UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

For the quarterly period ended September 30, 2017

OR

For the transition period from                    to                    

Commission file number 001-14875

 

FTI CONSULTING, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

(202) 312-9100

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web Site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ☒    No  ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ☐    No  ☒

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

 

 

 

 

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FTI CONSULTING, INC. AND SUBSIDIARIES

INDEX

 

 

 

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PART I—FINANCIAL INFORMATION

FTI Consulting, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except per share data)

 

 

 

See accompanying notes to condensed consolidated financial statements

 

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FTI Consulting, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(in thousands, except per share data)

(Unaudited)

 

 

See accompanying notes to condensed consolidated financial statements

 

 

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FTI Consulting, Inc. and Subsidiaries

Condensed Consolidated Statement of Stockholders’ Equity

(in thousands)

(Unaudited)

 

 

See accompanying notes to condensed consolidated financial statements

 

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FTI Consulting, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

 

See accompanying notes to condensed consolidated financial statements

 

 

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FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar and share amounts in tables in thousands, except per share data)

(Unaudited)

 

1. Basis of Presentation and Significant Accounting Policies

The unaudited condensed consolidated financial statements of FTI Consulting, Inc., including its consolidated subsidiaries (collectively, the “Company,” “we,” “our,” or “FTI Consulting”), presented herein, have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and under the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. Some of the information and footnote disclosures normally included in annual financial statements have been condensed or omitted pursuant to those rules and regulations. Certain prior period amounts have been reclassified to conform to the current period presentation. In management’s opinion, the interim financial statements reflect all adjustments that are necessary for a fair presentation of the results for the interim periods presented. All adjustments made were normal recurring accruals. Results of operations for the interim periods presented herein are not necessarily indicative of results of operations for a full year. These financial statements should be read in conjunction with the consolidated financial statements and the notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC.

 

 

2. Earnings Per Common Share

Basic earnings per common share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per common share adjusts basic earnings per common share for the effects of potentially dilutive common shares. Potentially dilutive common shares include the dilutive effects of shares issuable under our equity compensation plans, including stock options and restricted shares, each using the treasury stock method.

 

 

 

3. New Accounting Standards

 

Adopted Accounting Standards

In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This standard makes several modifications to Topic 718, including the accounting for forfeitures, employer tax withholding on share-based compensation and income tax consequences, and clarifies the statement of cash flows presentation for certain components of share-based awards, all of which are intended to simplify various aspects of the accounting for share-based compensation. We adopted this standard as of January 1, 2017, and since then we have recorded the excess benefits realized from stock compensation transactions in the Condensed Consolidated Statement of Comprehensive Income. Additionally, we elected to recognize forfeiture expense as forfeitures occur, rather than estimating forfeitures based on historical data.

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, which removes the prohibition against immediate recognition of current and deferred income tax effects on intra-entity transfers of assets other than inventory. We elected to early adopt this standard as of January 1, 2017, and recorded a $3.2 million

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cumulative effect adjustment to the beginning balance of retained earnings on January 1, 2017 which resulted in a net impact of increasing deferred tax assets by $2.6 million and decreasing a deferred tax charge in other assets by $5.8 million related to a prior period intra-entity transfer of intellectual property.

Accounting Standards Not Yet Adopted

 

In January 2017, the FASB issued ASU 2017-04: Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This standard requires entities to measure goodwill impairment using the difference between the carrying amount and the fair value of the reporting unit, instead of performing a hypothetical purchase price allocation. This guidance is effective beginning January 1, 2020, although early adoption is permitted. The adoption of this guidance would only impact the measurement of a future goodwill impairment to the extent applicable.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes existing lease guidance. Under this ASU, we will be required to record right-of-use assets and corresponding lease liabilities on the balance sheet. This guidance is effective beginning January 1, 2019. The new standard is required to be applied with a modified retrospective approach to each prior reporting period presented. We have not yet determined the impact that the adoption of this guidance will have on our consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). Under this ASU and subsequently issued amendments, revenues are recognized at the time when goods or services are transferred to a customer in an amount that reflects the consideration it expects to receive in exchange for those goods or services. Companies may use either a full retrospective or a modified retrospective approach to adopt this ASU. We will adopt this standard using the modified retrospective method effective January 1, 2018. Substantially all of the Company’s engagements are performed either under time-and-expense or fixed-fee contract arrangements. The Company will use the right-to-invoice practical expedient to account for time-and-expense contract arrangements when the Company has a right to consideration from a customer in an amount that corresponds directly with the value of the entity’s performance completed to date, which is consistent with the Company’s current revenue recognition policy.

We believe that the adoption of this standard will primarily impact contracts that contain some form of variable consideration, where the Company will earn revenues if certain predefined outcomes occur in the future and which will be subject to probability assessments as defined by the new standard.

Contracts with success fees – The Company may recognize revenue under certain contract arrangements that contain success fees earlier upon the adoption of this standard than we do under current practice, when the related performance obligations are satisfied over time. The Company will estimate revenue using either the expected value method or the most likely amount method, as appropriate, and in an amount that is probable not to result in a significant reversal of cumulative revenue recognized.

Fixed-fee contract arrangements – The Company will recognize revenue as individual performance obligations are satisfied, using a measure of progress that is based on the efforts and costs incurred (i.e. an input method measure of progress). This may lead to a difference from current practice when applying the definition of a performance obligation under the new standard.

Other contract attributes – We believe this standard could affect the timing of revenue recognition for contracts that provide volume-based discounts, time-and-expense contract arrangements that have a cap on total fees, and contract arrangement fees that are subject to third-party approval, among others.

We continue to evaluate the potential impacts of the new guidance on the measurement and presentation of our revenues, as well as required enhancements to disclosures.  The Company is underway in its implementation plan which includes information system and process changes to identify and assess contracts which are impacted by the new revenue recognition criteria and accumulate data to satisfy new disclosure requirements. We are unable to provide an assessment of the financial impact which will be recognized upon adoption as our assessment is dependent on an analysis of individual contracts which exist at the date of adoption.

 

4. Special Charges

There were no special charges recorded during the three months ended September 30, 2017.

         During the nine months ended September 30, 2017, we recorded a special charge of $30.1 million. The charge includes the impact of certain targeted reductions in areas of each segment where we needed to re-align our workforce with current business demand. In addition, cost cutting actions were taken in certain corporate departments where we were able to streamline support activities and reduce our real estate costs. $37.6 million of the charge will be paid in cash. The total charge is net of a $7.5 million

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non-cash reduction to expense primarily for the reversal of a deferred rent liability. The special charge includes the following components:

There were no special charges recorded during the three months ended September 30, 2016.

During the nine months ended September 30, 2016, we recorded special charges of $6.8 million related to employee terminations in the health solutions practice of our Forensic and Litigation Consulting segment and employee terminations in our Technology segment.  

The following table details the special charges by segment for the nine months ended September 30, 2017 and 2016:

 

 

Activity related to the liability for the special charges for the nine months ended September 30, 2017 is as follows:

 

 

 

 

5. Allowance for Doubtful Accounts and Unbilled Services

We record adjustments to the allowance for doubtful accounts and unbilled services as a reduction in revenues when there are changes in estimates of fee reductions that may be imposed by bankruptcy courts and other regulatory institutions for both billed and unbilled receivables. The allowance for doubtful accounts and unbilled services is also adjusted after the related work has been billed to the client and we discover that collectability is not reasonably assured. These adjustments are recorded to “Selling, general and administrative expenses” on the Condensed Consolidated Statements of Comprehensive Income and totaled $4.5 million and $10.5 million for the three and nine months ended September 30, 2017, respectively, and $1.6 million and $5.9 million for the three and nine months ended September 30, 2016, respectively.

 

 

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6. Research and Development Costs

Research and development costs related to software development totaled $3.3 million and $11.8 million for the three and nine months ended September 30, 2017, respectively, and $4.5 million and $13.0 million for the three and nine months ended September 30, 2016 respectively. Research and development costs are included in “Selling, general and administrative expenses” on the Condensed Consolidated Statements of Comprehensive Income.

 

 

7. Financial Instruments

We consider the recorded value of certain financial assets and liabilities, which consist primarily of cash equivalents, accounts receivable and accounts payable, to approximate the fair value of the respective assets and liabilities at September 30, 2017 and December 31, 2016, based on the short-term nature of the assets and liabilities. The fair value of our total debt at September 30, 2017 was $475.1 million compared to a carrying value of $465.0 million. At December 31, 2016, the fair value of our total debt was $382.8 million compared to a carrying value of $370.0 million. We determine the fair value of our long-term debt primarily based on quoted market prices for our 6% Senior Notes Due 2022 (“2022 Notes”). The fair value of our borrowings on our $550.0 million senior secured bank revolving credit facility (“Senior Bank Credit Facility”) approximates the carrying amount. The fair value of our long-term debt is classified within Level 2 of the fair value hierarchy, because it is traded in less active markets.

 

 

8. Goodwill and Other Intangible Assets

Goodwill

The table below summarizes the changes in the carrying amount of goodwill by reportable segment:  

 

During the three months ended September 30, 2017, we made an initial payment of $8.9 million at closing to acquire a restructuring business within our Corporate Finance & Restructuring segment. We recorded $11.9 million in goodwill as a result of the acquisition. We have included the results of the acquired business’ operations in the Corporate Finance & Restructuring segment since its acquisition date.  

Other Intangible Assets

Other intangible assets with finite lives are amortized over their estimated useful lives. We recorded amortization expense of $2.9 million and $7.8 million for the three and nine months ended September 30, 2017, respectively, and $2.8 million and $8.0 million for the three and nine months ended September 30, 2016, respectively.

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We estimate our future amortization expense for our intangible assets with finite lives to be as follows:

 

 

 

 

9. Long-Term Debt

The components of long-term debt obligations are presented in the table below:

 

 

The Company has classified the borrowings under the Company’s Senior Bank Credit Facility as long-term debt in the accompanying Condensed Consolidated Balance Sheets as amounts due under the credit agreement entered into as of June 26, 2015, which expires on June 26, 2020, are not contractually required or expected to be liquidated for more than one year from the applicable balance sheet date. Additionally, $0.7 million of the borrowing limit was utilized for letters of credit as of September 30, 2017.

 

 

10. Commitments and Contingencies

We are subject to legal actions arising in the ordinary course of business. In management’s opinion, we believe we have adequate legal defenses and/or insurance coverage with respect to the eventuality of such actions. We do not believe any settlement or judgment relating to any pending legal action would materially affect our financial position or results of operations.

 

 

11. Share-Based Compensation

During the nine months ended September 30, 2017, we granted 248,509 restricted stock awards, stock options exercisable for up to 130,650 shares, 53,175 restricted stock units and 100,052 performance-based restricted stock units. These awards are recorded as equity on the Condensed Consolidated Balance Sheets. During the nine months ended September 30, 2017, stock options exercisable for up to 96,802 shares and 24,920 shares of restricted stock awards were forfeited prior to the completion of the vesting requirements.

Total share-based compensation expense, net of forfeitures, for the three months and nine months ended September 30, 2017 and 2016 is detailed in the following table:  

 

 

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12. Stockholders’ Equity

On June 2, 2016, our Board of Directors authorized a stock repurchase program of up to $100.0 million (the “Stock Repurchase Program”). On May 18, 2017, our Board of Directors authorized an additional $100.0 million increasing the Stock Repurchase Program to an aggregate authorization of $200.0 million. No time limit has been established for the completion of the program, and the program may be suspended, discontinued or replaced by the Board of Directors at any time without prior notice. As of September 30, 2017, we have $26.1 million available under this program to repurchase additional shares.

The following table details our stock repurchases:

 

 

 

13. Segment Reporting

We manage our business in five reportable segments: Corporate Finance & Restructuring, Forensic and Litigation Consulting, Economic Consulting, Technology and Strategic Communications.

Our Corporate Finance & Restructuring segment focuses on the strategic, operational, financial and capital needs of our clients around the world and delivers a wide range of distressed and non-distressed practice offerings. Our distressed practice offerings include corporate restructuring (and bankruptcy) and interim management services. Our non-distressed practice offerings include financings, mergers and acquisitions (“M&A”), M&A integration, valuations and tax advice, as well as financial, operational and performance improvement services.

Our Forensic and Litigation Consulting segment provides law firms, companies, government clients and other interested parties with multidisciplinary, independent dispute advisory, investigations, data analytics, forensic accounting, business intelligence and risk mitigation services, as well as interim management and performance improvement services for our health solutions practice clients.

Our Economic Consulting segment provides law firms, companies, government entities and other interested parties with analysis of complex economic issues for use in legal, regulatory and international arbitration proceedings, strategic decision making and public policy debates in the U.S. and around the world.

Our Technology segment offers a comprehensive portfolio of information governance and e-discovery software, services and consulting support to companies, law firms, courts and government agencies worldwide. Our services allow our clients to control the risk and expense of e-discovery events, as well as manage their data in the context of compliance and risk.

Our Strategic Communications segment designs and executes communications strategies for management teams and boards of directors to help them seize opportunities, manage financial, regulatory and reputational challenges, navigate market disruptions, articulate their brand, stake a competitive position, and preserve and grow their operations.

We evaluate the performance of our operating segments based on Adjusted Segment EBITDA. We define Adjusted Segment EBITDA as a segment’s share of consolidated operating income before depreciation, amortization of intangible assets, remeasurement of acquisition-related contingent consideration, special charges and goodwill impairment charges. We define Total Adjusted Segment EBITDA, a non-GAAP financial measure, as the total of Adjusted Segment EBITDA for all segments, which excludes unallocated corporate expenses. We use Adjusted Segment EBITDA to internally evaluate the financial performance of our segments because we believe it reflects current core operating performance and provides an indicator of the segment’s ability to generate cash.

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The table below presents revenues and Adjusted Segment EBITDA for our reportable segments:

 

 

The table below reconciles Net income to Total Adjusted Segment EBITDA:

 

 

 

 

14. Supplemental Condensed Consolidating Guarantor and Non-Guarantor Financial Information

Substantially all of our domestic subsidiaries are guarantors of borrowings under our Senior Bank Credit Facility and 2022 Notes. The guarantees are full and unconditional and joint and several. All of our guarantors are wholly owned, direct or indirect, subsidiaries.

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The following financial information presents condensed consolidating balance sheets, statements of comprehensive income and statements of cash flows for FTI Consulting, all the guarantor subsidiaries, all the non-guarantor subsidiaries and the eliminations necessary to arrive at the consolidated information for FTI Consulting and its subsidiaries. For purposes of this presentation, we have accounted for our investments in our subsidiaries using the equity method of accounting. The principal eliminating entries eliminate investment in subsidiary and intercompany balances and transactions.

Condensed Consolidating Balance Sheet as of September 30, 2017

 

 

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Condensed Consolidating Balance Sheet as of December 31, 2016

 

 

Condensed Consolidating Statement of Comprehensive Income for the Three Months Ended September 30, 2017

 

 

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Condensed Consolidating Statement of Comprehensive Income for the Three Months Ended September 30, 2016

 

 

Condensed Consolidating Statement of Comprehensive Income for the Nine Months Ended September 30, 2017

 

 

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Condensed Consolidating Statement of Comprehensive Income for the Nine Months Ended September 30, 2016

 

 

Condensed Consolidating Statement of Cash Flows for the Nine Months Ended September 30, 2017

 

 

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Condensed Consolidating Statement of Cash Flows for the Nine Months Ended September 30, 2016

 

 

 

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The following is a discussion and analysis of our consolidated financial condition, results of operations, liquidity and capital resources for the three and nine months ended September 30, 2017 and 2016 and significant factors that could affect our prospective financial condition and results of operations. This discussion should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and related notes and with our Annual Report on Form 10-K for the year ended December 31, 2016 filed with the Securities and Exchange Commission (“SEC”). In addition to historical information, the following discussion includes forward-looking statements based on current expectations that involve risks, uncertainties and assumptions, such as our plans, objectives, expectations and intentions. Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, these expectations or any of the forward-looking statements could prove to be incorrect, and actual results could differ materially from those projected or assumed in the forward-looking statements.  

BUSINESS OVERVIEW

FTI Consulting is a global business advisory firm dedicated to helping organizations manage change, mitigate risk and resolve disputes: financial, legal, operational, political and regulatory, reputational and transactional. Individually, each of our practices is staffed with experts recognized for the depth of their knowledge and a track record of making an impact. Collectively, FTI Consulting offers a comprehensive suite of services designed to assist clients across the business cycle, from proactive risk management to rapid response to unexpected events and dynamic environments.  

We report financial results for the following five reportable segments:

Our Corporate Finance & Restructuring (“Corporate Finance”) segment focuses on the strategic, operational, financial and capital needs of our clients around the world and delivers a wide range of distressed and non-distressed practice offerings. Our distressed practice offerings include corporate restructuring (and bankruptcy) and interim management services. Our non-distressed practice offerings include financings, M&As, M&A integration, valuations and tax advice, as well as financial, operational and performance improvement services.

Our Forensic and Litigation Consulting (“FLC”) segment provides law firms, companies, government clients and other interested parties with multidisciplinary, independent dispute advisory, investigations, data analytics, forensic accounting, business intelligence and risk mitigation services, as well as interim management and performance improvement services for our health solutions practice clients.

Our Economic Consulting segment provides law firms, companies, government entities and other interested parties with analysis of complex economic issues for use in legal, regulatory and international arbitration proceedings, strategic decision making and public policy debates in the U.S. and around the world.

Our Technology segment offers a comprehensive portfolio of information governance and e-discovery software, services and consulting support to companies, law firms, courts and government agencies worldwide. Our services allow our clients to control the risk and expense of e-discovery events, as well as manage their data in the context of compliance and risk.

Our Strategic Communications segment designs and executes communications strategies for management teams and boards of directors to help them seize opportunities, manage financial, regulatory and reputational challenges, navigate market disruptions, articulate their brand, stake a competitive position, and preserve and grow their operations.

We derive substantially all of our revenues from providing professional services to both U.S. and global clients. Most of our services are rendered under time-and-expense arrangements that obligate the client to pay us a fee for the hours that we incur at agreed-upon rates. Under this arrangement, we typically bill our clients for reimbursable expenses, which may include the cost of producing our work product and other direct expenses that we incur on behalf of the client, such as travel costs. We also render services for which certain clients may be required to pay us a fixed fee or recurring retainer. These arrangements are generally cancelable at any time. Some of our engagements contain performance-based arrangements in which we earn a success fee when and if certain predefined outcomes occur. This type of success fee may supplement a time-and-expense or fixed-fee arrangement. Success fee revenues may cause variations in our revenues and operating results due to the timing of achieving the performance-based criteria. In our Technology segment, certain clients are also billed based on the amount of data stored on our electronic systems, the volume of information processed, or the number of users licensing our Ringtail^® software products for use or installation within their own environments. We license certain products directly to end users, as well as indirectly through our channel partner relationships. Unit-based revenues are defined as revenues billed on a per-item, per-page or some other unit-based method and include revenues from data processing and hosting, software usage and software licensing. Unit-based revenues include revenues associated with our proprietary software that are made available to customers, either via a web browser (“on-demand”) or installed at our customer or partner locations (“on-premise”). On-demand revenues are charged on a unit or monthly basis and include, but are not limited to, processing and review related functions. On-premise revenues are comprised of upfront license fees, with recurring support and maintenance. Seasonal factors, such as the timing of our employees’ and clients’ vacations and holidays, impact the timing of our revenues.

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Our financial results are primarily driven by:

We define acquisition growth as revenues of acquired companies in the first 12 months following the effective date of an acquisition. Our definition of organic growth is the change in revenues excluding the impact of all such acquisitions.

When significant, we identify the estimated impact of foreign currency translation (“FX”) driven by our businesses with functional currencies other than the U.S. dollar (“USD”), on the period-to-period performance results. The estimated impact of FX is calculated as the difference between the prior period results multiplied by the average foreign currency exchange rates to USD in the current period and the prior period results multiplied by the average foreign currency rates to USD in the prior period.

Non-GAAP Financial Measures

In the accompanying analysis of financial information, we sometimes use information derived from consolidated and segment financial information that may not be presented in our financial statements or prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). Certain of these financial measures are considered not in conformity with GAAP (“non-GAAP financial measures”) under the SEC rules. Specifically, we have referred to the following non-GAAP financial measures:

We have included the definitions of Segment Operating Income and Adjusted Segment EBITDA below in order to more fully define the components of certain non-GAAP financial measures in the accompanying analysis of financial information. As described in Note 13, “Segment Reporting” in Part 1, Item 1, of this Quarterly Report on Form 10-Q, we evaluate the performance of our operating segments based on Adjusted Segment EBITDA, and Segment Operating Income is a component of the definition of Adjusted Segment EBITDA.  

We define Segment Operating Income as a segment’s share of consolidated operating income. We define Total Segment Operating Income, which is a non-GAAP financial measure, as the total of Segment Operating Income for all segments, which excludes unallocated corporate expenses. We use Segment Operating Income for the purpose of calculating Adjusted Segment EBITDA. We define Adjusted Segment EBITDA as a segment’s share of consolidated operating income before depreciation, amortization of intangible assets, remeasurement of acquisition-related contingent consideration, special charges and goodwill impairment charges. We use Adjusted Segment EBITDA as a basis to internally evaluate the financial performance of our segments because we believe it reflects current core operating performance and provides an indicator of the segment’s ability to generate cash. We define Adjusted EBITDA Margin as Adjusted EBITDA as a percentage of total revenues. We define Adjusted Segment EBITDA Margin as Adjusted Segment EBITDA as a percentage of a segment’s revenues.

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We define Total Adjusted Segment EBITDA, which is a non-GAAP financial measure, as the total of Adjusted Segment EBITDA for all segments, which excludes unallocated corporate expenses. We define Adjusted EBITDA, which is a non-GAAP financial measure, as consolidated net income before income tax provision, other non-operating income (expense), depreciation, amortization of intangible assets, remeasurement of acquisition-related contingent consideration, special charges, goodwill impairment charges and losses on early extinguishment of debt. We believe that the non-GAAP financial measures, which exclude the effects of remeasurement of acquisition-related contingent consideration, special charges and goodwill impairment charges, when considered together with our GAAP financial results and GAAP measures, provide management and investors with a more complete understanding of our operating results, including underlying trends. In addition, EBITDA is a common alternative measure of operating performance used by many of our competitors. It is used by investors, financial analysts, rating agencies and others to value and compare the financial performance of companies in our industry. Therefore, we also believe that these measures, considered along with corresponding GAAP measures, provide management and investors with additional information for comparison of our operating results with the operating results of other companies.

We define Adjusted Net Income and Adjusted Earnings per Diluted Share (“Adjusted EPS”), which are non-GAAP financial measures, as net income and earnings per diluted share, respectively, excluding the impact of remeasurement of acquisition-related contingent consideration, special charges, goodwill impairment charges and losses on early extinguishment of debt. We use Adjusted Net Income for the purpose of calculating Adjusted EPS. Management uses Adjusted EPS to assess total Company operating performance on a consistent basis. We believe that this non-GAAP financial measure, which excludes the effects of the remeasurement of acquisition-related contingent consideration, special charges, goodwill impairment charges and losses on early extinguishment of debt, when considered together with our GAAP financial results, provides management and investors with an additional understanding of our business operating results, including underlying trends.

We define Free Cash Flow as net cash provided by operating activities less cash payments for purchases of property and equipment. We believe this non-GAAP financial measure, when considered together with our GAAP financial results, provides management and investors with an additional understanding of the Company’s ability to generate cash for ongoing business operations and other capital deployment.

Non-GAAP financial measures are not defined in the same manner by all companies and may not be comparable with other similarly titled measures of other companies. Non-GAAP financial measures should be considered in addition to, but not as a substitute for or superior to, the information contained in our Condensed Consolidated Statements of Comprehensive Income. Reconciliations of non-GAAP financial measures to the most directly comparable GAAP financial measures are included elsewhere in this report.

EXECUTIVE HIGHLIGHTS

 

 

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Third Quarter 2017 Executive Highlights

Revenues

Revenues for the three months ended September 30, 2017 increased $10.9 million, or 2.5%, to $449.0 million, compared with revenues of $438.0 million for the three months ended September 30, 2016 primarily driven by higher revenue in our Corporate Finance and FLC segments, partially offset by declines in our Economic Consulting segment.

Special charges

There were no special charges recorded during the three months ended September 30, 2017.

 

 

Net income

 

Net income for the three months ended September 30, 2017 was $32.2 million compared with net income of $21.7 million for the three months ended September 30, 2016. This increase from the prior year quarter was due to the impact of operating profits driven by segment performance and a lower effective income tax rate.

Adjusted EBITDA

Adjusted EBITDA for the three months ended September 30, 2017 increased $10.2 million, or 21.6% to $57.4 million compared with $47.2 million for the three months ended September 30, 2016. Adjusted EBITDA was 12.8% of revenues for the three months ended September 30, 2017 compared with 10.8% of revenues for the three months ended September 30, 2016. The increase in Adjusted EBITDA was due to higher margin revenues, including success fees, and improved utilization largely within our Corporate Finance and FLC segments.  

Earnings per diluted share (EPS) and Adjusted EPS

Earnings per diluted share for the three months ended September 30, 2017 increased $0.33 to $0.85 compared with $0.52 for the three months ended September 30, 2016. Adjusted EPS for the three months ended September 30, 2017 increased $0.31 to $0.83 compared with $0.52 for the three months ended September 30, 2016. The increases for both EPS and Adjusted EPS were due to the operating results described above, lower weighted average shares outstanding as a result of repurchases made under our Stock Repurchase Program and a lower effective income tax rate.

Liquidity and capital allocation

Net cash provided by operating activities for the three months ended September 30, 2017 increased $35.3 million to $106.2 million compared with $70.9 million for the prior year quarter mainly due to higher cash collections as a result of higher revenues, lower income tax payments and benefits related to the timing of certain other operating expenditures. Days sales outstanding (“DSO”) was slightly lower (DSO was 105 days at September 30, 2017 and 106 days at September 30, 2016). Free cash flow for the three months ended September 30, 2017 was $99.3 million compared with $60.1 million for the three months ended September 30, 2016.

A portion of net cash provided by operating activities was used to repurchase and retire 1,599,400 shares of our common stock for an average price per share of $32.98, at a total cost of $52.7 million and make $20.0 million of net repayments under the Company’s $550.0 million senior secured bank revolving credit facility (“Senior Bank Credit Facility”).

Other strategic activities

During the three months ended September 30, 2017, we acquired the operations of a restructuring advisory firm in New York. As part of the transaction, 19 professionals, including five Senior Managing Directors, joined the Company’s Corporate Finance segment. The addition of these professionals will further enhance our top restructuring position in North America by strengthening our company-side and interim management capabilities.

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Headcount

Our total headcount decreased 1.4% from 4,718 at December 31, 2016 to 4,654 at September 30, 2017. The following table includes the net billable headcount additions (reductions) for the nine months ended September 30, 2017.

 

 

CONSOLIDATED RESULTS OF OPERATIONS

Segment and Consolidated Operating Results:

 

 

 

 

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Reconciliation of Net Income to Adjusted EBITDA:

 

 

Reconciliation of Net Income and Earnings Per Diluted Share to Adjusted Net Income and Adjusted EPS:

 

 

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Reconciliation of Net Cash Provided by Operating Activities to Free Cash Flow:

 

 

 

Three Months Ended September 30, 2017 Compared with Three Months Ended September 30, 2016

Revenues and operating income

See “Segment Results” for an expanded discussion of revenues, gross profit and selling, general and administrative (“SG&A”) expense.

Unallocated corporate expenses

Unallocated corporate expenses for the three months ended September 30, 2017 decreased $2.9 million, or 13.4%, to $18.8 million compared to $21.7 million for the three months ended September 30, 2016.  The decrease was primarily due to lower infrastructure departments spend and lower executive compensation expense, which was partially offset by higher legal expenses.

Interest income and other

Interest income and other, which includes foreign currency transaction gains and losses, decreased $2.1 million to $1.1 million for the three months ended September 30, 2017 compared with $3.2 million for the three months ended September 30, 2016. The decrease was primarily due to net unrealized foreign currency transaction losses, which were $0.3 million for the three months ended September 30, 2017 compared with a $1.3 million gain for the three months ended September 30, 2016. Transaction gains and losses, both realized and unrealized, relate to the remeasurement or settlement of monetary assets and liabilities that are denominated in a currency other than an entity’s functional currency. These monetary assets and liabilities include cash as well as third party and intercompany receivables and payables.

Interest expense

Interest expense for the three months ended September 30, 2017 increased $0.5 million, or 7.2%, to $6.8 million compared to $6.3 million for three months ended September 30, 2016. Interest expense for the three months ended September 30, 2017 was negatively impacted by higher average interest rates on our borrowings under the Senior Bank Credit Facility.

Income tax provision

The effective income tax rate for the three months ended September 30, 2017 was 22.2% compared with 32.2% for the three months ended September 30, 2016. The current quarter rate declined as a result of the favorable impact of an intercompany service fee that reduced certain foreign net operating losses and related valuation allowances, and higher foreign earnings which are in lower taxed jurisdictions. The effective tax rate, prior to discrete items, declined by 7.9 percentage points, primarily as a result of these benefits as compared to the prior year period. In addition certain discrete adjustments reduced the rate by 2.1 percentage points as compared to the prior year period.

 

Nine Months Ended September 30, 2017 Compared with Nine Months Ended September 30, 2016

Revenues and operating income

See “Segment Results” for an expanded discussion of revenues, gross profit and SG&A expense.

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Unallocated corporate expenses

Unallocated corporate expenses for the nine months ended September 30, 2017 decreased $0.7 million, or 1.2%, to $60.2 million compared to $60.9 million for the nine months ended September 30, 2016.  Excluding the impact of special charges of $3.2 million recorded in 2017, unallocated corporate expenses decreased by $3.9 million in 2017 or 6.5%.  The decrease was primarily due to lower infrastructure departments spend and lower executive compensation expense, which was partially offset by higher legal expenses and the 2017 global senior management meeting.

Interest income and other

Interest income and other, which includes foreign currency transaction gains and losses, decreased $6.6 million to $3.3 million for the nine months ended September 30, 2017 compared with $9.9 million for the nine months ended September 30, 2016. The decrease was primarily due to net unrealized foreign currency transaction losses, which were $0.1 million for the nine months ended September 30, 2017 compared with a $5.7 million gain for the nine months ended September 30, 2016. Transaction gains and losses, both realized and unrealized, relate to the remeasurement or settlement of monetary assets and liabilities that are denominated in a currency other than an entity’s functional currency. These monetary assets and liabilities include cash as well as third party and intercompany receivables and payables.

Interest expense

 

Interest expense for the nine months ended September 30, 2017 of $18.8 million was consistent with the nine months ended September 30, 2016.

Income tax provision

Our effective tax rate for the nine months ended September 30, 2017 was 30.0% compared to 36.0% for the nine months ended September 30, 2016. The current year rate declined as a result of a mix of higher foreign earnings which are in lower taxed jurisdictions partially offset by an increase in valuation allowances on certain foreign net operating losses. The effective tax rate, prior to discrete items, declined by 3.7 percentage points, primarily as a result of these benefits as compared to the prior year period. In addition certain discrete adjustments reduced the rate by 2.3 percentage points compared to the prior year period.

 

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SEGMENT RESULTS

Total Adjusted Segment EBITDA

We evaluate the performance of our operating segments based on Adjusted Segment EBITDA. We define Total Adjusted Segment EBITDA, which is a non-GAAP financial measure, as the total of Adjusted Segment EBITDA for all segments, which excludes unallocated corporate expenses. The following table reconciles Net Income to Total Adjusted Segment EBITDA for the three and nine months ended September 30, 2017 and 2016.

 

 

Other Segment Operating Data

 

 

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CORPORATE FINANCE & RESTRUCTURING

 

 

Three Months Ended September 30, 2017 Compared with Three Months Ended September 30, 2016

Revenues increased $17.5 million, or 15.8%, to $128.1 million for the three months ended September 30, 2017, which included $3.7 million, or 3.4%, from an acquisition that closed in the quarter. Excluding the acquisition, revenues increased organically by $13.8 million, or 12.5%. This increase was primarily due to increased demand globally for restructuring services, and an $8.5 million increase in success fees.

Gross profit increased $9.2 million, or 24.7%, to $46.4 million for the three months ended September 30, 2017. Gross profit margin increased 2.6 percentage points for the three months ended September 30, 2017. This increase was a result of higher success fees and improved utilization.

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SG&A expense increased $0.3 million, or 1.7%, to $20.4 million for the three months ended September 30, 2017. SG&A expenses were 16.0% of revenues for the three months ended September 30, 2017 compared with 18.2% for the three months ended September 30, 2016.    

Nine Months Ended September 30, 2017 Compared with Nine Months Ended September 30, 2016

Revenues decreased $18.4 million, or 5.0%, to $351.5 million for the nine months ended September 30, 2017, which included a 0.8% estimated negative impact from FX. Excluding the estimated impact of FX, revenues decreased $15.5 million, or 4.2%. This decrease was primarily driven by lower demand for restructuring services globally, partially offset by higher success fees.

Gross profit decreased $22.1 million, or 15.8%, to $118.0 million for the nine months ended September 30, 2017. Gross profit margin decreased 4.3 percentage points for the nine months ended September 30, 2017. This decrease was due to lower utilization across all regions, partially offset by higher success fees in North America.

SG&A expenses increased $2.4 million, or 3.9%, to $63.3 million for the nine months ended September 30, 2017. SG&A expenses were 18.0% of revenues for the nine months ended September 30, 2017 compared with 16.5% for the nine months ended September 30, 2016. The increase in SG&A expense was due to an increase in bad debt expense and higher infrastructure support costs. Bad debt expense in 2016 included a collection of a prior period write-off.  

FORENSIC AND LITIGATION CONSULTING

 

 

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Three Months Ended September 30, 2017 Compared with Three Months Ended September 30, 2016

Revenues increased $3.6 million, or 3.1%, to $118.6 million for the three months ended September 30, 2017. This increase in revenues was primarily due to higher demand for forensic accounting and advisory services and construction solutions offerings, partially offset by a $4.5 million decrease in success fees in our health solutions practice.  

Gross profit increased $5.5 million, or 14.5%, to $43.4 million for the three months ended September 30, 2017. Gross profit margin increased 3.7 percentage points for the three months ended September 30, 2017. This increase is related to a 6 percentage point improvement in utilization, which was partially offset by the impact of lower success fees in our health solutions practice.

SG&A expenses decreased $0.7 million, or 3.1%, to $21.9 million for the three months ended September 30, 2017. SG&A expenses were 18.4% of revenues for the three months ended September 30, 2017 compared with 19.6% for the three months ended September 30, 2016. The decrease in SG&A expense was due to lower compensation and travel expenses, partially offset by higher bad debt expense.

Nine Months Ended September 30, 2017 Compared with Nine Months Ended September 30, 2016

Revenues decreased $10.8 million, or 3.1%, to $341.5 million for the nine months ended September 30, 2017. This decrease was primarily driven by lower demand in our global investigations and health solutions practices, partially offset by increased volume in our global construction solutions and North America data and analytics practices.

Gross profit decreased $1.6 million, or 1.4%, to $112.0 million for the nine months ended September 30, 2017. Gross profit margin increased 0.6 percentage point for the nine months ended September 30, 2017. This increase is related to better utilization in our global construction solutions practice coupled with lower personnel costs in our health solutions practice partially offset by lower utilization in our global investigations.

SG&A expenses increased $0.8 million, or 1.3%, to $66.1 million for the nine months ended September 30, 2017. SG&A expenses were 19.4% of revenues for the nine months ended September 30, 2017 compared with 18.5% for the nine months ended September 30, 2016. The increase in SG&A expense was due to higher bad debt expense, partially offset by lower travel expenses and other declines in general overhead expenses.

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ECONOMIC CONSULTING

 

 

Three Months Ended September 30, 2017 Compared with Three Months Ended September 30, 2016

Revenues decreased $10.7 million, or 8.8%, to $111.8 million for the three months ended September 30, 2017. This decrease was primarily driven by lower demand for antitrust and financial economics services in North America.

Gross profit decreased $6.0 million, or 17.7%, to $27.8 million for the three months ended September 30, 2017. Gross profit margin decreased 2.7 percentage points for the three months ended September 30, 2017. This decrease was primarily due to a 7 percentage point decline in utilization, resulting from lower demand and an increase in billable staff.

SG&A expenses increased $0.4 million, or 2.3%, to $17.1 million for the three months ended September 30, 2017. SG&A expenses were 15.3% of revenues for the three months ended September 30, 2017 compared with 13.7% for the three months ended September 30, 2016.

Nine Months Ended September 30, 2017 Compared with Nine Months Ended September 30, 2016

Revenues increased $3.8 million, or 1.0%, to $375.0 million for the nine months ended September 30, 2017, which included a 1.5% estimated negative impact from FX. Excluding the estimated impact of FX, revenues increased by $9.2 million, or 2.5%. This increase was primarily driven by higher demand and realized rates for antitrust services in North America, which was partially offset by lower demand for our financial economics services in North America.

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Gross profit decreased $6.6 million, or 6.4%, to $96.1 million for the nine months ended September 30, 2017. Gross profit margin decreased 2.1 percentage points for the nine months ended September 30, 2017. This decrease was primarily due to a 5 percentage point decline in utilization, with an increase in billable staff.

SG&A expenses increased $1.9 million, or 3.7%, to $52.7 million for the nine months ended September 30, 2017. SG&A expenses were 14.0% of revenues for the nine months ended September 30, 2017 compared with 13.7% for the nine months ended September 30, 2016. The increase in SG&A expense was driven primarily by higher depreciation, bad debt, and infrastructure support costs, which was partially offset by lower legal fees.

TECHNOLOGY

 

 

Three Months Ended September 30, 2017 Compared with Three Months Ended September 30, 2016

Revenues decreased $1.8 million, or 4.1%, to $42.3 million for the three months ended September 30, 2017. This decrease was primarily driven by lower demand for managed review and lower pricing for hosting services, partially offset by increased demand for consulting services. These decreases were related to the wind down of large cross-border investigations, partially offset by new M&A-related “second requests.”

Gross profit decreased $0.3 million, or 1.8%, to $18.1 million for the three months ended September 30, 2017. Gross profit margin increased by 1.0 percentage point for the three months ended September 30, 2017. This margin increase is due to lower data center costs partially offset by an unfavorable revenue mix.

SG&A expenses decreased $0.2 million, or 1.4%, to $14.9 million for the three months ended September 30, 2017. SG&A expenses were 35.3% of revenues for the three months ended September 30, 2017 compared with 34.3% for the three months ended

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September 30, 2016. Research and development expense related to software development was $3.3 million for the three months ended September 30, 2017, a decline of $1.2 million, compared with $4.5 million for the three months ended September 30, 2016. This reduction was offset by higher selling expenses and bad debt expense.

Nine Months Ended September 30, 2017 Compared with Nine Months Ended September 30, 2016

Revenues decreased $0.3 million, or 0.2%, to $133.9 million for the nine months ended September 30, 2017. Revenues were relatively consistent with the prior year period primarily driven by lower pricing for hosting, which was offset by higher demand and pricing for consulting. This was due to higher demand in M&A second request and investigation work offset by the wind down of certain hosting services engagements.

Gross profit increased $1.0 million, or 1.7%, to $56.7 million for the nine months ended September 30, 2017. Gross profit margin increased 0.8 percentage points for the nine months ended September 30, 2017. This margin increase is due to lower data center costs largely offset by an unfavorable revenue mix.

SG&A expenses decreased $0.9 million, or 1.8%, to $46.5 million for the nine months ended September 30, 2017. SG&A expenses were 34.7% of revenues for the nine months ended September 30, 2017 compared with 35.3% for the nine months ended September 30, 2016. Research and development expense related to software development was $11.8 million for the nine months ended September 30, 2017, a decline of $1.2 million, compared with $13.0 million for the nine months ended September 30, 2016.

STRATEGIC COMMUNICATIONS

 

 

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Three Months Ended September 30, 2017 Compared with Three Months Ended September 30, 2016

Revenues increased $2.3 million, or 5.1%, to $48.2 million for the three months ended September 30, 2017, which included 1.0% estimated favorable impact from FX. Excluding the estimated impact of FX, revenues increased $1.9 million, or 4.1%, primarily driven by higher retainer based revenues, partially offset by lower pass-through revenues.

Gross profit increased $1.4 million, or 8.3%, to $18.5 million for the three months ended September 30, 2017. Gross profit margin increased 1.1 percentage points for the three months ended September 30, 2017. This increase was primarily due to a lower proportion of lower margin pass-through revenues and the impact of a success fee.

SG&A expenses increased $0.8 million, or 7.9%, to $10.7 million for the three months ended September 30, 2017. SG&A expenses were 22.3% of revenues for the three months ended September 30, 2017 compared with 21.7% for the three months ended September 30, 2016. The increase in SG&A expenses was largely driven by higher general overhead expenses.

Nine Months Ended September 30, 2017 Compared with Nine Months Ended September 30, 2016

Revenues decreased $2.7 million, or 1.9%, to $138.1 million for the nine months ended September 30, 2017, which included 2.2% estimated negative impact from FX. Excluding the estimated impact from FX, revenues were in line with prior year but include an increase in retainer based revenues across all regions offset by declining project income, mainly in North America.

Gross profit decreased $4.5 million, or 8.4%, to $49.3 million for the nine months ended September 30, 2017. Gross profit margin decreased 2.5 percentage points for the nine months ended September 30, 2017. This decrease was primarily due to fewer large, high margin engagements in North America as well as higher compensation as a result of increased average headcount.

SG&A expenses increased $0.3 million, or 0.8%, to $33.1 million for the nine months ended September 30, 2017. SG&A expenses were 24.0% of revenues for the nine months ended September 30, 2017 compared with 23.3% for the nine months ended September 30, 2016.

 

 

CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements, which we have prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Note 1 to the Consolidated Financial Statements included in Part II, Item 7, of our Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC, describes the significant accounting policies and methods used in preparation of the Consolidated Financial Statements. We evaluate our estimates, including those related to allowance for doubtful accounts and unbilled services, goodwill, income taxes and contingencies on an ongoing basis. We base our estimates on current facts and circumstances, historical experience and on various other assumptions that we believe are reasonable. These results form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The accounting policies that reflect our more significant estimates, judgments and assumptions and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:

There have been no material changes to our critical accounting policies and estimates from the information provided in “Critical Accounting Policies” in Part II, Item 7, of our Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC.

Goodwill and Other Intangible Assets

On a quarterly basis, we monitor the key drivers of fair value to detect events or other changes that would warrant an interim impairment test of our goodwill and intangible assets. Factors we consider important that could trigger an interim impairment review include, but are not limited to, the following: significant underperformance relative to historical or projected future operating results; a significant change in the manner of our use of the acquired asset or strategy for our overall business; a significant negative industry or

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economic trend; and our market capitalization relative to net book value. When we evaluate these factors and determine that a triggering event has occurred, we perform an interim impairment analysis.

As of October 1, 2016, the date of our last annual goodwill impairment test, the estimated fair value of each of our reporting units significantly exceeded their respective carrying values and no further testing was required. Through our quarterly assessment, we determined that there were no events or circumstances that more likely than not would reduce the fair value of any of our reporting units below their carrying value.

There can be no assurance that the estimates and assumptions used in our goodwill impairment testing will prove to be accurate predictions of the future. If our assumptions regarding forecasted cash flows are not achieved, we may be required to perform the two-step quantitative goodwill impairment analysis prior to our next annual impairment test. In addition, if the aforementioned factors have the effect of changing one of the critical assumptions or estimates we use to calculate the value of our goodwill or intangible assets, we may be required to record goodwill and/or intangible asset impairment charges in future periods, whether in connection with our next annual impairment test or if a triggering event occurs outside of the quarter during which the annual goodwill impairment test is performed. It is not possible at this time to determine if any future impairment charge would result or, if it does, whether such charge would be material.

SIGNIFICANT NEW ACCOUNTING PRONOUNCEMENTS

See Note 3, “New Accounting Standards” in Part I, Item 1, of this Quarterly Report on Form 10-Q.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

 

 

We have generally financed our day-to-day operations, capital expenditures and acquisitions through cash flows from operations. During the first quarter of our fiscal year, our cash needs generally exceed our cash flows from operations due to the payment of annual incentive compensation. Our operating cash flows are generally positive subsequent to the first quarter of each year.

Our operating assets and liabilities consist primarily of billed and unbilled accounts receivable, notes receivable from employees, accounts payable, accrued expenses and accrued compensation expenses. The timing of billings and collections of receivables, as well as compensation and vendor payments, affect the changes in these balances.

DSO is a performance measure used to assess how quickly revenues are collected by the Company. We calculate DSO at the end of each reporting period by dividing net accounts receivable reduced by billings in excess of services provided, by revenues for the quarter, adjusted for changes in foreign exchange rates. We multiply the result by the number of days in the quarter.

Nine Months Ended September 30, 2017 Compared with Nine Months Ended September 30, 2016

Net cash provided by operating activities for the nine months ended September 30, 2017 was $24.0 million compared with $111.6 million for the nine months ended September 30, 2016. The decrease in net cash provided by operating activities was primarily due to lower cash collections as a result of lower revenues and increased compensation and severance payments partially offset by lower income tax payments and timing of operating expense payments.

Net cash used in investing activities for the nine months ended September 30, 2017 was $28.9 million compared with $22.8 million for the nine months ended September 30, 2016. Cash payment for the acquisition completed in the three months ended September 30, 2017 was $8.9 million. Capital expenditures were $20.0 million for the nine months ended September 30, 2017 compared with $22.9 million for the nine months ended September 30, 2016.

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Net cash used in financing activities for the nine months ended September 30, 2017 was $59.1 million compared with $6.3 million for the nine months ended September 30, 2016. Cash used in financing activities in the nine months ended September 30, 2017 included payments of $155.3 million used to settle repurchases of our common stock, which included $95.0 million of net borrowings under our Senior Bank Credit Facility and $3.6 million of refundable deposits related to one of our foreign entities. Our financing activities for the nine months ended September 30, 2016 included a $25.0 million repayment of borrowings under our Senior Bank Credit Facility and payments in a total amount of $2.9 million to settle repurchases of our common stock, partially offset by $18.4 million in cash received from the issuance of common stock under our equity compensation plan and the receipt of $2.8 million of refundable deposits related to one of our foreign entities.

Capital Resources

As of September 30, 2017, our capital resources included $158.0 million of cash and cash equivalents and available borrowing capacity of $384.3 million under our Senior Bank Credit Facility. As of September 30, 2017, we had $165.0 million of borrowing outstanding under our Senior Bank Credit Facility and $0.7 million of outstanding letters of credit, which reduced the availability of borrowings. We primarily use letters of credit in lieu of security deposits for our leased office facilities.

Future Capital Needs

We anticipate that our future capital needs will principally consist of funds required for:

During the nine months ended September 30, 2017, we spent $20.0 million in capital expenditures to support our organization, including direct support for specific client engagements.  We expect to make additional capital expenditures in an aggregate amount between $5 million and $12 million for the remainder of 2017. Our estimate takes into consideration the needs of our existing businesses but does not include the impact of any purchases that we may be required to make as a result of future acquisitions or specific client engagements that are not currently contemplated. Our capital expenditure requirements may change if our staffing levels or technology needs change significantly from what we currently anticipate, if we are required to purchase additional equipment specifically to support new client engagements or for their purposes or if we pursue and complete additional acquisitions.

Our cash flows from operations have historically exceeded our cash needs for capital expenditures and debt service requirements. We believe that our cash flows from operations, supplemented by borrowings under our Senior Bank Credit Facility, as necessary, will provide adequate cash to fund our long-term cash needs from normal operations for the next 12 months or longer.

Our conclusion that we will be able to fund our cash requirements by using existing capital resources and cash generated from operations does not take into account the impact of any unanticipated capital expenditures, future acquisitions, unexpected significant changes in numbers of employees or other unanticipated uses of cash. The anticipated cash needs of our businesses could change significantly if we pursue and complete additional business acquisitions, if our business plans change, if economic conditions change from those currently prevailing or from those now anticipated, or if other unexpected circumstances arise that may have a material effect on the cash flow or profitability of our businesses, including material negative changes in the operating performance or financial results of our businesses. Any of these events or circumstances, including any new business opportunities, could involve significant additional funding needs in excess of the identified currently available sources and could require us to raise additional debt or equity funding to meet those needs. Our ability to raise additional capital, if necessary, is subject to a variety of factors that we cannot predict with certainty, including:

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Any new debt funding, if available, may be on terms less favorable to us than our Senior Bank Credit Facility or the Indenture that governs our senior notes due 2022. See “Forward-Looking Statements” of this Quarterly Report on Form 10-Q and “Risk Factors” previously disclosed in Part II, Item 1A, of our Quarterly Report on Form 10-Q for the second quarter ended June 30, 2017, filed with the SEC on July 27, 2017.  

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements, other than operating leases, and we have not entered into any transactions involving unconsolidated subsidiaries or special purpose entities.

Future Contractual Obligations

There have been no significant changes in our future contractual obligations as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC.

Forward-Looking Statements

This Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that involve uncertainties and risks. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues, future results and performance, future capital allocations and expenditures, expectations, plans or intentions relating to acquisitions, share repurchases and other matters, business trends and other information that is not historical. Forward-looking statements often contain words such as “estimates,” “expects,” “anticipates,”  “projects,” “plans,” “intends,” “believes,” “forecasts” and variations of such words or similar expressions. All forward-looking statements, including, without limitation, management’s financial guidance and examination of operating trends, are based upon our historical performance and our current plans, estimates and expectations at the time we make them and various assumptions. There can be no assurance that management’s expectations, beliefs and projections will result or be achieved. Our actual financial results, performance or achievements could differ materially from those expressed in, or implied by, any forward-looking statements. The inclusion of any forward-looking information should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved. Given these risks, uncertainties and other factors, you should not place undue reliance on any forward-looking statements.

There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in, or implied by, this Quarterly Report on Form 10-Q. Important factors that could cause our actual results to differ materially from the forward-looking statements we make in this Quarterly Report on Form 10-Q include those set forth under the heading “Risk Factors” in Part II, Item 1A, of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2017 filed with the SEC. Important factors that could cause our actual results to differ materially from the forward-looking statements we make in this Quarterly Report on Form 10-Q include, but are not limited to, the following:

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There may be other factors that may cause our actual results to differ materially from our forward-looking statements. All forward-looking statements attributable to us or persons acting on our behalf apply only as of the date of this Quarterly Report on Form 10-Q and are expressly qualified in their entirety by the cautionary statements included herein. We undertake no obligation to publicly update or revise any forward-looking statements to reflect subsequent events or circumstances and do not intend to do so.

For information regarding our exposure to certain market risks see “Quantitative and Qualitative Disclosures about Market Risk” in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC. There have been no significant changes in our market risk exposure during the period covered by this Quarterly Report on Form 10-Q.

Evaluation of Disclosure Controls and Procedures. An evaluation of the effectiveness of the design and operation of our “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Exchange Act), as of the end of the period covered by this Quarterly Report on Form 10-Q was made under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (a) were effective to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is timely recorded, processed, summarized and reported and (b) included, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting. There have not been any changes in our internal control over financial reporting that occurred during the three months ended September 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

From time to time in the ordinary course of business, we are subject to claims, asserted or unasserted, or named as a party to lawsuits or investigations. Litigation, in general, and intellectual property and securities litigation in particular, can be expensive and disruptive to normal business operations. Moreover, the results of legal proceedings cannot be predicted with any certainty and in the case of more complex legal proceedings such as intellectual property and securities litigation, the results are difficult to predict at all. We are not aware of any asserted or unasserted legal proceedings or claims that we believe would have a material adverse effect on our financial condition or results of our operations.  

Part II, Item 1A of our Quarterly Report on Form 10-Q for the second quarter ended June 30, 2017, filed with the SEC on July 27, 2017, included amended and restated risk factors associated with our business, which included material changes to and supersedes the risk factors associated with our business previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, filed with the Securities and Exchange Commission on February 18, 2017. There has been no material change in any of the risk factors previously disclosed in our Quarterly Report on Form 10-Q for the second quarter ended June 30, 2017. We may disclose changes to risk factors or disclose additional factors from time to time in our future filings with the SEC. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations.  

Unregistered sales of equity securities.

None.

Repurchases of our common stock.

The following table provides information with respect to purchases we made of our common stock during the three months ended September 30, 2017:

 

 

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None.

Not applicable.

None.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: October 26, 2017

 

 

 

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