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, 2014

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.)

1101 K Street NW,

Washington, D.C.

  20005
(Address of Principal Executive Offices)   (Zip Code)

(202) 312-9100

(Registrant’s telephone number, including area code)

 

 

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

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

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

 

Large accelerated filer    x    Accelerated filer   ¨
Non-accelerated filer    ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

 

Outstanding at July 28, 2014

Common stock, par value $0.01 per share   40,946,943

 

 

 


Table of Contents

FTI CONSULTING, INC. AND SUBSIDIARIES

INDEX

 

         Page  

PART I—FINANCIAL INFORMATION

  

Item 1.

  Financial Statements   
  Condensed Consolidated Balance Sheets—June 30, 2014 and December 31, 2013      3   
  Condensed Consolidated Statements of Comprehensive Income—Three and Six Months Ended June 30, 2014 and 2013      4   
  Condensed Consolidated Statement of Stockholders’ Equity—Six Months Ended June 30, 2014      5   
  Condensed Consolidated Statements of Cash Flows—Six Months Ended June 30, 2014 and 2013      6   
  Notes to Condensed Consolidated Financial Statements      7   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      20   

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      47   

Item 4.

  Mine Safety Disclosures      47   

Item 5.

  Other Information      48   

Item 6.

  Exhibits      48   

SIGNATURE

     49   

 

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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,
2014
    December 31,
2013
 
     (Unaudited)        

Assets

    

Current assets

    

Cash and cash equivalents

   $ 94,412      $ 205,833   

Accounts receivable:

    

Billed receivables

     423,058        352,411   

Unbilled receivables

     296,299        233,307   

Allowance for doubtful accounts and unbilled services

     (139,620     (109,273
  

 

 

   

 

 

 

Accounts receivable, net

     579,737        476,445   

Current portion of notes receivable

     29,911        33,093   

Prepaid expenses and other current assets

     52,162        61,800   

Current portion of deferred tax assets

     29,046        26,690   
  

 

 

   

 

 

 

Total current assets

     785,268        803,861   

Property and equipment, net of accumulated depreciation

     83,495        79,007   

Goodwill

     1,225,403        1,218,733   

Other intangible assets, net of amortization

     86,270        97,148   

Notes receivable, net of current portion

     131,707        108,298   

Other assets

     61,097        57,900   
  

 

 

   

 

 

 

Total assets

   $ 2,373,240      $ 2,364,947   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Current liabilities

    

Accounts payable, accrued expenses and other

   $ 96,005      $ 126,886   

Accrued compensation

     169,923        222,738   

Current portion of long-term debt

     6,000        6,014   

Billings in excess of services provided

     36,946        28,692   
  

 

 

   

 

 

 

Total current liabilities

     308,874        384,330   

Long-term debt, net of current portion

     711,000        711,000   

Deferred income taxes

     149,130        137,697   

Other liabilities

     96,316        89,661   
  

 

 

   

 

 

 

Total liabilities

     1,265,320        1,322,688   
  

 

 

   

 

 

 

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—40,936 (2014) and 40,526 (2013)

     409        405   

Additional paid-in capital

     380,193        362,322   

Retained earnings

     765,985        730,621   

Accumulated other comprehensive loss

     (38,667     (51,089
  

 

 

   

 

 

 

Total stockholders’ equity

     1,107,920        1,042,259   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 2,373,240      $ 2,364,947   
  

 

 

   

 

 

 

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

(in thousands, except per share data)

Unaudited

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2014     2013     2014     2013  

Revenues

   $ 454,324      $ 414,613      $ 879,876      $ 821,791   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

        

Direct cost of revenues

     295,549        259,528        569,824        518,008   

Selling, general and administrative expense

     107,032        96,325        215,419        192,972   

Special charges

     9,364        —          9,364        427   

Acquisition-related contingent consideration

     (5     (7,452     (1,848     (6,721

Amortization of other intangible assets

     3,452        5,953        8,068        11,517   
  

 

 

   

 

 

   

 

 

   

 

 

 
     415,392        354,354        800,827        716,203   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     38,932        60,259        79,049        105,588   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense)

        

Interest income and other

     1,448        (387     2,451        550   

Interest expense

     (12,908     (13,071     (25,563     (25,786
  

 

 

   

 

 

   

 

 

   

 

 

 
     (11,460     (13,458     (23,112     (25,236
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax provision

     27,472        46,801        55,937        80,352   

Income tax provision

     10,225        23,315        20,573        33,186   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 17,247      $ 23,486      $ 35,364      $ 47,166   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share—basic

   $ 0.43      $ 0.60      $ 0.89      $ 1.20   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share—diluted

   $ 0.42      $ 0.58      $ 0.87      $ 1.17   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax:

        

Foreign currency translation adjustments, net of tax $0

   $ 7,694      $ (11,714   $ 12,422      $ (27,223
  

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income (loss), net of tax

     7,694        (11,714     12,422        (27,223
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

   $ 24,941      $ 11,772      $ 47,786      $ 19,943   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements

 

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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, 2013

    40,526      $ 405      $ 362,322      $ 730,621      $ (51,089   $ 1,042,259   

Net income

    —          —          —          35,364        —          35,364   

Other comprehensive income:

           

Cumulative translation adjustment

    —          —          —          —          12,422        12,422   

Issuance of common stock in connection with:

           

Exercise of options

    148        2        3,145        —          —          3,147   

Restricted share grants

    262        2        (5,093     —          —          (5,091

Stock units issued under incentive compensation plan

    —          —          1,674        —          —          1,674   

Non-employee vesting of stock options

    —          —          2,951        —          —          2,951   

Share-based compensation

    —          —          15,194        —          —          15,194   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance June 30, 2014

    40,936      $ 409      $ 380,193      $ 765,985      $ (38,667   $ 1,107,920   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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,
 
     2014     2013  

Operating activities

    

Net income

   $ 35,364      $ 47,166   

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

    

Depreciation and amortization

     18,138        16,022   

Amortization of other intangible assets

     8,068        11,517   

Acquisition-related contingent consideration

     (1,848     (6,721

Provision for doubtful accounts

     8,671        7,478   

Non-cash share-based compensation

     15,194        17,046   

Non-cash interest expense

     1,348        1,349   

Other

     (368     (197

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

    

Accounts receivable, billed and unbilled

     (115,787     (58,827

Notes receivable

     (22,559     (11,113

Prepaid expenses and other assets

     8,860        (1,485

Accounts payable, accrued expenses and other

     2,645        (1,354

Income taxes

     4,832        14,740   

Accrued compensation

     (47,418     (10,467

Billings in excess of services provided

     7,756        (5,785
  

 

 

   

 

 

 

Net cash (used in) provided by operating activities

     (77,104     19,369   
  

 

 

   

 

 

 

Investing activities

    

Payments for acquisition of businesses, net of cash received

     (15,611     (40,512

Purchases of property and equipment

     (21,778     (14,130

Other

     (6     21   
  

 

 

   

 

 

 

Net cash used in investing activities

     (37,395     (54,621
  

 

 

   

 

 

 

Financing activities

    

Purchase and retirement of common stock

     (4,367     (28,758

Net issuance of common stock under equity compensation plans

     (2,692     1,245   

Deposits

     11,580        —     

Other

     (891     (616
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     3,630        (28,129
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (552     (850
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (111,421     (64,231

Cash and cash equivalents, beginning of period

     205,833        156,785   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 94,412      $ 92,554   
  

 

 

   

 

 

 

Supplemental cash flow disclosures

    

Cash paid for interest

   $ 23,541      $ 22,903   

Cash paid for income taxes, net of refunds

     15,743        18,446   

Non-cash investing and financing activities:

    

Issuance of stock units under incentive compensation plans

     1,674        3,005   

Issuance of common stock to acquire businesses

     —          2,883   

See accompanying notes to the condensed consolidated financial statements

 

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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. 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, 2013.

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 common 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, each using the treasury stock method.

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2014      2013      2014      2013  

Numerator—basic and diluted

           

Net income

   $ 17,247       $ 23,486       $ 35,364       $ 47,166   
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator

           

Weighted average number of common shares outstanding—basic

     39,681         39,143         39,560         39,272   

Effect of dilutive stock options

     288         589         322         592   

Effect of dilutive restricted shares

     781         561         722         592   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of common shares outstanding—diluted

     40,750         40,293         40,604         40,456   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per common share—basic

   $ 0.43       $ 0.60       $ 0.89       $ 1.20   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per common share—diluted

   $ 0.42       $ 0.58       $ 0.87       $ 1.17   
  

 

 

    

 

 

    

 

 

    

 

 

 

Antidilutive stock options and restricted shares

     3,637         3,593         3,408         3,541   
  

 

 

    

 

 

    

 

 

    

 

 

 

3. New Accounting Standards Not Yet Adopted

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers, or ASU 2014-09. ASU 2014-09 is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or

 

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services. This guidance is effective for interim and annual periods beginning after December 15, 2016 and early adoption is not permitted. Companies may use either a full retrospective or a modified retrospective approach to adopt this ASU. The Company is currently evaluating which transition approach to use and the impact of the adoption of this accounting standard update on its condensed consolidated financial statements.

In April 2014, the FASB issued Accounting Standards Update 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, or ASU 2014-08. ASU 2014-08 amends the criteria for reporting a discontinued operation. The amended guidance requires that a disposal representing a strategic shift that has (or will have) a major effect on an entity’s operations and financial results or a business activity classified as held for sale should be reported as discontinued operations. The amendments also expand the disclosure requirements for discontinued operations and add new disclosures for individually significant dispositions that do not qualify as discontinued operations. This guidance is effective for interim and annual periods beginning after December 15, 2014, with early adoption permitted. ASU 2014-08 would impact the Company’s consolidated results of operations and financial condition only in the instance of an event or transaction described above.

4. Special Charges

During the three months ended June 30, 2014, we recorded special charges totaling $9.4 million, of which $0.6 million was non-cash. The charges consisted of $7.9 million related to the termination of the Company’s corporate airplane lease and $1.5 million related to the closure of the Company’s West Palm Beach executive office and related lease termination.

During the three months ended March 31, 2013, we recorded adjustments to the special charges for office spaces vacated prior to the end of the second quarter of 2012 of approximately $0.4 million. These charges reflected the changes to sublease terms and associated costs for those locations for which subleases were entered into during the three months ended March 31, 2013.

The following table details the special charges by segment for the three months ended June 30, 2014 and six months ended June 30, 2014 and 2013. We did not record any special charges for the three months ended June 30, 2013.

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2014          2014              2013      

Corporate Finance/Restructuring

   $ —         $ —         $ 68   

Forensic and Litigation Consulting

     —           —           173   

Economic Consulting

     —           —           (4

Technology

     —           —           14   

Strategic Communications

     —           —           64   
  

 

 

    

 

 

    

 

 

 
     —           —           315   

Unallocated Corporate

     9,364         9,364         112   
  

 

 

    

 

 

    

 

 

 

Total

   $ 9,364       $ 9,364       $ 427   
  

 

 

    

 

 

    

 

 

 

During the year ended December 31, 2013, we recorded special charges totaling $38.4 million, of which $14.1 million was non-cash. The charges reflect contractual post-employment severance and transition services, equity award and retention bonus expense acceleration primarily related to the transition of the Company’s former Executive Chairman and former President and Chief Executive Officer. Special charges also included accelerated expenses related to future payments required to be made under a contractual transition service agreement with a Corporate Finance/Restructuring segment senior client facing professional. We also incurred costs related to actions we took to realign our workforce to address current business demands impacting our

 

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Corporate Finance/Restructuring and Forensic and Litigation Consulting segments, and to reduce certain corporate overhead within our Europe, Middle East and Africa (“EMEA”) region, most of which were recorded in the third and fourth quarters of 2013.

The total cash outflow associated with the special charges recorded in 2014, 2013 and 2012 is expected to be $57.3 million, of which $34.5 million has been paid as of June 30, 2014. Approximately $6.2 million is expected to be paid during the remainder of 2014, $5.0 million is expected to be paid in 2015, $3.1 million is expected to be paid in 2016, $3.1 million is expected to be paid in 2017, and the remaining balance of $5.4 million will be paid from 2018 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.

Activity related to the liability for these costs for the three months ended June 30, 2014 is as follows:

 

     Employee
Termination
Costs
    Lease
Costs
    Total  

Balance at December 31, 2013

   $ 19,965      $ 6,096      $ 26,061   

Additions

     —          8,770        8,770   

Payments

     (2,397     (9,645     (12,042

Foreign currency translation adjustment and other

     12        —          12   
  

 

 

   

 

 

   

 

 

 

Balance at June 30, 2014

   $ 17,580      $ 5,221      $ 22,801   
  

 

 

   

 

 

   

 

 

 

5. Allowance for Doubtful Accounts and Unbilled Services

We record adjustments to the allowance for doubtful accounts and unbilled services as a reduction in revenue when there are changes in estimates of fee reductions that may be imposed by bankruptcy courts and other regulatory institutions, for both billed and unbilled receivables. The allowance for doubtful accounts and unbilled services is also adjusted after the related work has been billed to the client and we discover that collectability is not reasonably assured. These adjustments are recorded to “Selling, general and administrative expense” on the Condensed Consolidated Statements of Comprehensive Income and totaled $4.2 million and $8.7 million for the three and six months ended June 30, 2014, respectively, and $3.4 million and $7.5 million for the three and six months ended June 30, 2013, respectively.

6. Research and Development Costs

Research and development costs related to software development totaled $4.6 million and $9.1 million for the three and six months ended June 30, 2014, respectively, and $3.5 million and $7.5 million for the three and six months ended June 30, 2013, respectively. Research and development costs are included in “Selling, general and administrative expense” on the Condensed Consolidated Statements of Comprehensive Income.

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, 2014 and December 31, 2013, based on the short-term nature of the assets and liabilities. The fair value of our long-term debt at June 30, 2014 was $753.8 million compared to a carrying value of $717.0 million. At December 31, 2013, the fair value of our long-term debt was $752.8 million compared to a carrying value of $717.0 million. We determine the fair value of our long-term debt primarily based on quoted market prices for our 63/4% 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.

 

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For business combinations consummated on or after January 1, 2009, we estimate the fair value of acquisition-related contingent consideration based on the present value of the consideration expected to be paid during the remainder of the earnout period, based on management’s assessment of 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 similar change in the fair value measurement. The fair value of the contingent consideration is reassessed on a quarterly basis by the Company 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 as income or expense, respectively, and is included within “Acquisition-related contingent consideration” in the Condensed Consolidated Statements of Comprehensive Income. During the three and six months ended June 30, 2014, management determined that the fair value of the contingent consideration liability for certain of its acquisitions had declined and recorded a remeasurement gain of $0.3 million and $2.4 million, respectively, compared to a remeasurement gain of $8.2 million for the three and six months ended June 30, 2013.

Accretion expense for acquisition-related contingent consideration totaled $0.3 million and $0.5 million for the three and six months ended June 30, 2014, respectively, and $0.8 million and $1.5 million for the three and six months ended June 30, 2013, respectively.

The following table represents the changes in the acquisition-related contingent consideration liability during the three and six months ended June 30, 2014 and 2013:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2014     2013     2014     2013  

Beginning balance

   $ 6,903      $ 16,296      $ 13,329      $ 16,426   

Acquisition (1)

     —          5,377        (4,495     4,528   

Accretion of acquisition-related contingent consideration

     255        764        535        1,495   

Remeasurement of acquisition-related contingent consideration

     (261     (8,216     (2,383     (8,216

Payments

     (314     (235     (378     (235

Unrealized losses related to currency translation in other comprehensive income

     18        (701     (7     (713
  

 

 

   

 

 

   

 

 

   

 

 

 

Ending balance

   $ 6,601      $ 13,285      $ 6,601      $ 13,285   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Includes adjustments during the purchase price allocation period.

8. Acquisitions

Certain purchase price allocations were preliminary at December 31, 2013. For these acquisitions, we recorded $4.7 million of acquisition related contingent consideration, $9.5 million of identifiable intangible assets, $1.2 million of deferred taxes and $10.1 million of goodwill in the year ended December 31, 2013. During the first and second quarter of 2014 we finalized the purchase price allocations and recorded adjustments to the

 

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preliminary purchase price for certain acquisitions completed during the fourth quarter of 2013. These adjustments were immaterial; therefore no retrospective adjustments were made to the fair value of the assets acquired and liabilities assumed in the Condensed Consolidated Balance Sheet as of December 31, 2013.

9. Goodwill and Other Intangible Assets

The changes in the carrying amounts of goodwill by operating segment for the six months ended June 30, 2014, are as follows:

 

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

Balances at December 31, 2013:

           

Goodwill

  $ 449,710      $ 241,651      $ 263,474      $ 118,073      $ 339,964      $ 1,412,872   

Accumulated goodwill impairment

    —          —          —          —          (194,139     (194,139
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Goodwill, net at December 31, 2013

    449,710        241,651        263,474        118,073        145,825        1,218,733   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Acquisitions (1)

    —          (224     —          —          —          (224

Foreign currency translation adjustment and other

    2,088        1,179        205        62        3,360        6,894   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Goodwill

    451,798        242,606        263,679        118,135        343,324        1,419,542   

Accumulated goodwill impairment

    —          —          —          —          (194,139     (194,139
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Goodwill, net at June 30, 2014

  $ 451,798      $ 242,606      $ 263,679      $ 118,135      $ 149,185      $ 1,225,403   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Includes adjustments during the purchase price measurement period.

Other intangible assets with finite lives are amortized over their estimated useful lives. For intangible assets with finite lives, we recorded amortization expense of $3.5 million and $8.1 million for the three and six months ended June 30, 2014, respectively, and $6.0 million and $11.5 million for the three and six months ended June 30, 2013, respectively. Based solely on the amortizable intangible assets recorded as of June 30, 2014, we estimate amortization expense to be $6.7 million during the remainder of 2014, $12.2 million in 2015, $11.0 million in 2016, $10.3 million in 2017, $8.6 million in 2018, $7.9 million in 2019, and $23.9 million in years after 2019. Actual amortization expense to be reported in future periods could differ from these estimates as a result of new intangible asset acquisitions, finalization of asset valuations for newly acquired assets, changes in useful lives, changes in value due to foreign currency translation, and other factors.

10. Debt

The components of debt obligations are presented in the table below:

 

     June 30,
2014
     December 31,
2013
 

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

     17,000         17,000   

Other

     —           14   
  

 

 

    

 

 

 

Total debt

     717,000         717,014   

Less current portion

     6,000         6,014   
  

 

 

    

 

 

 

Long-term debt, net of current portion

   $ 711,000       $ 711,000   
  

 

 

    

 

 

 

 

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There were no borrowings outstanding under the Company’s senior secured bank credit facility as of June 30, 2014.

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 three months ended June 30, 2014 and March 31, 2014 we granted 183,105 and 645,593, respectively, of share-based awards consisting primarily of restricted stock awards, restricted stock units, and stock options. These awards are recorded as equity on the Company’s balance sheet.

On April 1, 2014, certain executive officers of the Company were granted an aggregate of 234,536 cash-based awards under the Company’s 2014 executive officer long-term incentive program. These awards include cash-based stock appreciation rights (the “Executive SARs”) and cash-based units, which vest pro rata on the first through third anniversaries of the date of grant. The Executive SARs expire ten years from the date of grant. The awards also consist of cash-based performance units, subject to performance conditions based on the adjusted total shareholder return of the Company as compared to the adjusted total shareholder return of the adjusted S&P 500 for the three-year period ending March 31, 2017. The Executive SAR represents the right to receive cash upon exercise equal to the product of (i) the aggregate number of shares with respect to which the Executive SAR is exercised and (ii) the excess of (A) the closing price per share as reported on the New York Stock Exchange (the “NYSE”) of a share of our common stock as of the date of exercise over (B) the exercise price of such Executive SAR. The cash-based units and performance units will have a value equivalent to the closing price per share of our common stock as reported on the NYSE for the applicable vesting or performance measurement date, as the case may be. As these awards will be settled in cash, they have been recorded as liabilities on the Company’s balance sheet at fair value. Subsequent changes in the fair value of these awards based on fluctuations in the value of our common stock will be included in the related cash-based compensation expense recorded over the vesting period.

Total share-based compensation expense for the three and six months ended June 30, 2014 and 2013 is detailed in the following table:

 

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

Comprehensive Income Statement Classification

        2014                2013           2014      2013  

Direct cost of revenues

   $ 3,548       $ 3,742       $ 9,370       $ 10,699   

Selling, general and administrative expense

     2,773         3,524         6,027         6,500   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total share-based compensation expense

   $ 6,321       $ 7,266       $ 15,397       $ 17,199   
  

 

 

    

 

 

    

 

 

    

 

 

 

13. Income Taxes

The Company has estimated its annual effective tax rate for the full fiscal year 2014 and applied that rate to its income before income taxes in determining its provision for income taxes for the three and six months ended

 

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June 30, 2014. The Company also records discrete items in each respective period as appropriate. During the second quarter of 2013, we determined that certain deferred tax assets associated with United States (“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, 2014 and December 31, 2013, valuation allowances of $9.6 million and $10.2 million, respectively, were recorded against the Company’s net deferred tax assets.

14. Stockholder’s 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 year ended December 31, 2013, we repurchased and retired 1,956,900 shares of our common stock for an average price per share of $36.35, at a cost of $71.1 million, of which $4.4 million was accrued and included in the Condensed Consolidated Balance Sheet, and $66.7 million was paid at December 31, 2013. In January 2014, we paid the balance due of $4.4 million on our 2013 share repurchases. No shares were repurchased during the six months ended June 30, 2014. The 2012 Repurchase Program expired on June 5, 2014, with an unused balance of $128.8 million.

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.

We evaluate the performance of our operating segments based on Adjusted Segment EBITDA. Beginning with the quarter ended March 31, 2014, the definition of Adjusted Segment EBITDA has been updated to exclude the impact of changes in the fair value of acquisition-related contingent consideration liabilities. Prior period amounts have been reclassified to conform to the current period’s presentation.

 

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We define Adjusted Segment EBITDA as a segment’s share of consolidated operating income before depreciation, amortization of intangible assets, remeasurement of acquisition-related contingent consideration, 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, 2014 and 2013:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2014      2013      2014      2013  

Revenues

           

Corporate Finance/Restructuring

   $ 104,020       $ 96,714       $ 198,002       $ 195,794   

Forensic and Litigation Consulting

     119,081         105,120         240,510         205,844   

Economic Consulting

     117,227         111,014         224,078         226,208   

Technology

     60,720         51,196         120,783         97,900   

Strategic Communications

     53,276         50,569         96,503         96,045   
  

 

 

    

 

 

    

 

 

    

 

 

 

Revenues

   $ 454,324       $ 414,613       $ 879,876       $ 821,791   
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted Segment EBITDA

           

Corporate Finance/Restructuring

   $ 19,133       $ 17,848       $ 30,084       $ 36,933   

Forensic and Litigation Consulting

     22,271         18,752         48,765         31,563   

Economic Consulting

     18,043         20,803         31,073         46,997   

Technology

     15,104         16,888         32,452         30,604   

Strategic Communications

     5,834         5,219         8,563         8,773   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Adjusted Segment EBITDA

   $ 80,385       $ 79,510       $ 150,937       $ 154,870   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2014     2013     2014     2013  

Total Adjusted Segment EBITDA

   $ 80,385      $ 79,510      $ 150,937      $ 154,870   

Segment depreciation expense

     (7,512     (6,944     (15,060     (13,820

Amortization of other intangible assets

     (3,452     (5,953     (8,068     (11,517

Special charges

     (9,364     —          (9,364     (427

Unallocated corporate expenses, excluding special charges

     (21,386     (14,570     (41,779     (31,734

Interest income and other

     1,448        (387     2,451        550   

Interest expense

     (12,908     (13,071     (25,563     (25,786

Remeasurement of acquisition-related contingent consideration

     261        8,216        2,383        8,216   
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax provision

   $ 27,472      $ 46,801      $ 55,937      $ 80,352   
  

 

 

   

 

 

   

 

 

   

 

 

 

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 Notes and 2022 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

 

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

 

15


Table of Contents

Condensed Consolidating Balance Sheet Information as of June 30, 2014

 

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

Assets

         

Cash and cash equivalents

  $ 33,141      $ 156      $ 61,115      $ —        $ 94,412   

Accounts receivable, net

    179,545        208,622        191,570        —          579,737   

Intercompany receivables

    —          775,962        15,247        (791,209  

Other current assets

    63,841        21,281        25,997        —          111,119   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    276,527        1,006,021        293,929        (791,209     785,268   

Property and equipment, net

    32,063        14,875        36,557        —          83,495   

Goodwill

    559,318        408,903        257,182        —          1,225,403   

Other intangible assets, net

    31,883        18,163        62,648        (26,424     86,270   

Investments in subsidiaries

    1,873,211        516,819        —          (2,390,030     —     

Other assets

    66,738        79,341        46,725        —          192,804   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 2,839,740      $ 2,044,122      $ 697,041      $ (3,207,663   $ 2,373,240   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

         

Intercompany payables

  $ 705,096      $ 39,257      $ 46,856      $ (791,209   $ —     

Other current liabilities

    121,886        88,773        98,215        —          308,874   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    826,982        128,030        145,071        (791,209     308,874   

Long-term debt, net

    700,000        11,000        —          —          711,000   

Other liabilities

    204,838        13,335        27,273        —          245,446   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    1,731,820        152,365        172,344        (791,209     1,265,320   

Stockholders’ equity

    1,107,920        1,891,757        524,697        (2,416,454     1,107,920   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

  $ 2,839,740      $ 2,044,122      $ 697,041      $ (3,207,663   $ 2,373,240   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Condensed Consolidating Balance Sheet Information as of December 31, 2013

 

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

Assets

         

Cash and cash equivalents

  $ 111,943      $ 494      $ 93,396      $ —        $ 205,833   

Accounts receivable, net

    154,357        162,505        159,583        —          476,445   

Intercompany receivables

    —          820,158        18,881        (839,039     —     

Other current assets

    68,292        20,932        32,359        —          121,583   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    334,592        1,004,089        304,219        (839,039     803,861   

Property and equipment, net

    31,304        19,047        28,656        —          79,007   

Goodwill

    559,820        408,903        250,010        —          1,218,733   

Other intangible assets, net

    33,746        19,534        72,221        (28,353     97,148   

Investments in subsidiaries

    1,772,130        498,001        —          (2,270,131     —     

Other assets

    75,561        56,949        33,688        —          166,198   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 2,807,153      $ 2,006,523      $ 688,794      $ (3,137,523   $ 2,364,947   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

         

Intercompany payables

  $ 709,628      $ 74,813      $ 54,598      $ (839,039   $ —     

Other current liabilities

    154,049        114,883        115,398        —          384,330   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    863,677        189,696        169,996        (839,039     384,330   

Long-term debt, net

    700,000        11,000        —          —          711,000   

Other liabilities

    201,217        15,009        11,132        —          227,358   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    1,764,894        215,705        181,128        (839,039     1,322,688   

Stockholders’ equity

    1,042,259        1,790,818        507,666        (2,298,484     1,042,259   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

  $ 2,807,153      $ 2,006,523      $ 688,794      $ (3,137,523   $ 2,364,947   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Condensed Consolidating Statement of Comprehensive Income for the Three Months Ended

June 30, 2014

 

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

Revenues

  $ 155,457      $ 269,329      $ 131,805      $ (102,267   $ 454,324   

Operating expenses

         

Direct cost of revenues

    98,574        210,455        88,439        (101,919     295,549   

Selling, general and administrative expense

    45,864        30,077        31,439        (348     107,032   

Special charges

    9,364        —          —          —          9,364   

Acquisition-related contingent consideration

    2        200        (207     —          (5

Amortization of other intangible assets

    1,086        641        2,697        (972     3,452   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    567        27,956        9,437        972        38,932   

Other (expense) income

    (12,262     (1,969     2,771        —          (11,460
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax provision

    (11,695     25,987        12,208        972        27,472   

Income tax (benefit) provision

    (4,847     11,858        3,214        —          10,225   

Equity in net earnings of subsidiaries

    24,095        8,357        —          (32,452     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    17,247        22,486        8,994        (31,480     17,247   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income, net of tax:

         

Foreign currency translation adjustments, net of tax $0

    —          —          7,694        —          7,694   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income, net of tax

    —          —          7,694        —          7,694   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

  $ 17,247      $ 22,486      $ 16,688      $ (31,480   $ 24,941   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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 loss, net of tax:

         
         

Foreign currency translation adjustments, net of tax $0

    —          —          (11,714     —          (11,714
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income, net of tax

    —          —          (11,714     —          (11,714
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Condensed Consolidating Statement of Comprehensive Income for the Six Months Ended

June 30, 2014

 

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

Revenues

  $ 306,489      $ 521,412      $ 252,332      $ (200,357   $ 879,876   

Operating expenses

         

Direct cost of revenues

    198,072        406,154        165,296        (199,698     569,824   

Selling, general and administrative expense

    91,162        58,577        66,339        (659     215,419   

Special charges

    9,364        —          —          —          9,364   

Acquisition-related contingent consideration

    (596     (403     (849     —          (1,848

Amortization of other intangible assets

    2,159        1,370        6,468        (1,929     8,068   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    6,328        55,714        15,078        1,929        79,049   

Other (expense) income

    (25,576     (4,235     6,699        —          (23,112
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax provision

    (19,248     51,479        21,777        1,929        55,937   

Income tax (benefit) provision

    (7,705     22,904        5,374        —          20,573   

Equity in net earnings of subsidiaries

    46,907        14,690        —          (61,597     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    35,364        43,265        16,403        (59,668     35,364   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax:

         

Foreign currency translation adjustments, net of tax $0

    —          —          12,422        —          12,422   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income, net of tax

    —          —          12,422        —          12,422   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

  $ 35,364      $ 43,265      $ 28,825      $ (59,668   $ 47,786   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total other comprehensive income, net of tax

    —          —          (27,223     —          (27,223
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Condensed Consolidating Statement of Cash Flows for the Six Months Ended June 30, 2014

 

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

Operating activities

       

Net cash used in operating activities

  $ (26,238   $ (33,013   $ (17,853   $ (77,104

Investing activities

       

Payments for acquisition of businesses, net of cash received

    (14,656     —          (955     (15,611

Purchases of property and equipment

    (7,140     (3,890     (10,748     (21,778

Other

    (6     —          —          (6
 

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

    (21,802     (3,890     (11,703     (37,395
 

 

 

   

 

 

   

 

 

   

 

 

 

Financing activities

       

Purchase and retirement of common stock

    (4,367     —          —          (4,367

Net issuance of common stock under equity compensation plans

    (2,692     —          —          (2,692

Deposits

    —          —          11,580        11,580   

Other

    444        (378     (957     (891

Intercompany transfers

    (24,147     36,943        (12,796     —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by financing activities

    (30,762     36,565        (2,173     3,630   
 

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

    —          —          (552     (552
 

 

 

   

 

 

   

 

 

   

 

 

 

Net decrease in cash and cash equivalents

    (78,802     (338     (32,281     (111,421

Cash and cash equivalents, beginning of period

    111,943        494        93,396        205,833   
 

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

  $ 33,141      $ 156      $ 61,115      $ 94,412   
 

 

 

   

 

 

   

 

 

   

 

 

 

Condensed Consolidating Statement of Cash Flows 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

       

Purchase and retirement of common stock

    (28,758     —          —          (28,758

Net issuance of common stock under equity compensation plans

    1,245        —          —          1,245   

Other

    29        —          (645     (616

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   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

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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, 2014 and 2013 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, 2013. 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, securities litigation, 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.

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

 

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Table of Contents

Most of our services are rendered under time-and-expense arrangements that obligate the client to pay us a fee for the hours that we incur at agreed upon rates. Under this arrangement, we typically bill our clients for reimbursable expenses, which may include the cost of producing our work product and other direct expenses that we incur on behalf of the client, such as travel costs. We also render services for which certain clients may be required to pay us a fixed fee or recurring retainer. These arrangements are generally cancellable at any time. Some of our engagements contain performance-based arrangements in which we earn a success fee when and if certain predefined outcomes occur. This type of success fee may supplement a time-and-expense or fixed-fee arrangement. Success fee revenues may cause variations in our revenues and operating results due to the timing of achieving the performance-based criteria. In our Technology segment, certain clients are also billed based on the amount of data stored on our electronic systems, the volume of information processed or the number of users licensing our Ringtail® software products for use or installation within their own environments. We license certain 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. Seasonal factors, such as the timing of our employees’ and clients’ vacations and holidays, impact the timing of our revenues.

Our financial results are primarily driven by:

 

   

the number, size and type of engagements we secure;

 

   

the rate per hour or fixed charges we charge our clients for services;

 

   

the utilization rates of the revenue-generating professionals we employ;

 

   

the number of revenue-generating professionals;

 

   

fees from clients on a retained basis or other;

 

   

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 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

 

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Beginning with the quarter ended March 31, 2014, the definitions of each of these non-GAAP measures have been updated to exclude the impact of changes in the fair value of acquisition-related contingent consideration liabilities. Prior period amounts have been reclassified to conform to the current period’s presentation.

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, remeasurement of acquisition-related contingent consideration, special charges, goodwill impairment charges and losses on early extinguishment of debt. We define Adjusted Segment EBITDA as a segment’s share of consolidated operating income before depreciation, amortization of intangible assets, remeasurement of acquisition-related contingent consideration, 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 remeasurement of acquisition-related contingent consideration, 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 remeasurement of acquisition-related contingent consideration, 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 the remeasurement of acquisition-related contingent consideration, 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. Reconciliations of GAAP to non-GAAP financial measures are included elsewhere in this filing.

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

 

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EXECUTIVE HIGHLIGHTS

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
           2014                  2013                  2014                 2013        
     (dollars in thousands,
except per share amounts)
     (dollars in thousands,
except per share amounts)
 

Revenues

   $ 454,324       $ 414,613       $ 879,876      $ 821,791   

Special charges

   $ 9,364       $ —         $ 9,364      $ 427   

Adjusted EBITDA

   $ 59,903       $ 66,012       $ 111,099      $ 125,338   

Net income

   $ 17,247       $ 23,486       $ 35,364      $ 47,166   

Earnings per common share—diluted

   $ 0.42       $ 0.58       $ 0.87      $ 1.17   

Adjusted EPS

   $ 0.55       $ 0.38       $ 0.97      $ 0.97   

Cash provided by (used in) operating activities

   $ 33,691       $ 21,673       $ (77,104   $ 19,369   

Total number of employees at June 30,

     4,223         4,040         4,223        4,040   

Second Quarter 2014 Executive Highlights

Revenues

Revenues for the three months ended June 30, 2014 increased $39.7 million, or 9.6%, to $454.3 million, compared to $414.6 million in the same prior year period. The revenue increase largely resulted from organic growth in all segments, with the most significant revenue growth due to higher demand related to disputes and investigations in our North America and Asia Pacific regions in our Forensic and Litigation Consulting (“FLC”) segment, as well as, complex global investigation matters in our Technology segment. Additionally, our results reflected improved demand in the Corporate Finance/Restructuring (“Corporate Finance”) North American non-distressed service offerings and our Economics Consulting segment’s international arbitration and financial service offering in the Europe, Middle East and Africa (“EMEA”) region.

Special Charges

We recorded $9.4 million of special charges in the second quarter, related to the termination of the Company’s corporate airplane lease and to the closure of our West Palm Beach executive office and related lease termination.

Adjusted EBITDA (excluding special charges)

Adjusted EBITDA in the second quarter decreased $6.1 million, or 9.3%, to $59.9 million, or 13.2% of revenues, compared to $66.0 million, or 15.9% of revenues, in the same prior year period. Adjusted EBITDA was favorably impacted by revenue increases across the segments but were offset by a related increase in performance-based compensation costs, investments in certain global corporate initiatives, the impact of employment contract extensions of key senior client-service professionals in our Economics Consulting segment, investments in hiring key personnel in our FLC health solutions, Corporate Finance EMEA transaction advisory sub-practices and our Technology segment.

Net Income

Net income for the three months ended June 30, 2014 decreased $6.2 million to $17.2 million, compared to $23.5 million in the same prior year period. Net income for the quarter was impacted by the segment results and the special charges described above. Net income for the prior year quarter was impacted by a $8.2 million fair value adjustment related to contingent consideration offset by a $6.9 million income tax valuation allowance against our U.S. future foreign tax credits.

 

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Table of Contents

Earnings per diluted share and Adjusted EPS

Earnings per diluted share for the three months ended June 30, 2014 decreased $0.16 to $0.42 from $0.58 in the same prior year period. Earnings per diluted share were impacted by the results as outlined above, including the impact of the special charge of $9.4 million recorded in the quarter, which reduced earnings per share by $0.14. Adjusted earnings per diluted share for the three months ended June 30, 2014 were $0.55 as compared to $0.38 in the same prior year period.

Liquidity highlights

Cash provided by operating activities increased $12.0 million to $33.7 million for the three months ended June 30, 2014 compared to $21.7 million for the same prior year period primarily as a result of lower funding of employee notes receivable and higher revenue driven cash collections partially offset by increased compensation payments and the lease termination payment for our corporate airplane. Days sales outstanding (“DSO”), which is one measure of the collections cycle, was 108 days at June 30, 2014 and 99 days at June 30, 2013. Current DSO compared to the prior year has been impacted by the mix of revenues between our segments, an increase in unbilled receivables related to our Asia Pacific liquidation business which is subject to lengthy regulatory proceedings and extended payment terms which have been granted to certain large scale engagements.

Our financing activities during the three months ended June 30, 2014, included the repayment of short-term net borrowings of $20.0 million on our revolving line of credit under our senior secured bank credit facility, and $11.6 million of refundable deposits related to one of our foreign entities. The Company did not repurchase any common stock during the second quarter of 2014.

Headcount

As of June 30, 2014 our total headcount of 4,223 increased by 183 employees from June 30, 2013 largely driven by investments in our FLC segment, which includes the impact of acquisitions, as well as our Technology segment, and growth in our regional support teams. For the six months ended June 30, 2014 net total headcount increased by 16. Billable headcount additions for the same periods, by segment are referenced in the table below.

 

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

Billable Headcount

             
             

December 31, 2013

     737        1,061        530        306         590        3,224   

Additions (reductions)

     (11     15        8        15         (6     21   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

March 31, 2014

     726        1,076        538        321         584        3,245   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Additions (reductions)

     (13     (17     (13     7         (18     (54
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

June 30, 2014

     713        1,059        525        328         566        3,191   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

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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,
 
     2014     2013     2014     2013  
     (in thousands, except
per share amounts)
    (in thousands, except
per share amounts)
 

Revenues

        

Corporate Finance/Restructuring

   $ 104,020      $ 96,714      $ 198,002      $ 195,794   

Forensic and Litigation Consulting

     119,081        105,120        240,510        205,844   

Economic Consulting

     117,227        111,014        224,078        226,208   

Technology

     60,720        51,196        120,783        97,900   

Strategic Communications

     53,276        50,569        96,503        96,045   
  

 

 

   

 

 

   

 

 

   

 

 

 

Revenues

   $ 454,324      $ 414,613      $ 879,876      $ 821,791   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

        

Corporate Finance/Restructuring

   $ 17,068      $ 21,436      $ 25,675      $ 38,135   

Forensic and Litigation Consulting

     20,839        19,177        46,241        30,279   

Economic Consulting

     16,840        19,530        29,270        44,525   

Technology

     10,905        11,292        23,971        19,374   

Strategic Communications

     4,030        3,394        5,035        5,121   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total segment operating income

     69,682        74,829        130,192        137,434   

Unallocated corporate expenses

     (30,750     (14,570     (51,143     (31,846
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     38,932        60,259        79,049        105,588   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense)

        

Interest income and other

     1,448        (387     2,451        550   

Interest expense

     (12,908     (13,071     (25,563     (25,786
  

 

 

   

 

 

   

 

 

   

 

 

 
     (11,460     (13,458     (23,112     (25,236
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax provision

     27,472        46,801        55,937        80,352   

Income tax provision

     10,225        23,315        20,573        33,186   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 17,247      $ 23,486      $ 35,364      $ 47,166   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share—basic

   $ 0.43      $ 0.60      $ 0.89      $ 1.20   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share—diluted

   $ 0.42      $ 0.58      $ 0.87      $ 1.17   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Reconciliation of Net Income to Adjusted EBITDA:

 

    Three Months
Ended June 30,
    Six Months Ended
June 30,
 
    2014     2013     2014     2013  
    (in thousands)     (in thousands)  

Net income

  $ 17,247      $ 23,486      $ 35,364      $ 47,166   

Add back:

       

Income tax provision

    10,225        23,315        20,573        33,186   

Other income (expense), net

    11,460        13,458        23,112        25,236   

Depreciation and amortization

    8,416        8,016        17,001        16,022   

Amortization of other intangible assets

    3,452        5,953        8,068        11,517   

Special charges

    9,364        —          9,364        427   

Remeasurement of acquisition-related contingent consideration

    (261     (8,216     (2,383     (8,216
 

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 59,903      $ 66,012      $ 111,099      $ 125,338   
 

 

 

   

 

 

   

 

 

   

 

 

 

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,
 
    2014     2013     2014     2013  
    (in thousands,
except per share
amounts)
    (in thousands,
except per share
amounts)
 

Net income

  $ 17,247      $ 23,486      $ 35,364      $ 47,166   

Add back:

       

Special charges, net of tax effect (1)

    5,523        —          5,523        253   

Remeasurement of acqusition-related contingent consideration, net of tax effect (2)

    (164     (8,216     (1,514     (8,216
 

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted net income

  $ 22,606      $ 15,270      $ 39,373      $ 39,203   
 

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share—diluted

  $ 0.42      $ 0.58      $ 0.87      $ 1.17   

Add back:

       

Special charges, net of tax effect (1)

    0.14        —          0.14        —     

Remeasurement of acqusition-related contingent consideration, net of tax effect (2)

    (0.01     (0.20     (0.04     (0.20
 

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted earnings per common share—diluted

  $ 0.55      $ 0.38      $ 0.97      $ 0.97   
 

 

 

   

 

 

   

 

 

   

 

 

 

Weighted average number of common shares outstanding—diluted

    40,750        40,293        40,604        40,456   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

(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 rate for the adjustments related to special charges for the three and six months ended June 30, 2014 was 41.0%. The tax expense related to the adjustment for special charges for the three and six months ended June 30, 2014 were $3.8 million, or a $0.09 impact on diluted earnings per share. The effective tax rate for the adjustments related to special charges for the six months ended June 30, 2013 was 40.7%. The tax expense related to the adjustment for special charges for the six months ended June 30, 2013 was $0.2 million with no impact on diluted earnings per share. In the three months ended June 30, 2013, there were no special charges.

 

(2) 

The tax effect takes into account the tax treatment and related tax rate(s) that apply to each adjustment in the applicable tax jurisdiction(s). As a result, the effective tax rates for the adjustments related to the remeasurement of acquisition-related contingent consideration for the three and six months ended June 30, 2014 were 37.2% and 36.5%, respectively. The tax expense related to the remeasurement of acquisition-related contingent consideration for the three and six months ended June 30, 2014 was $0.1 million with no impact on diluted earnings per share and, $0.9 million, or a $0.02 impact on diluted earnings per share. The adjustments related to remeasurement of acquisition-related contingent consideration for the three and six months ended June 30, 2013 were not taxable.

 

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Table of Contents

Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013

Revenues and operating income

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

Unallocated corporate expenses

Unallocated corporate expenses increased $16.2 million to $30.8 million for the three months ended June 30, 2014 from $14.6 million for the same prior year period. Excluding the impact of special charges of $9.4 million in the three months ended June 30, 2014; unallocated corporate expenses increased $6.8 million. The increase was primarily due to higher costs related to performance based compensation for U.S. and regional teams, increased third party costs related to executive search activities and strategic development efforts.

Interest income and other

Interest income and other, which includes foreign currency transaction gains and losses, increased by $1.8 million to $1.4 million for the three months ended June 30, 2014 from a loss of $0.4 million for the same prior year period. The increase was primarily due to net foreign currency transaction gains in the period ended June 30, 2014 as compared to net losses 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.

Interest expense

Interest expense decreased $0.2 million to $12.9 million for the three months ended June 30, 2014 from $13.1 million for the same prior year period. Interest expense in 2014 was favorably impacted by lower average borrowings.

Special charges

During the three months ended June 30, 2014, we recorded special charges totaling $9.4 million, of which $0.6 million was non-cash. The charges consisted of $7.9 million related to the termination of the Company’s corporate airplane lease and $1.5 million related to the closure of the Company’s West Palm Beach executive office and related lease termination. These special charges are included in unallocated corporate expenses.

We did not record any special charges for 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 37.2% for the three months ended June 30, 2014 as compared to 49.8% 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%.

Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013

Revenues and operating income

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

 

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Table of Contents

Unallocated corporate expenses

Unallocated corporate expenses increased $19.3 million to $51.1 million for the six months ended June 30, 2014 from $31.8 million for the same prior year period. Excluding the impact of special charges of $9.4 million in the six months ended June 30, 2014; unallocated corporate expenses increased $10.0 million. The increase was primarily due to higher performance-based compensation costs and increased costs to support certain global corporate initiatives.

Interest income and other

Interest income and other, which includes foreign currency transaction gains and losses, increased by $1.9 million to $2.5 million for the six months ended June 30, 2014 from $0.6 million for the same prior year period. The increase was primarily due to lower net foreign currency transaction losses in the period ended June 30, 2014 as compared to net losses 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.

Interest expense

Interest expense was $25.6 million for the six months ended June 30, 2014, which decreased from $25.8 million for the same prior year period. Interest expense in 2014 was favorably impacted by lower average borrowings.

Special charges

During the six months ended June 30, 2014, we recorded special charges totaling $9.4 million, of which $0.6 million was non-cash. The charges consisted of $7.9 million related to the termination of the Company’s corporate airplane lease and $1.5 million related to the closure of the Company’s West Palm Beach executive office and related lease termination.

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 were 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 charge adjustments by segment for the six months ended June 30, 2014 and 2013:

 

     Six Months Ended
June 30,
 
         2014              2013      
    

(in thousands)

 

Corporate Finance/Restructuring

   $ —         $ 68   

Forensic and Litigation Consulting

     —           173   

Economic Consulting

     —           (4

Technology

     —           14   

Strategic Communications

     —           64   
  

 

 

    

 

 

 
     —           315   

Unallocated Corporate

     9,364         112   
  

 

 

    

 

 

 

Total

   $ 9,364       $ 427   
  

 

 

    

 

 

 

 

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Table of Contents

Income tax provision

Our provision for income taxes in interim periods is computed by applying our estimated annual effective tax rate against income before income tax expense for the period. In addition, non-recurring or discrete items are recorded during the period in which they occur or become known. The effective tax rate was 36.8% for the six months ended June 30, 2014 as compared to 41.3% for the same prior year 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%.

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 and six months ended June 30, 2014 and 2013.

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2014     2013     2014     2013  
     (in thousands)     (in thousands)  

Net income

   $ 17,247      $ 23,486      $ 35,364      $ 47,166   

Add back:

        

Income tax provision

     10,225        23,315        20,573        33,186   

Other income (expense), net

     11,460        13,458        23,112        25,236   

Unallocated corporate expense

     30,750        14,570        51,143        31,846   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Segment Operating Income

   $ 69,682      $ 74,829      $ 130,192      $ 137,434   

Add back:

        

Segment depreciation expense

     7,512        6,944        15,060        13,820   

Amortization of other intangible assets

     3,452        5,953        8,068        11,517   

Segment special charges

     —          —          —          315   

Remeasurement of acquisition-related contingent consideration

     (261     (8,216     (2,383     (8,216
  

 

 

   

 

 

   

 

 

   

 

 

 

Total Adjusted Segment EBITDA

   $ 80,385      $ 79,510      $ 150,937      $ 154,870   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Other Segment Operating Data

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2014     2013     2014     2013  

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

        

Corporate Finance/Restructuring

     713        718        713        718   

Forensic and Litigation Consulting

     1,059        969        1,059        969   

Economic Consulting

     525        499        525        499   

Technology

     328        285        328        285   

Strategic Communications

     566        611        566        611   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue-generating professionals

     3,191        3,082        3,191        3,082   
  

 

 

   

 

 

   

 

 

   

 

 

 

Utilization rates of billable professionals: (1)

        

Corporate Finance/Restructuring

     71     62     71     66

Forensic and Litigation Consulting

     71     67     73     65

Economic Consulting

     78     82     75     86

Average billable rate per hour: (2)

        

Corporate Finance/Restructuring

   $ 412      $ 416      $ 396      $ 412   

Forensic and Litigation Consulting

     323        307        319        314   

Economic Consulting

     522        505        519        501   

 

(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 (excluding revenues from success fees, pass-through and outside consultants) 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.

 

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Table of Contents

CORPORATE FINANCE/RESTRUCTURING

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2014     2013     2014     2013  
     (dollars in thousands,
except rate per hour)
    (dollars in thousands,
except rate per hour)
 

Revenues

   $ 104,020      $ 96,714      $ 198,002      $ 195,794   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Direct cost of revenues

     67,510        59,516        131,479        121,949   

Selling, general and administrative expenses

     18,191        19,730        37,977        37,420   

Special charges

     —          —          —          68   

Acquisition-related contingent consideration

     40        (5,800     (555     (5,161

Amortization of other intangible assets

     1,211        1,832        3,426        3,383   
  

 

 

   

 

 

   

 

 

   

 

 

 
     86,952        75,278        172,327        157,659   
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment operating income

     17,068        21,436        25,675        38,135   

Add back:

        

Depreciation and amortization of intangible assets

     2,065        2,687        5,071        5,005   

Special charges

     —          —          —          68   

Remeasurement of acquisition-related contingent consideration

     —          (6,275     (662     (6,275
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Segment EBITDA

   $ 19,133      $ 17,848      $ 30,084      $ 36,933   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (1)

   $ 36,510      $ 37,198      $ 66,523      $ 73,845   

Gross profit margin (2)

     35.1     38.5     33.6     37.7

Adjusted Segment EBITDA as a percent of revenues

     18.4     18.5     15.2     18.9

Number of revenue generating professionals (at period end)

     713        718        713        718   

Utilization rates of billable professionals

     71     62     71     66

Average billable rate per hour

   $ 412      $ 416      $ 396      $ 412   

 

(1) 

Revenues less direct cost of revenues

 

(2) 

Gross profit as a percent of revenues

Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013

Revenues increased $7.3 million, or 7.6%, to $104.0 million for the quarter ended June 30, 2014 compared to $96.7 million for the same prior year period. The increase in revenues was due to growth in our non-distressed engagements in our North America core business; partially offset by continued slowness in global bankruptcy restructuring.

Gross profit decreased $0.7 million, or 1.8%, to $36.5 million for the quarter ended June 30, 2014 compared to $37.2 million for the same prior year period. Gross profit margin decreased to 35.1% for the quarter ended June 30, 2014 compared to 38.5% for the same prior year period. The decrease in gross profit margin was due to higher demand and net average realized bill rates in North America bankruptcy and restructuring; more than offset by higher performance-based compensation expense and the investment in the European transaction advisory practice.

Selling, general and administrative (“SG&A”) expense decreased $1.5 million, or 7.8%, to $18.2 million for the quarter ended June 30, 2014 compared to $19.7 million for the same prior year period. SG&A expense was 17.5% of revenues for the quarter ended June 30, 2014, compared to 20.4% for the same prior year period. The decrease in SG&A expense was due to the absence of non-recurring acquisition costs recorded in the same prior year period.

 

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Table of Contents

Amortization of other intangible assets was $1.2 million for the quarter ended June 30, 2014 compared to $1.8 million for the same prior year period.

Adjusted Segment EBITDA increased $1.3 million, or 7.2%, to $19.1 million for the quarter ended June 30, 2014 compared to $17.8 million for the same prior year period.

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

Revenues increased $2.2 million, or 1.1%, to $198.0 million for the six months ended June 30, 2014 compared to $195.8 million for the same prior year period. Revenues increased $4.4 million, or 2.2%, due to acquisitions as compared to the same prior year period. Revenues decreased organically $2.2 million, or 1.1%, primarily due to continued slowness in global bankruptcy restructuring practice; partially offset by the increase in non-distressed engagements in North America.

Gross profit decreased $7.3 million, or 9.9%, to $66.5 million for the six months ended June 30, 2014 compared to $73.8 million for the same prior year period. Gross profit margin decreased 4.1% to 33.6% for the six months ended June 30, 2014 compared to 37.7% for the same prior year period. The decrease in gross profit margin was due to the investment in the European transaction advisory practice, higher performance-based compensation expense, and slowness in global bankruptcy restructuring.

SG&A expense increased $0.6 million, or 1.5%, to $38.0 million for the six months ended June 30, 2014 compared to $37.4 million for the same prior year period. SG&A expense was 19.2% of revenues for the six months ended June 30, 2014, compared to 19.1% for the same prior year period. The increase in SG&A expense was due to the overhead costs related to the acquired practices and the investment in the European transaction advisory practice partially offset by absence of the non-recurring acquisition costs of $1.8 million recorded in the same prior year period.

Amortization of other intangible assets was $3.4 million for the six months ended June 30, 2014 compared to $3.4 million for the same prior year period.

Adjusted Segment EBITDA decreased $6.8 million, or 18.5%, to $30.1 million for the six months ended June 30, 2014 compared to $36.9 million for the same prior year period.

 

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FORENSIC AND LITIGATION CONSULTING

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2014     2013     2014     2013  
     (dollars in thousands,
except rate per hour)
    (dollars in thousands,
except rate per hour)
 

Revenues

   $ 119,081      $ 105,120      $ 240,510      $ 205,844   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Direct cost of revenues

     75,332        66,861        149,133        134,835   

Selling, general and administrative expenses

     22,481        20,351        44,602        41,222   

Special charges

     —          —          —          173   

Acquisition-related contingent consideration

     (245     (1,848     (890     (1,756

Amortization of other intangible assets

     674        579        1,424        1,091   
  

 

 

   

 

 

   

 

 

   

 

 

 
     98,242        85,943        194,269        175,565   
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment operating income

     20,839        19,177        46,241        30,279   

Add back:

        

Depreciation and amortization of intangible assets

     1,693        1,516        3,458        3,052   

Special charges

     —          —          —          173   

Remeasurement of acquisition-related contingent consideration

     (261     (1,941     (934     (1,941
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Segment EBITDA

   $ 22,271      $ 18,752      $ 48,765      $ 31,563   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit (1)

   $ 43,749      $ 38,259      $ 91,377      $ 71,009   

Gross profit margin (2)

     36.7     36.4     38.0     34.5

Adjusted Segment EBITDA as a percent of revenues

     18.7     17.8     20.3     15.3

Number of revenue generating professionals (at period end)

     1,059        969        1,059        969   

Utilization rates of billable professionals

     71     67     73     65

Average billable rate per hour

   $ 323      $ 307      $ 319      $ 314   

 

(1) 

Revenues less direct cost of revenues

 

(2) 

Gross profit as a percent of revenues

Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013

Revenues increased $14.0 million, or 13.3%, to $119.1 million for the three months ended June 30, 2014 from $105.1 million for the same prior year period which included 2.9% from acquisitions. Revenues increased organically $10.9 million, or 10.4%, due to higher demand related primarily to disputes and investigations in our North America and Asia Pacific regions.

Gross profit increased $5.4 million, or 14.1%, to $43.7 million for the three months ended June 30, 2014 from $38.3 million for the same prior year period. Gross profit margin increased to 36.7% for the three months ended June 30, 2014 from 36.4% for the same prior year period. The increase in gross profit margin was related to higher utilization and improved leverage in our North America and Asia Pacific regions partially offset by increased performance based compensation, lower utilization on increased headcount, and the impact of lower success fees in our health solutions practice.

SG&A expense increased $2.1 million, or 10.5%, to $22.5 million for the three months ended June 30, 2014 from $20.4 million for the same prior year period. SG&A expense was 18.9% of revenue for the three months ended June 30, 2014, down from 19.4% for the same prior year period. The increase in SG&A expense was due to higher overhead expenses due to acquired businesses and higher administrative expenses.

 

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Amortization of other intangible assets increased $0.1 million to $0.7 million for the three months ended June 30, 2014 compared to $0.6 million for the same prior year period.

Adjusted Segment EBITDA increased by $3.5 million, or 18.8%, to $22.3 million for the three months ended June 30, 2014 from $18.8 million for the same prior year period.

Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013

Revenues increased $34.7 million, or 16.8%, to $240.5 million for the six months ended June 30, 2014 from $205.8 million for the same prior year period. Revenues increased $6.0 million, or 2.9%, due to acquisitions as compared to the same prior year period. Revenues increased organically $28.7 million, or 13.9%, due to higher demand in our North America and Asia Pacific regions; partially offset by the impact of lower success fees in our health solutions practice.

Gross profit increased $20.4 million, or 28.7%, to $91.4 million for the six months ended June 30, 2014 from $71.0 million for the same prior year period. Gross profit margin increased to 38.0% for the six months ended June 30, 2014 from 34.5% for the same prior year period. The increase in gross profit margin was related to higher utilization and improved leverage in our practices in North America and Asia Pacific regions; partially offset by the impact of lower success fees in our health solutions practice and increased performance based compensation.

SG&A expense increased $3.4 million, or 8.2%, to $44.6 million for the six months ended June 30, 2014 from $41.2 million for the same prior year period. SG&A expense was 18.5% of revenue for the six months ended June 30, 2014, down from 20.0% for the same prior year period. The increase in SG&A expense was due to acquired overhead expense, increased compensation costs, and higher administrative expenses; partially offset by lower bad debt expense.

Amortization of other intangible assets increased $0.3 million to $1.4 million for the six months ended June 30, 2014 compared to $1.1 million for the same prior year period.

Adjusted Segment EBITDA increased by $17.2 million, or 54.5%, to $48.8 million for the six months ended June 30, 2014 from $31.6 million for the same prior year period.

 

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ECONOMIC CONSULTING

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2014     2013     2014     2013  
     (dollars in thousands,
except rate per hour)
    (dollars in thousands,
except rate per hour)
 

Revenues

   $ 117,227      $ 111,014      $ 224,078      $ 226,208   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Direct cost of revenues

     84,855        76,671        162,825        152,622   

Selling, general and administrative expenses

     15,242        14,356        32,122        28,210   

Special charges

     —          —          —          (4

Acquisition-related contingent consideration

     68        47        (667     47   

Amortization of other intangible assets

     222        410        528        808