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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, 2020
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,

 

DC
 
 
20004
(Address of Principal Executive Offices)
 
 
(Zip Code)
( 202 ) 312-9100
(Registrant’s telephone number, including area code)
 
  
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol
 
Name of each exchange on which registered
Common Stock, $0.01 par value
 
FCN
 
New York Stock Exchange
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. 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange 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 23, 2020
Common Stock, $0.01 par value
37,098,282
 



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,
 
2020
 
2019
 
(Unaudited)
 
 
Assets
 
 
 
Current assets
 

 
 

Cash and cash equivalents
$
223,063

 
$
369,373

Accounts receivable:
 
 
 
Billed receivables
584,620

 
540,584

Unbilled receivables
436,944

 
418,288

Allowance for doubtful accounts and unbilled services
( 284,666
)
 
( 265,500
)
Accounts receivable, net
736,898

 
693,372

Current portion of notes receivable
31,942

 
35,106

Prepaid expenses and other current assets
74,544

 
80,810

Total current assets
1,066,447

 
1,178,661

Property and equipment, net
92,852

 
93,672

Operating lease assets
149,570

 
159,777

Goodwill
1,191,948

 
1,202,767

Other intangible assets, net
35,682

 
38,432

Notes receivable, net
63,801

 
69,033

Other assets
36,881

 
40,800

Total assets
$
2,637,181

 
$
2,783,142

Liabilities and Stockholders' Equity
 
 
 
Current liabilities
 
 
 
Accounts payable, accrued expenses and other
$
170,930

 
$
158,936

Accrued compensation
240,192

 
416,903

Billings in excess of services provided
40,219

 
36,698

Total current liabilities
451,341

 
612,537

Long-term debt, net
328,193

 
275,609

Noncurrent operating lease liabilities
163,594

 
176,378

Deferred income taxes
152,347

 
151,352

Other liabilities
73,022

 
78,124

Total liabilities
1,168,497

 
1,294,000

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 — 37,110 (2020) and 37,390 (2019)
371

 
374

Additional paid-in capital
170,062

 
216,162

Retained earnings
1,470,200

 
1,413,453

Accumulated other comprehensive loss
( 171,949
)
 
( 140,847
)
Total stockholders' equity
1,468,684

 
1,489,142

Total liabilities and stockholders' equity
$
2,637,181

 
$
2,783,142

 
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,
 
 
2020
 
2019
Revenues
 
$
604,593

 
$
551,274

Operating expenses
 
 
 
 
Direct cost of revenues
 
402,247

 
349,066

Selling, general and administrative expenses
 
126,959

 
113,185

Amortization of other intangible assets
 
2,331

 
1,861

 
 
531,537

 
464,112

Operating income
 
73,056

 
87,162

Other income (expense)
 
 

 
 

Interest income and other
 
5,017

 
159

Interest expense
 
( 4,861
)
 
( 4,746
)
 
 
156

 
( 4,587
)
Income before income tax provision
 
73,212

 
82,575

Income tax provision
 
16,465

 
19,930

Net income
 
$
56,747

 
$
62,645

Earnings per common share — basic
 
$
1.56

 
$
1.69

Earnings per common share — diluted
 
$
1.49

 
$
1.64

Other comprehensive income (loss), net of tax
 
 
 
 
Foreign currency translation adjustments, net of tax
   expense of $0
 
$
( 31,102
)
 
$
5,223

Total other comprehensive income (loss), net of tax
 
( 31,102
)
 
5,223

Comprehensive income
 
$
25,645

 
$
67,868

 
See accompanying notes to condensed consolidated financial statements

4


FTI Consulting, Inc. and Subsidiaries
Condensed Consolidated Statements 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, 2019
37,390

 
$
374

 
$
216,162

 
$
1,413,453

 
$
( 140,847
)
 
$
1,489,142

Net income

 
$

 
$

 
$
56,747

 
$

 
$
56,747

Other comprehensive loss:
 
 
 
 
 
 
 
 
 
 
 
Cumulative translation adjustment

 

 

 

 
( 31,102
)
 
( 31,102
)
Issuance of common stock in
connection with:
 
 
 
 
 
 
 
 
 
 
 
Exercise of options
34

 
1

 
1,206

 

 

 
1,207

           Restricted share grants, less net
             settled shares of 58
136

 
1

 
( 6,768
)
 

 

 
( 6,767
)
           Stock units issued under incentive
             compensation plan

 

 
2,314

 

 

 
2,314

Purchase and retirement of common
stock
( 450
)
 
( 5
)
 
( 50,306
)
 

 

 
( 50,311
)
Share-based compensation

 

 
7,454

 

 

 
7,454

Balance at March 31, 2020
37,110

 
$
371

 
$
170,062

 
$
1,470,200

 
$
( 171,949
)
 
$
1,468,684


 
Common Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 
 
 
Shares
 
Amount
 
 
 
 
Total
Balance at December 31, 2018
38,147

 
$
381

 
$
299,534

 
$
1,196,727

 
$
( 147,817
)
 
$
1,348,825

Net income

 
$

 
$

 
$
62,645

 
$

 
$
62,645

Other comprehensive income:
 
 
 
 
 
 
 
 
 
 
 
Cumulative translation adjustment

 

 

 

 
5,223

 
5,223

Issuance of common stock in connection with:
 
 
 
 
 
 
 
 
 
 
 
Exercise of options
55

 
1

 
2,211

 

 

 
2,212

Restricted share grants, less net
settled shares of 38
153

 
1

 
( 2,740
)
 

 

 
( 2,739
)
Stock units issued under incentive
   compensation plan

 

 
1,346

 

 

 
1,346

Purchase and retirement of common stock
( 328
)
 
( 3
)
 
( 21,880
)
 

 

 
( 21,883
)
Share-based compensation

 

 
6,393

 

 

 
6,393

Balance at March 31, 2019
38,027

 
$
380

 
$
284,864

 
$
1,259,372

 
$
( 142,594
)
 
$
1,402,022


 
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,
 
2020
 
2019
Operating activities
 
 
 
Net income
$
56,747

 
$
62,645

Adjustments to reconcile net income to net cash used in operating
   activities:
 
 
 
Depreciation and amortization
7,823

 
7,066

Amortization and impairment of other intangible assets
2,331

 
1,861

Acquisition-related contingent consideration
506

 
93

Provision for doubtful accounts
3,872

 
3,784

Share-based compensation
7,454

 
6,393

Amortization of debt discount and issuance costs
2,978

 
2,860

Deferred income taxes
545

 
8,752

Other

 
( 42
)
Changes in operating assets and liabilities, net of effects from
   acquisitions:
 
 
 
Accounts receivable, billed and unbilled
( 60,963
)
 
( 95,746
)
Notes receivable
7,051

 
9,653

Prepaid expenses and other assets
9,442

 
5,979

Accounts payable, accrued expenses and other
11,136

 
( 450
)
Income taxes
( 667
)
 
2,534

Accrued compensation
( 176,070
)
 
( 123,260
)
Billings in excess of services provided
4,253

 
5,792

Net cash used in operating activities
( 123,562
)
 
( 102,086
)
Investing activities
 
 
 
Purchases of property and equipment
( 8,236
)
 
( 10,153
)
Other
8

 
72

Net cash used in investing activities
( 8,228
)
 
( 10,081
)
Financing activities
 
 
 
Borrowings under revolving line of credit
55,000

 

Repayments under revolving line of credit
( 5,000
)
 

Purchase and retirement of common stock
( 49,135
)
 
( 21,883
)
Net issuance of common stock under equity compensation plans
( 5,583
)
 
( 605
)
Payments for business acquisition liabilities

 
( 1,282
)
Deposits and other
3,870

 
1,003

Net cash used in financing activities
( 848
)
 
( 22,767
)
Effect of exchange rate changes on cash and cash equivalents
( 13,672
)
 
2,106

Net decrease in cash and cash equivalents
( 146,310
)
 
( 132,828
)
Cash and cash equivalents, beginning of period
369,373

 
312,069

Cash and cash equivalents, end of period
$
223,063

 
$
179,241

Supplemental cash flow disclosures
 
 
 
Cash paid for interest
$
3,136

 
$
3,450

Cash paid for income taxes, net of refunds
$
16,588

 
$
8,644

Non-cash investing and financing activities:
 
 
 
Issuance of stock units under incentive compensation plans
$
2,314

 
$
1,346

  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
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, 2019 filed with the SEC.   
2. New Accounting Standards
  Recently Adopted Accounting Standards
In August 2018, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2018-15 ("ASU 2018-15"), Internal Use Software (Subtopic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract , which requires companies to capitalize implementation costs of a hosting arrangement that is a service contract and expense those costs over the term of the hosting arrangement. On January 1, 2020, we prospectively adopted ASU 2018-15 for eligible costs incurred on or after the adoption date. The adoption of this standard may result in the recognition of additional internal use software costs, which are included in the “Property and equipment, net” financial statement line item on the Condensed Consolidated Balance Sheets. There was no material impact on the Condensed Consolidated Balance Sheets as of March 31, 2020 or on the Condensed Consolidated Statements of Comprehensive Income, Condensed Consolidated Statements of Stockholders’ Equity or Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2020.
Accounting Standards Not Yet Adopted
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes , which is intended to reduce the complexity in accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and clarifying and amending existing guidance. The amendments in this ASU are effective for annual periods beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022, although early adoption is permitted. The Company is in the process of evaluating the impact of this new guidance on its consolidated financial statements.
3. 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.
Because we expect to settle the principal amount of the outstanding 2.0 % convertible senior notes due 2023 ("2023 Convertible Notes") in cash, we use the treasury stock method for calculating the potential dilutive effect of the conversion feature on earnings per common share, if applicable. The conversion feature had a dilutive impact on earnings per common share for the three months ended March 31, 2020 , as the average market price per share of our common stock for the period exceeded the conversion price of $ 101.38 per share. See Note 8, "Debt" for additional information about the 2023 Convertible Notes.

7


 
Three Months Ended March 31,
 
2020
 
2019
Numerator — basic and diluted
 
 
 
Net income
$
56,747

 
$
62,645

Denominator
 
 
 
Weighted average number of common shares outstanding — basic
36,415

 
36,981

Effect of dilutive convertible notes
433

 

Effect of dilutive stock options
461

 
431

Effect of dilutive restricted shares
881

 
807

Weighted average number of common shares outstanding — diluted
38,190

 
38,219

Earnings per common share — basic
$
1.56

 
$
1.69

Earnings per common share — diluted
$
1.49

 
$
1.64

Antidilutive stock options and restricted shares
12

 
49


4. Revenues
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 revenues 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.
Fixed-fee arrangements require the client to pay a pre-established fee in exchange for a predetermined set of professional services. We recognize revenues earned to date by applying the proportional performance method. Generally, these arrangements 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. We recognize revenues earned to date in an amount that is probable not to reverse and by applying the proportional performance method when the criteria for over time revenue recognition are met.
Revenues are recognized when we satisfy a performance obligation by transferring services promised in a contract to a customer and in an amount that reflects the consideration that we expect to receive in exchange for those services. Performance obligations in our contracts represent distinct or separate services that we provide to our customers.
Revenues recognized during the current period may include revenues from performance obligations satisfied or partially satisfied in previous periods. This primarily occurs when the estimated transaction price has changed based on our current probability assessment over whether the agreed-upon outcome for our performance-based and contingent arrangements will be achieved. The aggregate amount of revenues recognized related to a change in the transaction price in the current period, which related to performance obligations satisfied or partially satisfied in a prior period, was $ 8.3 million and $ 6.4 million for the three months ended March 31, 2020 and 2019 , respectively.
Unfulfilled performance obligations represent the remaining contract transaction prices allocated to the performance obligations that are unsatisfied. Unfulfilled performance obligations primarily consist of fees not yet recognized on a proportional performance basis for fixed-fee arrangements and performance-based and contingent arrangements. As of March 31, 2020 and December 31, 2019 , the aggregate amount of the remaining contract transaction price allocated to unfulfilled performance obligations was $ 1.4 million and $ 2.3 million , respectively. We expect to recognize the majority of the related revenues over the next 24 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 but 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, 2020 and $ 1.3 million as of December 31, 2019 .

8


Contract liabilities are defined as liabilities incurred when we have received consideration but have not yet performed the agreed-upon services. This may occur when clients pay us upfront fees before we begin work for them. The contract liability balance was immaterial as of March 31, 2020 and December 31, 2019 .
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. Our contract terms generally include a requirement of payment within 30 days when no contingencies exist. Payment terms and conditions vary depending on the jurisdiction, market and type of service, and whether regulatory or other third-party approvals are required. At times, we may execute contracts in a form provided by customers that might include different payment terms and contracts may be negotiated at the client’s request.
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, such as those fee reductions 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” ("SG&A") on the Condensed Consolidated Statements of Comprehensive Income. Our bad debt expense totaled $ 3.9 million and $ 3.8 million for the three months ended March 31, 2020 and 2019 , respectively. Our write-offs totaled $ 6.1 million and $ 2.5 million for the three months ended March 31, 2020 and 2019 , respectively.
6. 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, 2019
 
 
 
 
 
 
 
 
 
 
 
Goodwill
$
478,842

 
$
232,120

 
$
268,677

 
$
96,770

 
$
320,497

 
$
1,396,906

Accumulated goodwill impairment

 

 

 

 
( 194,139
)
 
( 194,139
)
Goodwill, net at December 31, 2019
478,842


232,120


268,677


96,770


126,358


1,202,767

Foreign currency translation adjustment and other
( 3,771
)
 
( 1,802
)
 
( 331
)
 
( 81
)
 
( 4,834
)
 
( 10,819
)
Balance at March 31, 2020
 
 
 
 
 
 
 
 
 
 
 
Goodwill
475,071


230,318


268,346


96,689

 
315,663

 
1,386,087

Accumulated goodwill impairment

 

 

 

 
( 194,139
)
 
( 194,139
)
Goodwill, net at March 31, 2020
$
475,071


$
230,318


$
268,346


$
96,689


$
121,524


$
1,191,948



9


Other Intangible Assets
Other intangible assets were as follows:  
 
 
March 31, 2020
 
December 31, 2019
 
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Gross
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
Amortizing intangible assets
 
 
 
 
 
 
 
 
 
 
 
 
Customer relationships
 
$
97,870

 
$
77,171

 
$
20,699

 
$
99,613

 
$
76,808

 
$
22,805

Trademarks
 
9,730

 
1,051

 
8,679

 
9,855

 
653

 
9,202

Acquired software and other
 
3,319

 
2,115

 
1,204

 
3,386

 
2,061

 
1,325

 
 
110,919

 
80,337

 
30,582

 
112,854

 
79,522

 
33,332

Non-amortizing intangible assets
 
 
 
 
 
 
 
 
 
 
 
 
Trademarks
 
5,100

 

 
5,100

 
5,100

 

 
5,100

Total
 
$
116,019

 
$
80,337

 
$
35,682

 
$
117,954

 
$
79,522

 
$
38,432


Other intangible assets with finite lives are amortized over their estimated useful lives. We recorded amortization expense of $ 2.3 million and $ 1.9 million for the three months ended March 31, 2020 and 2019 , respectively.
We estimate our future amortization expense for our intangible assets with finite lives to be as follows: 
Year
As of
March 31, 2020 (1)
2020 (remaining)
$
6,939

2021
8,740

2022
6,944

2023
3,564

2024
2,177

Thereafter
2,218

 
$
30,582


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

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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, 2020 and December 31, 2019 :
 
March 31, 2020
 
 
 
Hierarchy Level
(Fair Value)
 
Carrying
Amount
 
Level 1
 
Level 2
 
Level 3
Liabilities
 
 
 
 
 
 
 
Acquisition-related contingent consideration, including
   current portion (1)
$
15,184

 
$

 
$

 
$
15,184

2023 Convertible Notes (2)
278,193

 

 
417,937

 

Total
$
293,377

 
$

 
$
417,937

 
$
15,184

 
December 31, 2019
 
 
 
Hierarchy Level
(Fair Value)
 
Carrying
Amount
 
Level 1
 
Level 2
 
Level 3
Liabilities
 
 
 
 
 
 
 
Acquisition-related contingent consideration, including
   current portion (1)
$
14,826

 
$

 
$

 
$
14,826

2023 Convertible Notes (2)
275,609

 

 
398,016

 

Total
$
290,435

 
$

 
$
398,016

 
$
14,826

 
(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.  
(2)  
The carrying values include unamortized deferred debt issue costs and debt discount.
The fair values of financial instruments not included in the tables above are estimated to be equivalent to their carrying values as of March 31, 2020 and December 31, 2019 .
We estimate the fair value of our 2023 Convertible Notes based on their last actively traded prices. The fair value of our 2023 Convertible Notes is classified within Level 2 of the fair value hierarchy because it is traded in less active markets.
We estimate the fair value of acquisition-related contingent consideration using either a probability-weighted discounted cash flow model or a Monte Carlo simulation. These fair value estimates represent Level 3 measurements as they are based on significant inputs not observed in the market and reflect our own assumptions. We have multiple valuation models that use different inputs and assumptions based on the timing of the acquisitions. As a result, the significant unobservable inputs used in these models vary. The acquisition-related contingent consideration subject to the probability-weighted discounted cash flow model was valued using significant unobservable inputs including a discount rate of 13.5 % and future cash flows. The acquisition-related contingent consideration subject to the Monte Carlo simulation was valued using significant unobservable inputs including a volatility rate of 30.0 % , a discount rate of 13.6 % , which reflects the weighted average of our cost of debt and adjusted cost of equity of the acquired company, and future cash flows. Significant increases (decreases) in these unobservable inputs in isolation would result in a significantly lower (higher) fair value. We reassess the fair value of our acquisition-related contingent consideration at each reporting period based on additional information as it becomes available.

11


The change in our liability for acquisition-related contingent consideration for our Level 3 financial instruments is as follows:
 
Liability for Acquisition-Related Contingent Consideration
Balance at December 31, 2019
$
14,826

Accretion for time value of money (1)
506

Foreign currency translation adjustment (2)
( 148
)
Balance at March 31, 2020
$
15,184

 
Liability for Acquisition-Related Contingent Consideration
Balance at December 31, 2018
$
3,698

Accretion for time value of money (1)
93

Balance at March 31, 2019
$
3,791

 
(1)  
Accretion for the time value of money is included in "Selling, general and administrative expenses" on the Condensed Consolidated Statements of Comprehensive Income.
(2)  
Foreign currency translation adjustments are included in "Other comprehensive income (loss), net of tax" on the Condensed Consolidated Statements of Comprehensive Income.
8. Debt
The table below summarizes the components of the Company’s debt: 
 
March 31,
2020
 
December 31,
2019
2023 Convertible Notes
$
316,250

 
$
316,250

Credit Facility
50,000

 

Total debt
366,250

 
316,250

Less: deferred debt discount
( 33,168
)
 
( 35,393
)
Less: deferred debt issue costs
( 4,889
)
 
( 5,248
)
Long-term debt, net (1)
$
328,193

 
$
275,609

Additional paid-in capital
$
35,306

 
$
35,306

Discount attribution to equity
( 1,175
)
 
( 1,175
)
Equity component, net
$
34,131

 
$
34,131

 
(1)  
There were no current portions of long-term debt as of March 31, 2020 and December 31, 2019 .
2023 Convertible Notes
On August 20, 2018, we issued the 2023 Convertible Notes in an aggregate principal amount of $ 316.3 million . The 2023 Convertible Notes bear interest at a fixed rate of 2.0 % per year, payable semiannually in arrears on February 15th and August 15th of each year and will mature on August 15, 2023, unless earlier converted or repurchased. The 2023 Convertible Notes are senior unsecured obligations of the Company.
The 2023 Convertible Notes are convertible at a conversion rate of 9.8643 shares of our common stock per $1,000 principal amount of the 2023 Convertible Notes (equivalent to a conversion price of approximately $ 101.38 per share of common stock). Subject to the conditions set forth in the indenture governing the 2023 Convertible Notes, holders may convert their 2023 Convertible Notes at any time prior to the close of business on the business day immediately preceding May 15, 2023. The circumstances required to allow the holders to convert their 2023 Convertible Notes prior to maturity were not met as of March 31, 2020 .

12


The excess of the principal amount of the liability over its carrying amount ("debt discount") is amortized to interest expense over the term of the 2023 Convertible Notes using the effective interest rate method.
We incurred debt issue costs and allocated the total amount to the liability and equity components of the 2023 Convertible Notes based on their relative values. The debt issue costs attributable to the liability component are amortized to interest expense over the term of the 2023 Convertible Notes using the effective interest rate method. Issuance costs attributable to the equity component were netted with the equity component in stockholders' equity.
The table below summarizes the amount of interest cost recognized by us for both the contractual interest expense and amortization of the debt discount for the 2023 Convertible Notes:
 
Three Months Ended March 31,
 
2020
 
2019
Contractual interest expense
$
1,581

 
$
1,581

Amortization of debt discount (1)
2,225

 
2,108

Total
$
3,806

 
$
3,689

 
(1)  
The effective interest rate of the liability component was 5.45 % as of March 31, 2020 .  
Credit Facility
On June 26, 2015, we entered into a credit agreement (the "Original Credit Agreement"), which provides for a $ 550.0 million senior secured bank revolving credit facility (the “Credit Facility”) maturing on June 26, 2020. In November 2018, we amended and restated the Original Credit Agreement, to, among other things, extend the maturity of the revolving loans under the Credit Facility to November 30, 2023 and incurred an additional $ 1.7 million  of debt issuance costs (the Original Credit Agreement as amended and restated, the “Credit Agreement”).
The Company 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 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 (and, therefore, unavailable) as of March 31, 2020 for letters of credit.
There were $ 1.6 million and $ 2.0 million of unamortized debt issue costs related to the Credit Facility as of March 31, 2020 and December 31, 2019 , respectively. These amounts were included in “Other assets” on our Condensed Consolidated Balance Sheets.
9. Leases
We lease office space and equipment under non-cancelable operating leases. We recognize operating lease expense on a straight-line basis over the lease term. Leases with an initial term of 12 months or less are not recorded on the balance sheet and are expensed on a straight-line basis. Most leases include one or more options to renew, with renewal terms that can extend the lease term from six months to seven years . The exercise of lease renewal options is at our sole discretion. Certain of our lease agreements include rental payments that are adjusted periodically for inflation. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants.

13


The table below summarizes the carrying amount of our operating lease assets and liabilities:
Leases
 
Classification
 
As of
March 31,
2020
 
As of
December 31,
2019
Assets
 
 
 
 
 
 
  Operating lease assets
 
Operating lease assets
 
$
149,570

 
$
159,777

Total lease assets
 
 
 
$
149,570

 
$
159,777

Liabilities
 
 
 
 
 
 
Current
 
 
 
 
 
 
  Operating lease liabilities
 
Accounts payable, accrued expenses and other
 
$
36,235

 
$
35,727

Noncurrent
 
 
 
 
 
 
  Operating lease liabilities
 
Noncurrent operating lease liabilities
 
163,594

 
176,378

Total lease liabilities
 
 
 
$
199,829

 
$
212,105



The table below summarizes total lease costs:
 
Three months ended March 31,
Lease Cost
2020
 
2019
Operating lease costs
$
11,900

 
$
10,865

Short-term lease costs
522

 
863

Variable lease costs
2,987

 
3,013

Sublease income
( 1,090
)
 
( 1,197
)
Total lease cost
$
14,319

 
$
13,544



We sublease certain of our leased office spaces to third parties. Our sublease portfolio consists of leases of office space that we have vacated before the lease term expiration. Operating lease expense on vacated office space is reduced by sublease rental income, which is recorded to SG&A expenses on the Condensed Consolidated Statements of Comprehensive Income. Our sublease arrangements do not contain renewal options or restrictive covenants. We estimate future sublease rental income to be $ 3.6 million for the remainder of 2020, $ 4.5 million in 2021, $ 0.7 million in 2022, $ 0.6 million in 2023, $ 0.6 million in 2024 and $ 0.3 million in years beyond 2024.

The maturity analysis below summarizes the remaining future undiscounted cash flows for our operating leases and includes a reconciliation to operating lease liabilities reported on the Condensed Consolidated Balance Sheet:
 
As of
March 31, 2020
2020 (remaining)
$
32,688

2021
50,784

2022
31,886

2023
26,654

2024
23,518

Thereafter
75,776

   Total future lease payments
241,306

   Less: imputed interest
( 41,477
)
Total
$
199,829



The table below includes cash paid for our operating lease liabilities, other non-cash information, our weighted average remaining lease term and weighted average discount rate:

14