| NAVIGANT CONSULTING INC Item 1A Risk Factors In addition to other information contained in this Annual Report on Form 10-K and in the documents incorporated by reference herein, the following risk factors should be considered carefully in evaluating the Company and its business |
| Such factors could have a significant impact on the Company’s business, operating results and financial condition |
| The Company’s inability to retain and, as necessary, strengthen our executive management team would be detrimental to the success of our business |
| The Company relies heavily on a small group of senior executives and retaining their services is important to our future success |
| As the Company continues to expand, the executive management will face increasing 7 ______________________________________________________________________ [35]Table of Contents challenges and the possible need to supplement or expand the existing team, as well as a necessary succession plan |
| Any failures in this regard could impact, among other factors, the Company’s revenues, growth and profitability |
| The Company’s inability to retain highly skilled consulting professionals could have a material adverse effect on the Company |
| The Company relies heavily on its consulting staff and management team |
| The Company’s success depends, in large part, on its ability to hire, retain, develop and motivate highly skilled professionals |
| Competition for these skilled professionals is intense and the Company’s inability to attract and retain adequate numbers of consultants and managers could have a serious effect on its ability to meet client needs |
| A loss of a significant number of its employees could have a serious negative effect on the Company |
| The Company’s profitability will suffer if it is not able to maintain current pricing and utilization rates |
| The Company revenues, and thereby its profitability, is largely a function of the bill rates and the utilization rate of its professionals |
| Accordingly, if the Company is not able to maintain the pricing for its services or an appropriate utilization rate for its professionals, revenues, project profit margins and the Company’s profitability will suffer |
| Pricing pressures could result in permanent changes in pricing policies and project profit margins |
| Bill rates and utilization rates are affected by a number of factors, including: • Management’s ability to predict future demand for services and maintain the appropriate headcount without significant underutilized personnel; • Management’s ability to transition employees from completed projects to new engagements; • The Company’s clients’ perceptions of its ability to add value through its services; • The pricing of its competitor’s services; • The market demand for the services provided by the Company; • The Company’s ability to manage attrition rates; and • Management may not be able to manage significantly larger and more diverse workforces as the Company increases the number of its professionals and executes its growth strategies |
| The Company’s use of equity- based compensation could impact its ability to attract, retain and motivate key employees, if the Company’s stock price declines |
| Any excessive volatility or decline in the common stock could impair the Company’s ability to use equity-based compensation to attract, retain and motivate key employees |
| Compensation and retention related issues represent a continuing challenge for the Company |
| The Company faces significant challenges in achieving and managing growth |
| Failure to meet these management challenges could have a material adverse effect on the future profitability of the Company |
| The increased scale and complexity of the Company’s businesses may require additional management systems that the Company may not be able to implement in a timely manner |
| The challenges of achieving and managing sustained growth may cause strain on the Company’s management team and the Company’s systems |
| If the Company is unsuccessful in meeting these challenges, this may impair the Company’s financial results, competitive position and ability to retain its professionals |
| The Company may be exposed to potential risks if the Company is unable to maintain effective internal controls |
| If the Company fails to maintain adequate internal controls over financial reporting or fails to implement necessary new or improved controls that provide reasonable assurance of the reliability of the financial reporting 8 ______________________________________________________________________ [36]Table of Contents and preparation of our financial statements for external use, the Company may fail to meet its public reporting requirements on a timely basis, or be unable to adequately report on its business and the results of operations |
| This could have a material adverse effect on the market price of the Company’s stock |
| Finally, the inherent limitations of internal control over financial reporting may not prevent or detect all misstatements or fraud, regardless of the adequacy of those controls |
| Regulatory and legislative changes affecting the Company, its clients, competitors, or staff could have an impact on the Company’s business |
| Many of the Company’s clients are in highly regulated industries such as the healthcare, energy, financial institutions and insurance industries |
| Regulatory and legislative changes in these industries, including asbestos reform litigation, could impact the market for the Company’s service offerings and could render its current service offerings obsolete |
| In addition, regulatory and legislative changes could impact the competition for consulting services |
| This change could have either increase or decrease the Company’s competitive position compared with the Company’s competitors |
| The Company’s client engagements are generally short term in nature, less than one year, and may be terminated |
| The Company’s inability to attract business from new or existing clients could have a material adverse effect on the Company |
| The Company’s inability to continually replace a significant portion of current engagements with new engagements would have an adverse effect on the Company’s ability to meet its current and future commitments |
| Many of the client engagement agreements can be terminated by the Company’s clients with little or no notice and without penalty |
| For example, in engagements related to litigation, if the litigation is settled, our engagement for those services usually is no longer necessary and is promptly terminated |
| The Company also is retained by clients where the work involves multiple engagements or stages |
| In such engagements, there is a risk that a client may choose not to retain the Company for additional stages of an engagement or that a client will cancel or delay additional planned engagements |
| The Company’s engagements are usually relatively short-term in comparison to its office-related expenses and other infrastructure commitments |
| Additionally, the above mentioned factors limit the Company’s ability to predict future revenues and required professional staffing |
| If the Company inaccurately predicts its future revenues, this can impact its financial results |
| The Company’s client engagements and revenues are frequently event-driven and therefore difficult to forecast |
| The Company markets its services as assisting companies and their legal counsel in addressing the challenges of uncertainty and risk, and leveraging opportunities for overall business improvement |
| In the past, the Company has derived significant revenues from events as inherently unpredictable as the California energy crisis, the Sarbanes-Oxley Act of 2002, and Hurricane Katrina |
| Such events, in addition to being unpredictable, often have impacts that decline over time as clients adjust to and compensate for such challenges |
| These factors limit the Company’s ability to predict future revenues and required professional staffing |
| If the Company inaccurately predicts its future revenues, this can impact its financial results |
| The Company has invested in specialized systems, processes and intellectual capital for which the Company may fail to recover its investment or which may become obsolete |
| Specialized systems and processes have been developed by the Company and provide a competitive advantage in serving current clients and obtaining new clients |
| Additionally, many of the Company’s service offerings rely on technology that is subject to rapid change |
| The Company’s intellectual capital, in certain service offerings, may be rendered obsolete due to new governmental regulation |
| 9 ______________________________________________________________________ [37]Table of Contents The Company’s unsuccessful client engagements could result in damage to its professional reputation or legal liability which could have a material adverse effect on the Company |
| The professional reputation of the Company and its consultants is critical to the Company’s ability to successfully compete for new client engagements and attract or retain professionals |
| Any factors that damage the Company’s professional reputation could have a material adverse effect on the Company’s business |
| In addition, the Company’s engagements are subject to the risk of legal liability |
| Any public assertion or litigation alleging that the Company’s services were negligent or that the Company breached any of its obligations to a client could expose the Company to significant legal liabilities, could distract its management and could damage its reputation |
| The Company carries professional liability insurance, but such insurance may not cover every type of claim or liability that could potentially arise from the Company’s engagements |
| In addition, the limits of our insurance coverage may not be adequate to cover a particular claim, a group of claims, and the costs of defense |
| Some of the work that the Company does involves greater risk than ordinary consulting engagements |
| The Company does work for clients that for financial, legal or other reasons may present higher than normal risks |
| While the Company attempts to identify such higher risk engagements and higher risk clients in time to avoid unnecessary risks or to limit our potential exposure, these efforts may be ineffective and a professional error or omission in one or more of these higher-risk engagements could have a material adverse impact on our financial condition |
| Examples of such higher risk engagements include, but are not limited to: • interim management engagements, usually in hospitals and other healthcare providers; • expert witness engagements; • corporate restructuring engagements, both inside and outside bankruptcy proceedings; • fairness opinions; • compliance effectiveness opinions; • actuarial opinions with respect to insurance company loss reserves; • estimates of asbestos-related and other mass tort insurance recoveries for financial reporting purposes by public companies and other clients; and • Independent consultant’s reports in support of bond financings |
| As the Company becomes larger, the Company increasingly encounter professional conflicts of interest |
| As independent consultants, the Company generally does not have duties of undivided loyalty to specific clients |
| However, if the Company is unable to accept new engagements for any reason, our consultants may become underutilized or discontented, which may adversely affect our revenues and results of operations for future periods and may also create challenges for the Company in retaining such consultants |
| In addition, although the Company has systems and procedures to identify potential conflicts prior to accepting each new engagement, those systems are not fool-proof and undetected conflicts may result in damage to our reputation and professional liability |
| The Company cannot be certain that it will be able to raise capital or obtain debt financing to execute future acquisitions or to meet required working capital needs |
| The Company maintains a revolving line of credit agreement to assist in funding short-term and long-term cash requirements from normal operations |
| This agreement contains certain covenants requiring, among other things, a minimum level of earnings |
| In addition, the current agreement may not be sufficient to meet the future needs of the business if a decline in financial performance occurs |
| 10 ______________________________________________________________________ [38]Table of Contents If the financial condition of the Company’s clients were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances for uncollectability would likely be required |
| The Company may not be able to acquire businesses in the future and already acquired business may not achieve expected results |
| The Company may fail to achieve a return of its capital on certain business acquisitions |
| The financing of these acquisitions through cash, borrowings or common stock could impair liquidity or cause significant stock dilution |
| The substantial majority of the purchase price the Company pays for acquired businesses is related to intangible assets and the value of these assets may not be realized |
| The acquired business culture may not integrate into the Company’s culture |
| The Company may not achieve synergies sought in certain acquisitions |
| The acquired businesses clients and employees may not transfer to the Company |
| Any of these issues caoul have a material adverse effect on the Company |
| As the Company’s work with governmental clients increases, this increases the risks inherent in the governmental contracting process |
| The Company does work for various municipal, state and federal entities and agencies |
| These projects have risks that include, but are not limited to the following: • Government entities reserve the right to audit the Company’s contract costs, including allocated indirect costs, and conduct inquiries and investigations of the Company’s business practices with respect to government contracts |
| If the government finds that the costs are not reimbursable then the Company will not be allowed to bill for them, or the cost must be refunded to the government if it has already been paid to the Company |
| Findings from such an audit also may result in being required to prospectively adjust previously agreed rates for work and affect future margins |
| • If a government client discovers improper or illegal activities in the course of audits or investigations, the Company 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 |
| The inherent limitations of internal controls may not prevent or detect all improper or illegal activities, regardless of their adequacy |
| • Government contracts, and the proceedings surrounding them, are often subject to more extensive scrutiny and publicity than other commercial contracts |
| Negative publicity related to our government contracts, regardless of its accuracy, may further damage our business by affecting our ability to compete for new contracts |
| The impact of any of the occurrences or conditions described above could affect not only business with the particular government agency involved, but also other agencies of the same or other governmental entities |
| Depending on the size of the project 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 the Company’s business or results of operations |
| The Company is subject to unpredictable risks of litigation |
| Reference is made to the discussion of the City of Vernon arbitration in |