PART I
Navigant Consulting, Inc. (Navigant, we, us, or our) (NYSE: NCI) is a specialized, global professional services firm that helps clients take control of
their future. With a focus on markets and clients facing transformational change and significant regulatory or legal pressures, Navigant primarily serves clients in the healthcare, energy and financial services industries.
We are a Delaware corporation incorporated in 1996 and headquartered in Chicago, Illinois. Our executive office is located at 30 South
Wacker Drive, Suite 3550, Chicago, Illinois 60606. Our telephone number is
(312) 573-5600.
Our common stock is traded on the New York Stock Exchange under the symbol NCI.
General Development of the Business
Development of the Business Reporting Segments
Our
business is organized in four reporting segments Healthcare; Energy; Financial Services Advisory and Compliance; and Disputes, Forensics & Legal Technology. During the first quarter of 2016, we renamed two of our business
segments. The Disputes, Forensics & Legal Technology segment was formerly known as Disputes, Investigations & Economics segment and the Financial Services Advisory and Compliance was formerly known as the Financial, Risk &
Compliance segment. Other than the changes to the names of these segments, the characteristics of our business segments remain unchanged. Within these segments we deliver consulting and advisory services and also provide technology-based solutions,
data hosting or processing, and business process management services (which we refer to as Technology, Data & Process services herein). We conduct business globally in certain areas across our segments and are strategically focused on
offering services to industries and clients facing transformational change and significant regulatory or legal pressures, including clients in the healthcare, energy and financial services industries. Since our inception, we have grown through
selective acquisitions of businesses (which we consider inorganic growth), recruitment of employees (which we consider organic growth) and investments in technology to complement our consulting skills and enhance our service offerings. These
investments have enhanced or expanded existing expertise, added new services, broadened our geographic reach, and enhanced our market share.
Our Healthcare segment provides consulting services and business process management services. Clients of this segment include healthcare providers, payers and life sciences companies. This segment has
grown significantly through a combination of strategic acquisitions and recruitment of senior hires. Our recruiting efforts within this segment have been focused on building multi-functional consulting teams that allow us to help our clients respond
to the most significant issues impacting the healthcare industry today. Our services include strategy consulting, operational and performance improvement consulting, and business process management services. The Cymetrix acquisition in 2014 and the
RevenueMed acquisition in 2015 greatly expanded our business process management service capabilities, extending those services to both hospitals and physician groups. These acquisitions and related hiring complement our traditional consulting
services, and provide us with more recurring revenue streams. The term of contracts for business process management services is generally for multiple years. Our business process management services are enabled by systems, data and technology that
can also be leveraged across our other healthcare consulting service offerings. In addition, the Healthcare segment continues to invest in analytical tools that help our clients manage resources and processes to improve their operations, patient
care, and financial performance.
Our Energy segments professionals provide advisory solutions in business strategy and
planning, distributed energy resources and renewables, energy efficiency and demand response and grid modernization. Clients of this segment include utilities, governmental entities, investors, manufacturers, oil and gas companies, and major
corporations. The segment has grown through a combination of investments in hiring, solution development and acquisitions. These investments have expanded our operations in key markets and geographies and over time have broadened our service
offerings to more effectively help our clients respond to and capitalize on the global transformation occurring within the energy sector. We have also grown our benchmarking, data,
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and research services that now enable us to offer a broad array of market research capabilities (included within our Technology, Data & Process services). Additionally, the November 2016
acquisition of Ecofys Investments B.V. (Ecofys), an international consulting firm specializing in renewable energy and sustainability, has provided us with a European platform to augment our capabilities in energy policy, climate strategies, energy
systems and markets, urban energy, and sustainability services.
Our Financial Services Advisory and Compliance segment
provides consulting and advisory services to clients primarily in the highly-regulated financial services industry, including major financial and insurance institutions. This segment also provides anti-corruption solutions and anti-money laundering
consulting, litigation support and tax compliance and valuation services to clients in a broad variety of industries. From time to time, this segment is sought to perform large scale, compliance-oriented engagements. The strategic, operational,
valuation and risk management services within this segment have largely developed over time through the recruitment of senior hires. Senior hiring remains a key strategy to drive future growth for this segment. We have also developed technology
tools that enable our professionals to more efficiently identify compliance risks and streamline operational activities for our clients.
Our Disputes, Forensics & Legal Technology segments professional services include valuation and economic analysis, as well as accounting, regulatory, construction and computer forensic
expertise. In addition to these capabilities, our professionals use technological tools to perform eDiscovery services and to deliver custom technology and data analytic solutions. Our clients principally include companies along with their
in-house
counsel and law firms, as well as accounting firms, corporate boards and government agencies. Our professionals help clients across the globe through many complex business and legal matters. These matters
include finance, economics, forensic accounting, regulatory compliance, international arbitration, defective construction, computer system disruptions and other information security events. Our clients operate within a broad range of industries
which include but are not limited to financial services, healthcare, life sciences, energy, government and construction. We have built upon our service offerings within this segment and expanded our global and industry reach through investments in
acquisitions, the recruitment of senior hires and the development of technology. Our development of technology tools has enabled our professionals in delivering both flexible and scalable solutions to our clients.
We operate globally across our segments. We have continued to build our international footprint to facilitate and expand our service
offerings to clients outside of the United States (U.S.). As global demand for our services has increased, we have established international offices to provide our clients with
on-the-ground
resources including within Europe, the Middle East, and Asia through hiring and acquisitions.
We continue to invest in technology infrastructure to support our evolving and expanding technology-based service offerings, and to allow
us to deliver more scalable solutions to meet the changing demands of our clients.
We have supplemented these technology
investments with employee-related initiatives to promote innovation and collaboration. In addition, we have invested in development programs for our client-service professionals designed to improve sales effectiveness and collaboration across the
organization. We have also focused on other aspects of employee development, including talent management and mentoring programs. Collectively, these innovation, collaboration, development and sales initiatives are intended to contribute to the
professional development of our employees while enhancing our ability to grow the business organically.
Human Capital
Resources
At December 31, 2016, we had 5,768 employees. After adjusting total employees for part-time status and
excluding project employees, we had 5,646 full-time equivalent (FTE) employees. These FTEs were comprised of the following:
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Client-service employees (Client-Service FTE) (related costs for these employees are recorded as cost of services before reimbursements)
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1,908 consulting employees (Consulting FTE) in businesses that deliver professional services. These individuals record time to client engagements.
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2,753 Technology, Data & Process employees (Technology, Data & Process FTE) in businesses that are comprised of technology-enabled
professional services, including eDiscovery services, data analytics, business process management services, technology solutions, invoice and insurance claims processing, market research and benchmarking. While some of these individuals may record
time to client engagements (in professional services engagements), many do not record time to specific engagements. 1,481 of these Technology, Data & Process FTEs were based in India.
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Non-billable
employees
(Non-billable
FTE)
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895
non-billable
employees who are assigned to administrative and support functions, including office services,
corporate functions, and certain practice support functions. The majority of costs related to these employees is recorded in general and administrative expense while the costs directly relating to practice support functions are recorded as cost of
services before reimbursements.
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We also had 90 project employees who perform client services on a
contractual basis. Project employee levels vary from period to period based on staffing and resource requirements. The majority of costs related to these employees is recorded in cost of services before reimbursements.
Our revenues are primarily generated from services performed by our client-service employees; therefore, our success depends in large part
on attracting, retaining and motivating talented, creative and experienced client-service employees at all levels and across various geographies. We employ internal recruiters, retain executive search firms, and utilize personal and business
contacts. Our client-service employees are drawn from a variety of sources, including the industries we serve, accounting and other consulting organizations, and
top-rated
colleges and universities. Our
client-service employees include, but are not limited to, PhDs, MDs, MBAs, JDs, CPAs, CFEs (certified fraud examiners), ASAs (accredited senior appraisers), engineers, nurses and former government officials.
In developing and growing our Technology, Data, & Process services, we have added employees supporting these businesses. We recruit,
retain, and manage many of our Technology, Data & Process employees differently from our client-service employees. Particularly, in our business process management services, we add Technology, Data & Process employees through
traditional recruitment, by transitioning client employees to become Navigant employees, or by subcontracting services from our clients. Our demand for these resources may fluctuate depending on our clients needs and our ability to more
efficiently perform our services by utilizing technology resources. By managing these employees with our processes, centralizing their functions in our business centers, and leveraging proprietary technology to enable work streams, we are able to
more efficiently and effectively deliver services. We leverage our business centers not only to help us better manage employee work forces across work streams and projects but also to create opportunities for these employees to develop
professionally by exposing them to new service areas and possibilities for promotion within the management teams at these locations.
We seek to retain our employees by offering competitive compensation packages of base and incentive compensation (and in certain instances share-based compensation and retention incentives), attractive
benefits and rewarding careers. We periodically review and adjust, if needed, our employees total compensation (including salaries, annual cash incentive compensation, other cash and equity incentives, and benefits) to ensure that it is
competitive within the industry and is consistent with our level of performance. In addition to compensation, we promote numerous charitable, philanthropic, and social awareness programs that not only support our community, but also provide
experiences for our employees to promote a collaborative and rewarding environment.
We regularly evaluate employees and their
productivity against future demand expectations and historical trends. From time to time, we may reduce or add resources in certain areas in an effort to align with changing demands. In connection with these changing demands, we utilize project
employees and engage independent contractors on certain engagements, which allow us to quickly adjust staffing in response to changing demand for our services.
In connection with recruiting activities and business acquisitions, our general policy is to obtain
non-solicitation
covenants from senior and some
mid-level
employees. Most of these covenants have restrictions
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that extend 12 months or more beyond the termination of employment. We utilize these contractual agreements and other agreements to protect our business interests, which can also reduce the
risk of attrition and provide stability to our existing clients, staff and projects.
In our consulting businesses, our bill
rates or fees charged to clients are tiered in accordance with the experience and position of our employees staffed on each matter. We monitor and adjust those bill rates or fees according to then-current market conditions for our service offerings
and within the various industries we serve. Similarly, pricing for our Technology, Data, & Process services is based upon the complexity of services delivered and markets served.
Industry Sectors
We provide services to clients in industries undergoing substantial regulatory or structural change, with a primary focus on the energy, healthcare and financial services industries across our segments.
Our legal and compliance-based service offerings are relevant to law firms and clients in many industries. In addition, we do work for governmental agencies.
Competition
The market for our services is highly competitive,
highly fragmented and subject to rapid change. The market includes a large number of participants with a variety of skills and industry expertise, including general management and information technology consulting firms, strategy firms, global
accounting firms, business process and technology solution providers and other local, boutique, regional, national and international consulting firms. Many of these companies are international in scope and have larger teams of personnel and greater
financial, technical and marketing resources than we do. In particular, the Big Four accounting firms (PwC, Deloitte, EY and KPMG) are highly competitive in the consulting industry. However, we believe that our industry focus, deep industry and
operational expertise, reputation, global business model and broad range of service offerings enable us to compete effectively in the marketplace.
Developing Client Relationships
We market our services directly to
corporate executives and senior management, corporate counsel, law firms, corporate boards, special committees and governmental agencies. We use a variety of business development and marketing channels to communicate directly with current and
prospective clients, including
on-site
presentations, industry seminars, thought leadership and industry-specific articles. In addition, we have strengthened our market presence by developing our brand name
and
go-to-market
strategy. New engagements are sought and won by our senior and
mid-level
employees working together across our
business segments. We seek to leverage our client relationships in one business segment to cross-sell service offerings provided by other business segments. Clients frequently expand the scope of engagements during delivery to include
follow-on
or complementary services. Our future performance will continue to depend upon our ability to win new engagements, attract and retain employees, develop and continue client relationships and maintain our
reputation.
We believe our unique mix of deep industry expertise, combined with our scale, broad geographic presence,
multi-disciplinary professionals and specialized service offerings, positions us to address our clients critical business needs. We continue to establish programs to facilitate collaborative product development and marketing efforts, and also
to develop new, innovative and repeatable solutions for our clients.
Financial Information about our Business Segments
See Managements Discussion and Analysis of Financial Condition and Results of Operations and
Note 4 Segment Information to the notes to our consolidated financial statements for discussion of total revenues, revenues before reimbursements, segment operating profit and total assets by business segment. Certain areas
within our segments operate globally. For information regarding our total revenues and total assets by geographic region see Note 4 Segment Information to the notes to our consolidated financial statements. For information regarding
risks related to our international operations see Risk Factors.
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How Our Income is Derived
Our clients demand for our services ultimately drives our revenues and expenses. We derive our revenues from fees on services
provided. The majority of our revenues is generated on a time and materials basis, though we also have engagements where fees are a fixed amount (either in total or for a period of time) or are on a per unit or subscription basis. We may also earn
incremental revenues, in addition to hourly or fixed fees, that are contingent on the attainment of certain contractual milestones or outcomes. Variations in our quarterly or yearly revenues and resulting operating profit margins may occur depending
on the timing of such contractual outcomes and our ability to consider these revenues earned and realized. Regardless of the terms of our engagements, our ability to earn fees is reliant on experience and expertise of our client-service employees.
Our most significant expense is client-service employee compensation, which includes salaries, incentive compensation, and
amortization of
sign-on
and retention incentive payments, share-based compensation and benefits. Client-service employee compensation is included in cost of services before reimbursable expenses, in addition
to sales and marketing expenses and the direct costs of recruiting and training client-service employees.
Our most significant
overhead expenses are administrative compensation and benefits and office-related expenses. Administrative compensation includes salaries, incentive compensation, share-based compensation and benefits for corporate management and administrative
personnel that indirectly support client engagements. Office-related expenses primarily consist of rent for our offices. Other administrative costs include bad debt expense, marketing, technology, finance and human capital management.
Concentration of Revenues
Revenues earned from our top 20 clients remained relatively steady at 27%, 25% and 27% of our total revenues for 2016, 2015 and 2014, respectively. No single client accounted for more than 10% of our
total revenues during 2016, 2015 or 2014. For further information on segment concentration see Item 7 Management, Discussion and Analysis of Financial condition and Results of Operations Segment Results below.
Non-U.S.
Operations
We operate globally and have offices outside the U.S. including in countries in Europe, the Middle East and Asia. No country, other than
the U.S., accounted for more than 10% of our total revenues during 2016, 2015 or 2014. Our
non-U.S.
subsidiaries, in the aggregate, represented approximately 9%, or $96.3 million, of our total revenues in
2016 compared to 9%, or $86.0 million, in 2015 and 8%, or $71.2 million, in 2014. Revenues are allocated among our subsidiaries based on the respective entity or entities employing the personnel deployed on the engagement. For further
geographic information, see Note 4 Segment Information to the notes to our consolidated financial statements.
Available Information
We maintain a corporate website at www.navigant.com. The content of our website is not incorporated by reference into this report or any other reports we file with, or furnish to, the SEC. Investors may
access our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q
and current reports on
Form 8-K,
and
amendments to those reports, as well as the proxy statement for our annual meeting of shareholders, free of charge (as soon as reasonably practicable after these materials are electronically filed with, or furnished to, the SEC) by going to the
Investor Relations section of our website (investors.navigant.com) and searching under SEC Filings. These materials are also available in printed form free of charge upon request. Requests should be submitted to: Navigant Consulting,
Inc., 30 South Wacker Drive, Suite 3550, Chicago, Illinois 60606, Attention: Investor Relations.
In addition to other information contained in this report and in the documents incorporated by reference herein, the following factors
should be considered carefully in evaluating us and our business. These factors
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could materially affect our business, financial condition, results of operations and/or stock price in future periods. Additional risks not currently known to us or that we currently deem to be
immaterial also could materially affect our business, financial condition, results of operations or stock price in future periods.
Risks Related to the Market
Our business, results of
operations and financial condition could be adversely affected by disruptions in the marketplace caused by economic and political conditions.
Economic and political conditions affect our clients businesses and the markets they serve. A severe and/or prolonged economic downturn or a negative or uncertain political climate could adversely
affect our clients financial condition and the levels and types of business activity engaged in by our clients and the industries we serve. Clients could determine that discretionary projects are no longer viable or that new projects are not
advisable. This may reduce demand for our services, depress pricing for our services or render certain of our service offerings obsolete, all of which could have a material adverse effect on our business, results of operations and financial
condition. Changes in economic and political conditions could drive changes to the regulatory or legislative landscape and consequently render certain of our service offerings obsolete or shift demand to services that we do not offer or for which we
do not have competitive advantages, which could negatively affect the amount of new business that we are able to obtain. If we are unable to predict or assess the impact of changing economic and political conditions on our business or if we are
unable to effectively plan for and respond to those changes, including realigning our resources and managing our costs, our business could be adversely affected. Additionally, significant economic turmoil or financial market disruptions could
adversely impact the availability of financing to our clients and, in turn, could adversely impact our ability to secure new engagements or collect outstanding amounts due from our clients or cause them to terminate their existing contracts with us,
each of which could adversely affect our financial position and results of operations.
Our business could be adversely
impacted by competition.
The market for our services is highly competitive, highly fragmented, and subject to rapid
change. The market includes a large number of participants with a variety of skills and industry expertise, including general management and information technology consulting firms, strategy firms, global accounting firms, business process and
technology solution providers and other local, regional, national, and international consulting firms. Many of these firms are international in scope and have larger teams of personnel and greater financial, technical and marketing resources than we
do. Some firms may have lower overhead and other operating costs and, therefore, may be able to more effectively compete through lower cost service offerings. If we are unable to compete effectively, our results of operations and financial condition
could be adversely impacted.
We serve clients in industries undergoing significant change, and a significant change in
the legal and regulatory landscape may reduce the demand for our services or render certain of our service offerings obsolete.
Many of our clients operate in highly regulated industries such as healthcare, energy, and financial services.. These industries are subject to changing political, legislative, regulatory and other
influences. The laws and regulations in these industries can be complex, and the application of those laws and regulations to our clients and to us is not always clear. Regulatory and legislative changes in these industries could reduce the demand
for our services, decreasing our competitive position, or potentially render certain of our service offerings obsolete or require us to make unplanned modifications to our service offerings, which could require additional time and investment. If we
fail to accurately anticipate the application of the laws and regulations affecting our clients and the industries they serve, or if such laws and regulations decrease our competitive position or limit the applicability of our service offerings, our
results of operations and financial condition could be adversely impacted.
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If we are unable to successfully recruit, retain and incentivize our senior-level
employees, our ability to win new client engagements and compete effectively could be adversely affected.
We rely
heavily on a group of senior-level employees and business development professionals. We believe our future success is dependent on our ability to successfully recruit and retain their services. Competition for skilled employees is intense, and
retention of our employees, particularly senior revenue-generators, is a key factor affecting our ability to continue to grow organically and achieve our long-term strategic initiatives. The professional services industry has low barriers to entry
making it easy for employees to start their own businesses or work independently. In addition, it is relatively easy for employees to change employers. In addition, our senior-level employees and business development professionals may develop strong
bonds with the clients they serve. In the event that such professionals leave us, we may lose clients who decide they prefer to continue working with a particular professional.
The costs associated with recruiting, training and retaining employees are significant, and restrictive covenants prevalent in the professional services industry often prevent senior-level employees from
generating revenue quickly upon hire. If we are unable to successfully recruit and retain our senior-level employees, we could lose existing clients, experience an adverse effect on our ability to win new client engagements, or experience difficulty
meeting client needs in our current engagements, and our results of operations could be adversely affected.
Although we offer
various incentive compensation programs, including share-based compensation designed to retain and incentivize our senior-level employees, there can be no assurance that these programs will be effective. Further, limitations on the amount of shares
available under our equity compensation plans or a sustained decline in our stock price, which would require us to grant more shares in order to deliver the desired level of value, could also affect our ability to offer adequate share-based
compensation as incentives to our senior-level employees. If we are unable to successfully incentivize our senior-level employees, those employees could leave us, and our results of operations could be adversely affected.
Risks Related to Capital and Financing
We cannot be assured that we will have access to sufficient sources of capital to meet our cash needs.
We rely on our current cash and cash equivalents, cash flows from operations and borrowings under our credit agreement to fund our short-term and anticipated long-term operating and investing activities.
Our credit agreement provides a $400.0 million revolving credit facility. At our option, subject to the terms and conditions in the credit agreement, we may elect to increase commitments under the credit facility up to an aggregate amount of
$500.0 million. The credit facility becomes due and payable in full upon maturity in September 2018. At December 31, 2016, we had $135.0 million in borrowings outstanding under the credit facility and approximately $260 million
available. There can be no assurance that the credit facility will continue to be sufficient to meet the future needs of our business, particularly if a decline in our financial performance were to occur. In addition, there is no assurance that we
will be able to refinance or extend this facility on similar or more favorable economic terms. If this occurs, and we are unable to otherwise increase our cash flows from operations, raise additional capital or obtain debt financing from other
sources, we may be unable to meet our future cash needs, including, for example, funding our acquisitions and other strategic and capital investments. Furthermore, certain financial institutions that are lenders under our credit facility could be
adversely impacted by significant economic turmoil or financial market disruptions and therefore could become unable to meet their commitments under our credit facility, which in turn would reduce the amounts available to us under that facility.
If we are unable to collect receivables in a timely manner, our operating cash flows could be adversely affected.
For the majority of our engagements, we do not receive retainers prior to performing services on a clients
behalf. In certain cases, particularly in our Disputes, Forensics & Legal Technology segment, we may be engaged by a clients counsel for privilege or other reasons, which may cause a delay in the remittance of our invoices. If the
average time it takes our clients to pay our invoices increases, or if the financial condition of any
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of our clients were to deteriorate, impairing their ability to make payments due to us, our operating cash flows would be adversely impacted which may require us to fund a greater portion of our
working capital needs with borrowings under our credit facility or other capital sources.
Our failure to comply with
the covenants in our credit agreement could have a material adverse effect on our financial condition and liquidity.
Our credit agreement contains financial covenants requiring that we maintain, among other things, certain levels of fixed charge and debt
coverage. Poor financial performance could cause us to be in default of these covenants. While we were in compliance with these covenants at December 31, 2016, there can be no assurance that we will remain in compliance in the future. Our
borrowings under the credit facility tend to be higher during the first half of the year to fund annual incentive payments, and as a result, our consolidated leverage ratio is expected to increase from December 31, 2016 levels. If we fail to
comply with the covenants in our credit agreement, this could result in our having to seek an amendment or waiver from our lenders to avoid the termination of their commitments and/or the acceleration of the maturity of outstanding amounts under the
credit facility. The cost of our obtaining an amendment or waiver could be significant, and further, there can be no assurance that we would be able to obtain an amendment or waiver. If our lenders were unwilling to enter into an amendment or
provide a waiver, all amounts outstanding under our credit facility would become immediately due and payable.
We have
variable rate indebtedness which subjects us to interest rate risk and may cause our annual debt service obligations to increase significantly.
Borrowings under our credit facility are based on short term variable rates of interest which expose us to interest rate risk. While market interest rates have remained low for some time, these rates
could increase, adversely impacting our interest expense, cash outflows and results of operations. From time to time, we use derivative instruments for
non-trading
purposes, primarily consisting of interest
rate swap agreements, to manage our interest rate exposure by achieving a desired proportion of fixed rate versus variable rate borrowings. There can be no assurance, however, that our derivative instruments will be successful in reducing the risks
inherent in exposure to interest rate fluctuations.
Risks Related to our Business Operations
Our results of operations and consequently our business may suffer if we are not able to maintain current pricing, compensation
costs and productivity levels.
Our revenues and profitability are largely based on the pricing of our services,
compensation costs and the number of hours our client-service employees work on client engagements. Accordingly, if we are not able to maintain adequate pricing for our services or appropriately manage our compensation costs and productivity levels,
our results of operations may suffer. Pricing, compensation costs and productivity levels are affected by a number of factors, including:
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Our ability to predict future demand for our services and maintain the appropriate staffing levels;
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Our ability to transition client-service employees from completed client engagements to new client engagements;
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Our clients perceptions of our ability to add value through our services;
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Our competitors pricing of services and compensation levels;
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The market demand for our services and our ability to successfully balance our supply of skills and resources with client demand;
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The market rate for employee compensation costs;
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Our ability to manage our human capital resources particularly as we increase the size and diversity of our workforce and expand into new service
offerings as part of our growth strategies;
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The economic, political and regulatory environment;
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Our ability to accurately estimate and appropriately manage professional hours and other aspects of
fixed-fee
engagements and discounted fees which may result in the costs of providing such services exceeding the fees collected; and
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Our failure to meet key performance improvement measures embedded within certain contracts that could trigger penalties.
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Some of the work we do involves greater risk than ordinary engagements which could negatively impact our business.
We do work for clients that for financial, legal, reputational or other reasons may present higher than normal risks.
While we attempt to identify and mitigate our exposure with respect to higher-risk engagements and higher-risk clients, these efforts may be ineffective and an actual or alleged error or omission on our part or the part of our client or other third
parties on one or more of these higher-risk engagements could have a material adverse impact on our business and financial condition. Examples of higher-risk engagements include, but are not limited to:
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Interim management engagements, including those for hospitals and other healthcare providers;
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Engagements where we assist clients in complying with healthcare-related regulatory requirements;
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Engagements where we serve as independent monitor or as an independent review organization or which otherwise subject us to heightened requirements
relating to our independence from our client;
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Financial advisory engagements;
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Engagements where we provide transactional or valuation related services;
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Engagements where we deliver a fairness opinion;
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Engagements where we deliver project management services for large construction projects;
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Engagements where we receive or process or host sensitive data, including personal consumer or private health information;
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Engagements where we deliver a compliance effectiveness opinion;
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Engagements involving independent consultants reports issued pursuant to consent or similar orders to which our clients may be subject or in
support of financings and business transactions; and
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Engagements for governmental clients or where our work product will be relied upon by governmental agencies which regulate our clients.
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Our international operations create special risks that could negatively impact our business.
We have offices outside the U.S., including countries in Europe, the Middle East and Asia, and conduct business in
many other countries. We expect to continue to expand globally and our international revenues may account for an increasing portion of our revenues in the future. Our international operations carry special financial, business, legal and reputational
risks, including:
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Cultural and language differences in conducting business;
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Employment and labor laws and related factors that could, among other things, result in lower utilization, higher compensation costs and cyclical
fluctuations of utilization and revenues and affect our ability to realign resources with demand for our services;
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Currency fluctuations that could adversely affect our financial position and operating results;
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Compliance with varying legal and regulatory requirements, and other barriers to conducting business;
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Impact on consulting spend from international firms and global economies affected by the United Kingdoms withdrawal from the European Union (or
Brexit), European sovereign debt crisis and the political, economic and commercial responses related to such events;
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Risks associated with engagements performed by employees and independent contractors with governmental officials and agencies, including the risks
arising from the anti-bribery and corruption regulations;
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Greater difficulties in managing and staffing foreign operations, including in higher risk geographies;
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Greater personal security risks to employees traveling to or located in unstable locations;
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Difficulties developing talent and leadership capabilities in emerging markets, where depth of skilled employees is often limited and competition for
these resources is intense, can be expensive and may be unsuccessful;
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Successful entry and execution in new markets;
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Restrictions on the repatriation of earnings; and
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Potentially adverse tax consequences, such as net operating loss carry forwards that cannot be realized or higher effective tax rates.
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If we are not able to successfully mitigate the special risks associated with our international operations,
our business prospects and results of operations could be negatively impacted.
If we are unable to effectively execute
on long-term growth objectives, our results of operations and our share value could be adversely affected.
Achievement
of our long-term growth objectives may require additional investments in technology, people and acquisitions. These investments may be significantly different in size, nature and complexity in comparison to those we have made in the past, which
could inherently create more risk around those investment decisions than would otherwise be the case. Specifically:
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Incentive compensation programs designed to motivate growth may result in innovation or investments that drive near-term growth, but that do not
achieve longer-term growth and profitability objectives, or may incentivize an increase in risk compared to our current risk tolerance.
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Investments in acquisitions may result in growth in businesses that may add to near-term revenues and earnings, but may negatively impact shareholder
return over the long-term if they do not perform as expected, or may otherwise create higher longer-term risks, including new legal, compliance, profitability or regulatory implications.
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The businesses and services added through these investments may extend beyond the knowledge, expertise or resources of our current management team,
which could result in unintended risks.
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If we are unable to successfully maintain a sales pipeline
and to attract business from new or existing clients, our results of operations could be materially and adversely affected.
Many of our client engagement agreements are short term in nature (less than one year) or can be terminated by our clients with little or no notice and without penalty. For example, in our
litigation-related engagements, if the litigation is settled, our services usually are no longer necessary and our engagement is promptly terminated. Some of our services involve multiple engagements or stages. In those engagements, there is a risk
that a client may choose not to retain us for the additional stages of an engagement or that a client will cancel or delay additional planned engagements. When contracts are terminated or not renewed, we lose the anticipated revenues and it may take
significant time to replace the revenues lost or redeploy resources. Also, companies in the industries we serve may combine or be acquired by other companies. If a current client merges or consolidates with a company that relies on another provider
for the services we offer, we may lose future revenue from that client and the opportunity to gain additional work. For all these reasons, we rely heavily on our senior-level employees ability to develop new business opportunities for our
services.
In the past, we have derived significant revenues from events as inherently unpredictable as the Dodd-Frank Act,
healthcare reform, the credit crisis and significant natural disasters including major hurricanes and earthquakes. Those events, in addition to being unpredictable, often have impacts that decline over time as clients
13
adjust to and compensate for the challenges they face. These factors also limit our ability to predict future revenues and human capital resource needs especially for large engagements that may
end abruptly due to factors beyond our control which in turn could adversely impact our results of operations.
Unsuccessful client engagements could result in damage to our professional reputation or legal liability which could have a
material adverse effect on our business.
Our professional reputation and that of our client-service employees is
critical to our ability to successfully compete for new client engagements and attract and retain employees. In addition, our client engagements subject us to the risk of legal liability. Any public assertion or litigation alleging that our services
were deficient or that we breached any of our obligations to a client could expose us to significant legal liabilities, distract our management and damage our reputation. Our professional liability insurance may not cover every type of claim or
liability that could potentially arise from our client engagements. In addition, the limits of our insurance coverage may not be enough to cover a particular claim or a group of claims and the costs of defense. Any factors that damage our
professional reputation could have a material adverse effect on our business.
We may not be able to maintain the equity
in our brand name.
We believe that the Navigant brand is an important part of our overall effort to attract and retain
clients and that the importance of brand recognition will increase as competition for our services increases. We may expand our marketing activities to promote and strengthen our brand and may need to increase our marketing budget, hire additional
marketing and public relations personnel or expend additional amounts to protect our brand and otherwise to create and maintain client brand loyalty. If we fail to effectively promote and maintain the Navigant brand, or incur excessive expenses in
doing so, our business and results of operations could be adversely impacted.
We encounter professional conflicts of
interest.
If we are unable to accept new client engagements for any reason, including business and legal conflicts,
our client-service employees may become underutilized or discontented, which may adversely affect our future results of operations, as well as our ability to retain these consultants. In addition, although we have systems and procedures to identify
potential conflicts of interest prior to accepting a new client engagement, there is no guarantee that all potential conflicts of interest will be identified, and undetected conflicts may result in damage to our professional reputation and result in
legal liability which may adversely impact our business.
We may be exposed to potential risks if we are unable to
achieve and maintain effective internal controls.
If we fail to achieve and maintain adequate internal control over
financial reporting or fail to implement necessary new or improved controls that provide reasonable assurance of the reliability of our financial reporting and the preparation of our financial statements for external purposes, we may fail to meet
our public reporting requirements on a timely basis, suffer harm to our reputation, may be unable to adequately or accurately report on our business and our results of operations or may be required to restate our financial statements. Even with
adequate internal controls, we may not prevent or detect all misstatements or fraud. Also, internal controls that are currently adequate may in the future become inadequate because of changes in conditions or changes in regulatory standards, and the
degree of compliance with our policies or procedures may deteriorate. Further, we are in the process of implementing a new Enterprise Resource Planning System and have migrated a portion of our legacy operating and financial information to the new
system which resulted in modifications of certain controls which may prove to be inadequate or ineffective in the new environment. In connection with the implementation and operation of the new system, certain controls could be overlooked and/or not
operate as designed. Failure to maintain these controls could have a material adverse effect on our business and our results of operations.
Acquired businesses may not achieve expected results which could adversely affect our results of operations.
We have grown our business, in part, through the acquisition of complementary businesses. The substantial majority of the purchase price we pay for acquired businesses is related to goodwill and
intangible assets. We
14
may not be able to realize the value of those assets or otherwise realize anticipated synergies unless we are able to effectively integrate the businesses we acquire. We face multiple challenges
in integrating acquired businesses and their personnel, including differences in corporate cultures and management styles, retention of personnel, conflict issues with clients, and the need to divert managerial resources that would otherwise be
dedicated to our current businesses. Additionally, certain senior-level employees, as sellers of the acquired businesses, are bound by
non-competition
covenants that expire after a specific amount of time from
the date of acquisition. When these covenants expire, any loss of these senior-level employees could significantly impact the acquired businesses and their successful integration. Any failure to successfully integrate acquired businesses and retain
personnel could cause the acquired businesses to fail to achieve their expected results, which would in turn adversely affect our financial performance and may require a possible impairment of the acquired assets.
We may also be adversely impacted by liabilities we assume from a company we acquire. We may fail to identify or adequately assess the
magnitude of certain liabilities, shortcomings or other circumstances prior to acquiring a company, including potential exposure to regulatory sanctions or liabilities resulting from an acquisition targets previous activities. Should these
events occur, our expected benefit from such transactions may not be realized. Additionally, the financing of acquisitions through cash, borrowings or common stock could also impair our liquidity or cause significant dilution of our shareholders.
Goodwill and other intangible assets represent a significant portion of our assets, and an impairment of these assets
could have a material adverse effect on our financial condition and results of operations.
Because we have acquired a
significant number of businesses, goodwill and other intangible assets represent a significant portion of our total assets. Under generally accepted accounting principles, we are required to perform an annual impairment test at the reporting unit
level on our goodwill and, on a quarterly basis, we are required to assess the recoverability of both our goodwill and long-lived intangible assets. We consider our operating segments to be our reporting units. We may need to perform an impairment
test more frequently if events occur or circumstances indicate that the carrying amount of these assets may not be recoverable. These events or circumstances could include a significant change in the business climate, attrition of key personnel, a
prolonged decline in our stock price and market capitalization, legal factors, operating performance indicators, competition, sale or disposition of a significant portion of one of our businesses, and other factors. If the fair market value of one
of our reporting units or other long-lived intangible assets is less than the carrying amount of the related assets, we could be required to record an impairment charge in the future. The valuation of our reporting units requires judgment in
estimating future cash flows, discount rates and other factors. In making these judgments, we evaluate the financial health of our reporting units, including such factors as market performance, changes in our client base and projected growth rates.
Because these factors are ever changing, due to market and general business conditions, we cannot predict whether, and to what extent, our goodwill and long-lived intangible assets may be impaired in future periods. During the year ended
December 31, 2014, in conjunction with our annual goodwill impairment test, we recorded a $122.0 million goodwill impairment related to our Disputes, Forensics & Legal Technology segment. At December 31, 2016, we had goodwill
of $625.0 million and net intangible assets of $28.7 million. The amount of any future impairment could be significant and could have a material adverse effect on our financial results. See Note 5 Goodwill and
Intangible Assets, Net to the notes to our consolidated financial statements.
Changes in our level of taxes, as well as
adverse outcomes in audits, investigations and tax proceedings, or changes in tax laws or in their interpretation or enforcement, could have a material adverse effect on our effective income tax rate, results of operations, cash flows and financial
condition.
We are subject to taxes in numerous jurisdictions. We calculate and provide for taxes in each tax
jurisdiction in which we operate. Tax accounting often involves complex matters and requires our judgment to determine our provision for income taxes and other tax liabilities. We are subject to ongoing audits, investigations and tax proceedings in
various jurisdictions. Tax authorities have disagreed with, and may in the future take positions opposing, the judgments we make, including with respect to our intercompany transactions. We regularly assess the likely outcomes of our audits,
investigations and tax proceedings to determine the appropriateness of our tax
15
liabilities. However, our judgments may not be sustained as a result of these audits, investigations and tax proceedings, and the amounts ultimately paid could be materially different from the
amounts recorded and reflected in our consolidated financial statements.
Our effective income tax rate could be adversely
affected in the future by the expiration of current tax benefits, changes in the mix of earnings in countries with differing statutory tax rates, challenges to our intercompany transactions, changes in the valuation of deferred tax assets and
liabilities and changes in tax laws or in their interpretation or enforcement. Additionally, a number of jurisdictions where we do business, including the U.S., are considering changes in their relevant tax, accounting and other laws, regulations
and interpretations. Changes in tax laws, treaties or regulations, and their interpretation or enforcement, have become more unpredictable, particularly as taxing jurisdictions face an increasing number of political, budgetary and other fiscal
challenges. Tax rates in the jurisdictions in which we operate may change as a result of macroeconomic and other factors outside of our control, making it increasingly difficult for multinational corporations like ourselves to operate with certainty
about taxation in many jurisdictions. As a result, we could be materially adversely affected by future changes in tax law or policy (or in their interpretation or enforcement) in the jurisdictions where we operate, including the U.S., which
could have a material adverse effect on our effective income tax rate, results of operations, cash flows and financial condition.
We are subject to unpredictable risks of litigation.
Although we
seek to avoid litigation whenever possible, from time to time we are party to various lawsuits and claims. Disputes may arise, for example, from client engagements, employment issues, regulatory actions, business acquisitions and real estate and
other commercial transactions. There can be no assurances that any lawsuits or claims will be immaterial in the future. Any material lawsuits or claims could adversely affect our business and reputation. Additionally, regardless of the merits of
claims, the cost to defend current and future litigation may be significant and may be time-consuming and divert managements attention and resources.
Our work with governmental clients has inherent risks related to the governmental contracting process.
We work for various U.S., state, local and foreign governmental entities and agencies. These engagements have special risks and characteristics that include, but are not limited to, the following:
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Governmental agencies generally reserve the right to audit our contract costs, including allocated indirect costs, and conduct inquiries and
investigations of our business practices with respect to governmental contracts. If the governmental entity finds that the costs are not reimbursable, then we will not be allowed to bill for them or the cost must be refunded to the governmental
entity if it has already been paid to us. Findings from an audit also may result in our being required to prospectively adjust previously agreed rates for work which would affect our future profit margins.
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If a governmental client discovers improper or illegal activities in the course of its audits or investigations, we may become subject to various civil
and criminal penalties and administrative sanctions, which may include termination of contracts, forfeiture of profits, suspension of payments, fines and suspensions or debarment from doing business with other agencies of that government.
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The terms and conditions of government contracts tend to be more onerous and are often more difficult to negotiate than other types of contracts with
our clients.
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Governmental contracts, and the proceedings surrounding them, are often subject to political sensitivities and more extensive scrutiny and publicity
than other commercial contracts. Negative publicity related to our governmental contracts, regardless of whether it is accurate, may damage our business by impairing our professional reputation and our ability to compete for new client engagements.
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Government entities typically fund projects through appropriated monies. Government entities usually reserve the right to change the scope of or
terminate projects for lack of approved funding (or at their convenience). Budget deficits or shortfalls, government spending reductions or other debt constraints could result in projects we have with government entities being reduced in price or
scope or terminated altogether.
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Political and economic factors, such as pending elections, the outcome of recent elections, changes in leadership among key executive or legislative
decision makers, revisions of government tax or other policies and reduced tax revenues, may affect our ability to win contract awards with governmental entities as well as the number and terms of contracts we have with government entities.
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The impact of any of the occurrences or conditions described above could affect not only our relationship
with the particular governmental agency involved, but also other agencies of the same or other governmental entities as well as other
non-governmental
clients. Depending on the size of the engagement or the
magnitude of the potential costs, penalties or negative publicity involved, any of these occurrences or conditions could have a material adverse effect on our business or results of operations.
Our revenues, operating income (loss) and cash flows are likely to fluctuate.
We experience periodic fluctuations in our revenues, operating income (loss) and cash flows and expect that this will continue to occur in
the future due to timing and duration of our client engagements, utilization of our consultants, the types of engagements we are working on at different times, the geographic locations of our clients or where the services are rendered, the length of
billing and collection cycles, hiring, business and asset acquisitions including the integration of those acquired businesses into our firm, and general economic factors beyond our control. We may also experience future fluctuations in our cash
flows because of increases in employee compensation, including changes to our incentive compensation structure and the timing of incentive payments, which we generally pay during the first quarter of each year, or hiring or retention payments or
bonuses which are paid throughout the year.
The expansion and growth of our business process management services and
the evolution of our service offerings into new areas subject us to different operational risks than our traditional consulting and expert businesses.
Our Technology, Data & Process businesses, in particular, our business process management services, present different operational risks when compared to our traditional consulting and expert
businesses. For example, our business process management services involve managing the revenue cycle function for all or certain portions of our physician and hospital clients businesses, including the operation, management or oversight of
billing, coding and accounts receivable departments that are critical to our clients financial performance. In addition, certain of our businesses, most significantly our business process management services business, utilizes offshore
personnel, including personnel in India, which exposes us to additional operational risks, including special risks associated with conducting business internationally. Disruptions in service delivery, regulatory compliance concerns, data privacy and
security concerns, particularly in the billing and coding areas, labor disputes, technology issues or other performance problems could damage our clients businesses, expose us to enhanced regulatory scrutiny and claims, and harm our reputation
and our business.
As part of our long-term strategy, we plan to continue to expand our services and solutions into new areas.
Expanding into new areas, and providing services to new types of clients may expose us to additional operational, regulatory or other risks specific to these new areas. We could also incur liability if we fail to comply with laws or regulations
applicable to the services we provide to our clients.
If our pricing estimates do not accurately anticipate the cost,
risk and complexity of performing our work, our contracts could have delivery inefficiencies or be unprofitable.
Our
pricing for our fixed fee engagements, particularly in connection with our business process management services engagements that have multi-year pricing agreements, is highly dependent on our forecasts and predictions about the level of effort and
cost necessary to deliver the applicable services and solutions. Our estimates are based on available data at the time the fees are set, and could turn out to be materially inaccurate. If we do not accurately estimate the effort, costs or
timing for meeting our contractual commitments and/or completing projects to a clients satisfaction, our contracts could yield lower margins than planned, or be
17
unprofitable. In addition, we may fail to accurately assess the risks associated with potential contracts. This could result in existing contracts and contracts entered into in the future being
less profitable than expected or unprofitable, which could have an adverse effect on our overall profitability.
We
could be adversely impacted by changes in accounting standards as well as estimates and assumptions by management related to significant accounting matters.
Generally accepted accounting principles and related accounting pronouncements, implementation guidelines and interpretations with regard to a wide range of matters are highly complex and require
management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and the related notes. Examples include: determination of the allowance for doubtful accounts, accruals for incentive-based
compensation, the fair value of acquisition-related contingent consideration, revenue recognition, the measurement of deferred tax assets, estimation of future performance for recording expenses associated with performance-based equity incentive
awards, and the assessment of recoverability of intangible assets and goodwill. Changes in these rules or their interpretation or changes in the underlying estimates and assumptions made by management could significantly change our reported or
expected financial performance or financial condition. For example, changes in accounting standards and the application of existing accounting standards particularly related to the measurement of fair value as compared to carrying value for our
reporting units could have an adverse effect on our financial condition and results of operations. Factors that could lead to impairment of goodwill and intangible assets include significant adverse changes in the business climate and declines in
the financial condition of a reporting unit. In addition, new accounting guidance also may require systems and other changes that could increase our general and administrative expenses and/or adversely impact our financial statements. For example,
implementing future accounting guidance related to revenue and other areas impacted by the current convergence project between the Financial Accounting Standards Board and the International Accounting Standards Board could require us to make
significant changes to our accounting and financial reporting systems and could result in adverse changes to our financial statements.
Risks Related to Technology
We have invested in specialized
technology and other intellectual property for which we may fail to fully recover our investment or which may become obsolete.
We have invested in developing specialized technology and intellectual property, including proprietary systems, processes and methodologies, that we believe provide us a competitive advantage in serving
our current clients and winning new client engagements. Many of our service offerings rely on specialized technology or intellectual property that is subject to rapid change, and to the extent that this technology and intellectual property is
rendered obsolete and of no further use to us or our clients, our ability to continue offering these services, and grow our revenues, could be adversely affected. There is no assurance that we will be able to develop new, innovative or improved
technology or technology and intellectual property or that our technology and intellectual property will effectively compete with the intellectual property developed by our competitors. If we are unable to develop new technology and
intellectual property or if our competitors develop better technology or intellectual property, our revenues and results of operations could be adversely affected. Moreover, if we fail to adequately protect our intellectual property rights from
unauthorized use or infringement by third parties, our business could be adversely affected.
In addition, the scale and
complexity of our business and new service offerings may require additional information systems that we may not be able to implement in a timely or cost effective manner. This may impair our ability to achieve our operating objectives and retain our
competitive position, which in turn could adversely affect our results of operations.
Information system failures or
service interruptions could affect our ability to provide services to our clients.
We may be subject to disruption to
our operating systems, technology or ability to communicate with our workforce and clients as a result of events that are beyond our control, including but not limited to the possibility of failures at third-party data centers, worker strikes,
disruptions to the internet, political instability, natural
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disasters, malicious attacks, or other conditions. While we have taken steps to prevent such events and have developed disaster recovery processes, there can be no assurance that these steps will
be effective in every situation. Such disruptions could adversely affect our ability to fulfill client engagements and as a result may damage our reputation and adversely affect our business and results of operations.
If the integrity of our information systems is compromised or our information systems are inadequate to keep up with the needs of
our business, our reputation, business and results of operations could be adversely affected.
We depend on information
systems to manage and run our business. Additionally, certain services we provide require us to store, transmit or process sensitive or confidential client information, including personal consumer information and health or other personally
identifiable information. If any person, including any of our employees or third-party vendors with whom we contract for data hosting services, negligently disregards or intentionally breaches the information security controls we have
implemented to protect our clients data, or our own data or those security controls prove to be ineffective against intrusion, we could incur legal liability and may also be subject to regulatory enforcement actions, fines and/or criminal
prosecution in multiple jurisdictions. Our potential liability in the event of a security breach of client data or our own data could be significant and depending on the circumstances giving rise to the breach, this liability may not be subject
to a contractual limit of liability or an exclusion of consequential or indirect damages. Any unauthorized disclosure of sensitive, personal or confidential client information, whether through systems failure, employee negligence, fraud or
misappropriation, could damage our reputation and cause us to lose clients. Similarly, unauthorized access to or through our information systems, including an intentional attack by any person who may develop and deploy viruses, worms or other
malicious software programs, could result in negative publicity, legal liability, significant remediation costs and damage to our reputation and could have a material adverse effect on our business and results of operations.
We may experience difficulties in implementing new business and financial systems.
We currently are in the process of transitioning certain of our business and financial systems to new platforms. The process of migrating
our legacy systems and implementing new modules within our enterprise resource systems could disrupt our ability to timely and accurately process and report key aspects of our revenue cycle, including billing and accounts receivable. Any such
disruption could adversely affect our results of operations or financial condition and cause harm to our reputation.
Item 1B.
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Unresolved Staff Comments.
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None.
Our principal executive offices are leased and are located in Chicago, Illinois. We have approximately 40 other operating leases for offices with at least 20 employees, principally in the U.S., which are
utilized across our business segments. Our office space needs in certain geographic areas may change as our business expands or where we determine virtual work environments are appropriate.
Item 3.
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Legal Proceedings.
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We are party to a variety of legal proceedings that arise in the normal course of our business. While the results of these legal proceedings cannot be predicted with certainty, we believe that the final
outcome of these proceedings will not have a material adverse effect, individually or in the aggregate, on our results of operations or financial condition.
Item 4.
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Mine Safety Disclosures.
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Not applicable.
19
Executive Officers of the Registrant
The following are our executive officers at February 17, 2017:
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Name
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Title
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Age
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Julie M. Howard
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Chairman and Chief Executive Officer
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54
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Lee A. Spirer
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Executive Vice President and Global Business Leader
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50
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Stephen R. Lieberman
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Executive Vice President and Chief Financial Officer
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52
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Monica M. Weed
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Executive Vice President, General Counsel and Secretary
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56
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Julie M. Howard
, 54, has served as our Chairman and Chief Executive Officer since May 2014 and
Chief Executive Officer and a member of our board of directors since March 2012. Ms. Howard served as our President from 2006 to March 2012 and our Chief Operating Officer from 2003 to March 2012. From 2001 to 2003, Ms. Howard was our Vice
President and Human Capital Officer. Prior to 2001, Ms. Howard held a variety of consulting and operational positions, including with Navigant. Ms. Howard is currently a member of the board of directors of Innerworkings Inc. and
ManpowerGroup Inc. Ms. Howard also serves on the Medical Center Board for Ann & Robert H. Lurie Childrens Hospital of Chicago and is a founding member of the Womens Leadership and Mentoring Alliance (WLMA). Ms. Howard
is a past member of the board of directors of Kemper Corporation and the Association of Management Consulting Firms, the Deans Advisory Board of the Business School of the University of Wisconsin Madison and the Board of
Governors for the Metropolitan Planning Council of Chicago. Ms. Howard is a graduate of the University of Wisconsin, with a Bachelor of Science degree in Finance. She has also completed several post-graduate courses within the Harvard
Business School Executive Education program, focusing in finance and management.
Lee A. Spirer
, 50, has served as our
Executive Vice President and Global Business Leader since November 2012. Mr. Spirer has served in a variety of strategic and operational roles in a range of professional and business services organizations. From April 2009 to May 2012,
Mr. Spirer served as Senior Vice President and Global Business Head of Kroll Risk & Compliance Solutions, and prior to that, from September 2005 to February 2008, Mr. Spirer served as Senior Vice President and Global Leader of
Corporate Strategy and Development for Dun & Bradstreet Corporation. From June 2001 to September 2005, Mr. Spirer held several senior management roles at IBM Business Consulting Services, last serving as General Manager, Global
Financial Markets. In addition, from March 2008 to April 2009 and again from June 2012 to October 2012, Mr. Spirer served as Managing Partner of LAS Advisory Services, advising private equity and venture capital firms on a variety of strategic
and operational issues. Mr. Spirer is a graduate of The Wharton School with a Masters degree in Business Administration and Brandeis University with a Bachelors degree in Economics, with high honors and Phi Beta Kappa.
Stephen R. Lieberman
, 52, was appointed our Executive Vice President and Chief Financial Officer, effective April 18, 2016.
Prior to joining Navigant, from January 2012 to April 2016, Mr. Lieberman served as Senior Vice President, Finance and Chief Financial Officer, Latin America for Laureate Education, Inc., a global network of private higher education
institutions. From March 2011 to January 2012, Mr. Lieberman served as Senior Vice President, Finance for Dana Holding Corporation, a vehicle component supplier, and prior to that, from September 2006 to October 2010, he served as Vice
President and Treasurer of United Airlines. Mr. Lieberman also spent nearly 15 years at General Motors in various capacities, including Treasurer and Controller General for the auto manufacturers Mexico operations and the Treasurer
of the Asia Pacific Regional Treasury Center, Greater China. Mr. Lieberman received a Bachelor of Science degree in Electrical Engineering and a Masters degree in Business Administration from the University of Michigan.
Monica M. Weed,
56, has served as our Executive Vice President since October 2013 and General Counsel and Secretary since November
2008. Previously, Ms. Weed served as Associate General Counsel for Baxter Healthcare Corporation from March 2006 to October 2008. From March 2004 to March 2006, Ms. Weed served as Special Counsel, Rights Agent and Litigation Trustee to
Information Resources, Inc. Litigation Contingent Payment Rights Trust, a publicly traded litigation trust. From 1991 through 2004, Ms. Weed served in a variety of legal roles, including Executive Vice President, General Counsel and Corporate
Secretary for Information
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Resources, Inc., an international market research provider to the consumer packaged goods industry. She started her legal career at the law firm of Sonnenschein Nath & Rosenthal LLP (now
Dentons). Ms. Weed received a Bachelor of Arts in Classics from Northwestern University, a law degree from the Northwestern University School of Law and a Masters degree in Business Administration from the Kellogg Graduate School of
Management, Northwestern University.
21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
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DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
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Navigant Consulting, Inc. (Navigant, we, us, or our) (NYSE: NCI) is a specialized, global
professional services firm that helps clients take control of their future. With a focus on markets and clients facing transformational change and significant regulatory or legal pressures, Navigant primarily serves clients in the healthcare, energy
and financial services industries.
We do not believe that any material subsequent events occurred during this period that
requires disclosure in the notes to the consolidated financial statements.
We are headquartered in Chicago, Illinois and have
offices in various cities within the U.S., as well as offices in countries in Europe, the Middle East, and Asia. Our
non-U.S. subsidiaries,
in the aggregate, represented approximately 9%, 9% and 8% of our
total revenues for the years ended December 31, 2016, 2015 and 2014, respectively.
2.
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SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS
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Principles of Consolidation
The consolidated financial statements include our accounts and those of our subsidiaries. All significant intercompany transactions have been eliminated in consolidation.
Use of Estimates
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. Examples include: determination of the allowance for
doubtful accounts, accruals for incentive compensation, the fair value of deferred contingent acquisition liabilities, revenue-related percentage of completion estimates, the measurement of deferred tax assets, estimating future performance for
recording expense associated with our performance based long-term incentive plan, and the assessment of recoverability of intangible assets and goodwill. We base our estimates on historical trends, current experience and other assumptions that we
believe are reasonable.
Cash and Cash Equivalents
Cash equivalents are comprised of liquid instruments with original maturity dates of 90 days or less.
Fair Value of Financial Instruments
We consider the recorded value of our 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 December 31, 2016 and 2015 based upon the short-term nature of the assets and liabilities. In addition, the fair value of our bank debt considers counterparty and our own credit risk and as of
December 31, 2016, approximated carrying value as it bears interest at variable rates. As noted below, we maintain interest rate derivatives which are recorded at fair value (see Note 16 Fair Value).
Accounts Receivable Realization
We maintain allowances for doubtful accounts for estimated losses resulting from our clients inability to make required cash payments of amounts due to us or for disputes that affect our ability to
fully collect our billed accounts receivable or for potential fee reductions negotiated by clients. Our estimation is based on historical
F-7
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
collection and our review and assessment of our clients likelihood to make required cash payments of amounts due to us. Estimated losses may vary from actual results. If our clients
financial condition were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. If the collectability of billed amounts is not assured, an allowance is recorded to general and
administrative expense. If the collectability of unbilled amounts is not assured or certain pricing adjustments are made, an allowance is recorded as a reduction to revenue.
Property and Equipment, Net
We record property and equipment at
cost. We compute depreciation using the straight-line method based on the estimated useful lives of the assets, ranging from three to seven years for software, furniture, fixtures and equipment. We compute amortization of leasehold improvements over
the shorter of the remaining lease term or the estimated useful life of the asset. The lease term of our leaseholds expire at various dates through 2028. During the years ended December 31, 2016, 2015 and 2014, we capitalized compensation costs
related to internally developed software for internal use of $1.4 million, $1.5 million and $1.3 million, respectively. We capitalize internally developed software costs during the development stage.
Client-Facing Software
Prepaid expenses and other assets also include investments in capitalized client-facing software which is utilized to deliver services to or licensed to our clients. These amounts are amortized into
cost of services before reimbursable expenses over their estimated remaining useful life. During the years ended December 31, 2016, 2015 and 2014, we capitalized compensation costs related to internally developed client-facing software of
$0.1 million, nil, and $0.3 million, respectively. We capitalize internally developed software costs during the development stage.
Operating Leases
We lease office space under operating leases. Some
of the lease agreements contain one or more of the following provisions or clauses: tenant allowances, rent holidays, lease premiums, and rent escalation clauses. For the purpose of recognizing these provisions on a straight-line basis over the
terms of the leases, we use the date of initial possession to begin amortization, which is generally when we enter the space and begin to make improvements in preparation of intended use.
For tenant allowances and rent holidays, we record a deferred rent liability and amortize the deferred rent over the terms of the leases
as reductions to rent expense. For scheduled rent escalation clauses during the lease term or for rental payments commencing at a date other than the date of initial occupancy, we record minimum rental expenses on a straight-line basis over the
terms of the leases.
In addition, some of our operating leases contain exit clauses, which include termination fees associated
with exiting a lease prior to the expiration of the lease term. We record termination obligations when we give notice to the landlord that we have elected to exercise the early termination clause of such agreement.
Notes Receivable, Prepaid
Sign-on
and Retention Bonuses
We grant and pay
sign-on
and retention bonuses to attract and retain certain senior-level
consultants and administrative personnel. Generally, we require grantees to sign incentive recovery agreements, which obligate the grantees to fulfill a service term, typically between one to five years. If such service term is not fulfilled, the
monetary equivalent of the uncompleted service term is required to be paid back to us. We record paid
sign-on
and retention bonuses to current and
non-current
other
assets and the bonuses are amortized as compensation expense over the service period as defined by the incentive recovery agreements. Certain
sign-on
and retention bonuses of relatively low amounts are
expensed to compensation expense when paid.
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NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We also issue notes receivable in the form of unsecured employee loans with terms that
are generally three to five years. These loans are issued to recruit and retain certain senior-level consultants. The principal amount and accrued interest is either paid by the consultant or forgiven by us over the terms of the loans, so long as
the consultant continues employment and complies with certain contractual requirements. The expense associated with the forgiveness of the principal amount of the loans and accrued interest 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 and is recorded as interest income.
The collectability of the unsecured employee loans is reviewed on a quarterly basis based on our assessment of the employees ability to repay the loan should the contractual requirements of the loan
not be fulfilled.
Goodwill and Intangible Assets
Goodwill represents the difference between the purchase price of the acquired business and the related fair value of the net assets
acquired, which is accounted for by the acquisition method of accounting. Intangible assets consist of identifiable intangibles other than goodwill. Identifiable intangible assets, other than goodwill, include customer lists and relationships,
employee
non-compete
agreements, backlog revenue and trade names. These assets are subject to changes in events or circumstances that could impact their carrying value.
Goodwill is tested for impairment annually during the second quarter. In addition to our annual goodwill test, on a periodic basis, we are
required to consider whether it is more likely than not that the fair value has fallen below the carrying amount of an asset and thus requiring us to perform an interim goodwill impairment test. We consider elements and other factors including, but
not limited to:
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adverse changes in the business climate in which we operate;
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attrition of key personnel;
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unanticipated competition;
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our market capitalization in comparison to our book value;
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our recent operating performance; and/or
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our financial projections.
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The goodwill impairment test is performed at a reporting unit level. A reporting unit, as defined by ASC Topic 350, is an operating segment of a business or one level below an operating segment if
discrete financial information is available and regularly reviewed by segment management. At December 31, 2016, we had four operating segments which were also considered to be our reporting units, as follows: Healthcare; Energy; Financial
Services Advisory and Compliance; and Disputes, Forensics & Legal Technology.
ASC Topic 350 permits an entity to make
a qualitative assessment of whether it is more likely than not that a reporting units fair value is less than its carrying amount before applying a
two-step
goodwill impairment test. This step is
referred to as step zero. If an entity concludes that it is not likely that the fair value of the reporting unit is less than its carrying amount, it would not be required to perform a
two-step
impairment test for that reporting unit. The guidance lists certain factors to consider when making the qualitative assessment. In the event that the conclusion requires the
two-step
test, the first step
compares the fair value of a reporting unit to its carrying value. The fair value is determined using a discounted cash flow analysis (income approach) and a comparable company analysis (market approach). The second step is performed only if the
carrying value exceeds the fair value determined in step one.
We determine the fair value of a reporting unit by using an
equal weighting of estimated fair value using the income and market approaches. The income approach uses estimated future cash flows and terminal values. Assumptions used to determine future cash flows include: forecasted growth rates; profit
margins; longer-term historical performance and cost of capital. Our assumptions are consistent with our internal projections and
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NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
operating plans. Our internal projections and operating plans and thus our estimated fair value may be impacted by the overall economic environment. Our assumptions may change as a result of,
among other things: changes in our estimated business future growth rate; profit margin; long-term outlook; market valuations of comparable companies; the ability to retain key personnel; changes in operating segments; competitive environment and
weighted average cost of capital. Under the market approach for determining fair value, 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 the valuation can be readily observable, market-corroborated or unobservable. Wherever possible, we use valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs;
however, due to the use of our own assumptions about the inputs in measuring fair value, our goodwill impairment testing also makes use of significant unobservable inputs. The fair value of our reporting units is also impacted by our overall market
capitalization and may be impacted by volatility in our stock price and assumed control premium, among other things.
If the
carrying value exceeds the fair value determined in step one, step two is performed. Step two requires us to calculate the implied fair value of a reporting units goodwill. This is accomplished by performing a hypothetical purchase price
allocation for the reporting unit as of the measurement date, similar to the purchase price allocation used when purchasing a new business. We estimate the fair value of the reporting units assets and liabilities and deem the residual fair
value of the reporting unit as the implied fair value of the reporting units goodwill. To the extent that the implied fair value of goodwill is below our carrying value, an impairment charge is recorded to reduce the carrying value to the
implied fair value. The resulting impairment charge may be significantly higher than the difference between the carrying value and fair value determined in step one as a result of fair value assigned to other assets and liabilities in the
hypothetical purchase price allocation completed in step two.
Intangible assets with definite lives are amortized based on the
estimated period of consumption. We review these assets for impairment whenever events or changes in circumstances indicate an assets carrying value may not be recoverable.
Further information regarding our goodwill balances and current year impairment testing and review can be found in Note
5 Goodwill and Intangible Assets, Net.
Revenue Recognition
We recognize revenues when evidence of an arrangement exists, the price of work is fixed or determinable, work is performed and
collectability is reasonably assured. We generate the majority of our revenues from providing services under the following types of arrangements: time and material,
fixed-fee,
units of production and
performance based.
For our time and material arrangements, revenue is recognized based on the number of hours worked by our
Client-Service FTE at the contracted bill rates. In some cases, our time and materials engagements are subject to a maximum fee amount not to be exceeded, in which case we periodically evaluate the progress of work performed to ensure that the
maximum amount billable to the client is not expected to be exceeded. Additionally, revenue is recognized on our units of production arrangements in a similar manner based on measures such as the number of items processed at agreed-upon rates.
With our
fixed-fee
arrangements, we are contracted to complete a
pre-determined
set of professional services for a
pre-determined
fee. However, the fee and engagement scope can be adjusted based on a mutual agreement between us and the
client. In many cases, the recording of fixed revenue amounts requires us to make an estimate of the total amount of work to be performed, and revenues are then recognized as efforts are expended based on hours worked unless another method such as
output or straight-line is more representative of revenue earned.
We also have certain arrangements in which the fees are
dependent on the completion of contractually defined outcomes. In many cases, this fee is earned in addition to an hourly or
fixed-fee,
but is not recognized
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NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
until certain contractual milestones or outcomes are met. Variations in our quarterly or yearly revenues and resulting operating profit margins may occur depending on the timing of such
contractual outcomes and our ability to consider these revenues earned and realized.
We may provide multiple deliverables
under the terms of one or multiple arrangements. Arrangements under these scenarios are evaluated in order to determine whether one or more units of accounting are present and revenue is allocated appropriately to each unit of accounting.
Reimbursable expenses for our engagements include travel,
out-of-pocket
and independent contractor costs. Such expenses are passed through to clients as contractually allowed. Typically, reimbursable expenses are recognized as
revenue during the period in which the expenses are incurred.
Revenues recognized for services performed but not yet billed
are recorded as engagements in process within accounts receivable. Advance payments and retainers are recorded as deferred revenue within other current liabilities and are recognized as services are provided. Any taxes assessed on revenues relating
to services provided to our clients are recorded on a net basis.
Legal
We record legal expenses as incurred. Potential exposures related to unfavorable outcomes of legal matters are accrued for when they
become probable and reasonably estimable.
Share-Based Compensation
We recognize the cost resulting from all share-based compensation arrangements, including stock options, restricted stock awards and
restricted stock units that we grant under our long-term incentive plans in our consolidated financial statements based on their grant date fair value. The expense is recognized over the requisite service period or performance period of the award.
Awards with a graded vesting period based on service are expensed on a straight-line basis for the entire award. Awards with performance-based vesting conditions which require the achievement of a specific company financial performance goal at the
end of the performance period and required service period are recognized over the performance period. Each reporting period, we reassess the probability of achieving the respective performance goal. If the goals are not expected to be met, no
compensation cost is recognized and any previously recognized amount recorded is reversed. If the award contains market-based vesting conditions, the compensation cost is based on the grant date fair value and expected achievement of market
condition and is not subsequently reversed if it is later determined that the condition is not likely to be met or is expected to be lower than initial expectations.
The grant date fair value of stock options is based on the Black-Scholes-Merton pricing model. The Black-Scholes-Merton option-pricing model requires judgmental assumptions including volatility and
expected term, both based on historical experience. The risk-free interest rate is based on U.S. Treasury interest rates whose term is consistent with the expected term of the option.
The grant date fair value of restricted stock and restricted stock units is based on the closing price of the underlying stock on the date
of the grant.
At the time of the grant, we make an estimation of expected forfeitures based upon past experience. Compensation
expense is recorded only for those awards expected to vest. Our forfeiture rate is reviewed periodically and may change from year to year.
Income Taxes
We account for income taxes in accordance with FASB
ASC Topic 740, Income Taxes. Our income tax expense, deferred tax assets and liabilities, and reserves for unrecognized tax benefits reflect managements best
F-11
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
assessment of estimated tax obligations. We are subject to income taxes in the U.S. and a number of foreign jurisdictions. Significant judgments and estimates are required in determining the
consolidated income tax expense.
On October 1, 2015, we adopted FASB ASU
No. 2015-17,
Balance Sheet Classification of Deferred Taxes (Topic 740) on a prospective basis. This ASU requires that the deferred tax assets and liabilities be classified as
non-current
in a statement of financial position. Adoption of this ASU resulted in a reclassification of our deferred tax assets and liabilities to the net
non-current
deferred tax liability in our consolidated balance sheet as of December 31, 2015. No prior periods were retrospectively adjusted.
Deferred income taxes arise from temporary differences between the tax and financial statement recognition of revenue and expense. In evaluating our ability to recover our deferred tax assets within the
jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income,
tax-planning
strategies, and results of recent operations. When appropriate, we evaluate the need for a valuation allowance to reduce deferred tax assets. The evaluation of the need for a valuation allowance requires management judgment and could impact our
financial results and effective tax rate. We record interest and penalties as a component of our income tax provision. Such amounts were not material during any of the years ended December 31, 2016, 2015 or 2014.
Treasury Stock
We account for treasury stock transactions at cost and for the reissuance of treasury stock using the average cost method.
Foreign Currency Transactions
Assets and liabilities of our foreign
subsidiaries whose functional currency is not the U.S. Dollar (USD) are translated into USD using the exchange rates in effect at period end. Revenue and expense items are translated using the average exchange rates for the period. These
currency translation adjustments are reflected within stockholders equity as a component of accumulated other comprehensive loss.
Our foreign subsidiaries have various assets and liabilities, primarily receivables and payables, which are denominated in currencies other than their functional currency. These balance sheet items are
subject to
re-measurement,
the impact of which is recorded in other income, net in the consolidated statements of comprehensive income (loss). We recognized $1.7 million, $0.1 million and
$0.2 million gains for the years ended December 31, 2016, 2015 and 2014, respectively.
Interest Rate
Derivatives
We maintain interest rate swaps that are designated as cash flow hedges to manage the market risk from
changes in interest rates on a portion of our variable rate loans. We recognize derivative instruments which are cash flow hedges as assets or liabilities at fair value, with the related gain or loss reflected within stockholders equity as a
component of accumulated other comprehensive loss. Such instruments are recorded at fair value at each reporting date on a recurring basis. Changes in fair value as calculated are recorded in other comprehensive income (loss) (see
Note 11 Derivatives and Hedging Activity) only to the extent of effectiveness. Any ineffectiveness on the instruments would be recognized in the consolidated statements of comprehensive income (loss). The differentials to be
received or paid under the instruments are recognized in earnings over the life of the contract as adjustments to interest expense. During the years ended December 31, 2016, 2015 and 2014, we recorded no gain or loss due to ineffectiveness and
recorded $0.2 million, $0.5 million and $0.4 million, respectively, in interest expense associated with differentials paid under the instrument. Based on the net fair value of our interest rate swaps at December 31, 2016, we
expect no material expense related to these instruments for the year ending December 31, 2017.
F-12
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
All of our derivative instruments are transacted under International Swaps and
Derivatives Association (ISDA) master agreements. These agreements permit the net settlement of amounts owed in the event of default and certain other termination events, and it is our policy to net all derivative assets and liabilities on the
consolidated balance sheets. As of December 31, 2016 and 2015, all of our derivative instruments were held with counterparties that are lenders under our credit agreement.
Accounting for Business Combinations
We use the acquisition method of accounting under the authoritative guidance on business combinations. Each acquired companys operating results are included in our consolidated financial statements
starting on the date of acquisition. The purchase price is equivalent to the fair value of consideration transferred. Tangible and identifiable intangible assets acquired and liabilities assumed as of the date of acquisition are recorded at fair
value as of the acquisition date. Goodwill is recognized for the excess of purchase price over the net fair value of assets acquired and liabilities assumed. Deferred contingent consideration, which is primarily based on the business achieving
certain performance targets, is recognized at its fair value on the acquisition date, and changes in fair value are recognized in earnings until settled. For the year ended December 31, 2016, we recorded a cost of $1.3 million, and during
the years ended December 31, 2015 and 2014, we recorded benefits of $13.0 million and $5.0 million, respectively, in other operating costs (benefit) for these fair value adjustments. The fair value of the contingent consideration is
based on our estimations of future performance of the business and is determined based on Level 3 observable inputs. Further information regarding our contingent acquisition liability balances can be found in Note 16 Fair
Value.
Impairment of Long-Lived Assets
We review long-lived assets such as property and equipment and definite-lived intangible assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. These events or changes in circumstances may include a significant deterioration of operating results, changes in business plans such as a disposition, or changes in anticipated future cash flows. If an impairment indicator is present,
we evaluate recoverability of assets to be held and used by a comparison of the carrying value of the assets to future undiscounted net cash flows expected to be generated by the assets. We group assets at the lowest level for which there are
identifiable cash flows that are largely independent of the cash flows generated by other asset groups. If the total of the expected undiscounted future cash flows is less than the carrying amount of the asset group, we estimate the fair value of
the asset group to determine whether an impairment loss should be recognized. An impairment loss is recognized for the difference between the fair value and carrying value of the asset group.
Comprehensive Income
Comprehensive income consists of net income (loss), unrealized foreign currency translation adjustments and unrealized net loss and/or gain on interest rate derivatives.
Discontinued Operations
The results of operations for business components meeting the criteria for discontinued operations are presented as such in our consolidated statements of comprehensive income (loss). For periods prior to
the designation as discontinued operations, we reclassify the results of operations to discontinued operations. In addition, the net gain or loss (including any impairment loss) on the disposal is presented as discontinued operations when
recognized. The change in presentation for discontinued operations does not have any impact on our financial condition or results of operations. We combine the cash flows and assets and liabilities attributable to discontinued operations with the
respective cash flows and assets and liabilities from continuing operations to the extent that they are immaterial.
F-13
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Recent Accounting Pronouncements
In May 2014, the FASB issued ASU
2014-09,
Revenue from Contracts with Customers (Topic 606). This
update is intended to improve the financial reporting requirements for revenue from contracts with customers by providing a principle based approach. The core principle of the standard is that revenue should be recognized when the transfer of
promised goods or services is made in an amount that the entity expects to be entitled to in exchange for the transfer of goods and services. The update also requires disclosures enabling users of financial statements to understand the nature,
amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The FASB has recently issued several amendments to the standard, including clarification on principal versus agent considerations, accounting for
licenses of intellectual property and identifying performance obligations. Although early adoption as of the original effective date of January 1, 2017 is permitted, we will elect to adopt on January 1, 2018 as the effective date for us.
The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (full retrospective method), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial
application (the cumulative
catch-up
transition method). We currently anticipate that we will see the most impact in contracts which include variable consideration and anticipate adopting the standard using
the cumulative
catch-up
transition method. We will continue to evaluate the impact of our pending adoption of this guidance to our consolidated financial statements and our preliminary assessments are subject
to change.
In April 2015, the FASB issued ASU
2015-03,
Simplifying the Presentation of
Debt Issuance Costs (Subtopic
835-30).
This update includes amendments that change the presentation of debt issuance costs in financial statements. ASU
2015-03
requires
an entity to present such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs will continue to be reported as interest expense. In August 2015, the FASB issued ASU
2015-15,
which clarified the guidance in ASU
2015-03
that for a
line-of-credit
(revolving
credit) arrangement the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term. We adopted this standard as of
January 1, 2016; however, since our credit facility is a revolving credit arrangement we will continue to present our current net debt issuance cost balance in other assets. Our net debt issuance cost as of December 31, 2016 was
$0.9 million.
In September 2015, the FASB issued ASU
2015-16,
Business
Combinations (Topic 805). This update requires the acquirer in a business combination to recognize to the income statement adjustments to provisional amounts that are identified during the measurement period in the reporting period in which
adjustment amounts are determined. The adjustments are calculated as if the accounting had been completed at the acquisition date. Prior to this update, an acquirer was required to restate prior period financial statements as of the acquisition date
for adjustments to provisional amounts. This standard was adopted by us on January 1, 2016, and will be applied, as needed, to acquisitions after this date.
In November 2015, the FASB issued ASU
2015-17,
Balance Sheet Classification of Deferred Taxes (Topic 740). This update requires entities with a classified balance
sheet to present all deferred tax assets and liabilities as noncurrent. The current requirement that deferred tax liabilities and assets be offset by jurisdiction and presented as a single amount is not affected by this standard update. This
standard will be effective for financial statements issued by public companies for annual and interim periods beginning after December 15, 2016. Early adoption of the standard is permitted, and the standard may be applied either retrospectively
or prospectively. We adopted this standard prospectively as of October 1, 2015, and have reclassified our deferred tax assets and liabilities to the net
non-current
deferred tax liability in our
consolidated balance sheets.
In February 2016, the FASB issued ASU
2016-02,
Leases
(Topic 842). This update amends the requirements for assets and liabilities recognized for all leases longer than twelve months. Lessees will be required to recognize a lease liability measured on a discounted basis, which is the lessees
obligation to make lease payments arising from the lease, and a
right-of-use
asset, which is an asset that represents the lessees right
F-14
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
to use, or control the use of, a specified asset for the lease term. This standard will be effective for financial statements issued by public companies for the annual and interim periods
beginning after December 15, 2018. Early adoption of the standard is permitted. The standard will be applied in a modified retrospective approach for leases existing at or entered into after the beginning of the earliest comparative period
presented. We are currently evaluating the potential impact of this guidance on our consolidated financial statements.
In
March 2016, the FASB issued ASU
2016-09,
Compensation-Stock Compensation (Topic 718), which simplifies the accounting for share-based payment transactions. As required by the standard, excess tax benefits and
deficiencies recognized on share-based compensation expense will be recorded in the consolidated statements of comprehensive income (loss) as a component of income tax expense rather than additional
paid-in
capital on the consolidated balance sheets. Also, as required by the standard, excess tax benefits recognized on stock-based compensation expense will be classified as an operating activity in our consolidated statements of cash flows rather than a
financing activity. These changes will be adopted on a prospective basis. Lastly, the update allows forfeitures to be estimated or recognized when they occur, rather than estimating the expected forfeitures over the course of the vesting
period. We plan to elect to account for forfeitures as occurred. This change in accounting policy will be applied on a modified retrospective basis. Following adoption, the primary impact on our consolidated financial statements will be increased
volatility in the reported amounts of income tax expense and net income (loss). We estimate this change will reduce our fiscal year 2017 effective tax rate by an immaterial amount. Other impacts are expected to be immaterial to our consolidated
balance sheet and statements of comprehensive income. This standard will be effective for financial statements issued by public companies for annual and interim periods beginning after December 15, 2016. We will adopt the new guidance on
January 1, 2017. We are continuing to evaluate the impacts of the adoption of this guidance and our preliminary estimates and assessments are subject to change.
In August 2016, the FASB issued ASU
2016-15,
Statement of Cash Flow (Topic 230). This update is intended to reduce diversity in practice in how certain transactions
are classified in the statement of cash flows. The update provides new guidance regarding the classification of debt prepayment or debt extinguishment costs, settlement of
zero-coupon
debt instruments,
contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies including bank-owned life insurance policies,
distributions received from equity method investments, beneficial interests in securitized transactions, and separately identifiable cash flows and application of the predominance principle. This standard will be effective for financial statements
issued by public companies for the annual and interim periods beginning after December 15, 2017. Early adoption of the standard is permitted. The standard will be applied in a retrospective approach for each period presented. We have completed
an initial evaluation of this standard and have determined that the way we classify our contingent acquisition liability payments in the statement of cash flows will change. Based on our initial evaluation, adoption of this standard may require an
immaterial reclassification of a portion of the payments previously reported as financing activities for comparative periods in the statement of cash flows within our consolidated financial statements issued on or after January 1, 2018. Under
this guidance, portions of these payments will be reclassified from financing activities to operating activities. We will continue to evaluate the potential impact of this guidance on our consolidated financial statements
2016 Acquisitions
During the year ended December 31, 2016, we
acquired three businesses including Ecofys Investments B.V. (Ecofys) for an aggregate purchase price of $19.1 million, of which $17.6 million was paid in cash at closing. Ecofys was integrated into our Energy segment, and the other two
acquired businesses were integrated into our Healthcare segment. None of these acquisitions were material to our consolidated financial position.
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NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2015 Acquisitions
On December 31, 2015, we acquired McKinnis Consulting Services, LLC (McKinnis) to further expand our healthcare business. McKinnis
specialized in providing revenue cycle assessment, strategy and optimization assistance for healthcare providers. The acquisition included approximately 70 professionals and was integrated into our Healthcare segment. We paid $45.7 million at
closing, including $42.7 million in cash (net of cash acquired) and $3.0 million (or 176,758 shares) in our common stock. The purchase agreement also provides for a deferred contingent acquisition payment to the selling members of McKinnis
in an amount up to $10.0 million based on the business achieving certain performance targets over the
one-year
period ending December 31, 2016. We estimated deferred contingent consideration fair
value on the closing date to be $8.3 million which was recorded in other
non-current
liabilities at net present value using a risk-adjusted discount rate. Based on a recent review of the business
operating performance, the fair value of the deferred contingent acquisition liability was recorded at its maximum performance target of $10.0 million for the year ended December 31, 2016 and is expected to be settled during the first
quarter of 2017. A working capital adjustment, including a $5.5 million payment to the selling members for undistributed cash held in the business as of the closing, was settled during the year ended December 31, 2016. As part of our
purchase price allocation, we recorded $13.0 million in identifiable intangible assets, $45.5 million in goodwill and other net assets of $1.0 million.
On February 23, 2015, we acquired RevenueMed, Inc. (RevenueMed) to expand the business process management service capabilities within our Healthcare segment. RevenueMed specialized in providing
coding, revenue cycle management, and business process management services to healthcare providers. This acquisition included approximately 1,500 professionals primarily located in India and was integrated into the Technology, Data &
Process business within our Healthcare segment. We paid $21.3 million in cash (net of cash acquired) at closing. The purchase agreement also provided for a deferred contingent acquisition payment to the selling stockholders of RevenueMed in an
amount up to $4.0 million based on the business achieving certain performance targets over the
six-month
period beginning January 1, 2015 and ending June 30, 2015, which was settled on
October 1, 2015 for $4.0 million cash. We estimated deferred contingent consideration fair value on the closing date to be $3.8 million which was recorded in other current liabilities at net present value using a risk-adjusted
discount rate. As part of our purchase price allocation, we recorded $7.3 million in identifiable intangible assets, $14.4 million in goodwill, $1.4 million of internally developed software and other net assets of $2.6 million.
Other net assets included a liability for uncertain tax positions of $1.3 million, and based on the indemnification terms of the purchase agreement, which entitles us to indemnification if tax is due, an offsetting receivable from RevenueMed
was recorded in prepaid expenses and other current assets.
2014 Acquisitions
On May 14, 2014, we acquired Cymetrix Corporation to expand our healthcare business. Cymetrix specializes in providing business
process management services to hospital and healthcare networks. This acquisition included approximately 600 professionals and was integrated into the Technology, Data & Process business within our Healthcare segment. We paid
$76.9 million, including selling costs, in cash at closing. The terms of the original agreement provided for a deferred contingent acquisition payment to the selling stockholders of Cymetrix of up to $25.0 million based on the business
achieving certain performance targets over the period beginning November 1, 2014 and ending October 31, 2015. The deferred contingent consideration fair value was estimated on the closing date to be $20.3 million which was recorded in
other
non-current
liabilities at net present value using a risk-adjusted discount rate. During the year ended December 31, 2015, we amended the original agreement effectively changing the deferred
contingent consideration to a fixed cash payment of $10.0 million, which resulted in an other operating benefit of $13.3 million. On December 28, 2015 we settled the liability in full. As part of our final purchase price allocation,
we recorded $1.4 million in cash, $11.3 million in accounts receivable, net, $1.6 million in other current assets, $11.8 million in property and equipment, net, $71.3 million in goodwill, $18.0 million in identifiable
intangible assets, and $36.9 million in total liabilities.
F-16
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Also, during the year ended December 31, 2014, we acquired three other businesses,
for an aggregate purchase price of $11.8 million, of which $9.3 million was paid in cash at closing. Two of the businesses were integrated into our Healthcare segment and the third was integrated into our Disputes, Forensics &
Legal Technology segment. None of these other acquired businesses were material to our consolidated financial position.
See
Note 16 Fair Value for additional information regarding deferred contingent consideration fair value adjustments.
Unaudited Pro Forma Information
The following supplemental pro
forma financial information was prepared as if the 2016 and 2015 acquisitions noted above had occurred as of January 1, 2015. The following table was prepared for comparative purposes only and does not purport to be indicative of what would
have occurred had the acquisitions been made at that time or of results which may occur in the future (in thousands, except per share data).
|
|
|
|
|
|
|
|
|
|
|
For the year ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Total revenues
|
|
$
|
1,057,910
|
|
|
$
|
976,388
|
|
Net income
|
|
$
|
57,198
|
|
|
$
|
61,196
|
|
Basic net income per basic share
|
|
$
|
1.21
|
|
|
$
|
1.27
|
|
Shares used in computing net income per basic share
|
|
|
47,343
|
|
|
|
48,082
|
|
Diluted net income per diluted share
|
|
$
|
1.17
|
|
|
$
|
1.24
|
|
Shares used in computing net income per diluted share
|
|
|
48,813
|
|
|
|
49,400
|
|
Our business is assessed and resources are allocated based on the following four reportable segments:
|
|
|
The
Healthcare
segment provides consulting services and business process management services. Clients of this segment include healthcare
providers, payers and life sciences companies. We help clients respond to market legislative changes such as the shift to an outcomes and value-based reimbursements model, ongoing industry consolidation and reorganization, Medicaid expansion, and
the implementation of a new electronic health records system.
|
|
|
|
The
Energy
segment provides advisory services to utilities, governmental agencies, manufacturers and investors. We provide our clients with
advisory solutions in business strategy and planning, distributed energy resources and renewables, energy efficiency and demand response, and grid modernization. In addition, we provide a broad array of benchmarking and research services.
|
|
|
|
The
Financial Services Advisory and Compliance
(formerly Financial, Risk & Compliance) segment provides strategic, operational,
valuation, risk management, investigative and compliance advisory services to clients primarily in the highly-regulated financial services industry, including major financial and insurance institutions. This segment also provides anti-corruption
solutions and anti-money laundering, litigation support and tax compliance and valuation services to clients in a broad variety of industries.
|
|
|
|
The
Disputes, Forensics
& Legal Technology
(formerly Disputes, Investigations & Economics) segments
professional services include accounting, regulatory, construction and computer forensic expertise, as well as valuation and economic analysis. In addition to these capabilities, our professionals use technological tools to perform eDiscovery
services and to deliver custom technology and data analytic
|
F-17
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
solutions. The clients of this segment principally include companies along with their
in-house
counsel and law firms, as well as accounting firms,
corporate boards and government agencies.
|
The following information includes segment revenues before
reimbursements, segment total revenues and segment operating profit. Certain unallocated expense amounts related to specific reporting segments have been excluded from segment operating profit to be consistent with the information used by management
to evaluate segment performance. Segment operating profit represents total revenues less cost of services excluding long-term compensation expense attributable to client-service employees. Long-term compensation expense attributable to
client-service employees includes share-based compensation expense and compensation expense attributed to certain retention incentives (see Note 8 Share-based Compensation Expense and Note 9 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.
F-18
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Information on the segment operations has been summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Revenues before reimbursements:
|
|
|
|
|
|
|
|
|
|
|
|
|
Healthcare
|
|
$
|
354,268
|
|
|
$
|
288,798
|
|
|
$
|
223,817
|
|
Energy
|
|
|
115,940
|
|
|
|
106,023
|
|
|
|
97,667
|
|
Financial Services Advisory and Compliance
|
|
|
152,166
|
|
|
|
124,359
|
|
|
|
135,498
|
|
Disputes, Forensics & Legal Technology
|
|
|
316,372
|
|
|
|
314,628
|
|
|
|
309,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues before reimbursements
|
|
$
|
938,746
|
|
|
$
|
833,808
|
|
|
$
|
766,552
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Healthcare
|
|
$
|
389,233
|
|
|
$
|
313,884
|
|
|
$
|
248,095
|
|
Energy
|
|
|
133,612
|
|
|
|
124,491
|
|
|
|
115,612
|
|
Financial Services Advisory and Compliance
|
|
|
173,391
|
|
|
|
142,959
|
|
|
|
162,637
|
|
Disputes, Forensics & Legal Technology
|
|
|
338,244
|
|
|
|
338,152
|
|
|
|
333,273
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
1,034,480
|
|
|
$
|
919,486
|
|
|
$
|
859,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating profit:
|
|
|
|
|
|
|
|
|
|
|
|
|
Healthcare
|
|
$
|
115,163
|
|
|
$
|
90,869
|
|
|
$
|
65,104
|
|
Energy
|
|
|
32,637
|
|
|
|
31,380
|
|
|
|
30,507
|
|
Financial Services Advisory and Compliance
|
|
|
63,464
|
|
|
|
49,130
|
|
|
|
58,929
|
|
Disputes, Forensics & Legal Technology
|
|
|
108,685
|
|
|
|
102,449
|
|
|
|
104,466
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment operating profit
|
|
|
319,949
|
|
|
|
273,828
|
|
|
|
259,006
|
|
|
|
|
|
Segment reconciliation to income (loss) from continuing operations before income tax expense (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciling items:
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses
|
|
|
168,954
|
|
|
|
147,462
|
|
|
|
136,057
|
|
Depreciation expense
|
|
|
27,742
|
|
|
|
23,612
|
|
|
|
19,580
|
|
Amortization expense
|
|
|
11,507
|
|
|
|
8,613
|
|
|
|
5,959
|
|
Other operating costs (benefit), net
|
|
|
1,872
|
|
|
|
(9,900
|
)
|
|
|
118,580
|
|
Long-term compensation expense attributable to client-service employees (including share-based compensation
expense)
|
|
|
13,138
|
|
|
|
11,914
|
|
|
|
11,611
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
|
96,736
|
|
|
|
92,127
|
|
|
|
(32,781
|
)
|
Interest and other expense, net
|
|
|
3,325
|
|
|
|
3,974
|
|
|
|
5,477
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income tax expense (benefit)
|
|
$
|
93,411
|
|
|
$
|
88,153
|
|
|
$
|
(38,258
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-19
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Total assets allocated by segment include accounts receivable (net), certain
retention-related prepaid assets, intangible assets and goodwill. The remaining assets are unallocated. Allocated assets by segment were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Healthcare
|
|
$
|
391,859
|
|
|
$
|
379,032
|
|
Energy
|
|
|
120,311
|
|
|
|
108,630
|
|
Financial Services Advisory and Compliance
|
|
|
98,846
|
|
|
|
88,956
|
|
Disputes, Forensics & Legal Technology
|
|
|
330,239
|
|
|
|
332,772
|
|
Unallocated assets
|
|
|
113,542
|
|
|
|
106,506
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,054,797
|
|
|
$
|
1,015,896
|
|
|
|
|
|
|
|
|
|
|
Geographic data
Total revenues and assets by geographic region were as follows (shown in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Total revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
938,224
|
|
|
$
|
833,527
|
|
|
$
|
788,422
|
|
United Kingdom
|
|
|
55,626
|
|
|
|
62,099
|
|
|
|
56,536
|
|
Other
|
|
|
40,630
|
|
|
|
23,860
|
|
|
|
14,659
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,034,480
|
|
|
$
|
919,486
|
|
|
$
|
859,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Total assets:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
952,572
|
|
|
$
|
916,263
|
|
United Kingdom
|
|
|
62,156
|
|
|
|
80,209
|
|
Other
|
|
|
40,069
|
|
|
|
19,424
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,054,797
|
|
|
$
|
1,015,896
|
|
|
|
|
|
|
|
|
|
|
F-20
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
5.
|
GOODWILL AND INTANGIBLE ASSETS, NET
|
Changes made to our goodwill balances during the years ended December 31, 2016 and 2015 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Healthcare
|
|
|
Energy
|
|
|
Financial
Services
Advisory and
Compliance
|
|
|
Disputes,
Forensics &
Legal
Technology
|
|
|
Total
Company
|
|
Gross goodwill at December 31, 2015
|
|
$
|
264,163
|
|
|
$
|
76,566
|
|
|
$
|
55,341
|
|
|
$
|
354,604
|
|
|
$
|
750,674
|
|
Acquisitions
|
|
|
8,057
|
|
|
|
2,122
|
|
|
|
|
|
|
|
|
|
|
|
10,179
|
|
Adjustments
|
|
|
(12
|
)
|
|
|
|
|
|
|
(35
|
)
|
|
|
(153
|
)
|
|
|
(200
|
)
|
Foreign currency translation
|
|
|
(176
|
)
|
|
|
(764
|
)
|
|
|
(1,522
|
)
|
|
|
(5,694
|
)
|
|
|
(8,156
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross goodwill at December 31, 2016
|
|
|
272,032
|
|
|
|
77,924
|
|
|
|
53,784
|
|
|
|
348,757
|
|
|
|
752,497
|
|
Accumulated goodwill impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(122,045
|
)
|
|
|
(122,045
|
)
|
Accumulated amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,425
|
)
|
|
|
(5,425
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net goodwill at December 31, 2016
|
|
$
|
272,032
|
|
|
$
|
77,924
|
|
|
$
|
53,784
|
|
|
$
|
221,287
|
|
|
$
|
625,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes made to our goodwill balances during the years ended
December 31, 2015 and 2014 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Healthcare
|
|
|
Energy
|
|
|
Financial
Services
Advisory and
Compliance
|
|
|
Disputes,
Forensics &
Legal
Technology
|
|
|
Total
Company
|
|
Gross goodwill at December 31, 2014
|
|
$
|
204,469
|
|
|
$
|
76,572
|
|
|
$
|
55,320
|
|
|
$
|
359,200
|
|
|
$
|
695,561
|
|
Acquisitions
|
|
|
59,919
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59,919
|
|
Dispositions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8
|
)
|
|
|
(8
|
)
|
Adjustments
|
|
|
(11
|
)
|
|
|
|
|
|
|
(35
|
)
|
|
|
(155
|
)
|
|
|
(201
|
)
|
Foreign currency translation
|
|
|
(214
|
)
|
|
|
(6
|
)
|
|
|
56
|
|
|
|
(4,433
|
)
|
|
|
(4,597
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross goodwill at December 31, 2015
|
|
|
264,163
|
|
|
|
76,566
|
|
|
|
55,341
|
|
|
|
354,604
|
|
|
|
750,674
|
|
Accumulated goodwill impairment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(122,045
|
)
|
|
|
(122,045
|
)
|
Accumulated amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,425
|
)
|
|
|
(5,425
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net goodwill at December 31, 2015
|
|
$
|
264,163
|
|
|
$
|
76,566
|
|
|
$
|
55,341
|
|
|
$
|
227,134
|
|
|
$
|
623,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We performed our 2016 annual goodwill impairment test as of May 31, 2016 (see Note
2 Summary of Significant Accounting Policies for further information on goodwill testing procedures). The key assumptions included: internal projections completed during our second quarter 2016 forecasting process; profit margin
improvement generally consistent with our longer-term historical performance; assumptions regarding contingent revenue; revenue growth consistent with our longer term historical performance, also considering our near term investment plans and growth
objectives; discount rates that were determined based on comparable discount rates for our peer group; Company-specific risk considerations; control premium; and cost of capital based on our historical experience.
Based on our assumptions, at that time, the estimated fair value exceeded the net asset carrying value for each of our reporting units as
of May 31, 2016. Accordingly, there was no indication of impairment of our goodwill for any of our reporting units. As of May 31, 2016, the estimated fair value of our Healthcare, Energy, Financial Services Advisory and Compliance, and
Disputes, Forensics & Legal Technology reporting units exceeded the fair value of invested capital by 22%, 32%, 61%, and 17%, respectively.
F-21
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We have reviewed our most recent financial projections and considered the impact of
changes to our business and market conditions on our goodwill valuation and determined that no events or conditions have occurred or are expected to occur that would trigger a need to perform an interim goodwill impairment test. We will continue to
monitor the factors and key assumptions used in determining the fair value of each of our reporting units. There can be no assurance that goodwill or intangible assets will not be impaired in the future. We will perform our next annual goodwill
impairment test as of May 31, 2017.
Intangible assets consisted of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
Customer lists and relationships
|
|
$
|
106,536
|
|
|
$
|
109,745
|
|
Non-compete
agreements
|
|
|
23,407
|
|
|
|
23,808
|
|
Other
|
|
|
28,274
|
|
|
|
27,302
|
|
|
|
|
|
|
|
|
|
|
Intangible assets, at cost
|
|
|
158,217
|
|
|
|
160,855
|
|
Less: accumulated amortization
|
|
|
(129,490
|
)
|
|
|
(122,695
|
)
|
|
|
|
|
|
|
|
|
|
Intangible assets, net
|
|
$
|
28,727
|
|
|
$
|
38,160
|
|
|
|
|
|
|
|
|
|
|
Our intangible assets have estimated remaining useful lives ranging up to eight years which approximate
the estimated periods of consumption. We will amortize the remaining net book values of intangible assets over their remaining useful lives. At December 31, 2016, our intangible assets categories are as follows (in thousands, except year data):
|
|
|
|
|
|
|
|
|
Category
|
|
Weighted Average
Remaining Years
|
|
|
Amount
|
|
Customer lists and relationships, net
|
|
|
5.6
|
|
|
$
|
23,958
|
|
Non-compete
agreements, net
|
|
|
3.6
|
|
|
|
2,503
|
|
Other intangible assets, net
|
|
|
2.8
|
|
|
|
2,266
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets, net
|
|
|
5.2
|
|
|
$
|
28,727
|
|
|
|
|
|
|
|
|
|
|
Total amortization expense was $11.5 million, $8.6 million and $6.0 million for the years
ended December 31, 2016, 2015 and 2014, respectively. The estimated annual aggregate amortization expense to be recorded in the next five years related to intangible assets at December 31, 2016 is as follows (in thousands):
|
|
|
|
|
Year Ending December 31,
|
|
Amount
|
|
2017
|
|
$
|
8,719
|
|
2018
|
|
|
6,314
|
|
2019
|
|
|
4,460
|
|
2020
|
|
|
3,444
|
|
2021
|
|
|
3,584
|
|
F-22
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6.
|
NET INCOME (LOSS) PER SHARE (EPS)
|
The components of basic and diluted shares (in thousands and based on the weighted average days outstanding for the periods) are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Basic shares
|
|
|
47,343
|
|
|
|
47,906
|
|
|
|
48,741
|
|
Employee stock options
|
|
|
129
|
|
|
|
111
|
|
|
|
|
|
Restricted stock units
|
|
|
1,262
|
|
|
|
1,130
|
|
|
|
|
|
Contingently issuable shares
|
|
|
79
|
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted shares
|
|
|
48,813
|
|
|
|
49,224
|
|
|
|
48,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Antidilutive shares(1)
|
|
|
136
|
|
|
|
212
|
|
|
|
1,338
|
|
(1)
|
Stock options with exercise prices greater than the average market price of our common stock during the respective time periods were excluded from the computation of
diluted shares because the impact of including the shares subject to these stock options in the diluted share calculation would have been antidilutive.
|
Due to a net loss applicable to common shareholders for the year ended December 31, 2014, we excluded 1,235 in potentially dilutive securities from the computation as their effect would have been
antidilutive.
For the year ended December 31, 2016
During the year ended
December 31, 2016, we repurchased 1,436,147 shares of our common stock at a weighted average price of $17.45. During the year ended December 31, 2016, $1.9 million relating to accrued incentive compensation liabilities for the 2015
performance year was recorded as additional
paid-in
capital at the time of grant of the restricted stock units in 2016.
During the year ended December 31, 2016, we retired 8,000,000 shares of treasury stock. As a result, within the stockholders equity accounts on our consolidated balance sheets, treasury stock
was reduced by $140.3 million for the value of the shares calculated using the weighted average treasury stock inventory price, common stock was reduced $8.0 thousand for the aggregate par value of the shares retired, and
$140.3 million was recorded as a reduction to retained earnings.
For the year ended December 31, 2015
During the year ended December 31, 2015, we repurchased 1,589,072 shares of our common stock at a weighted
average price of $15.12 and issued 176,758 of common stock having a fair value of $3.0 million relating to the McKinnis acquisition (see Note 3 Acquisitions). During the year ended December 31, 2015, $1.3 million
relating to accrued incentive compensation liabilities for the 2014 performance year was recorded as additional
paid-in
capital at the time of grant of the restricted stock units in 2015.
For the year ended December 31, 2014
During the year ended December 31, 2014, we repurchased 1,653,315 shares of our common stock at a weighted average price of $16.50. During the year ended December 31, 2014, $2.6 million
relating to accrued incentive compensation liabilities for the 2013 performance year was recorded as additional
paid-in
capital at the time of grant of the restricted stock units in 2014.
F-23
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
8.
|
SHARE-BASED COMPENSATION EXPENSE
|
Summary
On May 22, 2012, our shareholders approved the
Navigant Consulting, Inc. 2012 Long-Term Incentive Plan (2012 Plan). The purposes of the 2012 Plan are: (i) to align the interests of our shareholders and recipients of awards under the 2012 Plan by increasing the proprietary interest of such
recipients in our growth and success; (ii) to attract and retain officers, other employees,
non-employee
directors, consultants, independent contractors and agents; and (iii) to motivate such persons
to act in the long-term best interests of our shareholders. The 2012 Plan allows for awards of stock options, stock appreciation rights, restricted stock and restricted stock units, and performance awards.
In May 2015, our shareholders approved an amendment and restatement of the 2012 Plan to, among other things, increase the number of shares
authorized for issuance under the plan by 2.2 million shares.
As of December 31, 2016, 2,492,109 shares remained
available for future issuance under the 2012 Plan, as amended and restated.
We record share-based compensation expense for
restricted stock units, stock options and the discount given on employee stock purchase plan transactions. Our long-term incentive program for our senior-level employees currently provides for either an award of restricted stock units or deferred
cash. The aggregate value of the awards granted to eligible recipients is determined based on our financial performance for the prior fiscal year, and the awards vest three years following the date of grant. During the year ended December 31,
2016, we recorded $2.0 million in other compensation expense related to this program. These awards are expected to have an approximate fair value of $8.0 million on the grant date in 2017.
The following table shows the amounts attributable to each category (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Amortization of restricted stock unit awards
|
|
$
|
11,876
|
|
|
$
|
9,379
|
|
|
$
|
8,283
|
|
Amortization of stock option awards
|
|
|
864
|
|
|
|
672
|
|
|
|
758
|
|
Discount given on employee stock purchase transactions through our Employee Stock Purchase Plan
|
|
|
331
|
|
|
|
277
|
|
|
|
275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation expense
|
|
$
|
13,071
|
|
|
$
|
10,328
|
|
|
$
|
9,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation expense consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year
ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Cost of services before reimbursable expenses
|
|
$
|
7,794
|
|
|
$
|
6,407
|
|
|
$
|
4,965
|
|
General and administrative expenses
|
|
|
5,277
|
|
|
|
3,921
|
|
|
|
4,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total share-based compensation expense
|
|
$
|
13,071
|
|
|
$
|
10,328
|
|
|
$
|
9,316
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share-based compensation expense attributable to client-service employees was included in cost of services
before reimbursable expenses. Share-based compensation expense attributable to corporate management and support personnel was included in general and administrative expenses.
Income tax benefit recorded in the accompanying consolidated statements of comprehensive income (loss) related to share-based compensation expense for the years ended December 31, 2016 and 2015 was
$4.9 million and $3.3 million, respectively.
F-24
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
At December 31, 2016, we had $12.3 million of total compensation costs related
to unvested share-based awards that have not been recognized as share-based compensation expense. The compensation costs will be recognized as an expense over the remaining vesting periods. The weighted average remaining vesting period is
approximately two years. During the year ended December 31, 2016, we granted an aggregate of 1,079,501 share-based awards, consisting of restricted stock units and stock options with an aggregate fair value of $14.9 million at the time of
grant. These grants include certain awards that vest based on relative achievement of
pre-established
performance criteria.
Restricted Stock Units Outstanding
The measurement price of our restricted
stock units is the market price of our common stock at the date of grant of the awards.
At December 31, 2016, we had
$11.5 million of total compensation costs related to unvested restricted stock units that have not been recognized as share-based compensation expense. Those compensation costs will be recognized as an expense over the remaining vesting periods
of the awards. The weighted average remaining vesting period of these awards is approximately two years.
The following table
summarizes information regarding restricted stock units outstanding as of December 31, 2016:
|
|
|
|
|
|
|
|
|
Range of Measurement Date Prices
|
|
Outstanding
Shares
(000s)
|
|
|
Weighted
Average
Measurement
Date Price
|
|
$10.00 $14.99
|
|
|
758
|
|
|
$
|
14.00
|
|
$15.00 $19.99
|
|
|
1,525
|
|
|
|
16.53
|
|
$20.00 and above
|
|
|
16
|
|
|
|
23.75
|
|
|
|
|
|
|
|
|
|
|
Total restricted stock units outstanding
|
|
|
2,299
|
|
|
$
|
15.74
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes restricted stock unit activity for the year ended December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
(000s)
|
|
|
Weighted Average
Measurement
Date Price
|
|
Restricted stock units outstanding at beginning of the period
|
|
|
2,330
|
|
|
$
|
14.67
|
|
Granted
|
|
|
887
|
|
|
|
15.75
|
|
Vested
|
|
|
(824
|
)
|
|
|
12.72
|
|
Forfeited
|
|
|
(94
|
)
|
|
|
15.64
|
|
|
|
|
|
|
|
|
|
|
Restricted stock units outstanding at end of period
|
|
|
2,299
|
|
|
$
|
15.74
|
|
|
|
|
|
|
|
|
|
|
During the year ended December 31, 2016, we granted 886,992 restricted stock units. At the time of
grant, the awards had a fair value of $14.0 million. Of the restricted stock units granted, 123,325 restricted stock units vest based upon the achievement of certain performance criteria or market conditions. Of the restricted stock units
vested, 108,506 were performance-based or based on market conditions.
Stock Options Outstanding
At December 31, 2016, the intrinsic value of the stock options outstanding and stock options exercisable was $8.5 million and
$4.9 million, respectively, based on a market price of $26.18 per share for our common stock at December 31, 2016.
F-25
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes stock option activity for the year ended
December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
(000s)
|
|
|
Weighted Average
Exercise Price
|
|
Options outstanding beginning of the period
|
|
|
640
|
|
|
$
|
13.42
|
|
Granted
|
|
|
193
|
|
|
|
15.20
|
|
Exercised
|
|
|
(127
|
)
|
|
|
12.20
|
|
Forfeited
|
|
|
(5
|
)
|
|
|
18.45
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at end of the period
|
|
|
701
|
|
|
$
|
14.09
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at end of the period
|
|
|
388
|
|
|
$
|
13.43
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information regarding stock options outstanding at December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of Measurement Date Prices
|
|
Outstanding
Shares
(000s)
|
|
|
Average
Measurement
Date Price
|
|
|
Remaining
Exercise
Period
(years)
|
|
$0.00 $9.99
|
|
|
58
|
|
|
$
|
9.58
|
|
|
|
0.3
|
|
$10.00 $14.99
|
|
|
372
|
|
|
|
13.31
|
|
|
|
2.7
|
|
$15.00 $19.99
|
|
|
271
|
|
|
|
16.14
|
|
|
|
4.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
701
|
|
|
$
|
14.09
|
|
|
|
3.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information regarding stock options exercisable at December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of Exercise Prices
|
|
Outstanding
Shares
(000s)
|
|
|
Weighted Average
Exercise Price
|
|
|
Remaining
Exercise
Period
(years)
|
|
$0.00 $9.99
|
|
|
58
|
|
|
$
|
9.58
|
|
|
|
0.3
|
|
$10.00 $14.99
|
|
|
278
|
|
|
|
13.29
|
|
|
|
2.2
|
|
$15.00 $19.99
|
|
|
52
|
|
|
|
18.45
|
|
|
|
3.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
388
|
|
|
$
|
13.43
|
|
|
|
2.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the information regarding stock options outstanding under each plan at
December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan Category
|
|
Outstanding
Shares
(000s)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Shares
Remaining
Available
for Future
Issuances
(000s)
|
|
Long-Term Incentive Plan (2012 Plan)
|
|
|
642
|
|
|
$
|
14.50
|
|
|
|
2,492
|
|
Long-Term Incentive Plan (2005 Plan)
|
|
|
58
|
|
|
|
9.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
701
|
|
|
$
|
14.09
|
|
|
|
2,492
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-26
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Stock Option Grants
The fair value of each option grant is estimated at the grant date using the Black-Scholes-Merton option-pricing model. The weighted
average fair value of options granted and the assumptions used in the Black-Scholes-Merton option-pricing model were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Fair value of options granted
|
|
$
|
4.85
|
|
|
$
|
4.59
|
|
|
$
|
7.53
|
|
Expected volatility
|
|
|
33
|
%
|
|
|
36
|
%
|
|
|
45
|
%
|
Risk free interest rate
|
|
|
1.6
|
%
|
|
|
1.8
|
%
|
|
|
1.7
|
%
|
Forfeiture rate
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Dividend yield
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
Contractual or expected lives (years)
|
|
|
5.0
|
|
|
|
5.0
|
|
|
|
5.0
|
|
We estimated a zero forfeiture rate for these stock option grants as the awards have short vesting terms
and have a low probability of forfeiture based on the recipients of the stock options.
During the years ended
December 31, 2016, 2015, and 2014, we received $3.0 million, $3.5 million, and $0.4 million, respectively, of cash from employee stock option exercises. Additionally, during the years ended December 31, 2016, 2015, and 2014,
we generated tax benefits of $0.2 million, $0.2 million, and $0.1 million, respectively, related to employee stock option exercises.
Employee Stock Purchase Plan
On May 3, 2006, our shareholders
approved an employee stock purchase plan that became effective on January 1, 2007. The employee stock purchase plan permits employees to purchase shares of our common stock each quarter at 90 percent of the market value. The market value
of shares purchased for this purpose is determined to be the closing market price on the last day of each calendar quarter. The plan is considered compensatory and, as such, the purchase discount from market price purchased by employees is recorded
as compensation expense. During each of the years ended December 31, 2016, 2015 and 2014, we recorded $0.3 million of compensation expense related to the discount given on employee stock purchases through our employee stock purchase plan.
During the years ended December 31, 2016, 2015 and 2014, we issued 178,857, 191,377, and 166,425 shares, respectively, of our common stock pursuant to this plan.
The maximum number of shares of our common stock remaining at December 31, 2016 that can be issued under the employee stock purchase plan was 289,012 shares, subject to certain adjustments. The
employee stock purchase plan will expire on the date that all of the shares available under it are purchased by or issued to employees.
During the years ended December 31, 2016, 2015, and 2014, we received $1.3 million, $2.5 million, and $2.5 million, respectively, of cash from employee stock purchases.
F-27
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9.
|
SUPPLEMENTAL CONSOLIDATED BALANCE SHEET INFORMATION
|
Accounts Receivable, net
The components of accounts receivable are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Billed amounts
|
|
$
|
183,656
|
|
|
$
|
153,837
|
|
Engagements in process
|
|
|
100,779
|
|
|
|
80,102
|
|
Allowance for uncollectible billed amounts
|
|
|
(14,967
|
)
|
|
|
(9,797
|
)
|
Allowance for uncollectible engagements in process
|
|
|
(7,713
|
)
|
|
|
(7,482
|
)
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
$
|
261,755
|
|
|
$
|
216,660
|
|
|
|
|
|
|
|
|
|
|
Receivables attributable to engagements in process represent balances for services that have been
performed and earned but have not been billed to the client. Services are generally billed on a monthly basis for the prior months services. Our allowance for uncollectible accounts is based on historical experience and management judgment and
may change based on market conditions or specific client circumstances. During the year ended December 31, 2016, we acquired $7.0 million in accounts receivable as part of our business acquisitions.
Prepaid Expenses and Other Current Assets
The components of prepaid expenses and other current assets are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Notes receivable current
|
|
$
|
2,636
|
|
|
$
|
3,342
|
|
Prepaid recruiting and retention incentives current
|
|
|
9,173
|
|
|
|
9,688
|
|
Other prepaid expenses and other current assets
|
|
|
17,953
|
|
|
|
16,699
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
$
|
29,762
|
|
|
$
|
29,729
|
|
|
|
|
|
|
|
|
|
|
Other Assets
The components of other assets are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Notes
receivable non-current
|
|
$
|
2,943
|
|
|
$
|
4,420
|
|
Capitalized client-facing software
|
|
|
1,733
|
|
|
|
1,567
|
|
Prepaid recruiting and retention
incentives non-current
|
|
|
11,116
|
|
|
|
14,009
|
|
Prepaid expenses and other
non-current
assets
|
|
|
2,490
|
|
|
|
2,535
|
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
$
|
18,282
|
|
|
$
|
22,531
|
|
|
|
|
|
|
|
|
|
|
Notes receivable, current and
non-current,
represent unsecured
employee loans. These loans were issued to recruit or retain certain senior-level client-service employees. During the years ended December 31, 2016 and 2015, we issued unsecured employee loans aggregating to $1.3 million and
$4.9 million, respectively. The principal amount and accrued interest on these loans is either paid by the employee or forgiven by us over the term of the loans so long as the employee remains continuously employed by us and complies with
certain contractual requirements. The expense associated with the forgiveness of the principal amount of the loans is amortized as compensation expense over the service period, which is consistent with the term of the loans.
F-28
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Capitalized client-facing software is used by our clients as part of client engagements.
These amounts are amortized into cost of services before reimbursable expenses over their estimated remaining useful life.
Prepaid recruiting and retention incentives, current and
non-current,
include
sign-on
and retention bonuses that are generally recoverable from an employee if the employee voluntarily terminates employment or if the employees employment is terminated for cause prior to
fulfilling his or her obligations to us. These amounts are amortized as compensation expense over the period in which they are recoverable from the employee, generally in periods up to six years. During the years ended December 31, 2016 and
2015, we granted $12.4 million and $21.5 million, respectively, in
sign-on
and retention bonuses.
Property and Equipment, net
The components of property and
equipment, net are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Furniture, fixtures and equipment
|
|
$
|
69,210
|
|
|
$
|
63,995
|
|
Software
|
|
|
83,766
|
|
|
|
77,910
|
|
Leasehold improvements
|
|
|
57,128
|
|
|
|
40,560
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, at cost
|
|
|
210,104
|
|
|
|
182,465
|
|
Less: accumulated depreciation and amortization
|
|
|
(127,151
|
)
|
|
|
(105,748
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
82,953
|
|
|
$
|
76,717
|
|
|
|
|
|
|
|
|
|
|
During the year ended December 31, 2016, we invested $33.3 million in property and equipment
which included $12.4 million in our technology infrastructure and software, $17.5 million in leasehold improvements, $3.1 million in furniture, and $0.3 million in other equipment. As of December 31, 2016, $4.6 million
of property and equipment included above was accrued. In addition, we acquired $0.9 million in property and equipment as part of our business acquisitions. During the year ended December 31, 2016, we retired $6.0 million in fully
depreciated assets.
Other Current Liabilities
The components of other current liabilities are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Deferred acquisition liabilities current
|
|
$
|
10,780
|
|
|
$
|
1,665
|
|
Deferred revenue
|
|
|
21,258
|
|
|
|
19,317
|
|
Deferred rent current
|
|
|
2,894
|
|
|
|
2,909
|
|
Other current liabilities
|
|
|
3,684
|
|
|
|
8,256
|
|
|
|
|
|
|
|
|
|
|
Total other current liabilities
|
|
$
|
38,616
|
|
|
$
|
32,147
|
|
|
|
|
|
|
|
|
|
|
F-29
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other
Non-Current
Liabilities
The components of other
non-current
liabilities are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Deferred acquisition
liabilities non-current
|
|
$
|
943
|
|
|
$
|
8,300
|
|
Deferred
rent non-current
|
|
|
19,776
|
|
|
|
14,358
|
|
Other
non-current
liabilities
|
|
|
11,860
|
|
|
|
6,298
|
|
|
|
|
|
|
|
|
|
|
Total other
non-current
liabilities
|
|
$
|
32,579
|
|
|
$
|
28,956
|
|
|
|
|
|
|
|
|
|
|
Deferred acquisition liabilities, current and
non-current,
at
December 31, 2016 consisted of cash obligations related to contingent and definitive purchase price considerations recorded at fair value and net present value and fair value, respectively. See Note 16 Fair Value for additional
information regarding deferred contingent consideration fair value adjustments.
During the year ended December 31, 2016,
we made a working capital payment of $5.5 million to the selling members of McKinnis for cash held in the business at closing, which reduced other current liabilities.
The current and
non-current
portions of deferred rent relate to tenant allowances and incentives on lease arrangements for our office facilities that expire at
various dates through 2028. During the year ended December 31, 2016, we recorded $5.7 million in deferred rent related to tenant allowances granted under the lease for our new Chicago office space.
At December 31, 2016, other
non-current
liabilities included $2.0 million of
performance-based long-term incentive compensation liabilities. As part of our long-term incentive program for select senior level client service employees and leaders, we grant restricted stock units which vest three years from the grant date. The
value of equity granted is based on the achievement of certain performance targets during the year prior to the grant.
At
December 31, 2016, other
non-current
liabilities also included $6.5 million for uncertain tax positions (see Note 15 Income Taxes).
Deferred revenue represents advance billings to our clients for services that have not yet been performed and earned.
F-30
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
10.
|
ACCUMULATED OTHER COMPREHENSIVE LOSS
|
The activity in accumulated other comprehensive loss is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year
ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Unrealized loss on foreign exchange:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
(16,446
|
)
|
|
$
|
(11,973
|
)
|
|
$
|
(9,129
|
)
|
Unrealized loss on foreign exchange
|
|
|
(8,720
|
)
|
|
|
(4,473
|
)
|
|
|
(2,844
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
(25,166
|
)
|
|
$
|
(16,446
|
)
|
|
$
|
(11,973
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on derivatives:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at beginning of period
|
|
$
|
(114
|
)
|
|
$
|
(111
|
)
|
|
$
|
(212
|
)
|
Unrealized loss on derivatives in period, net of reclassification
|
|
|
(72
|
)
|
|
|
(317
|
)
|
|
|
(127
|
)
|
Reclassified to interest expense
|
|
|
244
|
|
|
|
523
|
|
|
|
380
|
|
Income tax expense
|
|
|
(98
|
)
|
|
|
(209
|
)
|
|
|
(152
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of period
|
|
$
|
(40
|
)
|
|
$
|
(114
|
)
|
|
$
|
(111
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Accumulated other comprehensive loss at December 31,
|
|
$
|
(25,206
|
)
|
|
$
|
(16,560
|
)
|
|
$
|
(12,084
|
)
|
11.
|
DERIVATIVES AND HEDGING ACTIVITY
|
During the year ended December 31, 2016, the interest rate derivatives outstanding are as follows (summarized based on month of execution):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Month executed
|
|
Number of
Contracts
|
|
|
Beginning Date
|
|
|
Maturity Date
|
|
|
Rate
|
|
|
Total Notional Amount
(millions)
|
|
July 2014
|
|
|
5
|
|
|
|
July 11, 2014
|
|
|
|
July 11, 2017
|
|
|
|
1.10
|
%
|
|
$
|
30.0
|
|
March 2015
|
|
|
1
|
|
|
|
May 29, 2015
|
|
|
|
May 31, 2018
|
|
|
|
1.47
|
%
|
|
$
|
10.0
|
|
June 2015
|
|
|
1
|
|
|
|
June 30, 2015
|
|
|
|
June 30, 2018
|
|
|
|
1.40
|
%
|
|
$
|
5.0
|
|
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 derivatives as a cash flow hedge. As a result, gains or losses related to fluctuations in the fair value of the interest rate derivatives are recorded as a component of accumulated other comprehensive
loss and reclassified into interest expense as the variable interest expense on our bank debt is recorded. There was no ineffectiveness related to the interest rate derivatives during the year ended December 31, 2016. For the years ended
December 31, 2016, 2015 and 2014, we recorded $0.2 million, $0.5 million, and $0.4 million, respectively, in interest expense associated with differentials received or paid under the interest rate derivatives.
At December 31, 2016, we had $0.1 million of net liability related to the interest rate derivatives.
Our credit agreement provides a $400.0 million revolving credit facility. At our option, subject to the terms and conditions specified in the credit agreement, we may elect to increase commitments
under the credit facility up to an aggregate amount of $500.0 million. The credit facility becomes due and payable in full upon maturity
F-31
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
in September 2018. Borrowings and repayments under the credit facility may be made in multiple currencies including U.S. Dollars, Canadian Dollars, U.K. Pound Sterling and Euro.
At December 31, 2016, we had aggregate borrowings outstanding of $135.0 million, compared to $173.7 million at
December 31, 2015. Based on our financial covenants at December 31, 2016, approximately $260.4 million in additional borrowings were available to us under the credit facility. At December 31, 2016, we had $4.1 million of
unused letters of credit under our credit facility, which have been included as a reduction in the available borrowings above. The letters of credit are primarily related to the requirements of certain lease agreements for office space.
At our option, borrowings under the credit facility bear interest at a variable rate equal to an applicable base rate or LIBOR, in each
case plus an applicable margin. For LIBOR loans, the applicable margin varies depending upon our consolidated leverage ratio (the ratio of total funded debt to adjusted EBITDA, as defined in the credit agreement). At December 31, 2016, the
applicable margins on LIBOR and base rate loans were 1.00% and 0.00%, respectively. Depending upon our performance and financial condition, our LIBOR loans will have applicable margins varying between 1.00% and 2.00%, and our base rate loans have
applicable margins varying between zero and 1.00%. Our average borrowing rate (including the impact of our interest rate derivatives; see Note 11 Derivatives and Hedging Activity) was 2.3% and 2.2% for the years ended
December 31, 2016 and 2015, respectively.
Our credit agreement contains certain financial covenants, including covenants
that require that we maintain a consolidated leverage ratio of not greater than 3.25:1 (except for the first quarter of each calendar year when the covenant requires us to maintain a consolidated leverage ratio of not greater than 3.5:1) and a
consolidated interest coverage ratio (the ratio of the sum of adjusted EBITDA (as defined in the credit agreement) and rental expense to the sum of cash interest expense and rental expense) of not less than 2.0:1. At December 31, 2016, under
the definitions in the credit agreement, our consolidated leverage ratio was 0.9 and our consolidated interest coverage ratio was 5.2. In addition, the credit agreement contains customary affirmative and negative covenants (subject to customary
exceptions), including covenants that limit our ability to incur liens or other encumbrances, make investments, incur indebtedness, enter into mergers, consolidations and asset sales, change the nature of our business and engage in transactions with
affiliates, as well as customary provisions with respect to events of default. We were in compliance with the covenants contained in our credit agreement at December 31, 2016; however, there can be no assurances that we will remain in
compliance in the future.
13.
|
OTHER OPERATING COSTS (BENEFIT)
|
Other operating costs (benefit) for the years ended December 31, 2016, 2015, and 2014 consisted of the following (shown in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Office consolidation, net:
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjustments to office closure obligations, discounted and net of expected sublease income
|
|
$
|
509
|
|
|
$
|
1,354
|
|
|
$
|
|
|
Rent expense during office consolidation
|
|
|
|
|
|
|
1,247
|
|
|
|
725
|
|
Accelerated depreciation
|
|
|
33
|
|
|
|
165
|
|
|
|
|
|
Contingent acquisition liability adjustments, net
|
|
|
1,330
|
|
|
|
(13,047
|
)
|
|
|
(4,992
|
)
|
Loss (gain) on disposition of assets
|
|
|
|
|
|
|
283
|
|
|
|
(541
|
)
|
Goodwill impairment
|
|
|
|
|
|
|
|
|
|
|
122,045
|
|
Other impairment
|
|
|
|
|
|
|
98
|
|
|
|
1,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating costs (benefits)
|
|
$
|
1,872
|
|
|
$
|
(9,900
|
)
|
|
$
|
118,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-32
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Office Consolidation, Net
During the year ended December 31, 2015, we recorded a cost of $2.6 million related to our new consolidated office space in New
York City which we took possession of on October 22, 2014. The cost includes future rent expense, net of expected sublease income, accelerated depreciation and deferred rent relating to the old office space and rent expense for duplicate rent
as we occupied our old New York City offices until completion of the
build-out
of the new space.
As of December 31, 2016, we have recorded $3.1 million in current and
non-current
liabilities for office consolidation expenses. The activity for the
years ended December 31, 2016 and 2015 is as follows (shown in thousands):
|
|
|
|
|
|
|
Office Space
Reductions
|
|
Balance at December 31, 2014
|
|
$
|
242
|
|
Cost to operations during the year ended December 31, 2015
|
|
|
1,354
|
|
Deferred rent liability
|
|
|
2,624
|
|
Utilized during the year ended December 31, 2015
|
|
|
(1,137
|
)
|
|
|
|
|
|
Balance at December 31, 2015
|
|
$
|
3,083
|
|
Cost to operations during the year ended December 31, 2016
|
|
|
509
|
|
Utilized during the year ended December 31, 2016
|
|
|
(532
|
)
|
|
|
|
|
|
Balance at December 31, 2016
|
|
$
|
3,060
|
|
|
|
|
|
|
We monitor our estimates for office closure obligations and related expected sublease income, if any, on a
periodic basis. Additionally, we continue to consider all options with respect to the abandoned offices, including settlements with the property owners and the timing of termination clauses under the respective lease. Such estimates are subject to
market conditions and may be adjusted in future periods as necessary. Of the $3.1 million liability recorded at December 31, 2016, we expect to pay $1.1 million in cash relating to these obligations during the next twelve months. The
office closure obligations have been discounted to net present value.
Contingent Acquisition Liability Adjustment, Net
Contingent acquisition liabilities are initially estimated based on expected performance at the acquisition date and
subsequently reviewed each quarter (see Note 16 Fair Value).
Goodwill Impairment
During the year ended December 31, 2014, we recorded a
pre-tax
goodwill impairment of
$122.0 million relating to our Disputes, Forensics & Legal Technology segment.
We lease office facilities under operating lease arrangements that expire at various dates through 2028. We lease office facilities under operating leases that include fixed or minimum payments plus, in
some cases, scheduled base rent increases over the terms of the leases and additional rents based on the Consumer Price Index. Certain leases provide for monthly payments of real estate taxes, insurance and other operating expenses applicable to the
property.
F-33
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Future minimum annual lease payments for the years subsequent to December 31, 2016
and in the aggregate are as follows (shown in thousands):
|
|
|
|
|
Year ending December 31,
|
|
Amount
|
|
2017
|
|
$
|
26,158
|
|
2018
|
|
|
24,222
|
|
2019
|
|
|
21,509
|
|
2020
|
|
|
19,332
|
|
2021
|
|
|
15,235
|
|
Thereafter
|
|
|
43,424
|
|
|
|
|
|
|
|
|
$
|
149,880
|
|
|
|
|
|
|
Rent expense for operating leases was $29.8 million, $28.6 million and $26.3 million for
the years ended December 31, 2016, 2015 and 2014, respectively.
The sources of income (loss) from continuing operations before income taxes are as follows (shown in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
United States
|
|
$
|
81,226
|
|
|
$
|
81,049
|
|
|
$
|
(2,747
|
)
|
Foreign
|
|
|
12,185
|
|
|
|
7,104
|
|
|
|
(35,511
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income tax expense (benefit)
|
|
$
|
93,411
|
|
|
$
|
88,153
|
|
|
$
|
(38,258
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) consists of the following (shown in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year
ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Federal:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
28,359
|
|
|
$
|
10,357
|
|
|
$
|
13,590
|
|
Deferred
|
|
|
(1,102
|
)
|
|
|
11,163
|
|
|
|
(13,401
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
27,257
|
|
|
|
21,520
|
|
|
|
189
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
State:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
6,649
|
|
|
|
1,915
|
|
|
|
2,949
|
|
Deferred
|
|
|
(310
|
)
|
|
|
2,900
|
|
|
|
(3,419
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
6,339
|
|
|
|
4,815
|
|
|
|
(470
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
2,459
|
|
|
|
1,729
|
|
|
|
162
|
|
Deferred
|
|
|
(742
|
)
|
|
|
(256
|
)
|
|
|
(1,232
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,717
|
|
|
|
1,473
|
|
|
|
(1,070
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total federal, state and foreign income tax expense (benefit)
|
|
$
|
35,313
|
|
|
$
|
27,808
|
|
|
$
|
(1,351
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-34
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Income tax expense (benefit) differs from the amounts estimated by applying the
statutory income tax rates to income before income taxes as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Federal tax expense (benefit) at the statutory rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
(35.0
|
)%
|
State tax expense at the statutory rate, net of federal tax benefits
|
|
|
4.5
|
|
|
|
4.8
|
|
|
|
|
|
Foreign taxes
|
|
|
(1.9
|
)
|
|
|
(0.9
|
)
|
|
|
0.1
|
|
Effect of goodwill impairment
|
|
|
|
|
|
|
|
|
|
|
30.7
|
|
Effect of enacted tax rate changes
|
|
|
|
|
|
|
(0.6
|
)
|
|
|
0.5
|
|
Effect of contingent
earn-out
adjustment
|
|
|
|
|
|
|
(6.9
|
)
|
|
|
|
|
Effect of valuation allowances
|
|
|
(0.7
|
)
|
|
|
0.8
|
|
|
|
(1.6
|
)
|
Effect of
non-deductible
meals and entertainment expense
|
|
|
0.6
|
|
|
|
0.6
|
|
|
|
1.6
|
|
Effect of other transactions, net
|
|
|
0.3
|
|
|
|
(1.3
|
)
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37.8
|
%
|
|
|
31.5
|
%
|
|
|
(3.5
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes result from temporary differences between years in the recognition of certain
expense items for income tax and financial reporting purposes. The source and income tax effects of these differences (shown in thousands) are as follows:
|
|
|
|
|
|
|
|
|
|
|
For the year ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Deferred tax assets (liabilities) attributable to:
|
|
|
|
|
|
|
|
|
Allowance for uncollectible receivables
|
|
$
|
5,231
|
|
|
$
|
3,550
|
|
Deferred revenue
|
|
|
3,427
|
|
|
|
5,187
|
|
Accrued compensation
|
|
|
1,601
|
|
|
|
2,049
|
|
Accrued office consolidation costs
|
|
|
644
|
|
|
|
404
|
|
Interest rate derivatives
|
|
|
26
|
|
|
|
76
|
|
Share-based compensation
|
|
|
10,403
|
|
|
|
9,670
|
|
Unsecured employee loans
|
|
|
785
|
|
|
|
1,010
|
|
Deferred rent
|
|
|
8,683
|
|
|
|
|
|
Foreign net operating losses
|
|
|
1,417
|
|
|
|
2,022
|
|
Other
|
|
|
2,171
|
|
|
|
1,275
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets before foreign valuation allowance
|
|
|
34,388
|
|
|
|
25,243
|
|
Foreign valuation allowance
|
|
|
(1,410
|
)
|
|
|
(2,758
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax assets
|
|
|
32,978
|
|
|
|
22,485
|
|
Goodwill and intangible assets acquisition cost
|
|
|
(96,328
|
)
|
|
|
(84,168
|
)
|
Depreciation and amortization
|
|
|
(10,965
|
)
|
|
|
(11,920
|
)
|
Prepaid expenses
|
|
|
(3,422
|
)
|
|
|
(2,116
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
(110,715
|
)
|
|
|
(98,204
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$
|
(77,737
|
)
|
|
$
|
(75,719
|
)
|
|
|
|
|
|
|
|
|
|
F-35
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
When appropriate, we evaluate the need for a valuation allowance to reduce deferred tax
assets. The evaluation of the need for a valuation allowance requires management judgment and could impact our financial results and effective tax rate. Management has determined that it is more likely than not, due to the uncertainty surrounding
our international business operations, that sufficient future taxable income will not be available to realize certain deferred tax assets, therefore management recognized a full valuation allowance for those deferred tax assets in the financial
statements.
On October 1, 2015, we adopted FASB ASU
No. 2015-17,
Balance
Sheet Classification of Deferred Taxes (Topic 740) on a prospective basis. This update requires that deferred tax assets and liabilities be classified as
non-current
in a statement of financial position. The
adoption of this standard resulted in a reclassification of our deferred tax assets and liabilities to the
non-current
deferred tax liability, net in our consolidated balance sheet as of December 31,
2015. No prior periods were retrospectively adjusted.
We do not provide for U.S. federal income and foreign withholding
taxes on the portion of undistributed earnings of foreign subsidiaries that are intended to be permanently reinvested. The cumulative amount of such undistributed earnings totaled approximately $9.0 million at December 31, 2016. These
earnings would become taxable in the U.S. upon the sale or liquidation of these foreign subsidiaries or upon the remittance of dividends. Dividends or proceeds received from our foreign subsidiaries could result in additional foreign tax credits,
which could reduce the U.S. federal income tax cost of the earnings. Significant judgment would be needed to estimate the amount of any withholding tax or other indirect taxes to be applied by any of the several foreign jurisdictions involved, which
could increase the U.S. federal income tax cost of the earnings. As a result of these uncertainties, we believe it is not practicable to estimate the amount of the deferred tax liabilities on such earnings.
Unrecognized Tax Benefits
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
|
|
|
|
|
|
|
Amount
(in thousands)
|
|
Balance at January 1, 2016
|
|
$
|
1,724
|
|
Additions based on tax positions related to the current year
|
|
|
2,432
|
|
Additions based on tax positions of prior years
|
|
|
6,386
|
|
Reductions based on tax positions of prior years
|
|
|
(128
|
)
|
Settlements
|
|
|
(54
|
)
|
|
|
|
|
|
Balance at December 31, 2016
|
|
$
|
10,360
|
|
|
|
|
|
|
Of the $10.4 million of our accrual for uncertain tax positions at December 31, 2016,
$0.4 million would impact our effective income tax rate if recognized. We believe that only a specific resolution of the matters with the taxing authorities or the expiration of the applicable statute of limitations would provide sufficient
evidence for management to conclude that the deductibility is more likely than not sustainable.
We recognize interest and
penalties accrued related to uncertain tax positions as income tax expense. The total amount of interest and penalties accrued as of December 31, 2016 and December 31, 2015 was $0.6 million and $0.1 million, respectively.
During the year ended December 31, 2016, we increased our accrual for uncertain tax positions by $8.7 million due to
a tax accounting method change that we expect to be resolved within the next twelve months.
During the year ended
December 31, 2015, we acquired a liability for uncertain tax positions of $1.3 million in connection with our acquisition of the Indian subsidiary of RevenueMed. Based on the indemnification terms of the purchase agreement, which entitle
us to indemnification if tax is due, an offsetting receivable from
F-36
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
RevenueMed was recorded. As a result, we estimate that the settlement or other disposition of this matter will not have an impact on our effective income tax rate.
We expect that our uncertain tax positions will decrease substantially during the next twelve months due to the resolution of audits, tax
agreements and/or tax accounting method changes. We estimate this decrease to be between $8.7 million and $10.2 million.
We are subject to U.S. federal income tax as well as income tax in multiple state and foreign jurisdictions. We have substantially concluded all U.S. federal and material state income tax
matters for years through 2012. We are currently under audit with the Internal Revenue Service for the year 2014. Our Indian subsidiary which we acquired from RevenueMed is currently under either audit or tax appeals with its local taxing
authority for all statutory tax years 2009 through 2014.
Fair value is defined as the price that would be received on the sale of 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. As circumstances change, we will reassess the level in which the inputs are included in the fair value hierarchy.
We utilize a third-party to value our interest rate derivatives. The interest rate derivatives are used to hedge the risk of variability
from interest payments on our borrowings (see Note 11 Derivatives and Hedging Activity). A majority of the inputs used in determining the fair value of the derivatives is derived mainly from Level 2 observations which include
counterparty quotations in over the counter markets. However, the credit valuation adjustments associated with the derivatives utilize Level 3 inputs, such as estimates of current credit spreads, to evaluate the likelihood of default by
ourselves and our counterparties. We determined that these adjustments are not significant to the overall valuation of our derivatives. As a result, our interest rate derivatives are classified in Level 2 in the fair value hierarchy.
In certain instances our acquisitions provide for deferred contingent acquisition payments. These deferred payments are
recorded at fair value at the time of acquisition and are included in other current and/or
non-current
liabilities on our consolidated balance sheets. We estimate the fair value of our deferred contingent
acquisition liabilities using a probability-weighted discounted cash flow model. This fair value measure is based on significant inputs not observed in the market and thus represents a Level 3 measurement. Fair value measurements characterized
within Level 3 of the fair value hierarchy are measured based on unobservable inputs that are supported by little or no market activity and reflect our own assumptions in measuring fair value.
The significant unobservable inputs used in the fair value measurements of our deferred contingent acquisition liabilities are our
measures of the future profitability and related cash flows and discount rates. The fair value of the deferred contingent acquisition liabilities is reassessed on a quarterly basis based on assumptions provided to us by segment and business area
leaders together with our corporate development and finance departments. Any change in the fair value estimate is recorded in the earnings of that period. During the year
F-37
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
ended December 31, 2016, we recorded a cost of $1.3 million, compared to a benefit of $13.0 million during the year ended December 31, 2015, in other operating costs (benefit)
reflecting changes in the fair value estimate of the deferred contingent acquisition liability (see Note 3 Acquisitions). Also during the year ended December 31, 2015, the contingent acquisition liability related to the
Cymetrix acquisition was reclassified as a definitive acquisition liability (see Note 3 Acquisitions). At December 31, 2016, the contingent acquisition liability fair value related to our McKinnis acquisition was reclassified
as a definitive acquisition liability as the performance period ended pursuant to the terms of the purchase agreement. The following table summarizes the changes in deferred contingent acquisition liabilities are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the year ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Beginning Balance
|
|
$
|
8,782
|
|
|
$
|
23,272
|
|
Acquisitions
|
|
|
1,668
|
|
|
|
12,065
|
|
Accretion of acquisition-related contingent consideration
|
|
|
771
|
|
|
|
1,084
|
|
Remeasurement of acquisition-related contingent consideration
|
|
|
1,330
|
|
|
|
(13,047
|
)
|
Payments
|
|
|
(828
|
)
|
|
|
(4,592
|
)
|
Reclassification to definitive consideration liability
|
|
|
(10,000
|
)
|
|
|
(10,000
|
)
|
|
|
|
|
|
|
|
|
|
Ending Balance
|
|
$
|
1,723
|
|
|
$
|
8,782
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2016, the carrying value of our bank debt approximated fair value as it bears
interest at variable rates, and we believe our credit risk is consistent with when the debt originated. 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 December 31, 2016 based upon the short-term nature of the assets and liabilities.
Our financial assets and liabilities measured at fair value on a recurring basis at December 31, 2016 and December 31, 2015 are
as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
|
Significant
Unobservable Inputs
(Level 3)
|
|
|
Total
|
|
At December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate derivatives, net
|
|
$
|
|
|
|
$
|
64
|
|
|
$
|
|
|
|
$
|
64
|
|
Deferred contingent acquisition liabilities
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,723
|
|
|
$
|
1,723
|
|
At December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate derivatives, net
|
|
$
|
|
|
|
$
|
189
|
|
|
$
|
|
|
|
$
|
189
|
|
Deferred contingent acquisition liabilities
|
|
$
|
|
|
|
$
|
|
|
|
$
|
8,782
|
|
|
$
|
8,782
|
|
17.
|
EMPLOYEE BENEFIT PLANS
|
We sponsor 401(k) savings plans for eligible U.S. employees and currently match a certain percentage of participant contributions pursuant to the terms of the plans, which contributions are limited to a
percent of the participants eligible compensation, up to the annual limit specified by the Internal Revenue Service. We, as sponsor of the plans, use independent third parties to provide administrative services to the plans. We have the right
to terminate the plans at any time. Our matching contributions were $9.0 million, $8.6 million, and $7.6 million for the years ended December 31, 2016, 2015 and 2014, respectively.
F-38
NAVIGANT CONSULTING, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We sponsor other retirement plans for certain of our foreign subsidiaries
employees. During the years ended December 31, 2016, 2015 and 2014, we recorded expense of $2.7 million, $2.2 million and $2.2 million, respectively, related to such plans.
18.
|
LITIGATION AND SETTLEMENTS
|
We are a party to a variety of legal proceedings that arise in the normal course of our business. While the results of these legal proceedings cannot be predicted with certainty, we believe that the final
outcome of these proceedings will not have a material adverse effect, individually or in the aggregate, on our results of operations or financial condition.
F-39