 and 2009 we recorded $2.1 million
and $1.6 in interest expense, respectively, associated with differentials to be received or paid
under the instruments.
14
As of March 31, 2010, we have a $2.6 million net liability related to the interest rate
derivatives. During the three months ended March 31, 2010, we recorded a $0.8 million unrealized
gain related to our derivatives, which is net of income taxes of $0.5 million, to accumulated other
comprehensive income. As of March 31, 2010, accumulated other comprehensive income is comprised of
foreign currency translation loss of $14.1 million and unrealized net loss on interest rate
derivatives of $1.6 million.
Note 11. Fair Value
Fair value is defined 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). The inputs used to measure fair value are classified 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 swaps (see Note 10 Comprehensive
Income) are 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,
2010, we have assessed the significance of the impact on the overall valuation and believe that
these adjustments are not significant. As such, our derivative instruments are classified within
Level 2.
Additionally, the value of our bank borrowing credit agreement (see Note 12 Bank Borrowings)
was estimated to be 3% below its carrying value based on unobservable Level 3 inputs such as
estimates of current credit spreads to evaluate the likelihood of default by ourselves and our
counterparties. We consider the recorded value of our other financial assets and liabilities, which
consist primarily of cash and cash equivalents, accounts receivable and accounts payable, to
approximate the fair value of the respective assets and liabilities at March 31, 2010 based upon
the short-term nature of the assets and liabilities.
The following table summarizes the liability measured at fair value on a recurring basis at
March 31, 2010 and December 2009 (shown in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in |
|
|
|
|
|
|
|
|
Active Markets for |
|
Significant Other |
|
Significant |
|
|
|
|
Identical Assets |
|
Observable Inputs |
|
Unobservable Inputs |
|
|
|
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
Total |
March 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swaps (recorded in other liabilities) |
|
|
|
|
|
$ |
2,618 |
|
|
|
|
|
|
$ |
2,618 |
|
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap (recorded in other liabilities) |
|
|
|
|
|
$ |
3,948 |
|
|
|
|
|
|
$ |
3,948 |
|
15
Note 12. Bank Borrowings
As of March 31, 2010, we maintained a bank borrowing credit agreement consisting of a
$275.0 million revolving line of credit which, subject to certain bank approvals, includes an
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, 2010, we had aggregate borrowings of $197.3 million, compared to
$219.4 million as of December 31, 2009. Based on our financial covenant restrictions under our
credit facility as of March 31, 2010, a maximum of approximately $85.0 million would be available
in additional borrowings on our line of credit. In January 2010, we used a portion of our cash to
prepay $40.0 million of our term loan facility under our credit facility which reduced future
required quarterly payments on a pro rata basis. 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, 2010, 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,
2010, the applicable margins for base rate loans under the term loan facility and revolving credit
facility were 0.25% and zero, respectively. For LIBOR loans, the applicable margin will vary
between 0.50% to 1.75% depending upon our performance and financial condition. Our average
borrowing rate under our credit agreement (including the impact of our interest rate swap
agreement see Note 10 Comprehensive Income) was 6.1% for the three months ended March 31, 2010
compared to 5.7% for the corresponding period in 2009.
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, 2010, under the definitions in the credit agreement, our consolidated leverage ratio was 2.3
and our consolidated fixed charge coverage ratio was 3.3. 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, 2010 and
December 31, 2009; however there can be no assurances that we will remain in compliance in the
future.
Note 13. Other Operating Costs
Other operating costs consisted of the following (shown in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the three |
|
|
|
months ended |
|
|
|
March 31, |
|
|
|
2010 |
|
|
2009 |
|
Adjustments to office closures obligations, discounted and net of expected sublease income |
|
$ |
|
|
|
$ |
300 |
|
Accelerated depreciation on leasehold improvements due to expected office closures |
|
|
|
|
|
|
608 |
|
|
|
|
|
|
|
|
Other operating costs |
|
$ |
|
|
|
$ |
908 |
|
|
|
|
|
|
|
|
During the quarter ended March 31, 2009 we recorded $0.9 million of expense associated with
the office closings, market adjustments to related sublease income and excess space reductions. The
costs consisted of adjustments to office closure obligations and accelerated depreciation on
leasehold improvements in offices to be abandoned. In determining our reserves for office
consolidation expenses at March 31, 2010, we estimated future sublease proceeds based on market
conditions of $4.1 million on three properties for which we do not have a contracted subtenant.
We continue to monitor our estimates for office closure obligations and related expected
sublease income. Such estimates are subject to market conditions and have been adjusted and may be
adjusted in future periods as necessary. During the three months ended March 31, 2010 we paid $1.3
million of our office obligation costs resulting in a balance in current and non-current
liabilities of $7.5 million as of March 31, 2010. Of the $7.5 million liability recorded at
March 31, 2010, we expect to pay $3.6 million in cash relating to these obligations during the next
twelve months. The office closure obligations have been discounted to net present value and are not
allocated to our business segments.
16
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 and timing in executing our strategic business
assessment; the success of our Companys organizational changes and cost reduction actions; risks
inherent in international operation, 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 prior filings with the SEC
under the Risk Factors sections and elsewhere in those filings. We cannot guarantee any future
results, levels of activity, performance or achievement and we undertake no obligation to update
any of our forward-looking statements.
Overview
We are an independent specialty consulting firm that combines deep industry knowledge with
technical expertise to enable companies to create and protect value in the face of complex and
critical business risks and opportunities. 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 may continue to be impacted by a significant decline in the
United States and world economies. 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
unusual variations in quarterly revenues and operating results.
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. Other administrative costs include marketing, technology, finance
and human capital management.
17
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 average number of FTE consultants is adjusted for part-time status and takes into
consideration hiring and attrition which occurred during the period.
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 recruiting activities and business acquisitions, our policy is to obtain
non-solicitation covenants from senior and some mid-level consultants. Most of these covenants have
restrictions that extend 12 months beyond termination of employment. We utilize these contractual
agreements and other agreements to reduce the risk of attrition and to safeguard our existing
clients, staff and projects.
The following table summarizes for comparative purposes certain financial and statistical data
for our consolidated results.
Results of Operations
2010 compared to 2009 For the three months ended March 31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 over |
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
|
For the three months ended |
|
|
Increase |
|
(Amounts in thousands, except |
|
March 31, |
|
|
(Decrease) |
|
per share data and metrics) |
|
2010 |
|
|
2009 |
|
|
Percentage |
|
Revenues before reimbursements |
|
$ |
153,870 |
|
|
$ |
167,212 |
|
|
|
(8.0 |
) |
Reimbursements |
|
|
19,680 |
|
|
|
15,150 |
|
|
|
29.9 |
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
173,550 |
|
|
|
182,362 |
|
|
|
(4.8 |
) |
Cost of services before reimbursable expenses |
|
|
102,230 |
|
|
|
110,267 |
|
|
|
(7.3 |
) |
Reimbursable expenses |
|
|
19,680 |
|
|
|
15,150 |
|
|
|
29.9 |
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of services |
|
|
121,910 |
|
|
|
125,417 |
|
|
|
(2.8 |
) |
General and administrative expenses |
|
|
30,460 |
|
|
|
34,893 |
|
|
|
(12.7 |
) |
Depreciation expense |
|
|
3,801 |
|
|
|
4,640 |
|
|
|
(18.1 |
) |
Amortization expense |
|
|
2,796 |
|
|
|
3,620 |
|
|
|
(22.8 |
) |
Other operating costs: |
|
|
|
|
|
|
|
|
|
|
|
|
Office consolidation |
|
|
|
|
|
|
908 |
|
|
|
(100.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
14,583 |
|
|
|
12,884 |
|
|
|
13.2 |
|
Interest expense |
|
|
3,478 |
|
|
|
3,968 |
|
|
|
(12.3 |
) |
Interest income |
|
|
(313 |
) |
|
|
(296 |
) |
|
|
5.7 |
|
Other expense (income), net |
|
|
105 |
|
|
|
(321 |
) |
|
|
(132.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
Income before income tax expense |
|
|
11,313 |
|
|
|
9,533 |
|
|
|
18.7 |
|
Income tax expense |
|
|
4,866 |
|
|
|
4,100 |
|
|
|
18.7 |
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
6,447 |
|
|
$ |
5,433 |
|
|
|
18.7 |
|
|
|
|
|
|
|
|
|
|
|
|
Basic net income per share |
|
$ |
0.13 |
|
|
$ |
0.11 |
|
|
|
18.2 |
|
Diluted net income per share |
|
$ |
0.13 |
|
|
$ |
0.11 |
|
|
|
18.2 |
|
Key operating metrics: |
|
|
|
|
|
|
|
|
|
|
|
|
Average FTE |
|
|
|
|
|
|
|
|
|
|
|
|
Billable |
|
|
1,679 |
|
|
|
1,941 |
|
|
|
(13.5 |
) |
Non-billable |
|
|
517 |
|
|
|
580 |
|
|
|
(10.9 |
) |
Period End FTE |
|
|
|
|
|
|
|
|
|
|
|
|
Billable |
|
|
1,661 |
|
|
|
1,920 |
|
|
|
(13.5 |
) |
Non-billable |
|
|
518 |
|
|
|
573 |
|
|
|
(9.6 |
) |
Bill Rate |
|
$ |
264 |
|
|
$ |
252 |
|
|
|
4.8 |
|
Utilization |
|
|
77 |
% |
|
|
75 |
% |
|
|
2.7 |
|
18
Earnings Summary. Net income for the three months ended March 31, 2010 increased 18.7%
compared to the corresponding period in 2009. Net income was higher in 2010 mainly due to lower
severance, office consolidation and general and administrative costs. Severance costs were $0.8
million and $3.0 million for the three months ended March 31, 2010 and 2009, respectively. The
higher costs in 2009 reflected our efforts to realign our cost structure to match the anticipated
decline in revenue resulting from the impact of unprecedented economic conditions which began in
2008. These lower costs in 2010 were offset by decreased revenues before reimbursements of 8.0%.
Revenues declined due to having 13% fewer consultants as well as repositioning of several service
lines and other late 2009 and early 2010 departures. Reimbursement revenue was up 29.9% due to the
increased use of specialized independent contractors which, resulted in an overall total revenue
decrease of 4.8%
Overall utilization was 2.7% higher in 2010 when compared to the corresponding period in 2009
and average bill rate increased 4.8% over the same periods. Average full time equivalent
consultants decreased 13.5% for the three months ended March 31, 2010 from the corresponding period
in 2009 to 1,679. The decrease in headcount was a result of staffing reductions made during 2009,
certain late 2009 and early 2010 departures, and the redeployment of certain service areas. The
increase in utilization and bill rate reflect improving business climate and our realignment
efforts enacted throughout 2009.
For the three months ended March 31, 2010, both cost of services before reimbursable expenses
and general and administrative expenses were significantly lower than in the corresponding period
in 2009, reflecting the impact of the cost reduction initiatives implemented throughout 2009 and
lower severance costs. In addition, depreciation and amortization were 18.1% and 22.8% lower for
the three months ended March 31, 2010 compared to the corresponding period in 2009, respectively.
Revenues before Reimbursements. For the three months ended March 31, 2010, revenues before
reimbursements decreased 8.0% compared to the corresponding period in 2009. Revenues declined due
to having 13% fewer consultants as a result of above mentioned reductions as well as the
repositioning of several service lines and other late 2009 and early 2010 departures. The overall
consultant utilization rate was 77% and 75% for the three months ended March 31, 2010 and 2009,
respectively, reflecting the above mentioned headcount reductions.
Cost of Services before Reimbursable Expenses. Cost of services before reimbursable expenses
decreased 7.3% for the three months ended March 31, 2010 compared to the corresponding period in
2009. The decrease was a result of redeployment of certain service areas and our cost-saving
initiatives which included staffing reductions, managing salary adjustments and reducing
discretionary costs primarily in response to lower demand. Average full-time headcount decreased
16.9% excluding the impact of acquisitions. The staffing reductions reduced consultant compensation
expense, mainly due to wage savings. Severance costs relating to cost of services for the three
months ended March 31, 2010 and 2009 were $0.7 million and $2.6 million, respectively. These
savings were partially offset by higher incentive compensation expense as a result of improved
operating performance.
General and Administrative Expenses. General and administrative expenses decreased 12.7% to
$30.5 million for the three months ended March 31, 2010. The decrease in general and administrative
expenses was the result of reduced bad debt expense and cost-saving initiatives which included
lower discretionary spending and the benefit of headcount reductions enacted after the first
quarter of 2009. Average full-time equivalent for the three months ended March 31, 2010 and 2009
were 517 and 580, respectively. General and administrative expenses were approximately 20% and 21%
of revenues before reimbursements for the three months ended March 31, 2010 and 2009, respectively,
reflecting the cost-saving initiatives discussed above. Bad debt expense decreased for the three
months ended March 31, 2010 by $2.2 million compared to the corresponding period in 2009 and
represented approximately 1.0% and 2.2% of revenues before reimbursement for those periods,
respectively. This reflected improved aging of our accounts receivable and the negative impact of
the financial crisis on our receivables in the first half of 2009. 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.
Other Operating Costs Office Consolidation. We did not record any office consolidation
costs during the three months ended March 31, 2010. During the corresponding period in 2009, we
recorded $0.9 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 in future periods. We have an ongoing program to
eliminate duplicate facilities and to consolidate and close certain offices which could result in
future charges.
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 $3.6 million relating to these
19
obligations. In determining our reserves for office consolidation expenses at March 31, 2010,
we estimated future sublease proceeds based on market conditions of $4.1 million on three
properties for which we do not have a contracted subtenant.
Amortization Expense. The decrease in amortization expense of 22.8% to $2.8 million for the
three months ended March 31, 2010 was primarily due to the lapse of amortization for certain
intangible assets as such assets useful lives expired, partially offset by amortization relating
to our 2009 and 2010 acquisitions.
Interest Expense. Interest expense decreased 12.3% to $3.5 million for the three months ended
March 31, 2010. The decrease primarily related to lower average borrowing balances under our
credit agreement and our term loan. During the quarter ended March 31, 2010, using our excess
cash, we made an unscheduled repayment on our term loan of $40.0 million. Our average borrowing
rate under our credit agreement (including the impact of our interest rate swap agreements; see
Note 10 Comprehensive Income in the notes to the consolidated financial statements) was 6.1% and
5.7% for the three months ended March 31, 2010 and 2009, respectively.
Income Tax Expense. The effective income tax rate for the each of three month periods ended
March 31, 2010 and 2009 was 43.0%. Our effective income tax rate is attributable to the mix of
income earned in various tax jurisdictions, including state and foreign jurisdictions, which have
different income tax rates.
Segment Results
Our business is organized in four reportable segments Dispute and Investigative Services,
Business Consulting Services, International Consulting and Economic Consulting. These reportable
segments are generally defined by the nature of their services and geography and may be the
aggregation of multiple operating segments as indicated in the description below. During the
first quarter of 2010, certain organizational changes were made, which along with other factors,
resulted in the identification of two additional operating segments and the repositioning of
certain service offerings between the segments. Prior year comparative segment data has been
restated to be consistent with the current presentation.
The Dispute and Investigative Services reporting 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
counsel and corporate boards.
The Business Consulting Services reporting segment provides strategic, operational, financial,
regulatory and technical management consulting services to clients. Beginning with the first
quarter of 2010, the Energy and Healthcare business units are now defined as operating segments due
to their size, importance and organizational reporting relationships. The reporting segment is
comprised of three operating segments, Energy, Healthcare and other business consulting practices,
which is primarily associated with providing operations advisory, valuation and restructuring
services to financial services and other markets. The clients are principally C suite and
corporate management, government entities and law firms.
The International Consulting reporting segment provides a mix of dispute and business
consulting services to clients predominately outside North America. The clients are principally C
suite and corporate management, government entities, and law firms
The Economic Consulting reporting 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.
The following information includes segment revenues before reimbursement, segment total
revenues and segment operating profit. 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 (see Note 3 Segment Information in
the notes to the Consolidated Financial Statements). Segment operating profit represents total
revenue less cost of services excluding long-term compensation expense related to consulting
personnel. The information presented does not necessarily reflect the results of segment operations
that would have occurred had the segments been stand-alone businesses.
20
Dispute and Investigative Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 over |
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
For the three months ended |
|
Increase |
|
|
March 31, |
|
(Decrease) |
|
|
2010 |
|
2009 |
|
Percentage |
Revenues before reimbursements (in 000s) |
|
$ |
63,338 |
|
|
$ |
71,903 |
|
|
|
(11.9 |
) |
Total revenues (in 000s) |
|
|
67,894 |
|
|
|
77,496 |
|
|
|
(12.4 |
) |
Segment operating profit (in 000s) |
|
|
25,408 |
|
|
|
28,234 |
|
|
|
(10.0 |
) |
Segment operating profit margin |
|
|
40.1 |
% |
|
|
39.3 |
% |
|
|
2.0 |
|
Average FTE consultants |
|
|
647 |
|
|
|
810 |
|
|
|
(20.1 |
) |
Average utilization rates based on 1,850 hours |
|
|
75 |
% |
|
|
73 |
% |
|
|
2.7 |
|
Bill rate |
|
$ |
292 |
|
|
$ |
278 |
|
|
|
5.0 |
|
Revenues before reimbursements for this segment decreased 11.9% during the three months ended
March 31, 2010 compared to the corresponding period in 2009. The decline reflected the 20.1%
decrease in headcount, which decreased as a result of our response to the continued lower demand
throughout 2009 as well as higher than normal voluntary attrition particularly in our West region.
As a result of the lower headcount, utilization increased 2.7%. The headcount changes also
resulted in a change in the mix of billable hours that contributed to a 5% increase in bill rates.
Segment operating profit decreased $2.8 million while segment operating profit margin increased
modestly, primarily as result of adjusted staffing levels and resulting lower wage costs and lower
severance costs during the three months ended March 31, 2010 compared to the corresponding period
in 2009.
Business Consulting Services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 over |
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
For the three months ended |
|
Increase |
|
|
March 31, |
|
(Decrease) |
|
|
2010 |
|
2009 |
|
Percentage |
Revenues before reimbursements (in 000s) |
|
$ |
57,399 |
|
|
$ |
66,906 |
|
|
|
(14.2 |
) |
Total revenues (in 000s) |
|
|
66,250 |
|
|
|
73,516 |
|
|
|
(9.9 |
) |
Segment operating profit (in 000s) |
|
|
19,017 |
|
|
|
23,452 |
|
|
|
(18.9 |
) |
Segment operating profit margin |
|
|
33.1 |
% |
|
|
35.1 |
% |
|
|
(5.7 |
) |
Average FTE consultants |
|
|
706 |
|
|
|
804 |
|
|
|
(12.2 |
) |
Average utilization rates based on 1,850 hours |
|
|
80 |
% |
|
|
77 |
% |
|
|
3.9 |
|
Bill rate |
|
$ |
218 |
|
|
$ |
219 |
|
|
|
(0.5 |
) |
Revenues before reimbursements for this segment decreased 14.2% for the three months ended
March 31, 2010 compared to the corresponding period in 2009. The decline reflected the 12.2%
decrease in headcount, reflecting our response to the continued lower demand throughout 2009 and
the redeployment of some of our consulting resources. In addition, projects which are contingent
on the attainment of certain performance objectives declined to $0.3 million this quarter from $3.9
million for the three months ended 2009. The decrease in headcount was partially offset by the
acquisition of Summit Blue on December 31, 2009 which added approximately 60 consultants. Utilization increased
3.9% mainly as a result of strong healthcare and energy markets, lower headcount and was partially
offset by acquisition integration efforts. Bill rates remained relatively flat, as a larger mix of
operational consulting engagements in our energy and business services area offset higher bill rate
engagements in healthcare and restructuring. Segment operating profit decreased $4.4 million and
segment operating profit margin declined 2.0 percentage points for the three months ended March 31,
2010 compared to the corresponding period in 2009. Segment operating profit margin decreased due
to lower performance fees mentioned above partially offset by lower cost of services, including
severance costs which were $0.3 million and $1.6 million for the three months ending March 31, 2010
and 2009, respectively.
21
International Consulting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 over |
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
For the three months ended |
|
Increase |
|
|
March 31, |
|
(Decrease) |
|
|
2010 |
|
2009 |
|
Percentage |
Revenues before reimbursements (in 000s) |
|
$ |
16,145 |
|
|
$ |
15,516 |
|
|
|
4.1 |
|
Total revenues (in 000s) |
|
|
20,797 |
|
|
|
17,303 |
|
|
|
20.2 |
|
Segment operating profit (in 000s) |
|
|
3,740 |
|
|
|
4,176 |
|
|
|
(10.4 |
) |
Segment operating profit margin |
|
|
23.2 |
% |
|
|
26.9 |
% |
|
|
(13.8 |
) |
Average FTE consultants |
|
|
212 |
|
|
|
226 |
|
|
|
(6.2 |
) |
Average utilization rates based on 1,850 hours |
|
|
65 |
% |
|
|
67 |
% |
|
|
(3.0 |
) |
Bill rate |
|
$ |
263 |
|
|
$ |
233 |
|
|
|
12.9 |
|
Revenues before reimbursements for this segment increased 4.1% for the three months ended
March 31, 2010 compared to the corresponding period in 2009. The increase was mainly due to
favorable foreign currency impacts of approximately $1.5 million. Total revenues increased as
several engagements required specialized independent contractor services. These increases were
offset by a 3.0% decrease in utilization and a 6.2% decrease in headcount as the segment reacted to
the settlement of a large construction dispute engagement. Bill rates increased 12.9% as a result
of change in consultant mix in addition to higher bill rates for certain construction related
projects. Segment operating profit decreased $0.4 million and segment operating profit margin
declined 3.7 percentage points for the three months ended March 31, 2010 compared to the
corresponding period in 2009 primarily related to the decreased construction dispute revenue.
Economic Consulting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 over |
|
|
|
|
|
|
|
|
|
|
2009 |
|
|
For the three months ended |
|
Increase |
|
|
March 31, |
|
(Decrease) |
|
|
2010 |
|
2009 |
|
Percentage |
Revenues before reimbursements (in 000s) |
|
$ |
16,988 |
|
|
$ |
12,887 |
|
|
|
31.8 |
|
Total revenues (in 000s) |
|
|
18,609 |
|
|
|
14,047 |
|
|
|
32.5 |
|
Segment operating profit (in 000s) |
|
|
6,296 |
|
|
|
4,644 |
|
|
|
35.6 |
|
Segment operating profit margin |
|
|
37.1 |
% |
|
|
36.0 |
% |
|
|
3.1 |
|
Average FTE consultants |
|
|
114 |
|
|
|
101 |
|
|
|
12.9 |
|
Average utilization rates based on 1,850 hours |
|
|
90 |
% |
|
|
85 |
% |
|
|
5.9 |
|
Bill rate |
|
$ |
367 |
|
|
$ |
343 |
|
|
|
7.0 |
|
Revenues before reimbursements for this segment increased 31.8% for the three months ended
March 31, 2010 compared to the corresponding period in 2009. The increase was mainly a result of a
5.9% increase in utilization and a 7.0% increase in bill rate reflecting an annual bill rate
increases implemented January 1, 2010. Headcount increased as a result of the Empiris acquisition
in January 2010 (see Note 2 Acquisitions in the notes to the consolidated financial statements).
Segment operating profit increased $1.7 million and segment operating profit margin increased
1.1 percentage points for the three months ended March 31, 2010 compared to the corresponding
period in 2009 due to the increased revenue and improved utilization and bill rates.
2010 Outlook
We continue to expect our core growth initiatives to be increasingly reflected in our
financial results as the year progresses. We are focused on emerging market trends and strategic
investments in our key areas of Disputes, Economics, Healthcare and Energy. Our future financial
results may be impacted by acquisitions and further redeployments of
lower growth service lines.
22
Liquidity and Capital Resources
Summary
We had $0.4 million in cash and cash equivalents at March 31, 2010, compared to $49.1 million
at December 31, 2009. In January 2010, we used
$40.0 million in excess cash to pay down a portion of our term
loan borrowings. 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, 2010, we had total bank debt
outstanding of $197.3 million under our credit agreement, compared to $219.4 million as of December
31, 2009 reflecting the unscheduled repayment on our term loan offset by borrowings under our line
of credit. The term loan payment reduced future required quarterly payments on a pro rata basis
(see Contractual Obligations below).
We calculate accounts receivable days sales outstanding (DSO) by dividing the accounts
receivable balance, net of reserves and 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
83 days at March 31, 2010, compared to 78 days at December 31, 2009 and 87 days at March 31, 2009.
Operating Activities
Net cash used in operating activities was $21.0 million for the three months ended March 31,
2010, compared to $34.6 million used for the three months ended March 31, 2009. The decrease in net
cash used in operating activities resulted primarily from higher cash flow from operations combined
with lower investment in working capital including improved accounts receivable collections in
2010.
Investing Activities
Net cash used in investing activities for the three months ended March 31, 2010 was $7.1
million compared to $10.4 million for the three months ended March 31, 2009. The decrease in the
use of cash resulted primarily from lower investment spending on property and equipment
expenditures during the first quarter of 2010 compared to the corresponding period in 2009, which
was mainly related to leasehold improvements for our New York office location.
Financing Activities
Net cash used in financing activities for the three months ended March 31, 2010 was $20.9
million compared to net cash provided by financing activities of $28.9 million for the three months
ended March 31, 2009. The decrease was primarily attributable to our use of excess cash to make a
repayment of $40.0 million on our term loan facility.
Debt, Commitments and Capital
As of March 31, 2010, we maintained a bank borrowing credit agreement consisting of a
$275.0 million revolving line of credit which, subject to certain bank approvals, includes an
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, 2010, we had aggregate borrowings of $197.3 million, compared to
$219.4 million as of December 31, 2009. Based on our financial covenant restrictions under our
credit facility as of March 31, 2010, a maximum of approximately $85.0 million would be available
in additional borrowings on our line of credit. In January 2010, we used a portion of our cash to
prepay $40.0 million of our term loan facility under our credit facility which reduced future
required quarterly payments on a pro rata basis. 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, 2010, 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,
2010, the applicable margins for base rate loans under the term loan facility and revolving credit
facility were 0.25% and zero, respectively. For LIBOR loans, the applicable margin will vary
between 0.50% to 1.75% depending upon our performance and financial condition. Our average
borrowing rate under our credit agreement (including the impact of our interest rate swap
agreement see Note 10 Comprehensive Income in the notes to the consolidated financial
statements) was 6.1% for the three months ended March 31, 2010 compared to 5.7% for the
corresponding period in 2009.
23
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, 2010, under the definitions in the credit agreement, our consolidated leverage ratio was 2.3
and our consolidated fixed charge coverage ratio was 3.3. 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, 2010 and
December 31, 2009; however there can be no assurances that we will remain in compliance in the
future.
As of March 31, 2010, we had total commitments of $342.9 million, which included $17.5 million
in deferred business acquisition obligations, payable in cash and common stock, software license
agreements of $1.0 million, and $127.2 million in lease commitments. As of March 31, 2010, we had
no significant commitments for capital expenditures.
The following table shows the components of significant commitments as of March 31, 2010 and
the scheduled years of payments (shown in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
From April 1, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 to |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
|
|
|
|
Contractual Obligations |
|
Total |
|
|
2010 |
|
|
2011 to 2012 |
|
|
2013 to 2014 |
|
|
Thereafter |
|
Deferred purchase price obligations |
|
$ |
17,462 |
|
|
$ |
8,423 |
|
|
$ |
7,577 |
|
|
$ |
1,462 |
|
|
$ |
|
|
Software license agreements |
|
|
984 |
|
|
|
480 |
|
|
|
504 |
|
|
|
|
|
|
|
|
|
Revolving loan |
|
|
18,360 |
|
|
|
|
|
|
|
18,360 |
|
|
|
|
|
|
|
|
|
Term loan |
|
|
178,915 |
|
|
|
9,659 |
|
|
|
169,256 |
|
|
|
|
|
|
|
|
|
Lease commitments |
|
|
127,212 |
|
|
|
19,863 |
|
|
|
43,514 |
|
|
|
30,652 |
|
|
|
33,183 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
342,933 |
|
|
$ |
38,425 |
|
|
$ |
239,211 |
|
|
$ |
32,114 |
|
|
$ |
33,183 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Of the $239.2 million commitments in 2011 and 2012, in the table above, $18.4 million relates
to term loan payments payable in 2011. On April 30, we issued approximately 450,000 shares of our
common stock to settle $5.8 million of deferred purchase price obligations.
During 2007, we began to eliminate duplicate facilities and consolidate and close certain
offices. Of the $127.2 million of lease commitments as of March 31, 2010, $21.7 million of such
lease commitments related to offices we have abandoned or reduced excess space within, which have
been subleased or are available for sublease. As of March 31, 2010, we have contractual sublease
income of $8.5 million, which is not reflected in the table above. Such sublease income would
offset the cash outlays. Additionally, we intend to secure subtenants for the other properties
available for sublease to offset the rent payments and will seek to exercise termination clauses,
if any, to shorten the term of the lease commitments. The lease commitments for these offices
extend through 2020.
We believe that our current cash and cash equivalents, the future cash flows from operations
and borrowings under our credit agreement will provide adequate cash to fund anticipated short-term
and long-term cash needs from normal operations. In the event we make significant cash expenditures
in the future for major acquisitions or other non-operating activities, we might need additional
debt or equity financing, as appropriate. Additionally, our credit agreement is with a syndicate of
several banks. These banks could be negatively impacted by the recent disruptions in the financial
markets. See note 11 Fair Value in the notes to the consolidated financial statements, for
current fair value of our bank debt.
We do not expect to significantly increase or reduce our reserve for uncertain tax positions
during the next twelve months.
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.
Critical Accounting Policies
Other than the repositioning of segments, as discussed in Note 3 Segment Information, there
have been no material changes to our critical accounting policies and estimates from the
information provided in Part II, Managements Discussion and Analysis of
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Financial Condition and Results of Operations Critical Accounting Policies as disclosed in
our Annual Report on Form 10-K for the year ended December 31, 2009.
Recently Issued Standards
In March, 2010, guidance was issued on milestone accounting. The guidance is limited to
transactions involving research or development. After meeting specified criteria, entities can
make an accounting policy election to recognize arrangement consideration received for achieving
specified performance measures during the periods in which the milestones are achieved. The update
is effective for interim and annual periods beginning on or after June 15, 2010; however, earlier
adoption is permitted. We are currently evaluating the impact this adoption will have on our
statements of financial position, results of operations or cash flow.
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 borrowings under our credit agreement and our
investment portfolio, classified as cash equivalents. The foreign currency risk is associated with
our operations in foreign countries.
As of March 31, 2010, borrowings under our 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. We are exposed to interest rate risk relating to the fluctuations in LIBOR. We use interest
rate swap agreements to manage our exposure to fluctuations in LIBOR. Our $165.0 million notional
amount interest rate swap effectively fixed our LIBOR base rate on $165.0 million of our debt at an
interest rate of 5.30% through June 30, 2010. Based on borrowings under the credit agreement at
March 31, 2010 and after giving effect to the impact of our interest rate swap agreement, our
interest rate exposure is limited to $32.3 million of debt, and each quarter point change in market
interest rates would result in approximately a $0.1 million change in annual interest expense. On
June 30, 2010, our $165.0 million notional amount interest rate swap will mature.
In December 2009, we entered into four interest rate swap agreements of equal amounts with
four different banks for an aggregate notional value of $60.0 million. These agreements
effectively fixed $60.0 million of our LIBOR base rate indebtedness at an average rate of 1.83%
beginning July 1, 2010 through May 31, 2012. In March 2010, we entered into two interest rate swap
agreements of equal amounts with two different banks for an aggregate notional value of $30.0
million. These agreements effectively fixed $30.0 million of our LIBOR base rate indebtedness at
an average rate of 1.45% beginning July 1, 2010 through May 31, 2012.
At March 31, 2010, 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.
We operate in foreign countries, which exposes us to market risk associated with foreign
currency exchange rate fluctuations. At March 31, 2010, we had net assets of approximately $79.7
million with a functional currency of the UK Pounds Sterling and $30.1 million with a functional
currency of the Canadian Dollar related to our operations in the United Kingdom and Canada,
respectively. At March 31, 2010, we had net assets denominated in the non-functional currency of
approximately $4.6 million. As such, a ten percent change in the value of the local currency would
result in a $0.5 million currency 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, 2010. 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
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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, 2010, there have not been any changes in our internal
control over financial reporting that have materially affected or are reasonably likely to
materially affect our internal control over financial reporting as defined in Exchange Act Rule
13a-15(f).
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 6. Exhibits
The following exhibits are filed with the Form 10-Q:
Exhibit 31.1 - Rule 13a14(a) Certification of the Chairman and Chief Executive Officer.
Exhibit 31.2 - Rule 13a14(a) Certification of the Executive Vice President and Chief Financial Officer.
Exhibit 32.1 - Section 1350 Certification
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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 5, 2010
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