Form 10-Q
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 June 30, 2011

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 July 28, 2011

Common stock, par value $0.01 per share

   41,555,223

 

 

 


Table of Contents

FTI CONSULTING, INC. AND SUBSIDIARIES

INDEX

 

          Page  

PART I—FINANCIAL INFORMATION

  

Item 1.

   Financial Statements   
   Condensed Consolidated Balance Sheets—June 30, 2011 and December 31, 2010      3   
   Condensed Consolidated Statements of Income—Three and six months ended June 30, 2011 and 2010      4   
   Condensed Consolidated Statement of Stockholders’ Equity and Comprehensive Income—Six months ended June 30, 2011      5   
   Condensed Consolidated Statements of Cash Flows—Six months ended June 30, 2011 and 2010      6   
   Notes to Condensed Consolidated Financial Statements      7   

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      21   

Item 3.

   Quantitative and Qualitative Disclosures about Market Risk      44   

Item 4.

   Controls and Procedures      45   

PART II—OTHER INFORMATION

  

Item 1.

   Legal Proceedings      46   

Item 1A.

   Risk Factors      46   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      46   

Item 3.

   Defaults Upon Senior Securities      47   

Item 4.

   (Removed and Reserved)      47   

Item 5.

   Other Information      47   

Item 6.

   Exhibits      48   

SIGNATURES

     49   


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

 

     June 30,     December 31,  
     2011     2010  
     (Unaudited)        

Assets

    

Current assets

    

Cash and cash equivalents

   $ 98,745      $ 384,570   

Restricted cash

     11,383        10,518   

Accounts receivable:

    

Billed receivables

     318,554        268,386   

Unbilled receivables

     199,825        120,896   

Allowance for doubtful accounts and unbilled services

     (72,204     (63,205
  

 

 

   

 

 

 

Accounts receivable, net

     446,175        326,077   

Current portion of notes receivable

     25,771        26,130   

Prepaid expenses and other current assets

     32,137        28,174   

Income taxes receivable

     17,885        13,246   
  

 

 

   

 

 

 

Total current assets

     632,096        788,715   

Property and equipment, net of accumulated depreciation

     71,983        73,238   

Goodwill

     1,305,170        1,269,447   

Other intangible assets, net of amortization

     132,035        134,970   

Notes receivable, net of current portion

     94,106        87,677   

Other assets

     64,305        60,312   
  

 

 

   

 

 

 

Total assets

   $ 2,299,695      $ 2,414,359   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Current liabilities

    

Accounts payable, accrued expenses and other

   $ 105,589      $ 105,864   

Accrued compensation

     141,972        143,971   

Current portion of long-term debt and capital lease obligations

     6,616        7,559   

Billings in excess of services provided

     35,674        27,836   

Deferred income taxes

     4,052        4,052   
  

 

 

   

 

 

 

Total current liabilities

     293,903        289,282   

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

     790,321        785,563   

Deferred income taxes

     99,520        92,134   

Other liabilities

     87,452        80,061   
  

 

 

   

 

 

 

Total liabilities

     1,271,196        1,247,040   
  

 

 

   

 

 

 

Commitments and contingent liabilities (notes 7, 9 and 10)

    

Stockholders’ equity

    

Preferred stock, $0.01 par value; shares authorized—5,000; none outstanding

     —          —     

Common stock, $0.01 par value; shares authorized—75,000; shares issued and outstanding—41,555 (2011) and 46,144 (2010)

     416        461   

Additional paid-in capital

     338,789        532,929   

Retained earnings

     726,129        687,419   

Accumulated other comprehensive loss

     (36,835     (53,490
  

 

 

   

 

 

 

Total stockholders’ equity

     1,028,499        1,167,319   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 2,299,695      $ 2,414,359   
  

 

 

   

 

 

 

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
June 30,
    Six Months Ended
June 30,
 
     2011     2010     2011     2010  

Revenues

   $ 400,437      $ 349,033      $ 762,253      $ 699,073   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

        

Direct cost of revenues

     247,036        209,031        466,176        406,491   

Selling, general and administrative expense

     94,819        82,202        183,548        166,603   

Special charges

     16,772        —          16,772        30,245   

Amortization of other intangible assets

     5,498        5,852        10,952        11,943   
  

 

 

   

 

 

   

 

 

   

 

 

 
     364,125        297,085        677,448        615,282   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     36,312        51,948        84,805        83,791   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense)

        

Interest income and other

     2,923        (141     4,923        2,213   

Interest expense

     (14,500     (11,378     (29,810     (22,696
  

 

 

   

 

 

   

 

 

   

 

 

 
     (11,577     (11,519     (24,887     (20,483
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax provision

     24,735        40,429        59,918        63,308   

Income tax provision

     7,823        15,363        21,208        24,057   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 16,912      $ 25,066      $ 38,710      $ 39,251   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share—basic

   $ 0.42      $ 0.55      $ 0.92      $ 0.86   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share—diluted

   $ 0.40      $ 0.52      $ 0.88      $ 0.82   
  

 

 

   

 

 

   

 

 

   

 

 

 

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, 2011

     46,144      $ 461      $ 532,929      $ 687,419       $ (53,490   $ 1,167,319   

Comprehensive income:

             

Cumulative translation adjustment, including income tax benefit of $2,068

     —          —          —          —           16,655        16,655   

Net income

     —          —          —          38,710         —          38,710   
             

 

 

 

Total comprehensive income

                55,365   

Issuance of common stock in connection with:

             

Exercise of options, including income tax benefit from share-based awards of $68

     149        2        3,841        —           —          3,843   

Restricted share grants, less net settled shares of 84

     324        4        (3,094     —           —          (3,090

Stock units issued under incentive compensation plan

     —          —          4,241        —           —          4,241   

Business combinations

     —          —          (5,455     —           —          (5,455

Purchase and retirement of common stock

     (5,062     (51     (209,349     —           —          (209,400

Share-based compensation

     —          —          15,676        —           —          15,676   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Balance June 30, 2011

     41,555      $ 416      $ 338,789      $ 726,129       $ (36,835   $ 1,028,499   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

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

 

     Six Months Ended
June 30,
 
     2011     2010  

Operating activities

    

Net income

   $ 38,710      $ 39,251   

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

    

Depreciation, amortization and accretion

     15,683        15,361   

Amortization of other intangible assets

     10,952        11,943   

Provision for doubtful accounts

     5,768        4,618   

Non-cash share-based compensation

     15,942        14,651   

Excess tax benefits from share-based compensation

     (124     (625

Non-cash interest expense

     4,190        3,599   

Other

     136        (315

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

    

Accounts receivable, billed and unbilled

     (99,137     (34,895

Notes receivable

     (5,281     (17,789

Prepaid expenses and other assets

     (5,893     (2,240

Accounts payable, accrued expenses and other

     227        11,262   

Income taxes

     (5,742     (4,339

Accrued compensation

     4,093        (18,671

Billings in excess of services provided

     7,652        144   
  

 

 

   

 

 

 

Net cash (used in) provided by operating activities

     (12,824     21,955   
  

 

 

   

 

 

 

Investing activities

    

Payments for acquisition of businesses, net of cash received

     (50,888     (22,834

Purchases of property and equipment

     (12,705     (11,632

Proceeds from sale or maturity of short-term investments

     —          15,000   

Other

     (405     (475
  

 

 

   

 

 

 

Net cash used in investing activities

     (63,998     (19,941
  

 

 

   

 

 

 

Financing activities

    

Borrowings under revolving line of credit

     25,000        20,000   

Payments of revolving line of credit

     (25,000     (20,000

Payments of long-term debt and capital lease obligations

     (937     (465

Purchase and retirement of common stock

     (209,400     —     

Net issuance of common stock under equity compensation plans

     685        4,235   

Excess tax benefits from share-based compensation

     124        625   

Other

     51        442   
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (209,477     4,837   
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     474        (2,469
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (285,825     4,382   

Cash and cash equivalents, beginning of period

     384,570        118,872   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 98,745      $ 123,254   
  

 

 

   

 

 

 

Supplemental cash flow disclosures

    

Cash paid for interest

   $ 25,711      $ 19,144   

Cash paid for income taxes, net of refunds

     27,016        28,396   

Non-cash investing and financing activities:

    

Issuance of stock units under incentive compensation plans

     4,241        6,531   

Issuance of notes payable to acquire businesses

     —          4,772   

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, 2010.

2. New Accounting Standards Not Yet Adopted

In June 2011, the Financial Accounting Standards Board issued Accounting Standards Update 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, which amends current comprehensive income guidance. This accounting update eliminates the option to present the components of other comprehensive income as part of the statement of shareholders’ equity. Instead, the company must report comprehensive income in either a single continuous statement of comprehensive income which contains two sections, net income and other comprehensive income, or in two separate but consecutive statements. This guidance will be effective for us beginning in the first quarter of 2012. We do not expect the guidance to impact our consolidated financial statements, as it only requires a change in the format of presentation.

3. 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 due 2012 (“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 June 30,
    Six Months Ended
June 30,
 
        2011             2010             2011             2010      

Numerator—basic and diluted

       

Net income

  $ 16,912      $ 25,066      $ 38,710      $ 39,251   
 

 

 

   

 

 

   

 

 

   

 

 

 

Denominator

       

Weighted average number of common shares outstanding—basic

    40,587        45,857        42,223        45,828   

Effect of dilutive stock options

    857        954        831        954   

Effect of dilutive convertible notes

    836        1,184        759        1,167   

Effect of dilutive restricted shares

    238        181        257        204   
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of common shares outstanding—diluted

    42,518        48,176        44,070        48,153   
 

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share—basic

  $ 0.42      $ 0.55      $ 0.92      $ 0.86   
 

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share—diluted

  $ 0.40      $ 0.52      $ 0.88      $ 0.82   
 

 

 

   

 

 

   

 

 

   

 

 

 

Antidilutive stock options and restricted shares

    2,345        1,653        2,190        1,478   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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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. Special Charges

During the year ended December 31, 2010, we recorded special charges of $52.0 million, of which $32.3 million was non-cash. The non-cash charges primarily included trade name impairment charges related to our global FTI Consulting branding strategy and other strategic branding decisions. The remaining charges related to a realignment of our workforce and a consolidation of four office locations. The charges reflect actions we took to support our corporate positioning, as well as actions taken to better align capacity with expected demand, to eliminate certain redundancies resulting from acquisitions and to provide for appropriate levels of administrative support.

During the quarter ended June 30, 2011, we recorded special charges of $16.8 million, of which $6.4 million was non-cash. The charges reflect actions we took to reduce senior management related overhead in connection with our recent realignment of our segment management on a global basis and to align our workforce with expected market trends. These actions included a reduction in workforce totaling 37 employees. The special charges consisted of:

 

   

$10.4 million of salary continuance and other contractual employee related costs associated with the reduction in workforce;

 

   

$3.6 million related to loan forgiveness and accelerated vesting of share-based awards related to the reduction in workforce; and

 

   

$2.8 million of deferred costs under a service contract without a substantive future economic benefit to the Company.

The following table details the special charges by segment for the quarter ended June 30, 2011:

 

Corporate Finance/Restructuring

   $  11,000   

Forensic and Litigation Consulting

     839   

Economic Consulting

     2,093   
  

 

 

 
     13,932   

Unallocated Corporate

     2,840   
  

 

 

 

Total

   $ 16,772   
  

 

 

 

The total cash outflow associated with the 2010 special charges is expected to be $19.7 million, of which $19.1 million has been paid as of June 30, 2011. The total cash outflow associated with the 2011 special charges is expected to be $10.4 million, of which $0.5 million has been paid as of June 30, 2011. Of the remaining liability at June 30, 2011, $6.9 million is expected to be paid during the remainder of 2011 and the balance of approximately $3.6 million is expected to be paid during 2012. A liability for the amounts to be paid is included in “Accounts payable, accrued expenses and other” on the Condensed Consolidated Balance Sheets. Activity related to the liability for these costs for the six months ended June 30, 2011 is as follows:

 

     Employee
Termination
Costs
    Lease
Termination
Costs
    Total  

Balances at January 1, 2011

   $ 1,920      $ 2,762      $ 4,682   

Additions

     10,370        —          10,370   

Payments

     (1,798     (2,646     (4,444

Adjustments

     (36     (116     (152
  

 

 

   

 

 

   

 

 

 

Balances at June 30, 2011

   $ 10,456      $ —        $ 10,456   
  

 

 

   

 

 

   

 

 

 

 

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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

 

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 $3.2 million and $5.8 million for the three and six months ended June 30, 2011, respectively and $1.6 million and $4.6 million for the three and six months ended June 30, 2010, respectively.

6. Research and Development Costs

Research and development costs related to software development totaled $6.0 million and $11.8 million for the three and six months ended June 30, 2011, respectively, and $5.3 million and $10.7 million for the three and six months ended June 30, 2010, respectively. 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 June 30, 2011, based on the short-term nature of the assets and liabilities. The fair value of our long-term debt at June 30, 2011 was $849.0 million compared to a carrying value of $814.8 million. At December 31, 2010, the fair value of our long-term debt was $847.2 million compared to a carrying value of $810.8 million. We determined the fair value of our long-term debt primarily based on quoted market prices for our 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.

Derivative Financial Instruments

From time to time, we hedge the cash flows and fair values of some of our long-term debt using interest rate swaps. We enter into these derivative contracts to manage our exposure to interest rate changes by achieving a desired proportion of fixed rate versus variable rate debt.

Accordingly, to achieve the desired mix of fixed and floating interest rate debt, we entered into four interest rate swap agreements in March 2011, which qualify and have been designated as fair value hedges. The interest rate swaps mature on October 1, 2016. Under the terms of the interest rate swaps, we receive interest on the $215.0 million notional amount at a fixed rate of 7   3/4% and pay a variable rate of interest, based on LIBOR as the benchmark interest rate. For the three months ended June 30, 2011, our variable interest rate was 5.48%. The maturity, payment dates and other critical terms of these swaps exactly match those of the hedged senior notes. These interest rate swaps qualified for hedge accounting using the short-cut method under ASC 815-20-25, Derivatives and Hedging (formerly SFAS No. 133), which assumes no hedge ineffectiveness. As a result, changes in the fair value of the interest rate swaps and changes in the fair value of the hedged debt were assumed to be equal and offsetting. As of June 30, 2011, the fair value of our interest rate swaps was an asset of $2.2 million, which is recorded in “Other assets” on the Condensed Consolidated Balance Sheets. The impact of effectively converting the interest rate of $215.0 million of our senior notes from fixed rate to variable rate decreased interest expense by $1.5 million for the six months ended June 30, 2011.

 

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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

In March 2011, we completed acquisitions of certain practices of LECG Corporation in Europe, the United States and Latin America with services relating to those provided through our Economic Consulting, Forensic and Litigation Consulting, and Corporate Finance/Restructuring segments. The acquisition-date fair value of the total consideration transferred is approximately $30.0 million, which consisted of $27.0 million of cash paid at the closings of these acquisitions, a portion of which is subject to certain working capital and other adjustments, and contingent consideration with an estimated fair value of $3.0 million. As part of the preliminary purchase price allocation, we recorded an aggregate of $24.6 million in accounts receivable, $6.0 million in identifiable intangible assets, $18.8 million of assumed liabilities and $14.9 million in goodwill. Aggregate acquisition-related costs of approximately $1.4 million have been recognized in earnings in the first quarter of 2011. Pro forma results of operations have not been presented because the acquisitions were 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 contain 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 six months ended June 30, 2011, we paid $6.2 million in cash in relation to the stock price guarantees on certain shares of common stock that became unrestricted, which was recorded as a reduction to additional paid-in-capital. Our remaining common stock price guarantee provisions have stock floor prices that range from $24.50 to $69.48 per share and have determination dates that range from 2011 to 2013.

9. Goodwill and Other Intangible Assets

The changes in the carrying amounts of goodwill by business segment for the six months ended June 30, 2011, are as follows:

 

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

Balances at January 1, 2011

  $ 434,439      $ 197,234      $ 202,689      $ 117,960      $ 317,125      $ 1,269,447   

Goodwill acquired during the period

    1,616        929        12,380        —          —          14,925   

Contingent consideration(1)

    —          32        —          —          11,412        11,444   

Foreign currency translation adjustment and other

    (241     1,296        47        61        8,191        9,354   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at June 30, 2011

  $ 435,814      $ 199,491      $ 215,116      $ 118,021      $ 336,728      $ 1,305,170   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

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 $5.5 million and $11.0 million for the three and six months ended June 30, 2011, respectively, and $5.9 million and $11.9 million for the three and six months ended June 30, 2010, respectively. Based solely on the amortizable intangible assets recorded as of June 30, 2011, we estimate amortization expense to be $11.2 million during the remainder of 2011, $22.2 million in 2012, $20.4 million in 2013, $11.8 million in 2014, $10.8 million in 2015, $9.3 million in 2016 and $40.7 million in years

 

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Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

after 2016. 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. During the six months ended June 30, 2011, we wrote-off $26.3 million of fully amortized intangible assets related to our customer relationships, non-competition agreements, tradenames and contract backlog with a net book value of zero.

 

          June 30, 2011      December 31, 2010  
      Useful Life
in Years
   Gross
Carrying
Amount
     Accumulated
Amortization
     Gross
Carrying
Amount
     Accumulated
Amortization
 

Amortized intangible assets

              

Customer relationships

   1 to 15    $ 150,039       $ 45,630       $ 149,278       $ 46,146   

Non-competition agreements

   1 to 10      15,931         9,042         19,796         11,722   

Software

   5 to 6      33,300         18,163         37,700         19,536   

Tradenames

   1 to 5      —           —           9,610         9,610   

Contract backlog

   1      —           —           333         333   
     

 

 

    

 

 

    

 

 

    

 

 

 
        199,270         72,835         216,717         87,347   

Unamortized intangible assets

              

Tradenames

   Indefinite      5,600         —           5,600         —     
     

 

 

    

 

 

    

 

 

    

 

 

 
      $ 204,870       $ 72,835       $ 222,317       $ 87,347   
     

 

 

    

 

 

    

 

 

    

 

 

 

10. Long-term Debt and Capital Lease Obligations

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

 

    June 30,
2011
    December 31,
2010
 

7 3/4% senior notes due 2016(a)

  $ 217,156      $ 215,000   

6 3/4% senior notes due 2020

    400,000        400,000   

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

    144,140        141,515   

Notes payable to former shareholders of acquired businesses

    35,502        36,307   
 

 

 

   

 

 

 

Total debt

    796,798        792,822   

Less current portion

    6,502        7,307   
 

 

 

   

 

 

 

Long-term debt, net of current portion

    790,296        785,515   
 

 

 

   

 

 

 

Total capital lease obligations

    139        300   

Less current portion

    114        252   
 

 

 

   

 

 

 

Capital lease obligations, net of current portion

    25        48   
 

 

 

   

 

 

 

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

  $ 790,321      $ 785,563   
 

 

 

   

 

 

 

 

(a) 

Balance includes a fair value hedge adjustment of $2.2 million relating to interest rate swaps entered into on March 9, 2011.

 

(b) 

Balance includes $149.9 million principal amount of Convertible Notes net of discount of $5.8 million at June 30, 2011 and $8.4 million at December 31, 2010.

 

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Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

Convertible Notes

Our Convertible Notes are convertible at the option of the holder during any conversion period if the per share closing price of our common stock exceeds the conversion threshold price of $37.50 for at least 20 trading days in the 30 consecutive trading day period ending on the first day of such conversion period. A conversion period is the period from and including the eleventh trading day in a fiscal quarter up to but not including the eleventh trading day of the following fiscal quarter.

When the Convertible Notes are convertible at the option of the holder, they are classified as current on our Consolidated Balance Sheet. When the Convertible Notes are not convertible at the option of the holder, and the scheduled maturity is not within one year after the balance sheet date, they are classified as long-term. As of June 30, 2011, the Convertible Notes are classified as long-term given that the per share price of our common stock did not close above the conversion threshold for 20 days in the 30 consecutive trading day period ended April 14, 2011. As of July 15, 2011, the Convertible Notes did not meet the conversion threshold and therefore, the Convertible Notes will remain non-convertible and classified as long-term through July 16, 2011, when the Convertible Notes will be a year from maturity and classified as short-term.

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 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 Offering were $390.4 million after deducting debt issuance costs. On March 25, 2011, the Company filed a Registration Statement on Form S-4 with the SEC to register the exchange offer of the 6  3/4% senior notes for publicly registered senior notes with identical terms, which was declared effective on May 24, 2011. The Company completed the exchange offer of all outstanding 6 3/4% senior notes on June 24, 2011.

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

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 Consulting’s equity compensation plans, subject to the discretion of the administrator of the plans. During the six months ended June 30, 2011, aggregate share-based awards included stock option grants exercisable for 744,147 shares of common stock upon vesting, restricted stock awards of 389,288 shares of common stock and restricted stock units equivalent to 353,835 shares of common stock.

 

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Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

Total share-based compensation expense for the three and six months ended June 30, 2011 and 2010 is detailed in the following table:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
Income Statement Classification    2011      2010      2011      2010  

Direct cost of revenues

   $ 4,742       $ 4,746       $ 9,354       $ 7,325   

Selling, general and administrative expense

     2,682         2,511         4,879         4,852   

Special charges

     1,718         —           1,718         2,474   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total share-based compensation expense

   $ 9,142       $ 7,257       $ 15,951       $ 14,651   
  

 

 

    

 

 

    

 

 

    

 

 

 

13. Stockholders’ Equity

Common Stock Repurchase Program

In November 2009, our Board of Directors authorized a two-year stock repurchase program of up to $500.0 million (the “Repurchase Program”) and terminated the $50.0 million stock repurchase program authorized in February 2009. Also in November 2009, we entered into a collared stock buyback master confirmation agreement (the “Master Agreement”) with Goldman, Sachs & Co. (“Goldman Sachs”). Through December 31, 2010, we repurchased and retired approximately 6,633,680 shares of our common stock with a value equivalent to approximately $290.6 million at the time of repurchase under the Repurchase Program, including a $250.0 million accelerated stock buyback transaction pursuant to a supplemental confirmation under the Master Agreement. As of December 31, 2010, a balance of $209.4 million remained available under the Repurchase Program to fund stock repurchases by the Company.

On March 2, 2011, we entered into a supplemental confirmation with Goldman Sachs for a $209.4 million accelerated stock buyback (the “2011 ASB”), pursuant to the Master Agreement. On March 7, 2011, we paid $209.4 million to Goldman Sachs using available cash on hand and received a majority of the shares of FTI Consulting common stock, representing 4,433,671 shares, expected to be delivered in the 2011 ASB. On May 17, 2011, FTI Consulting received additional shares bringing the total number of shares of our common stock delivered in the 2011 ASB to 5,061,558 shares of FTI Consulting common stock. The specific number of shares that ultimately will be repurchased in the 2011 ASB will be based generally on the volume-weighted average share price of our common stock during the term of the repurchase agreement, subject to provisions that establish minimum and maximum numbers of shares. The 2011 ASB contemplates that final settlement may occur in December 2011, although under certain circumstances, at Goldman Sachs’ discretion, the completion date may be accelerated. At settlement, we may be entitled to receive additional shares of our common stock from Goldman Sachs. This transaction was accounted for as two separate transactions, a share repurchase and a forward contract indexed to our own stock. The repurchase of shares was accounted for as a share retirement resulting in a reduction of common stock issued and outstanding of 5,061,558 shares and a corresponding reduction in common stock and additional paid-in capital of $209.4 million. Any additional shares received will be accounted for as a share retirement in the period(s) in which the shares are received. The 2011 ASB completes the Repurchase Program.

For the quarter ended June 30, 2011, the forward contract was anti-dilutive as the forward contract represented a contingent number of shares that could be delivered to FTI Consulting by the investment bank. As the shares were anti-dilutive, their impact was not considered in the computation of earnings per share for the

 

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Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

quarter ended June 30, 2011 in accordance with the guidance of ASC 260, Earnings Per Share. Additional shares that may be received before the final settlement date in December 2011 will be considered in the calculation of weighted average shares outstanding used for the calculation of earnings per share after delivery to FTI Consulting.

14. 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 matters, 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 services 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.

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, accretion of contingent consideration and special charges. 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.

 

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Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

The table below presents revenues and adjusted segment EBITDA for our reportable segments for the three and six months ended June 30, 2011 and 2010:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2011      2010      2011      2010  

Revenues

           

Corporate Finance/Restructuring

   $ 101,896       $ 111,095       $ 209,150       $ 228,562   

Forensic and Litigation Consulting

     93,368         80,754         176,281         159,432   

Economic Consulting

     94,480         64,552         168,739         131,859   

Technology

     57,130         42,791         108,165         86,164   

Strategic Communications

     53,563         49,841         99,918         93,056   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

   $ 400,437       $ 349,033       $ 762,253       $ 699,073   
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted segment EBITDA

           

Corporate Finance/Restructuring

   $ 17,311       $ 25,977       $ 38,832       $ 60,696   

Forensic and Litigation Consulting

     19,232         19,346         36,110         39,130   

Economic Consulting

     18,914         11,453         32,156         24,973   

Technology

     20,692         15,857         39,323         33,118   

Strategic Communications

     6,457         8,635         11,865         14,377   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total adjusted segment EBITDA

   $ 82,606       $ 81,268       $ 158,286       $ 172,294   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2011     2010     2011     2010  

Total adjusted segment EBITDA

   $ 82,606      $ 81,268      $ 158,286      $ 172,294   

Segment depreciation expense

     (5,866     (6,312     (11,614     (12,638

Amortization of intangible assets

     (5,498     (5,852     (10,952     (11,943

Special charges

     (16,772     —          (16,772     (30,245

Accretion of contingent consideration

     (799     —          (1,595     —     

Unallocated corporate expenses, excluding special charges

     (17,359     (17,156     (32,548     (33,677

Interest income and other

     2,923        (141     4,923        2,213   

Interest expense

     (14,500     (11,378     (29,810     (22,696
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax provision

   $ 24,735      $ 40,429      $ 59,918      $ 63,308   
  

 

 

   

 

 

   

 

 

   

 

 

 

15. 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.

 

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Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

The following financial information presents condensed consolidating balance sheets, statements of income and statements of cash flows for FTI Consulting, all the guarantor subsidiaries, all the non-guarantor subsidiaries and the eliminations necessary to arrive at the consolidated information for FTI Consulting 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 June 30, 2011

 

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

Assets

             

Cash and cash equivalents

   $ 24,097       $ 371       $ 74,277       $ —        $ 98,745   

Restricted cash

     8,632         —           2,751         —          11,383   

Accounts receivable, net

     152,169         172,180         121,826         —          446,175   

Intercompany receivables

     90,403         496,810         97,713         (684,926     —     

Other current assets

     30,185         15,816         29,792         —          75,793   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     305,486         685,177         326,359         (684,926     632,096   

Property and equipment, net

     43,717         13,384         14,882         —          71,983   

Goodwill

     481,116         490,659         333,395         —          1,305,170   

Other intangible assets, net

     10,401         71,001         50,633         —          132,035   

Investments in subsidiaries

     1,611,937         529,507         —           (2,141,444     —     

Other assets

     72,546         65,337         20,528         —          158,411   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 2,525,203       $ 1,855,065       $ 745,797       $ (2,826,370   $ 2,299,695   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Liabilities

             

Intercompany payables

   $ 501,204       $ 70,816       $ 112,906       $ (684,926   $ —     

Other current liabilities

     118,748         102,258         72,897         —          293,903   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     619,952         173,074         185,803         (684,926     293,903   

Long-term debt, net

     761,297         29,024         —           —          790,321   

Other liabilities

     115,455         42,462         29,055         —          186,972   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     1,496,704         244,560         214,858         (684,926     1,271,196   

Stockholders’ equity

     1,028,499         1,610,505         530,939         (2,141,444     1,028,499   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 2,525,203       $ 1,855,065       $ 745,797       $ (2,826,370   $ 2,299,695   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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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, 2010

 

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

Assets

         

Cash and cash equivalents

  $ 292,738      $ 1,430      $ 90,402      $ —        $ 384,570   

Restricted cash

    8,633        —          1,885        —          10,518   

Accounts receivable, net

    109,663        140,328        76,086        —          326,077   

Intercompany receivables

    49,809        497,108        96,251        (643,168     —     

Other current assets

    26,635        15,007        25,908        —          67,550   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    487,478        653,873        290,532        (643,168     788,715   

Property and equipment, net

    47,091        13,893        12,254        —          73,238   

Goodwill

    426,866        541,395        301,186        —          1,269,447   

Other intangible assets, net

    5,906        79,984        49,080        —          134,970   

Investments in subsidiaries

    1,619,224        512,127        —          (2,131,351     —     

Other assets

    68,983        58,713        20,293        —          147,989   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 2,655,548      $ 1,859,985      $ 673,345      $ (2,774,519   $ 2,414,359   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

         

Intercompany payables

  $ 488,860      $ 70,622      $ 83,686      $ (643,168   $ —     

Other current liabilities

    135,652        104,056        49,574        —          289,282   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    624,512        174,678        133,260        (643,168     289,282   

Long-term debt, net

    756,515        29,048        —          —          785,563   

Other liabilities

    107,202        40,034        24,959        —          172,195   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    1,488,229        243,760        158,219        (643,168     1,247,040   

Stockholders’ equity

    1,167,319        1,616,225        515,126        (2,131,351     1,167,319   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

  $ 2,655,548      $ 1,859,985      $ 673,345      $ (2,774,519   $ 2,414,359   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Condensed Consolidating Statement of Income for the Three Months Ended June 30, 2011

 

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

Revenues

  $ 144,100      $ 254,289      $ 103,392      $ (101,344   $ 400,437   

Operating expenses

         

Direct cost of revenues

    94,622        182,744        68,010        (98,340     247,036   

Selling, general and administrative expense

    40,544        30,296        26,983        (3,004     94,819   

Special charges

    10,121        228        6,423        —          16,772   

Amortization of other intangible assets

    605        3,264        1,629        —          5,498   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    (1,792     37,757        347        —          36,312   

Other (expense) income

    (12,595     759        259        —          (11,577
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax provision

    (14,387     38,516        606        —          24,735   

Income tax (benefit) provision

    (6,757     17,012        (2,432     —          7,823   

Equity in net earnings of subsidiaries

    24,542        2,944        —          (27,486     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 16,912      $ 24,448      $ 3,038      $ (27,486   $ 16,912   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

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

 

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

Revenues

  $ 127,150      $ 300,309      $ 73,786      $ (152,212   $ 349,033   

Operating expenses

         

Direct cost of revenues

    76,463        234,633        48,141        (150,206     209,031   

Selling, general and administrative expense

    36,092        31,390        16,726        (2,006     82,202   

Amortization of other intangible assets

    710        3,931        1,211        —          5,852   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    13,885        30,355        7,708        —          51,948   

Other (expense) income

    (10,909     2,017        (2,627     —          (11,519
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax provision

    2,976        32,372        5,081        —          40,429   

Income tax provision (benefit)

    4,810        13,403        (2,850     —          15,363   

Equity in net earnings of subsidiaries

    26,900        7,416        2,088        (36,404     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 25,066      $ 26,385      $ 10,019      $ (36,404   $ 25,066   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Condensed Consolidating Statement of Income for the Six Months Ended June 30, 2011

 

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

Revenues

  $ 270,751      $ 507,388      $ 180,391      $ (196,277   $ 762,253   

Operating expenses

         

Direct cost of revenues

    174,528        363,381        119,589        (191,322     466,176   

Selling, general and administrative expense

    76,198        64,413        47,892        (4,955     183,548   

Special charges

    10,121        228        6,423        —          16,772   

Amortization of other intangible assets

    879        6,859        3,214        —          10,952   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    9,025        72,507        3,273        —          84,805   

Other (expense) income

    (25,680     557        236        —          (24,887
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax provision

    (16,655     73,064        3,509        —          59,918   

Income tax (benefit) provision

    (7,634     30,371        (1,529     —          21,208   

Equity in net earnings of subsidiaries

    47,731        4,455        —          (52,186     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 38,710      $ 47,148      $ 5,038      $ (52,186   $ 38,710   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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 Statement of Income for the Six Months Ended June 30, 2010

 

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

Revenues

  $ 262,259      $ 602,846      $ 146,434      $ (312,466   $ 699,073   

Operating expenses

         

Direct cost of revenues

    154,494        467,230        92,876        (308,109     406,491   

Selling, general and administrative expense

    73,810        65,573        31,577        (4,357     166,603   

Special charges

    18,558        10,842        845        —          30,245   

Amortization of other intangible assets

    1,420        8,021        2,502        —          11,943   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    13,977        51,180        18,634        —          83,791   

Other (expense) income

    (20,450     4,742        (4,775     —          (20,483
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax provision

    (6,473     55,922        13,859        —          63,308   

Income tax provision (benefit)

    905        23,152        —          —          24,057   

Equity in net earnings of subsidiaries

    46,629        12,986        4,273        (63,888     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 39,251      $ 45,756      $ 18,132      $ (63,888   $ 39,251   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Condensed Consolidating Statement of Cash Flow for the Six Months Ended June 30, 2011

 

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

Operating activities

        

Net cash (used in) provided by operating activities

   $ (33,412   $ 42,156      $ (21,568   $ (12,824

Investing activities

        

Payments for acquisition of businesses, net of cash received

     (33,735     —          (17,153     (50,888

Purchases of property and equipment

     (4,058     (6,192     (2,455     (12,705

Other

     (405     —          —          (405
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (38,198     (6,192     (19,608     (63,998
  

 

 

   

 

 

   

 

 

   

 

 

 

Financing activities

        

Borrowings under revolving line of credit

     25,000        —          —          25,000   

Payments under revolving line of credit

     (25,000     —          —          (25,000

Payments of long-term debt and capital lease obligations

     (776     (161     —          (937

Net issuance of common stock and other

     736        —          —          736   

Purchase and retirement of common stock

     (209,400     —          —          (209,400

Excess tax benefits from share-based compensation

     124        —          —          124   

Intercompany transfers

     12,285        (36,862     24,577        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (197,031     (37,023     24,577        (209,477
  

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     —          —          474        474   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (268,641     (1,059     (16,125     (285,825

Cash and cash equivalents, beginning of period

     292,738        1,430        90,402        384,570   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 24,097      $ 371      $ 74,277      $ 98,745   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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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 Flow for the Six Months Ended June 30, 2010

 

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

Operating activities

        

Net cash (used in) provided by operating activities

   $ (11,322   $ 42,592      $ (9,315   $ 21,955   

Investing activities

        

Payments for acquisition of businesses, net of cash received

     (22,834     —          —          (22,834

Purchases of property and equipment and other

     (4,393     (5,644     (2,070     (12,107

Proceeds from sale or maturity of short-term investments

     15,000        —          —          15,000   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (12,227     (5,644     (2,070     (19,941
  

 

 

   

 

 

   

 

 

   

 

 

 

Financing activities

        

Borrowings under revolving line of credit

     20,000        —          —          20,000   

Payments of revolving linet of credit

     (20,000     —          —          (20,000

Payments of long-term debt and capital lease obligations

     (161     (304     —          (465

Net issuance of common stock and other

     4,677        —          —          4,677   

Excess tax benefits from share-based compensation

     625        —          —          625   

Intercompany transfers

     31,658        (36,645     4,987        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     36,799        (36,949     4,987        4,837   
  

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     —          —          (2,469     (2,469
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     13,250        (1     (8,867     4,382   

Cash and cash equivalents, beginning of period

     60,720        665        57,487        118,872   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 73,970      $ 664      $ 48,620      $ 123,254   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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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 six month periods ended June 30, 2011 and 2010 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, 2010. 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 matters, such as restructuring (including bankruptcy), financing, claims management, M&A, post-acquisition integration, valuations, tax issues and performance improvement.

Our Forensic and Litigation Consulting (“FLC”) 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 services 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.

We derive substantially all of our revenues from providing professional services to both U.S. and international 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.

 

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Table of Contents

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® 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, accretion of contingent consideration (often referred to as earn-outs) and special charges. We define adjusted segment EBITDA as a segment’s share of consolidated operating income before depreciation, amortization of intangible assets, accretion of contingent consideration and special charges. 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 each of 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.

 

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Table of Contents

EXECUTIVE HIGHLIGHTS

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2011      2010      2011     2010  
     (dollars in thousands, except per share amounts)  

Revenues

   $ 400,437       $ 349,033       $ 762,253      $ 699,073   

Earnings per common share—diluted

     0.40         0.52         0.88        0.82   

Adjusted earnings per common share—diluted

     0.64         0.52         1.11        1.19   

Operating income

     36,312         51,948         84,805        83,791   

Adjusted EBITDA

     66,524         65,458         128,212        141,340   

Cash provided by (used in) operating activities

     26,373         49,218         (12,824     21,955   

Total number of employees at June 30,

     3,740         3,366         3,740        3,366   

Second Quarter 2011 Executive Highlights

Revenues

Revenues for the quarter ended June 30, 2011 increased by 14.7% or $51.4 million to $400.4 million, compared to $349.0 million in the same prior year period, with approximately 2% of the increase due to favorable currency translation related primarily to our UK based operations. Organic growth of 4.3% and acquisition growth of 8.6% made up the remainder.

Our second quarter revenue results reflected strength in our Economic Consulting, Technology, FLC and Strategic Communications segments which included the impact from our acquisitions of several practices from LECG Corporation at the end of March 2011. Our Corporate Finance/Restructuring segment continues to be affected by a decline in restructuring activity, partially offset by revenues generated by the business in Asia acquired in the third quarter of 2010 and improvement in its Healthcare practice. Our other four segments accounted for approximately 25% of such revenue growth which more than overcame the decline in the Corporate Finance/Restructuring segment.

Adjusted EBITDA

Adjusted EBITDA, as previously defined, increased by 1.6% or $1.1 million to $66.5 million, or 16.6% of revenues, compared to $65.5 million, or 18.8% of revenues, in the prior year period. Adjusted EBITDA increased with strong revenue performance in the Economic and Technology segments which was largely offset by the impact of the decline in Corporate Finance/Restructuring revenue.

Earnings per share

Earnings per diluted share for the three months ended June 30, 2011 were $0.40, which included $16.8 million of special charges primarily related to workforce realignments, compared to $0.52 in the prior year period. Adjusted earnings per diluted share, as previously defined, were $0.64, compared to $0.52 in the prior year period due to the impact of the operating results described above and an 11.7% reduction in fully diluted shares outstanding compared to the prior year period due to the repurchase of 5.1 million shares through June 2011 under the $209.4 million accelerated stock buyback with Goldman, Sachs & Co. (the “2011 ASB”).

Operating cash flows

Cash provided by operating activities for the three months ended June 30, 2011 was $26.4 million as compared to $49.2 million for the three months ended June 30, 2010. The decline was primarily a result of a shift in the relative mix of receivables towards clients and geographic regions that traditionally have longer billing and collection cycles, particularly related to revenue growth in our Economic Consulting business and our Asia region in general. Overall, cash collections for the quarter were strong at approximately $349 million, and the current collection experience of our accounts receivable by practice has not changed materially.

 

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Table of Contents

Headcount

Headcount of 3,740 at June 30, 2011 increased by 374, or 11.1%, compared to the same period a year ago including approximately 200 professionals who joined FTI Consulting as a result of the professionals who joined us from LECG in the first quarter of 2011 along with approximately 130 professionals who joined us with the practices in Asia acquired in the third quarter of 2010. Headcount increased in all segments, but most notably in our Economic Consulting and FLC segments, through a combination of hiring to support the growth of these businesses and the addition of employees who joined the Company through acquisitions completed during the previous twelve months. Headcount in the Corporate Finance/Restructuring segment increased due to the acquisition of the practices in Asia in the third quarter of 2010, partially offset by staff reductions made in 2010 and 2011 to balance current demands with resource requirements.

Other strategic activities

We recorded special charges in the three months ended June 30, 2011 of $16.8 million which reduced our fully diluted earnings per share by $0.24. These charges are primarily comprised of salary continuation, loan forgiveness and equity acceleration associated with a reduction in workforce totaling 37 employees, primarily in our Corporate Finance/Restructuring segment. The charges reflect actions we took to reduce key management overhead in connection with the recent regional restructuring of the Company as well as targeted workforce reductions to align capacity with expected market trends. The total cash outflow associated with the special charges is expected to be $10.4 million, while the noncash charges are $6.4 million.

On March 3, 2011 we announced that we had entered into a $209.4 million accelerated stock buyback with Goldman, Sachs & Co. During the three months ended June 30, 2011 we received and retired approximately 628,000 shares of our common stock under the 2011 ASB. At final settlement, we may be entitled to receive additional shares.

 

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Table of Contents

CONSOLIDATED RESULTS OF OPERATIONS

Segment and Consolidated Operating Results:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2011     2010     2011     2010  
     (in thousands, except per share amounts)  

Revenues

        

Corporate Finance/Restructuring

   $ 101,896      $ 111,095      $ 209,150      $ 228,562   

Forensic and Litigation Consulting

     93,368        80,754        176,281        159,432   

Economic Consulting

     94,480        64,552        168,739        131,859   

Technology

     57,130        42,791        108,165        86,164   

Strategic Communications

     53,563        49,841        99,918        93,056   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

   $ 400,437      $ 349,033      $ 762,253      $ 699,073   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

        

Corporate Finance/Restructuring

   $ 3,289      $ 23,567      $ 21,809      $ 49,211   

Forensic and Litigation Consulting

     16,849        17,537        32,192        29,937   

Economic Consulting

     15,889        10,459        28,267        16,225   

Technology

     15,973        10,991        29,944        18,293   

Strategic Communications

     4,511        6,550        7,981        8,897   
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment operating income

     56,511        69,104        120,193        122,563   

Unallocated corporate expenses

     (20,199     (17,156     (35,388     (38,772
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating income

     36,312        51,948        84,805        83,791   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense)

        

Interest income and other

     2,923        (141     4,923        2,213   

Interest expense

     (14,500     (11,378     (29,810     (22,696
  

 

 

   

 

 

   

 

 

   

 

 

 
     (11,577     (11,519     (24,887     (20,483
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax provision

     24,735        40,429        59,918        63,308   

Income tax provision

     7,823        15,363        21,208        24,057   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 16,912      $ 25,066      $ 38,710      $ 39,251   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share—basic

   $ 0.42      $ 0.55      $ 0.92      $ 0.86   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share—diluted

   $ 0.40      $ 0.52      $ 0.88      $ 0.82   
  

 

 

   

 

 

   

 

 

   

 

 

 

Reconciliation of Operating Income to Adjusted EBITDA:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2011      2010      2011      2010  
     (in thousands)  

Operating income

   $ 36,312       $ 51,948       $ 84,805       $ 83,791   

Add back:

           

Depreciation and amortization

     7,143         7,658         14,088         15,361   

Amortization of other intangible assets

     5,498         5,852         10,952         11,943   

Accretion of contingent consideration

     799         —           1,595         —     

Special charges

     16,772         —           16,772         30,245   
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ 66,524       $ 65,458       $ 128,212       $ 141,340   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2011      2010      2011      2010  

Net income

   $ 16,912       $ 25,066       $ 38,710       $ 39,251   

Add back: Special charges, net of tax

     10,198         —           10,198         18,069   
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted net income

   $ 27,110       $ 25,066       $ 48,908       $ 57,320   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per common share—diluted

   $ 0.40       $ 0.52       $ 0.88       $ 0.82   
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted earnings per common share—diluted

   $ 0.64       $ 0.52       $ 1.11       $ 1.19   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of common shares outstanding—diluted

     42,518         48,176         44,070         48,153   
  

 

 

    

 

 

    

 

 

    

 

 

 

Three Months Ended June 30, 2011 Compared to Three Months Ended June 30, 2010

Revenues and operating income

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

Unallocated corporate expenses

Unallocated corporate expenses increased $3.0 million, or 17.7%, to $20.2 million for the three months ended June 30, 2011, from $17.2 million for the three months ended June 30, 2010. Excluding the impact of special charges of $2.8 million recorded in the three months ended June 30, 2011, unallocated corporate expenses increased $0.2 million, or 1.2% from the three months ended June 30, 2010. The increase was primarily due to $2.0 million of higher performance-based compensation costs, largely offset by a $1.6 million increase in allocation of centrally managed costs in direct support of our operating segments.

Interest income and other

Interest income and other, which includes foreign currency transaction gains and losses, increased by $3.1 million to $2.9 million for the three months ended June 30, 2011 from a net expense of $0.1 million for the three months ended June 30, 2010. The increase is primarily due to a $2.4 million favorable impact from net foreign currency transaction gains 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 $3.1 million to $14.5 million for the three months ended June 30, 2011 from $11.4 million for the three months ended June 30, 2010. The increase is due to additional senior debt from the issuance of $400.0 million aggregate principal amount of 6 3/4% senior notes due 2020 in the third quarter of 2010 and the loan notes issued as a portion of the consideration in connection with the acquisition in Asia which we completed in August 2010. This increase was partially offset by a $1.2 million favorable impact of lower interest rates as a result of interest rate swap agreements entered into in March 2011.

Special charges

During the quarter ended June 30, 2011, we recorded special charges of $16.8 million, of which $6.4 million was non-cash. The charges reflect actions we took to reduce executive management related overhead in connection with our recent restructuring on a global basis and to align our workforce with expected market trends. These actions included a reduction in workforce totaling 37 employees. The special charges consisted of:

 

   

$10.4 million of salary continuance and other contractual employee related costs associated with the reduction in workforce;

 

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$3.6 million related to loan forgiveness and accelerated vesting of share-based awards related to the reduction in workforce; and

 

   

$2.8 million of deferred costs under a service contract without a substantive future economic benefit to the Company.

The following table details the special charges by segment and the decrease in total headcount that resulted from the reduction in workforce during the three months ended June 30, 2011:

 

     Special
Charges
     Total
Headcount
 
     (dollars in thousands)  

Corporate Finance/Restructuring

   $ 11,000         22   

Forensic and Litigation Consulting

     839         7   

Economic Consulting

     2,093         6   
  

 

 

    

 

 

 
     13,932         35   

Unallocated Corporate

     2,840         2   
  

 

 

    

 

 

 

Total

   $ 16,772         37   
  

 

 

    

 

 

 

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 or become known. The effective tax rate was 31.6% for the three months ended June 30, 2011 as compared to 38.0% for the three months ended June 30, 2010. For the three months ended June 30, 2011, the effective tax rate was favorably impacted by lower provisions for foreign income taxes due to lower tax rates on undistributed earnings of certain foreign subsidiaries that we intend to reinvest indefinitely, and lower state income taxes due to the mix of earnings by jurisdiction. In addition, we recognized tax benefits in the three months ended June 30, 2011 for discrete items primarily related to the reversal of previously recognized deferred tax liabilities which are no longer required.

Six Months Ended June 30, 2011 Compared to Six Months Ended June 30, 2010

Revenues and operating income

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

Unallocated corporate expenses

Unallocated corporate expenses decreased $3.4 million, or 8.7%, to $35.4 million for the six months ended June 30, 2011, from $38.8 million for the six months ended June 30, 2010. Excluding the impact of special charges of $2.8 million recorded in the three months ended June 30, 2011 and $5.1 million recorded in the six months ended June 30, 2010, unallocated corporate expenses decreased $1.1 million, or 3.4% from the six months ended June 30, 2010. The decrease was primarily due to a $3.3 million increase in allocation of centrally managed costs in direct support of our operating segments, partially offset by $2.2 million higher performance-based compensation costs.

Interest income and other

Interest income and other, which includes foreign currency transaction gains and losses, increased by $2.7 million to $4.9 million for the six months ended June 30, 2011 from $2.2 million for the six months ended June 30, 2010. The increase is primarily due to a $2.0 million favorable impact from net foreign currency transaction gains resulting from the remeasurement of receivables and payables required to be settled in a currency other than an entity’s functional currency.

 

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Interest expense

Interest expense increased $7.1 million to $29.8 million for the six months ended June 30, 2011 from $22.7 million for the six months ended June 30, 2010. The increase is due to additional senior debt from the issuance of $400.0 million aggregate principal amount of 6 3/4% senior notes due 2020 in the third quarter of 2010 and the loan notes issued as a portion of the consideration in connection with the acquisition in Asia which we completed in August 2010. This increase was partially offset by a $1.5 million favorable impact of lower interest rates as a result of interest rate swap agreements entered into in March 2011.

Special charges

During the six months ended June 30, 2011 and 2010, we recorded special charges of $16.8 million and $30.2 million, respectively.

See the “Special charges” discussion above for the Three Months Ended June 30, 2011 Compared to Three Months Ended June 30, 2010 for an expanded discussion of the special charges recorded in 2011.

During the six months ended June 30, 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 reflected 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 consisted 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 and the decrease in total headcount that resulted from the reduction in workforce during the six months ended June 30, 2010:

 

     Special
Charges
     Total
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   
  

 

 

    

 

 

 

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 or become known. The effective tax rate was 35.4% for the

 

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six months ended June 30, 2011 as compared to 38.0% for the six months ended June 30, 2010. For the six months ended June 30, 2011, the effective tax rate was favorably impacted by lower provisions for foreign income taxes due to lower tax rates on undistributed earnings of certain foreign subsidiaries that we intend to reinvest indefinitely, and lower state income taxes due to the mix of earnings by jurisdiction. In addition, we recognized tax benefits in the six months ended June 30, 2011 for discrete items primarily related to the reversal of previously recognized deferred tax liabilities which are no longer required.

SEGMENT RESULTS

Adjusted Segment EBITDA

The following table reconciles segment operating income to adjusted segment EBITDA for the three and six months ended June 30, 2011 and 2010.

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2011      2010      2011      2010  
     (in thousands)  

Segment operating income

   $ 56,511       $ 69,104       $ 120,193       $ 122,563   

Add back:

           

Depreciation and amortization

     5,866         6,312         11,614         12,638   

Amortization of other intangible assets

     5,498         5,852         10,952         11,943   

Accretion of contingent consideration

     799         —           1,595         —     

Special charges

     13,932         —           13,932         25,150   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total adjusted segment EBITDA

   $ 82,606       $ 81,268       $ 158,286       $ 172,294   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other Segment Operating Data

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2011     2010     2011     2010  

Number of revenue-generating professionals (at period end):

        

Corporate Finance/Restructuring

     730        683        730        683   

Forensic and Litigation Consulting

     863        784        863        784   

Economic Consulting

     409        286        409        286   

Technology

     261        234        261        234   

Strategic Communications

     562        561        562        561   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue-generating professionals

     2,825        2,548        2,825        2,548   
  

 

 

   

 

 

   

 

 

   

 

 

 

Utilization rates of billable professionals:(1)

        

Corporate Finance/Restructuring

     65     65     68     67

Forensic and Litigation Consulting(3)

     71     72     70     74

Economic Consulting

     86     77     87     80

Average billable rate per hour:(2)

        

Corporate Finance/Restructuring

   $ 420      $ 438      $ 426      $ 448   

Forensic and Litigation Consulting(3)

     330        327        330        319   

Economic Consulting

     496        472        487        470   

 

(1) 

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

 

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  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.

 

(2) 

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 and Strategic Communications segments as most of the revenues of these segments are not based on billable hours.

 

(3) 

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

CORPORATE FINANCE/RESTRUCTURING

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2011     2010     2011     2010  
     (dollars in thousands, except rate per hour)  

Revenues

   $ 101,896      $ 111,095      $ 209,150      $ 228,562   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Direct cost of revenues

     67,036        69,720        135,283        135,888   

Selling, general and administrative expenses

     19,151        16,325        38,220        33,899   

Special charges

     11,000        —          11,000        6,589   

Amortization of other intangible assets

     1,420        1,483        2,838        2,975   
  

 

 

   

 

 

   

 

 

   

 

 

 
     98,607        87,528        187,341        179,351   
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment operating income

     3,289        23,567        21,809        49,211   

Add back:

        

Depreciation and amortization of intangible assets

     2,314        2,410        4,608        4,896   

Accretion of contingent consideration

     708        —          1,415        —     

Special charges

     11,000        —          11,000        6,589   
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted segment EBITDA

   $ 17,311      $ 25,977      $ 38,832      $ 60,696   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit(1)

   $ 34,860      $ 41,375      $ 73,867      $ 92,674   

Gross profit margin(2)

     34.2     37.2     35.3     40.5

Adjusted segment EBITDA as a percent of revenues

     17.0     23.4     18.6     26.6

Number of revenue-generating professionals (at period end)

     730        683        730        683   

Utilization rates of billable professionals

     65     65     68     67

Average billable rate per hour

   $ 420      $ 438      $ 426      $ 448   

 

(1) 

Revenues less direct cost of revenues

 

(2) 

Gross profit as a percent of revenues

Three Months Ended June 30, 2011 Compared to Three Months Ended June 30, 2010

Revenues decreased $9.2 million, or 8.3%, to $101.9 million for the three months ended June 30, 2011 from $111.1 million for the three months ended June 30, 2010 with approximately 1.0% growth from the estimated positive impact of foreign currency translation, primarily due to the strengthening of the British pound relative to the U.S. dollar. Revenue from the Asia practice acquired in the third quarter of 2010 was $6.4 million, or 5.7%. Organic revenue declined $16.6 million, or 15.0% due to fewer consulting hours and lower average billable rates per hour as the demand for bankruptcy and restructuring services in North America decreased, partially offset by higher healthcare services and European restructuring revenues.

 

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Gross profit decreased $6.5 million, or 15.7%, to $34.9 million for the three months ended June 30, 2011 from $41.4 million for the three months ended June 30, 2010. Gross profit margin decreased 3.0 percentage points to 34.2% for the three months ended June 30, 2011 from 37.2% for the three months ended June 30, 2010. The gross profit margin decline was primarily due to lower revenue from the higher margin bankruptcy and restructuring practices, partially offset by improvements in the segment’s healthcare services and from the acquired Asia practice.

SG&A expense increased by $2.8 million, or 17.3%, to $19.2 million for the three months ended June 30, 2011 from $16.3 million for the three months ended June 30, 2010. SG&A expense was 18.8% of revenue for the three months ended June 30, 2011, up from 14.7% for the three months ended June 30, 2010. The increase in SG&A expense was primarily due to overhead related to the acquired Asia practice. Bad debt expense was 0.1% of revenue for the three months ended June 30, 2011, unchanged from the three months ended June 30, 2010.

Amortization of other intangible assets decreased to $1.4 million for the three months ended June 30, 2011 from $1.5 million for the three months ended June 30, 2010.

Adjusted segment EBITDA decreased $8.7 million, or 33.4%, to $17.3 million for the three months ended June 30, 2011 from $26.0 million for the three months ended June 30, 2010.

Six Months Ended June 30, 2011 Compared to Six Months Ended June 30, 2010

Revenues decreased $19.4 million, or 8.5%, to $209.2 million for the six months ended June 30, 2011 from $228.6 million for the six months ended June 30, 2010 with 0.6% growth from the estimated positive impact of foreign currency translation, primarily due to the strengthening of the British pound and Canadian dollar relative to the U.S. dollar. Revenue from the Asia practice acquired in the third quarter of 2010 was $13.2 million, or 5.8%. Organic revenue declined $34.0 million, or 14.9% due to fewer consulting hours and lower average billable rates per hour as the demand for bankruptcy and restructuring services decreased in North America and Europe, partially offset by higher healthcare services revenues.

Gross profit decreased $18.8 million, or 20.3%, to $73.9 million for the six months ended June 30, 2011 from $92.7 million for the six months ended June 30, 2010. Gross profit margin decreased 5.2 percentage points to 35.3% for the six months ended June 30, 2011 from 40.5% for the six months ended June 30, 2010. The gross profit margin decline was primarily due to lower revenues from the higher margin bankruptcy and restructuring practices, partially offset by improvements in healthcare services and from the acquired Asia practice.

SG&A expense increased by $4.3 million, or 12.7%, to $38.2 million for the six months ended June 30, 2011 from $33.9 million for the six months ended June 30, 2010. SG&A expense was 18.3% of revenue for the six months ended June 30, 2011, up from 14.8% for the six months ended June 30, 2010. The increase in SG&A expense was primarily due to overhead related to the acquired Asia practice. Bad debt expense was 0.1% of revenue for the six months ended June 30, 2011, unchanged from the six months ended June 30, 2010.

Amortization of other intangible assets decreased to $2.8 million for the six months ended June 30, 2011 from $3.0 million for the six months ended June 30, 2010.

Adjusted segment EBITDA decreased $21.9 million, or 36.0%, to $38.8 million for the six months ended June 30, 2011 from $60.7 million for the six months ended June 30, 2010.

 

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FORENSIC AND LITIGATION CONSULTING

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2011     2010     2011     2010  
     (dollars in thousands, except rate per hour)  

Revenues

   $ 93,368      $ 80,754      $ 176,281      $ 159,432   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Direct cost of revenues

     57,991        47,330        108,695        93,153   

Selling, general and administrative expenses

     17,093        14,921        33,368        28,821   

Special charges

     839        —          839        5,560   

Amortization of other intangible assets

     596        966        1,187        1,961   
  

 

 

   

 

 

   

 

 

   

 

 

 
     76,519        63,217        144,089        129,495   
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment operating income

     16,849        17,537        32,192        29,937   

Add back:

        

Depreciation and amortization of intangible assets

     1,453        1,809        2,899        3,633   

Accretion of contingent consideration

     91        —          180        —     

Special charges

     839        —          839        5,560   
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted segment EBITDA

   $ 19,232      $ 19,346      $ 36,110      $ 39,130   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit(1)

   $ 35,377      $ 33,424      $ 67,586      $ 66,279   

Gross profit margin(2)

     37.9     41.4     38.3     41.6

Adjusted segment EBITDA as a percent of revenues

     20.6     24.0     20.5     24.5

Number of revenue-generating professionals (at period end)

     863        784        863        784   

Utilization rates of billable professionals(3)

     71     72     70     74

Average billable rate per hour(3)

   $ 330      $ 327      $ 330      $ 319   

 

(1) 

Revenues less direct cost of revenues

 

(2) 

Gross profit as a percent of revenues

 

(3) 

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

Three Months Ended June 30, 2011 Compared to Three Months Ended June 30, 2010

Revenues increased $12.6 million, or 15.6%, to $93.4 million for the three months ended June 30, 2011 from $80.8 million for the three months ended June 30, 2010 with 1.4% growth from the estimated positive impact foreign currency translation, which was primarily due to the strengthening of the British pound and Brazilian real relative to the U.S. dollar. Revenue from the practices acquired from the LECG Corporation in the first quarter of 2011 was $5.0 million, or 6.1%, primarily driven by the disputes and forensic accounting and environmental solution practices in North America. The organic revenue growth of $6.5 million, or 8.1%, was attributed to increases in both consulting hours and higher average billable rates per hour in North America from the construction practice and insurance and compliance-related engagements, while the Asia Pacific and Europe, Middle East and Africa regions benefited from growth in our construction, forensic accounting and litigation support services.

Gross profit increased $2.0 million, or 5.8%, to $35.4 million for the three months ended June 30, 2011 from $33.4 million for the three months ended June 30, 2010. Gross profit margin decreased 3.5 percentage points to 37.9% for the three months ended June 30, 2011 from 41.4% for the three months ended June 30, 2010. The gross profit margin decline was due to lower utilization in the North America and data analytics practices and increased headcount from investments in key practices which offset higher consulting volume and price increases.

SG&A expense increased $2.2 million, or 14.6%, to $17.1 million for the three months ended June 30, 2011 from $14.9 million for the three months ended June 30, 2010. SG&A expense was 18.3% of revenue for the

 

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three months ended June 30, 2011, down from 18.5% for the three months ended June 30, 2010. The increase in SG&A expense was due to increased facilities and information technology support costs to support growing operations. Bad debt expense was 1.1% of revenues for the three months ended June 30, 2011 unchanged from the three months ended June 30, 2010.

Amortization of other intangible assets decreased to $0.6 million for the three months ended June 30, 2011 from $1.0 million for the three months ended June 30, 2010. The decrease in amortization of other intangible assets was due primarily to the timing of certain acquired intangible assets becoming fully amortized in 2010.

Adjusted segment EBITDA decreased by $0.1 million, or 0.6%, to $19.2 million for the three months ended June 30, 2011 from $19.3 million for the three months ended June 30, 2010.

Six Months Ended June 30, 2011 Compared to Six Months Ended June 30, 2010

Revenues increased $16.8 million, or 10.6%, to $176.3 million for the six months ended June 30, 2011 from $159.4 million for the six months ended June 30, 2010 with 0.9% growth from the estimated positive impact foreign currency translation, which was primarily due to the strengthening of the British pound and Brazilian real relative to the U.S. dollar. Revenue from the practices acquired from LECG in the first quarter of 2011 was $6.0 million, or 3.8%, primarily driven by the disputes and forensic accounting and environmental solution practices in North America. The organic revenue growth of $9.5 million, or 5.9%, was attributed to increases in both consulting hours and higher average billable rates per hour in North America from the construction practice and insurance and compliance-related engagements, while the Asia Pacific and Europe, Middle East and Africa regions benefited from growth in our construction, forensic accounting and litigation support services. These improvements were partially offset by lower data analytics revenue due to fewer consulting hours despite higher average billable rates per hour pertaining to that practice.

Gross profit increased $1.3 million, or 2.0%, to $67.6 million for the six months ended June 30, 2011 from $66.3 million for the six months ended June 30, 2010. Gross profit margin decreased 3.3 percentage points to 38.3% for the six months ended June 30, 2011 from 41.6% for the six months ended June 30, 2010. The gross profit margin decline was due to lower utilization and increased headcount from investments in key practices which offset higher consulting volume and price increases.

SG&A expense increased $4.5 million, or 15.8%, to $33.4 million for the six months ended June 30, 2011 from $28.8 million for the six months ended June 30, 2010. SG&A expense was 18.9% of revenue for the six months ended June 30, 2011, up from 18.1% for the six months ended June 30, 2010. The increase in SG&A expense was due to increased facilities and information technology support costs to support growing operations. Bad debt expense was 1.1% of revenues for the six months ended June 30, 2011 unchanged from the six months ended June 30, 2010.

Amortization of other intangible assets decreased to $1.2 million for the six months ended June 30, 2011 from $2.0 million for the six months ended June 30, 2010. The decrease in amortization of other intangible assets was due primarily to the timing of certain acquired intangible assets becoming fully amortized in 2010.

Adjusted segment EBITDA decreased by $3.0 million, or 7.7%, to $36.1 million for the six months ended June 30, 2011 from $39.1 million for the six months ended June 30, 2010.

 

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ECONOMIC CONSULTING

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2011     2010     2011     2010  
     (dollars in thousands, except rate per hour)  

Revenues

   $ 94,480      $ 64,552      $ 168,739      $ 131,859   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Direct cost of revenues

     64,357        44,398        115,885        89,267   

Selling, general and administrative expenses

     11,844        9,385        21,901        18,933   

Special charges

     2,093        —          2,093        6,814   

Amortization of other intangible assets

     297        310        593        620   
  

 

 

   

 

 

   

 

 

   

 

 

 
     78,591        54,093        140,472        115,634   
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment operating income

     15,889        10,459        28,267        16,225   

Add back:

        

Depreciation and amortization of intangible assets

     932        994        1,796        1,934   

Special charges

     2,093        —          2,093        6,814   
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted segment EBITDA

   $ 18,914      $ 11,453      $ 32,156      $ 24,973   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit(1)

   $ 30,123      $ 20,154      $ 52,854      $ 42,592   

Gross profit margin(2)

     31.9     31.2     31.3     32.3

Adjusted segment EBITDA as a percent of revenues

     20.0     17.7     19.1     18.9

Number of revenue-generating professionals (at period end)

     409        286        409        286   

Utilization rates of billable professionals

     86     77     87     80

Average billable rate per hour

   $ 496      $ 472      $ 487      $ 470   

 

(1) 

Revenues less direct cost of revenues

 

(2) 

Gross profit as a percent of revenues

Three Months Ended June 30, 2011 Compared to Three Months Ended June 30, 2010

Revenues increased by $29.9 million, or 46.4%, to $94.5 million for the three months ended June 30, 2011 from $64.6 million for the three months ended June 30, 2010 with 0.9% growth from the estimated positive impact of foreign currency translation, which was primarily due to the strengthening of the British pound relative to the U.S. dollar. Revenue from the competition policy, financial advisory, international arbitration, and airline competition practices acquired from LECG in the first quarter of 2011 was $18.0 million, or 27.9%. The organic revenue growth of $11.4 million, or 17.6%, was due to an increase in both consulting hours and average billable rates per hour in antitrust and M&A and the European international arbitration, regulatory and valuation practice compared to the three months ended June 30, 2010, as well as higher volumes in financial economics consulting.

Gross profit increased by $10.0 million, or 49.5%, to $30.1 million for the three months ended June 30, 2011 from $20.2 million for the three months ended June 30, 2010. Gross profit margin increased to 31.9% for the three months ended June 30, 2011 from 31.2% for the three months ended June 30, 2010. The increase in gross profit margin was attributed to more consulting hours and higher utilization with better staff leverage, partially offset by higher variable compensation costs relative to 2010.

SG&A expense increased by $2.5 million, or 26.2%, to $11.8 million for the three months ended June 30, 2011 from $9.4 million for the three months ended June 30, 2010. SG&A expense was 12.5% of revenue for the three months ended June 30, 2011 compared to 14.5% for the three months ended June 30, 2010. The increase in SG&A expense was due to overhead in the acquired practices. Bad debt expense was 1.7% of revenue for the three months ended June 30, 2011 compared to 1.8% of revenue for the three months ended June 30, 2010.

 

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Amortization of other intangible assets was $0.3 million for the three months ended June 30, 2011 unchanged from the three months ended June 30, 2010.

Adjusted segment EBITDA increased by $7.5 million, or 65.1%, to $18.9 million for the three months ended June 30, 2011 from $11.5 million for the three months ended June 30, 2010.

Six Months Ended June 30, 2011 Compared to Six Months Ended June 30, 2010

Revenues increased by $36.9 million, or 28.0%, to $168.7 million for the six months ended June 30, 2011 from $131.9 million for the six months ended June 30, 2010 with 0.5% growth from the estimated positive impact of foreign currency translation, which was primarily due to the strengthening of the British pound relative to the U.S. dollar. Revenue from the competition policy, financial advisory, international arbitration, and airline competition practices acquired from LECG in the first quarter of 2011 was $19.0 million, or 14.4%. The organic revenue growth of $17.2 million, or 13.0%, was due to an increase in both consulting hours and average billable rates per hour in antitrust and M&A and the European international arbitration, regulatory and valuation practice compared to the six months ended June 30, 2010, as well as higher volumes in financial economics consulting.

Gross profit increased by $10.3 million, or 24.1%, to $52.9 million for the six months ended June 30, 2011 from $42.6 million for the six months ended June 30, 2010. Gross profit margin decreased to 31.3% for the six months ended June 30, 2011 from 32.3% for the six months ended June 30, 2010. The gross profit margin decline was primarily due to increased variable compensation costs compared to the six months ended June 30, 2010 despite higher utilization and more consulting hours.

SG&A expense increased by $3.0 million, or 15.7%, to $21.9 million for the six months ended June 30, 2011 from $18.9 million for the six months ended June 30, 2010. SG&A expense was 13.0% of revenue for the six months ended June 30, 2011 compared to 14.4% for the six months ended June 30, 2010. The increase in SG&A expense was due to overhead in the acquired practices. Bad debt expense was 1.5% of revenue for the six months ended June 30, 2011 compared to 1.9% of revenue for the six months ended June 30, 2010.

Amortization of other intangible assets was $0.6 million for the six months ended June 30, 2011 unchanged compared to the six months ended June 30, 2010.

Adjusted segment EBITDA increased by $7.2 million, or 28.8%, to $32.2 million for the six months ended June 30, 2011 from $25.0 million for the six months ended June 30, 2010.

 

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TECHNOLOGY

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2011     2010     2011     2010  
     (dollars in thousands)  

Revenues

   $ 57,130      $ 42,791      $ 108,165      $ 86,164   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Direct cost of revenues

     23,187        17,094        42,338        30,975   

Selling, general and administrative expenses

     15,992        12,873        31,929        28,154   

Special charges

     —          —          —          4,927   

Amortization of other intangible assets

     1,978        1,833        3,954        3,815   
  

 

 

   

 

 

   

 

 

   

 

 

 
     41,157        31,800        78,221        67,871   
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment operating income

     15,973        10,991        29,944        18,293   

Add back:

        

Depreciation and amortization of intangible assets

     4,719        4,866        9,379        9,898   

Special charges

     —          —          —          4,927   
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted segment EBITDA

   $ 20,692      $ 15,857      $ 39,323      $ 33,118   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit(1)

   $ 33,943      $ 25,697      $ 65,827      $ 55,189   

Gross profit margin(2)

     59.4     60.1     60.9     64.1

Adjusted segment EBITDA as a percent of revenues

     36.2     37.1     36.4     38.4

Number of revenue-generating professionals (at period end)(3)

     261        234        261        234   

 

(1) 

Revenues less direct cost of revenues

 

(2) 

Gross profit as a percent of revenues

 

(3) 

Includes personnel involved in direct client assistance and revenue-generating consultants

Three Months Ended June 30, 2011 Compared to Three Months Ended June 30, 2010

Revenues increased by $14.3 million, or 33.5%, to $57.1 million for the three months ended June 30, 2011 from $42.8 million for the three months ended June 30, 2010 with 0.7% growth from the estimated positive impact of foreign currency translation due to the strengthening of the British pound relative to the U.S. dollar. Organic revenue growth of $14.0 million, or 32.8% was due to increased revenues from our AcuityTM offering and higher product licensing revenues related to complex litigation and investigation engagements. Unit based revenues increased due to higher volumes while pricing was relatively stable on the combined mix of offerings.

Unit based revenue is defined as revenue billed on a per item, per page, or using some other unit based method and includes revenue from data processing and storage, software usage and software licensing. Unit based revenue includes revenue associated with our proprietary software that is made available to customers, either via a web browser (“on-demand”) or installed at our customer or partner locations (“on-premise”). On-demand revenue is charged on a unit or monthly basis and includes, but is not limited to, processing and review related functions. On-premise revenue is comprised of up-front license fees, with recurring support and maintenance.

Gross profit increased by $8.2 million, or 32.1%, to $33.9 million for the three months ended June 30, 2011 from $25.7 million for the three months ended June 30, 2010. Gross profit margin decreased 0.7 percentage points to 59.4% for the three months ended June 30, 2011 from 60.1% for the three months ended June 30, 2010. The gross profit margin decline was due to a change in the mix of revenue with higher third party costs related to an increase in certain litigation engagements relative to the three months ended June 30, 2010.

 

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SG&A expense increased by $3.1 million, or 24.2%, to $16.0 million for the three months ended June 30, 2011 from $12.9 million for the three months ended June 30, 2010. SG&A expense was 28.0% of revenue for the three months ended June 30, 2011, down from 30.1% for the three months ended June 30, 2010. The increase in SG&A expense is primarily due to higher variable compensation and an increase in bad debt expense driven by fewer favorable collection resolutions on previously reserved items compared to the three months ended June 30, 2010. We had net recoveries of bad debt of $0.2 million for the three months ended June 30, 2011 compared to net recoveries of bad debt of $1.2 million for the three months ended June 30, 2010. Research and development expense in the second quarter of 2011 was $6.0 million, compared to $5.3 million in the three months ended June 30, 2010.

Amortization of other intangible assets increased to $2.0 million for the three months ended June 30, 2011 from $1.8 million for the three months ended June 30, 2010.

Adjusted segment EBITDA increased $4.8 million, or 30.5%, to $20.7 million for the three months ended June 30, 2011 from $15.9 million for the three months ended June 30, 2010.

Six Months Ended June 30, 2011 Compared to Six Months Ended June 30, 2010

Revenues increased by $22.0 million, or 25.5%, to $108.2 million for the six months ended June 30, 2011 from $86.2 million for the six months ended June 30, 2010 with 0.4% growth from the estimated positive impact of foreign currency translation due to the strengthening of the British pound relative to the U.S. dollar. The organic growth of $21.7 million, or 25.1%, was due to increased revenues from our AcuityTM offering, higher unit based revenues and higher consulting revenues. Unit based revenues increased due to higher volumes partially offset by lower per unit pricing related to a change in the mix of offerings. Consulting revenues increased primarily due to higher volumes from certain litigation matters.

Gross profit increased by $10.6 million, or 19.3%, to $65.8 million for the six months ended June 30, 2011 from $55.2 million for the six months ended June 30, 2010. Gross profit margin decreased 3.2 percentage points to 60.9% for the six months ended June 30, 2011 from 64.1% for the six months ended June 30, 2010. The gross profit margin decline was due to a change in the mix of revenue with higher margin unit based revenue comprising a smaller percentage of total revenue, coupled with higher third party costs related to an increase in certain litigation engagements relative to the six months ended June 30, 2010.

SG&A expense increased by $3.8 million, or 13.4%, to $31.9 million for the six months ended June 30, 2011 from $28.2 million for the six months ended June 30, 2010. SG&A expense was 29.5% of revenue for the six months ended June 30, 2011, down from 32.7% for the six months ended June 30, 2010. The increase in SG&A expense is primarily due to higher variable compensation and an increase in bad debt expense driven by fewer favorable resolution or collections on previously reserved items compared to the six months ended June 30, 2010. Bad debt expense was 0.3% of revenues for the six months ended June 30, 2011 compared to net recoveries of bad debt of $0.9 million for the six months ended June 30, 2010. Research and development expense for the six months ended June 30, 2011 was $11.8 million, compared to $10.7 million for the six months ended June 30, 2010.

Amortization of other intangible assets increased to $4.0 million for the six months ended June 30, 2011 from $3.8 million for the six months ended June 30, 2010.

Adjusted segment EBITDA increased $6.2 million, or 18.7%, to $39.3 million for the six months ended June 30, 2011 from $33.1 million for the six months ended June 30, 2010.

 

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STRATEGIC COMMUNICATIONS

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2011     2010