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 September 30, 2012

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 November 1, 2012

Common stock, par value $0.01 per share

   41,470,784

 

 

 


Table of Contents

FTI CONSULTING, INC. AND SUBSIDIARIES

INDEX

 

          Page  

PART I—FINANCIAL INFORMATION

  

Item 1.

   Financial Statements   
   Condensed Consolidated Balance Sheets—September 30, 2012 and December 31, 2011      3   
   Condensed Consolidated Statements of Comprehensive Income—Three and Nine months ended September 30, 2012 and 2011      4   
   Condensed Consolidated Statement of Stockholders’ Equity—Nine months ended September 30, 2012      5   
   Condensed Consolidated Statements of Cash Flows—Nine months ended September 30, 2012 and 2011      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.

   Mine Safety Disclosures      47   

Item 5.

   Other Information      47   

Item 6.

   Exhibits      47   

SIGNATURES

     49   

 

2


Table of Contents

PART I—FINANCIAL INFORMATION

FTI Consulting, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except per share amounts)

 

Item 1. Financial Statements

 

     September  30,
2012
    December  31,
2011
 
     (Unaudited)        

Assets

    

Current assets

    

Cash and cash equivalents

   $ 126,928      $ 264,423   

Restricted cash

     1,192        10,213   

Accounts receivable:

    

Billed receivables

     363,486        335,758   

Unbilled receivables

     215,456        173,440   

Allowance for doubtful accounts and unbilled services

     (93,885     (80,096
  

 

 

   

 

 

 

Accounts receivable, net

     485,057        429,102   

Current portion of notes receivable

     32,735        26,687   

Prepaid expenses and other current assets

     35,327        30,448   

Income taxes receivable

     11,562        10,081   
  

 

 

   

 

 

 

Total current assets

     692,801        770,954   

Property and equipment, net of accumulated depreciation

     66,933        74,448   

Goodwill

     1,327,041        1,309,358   

Other intangible assets, net of amortization

     104,068        118,889   

Notes receivable, net of current portion

     97,141        81,748   

Other assets

     61,964        55,687   
  

 

 

   

 

 

 

Total assets

   $ 2,349,948      $ 2,411,084   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Current liabilities

    

Accounts payable, accrued expenses and other

   $ 99,536      $ 132,773   

Accrued compensation

     154,773        180,366   

Current portion of long-term debt and capital lease obligations

     81,021        153,381   

Billings in excess of services provided

     25,519        19,063   

Deferred income taxes

     6,215        12,254   
  

 

 

   

 

 

 

Total current liabilities

     367,064        497,837   

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

     636,821        643,579   

Deferred income taxes

     99,373        88,071   

Other liabilities

     72,970        75,395   
  

 

 

   

 

 

 

Total liabilities

     1,176,228        1,304,882   
  

 

 

   

 

 

 

Commitments and contingent liabilities (notes 8, 10 and 11)

    

Stockholders’ equity

    

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

     —          —     

Common stock, $0.01 par value; shares authorized—75,000; shares issued and outstanding—41,355 (2012) and 41,484 (2011)

     414        415   

Additional paid-in capital

     387,986        383,978   

Retained earnings

     827,092        778,201   

Accumulated other comprehensive loss

     (41,772     (56,392
  

 

 

   

 

 

 

Total stockholders’ equity

     1,173,720        1,106,202   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 2,349,948      $ 2,411,084   
  

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements

 

3


Table of Contents

FTI Consulting, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(in thousands, except per share data)

Unaudited

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2012     2011     2012     2011  

Revenues

   $ 386,055      $ 413,802      $ 1,177,526      $ 1,176,055   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

        

Direct cost of revenues

     241,614        249,975        735,452        723,903   

Selling, general and administrative expense

     88,909        97,618        283,958        280,364   

Special charges

     2,775        —          29,557        15,212   

Acquisition-related contingent consideration

     403        944        (2,581     2,538   

Amortization of other intangible assets

     5,766        5,843        16,773        16,795   
  

 

 

   

 

 

   

 

 

   

 

 

 
     339,467        354,380        1,063,159        1,038,812   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     46,588        59,422        114,367        137,243   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense)

        

Interest income and other

     1,584        486        4,503        5,409   

Interest expense

     (13,208     (14,319     (43,607     (44,129
  

 

 

   

 

 

   

 

 

   

 

 

 
     (11,624     (13,833     (39,104     (38,720
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax provision

     34,964        45,589        75,263        98,523   

Income tax provision

     12,251        16,150        26,372        34,501   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 22,713      $ 29,439      $ 48,891      $ 64,022   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share—basic

   $ 0.56      $ 0.73      $ 1.21      $ 1.54   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share—diluted

   $ 0.55      $ 0.70      $ 1.17      $ 1.47   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax:

        

Foreign currency translation adjustments, net of tax expense (benefit) of $0 for the three and nine months ended September 30, 2012, and $500 and ($1,568) for the three and nine months ended September 30, 2011, respectively

   $ 12,731      $ (15,873   $ 14,620      $ 782   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     12,731        (15,873     14,620        782   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 35,444      $ 13,566      $ 63,511      $ 64,804   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements

 

4


Table of Contents

FTI Consulting, Inc. and Subsidiaries

Condensed Consolidated Statement of Stockholders’ Equity

(in thousands)

Unaudited

 

    Common Stock     Additional
Paid-in
Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive
Loss
    Total  
  Shares     Amount          

Balance December 31, 2011

    41,484      $ 415      $ 383,978      $ 778,201      $ (56,392   $ 1,106,202   

Net income

    —          —          —          48,891        —          48,891   

Other comprehensive income:

           

Cumulative translation adjustment

    —          —          —          —          14,620        14,620   

Issuance of common stock in connection with:

           

Exercise of options, net of income tax expense from share-based awards of $270

    206        2        5,110        —          —          5,112   

Restricted share grants, less net settled shares of 129

    423        4        (4,885     —          —          (4,881

Stock units issued under incentive compensation plan

    —          —          3,079        —          —          3,079   

Business combinations

    —          —          (3,647     —          —          (3,647

Reacquisition of equity component of convertible debt

    —          —          (108     —          —          (108

Purchase and retirement of common stock

    (758     (7     (20,006     —          —          (20,013

Share-based compensation

    —          —          24,465        —          —          24,465   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance September 30, 2012

    41,355      $ 414      $ 387,986      $ 827,092      $ (41,772   $ 1,173,720   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements

 

5


Table of Contents

FTI Consulting, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands)

Unaudited

 

     Nine Months Ended
September 30,
 
     2012     2011  

Operating activities

    

Net income

   $ 48,891      $ 64,022   

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

    

Depreciation and amortization

     26,475        21,508   

Amortization of other intangible assets

     16,948        16,795   

Acquisition-related contingent consideration

     (2,581     2,538   

Provision for doubtful accounts

     9,387        9,483   

Non-cash share-based compensation

     24,465        29,043   

Excess tax benefits from share-based compensation

     (98     (198

Non-cash interest expense

     4,505        6,322   

Other

     108        (559

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

    

Accounts receivable, billed and unbilled

     (62,466     (130,132

Notes receivable

     (20,732     (4,914

Prepaid expenses and other assets

     (3,701     (3,670

Accounts payable, accrued expenses and other

     5,608        14,489   

Income taxes

     (5,595     1,061   

Accrued compensation

     (33,734     21,098   

Billings in excess of services provided

     6,144        (38
  

 

 

   

 

 

 

Net cash provided by operating activities

     13,624        46,848   
  

 

 

   

 

 

 

Investing activities

    

Payments for acquisition of businesses, net of cash received

     (26,453     (62,346

Purchases of property and equipment

     (20,534     (24,595

Other

     (1,105     (127
  

 

 

   

 

 

 

Net cash used in investing activities

     (48,092     (87,068
  

 

 

   

 

 

 

Financing activities

    

Borrowings under revolving line of credit

     75,000        25,000   

Payments of revolving line of credit

     —          (25,000

Payments of long-term debt and capital lease obligations

     (156,487     (6,967

Purchase and retirement of common stock

     (20,013     (209,400

Net issuance of common stock under equity compensation plans

     523        797   

Excess tax benefits from share-based compensation

     98        198   

Other

     (2,080     (1
  

 

 

   

 

 

 

Net cash used in financing activities

     (102,959     (215,373
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (68     (747
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (137,495     (256,340

Cash and cash equivalents, beginning of period

     264,423        384,570   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 126,928      $ 128,230   
  

 

 

   

 

 

 

Supplemental cash flow disclosures

    

Cash paid for interest

   $ 31,343      $ 31,725   

Cash paid for income taxes, net of refunds

     31,968        33,443   

Non-cash investing and financing activities:

    

Issuance of stock units under incentive compensation plans

     3,079        4,241   

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

The unaudited condensed consolidated financial statements of FTI Consulting, Inc. and its wholly owned subsidiaries (“FTI Consulting,” the “Company,” “we,” or “our”) presented herein 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. Certain prior period amounts have been reclassified to conform to the current period presentation. In management’s opinion, the interim financial statements reflect all adjustments that are necessary for a fair presentation of the results for the interim periods presented. All adjustments made were normal recurring accruals. Results of operations for the interim periods presented herein are not necessarily indicative of results of operations for a full year. These financial statements should be read in conjunction with the consolidated financial statements and the notes contained in our Annual Report on Form 10-K for the year ended December 31, 2011.

2. Earnings Per Common Share

Basic earnings per common share are calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per common share adjust basic earnings per share for the effects of potentially dilutive common shares. Potentially dilutive common shares include the dilutive effects of shares issuable under our equity compensation plans, including stock options and restricted stock, and shares issuable upon the potential conversion of our 3 3/4% senior subordinated convertible notes due 2012 (“Convertible Notes”) prior to their maturity on July 15, 2012 and payment in full on July 16, 2012 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 three months ended September 30, 2011 and the nine months ended September 30, 2012 and 2011, respectively, because the average closing price per share of our common stock for such periods was above the conversion price of the Convertible Notes of $31.25 per share.

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2012      2011      2012      2011  

Numerator—basic and diluted

           

Net income

   $ 22,713       $ 29,439       $ 48,891       $ 64,022   
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator

           

Weighted average number of common shares outstanding—basic

     40,387         40,182         40,446         41,535   

Effect of dilutive stock options

     160         884         590         895   

Effect of dilutive convertible notes

     —           647         224         722   

Effect of dilutive restricted shares

     555         554         622         519   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of common shares outstanding—diluted

     41,102         42,267         41,882         43,671   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per common share—basic

   $ 0.56       $ 0.73       $ 1.21       $ 1.54   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per common share—diluted

   $ 0.55       $ 0.70       $ 1.17       $ 1.47   
  

 

 

    

 

 

    

 

 

    

 

 

 

Antidilutive stock options and restricted shares

     5,421         2,612         3,678         2,330   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

7


Table of Contents

3. New Accounting Standards Not yet Adopted

In July 2012, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2012-02, Intangibles—Goodwill and Other (Topic 350): Testing Indefinite—Lived Intangible Assets for Impairment (“ASU 2012-02”). ASU 2012-02 permits an entity to make a qualitative assessment to determine whether it is more likely than not that an indefinite-lived intangible asset, other than goodwill, is impaired. If the entity determines, on the basis of all relevant qualitative factors, that it is not more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount, it will not be required to perform a quantitative impairment test for that asset. ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. The adoption of this ASU will not have an impact on the Company’s consolidated financial position, results of operations or cash flows.

4. Special Charges

During the quarter ended June 30, 2011, we recorded special charges of $15.2 million. The charges reflect actions we took to reduce overhead in connection with the realignment of certain senior management on a global basis and to align our workforce with expected market trends, primarily in our Corporate Finance/Restructuring segment.

During the quarter ended June 30, 2012, we recorded special charges totaling $26.8 million, of which $4.6 million was non-cash. The charges reflect actions we took to realign our workforce to address current business demands and global macro-economic conditions impacting our Forensic and Litigation Consulting, Strategic Communications and Technology segments, to address certain targeted practices within our Corporate Finance/Restructuring and Economic Consulting segments, and to reduce excess real estate capacity. These actions include the termination of 116 employees, the consolidation of leased office space within six office locations and certain other actions. The special charges consisted of:

 

   

$18.4 million of salary continuance and other contractual employee related costs, including loan forgiveness and accelerated recognition of compensation cost of share-based awards, associated with the reduction in workforce of 116 employees; and

 

   

$8.4 million of expense associated with lease costs related to the consolidation of leased office space in six office locations.

During the quarter ended September 30, 2012, we recorded special charges totaling $2.8 million, of which $0.4 million was non-cash. The charges reflect further actions to reduce excess real estate capacity by consolidating leased office space in three additional locations.

The following table details the special charges by segment for the three months ended September 30, 2012 and nine months ended September 30, 2012 and 2011.There were no special charges for the three months ended September 30, 2011.

 

     Three Months  Ended
September 30,
     Nine Months Ended
September 30,
 
     2012      2012      2011  

Corporate Finance/Restructuring

   $ 820       $ 11,936       $ 9,440   

Forensic and Litigation Consulting

     419         7,672         839   

Economic Consulting

     173         991         2,093   

Technology

     148         3,114         —     

Strategic Communications

     201         4,712         —     
  

 

 

    

 

 

    

 

 

 
     1,761         28,425         12,372   

Unallocated Corporate

     1,014         1,132         2,840   
  

 

 

    

 

 

    

 

 

 

Total

   $ 2,775       $ 29,557       $ 15,212   
  

 

 

    

 

 

    

 

 

 

 

8


Table of Contents

The total cash outflow associated with the 2012 special charges is expected to be $24.6 million, of which $7.5 million has been paid as of September 30, 2012, $3.5 million is expected to be paid during the remainder of 2012, $5.9 million is expected to be paid in 2013, $2.6 million is expected to be paid in 2014, and the remaining balance of $5.1 million related to lease costs will be paid from 2015 to 2025. In addition, the remaining balance of $0.3 million related to the 2011 special charges is expected to be paid during the remainder of 2012. A liability for the current and noncurrent portions of the amounts to be paid is included in “Accounts payable, accrued expenses and other” and “Other liabilities,” respectively, on the Condensed Consolidated Balance Sheets. Activity related to the liability for these costs for the nine months ended September 30, 2012 is as follows:

 

     Employee
Termination
Costs
    Lease
Costs
    Total  

Balance at December 31, 2011

   $ 4,758        —        $ 4,758   

Additions

     14,276        10,274        24,550   

Payments

     (10,582     (1,032     (11,614

Foreign currency translation adjustment and other

     (295     —          (295
  

 

 

   

 

 

   

 

 

 

Balance at September 30, 2012

   $ 8,157      $ 9,242      $ 17,399   
  

 

 

   

 

 

   

 

 

 

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 Comprehensive Income. The provision for doubtful accounts totaled $2.4 million and $9.4 million for the three and nine months ended September 30, 2012, respectively, and $3.7 million and $9.5 million for the three and nine months ended September 30, 2011, respectively.

6. Research and Development Costs

Research and development costs related to software development totaled $4.2 million and $16.1 million for the three and nine months ended September 30, 2012, respectively, and $5.1 million and $16.9 million for the three and nine months ended September 30, 2011, respectively. Research and development costs are included in “Selling, general and administrative expense” on the Condensed Consolidated Statements of Comprehensive Income.

7. Financial Instruments

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 we designated as fair value hedges of our 7 3/4% senior notes due 2016 (“2016 Notes”). Under the terms of the interest rate swaps, we received interest on the $215.0 million notional amount at a fixed rate of 7 3/4% and paid a variable rate of interest, which varied between 5.43% and 5.56% for the year ended December 31, 2011. The variable rate was based on the London Interbank Offered Rate (“LIBOR”) as the benchmark interest rate. The maturity, payment dates and other critical terms of these swaps exactly matched those of the hedged 2016 Notes. These interest rate swaps qualified for hedge accounting using the short-cut method under ASC 815-20-25, Derivatives and Hedging, which assumes no hedge ineffectiveness. As a result, the changes in the fair value of the interest rate swaps and the changes in fair value of the hedged debt were assumed to be equal and offsetting.

 

9


Table of Contents

On December 16, 2011, we negotiated the right to terminate the interest rate swap agreements. Upon termination of these interest rate swap agreements we received cash proceeds of approximately $6.6 million, including $1.0 million of accrued interest. The net proceeds of $5.6 million have been recorded in “Long-term debt and capital lease obligations” on the Condensed Consolidated Balance Sheets and will be amortized as a reduction to interest expense over the remaining term of the 2016 Notes, resulting in an effective interest rate of 7.1% per annum. For the nine months ended September 30, 2012, $0.8 million of the net proceeds have been amortized as a reduction of interest expense, with a remaining balance of $4.8 million at September 30, 2012. At September 30, 2012, we had no derivative instruments.

Fair Value of Financial Instruments

We consider the recorded value of certain of our financial assets and liabilities, which consist primarily of cash equivalents, accounts receivable and accounts payable, to approximate the fair value of the respective assets and liabilities at September 30, 2012 and December 31, 2011, based on the short-term nature of the assets and liabilities. The fair value of our long-term debt at September 30, 2012 was $747 million compared to a carrying value of $718 million. At December 31, 2011, the fair value of our long-term debt was $882 million compared to a carrying value of $815 million. We determine the fair value of our long-term debt primarily based on quoted market prices for our 2016 Notes, 6 3/4% senior notes due 2020 and Convertible Notes. The fair value of our long-term debt is classified within Level 2 of the fair value hierarchy, because it is traded in less active markets. At December 31, 2011, 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. Our Convertible Notes matured on July 15, 2012 and were paid in full on July 16, 2012.

For business combinations consummated on or after January 1, 2009, we estimate the fair value of acquisition-related contingent consideration using a probability-weighted discounted cash flow model. This fair value measure is based on significant inputs not observed in the market and thus represents a Level 3 measurement. Fair value measurements characterized within Level 3 of the fair value hierarchy are measured based on unobservable inputs that are supported by little or no market activity and reflect our own assumptions in measuring fair value.

The significant unobservable inputs used in the fair value measurements of our acquisition-related contingent consideration are our measures of the future profitability and related cash flows and discount rates. Significant increases (decreases) in any of these inputs in isolation would result in a significantly lower (higher) fair value measurement. Generally, a change in the assumptions used for the discount rates is accompanied by a directionally opposite change in the fair value measurement and a change in the assumptions used for the future cash flows is accompanied by a directionally similar change in the fair value measurement.

During the second quarter of 2012, management determined that the fair value of the acquisition-related contingent consideration liability had declined. This remeasurement of the contingent consideration was based on management’s probability-adjusted present value of the consideration expected to be transferred during the remainder of the earnout period, based on the acquired operations’ forecasted results. The resulting reduction in the liability of $4.1 million is recorded as income and is included within “Acquisition-related contingent consideration” in the Condensed Consolidated Statements of Comprehensive Income. There were no remeasurement gains or losses for the quarter ended September 30, 2012.

Accretion expense for acquisition-related contingent consideration totaled $0.4 million and $1.5 million for the three and nine months ended September 30, 2012, respectively, and $0.9 million and $2.5 million for the three and nine months ended September 30, 2011, respectively.

 

10


Table of Contents

The following table represents the change in the acquisition-related contingent consideration liability during the three and nine months ended September 30, 2012 and 2011:

 

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

(in thousands)

       2012              2011         2012     2011  

Beginning balance

   $ 8,237       $ 23,882      $ 14,990      $ 19,864   

Acquisition date fair value measurement

     1,150         —          1,150        3,000   

Adjustments to fair value recorded in earnings(a)

     404         944        (2,581     2,538   

Payments

     —           —          (1,287     (577

Elimination of contingency(b)

     —           —          (2,534     —     

Unrealized gains (losses) related to currency translation in other comprehensive income

     59         (95     112        (94
  

 

 

    

 

 

   

 

 

   

 

 

 

Ending balance

   $ 9,850       $ 24,731      $ 9,850      $ 24,731   
  

 

 

    

 

 

   

 

 

   

 

 

 

 

(a)

Adjustments to fair value related to accretion and remeasurement of contingent consideration are recorded in “Acquisition-related contingent consideration” on the Condensed Consolidated Statements of Comprehensive Income.

 

(b)

During the three months ended June 30, 2012, we fixed an acquisition-related contingent consideration liability in the amount of $2.5 million. The non-contingent consideration liability is no longer required to be remeasured to fair value and, accordingly, is not classified as a Level 3 measurement.

The following table presents financial liabilities measured at fair value:

 

     Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
     Total  

As of September 30, 2012

           

Liabilities:

           

Acquisition-related contingent consideration, including current portion

   $ —         $ —         $ 9,850       $ 9,850   

As of December 31, 2011

           

Liabilities:

           

Acquisition-related contingent consideration, including current portion

   $ —         $ —         $ 14,990       $ 14,990   

8. Acquisitions

In October 2012, we completed an acquisition in Australia for our Corporate Finance/Restructuring segment. In advance of the acquisition closing, we transferred a portion of the purchase price in the amount of $1.2 million in cash to a third party in September 2012. This purchase price advance is included in the Condensed Consolidated Balance Sheets in “Other assets” and is reflected in the Condensed Consolidated Statements of Cash Flows within “Other investing activities.” The purchase price includes initial consideration with an approximate value of $25 million plus acquisition-related contingent consideration, which is payable annually through December 31, 2017 if the acquired business meets certain performance measures, and is subject to an approximate $16 million aggregate cap. The results of the acquired business will be included in our consolidated results of operations beginning on October 2, 2012, the date of the completion of the acquisition, and therefore are not included in our consolidated results of operations for the three and nine months ended September 30, 2012. We are currently evaluating the fair values of the consideration transferred, assets acquired and liabilities assumed.

In March 2012, we completed an acquisition in the United States for our Corporate Finance/Restructuring segment. The acquisition price of $3.1 million consisted of $2.0 million in cash and contingent consideration

 

11


Table of Contents

with an estimated fair value of $1.1 million. The fair value of the acquisition related contingent consideration is recorded in “Other liabilities” on the Condensed Consolidated Balance Sheets. As part of the purchase price allocation, we recorded $0.9 million in identifiable intangible assets and $2.2 million in goodwill.

In March 2011, we completed acquisitions of certain practices of LECG Corporation (“LECG”) 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 $27.1 million of cash paid at the closings of these acquisitions and contingent consideration with an estimated fair value of $2.9 million. As part of the purchase price allocation, we recorded an aggregate of $24.2 million of accounts receivable, $6.3 million of identifiable intangible assets, $20.6 million of assumed liabilities and $14.8 million of goodwill. The identifiable intangible assets consisted of customer relationships with a weighted average amortization period of 12.4 years. Aggregate acquisition-related costs of approximately $1.5 million have been recognized in earnings in 2011.

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 nine months ended September 30, 2012, we paid $3.6 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 on the Condensed Consolidated Balance Sheets. We did not make any stock price guarantee payments during the three months ended September 30, 2012. Our remaining common stock price guarantee provisions have stock floor prices that range from $54.33 to $69.48 per share and have determination dates through 2013.

9. Goodwill and Other Intangible Assets

The changes in the carrying amounts of goodwill by operating segment for the nine months ended September 30, 2012, are as follows:

 

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

Balances at December 31, 2011

  $ 436,043      $ 198,047      $ 229,487      $ 117,958      $ 327,823      $ 1,309,358   

Goodwill acquired during the period

    2,195        —          —          —          —          2,195   

Contingent Consideration(a)

    —          23        4,852        —          —          4,875   

Foreign currency translation adjustment and other

    348        945        456        79        8,785        10,613   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at September 30, 2012

  $ 438,586      $ 199,015      $ 234,795      $ 118,037      $ 336,608      $ 1,327,041   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) 

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

Other intangible assets with finite lives are amortized over their estimated useful lives. For intangible assets with finite lives, we recorded amortization expense of $5.8 million and $16.9 million for the three and nine months ended September 30, 2012, respectively, and $5.8 million and $16.8 million for the three and nine months ended September 30, 2011, respectively. Based solely on the amortizable intangible assets recorded as of September 30, 2012, we estimate amortization expense to be $5.6 million during the remainder of 2012, $20.4 million in 2013, $11.9 million in 2014, $10.9 million in 2015, $9.3 million in 2016, $8.6 million in 2017, and $31.8 million in years after 2017. Actual amortization expense to be reported in future periods could differ from

 

12


Table of Contents

these estimates as a result of new intangible asset acquisitions, finalization of asset valuations for newly acquired assets, changes in useful lives, change in value due to foreign currency translation, or other factors.

 

     Useful Life
in Years
   September 30, 2012      December 31, 2011  
      Gross
Carrying
Amount
     Accumulated
Amortization
     Gross
Carrying
Amount
     Accumulated
Amortization
 

Finite lived intangible assets

              

Customer relationships

   1 to 15    $ 146,872       $ 60,494       $ 144,696       $ 49,381   

Non-competition agreements

   1 to 10      14,470         10,619         14,601         8,965   

Software

   2 to 6      33,979         25,867         33,549         21,211   

Tradenames

   2      180         53         —           —     
     

 

 

    

 

 

    

 

 

    

 

 

 
        195,501         97,033         192,846         79,557   

Indefinite-lived intangible assets

              

Tradenames

   Indefinite      5,600         —           5,600         —     
     

 

 

    

 

 

    

 

 

    

 

 

 
      $ 201,101       $ 97,033       $ 198,446       $ 79,557   
     

 

 

    

 

 

    

 

 

    

 

 

 

We test our goodwill and other indefinite-lived intangible assets for impairment annually as of the first day of the fourth quarter. We also consider factors that could trigger an interim impairment review. Through our assessment, we determined that there were no events or circumstances that more likely than not would reduce the fair value of any of our reporting units below their carrying value. Accordingly, we did not perform an interim impairment test.

10. Long-term Debt and Capital Lease Obligations

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

 

     September 30,
2012
     December 31,
2011
 

7 3/4% senior notes due 2016(a)

   $ 219,797       $ 220,555   

6 3/4% senior notes due 2020

     400,000         400,000   

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

     —           146,867   

Revolving line of credit

     75,000         —     

Notes payable to former shareholders of acquired business

     23,000         29,445   
  

 

 

    

 

 

 

Total debt

     717,797         796,867   

Less current portion

     81,000         153,312   
  

 

 

    

 

 

 

Long-term debt, net of current portion

     636,797         643,555   
  

 

 

    

 

 

 

Total capital lease obligations

     45         94   

Less current portion

     21         70   
  

 

 

    

 

 

 

Capital lease obligations, net of current portion

     24         24   
  

 

 

    

 

 

 

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

   $ 636,821       $ 643,579   
  

 

 

    

 

 

 

 

(a)

Balance includes $215.0 million principal amount of 2016 Notes and a premium of $4.8 million at September 30, 2012 and $5.6 million at December 31, 2011.

 

(b)

Balance includes $149.9 million principal amount of Convertible Notes, net of discount of $3.1 million at December 31, 2011.

Convertible Notes

The Convertible Notes matured on July 15, 2012. On July 16, 2012, we repaid all amounts due on our outstanding Convertible Notes. The total repayment of approximately $151.3 million, including $2.8 million of accrued interest, was made using cash on hand and the proceeds of a $75.0 million borrowing under our senior secured bank credit facility.

 

13


Table of Contents

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 potential 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 the Company’s equity compensation plans, subject to the discretion of the administrator of the plans. During the nine months ended September 30, 2012, we granted an aggregate of 1,373,113 share-based awards, consisting primarily of restricted stock awards and stock options.

Total share-based compensation expense for the three and nine months ended September 30, 2012 and 2011 is detailed in the following table:

 

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

Comprehensive Income Statement Classification

       2012              2011          2012      2011  

Direct cost of revenues

   $ 3,475       $ 4,111       $ 12,883       $ 19,932   

Selling, general and administrative expense

     3,179         3,029         10,338         8,667   

Special charges

     —           —           814         833   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total share-based compensation expense

   $ 6,654       $ 7,140       $ 24,035       $ 29,432   
  

 

 

    

 

 

    

 

 

    

 

 

 

13. Stockholders’ Equity

On June 6, 2012, our Board of Directors authorized a two-year stock repurchase program of up to $250 million (the “Repurchase Program”). During the three months ended September 30, 2012, we repurchased and retired 757,650 shares of our common stock for an average price per share of $26.40, using cash on hand, with a value equivalent to approximately $20 million. As of September 30, 2012, a balance of approximately $230 million remained available under the Repurchase Program.

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 areas, such as restructuring (including bankruptcy), interim management, financings, mergers and acquisitions (“M&A”), post-acquisition integration, valuations, tax issues and performance improvement.

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

 

14


Table of Contents

Our Technology segment provides electronic discovery (“e-discovery”) and information management consulting, 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 (“ESI”), 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 and corporate communications and investor relations, reputation management and brand communications, public affairs, business consulting and digital design and marketing.

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

The table below presents revenues and Adjusted Segment EBITDA for our reportable segments for the three and nine months ended September 30, 2012 and 2011:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2012      2011      2012      2011  

Revenues

           

Corporate Finance/Restructuring

   $ 110,217       $ 110,311       $ 336,031       $ 319,461   

Forensic and Litigation Consulting

     83,366         99,064         260,504         275,345   

Economic Consulting

     96,375         95,662         295,882         264,401   

Technology

     50,286         56,972         147,643         165,137   

Strategic Communications

     45,811         51,793         137,466         151,711   
  

 

 

    

 

 

    

 

 

    

 

 

 

Revenues

   $ 386,055       $ 413,802       $ 1,177,526       $ 1,176,055   
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted Segment EBITDA

           

Corporate Finance/Restructuring

   $ 25,029       $ 27,495       $ 81,003       $ 59,173   

Forensic and Litigation Consulting

     13,211         19,113         42,916         53,016   

Economic Consulting

     19,087         18,650         56,002         50,635   

Technology

     15,675         19,619         41,739         58,362   

Strategic Communications

     6,778         7,429         16,277         19,267   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Adjusted Segment EBITDA

   $ 79,780       $ 92,306       $ 237,937       $ 240,453   
  

 

 

    

 

 

    

 

 

    

 

 

 

The table below reconciles Total Adjusted Segment EBITDA to income before income tax provision:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2012     2011     2012     2011  

Total Adjusted Segment EBITDA(1)

   $ 79,780      $ 92,306      $ 237,937      $ 240,453   

Segment depreciation expense

     (6,038     (6,115     (18,646     (17,729

Amortization of other intangible assets

     (5,766     (5,843     (16,773     (16,795

Special Charges

     (2,775     —          (29,557     (15,212

Unallocated corporate expenses, excluding special charges

     (18,613     (20,926     (58,594     (53,474

Interest income and other

     1,584        486        4,503        5,409   

Interest expense

     (13,208     (14,319     (43,607     (44,129
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax provision

   $ 34,964      $ 45,589      $ 75,263      $ 98,523   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Total Adjusted Segment EBITDA is the total of Adjusted Segment EBITDA for all segments.

 

15


Table of Contents

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 Convertible Notes matured on July 15, 2012. The guarantees are full and unconditional and joint and several. All of our guarantors are wholly-owned, direct or indirect, subsidiaries. The following financial information presents condensed consolidating balance sheets, statements of comprehensive 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 September 30, 2012

 

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

Assets

             

Cash and cash equivalents

   $ 31,267       $ 547       $ 95,114       $ —        $ 126,928   

Restricted cash

     —           —           1,192         —          1,192   

Accounts receivable, net

     175,934         183,820         125,303         —          485,057   

Intercompany receivables

     —           596,880         57,826         (654,706     —     

Other current assets

     25,744         23,383         30,497         —          79,624   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     232,945         804,630         309,932         (654,706     692,801   

Property and equipment, net

     37,247         15,463         14,223         —          66,933   

Goodwill

     549,567         443,920         333,554         —          1,327,041   

Other intangible assets, net

     35,648         26,464         74,377         (32,421     104,068   

Investments in subsidiaries

     1,668,949         551,607         —           (2,220,556     —     

Other assets

     77,984         103,196         24,477         (46,552     159,105   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 2,602,340       $ 1,945,280       $ 756,563       $ (2,954,235   $ 2,349,948   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Liabilities

             

Intercompany payables

   $ 482,622       $ 105,751       $ 66,333       $ (654,706   $ —     

Other current liabilities

     204,466         91,399         71,199         —          367,064   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     687,088         197,150         137,532         (654,706     367,064   

Long-term debt, net

     619,821         17,000         —           —          636,821   

Other liabilities

     121,711         36,970         60,214         (46,552     172,343   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     1,428,620         251,120         197,746         (701,258     1,176,228   

Stockholders’ equity

     1,173,720         1,694,160         558,817         (2,252,977     1,173,720   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 2,602,340       $ 1,945,280       $ 756,563       $ (2,954,235   $ 2,349,948   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

16


Table of Contents

Condensed Consolidating Balance Sheet Information as of December 31, 2011

 

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

Assets

         

Cash and cash equivalents

  $ 161,180      $ 197      $ 103,046      $ —        $ 264,423   

Restricted cash

    8,632        —          1,581        —          10,213   

Accounts receivable, net

    148,698        165,871        114,533        —          429,102   

Intercompany receivables

    —          557,846        59,857        (617,703     —     

Other current assets

    22,599        15,694        28,923        —          67,216   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    341,109        739,608        307,940        (617,703     770,954   

Property and equipment, net

    44,233        14,240        15,975        —          74,448   

Goodwill

    547,667        439,068        322,623        —          1,309,358   

Other intangible assets, net

    38,913        34,692        45,284        —          118,889   

Investments in subsidiaries

    1,538,883        532,091        —          (2,070,974     —     

Other assets

    70,551        48,529        18,355        —          137,435   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 2,581,356      $ 1,808,228      $ 710,177      $ (2,688,677   $ 2,411,084   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

         

Intercompany payables

  $ 433,284      $ 93,947      $ 90,472      $ (617,703   $ —     

Other current liabilities

    316,559        109,651        71,627        —          497,837   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    749,843        203,598        162,099        (617,703     497,837   

Long-term debt, net

    620,579        23,000        —          —          643,579   

Other liabilities

    104,732        43,297        15,437        —          163,466   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    1,475,154        269,895        177,536        (617,703     1,304,882   

Stockholders’ equity

    1,106,202        1,538,333        532,641        (2,070,974     1,106,202   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

  $ 2,581,356      $ 1,808,228      $ 710,177      $ (2,688,677   $ 2,411,084   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Condensed Consolidating Statement of Comprehensive Income for the Three Months Ended September 30, 2012

 

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

Revenues

  $ 145,198      $ 233,300      $ 99,963      $ (92,406   $ 386,055   

Operating expenses

         

Direct cost of revenues

    93,428        175,160        65,052        (92,026     241,614   

Selling, general and administrative expense

    36,915        28,226        24,148        (380     88,909   

Special Charges

    2,295        451        29        —          2,775   

Acquisition-related contingent consideration

    63        —          340        —          403   

Amortization of other intangible assets

    1,590        2,488        2,512        (824     5,766   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    10,907        26,975        7,882        824        46,588   

Other (expense) income

    (15,921     5,514        (1,217     —          (11,624
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax provision

    (5,014     32,489        6,665        824        34,964   

Income tax (benefit) provision

    (675     10,598        2,328        —          12,251   

Equity in net earnings of subsidiaries

    27,052        4,710        —          (31,762     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    22,713        26,601        4,337        (30,938     22,713   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax:

         

Foreign currency translation adjustments including tax benefit of $0

    —          —          12,731        —          12,731   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

    —          —          12,731        —          12,731   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

  $ 22,713      $ 26,601      $ 17,068      $ (30,938   $ 35,444   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

17


Table of Contents

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

 

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

Revenues

  $ 157,053      $ 253,165      $ 103,795      $ (100,211   $ 413,802   

Operating expenses

         

Direct cost of revenues

    99,635        181,359        66,111        (97,130     249,975   

Selling, general and administrative expense

    43,053        31,347        26,299        (3,081     97,618   

Acquisition-related contingent consideration

    —          —          944        —          944   

Amortization of other intangible assets

    1,467        2,667        1,709        —          5,843   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    12,898        37,792        8,732        —          59,422   

Other (expense) income

    (14,067     (1,890     2,124        —          (13,833
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax provision

    (1,169     35,902        10,856        —          45,589   

Income tax provision

    209        15,082        859        —          16,150   

Equity in net earnings of subsidiaries

    30,817        (8,498     —          (22,319     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 29,439      $ 12,322      $ 9,997      $ (22,319   $ 29,439   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive loss, net of tax:

         

Foreign currency translation adjustments including tax expense of $500

    (503     —          (15,370     —          (15,873
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive loss, net of tax

    (503     —          (15,370     —          (15,873
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

  $ 28,936      $ 12,322      $ (5,373   $ (22,319   $ 13,566   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Condensed Consolidating Statement of Comprehensive Income for the Nine months ended September 30, 2012

 

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

Revenues

  $ 450,221      $ 716,049      $ 303,472      $ (292,216   $ 1,177,526   

Operating expenses

         

Direct cost of revenues

    291,053        537,897        194,051        (287,549     735,452   

Selling, general and administrative expense

    123,350        85,785        79,490        (4,667     283,958   

Special charges

    19,026        4,738        5,793        —          29,557   

Acquisition-related contingent consideration

    63        —          (2,644     —          (2,581

Amortization of other intangible assets

    4,190        7,438        7,609        (2,464     16,773   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    12,539        80,191        19,173        2,464        114,367   

Other (expense) income

    (46,377     41,501        657        (34,885     (39,104
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax provision

    (33,838     121,692        19,830        (32,421     75,263   

Income tax (benefit) provision

    (29,055     51,322        4,105        —          26,372   

Equity in net earnings of subsidiaries

    53,674        18,093        —          (71,767     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    48,891        88,463        15,725        (104,188     48,891   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income, net of tax:

         

Foreign currency translation adjustments net of tax benefit of $0

    —          —          14,620        —          14,620   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income, net of tax

    —          —          14,620        —          14,620   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

  $ 48,891      $ 88,463      $ 30,345      $ (104,188   $ 63,511   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

18


Table of Contents

Condensed Consolidating Statement of Comprehensive Income for the Nine Months Ended September 30, 2011

 

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

Revenues

  $ 427,804      $ 760,553      $ 284,186      $ (296,488   $ 1,176,055   

Operating expenses

         

Direct cost of revenues

    281,576        545,080        185,699        (288,452     723,903   

Selling, general and administrative expense

    119,639        96,038        72,723        (8,036     280,364   

Special charges

    8,561        228        6,423        —          15,212   

Acquisition-related contingent consideration

    —          —          2,538        —          2,538   

Amortization of other intangible assets

    2,346        9,526        4,923        —          16,795   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    15,682        109,681        11,880        —          137,243   

Other (expense) income

    (39,747     (1,333     2,360        —          (38,720
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax provision

    (24,065     108,348        14,240        —          98,523   

Income tax (benefit) provision

    (9,998     45,216        (717     —          34,501   

Equity in net earnings of subsidiaries

    78,089        (4,121     —          (73,968     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

  $ 64,022      $ 59,011      $ 14,957      $ (73,968   $ 64,022   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax:

         

Foreign currency translation adjustments net of tax benefit of $1,568

    1,565        —          (783     —          782   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

    1,565        —          (783     —          782   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

  $ 65,587      $ 59,011      $ 14,174      $ (73,968   $ 64,804   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Condensed Consolidating Statement of Cash Flow for the Nine months ended September 30, 2012

 

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

Operating activities

       

Net cash (used in) provided by operating activities

  $ (47,163   $ 36,366      $ 24,421      $ 13,624   

Investing activities

       

Payments for acquisition of businesses, net of cash received

    (26,089     —          (364     (26,453

Purchases of property and equipment

    (6,016     (11,689     (2,829     (20,534

Other

    (1,105     —          —          (1,105
 

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

    (33,210     (11,689     (3,193     (48,092
 

 

 

   

 

 

   

 

 

   

 

 

 

Financing activities

       

Borrowings under revolving line of credit

    75,000        —          —          75,000   

Payments of long-term debt and capital lease obligations

    (156,438     (49     —          (156,487

Purchase and retirement of common stock

    (20,013     —            (20,013

Net issuance of common stock and other

    415        —          (1,972     (1,557

Excess tax benefits from share-based compensation

    98        —          —          98   

Intercompany transfers

    51,398        (24,278     (27,120     —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

    (49,540     (24,327     (29,092     (102,959
 

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

    —          —          (68     (68
 

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

    (129,913     350        (7,932     (137,495

Cash and cash equivalents, beginning of period

    161,180        197        103,046        264,423   
 

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

  $ 31,267      $ 547      $ 95,114      $ 126,928   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

19


Table of Contents

Condensed Consolidating Statement of Cash Flow for the Nine months ended September 30, 2011

 

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

Operating activities

       

Net cash (used in) provided by operating activities

  $ (18,645   $ 77,208      $ (11,715   $ 46,848   

Investing activities

       

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

    (33,735     —          (28,611     (62,346

Purchases of property and equipment

    (7,644     (10,210     (6,741     (24,595

Other

    (127     —          —          (127
 

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

    (41,506     (10,210     (35,352     (87,068
 

 

 

   

 

 

   

 

 

   

 

 

 

Financing activities

       

Borrowings under revolving line of credit

    25,000        —          —          25,000   

Payments of revolving line of credit

    (25,000     —          —          (25,000

Payments of long-term debt and capital lease obligations

    (6,806     (161     —          (6,967

Net issuance of common stock and other

    796        —          —          796   

Purchase and retirement of common stock

    (209,400     —          —          (209,400

Excess tax benefits from share-based compensation

    198        —          —          198   

Intercompany transfers

    40,555        (67,857     27,302        —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by financing activities

    (174,657     (68,018     27,302        (215,373
 

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

    —          —          (747     (747
 

 

 

   

 

 

   

 

 

   

 

 

 

Net decrease in cash and cash equivalents

    (234,808     (1,020     (20,512     (256,340

Cash and cash equivalents, beginning of period

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

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

  $ 57,930      $ 410      $ 69,890      $ 128,230   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

20


Table of Contents
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following is a discussion and analysis of our consolidated financial condition and results of operations for the three and nine month ended September 30, 2012 and 2011 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, 2011. 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, 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 matters, international arbitrations, M&A, antitrust and competition matters, e-discovery, management and retrieval of ESI, reputation management and strategic communications. We also provide services to help our clients take advantage of economic, regulatory, financial and other business opportunities. Our experienced teams of professionals include many individuals who are widely recognized as experts in their respective fields. We believe clients retain us because of our recognized expertise and capabilities in highly specialized areas as well as our reputation for satisfying client needs.

We report financial results for the following five operating segments:

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

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

Our Technology segment provides e-discovery and information management consulting, 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 ESI, 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 and corporate communications and investor relations, reputation management and brand communications, public affairs, business consulting and digital design and marketing.

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

 

21


Table of Contents

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 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. Unit-based revenue is defined as revenue billed on a per-item, per-page, or some other unit-based method and includes revenue from data processing and hosting, 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.

Over the past several years the growth in our revenues has resulted from our ability to attract new and recurring engagements and from the acquisitions we have completed. 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 of the revenue-generating professionals we employ;

 

   

the number and experience mix of revenue-generating professionals;

 

   

fees from clients on a retained basis or other;

 

   

licensing of our software products and other technology services;

 

   

the types of assignments we are working on at different times;

 

   

the length of the billing and collection cycles; and

 

   

the geographic locations of our clients or locations in which services are rendered.

We define Adjusted EBITDA as net income before income tax provision, other income (expense), depreciation, amortization of intangible assets and special charges. We define Adjusted Segment EBITDA as a segment’s share of consolidated operating income before depreciation, amortization of intangible assets and special charges. We define Total Adjusted Segment EBITDA as the total of Adjusted Segment EBITDA for all segments. We define Adjusted Net Income and Adjusted EPS as net income and earnings per diluted share, respectively, excluding the net impact of any special charges and any loss on early extinguishment of debt that were incurred in that period. Adjusted EBITDA, Adjusted Segment EBITDA, Total Adjusted Segment EBITDA, Adjusted EPS and Adjusted Net Income are not defined in the same manner by all companies and may not be comparable to other similarly titled measures of other companies. These non-GAAP measures should be considered in addition to, but not as a substitute for or superior to, the information contained in our Condensed Consolidated Statements of Comprehensive Income. We believe that these measures can be useful 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.

 

22


Table of Contents

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

EXECUTIVE HIGHLIGHTS

 

     Three Months Ended
September 30,
    

 

   Nine Months Ended
September 30,
 
     2012     

 

   2011     

 

   2012     

 

   2011  
    

(dollars in thousands,

except per share amounts)

         

(dollars in thousands,

except per share amounts)

 

Revenues

   $ 386,055          $ 413,802          $ 1,177,526          $ 1,176,055   

Special charges

   $ 2,775          $ —            $ 29,557          $ 15,212   

Adjusted EBITDA

   $ 62,281          $ 72,684          $ 182,857          $ 190,757   

Net income

   $ 22,713          $ 29,439          $ 48,891          $ 64,022   

Earnings per common share—diluted

   $ 0.55          $ 0.70          $ 1.17          $ 1.47   

Adjusted EPS

   $ 0.60          $ 0.70          $ 1.62          $ 1.68   

Cash provided by operating activities

   $ 70,912          $ 59,672          $ 13,624          $ 46,848   

Total number of employees at September 30,

     3,819            3,824            3,819            3,824   

Third Quarter 2012 Executive Highlights

Revenues

Revenues for the quarter ended September 30, 2012 decreased $27.7 million, or 6.7%, to $386.1 million, compared to $413.8 million in the same prior year period. Revenue declined in our Forensic and Litigation Consulting segment due to a slowdown in regulatory cases. Revenues in our Technology segment were impacted by unit-based service price declines relative to our mix of clients. Additionally, revenue from our Strategic Communications segment declined with fewer M&A engagements and pricing pressure on portions of our retained business.

Special charges

We recorded a $2.8 million special charge in the three months ended September 30, 2012, which reduced our fully diluted earnings per share by $0.05. This charge relates to net curtailment costs related to three real estate leases in North America as we continue our efforts to make more efficient use of office space.

Adjusted EBITDA

Adjusted EBITDA decreased $10.4 million, or 14.3%, to $62.3 million, or 16.1% of revenues, compared to $72.7 million, or 17.6% of revenues, in the prior year period. Adjusted EBITDA decreased primarily as a result of underutilization in our Forensic and Litigation Consulting and Corporate Finance/Restructuring segments coupled with pricing pressures in our Technology segment. These impacts were partially offset by reduced unallocated corporate and regional infrastructure expense.

Net income

Net income decreased $6.7 million, or 22.8%, to $22.7 million, compared to $29.4 million in the prior year period. The decrease was primarily attributable to the decrease in revenues described above and the special charge recorded in the three months ended September 30, 2012 partially offset by reduced interest expense.

Earnings per common share and Adjusted EPS

Earnings per diluted share for the three months ended September 30, 2012 were $0.55, which included $2.8 million of special charges, compared to $0.70 in the prior year period. Adjusted earnings per diluted share, which exclude the impact of the special charge, were $0.60, compared to $0.70 in the prior year period due to the impact of the operating results described above.

 

23


Table of Contents

Cash provided by operating activities

Cash provided by operating activities for the three months ended September 30, 2012 was $70.9 million compared to $59.7 million for the three months ended September 30, 2011. The increase was the result of lower income tax and employee loan payments and a reduction of overhead spending. Cash collections for the quarter were comparable to the prior year period; however, our collection experience continues to be affected by the mix of business largely related to the payment conditions of key matters, such as, receivables that are subject to court approval.

Headcount

Headcount of 3,819 at September 30, 2012 decreased slightly from the prior year, as the Company continues to manage growth against commercial demand on a segment by segment basis. Non-billable headcount decreased as Corporate infrastructure staff is realigned to support international expansion. Billable headcount increased in the Economic Consulting and Corporate Finance/Restructuring segments to support growing operations.

Other strategic activities

On June 6, 2012, our Board of Directors authorized a $250 million stock repurchase program (the “Repurchase Program”) to be executed over a two year period. During the three months ended September 30, 2012 we repurchased and retired 757,650 shares of our common stock for an average price per share of $26.40, with a value equivalent to approximately $20.0 million. At September 30, 2012, a balance of approximately $230 million remained available under the Repurchase Program.

 

24


Table of Contents

CONSOLIDATED RESULTS OF OPERATIONS

Segment and Consolidated Operating Results:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2012     2011     2012     2011  
    

(in thousands, except per

share amounts)

   

(in thousands, except per

share amounts)

 

Revenues

        

Corporate Finance/Restructuring

   $ 110,217      $ 110,311      $ 336,031      $ 319,461   

Forensic and Litigation Consulting

     83,366        99,064        260,504        275,345   

Economic Consulting

     96,375        95,662        295,882        264,401   

Technology

     50,286        56,972        147,643        165,137   

Strategic Communications

     45,811        51,793        137,466        151,711   
  

 

 

   

 

 

   

 

 

   

 

 

 

Revenues

   $ 386,055      $ 413,802      $ 1,177,526      $ 1,176,055   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

        

Corporate Finance/Restructuring

   $ 21,655      $ 25,141      $ 61,885      $ 42,771   

Forensic and Litigation Consulting

     11,431        17,581        30,963        47,746   

Economic Consulting

     17,810        17,469        51,681        45,565   

Technology

     10,445        14,662        23,403        44,026   

Strategic Communications

     4,874        5,495        6,161        13,449   
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment operating income

     66,215        80,348        174,093        193,557   

Unallocated corporate expenses

     (19,627     (20,926     (59,726     (56,314
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     46,588        59,422        114,367        137,243   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense)

        

Interest income and other

     1,584        486        4,503        5,409   

Interest expense

     (13,208     (14,319     (43,607     (44,129
  

 

 

   

 

 

   

 

 

   

 

 

 
     (11,624     (13,833     (39,104     (38,720
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax provision

     34,964        45,589        75,263        98,523   

Income tax provision

     12,251        16,150        26,372        34,501   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 22,713      $ 29,439      $ 48,891      $ 64,022   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share—basic

   $ 0.56      $ 0.73      $ 1.21      $ 1.54   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share—diluted

   $ 0.55      $ 0.70      $ 1.17      $ 1.47   
  

 

 

   

 

 

   

 

 

   

 

 

 

Reconciliation of Net Income to Adjusted EBITDA:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2012      2011      2012      2011  
     (in thousands)      (in thousands)  

Net income

   $ 22,713       $ 29,439       $ 48,891       $ 64,022   

Add back:

           

Income tax provision

     12,251         16,150         26,372         34,501   

Other income (expense), net

     11,624         13,833         39,104         38,720   

Depreciation and amortization

     7,152         7,419         22,160         21,507   

Amortization of other intangible assets

     5,766         5,843         16,773         16,795   

Special charges

     2,775         —           29,557         15,212   
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ 62,281       $ 72,684       $ 182,857       $ 190,757   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

25


Table of Contents

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

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2012      2011      2012      2011  

Net income

   $ 22,713       $ 29,439       $ 48,891       $ 64,022   

Add back: Special charges, net of tax effect(1)

     1,794         —           19,115         9,285   
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted net income

   $ 24,507       $ 29,439       $ 68,006       $ 73,307   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per common share—diluted

   $ 0.55       $ 0.70       $ 1.17       $ 1.47   

Add back: Special charges, net of tax effect(1)

     0.05         —           0.45         0.21   
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted earnings per common share—diluted

   $ 0.60       $ 0.70       $ 1.62       $ 1.68   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of common shares outstanding—diluted

     41,102         42,267         41,882         43,671   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

The tax effect takes into account the tax treatment and related tax rate(s) that apply to each adjustment in the applicable tax jurisdiction(s). As a result, the effective tax rates for the adjustments for both the three and nine months ended September 30, 2012 were 35.3% and 39% for the nine months ended September 30, 2011. The tax expense related to the adjustments for the three and nine months ended September 30, 2012 was $1.0 million or $0.02 impact on diluted earnings per share and $10.4 million or $0.25 impact on diluted earnings per share. The tax expense for the nine months ended September 30, 2011 was $5.9 million or $0.14 impact on diluted earnings per share.

Three Months Ended September 30, 2012 Compared to Three Months Ended September 30, 2011

Revenues and operating income

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

Unallocated corporate expenses

Unallocated corporate expenses decreased $1.3 million, or 6.2%, to $19.6 million for the three months ended September 30, 2012, from $20.9 million for the three months ended September 30, 2011. Excluding the impact of unallocated corporate special charges of $1.0 million recorded in the three months ended September 30, 2012, unallocated corporate expenses decreased $2.3 million, or 11.1%. The decrease was due to lower marketing event spending in the current year and regional infrastructure investment in 2011, which did not occur during the three months ended September 30, 2012.

Interest income and other

Interest income and other, which includes foreign currency transaction gains and losses, increased by $1.1 million to $1.6 million for the three months ended September 30, 2012 from $0.5 million for the three months ended September 30, 2011. The increase is primarily due to net foreign currency transaction gains in the months ended September 30, 2012 as compared to net losses in the three months ended September 30, 2011. Transaction gains and losses, both realized and unrealized, occur as either payments are made or month end remeasurement occurs relative to the Company’s receivables and payables which have been or will be received or paid in a currency that is different from the entity’s functional currency.

Interest expense

Interest expense was $13.2 million for the three months ended September 30, 2012 as compared to $14.3 million for the three months ended September 30, 2011. Interest expense in 2012 was favorably impacted by the repayment, in full, of our outstanding Convertible Notes in July 2012.

 

26


Table of Contents

Special charges

During the quarter ended September 30, 2012, we recorded a special charge of $2.8 million, of which $0.4 million was non-cash. The charge reflects actions we took to reduce excess real estate capacity, by consolidating leased office space in three office locations in the U.S.

The following table details the special charges by segment:

 

     Three Months  Ended
September 30,
 
     2012  

Corporate Finance/Restructuring

   $ 820   

Forensic and Litigation Consulting

     419   

Economic Consulting

     173   

Technology

     148   

Strategic Communications

     201   
  

 

 

 
     1,761   

Unallocated Corporate

     1,014   
  

 

 

 

Total

   $ 2,775   
  

 

 

 

We did not record any special charges in the three months ended September 30, 2011.

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 35.0% for the three months ended September 30, 2012 as compared to 35.4% for the three months ended September 30, 2011. For the three months ended September 30, 2012, the effective tax rate was favorably impacted by lower taxes on foreign earnings. For the three months ended September 30, 2011, the effective tax rate was favorably impacted by lower taxes on foreign earnings and a discrete item recorded in the quarter for a change in estimate related to the prior year tax provision.

Nine months ended September 30, 2012 Compared to Nine Months Ended September 30, 2011

Revenues and operating income

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

Unallocated corporate expenses

Unallocated corporate expenses increased $3.4 million, or 6.1%, to $59.7 million for the nine months ended September 30, 2012, from $56.3 million for the nine months ended September 30, 2011. Excluding the impact of unallocated corporate special charges of $1.1 million recorded in the nine months ended September 30, 2012 and $2.8 million recorded in the nine months ended September 30, 2011, unallocated corporate expenses increased $5.1 million, or 9.6% from the nine months ended September 30, 2011. The increase was due to a $3.4 million increase in global leadership costs, $1.1 million of strategic planning activities that took place in the three months ended March 31, 2012, $1.0 million of higher compensation and benefit costs and a $0.5 million decrease in allocations of certain system development and support costs. The increase was partially offset by $1.1 million of regional infrastructure investment in 2011, which did not occur during the nine months ended September 30, 2012.

Interest income and other

Interest income and other, which includes foreign currency transaction gains and losses, decreased by $0.9 million to $4.5 million for the nine months ended September 30, 2012 from $5.4 million for the nine months

 

27


Table of Contents

ended September 30, 2011. The decrease is primarily due to reduced earnings of affiliates recognized in the nine months ended September 30, 2012. In addition, there was a positive impact on other non-operating income due to the write-off of certain liabilities related to unclaimed property, in the prior year period.

Interest expense

Interest expense was $43.6 million for the nine months ended September 30, 2012 as compared to $44.1 million for the nine months ended September 30, 2011. Interest expense in 2012 was favorably impacted by the repayment, in full, of our outstanding Convertible Notes in July 2012. This impact was offset by lower interest rates in 2011 due to an interest rate swap agreement which was entered into in March 2011 and terminated in December 2011.

Special charges

During the quarter ended June 30, 2011, we recorded special charges of $15.2 million. The charges reflect actions we took to reduce senior management overhead in connection with the realignment of certain senior management on a global basis and to align our workforce with expected market trends, primarily in our Corporate Finance/Restructuring segment.

During the quarter ended June 30, 2012, we recorded special charges totaling $26.8 million, of which $4.6 million was non-cash. The charges reflect actions we took to realign our workforce to address current business demands and global macro-economic conditions impacting our Forensic and Litigation Consulting, Strategic Communications and Technology segments and address certain targeted practices within our Corporate Finance/ Restructuring and Economic Consulting segments, and to reduce excess real estate capacity. These actions include the termination of 116 employees, the consolidation of leased office space within six office locations and certain other actions. The special charges consisted of:

 

   

$18.4 million of salary continuance and other contractual employee related costs, including loan forgiveness and accelerated recognition of compensation cost of share-based awards, associated with the reduction in workforce of 116 employees; and

 

   

$8.4 million of expense associated with lease costs related to the consolidation of leased office space in six office locations.

During the quarter ended September 30, 2012, we recorded special charges totaling $2.8 million, of which $0.4 million was non-cash. The charges reflect actions we took to reduce excess real estate capacity, including the consolidation of leased office space in three additional locations.

The following table details the special charges by segment and the decrease in total headcount:

 

     Nine Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2012      2011  
     Special
Charges
     Total
Headcount
     Special
Charges
     Total
Headcount
 

Corporate Finance/Restructuring

   $ 11,936         6         9,440         22   

Forensic and Litigation Consulting

     7,672         41         839         7   

Economic Consulting

     991         8         2,093         6   

Technology

     3,114         42         —           —     

Strategic Communications

     4,712         15         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     28,425         112         12,372         35   

Unallocated Corporate

     1,132         4         2,840         2   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 29,557         116       $ 15,212         37   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

28


Table of Contents

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 35.0% for the nine months ended September 30, 2012 and 2011. For the nine months ended September 30, 2012, the effective tax rate was favorably impacted by lower taxes on foreign earnings and the benefit related to income from a reduction in the fair value of acquisition-related contingent consideration, which is not taxable. For the nine months ended September 30, 2011, the effective tax rate was favorably impacted by lower provisions for foreign income taxes and tax benefits recognized for discrete items primarily related to the reversal of previously recognized deferred tax liabilities which were no longer required.

SEGMENT RESULTS

Total Adjusted Segment EBITDA

The following table reconciles net income to Total Adjusted Segment EBITDA for the three and nine months ended September 30, 2012 and 2011.

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2012      2011      2012      2011  
     (in thousands)      (in thousands)  

Net income

   $ 22,713       $ 29,439       $ 48,891       $ 64,022   

Add back:

           

Income tax provision

     12,251         16,150         26,372         34,501   

Other income (expense), net

     11,624         13,833         39,104         38,720   

Unallocated corporate expense

     19,627         20,926         59,726         56,314   
  

 

 

    

 

 

    

 

 

    

 

 

 

Segment operating income

   $ 66,215       $ 80,348       $ 174,093       $ 193,557   

Add back:

           

Segment depreciation expense

     6,038         6,115         18,646         17,729   

Amortization of other intangible assets

     5,766         5,843         16,773         16,795   

Special charges

     1,761         —           28,425         12,372   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Adjusted Segment EBITDA

   $ 79,780       $ 92,306       $ 237,937       $ 240,453   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

29


Table of Contents

Other Segment Operating Data

 

     Three Months  Ended
September 30,
    Nine Months  Ended
September 30,
 
         2012             2011             2012             2011      

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

        

Corporate Finance/Restructuring

     751        711        751        711   

Forensic and Litigation Consulting

     809        872        809        872   

Economic Consulting

     467        424        467        424   

Technology

     283        284        283        284   

Strategic Communications

     597        590        597        590   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue-generating professionals

     2,907        2,881        2,907        2,881   
  

 

 

   

 

 

   

 

 

   

 

 

 

Utilization rates of billable professionals:(1)

        

Corporate Finance/Restructuring

     70     75     73     70

Forensic and Litigation Consulting

     62     69     67     69

Economic Consulting

     79     85     82     86

Average billable rate per hour:(2)

        

Corporate Finance/Restructuring

   $ 391      $ 406      $ 397      $ 422   

Forensic and Litigation Consulting

     345        331        333        331   

Economic Consulting

     495        487        493        486   

 

(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 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.

 

30


Table of Contents

CORPORATE FINANCE/RESTRUCTURING

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
   2012     2011     2012     2011  
  

(dollars in thousands,

except rate per hour)

   

(dollars in thousands,

except rate per hour)

 

Revenues

   $ 110,217      $ 110,311      $ 336,031      $ 319,461   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Direct cost of revenues

     69,343        65,862        208,205        206,730   

Selling, general and administrative expenses

     16,295        16,946        51,774        53,905   

Special charges

     820        —          11,936        9,440   

Acquisition-related contingent consideration

     355        855        (2,423     2,270   

Amortization of other intangible assets

     1,749        1,507        4,654        4,345   
  

 

 

   

 

 

   

 

 

   

 

 

 
     88,562        85,170        274,146        276,690   
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment operating income

     21,655        25,141        61,885        42,771   

Add back:

        

Depreciation and amortization of intangible assets

     2,554        2,354        7,182        6,962   

Special charges

     820        —          11,936        9,440   
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Segment EBITDA

   $ 25,029      $ 27,495      $ 81,003      $ 59,173   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit(1)

   $ 40,874      $ 44,449      $ 127,826      $ 112,731   

Gross profit margin(2)

     37.1     40.3     38.0     35.3

Adjusted Segment EBITDA as a percent of revenues

     22.7     24.9     24.1     18.5

Number of revenue generating professionals (at period end)

     751        711        751        711   

Utilization rates of billable professionals

     70     75     73     70

Average realized billable rate per hour(3)

   $ 391      $ 406      $ 397      $ 422   

 

(1)

Revenues less direct cost of revenues

 

(2)

Gross profit as a percent of revenues

 

(3) 

Excludes impact of healthcare practice

Three Months Ended September 30, 2012 Compared to Three Months Ended September 30, 2011

Revenues decreased $0.1 million, or 0.1%, to $110.2 million for the three months ended September 30, 2012 compared to $110.3 million for the three months ended September 30, 2011. Revenue was impacted by lower chargeable hours in our North America bankruptcy and restructuring and real estate consulting practices and pricing pressure in our UK restructuring practice, partially offset by higher success fees in our North America bankruptcy and restructuring practice and higher volume in our healthcare practice.

Gross profit decreased $3.6 million, or 8.0%, to $40.9 million for the three months ended September 30, 2012 compared to $44.4 million for the three months ended September 30, 2011. Gross profit margin decreased 3.2 percentage points to 37.1% for the three months ended September 30, 2012 compared to 40.3% for the three months ended September 30, 2011. The decrease in gross profit margin was impacted by lower utilization in both North America restructuring and real estate practices and increased fixed compensation costs largely in our European business.

SG&A expense decreased $0.6 million, or 3.8%, to $16.3 million for the three months ended September 30, 2012 compared to $16.9 million for the three months ended September 30, 2011. SG&A expense was 14.8% of revenue for the three months ended September 30, 2012, down from 15.4% for the three months ended September 30, 2011.

Amortization of other intangible assets increased to $1.7 million for the three months ended September 30, 2012 compared to $1.5 million for the three months ended September 30, 2011.

Adjusted segment EBITDA decreased $2.5 million, or 9.0%, to $25.0 million for the three months ended September 30, 2012 compared to $27.5 million for the three months ended September 30, 2011.

 

31


Table of Contents

Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011

Revenues increased $16.6 million, or 5.2%, to $336.0 million for the nine months ended September 30, 2012 compared to $319.5 million for the nine months ended September 30, 2011. Acquisition-related revenue from LECG and Think First was $4.0 million, or 1.3% growth from the prior year. Revenue increased organically $12.6 million, or 3.9%, primarily due to greater demand for our bankruptcy and restructuring practice in North America and Europe, as well as higher revenues in our healthcare, transaction advisory and Asia practices, partially offset by lower average bill rates and volume for our real estate consulting practice.

Gross profit increased $15.1 million, or 13.4%, to $127.8 million for the nine months ended September 30, 2012 compared to $112.7 million for the nine months ended September 30, 2011. Gross profit margin increased 2.8 percentage points to 38.0% for the nine months ended September 30, 2012 compared to 35.3% for the nine months ended September 30, 2011 primarily due to higher staff utilization.

SG&A expense decreased $2.1 million, or 4.0%, to $51.8 million for the nine months ended September 30, 2012 compared to $53.9 million for the nine months ended September 30, 2011. SG&A expense was 15.4% of revenue for the nine months ended September 30, 2012, down from 16.9% for the nine months ended September 30, 2011. The decrease in SG&A expense was primarily due to lower personnel and non-billable travel and entertainment costs.

Amortization of other intangible assets increased to $4.7 million for the three months ended September 30, 2012 compared to $4.3 million the three months ended September 30, 2011.

Adjusted segment EBITDA increased $21.8 million, or 36.9%, to $81.0 million for the nine months ended September 30, 2012 compared to $59.2 million for the nine months ended September 30, 2011.

 

32


Table of Contents

FORENSIC AND LITIGATION CONSULTING

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
   2012     2011     2012     2011  
  

(dollars in thousands,

except rate per hour)

   

(dollars in thousands,

except rate per hour)

 

Revenues

   $ 83,366      $ 99,064      $ 260,504      $ 275,345   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Direct cost of revenues

     54,658        63,249        168,803        173,738   

Selling, general and administrative expenses

     16,338        17,480        51,755        50,901   

Special charges

     419        —          7,672        839   

Acquisition-related contingent consideration

     48        89        (158     269   

Amortization of other intangible assets

     472        665        1,469        1,852   
  

 

 

   

 

 

   

 

 

   

 

 

 
     71,935        81,483        229,541        227,599   
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment operating income

     11,431        17,581        30,963        47,746   

Add back:

        

Depreciation and amortization of intangible assets

     1,361        1,532        4,281        4,431   

Special charges

     419        —          7,672        839   
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Segment EBITDA

   $ 13,211      $ 19,113