FORM 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended June 30, 2013

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 August 2, 2013

Common stock, par value $0.01 per share

   40,559,669

 

 

 


Table of Contents

FTI CONSULTING, INC. AND SUBSIDIARIES

INDEX

 

          Page  

PART I—FINANCIAL INFORMATION

  

Item 1.

   Financial Statements   
   Condensed Consolidated Balance Sheets—June 30, 2013 and December 31, 2012      3   
   Condensed Consolidated Statements of Comprehensive Income (Loss)—Three and six months ended June 30, 2013 and 2012      4   
   Condensed Consolidated Statement of Stockholders’ Equity—Six months ended
June 30, 2013
     5   
   Condensed Consolidated Statements of Cash Flows—Six months ended June 30, 2013
and 2012
     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      45   

Item 4.

   Controls and Procedures      45   

PART II—OTHER INFORMATION

  

Item 1.

   Legal Proceedings      47   

Item 1A.

   Risk Factors      47   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      47   

Item 3.

   Defaults Upon Senior Securities      48   

Item 4.

   Mine Safety Disclosures      48   

Item 5.

   Other Information      48   

Item 6.

   Exhibits      48   

SIGNATURE

     50   

 

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Table of Contents

PART I—FINANCIAL INFORMATION

FTI Consulting, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except per share amounts)

 

Item 1. Financial Statements

 

     June 30,
2013
    December 31,
2012
 
     (Unaudited)        

Assets

    

Current assets

    

Cash and cash equivalents

   $ 92,554      $ 156,785   

Restricted cash

     —          1,190   

Accounts receivable:

    

Billed receivables

     362,664        314,491   

Unbilled receivables

     223,875        208,797   

Allowance for doubtful accounts and unbilled services

     (106,507     (94,048
  

 

 

   

 

 

 

Accounts receivable, net

     480,032        429,240   

Current portion of notes receivable

     34,128        33,194   

Prepaid expenses and other current assets

     40,298        50,351   

Current portion of deferred tax assets

     17,765        3,615   
  

 

 

   

 

 

 

Total current assets

     664,777        674,375   

Property and equipment, net of accumulated depreciation

     65,607        68,192   

Goodwill

     1,263,166        1,260,035   

Other intangible assets, net of amortization

     101,675        104,181   

Notes receivable, net of current portion

     110,908        101,623   

Other assets

     64,748        67,046   
  

 

 

   

 

 

 

Total assets

   $ 2,270,881      $ 2,275,452   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Current liabilities

    

Accounts payable, accrued expenses and other

   $ 85,974      $ 98,109   

Accrued compensation

     144,391        168,392   

Current portion of long-term debt and capital lease obligations

     6,000        6,021   

Billings in excess of services provided

     25,413        31,675   
  

 

 

   

 

 

 

Total current liabilities

     261,778        304,197   

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

     717,000        717,024   

Deferred income taxes

     129,111        105,751   

Other liabilities

     83,425        80,248   
  

 

 

   

 

 

 

Total liabilities

     1,191,314        1,207,220   
  

 

 

   

 

 

 

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—40,494 (2013) and 40,755 (2012)

     405        408   

Additional paid-in capital

     359,373        367,978   

Retained earnings

     788,381        741,215   

Accumulated other comprehensive loss

     (68,592     (41,369
  

 

 

   

 

 

 

Total stockholders’ equity

     1,079,567        1,068,232   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 2,270,881      $ 2,275,452   
  

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements

 

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Table of Contents

FTI Consulting, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Loss)

(in thousands, except per share data)

Unaudited

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2013     2012     2013     2012  

Revenues

   $ 414,613      $ 396,243      $ 821,791      $ 791,471   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

        

Direct cost of revenues

     259,528        248,220        518,008        493,838   

Selling, general and administrative expense

     96,325        92,460        192,972        195,049   

Special charges

     —          26,782        427        26,782   

Acquisition-related contingent consideration

     (7,452     (3,541     (6,721     (2,984

Amortization of other intangible assets

     5,953        5,490        11,517        11,007   
  

 

 

   

 

 

   

 

 

   

 

 

 
     354,354        369,411        716,203        723,692   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     60,259        26,832        105,588        67,779   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense)

        

Interest income and other

     (387     (363     550        2,919   

Interest expense

     (13,071     (15,195     (25,786     (30,399
  

 

 

   

 

 

   

 

 

   

 

 

 
     (13,458     (15,558     (25,236     (27,480
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax provision

     46,801        11,274        80,352        40,299   

Income tax provision

     23,315        3,527        33,186        14,121   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 23,486      $ 7,747      $ 47,166      $ 26,178   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share—basic

   $ 0.60      $ 0.19      $ 1.20      $ 0.65   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share—diluted

   $ 0.58      $ 0.18      $ 1.17      $ 0.61   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax:

        

Foreign currency translation adjustments, net of tax $0

   $ (11,714   $ (10,960   $ (27,223   $ 1,889   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     (11,714     (10,960     (27,223     1,889   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ 11,772      $ (3,213   $ 19,943      $ 28,067   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements

 

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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, 2012

    40,755      $ 408      $ 367,978      $ 741,215      $ (41,369   $ 1,068,232   

Net income

    —          —          —          47,166        —          47,166   

Other comprehensive income:

           

Cumulative translation adjustment

    —          —          —          —          (27,223     (27,223

Issuance of common stock in connection with:

           

Exercise of options, net of income tax expense from share-based awards of $368

    213        2        5,621        —          —          5,623   

Restricted share grants, less net settled shares of 132

    272        2        (4,532     —          —          (4,530

Stock units issued under incentive compensation plan

    —          —          3,005        —          —          3,005   

Business combinations

    81        1        (995     —          —          (994

Purchase and retirement of common stock

    (827     (8     (28,750     —          —          (28,758

Share-based compensation

    —          —          17,046        —          —          17,046   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance June 30, 2013

    40,494      $ 405      $ 359,373      $ 788,381      $ (68,592   $ 1,079,567   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements

 

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Table of Contents

FTI Consulting, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands)

Unaudited

 

     Six Months Ended
June 30,
 
     2013     2012  

Operating activities

    

Net income

   $ 47,166      $ 26,178   

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

    

Depreciation and amortization

     16,022        18,449   

Amortization of other intangible assets

     11,517        11,186   

Acquisition-related contingent consideration

     (6,721     (2,984

Provision for doubtful accounts

     7,478        7,027   

Non-cash share-based compensation

     17,046        17,805   

Non-cash interest expense

     1,349        3,887   

Other

     (197     70   

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

    

Accounts receivable, billed and unbilled

     (58,827     (50,190

Notes receivable

     (11,113     (23,834

Prepaid expenses and other assets

     (1,485     (4,363

Accounts payable, accrued expenses and other

     (1,354     (1,216

Income taxes

     14,740        (17,108

Accrued compensation

     (10,467     (43,081

Billings in excess of services provided

     (5,785     886   
  

 

 

   

 

 

 

Net cash provided by (used in) operating activities

     19,369        (57,288
  

 

 

   

 

 

 

Investing activities

    

Payments for acquisition of businesses, net of cash received

     (40,512     (21,550

Purchases of property and equipment

     (14,130     (13,728

Other

     21        93   
  

 

 

   

 

 

 

Net cash used in investing activities

     (54,621     (35,185
  

 

 

   

 

 

 

Financing activities

    

Payments of long-term debt and capital lease obligations

     —          (1,974

Purchase and retirement of common stock

     (28,758     —     

Net issuance of common stock under equity compensation plans

     1,245        (840

Other

     (616     (1,324
  

 

 

   

 

 

 

Net cash used in financing activities

     (28,129     (4,138
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (850     (1,831
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (64,231     (98,442

Cash and cash equivalents, beginning of period

     156,785        264,423   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 92,554      $ 165,981   
  

 

 

   

 

 

 

Supplemental cash flow disclosures

    

Cash paid for interest

   $ 22,903      $ 25,367   

Cash paid for income taxes, net of refunds

     18,446        31,230   

Non-cash investing and financing activities:

    

Issuance of stock units under incentive compensation plans

     3,005        3,079   

Issuance of common stock to acquire businesses

     2,883        —     

See accompanying notes to the condensed consolidated financial statements

 

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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. including its consolidated subsidiaries (collectively, the “Company,” “we,” “our” or “FTI Consulting”) 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. See Note 15 “Segment Reporting” for information on our segment reclassification. 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, 2012 filed with the SEC on February 28, 2013 and our Current Report on Form 8-K dated May 21, 2013, in which we reclassified historical segment information on a basis consistent with our current segment reporting structure.

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, for the three and six months ended June 30, 2012, shares issuable upon the potential conversion of our 33/4% senior subordinated convertible notes due on July 15, 2012 (“Convertible Notes”), each using the treasury stock method. In addition, the conversion feature of our Convertible Notes had a dilutive effect on our earnings per share for the three and six months ended June 30, 2012, assuming the conversion premium was converted into common stock based on the average closing price per share of our stock during those periods, because the average closing price per share of our common stock for such periods was above the conversion price of the Convertible Notes of $31.25 per share.

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2013      2012      2013      2012  

Numerator—basic and diluted

           

Net income

   $ 23,486       $ 7,747       $ 47,166       $ 26,178   
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator

           

Weighted average number of common shares outstanding—basic

     39,143         40,592         39,272         40,475   

Effect of dilutive stock options

     589         646         592         804   

Effect of dilutive convertible notes

     —           229         —           737   

Effect of dilutive restricted shares

     561         607         592         656   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of common shares outstanding—diluted

     40,293         42,074         40,456         42,672   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per common share—basic

   $ 0.60       $ 0.19       $ 1.20       $ 0.65   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per common share—diluted

   $ 0.58       $ 0.18       $ 1.17       $ 0.61   
  

 

 

    

 

 

    

 

 

    

 

 

 

Antidilutive stock options and restricted shares

     3,593         3,530         3,541         2,806   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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3. New Accounting Standards Not yet Adopted

In March 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2013-05, Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity (“ASU 2013-05”). ASU 2013-05 updates accounting guidance related to the application of consolidation guidance and foreign currency matters, and resolves the diversity in practice about what guidance applies to the release of the cumulative translation adjustment into net income. ASU 2013-05 requires that the entire amount of a cumulative translation adjustment related to an entity’s investment in a foreign entity should be released when there has been a: (i) sale of a subsidiary or group of net assets within a foreign entity and the sale represents the substantially complete liquidation of the investment in the foreign entity, (ii) loss of a controlling financial interest in an investment in a foreign entity, and (iii) step acquisition for a foreign entity. This guidance is effective for interim and annual periods beginning after December 15, 2013. This ASU would impact the Company’s consolidated results of operations and financial condition only in the instance of an event/transaction as described above.

4. Special Charges

During the year ended December 31, 2012, we recorded special charges totaling $29.6 million, of which $5.0 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 included the termination of 116 employees, the consolidation of leased office space within nine office locations and certain other actions.

During the three months ended March 31, 2013, we recorded an adjustment to the special charge recorded in 2012 of approximately $0.4 million, primarily related to the consolidation of office spaces previously vacated. This adjustment reflects changes to sublease terms and associated costs for those locations for which actual subleases have been entered into during the quarter ended March 31, 2013, as well as the impact of updated forecasts of expected sublease income and employee termination costs.

The following table details the special charges by segment for the three months ended June 30, 2012 and six months ended June 30, 2013 and 2012. We did not record any special charges in the three months ended June 30, 2013.

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2012      2013     2012  

Corporate Finance/Restructuring

   $ 10,561       $ 68      $ 10,561   

Forensic and Litigation Consulting

     7,808         173        7,808   

Economic Consulting

     818         (4     818   

Technology

     2,966         14        2,966   

Strategic Communications

     4,511         64        4,511   
  

 

 

    

 

 

   

 

 

 
     26,664         315        26,664   

Unallocated Corporate

     118         112        118   
  

 

 

    

 

 

   

 

 

 

Total

   $ 26,782       $ 427      $ 26,782   
  

 

 

    

 

 

   

 

 

 

The total cash outflow associated with the special charges is expected to be $24.7 million, of which $13.1 million has been paid as of June 30, 2013. Approximately, $3.2 million is expected to be paid during the remainder of 2013, $2.7 million is expected to be paid in 2014, $1.2 million is expected to be paid in 2015, $0.8 million is expected to be paid in 2016, and the remaining balance of $3.7 million related to lease costs will be paid from 2017 to 2025. 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.

 

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Activity related to the liability for these costs for the six months ended June 30, 2013 is as follows:

 

     Employee
Termination
Costs
    Lease
Costs
    Total  

Balance at December 31, 2012

   $ 6,696      $ 8,517      $ 15,213   

Additions

     (100     527        427   

Payments

     (1,924     (1,936     (3,860

Foreign currency translation adjustment and other

     (162     —          (162
  

 

 

   

 

 

   

 

 

 

Balance at June 30, 2013

   $ 4,510      $ 7,108      $ 11,618   
  

 

 

   

 

 

   

 

 

 

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 (Loss). The provision for doubtful accounts totaled $3.4 million and $7.5 million for the three and six months ended June 30, 2013, respectively, and $2.5 million and $7.0 million for the three and six months ended June 30, 2012, respectively.

6. Research and Development Costs

Research and development costs related to software development totaled $3.5 million and $7.5 million for the three and six months ended June 30, 2013, respectively, and $5.1 million and $11.9 million for the three and six months ended June 30, 2012, respectively. Research and development costs are included in “Selling, general and administrative expense” on the Condensed Consolidated Statements of Comprehensive Income (Loss).

7. Financial Instruments

Fair Value of Financial Instruments

We consider the recorded value of certain financial assets and liabilities, which consist primarily of cash equivalents, accounts receivable and accounts payable, to approximate the fair value of the respective assets and liabilities at June 30, 2013 and December 31, 2012, based on the short-term nature of the assets and liabilities. The fair value of our long-term debt at June 30, 2013 was $743.0 million compared to a carrying value of $723.0 million. At December 31, 2012, the fair value of our long-term debt was $762.0 million compared to a carrying value of $723.0 million. We determine the fair value of our long-term debt primarily based on quoted market prices for our 6 3/4% Senior Notes Due 2020 (“2020 Notes”) and 6.0% Senior Notes Due 2022 (“2022 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.

For business combinations consummated on or after January 1, 2009, we estimate the fair value of acquisition-related contingent consideration based on management’s probability-weighted present value of the consideration expected to be transferred during the remainder of the earnout period, based on the acquired operations’ forecasted earnings. 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 include our measures of the future profitability and related cash flows of the acquired business or assets, impacted by appropriate 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

 

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similar change in the fair value measurement. The fair value of the contingent consideration is reassessed on a quarterly basis by the Company based on a collaborative effort of the Company’s operations, finance and accounting groups using additional information as it becomes available. Any change in the fair value of an acquisition’s contingent consideration liability results in a remeasurement gain or loss that is recorded in the earnings of that period.

Remeasurement gains or losses are recorded as income or expense, respectively and are included within “Acquisition-related contingent consideration” in the Condensed Consolidated Statements of Comprehensive Income (Loss). During the three months ended June 30, 2013, management determined that the fair value of the contingent consideration liability for one of its acquisitions had declined and recorded a remeasurement gain of $8.2 million compared to a gain of $4.1 million for the three and six months ended June 30, 2012.

Accretion expense for acquisition-related contingent consideration totaled $0.8 million and $1.5 million for the three and six months ended June 30, 2013 respectively, and $0.6 million and $1.1 million for the three and six months ended June 30, 2012, respectively.

The following table represents the changes in the acquisition-related contingent consideration liability during the three and six months ended June 30, 2013 and 2012:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
      2013     2012     2013     2012  

Beginning balance

   $ 16,296      $ 15,276      $ 16,426      $ 14,990   

Acquisition(1)

     5,377        —          4,528        —     

Adjustments to fair value recorded in earnings(2)

     (7,452     (3,541     (6,721     (2,984

Payments

     (235     (917     (235     (1,287

Elimination of contingency(3)

     —          (2,534     —          (2,534

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

     (701     (47     (713     52   
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 13,285      $ 8,237      $ 13,285      $ 8,237   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Includes adjustments during the purchase price allocation period.

 

(2)

Includes adjustments to fair value related to accretion and remeasurement of contingent consideration which are recorded in “Acquisition-related contingent consideration” on the Condensed Consolidated Statements of Comprehensive Income (Loss).

 

(3)

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 June 30, 2013

           

Liabilities:

           

Acquisition-related contingent consideration, including current portion

   $ —         $ —         $ 13,285       $ 13,285   

As of December 31, 2012

           

Liabilities:

           

Acquisition-related contingent consideration, including current portion

   $ —         $ —         $ 16,426       $ 16,426   

 

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8. Acquisitions

Certain acquisition-related restricted stock agreements entered into prior to January 1, 2009 contained stock price guarantees that would result in cash payments if our per share price fell below a specified per share market value on the date that the applicable stock restrictions lapsed (the “determination date”). For those acquisitions, the settlement of the stock price guarantees related to our common stock price was recorded as a reduction to additional paid-in capital as of the determination dates. During the three and six months ended June 30, 2013, we paid $3.1 million and $3.9 million, respectively, 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. As of June 30, 2013, no further acquisition-related stock price guarantees are outstanding.

2013 Acquisitions

During the second quarter of 2013, we completed two business combinations. The total purchase price included initial consideration with a value of $26.8 million plus acquisition-related contingent consideration. The contingent consideration is payable through the next five years if the acquired businesses meet certain performance measures.

During the first quarter of 2013, we completed two business combinations. The total purchase price included initial consideration with a value of $9.1 million plus, for one of the business combinations, acquisition-related contingent consideration. The contingent consideration is payable annually through December 31, 2017 if the acquired business meets certain performance measures, and is subject to an $8.0 million aggregate cap.

For acquisitions completed during the six months ended June 30, 2013, as part of the preliminary purchase price allocations, we recorded $9.4 million in identifiable intangible assets and $27.2 million in goodwill. The estimated fair value of the acquisition-related contingent consideration of $8.2 million is recorded in “Other liabilities” on the Consolidated Balance Sheets. Pro forma results of operations were not presented because these acquisitions were not material in relation to our consolidated financial position or results of operations for the periods presented.

9. Goodwill and Other Intangible Assets

The changes in the carrying amounts of goodwill by operating segment for the six months ended June 30, 2013, are as follows:

 

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

Balances at December 31, 2012

  $ 469,050      $ 198,957      $ 247,718      $ 118,035      $ 226,275      $ 1,260,035   

Acquisitions(1)

    12,393        1,050        1,925        —          5,220        20,588   

Foreign currency translation adjustment

    (4,833     (2,059     (506     (105     (9,954     (17,457

Intersegment transfers in/(out)(2)

    (31,471     31,471        —          —          —          —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at June 30, 2013

  $ 445,139      $ 229,419      $ 249,137      $ 117,930      $ 221,541      $ 1,263,166   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Includes adjustments during the purchase price allocation period.

 

(2) 

Includes the reclassification of the Corporate Finance/Restructuring segment’s healthcare and life sciences practices into the Forensic and Litigation Consulting segment. See Note 15 “Segment Reporting” for information on this segment reclassification.

Other intangible assets with finite lives are amortized over their estimated useful lives. For intangible assets with finite lives, we recorded amortization expense of $6.0 million and $11.5 million for the three and six months ended June 30, 2013, respectively and $5.7 million and $11.2 million for the three and six months ended June 30,

 

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2012, respectively. Based solely on the amortizable intangible assets recorded as of June 30, 2013, we estimate amortization expense to be $10.8 million during the remainder of 2013, $13.2 million in 2014, $12.2 million in 2015, $10.7 million in 2016, $9.9 million in 2017, $8.6 million in 2018, and $30.7 million in years after 2018. Actual amortization expense to be reported in future periods could differ from these estimates as a result of new intangible asset acquisitions, finalization of asset valuations for newly acquired assets, changes in useful lives, and changes in value due to foreign currency translation or other factors.

 

     Useful Life
in Years
   June 30, 2013      December 31, 2012  
      Gross
Carrying
Amount
     Accumulated
Amortization
     Gross
Carrying
Amount
     Accumulated
Amortization
 

Finite lived intangible assets

              

Customer relationships

   1 to 15    $ 155,023       $ 65,093       $ 151,990       $ 64,095   

Non-competition agreements

   1 to 10      10,979         8,527         15,184         11,158   

Software

   3 to 10      33,948         30,518         33,979         27,424   

Tradenames

   1 to 2      450         187         180         75   
     

 

 

    

 

 

    

 

 

    

 

 

 
        200,400         104,325         201,333         102,752   

Indefinite-lived intangible assets

              

Tradenames

   Indefinite      5,600         —           5,600         —     
     

 

 

    

 

 

    

 

 

    

 

 

 
      $ 206,000       $ 104,325       $ 206,933       $ 102,752   
     

 

 

    

 

 

    

 

 

    

 

 

 

10. Long-term Debt and Capital Lease Obligations

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

 

     June 30,
2013
     December 31,
2012
 

6 3/4% senior notes due 2020

   $ 400,000       $ 400,000   

6.0% senior notes due 2022

     300,000         300,000   

Notes payable to former shareholders of acquired businesses

     23,000         23,000   
  

 

 

    

 

 

 

Total debt

     723,000         723,000   

Less current portion

     6,000         6,000   
  

 

 

    

 

 

 

Long-term debt, net of current portion

     717,000         717,000   
  

 

 

    

 

 

 

Total capital lease obligations

     —           45   

Less current portion

     —           21   
  

 

 

    

 

 

 

Capital lease obligations, net of current portion

     —           24   
  

 

 

    

 

 

 

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

   $ 717,000       $ 717,024   
  

 

 

    

 

 

 

6.0 % Senior Notes Due 2022

On November 27, 2012, we completed the private offering of $300.0 million aggregate principal amount of our 2022 Notes. The 2022 Notes were issued at a price of 100% of their principal amount. The 2022 Notes and related guarantees were offered only to qualified institutional buyers in reliance on the exemption from registration set forth in Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and outside the United States (“U.S.”) to non-U.S. persons in reliance on the exemption from registration set forth in Regulation S under the Securities Act. On May 22, 2013, the Company filed a Registration Statement on Form S-4 with the SEC to register the exchange offer of the 2022 Notes for publicly registered senior notes with identical terms, which was declared effective on June 27, 2013. The Company completed the exchange offer of all outstanding 2022 Notes for publically registered notes on July 26, 2013.

 

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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 resolutions 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 six months ended June 30, 2013, we granted an aggregate of 857,328 share-based awards, consisting primarily of restricted stock awards, restricted stock units and stock options.

Total share-based compensation expense for the three and six months ended June 30, 2013 and 2012 is detailed in the following table:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 

Comprehensive Income Statement Classification

   2013      2012      2013      2012  

Direct cost of revenues

   $ 3,742       $ 3,025       $ 10,699       $ 9,408   

Selling, general and administrative expense

     3,524         3,239         6,500         7,159   

Special charges

     —           814         —           814   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total share-based compensation expense

   $ 7,266       $ 7,078       $ 17,199       $ 17,381   
  

 

 

    

 

 

    

 

 

    

 

 

 

13. Income Taxes

During the second quarter of 2013, we determined that certain deferred tax assets associated with U.S. future foreign tax credits no longer met the “more-likely-than-not” test regarding the realization of those assets primarily due to lower forecasted foreign earnings. Accordingly, the Company increased the valuation allowance against its U.S. future foreign tax credit assets, resulting in a discrete adjustment to the income tax provision in the amount of $6.9 million. As of June 30, 2013 and December 31, 2012, valuation allowances of $9.4 million and $1.9 million, respectively, were recorded against the Company’s net deferred tax assets. We have not established a valuation allowance for any of our other deferred tax assets as we expect that future taxable income as well as the reversal of temporary differences will enable us to fully utilize our deferred tax assets.

As of June 30, 2013, all of the Company’s undistributed non-U.S. subsidiary earnings are considered permanently invested. Accordingly, as of June 30, 2013, we have not provided for deferred taxes on $15.7 million of the undistributed non-U.S. subsidiary earnings. A deferred tax liability will be recognized if and when the Company is no longer able to demonstrate that it plans to permanently reinvest undistributed earnings. If these earnings were repatriated, the Company would be subject to U.S. income taxes. The amount of the unrecognized deferred U.S. income tax liability associated with the indefinitely reinvested undistributed earnings is estimated to be approximately $5.5 million as of June 30, 2013.

Our liability for uncertain tax positions was $2.3 million and $3.8 million at June 30, 2013 and December 31, 2012, respectively. During the first quarter of 2013, the Company effectively settled certain prior year tax matters. As a result, the Company reversed approximately $2.2 million of its liability for uncertain tax positions.

 

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The Company has estimated its annual effective tax rate for the full fiscal year 2013 and applied that rate to its income before income taxes in determining its provision for income taxes for the three and six months ended June 30, 2013. The Company also records discrete items in each respective period as appropriate. For the three months ended June 30, 2013, the Company recorded net discrete adjustments of $7.1 million to the income tax provision that resulted in an effective tax rate of 49.8%, as compared to an effective tax rate of 31.3% for the three months ended June 30, 2012. Excluding the impact of this item, the Company’s effective tax rate would have been 34.6%. For the six months ended June 30, 2013, the Company recorded net discrete adjustments of $4.6 million to the income tax provision that resulted in an effective tax rate of 41.3%, as compared to an effective tax rate of 35.0% for the six months ended June 30, 2012. Excluding the impact of these items, the Company’s effective tax rate would have been 35.6%.

14. Stockholders’ Equity

On June 6, 2012, our Board of Directors authorized a two-year stock repurchase program of up to $250.0 million (the “2012 Repurchase Program”). During the three months ended March 31, 2013, we repurchased and retired 826,800 shares of our common stock for an average price per share of $34.78, with a value equivalent to approximately $28.8 million. No share repurchases were made during the three months ended June 30, 2013. During the year ended December 31, 2012 we repurchased and retired 1,681,029 shares of our common stock for an average price per share of $29.76 with a value equivalent to approximately $50.0 million. As of June 30, 2013, a balance of approximately $171.2 million remained available under the 2012 Repurchase Program.

15. Segment Reporting

We manage our business in five reportable 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, 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, risk mitigation services as well as interim management and performance improvement services for our health solutions practice clients.

Our Economic Consulting segment provides law firms, companies, government entities and other interested parties with analysis of complex economic issues for use in legal, regulatory and international arbitration proceedings, strategic decision making and public policy debates in the U.S. and around the world.

Our Technology segment provides electronic 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, 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.

Effective in the first quarter of 2013, we modified our reportable segments to reflect changes in how we operate our business and the related internal management reporting. The Company’s healthcare and life sciences

 

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practices from both our Corporate Finance/Restructuring segment and our Forensic and Litigation Consulting segment have been combined under a single organizational structure. This single integrated practice, our health solutions practice, is now aggregated in its entirety within the Forensic and Litigation Consulting reportable segment. Prior period Corporate Finance/Restructuring and Forensic and Litigation Consulting segment information has been reclassified to conform to the current period presentation.

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, special charges and goodwill impairment charges. We define Total Adjusted Segment EBITDA as the total of Adjusted Segment EBITDA for all segments, which excludes unallocated corporate expenses. Although Adjusted Segment EBITDA is not a measure of financial condition or performance determined in accordance with GAAP, we use Adjusted Segment EBITDA to internally evaluate the financial performance of our segments because we believe it is a useful supplemental measure which reflects current core operating performance and provides an indicator of the segment’s ability to generate cash.

The table below presents revenues and Adjusted Segment EBITDA for our reportable segments for the three and six months ended June 30, 2013 and 2012:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2013      2012      2013      2012  

Revenues

           

Corporate Finance/Restructuring

   $ 96,714       $ 96,187       $ 195,794       $ 193,061   

Forensic and Litigation Consulting

     105,120         106,256         205,844         209,891   

Economic Consulting

     111,014         99,455         226,208         199,507   

Technology

     51,196         47,697         97,900         97,357   

Strategic Communications

     50,569         46,648         96,045         91,655   
  

 

 

    

 

 

    

 

 

    

 

 

 

Revenues

   $ 414,613       $ 396,243       $ 821,791       $ 791,471   
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted Segment EBITDA

           

Corporate Finance/Restructuring

   $ 24,123       $ 27,296       $ 43,208       $ 51,468   

Forensic and Litigation Consulting

     20,693         19,542         33,504         34,211   

Economic Consulting

     20,803         18,491         46,997         36,915   

Technology

     16,888         12,849         30,604         26,064   

Strategic Communications

     5,219         4,970         8,773         9,499   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Adjusted Segment EBITDA(1)

   $ 87,726       $ 83,148       $ 163,086       $ 158,157   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

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

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

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2013     2012     2013     2012  

Total Adjusted Segment EBITDA(1)

   $ 87,726      $ 83,148      $ 163,086      $ 158,157   

Segment depreciation expense

     (6,944     (6,335     (13,820     (12,608

Amortization of other intangible assets

     (5,953     (5,490     (11,517     (11,007

Special Charges

     —          (26,782     (427     (26,782

Unallocated corporate expenses, excluding special charges

     (14,570     (17,709     (31,734     (39,981

Interest income and other

     (387     (363     550        2,919   

Interest expense

     (13,071     (15,195     (25,786     (30,399
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax provision

   $ 46,801      $ 11,274      $ 80,352      $ 40,299   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

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

 

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Table of Contents

16. 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 and 2020 Senior Notes and 2022 Senior Notes (collectively, the “Senior Notes”). The guarantees are full and unconditional and joint and several. All of the guarantors are 100%-owned, direct or indirect, subsidiaries. The following financial information presents condensed consolidating balance sheets, statements of comprehensive income (loss) and statements of cash flows for FTI Consulting, all the guarantor subsidiaries, all the non-guarantor subsidiaries and the eliminations necessary to arrive at the consolidated information for FTI Consulting and its subsidiaries. For purposes of this presentation, we have accounted for our investments in our subsidiaries using the equity method of accounting. The principal eliminating entries eliminate investment in subsidiary and intercompany balances and transactions.

Condensed Consolidating Balance Sheet Information as of June 30, 2013

 

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

Assets

         

Cash and cash equivalents

  $ 19,671      $ 308      $ 72,575      $ —        $ 92,554   

Accounts receivable, net

    149,013        186,230        144,789        —        $ 480,032   

Intercompany receivables

    —          729,235        —          (729,235   $ —     

Other current assets

    52,287        19,289        20,615        —        $ 92,191   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    220,971        935,062        237,979        (729,235     664,777   

Property and equipment, net

    33,641        18,683        13,283        —        $ 65,607   

Goodwill

    559,519        425,864        277,783        —        $ 1,263,166   

Other intangible assets, net

    35,754        23,797        72,129        (30,005   $ 101,675   

Investments in subsidiaries

    1,768,811        511,827        —          (2,280,638   $ —     

Other assets

    96,327        62,491        27,766        (10,928   $ 175,656   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 2,715,023      $ 1,977,724      $ 628,940      $ (3,050,806   $ 2,270,881   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

         

Intercompany payables

  $ 648,931      $ 67,108      $ 13,196      $ (729,235   $ —     

Other current liabilities

    90,049        85,967        85,762        —        $ 261,778   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    738,980        153,075        98,958        (729,235     261,778   

Long-term debt, net

    700,000        17,000        —          —        $ 717,000   

Other liabilities

    196,476        20,690        6,298        (10,928   $ 212,536   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    1,635,456        190,765        105,256        (740,163     1,191,314   

Stockholders’ equity

    1,079,567        1,786,959        523,684        (2,310,643   $ 1,079,567   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

  $ 2,715,023      $ 1,977,724      $ 628,940      $ (3,050,806   $ 2,270,881   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Condensed Consolidating Balance Sheet Information as of December 31, 2012

 

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

Assets

         

Cash and cash equivalents

  $ 66,663      $ 610      $ 89,512      $ —        $ 156,785   

Restricted cash

    —          —          1,190        —          1,190   

Accounts receivable, net

    140,254        149,253        139,733        —          429,240   

Intercompany receivables

    7,053        674,136        23,185        (704,374     —     

Other current assets

    46,978        20,469        19,713        —          87,160   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    260,948        844,468        273,333        (704,374     674,375   

Property and equipment, net

    37,411        16,477        14,304        —          68,192   

Goodwill

    558,473        418,789        282,773        —          1,260,035   

Other intangible assets, net

    36,826        23,975        74,967        (31,587     104,181   

Investments in subsidiaries

    1,631,243        502,954        —          (2,134,197     —     

Other assets

    85,109        66,170        28,318        (10,928     168,669   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 2,610,010      $ 1,872,833      $ 673,695      $ (2,881,086   $ 2,275,452   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

         

Intercompany payables

  $ 549,339      $ 112,137      $ 42,898      $ (704,374   $ —     

Other current liabilities

    118,865        79,533        105,799        —          304,197   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    668,204        191,670        148,697        (704,374     304,197   

Long-term debt, net

    700,024        17,000        —          —          717,024   

Other liabilities

    173,550        10,479        12,898        (10,928     185,999   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    1,541,778        219,149        161,595        (715,302     1,207,220   

Stockholders’ equity

    1,068,232        1,653,684        512,100        (2,165,784     1,068,232   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

  $ 2,610,010      $ 1,872,833      $ 673,695      $ (2,881,086   $ 2,275,452   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Condensed Consolidating Statement of Comprehensive Income for the Three Months Ended June 30, 2013

 

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

Revenues

  $ 144,390      $ 254,394      $ 113,565      $ (97,736   $ 414,613   

Operating expenses

         

Direct cost of revenues

    92,781        192,526        70,725        (96,504     259,528   

Selling, general and administrative expense

    38,575        28,614        30,367        (1,231     96,325   

Acquisition-related contingent consideration

    92        195        (7,739     —          (7,452

Amortization of other intangible assets

    1,095        2,501        3,146        (789     5,953   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    11,847        30,558        17,066        788        60,259   

Other (expense) income

    (16,773     202        3,113        —          (13,458
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax provision

    (4,926     30,760        20,179        788        46,801   

Income tax (benefit) provision

    (4,290     24,090        3,515        —          23,315   

Equity in net earnings of subsidiaries

    24,122        15,679        —          (39,801     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    23,486        22,349        16,664        (39,013     23,486   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax:

         

Foreign currency translation adjustments, net of tax $0

    —          —          (11,714     —          (11,714
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

    —          —          (11,714     —          (11,714
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

  $ 23,486      $ 22,349      $ 4,950      $ (39,013   $ 11,772   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Condensed Consolidating Statement of Comprehensive Income (Loss) for the Three Months Ended June 30, 2012

 

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

Revenues

  $ 151,442      $ 241,033      $ 101,451      $ (97,683   $ 396,243   

Operating expenses

         

Direct cost of revenues

    96,450        180,788        66,080        (95,098     248,220   

Selling, general and administrative expense

    39,041        28,507        27,497        (2,585     92,460   

Special Charges

    16,731        4,287        5,764          26,782   

Acquisition-related contingent consideration

    —          —          (3,541     —          (3,541

Amortization of other intangible assets

    1,297        2,473        2,541        (821     5,490   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    (2,077     24,978        3,110        821        26,832   

Other (expense) income

    (17,469     (195     2,106        —          (15,558
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax provision

    (19,546     24,783        5,216        821        11,274   

Income tax (benefit) provision

    (9,666     12,910        283        —          3,527   

Equity in net earnings of subsidiaries

    17,627        5,741        —          (23,368     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    7,747        17,614        4,933        (22,547     7,747   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax:

         

Foreign currency translation adjustments, net of tax $0

    —          —          (10,960     —          (10,960
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

    —          —          (10,960     —          (10,960
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

  $ 7,747      $ 17,614      $ (6,027   $ (22,547   $ (3,213
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Condensed Consolidating Statement of Comprehensive Income for the Six Months Ended June 30, 2013

 

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

Revenues

  $ 295,350      $ 501,055      $ 221,561      $ (196,175   $ 821,791   

Operating expenses

         

Direct cost of revenues

    193,618        379,873        138,698        (194,181     518,008   

Selling, general and administrative expense

    81,471        56,590        56,905        (1,994     192,972   

Special charges

    323        104        —          —          427   

Acquisition-related contingent consideration

    179        195        (7,095     —          (6,721

Amortization of other intangible assets

    2,322        4,948        5,829        (1,582     11,517   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    17,437        59,345        27,224        1,582        105,588   

Other (expense) income

    (31,713     531        5,946        —          (25,236
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax provision

    (14,276     59,876        33,170        1,582        80,352   

Income tax (benefit) provision

    (7,221     34,062        6,345        —          33,186   

Equity in net earnings of subsidiaries

    54,221        24,114        —          (78,335     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    47,166        49,928        26,825        (76,753     47,166   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income, net of tax:

         

Foreign currency translation adjustments, net of tax $0

    —          —          (27,223     —          (27,223
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income, net of tax

    —          —          (27,223     —          (27,223
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

  $ 47,166      $ 49,928      $ (398   $ (76,753   $ 19,943   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Condensed Consolidating Statement of Comprehensive Income for the Six Months Ended June 30, 2012

 

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

Revenues

  $ 305,023      $ 482,749      $ 203,509      $ (199,810   $ 791,471   

Operating expenses

         

Direct cost of revenues

    197,625        362,737        128,999        (195,523     493,838   

Selling, general and administrative expense

    86,435        57,559        55,342        (4,287     195,049   

Special charges

    16,731        4,287        5,764        —          26,782   

Acquisition-related contingent consideration

    —          —          (2,984     —          (2,984

Amortization of other intangible assets

    2,600        4,950        5,097        (1,640     11,007   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    1,632        53,216        11,291        1,640        67,779   

Other (expense) income

    (30,456     35,987        1,874        (34,885     (27,480
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax provision

    (28,824     89,203        13,165        (33,245     40,299   

Income tax (benefit) provision

    (28,380     40,724        1,777        —          14,121   

Equity in net earnings of subsidiaries

    26,622        13,383        —          (40,005     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    26,178        61,862        11,388        (73,250     26,178   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income, net of tax:

         

Foreign currency translation adjustments, net of tax $0

    —          —          1,889        —          1,889   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income, net of tax

    —          —          1,889        —          1,889   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

  $ 26,178      $ 61,862      $ 13,277      $ (73,250   $ 28,067   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Condensed Consolidating Statement of Cash Flow for the Six Months Ended June 30, 2013

 

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

Operating activities

        

Net cash (used in) provided by operating activities

   $ (59,591   $ 50,836      $ 28,124      $ 19,369   

Investing activities

        

Payments for acquisition of businesses, net of cash received

     (11,601     (7,157     (21,754     (40,512

Purchases of property and equipment

     (1,505     (10,386     (2,239     (14,130

Other

     21        —          —          21   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (13,085     (17,543     (23,993     (54,621
  

 

 

   

 

 

   

 

 

   

 

 

 

Financing activities

        

Issuance of common stock and other

     1,083        —          (645     438   

Purchase and retirement of common stock

     (28,758     —          —          (28,758

Excess tax benefits from share-based compensation

     191        —          —          191   

Intercompany transfers

     53,168        (33,595     (19,573     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     25,684        (33,595     (20,218     (28,129
  

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     —          —          (850     (850
  

 

 

   

 

 

   

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (46,992     (302     (16,937     (64,231

Cash and cash equivalents, beginning of period

     66,663        610        89,512        156,785   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 19,671      $ 308      $ 72,575      $ 92,554   
  

 

 

   

 

 

   

 

 

   

 

 

 

Condensed Consolidating Statement of Cash Flow for the Six Months Ended June 30, 2012

 

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

Operating activities

        

Net cash (used in) provided by operating activities

   $ (70,726   $ 336      $ 13,102      $ (57,288

Investing activities

        

Payments for acquisition of businesses, net of cash received

     (21,186     —          (364     (21,550

Purchases of property and equipment

     (3,384     (8,350     (1,994     (13,728

Other

     93        —          —          93   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (24,477     (8,350     (2,358     (35,185
  

 

 

   

 

 

   

 

 

   

 

 

 

Financing activities

        

Payments of long-term debt and capital lease obligations

     (1,929     (45     —          (1,974

Net issuance of common stock and other

     (948     —          (1,287     (2,235

Excess tax benefits from share-based compensation

     71        —          —          71   

Intercompany transfers

     8,906        7,955        (16,861     —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     6,100        7,910        (18,148     (4,138
  

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     —          —          (1,831     (1,831
  

 

 

   

 

 

   

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (89,103     (104     (9,235     (98,442

Cash and cash equivalents, beginning of period

     161,180        197        103,046        264,423   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 72,077      $ 93      $ 93,811      $ 165,981   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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

The following is a discussion and analysis of our consolidated financial condition and results of operations for the three and six months ended June 30, 2013 and 2012 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, 2012 filed with the Securities and Exchange Commission (the “SEC”) on February 28, 2013 and our Current Report on Form 8-K dated May 21, 2013, in which we reclassified historical segment information on a basis consistent with our current segment reporting structure. 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, mergers and acquisitions (“M&A”), antitrust and competition matters, electronic discovery (“e-discovery”), management and retrieval of electronically stored information (“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 reportable 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, risk mitigation services as well as interim management and performance improvement services for our health solutions practice clients.

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.

As of January 1, 2013, the Company’s financial results reflect a combination of the healthcare and life sciences focused personnel that were formerly included in the Corporate Finance/Restructuring and Forensic and

 

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Table of Contents

Litigation Consulting segments, into a single integrated practice. The newly combined health solutions practice consists of over 200 professionals dedicated to serving this growth industry. In the first quarter of 2013, we modified our reportable segments to reflect the changes described above. The Company’s health solutions practice is now aggregated in its entirety in the Forensic and Litigation Consulting reportable segment. Prior period Corporate Finance/Restructuring and Forensic and Litigation Consulting segment information has been reclassified to conform to the current period presentation.

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

Non-GAAP Measures

In the accompanying analysis of financial information, we sometimes use information derived from consolidated and segment financial information that is not presented in our financial statements and prepared in

 

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Table of Contents

accordance with U.S. generally accepted accounting principles (“GAAP”). Certain of these measures are considered “non-GAAP financial measures” under the SEC rules. Specifically, we have referred to:

 

   

Segment Operating Income

 

   

Total Segment Operating Income

 

   

Adjusted EBITDA

 

   

Adjusted Segment EBITDA

 

   

Total Adjusted Segment EBITDA

 

   

Adjusted Net Income

 

   

Adjusted Earnings per Diluted Share

We define Segment Operating Income as a segment’s share of consolidated operating income. We define Total Segment Operating Income as the total of Segment Operating Income for all segments, which excludes unallocated corporate expenses. We use Segment Operating Income for the purpose of calculating Adjusted Segment EBITDA. We define Adjusted EBITDA as consolidated net income before income tax provision, other non-operating income (expense), depreciation, amortization of intangible assets, special charges and goodwill impairment charges. We define Adjusted Segment EBITDA as a segment’s share of consolidated operating income before depreciation, amortization of intangible assets, special charges and goodwill impairment charges. We define Total Adjusted Segment EBITDA as the total of Adjusted Segment EBITDA for all segments, which excludes unallocated corporate expenses. We use Adjusted Segment EBITDA to internally evaluate the financial performance of our segments because we believe it is a useful supplemental measure which reflects current core operating performance and provides an indicator of the segment’s ability to generate cash. We also believe that these measures, when considered together with our GAAP financial results, provide management and investors with a more complete understanding of our operating results, including underlying trends, by excluding the effects of special charges and goodwill impairment charges. In addition, EBITDA is a common alternative measure of operating performance used by many of our competitors. It is used by investors, financial analysts, rating agencies and others to value and compare the financial performance of companies in our industry. Therefore, we also believe that these measures, considered along with corresponding GAAP measures, provide management and investors with additional information for comparison of our operating results to the operating results of other companies.

We define Adjusted Net Income and Adjusted Earnings per Diluted Share as net income and earnings per diluted share, respectively, excluding the impact of special charges, goodwill impairment charges and losses on early extinguishment of debt. We use Adjusted Net Income for the purpose of calculating Adjusted Earnings per Diluted Share. Management uses Adjusted Earnings per Diluted Share to assess total company operating performance on a consistent basis. We believe that this measure, when considered together with our GAAP financial results, provides management and investors with a more complete understanding of our business operating results, including underlying trends, by excluding the effects of special charges, goodwill impairment charges and losses on early extinguishment of debt.

Non-GAAP financial measures are not defined in the same manner by all companies and may not be comparable to other similarly titled measures of other companies. Non-GAAP financial measures should be considered in addition to, but not as a substitute for or superior to, the information contained in our Consolidated Statements of Comprehensive Income (Loss). Reconciliations of GAAP to non-GAAP financial measures are included elsewhere in this filing.

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

 

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Table of Contents

EXECUTIVE HIGHLIGHTS

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2013      2012      2013      2012  
     (dollars in thousands,
except per share amounts)
     (dollars in thousands,
except per share amounts)
 

Revenues

   $ 414,613       $ 396,243       $ 821,791       $ 791,471   

Special charges

   $ —         $ 26,782       $ 427       $ 26,782   

Adjusted EBITDA

   $ 74,228       $ 66,616       $ 133,554       $ 120,576   

Net income

   $ 23,486       $ 7,747       $ 47,166       $ 26,178   

Earnings per common share—diluted

   $ 0.58       $ 0.18       $ 1.17       $ 0.61   

Adjusted EPS

   $ 0.58       $ 0.60       $ 1.17       $ 1.02   

Cash provided by (used in) operating activities

   $ 21,673       $ 533       $ 19,369       $ (57,288

Total number of employees at June 30,

     4,040         3,855         4,040         3,855   

Second Quarter 2013 Executive Highlights

Revenues

Revenues for the quarter ended June 30, 2013 increased $18.4 million, or 4.6%, to $414.6 million, compared to $396.2 million in the same prior year period. Revenues grew largely due to $13 million of revenue generated by acquired businesses in our Corporate Finance/Restructuring segment. Revenues increased organically 0.9% due to strong demand for our Economic Consulting and Strategic Communications segments in the North America and Europe, Middle East and Africa (“EMEA”) regions as well as increased volumes for merger and acquisition (“M&A”) related second request document review services in our Technology segment. These increases were partially offset by weak demand for our bankruptcy and restructuring practices in our Corporate Finance/Restructuring segment in the North America and Asia Pacific regions.

Special Charges

There were no special charges recorded in the quarter ended June 30, 2013, compared to $26.8 million in special charges recorded in the same prior year period. The June 30, 2012 special charges were primarily related to staff reductions and leased real estate consolidations.

Adjusted EBITDA

Adjusted EBITDA increased $7.6 million, or 11.4%, to $74.2 million, or 17.9% of revenues, compared to $66.6 million, or 16.8% of revenues, in the same prior year period. The Company reduced its acquisition-related contingent consideration liability related to business operations in Asia that were acquired in 2010, based upon a revaluation of the consideration expected to be paid over the remaining earn out period. The $8.2 million non-cash valuation adjustment was recorded as a revaluation gain and is included within “Acquisition-related contingent consideration” in the Condensed Consolidated Statements of Comprehensive Income (Loss). Approximately $6.3 million of the revaluation gain was recorded in the Corporate Finance/Restructuring segment, with $1.9 million recorded in the Forensic and Litigation Consulting segment. A similar revaluation gain of $4.1 million was recorded in the same prior year period, of which $3.8 million was recorded in the Corporate Finance/Restructuring segment and $0.3 million was recorded in the Forensic and Litigation Consulting segment.

Excluding the impact of the revaluation gain, Adjusted EBITDA increased primarily from a reduction in performance-based compensation expense, increased volumes in our Technology segment and higher utilization in our Economic Consulting segment, partially offset by under-utilization in our bankruptcy and restructuring practices in our Corporate Finance/Restructuring segment in the North America region.

 

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Net Income

Net income increased $15.8 million to $23.5 million, compared to the $7.7 million in the same prior year period. The increase was primarily attributable to the $26.8 million special charge made in the quarter ended June 30, 2012 that was not present in the quarter ended June 30, 2013. Net income for the quarter ended June 30, 2013 included a favorable $7.1 million after-tax impact related to a revaluation gain, compared to a favorable after-tax impact of approximately $3.2 million related to a revaluation gain in the same prior year period. Additionally, a $6.9 million non-cash valuation reserve was recorded to reduce a deferred tax asset previously established to reflect the benefit of future foreign tax credits which, based on a current assessment, may not be realizable in the future. This valuation reserve was recorded as an increase in income tax expense for the quarter.

Earnings per share and Adjusted EPS

Earnings per diluted share for the quarter ended June 30, 2013 were $0.58, compared to $0.18 in the same prior year period, as the prior year period included a special charge of $26.8 million primarily related to staff reductions and leased real estate consolidations. Earnings per diluted share for the quarter ended June 30, 2013 included an $8.2 million revaluation gain resulting in a $0.18 increase in EPS and Adjusted EPS and an unfavorable $6.9 million deferred tax valuation reserve resulting in a $0.17 decrease in EPS and Adjusted EPS for the quarter compared to a favorable revaluation gain of $4.1 million resulting in a $0.08 increase in EPS and Adjusted EPS in the same prior year period. Adjusted earnings per diluted share, which exclude the impact of the special charge, were $0.58, compared to $0.60 in the same prior year period due to the impact of the operating results described above.

Operating cash flows

Cash provided from operating activities for the quarter ended June 30, 2013 was $21.7 million compared to $0.5 million for the same prior year period. The increase was the result of higher cash collections on accounts receivable, partially offset by bonuses paid and higher tax payments. Cash collections for the quarter were strong at $396 million.

Headcount

Headcount increased by 185, or 4.8%, to 4,040.

Billable headcount increased in the Corporate Finance/Restructuring segment as a result of acquisitions, in the Economic Consulting segment to support growing operations, and Forensic and Litigation Consulting segment related to growth in our health solutions practice, partially offset by a decrease in our Technology segment.

Other strategic activities

On April 4, 2013, the Company announced the acquisition of the operations of Taylor Woodings partnership, an Australian specialist corporate advisory firm with offices in Sydney, Melbourne, Perth and Brisbane. On May 1, 2013, the Company announced the acquisition of the operations of Princeton Economics Group, an economic consulting firm based in Princeton, N.J. The Taylor Woodings acquisition expanded the geographic footprint and service offerings of FTI Consulting in Australia, adding nearly 80 professionals into the Company’s Corporate/Finance Restructuring segment, and the Princeton Economics Consulting Group acquisition added 10 professionals to the Company’s Economic Consulting segment, enhancing capacity within antitrust and competition economics services.

 

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Table of Contents

CONSOLIDATED RESULTS OF OPERATIONS

Segment and Consolidated Operating Results:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2013     2012     2013     2012  
     (in thousands, except
per share amounts)
    (in thousands, except
per share amounts)
 

Revenues

        

Corporate Finance/Restructuring

   $ 96,714      $ 96,187      $ 195,794      $ 193,061   

Forensic and Litigation Consulting

     105,120        106,256        205,844        209,891   

Economic Consulting

     111,014        99,455        226,208        199,507   

Technology

     51,196        47,697        97,900        97,357   

Strategic Communications

     50,569        46,648        96,045        91,655   
  

 

 

   

 

 

   

 

 

   

 

 

 

Revenues

   $ 414,613      $ 396,243      $ 821,791      $ 791,471   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

        

Corporate Finance/Restructuring

   $ 21,436      $ 14,520      $ 38,135      $ 36,464   

Forensic and Litigation Consulting

     19,177        10,201        30,279        23,298   

Economic Consulting

     19,530        16,551        44,525        33,871   

Technology

     11,292        4,757        19,374        12,958   

Strategic Communications

     3,394        (1,370     5,121        1,287   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total segment operating income

     74,829        44,659        137,434        107,878   

Unallocated corporate expenses

     (14,570     (17,827     (31,846     (40,099
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     60,259        26,832        105,588        67,779   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense)

        

Interest income and other

     (387     (363     550        2,919   

Interest expense

     (13,071     (15,195     (25,786     (30,399
  

 

 

   

 

 

   

 

 

   

 

 

 
     (13,458     (15,558     (25,236     (27,480
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax provision

     46,801        11,274        80,352        40,299   

Income tax provision

     23,315        3,527        33,186        14,121   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 23,486      $ 7,747      $ 47,166      $ 26,178   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share—basic

   $ 0.60      $ 0.19      $ 1.20      $ 0.65   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share—diluted

   $ 0.58      $ 0.18      $ 1.17      $ 0.61   
  

 

 

   

 

 

   

 

 

   

 

 

 

Reconciliation of Net Income to Adjusted EBITDA:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2013      2012      2013      2012  
     (in thousands)      (in thousands)  

Net income

   $ 23,486       $ 7,747       $ 47,166       $ 26,178   

Add back:

           

Income tax provision

     23,315         3,527         33,186         14,121   

Other income (expense), net

     13,458         15,558         25,236         27,480   

Depreciation and amortization

     8,016         7,512         16,022         15,008   

Amortization of other intangible assets

     5,953         5,490         11,517         11,007   

Special charges

     —           26,782         427         26,782   
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ 74,228       $ 66,616       $ 133,554       $ 120,576   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
         2013              2012              2013              2012      

Net income

   $ 23,486       $ 7,747       $ 47,166       $ 26,178   

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

     —           17,320         253         17,320   
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted net income

   $ 23,486       $ 25,067       $ 47,419       $ 43,498   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per common share—diluted

   $ 0.58       $ 0.18       $ 1.17       $ 0.61   

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

     —           0.42         —           0.41   
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted earnings per common share—diluted

   $ 0.58       $ 0.60       $ 1.17       $ 1.02   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of common shares outstanding—diluted

     40,293         42,074         40,456         42,672   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(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 adjustment for the six months ended June 30, 2013 was 40.7%, and the adjustment was 35.3% for each of the three and six months ended June 30, 2012. The tax expense related to the adjustments for the six months ended June 30, 2013 was $0.2 million with no impact on diluted earnings per share. The tax expense for the three and six months ended June 30, 2012 was $9.5 million or $0.22 impact on diluted earnings per share.

Three Months Ended June 30, 2013 Compared to Three Months Ended June 30, 2012

Revenues and operating income

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

Unallocated corporate expenses

Unallocated corporate expenses decreased $3.2 million, or 18.3%, to $14.6 million for the three months ended June 30, 2013 from $17.8 million for the same prior year period. The decrease was due to a reduction in performance-based compensation expense and lower spending on core marketing, partially offset by higher legal fees in the three months ended June 30, 2013 when compared to the same prior year period.

Interest income and other

Interest income and other, which includes foreign currency transaction gains and losses was a loss of $0.4 million for the three months ended June 30, 2013, which was unchanged from a loss of $0.4 million for the same prior year period.

Interest expense

Interest expense was $13.1 million for the three months ended June 30, 2013 as compared to $15.2 million for the same prior year period. Interest expense in 2013 was favorably impacted by lower average borrowings, interest rates and deferred financing fees in 2013 as compared to 2012, primarily due to the repayment in July 2012 of $150.0 million aggregate principal amount of 3 3/4% senior subordinated convertible notes (“Convertible Notes”) and the extinguishment of the $215.0 million aggregate principal amount of 7 3/4% senior notes due 2016 (“2016 Notes”) in the fourth quarter of 2012, which was partially offset by interest expense relating to the issuance of the $300.0 million aggregate principal amount of 6.0% senior notes due 2022 (“2022 Notes”) in the fourth quarter of 2012.

 

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Table of Contents

Special charges

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 included the termination of 116 employees, the consolidation of leased office space within six office locations and certain other actions.

The following table details the special charge adjustments by segment for the quarter ended June 30, 2012:

 

     Three Months Ended
June 30,
 
     2012  
     Special
Charges
     Total
Headcount
 

Corporate Finance/Restructuring

   $ 10,561         4   

Forensic and Litigation Consulting

     7,808         43   

Economic Consulting

     818         8   

Technology

     2,966         42   

Strategic Communications

     4,511         15   
  

 

 

    

 

 

 
     26,664         112   

Unallocated Corporate

     118         4   
  

 

 

    

 

 

 

Total

   $ 26,782         116   
  

 

 

    

 

 

 

We did not record any special charges in the three months ended June 30, 2013.

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 49.8% for the three months ended June 30, 2013 as compared to 31.3% for the same prior year period. During the second quarter of 2013, we recorded a deferred tax valuation reserve related to foreign tax credits, primarily due to lower forecasted foreign earnings, resulting in an increase to the income tax provision in the amount of $6.9 million. Excluding the impact of the discrete item, the effective tax rate for the three months ended June 30, 2013 would have been 34.6%, higher than the same prior year period due to the impact from a change in the mix of earnings by jurisdiction, both state and foreign, and certain non-deductible expenses relating to acquisitions completed in 2013.

Six Months Ended June 30, 2013 Compared to Six Months Ended June 30, 2012

Revenues and operating income

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

Unallocated corporate expenses

Unallocated corporate expenses decreased $8.3 million, or 20.6%, to $31.8 million for the six months ended June 30, 2013 from $40.1 million for the same prior year period. The decrease was due to a reduction in performance-based compensation expense, lower spending on core marketing and lower costs related to strategic planning activities in the six months ended June 30, 2013 when compared to the same prior year period.

 

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Table of Contents

Interest income and other

Interest income and other, which includes foreign currency transaction gains and losses, decreased by $2.3 million to $0.6 million for the six months ended June 30, 2013 from $2.9 million for the same prior year period. The decrease is primarily due to net foreign currency transaction losses in the period ended June 30, 2013 as compared to net gains in the same prior year period. Transaction gains and losses, both realized and unrealized, relate to the remeasurement or settlement of monetary assets and liabilities that are denominated in a currency other than an entity’s functional currency. These monetary assets and liabilities include current intercompany receivables and payables. The foreign exchange losses in the six months ended June 30, 2013 were primarily the result of the strengthening of the US dollar and Hong Kong dollar relative to the Australian dollar, Canadian dollar and British pound.

Interest expense

Interest expense was $25.8 million for the six months ended June 30, 2013 as compared to $30.4 million for the same prior year period. Interest expense in 2013 was favorably impacted by lower average borrowings, interest rates and deferred financing fees in 2013 as compared to 2012, primarily due to the repayment in July 2012 of $150.0 million aggregate principal amount of Convertible Notes and the extinguishment of the 2016 Notes in the fourth quarter of 2012, which was partially offset by interest expense relating to the issuance of the 2022 Notes in the fourth quarter of 2012.

Special charges

During the six months ended June 30, 2013, we recorded adjustments to the special charges recorded in 2012 of approximately $0.4 million, primarily related to the consolidation of office spaces previously vacated. These charges reflect the changes to sublease terms and associated costs for those locations for which actual subleases have been entered into during the six months ended June 30, 2013, as well as the impact of updated forecasts of expected sublease income and employee termination costs.

The following table details the special charges by segment for the six months ended June 30, 2013 and 2012:

 

     Six Months Ended June 30,      Six Months Ended June 30,  
     2013      2012  
     Special Charges     Total
Headcount
     Special Charges      Total
Headcount
 

Corporate Finance/Restructuring

   $ 68        —         $ 10,561         4   

Forensic and Litigation Consulting

     173        —           7,808         43   

Economic Consulting

     (4     —           818         8   

Technology

     14        —           2,966         42   

Strategic Communications

     64        —           4,511         15   
  

 

 

   

 

 

    

 

 

    

 

 

 
     315        —           26,664         112   

Unallocated Corporate

     112        —           118         4   
  

 

 

   

 

 

    

 

 

    

 

 

 

Total

   $ 427        —         $ 26,782         116   
  

 

 

   

 

 

    

 

 

    

 

 

 

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 41.3% for the six months ended June 30, 2013 as compared to 35.0% for the same period in 2012 due to an increase in income tax expense related to a discrete adjustment recorded in the period. During the six months ended June 30, 2013, we recorded a deferred tax valuation reserve related to foreign tax credits, primarily due to lower forecasted foreign earnings, resulting in a discrete increase to the income tax provision in the amount of $6.9 million. We also recognized the impact of a discrete benefit related to the favorable resolution of an income tax contingency in the amount of $2.2 million. Excluding the impact of these discrete items, the effective tax rate for the six months ended June 30, 2013 would have been 35.6%, comparable to the effective tax rate in the same prior year period.

 

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Table of Contents

SEGMENT RESULTS

Total Adjusted Segment EBITDA

The following table reconciles net income to Total Segment Operating Income and Total Adjusted Segment EBITDA for the three months ended June 30, 2013 and 2012.

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2013      2012      2013      2012  
     (in thousands)      (in thousands)  

Net income

   $ 23,486       $ 7,747       $ 47,166       $ 26,178   

Add back:

           

Income tax provision

     23,315         3,527         33,186         14,121   

Other income (expense), net

     13,458         15,558         25,236         27,480   

Unallocated corporate expense

     14,570         17,827         31,846         40,099   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Segment Operating Income

   $ 74,829       $ 44,659       $ 137,434       $ 107,878   

Add back:

           

Segment depreciation expense

     6,944         6,335         13,820         12,608   

Amortization of other intangible assets

     5,953         5,490         11,517         11,007   

Special charges

     —           26,664         315         26,664   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Adjusted Segment EBITDA

   $ 87,726       $ 83,148       $ 163,086       $ 158,157   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other Segment Operating Data

 

     Three Months Ended
June 30,
    Six Months
Ended June 30,
 
     2013     2012     2013     2012  

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

        

Corporate Finance/Restructuring

     718        596        718        596   

Forensic and Litigation Consulting

     969        930        969        930   

Economic Consulting

     499        467        499        467   

Technology

     285        311        285        311   

Strategic Communications

     611        599        611        599   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue-generating professionals

     3,082        2,903        3,082        2,903   
  

 

 

   

 

 

   

 

 

   

 

 

 

Utilization rates of billable professionals:(1)

        

Corporate Finance/Restructuring

     62     75     66     77

Forensic and Litigation Consulting

     67     68     65     74

Economic Consulting

     82     80     86     83

Average billable rate per hour:(2)(3)

        

Corporate Finance/Restructuring

   $ 416      $ 413      $ 412      $ 413   

Forensic and Litigation Consulting

     307        306        314        304   

Economic Consulting

     505        496        501        483   

 

(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.

 

(3) 

2013 and 2012 utilization and average bill rate calculations for our Corporate Finance/Restructuring, Forensic and Litigation Consulting, and Economic Consulting segments were updated to reflect the realignment of certain practices as well as information related to non-U.S. operations that was not previously available.

 

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Table of Contents

CORPORATE FINANCE/RESTRUCTURING

 

     Three Months
Ended June 30,
    Six Months Ended
June 30,
 
     2013     2012     2013     2012  
     (dollars in
thousands, except
rate per hour)
    (dollars in thousands,
except rate per hour)
 

Revenues

   $ 96,714      $ 96,187      $ 195,794      $ 193,061   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Direct cost of revenues

     59,516        58,372        121,949        116,810   

Selling, general and administrative expenses

     19,730        14,571        37,420        29,126   

Special charges

     —          10,561        68        10,561   

Acquisition-related contingent consideration

     (5,800     (3,277     (5,161     (2,778

Amortization of other intangible assets

     1,832        1,440        3,383        2,878   
  

 

 

   

 

 

   

 

 

   

 

 

 
     75,278        81,667        157,659        156,597   
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment operating income

     21,436        14,520        38,135        36,464   

Add back:

        

Depreciation and amortization of intangible assets

     2,687        2,215        5,005        4,443   

Special charges

     —          10,561        68        10,561   
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Segment EBITDA

   $ 24,123      $ 27,296      $ 43,208      $ 51,468   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit(1)

   $ 37,198      $ 37,815      $ 73,845      $ 76,251   

Gross profit margin(2)

     38.5     39.3     37.7     39.5

Adjusted Segment EBITDA as a percent of revenues

     24.9     28.4     22.1     26.7

Number of revenue generating professionals (at period end)

     718        596        718        596   

Utilization rates of billable professionals

     62     75     66     77

Average billable rate per hour

   $ 416      $ 413      $ 412      $ 413   

 

(1) 

Revenues less direct cost of revenues

 

(2) 

Gross profit as a percent of revenues

Three Months Ended June 30, 2013 Compared to Three Months Ended June 30, 2012

Revenues increased $0.5 million, or 0.5%, to $96.7 million for the three months ended June 30, 2013 compared to $96.2 million for the same prior year period. Revenues increased $13.0 million, or 13.6%, in 2013 due to acquisitions as compared to the same prior year period. Revenues decreased organically $12.5 million, or 13.1%, due to lower demand in our North America and Asia Pacific restructuring practices, partially offset by higher realization in the EMEA region and success fees in our telecom, media and technology practice.

Gross profit decreased $0.6 million, or 1.6%, to $37.2 million for the three months ended June 30, 2013 compared to $37.8 million for the same prior year period. Gross profit margin decreased 0.8 percentage points to 38.5% for the three months ended June 30, 2013 compared to 39.3% for the same prior year period. The decrease in gross profit margin was due to lower utilization in our North America and Asia Pacific restructuring practices, partially offset by favorable margins from our acquired practices and a reduction in performance-based compensation expense.

SG&A expense increased $5.1 million, or 35.4%, to $19.7 million for the three months ended June 30, 2013 compared to $14.6 million for the same prior year period. SG&A expense was 20.4% of revenues for the three months ended June 30, 2013, compared to 15.1% for the same prior year period. The increase in SG&A expense was due to the overhead costs related to the acquired practices as well as non-recurring acquisition costs of $1.8 million.

Amortization of other intangible assets was $1.8 million for the three months ended June 30, 2013 compared to $1.4 million for the same prior year period.

 

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Adjusted Segment EBITDA decreased $3.2 million, or 11.6%, to $24.1 million for the three months ended June 30, 2013 compared to $27.3 million for the same prior year period. Excluding the revaluation gains in 2013 and 2012 of $6.3 million and $3.8 million, respectively, Adjusted Segment EBITDA decreased by $5.7 million to $17.8 million.

Six Months Ended June 30, 2013 Compared to Six Months Ended June 30, 2012

Revenues increased $2.7 million, or 1.4%, to $195.8 million for the six months ended June 30, 2013 compared to $193.1 million for the same prior year period. Revenues increased $19.5 million, or 10.1%, in 2013 due to acquisitions as compared to the same prior year period. Revenues decreased organically $16.8 million, or 8.7%, primarily due to lower demand and realization in our North America and Asia Pacific restructuring practices, partially offset by higher demand and realization in the EMEA region and increased demand for our telecom, media and technology practices.

Gross profit decreased $2.5 million, or 3.2%, to $73.8 million for the six months ended June 30, 2013 compared to $76.3 million for the same prior year period. Gross profit margin decreased 1.8 percentage points to 37.7% for the six months ended June 30, 2013 compared to 39.5% for the same prior year period. The decrease in gross profit margin was due to lower utilization in our North America and Asia Pacific restructuring practices, partially offset by favorable margins from our acquired practices and reduced performance-based compensation expense.

SG&A expense increased $8.3 million, or 28.5%, to $37.4 million for the six months ended June 30, 2013 compared to $29.1 million for the same prior year period. SG&A expense was 19.1% of revenues for the six months ended June 30, 2013, compared to 15.1% for the same prior year period. The increase in SG&A expense was primarily due to the overhead costs related to the acquired practices as well as non-recurring acquisition costs of $1.8 million. Amortization of other intangible assets was $3.4 million for the six months ended June 30, 2013 compared to $2.9 million for the same prior year period.

Adjusted Segment EBITDA decreased $8.3 million, or 16.0%, to $43.2 million for the six months ended June 30, 2013 compared to $51.5 million for the same prior year period. Excluding the revaluation gains in 2013 and 2012 of $6.3 million and $3.8 million, respectively, Adjusted Segment EBITDA decreased $10.8 million to $36.9 million.

 

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FORENSIC AND LITIGATION CONSULTING

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2013     2012     2013     2012  
     (dollars in thousands,
except rate per hour)
    (dollars in thousands,
except rate per hour)
 

Revenues

   $ 105,120      $ 106,256      $ 205,844      $ 209,891   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Direct cost of revenues

     66,861        67,836        134,835        136,197   

Selling, general and administrative expenses

     20,351        20,167        41,222        41,770   

Special charges

     —          7,808        173        7,808   

Acquisition-related contingent consideration

     (1,848     (264     (1,756     (206

Amortization of other intangible assets

     579        508        1,091        1,024   
  

 

 

   

 

 

   

 

 

   

 

 

 
     85,943        96,055        175,565        186,593   
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment operating income

     19,177        10,201        30,279        23,298   

Add back:

        

Depreciation and amortization of intangible assets

     1,516        1,533        3,052        3,105   

Special charges

     —          7,808        173        7,808   
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Segment EBITDA

   $ 20,693      $ 19,542      $ 33,504      $ 34,211   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit(1)

   $ 38,259      $ 38,420      $ 71,009      $ 73,694   

Gross profit margin(2)

     36.4     36.2     34.5     35.1

Adjusted Segment EBITDA as a percent of revenues

     19.7     18.4     16.3     16.3

Number of revenue generating professionals (at period end)

     969        930        969        930   

Utilization rates of billable professionals

     67     68     65     74

Average billable rate per hour

   $ 307      $ 306      $ 314      $ 304   

 

(1) 

Revenues less direct cost of revenues

 

(2) 

Gross profit as a percent of revenues

Three Months Ended June 30, 2013 C