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EX-32.2 - EX-32.2 - FTI CONSULTING, INCfti33118-10qex322.htm
EX-32.1 - EX-32.1 - FTI CONSULTING, INCfti33118-10qex321.htm
EX-31.2 - EX-31.2 - FTI CONSULTING, INCfti33118-10qex312.htm
EX-31.1 - EX-31.1 - FTI CONSULTING, INCfti33118-10qex311.htm
EX-10.1 - EX-10.1 - FTI CONSULTING, INCamendmentno3toemployment.htm

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2018
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                    to                    
Commission file number 001-14875
 
 
FTI CONSULTING, INC.
(Exact Name of Registrant as Specified in its Charter)
 
 
 
 
Maryland
52-1261113
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
 
 
555 12th Street NW
Washington, D.C.
20004
(Address of Principal Executive Offices)
(Zip Code)
(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. 
Large accelerated filer
Accelerated filer
 
 
 
 
Non-accelerated filer
☐  (Do not check if a smaller reporting company)
Smaller reporting company
 
 
 
 
Emerging growth company
 
 
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. 
Class
Outstanding at April 19, 2018
Common stock, par value $0.01 per share
37,769,081
 



FTI CONSULTING, INC. AND SUBSIDIARIES
INDEX
 
 
 
Page 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


PART I—FINANCIAL INFORMATION
FTI Consulting, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except per share data)
Item 1.
Financial Statements
 
 
March 31,
 
December 31,
 
2018
 
2017
Assets
(Unaudited)
 
 
Current assets
 

 
 

Cash and cash equivalents
$
152,044

 
$
189,961

Accounts receivable:
 
 
 
Billed receivables
417,085

 
390,996

Unbilled receivables
367,516

 
312,569

Allowance for doubtful accounts and unbilled services
(201,013
)
 
(180,687
)
Accounts receivable, net
583,588

 
522,878

Current portion of notes receivable
29,371

 
25,691

Prepaid expenses and other current assets
50,775

 
55,649

Total current assets
815,778

 
794,179

Property and equipment, net
75,586

 
75,075

Goodwill
1,208,011

 
1,204,803

Other intangible assets, net
42,390

 
44,150

Notes receivable, net
91,215

 
98,105

Other assets
43,472

 
40,929

Total assets
$
2,276,452

 
$
2,257,241

Liabilities and Stockholders' Equity
 
 
 
Current liabilities
 
 
 
Accounts payable, accrued expenses and other
$
105,966

 
$
94,873

Accrued compensation
191,055

 
268,513

Billings in excess of services provided
46,446

 
46,942

Total current liabilities
343,467

 
410,328

Long-term debt, net
441,473

 
396,284

Deferred income taxes
129,274

 
124,471

Other liabilities
124,804

 
134,187

Total liabilities
1,039,018

 
1,065,270

Commitments and contingent liabilities (Note 10)


 


Stockholders' equity
 
 
 
Preferred stock, $0.01 par value; shares authorized — 5,000; none
   outstanding

 

Common stock, $0.01 par value; shares authorized — 75,000;
   shares issued and outstanding — 37,720 (2018) and 37,729 (2017)
377

 
377

Additional paid-in capital
261,765

 
266,035

Retained earnings
1,085,061

 
1,045,774

Accumulated other comprehensive loss
(109,769
)
 
(120,215
)
Total stockholders' equity
1,237,434

 
1,191,971

Total liabilities and stockholders' equity
$
2,276,452

 
$
2,257,241

 
See accompanying notes to condensed consolidated financial statements

3


FTI Consulting, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(in thousands, except per share data)
(Unaudited)
 
 
Three Months Ended March 31,
 
2018
 
2017
Revenues
$
497,774

 
$
446,344

Operating expenses
 
 
 
Direct cost of revenues
321,117

 
309,072

Selling, general and administrative expenses
112,128

 
107,690

Amortization of other intangible assets
2,270

 
2,493

 
435,515

 
419,255

Operating income
62,259

 
27,089

Other income (expense)
 

 
 

Interest income and other
(1,800
)
 
605

Interest expense
(6,244
)
 
(5,801
)
 
(8,044
)
 
(5,196
)
Income before income tax provision
54,215

 
21,893

Income tax provision
15,270

 
7,877

Net income
$
38,945

 
$
14,016

Earnings per common share — basic
$
1.06

 
$
0.35

Earnings per common share — diluted
$
1.04

 
$
0.34

Other comprehensive income, net of tax
 
 
 
Foreign currency translation adjustments, net of tax expense of $0
$
10,446

 
$
7,370

Total other comprehensive income, net of tax
10,446

 
7,370

Comprehensive income
$
49,391

 
$
21,386

 
See accompanying notes to condensed consolidated financial statements

4


FTI Consulting, Inc. and Subsidiaries
Condensed Consolidated Statement of Stockholders’ Equity
(in thousands)
(Unaudited)
 
 
Common Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
 
 
Shares
 
Amount
 
 
 
 
Total
Balance at December 31, 2017
37,729

 
$
377

 
$
266,035

 
$
1,045,774

 
$
(120,215
)
 
$
1,191,971

Net income

 
$

 
$

 
$
38,945

 
$

 
$
38,945

Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
Cumulative translation adjustment

 

 

 

 
10,446

 
10,446

Issuance of common stock in
  connection with:
 
 
 
 
 
 
 
 
 
 
 
Exercise of options
153

 
1

 
5,793

 

 

 
5,794

           Restricted share grants, less net
             settled shares of 35
175

 
2

 
(1,581
)
 

 

 
(1,579
)
           Stock units issued under incentive
             compensation plan

 

 
1,059

 

 

 
1,059

Purchase and retirement of common
   stock
(337
)
 
(3
)
 
(14,217
)
 

 

 
(14,220
)
     Cumulative effect due to adoption of
        new accounting standard

 

 

 
342

 

 
342

Share-based compensation

 

 
4,676

 

 

 
4,676

Balance at March 31, 2018
37,720

 
$
377

 
$
261,765

 
$
1,085,061

 
$
(109,769
)
 
$
1,237,434

 
See accompanying notes to condensed consolidated financial statements

5


FTI Consulting, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
 
 
Three Months Ended March 31,
Operating activities
2018
 
2017
Net income
$
38,945

 
$
14,016

Adjustments to reconcile net income to net cash used in operating
   activities:
 
 
 
Depreciation and amortization
7,765

 
8,571

Amortization and impairment of other intangible assets
2,270

 
2,493

Acquisition-related contingent consideration
396

 
395

Provision for doubtful accounts
5,676

 
3,551

Non-cash share-based compensation
4,676

 
7,281

Non-cash interest expense and other
591

 
508

Changes in operating assets and liabilities, net of effects from
   acquisitions:
 
 
 
Accounts receivable, billed and unbilled
(61,677
)
 
(52,489
)
Notes receivable
2,622

 
7,153

Prepaid expenses and other assets
(378
)
 
553

Accounts payable, accrued expenses and other
9,348

 
287

Income taxes
13,480

 
3,650

Accrued compensation
(92,501
)
 
(92,561
)
Billings in excess of services provided
(413
)
 
3,505

Net cash used in operating activities
(69,200
)
 
(93,087
)
Investing activities
 
 
 
Purchases of property and equipment
(7,680
)
 
(5,831
)
Other
27

 
127

Net cash used in investing activities
(7,653
)
 
(5,704
)
Financing activities
 
 
 
Borrowings under revolving line of credit, net
45,000

 
37,000

Deposits
1,431

 
3,069

Purchase and retirement of common stock
(14,220
)
 
(36,918
)
Net issuance of common stock under equity compensation plans
4,215

 
(812
)
Payments for acquisition-related contingent consideration
(2,502
)
 

Net cash provided by financing activities
33,924

 
2,339

Effect of exchange rate changes on cash and cash equivalents
5,012

 
1,253

Net decrease in cash and cash equivalents
(37,917
)
 
(95,199
)
Cash and cash equivalents, beginning of period
189,961

 
216,158

Cash and cash equivalents, end of period
$
152,044

 
$
120,959

Supplemental cash flow disclosures
 
 
 
Cash paid for interest
$
1,087

 
$
762

Cash paid for income taxes, net of refunds
$
1,688

 
$
4,246

Non-cash investing and financing activities:
 
 
 
Issuance of stock units under incentive compensation plans
$
1,059

 
$
1,547

 
See accompanying notes to condensed consolidated financial statements

6


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
Basis of Presentation
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 generally accepted accounting principles 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, 2017 filed with the SEC.  
Revenue Recognition
As of January 1, 2018, the Company adopted Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers ("ASC 606"), which impacts the timing of when certain types of revenue will be recognized. Revenues are recognized when we satisfy a performance obligation by transferring goods or services promised in a contract to a customer, in an amount that reflects the consideration that we expect to receive in exchange for those goods and services. Performance obligations in our contracts represent distinct or separate service streams that we provide to our customers.
We evaluate our revenue contracts with customers based on the five-step model under ASC 606: (1) Identify the contract with the customer; (2) Identify the performance obligations in the contract; (3) Determine the transaction price; (4) Allocate the transaction price to separate performance obligations; and (5) Recognize revenue when (or as) each performance obligation is satisfied. If, at the outset of an arrangement, we determine that a contract with enforceable rights and obligations does not exist, revenues are deferred until all criteria for an enforceable contract are met.
We generate the majority of our revenues by providing consulting services to our clients. Most of our consulting service contracts are based on one of the following types of arrangements:
Time and expense arrangements require the client to pay us based on the number of hours worked at contractually agreed-upon rates. We recognize revenue for these arrangements based on hours incurred and contracted rates utilizing a right-to-invoice practical expedient, because we have a right to consideration for services completed to date. When a time and expense arrangement has a not-to-exceed or "cap" amount and we expect to perform work in excess of the cap, we recognize up to the cap amount specified by the client, based on the efforts or hours incurred as a percentage of total efforts or hours expected to be incurred (e.g. proportional performance method). Certain time and materials arrangements may be subject to third party approval, e.g. a court or other regulatory institution, with interim billing and payments made and received based upon preliminarily agreed upon rates. We record revenue for the portion of our services based on our assessment of the expected probability of amounts ultimately to be agreed upon by the court or regulator. These assessments are made on a case-by-case basis depending on the nature of the engagement, client economics, historical experience and other appropriate factors.
Fixed fee arrangements require the client to pay a pre-established fee in exchange for a predetermined set of professional services. We recognize revenue for these arrangements based on the proportional performance related to individual performance obligations within each arrangement, however, these arrangements generally have one performance obligation.
Performance based or contingent arrangements represent forms of variable consideration. In these arrangements, our fees are based on the attainment of contractually defined objectives with our client, such as completing a business transaction or assisting the client in achieving a specific business objective. When our performance obligation(s) are satisfied over time, we determine the transaction price based on the expected probability of achieving the agreed-upon outcome and recognize revenue earned to date by applying the proportional performance method. These arrangements

7


include conditional payments, commonly referred to as success fees, which were previously recognized when the cash was collected.
In addition, we generate certain revenues from our Technology segment that are based on units of data stored or processed. Unit based revenues are recognized as services are provided, based on either the amount of data stored or processed, the number of concurrent users accessing the information, or the number of pages or images processed for a client, and agreed upon per-unit rates. We also generate revenues from our on-premise software licenses and on-demand service contracts. Software license revenues are generally recognized at a point in time when the customer acceptance occurs, in accordance with the provision of the arrangements, and software service revenues are recognized over the duration of the service period.
Certain of our time-and-expense and fixed fee billing arrangements may include client incentives in the form of volume-based discounts, where if certain fee levels are reached, the client can receive future services at a discounted hourly rate. Contracts with customers that have a discounted pricing option are evaluated to determine whether they include a material right, which is an option that provides a customer the right to acquire free or discounted goods or services in the future. If the option provides a material right to the customer, we allocate a portion of the transaction price to the material right and defer revenue during the pre-discount period, compared to our previous practice of recognizing the reduction in revenue when customers became eligible to receive the discount.
Reimbursable expenses, including those relating to travel, out-of-pocket expenses, outside consultants and other outside service costs, are generally included in revenues, and an equivalent amount of reimbursable expenses is included in costs of services in the period in which the expense is incurred.
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. 
 
Three Months Ended March 31,
 
2018
 
2017
Numerator — basic and diluted
 
 
 
Net income
$
38,945

 
$
14,016

Denominator
 
 
 
Weighted average number of common shares outstanding — basic
36,700

 
40,527

Effect of dilutive stock options
303

 
194

Effect of dilutive restricted shares
609

 
524

Weighted average number of common shares outstanding — diluted
37,612

 
41,245

Earnings per common share — basic
$
1.06

 
$
0.35

Earnings per common share — diluted
$
1.04

 
$
0.34

Antidilutive stock options and restricted shares
613

 
903

 
3. New Accounting Standards
 Adopted Accounting Standards
In May 2014, the Financial Accounting Standards Board ("FASB") issued ASU 2014-09, Revenue from Contracts with Customers. On January 1, 2018, we adopted ASC 606 using the modified retrospective method and recorded an immaterial cumulative effect adjustment to the beginning balance of retained earnings for revenue contracts which existed at the adoption date. Under the modified retrospective method, prior year information has not been adjusted and continues to be reported under the accounting standards in effect for periods prior to the adoption date. We have not retroactively restated the existing contracts for modifications that occurred before January 1, 2018.
See Note 1, "Basis of Presentation and Significant Accounting Policies" in Part I, Item 1, of this Quarterly Report on Form 10-Q for a description of the significant accounting policies and methods used in preparation of the Condensed Consolidated Financial Statements. See Note 4, “Revenues” in Part I, Item 1, of this Quarterly Report on Form 10-Q for the disclosures required under ASC 606. The adoption of ASC 606 had an immaterial impact on our Condensed Consolidated

8


Statements of Comprehensive Income and Condensed Consolidated Balance Sheets, and no impact on our Condensed Consolidated Statements of Cash Flows.
In March 2018, the FASB issued ASU 2018-05, Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118 (SEC Update), Income Taxes (Topic 740). ASU 2018-05 provides guidance regarding the recording of tax impacts where uncertainty exists, in the period of adoption of the 2017 U.S. Tax Cuts and Jobs Act (the “2017 Tax Act”). In accordance with this guidance, the Company’s financial results reflect provisional amounts for those specific income tax effects of the 2017 Tax Act for which the accounting under ASC Topic 740 is incomplete but a reasonable estimate could be determined. During the three months ended March 31, 2018, the Company did not recognize any changes to the provisional amounts recorded in our 2017 Annual Report on Form 10-K in connection with the 2017 Tax Act, as the Company continues to collect the information necessary to complete those calculations. The accounting for the tax effects of the 2017 Tax Act will be completed in the second half of 2018.
Accounting Standards Not Yet Adopted
In February 2016, the FASB issued ASU 2016-02, Leases ("ASC 842"), which supersedes existing lease guidance. Under ASC 842, we will be required to record right-of-use assets and corresponding lease liabilities on the balance sheet. Previously, there was no requirement to recognize an asset or liability on the balance sheet for an operating lease. ASC 842 also requires disclosure of key information about leasing arrangements. This guidance is effective beginning January 1, 2019. The new standard is required to be applied with a modified retrospective approach for each prior reporting period presented. We are in the preliminary phases of our implementation plan, which includes the identification of all lease contracts and an assessment of the effect of ASC 842 on our portfolio of leases. While this assessment continues, we have not yet determined the effect of ASC 842 on our Condensed Consolidated Balance Sheet. We do not expect that the adoption of ASC 842 will have a material impact on our results of operations or cash flow presentation.
4. Revenues
Revenues recognized during the current period may include revenues recognized from performance obligations satisfied or partially satisfied in previous periods. This primarily occurs when the estimated transaction price has changed based on a re-assessment of the expected probability of achieving the agreed-upon outcome for our performance based and contingent arrangements, resulting in catch-up adjustment for service provided in previous periods. The aggregate amount of revenue recognized during the three months ended March 31, 2018 related to the catch-up adjustment due to a change in the transaction price in the current period was $3.7 million.
Unfulfilled performance obligations represent the remaining contract transaction prices allocated to the performance obligations that are unsatisfied, or partially unsatisfied, and therefore revenues have not yet been recorded. Unfulfilled performance obligations primarily consist of the remaining fees not yet recognized under our proportional performance method for both our fixed fee arrangements, and the portion of performance based and contingent arrangements which we have deemed probable. As of March 31, 2018, the aggregate amount of the transaction price allocated to unfulfilled performance obligations was $6.5 million, and we expect to recognize the majority of the related revenues over the next 18 months. We elected to utilize the optional exemption to exclude from this disclosure, fixed fee and performance based and contingent arrangements with an original expected duration of one year or less and to exclude our time and expense arrangements for which revenues are recognized using the right to invoice practical expedient.
Contract assets are defined as assets for which we have recorded revenue because we determined that it is probable that we will earn a performance based or contingent fee, but we are not yet entitled to receive our fees, because certain events, such as completion of the measurement period or client approval, must occur. The contract asset balance was immaterial as of March 31, 2018 and December 31, 2017.
Contract liabilities are defined as liabilities incurred when we have received consideration from a client but have not yet performed the agreed upon services. This may occur when we receive advance billings before delivery and acceptance of software licenses in our Technology segment and when clients pay us up-front fees before we begin work for them. The contract liability balance was immaterial as of March 31, 2018 and December 31, 2017.

9


5. Accounts Receivable and Allowance for Doubtful Accounts
Timing of revenue recognition often differs from the timing of billing to our customers. Generally, we transfer goods or services to a customer before the customer pays consideration or payment is due. If we have an unconditional right to invoice and receive payment for goods or services already provided, we record billed and unbilled receivables on our Condensed Consolidated Balance Sheets. Payment terms and conditions vary depending on the jurisdiction, market, type of service, and whether or not regulatory or other third party approvals are required. In addition, contracts may be negotiated per client’s request or at times, we are asked to execute contracts in a form provided by customers which might include different terms. Our standard contract terms generally include a requirement of payment within 30 days where no contingencies exist.
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. Our bad debt expense totaled $5.7 million and $3.6 million for the three months ended March 31, 2018 and 2017, respectively.
6. Research and Development Costs
Research and development costs related to software development totaled $2.9 million and $4.2 million for the three months ended March 31, 2018 and 2017, respectively. Research and development costs are included in “Selling, general and administrative expenses” on the Condensed Consolidated Statements of Comprehensive Income.  
7. Financial Instruments
The following table presents the carrying amounts and estimated fair values of our financial instruments by hierarchy level as of March 31, 2018 and December 31, 2017.

 
March 31, 2018
 
 
 
Hierarchy Level
 
Carrying
Amount
 
Level 1
 
Level 2
 
Level 3
Liabilities
 
 
 
 
 
 
 
Acquisition-related contingent consideration, including
current portion (1)
$
3,750

 
$

 
$

 
$
3,750

Long-term debt
445,000

 

 
452,500

 

Total
$
448,750

 
$

 
$
452,500

 
$
3,750

 
December 31, 2017
 
 
 
Hierarchy Level
 
Carrying
Amount
 
Level 1
 
Level 2
 
Level 3
Liabilities
 
 
 
 
 
 
 
Acquisition-related contingent consideration, including
current portion (1)
$
3,750

 
$

 
$

 
$
3,750

Long-term debt
400,000

 

 
409,000

 

Total
$
403,750

 
$

 
$
409,000

 
$
3,750

 
(1) 
The short-term portion is included in “Accounts payable, accrued expenses and other,” and the long-term portion is included in “Other liabilities” on the Condensed Consolidated Balance Sheets.  
The fair values of financial instruments not included in this table are estimated to be equal to their carrying values as of March 31, 2018 and December 31, 2017.
We determine the fair value of our long-term debt primarily based on quoted market prices for our 6% senior notes due 2022 (the “2022 Notes”) as of March 31, 2018 and December 31, 2017. The fair value of our borrowings on our senior secured bank revolving credit facility (“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.

10


We estimate the fair value of acquisition-related contingent consideration using a probability-weighted discounted cash flow model. This fair value estimate represents a Level 3 measurement as it is based on significant inputs not observed in the market and reflect our own assumptions. The significant unobservable inputs used in the fair value measurements of our acquisition-related contingent consideration are our measures of the future profitability and related cash flows and discount rates. The fair value of the contingent consideration is reassessed at each reporting period by the Company based on additional information as it becomes available.
Any change in the fair value of an acquisition’s contingent consideration liability results in a remeasurement gain or loss that is recorded in “Selling, general and administrative expenses” on the Condensed Consolidated Statements of Comprehensive Income. During the three months ended March 31, 2018 there was no change in the estimated fair value of future expected contingent consideration payments. During the three months ended March 31, 2017, we recorded a remeasurement loss of $0.2 million.
8. Goodwill and Other Intangible Assets
Goodwill
The table below summarizes the changes in the carrying amount of goodwill by reportable segment:   
 
Corporate
Finance &
Restructuring
 
Forensic and
Litigation
Consulting
 
Economic
Consulting
 
Technology
 
Strategic
Communications
 
Total
Balance at December 31, 2017
 
 
 
 
 
 
 
 
 
 
 
Goodwill
$
454,816

 
$
233,719

 
$
268,995

 
$
117,740

 
$
323,672

 
$
1,398,942

Accumulated goodwill impairment

 

 

 

 
(194,139
)
 
(194,139
)
Goodwill, net at December 31, 2017
454,816


233,719


268,995


117,740


129,533


1,204,803

Foreign currency translation adjustment and other
(902
)
 
1,244

 
294

 
60

 
2,512

 
3,208

Balance at March 31, 2018
 
 
 
 
 
 
 
 
 
 
 
Goodwill
453,914


234,963


269,289


117,800

 
326,184

 
1,402,150

Accumulated goodwill impairment

 

 

 

 
(194,139
)
 
(194,139
)
Goodwill, net at March 31, 2018
$
453,914


$
234,963


$
269,289


$
117,800


$
132,045


$
1,208,011

Other Intangible Assets
Other intangible assets with finite lives are amortized over their estimated useful lives. We recorded amortization expense of $2.3 million and $2.5 million for the three months ended March 31, 2018 and March 31, 2017, respectively.
We estimate our future amortization expense for our intangible assets with finite lives to be as follows: 
Year
As of
March 31, 2018 (1)
2018 (remaining)
$
6,086

2019
7,702

2020
7,538

2021
6,900

2022
5,012

Thereafter
3,552

 
$
36,790

 
(1) 
Actual amortization expense to be reported in future periods could differ from these estimates as a result of new intangible asset acquisitions, changes in useful lives or other relevant factors or changes.

11


9. Long-Term Debt
The table below summarizes the components of the Company’s long-term debt. 
 
March 31, 2018
 
December 31, 2017
2022 Notes
$
300,000

 
$
300,000

Credit Facility
145,000

 
100,000

Total debt
445,000


400,000

Less: deferred debt issue costs
(3,527
)
 
(3,716
)
Long-term debt, net (1)
$
441,473


$
396,284

 
 
(1) 
There were no current portions of long-term debt as of March 31, 2018 and December 31, 2017.
The Company has classified the borrowings under the Company’s Credit Facility as long-term debt in the accompanying Condensed Consolidated Balance Sheets as amounts due under the credit agreement entered into on 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, $1.0 million of the borrowing limit under the Credit Facility was utilized for letters of credit as of March 31, 2018.  
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 three months ended March 31, 2018, we granted 144,190 restricted stock awards, 24,642 restricted stock units and 91,370 performance-based restricted stock units. These awards are recorded as equity on the Condensed Consolidated Balance Sheets. During the three months ended March 31, 2018, stock options exercisable for up to 55,304 shares were forfeited prior to the completion of the vesting requirements.
Total share-based compensation expense, net of forfeitures, for the three months ended March 31, 2018 and 2017 is detailed in the following table:   
 
Three Months Ended March 31,
Income Statement Classification
2018
 
2017
Direct cost of revenues
$
3,779

 
$
5,838

Selling, general and administrative expenses
2,189

 
843

Total share-based compensation expense
$
5,968


$
6,681

12. Stockholders’ Equity
On June 2, 2016, our Board of Directors authorized a stock repurchase program of up to $100.0 million (the “Repurchase Program”). On each of May 18, 2017 and December 1, 2017, our Board of Directors authorized an additional $100.0 million increasing the Repurchase Program to an aggregate authorization of $300.0 million. No time limit has been established for the completion of the Repurchase Program, and the Repurchase Program may be suspended, discontinued or replaced by the Board of Directors at any time without prior notice. As of March 31, 2018, we have $99.1 million available under the Repurchase Program to repurchase additional shares.

12


The following table details our stock repurchases under the Repurchase Program: 
 
Three Months Ended March 31,
 
2018
 
2017
Shares of common stock repurchased and retired
337

 
880

Average price paid per share
$
42.17

 
$
41.95

Total cost
$
14,213

 
$
36,901

  
13. Segment Reporting
We manage our business in five reportable segments: Corporate Finance & Restructuring ("Corporate Finance"), Forensic and Litigation Consulting ("FLC"), Economic Consulting, Technology and Strategic Communications.
Our Corporate Finance segment focuses on the strategic, operational, financial and capital needs of our clients around the world and delivers a wide range of service offerings related to restructuring, business transformation and transaction support. Our restructuring practice includes corporate restructuring, including bankruptcy and interim management services. Our business transformation and transaction support practices include financings, mergers and acquisitions (“M&A”), M&A integration, valuations and tax advice, as well as financial, operational and performance improvement services.
Our 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 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.

13


The table below presents revenues and Adjusted Segment EBITDA for our reportable segments: 
 
Three Months Ended March 31,
 
2018
 
2017
Revenues
 
 
 
Corporate Finance & Restructuring
$
142,922

 
$
105,901

Forensic and Litigation Consulting
128,039

 
111,406

Economic Consulting
133,109

 
139,221

Technology
40,914

 
46,087

Strategic Communications
52,790

 
43,729

Total revenues
$
497,774


$
446,344

Adjusted Segment EBITDA
 
 
 
Corporate Finance & Restructuring
$
34,804

 
$
10,325

Forensic and Litigation Consulting
25,757

 
13,521

Economic Consulting
19,136

 
20,110

Technology
5,732

 
7,804

Strategic Communications
9,852

 
4,257

Total Adjusted Segment EBITDA
$
95,281


$
56,017

The table below reconciles Net income to Total Adjusted Segment EBITDA: 
 
Three Months Ended March 31,
 
2018
 
2017
Net income
$
38,945

 
$
14,016

Add back:
 
 
 
Income tax provision
15,270

 
7,877

Interest income and other
1,800

 
(605
)
Interest expense
6,244

 
5,801

Unallocated corporate expenses
23,888

 
19,053

Segment depreciation expense
6,864

 
7,216

Amortization of intangible assets
2,270

 
2,493

Remeasurement of acquisition-related contingent
   consideration

 
166

Total Adjusted Segment EBITDA
$
95,281


$
56,017

14. Supplemental Condensed Consolidating Guarantor and Non-Guarantor Financial Information
Substantially all of our domestic subsidiaries are guarantors of borrowings under our 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.
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.

14


Condensed Consolidating Balance Sheet as of March 31, 2018  
 
FTI
Consulting
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Assets
 

 
 

 
 

 
 

 
 

Cash and cash equivalents
$
8,406

 
$
157

 
$
143,481

 
$

 
$
152,044

Accounts receivable, net
185,359

 
181,692

 
216,537

 

 
583,588

Intercompany receivables

 
1,114,635

 
5,251

 
(1,119,886
)
 

Other current assets
28,620

 
23,096

 
28,430

 

 
80,146

Total current assets
222,385

 
1,319,580

 
393,699

 
(1,119,886
)
 
815,778

Property and equipment, net
39,967

 
12,508

 
23,111

 

 
75,586

Goodwill
570,876

 
416,053

 
221,082

 

 
1,208,011

Other intangible assets, net
17,552

 
10,838

 
28,160

 
(14,160
)
 
42,390

Investments in subsidiaries
2,224,753

 
544,824

 

 
(2,769,577
)
 

Other assets
32,297

 
65,651

 
36,739

 

 
134,687

Total assets
$
3,107,830

 
$
2,369,454

 
$
702,791

 
$
(3,903,623
)
 
$
2,276,452

Liabilities
 
 
 
 
 
 
 
 
 
Intercompany payables
$
1,119,886

 
$

 
$

 
$
(1,119,886
)
 
$

Other current liabilities
110,376

 
128,921

 
104,170

 

 
343,467

Total current liabilities
1,230,262

 
128,921

 
104,170

 
(1,119,886
)
 
343,467

Long-term debt, net
441,473

 

 

 

 
441,473

Other liabilities
198,661

 
10,308

 
45,109

 

 
254,078

Total liabilities
1,870,396

 
139,229

 
149,279

 
(1,119,886
)
 
1,039,018

Stockholders' equity
1,237,434

 
2,230,225

 
553,512

 
(2,783,737
)
 
1,237,434

Total liabilities and stockholders' equity
$
3,107,830

 
$
2,369,454

 
$
702,791

 
$
(3,903,623
)
 
$
2,276,452


15


Condensed Consolidating Balance Sheet as of December 31, 2017  
 
FTI
Consulting
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
10,186

 
$
159

 
$
179,616

 
$

 
$
189,961

Accounts receivable, net
155,124

 
156,859

 
210,895

 

 
522,878

Intercompany receivables

 
1,093,211

 
32,695

 
(1,125,906
)
 

Other current assets
31,933

 
21,840

 
27,567

 

 
81,340

Total current assets
197,243

 
1,272,069

 
450,773

 
(1,125,906
)
 
794,179

Property and equipment, net
39,137

 
13,572

 
22,366

 

 
75,075

Goodwill
570,876

 
416,053

 
217,874

 

 
1,204,803

Other intangible assets, net
18,426

 
11,251

 
29,441

 
(14,968
)
 
44,150

Investments in subsidiaries
2,175,362

 
566,911

 

 
(2,742,273
)
 

Other assets
34,454

 
60,566

 
44,014

 

 
139,034

Total assets
$
3,035,498

 
$
2,340,422

 
$
764,468

 
$
(3,883,147
)
 
$
2,257,241

Liabilities
 
 
 
 
 
 
 
 
 
Intercompany payables
$
1,125,906

 
$

 
$

 
$
(1,125,906
)
 
$

Other current liabilities
127,295

 
144,474

 
138,559

 

 
410,328

Total current liabilities
1,253,201

 
144,474

 
138,559

 
(1,125,906
)
 
410,328

Long-term debt, net
396,284

 

 

 

 
396,284

Other liabilities
194,042

 
14,753

 
49,863

 

 
258,658

Total liabilities
1,843,527

 
159,227

 
188,422

 
(1,125,906
)
 
1,065,270

Stockholders' equity
1,191,971

 
2,181,195

 
576,046

 
(2,757,241
)
 
1,191,971

Total liabilities and stockholders' equity
$
3,035,498

 
$
2,340,422

 
$
764,468

 
$
(3,883,147
)
 
$
2,257,241

 

16


Condensed Consolidating Statement of Comprehensive Income for the Three Months Ended March 31, 2018  
 
FTI
Consulting
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues
$
185,321

 
$
157,129

 
$
157,772

 
$
(2,448
)
 
$
497,774

Operating expenses
 
 
 
 
 
 
 
 
 
Direct cost of revenues
115,460

 
109,398

 
98,597

 
(2,338
)
 
321,117

Selling, general and administrative expenses
50,681

 
28,980

 
32,577

 
(110
)
 
112,128

Amortization of other intangible assets
874

 
414

 
1,790

 
(808
)
 
2,270

 
167,015

 
138,792

 
132,964

 
(3,256
)
 
435,515

Operating income
18,306

 
18,337

 
24,808

 
808

 
62,259

Other income (expense)
16,930

 
(309
)
 
(1,665
)
 
(23,000
)
 
(8,044
)
Income before income tax provision
35,236

 
18,028

 
23,143

 
(22,192
)
 
54,215

Income tax provision (benefit)
4,370

 
6,040

 
4,860

 

 
15,270

Equity in net earnings of subsidiaries
8,079

 
34,788

 

 
(42,867
)
 

Net income
$
38,945

 
$
46,776

 
$
18,283

 
$
(65,059
)
 
$
38,945

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments, net of
   tax expense of $0
$

 
$

 
$
10,446

 
$

 
$
10,446

Other comprehensive income, net of tax

 

 
10,446

 

 
10,446

Comprehensive income
$
38,945

 
$
46,776

 
$
28,729

 
$
(65,059
)
 
$
49,391


Condensed Consolidating Statement of Comprehensive Income for the Three Months Ended March 31, 2017  
 
FTI
Consulting
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues
$
151,807

 
$
171,026

 
$
126,103

 
$
(2,592
)
 
$
446,344

Operating expenses
 
 
 
 
 
 
 
 
 
Direct cost of revenues
111,258

 
117,786

 
82,561

 
(2,533
)
 
309,072

Selling, general and administrative expenses
45,798

 
31,379

 
30,572

 
(59
)
 
107,690

Amortization of other intangible assets
902

 
540

 
1,770

 
(719
)
 
2,493

 
157,958


149,705


114,903


(3,311
)

419,255

Operating income
(6,151
)
 
21,321

 
11,200

 
719

 
27,089

Other income (expense)
(5,252
)
 
(427
)
 
483

 

 
(5,196
)
Income (loss) before income tax provision
(11,403
)

20,894


11,683


719


21,893

Income tax provision (benefit)
(5,583
)
 
10,918

 
2,542

 

 
7,877

Equity in net earnings of subsidiaries
19,836

 
8,573

 

 
(28,409
)
 

Net income
$
14,016


$
18,549


$
9,141


$
(27,690
)

$
14,016

Other comprehensive loss, net of tax:
 
 
 
 
 
 
 
 
 
Foreign currency translation adjustments, net of
   tax expense of $0
$

 
$

 
$
7,370

 
$

 
$
7,370

Other comprehensive income, net of tax

 

 
7,370

 

 
7,370

Comprehensive income
$
14,016


$
18,549


$
16,511


$
(27,690
)

$
21,386

 

17


 Condensed Consolidating Statement of Cash Flows for the Three Months Ended March 31, 2018 
 
FTI
Consulting
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidated
Operating activities
 
 
 
 
 
 
 
Net cash provided by (used in) operating activities
$
(27,503
)
 
$
53,809

 
$
(95,506
)
 
$
(69,200
)
Investing activities
 
 
 
 
 
 
 
Purchases of property and equipment
(3,278
)
 
(2,583
)
 
(1,819
)
 
(7,680
)
Other
27

 

 

 
27

Net cash used in investing activities
(3,251
)
 
(2,583
)
 
(1,819
)
 
(7,653
)
Financing activities
 
 
 
 
 
 
 
Borrowings under revolving line of credit, net
45,000

 

 

 
45,000

Deposits

 

 
1,431

 
1,431

Purchase and retirement of common stock
(14,220
)
 

 

 
(14,220
)
Net issuance of common stock under equity compensation
   plans
4,215

 

 

 
4,215

Payments for acquisition-related contingent consideration

 
(2,502
)
 

 
(2,502
)
Intercompany transfers
(6,021
)
 
(48,726
)
 
54,747

 

Net cash used in financing activities
28,974

 
(51,228
)
 
56,178

 
33,924

Effects of exchange rate changes on cash and cash equivalents

 

 
5,012

 
5,012

Net increase (decrease) in cash and cash equivalents
(1,780
)
 
(2
)
 
(36,135
)
 
(37,917
)
Cash and cash equivalents, beginning of year
10,186

 
159

 
179,616

 
189,961

Cash and cash equivalents, end of year
$
8,406

 
$
157

 
$
143,481

 
$
152,044

Condensed Consolidating Statement of Cash Flows for the Three Months Ended March 31, 2017  
 
FTI
Consulting
 
Guarantor
Subsidiaries
 
Non-Guarantor
Subsidiaries
 
Consolidated
Operating activities
 
 
 
 
 
 
 
Net cash used in operating activities
$
(64,127
)
 
$
(14,723
)
 
$
(14,237
)
 
$
(93,087
)
Investing activities
 
 
 
 
 
 
 
Purchases of property and equipment
(1,985
)
 
(2,396
)
 
(1,450
)
 
(5,831
)
Other
127

 

 

 
127

Net cash used in investing activities
(1,858
)
 
(2,396
)
 
(1,450
)
 
(5,704
)
Financing activities
 
 
 
 
 
 
 
Borrowings under revolving line of credit, net
37,000

 

 

 
37,000

Deposits

 

 
3,069

 
3,069

Purchase and retirement of common stock
(36,918
)
 

 

 
(36,918
)
Net issuance of common stock under equity compensation
   plans
(812
)
 

 

 
(812
)
Intercompany transfers
37,666

 
17,120

 
(54,786
)
 

Net cash provided by (used in) financing activities
36,936

 
17,120

 
(51,717
)
 
2,339

Effects of exchange rate changes on cash and cash equivalents

 

 
1,253

 
1,253

Net increase (decrease) in cash and cash equivalents
(29,049
)
 
1

 
(66,151
)
 
(95,199
)
Cash and cash equivalents, beginning of year
47,420

 
156

 
168,582

 
216,158

Cash and cash equivalents, end of year
$
18,371

 
$
157

 
$
102,431

 
$
120,959


18


Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
The following is a discussion and analysis of our consolidated financial condition, results of operations, liquidity and capital resources for the three months ended March 31, 2018 and 2017 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, 2017 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 service offerings related to restructuring, business transformation and transaction support. Our restructuring practice includes corporate restructuring, including bankruptcy and interim management services. Our business transformation and transactions support practices 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 (“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 United States ("U.S.") and around the world.
Our Technology segment offers a comprehensive portfolio of information governance and electronic discovery ("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 more confidently, 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 the 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 contingent or 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 when achieving the performance-based criteria becomes probable. Seasonal factors, such as the timing of our employees’ and clients’ vacations and holidays, may impact the timing of our revenues across our segments.

19


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. 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.
Our financial results are primarily driven by:
the number, size and type of engagements we secure;
the rate per hour or fixed charges we charge our clients for services;
the utilization rates of the revenue-generating professionals we employ;
the timing of revenue recognition related to revenues subject to certain performance-based contingencies;
the number of revenue-generating professionals;
licensing of our software products and other technology services;
the types of assignments we are working on at different times;
the length of the billing and collection cycles; and
the geographic locations of our clients or locations in which services are rendered.
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 exchange 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 U.S. ("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:
Total Segment Operating Income
Adjusted EBITDA
Total Adjusted Segment EBITDA
Adjusted EBITDA Margin
Adjusted Net Income
Adjusted Earnings per Diluted Share
Free Cash Flow
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 I, Item 1, of this Quarterly Report on the Form 10-Q, we evaluate the

20


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, a GAAP financial measure, 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, a GAAP financial measure, 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 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 these non-GAAP financial measures, which exclude the effects of 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 and GAAP financial 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 financial 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 ("EPS"), respectively, excluding the impact of remeasurement of acquisition-related contingent consideration, special charges, goodwill impairment charges, losses on early extinguishment of debt and the impact of adopting the 2017 U.S. Tax Cuts and Jobs Act (the “2017 Tax Act”). 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, losses on early extinguishment of debt and the impact of adopting the 2017 Tax Act, 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, which is a non-GAAP financial measure, 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 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.

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EXECUTIVE HIGHLIGHTS
 
Three months ended March 31,
 
2018
 
2017
 
(dollar amounts in thousands,
except per share data)
Revenues
$
497,774

 
$
446,344

Net income
$
38,945

 
$
14,016

Adjusted EBITDA
$
72,294

 
$
38,319

Earnings per common share — diluted
$
1.04

 
$
0.34

Adjusted earnings per common share — diluted
$
1.04

 
$
0.34

Net cash used in operating activities
$
(69,200
)
 
$
(93,087
)
Total number of employees
4,629

 
4,742

First Quarter 2018 Executive Highlights
Revenues
Revenues for the three months ended March 31, 2018 increased $51.4 million, or 11.5%, to $497.8 million, as compared to the three months ended March 31, 2017. The increase included a 2.7% estimated positive impact from FX. The increase in revenue was primarily driven by higher demand within the Corporate Finance and FLC segments.
On January 1, 2018, the Company adopted Revenue from Contracts with Customers ("ASC 606") which changes the timing of when certain types of revenue will be recognized. Our adoption of the new standard had an immaterial transition impact on retained earnings as of January 1, 2018 and did not significantly impact our revenues during the three months ended March 31, 2018.
Net income
Net income for the three months ended March 31, 2018 increased $24.9 million, or 177.9%, to $38.9 million, as compared to the three months ended March 31, 2017. This increase 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 March 31, 2018 increased $34.0 million, or 88.7%, to $72.3 million, as compared to the three months ended March 31, 2017. Adjusted EBITDA was 14.5% of revenues for the three months ended March 31, 2018 compared with 8.6% of revenues for the three months ended March 31, 2017. The increase in Adjusted EBITDA was primarily due to higher revenues and improved utilization largely within the Corporate Finance and FLC segments.
EPS and Adjusted EPS
EPS and Adjusted EPS for the three months ended March 31, 2018 increased $0.70 to $1.04 compared with $0.34 for the three months ended March 31, 2017 due to the operating results described above, a lower effective income tax rate and lower weighted average shares outstanding as a result of repurchases under our stock repurchase program.
Liquidity and capital allocation
Net cash used in operating activities for the three months ended March 31, 2018 decreased $23.9 million to $69.2 million compared with net cash used in operating activities of $93.1 million for the three months ended March 31, 2017. The decrease was primarily due to higher cash collections partially offset by increases in salaries and benefits and severance payments. Days sales outstanding (“DSO”) was 95 days at March 31, 2018 compared to 98 days at March 31, 2017.
We repurchased and retired 337,075 shares of our common stock for an average price per share of $42.17, at a total cost of $14.2 million during the three months ended March 31, 2018. The stock repurchases were made pursuant to a stock repurchase program initially authorized by the Board of Directors in 2016 and increased in 2017 with an aggregate authorization amount of $300.0 million (the “Repurchase Program”). We have $99.1 million remaining under the Repurchase Program to repurchase additional shares as of March 31, 2018.

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Free Cash Flow was an outflow of $76.9 million and $98.9 million for the three months ended March 31, 2018 and 2017, respectively.
Headcount
Our total headcount increased 0.4% from 4,609 at December 31, 2017 to 4,629 at March 31, 2018. The following table includes the net billable headcount additions (reductions) for the three months ended March 31, 2018.
Billable Headcount
Corporate
Finance &
Restructuring
 
Forensic and Litigation Consulting
 
Economic Consulting
 
Technology
 
Strategic
Communications
 
Total
December 31, 2017
901

 
1,067

 
683

 
292

 
630

 
3,573

Additions (reductions), net
9

 
5

 
6

 
(4
)
 

 
16

March 31, 2018
910

 
1,072

 
689

 
288

 
630

 
3,589

Percentage change in headcount from prior year
1.0
%
 
0.5
%
 
0.9
%
 
(1.4
)%
 
%
 
0.4
%
 
CONSOLIDATED RESULTS OF OPERATIONS
Segment and Consolidated Operating Results:
 
 
Three Months Ended
March 31,
 
2018
 
2017
 
(in thousands, except per share data)
Revenues
 
 
 
Corporate Finance & Restructuring
$
142,922

 
$
105,901

Forensic and Litigation Consulting
128,039

 
111,406

Economic Consulting
133,109

 
139,221

Technology
40,914

 
46,087

Strategic Communications
52,790

 
43,729

Total revenues
$
497,774

 
$
446,344

Segment operating income
 
 
 
Corporate Finance & Restructuring
$
33,211

 
$
8,749

Forensic and Litigation Consulting
24,330

 
11,924

Economic Consulting
17,648

 
18,502

Technology
2,593

 
4,440

Strategic Communications
8,365

 
2,527

Total segment operating income
86,147

 
46,142

Unallocated corporate expenses
(23,888
)
 
(19,053
)
Operating income
62,259

 
27,089

Other income (expense)
 
 
 
Interest income and other
(1,800
)
 
605

Interest expense
(6,244
)
 
(5,801
)
 
(8,044
)
 
(5,196
)
Income before income tax provision
54,215

 
21,893

Income tax provision
15,270

 
7,877

Net income
$
38,945

 
$
14,016

Earnings per common share — basic
$
1.06

 
$
0.35

Earnings per common share — diluted
$
1.04

 
$
0.34



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Reconciliation of Net Income to Adjusted EBITDA:
 
 
Three Months Ended
March 31,
 
2018
 
2017
 
(in thousands)
Net income
$
38,945

 
$
14,016

Add back:
 
 
 
Income tax provision
15,270

 
7,877

Interest income and other
1,800

 
(605
)
Interest expense
6,244

 
5,801

Depreciation and amortization
7,765

 
8,571

Amortization of other intangible assets
2,270

 
2,493

Remeasurement of acquisition-related contingent
   consideration

 
166

Adjusted EBITDA
$
72,294

 
$
38,319

 
Reconciliation of Net Income and EPS to Adjusted Net Income and Adjusted EPS:
 
 
Three Months Ended
March 31,
 
2018
 
2017
 
(in thousands, except per share data)
Net income
$
38,945

 
$
14,016

Add back: