nci-10q_20190331.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

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 No. 1-12173

 

Navigant Consulting, Inc.

(Exact name of registrant as specified in its charter)

 

 

 

 

Delaware

36-4094854

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

150 North Riverside Plaza, Suite 2100, Chicago, Illinois 60606

(Address of principal executive offices, including zip code)

(312) 573-5600

(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 every Interactive Data File required to be submitted 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 such files).    YES      NO  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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

 

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.    YES      NO  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    YES      NO  

As of April 18, 2019, 39,346,610 shares of the registrant’s common stock, par value $.001 per share, were outstanding.

 

 

 


 

INDEX

 

 

Page 

PART I — FINANCIAL INFORMATION

 

Item 1. Financial Statements

4

Notes to Unaudited Consolidated Financial Statements  

8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

Item 3. Quantitative and Qualitative Disclosures About Market Risk

28

Item 4. Controls and Procedures

28

PART II — OTHER INFORMATION

 

Item 1. Legal Proceedings

30

Item 1A. Risk Factors

30

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

30

Item 6. Exhibits

30

SIGNATURES

31

 

 

 

2


 

Forward-Looking Statements

Statements included in this report which are not historical in nature are “forward-looking statements” as defined in the Private Securities Litigation Reform Act of 1995. Forward-looking statements may generally be identified by words such as “anticipate,” “believe,” “may,” “should,” “could,” “intend,” “estimate,” “expect,” “likely,” “continue,” “plan,” “projects,” “positioned,” “outlook” and similar expressions. These statements are based upon management’s current expectations and speak only as of the date of this report. The Company cautions readers that there may be events in the future that the Company is not able to accurately predict or control and the information contained in the forward-looking statements is inherently uncertain and subject to a number of risks that could cause actual results to differ materially from those contained in or implied by the forward-looking statements including, without limitation: the risk of unanticipated costs, liabilities or an adverse impact on the Company’s business operations arising from the Company’s provision of post-divestiture transition services and support in connection with the sale of the Company’s Disputes, Forensics and Legal Technology segment and the transaction advisory services practice within the Company’s Financial Services Advisory and Compliance segment;  the execution of the Company’s long-term growth objectives and margin improvement initiatives; risks inherent in international operations, including foreign currency fluctuations; ability to make acquisitions and divestitures and complete such acquisitions and divestitures in the time anticipated; pace, timing and integration of acquisitions; operational risks associated with new or expanded service areas, including business process management services; impairments; changes in accounting standards or tax rates, laws or regulations; management of professional staff, including dependence on key personnel, recruiting, retention, attrition and the ability to successfully integrate new consultants into the Company’s practices; utilization rates; conflicts of interest; potential loss of clients or large engagements and the Company’s ability to attract new business; brand equity; competition; accurate pricing of engagements, particularly fixed fee and multi-year engagements; clients’ financial condition and their ability to make payments to the Company; risks inherent with litigation; higher risk client assignments; government contracting; professional liability; information security; the adequacy of our business, financial and information systems and technology; maintenance of effective internal controls; potential legislative and regulatory changes; continued and sufficient access to capital; compliance with covenants in our credit agreement; interest rate risk; and market and general economic and political conditions. Further information on these and other potential factors that could affect the Company’s business and financial condition and the results of operations are included in the “Risk Factors” section of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, and elsewhere in the Company’s filings with the Securities and Exchange Commission (“SEC”), which are available on the SEC’s website or at investors.navigant.com. The Company cannot guarantee any future results, levels of activity, performance or achievement and undertakes no obligation to update any of its forward-looking statements.

 

 

 

 

 

3


 

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements.

NAVIGANT CONSULTING, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

 

 

March 31,

 

 

December 31,

 

 

2019

 

 

2018

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

$

 

107,217

 

 

$

 

206,920

 

Accounts receivable, net and contract assets

 

 

186,523

 

 

 

 

179,923

 

Prepaid expenses and other current assets

 

 

26,835

 

 

 

 

22,512

 

Total current assets

 

 

320,575

 

 

 

 

409,355

 

Non-current assets:

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

61,374

 

 

 

 

63,025

 

Operating lease right-of-use assets

 

 

83,959

 

 

 

 

-

 

Intangible assets, net

 

 

15,470

 

 

 

 

14,166

 

Goodwill

 

 

425,069

 

 

 

 

422,357

 

Other assets

 

 

8,703

 

 

 

 

8,644

 

Total assets

$

 

915,150

 

 

$

 

917,547

 

LIABILITIES AND STOCKHOLDERS' EQUITY

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

Accounts payable

$

 

12,869

 

 

$

 

13,302

 

Accrued liabilities

 

 

16,075

 

 

 

 

15,558

 

Accrued compensation-related costs

 

 

40,784

 

 

 

 

69,555

 

Income tax payable

 

 

10,519

 

 

 

 

13,357

 

Operating lease liabilities

 

 

22,368

 

 

 

 

-

 

Other current liabilities

 

 

22,761

 

 

 

 

34,044

 

Total current liabilities

 

 

125,376

 

 

 

 

145,816

 

Non-current liabilities:

 

 

 

 

 

 

 

 

 

Deferred income tax liabilities

 

 

38,492

 

 

 

 

33,901

 

Operating lease liabilities

 

 

85,297

 

 

 

 

-

 

Other non-current liabilities

 

 

4,321

 

 

 

 

25,277

 

Total non-current liabilities

 

 

128,110

 

 

 

 

59,178

 

Total liabilities

 

 

253,486

 

 

 

 

204,994

 

Stockholders' equity:

 

 

 

 

 

 

 

 

 

Common stock

 

 

49

 

 

 

 

49

 

Additional paid-in capital

 

 

666,794

 

 

 

 

664,473

 

Treasury stock

 

 

(214,465

)

 

 

 

(160,972

)

Retained earnings

 

 

213,830

 

 

 

 

211,543

 

Accumulated other comprehensive loss

 

 

(6,971

)

 

 

 

(6,529

)

Total Navigant Consulting, Inc. stockholders' equity

 

 

659,237

 

 

 

 

708,564

 

Non-controlling interest

 

 

2,427

 

 

 

 

3,989

 

Total stockholders' equity

 

 

661,664

 

 

 

 

712,553

 

Total liabilities and stockholders' equity

$

 

915,150

 

 

$

 

917,547

 

 

See accompanying notes to unaudited consolidated financial statements.

 

4


 

NAVIGANT CONSULTING, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands, except per share data (1))

 

 

 

For the three months ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Revenues before reimbursements

 

$

 

186,129

 

 

$

 

161,445

 

Reimbursements

 

 

 

16,733

 

 

 

 

16,623

 

Total revenues

 

 

 

202,862

 

 

 

 

178,068

 

Cost of services before reimbursable expenses

 

 

 

135,356

 

 

 

 

116,936

 

Reimbursable expenses

 

 

 

16,733

 

 

 

 

16,623

 

Total cost of services

 

 

 

152,089

 

 

 

 

133,559

 

General and administrative expenses

 

 

 

35,167

 

 

 

 

37,079

 

Depreciation expense

 

 

 

4,586

 

 

 

 

4,997

 

Amortization expense

 

 

 

1,372

 

 

 

 

1,752

 

Other operating costs

 

 

 

32

 

 

 

 

983

 

Operating income (loss)

 

 

 

9,616

 

 

 

 

(302

)

Interest expense

 

 

 

318

 

 

 

 

828

 

Interest income

 

 

 

(689

)

 

 

 

(119

)

Other expense, net

 

 

 

132

 

 

 

 

361

 

Income (loss) from continuing operations before income tax expense

 

 

 

9,855

 

 

 

 

(1,372

)

Income tax expense

 

 

 

3,047

 

 

 

 

225

 

Net income (loss) from continuing operations

 

 

 

6,808

 

 

 

 

(1,597

)

(Loss) income from discontinued operations, net of tax

 

 

 

(489

)

 

 

 

13,450

 

Net income

 

 

 

6,319

 

 

 

 

11,853

 

Less: Income attributable to non-controlling interest, net of tax

 

 

 

(2,038

)

 

 

 

-

 

Net income attributable to Navigant Consulting, Inc.

 

$

 

4,281

 

 

$

 

11,853

 

Basic net income per share

 

 

 

 

 

 

 

 

 

 

Net income (loss) from continuing operations attributable to Navigant Consulting, Inc.

 

$

 

0.12

 

 

$

 

(0.04

)

(Loss) income from discontinued operations, net of tax

 

 

 

(0.01

)

 

 

 

0.30

 

Net income attributable to Navigant Consulting, Inc. (1)

 

$

 

0.11

 

 

$

 

0.26

 

Shares used in computing basic per share data

 

 

 

40,218

 

 

 

 

45,120

 

 

 

 

 

 

 

 

 

 

 

 

Diluted net income per share

 

 

 

 

 

 

 

 

 

 

Net income (loss) from continuing operations attributable to Navigant Consulting, Inc.

 

$

 

0.12

 

 

$

 

(0.04

)

(Loss) income from discontinued operations, net of tax

 

 

 

(0.01

)

 

 

 

0.30

 

Net income attributable to Navigant Consulting, Inc. (1)

 

$

 

0.10

 

 

$

 

0.26

 

Shares used in computing diluted per share data

 

 

 

41,408

 

 

 

 

45,120

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

 

6,319

 

 

$

 

11,853

 

Other comprehensive (loss) income, net of tax:

 

 

 

 

 

 

 

 

 

 

Unrealized net (loss) gain, foreign currency translation

 

 

 

(442

)

 

 

 

1,369

 

Unrealized net gain on interest rate derivatives

 

 

 

-

 

 

 

 

250

 

Reclassification adjustment on interest rate derivatives included in

   interest expense and income tax expense

 

 

 

-

 

 

 

 

7

 

Other comprehensive (loss) income, net of tax

 

 

 

(442

)

 

 

 

1,626

 

Total comprehensive income, net of tax

 

 

 

5,877

 

 

 

 

13,479

 

Income attributable to non-controlling interest, net of tax

 

 

 

(2,038

)

 

 

 

-

 

Total comprehensive income attributable to Navigant Consulting, Inc., net of tax

 

$

 

3,839

 

 

$

 

13,479

 

(1) Earnings per share may not foot due to rounding.

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

 

5


 

NAVIGANT CONSULTING, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

 

 

 

Navigant Consulting, Inc. Shareholders

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock Shares

 

 

Treasury Stock Shares

 

 

Common Stock Par Value

 

 

Additional Paid-In Capital

 

 

Treasury Stock Cost

 

 

Accumulated Other Comp-

rehensive Loss

 

 

Retained Earnings

 

 

Non-Controlling Interest

 

 

Total

Stock-holders' Equity

 

 

Balance at December 31, 2018

 

 

49,387

 

 

 

(8,114

)

 

$

49

 

 

$

664,473

 

 

$

(160,972

)

 

$

(6,529

)

 

$

211,543

 

 

$

3,989

 

 

$

712,553

 

 

Distributions to non-controlling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,600

)

 

 

(3,600

)

 

Comprehensive (loss) income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(442

)

 

 

4,281

 

 

 

2,038

 

 

 

5,877

 

 

Dividends paid ($0.05 per share)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,994

)

 

 

-

 

 

 

(1,994

)

 

Issuances of common stock

 

 

69

 

 

 

-

 

 

 

-

 

 

 

856

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

856

 

 

Vesting of restricted stock units, net of forfeitures and tax withholdings

 

 

90

 

 

 

-

 

 

 

-

 

 

 

(1,304

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,304

)

 

Share-based compensation expense

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,769

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,769

 

 

Repurchases of common stock

 

 

-

 

 

 

(2,317

)

 

 

-

 

 

 

-

 

 

 

(53,493

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(53,493

)

 

Balance at March 31, 2019

 

 

49,546

 

 

 

(10,431

)

 

$

49

 

 

$

666,794

 

 

$

(214,465

)

 

$

(6,971

)

 

$

213,830

 

 

$

2,427

 

 

$

661,664

 

 

 

 

 

 

Navigant Consulting, Inc. Shareholders

 

 

 

Common Stock Shares

 

 

Treasury Stock Shares

 

 

Common Stock Par Value

 

 

Additional Paid-In Capital

 

 

Treasury Stock Cost

 

 

Accumulated Other Comp-

rehensive Loss

 

 

Retained Earnings

 

 

Total Stock-holders' Equity

 

Balance at December 31, 2017

 

 

58,047

 

 

 

(12,661

)

 

$

58

 

 

$

659,825

 

 

$

(224,366

)

 

$

(19,178

)

 

$

270,995

 

 

$

687,334

 

Cumulative-effect adjustment resulting from the adoption of ASU 2014-09 (Note 2)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

151

 

 

 

151

 

Comprehensive income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,626

 

 

 

11,853

 

 

 

13,479

 

Issuances of common stock

 

 

89

 

 

 

-

 

 

 

-

 

 

 

1,238

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,238

 

Vesting of restricted stock units, net of forfeitures and tax withholdings

 

 

94

 

 

 

-

 

 

 

-

 

 

 

(1,516

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,516

)

Share-based compensation expense

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,377

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,377

 

Repurchases of common stock

 

 

-

 

 

 

(569

)

 

 

-

 

 

 

-

 

 

 

(11,357

)

 

 

-

 

 

 

-

 

 

 

(11,357

)

Balance at March 31, 2018

 

 

58,230

 

 

 

(13,230

)

 

$

58

 

 

$

662,924

 

 

$

(235,723

)

 

$

(17,552

)

 

$

282,999

 

 

$

692,706

 

 

See accompanying notes to unaudited consolidated financial statements.

 

 

 

6


 

NAVIGANT CONSULTING, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

 

 

 

For the three months ended

 

 

 

 

March 31,

 

 

 

 

2019

 

 

2018

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

 

6,319

 

 

$

 

11,853

 

 

Adjustments to reconcile net income to net cash used in operating activities:

 

 

 

 

 

 

 

 

 

 

 

Depreciation expense

 

 

 

4,586

 

 

 

 

6,845

 

 

Amortization expense

 

 

 

1,372

 

 

 

 

1,856

 

 

Share-based compensation expense

 

 

 

2,769

 

 

 

 

3,377

 

 

Deferred income taxes

 

 

 

5,086

 

 

 

 

968

 

 

Allowance for doubtful accounts receivable

 

 

 

448

 

 

 

 

3,130

 

 

Loss from disposition of discontinued operations

 

 

 

672

 

 

 

 

-

 

 

Other, net

 

 

 

185

 

 

 

 

1,007

 

 

Changes in assets and liabilities (net of acquisitions):

 

 

 

 

 

 

 

 

 

 

 

Accounts receivable, net and contract assets

 

 

 

(7,014

)

 

 

 

(23,615

)

 

Prepaid expenses and other assets

 

 

 

(4,305

)

 

 

 

(716

)

 

Accounts payable

 

 

 

(423

)

 

 

 

(2,100

)

 

Accrued liabilities

 

 

 

(119

)

 

 

 

2,200

 

 

Accrued compensation-related costs

 

 

 

(28,772

)

 

 

 

(36,458

)

 

Income taxes payable

 

 

 

(3,356

)

 

 

 

2,926

 

 

Other liabilities

 

 

 

(8,587

)

 

 

 

(6,120

)

 

Net cash used in operating activities

 

 

 

(31,139

)

 

 

 

(34,847

)

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

 

(3,007

)

 

 

 

(5,750

)

 

Acquisitions of businesses, net of cash acquired

 

 

 

(6,000

)

 

 

 

-

 

 

Net cash used in investing activities

 

 

 

(9,007

)

 

 

 

(5,750

)

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

 

 

 

Issuances of common stock

 

 

 

856

 

 

 

 

1,238

 

 

Repurchases of common stock

 

 

 

(53,493

)

 

 

 

(11,357

)

 

Dividend payments

 

 

 

(1,994

)

 

 

 

-

 

 

Repayments to banks

 

 

 

-

 

 

 

 

(79,144

)

 

Borrowings from banks

 

 

 

-

 

 

 

 

129,677

 

 

Distributions to non-controlling interest holder

 

 

 

(3,600

)

 

 

 

-

 

 

Other, net

 

 

 

(1,306

)

 

 

 

(1,596

)

 

Net cash (used in) provided by financing activities

 

 

 

(59,537

)

 

 

 

38,818

 

 

Effect of exchange rate changes on cash and cash equivalents

 

 

 

(20

)

 

 

 

(24

)

 

Net decrease in cash and cash equivalents

 

 

 

(99,703

)

 

 

 

(1,803

)

 

Cash and cash equivalents at beginning of the period

 

 

 

206,920

 

 

 

 

8,449

 

 

Cash and cash equivalents at end of the period

 

$

 

107,217

 

 

$

 

6,646

 

 

 

Supplemental Unaudited Consolidated Cash Flow Information

(In thousands)

 

 

 

For the three months ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Interest paid

 

$

 

153

 

 

$

 

1,014

 

Income taxes paid, net of refunds

 

$

 

1,137

 

 

$

 

891

 

 

See accompanying notes to unaudited consolidated financial statements.

7


 

NAVIGANT CONSULTING, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1.

DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

Navigant Consulting, Inc. (“Navigant,” “we,” “us,” or “our”) (NYSE: NCI) is a specialized, global professional services firm that helps clients take control of their future. Navigant’s professionals apply deep industry knowledge, substantive technical expertise, and an enterprising approach to help clients build, manage, and/or protect their business interests. With a focus on markets and clients facing transformational change and significant regulatory or legal pressures, Navigant primarily serves clients in the healthcare, energy, and financial services industries. Across a range of advisory, consulting, outsourcing, and technology/analytics services, we believe our practitioners bring sharp insights that pinpoint opportunities and delivers powerful results.

The accompanying unaudited consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim reporting and do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America (“GAAP”). The information contained herein includes all adjustments, consisting of normal and recurring adjustments except where indicated, which are, in the opinion of management, necessary for a fair presentation of the results of operations for the interim periods presented.

The results of operations for the three months ended March 31, 2019 are not necessarily indicative of the results to be expected for the entire year ending December 31, 2019.

These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and related notes as of and for the year ended December 31, 2018 included in our Annual Report on Form 10-K filed with the SEC on February 28, 2019 (“2018 Form 10-K”).

The preparation of unaudited consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the unaudited consolidated financial statements and the related notes. Actual results could differ from those estimates and may affect future results of operations and cash flows. We have evaluated events and transactions occurring after the balance sheet date and prior to the date of the filing of this report.

 

2.      RECENT ACCOUNTING PRONOUNCEMENTS

Recently Adopted Accounting Pronouncements

Effective January 1, 2019, we adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-02, Leases (“Topic 842”). This update amends the accounting requirements for leases by requiring recognition of lease liabilities and related right-of-use assets on the balance sheet. Lessees are required to recognize a lease liability measured on a discounted basis, which is the lessee’s obligation to make lease payments arising from a lease, and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. We adopted Topic 842 using the modified retrospective approach as of the effective date, January 1, 2019. We have recorded the cumulative effects on our balance sheet as of the effective date.  No adjustments were made to prior comparative periods.  Due to the number of leases we are party to, the related obligations and right-of-use assets did have a material impact on our unaudited consolidated balance sheets (see Note 11 – Leases). As a result of the adoption, there was no impact on net income or net assets. We recorded operating lease right-of-use assets of $84.0 million, current lease liability of $22.4 million and non-current lease liability of $85.3 million as of March 31, 2019. The right-of-use asset balance reflects the impact of other liability amounts, specifically deferred rent that has been effectively reclassified. As part of the adoption, we elected the package of practical expedients permitted under the transition guidance within Topic 842, which among other things, allowed us to carry forward the historical lease classification. Further, we also applied the practical expedient to combine, when applicable, lease and non-lease components. Leases with a term of 12 months or less are not recorded on the balance sheet.

On January 1, 2018, we adopted ASU 2014-09, Revenue from Contracts with Customers (“Topic 606”). As a result of the adoption, we recorded a net increase to retained earnings as of January 1, 2018 of $0.2 million, net of tax, with the impact primarily relating to certain contracts that include event-based variable consideration. For further discussion about our revenue recognition policy see Note 4 – Revenue Recognition.  

On January 1, 2018, we adopted ASU 2016-15, Statement of Cash Flow (“Topic 230”). This update is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The update provided new guidance regarding the classification of debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies including bank-owned life insurance policies, distributions received from equity

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method investments, beneficial interests in securitized transactions, and separately identifiable cash flows and application of the predominance principle. We determined that the manner in which we previously classified our contingent acquisition liability payments in the unaudited consolidated statement of cash flows would change.  Based on our evaluation, adoption of this standard required a reclassification of a portion of the payments previously reported as financing activities for comparative periods in the statement of cash flows within our unaudited consolidated financial statements issued for periods beginning on or after January 1, 2018. Under this guidance, portions of these payments have been reclassified from financing activities to operating activities. We applied this change retrospectively, and it did not have a material impact on our unaudited consolidated financial statements.

On January 1, 2018, we adopted ASU 2017-01, Business Combinations: Clarifying the Definition of a Business (“Topic 805”), which provides a new framework for determining whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. We applied this change prospectively, and it did not have a material impact on our unaudited consolidated financial statements.  

 

3.

DISPOSITIONS AND DISCONTINUED OPERATIONS

On August 24, 2018, we completed the disposition of our former Disputes, Forensics and Legal Technology segment and the transaction advisory services practice within our Financial Services Advisory and Compliance segment (collectively, “SaleCo”) to Ankura Consulting Group, LLC (“Ankura”) for total proceeds of $462.8 million net of working capital adjustments. The operations of SaleCo have been presented in accordance with ASC Topic 205 “Discontinued Operations” for all periods presented. All other operations are considered “continuing operations” and have been presented in three segments. See Note 5 – Segment Information.

In addition to the purchase agreement for SaleCo, we entered into a Transition Services Agreement pursuant to which we provide Ankura with certain services to enable Ankura to operate SaleCo (the “TSA Services”). The TSA Services include information technology, finance and accounting, human resources and other corporate support services. The TSA Services were provided to Ankura for a period of up to 6 months after the closing date for certain services, and certain services were extended at Ankura’s option through August 31, 2019. Income related to the TSA Services has been recorded in general and administrative expenses.

The amounts attributable to each category of discontinued operations were as follows (in thousands):

 

 

For the three months ended

 

 

March 31,

 

 

2019

 

 

2018

 

Revenues before reimbursements

$

 

-

 

 

$

 

82,434

 

Total revenues

$

 

-

 

 

$

 

86,452

 

Cost of services including reimbursable expenses

$

 

-

 

 

$

 

58,487

 

General and administrative expenses

$

 

-

 

 

$

 

7,283

 

Amortization and depreciation expense

$

 

-

 

 

$

 

1,953

 

Interest expense

$

 

-

 

 

$

 

488

 

Loss from disposition of discontinued operations

$

 

(672

)

 

$

 

-

 

Other expense, net

$

 

-

 

 

$

 

(29

)

(Loss) income from discontinued operations before income tax expense

$

 

(672

)

 

$

 

18,212

 

Income tax (benefit) expense from discontinued operations

$

 

(183

)

 

$

 

4,762

 

(Loss) income from discontinued operations, net of tax

$

 

(489

)

 

$

 

13,450

 

 

Amounts recorded to discontinued operations in the three months ended March 31, 2019 were due to settlements of certain working capital amounts, as well as changes in estimates of other transaction related contingencies. Certain contingencies remain unresolved and are subject to finalization and settlement, which may result in further adjustments to the gain (loss) on disposition.

We have allocated interest expense to discontinued operations based on the ratio of net assets of discontinued operations to the sum of total net assets plus consolidated debt.

Capital expenditures for the three months ended March 31, 2018 totaled $0.3 million. 

 

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4.

REVENUE RECOGNITION

Recently Adopted Accounting Pronouncements

On January 1, 2018, we adopted Topic 606 and all the related amendments (“the new revenue standard”) for all contracts with customers not completed as of the adoption date using the cumulative catch-up transition (modified retrospective) method. Results as of January 1, 2018 are presented under Topic 606.  Previously, we recognized event-based variable fees when contractual milestones or obligations were met, however, Topic 606 requires us to estimate and recognize the revenue from certain event-based variable fees over the period of performance to the extent that it is probable that a significant reversal will not occur.   

Contract Assets and Liabilities

We define contract assets as revenues recognized for fixed-fee, event-based or performance-based arrangements for which we are not contractually able to bill. These contract assets are included in accounts receivable, net and contract assets within the unaudited consolidated balance sheets. As of March 31, 2019 and December 31, 2018, our contract assets were not material. In most cases, our standard fixed fee contracts allow for monthly billing.  

We define contract liabilities as retainers and advance payments from or billings to our customers for services that have not yet been performed or earned and retainers. These liabilities are recorded within other current liabilities and are recognized as services are provided. Any taxes assessed on revenues relating to services provided to our clients are recorded on a net basis. As of March 31, 2019 and December 31, 2018, our contract liabilities were $21.3 million and $28.9 million, respectively. During the three months ended March 31, 2019, $17.7 million was recognized into revenue from the opening balance. The remaining change related to amounts billed or payments received for work not yet performed.

Performance Obligations

For disclosure purposes, we apply the practical expedient to exclude the value of unsatisfied performance obligations for contracts with an enforceable duration of one year or less. We also apply the practical expedient to exclude those amounts for contracts in which we apply the right to invoice. The majority of our contracts include termination for convenience clauses which generally require 30 days’ notice with no penalty. The notice period required determines the contract duration resulting in very few agreements which are contractually enforceable beyond one year. As of March 31, 2019, we had approximately $147.3 million of remaining performance obligations of which approximately $52.9 million are expected to be satisfied beyond one year. These obligations mainly relate to our newly formed joint venture with Baptist Health South Florida, Health System Solutions, LLC (“HSS”).

5.

SEGMENT INFORMATION

Our business is assessed and resources are allocated based on the following three reportable segments:

 

The Healthcare segment provides strategic, performance improvement, and business process management solutions. Clients of this segment include healthcare providers, physician enterprises, payers, government agencies and life sciences companies. We help clients respond to market legislative changes such as the shift to an outcomes and value-based reimbursements model, ongoing industry consolidation and reorganization, Medicaid expansion, the implementation of a new electronic health records system and product planning and commercialization expertise.

 

The Energy segment provides full lifecycle solutions that help clients transform their businesses in a rapidly changing energy environment, manage complexity and accelerate operational performance, meet compliance requirements, and transform their organizations and systems. In addition, we provide a broad array of benchmarking, data and market research capabilities related to the energy sector.

 

The Financial Services Advisory and Compliance segment provides strategic, operational, risk management, investigative and compliance advisory services to clients primarily in the highly-regulated financial services industry, including major financial and insurance institutions. This segment also provides anti-corruption solutions and anti-money laundering consulting, litigation support and tax compliance services to clients in a broad variety of industries.

The following information includes segment revenues before reimbursements, segment total revenues and segment operating profit. Certain unallocated expense amounts related to specific reporting segments have been excluded from segment operating profit to be consistent with the information used by management to evaluate segment performance. Segment operating profit represents total revenues less cost of services excluding long-term compensation expense attributable to client-service employees. Long-term compensation expense attributable to client-service employees includes share-based compensation expense and compensation expense

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attributed to certain retention incentives (see Note 8 — Share-Based Compensation Expense and Note 9 — Supplemental Consolidated Balance Sheet Information).

The information presented does not necessarily reflect the results of segment operations that would have occurred had the reporting segments been stand-alone businesses.

Information on the segment operations has been summarized as follows (in thousands):

 

 

 

For the three months ended

 

 

 

March 31,

 

 

 

2019

 

 

2018

 

Revenues before reimbursements:

 

 

 

 

 

 

 

 

 

 

Healthcare

 

$

 

119,003

 

 

$

 

90,149

 

Energy

 

 

 

36,249

 

 

 

 

33,704

 

Financial Services Advisory and Compliance

 

 

 

30,877

 

 

 

 

37,592

 

Total revenues before reimbursements

 

$

 

186,129

 

 

$

 

161,445

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues:

 

 

 

 

 

 

 

 

 

 

Healthcare

 

$

 

126,569

 

 

$

 

98,712

 

Energy

 

 

 

43,700

 

 

 

 

37,637

 

Financial Services Advisory and Compliance

 

 

 

32,593

 

 

 

 

41,719

 

Total revenues

 

$

 

202,862

 

 

$

 

178,068

 

 

 

 

 

 

 

 

 

 

 

 

Segment operating profit:

 

 

 

 

 

 

 

 

 

 

Healthcare

 

$

 

36,755

 

 

$

 

20,390

 

Energy

 

 

 

10,410

 

 

 

 

10,728

 

Financial Services Advisory and Compliance

 

 

 

5,231

 

 

 

 

14,836

 

Total segment operating profit

 

 

 

52,396

 

 

 

 

45,954

 

 

 

 

 

 

 

 

 

 

 

 

Segment reconciliation to income before income tax expense:

 

 

 

 

 

 

 

 

 

 

Reconciling items:

 

 

 

 

 

 

 

 

 

 

General and administrative expenses