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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 September 30, 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 October 22, 2020
Common Stock, $0.01 par value			35,661,709

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FTI CONSULTING, INC. AND SUBSIDIARIES

INDEX

 

						Page
PART I—FINANCIAL INFORMATION
Item 1.			Financial Statements			3
			Condensed Consolidated Balance Sheets—September 30, 2020 and December 31, 2019			3
			Condensed Consolidated Statements of Comprehensive Income—Three and Nine Months Ended September 30, 2020 and 2019			4
			Condensed Consolidated Statements of Stockholders’ Equity—Three and Nine Months Ended September 30, 2020 and 2019			5
			Condensed Consolidated Statements of Cash Flows—Nine Months Ended September 30, 2020 and 2019			7
			Notes to Condensed Consolidated Financial Statements			8
Item 2.			Management’s Discussion and Analysis of Financial Condition and Results of Operations			20
Item 3.			Quantitative and Qualitative Disclosures About Market Risk			42
Item 4.			Controls and Procedures			42
PART II—OTHER INFORMATION
Item 1.			Legal Proceedings			43
Item 1A.			Risk Factors			43
Item 2.			Unregistered Sales of Equity Securities and Use of Proceeds			43
Item 3.			Defaults Upon Senior Securities			44
Item 4.			Mine Safety Disclosures			44
Item 5.			Other Information			44
Item 6.			Exhibits			45
SIGNATURES						46

2

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PART I—FINANCIAL INFORMATION

FTI Consulting, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except per share data)

Item 1.			Financial Statements

 

			September 30,						December 31,
			2020						2019
			(Unaudited)
Assets
Current assets
Cash and cash equivalents			$	304,658					$	369,373
Accounts receivable:
Billed receivables			603,832						540,584
Unbilled receivables			482,586						418,288
Allowance for doubtful accounts and unbilled services			(323,658)						(265,500)
Accounts receivable, net			762,760						693,372
Current portion of notes receivable			34,089						35,106
Prepaid expenses and other current assets			74,223						80,810
Total current assets			1,175,730						1,178,661
Property and equipment, net			95,544						93,672
Operating lease assets			153,818						159,777
Goodwill			1,223,764						1,202,767
Other intangible assets, net			43,652						38,432
Notes receivable, net			66,078						69,033
Other assets			35,812						40,800
Total assets			$	2,794,398					$	2,783,142
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable, accrued expenses and other			$	164,493					$	158,936
Accrued compensation			397,147						416,903
Billings in excess of services provided			46,621						36,698
Total current liabilities			608,261						612,537
Long-term debt, net			308,454						275,609
Noncurrent operating lease liabilities			161,976						176,378
Deferred income taxes			150,572						151,352
Other liabilities			90,638						78,124
Total liabilities			1,319,901						1,294,000
Commitments and contingent liabilities (Note 11)
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 — 36,028 (2020) and 37,390 (2019)			360						374
Additional paid-in capital			46,642						216,162
Retained earnings			1,568,546						1,413,453
Accumulated other comprehensive loss			(141,051)						(140,847)
Total stockholders' equity			1,474,497						1,489,142
Total liabilities and stockholders' equity			$	2,794,398					$	2,783,142

 

See accompanying notes to condensed consolidated financial statements

3

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FTI Consulting, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(in thousands, except per share data)

(Unaudited)

 

			Three Months Ended September 30,												Nine Months Ended September 30,
			2020						2019						2020						2019
Revenues			$	622,249					$	593,106					$	1,834,694					$	1,750,499
Operating expenses
Direct cost of revenues			417,179						380,892						1,232,437						1,116,224
Selling, general and administrative expenses			122,102						127,951						375,989						371,042
Special charges			7,103						—						7,103						—
Amortization of other intangible assets			2,795						2,125						7,440						5,838
			549,179						510,968						1,622,969						1,493,104
Operating income			73,070						82,138						211,725						257,395
Other income (expense)
Interest income and other			(3,340)						2,973						3,879						5,741
Interest expense			(5,151)						(4,832)						(15,169)						(14,371)
			(8,491)						(1,859)						(11,290)						(8,630)
Income before income tax provision			64,579						80,279						200,435						248,765
Income tax provision			14,407						19,857						45,342						61,100
Net income			$	50,172					$	60,422					$	155,093					$	187,665
Earnings per common share — basic			$	1.41					$	1.65					$	4.30					$	5.09
Earnings per common share — diluted			$	1.35					$	1.59					$	4.11					$	4.92
Other comprehensive income (loss), net of tax
Foreign currency translation adjustments, net of tax          expense of $0			$	21,330					$	(16,633)					$	(204)					$	(16,225)
Total other comprehensive income (loss), net of tax			21,330						(16,633)						(204)						(16,225)
Comprehensive income			$	71,502					$	43,789					$	154,889					$	171,440

 

See accompanying notes to condensed consolidated financial statements

4

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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
Net income			—						$	—					$	—					$	48,174					$	—					$	48,174
Other comprehensive income:
Cumulative translation adjustment			—						—						—						—						9,568						9,568
Issuance of common stock in connection with:
Exercise of options			33						—						1,191						—						—						1,191
Restricted share grants, less net              settled shares of 18			38						1						(2,155)						—						—						(2,154)
Purchase and retirement of common stock			(471)						(5)						(51,048)						—						—						(51,053)
Share-based compensation			—						—						4,693						—						—						4,693
Balance at June 30, 2020			36,710						$	367					$	122,743					$	1,518,374					$	(162,381)					$	1,479,103
Net income			—						$	—					$	—					$	50,172					$	—					$	50,172
Other comprehensive income:
Cumulative translation adjustment			—						—						—						—						21,330						21,330
Issuance of common stock in connection with:
Exercise of options			43						—						1,536						—						—						1,536
Restricted share grants, less net              settled shares of 2			24						—						(207)						—						—						(207)
Purchase and retirement of common stock			(749)						(7)						(82,859)						—						—						(82,866)
Share-based compensation			—						—						5,429						—						—						5,429
Balance at September 30, 2020			36,028						$	360					$	46,642					$	1,568,546					$	(141,051)					$	1,474,497

5

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			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
Net income			—						$	—					$	—					$	64,598					$	—					$	64,598
Other comprehensive loss:
Cumulative translation adjustment			—						—						—						—						(4,815)						(4,815)
Issuance of common stock in connection with:
Exercise of options			87						1						3,075						—						—						3,076
Restricted share grants, less net settled shares of 17			78						1						(1,352)						—						—						(1,351)
Purchase and retirement of common stock			(580)						(6)						(48,326)						—						—						(48,332)
Share-based compensation			—						—						3,814						—						—						3,814
Balance at June 30, 2019			37,612						$	376					$	242,075					$	1,323,970					$	(147,409)					$	1,419,012
Net income			—						$	—					$	—					$	60,422					$	—					$	60,422
Other comprehensive loss:
Cumulative translation adjustment			—						—						—						—						(16,633)						(16,633)
Issuance of common stock in connection with:
Exercise of options			94						1						3,568						—						—						3,569
Restricted share grants, less net      settled shares of 13			14						—						(1,322)						—						—						(1,322)
Stock units issued under incentive compensation plan			—						—						67						—						—						67
Purchase and retirement of common stock			(91)						(1)						(7,733)						—						—						(7,734)
Share-based compensation			—						—						3,853						—						—						3,853
Balance at September 30, 2019			37,629						$	376					$	240,508					$	1,384,392					$	(164,042)					$	1,461,234

See accompanying notes to condensed consolidated financial statements

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FTI Consulting, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

			Nine Months Ended September 30,
			2020						2019
Operating activities
Net income			$	155,093					$	187,665
Adjustments to reconcile net income to net cash provided by operating    activities:
Depreciation and amortization			23,655						22,384
Amortization and impairment of other intangible assets			7,440						5,838
Acquisition-related contingent consideration			4,652						717
Provision for doubtful accounts			15,608						13,552
Share-based compensation			17,576						14,060
Amortization of debt discount and issuance costs			9,028						8,666
Deferred income taxes			(1,658)						4,084
Other			45						248
Changes in operating assets and liabilities, net of effects from    acquisitions:
Accounts receivable, billed and unbilled			(86,491)						(191,644)
Notes receivable			3,346						2,521
Prepaid expenses and other assets			8,294						(5,817)
Accounts payable, accrued expenses and other			7,713						(7,332)
Income taxes			(14,635)						26,693
Accrued compensation			(18,985)						5,156
Billings in excess of services provided			10,296						(9,925)
Net cash provided by operating activities			140,977						76,866
Investing activities
Payments for acquisition of businesses, net of cash received			(25,271)						(18,791)
Purchases of property and equipment			(25,663)						(27,026)
Other			558						55
Net cash used in investing activities			(50,376)						(45,762)
Financing activities
Borrowings under revolving line of credit			149,500						45,000
Repayments under revolving line of credit			(124,500)						(45,000)
Purchase and retirement of common stock			(175,832)						(77,949)
Net issuance of common stock under equity compensation plans			(5,195)						3,176
Payments for business acquisition liabilities			(3,948)						(2,282)
Deposits and other			4,561						535
Net cash used in financing activities			(155,414)						(76,520)
Effect of exchange rate changes on cash and cash equivalents			98						(8,183)
Net decrease in cash and cash equivalents			(64,715)						(53,599)
Cash and cash equivalents, beginning of period			369,373						312,069
Cash and cash equivalents, end of period			$	304,658					$	258,470
Supplemental cash flow disclosures
Cash paid for interest			$	7,115					$	7,264
Cash paid for income taxes, net of refunds			$	61,636					$	29,885
Non-cash investing and financing activities:
Issuance of stock units under incentive compensation plans			$	2,314					$	1,413
Purchase and retirement of common stock not yet paid			$	8,540					$	—
Business acquisition liabilities not yet paid			$	3,460					$	14,004

 

See accompanying notes to condensed consolidated financial statements

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FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

1. Basis of Presentation and Significant Accounting Policies

The unaudited condensed consolidated financial statements of FTI Consulting, Inc., including its consolidated subsidiaries (collectively, the “Company,” “we,” “our” or “FTI Consulting”), presented herein, have been prepared in accordance with 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 resulted 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. The impact was not material on the Condensed Consolidated Balance Sheets as of September 30, 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 and nine months ended September 30, 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.

In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies accounting for convertible instruments by removing major separation models required under current GAAP. The ASU also removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception and simplifies the diluted earnings per share calculation in certain areas. The amendments in this ASU are effective for annual and interim periods beginning after December 15, 2021, 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 (restricted share awards, restricted stock units and performance stock units), each using the treasury stock method.

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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 and nine months ended September 30, 2020 and 2019, 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 9, "Debt" for additional information about the 2023 Convertible Notes.

			Three Months Ended September 30,												Nine Months Ended September 30,
			2020						2019						2020						2019
Numerator — basic and diluted
Net income			$	50,172					$	60,422					$	155,093					$	187,665
Denominator
Weighted average number of common shares outstanding — basic			35,639						36,617						36,073						36,851
Effect of dilutive convertible notes			337						21						425						7
Effect of dilutive stock options			402						471						436						454
Effect of dilutive restricted shares			708						829						774						795
Weighted average number of common shares outstanding — diluted			37,086						37,938						37,708						38,107
Earnings per common share — basic			$	1.41					$	1.65					$	4.30					$	5.09
Earnings per common share — diluted			$	1.35					$	1.59					$	4.11					$	4.92
Antidilutive stock options and restricted shares			83						1						50						24

4. Special Charges

During the three and nine months ended September 30, 2020, we recorded a special charge of $7.1 million, which consists of the following components:

•$4.7 million of lease abandonment and other relocation costs associated with the consolidation of office space in New York, New York. The lease abandonment costs include non-cash charges of $4.4 million related to accelerated amortization on operating lease assets and accelerated depreciation on lease-related property and equipment; and

•$2.4 million of employee severance and other employee-related costs associated with performance-related actions in our Forensic and Litigation Consulting ("FLC") segment that impacted 16 employees. All of these amounts will be paid in cash within the next twelve months.

There were no special charges recorded during the three and nine months ended September 30, 2019.

The following table details the special charge by segment:

			Three Months Ended September 30,												Nine Months Ended September 30,
			2020												2020
Corporate Finance & Restructuring			$	861											$	861
FLC			3,484												3,484
Economic Consulting			35												35
Technology			276												276
Strategic Communications			2,074												2,074
Segment special charge			6,730												6,730
Unallocated Corporate			373												373
Total			$	7,103											$	7,103

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5. 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 $2.6 million and $15.1 million for the three and nine months ended September 30, 2020, respectively, and $7.0 million and $23.5 million for the three and nine months ended September 30, 2019, respectively.

Unfulfilled performance obligations primarily consist of fees not yet recognized on certain fixed-fee arrangements and performance-based and contingent arrangements. As of September 30, 2020 and December 31, 2019, the aggregate amount of unfulfilled performance obligations was $3.1 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 September 30, 2020 and $1.3 million as of December 31, 2019.

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 fees before work begins. The contract liability balance was $1.0 million as of September 30, 2020 and immaterial as of December 31, 2019.

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6. 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 accounts receivable. The allowance for doubtful accounts and unbilled services is also adjusted after the related work has been billed to the client and we determine that all or a portion of the accounts receivable is not expected to be collected.

Adjustments to the allowance for doubtful accounts and unbilled services related to expected credit losses are recorded to selling, general and administrative ("SG&A") expenses on the Condensed Consolidated Statements of Comprehensive Income as bad debt expense. Judgment is required to assess collectability and to adjust the allowance for doubtful accounts and unbilled services to the current estimate of expected credit losses. Our judgments consider customer specific risks such as the counterparty’s creditworthiness and historical collection experience. Other factors include but are not limited to current economic conditions and forward-looking estimates.

Our billed accounts receivables are written off when the potential for recovery is considered remote. The following table summarizes total bad debt expense and write-offs for the three and nine months ended September 30, 2020:

			Three Months Ended September 30,												Nine Months Ended September 30,
			2020						2019						2020						2019
Bad debt expense			$	3,984					$	7,292					$	15,608					$	13,552
Write-offs			6,182						2,951						19,707						8,869

7. Goodwill and Other Intangible Assets

Goodwill

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

			Corporate Finance & Restructuring						FLC						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
Acquisitions			20,532						—						—						—						—						20,532
Foreign currency translation adjustment and other			2,300						(600)						(7)						(29)						(1,199)						465
Balance at September 30, 2020
Goodwill			501,674						231,520						268,670						96,741						319,298						1,417,903
Accumulated goodwill impairment			—						—						—						—						(194,139)						(194,139)
Goodwill, net at September 30, 2020			$	501,674					$	231,520					$	268,670					$	96,741					$	125,159					$	1,223,764

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During the three months ended September 30, 2020, we acquired a strategy consulting and investment banking business that was assigned to the Corporate Finance & Restructuring ("Corporate Finance") segment. We recorded $20.5 million in goodwill based on a preliminary purchase price allocation as a result of the acquisition. We have included the results of the acquired business’s operations in the Corporate Finance segment since its acquisition date.

Other Intangible Assets

Other intangible assets were as follows:  

						September 30, 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 (1)						$	110,502					$	82,343					$	28,159					$	99,613					$	76,808					$	22,805
Trademarks (1)						11,401						2,108						9,293						9,855						653						9,202
Acquired software and other						3,537						2,437						1,100						3,386						2,061						1,325
						125,440						86,888						38,552						112,854						79,522						33,332
Non-amortizing intangible assets
Trademarks						5,100						—						5,100						5,100						—						5,100
Total						$	130,540					$	86,888					$	43,652					$	117,954					$	79,522					$	38,432

(1) During the three months ended September 30, 2020, we acquired a strategy consulting and investment banking business, and its related intangible assets were assigned to the Corporate Finance segment.

Other intangible assets with finite lives are amortized over their estimated useful lives. We recorded amortization expense of $2.8 million and $7.4 million for the three and nine months ended September 30, 2020, respectively, and $2.1 million and $5.8 million for the three and nine months ended September 30, 2019, respectively.

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

Year			As of September 30, 2020 (1)
2020 (remaining)			$	2,792
2021			10,642
2022			8,519
2023			4,821
2024			3,388
Thereafter			8,390
			$	38,552

(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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8. Financial Instruments

The following table presents the carrying amounts and estimated fair values of our financial instruments by hierarchy level as of September 30, 2020 and December 31, 2019:

			September 30, 2020
									Hierarchy Level (Fair Value)
			Carrying Amount						Level 1						Level 2						Level 3
Liabilities
Acquisition-related contingent consideration, including    current portion (1)(2)			$	18,545					$	—					$	—					$	18,545
2023 Convertible Notes (3)			283,454						—						394,079						—
Total			$	301,999					$	—					$	394,079					$	18,545

			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 (3)			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)During the three months ended September 30, 2020, we acquired a strategy consulting and investment banking business that was assigned to the Corporate Finance segment and recorded an acquisition-related contingent consideration liability.

(3)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 September 30, 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 liabilities subject to the Monte Carlo simulation were valued using significant unobservable inputs including volatility rates between 31.5% and 35.0% and discount rates between 14.0% and 13.0%, which reflect the weighted average of our cost of debt and adjusted cost of equity of the acquired companies, and future cash flows. Significant increases (or decreases) in these unobservable inputs in isolation would result in significantly lower (or higher) fair values. We reassess the fair value of our acquisition-related contingent consideration at each reporting period based on additional information as it becomes available.

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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 expense (1)			506
Foreign currency translation adjustment (2)			(148)
Balance at March 31, 2020			$	15,184
Accretion expense (1)			614
Payments			(4,692)
Foreign currency translation adjustment (2)			88
Balance at June 30, 2020			$	11,194
Additions (3)			3,460
Accretion expense (1)			3,532
Foreign currency translation adjustment (2)			359
Balance at September 30, 2020			$	18,545

			Liability for Acquisition-Related Contingent Consideration
Balance at December 31, 2018			$	3,698
Accretion expense (1)			93
Balance at March 31, 2019			$	3,791
Accretion expense (1)			93
Payments			(1,000)
Balance at June 30, 2019			$	2,884
Additions (3)			14,004
Accretion expense (1)			531
Foreign currency translation adjustment (2)			(333)
Balance at September 30, 2019			$	17,086

(1)Accretion expense 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.

(3)During the three months ended September 30, 2020 and 2019, we acquired businesses that were assigned to the Corporate Finance segment.

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9. Debt

The table below summarizes the components of the Company’s debt: 

			September 30, 2020						December 31, 2019
2023 Convertible Notes			$	316,250					$	316,250
Credit Facility			25,000						—
Total debt			341,250						316,250
Less: deferred debt discount			(28,626)						(35,393)
Less: deferred debt issue costs			(4,170)						(5,248)
Long-term debt, net (1)			$	308,454					$	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 September 30, 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 maturity 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 September 30, 2020.

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 September 30,												Nine Months Ended September 30,
			2020						2019						2020						2019
Contractual interest expense			$	1,581					$	1,581					$	4,744					$	4,743
Amortization of debt discount (1)			2,286						2,166						6,766						6,411
Total			$	3,867					$	3,747					$	11,510					$	11,154

(1)The effective interest rate of the liability component is 5.45%.

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

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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 Facility are not contractually required or expected to be liquidated for more than one year from the applicable balance sheet date. Additionally, $1.1 million of the borrowing limit under the Credit Facility was utilized (and, therefore, unavailable) as of September 30, 2020 for letters of credit.

There were $0.8 million and $2.0 million of unamortized debt issue costs related to the Credit Facility as of September 30, 2020 and December 31, 2019, respectively. These amounts were included in “Other assets” on our Condensed Consolidated Balance Sheets.

10. 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, which may include renewal or termination options that are reasonably certain of exercise. 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.

The table below summarizes the carrying amount of our operating lease assets and liabilities:

Leases						Classification						As of September 30, 2020						As of December 31, 2019
Assets
Operating lease assets						Operating lease assets						$	153,818					$	159,777
Total lease assets												$	153,818					$	159,777
Liabilities
Current
Operating lease liabilities						Accounts payable, accrued expenses and other						$	41,875					$	35,727
Noncurrent
Operating lease liabilities						Noncurrent operating lease liabilities						161,976						176,378
Total lease liabilities												$	203,851					$	212,105

The table below summarizes total lease costs:

			Three Months Ended September 30,												Nine Months Ended September 30,
Lease Cost			2020						2019						2020						2019
Operating lease costs			$	15,769					$	11,332					$	39,368					$	33,241
Short-term lease costs			768						926						1,778						2,355
Variable lease costs			3,730						3,030						9,563						8,728
Sublease income			(1,048)						(1,259)						(3,178)						(3,702)
Total lease cost, net			$	19,219					$	14,029					$	47,531					$	40,622

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 $1.2 million for the remainder of 2020, $4.6 million in 2021, $0.8 million in 2022, $0.6 million in 2023, $0.6 million in 2024 and $0.3 million in years beyond 2024.

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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 September 30, 2020
2020 (remaining)			$	4,428
2021			57,940
2022			37,736
2023			31,546
2024			27,760
Thereafter			84,838
Total future lease payments			244,248
Less: imputed interest			(40,397)
Total			$	203,851

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:

									Nine Months Ended September 30,
															2020						2019
Cash paid for amounts included in the measurement of operating lease liabilities															$	41,078					$	33,031
Operating lease assets obtained in exchange for lease liabilities															$	23,653					$	21,880
Weighted average remaining lease term (years)
Operating leases															6.8						6.5
Weighted average discount rate
Operating leases															5.5		%				5.6		%

On October 26, 2020, the Company entered into a material lease agreement, amending and restating the lease agreement entered into as of August 19, 2020 (the "Lease") for its new principal office space in New York, New York. The Company expects to accept possession of the premises on or about April 1, 2021, subject to the satisfaction of certain conditions, and shall continue for an initial fixed term of 15 years, subject to two renewal options of five years each. Fixed rental payments under the Lease are scheduled to commence in April 2022, payable in monthly installments and will aggregate approximately $145 million, excluding lease-related incentives over the term of the Lease. The Lease is not included in operating lease assets and operating lease liabilities on the Condensed Consolidated Balance Sheets as of September 30, 2020 as the Company does not yet have the right to use the premises.

11. Commitments and Contingencies

The Company entered into a material lease agreement for its new principal office space in New York, New York during the three months ended September 30, 2020. See Note 10, "Leases" for additional information about the terms of the Lease.

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.

12. Share-Based Compensation

During the nine months ended September 30, 2020, we granted 158,996 restricted share awards, 50,817 restricted stock units and 108,718 performance stock units under the FTI Consulting, Inc. 2017 Omnibus Incentive Compensation Plan, our employee equity compensation plan. Our performance stock units are presented at the maximum potential payout percentage of 150% of target shares granted. These awards are recorded as equity on the Condensed Consolidated Balance Sheets. During the

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nine months ended September 30, 2020, 6,805 shares of restricted stock and no stock options were forfeited prior to the completion of the applicable vesting requirements.

Total share-based compensation expense, net of forfeitures, for the three and nine months ended September 30, 2020 and 2019 is detailed in the following table:   

			Three Months Ended September 30,												Nine Months Ended September 30,
Income Statement Classification			2020						2019						2020						2019
Direct cost of revenues			$	2,404					$	2,327					$	10,268					$	10,129
Selling, general and administrative expenses			2,837						3,478						8,773						8,608
Total share-based compensation expense			$	5,241					$	5,805					$	19,041					$	18,737

13. 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, December 1, 2017, February 21, 2019 and February 20, 2020, our Board of Directors authorized an additional $100.0 million, respectively. On July 28, 2020, our Board of Directors authorized an additional $200.0 million, increasing the Repurchase Program to an aggregate authorization of $700.0 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 September 30, 2020, we have $182.4 million available under the Repurchase Program to repurchase additional shares.

The following table details our stock repurchases under the Repurchase Program: 

			Three Months Ended September 30,												Nine Months Ended September 30,
			2020						2019						2020						2019
Shares of common stock repurchased and retired			749						91						1,670						999
Average price paid per share			$	110.57					$	85.11					$	110.27					$	78.04
Total cost			$	82,852					$	7,732					$	184,196					$	77,929

Common stock outstanding was 36.0 million shares and 37.4 million shares as of September 30, 2020 and December 31, 2019, respectively. Common stock outstanding includes unvested restricted stock awards, which are considered issued and outstanding under the terms of the restricted stock award agreements.

14. Segment Reporting

We manage our business in five reportable segments: Corporate Finance, FLC, Economic Consulting, Technology and Strategic Communications.

Our Corporate Finance segment focuses on the strategic, operational, financial, transactional and capital needs of our clients around the world and delivers a wide range of service offerings related to restructuring, business transformation and transactions. Our restructuring practice includes corporate restructuring, including bankruptcy and interim management services. Our business transformation and transactions practices include financial, operational and performance improvement services, as well as due diligence, financing advisory, mergers and acquisitions ("M&A") advisory, M&A integration, carveout support and valuations.

Our FLC segment provides law firms, companies, government clients and other interested parties with multidisciplinary and independent services related to risk advisory, investigations and disputes. We have expertise in anti-corruption/anti-money laundering investigations and compliance, cybersecurity, data analytics, export controls and sanctions, and monitorship. We offer specialized industry expertise in the areas of insurance, construction, healthcare, environmental and trial services.    

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 and around the world.

Our Technology segment provides companies and law firms with a comprehensive and global portfolio of consulting and services for information governance, privacy and security, electronic discovery and insight analytics. Our consulting expertise enables clients to more confidently govern, secure, find, analyze and rapidly understand their data in the context of compliance and risk.

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

We evaluate the performance of our operating segments based on Adjusted Segment EBITDA, a GAAP financial measure. 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.

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

			Three Months Ended September 30,												Nine Months Ended September 30,
			2020						2019						2020						2019
Revenues
Corporate Finance			$	236,615					$	191,698					$	690,375					$	542,667
FLC			119,104						142,651						373,082						427,518
Economic Consulting			154,978						141,715						438,609						439,488
Technology			58,585						57,083						164,392						164,051
Strategic Communications			52,967						59,959						168,236						176,775
Total revenues			$	622,249					$	593,106					$	1,834,694					$	1,750,499
Adjusted Segment EBITDA
Corporate Finance			$	56,215					$	48,084					$	181,425					$	135,937
FLC			13,591						27,008						25,752						87,066
Economic Consulting			25,720						19,413						60,124						66,766
Technology			11,939						12,286						32,858						37,884
Strategic Communications			8,427						12,644						27,237						34,667
Total Adjusted Segment EBITDA			$	115,892					$	119,435					$	327,396					$	362,320

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

			Three Months Ended September 30,												Nine Months Ended September 30,
			2020						2019						2020						2019
Net income			$	50,172					$	60,422					$	155,093					$	187,665
Add back:
Income tax provision			14,407						19,857						45,342						61,100
Interest income and other			3,340						(2,973)						(3,879)						(5,741)
Interest expense			5,151						4,832						15,169						14,371
Unallocated corporate expenses (1)			26,061						27,783						79,928						78,778
Segment depreciation expense			7,236						7,389						21,573						20,309
Amortization of intangible assets			2,795						2,125						7,440						5,838
Segment special charges			6,730						—						6,730						—
Total Adjusted Segment EBITDA			$	115,892					$	119,435					$	327,396					$	362,320

(1) Includes $0.4 million of special charges.

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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 and liquidity and capital resources for the three and nine months ended September 30, 2020 and 2019 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, 2019 filed with the United States ("U.S.") 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, Inc. ("FTI Consulting," "we," "us" or the "Company") 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, transactional and capital needs of our clients around the world and delivers a wide range of service offerings related to restructuring, business transformation and transactions. Our restructuring practice includes corporate restructuring, including bankruptcy and interim management services. Our business transformation and transactions practices include financial, operational and performance improvement services, as well as due diligence, financing advisory, mergers and acquisitions ("M&A") advisory, M&A integration, carveout support and valuations.

Our Forensic and Litigation Consulting (“FLC”) segment provides law firms, companies, government clients and other interested parties with multidisciplinary and independent services related to risk advisory, investigations and disputes. We have expertise in anti-corruption/anti-money laundering investigations and compliance, cybersecurity, data analytics, export controls and sanctions, and monitorship. We offer specialized industry expertise in the areas of insurance, construction, healthcare, environmental and trial services.

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 provides companies and law firms with a comprehensive and global portfolio of consulting and services for information governance, privacy and security, electronic discovery ("e-discovery") and insight analytics. Our consulting expertise enables clients to more confidently govern, secure, find, analyze and rapidly understand their data in the context of compliance and risk.

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

We derive substantially all of our revenues from providing professional services to both U.S. and global clients. Most of our services are rendered under time and expense arrangements that obligate the client to pay us a fee for the hours that we incur at agreed-upon rates. Under this arrangement, we typically bill our clients for reimbursable expenses, which may include the cost of producing our work product and other direct expenses that we incur on behalf of the client, such as travel costs. We also render services for which certain clients may be required to pay us a fixed-fee or recurring retainer. These arrangements are generally cancelable at any time. Some of our engagements contain performance-based arrangements in which we earn a 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.

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In our Technology segment, certain clients are billed based on the amount of data storage used or the volume of information processed. 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. Unit-based revenues include revenues associated with the software products that are made available to customers via a web browser (“on-demand”). On-demand revenues are charged on a unit or monthly basis and include, but are not limited to, processing and review related functions.

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;

•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 (“FX”) driven by our businesses with functional currencies other than the U.S. dollar (“USD”). The estimated impact of FX on the period-to-period performance results is calculated as the difference between the prior period results multiplied by the average FX exchange rates to USD in the current period and the prior period results, multiplied by the average FX 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, which are GAAP financial measures, 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 14, “Segment Reporting” in Part I, Item 1, of this Quarterly Report on Form 10-Q, we evaluate the performance of our operating segments based on Adjusted Segment EBITDA, and Segment Operating Income is a component of the definition of Adjusted Segment EBITDA.

We define Segment Operating Income as a segment’s share of consolidated operating income. We define Total Segment Operating Income, which is a non-GAAP financial measure, as the total of Segment Operating Income for all segments, which excludes unallocated corporate expenses. We use Segment Operating Income for the purpose of calculating Adjusted Segment EBITDA. We define Adjusted Segment EBITDA as a segment’s share of consolidated operating income before depreciation,

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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, which is a non-GAAP financial measure, 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, gain or loss on sale of a business and losses on early extinguishment of debt. We believe that these non-GAAP financial measures, 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 non-GAAP financial 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, non-cash interest expense on convertible notes and the gain or loss on sale of a business. 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 these non-GAAP financial measures, when considered together with our GAAP financial results and GAAP financial measures, provide 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 Condensed Consolidated Statements of Comprehensive Income and Condensed Consolidated Statements of Cash Flows. Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP financial measures are included elsewhere in this report.

EXECUTIVE HIGHLIGHTS

			Three Months Ended September 30,												Nine Months Ended September 30,
			2020						2019						2020						2019
			(dollar amounts in thousands, except per share data)												(dollar amounts in thousands, except per share data)
Revenues			$	622,249					$	593,106					$	1,834,694					$	1,750,499
Special charges (1)			$	7,103					$	—					$	7,103					$	—
Net income			$	50,172					$	60,422					$	155,093					$	187,665
Adjusted EBITDA			$	90,917					$	92,343					$	249,924					$	285,616
Earnings per common share — diluted			$	1.35					$	1.59					$	4.11					$	4.92
Adjusted earnings per common share — diluted			$	1.54					$	1.63					$	4.39					$	4.99
Net cash provided by operating activities			$	111,563					$	131,304					$	140,977					$	76,866
Total number of employees			6,264						5,456						6,264						5,456

(1)    Excluded from non-GAAP financial measures.

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Third Quarter 2020 Executive Highlights

Revenues

Revenues for the three months ended September 30, 2020 increased $29.1 million, or 4.9%, to $622.2 million, as compared to the three months ended September 30, 2019, which included a 1.0% estimated positive impact from FX. Acquisition-related revenues contributed $8.5 million compared to the same quarter in the prior year. Excluding the estimated impact from FX and the acquisition-related revenues, revenues increased $14.8 million, or 2.5%, primarily due to increased demand for our Corporate Finance and Economic Consulting segments, which was partially offset by lower demand for our FLC and Strategic Communications segments, as well as a $13.6 million decrease in pass-through revenues, which includes billable travel and entertainment expenses and media buys, compared to the same quarter in the prior year.

Special Charges

During the three months ended September 30, 2020, we recorded a special charge of $7.1 million, which consists of the following components:

•$4.7 million of lease abandonment and other relocation costs associated with the consolidation of office space in New York, New York. The lease abandonment costs include non-cash charges of $4.4 million related to accelerated amortization on operating lease assets and accelerated depreciation on lease-related property and equipment; and

•$2.4 million of employee severance and other employee-related costs associated with performance-related actions in our FLC segment that impacted 16 employees. All of these amounts will be paid in cash within the next twelve months.

There were no special charges recorded during the three months ended September 30, 2019.

The following table details the special charge by segment:

			Three Months Ended September 30, 2020
			(in thousands)
Corporate Finance			$	861
FLC			3,484
Economic Consulting			35
Technology			276
Strategic Communications			2,074
Segment special charge			6,730
Unallocated Corporate			373
Total			$	7,103

Net income

Net income for the three months ended September 30, 2020 decreased $10.3 million to $50.2 million, as compared to the three months ended September 30, 2019. The decrease in net income was due to higher compensation expenses, primarily related to a 15.8% increase in billable headcount and higher variable compensation, as well as a special charge of $7.1 million and FX remeasurement losses, which were partially offset by an increase in revenues, a decline in selling, general and administrative ("SG&A") expenses and a lower effective tax rate.

Adjusted EBITDA

Adjusted EBITDA for the three months ended September 30, 2020 decreased $1.4 million, or 1.5%, to $90.9 million, as compared to the three months ended September 30, 2019. Adjusted EBITDA Margin of 14.6% for the three months ended September 30, 2020 compared with 15.6% for the three months ended September 30, 2019. The decrease in Adjusted EBITDA, which excludes the special charge, was due to higher compensation expenses, primarily related to a 15.8% increase in billable headcount and higher variable compensation, which were partially offset by an increase in revenues and a decline in SG&A expenses.

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EPS and Adjusted EPS

EPS for the three months ended September 30, 2020 decreased $0.24 to $1.35 compared to $1.59 for the three months ended September 30, 2019. The special charge recorded in the third quarter of 2020 reduced EPS by $0.14. The decrease in EPS was primarily due to the lower operating results described above, coupled with FX remeasurement losses, which were partially offset by a lower effective tax rate.

Adjusted EPS decreased $0.09 to $1.54 for the three months ended September 30, 2020 compared to $1.63 for the three months ended September 30, 2019. 2020 Adjusted EPS excludes $7.1 million of special charges and $2.3 million of non-cash interest expense related to the 2.0% convertible senior notes due 2023 (the "2023 Convertible Notes"), which increased Adjusted EPS by $0.14 and $0.05, respectively. 2019 Adjusted EPS excluded $2.2 million of non-cash interest expense related to the 2023 Convertible Notes, which increased Adjusted EPS by $0.04.

Liquidity and Capital Allocation

Net cash provided by operating activities for the three months ended September 30, 2020 decreased $19.7 million to $111.6 million compared with $131.3 million for the three months ended September 30, 2019. The decrease in net cash provided by operating activities was primarily due to an increase in compensation expenses largely related to headcount growth, combined with an increase in income tax payments, which were partially offset by lower non-compensation-related operating costs and slightly higher cash collections. Days sales outstanding (“DSO”) of 104 days at September 30, 2020 compared to 108 days at September 30, 2019.

Free Cash Flow was an inflow of $99.8 million and $124.9 million for the three months ended September 30, 2020 and 2019, respectively. The decrease for the three months ended September 30, 2020 was primarily due to lower net cash provided by operating activities, as described above.

Other strategic activities

During the three months ended September 30, 2020, we acquired certain assets of Delta Partners Group Limited, a leading telecom, media and technology focused strategy consulting and investment banking firm with offices in Dubai, New York, Singapore, Barcelona, Johannesburg, San Francisco and Sydney.

Also, during the three months ended September 30, 2020, we entered into a material lease agreement for our new principal office space in New York, New York to consolidate existing office space into fewer locations and in anticipation of future office space needs in view of our current leases, which are scheduled to expire in November 2021.

Coronavirus Disease 2019 ("COVID-19") Pandemic

The COVID-19 pandemic has created global volatility, economic uncertainty and general market disruption. The extent to which COVID-19 will ultimately impact our business is difficult to predict. During the three months ended September 30, 2020, the COVID-19 pandemic impacted each of our segments, practices and regions differently. In general, limitations in our ability to service our clients due to social distancing, travel restrictions and remote work have negatively impacted our financial results. In addition, we experienced a reduction in demand and delays in our ability to provide certain services due to regulatory moratoriums and postponements of legal proceedings and investigations. These events arising from COVID-19 have negatively impacted our segment results to a varied extent this quarter, but they particularly impacted our FLC segment. While restructuring and bankruptcy services provided by our Corporate Finance segment have experienced increased demand as compared to the same period in the prior year as a result of the adverse economic impact of the COVID-19 pandemic, during the third quarter of 2020 we experienced a decline in activity as compared to the second quarter of 2020 primarily resulting from government monetary stimulus and the availability of other financing sources. Thus, the increased demand for our restructuring and bankruptcy services may not adequately offset the potential negative impacts of the COVID-19 pandemic on our business in future quarters.

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Headcount

Our total headcount increased 12.5% from 5,567 at December 31, 2019 to 6,264 at September 30, 2020. The following table includes the net billable headcount additions (reductions) for the nine months ended September 30, 2020:

Billable Headcount			Corporate Finance (1)						FLC						Economic Consulting						Technology						Strategic Communications						Total
December 31, 2019			1,194						1,351						790						361						728						4,424
Additions, net			54						42						20						13						27						156
March 31, 2020			1,248						1,393						810						374						755						4,580
Additions (reductions), net			114						(67)						—						12						6						65
June 30, 2020			1,362						1,326						810						386						761						4,645
Additions, net			246						45						70						8						5						374
September 30, 2020			1,608						1,371						880						394						766						5,019
Percentage change in headcount from December 31, 2019			34.7		%				1.5		%				11.4		%				9.1		%				5.2		%				13.4		%

(1)    There were 131 revenue-generating professionals added during the three months ended September 30, 2020 related to the acquisition of a strategy consulting and investment banking business within the Corporate Finance segment.

CONSOLIDATED RESULTS OF OPERATIONS

Segment and Consolidated Operating Results: 

			Three Months Ended September 30,												Nine Months Ended September 30,
			2020						2019						2020						2019
			(in thousands, except per share data)												(in thousands, except per share data)
Revenues
Corporate Finance			$	236,615					$	191,698					$	690,375					$	542,667
FLC			119,104						142,651						373,082						427,518
Economic Consulting			154,978						141,715						438,609						439,488
Technology			58,585						57,083						164,392						164,051
Strategic Communications			52,967						59,959						168,236						176,775
Total revenues			$	622,249					$	593,106					$	1,834,694					$	1,750,499
Segment operating income
Corporate Finance			$	52,372					$	46,007					$	172,847					$	130,470
FLC			8,729						25,534						17,853						82,753
Economic Consulting			24,304						17,943						55,916						62,179
Technology			8,621						9,094						23,642						30,080
Strategic Communications			5,105						11,343						21,395						30,691
Total segment operating income			99,131						109,921						291,653						336,173
Unallocated corporate expenses			(26,061)						(27,783)						(79,928)						(78,778)
Operating income			73,070						82,138						211,725						257,395
Other income (expense)
Interest income and other			(3,340)						2,973						3,879						5,741
Interest expense			(5,151)						(4,832)						(15,169)						(14,371)
			(8,491)						(1,859)						(11,290)						(8,630)
Income before income tax provision			64,579						80,279						200,435						248,765
Income tax provision			14,407						19,857						45,342						61,100
Net income			$	50,172					$	60,422					$	155,093					$	187,665
Earnings per common share — basic			$	1.41					$	1.65					$	4.30					$	5.09
Earnings per common share — diluted			$	1.35					$	1.59					$	4.11					$	4.92

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Reconciliation of Net Income to Adjusted EBITDA: 

			Three Months Ended September 30,												Nine Months Ended September 30,
			2020						2019						2020						2019
			(in thousands)												(in thousands)
Net income			$	50,172					$	60,422					$	155,093					$	187,665
Add back:
Income tax provision			14,407						19,857						45,342						61,100
Interest income and other			3,340						(2,973)						(3,879)						(5,741)
Interest expense			5,151						4,832						15,169						14,371
Depreciation and amortization			7,949						8,080						23,656						22,383
Amortization of other intangible assets			2,795						2,125						7,440						5,838
Special charges			7,103						—						7,103						—
Adjusted EBITDA			$	90,917					$	92,343					$	249,924					$	285,616

 

Reconciliation of Net Income and EPS to Adjusted Net Income and Adjusted EPS: 

			Three Months Ended September 30,												Nine Months Ended September 30,
			2020						2019						2020						2019
			(in thousands, except per share data)												(in thousands, except per share data)
Net income			$	50,172					$	60,422					$	155,093					$	187,665
Add back:
Special charges			7,103						—						7,103						—
Tax impact of special charges			(1,847)						—						(1,847)						—
Non-cash interest expense on convertible notes			2,286						2,166						6,766						6,411
Tax impact of non-cash interest expense on convertible     notes			(595)						(563)						(1,760)						(1,666)
Tax impact of gain on sale of business (1)			—						—						—						(2,097)
Adjusted Net Income			$	57,119					$	62,025					$	165,355					$	190,313
Earnings per common share — diluted			$	1.35					$	1.59					$	4.11					$	4.92
Add back:
Special charges			0.19						—						0.19						—
Tax impact of special charges			(0.05)						—						(0.05)						—
Non-cash interest expense on convertible notes			0.06						0.06						0.18						0.17
Tax impact of non-cash interest expense on convertible     notes			(0.01)						(0.02)						(0.04)						(0.04)
Tax impact of gain on sale of business (1)			—						—						—						(0.06)
Adjusted earnings per common share — diluted			$	1.54					$	1.63					$	4.39					$	4.99
Weighted average number of common shares outstanding — diluted			37,086						37,938						37,708						38,107

(1)For the nine months ended September 30, 2019, represents a discrete tax adjustment resulting from a change in estimate related to the accounting for the Ringtail e-discovery software and related business (collectively, "Ringtail") divestiture in 2018.

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

			Three Months Ended September 30,												Nine Months Ended September 30,
			2020						2019						2020						2019
			(in thousands)												(in thousands)
Net cash provided by operating activities			$	111,563					$	131,304					$	140,977					$	76,866
Purchases of property and equipment			(11,764)						(6,365)						(25,663)						(27,026)
Free Cash Flow			$	99,799					$	124,939					$	115,314					$	49,840

Three Months Ended September 30, 2020 Compared with Three Months Ended September 30, 2019

Revenues and operating income

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

Unallocated corporate expenses

Unallocated corporate expenses for the three months ended September 30, 2020 decreased $1.7 million, or 6.2%, to $26.1 million compared with $27.8 million for the three months ended September 30, 2019. The decrease was primarily due to lower variable executive compensation and travel expenses, partially offset by higher corporate staff costs due to headcount growth.

Interest income and other

Interest income and other, which includes FX gains and losses, decreased $6.3 million to a $3.3 million loss for the three months ended September 30, 2020 compared with $3.0 million of income for the three months ended September 30, 2019. The decrease was primarily due to a $5.5 million increase in net FX loss, which was $3.5 million for the three months ended September 30, 2020 compared with a $2.0 million net FX gain for the three months ended September 30, 2019.

FX gains and losses, both realized and unrealized, relate to the remeasurement or settlement of monetary assets and liabilities that are denominated in a currency other than an entity’s functional currency. These monetary assets and liabilities include cash, as well as third-party and intercompany receivables and payables.

Interest expense

Interest expense for the three months ended September 30, 2020 increased by $0.3 million to $5.2 million compared with $4.8 million for the three months ended September 30, 2019.

Income tax provision

The effective income tax rate for the three months ended September 30, 2020 of 22.3% compared with 24.7% for the three months ended September 30, 2019. The 2020 tax rate was favorably impacted by a discrete tax adjustment related to share-based compensation and lower reserves for uncertain tax positions, as well as lower non-deductible U.S. expenses. The tax rate for the three months ended September 30, 2019 was favorably impacted by a discrete tax adjustment related to share-based compensation.

Nine Months Ended September 30, 2020 Compared with Nine Months Ended September 30, 2019

Revenues and operating income

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

Unallocated corporate expenses

Unallocated corporate expenses for the nine months ended September 30, 2020 increased $1.2 million, or 1.5%, to $79.9 million compared with $78.8 million for the nine months ended September 30, 2019. The increase was primarily due to higher corporate staff costs due to headcount growth, partially offset by a decrease in variable compensation expense for our executive and regional leadership. 

27

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Interest income and other

Interest income and other, which includes FX gains and losses, decreased $1.9 million to $3.9 million for the nine months ended September 30, 2020 compared with $5.7 million for the nine months ended September 30, 2019. The decrease in interest income and other for the nine months ended September 30, 2020 as compared to the prior year was primarily due to a $0.9 million decrease in net FX gains and a $0.4 million decrease in interest income from investments of excess cash.

FX gains and losses, both realized and unrealized, relate to the remeasurement or settlement of monetary assets and liabilities that are denominated in a currency other than an entity’s functional currency. These monetary assets and liabilities include cash, as well as third-party and intercompany receivables and payables.

Interest expense

Interest expense for the nine months ended September 30, 2020 increased $0.8 million to $15.2 million compared with $14.4 million for the nine months ended September 30, 2019.

Income tax provision

The effective income tax rate for the nine months ended September 30, 2020 was 22.6% compared with 24.6% for the nine months ended September 30, 2019. The 2020 tax rate was favorably impacted by a discrete tax adjustment related to share-based compensation, lower non-deductible U.S. expenses and the release of certain valuation allowances on our deferred tax assets. The tax rate for the nine months ended September 30, 2019 was favorably impacted by discrete tax adjustments including a change in estimate related to the accounting for the sale of Ringtail and share-based compensation. 

SEGMENT RESULTS

Total Adjusted Segment EBITDA

We evaluate the performance of each of our operating segments based on Adjusted Segment EBITDA, which is a GAAP financial measure. The following table reconciles net income to Total Adjusted Segment EBITDA, a non-GAAP financial measure, for the three and nine months ended September 30, 2020 and 2019:

			Three Months Ended September 30,												Nine Months Ended September 30,
			2020						2019						2020						2019
			(in thousands)												(in thousands)
Net income			$	50,172					$	60,422					$	155,093					$	187,665
Add back:
Income tax provision			14,407						19,857						45,342						61,100
Interest income and other			3,340						(2,973)						(3,879)						(5,741)
Interest expense			5,151						4,832						15,169						14,371
Unallocated corporate expenses (1)			26,061						27,783						79,928						78,778
Total segment operating income			99,131						109,921						291,653						336,173
Add back:
Segment depreciation expense			7,236						7,389						21,573						20,309
Amortization of other intangible assets			2,795						2,125						7,440						5,838
Segment special charges			6,730						—						6,730						—
Total Adjusted Segment EBITDA			$	115,892					$	119,435					$	327,396					$	362,320

(1)Includes a $0.4 million special charge.

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Other Segment Operating Data

			Three Months Ended September 30,												Nine Months Ended September 30,
			2020						2019						2020						2019
Number of revenue-generating professionals:    (at period end)
Corporate Finance			1,608						1,177						1,608						1,177
FLC			1,371						1,326						1,371						1,326
Economic Consulting			880						764						880						764
Technology (1)			394						348						394						348
Strategic Communications			766						719						766						719
Total revenue-generating professionals			5,019						4,334						5,019						4,334
Utilization rates of billable professionals: (2)
Corporate Finance			64		%				70		%				68		%				70		%
FLC			48		%				61		%				50		%				64		%
Economic Consulting			66		%				70		%				68		%				76		%
Average billable rate per hour: (3)
Corporate Finance			$	460					$	449					$	468					$	451
FLC			$	337					$	336					$	333					$	336
Economic Consulting			$	502					$	512					$	482					$	500

(1)The number of revenue-generating professionals for the Technology segment excludes as-needed professionals who we employ based on demand for the segment’s services. We employed an average of 380 as-needed employees during the three months ended September 30, 2020 compared with 343 as-needed employees during the three months ended September 30, 2019.

(2)We calculate the utilization rate for our billable professionals by dividing the number of hours that all of our billable professionals worked on client assignments during a period by the total available working hours for all of our billable professionals during the same period. Available hours are determined by the standard hours worked by each employee, adjusted for part-time hours, U.S. standard work weeks and local country holidays. Available working hours include vacation and professional training days, but exclude holidays. Utilization rates are presented for our segments that primarily bill clients on an hourly basis. We have not presented utilization rates for our Technology and Strategic Communications segments as most of the revenues of these segments are not generated on an hourly basis.

(3)For engagements where revenues are based on number of hours worked by our billable professionals, average billable rate per hour is calculated by dividing revenues (excluding revenues from success fees, pass-through revenues and outside consultants) for a period by the number of hours worked on client assignments during the same period. We have not presented average billable rates per hour for our Technology and Strategic Communications segments as most of the revenues of these segments are not based on billable hours.

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CORPORATE FINANCE & RESTRUCTURING

			Three Months Ended September 30,												Nine Months Ended September 30,
			2020						2019						2020						2019
			(dollars in thousands, except rate per hour)												(dollars in thousands, except rate per hour)
Revenues			$	236,615					$	191,698					$	690,375					$	542,667
Percentage change in revenues from prior year			23.4		%				41.6		%				27.2		%				29.3		%
Operating expenses
Direct cost of revenues			150,219						115,410						422,088						327,524
Selling, general and administrative expenses			31,290						29,168						89,988						82,027
Special charges			861						—						861						—
Amortization of other intangible assets			1,873						1,113						4,591						2,646
			184,243						145,691						517,528						412,197
Segment operating income			52,372						46,007						172,847						130,470
Percentage change in segment operating income    from prior year			13.8		%				82.2		%				32.5		%				41.0		%
Add back:
Depreciation and amortization of intangible assets			2,982						2,077						7,717						5,467
Special charges			861						—						861						—
Adjusted Segment EBITDA			$	56,215					$	48,084					$	181,425					$	135,937
Gross profit (1)			$	86,396					$	76,288					$	268,287					$	215,143
Percentage change in gross profit from prior year			13.2		%				59.2		%				24.7		%				33.5		%
Gross profit margin (2)			36.5		%				39.8		%				38.9		%				39.6		%
Adjusted Segment EBITDA as a percent of revenues			23.8		%				25.1		%				26.3		%				25.0		%
Number of revenue-generating professionals       (at period end) (3)			1,608						1,177						1,608						1,177
Percentage change in number of revenue-generating    professionals from prior year			36.6		%				27.1		%				36.6		%				27.1		%
Utilization rates of billable professionals			64		%				70		%				68		%				70		%
Average billable rate per hour			$	460					$	449					$	468					$	451

(1)Revenues less direct cost of revenues

(2)Gross profit as a percentage of revenues

(3)There were 131 revenue-generating professionals added during the three months ended September 30, 2020 related to the acquisition of a strategy consulting and investment banking business assigned to the Corporate Finance segment.

Three Months Ended September 30, 2020 Compared with Three Months Ended September 30, 2019

Revenues increased $44.9 million, or 23.4%, to $236.6 million for the three months ended September 30, 2020. Acquisition-related revenues contributed $8.5 million, or 4.4% of the increase, compared to the same quarter in the prior year. Excluding the acquisition-related revenues, revenues increased $36.4 million, or 19.0%, primarily due to increased demand and higher realized bill rates related to the mix of client engagements and staffing across restructuring services, largely in North America and Europe, the Middle East and Africa (“EMEA”).

Gross profit increased $10.1 million, or 13.2%, to $86.4 million for the three months ended September 30, 2020. Gross profit margin decreased 3.3 percentage points for the three months ended September 30, 2020. The decrease in gross profit margin was primarily due to a 6 percentage point decline in utilization, combined with higher variable compensation as a percentage of revenues.

SG&A expenses increased $2.1 million, or 7.3%, to $31.3 million for the three months ended September 30, 2020, which included a 1.5% estimated negative impact from FX. SG&A expenses of 13.2% of revenues for the three months ended September 30, 2020 compared with 15.2% of revenues for the three months ended September 30, 2019. The increase in SG&A expenses was primarily due to higher acquisition-related expenses and infrastructure support costs, largely related to an increase in headcount, which was partially offset by lower bad debt and travel and entertainment expenses.

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Nine Months Ended September 30, 2020 Compared with Nine Months Ended September 30, 2019

Revenues increased $147.7 million, or 27.2%, to $690.4 million for the nine months ended September 30, 2020. Acquisition-related revenues contributed $34.4 million, or 6.3% of the increase, compared to the same period in the prior year. Excluding the acquisition-related revenues, revenues increased $113.3 million, or 20.9%, primarily due to higher demand for our restructuring services in North America and EMEA, as well as higher demand for our business transformation and transactions services in EMEA, which were partially offset by a $12.4 million decrease in success fees compared to the same period in the prior year.

Gross profit increased $53.1 million, or 24.7%, to $268.3 million for the nine months ended September 30, 2020. Gross profit margin decreased 0.8 percentage points for the nine months ended September 30, 2020. The decrease in gross profit margin was primarily due to lower success fees, as well as lower utilization, primarily driven by our business transformation and transactions services.

SG&A expenses increased $8.0 million, or 9.7%, to $90.0 million for the nine months ended September 30, 2020. SG&A expenses of 13.0% of revenues for the nine months ended September 30, 2020 compared with 15.1% of revenues for the nine months ended September 30, 2019. The increase in SG&A expenses was primarily due to acquisition-related expenses and higher infrastructure support costs, largely related to an increase in headcount, which was partially offset by a decrease in travel and entertainment expenses and lower bad debt expenses.

FORENSIC AND LITIGATION CONSULTING

			Three Months Ended September 30,												Nine Months Ended September 30,
			2020						2019						2020						2019
			(dollars in thousands, except rate per hour)												(dollars in thousands, except rate per hour)
Revenues			$	119,104					$	142,651					$	373,082					$	427,518
Percentage change in revenues from prior year			-16.5		%				12.6		%				-12.7		%				10.1		%
Operating expenses
Direct cost of revenues			86,335						91,233						280,167						265,227
Selling, general and administrative expenses			20,385						25,598						70,951						78,673
Special charges			3,484						—						3,484						—
Amortization of other intangible assets			171						286						627						865
			110,375						117,117						355,229						344,765
Segment operating income			8,729						25,534						17,853						82,753
Percentage change in segment operating income     from prior year			-65.8		%				23.8		%				-78.4		%				16.3		%
Add back:
Depreciation and amortization of intangible assets			1,378						1,474						4,415						4,313
Special charges			3,484						—						3,484						—
Adjusted Segment EBITDA			$	13,591					$	27,008					$	25,752					$	87,066
Gross profit (1)			$	32,769					$	51,418					$	92,915					$	162,291
Percentage change in gross profit from prior year			-36.3		%				13.3		%				-42.7		%				13.9		%
Gross profit margin (2)			27.5		%				36.0		%				24.9		%				38.0		%
Adjusted Segment EBITDA as a percent of revenues			11.4		%				18.9		%				6.9		%				20.4		%
Number of revenue-generating professionals (at period end)			1,371						1,326						1,371						1,326
Percentage change in number of revenue-generating    professionals from prior year			3.4		%				17.4		%				3.4		%				17.4		%
Utilization rates of billable professionals			48		%				61		%				50		%				64		%
Average billable rate per hour			$	337					$	336					$	333					$	336

(1)Revenues less direct cost of revenues

(2)Gross profit as a percentage of revenues

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Three Months Ended September 30, 2020 Compared with Three Months Ended September 30, 2019

Revenues decreased $23.5 million, or 16.5%, to $119.1 million for the three months ended September 30, 2020. The decrease was primarily due to lower demand for most of our services, particularly for our disputes and investigations services.

Gross profit decreased $18.6 million, or 36.3%, to $32.8 million for the three months ended September 30, 2020. Gross profit margin decreased 8.5 percentage points for the three months ended September 30, 2020. The decrease in gross profit margin was largely related to a 13 percentage point decline in utilization and higher salaries due to a 3.4% increase in headcount, which were partially offset by lower variable compensation as a percentage of revenues.

SG&A expenses decreased $5.2 million, or 20.4%, to $20.4 million for the three months ended September 30, 2020. SG&A expenses of 17.1% of revenues for the three months ended September 30, 2020 compared with 17.9% of revenues for the three months ended September 30, 2019. The decrease in SG&A expenses was primarily driven by lower travel and entertainment and bad debt expenses, as well as a decline in other general and administrative expenses.

Nine Months Ended September 30, 2020 Compared with Nine Months Ended September 30, 2019

Revenues decreased $54.4 million, or 12.7%, to $373.1 million for the nine months ended September 30, 2020. The decrease was primarily due to lower demand for all of our services, particularly for our disputes, investigations and health solutions services.

Gross profit decreased $69.4 million, or 42.7%, to $92.9 million for the nine months ended September 30, 2020. Gross profit margin decreased 13.1 percentage points for the nine months ended September 30, 2020. The decrease in gross profit margin was largely related to a 14 percentage point decline in utilization and higher salaries due to increased headcount, which were partially offset by lower variable compensation as a percentage of revenues.

SG&A expenses decreased $7.7 million, or 9.8%, to $71.0 million for the nine months ended September 30, 2020. SG&A expenses of 19.0% of revenues for the nine months ended September 30, 2020 compared with 18.4% of revenues for the nine months ended September 30, 2019. The decrease in SG&A expenses was primarily driven by lower travel and entertainment, hiring, bad debt and other general and administrative expenses.

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ECONOMIC CONSULTING 

			Three Months Ended September 30,												Nine Months Ended September 30,
			2020						2019						2020						2019
			(dollars in thousands, except rate per hour)												(dollars in thousands, except rate per hour)
Revenues			$	154,978					$	141,715					$	438,609					$	439,488
Percentage change in revenues from prior year			9.4		%				1.8		%				-0.2		%				8.4		%
Operating expenses
Direct cost of revenues			110,716						104,920						322,002						322,541
Selling, general and administrative expenses			19,879						18,808						60,523						54,635
Special charges			35						—						35						—
Amortization of other intangible assets			44						44						133						133
			130,674						123,772						382,693						377,309
Segment operating income			24,304						17,943						55,916						62,179
Percentage change in segment operating income    from prior year			35.5		%				-17.4		%				-10.1		%				16.5		%
Add back:
Depreciation and amortization of intangible assets			1,381						1,470						4,173						4,587
Special charges			35						—						35						—
Adjusted Segment EBITDA			$	25,720					$	19,413					$	60,124					$	66,766
Gross profit (1)			$	44,262					$	36,795					$	116,607					$	116,947
Percentage change in gross profit from prior year			20.3		%				-4.8		%				-0.3		%				9.0		%
Gross profit margin (2)			28.6		%				26.0		%				26.6		%				26.6		%
Adjusted Segment EBITDA as a percent of revenues			16.6		%				13.7		%				13.7		%				15.2		%
Number of revenue-generating professionals (at period end)			880						764						880						764
Percentage change in number of revenue-generating    professionals from prior year			15.2		%				8.4		%				15.2		%				8.4		%
Utilization rates of billable professionals			66		%				70		%				68		%				76		%
Average billable rate per hour			$	502					$	512					$	482					$	500

(1)Revenues less direct cost of revenues

(2)Gross profit as a percentage of revenues

Three Months Ended September 30, 2020 Compared with Three Months Ended September 30, 2019

Revenues increased $13.3 million, or 9.4%, to $155.0 million for the three months ended September 30, 2020, which included a 1.3% estimated positive impact from FX. Excluding the estimated positive impact of FX, revenues increased $11.4 million, or 8.1%, primarily due to higher demand and realized bill rates for M&A-related antitrust services, which was partially offset by lower realized bill rates for non-M&A-related antitrust services.

Gross profit increased $7.5 million, or 20.3%, to $44.3 million for the three months ended September 30, 2020. Gross profit margin increased 2.6 percentage points for the three months ended September 30, 2020. The increase in gross profit margin was primarily due to lower compensation expense as a percentage of revenues due to a higher proportion of junior professional staff, which was partially offset by lower utilization.

SG&A expenses increased $1.1 million, or 5.7%, to $19.9 million for the three months ended September 30, 2020, which included a 1.3% estimated negative impact from FX. SG&A expenses of 12.8% of revenues for the three months ended September 30, 2020 compared with 13.3% of revenues for the three months ended September 30, 2019. The increase in SG&A expenses was primarily driven by higher bad debt expenses, which was partially offset by lower legal and travel and entertainment expenses.

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Nine Months Ended September 30, 2020 Compared with Nine Months Ended September 30, 2019

Revenues decreased $0.9 million, or 0.2%, to $438.6 million for the nine months ended September 30, 2020. The decrease was primarily due to lower demand for financial economics and non-M&A-related antitrust services, along with lower realized bill rates for our non-M&A-related antitrust services, which was partially offset by higher demand and realized bill rates for our M&A-related antitrust services.

Gross profit decreased $0.3 million, or 0.3%, to $116.6 million for the nine months ended September 30, 2020. Gross profit margin is in line with the nine months ended September 30, 2019. Gross profit margin was adversely impacted by an 8 percentage point decline in utilization, which was offset by a higher proportion of junior professional staff and a lower proportion of lower margin contractor revenues.

SG&A expenses increased $5.9 million, or 10.8%, to $60.5 million for the nine months ended September 30, 2020. SG&A expenses of 13.8% of revenues for the nine months ended September 30, 2020 compared with 12.4% of revenues for the nine months ended September 30, 2019. The increase in SG&A expenses was primarily driven by higher bad debt and rent and occupancy expenses, which was partially offset by lower travel and entertainment expenses.

TECHNOLOGY

			Three Months Ended September 30,												Nine Months Ended September 30,
			2020						2019						2020						2019
			(dollars in thousands)												(dollars in thousands)
Revenues			$	58,585					$	57,083					$	164,392					$	164,051
Percentage change in revenues from prior year			2.6		%				0.7		%				0.2		%				13.9		%
Operating expenses
Direct cost of revenues			35,369						33,293						99,077						93,319
Selling, general and administrative expenses			14,319						14,696						41,397						40,652
Special charges			276						—						276						—
			49,964						47,989						140,750						133,971
Segment operating income			8,621						9,094						23,642						30,080
Percentage change in segment operating income    from prior year			-5.2		%				14.7		%				-21.4		%				107.6		%
Add back:
Depreciation and amortization of intangible assets			3,042						3,192						8,940						7,804
Special charges			276						—						276						—
Adjusted Segment EBITDA			$	11,939					$	12,286					$	32,858					$	37,884
Gross profit (1)			$	23,216					$	23,790					$	65,315					$	70,732
Percentage change in gross profit from prior year			-2.4		%				1.2		%				-7.7		%				19.2		%
Gross profit margin (2)			39.6		%				41.7		%				39.7		%				43.1		%
Adjusted Segment EBITDA as a percent of revenues			20.4		%				21.5		%				20.0		%				23.1		%
Number of revenue-generating professionals (at period       end) (3)			394						348						394						348
Percentage change in number of revenue-generating    professionals from prior year			13.2		%				14.9		%				13.2		%				14.9		%

(1)Revenues less direct cost of revenues

(2)Gross profit as a percentage of revenues

(3)Includes personnel involved in direct client assistance and revenue-generating consultants and excludes professionals employed on an as-needed basis.

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Three Months Ended September 30, 2020 Compared with Three Months Ended September 30, 2019

Revenues increased $1.5 million, or 2.6%, to $58.6 million for the three months ended September 30, 2020. The increase was primarily driven by higher demand for our consulting and hosting services, which was partially offset by the completion of a transitional services agreement associated with the Ringtail divestiture and lower realized rates for our managed review services. The aforementioned increase in revenues was primarily due to higher demand for cross-border investigations and litigation services.

Gross profit decreased $0.6 million, or 2.4%, to $23.2 million for the three months ended September 30, 2020. Gross profit margin decreased by 2.0 percentage points for the three months ended September 30, 2020. The decrease in gross profit margin was largely due to the completion of a transitional services agreement, which was partially offset by the favorable mix and higher profitability for our hosting and consulting services.

SG&A expenses decreased $0.4 million, or 2.6%, to $14.3 million for the three months ended September 30, 2020. SG&A expenses of 24.4% of revenues for the three months ended September 30, 2020 compared with 25.7% of revenues for the three months ended September 30, 2019.

Nine Months Ended September 30, 2020 Compared with Nine Months Ended September 30, 2019

Revenues increased $0.3 million, or 0.2%, to $164.4 million for the nine months ended September 30, 2020. The increase was primarily driven by higher demand and realized bill rates for our consulting services, which was partially offset by lower demand and realized rates for our managed review services, as well as lower revenues related to the completion of a transitional services agreement associated with the Ringtail divestiture. The aforementioned increase in revenues was due to higher demand for M&A-related and information governance services, which was partially offset by lower demand for our litigation services.

Gross profit decreased $5.4 million, or 7.7%, to $65.3 million for the nine months ended September 30, 2020. Gross profit margin decreased by 3.4 percentage points for the nine months ended September 30, 2020. The decrease in gross profit margin was largely due to the completion of a transitional services agreement, coupled with an unfavorable mix and lower profitability for our managed review and processing services, which was partially offset by the favorable mix and higher profitability for our consulting services.

SG&A expenses increased $0.7 million, or 1.8%, to $41.4 million for the nine months ended September 30, 2020. SG&A expenses of 25.2% of revenues for the nine months ended September 30, 2020 compared with 24.8% of revenues for the nine months ended September 30, 2019.

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STRATEGIC COMMUNICATIONS 

			Three Months Ended September 30,												Nine Months Ended September 30,
			2020						2019						2020						2019
			(dollars in thousands)												(dollars in thousands)
Revenues			$	52,967					$	59,959					$	168,236					$	176,775
Percentage change in revenues from prior year			-11.7		%				8.9		%				-4.8		%				6.9		%
Operating expenses
Direct cost of revenues			34,540						36,036						109,103						107,613
Selling, general and administrative expenses			10,542						11,898						33,576						36,277
Special charges			2,074						—						2,074						—
Amortization of other intangible assets			706						682						2,088						2,194
			47,862						48,616						146,841						146,084
Segment operating income			5,105						11,343						21,395						30,691
Percentage change in segment operating income    from prior year			-55.0		%				20.6		%				-30.3		%				12.5		%
Add back:
Depreciation and amortization of intangible assets			1,248						1,301						3,768						3,976
Special charges			2,074						—						2,074						—
Adjusted Segment EBITDA			$	8,427					$	12,644					$	27,237					$	34,667
Gross profit (1)			$	18,427					$	23,923					$	59,133					$	69,162
Percentage change in gross profit from prior year			-23.0		%				13.4		%				-14.5		%				6.9		%
Gross profit margin (2)			34.8		%				39.9		%				35.1		%				39.1		%
Adjusted Segment EBITDA as a percent of revenues			15.9		%				21.1		%				16.2		%				19.6		%
Number of revenue-generating professionals (at period end)			766						719						766						719
Percentage change in number of revenue-generating    professionals from prior year			6.5		%				10.3		%				6.5		%				10.3		%

(1)Revenues less direct cost of revenues

(2)Gross profit as a percentage of revenues

Three Months Ended September 30, 2020 Compared with Three Months Ended September 30, 2019

Revenues decreased $7.0 million, or 11.7%, to $53.0 million for the three months ended September 30, 2020, which included a 2.1% estimated positive impact from FX. Excluding the estimated positive impact of FX, revenues decreased $8.2 million, or 13.7%, due to lower project- and retainer-based revenues, primarily driven by lower demand for corporate reputation and financial communication services, as well as a $2.4 million decline in pass-through revenues.

Gross profit decreased $5.5 million, or 23.0%, to $18.4 million for the three months ended September 30, 2020. Gross profit margin decreased 5.1 percentage points for the three months ended September 30, 2020. The decrease in gross profit margin was driven by higher employee-related costs due to a 6.5% increase in headcount, which was partially offset by a lower proportion of lower margin pass-through revenues.

SG&A expenses decreased $1.4 million, or 11.4%, to $10.5 million for the three months ended September 30, 2020, which included a 1.8% estimated negative impact from FX. SG&A expenses of 19.9% of revenues for the three months ended September 30, 2020 compared with 19.8% of revenues for the three months ended September 30, 2019. The decrease in SG&A expenses was primarily due to lower travel and entertainment and other general and administrative expenses.

Nine Months Ended September 30, 2020 Compared with Nine Months Ended September 30, 2019

Revenues decreased $8.5 million, or 4.8%, to $168.2 million for the nine months ended September 30, 2020. The decrease in revenues was due to a $3.9 million decline in pass-through revenues, and lower project- and retainer-based revenues, primarily driven by lower demand for corporate reputation services.

Gross profit decreased $10.0 million, or 14.5%, to $59.1 million for the nine months ended September 30, 2020. Gross profit margin decreased 4.0 percentage points for the nine months ended September 30, 2020. The decrease in gross profit

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margin was primarily driven by higher employee-related costs due to increased headcount, which was partially offset by a lower proportion of lower margin pass-through revenues.

SG&A expenses decreased $2.7 million, or 7.4%, to $33.6 million for the nine months ended September 30, 2020. SG&A expenses of 20.0% of revenues for the nine months ended September 30, 2020 compared with 20.5% of revenues for the nine months ended September 30, 2019. The decrease in SG&A expenses was primarily due to lower travel and entertainment expenses.

CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements, which we have prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. Note 1 to the Consolidated Financial Statements included in Part II, Item 8, of our Annual Report on Form 10-K for the year ended December 31, 2019 describes the significant accounting policies and methods used in preparation of the Consolidated Financial Statements. We evaluate our estimates, including those related to allowance for doubtful accounts and unbilled services, goodwill, income taxes and contingencies, on an ongoing basis. Our estimates are based on current facts and circumstances, historical experience and various other assumptions that we believe are reasonable and form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The accounting policies that reflect our more significant estimates, judgments and assumptions and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:

•Revenue recognition

•Allowance for doubtful accounts and unbilled services

•Goodwill and other intangible assets  

There were no material changes to our critical accounting policies and estimates from the information provided in “Critical Accounting Policies” in the Management's Discussion and Analysis, in Part II, Item 7, of our Annual Report on Form 10-K for the year ended December 31, 2019.

SIGNIFICANT NEW ACCOUNTING PRONOUNCEMENTS

See Note 2, “New Accounting Standards” in Part I, Item 1, of this Quarterly Report on Form 10-Q.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

			Nine Months Ended September 30,
			2020						2019
Cash Flows			(dollars in thousands)
Net cash provided by operating activities			$	140,977					$	76,866
Net cash used in investing activities			$	(50,376)					$	(45,762)
Net cash used in financing activities			$	(155,414)					$	(76,520)
DSO			104						108

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

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

DSO is a performance measure used to assess how quickly revenues are collected by the Company. We calculate DSO at the end of each reporting period by dividing net accounts receivable reduced by billings in excess of services provided, by

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revenues for the quarter, adjusted for changes in foreign exchange rates. We multiply the result by the number of days in the quarter.

Nine Months Ended September 30, 2020 Compared with Nine Months Ended September 30, 2019

Net cash provided by operating activities for the nine months ended September 30, 2020 was $141.0 million compared with $76.9 million for the nine months ended September 30, 2019. The increase in net cash provided by operating activities was primarily due to higher cash collections, combined with lower non-compensation-related operating costs, which were partially offset by higher salaries related to headcount growth, higher annual bonus payments and an increase in income tax payments. DSO was 104 days as of September 30, 2020 and 108 days as of September 30, 2019.

Net cash used in investing activities for the nine months ended September 30, 2020 was $50.4 million compared with $45.8 million for the nine months ended September 30, 2019. The increase in net cash used in investing activities for the nine months ended September 30, 2020 as compared to the same period in the prior year was primarily due to an increase of $6.5 million in payments for the acquisition of businesses, net of cash received, partially offset by a decrease of $1.4 million in capital expenditures.

Net cash used in financing activities for the nine months ended September 30, 2020 was $155.4 million compared with $76.5 million for the nine months ended September 30, 2019. The increase in net cash used in financing activities for the nine months ended September 30, 2020 as compared to the same period in the prior year was primarily due to an increase of $97.9 million in payments for common stock repurchases under the Repurchase Program, partially offset by an increase in net borrowings of $25.0 million under our senior secured bank revolving credit facility (the “Credit Facility”) in the current year.

Capital Resources

As of September 30, 2020, our capital resources included $304.7 million of cash and cash equivalents and available borrowing capacity of $523.9 million under the $550.0 million revolving line of credit under our Credit Facility. As of September 30, 2020, we had $25.0 million of outstanding borrowings under our Credit Facility and $1.1 million of outstanding letters of credit, which reduced the availability of borrowings under the Credit Facility. We use letters of credit primarily in lieu of security deposits for our leased office facilities. The $550.0 million revolving line of credit under the Credit Facility includes a $75.0 million sublimit for borrowings in currencies other than USD, including the euro, British pound, Australian dollar and Canadian dollar.

The availability of borrowings, as well as issuances and extensions of letters of credit, under our Credit Facility is subject to specified conditions. We may choose to repay outstanding borrowings under the Credit Facility at any time before maturity without premium or penalty. Borrowings under the Credit Facility in USD, euro and British pound bear interest at an annual rate equal to the London Interbank Offered Rate ("LIBOR"), plus an applicable margin or an alternative base rate plus an applicable margin. The alternative base rate means a fluctuating rate per annum equal to the highest of (1) the rate of interest in effect for such day as the prime rate announced by Bank of America, (2) the federal funds rate plus the sum of 50 basis points, and (3) the one-month LIBOR plus 100 basis points. Borrowings under the Credit Facility in Canadian dollars bear interest at an annual rate equal to the Canadian Dealer Offered Rate plus an applicable margin. Borrowings under the Credit Facility in Australian dollars bear interest at an annual rate equal to the Bank Bill Swap Reference Bid Rate plus an applicable margin. The Credit Facility is guaranteed by substantially all of our domestic subsidiaries and is secured by a first priority security interest in substantially all of the assets of FTI Consulting and such domestic subsidiaries. Subject to certain conditions, at any time prior to maturity, we will be able to invite existing and new lenders to increase the size of the facility up to a maximum of $700.0 million.

Our Credit Agreement and other indebtedness outstanding from time to time contains or may contain covenants that, among other things, may limit our ability to: incur additional indebtedness; create liens; pay dividends on our capital stock, make distributions or repurchases of our capital stock or make specified other restricted payments; consolidate, merge or sell all or substantially all of our assets; guarantee obligations of other entities or our foreign subsidiaries; enter into hedging agreements; enter into transactions with affiliates or related persons; or engage in any business other than consulting-related businesses. In addition, the Credit Agreement includes a financial covenant that requires us not to exceed a maximum consolidated total net leverage ratio (the ratio of funded debt (less unrestricted cash up to $150.0 million) to Consolidated EBITDA, as defined in the Credit Agreement). As of September 30, 2020, we were in compliance with the covenants contained in the Credit Agreement and the indenture, dated as of August 20, 2018, between us and U.S. Bank National Association, as trustee (the "Indenture"), governing the 2023 Convertible Notes.

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Future Capital Needs

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

•operating and general corporate expenses relating to the operation of our businesses;

•capital expenditures, primarily for information technology equipment, office furniture and leasehold improvements;

•debt service requirements, including interest payments on our long-term debt;

•compensation to designated executive management and senior managing directors under our various long-term incentive compensation programs;

•discretionary funding of the Repurchase Program;

•contingent obligations related to our acquisitions;

•potential acquisitions of businesses; and

•other known future contractual obligations.

During the nine months ended September 30, 2020, we spent $25.7 million in capital expenditures to support our organization, including direct support for specific client engagements. We currently expect to make additional capital expenditures in an aggregate amount between $10 million and $18 million to support our organization for the remainder of 2020. Our estimate takes into consideration the needs of our existing businesses but does not include the impact of any purchases that we may be required to make as a result of future acquisitions or specific client engagements that are not completed or not currently contemplated. Our capital expenditure requirements may change if our staffing levels or technology needs change significantly from what we currently anticipate, if we are required to purchase additional equipment specifically to support new client engagements or if we pursue and complete additional acquisitions.

2023 Convertible Notes

Our 2023 Convertible Notes were issued pursuant to the Indenture. The 2023 Convertible Notes bear interest at a fixed rate of 2.0% per year, payable semiannually in arrears on February 15 and August 15 of each year, beginning on February 15, 2019. The 2023 Convertible Notes will mature on August 15, 2023, unless earlier converted or repurchased. Upon conversion, the 2023 Convertible Notes may be settled, at our election, in cash, shares of our common stock or a combination of cash and shares of our common stock.

Each $1,000 principal amount of the 2023 Convertible Notes will be convertible into 9.8643 shares of our common stock, which is equivalent to a conversion price of approximately $101.38 per share of common stock, at maturity, subject to adjustment upon the occurrence of specified events. Prior to the close of business on the business day immediately preceding May 15, 2023, the 2023 Convertible Notes may be converted only under the following circumstances: (1) during any calendar quarter commencing after the calendar quarter ending on September 30, 2018 (and only during such calendar quarter), if the last reported sale price of our common stock for at least 20 trading days (whether or not consecutive) during a period of 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding calendar quarter is greater than or equal to 130% of the conversion price on each applicable trading day; (2) during the five business day period after any five consecutive trading day period (the “Measurement Period”) in which the trading price (as defined in the Indenture) per $1,000 principal amount of the 2023 Convertible Notes for each trading day of the Measurement Period was less than 98% of the product of the last reported sale price of our common stock and the conversion rate in effect on each such trading day; or (3) upon the occurrence of specified corporate events. On or after May 15, 2023, until the close of business on the business day immediately preceding the maturity date of August 15, 2023, holders may convert their 2023 Convertible Notes at any time, regardless of the foregoing circumstances.

We may not redeem the 2023 Convertible Notes prior to the maturity date.

If we undergo a fundamental change (as defined in the Indenture), subject to certain conditions, holders may require us to repurchase for cash all or part of their 2023 Convertible Notes in principal amounts of $1,000 or a multiple thereof. The fundamental change repurchase price will be equal to 100% of the principal amount of the 2023 Convertible Notes to be repurchased, plus accrued and unpaid interest, if any, to, but excluding, the fundamental change repurchase date. In addition, in certain circumstances, we may be required to increase the conversion rate for any 2023 Convertible Notes converted in connection with a make-whole fundamental change (as defined in the Indenture). See Note 9, "Debt" in Part I, Item 1 of this Quarterly Report on Form 10-Q for a further discussion of the 2023 Convertible Notes.

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Cash Flows

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

Our conclusion that we will be able to fund our cash requirements for the next 12 months by using existing capital resources and cash generated from operations does not take into account exacerbation of, or additional or prolonged disruptions caused by, the COVID-19 pandemic that result in a material adverse impact on our business, which are events beyond our control, or the impact of any future acquisitions, unexpected significant changes in number of employees or other unanticipated uses of cash. The anticipated cash needs of our business could change significantly if we pursue and complete additional business acquisitions, if our business plans change, if events, including economic disruptions, arising from the COVID-19 pandemic worsen, or if other economic conditions change from those currently prevailing or from those now anticipated, or if other unexpected circumstances arise that may have a material effect on the cash flow or profitability of our business, including material negative changes in the health and welfare of our employees or those of our clients, and the operating performance or financial results of our business. Any of these events or circumstances, including any new business opportunities, could involve significant additional funding needs in excess of the identified currently available sources and could require us to raise additional debt or equity funding to meet those needs. Our ability to raise additional capital, if necessary, is subject to a variety of factors that we cannot predict with certainty, including:

•our future profitability;

•the quality of our accounts receivable;

•our relative levels of debt and equity;

•the volatility and overall condition of the capital markets; and

•the market prices of our securities.

Any new debt funding, if available, may be on terms less favorable to us than our Credit Facility or the 2023 Convertible Notes. See “Forward-Looking Statements” in Part I, Item 2 of this Quarterly Report on Form 10-Q, and the information contained under the heading “Risk Factors” in Part I, Item 1A, of our Annual Report on Form 10-K for the year ended December 31, 2019 and under the heading “Risk Factors” in Part II, Item 1A, of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020. 

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements and we have not entered into any transactions involving unconsolidated subsidiaries or special purpose entities that would be expected to have a material impact on our financial condition or results of operations.

Future Contractual Obligations

On October 26, 2020, the Company entered into a material lease agreement, amending and restating the lease agreement entered into as of August 19, 2020 (the "Lease") for its new principal office space in New York, New York to consolidate existing office space into fewer locations and in anticipation of future office space needs in view of its current leases, which are scheduled to expire in November 2021. The Company expects to accept possession of the premises on or about April 1, 2021, subject to the satisfaction of certain conditions, and shall continue for an initial fixed term of 15 years, subject to two renewal options of five years each. Fixed rental payments under the Lease are scheduled to commence in April 2022, payable in monthly installments and will aggregate approximately $145 million, excluding lease-related incentives over the term of the Lease. During the lease term, the Company will be responsible for its percentage share of the leased square footage of the premises of increases in taxes over a base tax year of July 1, 2021 - June 30, 2022 and operating expenses over a base operating year of calendar year 2021.

There have been no other material changes in our future contractual obligations, as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019.

Forward-Looking Statements

This Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended

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

There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in, or implied by, this Quarterly Report on Form 10-Q. Important factors that could cause our actual results to differ materially from the forward-looking statements we make in this Quarterly Report on Form 10-Q include those set forth under the heading “Risk Factors” in Part II, Item 1A, of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 and Part I, Item 1A, of our Annual Report on Form 10-K for the year ended December 31, 2019, as well as in other information that we file with the SEC from time to time. Important factors that could cause our actual results to differ materially from the forward-looking statements we make in this Quarterly Report on Form 10-Q include, but are not limited to, the following:

•impact of the COVID-19 pandemic and related events that are beyond our control, including possible effects on our business and operations, clients and vendors, and employees and contractors, which could affect our segments, practices and the geographic regions in which we conduct business, differently and adversely;

•changes in demand for our services;

•our ability to attract and retain qualified professionals and senior management;

•conflicts resulting in our inability to represent certain clients;

•our former employees joining or forming competing businesses;

•our ability to manage our professionals’ utilization and billing rates and maintain or increase the pricing of our services and products;

•our ability to identify suitable acquisition candidates, negotiate favorable terms, take advantage of opportunistic acquisition situations and integrate the operations of acquisitions, as well as the costs of integration;

•our ability to adapt to and manage the risks associated with operating in non-U.S. markets;

•our ability to replace key personnel, including former executives, officers, senior managers and practice and regional leaders who have highly specialized skills and experience;

•our ability to protect the confidentiality of internal and client data and proprietary and confidential information, including from cyberattacks, systems failures or other similar events;

•legislation or judicial rulings, including legislation or rulings regarding data privacy and the discovery process;

•periodic fluctuations in revenues, operating income and cash flows;

•damage to our reputation as a result of claims involving the quality of our services;

•fee discounting or renegotiation, lower pricing, less advantageous contract terms and unexpected termination of client engagements;

•competition for clients and key personnel;

•general economic factors, industry trends, restructuring and bankruptcy rates, legal or regulatory requirements, capital market conditions, merger and acquisition activity, major litigation activity and other events outside of our control;

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•our ability to manage growth;

•risk of non-payment of receivables;

•the amount and terms of our outstanding indebtedness;

•uncertainty from the expected discontinuance of LIBOR and transition to any other interest rate benchmark;

•headcount and cost reductions during periods of reduced demand;

•risks relating to the obsolescence of or the protection of our proprietary software products, intellectual property rights and trade secrets;

•foreign currency disruptions and currency fluctuations between the U.S. dollar and foreign currencies; and

•fluctuations in the mix of our services and the geographic locations in which our clients are located or our services are rendered.

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

Item 3.			Quantitative and Qualitative Disclosures About Market Risk

For information regarding our exposure to certain market risks, see “Quantitative and Qualitative Disclosures About Market Risk” in Part II, Item 7A, of our Annual Report on Form 10-K for the year ended December 31, 2019. There have been no material changes in our market risk exposure during the period covered by this Quarterly Report on Form 10-Q.

Item 4.			Controls and Procedures

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

Changes in Internal Control over Financial Reporting. There have not been any changes in our internal control over financial reporting that occurred during the three months ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

Item 1.			Legal Proceedings

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

Item 1A.			Risk Factors

There have been no material changes in any risk factors previously disclosed in Part II, Item 1A, of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020 filed with the Securities and Exchange Commission (“SEC”) on April 30, 2020 and Part I, Item 1A, of our Annual Report on Form 10-K for the year ended December 31, 2019 filed with the SEC on February 25, 2020. We may disclose changes to risk factors or disclose additional factors from time to time in our future filings with the SEC. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations.

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

Unregistered sales of equity securities.

None.

Repurchases of our common stock.

The following table provides information with respect to purchases we made of our common stock during the three months ended September 30, 2020: 

			Total Number of Shares Purchased						Average Price Paid per Share						Total Number of Shares Purchased as Part of Publicly Announced Program (1)						Approximate Dollar Value That May Yet Be Purchased Under the Program
			(in thousands, except per share data)
July 1 through July 31, 2020			148			(2)			$	111.66					147			(4)			$	248,817
August 1 through August 31, 2020			98						$	117.59					98			(5)			$	237,304
September 1 through September 30, 2020			505			(3)			$	108.90					504			(6)			$	182,412
			751												749

 

(1)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, December 1, 2017, February 21, 2019 and February 20, 2020, our Board of Directors authorized an additional $100.0 million, respectively. On July 28, 2020, our Board of Directors authorized an additional $200.0 million, increasing the Repurchase Program to an aggregate authorization of $700.0 million. During the quarter ended September 30, 2020, we repurchased an aggregate of 749,315 shares of our outstanding common stock under the Repurchase Program at an average price of $110.57 per share for a total cost of approximately $82.9 million.

(2)Includes 235 shares of common stock withheld to cover payroll tax withholdings related to the lapse of restrictions on restricted stock.

(3)Includes 1,605 shares of common stock withheld to cover payroll tax withholdings related to the lapse of restrictions on restricted stock.

(4)During the month ended July 31, 2020, we repurchased and retired 147,409 shares of common stock, at an average price per share of $111.66, for an aggregate cost of $16.5 million.

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(5)During the month ended August 31, 2020, we repurchased and retired 97,890 shares of common stock, at an average price per share of $117.59, for an aggregate cost of $11.5 million.

(6)During the month ended September 30, 2020, we repurchased and retired 504,016 shares of common stock, at an average price per share of $108.89, for an aggregate cost of $54.9 million.

Item 3.			Defaults Upon Senior Securities

None.

Item 4.			Mine Safety Disclosures

Not applicable.

Item 5.			Other Information

None.

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Item 6.			Exhibits

Exhibit Number						Description
3.1						Articles of Incorporation of FTI Consulting, Inc., as amended and restated. (Filed with the Securities and Exchange Commission on May 23, 2003 as an exhibit to FTI Consulting, Inc.’s Current Report on Form 8-K dated May 21, 2003 and incorporated herein by reference.)
3.2						Articles of Amendment of FTI Consulting, Inc. (Filed with the Securities and Exchange Commission on June 2, 2011 as an exhibit to FTI Consulting, Inc.’s Current Report on Form 8-K dated June 1, 2011 and incorporated herein by reference.)
3.3						Bylaws of FTI Consulting, Inc., as amended and restated on June 1, 2011. (Filed with the Securities and Exchange Commission on June 2, 2011 as an exhibit to FTI Consulting, Inc.’s Current Report on Form 8-K dated June 1, 2011 and incorporated herein by reference.)
3.4						Amendment No. 1 to Bylaws of FTI Consulting, Inc. (Filed with the Securities and Exchange Commission on December 16, 2013 as an exhibit to FTI Consulting, Inc.’s Current Report on Form 8-K dated December 13, 2013 and incorporated herein by reference.)
3.5						Amendment No. 2 to Amended and Restated Bylaws of FTI Consulting, Inc. (Filed with the Securities and Exchange Commission on September 22, 2014 as an exhibit to FTI Consulting, Inc.’s Current Report on Form 8-K dated September 17, 2014 and incorporated herein by reference.)
10.1±						Amended and Restated Lease dated as of October 26, 2020 by and between 1166 LLC and FTI Consulting, Inc.
31.1†						Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended (Section 302 of the Sarbanes-Oxley Act of 2002.)
31.2†						Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended (Section 302 of the Sarbanes-Oxley Act of 2002.)
32.1†**						Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002.)
32.2†**						Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002.)
101						The following financial information from the Quarterly Report on Form 10-Q of FTI Consulting, Inc., included herewith, and formatted in Inline XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019; (ii) Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2020 and 2019; (iii) Condensed Consolidated Statement of Stockholders’ Equity for the three and nine months ended September 30, 2020 and 2019; (iv) Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2020 and 2019; and (v) Notes to the Condensed Consolidated Financial Statements, tagged as blocks of text.
104						The cover page from the Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 2020, formatted in Inline XBRL (included as Exhibit 101).

†			Filed herewith.

**			This certification is deemed not filed for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act.
±			Exhibits and Schedules (or similar attachments) to the Amended and Restated Lease are not filed. FTI Consulting, Inc. will supplementally furnish a copy of any omitted Exhibit or Schedule (or similar attachment) to the Securities and Exchange Commission upon request.

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SIGNATURES

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

Date: October 29, 2020

 

FTI CONSULTING, INC.
By:						/s/ Brendan Keating
						Brendan Keating
						Chief Accounting Officer and Controller
						(principal accounting officer)

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