UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31, 2019

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

For the transition period from to

Commission File No. 1-12173

Navigant Consulting, Inc.

(Exact name of registrant as specified in its charter)



Delaware	36-4094854
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

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

(Address of principal executive offices, including zip code)

(312) 573-5600

(Registrant’s telephone number, including area code)

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES ☒ NO ☐

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

Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. YES ☐ NO ☐

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

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

INDEX

	Page
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements	4
Notes to Unaudited Consolidated Financial Statements	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3. Quantitative and Qualitative Disclosures About Market Risk	28
Item 4. Controls and Procedures	28
PART II — OTHER INFORMATION
Item 1. Legal Proceedings	30
Item 1A. Risk Factors	30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	30
Item 6. Exhibits	30
SIGNATURES	31

Forward-Looking Statements

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

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements.

NAVIGANT CONSULTING, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED BALANCE SHEETS

(In thousands, except per share data)

	March 31,			December 31,
	2019			2018

ASSETS
Current assets:
Cash and cash equivalents	$	107,217		$	206,920
Accounts receivable, net and contract assets		186,523			179,923
Prepaid expenses and other current assets		26,835			22,512
Total current assets		320,575			409,355
Non-current assets:
Property and equipment, net		61,374			63,025
Operating lease right-of-use assets		83,959			-
Intangible assets, net		15,470			14,166
Goodwill		425,069			422,357
Other assets		8,703			8,644
Total assets	$	915,150		$	917,547
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	12,869		$	13,302
Accrued liabilities		16,075			15,558
Accrued compensation-related costs		40,784			69,555
Income tax payable		10,519			13,357
Operating lease liabilities		22,368			-
Other current liabilities		22,761			34,044
Total current liabilities		125,376			145,816
Non-current liabilities:
Deferred income tax liabilities		38,492			33,901
Operating lease liabilities		85,297			-
Other non-current liabilities		4,321			25,277
Total non-current liabilities		128,110			59,178
Total liabilities		253,486			204,994
Stockholders' equity:
Common stock		49			49
Additional paid-in capital		666,794			664,473
Treasury stock		(214,465	)		(160,972	)
Retained earnings		213,830			211,543
Accumulated other comprehensive loss		(6,971	)		(6,529	)
Total Navigant Consulting, Inc. stockholders' equity		659,237			708,564
Non-controlling interest		2,427			3,989
Total stockholders' equity		661,664			712,553
Total liabilities and stockholders' equity	$	915,150		$	917,547

See accompanying notes to unaudited consolidated financial statements.

NAVIGANT CONSULTING, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

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

	For the three months ended
	March 31,
	2019			2018
Revenues before reimbursements	$	186,129		$	161,445
Reimbursements		16,733			16,623
Total revenues		202,862			178,068
Cost of services before reimbursable expenses		135,356			116,936
Reimbursable expenses		16,733			16,623
Total cost of services		152,089			133,559
General and administrative expenses		35,167			37,079
Depreciation expense		4,586			4,997
Amortization expense		1,372			1,752
Other operating costs		32			983
Operating income (loss)		9,616			(302	)
Interest expense		318			828
Interest income		(689	)		(119	)
Other expense, net		132			361
Income (loss) from continuing operations before income tax expense		9,855			(1,372	)
Income tax expense		3,047			225
Net income (loss) from continuing operations		6,808			(1,597	)
(Loss) income from discontinued operations, net of tax		(489	)		13,450
Net income		6,319			11,853
Less: Income attributable to non-controlling interest, net of tax		(2,038	)		-
Net income attributable to Navigant Consulting, Inc.	$	4,281		$	11,853
Basic net income per share
Net income (loss) from continuing operations attributable to Navigant Consulting, Inc.	$	0.12		$	(0.04	)
(Loss) income from discontinued operations, net of tax		(0.01	)		0.30
Net income attributable to Navigant Consulting, Inc. (1)	$	0.11		$	0.26
Shares used in computing basic per share data		40,218			45,120

Diluted net income per share
Net income (loss) from continuing operations attributable to Navigant Consulting, Inc.	$	0.12		$	(0.04	)
(Loss) income from discontinued operations, net of tax		(0.01	)		0.30
Net income attributable to Navigant Consulting, Inc. (1)	$	0.10		$	0.26
Shares used in computing diluted per share data		41,408			45,120

Net income	$	6,319		$	11,853
Other comprehensive (loss) income, net of tax:
Unrealized net (loss) gain, foreign currency translation		(442	)		1,369
Unrealized net gain on interest rate derivatives		-			250
Reclassification adjustment on interest rate derivatives included in interest expense and income tax expense		-			7
Other comprehensive (loss) income, net of tax		(442	)		1,626
Total comprehensive income, net of tax		5,877			13,479
Income attributable to non-controlling interest, net of tax		(2,038	)		-
Total comprehensive income attributable to Navigant Consulting, Inc., net of tax	$	3,839		$	13,479
(1) Earnings per share may not foot due to rounding.

See accompanying notes to unaudited consolidated financial statements.

NAVIGANT CONSULTING, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands)

	Navigant Consulting, Inc. Shareholders
	Common Stock Shares		Treasury Stock Shares			Common Stock Par Value		Additional Paid-In Capital			Treasury Stock Cost			Accumulated Other Comp- rehensive Loss			Retained Earnings			Non-Controlling Interest			Total Stock-holders' Equity
Balance at December 31, 2018		49,387		(8,114	)	$	49	$	664,473		$	(160,972	)	$	(6,529	)	$	211,543		$	3,989		$	712,553
Distributions to non-controlling interests																					(3,600	)		(3,600	)
Comprehensive (loss) income		-		-			-		-			-			(442	)		4,281			2,038			5,877
Dividends paid ($0.05 per share)																		(1,994	)		-			(1,994	)
Issuances of common stock		69		-			-		856			-			-			-			-			856
Vesting of restricted stock units, net of forfeitures and tax withholdings		90		-			-		(1,304	)		-			-			-			-			(1,304	)
Share-based compensation expense		-		-			-		2,769			-			-			-			-			2,769
Repurchases of common stock		-		(2,317	)		-		-			(53,493	)		-			-			-			(53,493	)
Balance at March 31, 2019		49,546		(10,431	)	$	49	$	666,794		$	(214,465	)	$	(6,971	)	$	213,830		$	2,427		$	661,664

	Navigant Consulting, Inc. Shareholders
	Common Stock Shares		Treasury Stock Shares			Common Stock Par Value		Additional Paid-In Capital			Treasury Stock Cost			Accumulated Other Comp- rehensive Loss			Retained Earnings		Total Stock-holders' Equity
Balance at December 31, 2017		58,047		(12,661	)	$	58	$	659,825		$	(224,366	)	$	(19,178	)	$	270,995	$	687,334
Cumulative-effect adjustment resulting from the adoption of ASU 2014-09 (Note 2)		-		-			-		-			-			-			151		151
Comprehensive income		-		-			-		-			-			1,626			11,853		13,479
Issuances of common stock		89		-			-		1,238			-			-			-		1,238
Vesting of restricted stock units, net of forfeitures and tax withholdings		94		-			-		(1,516	)		-			-			-		(1,516	)
Share-based compensation expense		-		-			-		3,377			-			-			-		3,377
Repurchases of common stock		-		(569	)		-		-			(11,357	)		-			-		(11,357	)
Balance at March 31, 2018		58,230		(13,230	)	$	58	$	662,924		$	(235,723	)	$	(17,552	)	$	282,999	$	692,706

See accompanying notes to unaudited consolidated financial statements.

NAVIGANT CONSULTING, INC. AND SUBSIDIARIES

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

	For the three months ended
	March 31,
	2019			2018
Cash flows from operating activities:
Net income	$	6,319		$	11,853
Adjustments to reconcile net income to net cash used in operating activities:
Depreciation expense		4,586			6,845
Amortization expense		1,372			1,856
Share-based compensation expense		2,769			3,377
Deferred income taxes		5,086			968
Allowance for doubtful accounts receivable		448			3,130
Loss from disposition of discontinued operations		672			-
Other, net		185			1,007
Changes in assets and liabilities (net of acquisitions):
Accounts receivable, net and contract assets		(7,014	)		(23,615	)
Prepaid expenses and other assets		(4,305	)		(716	)
Accounts payable		(423	)		(2,100	)
Accrued liabilities		(119	)		2,200
Accrued compensation-related costs		(28,772	)		(36,458	)
Income taxes payable		(3,356	)		2,926
Other liabilities		(8,587	)		(6,120	)
Net cash used in operating activities		(31,139	)		(34,847	)
Cash flows from investing activities:
Purchases of property and equipment		(3,007	)		(5,750	)
Acquisitions of businesses, net of cash acquired		(6,000	)		-
Net cash used in investing activities		(9,007	)		(5,750	)
Cash flows from financing activities:
Issuances of common stock		856			1,238
Repurchases of common stock		(53,493	)		(11,357	)
Dividend payments		(1,994	)		-
Repayments to banks		-			(79,144	)
Borrowings from banks		-			129,677
Distributions to non-controlling interest holder		(3,600	)		-
Other, net		(1,306	)		(1,596	)
Net cash (used in) provided by financing activities		(59,537	)		38,818
Effect of exchange rate changes on cash and cash equivalents		(20	)		(24	)
Net decrease in cash and cash equivalents		(99,703	)		(1,803	)
Cash and cash equivalents at beginning of the period		206,920			8,449
Cash and cash equivalents at end of the period	$	107,217		$	6,646

Supplemental Unaudited Consolidated Cash Flow Information

(In thousands)

	For the three months ended
	March 31,
	2019		2018
Interest paid	$	153	$	1,014
Income taxes paid, net of refunds	$	1,137	$	891

See accompanying notes to unaudited consolidated financial statements.

NAVIGANT CONSULTING, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1.	DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

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

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

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

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

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

2. RECENT ACCOUNTING PRONOUNCEMENTS

Recently Adopted Accounting Pronouncements

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

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

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

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

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

3.	DISPOSITIONS AND DISCONTINUED OPERATIONS

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

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

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

	For the three months ended
	March 31,
	2019			2018
Revenues before reimbursements	$	-		$	82,434
Total revenues	$	-		$	86,452
Cost of services including reimbursable expenses	$	-		$	58,487
General and administrative expenses	$	-		$	7,283
Amortization and depreciation expense	$	-		$	1,953
Interest expense	$	-		$	488
Loss from disposition of discontinued operations	$	(672	)	$	-
Other expense, net	$	-		$	(29	)
(Loss) income from discontinued operations before income tax expense	$	(672	)	$	18,212
Income tax (benefit) expense from discontinued operations	$	(183	)	$	4,762
(Loss) income from discontinued operations, net of tax	$	(489	)	$	13,450

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

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

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

4.	REVENUE RECOGNITION

Recently Adopted Accounting Pronouncements

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

Contract Assets and Liabilities

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

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

Performance Obligations

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

5.	SEGMENT INFORMATION

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

•

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

•

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

•

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

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

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

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

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

	For the three months ended
	March 31,
	2019			2018
Revenues before reimbursements:
Healthcare	$	119,003		$	90,149
Energy		36,249			33,704
Financial Services Advisory and Compliance		30,877			37,592
Total revenues before reimbursements	$	186,129		$	161,445

Total revenues:
Healthcare	$	126,569		$	98,712
Energy		43,700			37,637
Financial Services Advisory and Compliance		32,593			41,719
Total revenues	$	202,862		$	178,068

Segment operating profit:
Healthcare	$	36,755		$	20,390
Energy		10,410			10,728
Financial Services Advisory and Compliance		5,231			14,836
Total segment operating profit		52,396			45,954

Segment reconciliation to income before income tax expense:
Reconciling items:
General and administrative expenses		35,167			37,079
Depreciation expense		4,586			4,997
Amortization expense		1,372			1,752
Other operating costs, net		32			983
Long-term compensation expense attributable to client-service employees (including share-based compensation expense)		1,623			1,445
Operating income (loss)		9,616			(302	)
Interest and other (income) expense, net		(239	)		1,070
Income (loss) from continuing operations before income tax expense	$	9,855		$	(1,372	)

Total assets allocated by segment include accounts receivable, net and contract assets, certain retention-related prepaid assets, intangible assets, net and goodwill. The remaining assets are unallocated. Allocated assets by segment were as follows (in thousands):

	March 31,		December 31,
	2019		2018
Healthcare	$	415,917	$	405,283
Energy		133,766		130,052
Financial Services Advisory and Compliance		81,508		85,250
Unallocated assets		283,959		296,962
Total assets	$	915,150	$	917,547

6.	GOODWILL AND INTANGIBLE ASSETS, NET

The changes made to the goodwill balances of our reporting units for the three months ended March 31, 2019 and the year ended December 31, 2018, were as follows (shown in thousands):

	Healthcare			Energy			Financial Services Advisory and Compliance			Total Company
Goodwill at December 31, 2018	$	294,283		$	80,034		$	48,040		$	422,357
Acquisitions		3,237			-			-			3,237
Adjustments		(2	)		-			(6	)		(8	)
Foreign currency translation		-			(58	)		(459	)		(517	)
Goodwill at March 31, 2019	$	297,518		$	79,976		$	47,575		$	425,069

	Healthcare			Energy			Financial Services Advisory and Compliance			Total Company
Goodwill at December 31, 2017	$	294,064		$	80,109		$	48,786		$	422,959
Adjustments		365			200			(24	)		541
Foreign currency translation		(146	)		(275	)		(722	)		(1,143	)
Goodwill at December 31, 2018	$	294,283		$	80,034		$	48,040		$	422,357

We performed our annual goodwill impairment test as of May 31, 2018 on our three continuing reporting units and our former Disputes, Forensics and Legal Technology reporting unit using certain key assumptions. The key assumptions included: internal projections completed during our first quarter 2018 forecasting process; profit margin improvement generally consistent with our longer-term historical performance; assumptions regarding contingent revenue; revenue growth consistent with our longer-term historical performance, also considering our near-term investment plans and growth objectives; discount rates based on comparable discount rates for our peer group; revenue and earnings before interest, taxes, depreciation and amortization (“EBITDA”) multiples comparable to multiples for our peer group; Navigant-specific risk considerations; control premium; and cost of capital based on our historical experience.

As of May 31, 2018, the estimated fair value of our Healthcare, Energy and Financial Services Advisory and Compliance reporting units exceeded the fair value of invested capital by 23%, 32%, and 72%, respectively.

We have reviewed our most recent financial projections and considered the impact of changes to our business and market conditions on our goodwill valuation and determined that no events or conditions have occurred or are expected to occur that would trigger a need to perform an interim goodwill impairment test on our remaining three reporting units. We will continue to monitor the factors and key assumptions used in determining the fair value of each of our continuing three reporting units. There can be no assurance that goodwill or intangible assets will not be impaired in the future. We will perform our next annual goodwill impairment test as of May 31, 2019.

Intangible assets consisted of (in thousands):

	March 31,			December 31,
	2019			2018
Intangible assets:
Customer lists and relationships	$	108,555		$	105,368
Non-compete agreements		23,066			22,923
Other		28,450			28,304
Intangible assets, at cost		160,071			156,595
Less: accumulated amortization		(144,601	)		(142,429	)
Intangible assets, net	$	15,470		$	14,166

Our intangible assets have estimated remaining useful lives ranging up to six years which approximate the estimated periods of consumption. We will amortize the remaining net book values of intangible assets over their remaining useful lives. At March 31, 2019, our intangible assets categories were as follows (in thousands, except year data):

Category	Weighted Average Remaining Years		Amount
Customer lists and relationships, net		4.1	$	14,014
Non-compete agreements, net		2.2		1,018
Other intangible assets, net		3.3		438
Total intangible assets, net		3.9	$	15,470

Total amortization expense was $1.4 million and $1.8 million for the three months ended March 31, 2019 and 2018, respectively. The estimated annual aggregate amortization expense to be recorded related to intangible assets at March 31, 2019 is as follows (in thousands):

Year Ending December 31,	Amount
2019 (includes January - March)	$	5,393
2020		4,196
2021		4,085
2022		936
2023		1,243
2024 and thereafter		989

7.	NET INCOME PER SHARE (EPS)

Income (loss) from continuing operations attributable to Navigant Consulting, Inc. was $4.8 million and ($1.6 million) for the three months ended March 31, 2019 and 2018, respectively. The components of basic and diluted shares (in thousands and based on the weighted average days outstanding for the periods) were as follows:

	For the three months ended
	March 31,
	2019		2018

Basic shares		40,218		45,120
Employee stock options		146		153
Restricted stock units		951		1,544
Contingently issuable shares		93		17
Diluted shares (1)		41,408		46,834
Antidilutive shares (2)		16		33

(1)	Diluted earnings per share is not presented for the three months ended March 31, 2018 as there is a net loss from continuing operations for that period.

(2)

Stock options with exercise prices greater than the average market price of our common stock during the respective time periods were excluded from the computation of diluted shares because the impact of including the shares subject to these stock options in the diluted share calculation would have been antidilutive.

8.	SHARE-BASED COMPENSATION EXPENSE

Share-based compensation expense is recorded for restricted stock units, stock options and the discount given on employee stock purchase plan transactions.

The amounts attributable to each category of share-based compensation expense were as follows (in thousands):

	For the three months ended
	March 31,
	2019		2018
Amortization of restricted stock awards and restricted stock unit awards	$	2,640	$	2,774
Amortization of stock option awards		21		34
Discount given on employee stock purchase transactions through our Employee Stock Purchase Plan		108		107
Share-based compensation expense from continuing operations		2,769		2,915
Share-based compensation expense from discontinued operations		-		462
Total share-based compensation expense	$	2,769	$	3,377

Total share-based compensation expense consisted of the following (in thousands):

	For the three months ended
	March 31,
	2019		2018
Cost of services before reimbursable expenses	$	639	$	767
General and administrative expenses		2,130		2,148
Share-based compensation expense from continuing operations		2,769		2,915
Share-based compensation expense from discontinued operations		-		462
Total share-based compensation expense	$	2,769	$	3,377

Share-based compensation expense attributable to client-service employees was included in cost of services before reimbursable expenses. Share-based compensation expense attributable to corporate management and support personnel was included in general and administrative expenses. For further information on discontinued operations see Note 3 – Dispositions and Discontinued Operations.

At March 31, 2019, we had $8.7 million of total compensation costs related to unvested share-based awards that have not been recognized as share-based compensation expense. The compensation costs will be recognized as an expense over the remaining vesting periods. The weighted average remaining vesting period is approximately two years. During the three months ended March 31, 2019, we granted an aggregate of 195,031 share-based awards, consisting of restricted stock awards and units with an aggregate fair value of $3.9 million at the time of grant. These grants include certain awards that vest based on relative achievement of pre-established performance criteria.

9.	SUPPLEMENTAL CONSOLIDATED BALANCE SHEET INFORMATION

Accounts Receivable, Net and Contract Assets

The components of accounts receivable, net and contract assets, were as follows (in thousands):

	March 31,			December 31,
	2019			2018
Billed amounts	$	108,125		$	116,190
Engagements in process and contract assets		89,512			74,633
Allowance for uncollectible billed amounts		(8,022	)		(7,815	)
Allowance for uncollectible engagements in process		(3,092	)		(3,085	)
Accounts receivable, net and contract assets	$	186,523		$	179,923

Receivables attributable to engagements in process represent balances for services that have been performed and earned but have not been billed to the client. Engagements in process include contract assets. See Note 4 – Revenue Recognition for information on contract assets. Services are generally billed on a monthly basis for the prior month’s services. Our allowance for uncollectible accounts is based on historical experience and management judgment and may change based on market conditions or specific client circumstances.

Prepaid Expenses and Other Current Assets

The components of prepaid expenses and other current assets were as follows (in thousands):

	March 31,		December 31,
	2019		2018
Prepaid recruiting and retention incentives - current	$	5,387	$	4,552
Other current prepaid expenses and other current assets		21,448		17,960
Prepaid expenses and other current assets	$	26,835	$	22,512

Other Assets

The components of other assets were as follows (in thousands):

	March 31,		December 31,
	2019		2018
Prepaid recruiting and retention incentives - non-current	$	3,070	$	2,654
Other prepaid expenses and other non-current assets		5,633		5,990
Other assets	$	8,703	$	8,644

Prepaid recruiting and retention incentives, current and non-current, include sign-on and retention bonuses that are generally recoverable from an employee if the employee voluntarily terminates employment or if the employee’s employment is terminated for “cause” prior to fulfilling his or her obligations to us. These amounts are amortized as compensation expense over the periods in which they are recoverable from the employees, with periods up to three years. During the three months ended March 31, 2019 and 2018, we granted $3.0 million and $2.5 million, respectively, in sign-on and retention bonuses.

Property and Equipment, Net

The components of property and equipment, net were as follows (in thousands):

	March 31,			December 31,
	2019			2018
Furniture, fixtures and equipment	$	56,944		$	55,619
Software		87,821			86,225
Leasehold improvements		47,114			47,097
Property and equipment, at cost		191,879			188,941
Less: accumulated depreciation and amortization		(130,505	)		(125,916	)
Property and equipment, net	$	61,374		$	63,025

During the three months ended March 31, 2019, we invested $3.0 million in property and equipment.

Other Current Liabilities

The components of other current liabilities were as follows (in thousands):

	March 31,		December 31,
	2019		2018
Deferred acquisition liabilities - current	$	978	$	969
Contract liabilities		21,301		28,909
Deferred rent - current		-		2,656
Other current liabilities		482		1,510
Total other current liabilities	$	22,761	$	34,044

Other Non-Current Liabilities

The components of other non-current liabilities were as follows (in thousands):

	March 31,		December 31,
	2019		2018
Deferred acquisition liabilities - non-current	$	733	$	710
Deferred rent - non-current		-		21,648
Other non-current liabilities		3,588		2,919
Total other non-current liabilities	$	4,321	$	25,277

Deferred acquisition liabilities, current and non-current, at March 31, 2019 consisted of cash obligations related to definitive and contingent purchase price considerations recorded at fair value and net present value, respectively. See Note 13 – Fair Value for additional information regarding deferred contingent consideration fair value adjustments.

As a result of the adoption of Topic 842, deferred rent amounts as of March 31, 2019 are reflected in the operating lease right-use assets.

At March 31, 2019, other non-current liabilities included $2.3 million of performance-based long-term incentive compensation liabilities. As part of our long-term incentive program for select senior-level client-service employees and leaders, we grant restricted stock units which typically vest three years from the grant date. The value of equity granted is based on the relative achievement of certain performance targets during the year prior to grant.

Contract liabilities represent advance billings to our clients for services that have not yet been performed and earned. See Note 4 – Revenue Recognition for information on contract liabilities.

10.	ACCUMULATED OTHER COMPREHENSIVE LOSS

The activity in accumulated other comprehensive loss attributable to Navigant Consulting Inc. was as follows (in thousands):

	For the three months ended
	March 31,
	2019			2018
Unrealized loss on foreign exchange:
Balance at beginning of period	$	(6,529	)	$	(19,308	)
Unrealized (loss) gain on foreign exchange		(442	)		1,369
Balance at end of period	$	(6,971	)	$	(17,939	)

Unrealized gain on derivatives:
Balance at beginning of period	$	-		$	130
Unrealized gain on derivatives in period, net of reclassification		-			250
Reclassified to interest expense		-			10
Income tax expense		-			(3	)
Balance at end of period	$	-		$	387

	2019			2018
Accumulated other comprehensive loss at March 31,	$	(6,971	)	$	(17,552	)

11.

LEASES

As described in Note 2 – Recent Accounting Pronouncements above, effective January 1, 2019, we adopted Topic 842. We have operating leases for office space and, to a much lesser extent, we also have operating leases for equipment. Our office leases are typically for terms of between 3 and 10 years. Rents usually increase annually in accordance with defined rent steps or based on current year consumer price index adjustments. Some of the lease agreements contain one or more of the following provisions or clauses: tenant allowances, rent holidays, lease premiums, and rent escalation clauses. For the purpose of recognizing these provisions on a straight-line basis over the terms of the leases, we use the date of initial possession to begin amortization, which is generally when we enter the space and begin to make improvements in preparation of intended use or in the case of a lease modification, the date both parties execute the modification. There are typically no purchase options, residual value guarantees or restrictive covenants. When renewal options exist, we generally do not deem them to be reasonably certain to be exercised, and therefore the amounts are not recognized as part of our lease liability nor our right-of-use asset. In certain cases, we sublease excess office space to third party tenants. We do not recognize liabilities or right-of-use assets for leases with an initial term of 12 months or less.

The components of lease expense were as follows (in thousands):

	For the Three Months Ended
	March 31, 2019
Operating lease cost	$	5,890
Variable lease costs		2,914
Short term lease costs		289
Sublease income		(1,780	)
Total net lease cost	$	7,313

Supplemental balance sheet information related to leases:

	March 31,
	2019
Weighted average remaining lease term (in years):
Operating leases		6

Weighted average discount rate:
Operating leases		5.4	%

The discount rates applied to each lease reflect our estimated incremental borrowing rate. This includes an assessment of our credit rating to determine the rate that we would have to pay to borrow, on a collateralized basis for a similar term, an amount equal to our lease payments in a similar economic environment.

Supplemental cash flow and other information related to leases was as follows (in thousands):

Future minimum lease payments under non-cancellable operating leases were as follows (in thousands):

	March 31,
	2019
2019 (excluding the three months ended March 31, 2019)	$	20,860
2020		25,452
2021		20,328
2022		14,428
2023		12,612
2024 and thereafter		34,798
Total lease payments	$	128,478
Less imputed interest		(20,813	)
Total	$	107,665

As of March 31, 2019, we have additional operating leases that have not yet commenced with obligations of $2.4 million. These operating leases expected to commence in 2019 with lease terms of 1 year to 5 years.

Future minimum annual lease payments for the years subsequent to December 31, 2018 and in the aggregate were as follows (shown in thousands):

Year ending December 31,	Amount
2019	$	27,496
2020		25,583
2021		20,742
2022		14,747
2023		12,873
Thereafter		35,077
	$	136,518

Rent expense for operating leases was $25.3 million for the year ended December 31, 2018.

12.

BANK DEBT

Our credit agreement provides a $350 million revolving credit facility. The credit facility becomes due and payable in full upon maturity on March 28, 2022. At our option, subject to the terms and conditions specified in the credit agreement, we may elect to increase commitments under the credit facility up to an aggregate amount of $450 million. Borrowings and repayments under the credit facility may be made in multiple currencies including United States (“U.S.”) Dollars, Canadian Dollars, United Kingdom (“U.K.”) Pound Sterling and Euro.

We had no aggregate borrowings outstanding at March 31, 2019 or at December 31, 2018. Based on our financial covenants at March 31, 2019, approximately $347.0 million in additional borrowings were available to us under the credit facility. At March 31, 2019, we had $3.0 million of unused letters of credit under our credit facility, which have been included as a reduction in the available borrowings above. The letters of credit are primarily related to the requirements of certain lease agreements for office space.

At our option, borrowings under the credit facility bear interest at a variable rate equal to an applicable base rate or LIBOR, in each case plus an applicable margin. For LIBOR loans, the applicable margin varies depending upon our consolidated leverage ratio (the ratio of total funded debt to adjusted EBITDA, as defined in the credit agreement). At March 31, 2019, the applicable margins on LIBOR and base rate loans were 1.00% and 0.00%, respectively. Depending upon our performance and financial condition, our LIBOR loans will have applicable margins varying between 1.00% and 2.00%, and our base rate loans have applicable margins varying between 0.00% and 1.00%.

Our credit agreement contains certain financial covenants, including covenants that require that we maintain a consolidated leverage ratio of not greater than 3.5:1, with certain exceptions as defined in the agreement, and a consolidated interest coverage ratio (the ratio of the sum of adjusted EBIT, as defined in the credit agreement, to cash interest expense) of not less than 2.0:1. At March 31, 2019, under the definitions in the credit agreement, our consolidated leverage ratio was 0.0:1 and our consolidated interest coverage ratio was 63.5:1. In addition, the credit agreement contains customary affirmative and negative covenants (subject to exceptions), including covenants that in certain circumstances limit our ability to incur liens or other encumbrances, make investments and acquisitions, incur indebtedness, enter into mergers, consolidations and asset dispositions, pay cash dividends after the occurrence of an event of default, change the nature of our business and engage in transactions with affiliates, as well as customary provisions with respect to events of default. We were in compliance with the covenants contained in our credit agreement at March 31, 2019; however, there can be no assurances that we will remain in compliance in the future.

13.	FAIR VALUE

Fair value is defined as the price that would be received on the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price). The inputs used to measure fair value are classified into the following hierarchy:

Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities

Level 2: Unadjusted quoted prices in active markets for similar assets or liabilities, or unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or inputs other than quoted prices that are observable for the asset or liability

Level 3: Unobservable inputs for the asset or liability

We endeavor to utilize the best available information in measuring fair value. Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. As circumstances change, we will reassess the level in which the inputs are included in the fair value hierarchy.

In certain instances, our acquisitions provide for deferred contingent acquisition payments. These deferred payments are recorded at fair value at the time of acquisition and are included in other current and/or non-current liabilities on our unaudited consolidated balance sheets. We estimate the fair value of our deferred contingent acquisition liabilities using a probability-weighted

discounted cash flow model. This fair value measure is based on significant inputs not observed in the market and thus represents a Level 3 measurement. Fair value measurements characterized within Level 3 of the fair value hierarchy are measured based on unobservable inputs that are supported by little or no market activity and reflect our own assumptions in measuring fair value.

The significant unobservable inputs used in the fair value measurements of our deferred contingent acquisition liabilities are our measures of the future profitability and related cash flows and discount rates. The fair value of the deferred contingent acquisition liabilities is reassessed on a quarterly basis based on assumptions provided to us by segment and business area leaders together with our corporate development and finance departments. Any change in the fair value estimate is recorded in the earnings of that period.

The following table summarizes the changes in deferred contingent acquisition liabilities (in thousands):

	For the three months ended
	March 31,
	2019		2018
Beginning Balance	$	710	$	3,870
Accretion of acquisition-related contingent consideration		23		59
Payments

For the Three Months Ended March 31,

Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows from operating leases

NAVIGANT CONSULTING INC 10-Q