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Navigant Consulting (NYSE:NCI)

Q4 2013 Earnings Call

February 13, 2014 10:00 am ET

Executives

Paul Longhini

Julie M. Howard - Chief Executive Officer, Director and Member of Executive Committee

Lucinda M. Baier - Chief Financial Officer and Executive Vice President

Analysts

David Gold - Sidoti & Company, LLC

Randle G. Reece - Avondale Partners, LLC, Research Division

Jerry R. Herman - Stifel, Nicolaus & Co., Inc., Research Division

Tobey Sommer - SunTrust Robinson Humphrey, Inc., Research Division

Matthew Hill

Operator

Good morning, and welcome to Navigant's Fourth Quarter and Full Year 2013 Earnings Conference Call. [Operator Instructions] The call is being recorded. If you have any objections, please disconnect at this time. I'd now like to introduce Mr. Paul Longhini, Executive Director of Investor Relations for Navigant. Mr. Longhini, you may begin.

Paul Longhini

Good morning, and welcome to Navigant's Fourth Quarter and Full Year 2013 Earnings Conference Call. We have posted our earnings release, as well as supplemental information about the quarter and year results and an updated investor presentation on the Investor Relations section of our website.

Before I turn the call over to Julie Howard, Navigant's Chief Executive Officer, I would like to highlight the disclosure at the end of our earnings release for information about any forward-looking statements that may be made or discussed on this call. Please review this information, along with the company's SEC filings for disclosure of information that may impact subjects that we'd discuss this morning. We will be discussing one or more non-GAAP financial measures on today's call. Reconciliations to the most comparable GAAP financial measures are contained in the schedules to our earnings release.

I will now turn the call over to Julie Howard.

Julie M. Howard

Thank you, Paul. Good morning, everyone, and thank you for joining us. Cindy Baier, our Chief Financial Officer, is with me today to present Navigant's financial results and discuss the company's 2014 business outlook. In addition, Lee Spirer is here as well, our Global Business leader, and he'll be available to answer questions during Q&A.

We are coming off a year of very solid operating performance, highlighted by growth in revenue and profitability with significant margin expansion. At the same time, we further strengthened the company's financial position, derisked our balance sheet, returned capital to our shareholders and invested in Navigant's foundation as we ready the company for accelerated growth.

For the full year, RBR grew 2% to $734.4 million and adjusted EPS increased 14%. Adjusted EBITDA also rose 14% to $124.1 million for a full year margin of 17%. These gains were driven by double-digit RBR growth in our Healthcare and Financial Risk & Compliance segments, with mid-single-digit increases in our energy practice.

My focus for Navigant throughout 2013 was clear. We would operate the company at a higher level to drive immediate improvement in business performance, and we would put the building blocks in place for accelerated revenue and earnings growth going forward. I believe we made significant progress towards these objectives on several fronts during 2013. And I wanted to share some of those highlights with you today.

Building a world-class team was a top priority coming into 2013. Following the addition of our Global Business leader, Lee Spirer, in late 2012, we appointed Cindy as our CFO in March 2013. Since then, we have brought on new leaders in human capital, legal technology solutions, as well as our Energy business and the Chief Information Officer. We also created new positions and filled those roles for a Chief Strategy & Innovation Officer, as well as a Business Technology Strategy leader. And we can talk more about that during Q&A.

The momentum we've established in our business and the buzz around Navigant is also helping us to attract top-tier expertise and practitioner talent throughout our organization. We're very disciplined and strategic about finding new talent that meets our high-performance criteria. And in 2013, we successfully recruited and integrated 52 new managing directors and directors, and we also have plans to accelerate our senior level hiring in 2014 to support our organic growth expectations.

In our recruiting efforts, we've focused on senior revenue-generating roles in skill areas that we perceive to be of high market demand. As you might expect, based on current performance and growth potential, we recruited many of our senior hires in healthcare with skills in provider and payer strategy, managed care operations, clinical effectiveness, revenue cycle management, operational productivity, R&D portfolio management, product commercialization and the list goes on. We've also attracted senior hires in other key areas in the company, including legal technology, healthcare disputes and compliance, global infrastructure claims, anti-money-laundering, smart grid operations, clean technology, transmission planning and asset valuation, a broad range of critical skills and expertise at the highest levels of the organization.

During 2013, we also focused on ensuring that the entire company was aligned with our Perform, Bank and Innovate operating framework, providing a foundation of actions taken now that will impact us over the longer term. And I'd like to highlight a few of those. We began by developing, communicating and implementing the building blocks for a 5-year aspirational plan as an overarching vision for our strategic direction. We will look to provide further insight into how we are planning to maximize the potential of Navigant's platform over the longer term with our investment community later in 2014.

We also developed strategic imperatives for the organization at a firm-wide level, cascading to the business level, then down to the individual with performance management metrics and MBOs correlated to our incentive compensation program. In addition, we implemented a new strategic planning process to augment our budgeting process and to help identify more specific growth plans and investment needs within our businesses. Additional progress on our portfolio planning, our practice strategies and our innovation efforts is going to be a key focus, with the addition of our new Chief Strategy & Innovation Officer, Renee Dye.

Margin improvement goals were also identified to each of our businesses in 2013 and monitored on a monthly basis to ensure real-time responsiveness. The resulting actions helped contribute to a 200 basis point increase in our adjusted EBITDA to 17% year-over-year, reflecting significant progress towards our long-term EBITDA goal of 18%.

I'm especially pleased with our capital management discipline in 2013. Given our margin improvement efforts and strong cash flows, we reduced our debt by 58% year-over-year, while continuing to return capital to our shareholders, manage our dilution and make investments in technology, new capabilities and client channels. At the same time, we also focused our corporate development efforts during the year to build a very robust pipeline of investment opportunities that align with our targeted growth agenda. We hope to use our balance sheet in 2014 to capitalize on these efforts in corporate development to complement our current high-demand businesses.

As I've mentioned in previous calls, the sales effectiveness program has been developed, which has included foundational training, coaching, tools and accountability measures, with the first efforts of this program being rolled out in late 2013. The program has simply been designed to put people in a better position to be more effective in the market, to be able to identify new sales prospects and really to collaborate better on opportunities across the organization.

And, finally, I wanted to just highlight the Innovation Development Council, which became fully operational in 2013 as well. They designed and launched a multi-pronged program, laying a great foundation for cultural shift and ideation progress in the coming year and beyond. My new programs include an idea portal, quarterly innovation challenges on annual business plan competition and mega trends brainstorming. Notably, at year end, the council was deep in evaluation mode on 25 new submitted business plans, with next steps in evaluation to be recommended later in the first quarter. With the addition of our new Chief Strategy & Innovation Officer, I anticipate we will begin to see additional new ideas for growth, where we blossom and take shape during the year.

During 2013 and continuing into 2014, we directed our business development efforts to capitalize on favorable market trends and anticipation of new opportunities, we believe, are emerging. And I'd like to highlight some of those now. Financial institutions continue to be under pressure from regulators regarding compliance, which is driving need in the market for advisory services, policy and process redesign, account reviews and look backs. We are seeing demand move beyond the largest banks to the next tier of banks who must also deal with the stress of regulatory oversight while delivering profitable performance. Our anti-money-laundering services are market leading and continue to build in relevance. We're really pleased with the growth in this year that helped offset the wind down in the mortgage servicing work we saw in 2013, and we're also seeing new opportunities in a much more robust M&A environment, which we expect to develop into increased demand in a number of our areas, including our valuation services.

As you know, the healthcare industry demand trends remain very positive. We expect 2014 to be another year of solid double-digit growth, resulting from strength across all of our service offerings. We have the broad, strategic and operational expertise that clients need as the industry adjusts to a quality of care and cost management emphasis. In 2014, we expect that we will continue to grow our capabilities in revenue cycle management outsourcing, which is a logical extension to our strategy and performance management capabilities and is also an example of the reoccurring revenue type of work we want to expand into.

Throughout 2013, energy efficiency had been a key theme and driver for our energy segment. With our portfolio of government utility and commercial clients, we see continued demand for our services as they manage the impacts of structural changes in the energy market. With the new practice leader and overhang from the Moreland report receding, following the favorable resolution from the U.S. Attorney's Office, we're looking forward to our energy practice returning to a more normalized double-digit growth trajectory in 2014.

Our Disputes, Investigations & Economics segment is coming off a challenging year, and we are encouraged that core areas of our business are positioned for growth. In the coming year, we expect to benefit from renewed growth in our legal technology solutions business, as a result of investments in our platform and new leadership for the business. Other opportunities for growth exist around large infrastructure construction claims, international arbitration and healthcare compliance and litigation around fraud, waste and abuse issues. Also, increased SEC focus on greater enforcement may also contribute to the segment's prospects, moving into the latter part of 2014. We are not satisfied with the performance of this segment in recent quarters, but we believe we are taking clear steps to identify and cultivate growth opportunities that the market is presenting.

In summary, I'm really pleased with the response throughout the Navigant organization to our challenge to perform, bank and innovate. We've taken steps to improve our ability to generate organic growth and increase market share, we've delivered higher margins and improved our financial strength and flexibility, and our culture of innovation continues to evolve with new business ideas surfacing from individuals and groups throughout the company. I'm particularly excited to see how these actions develop into expanded opportunities with our clients and enhance growth for our company over the longer term. As we enter 2014, I believe we are extremely well positioned to continue to advance against our strategy. We have strong demand drivers in place, a strong balance sheet and a robust pipeline of investment opportunities aligned to our growth agenda.

Now I'd to turn the call over to Cindy to review our results in detail and to share our outlook for 2014, and then I'll come back with a few closing remarks. Cindy?

Lucinda M. Baier

Thank you, Julie. Thanks to everyone for taking the time to join us on today's call. Navigant's full year 2013 results demonstrate year-over-year growth in key performance measures, including revenues, adjusted EBITDA and adjusted earnings per share. We are especially pleased with our 17% adjusted EBITDA margin for the year and our 58% reduction in bank debt, while returning $28.3 million of capital to our shareholders through our share repurchase program.

As you know, our business is largely project based, so in managing our business and evaluating our performance, we take a broader view and focus on the full year, rather than on any given quarter. With that in mind, I'd like to review our results for the fourth quarter and full year before turning to our performance by segment. I'll then provide some thoughts on our outlook for 2014.

For the 2013 fourth quarter, Navigant reported revenue before reimbursements, or RBR, of $177.8 million. Coming into the quarter, we recognized that we were up against difficult comp in a very strong 2012 fourth quarter results. Additionally, results for the recent period on a comparable basis reflect lower-than-anticipated utilization, partly related to timing of wind down of certain engagements and the start-up of new engagements.

Adjusted EBITDA for the fourth quarter 2013 was $29.8 million. We maintained our 17% margin rate for the period and reduced fourth quarter general administrative expenses by 24% year-over-year. This reflects continued progress in our cost control efforts and a significant reduction in our bad debt expense. Cash collections in the quarter were very strong, improving DSO to 65 days.

Operating income for fourth quarter 2013 includes $3.4 million of other operating benefit, reflecting a fair value adjustment to reduce the estimated contingent acquisition liability related to our Pike, AFE and EMPATH Acquisitions. This benefit has been excluded from our adjusted EBITDA calculation, as it is not reflective of the operating performance of the business. Our net income from continuing operations increased 8% in the fourth quarter. Adjusted earnings for the quarter were $0.25 per share.

For the full year of 2013, RBR was $734.4 million, reflecting 2% year-over-year growth, including double-digit growth in Healthcare and Financial Risk & Compliance. Adjusted EBITDA for 2013 increased 14% on a year-over-year basis to $124.1 million. Adjusted EBITDA margin improved 2 percentage points during 2013 to 17%. A 10% year-over-year reduction in general and administrative expenses contributed to our improved margin rate.

As a percentage of RBR, general and administrative expenses declined to 17% for 2013 compared to 20% for last year. Just under half of the general and administrative expense reduction was due to a year-over-year reduction in bad debt expense, reflecting the fourth quarter DSO reduction I mentioned earlier. We will continue to benefit from several cost-reduction steps implemented during the year, but we expect bad debt expense to be closer to, but not more than, historical norms beginning in the first quarter of 2014.

Operating income for 2013 benefited from $5.4 million in contingent acquisition liability adjustments in the third and fourth quarters relating to our Pike, AFE and EMPATH acquisitions and a gain of $1.7 million from the sale of a portion of our economics practice in the first quarter. These benefits have been excluded from our adjusted EBITDA calculation.

Our effective tax rate increased 2 percentage points year-over-year to 44% for 2013. We earned a greater portion of our revenue in the U.S. in 2013, which is a higher tax jurisdiction and increased our overall effective tax rate. In addition, we increased our valuation allowances related to deferred tax assets associated with tax losses generated in foreign tax jurisdictions, where we don't expect to receive a future tax benefit. Net income from continuing operations for 2013 increased 25% on a year-over-year basis to $55.1 million or $1.08 per share. Adjusted earnings for 2013 increased 14% on a year-over-year basis to $1.06 per share.

Let's now review our performance by business segment for the quarter and full year. Healthcare segment quarterly RBR grew 6% year-over-year, all of which was organic. As expected, the Healthcare segment's growth rate for the fourth quarter on a year-over-year basis reflects a tougher comp related to a large performance-based fee in the fourth quarter of 2012 and the passing of the anniversary of acquisitions in the segment. Additionally, growth in the period was limited by the timing of redeployment professionals working on a large engagement that was completed in the quarter. Our Healthcare segment is well positioned in this high demand market, and we expect continued double-digit growth in 2014.

For the full year, Healthcare RBR grew 21% on a year-over-year basis to $182.8 million. 2/3 of the growth was organic. Healthcare is our fastest-growing segment and represented 25% of total company RBR for 2013 compared to 21% last year. Healthcare segment operating profit increased 33% to $67.7 million in 2013. Healthcare's margins improved 3 percentage points to 37%, driven by top line growth and strong cost control.

Financial Risk & Compliance fourth quarter RBR declined 2% year-over-year. As we've previously discussed, 4 large mortgage servicing review engagements drove strong growth at the segment during 2012. Given the settlement of 3 of the reviews during the beginning of 2013 and the natural wind down of the remaining engagement, we expected a significant decline in the segment. We are pleased that the vast majority of the RBR reduction for the mortgage servicing was offset in the fourth quarter of 2013 by better-than-expected growth in the anti-money-laundering services and other compliance services.

For the full year, Financial Risk & Compliance RBR grew 10% on a year-over-year basis to $155.7 million. All the growth was organic, with a strong contribution from anti-money-laundering services as noted. Segment operating profit increased 12% on a year-over-year basis to $62.5 million in 2013. Segment operating margin of 40% was consistent with prior year. As a reminder, we sold our U.K. Financial Services Advisory business during the third quarter. The results of this practice have been removed from our segment results and are now reported as discontinued operations.

Energy's RBR for the quarter declined 4% on a year-over-year basis, which reflected the negative impact of the Moreland Commission report, as well as lower RBR from our energy research business year-over-year. As a result of the Moreland Commission report that was issued in late June 2013, our work at Long Island Power Authority, LIPA, and New York Power Authority was suspended. Following our announcement late November that the U.S. Attorney's Office had favorably concluded its investigation in the questions raised by the Moreland Commission, work for LIPA resumed. Moving forward, we expect the Energy segment to return to growth, consistent with past segment performance.

For the full year, Energy RBR grew 5% on a year-over-year basis to $94.4 million. The segment was adversely impacted by the Moreland Commission report but saw strong demand from clients developing and implementing energy efficiency programs. Results also reflect a full year contribution from our July 2012 Pike acquisition. The Energy segment had an operating profit of $31.3 million compared to $31.7 million in the prior year. Segment operating margin of 33% declined 2 percentage points from the prior year and reflected the disruption from the Moreland Commission report and lower-margin contributions from our energy research business.

Disputes, Investigations & Economics segment RBR for the quarter declined 14% on a year-over-year basis. The majority of the decline was due to the sale of a portion of the Economics practice during the first quarter of 2013, as well as some softness in forensic accounting demand in fourth quarter 2013 compared to the prior year quarter. A full quarter contribution in 2013 from our AFE consulting acquisition completed in December 2012, partially offset the decline.

For the full year, RBR for the Disputes, Investigations & Economics segment was $301.5 million, down 11% on a year-over-year basis. Segment operating profit was $99.8 million, with a 33% margin. Approximately 2/3 of the decline was due to the sale of a portion of our Economics business. We also experienced some weakness in our European disputes service line and were impacted by the natural conclusion of a large investigative matter that was not replaced by a similar-sized matter in 2013. The declines were partially offset by our AFE Consulting acquisition, albeit at lower levels than anticipated.

Performance-based fees for 2013 were $7.2 million compared to $10.7 million for last year. Our performance-based fees are primarily reflected in RBR of our Financial Risk & Compliance segment and our Healthcare segment. I'm especially pleased that our focus on operational improvement resulted in strong cash flow during 2013. Free cash flow of $78.8 million increased 38% compared to the prior year.

We employed a disciplined capital allocation strategy to strengthen our balance sheet, invest in our platform to support future growth and return capital to our shareholders through our share repurchase program. We repaid $77.5 million in bank debt during 2013, lowering our year-end balance by 58% from the year-earlier level. We are well positioned for future growth, with the year-end debt leverage ratio of 0.46x compared to 1.23x at the end of 2012. We repurchased 2.1 million shares of common stock during 2013 at an average cost of $13.76 per share and a total cost of $28.3 million. Our capital expenditures, which were primarily technology-related, totaled $14.2 million for the year.

Let's turn now to our outlook for 2014. Moving into 2014, we believe RBR growth rates will build throughout the year, starting with the first quarter that is similar to the fourth quarter of 2013 and builds as we execute our growth initiatives. We expect continued strong demand for our healthcare services in 2014, with anticipated mid- to high-teens RBR growth from the segment. We believe that the healthcare industry will continue to undergo transformational change, and our Healthcare segment is uniquely positioned to bring solutions to our clients.

With a new segment leader in place and the headwinds of 2013 resolved, we are excited about the prospects for the Energy segment 2014. We expect growth north of 10% in the low-double digits from the Energy segment. We believe that further emphasis on energy efficiency programs, smart grid implementation, market stress caused by natural gas pricing and a potential increase in M&A activity will drive demand across utilities, government agencies and investors.

Turning to Financial Risk & Compliance. We expect 2 factors to impact segment performance in 2014. First, we'll have mortgage servicing review work decline sequentially in each quarter during 2013, as part of our previously discussed wind down. It still creates a difficult comparable for the first half of the year, as it will take time to redeploy the team on opportunities that can benefit from its deep expertise in evaluation and compliance as preventive services for financial institutions.

Second, at the beginning of 2014, a small team of consultants that performed the majority of our restructuring engagements departed Navigant as planned and transitioned to a separate new company with a different business focus. We plan to work together with the departed team on the delivery of ongoing engagements that require our complementary services. We expect to have a lower RBR contribution from restructuring services in 2014. In the aggregate, we believe that these 2 items represent a headwind for the segment of approximately 40% for the year, with about 2/3 of the effect attributed to the first half of the year. Our anti-money-laundering work is expected to partially offset the impact of these factors, but we expect a decline in RBR of approximately 30% from this segment.

We have taken steps to enhance the market potential of our Disputes, Investigations & Economics segment, these include making leadership and strategy changes in our legal technology business. We expect the segment to benefit as the technology business matures and as we build scale. We are also investing internationally to take advantage of the global construction's dispute market. We expect to benefit from the improving market for our investigation services, targeted senior hiring and our internal sales initiatives. We will have a full year contribution from our third quarter Anson acquisition, focused on pharmaceutical company compliance. We will also pass the anniversary of the sale of a portion of the Economics practice on January 31, 2014. As a result, we expect mid-single-digit RBR growth to this segment.

During 2014, we plan to make investments in technology, talent and capabilities that will improve the long-term growth profile of our business. We expect there will be a short-term margin impact as costs related to these investments precede revenue. Let me add a reminder that we do experience a sequential increase in the first quarter employee benefit cost each year as our 401(k) match, FICA, and other compensation-related costs reset each year. This can impact our margin by 2 to 3 percentage points. We would expect that our margin rate will dip in the first part of the year and will be lower than the year-ago level due to investments in new capabilities and bad debt returning closer to historical norms. However, we still expect to build to the 18% adjusted EBITDA margin that we are targeting by year end.

Taking all of these factors into consideration for our 2014 outlook, we are targeting RBR in the range of $735 million to $775 million. The midpoint reflects growth of approximately 3%. We expect a range of $810 million to $850 million of total revenues. Our outlook for adjusted EBITDA is in the range of $120 million to $130 million. Adjusted earnings per share is estimated to be in the range of $1.03 to $1.13 per share. We are expecting free cash flow in a range of $65 million to $75 million. In 2014, we will continue to invest for long-term growth, while focusing on providing exceptional service to our clients and ensuring that Navigant is an attractive place for talented professionals to build their careers. We believe that we are well positioned in the markets that we serve to grow RBR and profitability over the longer term. We are building a platform for sustainable growth, as we continue to focus on growing markets with well-defined needs that we are well qualified to address.

Thank you for your time, I will now turn the call back over to Julie.

Julie M. Howard

Thank you, Cindy. Just ever so briefly, when I look back a year ago at the expectations we set and the challenges we faced early in the year, I am proud of the way the entire Navigant organization contributed together towards a very successful year, delivering value for all of our stakeholders. We still have more work to do, but we expect to continue that success in 2014 and beyond as we pursue our strategic priorities that we've set for the company.

And now I'd like to open it up for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] First question from David Gold with Sidoti.

David Gold - Sidoti & Company, LLC

I was hopeful you could go over -- and, I guess, a lot of information there, go over how you think about utilization targets and headcount targets on the hiring side for 2014? I know you commented some more senior level hiring, but curious, maybe, if you could put some guideposts around that and how significant the costs involved could be?

Julie M. Howard

I'll say this, that we would expect our utilization probably to, after we get out of the first quarter, trend up a little bit over the course of the year. And I think our hiring plan calls for a mid-single digit kind of headcount up over the course of the year. We're going to continue, as we've talked in previous quarters, to leverage the skills, capabilities and people we have in the organization and continue to augment where we feel we need. So we've started, as I mentioned in 2013, really focused on senior hiring. We're continuing that here in the first quarter. And then, David, as we see the benefits of that, we'll build the pyramid beneath.

David Gold - Sidoti & Company, LLC

Got you. And can you speak to what specific practice, obviously, Healthcare's busy, and you'll take whatever you can get there. But other areas where you'd like to focus on senior hiring?

Julie M. Howard

Yes, absolutely. So Healthcare, clearly, is a significant -- probably 1/3 of our senior hiring over the course of the next year in our Energy business. Jan Vrins is our new practice leader there has begun his focus on that. We've already had some senior people come in early in the year. And we have some kind of rebuilding and new hiring that we're anticipating in our Disputes business as well.

Operator

Next question from Randy Reece, Avondale Partners.

Randle G. Reece - Avondale Partners, LLC, Research Division

I was just trying to get a little better feel for how headcount growth billing rate changes and utilization changes into your guidance, if there's any significant difference? You already talked about what you expect for headcount, between billing rate, the expectations and utilization. How did you figure those into guidance?

Lucinda M. Baier

Randy, this is Cindy. As you know, I don't really look at sort of headcount growth billing rate and utilization. Having said that, when we think about our Financial Risk & Compliance business and the headwind that it faces from the mortgage servicing review wind down, we would certainly expect the utilization in that business to be slower. And with regard to the senior hiring, it normally takes 6 months to a year for practitioners to ramp up. So as we think about the guidance for the year, we look at margin rates that start lower in the first part of the year and then build to that 18% sustainable margin that we're targeting by the end of the year.

Randle G. Reece - Avondale Partners, LLC, Research Division

When you look at activity around the U.S. Federal Government, what's the difference in activity level -- regulatory activity versus the same time a year ago?

Julie M. Howard

That's a good question, Randy. I think the regulatory activity is similar, but different depending upon where it's impacted. So a year ago at that time, we were still heavily invested in and involved in the mortgage servicing review. That focus has, at least in financial services -- has really trended more towards compliance within the banks around anti-money laundering and account reviews and related transactions. We continue, as you know, our whole business model is really aligned with, or really geared towards, industries that are highly regulated. And so I think, if you look at all 3, healthcare, energy and financial services, you'll see that we're benefiting from significant regulatory reform in each of those areas.

Operator

Next question, Jerry Herman from Stifel.

Jerry R. Herman - Stifel, Nicolaus & Co., Inc., Research Division

Julie, a high-level question for you. As you talk about the building blocks for growth and you talked also about having an Investor Day later in the year. You've separately referenced the head of Strategy & Innovation. How should we think of that as the audience? Is it all coming together either in a timeline or in a package? Will you guys articulate your growth targets in financial terms? And how should we think about when that might happen?

Julie M. Howard

So the expectation is that we'll have our Investor Day in June of this year. We -- I think we're narrowing in on the date. And the location, it will be in New York. And the plan is to share more broadly with you our kind of our longer-term aspirational plan, where we intend to take the organization and, as I've said, kind of the steps that we intend to take to get there. And there will be some level of information around longer-term financial targets that we plan to share for the organization. So you can expect more on that. We just started that process internally in our organization this past year and, as I mentioned, putting a lot of the building blocks as it relates to the strategic planning process, the alignment of metrics, a lot of the functional initiatives around sales and innovation that are supporting that. And I want to make sure that those are functioning well down the road before we begin to share more deeply about the longer-term outlooks.

Jerry R. Herman - Stifel, Nicolaus & Co., Inc., Research Division

Great. And just a couple of sort of random questions. You guys talked about a team that left in Financial Risk & Compliance, was that expected? And what is the relative size of that team?

Julie M. Howard

It was expected. The gentleman that we've referenced before in our firm by the name of Ed Casas to run our Restructuring group. Ed, in a very planned way, we worked on this for better than a year, had planned to start another company that was focused on principal investing activities and distressed assets, so something entirely different. He was looking to make that maybe his next career move. And so we planned the transition of this team for early in 2014 over the last 18 months. And as we talked about -- we said, between the combination of that and the comparables from last year to this year around mortgage servicing review, that, that had about a 40% overall impact on the Financial Risk & Compliance segment. So that's why our guidance is in the range that we established for this year, having an acknowledgment of those 2 factors.

Jerry R. Herman - Stifel, Nicolaus & Co., Inc., Research Division

Okay, great. And just 2 quick questions for Cindy. So it was kind of breaking up when you talked about the expected change in Disputes, Investigations & Economics. There was some background noise. I'm wondering if you could reiterate what you think 2014 looks like there. And then as, my guess, continuation with regards to the first quarter, I think you indicated that the sequential revenue will be flat, and that you will incur some additional costs in the first quarter and you framed that at a couple of 2 to 3 percentage points, I believe, again, sequentially.

Lucinda M. Baier

So let me take the first or the second question, first, with regard to the ramp between Q4 and Q1. We're expecting our RBR between Q4 and Q1 to be relatively consistent. Now we always have a sequential increase in our benefit costs, including 401(k), FICA and annual costs. That's normally between 2 percentage points and 3 percentage points. On top of that, we are making some investments in our first quarter that should fund both organic and inorganic growth. And so we were expecting to see a further decline in the margin rate in Q1 relative to Q4 as a result of that. And then the margin rate will build throughout the year until we get to that 18% sustainable adjusted EBITDA margin target by the end of the year. But again, the investments that we're making in margin are designed to accelerate our growth of the business. With regard to Disputes, Investigations & Economics, we have a few things that are affecting our guidance. The first is the leadership and strategy changes in our legal technology business. We are investing as well and have invested to take advantage of the international global construction disputes market. And then we're looking for the investigative market to improve. We're making senior hiring, and then we've had a focus on internal sales initiatives. And then, finally, we made the Anson acquisition in July of this year. We'll have a full year benefit from that next year. So we're looking for mid-single-digit RBR growth in the DI&E segment. Does that answer your question, Jerry?

Jerry R. Herman - Stifel, Nicolaus & Co., Inc., Research Division

Yes. Very helpful, I appreciate, guys. I'll turn it over.

Operator

Next question, Tobey Sommer, SunTrust.

Tobey Sommer - SunTrust Robinson Humphrey, Inc., Research Division

I just had a question. Start out with the pace of internal growth or growth in 2014. I think you had an expectation for it to generally improve throughout the year. And I'm just wondering how you would allocate the -- or kind of what the drivers are between the changes -- any change in expected demand versus your hiring plans in the easier comparisons?

Julie M. Howard

Tobey, I think it would be fair to say, and we did say that we expect that growth to ramp over the course of the year. I don't think it's any surprise to our investment community when you think about professional services. Everybody's had a tough go here at the end of the fourth quarter, and into the new year as a result of the harsh weather. You have people on the road and visiting clients, and when they can't make it -- so to some degree, I think we're giving ourselves a little benefit of the doubt in the first quarter around those harsh weather conditions impacting our business. And then going forward, we have anticipations of new business demand in certain of our segments. We certainly do expect a lot of the senior hiring that we made in the end of 2013 and into 2014 to take effect. It's a combination of -- and, Cindy, do you want to add to that?

Lucinda M. Baier

Yes. The only other thing I want to make sure that you pay attention to is in the Financial Risk & Compliance segment, think about the mortgage servicing review work. And the first half of the year was significantly stronger than the second half of the year for that work last year. So every quarter, we saw sequential declines in sort of the mortgage servicing review work. So as you think about that headwind, the 40% that I talked about, related to the mortgage servicing review work and the departure of the restructuring team, we would expect about 2/3 of that to be in the first half of the year, which is why our first quarter comp is probably the hardest.

Tobey Sommer - SunTrust Robinson Humphrey, Inc., Research Division

That's helpful. And another question about one of the comments in your prepared remarks about potentially the SEC level of activity improving in the back half of the year. Is that something that you're already seeing early signs in investigations starting? Or is that more reflective of an expectation that, that commentary about more rigorous enforcement will translate into something farther out in the future?

Julie M. Howard

It's a combination of both, Tobey. We've had additional, small amounts of investigations that we've begun to see here in 2014, one. Two, it's an expectation based on the different kind of committees and structure that Mary Jo White put in place in 2013. And I appreciate you asking the question. We just had a recent, I think, positive reflection on Navigant. Mike Maloney, who is a head of our Forensic Accounting Business in Washington, has recently accepted the post from the SEC to be their Chief Accountant in the Enforcement division. So we're really gratified that -- example of the expertise that we have here. And I think it'll be good for Navigant over the long term.

Tobey Sommer - SunTrust Robinson Humphrey, Inc., Research Division

My last question is, Julie, do you want to be in the restructuring business? Is that a capability that you'll be looking to refill?

Julie M. Howard

We are not out entirely of the restructuring business. And we certainly have plenty of professionals around the organization, who have the capability. It's a nice collaborative or synergistic capability to our disputes business. So we're not out of the restructuring business, but for some of those core capabilities that had really been focused on the other side and distressed assets, that team is looking to do something entirely different. And so we made that plan to help them transition to that. But, no, we will continue to be able to provide those services around the organization.

Operator

Our final question today comes from Tim McHugh, William Blair.

Matthew Hill

This is Matt Hill, in for Tim McHugh this morning. Had a couple of questions. First, on the Energy segment, you'd mentioned the research services was -- impacted the growth area. I was just wondering, how big is that business in that segment? And is this the Pike Research acquisition?

Julie M. Howard

It is the Pike Research acquisition. It's not significantly material. I don't know if, Cindy, whether you want to share that? She's shaking her head, no. It's not significantly material to the overall business. That's all I can say.

Matthew Hill

Okay. And then on the Healthcare. How -- the large project winding down, is that also going to impact Q1 going forward? And then also, with the performance fees I think you gave -- the numbers that were given, was that a combined performance fees with the financial institution, just trying to see if we could figure out the impact of the slowdown there?

Julie M. Howard

It was a combined performance fee amount that we gave you relative to last year. And in Healthcare, like I said, in my quote, that just kind of -- fourth quarter kind of represents a timing and balance, if you will, between certain large jobs winding down and other new jobs winding up. And we had one larger engagement that came to its expected conclusion in 2013 in Healthcare, and we anticipate to rebuild and fill that pipeline going forward. We are still incredibly bullish on our Healthcare business and find that there's lots of growth opportunity, going forward.

Matthew Hill

Okay. And then one final question, on the -- the G&A expense came in a lot lower than what we were expecting in the fourth quarter. Was this the bad -- the lower bad debt expense, or was there something else? Is there anything sustainable about that number?

Lucinda M. Baier

So roughly half of the improvement in the quarter in G&A on a year-over-year basis was bad debt. We're very proud of the fact that we got to a 65-day DSO, which is the lowest in the company's history. We'll continue to focus on lowering our DSO and improving our collections. But to be fair, I would expect that our bad debt expense would return closer to historical norms, albeit below. The remainder of the sequential increase had to do with lower legal expenses for the wrap up of the Moreland Commission report. And then on a year-over-year basis, we saw lower compensation costs in the fourth quarter for administrative personnel.

Julie M. Howard

No further questions? All right, thanks very much for your time today. We appreciate it. We look forward to talking again at the end of the first quarter.

Operator

Okay. Thank you. That does conclude the call for today. You may disconnect your phone lines at this time.

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