Form 10-Q -- 3rd Quarter
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended September 30, 2010

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.)

777 South Flagler Drive, Suite 1500 West Tower,

West Palm Beach, Florida

  33401
(Address of Principal Executive Offices)   (Zip Code)

(561) 515-1900

(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  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web Site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.    Yes  x    No  ¨

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

 

Large accelerated filer    x

   Accelerated filer                       ¨

Non-accelerated filer    ¨  (Do not check if  a smaller reporting company)

   Smaller reporting company      ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

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 28, 2010

Common stock, par value $0.01 per share

   46,441,755

 

 

 


Table of Contents

 

FTI CONSULTING, INC. AND SUBSIDIARIES

INDEX

 

          Page  

PART I—FINANCIAL INFORMATION

  

Item 1.

   Financial Statements   
   Condensed Consolidated Balance Sheets—September 30, 2010 and December 31, 2009      3   
   Condensed Consolidated Statements of Income—Three and Nine months ended
September 30, 2010 and 2009
     4   
   Condensed Consolidated Statement of Stockholders’ Equity and Comprehensive
Income—Nine months ended September 30, 2010
     5   
   Condensed Consolidated Statements of Cash Flows—Nine months ended September 30, 2010
and 2009
     6   
   Notes to Condensed Consolidated Financial Statements      7   

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      24   

Item 3.

   Quantitative and Qualitative Disclosures about Market Risk      48   

Item 4.

   Controls and Procedures      48   

PART II—OTHER INFORMATION

  

Item 1.

   Legal Proceedings      50   

Item 1A.

   Risk Factors      50   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      55   

Item 3.

   Defaults Upon Senior Securities      56   

Item 4.

   (Removed and Reserved)      56   

Item 5.

   Other Information      56   

Item 6.

   Exhibits      57   

SIGNATURES

     59   


Table of Contents

 

PART I—FINANCIAL INFORMATION

FTI Consulting, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except per share amounts)

 

Item 1. Financial Statements

 

     September 30,
2010
    December 31,
2009
 
     (Unaudited)        

Assets

    

Current assets

    

Cash and cash equivalents

   $ 331,182      $ 118,872   

Restricted cash

     8,632        —     

Accounts receivable:

    

Billed receivables

     263,374        241,911   

Unbilled receivables

     148,248        104,959   

Allowance for doubtful accounts and unbilled services

     (65,306     (59,328
                

Accounts receivable, net

     346,316        287,542   

Current portion of notes receivable

     27,267        20,853   

Prepaid expenses and other current assets

     27,979        45,157   

Income taxes receivable

     21,138        7,015   

Deferred income taxes

     4,657        20,476   
                

Total current assets

     767,171        499,915   

Property and equipment, net of accumulated depreciation

     74,020        80,678   

Goodwill

     1,253,798        1,195,949   

Other intangible assets, net of amortization

     164,896        175,962   

Notes receivable, net of current portion

     84,826        69,213   

Other assets

     58,832        55,621   
                

Total assets

   $ 2,403,543      $ 2,077,338   
                

Liabilities and Stockholders’ Equity

    

Current liabilities

    

Accounts payable, accrued expenses and other

   $ 69,423      $ 81,193   

Accrued compensation

     128,580        152,807   

Current portion of long-term debt and capital lease obligations

     166,309        138,101   

Billings in excess of services provided

     29,907        34,101   
                

Total current liabilities

     394,219        406,202   

Long-term debt and capital lease obligations, net of current portion

     644,376        417,397   

Deferred income taxes

     117,328        95,704   

Other liabilities

     79,331        53,821   
                

Total liabilities

     1,235,254        973,124   
                

Commitments and contingent liabilities (notes 8, 10 and 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—46,427 (2010) and 46,985 (2009)

     464        470   

Additional paid-in capital

     539,631        535,754   

Retained earnings

     676,743        615,529   

Accumulated other comprehensive loss

     (48,549     (47,539
                

Total stockholders’ equity

     1,168,289        1,104,214   
                

Total liabilities and stockholders’ equity

   $ 2,403,543      $ 2,077,338   
                

See accompanying notes to the condensed consolidated financial statements

 

3


Table of Contents

 

FTI Consulting, Inc. and Subsidiaries

Condensed Consolidated Statements of Income

(in thousands, except per share data)

Unaudited

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2010     2009     2010     2009  

Revenues

   $ 346,140      $ 348,637      $ 1,045,213      $ 1,057,008   
                                

Operating expenses

        

Direct cost of revenues

     204,095        193,204        610,586        579,797   

Selling, general and administrative expense

     85,796        84,976        252,399        262,571   

Special charges

     —          —          30,245        —     

Amortization of other intangible assets

     6,286        6,171        18,229        18,370   
                                
     296,177        284,351        911,459        860,738   
                                

Operating income

     49,963        64,286        133,754        196,270   
                                

Other income (expense)

        

Interest income and other

     2,527        3,330        4,740        6,335   

Interest expense

     (11,904     (11,434     (34,600     (33,477

Loss on early extinguishment of debt

     (5,161     —          (5,161     —     
                                
     (14,538     (8,104     (35,021     (27,142
                                

Income before income tax provision

     35,425        56,182        98,733        169,128   

Income tax provision

     13,462        18,626        37,519        62,675   
                                

Net income

   $ 21,963      $ 37,556      $ 61,214      $ 106,453   
                                

Earnings per common share—basic

   $ 0.48      $ 0.74      $ 1.34      $ 2.11   
                                

Earnings per common share—diluted

   $ 0.47      $ 0.70      $ 1.28      $ 1.99   
                                

See accompanying notes to the condensed consolidated financial statements

 

4


Table of Contents

 

FTI Consulting, Inc. and Subsidiaries

Condensed Consolidated Statement of Stockholders’ Equity and Comprehensive Income

(in thousands)

Unaudited

 

     Common Stock     Additional
Paid-in

Capital
    Retained
Earnings
     Accumulated
Other
Comprehensive

Loss
    Total  
     Shares     Amount           

Balance January 1, 2010

     46,985      $ 470      $ 535,754      $ 615,529       $ (47,539   $ 1,104,214   

Comprehensive income:

             

Cumulative translation adjustment, including income tax benefit of $717

     —          —          —          —           (1,010     (1,010

Net income

     —          —          —          61,214         —          61,214   
                   

Total comprehensive income

                60,204   

Issuance of common stock in connection with:

             

Exercise of options, including income tax benefit from share-based awards of $767

     299        3        8,289        —           —          8,292   

Restricted share grants, less net settled shares of 73

     486        5        (2,926     —           —          (2,921

Stock units issued under incentive compensation plan

     —          —          6,531        —           —          6,531   

Business combinations

     —          —          (2,931     —           —          (2,931

Purchase and retirement of common stock

     (1,343     (14     (26,124     —           —          (26,138

Share-based compensation

     —          —          21,038        —           —          21,038   
                                                 

Balance September 30, 2010

     46,427      $ 464      $ 539,631      $ 676,743       $ (48,549   $ 1,168,289   
                                                 

See accompanying notes to the condensed consolidated financial statements

 

5


Table of Contents

 

FTI Consulting, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands)

Unaudited

 

     Nine Months Ended
September 30,
 
     2010     2009  

Operating activities

    

Net income

   $ 61,214      $ 106,453   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     24,138        21,523   

Amortization of other intangible assets

     18,229        18,370   

Provision for doubtful accounts

     7,179        15,040   

Non-cash share-based compensation

     19,837        18,439   

Excess tax benefits from share-based compensation

     (761     (3,647

Non-cash interest expense

     10,132        5,449   

Other

     633        (1,801

Changes in operating assets and liabilities, net of effects from acquisitions:

    

Accounts receivable, billed and unbilled

     (34,845     (30,120

Notes receivable

     (21,685     (19,638

Prepaid expenses and other assets

     1,994        3,451   

Accounts payable, accrued expenses and other

     9,120        (16,218

Income taxes

     9,041        30,761   

Accrued compensation

     (4,188     18,017   

Billings in excess of services provided

     (4,172     (2,535
                

Net cash provided by operating activities

     95,866        163,544   
                

Investing activities

    

Payments for acquisition of businesses, including contingent payments, net of cash received

     (60,273     (38,152

Purchases of property and equipment

     (14,833     (17,975

Purchases of short-term investments

     —          (35,717

Proceeds from maturity of short-term investment

     15,000        —     

Other

     (467     303   
                

Net cash used in investing activities

     (60,573     (91,541
                

Financing activities

    

Borrowings under revolving line of credit

     20,000        —     

Payments of revolving line of credit

     (20,000     —     

Payments of long-term debt and capital lease obligations

     (190,452     (13,459

Issuance of debt securities, net

     391,647        —     

Payments of debt financing fees

     (2,843     —     

Cash received for settlement of interest rate swaps

     —          2,288   

Purchase and retirement of common stock

     (26,138     —     

Net issuance of common stock under equity compensation plans

     4,604        15,671   

Excess of tax benefits from share-based compensation

     761        3,647   

Other

     442        (4
                

Net cash provided by financing activities

     178,021        8,143   
                

Effect of exchange rate changes on cash and cash equivalents

     (1,004     5,981   
                

Net increase in cash and cash equivalents

     212,310        86,127   

Cash and cash equivalents, beginning of period

     118,872        191,842   
                

Cash and cash equivalents, end of period

   $ 331,182      $ 277,969   
                

Supplemental cash flow disclosures

    

Cash paid for interest

   $ 34,504      $ 30,692   

Cash paid for income taxes, net of refunds

     28,124        31,913   

Non-cash investing and financing activities:

    

Issuance of common stock to acquire businesses

     —          707   

Issuance of notes payable to acquire businesses

     39,772        12,789   

Issuance of stock units under incentive compensation plans

     6,531        5,308   

See accompanying notes to the condensed consolidated financial statements

 

6


Table of Contents

 

FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

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

Unaudited

1. Basis of Presentation and Significant Accounting Policies

Our unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted 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. 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 contained in our Annual Report on Form 10-K for the year ended December 31, 2009.

Certain prior year amounts have been reclassified to conform to the current year presentation.

2. Earnings Per Common Share

Basic earnings per common share are calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per common share adjust basic earnings per 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 stock, and shares issuable upon conversion of our 3 3/4% senior subordinated convertible notes (“Convertible Notes”) assuming the conversion premium was converted into common stock based on the average closing price per share of our stock during the period, each using the treasury stock method. The conversion feature of our Convertible Notes had a dilutive effect on our earnings per share for the periods presented below because the average closing price per share of our common stock for such periods was above the conversion price of the Convertible Notes of $31.25 per share.

 

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
        2010             2009             2010             2009      

Numerator—basic and diluted

       

Net income

  $ 21,963      $ 37,556      $ 61,214      $ 106,453   
                               

Denominator

       

Weighted average number of common shares outstanding—basic

    45,471        50,696        45,708        50,419   

Effect of dilutive stock options

    737        1,196        882        1,202   

Effect of dilutive convertible notes

    449        1,689        950        1,665   

Effect of dilutive restricted shares

    151        315        186        298   
                               

Weighted average number of common shares outstanding—diluted

    46,808        53,896        47,726        53,584   
                               

Earnings per common share—basic

  $ 0.48      $ 0.74      $ 1.34      $ 2.11   
                               

Earnings per common share—diluted

  $ 0.47      $ 0.70      $ 1.28      $ 1.99   
                               

Antidilutive stock options and restricted shares

    2,059        1,221        1,671        1,081   
                               

 

7


Table of Contents

FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

 

3. Special Charges

During the quarter ended March 31, 2010, we recorded special charges totaling $30.2 million, primarily related to a realignment of our workforce and a consolidation of four office locations, of which $8.9 million was non-cash. The charges reflect actions we took to better align capacity with expected demand, to eliminate certain redundancies resulting from acquisitions and to provide for appropriate levels of administrative support. The special charges consist of:

 

   

$19.3 million of salary continuance and other contractual employee related costs associated with the reduction in workforce of 144 employees, including reserves against employee advances, costs related to loan forgiveness and accelerated vesting of share-based awards;

 

   

$7.8 million of expense associated with lease terminations related to the consolidation of four office locations; and

 

   

$3.1 million of accelerated amortization related to a software solution which will no longer be utilized by the Company.

The following table details the special charges by segment:

 

Corporate Finance/Restructuring

   $ 6,589   

Forensic and Litigation Consulting

     5,560   

Economic Consulting

     6,814   

Technology

     4,927   

Strategic Communications

     1,260   
        
     25,150   

Unallocated Corporate

     5,095   
        

Total

   $ 30,245   
        

The total cash outflow associated with the special charges is expected to be $21.3 million, of which $13.5 million has been paid as of September 30, 2010, $2.7 million is expected to be paid during the remainder of 2010, $4.7 million is expected to be paid in 2011, and the balance of approximately $0.4 million is expected to be paid in 2012 and 2013. A liability for the current and noncurrent portions of the amounts to be paid is included in “Accounts payable, accrued expenses and other” and “Other liabilities,” respectively, on the Condensed Consolidated Balance Sheets. Activity related to the liability for these costs for the nine months ended September 30, 2010 is as follows:

 

     Employee
Termination
Costs
    Lease
Termination
Costs
    Total  

Balance at January 1, 2010

   $ —        $ —        $ —     

Additions

     13,135        8,617        21,752   

Payments

     (9,078     (4,407     (13,485

Adjustments

     (225     (189     (414
                        

Balance at September 30, 2010

   $ 3,832      $ 4,021      $ 7,853   
                        

 

8


Table of Contents

FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

 

4. Comprehensive Income

The following table sets forth the components of comprehensive income:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2010      2009     2010     2009  

Net income

   $ 21,963       $ 37,556      $ 61,214      $ 106,453   

Other comprehensive income (loss), net of tax:

         

Cumulative translation adjustment

     18,028         (7,186     (1,010     33,980   

Unrealized loss on marketable securities

     —           (10     —          (10
                                 

Comprehensive income

   $ 39,991       $ 30,360      $ 60,204      $ 140,423   
                                 

5. Provision for Doubtful Accounts

The provision for doubtful accounts is recorded after the related work has been billed to the client and we determine that full collectability is not reasonably assured. It is classified in “Selling, general and administrative expense” on the Condensed Consolidated Statements of Income. The provision for doubtful accounts totaled $2.6 million and $7.2 million for the three and nine months ended September 30, 2010, respectively, and $2.8 million and $15.0 million for the three and nine months ended September 30, 2009, respectively.

6. Research and Development Costs

Research and development costs related to software development totaled $8.1 million and $18.8 million for the three and nine months ended September 30, 2010, respectively, and $5.3 million and $16.0 million for the three and nine months ended September 30, 2009, respectively. Research and development expense includes a charge of $2.8 million in the third quarter of 2010 related to the company’s decision to expense certain previously capitalized development efforts and prepaid software licensing costs for an offering that will be replaced with alternative technologies. Excluding this charge, research and development expense of $5.3 million and $16.0 million for the three and nine months ended September 30, 2010 remained flat compared to the prior year. Research and development costs are included in “Selling, general and administrative expense” on the Condensed Consolidated Statements of Income.

7. Financial Instruments

Fair value of financial instruments

We consider the recorded value of certain of our financial assets and liabilities, which consist primarily of cash equivalents, accounts receivable and accounts payable, to approximate the fair value of the respective assets and liabilities at September 30, 2010, based on the short-term nature of the assets and liabilities. The fair value of our long-term debt at September 30, 2010 was $869.8 million compared to a carrying value of $828.3 million. At December 31, 2009, the fair value of our long-term debt was $664.0 million compared to a carrying value of $572.7 million. We determined the fair value of our long-term debt primarily based on quoted market prices for our 7 5/8% senior notes due 2013, 7 3/4% senior notes due 2016, 6 3/4% senior notes due 2020 and Convertible Notes. The carrying value of long-term debt includes the $18.0 million equity component of our Convertible Notes which is recorded in “Additional paid-in capital” on the Condensed Consolidated Balance Sheets.

 

9


Table of Contents

FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

 

8. Acquisitions

During the third quarter of 2010, we completed an acquisition with operations in Hong Kong and other non-U.S. jurisdictions for our Corporate Finance/Restructuring segment. The initial acquisition price of $82.0 million consisted of approximately $20.2 million in cash paid at closing, $8.6 million in cash held in escrow, $35.0 million in loan notes to selling shareholders and contingent consideration with an estimated fair value of $18.2 million. The cash held in escrow is recorded as “Restricted cash” and the contingent consideration is recorded as “Accounts payable, accrued expenses and other” or “Other liabilities” on the Condensed Consolidated Balance Sheets based on the expected timing of the payments. The cash held in escrow is expected to become payable in the fourth quarter of 2010 upon final determination of the acquired working capital balance and the contingent consideration will become payable annually at December 31 of 2010 through 2015 if the acquired business achieves certain annual and cumulative financial performance measures based on EBITDA, and is subject to a $37.1 million cap. The accretion of the estimated $18.2 million fair value of the contingent consideration to the expected cash payments of $29.5 million is included within “Operating expenses” in the Condensed Consolidated Statements of Income.

As part of the purchase price allocation, we recorded $6.9 million in identifiable intangible assets and $42.5 million in goodwill. Pro forma results of operations have not been presented because the acquisition was not material in relation to our consolidated financial position or results of operations for the periods presented.

During the second quarter of 2010, we completed an acquisition with operations in Hong Kong for our Forensic and Litigation Consulting segment. The acquisition price of $2.8 million consisted of $2.3 million in cash paid at closing and contingent consideration with an estimated fair value of $0.5 million, which is recorded in “Other liabilities” on the Condensed Consolidated Balance Sheets. As part of the purchase price allocation, we recorded $0.2 million in identifiable intangible assets and $2.6 million in goodwill. Pro forma results of operations have not been presented because the acquisition was not material in relation to our consolidated financial position or results of operations for the periods presented.

Certain acquisition related restricted stock agreements entered into prior to January 1, 2009 contained stock price guarantees that may result in cash payments in the future if our share price falls below a specified per share market value on the date that the applicable stock restrictions lapse (the “determination date”). For those acquisitions, the future settlement of any contingency related to our common stock price will be recorded as a reduction to additional paid-in capital. During the nine months ended September 30, 2010, we paid $3.4 million in cash to the individuals or entities who received common stock consideration relating to three acquisitions in relation to price protection provision guarantees. Our remaining common stock price guarantee provisions have stock floor prices that range from $24.50 to $69.62 per share and have determination dates that range from 2011 to 2013.

 

10


Table of Contents

FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

 

9. Goodwill and Other Intangible Assets

The changes in the carrying amounts of goodwill by business segment for the nine months ended September 30, 2010, are as follows:

 

    Corporate
Finance/
Restructuring
    Forensic and
Litigation
Consulting
    Economic
Consulting
    Technology     Strategic
Communications
    Total  

Balance at January 1, 2010

  $ 387,276      $ 194,229      $ 196,731      $ 118,011      $ 299,702      $ 1,195,949   

Goodwill acquired during the year

    42,461        2,598        —          —          —          45,059   

Contingent consideration(a)

    —          18        17        —          11,324        11,359   

Foreign currency translation adjustment

    324        (132     —          (14     1,253        1,431   
                                               

Balance at September 30, 2010

  $ 430,061      $ 196,713      $ 196,748      $ 117,997      $ 312,279      $ 1,253,798   
                                               

 

(a)

Contingent consideration related to business combinations consummated prior to January 1, 2009.

Other intangible assets with finite lives are amortized over their estimated useful lives. For intangible assets with finite lives, we recorded amortization expense of $6.3 million and $18.2 million for the three and nine months ended September 30, 2010, respectively, and $6.2 million and $18.4 million for the three and nine months ended September 30, 2009, respectively. Based solely on the amortizable intangible assets recorded as of September 30, 2010, we estimate amortization expense to be $5.9 million during the remainder of 2010, $22.8 million in 2011, $22.2 million in 2012, $19.2 million in 2013, $11.5 million in 2014, $10.5 million in 2015, and $47.1 million in years after 2015. Actual amortization expense to be reported in future periods could differ from these estimates as a result of new intangible asset acquisitions, finalization of asset valuations for newly acquired assets, changes in useful lives, changes in value due to foreign currency translation, or other factors.

 

            September 30, 2010      December 31, 2009  
      Useful
Life
in Years
     Gross
Carrying
Amount
     Accumulated
Amortization
     Gross
Carrying
Amount
     Accumulated
Amortization
 

Amortized intangible assets

              

Customer relationships

     1 to 15       $ 149,996       $ 43,254       $ 144,048       $ 33,016   

Non-competition agreements

     1 to 10         19,713         11,024         18,268         8,788   

Software

     5 to 6         37,700         18,023         37,700         13,335   

Tradenames

     1 to 5         9,626         5,516         9,591         4,184   

Contract Backlog

     1         323         323         317         317   
                                      
        217,358         78,140         209,924         59,640   

Unamortized intangible assets

              

Tradenames

     Indefinite         25,678         —           25,678         —     
                                      
      $ 243,036       $ 78,140       $ 235,602       $ 59,640   
                                      

 

11


Table of Contents

FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

 

10. Long-term Debt and Capital Lease Obligations

The components of long-term debt and capital lease obligations are presented in the table below:

 

    September 30,
2010
    December 31,
2009
 

7 5/8% senior notes due 2013(a)

  $ 14,173      $ 202,012   

7 3/4% senior notes due 2016

    215,000        215,000   

6 3/4% senior notes due 2020

    400,000        —     

3 3/4% senior subordinated convertible notes due 2012(b)

    140,239        136,540   

Notes payable to former shareholders of acquired businesses

    40,886        1,132   
               

Total debt

    810,298        554,684   

Less current portion

    166,298        137,672   
               

Long-term debt, net of current portion

    644,000        417,012   
               

Total capital lease obligations

    387        814   

Less current portion

    11        429   
               

Capital lease obligations, net of current portion

    376        385   
               

Long-term debt and capital lease obligations, net of current portion

  $ 644,376      $ 417,397   
               

 

(a)

Balance at December 31, 2009 includes $200.0 million principal amounts of notes plus unamortized proceeds from interest rate swap terminations of $2.0 million.

 

(b)

Balance includes $149.9 million principal amount of notes net of discount of $9.7 million at September 30, 2010 and $13.4 million at December 31, 2009.

Issuance of 6 3/4% Senior Notes Due 2020

On September 27, 2010, we issued $400.0 million in aggregate principal amount of 6 3/4% senior notes due 2020 (“6 3/4% senior notes”) in a private offering (the “Offering”) that was exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”). The 6 3/4% senior notes may not be offered or sold in the United States or foreign jurisdictions without registration or an applicable exemption from registration requirements. The 6 3/4% senior notes were sold to “qualified institutional buyers” as defined in Rule 144A under the Securities Act and non-U.S. persons outside the United States under Regulation S under the Securities Act.

The net proceeds from the issuance of the 6 3/4% senior notes were $391.6 million after deducting debt issuance costs. A portion of the proceeds were used to fund the purchase of our 7 5/8% senior notes due 2013 (“7 5/8% senior notes”) in a concurrent tender offer as described below, and the balance may be used for general corporate purposes, which could include working capital, share repurchases, capital expenditures, acquisitions, refinancing of other debt or other capital transactions. The 6 3/4% senior notes are guaranteed, with certain exceptions, by our existing and future domestic subsidiaries. The 6 3/4% senior notes and the guarantees will be our and the guarantors’ general unsecured senior obligations and will be subordinated to all of our and the guarantors’ existing and future secured debt to the extent of the assets securing that secured debt. In addition, the 6 3/4% senior notes will be effectively subordinated to all of the liabilities of our subsidiaries that are not guaranteeing the notes, to the extent of the assets of those subsidiaries. Interest on the 6 3/4% senior notes accrues

 

12


Table of Contents

FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

at the rate of 6 3/4% per year, payable semi-annually in cash in arrears on April 1 and October 1 of each year, commencing on April 1, 2011. The 6 3/4% senior notes will mature on October 1, 2020.

The 6 3/4% senior notes are subject to redemption at our option, in whole or in part, at any time after October 1, 2015, upon not less than 30 nor more than 60 days’ prior notice at the following redemption prices (expressed as percentages of the principal amount to be redeemed) set forth below, plus accrued and unpaid interest, if any, to the redemption date, if redeemed during the twelve month period beginning on October 1 of the years indicated below, subject to the rights of holders of notes on the relevant record date to receive interest on the relevant interest payment date:

 

Year

   Redemption Price  

2015

     103.375

2016

     102.250

2017

     101.125

2018 and thereafter

     100.000

Debt issue costs of approximately $8.4 million were capitalized and are being amortized over the term of the 6 3/4% senior notes.

In connection with the Offering, FTI Consulting, Inc. and our guarantors entered into a Registration Rights Agreement, dated as of September 27, 2010 (the “Registration Rights Agreement”). Pursuant to the Registration Rights Agreement, we have agreed to (a) file an exchange offer registration statement within 180 days of the issue date of the 6 3/4% senior notes, (b) use our best efforts to have the exchange offer registration statement declared effective within 240 days of the issue date, and (c) complete the exchange offer within 30 business days of effectiveness. We have also agreed to file a shelf registration statement to cover resales of the 6 3/4% senior notes under certain circumstances. If we fail to satisfy our obligations under the Registration Rights Agreement, we will be required to pay additional interest to holders of the 6 3/4% senior notes under certain circumstances.

Tender Offer

On September 14, 2010, we commenced a cash tender offer for any and all of our outstanding 7 5/8% senior notes for a price equal to $1,021.56 per $1,000 principal amount of the notes, which included $1,001.56 as the tender offer consideration and $20.00 as a consent payment (the “Tender Offer”). In connection with the Tender Offer, we solicited consents to certain proposed amendments to the indenture dated as of August 2, 2005, under which the 7 5/8% senior notes were issued, that would, among other modifications, eliminate substantially all of the restrictive covenants and certain events of default in the indenture.

At the expiration of the consent payment deadline on September 27, 2010, an aggregate principal amount of $185.8 million 7 5/8% senior notes had been tendered. We used approximately $189.8 million of the net proceeds from the Offering to fund the purchase of the 7 5/8% senior notes and the related consent payments. We also received consents from holders of the required majority of the principal amount of the 7 5/8% senior notes to, among other modifications, eliminate substantially all of the restrictive covenants and certain events of default in the indenture governing the 7 5/8% senior notes.

On November 1, 2010, FTI redeemed all of the 2013 Notes that remained outstanding as of the tender offer expiration date of October 12, 2010 in the aggregate principal amount of approximately $14.2 million. The redemption price for such 7 5/8% senior notes was 101.906% of the principal amount plus accrued and unpaid

 

13


Table of Contents

FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

interest. Interest on the redeemed 7 5/8% senior notes ceased to accrue on and after November 1, 2010, and the only remaining right of the holders is to receive payment of the redemption price and interest accrued until, but not including, November 1, 2010 upon surrender to the paying agent of such 7 5/8% senior notes.

We recognized a loss on our early extinguishment of debt of approximately $5.2 million, consisting primarily of the consent payment and premium and write-off of unamortized deferred costs.

Credit Agreement Refinancing

On September 27, 2010, we refinanced our existing revolving senior bank credit facility, which was pursuant to the Amended and Restated Credit Agreement dated as of September 29, 2006 and maturing on September 30, 2011. Our new revolving senior bank credit facility consists of a $250.0 million senior secured revolving line of credit maturing on September 25, 2015. The former credit facility provided for a five-year $175.0 million senior secured revolving line of credit. We did not incur any early termination or prepayment penalties in connection with the replacement of the former credit facility. Debt under the bank credit facility bears interest at an annual rate equal to the Eurodollar rate plus an applicable margin or an alternative base rate plus the sum of 50 basis points and an applicable margin. Under the new senior bank revolving credit facility, the lenders have a security interest in substantially all of the assets of FTI Consulting, Inc. and substantially all of our 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 $325.0 million.

Convertible Notes

During the period beginning July 16, 2010 through October 14, 2010, the Convertible Notes were convertible at the option of the holders as provided in the indenture covering the notes. The Convertible Notes became convertible as a result of the closing price per share of our common stock exceeding the conversion threshold price of $37.50 per share (120% of the applicable conversion price of $31.25 per share) for at least 20 trading days in the 30 consecutive trading day period ended July 15, 2010. There were no Convertible Note conversions during the quarter ended September 30, 2010. As of October 15, 2010, the Convertible Notes became non-convertible as a result of the closing price per share of our common stock not exceeding the conversion threshold price of $37.50 per share (120% of the applicable conversion price of $31.25 per share) for at least 20 trading days in the 30 consecutive trading day period ended October 14, 2010. The Convertible Notes will be non-convertible through January 14, 2011 as provided in the indenture covering the notes. As a result, the Convertible Notes, due 2012, will be classified as a long-term liability in the fourth quarter of 2010.

Notes payable to shareholders of acquired business

In connection with the acquisition of FD International (Holdings) Limited in October 2006 (“FD”), we issued notes to former holders of FD capital shares who elected to receive notes in lieu of cash for acquisition and earn-out consideration. These notes are unsecured and bear interest based on the London Interbank Offered Rate, or LIBOR, that compounds quarterly. These notes are redeemable at any time prior to their maturity and accordingly they have been classified as a current obligation. The outstanding balance of these notes was $5.9 million at September 30, 2010 and $1.1 million at December 31, 2009.

In connection with our third quarter 2010 acquisition, we issued $35.0 million of notes to selling shareholders as part of the total consideration paid. These notes are unsecured and bear interest at 8% per annum.

 

14


Table of Contents

FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

Payments of unpaid principal and interest are to be made annually on August 19, 2011 through August 19, 2015. The principal payments have been classified as either current or non-current based on the timing of the payments. No amounts have been repaid as of September 30, 2010.

Future Maturities of Long-term Debt

Long-term debt that is puttable by the holder has been classified as maturing in 2010 on the following table and includes the $149.9 million principal amount of Convertible Notes and $5.9 million of notes payable to former owners of an acquired business. In addition, $14.2 million principal amount of 7 5/8% senior notes that were redeemed on November 1, 2010 has been classified as maturing in 2010.

 

     Long-term
Debt(a)
     Capital
Lease
Obligations
     Total  

2010

   $ 169,999       $ 11       $ 170,010   

2011

     6,000         326         6,326   

2012

     6,000         50         6,050   

2013

     6,000         —           6,000   

2014

     6,000         —           6,000   

Thereafter

     626,000         —           626,000   
                          
     819,999         387         820,386   
                          

Less imputed interest

     —           25         25   
                          
   $ 819,999       $ 362       $ 820,361   
                          

 

(a)

Principal balance on Convertible Notes does not include the discount or conversion premium.

11. Commitments and Contingencies

Contingencies

We are subject to legal actions arising in the ordinary course of business. In management’s opinion, we believe we have adequate legal defenses and/or insurance coverage with respect to the eventuality of such actions. We do not believe any settlement or judgment would materially affect our financial position or results of operations.

12. Share-Based Compensation

Amendment of equity-based compensation plan

On March 31, 2010, the Board of Directors of FTI Consulting, Inc. (“FTI”) adopted an amendment to the FTI Consulting, Inc. 2009 Omnibus Incentive Compensation Plan (the “2009 Plan”), subject to stockholder approval, to increase the number of authorized shares of FTI’s common stock available for equity awards under the 2009 Plan by an additional 4,500,000 shares (the “Amendment”). The Amendment was approved by the stockholders of FTI at the 2010 Annual Meeting of Stockholders held on June 2, 2010.

Share-based awards and share-based compensation expense

Our officers, employees, non-employee directors and certain individual service providers are eligible to participate in FTI’s equity compensation plans, subject to the discretion of the administrator of the plans. During

 

15


Table of Contents

FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

the nine months ended September 30, 2010, aggregate share-based awards included stock option grants exercisable for 599,863 shares of common stock upon vesting, restricted stock awards of 550,885 shares of common stock and restricted stock units equivalent to 193,900 shares of common stock.

Total share-based compensation expense for the three and nine months ended September 30, 2010 and 2009 is detailed in the following table:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 

Income Statement Classification

       2010              2009              2010              2009      

Direct cost of revenues

   $ 3,219       $ 2,242       $ 10,544       $ 8,239   

Selling, general and administrative expense

     2,380         2,848         7,232         10,200   

Special charges(a)

     —           —           2,474         —     
                                   

Total share-based compensation expense

   $ 5,599       $ 5,090       $ 20,250       $ 18,439   
                                   

 

(a)

Expense relates to accelerated vesting of share-based awards.

13. Segment Reporting

We manage our business in five reportable operating segments: Corporate Finance/Restructuring, Forensic and Litigation Consulting, Economic Consulting, Technology and Strategic Communications.

Our Corporate Finance/Restructuring segment focuses on strategic, operational, financial and capital needs of businesses around the world and provides consulting and advisory services on a wide range of areas, such as restructuring (including bankruptcy), financings, claims management, mergers and acquisitions, post-acquisition integration, valuations, tax issues and performance improvement.

Our Forensic and Litigation Consulting segment provides law firms, companies, government clients and other interested parties with dispute advisory, investigations, forensic accounting, data analytics, business intelligence assessments and risk mitigation 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 and regulatory proceedings, strategic decision making and public policy debates in the U.S. and around the world.

Our Technology segment provides electronic discovery (“e-discovery”) and information management software and service to its clients. It provides products, services and consulting to companies, law firms, courts and government agencies worldwide. Its comprehensive suite of software and services help clients locate, review and produce electronically stored information, including e-mail, computer files, voicemail, instant messaging, and financial and transactional data.

Our Strategic Communications segment provides advice and consulting services relating to financial communications, brand communications, public affairs and reputation management and business consulting.

Effective January 1, 2010, we implemented a change in our organizational structure that resulted in the movement of our Financial and Enterprise Data Analytics (“FEDA”) subpractice from our Technology segment to our Forensic and Litigation Consulting segment. This change has been reflected in our segment reporting for all periods presented.

 

16


Table of Contents

FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

 

We evaluate the performance of our operating segments based on adjusted segment EBITDA. We define adjusted segment EBITDA as a segment’s share of consolidated operating income before depreciation, amortization of intangible assets and special charges plus non-operating litigation settlements. Although adjusted segment EBITDA is not a measure of financial condition or performance determined in accordance with GAAP, we use adjusted segment EBITDA to evaluate and compare the operating performance of our segments.

The table below presents revenues and adjusted segment EBITDA for our reportable segments for the three and nine months ended September 30, 2010 and 2009:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2010     2009     2010     2009  

Revenues

        

Corporate Finance/Restructuring

   $ 109,736      $ 127,808      $ 338,298      $ 389,320   

Forensic and Litigation Consulting

     84,023        75,055        243,455        229,775   

Economic Consulting

     59,417        59,588        191,276        171,547   

Technology

     42,721        38,693        128,885        131,552   

Strategic Communications

     50,243        47,493        143,299        134,814   
                                

Total revenues

   $ 346,140      $ 348,637      $ 1,045,213      $ 1,057,008   
                                

Adjusted segment EBITDA

        

Corporate Finance/Restructuring

   $ 26,708      $ 43,584      $ 87,404      $ 131,750   

Forensic and Litigation Consulting

     20,189        18,550        59,319        61,347   

Economic Consulting

     11,932        13,957        36,905        34,621   

Technology

     13,908        11,547        47,026        43,831   

Strategic Communications

     7,223        6,557        21,600        18,232   
                                

Total adjusted segment EBITDA

   $ 79,960      $ 94,195      $ 252,254      $ 289,781   
                                

The table below reconciles adjusted segment EBITDA to income before income tax provision:

  

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2010     2009     2010     2009  

Adjusted segment EBITDA

   $ 79,960      $ 94,195      $ 252,254      $ 289,781   

Segment depreciation expense

     (7,476     (5,939     (20,114     (16,932

Amortization of intangible assets

     (6,286     (6,171     (18,229     (18,370

Special charges

     —          —          (30,245     —     

Unallocated corporate expenses, excluding special charges

     (16,235     (17,799     (49,912     (58,209

Interest income and other

     2,527        3,330        4,740        6,335   

Interest expense

     (11,904     (11,434     (34,600     (33,477

Loss on early extinguishment of debt

     (5,161     —          (5,161     —     
                                

Income before income tax provision

   $ 35,425      $ 56,182      $ 98,733      $ 169,128   
                                

 

17


Table of Contents

FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

 

14. Supplemental Condensed Consolidating Guarantor and Non-Guarantor Financial Information

Substantially all of our domestic subsidiaries are guarantors of borrowings under our senior bank credit facility, senior notes and our Convertible Notes. The guarantees are full and unconditional and joint and several. All of our guarantors are wholly-owned, direct or indirect, subsidiaries.

The following financial information presents condensed consolidating balance sheets, statements of income and statements of cash flows for FTI, all the guarantor subsidiaries, all the non-guarantor subsidiaries and the eliminations necessary to arrive at the consolidated information for FTI and its subsidiaries. For purposes of this presentation, we have accounted for our investments in our subsidiaries using the equity method of accounting. The principal eliminating entries eliminate investment in subsidiary and intercompany balances and transactions.

Condensed Consolidating Balance Sheet Information as of September 30, 2010

 

     FTI
Consulting, Inc.
     Guarantor
Subsidiaries
     Non-Guarantor
Subsidiaries
     Eliminations     Consolidated  

Assets

             

Cash and cash equivalents

   $ 258,042       $ 1,783       $ 71,357       $ —        $ 331,182   

Restricted cash

     8,632         —           —           —          8,632   

Accounts receivable, net

     113,274         156,664         76,378         —          346,316   

Intercompany receivables

     44,602         465,624         73,456         (583,682     —     

Other current assets

     44,425         24,294         21,310         (8,988     81,041   
                                           

Total current assets

     468,975         648,365         242,501         (592,670     767,171   

Property and equipment, net

     47,837         14,932         11,251         —          74,020   

Goodwill

     426,332         530,719         296,747         —          1,253,798   

Other intangible assets, net

     6,347         106,823         51,726         —          164,896   

Investments in subsidiaries

     1,562,989         944,238         814,540         (3,321,767     —     

Other assets

     66,942         165,158         22,191         (110,633     143,658   
                                           

Total assets

   $ 2,579,422       $ 2,410,235       $ 1,438,956       $ (4,025,070   $ 2,403,543   
                                           

Liabilities

             

Intercompany payables

   $ 406,424       $ 90,183       $ 87,075       $ (583,682   $ —     

Other current liabilities

     257,383         90,943         54,881         (8,988     394,219   
                                           

Total current liabilities

     663,807         181,126         141,956         (592,670     394,219   

Long-term debt, net

     615,000         29,376         —           —          644,376   

Other liabilities

     132,326         40,635         134,331         (110,633     196,659   
                                           

Total liabilities

     1,411,133         251,137         276,287         (703,303     1,235,254   

Stockholders’ equity

     1,168,289         2,159,098         1,162,669         (3,321,767     1,168,289   
                                           

Total liabilities and stockholders’ equity

   $ 2,579,422       $ 2,410,235       $ 1,438,956       $ (4,025,070   $ 2,403,543   
                                           

 

18


Table of Contents

FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

 

Condensed Consolidating Balance Sheet Information as of December 31, 2009

 

     FTI
Consulting, Inc.
     Guarantor
Subsidiaries
     Non-Guarantor
Subsidiaries
     Eliminations     Consolidated  

Assets

             

Cash and cash equivalents

   $ 60,720       $ 665       $ 57,487       $ —        $ 118,872   

Accounts receivable, net

     102,768         143,146         41,628         —          287,542   

Intercompany receivables

     58,969         335,933         120,210         (515,112     —     

Other current assets

     69,871         17,972         8,007         (2,349     93,501   
                                           

Total current assets

     292,328         497,716         227,332         (517,461     499,915   

Property and equipment, net

     46,298         22,728         11,652         —          80,678   

Goodwill

     426,314         530,809         238,826         —          1,195,949   

Other intangible assets, net

     8,465         118,756         48,741         —          175,962   

Investments in subsidiaries

     1,382,550         882,833         778,478         (3,043,861     —     

Other assets

     60,396         161,813         14,104         (111,479     124,834   
                                           

Total assets

   $ 2,216,351       $ 2,214,655       $ 1,319,133       $ (3,672,801   $ 2,077,338   
                                           

Liabilities

             

Intercompany payables

   $ 319,905       $ 99,833       $ 95,374       $ (515,112   $ —     

Other current liabilities

     265,053         92,350         51,148         (2,349     406,202   
                                           

Total current liabilities

     584,958         192,183         146,522         (517,461     406,202   

Long-term debt, net

     417,012         385         —           —          417,397   

Other liabilities

     110,167         37,671         113,166         (111,479     149,525   
                                           

Total liabilities

     1,112,137         230,239         259,688         (628,940     973,124   

Stockholders’ equity

     1,104,214         1,984,416         1,059,445         (3,043,861     1,104,214   
                                           

Total liabilities and stockholders’ equity

   $ 2,216,351       $ 2,214,655       $ 1,319,133       $ (3,672,801   $ 2,077,338   
                                           

 

19


Table of Contents

FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

 

Condensed Consolidating Statement of Income for the Three Months Ended September 30, 2010

 

    FTI
Consulting, Inc.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Revenues

  $ 126,096      $ 284,454      $ 78,860      $ (143,270   $ 346,140   

Operating expenses

         

Direct cost of revenues

    72,184        221,497        51,209        (140,795     204,095   

Selling, general and administrative expense

    36,240        34,211        17,820        (2,475     85,796   

Amortization of other intangible assets

    698        3,912        1,676        —          6,286   
                                       

Operating income

    16,974        24,834        8,155        —          49,963   

Other (expense) income

    (15,134     3,627        (3,031     —          (14,538
                                       

Income before income tax provision

    1,840        28,461        5,124        —          35,425   

Income tax (benefit) provision

    (2,891     13,020        3,333        —          13,462   

Equity in net earnings of subsidiaries

    17,232        1,513        2,168        (20,913     —     
                                       

Net income

  $ 21,963      $ 16,954      $ 3,959      $ (20,913   $ 21,963   
                                       

Condensed Consolidating Statement of Income for the Three Months Ended September 30, 2009

 

    FTI
Consulting, Inc.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Revenues

  $ 145,869      $ 289,064      $ 69,095      $ (155,391   $ 348,637   

Operating expenses

         

Direct cost of revenues

    79,095        226,552        40,359        (152,802     193,204   

Selling, general and administrative expense

    38,042        35,226        14,297        (2,589     84,976   

Amortization of other intangible assets

    259        4,530        1,382        —          6,171   
                                       

Operating income

    28,473        22,756        13,057        —          64,286   

Other (expense) income

    (9,976     2,729        (857     —          (8,104
                                       

Income before income tax provision

    18,497        25,485        12,200        —          56,182   

Income tax provision

    7,046        9,339        2,241        —          18,626   

Equity in net earnings of subsidiaries

    26,105        8,999        2,321        (37,425     —     
                                       

Net income

  $ 37,556      $ 25,145      $ 12,280      $ (37,425   $ 37,556   
                                       

 

20


Table of Contents

FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

 

Condensed Consolidating Statement of Income for the Nine Months Ended September 30, 2010

 

    FTI
Consulting, Inc.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Revenues

  $ 388,355      $ 887,300      $ 225,294      $ (455,736   $ 1,045,213   

Operating expenses

         

Direct cost of revenues

    226,678        688,727        144,085        (448,904     610,586   

Selling, general and administrative expense

    110,050        99,784        49,397        (6,832     252,399   

Special charges

    18,558        10,842        845        —          30,245   

Amortization of other intangible assets

    2,118        11,933        4,178        —          18,229   
                                       

Operating income

    30,951        76,014        26,789        —          133,754   

Other (expense) income

    (35,584     8,369        (7,806     —          (35,021
                                       

(Loss) income before income tax provision

    (4,633     84,383        18,983        —          98,733   

Income tax (benefit) provision

    (1,986     36,172        3,333        —          37,519   

Equity in net earnings of subsidiaries

    63,861        14,499        6,441        (84,801     —     
                                       

Net income

  $ 61,214      $ 62,710      $ 22,091      $ (84,801   $ 61,214   
                                       

Condensed Consolidating Statement of Income for the Nine Months Ended September 30, 2009

 

    FTI
Consulting, Inc.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Revenues

  $ 447,507      $ 889,179      $ 185,947      $ (465,625   $ 1,057,008   

Operating expenses

         

Direct cost of revenues

    242,378        684,621        112,849        (460,051     579,797   

Selling, general and administrative expense

    123,601        106,024        38,520        (5,574     262,571   

Amortization of other intangible assets

    778        13,749        3,843        —          18,370   
                                       

Operating income

    80,750        84,785        30,735        —          196,270   

Other (expense) income

    (30,311     10,692        (7,523     —          (27,142
                                       

Income before income tax provision

    50,439        95,477        23,212        —          169,128   

Income tax provision

    20,261        38,689        3,725        —          62,675   

Equity in net earnings of subsidiaries

    76,275        16,782        6,552        (99,609     —     
                                       

Net income

  $ 106,453      $ 73,570      $ 26,039      $ (99,609   $ 106,453   
                                       

 

21


Table of Contents

FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

 

Condensed Consolidating Statement of Cash Flows for the Nine Months Ended September 30, 2010

 

     FTI
Consulting, Inc.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Consolidated  

Operating activities

        

Net cash provided by (used in) operating activities

   $ 21,428      $ 80,032      $ (5,594   $ 95,866   

Investing activities

        

Payments for acquisition of businesses, including contingent payments, net of cash received

     (60,273     —          —          (60,273

Purchases of property and equipment and other

     (5,907     (6,338     (3,055     (15,300

Proceeds from maturity of short-term investment

     15,000        —          —          15,000   
                                

Net cash used in investing activities

     (51,180     (6,338     (3,055     (60,573
                                

Financing activities

        

Borrowings under revolving line of credit

     20,000        —          —          20,000   

Payments of revolving line of credit

     (20,000     —          —          (20,000

Payments of long-term debt and capital lease obligations

     (190,024     (428     —          (190,452

Issuance of debt securities, net

     391,647        —          —          391,647   

Payments of debt financing fees

     (2,843     —          —          (2,843

Purchase and retirement of common stock

     (26,138     —          —          (26,138

Net issuance of common stock and other

     5,046        —          —          5,046   

Excess tax benefits from share based compensation

     761        —          —          761   

Intercompany transfers

     48,625        (72,148     23,523        —     
                                

Net cash provided by (used in) financing activities

     227,074        (72,576     23,523        178,021   
                                

Effect of exchange rate changes on cash

     —          —          (1,004     (1,004
                                

Net increase in cash and cash equivalents

     197,322        1,118        13,870        212,310   

Cash and cash equivalents, beginning of period

     60,720        665        57,487        118,872   
                                

Cash and cash equivalents, end of period

   $ 258,042      $ 1,783      $ 71,357      $ 331,182   
                                

 

22


Table of Contents

FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

 

Condensed Consolidating Statement of Cash Flows for the Nine Months Ended September 30, 2009

 

     FTI
Consulting, Inc.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Consolidated  

Operating activities

        

Net cash provided by (used in) operating activities

   $ 245,024      $ (102,956   $ 21,476      $ 163,544   

Investing activities

        

Payments for acquisition of businesses, including contingent payments, net of cash received

     (37,822     952        (1,282     (38,152

Purchases of short-term investments

     (35,717     —          —          (35,717

Purchases of property and equipment and other

     (4,799     (9,265     (3,608     (17,672
                                

Net cash used in investing activities

     (78,338     (8,313     (4,890     (91,541
                                

Financing activities

        

Payments of long-term debt and capital lease obligations

     (12,802     (657     —          (13,459

Cash received for settlement of interest rate swaps

     2,288        —          —          2,288   

Net issuance of common stock and other

     15,667        —          —          15,667   

Excess tax benefits from share based compensation

     3,647        —          —          3,647   

Intercompany transfers

     (105,532     110,412        (4,880     —     
                                

Net cash (used in) provided by financing activities

     (96,732     109,755        (4,880     8,143   
                                

Effect of exchange rate changes on cash

     —          —          5,981        5,981   
                                

Net increase (decrease) in cash and cash equivalents

     69,954        (1,514     17,687        86,127   

Cash and cash equivalents, beginning of period

     131,412        11,663        48,767        191,842   
                                

Cash and cash equivalents, end of period

   $ 201,366      $ 10,149      $ 66,454      $ 277,969   
                                

 

23


Table of Contents

 

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 and results of operations for the three and nine month periods ended September 30, 2010 and 2009 and significant factors that could affect our prospective financial condition and results of operations. This discussion should be read together 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, 2009. Historical results and any discussion of prospective results may not indicate our future performance. See “Forward Looking Statements.”

BUSINESS OVERVIEW

We are a leading global business advisory firm dedicated to helping organizations protect and enhance their enterprise value. We work closely with our clients to help them anticipate, understand, manage and overcome complex business matters arising from such factors as the economy, financial and credit markets, governmental regulation and legislation and litigation. We assist clients in addressing a broad range of business challenges, such as restructuring (including bankruptcy), financing and credit issues and indebtedness, interim business management, forensic accounting and litigation services, mergers and acquisitions (“M&A”), antitrust and competition matters, electronic discovery (“e-discovery”), management and retrieval of electronically stored information, reputation management and strategic communications. We also provide services to help our clients take advantage of economic, regulatory, financial and other business opportunities. Our experienced teams of professionals include many individuals who are widely recognized as experts in their respective fields. We believe clients retain us because of our recognized expertise and capabilities in highly specialized areas as well as our reputation for satisfying client needs.

We report financial results for the following five operating segments:

Our Corporate Finance/Restructuring segment focuses on strategic, operational, financial and capital needs of businesses around the world and provides consulting and advisory services on a wide range of areas, such as restructuring (including bankruptcy), financing, claims management, M&A, post-acquisition integration, valuations, tax issues and performance improvement.

Our Forensic and Litigation Consulting segment provides law firms, companies, government clients and other interested parties with dispute advisory, investigations, forensic accounting, data analytics, business intelligence assessments and risk mitigation 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 and regulatory proceedings, strategic decision making and public policy debates in the U.S. and around the world.

Our Technology segment provides e-discovery and information management software and service to its clients. It provides products, services and consulting to companies, law firms, courts and government agencies worldwide. Its comprehensive suite of software and services help clients locate, review and produce electronically stored information, including e-mail, computer files, voicemail, instant messaging and financial and transactional data.

Our Strategic Communications segment provides advice and consulting services relating to financial communications, brand communications, public affairs and reputation management and business consulting.

Effective January 1, 2010, we implemented a change in our organizational structure that resulted in the movement of our Financial and Enterprise Data Analytics (“FEDA”) subpractice from our Technology segment to our Forensic and Litigation Consulting segment. This change has been reflected in our segment reporting for all periods presented.

 

24


Table of Contents

 

We derive substantially all of our revenues from providing professional services to both U.S. and global clients. Over the past several years the growth in our revenues and profitability has resulted from our ability to attract new and recurring engagements and from the acquisitions we have completed.

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 cancellable at any time. Some of our engagements contain performance-based arrangements in which we earn a 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 achieving the performance-based criteria. In our Technology segment, certain clients are also billed based on the amount of data stored on our electronic systems, the volume of information processed and the number of users licensing our Ringtail® and Attenex® software products for installation within their own environments. We license these products directly to end users as well as indirectly through our channel partner relationships. Seasonal factors, such as the timing of our employees’ and clients’ vacations and holidays, impact the timing of our revenues.

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 number of revenue-generating professionals;

 

   

fees from clients on a retained basis or other; and

 

   

licensing of our software products and other technology services.

We define adjusted EBITDA as consolidated operating income before depreciation, amortization of intangible assets and special charges plus non-operating litigation settlements. We define adjusted segment EBITDA as a segment’s share of consolidated operating income before depreciation, amortization of intangible assets and special charges plus non-operating litigation settlements. Adjusted EBITDA and adjusted segment EBITDA are not defined in the same manner by all companies and may not be comparable to other similarly titled measures of other companies unless the definition is the same. These non-GAAP measures should be considered in addition to, but not as a substitute for or superior to, the information contained in our statements of income. We believe that these measures can be a useful operating performance measure for evaluating our results of operations as compared from period-to-period and as compared to our competitors. EBITDA is a common alternative measure of operating performance used by investors, financial analysts and rating agencies to value and compare the financial performance of companies in our industry. We use adjusted EBITDA and adjusted segment EBITDA to evaluate and compare the operating performance of our segments.

We define adjusted net income and adjusted earnings per diluted share as net income and earnings per diluted share, respectively, excluding the impact of the special charges and loss on early extinguishment of debt that were incurred in that period, and their related income tax effects.

We define acquisition growth as the results of operations of acquired companies in the first twelve months following the effective date of an acquisition. Our definition of organic growth is the change in the results of operations excluding the impact of all such acquisitions.

 

25


Table of Contents

 

EXECUTIVE HIGHLIGHTS

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2010      2009      2010      2009  
     (dollars in thousands, except per share amounts)  

Revenues

   $ 346,140       $ 348,637       $ 1,045,213       $ 1,057,008   

Operating income

     49,963         64,286         133,754         196,270   

Adjusted EBITDA

     65,026         77,871         206,366         236,413   

Earnings per common share—diluted

     0.47         0.70         1.28         1.99   

Adjusted earnings per common share—diluted

     0.54         0.70         1.73         1.99   

Cash provided by operating activities

     73,911         119,864         95,866         163,544   

Total number of employees at September 30,

     3,514         3,500         3,514         3,500   

Third Quarter 2010 Executive Highlights

Revenues

Revenues for the quarter ended September 30, 2010 decreased $2.5 million, or 0.7%, to $346.1 million, compared to $348.6 million in the prior year. Excluding the estimated impact of foreign currency translation of the U.S. dollar against other currencies in the third quarter versus the prior year quarter, the Company’s revenues were relatively flat.

Our third quarter results reflected a continuation of the market conditions that have been impacting our business for the past several quarters. In our view, an erratic and inconsistent economic recovery has necessitated that businesses re-evaluate their prospects and restrain discretionary spending, notably strategic M&A and overall corporate investment. At the same time active fixed income markets, especially in speculative grade debt, have enabled challenged debtors to continue operations without seeking bankruptcy relief or major restructuring, which continues to negatively impact the performance of our Corporate Finance/Restructuring segment. Our procyclical activities continued to grow, albeit slowly. The net result was a relatively flat year-over-year revenue comparison, as growth in our Forensic and Litigation Consulting, Technology and Strategic Communications segments was offset by the decline in our Corporate Finance/Restructuring segment. Consolidated revenues were comparable to prior quarters.

Operating Income

Operating income in the third quarter was $50.0 million compared to $64.3 million in the prior year period. The decline in operating income was primarily due to lower demand for higher margin restructuring and bankruptcy work in the Company’s Corporate Finance/Restructuring segment. This decline was slightly offset by higher income in our Forensic and Litigation Consulting, Technology and Strategic Communications segments. While there were some additional headcount reductions in our Corporate Finance/Restructuring segment related to the restructuring declines during the third quarter, we continue to invest resources in our procyclical businesses, which we expect will reduce margins in the short term.

Adjusted Earnings Per Share

Adjusted earnings per diluted share was $0.54, compared to $0.70 in the prior year period due primarily to the operating results described above. In addition, the Company’s effective tax rate was 38.0% versus 33.2% in the prior year quarter, which was positively impacted by one-time strategic tax benefits.

Adjusted EBITDA

Adjusted EBITDA decreased by $12.9 million to $65.0 million, or 18.8% of revenues compared to $77.9 million, or 22.3% of revenues, in the prior year period. As noted above, profit improvements in our Technology, Forensic and Litigation Consulting and Strategic Communications segments were insufficient to offset lower profitability in our Corporate Finance/Restructuring and, to a lesser degree, Economic Consulting segments.

 

26


Table of Contents

 

Operating Cash Flows

The Company generated cash flows from operations of $73.9 million compared to $119.9 million for the same period last year. The decrease in operating cash flows was primarily driven by slower collection of our accounts receivables driven by mix of customer engagements and payment arrangements, particularly fewer restructuring clients with up-front payment requirements. Additionally, operating cash flows during the current period were negatively impacted by increased compensation, forgivable loan payments and salary continuance related to our reduction in workforce.

Strategic Activities

On August 19, 2010, the Company completed its acquisition of FS Asia Advisory (the former Ferrier Hodgson Hong Kong group) for $82.0 million in the form of $28.8 million in cash and $53.2 of deferred acquisition payments in the form of loan notes to the sellers and contingent consideration. FS Asia Advisory (the former Ferrier Hodgson Hong Kong group) is a leading provider of corporate finance, restructuring and turnaround, corporate advisory and corporate recovery services in Asia. The acquisition significantly expands FTI’s presence and breadth of capabilities in Asia, adding 130 professionals to FTI in the region. The acquisition is included in our Corporate Finance/Restructuring segment.

Additionally, during the third quarter the Company successfully completed its private offering of $400.0 million 6 3/4% senior notes due 2020 (the “Notes”). The Notes were issued at a price of 100% of their principal amount. The offering will extend the Company’s maturity profile and is expected to retain a leverage neutral capital structure on a net basis. The Company used a portion of the net proceeds of the offering to purchase its $200.0 million 7 5/8% Senior Notes due 2013. The remainder of the net proceeds may be used for general corporate purposes.

Headcount

Headcount of 3,514 at September 30, 2010 was relatively flat compared to the same period a year ago. Excluding the impact of professionals who joined us as a result of the acquisition of FS Asia Advisory (the former Ferrier Hodgson Hong Kong group) in the third quarter of 2010, the headcount decreased by 3.0% largely in our Corporate Finance/Restructuring and Technology segments to properly align resources in those segments with current and anticipated demand for their services.

 

27


Table of Contents

 

CONSOLIDATED RESULTS OF OPERATIONS

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2010     2009     2010     2009  
     (in thousands, except per share amounts)  

Revenues

        

Corporate Finance/Restructuring

   $ 109,736      $ 127,808      $ 338,298      $ 389,320   

Forensic and Litigation Consulting

     84,023        75,055        243,455        229,775   

Economic Consulting

     59,417        59,588        191,276        171,547   

Technology

     42,721        38,693        128,885        131,552   

Strategic Communications

     50,243        47,493        143,299        134,814   
                                

Total revenues

   $ 346,140      $ 348,637      $ 1,045,213      $ 1,057,008   
                                

Operating income

        

Corporate Finance/Restructuring

   $ 23,938      $ 41,058      $ 73,149      $ 124,475   

Forensic and Litigation Consulting

     18,420        17,230        48,357        57,399   

Economic Consulting

     11,077        12,925        27,302        31,665   

Technology

     7,634        6,605        25,927        29,055   

Strategic Communications

     5,129        4,267        14,026        11,885   
                                

Segment operating income

     66,198        82,085        188,761        254,479   

Unallocated corporate expenses

     (16,235     (17,799     (55,007     (58,209
                                

Total operating income

     49,963        64,286        133,754        196,270   
                                

Other income (expense)

        

Interest income and other

     2,527        3,330        4,740        6,335   

Interest expense

     (11,904     (11,434     (34,600     (33,477

Loss on early extinguishment of debt

     (5,161     —          (5,161     —     
                                
     (14,538     (8,104     (35,021     (27,142
                                

Income before income tax provision

     35,425        56,182        98,733        169,128   

Income tax provision

     13,462        18,626        37,519        62,675   
                                

Net income

   $ 21,963      $ 37,556      $ 61,214      $ 106,453   
                                

Earnings per common share—basic

   $ 0.48      $ 0.74      $ 1.34      $ 2.11   
                                

Earnings per common share—diluted

   $ 0.47      $ 0.70      $ 1.28      $ 1.99   
                                
Reconciliation of Operating Income to adjusted EBITDA:         
     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2010     2009     2010     2009  
     (in thousands)  

Operating income

   $ 49,963      $ 64,286      $ 133,754      $ 196,270   

Depreciation and amortization

     8,777        7,414        24,138        21,523   

Amortization of other intangible assets

     6,286        6,171        18,229        18,370   

Special charges

     —          —          30,245        —     

Litigation settlement gains, net

     —          —          —          250   
                                

Adjusted EBITDA

   $ 65,026      $ 77,871      $ 206,366      $ 236,413   
                                

 

28


Table of Contents

 

Reconciliation of Net Income and Earnings Per Share to Adjusted Net Income and

Adjusted Earnings Per Share

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
    2010     2009     2010     2009  

Net income

  $ 21,963      $ 37,556      $ 61,214      $ 106,453   

Add back: Special charges, net of tax

    —          —          18,069        —     

Add back: Loss on early extinguishment of debt, net of tax

    3,200        —          3,200        —     
                               

Adjusted net income

  $ 25,163      $ 37,556      $ 82,483      $ 106,453   
                               

Earnings per common share—diluted

  $ 0.47      $ 0.70      $ 1.28      $ 1.99   
                               

Adjusted earnings per common share—diluted

  $ 0.54      $ 0.70      $ 1.73      $ 1.99   
                               

Weighted average number of common shares outstanding—diluted

    46,808        53,896        47,726        53,584   
                               

Three Months Ended September 30, 2010 Compared to Three Months Ended September 30, 2009

Revenues and Operating Income

See “Segment Results” for an expanded discussion of segment operating revenues and operating income.

Unallocated corporate expenses

Unallocated corporate expenses decreased $1.6 million, or 8.8%, to $16.2 million for the three months ended September 30, 2010, from $17.8 million for the three months ended September 30, 2009, primarily due to lower performance-based compensation costs.

Interest income and other

Interest income and other, which includes foreign currency transaction gains and losses, decreased by $0.8 million, or 24.1%, to $2.5 million for the three months ended September 30, 2010 from $3.3 million for the three months ended September 30, 2009. Excluding the impact of a one-time remeasurement gain of $2.3 million that we recorded in the third quarter of 2009 related to our June 2009 acquisition of the remaining 50% interest in a German joint venture, interest income and other would have increased $1.5 million for the three months ended September 30, 2010. The increase is primarily due to a $1.4 million net favorable impact from foreign currency transaction gains and losses resulting from the remeasurement of receivables and payables required to be settled in a currency other than an entity’s functional currency.

Interest expense

Interest expense increased $0.5 million to $11.9 million for the three months ended September 30, 2010 from $11.4 million for the three months ended September 30, 2009. The increase in interest expense is primarily driven by the loan notes issued as a portion of the purchase price consideration in connection with the acquisition we completed in August 2010.

Income tax provision

Our provision for income taxes in interim periods is computed by applying our estimated annual effective tax rate against income before income tax expense for the period. In addition, non-recurring or discrete items are recorded during the period in which they occur. The effective tax rate was 38.0% for the three months ended September 30, 2010 as compared to 33.2% for the three months ended September 30, 2009. The increase in the rate is primarily due to discrete items recorded in the third quarter of 2009, including a non-tax effected gain

 

29


Table of Contents

realized in connection with the purchase of the remaining 50% interest in a German joint venture in the third quarter of 2009 and change in estimate related to prior year tax provisions. The change in estimate was primarily attributable to the completion of tax projects with respect to our ability to qualify for technical income tax positions surrounding certain tax credits and deductions.

Nine Months Ended September 30, 2010 Compared to Nine Months Ended September 30, 2009

Revenues and Operating Income

See “Segment Results” for an expanded discussion of segment operating revenues and operating income.

Special charges

During the quarter ended March 31, 2010, we recorded special charges totaling $30.2 million, primarily related to a realignment of our workforce and a consolidation of four office locations, of which $8.9 million was non-cash. The charges reflect actions we took to better align capacity with expected demand, to eliminate certain redundancies resulting from acquisitions and to provide for appropriate levels of administrative support. The special charges consist of:

 

   

$19.3 million of salary continuance and other contractual employee related costs associated with the reduction in workforce of 144 employees, including reserves against employee advances, costs related to loan forgiveness and accelerated vesting of share-based awards;

 

   

$7.8 million of expense associated with lease terminations related to the consolidation of four office locations; and

 

   

$3.1 million of accelerated amortization related to a software solution which will no longer be utilized by the Company.

The total cash outflow associated with the special charges is expected to be $21.3 million, of which $13.5 million has been paid as of September 30, 2010, $2.7 million is expected to be paid during the remainder of 2010, $4.7 million is expected to be paid in 2011, and the balance of approximately $0.4 million is expected to be paid in 2012 and 2013.

The following table details the special charges by segment and the decrease in total headcount that resulted from the reduction in workforce:

 

     Special
Charges
     Reduction
of
Headcount
 
     (dollars in thousands)  

Corporate Finance/Restructuring

   $ 6,589         71   

Forensic and Litigation Consulting

     5,560         20   

Economic Consulting

     6,814         19   

Technology

     4,927         16   

Strategic Communications

     1,260         1   
                 
     25,150         127   

Unallocated Corporate

     5,095         17   
                 

Total

   $ 30,245         144   
                 

Unallocated corporate expenses

Unallocated corporate expenses decreased $3.2 million, or 5.5%, to $55.0 million for the nine months ended September 30, 2010, from $58.2 million for the nine months ended September 30, 2009. Excluding the impact of special charges of $5.1 million, unallocated corporate expenses for the nine months ended September 30, 2010

 

30


Table of Contents

decreased $8.3 million, or 14.3%, to $49.9 million for the nine months ended September 30, 2010 from $58.2 million for the nine months ended September 30, 2009, primarily due to lower performance-based compensation costs partially offset by increased development costs related to business support systems.

Interest income and other

Interest income and other, which includes foreign currency transaction gains and losses, decreased by $1.6 million, or 25.2%, to $4.7 million for the nine months ended September 30, 2010 from $6.3 million for the nine months ended September 30, 2009. Excluding the impact of a one-time remeasurement gain of $2.3 million that we recorded in the third quarter of 2009 related to our June 2009 acquisition of the remaining 50% interest in a German joint venture, interest income and other would have increased $0.7 million for the nine months ended September 30, 2010. The increase is primarily due to a $1.5 million net favorable impact from foreign currency transaction gains and losses due to the remeasurement of receivables and payables required to be settled in a currency other than an entity’s functional currency, partially offset by a $0.4 million decrease in interest income in the current year and a $0.3 million litigation settlement gain in the prior year.

Interest expense

Interest expense increased $1.1 million to $34.6 million for the nine months ended September 30, 2010 from $33.5 million for the nine months ended September 30, 2009. Interest expense for the nine months ended September 30, 2009 benefited from the favorable impact of lower interest rates on variable rate hedge contracts which were terminated in June 2009. For the nine months ended September 30, 2010, interest expense was impacted by the loan notes issued as a portion of the purchase price consideration in connection with the acquisition we completed in August 2010.

Income tax provision

Our provision for income taxes in interim periods is computed by applying our estimated annual effective tax rate against income before income tax expense for the period. In addition, non-recurring or discrete items are recorded during the period in which they occur. The effective tax rate was 38.0% for the nine months ended September 30, 2010 as compared to 37.1% for the nine months ended September 30, 2009. The increase in the rate is primarily due to discrete items recorded in the third quarter of 2009, including a non-tax effected gain realized in connection with the purchase of the remaining 50% interest in a German joint venture in the third quarter of 2009 and change in estimate related to prior year tax provisions. The change in estimate was primarily attributable to the completion of tax projects with respect to our ability to qualify for technical income tax positions surrounding certain tax credits and deductions.

 

31


Table of Contents

 

SEGMENT RESULTS

Adjusted Segment EBITDA

The following table reconciles segment operating income to adjusted segment EBITDA for the three and nine months ended September 30, 2010 and 2009.

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2010     2009     2010     2009  
     (in thousands)  

Segment operating income

   $ 66,198      $ 82,085      $ 188,761      $ 254,479   

Depreciation and amortization

     7,476        5,939        20,114        16,932   

Amortization of other intangible assets

     6,286        6,171        18,229        18,370   

Special charges

     —          —          25,150        —     
                                

Total adjusted segment EBITDA

   $ 79,960      $ 94,195      $ 252,254      $ 289,781   
                                

Other Segment Operating Data

 

        
     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
         2010             2009             2010             2009      

Number of revenue-generating professionals:(1)

        

Corporate Finance/Restructuring

     740        776        740        776   

Forensic and Litigation Consulting

     799        745        799        745   

Economic Consulting

     292        302        292        302   

Technology

     248        261        248        261   

Strategic Communications

     579        547        579        547   
                                

Total revenue-generating professionals

     2,658        2,631        2,658        2,631   
                                

Utilization rates of billable professionals:(2)

        

Corporate Finance/Restructuring

     71     68     70     76

Forensic and Litigation Consulting(4)

     69     76     72     78

Economic Consulting

     70     73     78     75

Average billable rate per hour:(3)

        

Corporate Finance/Restructuring

   $ 421      $ 455      $ 440      $ 436   

Forensic and Litigation Consulting(4)

     338        310        327        317   

Economic Consulting

     481        460        472        457   

 

(1)

Revenue generating professionals are reflected as of the end of the applicable period.

 

(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, local country 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 a utilization rate for our Technology segment and Strategic Communications segment 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 for a period by the number of hours worked on client assignments during the same period. We have not presented an average billable rate per hour for our Technology segment and Strategic Communications segment as most of the revenues of these segments are not generated on an hourly basis.

 

(4)

2010 utilization and average billable rate calculations for our Forensic and Litigation Consulting segment include information related to non-domestic operations that was not available in 2009.

 

32


Table of Contents

 

CORPORATE FINANCE/RESTRUCTURING

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2010     2009     2010     2009  
     (dollars in thousands, except rate per hour)  

Revenues

   $ 109,736      $ 127,808      $ 338,298      $ 389,320   
                                

Operating expenses:

        

Direct cost of revenues

     66,152        69,698        202,040        210,353   

Selling, general and administrative expense

     17,751        15,460        51,650        49,730   

Special charges

     —          —          6,589        —     

Amortization of other intangible assets

     1,895        1,592        4,870        4,762   
                                
     85,798        86,750        265,149        264,845   
                                

Segment operating income

     23,938        41,058        73,149        124,475   

Add back: depreciation and amortization of intangible assets

     2,770        2,526        7,666        7,275   

Add back: special charges

     —          —          6,589        —     
                                

Adjusted segment EBITDA

   $ 26,708      $ 43,584      $ 87,404      $ 131,750   
                                

Gross profit(1)

   $ 43,584      $ 58,110      $ 136,258      $ 178,967   

Gross profit margin(2)

     39.7     45.5     40.3     46.0

Adjusted segment EBITDA as a percent of revenues

     24.3     34.1     25.8     33.8

Number of revenue generating professionals (at period end)

     740        776        740        776   

Utilization rates of billable professionals

     71     68     70     76

Average billable rate per hour

   $ 421      $ 455      $ 440      $ 436   

 

(1)

Revenues less direct cost of revenues

 

(2)

Gross profit as a percent of revenues

Three Months Ended September 30, 2010 Compared to Three Months Ended September 30, 2009

Revenues decreased $18.1 million, or 14.1%, to $109.7 million for the three months ended September 30, 2010 from $127.8 million for the three months ended September 30, 2009. Revenue growth from the new Asia practice acquired in 2010 was approximately $5.5 million, or 4.3%, and organic revenue decreased approximately $23.6 million or 18.4%. The decline in organic revenue is due to lower demand for bankruptcy, restructuring and transaction advisory services and a lower average bill rate, partially offset by growth in our real estate consulting business.

Gross profit decreased $14.5 million, or 25.0%, to $43.6 million for the three months ended September 30, 2010 from $58.1 million for the three months ended September 30, 2009. Gross profit margin decreased 5.8 percentage points to 39.7% for the three months ended September 30, 2010 from 45.5% for the three months ended September 30, 2009. The gross profit margin decline is primarily due to lower business volumes and $1.6 million severance expense recorded in the third quarter of 2010, partially offset by decreased low margin pass through revenue. The severance expense was related to staff reductions required to balance current demands with resource requirements.

SG&A expense increased $2.3 million to $17.8 million for the three months ended September 30, 2010 from $15.5 million for the three months ended September 30, 2009. SG&A expense was 16.2% of revenue for the three months ended September 30, 2010, up from 12.1% in 2009. The increase in SG&A expense in 2010 was primarily due to consolidation of the new Asia practice, as well as the associated legal, accounting and other administrative costs related to this acquisition.

 

33


Table of Contents

 

Amortization of other intangible assets increased to $1.9 million for the three months ended September 30, 2010 from $1.6 million for the three months ended September 30, 2009.

Adjusted segment EBITDA decreased $16.9 million, or 38.7%, to $26.7 million for the three months ended September 30, 2010 from $43.6 million for the three months ended September 30, 2009.

Nine Months Ended September 30, 2010 Compared to Nine Months Ended September 30, 2009

Revenues decreased $51.0 million, or 13.1%, to $338.3 million for the nine months ended September 30, 2010 from $389.3 million for the nine months ended September 30, 2009. Revenue growth from the new Asia practice acquired in 2010 was approximately $5.5 million, or 1.4%, and organic revenue decreased $56.5 million or 14.5%. The decline in organic revenue is primarily due to a decrease in consulting hours relative to 2009 as demand for bankruptcy, restructuring and transaction advisory services declined partially offset by growth in our real estate consulting business.

Gross profit decreased $42.7 million, or 23.9%, to $136.3 million for the nine months ended September 30, 2010 from $179.0 million for the nine months ended September 30, 2009. Gross profit margin decreased 5.7 percentage points to 40.3% for the nine months ended September 30, 2010 from 46.0% for the nine months ended September 30, 2009. The gross profit margin decline is primarily due to lower utilization and $3.1 million in severance expense as a result of additional staff reductions, partially offset by decreased low margin pass through revenue in 2010. Staff reductions were made in the second and third quarters of 2010 to balance current demands with resource requirements.

SG&A expense increased $2.0 million to $51.7 million for the nine months ended September 30, 2010 from $49.7 million for the nine months ended September 30, 2009. SG&A expense was 15.3% of revenue for the nine months ended September 30, 2010, up from 12.8% in 2009 primarily due to lower revenue. The increase in SG&A expense in 2010 was primarily due to increased marketing/business development, allocations of corporate costs incurred in direct support of segment operations and consolidation of the new Asia practice, partially offset by lower bad debt and recruiting expenses. Bad debt expense was $0.2 million for the nine months ended September 30, 2010 compared to $3.4 million for the nine months ended September 30, 2009. The improvement in bad debt expense was primarily driven by favorable resolution or collections on previously reserved items.

Amortization of other intangible assets increased to $4.9 million for the nine months ended September 30, 2010 from $4.8 million for the nine months ended September 30, 2009.

Adjusted segment EBITDA decreased $44.4 million, or 33.7%, to $87.4 million for the nine months ended September 30, 2010 from $131.8 million for the nine months ended September 30, 2009.

 

34


Table of Contents

 

FORENSIC AND LITIGATION CONSULTING

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2010     2009     2010     2009  
     (dollars in thousands, except rate per hour)  

Revenues

   $ 84,023      $ 75,055      $ 243,455      $ 229,775   
                                

Operating expenses:

        

Direct cost of revenues

     49,676        42,574        142,829        127,040   

Selling, general and administrative expense

     14,958        14,622        43,779        43,410   

Special charges

     —          —          5,560        —     

Amortization of other intangible assets

     969        629        2,930        1,926   
                                
     65,603        57,825        195,098        172,376   
                                

Segment operating income

     18,420        17,230        48,357        57,399   

Add back: depreciation and amortization of intangible assets

     1,769        1,320        5,402        3,948   

Add back: special charges

     —          —          5,560        —     
                                

Adjusted segment EBITDA

   $ 20,189      $ 18,550      $ 59,319      $ 61,347   
                                

Gross profit(1)

   $ 34,347      $ 32,481      $ 100,626      $ 102,735   

Gross profit margin(2)

     40.9     43.3     41.3     44.7

Adjusted segment EBITDA as a percent of revenues

     24.0     24.7     24.4     26.7

Number of revenue generating professionals (at period end)

     799        745        799        745   

Utilization rates of billable professionals(3)

     69     76     72     78

Average billable rate per hour(3)

   $ 338      $ 310      $ 327      $ 317   

 

(1)

Revenues less direct cost of revenues

 

(2)

Gross profit as a percent of revenues

 

(3)

2010 utilization and average billable rate calculations include information related to non-domestic operations that was not available in 2009.

Three Months Ended September 30, 2010 Compared to Three Months Ended September 30, 2009

Revenues increased $8.9 million, or 11.9%, to $84.0 million for the three months ended September 30, 2010 from $75.1 million for the three months ended September 30, 2009. Organic revenue growth was approximately $8.4 million, or 11.2%. The increase in organic revenue was attributed to higher average bill rates due to the mix of professionals working on engagements in North America, partially offset by a decrease in consulting hours and growth in our international risk and investigations practice in South America and the Asia Pacific region.

Gross profit increased by $1.8 million, or 5.7%, to $34.3 million for the three months ended September 30, 2010 from $32.5 million for the three months ended September 30, 2009. Gross profit margin decreased by 2.4 percentage points to 40.9% for the three months ended September 30, 2010 from 43.3% for the three months ended September 30, 2009. The gross profit margin decline was due to lower utilization and higher personnel costs primarily driven by increased headcount from investments in key practices.

SG&A expense increased by $0.4 million, or 2.3%, to $15.0 million for the three months ended September 30, 2010 from $14.6 million for the three months ended September 30, 2009. SG&A expense was 17.8% of revenue for the three months ended September 30, 2010, down from 19.5% in 2009. Higher internal allocations of corporate costs incurred in direct support of segment operations were partially offset by lower bad debt expense. Bad debt expense was 1.0% of revenues for the three months ended September 30, 2010 versus 1.6% for the three months ended September 30, 2009.

Amortization of other intangible assets increased by $0.4 million to $1.0 million for the three months ended September 30, 2010 from $0.6 million for the three months ended September 30, 2009.

 

35


Table of Contents

 

Adjusted segment EBITDA increased by $1.6 million, or 8.8%, to $20.2 million for the three months ended September 30, 2010 from $18.6 million for the three months ended September 30, 2009.

Nine Months Ended September 30, 2010 Compared to Nine Months Ended September 30, 2009

Revenues increased $13.7 million, or 6.0%, to $243.5 million for the nine months ended September 30, 2010 from $229.8 million for the nine months ended September 30, 2009. Organic revenue growth was approximately $12.7 million, or 5.5%. The increase in organic revenue was attributed to higher average bill rates due to the mix of professionals working on engagements in North America and growth in our international risk and investigations practice in South America and the Asia Pacific region.

Gross profit declined by $2.1 million, or 2.1%, to $100.6 million for the nine months ended September 30, 2010 from $102.7 million for the nine months ended September 30, 2009. Gross profit margin decreased by 3.4 percentage points to 41.3% for the nine months ended September 30, 2010 from 44.7% for the nine months ended September 30, 2009. The gross profit margin decline was due to lower utilization and higher personnel costs primarily driven by increased headcount from investments in key practices.

SG&A expense increased by $0.4 million, or 0.9%, to $43.8 million for the nine months ended September 30, 2010 from $43.4 million for the nine months ended September 30, 2009. SG&A expense was 18.0% of revenue for the nine months ended September 30, 2010, down from 18.9% in 2009. Higher internal allocations of corporate costs incurred in direct support of segment operations were partially offset by lower bad debt expense. Bad debt expense was 1.1% of revenues for the nine months ended September 30, 2010 versus 1.9% for the nine months ended September 30, 2009.

Amortization of other intangible assets increased by $1.0 million to $2.9 million for the nine months ended September 30, 2010 from $1.9 million for the nine months ended September 30, 2009.

Adjusted segment EBITDA decreased by $2.0 million, or 3.3%, to $59.3 million for the nine months ended September 30, 2010 from $61.3 million for the nine months ended September 30, 2009.

 

36


Table of Contents

 

ECONOMIC CONSULTING

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2010     2009     2010     2009  
     (dollars in thousands, except rate per hour)  

Revenues

   $ 59,417      $ 59,588      $ 191,276      $ 171,547   
                                

Operating expenses:

        

Direct cost of revenues

     39,040        37,294        128,307        112,598   

Selling, general and administrative expense

     9,000        8,818        27,933        25,636   

Special charges

     —          —          6,814        —     

Amortization of other intangible assets

     300        551        920        1,648   
                                
     48,340        46,663        163,974        139,882   
                                

Segment operating income

     11,077        12,925        27,302        31,665   

Add back: depreciation and amortization of intangible assets

     855        1,032        2,789        2,956   

Add back: special charges

     —          —          6,814        —     
                                

Adjusted segment EBITDA

   $ 11,932      $ 13,957      $ 36,905      $ 34,621   
                                

Gross profit(1)

   $ 20,377      $ 22,294      $ 62,969      $ 58,949   

Gross profit margin(2)

     34.3     37.4     32.9     34.4

Adjusted segment EBITDA as a percent of revenues

     20.1     23.4     19.3     20.2

Number of revenue generating professionals (at period end)

     292        302        292        302   

Utilization rates of billable professionals

     70     73     78     75

Average billable rate per hour

   $ 481      $ 460      $ 472      $ 457   

 

(1)

Revenues less direct cost of revenues

 

(2)

Gross profit as a percent of revenues

Three Months Ended September 30, 2010 Compared to Three Months Ended September 30, 2009

Revenues decreased by $0.2 million, or 0.3%, to $59.4 million for the three months ended September 30, 2010 from $59.6 million for the three months ended September 30, 2009. A decrease in consulting hours in our antitrust and M&A business was mostly offset by increased demand in our European international arbitration practice and our financial economics consulting practice.

Gross profit decreased by $1.9 million, or 8.6%, to $20.4 million for the three months ended September 30, 2010 from $22.3 million for the three months ended September 30, 2009. Gross profit margin decreased by 3.1 percentage points to 34.3% for the three months ended September 30, 2010 from 37.4% for the three months ended September 30, 2009. The gross profit margin decline is due to lower utilization, partially offset by higher average bill rates due to the mix of professionals working on engagements and increased compensation costs related to retaining key employees. Our European practice continues to create margin compression as operations have not yet reached the scale at which revenues and staff leverage will offset fixed costs paid to higher salaried senior hires.

SG&A expense increased by $0.2 million, or 2.1%, to $9.0 million for the three months ended September 30, 2010 from $8.8 million for the three months ended September 30, 2009. SG&A expense was 15.1% of revenue for the three months ended September 30, 2010 versus 14.8% for the three months ended September 30, 2009. The increase in SG&A expense in 2010 was due to higher bad debt expense partially offset by lower overhead cost to support operations. Bad debt expense was 2.9% of revenue for the three months ended September 30, 2010 versus 1.6% of revenue for the three months ended September 30, 2009.

Amortization of other intangible assets decreased to $0.3 million for the three months ended September 30, 2010 from $0.6 million for the three months ended September 30, 2009.

 

37


Table of Contents

 

Adjusted segment EBITDA decreased by $2.1 million, or 14.5%, to $11.9 million for the three months ended September 30, 2010 from $14.0 million for the three months ended September 30, 2009.

Nine Months Ended September 30, 2010 Compared to Nine Months Ended September 30, 2009

Revenues increased by $19.8 million, or 11.5%, to $191.3 million for the nine months ended September 30, 2010 from $171.5 million for the nine months ended September 30, 2009. The revenue growth was due to an increase in demand in our European international arbitration practice and our financial economics consulting practice.

Gross profit increased by $4.1 million, or 6.8%, to $63.0 million for the nine months ended September 30, 2010 from $58.9 million for the nine months ended September 30, 2009. Gross profit margin decreased by 1.5 percentage points to 32.9% for the nine months ended September 30, 2010 from 34.4% for the nine months ended September 30, 2009. The gross profit margin decline is due to increased compensation costs related to retaining senior employees. Our European practice continues to create margin compression as operations have not yet reached the scale at which revenues and staff leverage will offset fixed costs paid to higher salaried senior hires.

SG&A expense increased by $2.3 million, or 9.0%, to $27.9 million for the nine months ended September 30, 2010 from $25.6 million for the nine months ended September 30, 2009. SG&A expense was 14.6% of revenue for the nine months ended September 30, 2010 versus 14.9% for the nine months ended September 30, 2009. The increase in SG&A expense in 2010 was primarily due to higher professional service and legal fees, bad debt expense and higher internal allocations of corporate costs incurred in direct support of segment operations. Bad debt expense was 2.2% of revenue for the nine months ended September 30, 2010 versus 2.0% of revenue for the nine months ended September 30, 2009.

Amortization of other intangible assets decreased to $0.9 million for the nine months ended September 30, 2010 from $1.6 million for the nine months ended September 30, 2009.

Adjusted segment EBITDA increased by $2.3 million, or 6.6%, to $36.9 million for the nine months ended September 30, 2010 from $34.6 million for the nine months ended September 30, 2009.

 

38


Table of Contents

 

TECHNOLOGY

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2010     2009     2010     2009  
     (dollars in thousands)  

Revenues

   $ 42,721      $ 38,693      $ 128,885      $ 131,552   
                                

Operating expenses:

        

Direct cost of revenues

     16,570        14,302        47,545        45,517   

Selling, general and administrative expense

     16,685        15,728        44,839        50,794   

Special charges

     —          —          4,927        —     

Amortization of other intangible assets

     1,832        2,058        5,647        6,186   
                                
     35,087        32,088        102,958        102,497   
                                

Segment operating income

     7,634        6,605        25,927        29,055   

Add back: depreciation and amortization of intangible assets

     6,274        4,942        16,172        14,776   

Add back: special charges

     —          —          4,927        —     
                                

Adjusted segment EBITDA