XNYS:FCN FTI Consulting Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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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, 2012

OR

 

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

For the transition period from                      to                     

Commission file number 001-14875

 

 

FTI CONSULTING, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Maryland   52-1261113

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

777 South Flagler Drive, Suite 1500 West Tower,

West Palm Beach, Florida

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

(561) 515-1900

(Registrant’s telephone number, including area code)

 

 

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

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

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

 

Large accelerated filer    x

   Accelerated filer                       ¨

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

   Smaller reporting company      ¨

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

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

 

Class

  

Outstanding at July 25, 2012

Common stock, par value $0.01 per share

  

42,050,496

 

 

 


Table of Contents

FTI CONSULTING, INC. AND SUBSIDIARIES

INDEX

 

          Page  

PART I—FINANCIAL INFORMATION

  

Item 1.

   Financial Statements   
   Condensed Consolidated Balance Sheets—June 30, 2012 and December 31, 2011      3   
   Condensed Consolidated Statements of Comprehensive Income (Loss)—Three and six months ended June 30, 2012 and 2011      4   
   Condensed Consolidated Statement of Stockholders’ Equity—Six months ended June 30, 2012      5   
   Condensed Consolidated Statements of Cash Flows—Six months ended June 30, 2012 and 2011      6   
   Notes to Condensed Consolidated Financial Statements      7   

Item 2.

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

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk      42   

Item 4.

   Controls and Procedures      43   

PART II—OTHER INFORMATION

  

Item 1.

   Legal Proceedings      44   

Item 1A.

   Risk Factors      44   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      44   

Item 3.

   Defaults Upon Senior Securities      44   

Item 4.

   Mine Safety Disclosures      45   

Item 5.

   Other Information      45   

Item 6.

   Exhibits      45   

SIGNATURES

     46   

 

2


Table of Contents

PART I—FINANCIAL INFORMATION

FTI Consulting, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except per share amounts)

 

Item 1. Financial Statements

 

     June 30,
2012
    December 31,
2011
 
     (Unaudited)        

Assets

    

Current assets

    

Cash and cash equivalents

   $ 165,981      $ 264,423   

Restricted cash

     1,152        10,213   

Accounts receivable:

    

Billed receivables

     355,598        335,758   

Unbilled receivables

     200,361        173,440   

Allowance for doubtful accounts and unbilled services

     (83,300     (80,096
  

 

 

   

 

 

 

Accounts receivable, net

     472,659        429,102   

Current portion of notes receivable

     33,454        26,687   

Prepaid expenses and other current assets

     35,400        30,448   

Income taxes receivable

     15,790        10,081   
  

 

 

   

 

 

 

Total current assets

     724,436        770,954   

Property and equipment, net of accumulated depreciation

     68,807        74,448   

Goodwill

     1,313,382        1,309,358   

Other intangible assets, net of amortization

     107,782        118,889   

Notes receivable, net of current portion

     99,191        81,748   

Other assets

     60,483        55,687   
  

 

 

   

 

 

 

Total assets

   $ 2,374,081      $ 2,411,084   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Current liabilities

    

Accounts payable, accrued expenses and other

   $ 96,421      $ 132,773   

Accrued compensation

     137,378        180,366   

Current portion of long-term debt and capital lease obligations

     154,305        153,381   

Billings in excess of services provided

     19,958        19,063   

Deferred income taxes

     7,375        12,254   
  

 

 

   

 

 

 

Total current liabilities

     415,437        497,837   

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

     643,078        643,579   

Deferred income taxes

     94,376        88,071   

Other liabilities

     70,867        75,395   
  

 

 

   

 

 

 

Total liabilities

     1,223,758        1,304,882   
  

 

 

   

 

 

 

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

    

Stockholders’ equity

    

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

     —          —     

Common stock, $0.01 par value; shares authorized—75,000; shares issued and outstanding—42,039 (2012) and 41,484 (2011)

     420        415   

Additional paid-in capital

     400,027        383,978   

Retained earnings

     804,379        778,201   

Accumulated other comprehensive loss

     (54,503     (56,392
  

 

 

   

 

 

 

Total stockholders’ equity

     1,150,323        1,106,202   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 2,374,081      $ 2,411,084   
  

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements

 

3


Table of Contents

FTI Consulting, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Loss)

(in thousands, except per share data)

Unaudited

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2012     2011     2012     2011  

Revenues

   $ 396,243      $ 400,437      $ 791,471      $ 762,253   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

        

Direct cost of revenues

     248,220        250,844        493,838        473,928   

Selling, general and administrative expense

     92,460        94,442        195,049        182,745   

Special charges

     26,782        15,212        26,782        15,212   

Acquisition-related contingent consideration

     (3,541     799        (2,984     1,595   

Amortization of other intangible assets

     5,490        5,498        11,007        10,952   
  

 

 

   

 

 

   

 

 

   

 

 

 
     369,411        366,795        723,692        684,432   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     26,832        33,642        67,779        77,821   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense)

        

Interest income and other

     (363     2,923        2,919        4,923   

Interest expense

     (15,195     (14,500     (30,399     (29,810
  

 

 

   

 

 

   

 

 

   

 

 

 
     (15,558     (11,577     (27,480     (24,887
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax provision

     11,274        22,065        40,299        52,934   

Income tax provision

     3,527        6,740        14,121        18,351   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 7,747      $ 15,325      $ 26,178      $ 34,583   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share—basic

   $ 0.19      $ 0.38      $ 0.65      $ 0.82   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share—diluted

   $ 0.18      $ 0.36      $ 0.61      $ 0.78   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax:

        

Foreign currency translation adjustments, net of tax expense (benefit) of $0 for the three and six months ended June 30, 2012, and $100 and ($2,068) for the three and six months ended June 30, 2011, respectively

   $ (10,960   $ 1,836      $ 1,889      $ 16,655   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

     (10,960     1,836        1,889        16,655   
  

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

   $ (3,213   $ 17,161      $ 28,067      $ 51,238   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements

 

4


Table of Contents

FTI Consulting, Inc. and Subsidiaries

Condensed Consolidated Statement of Stockholders’ Equity

(in thousands)

Unaudited

 

    Common Stock     Additional
Paid-in

Capital
    Retained
Earnings
    Accumulated
Other
Comprehensive

Loss
    Total  
    Shares     Amount          

Balance December 31, 2011

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

Net income

    —          —          —          26,178        —          26,178   

Other comprehensive income:

           

Cumulative translation adjustment

    —          —          —          —          1,889        1,889   

Issuance of common stock in connection with:

           

Exercise of options, net of income tax expense from share-based awards of $218

    137        1        3,496        —          —          3,497   

Restricted share grants, less net settled shares of 117

    418        4        (4,576     —          —          (4,572

Stock units issued under incentive compensation plan

    —          —          3,079        —          —          3,079   

Business combinations

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

Reacquisition of equity component of convertible debt

    —          —          (108     —          —          (108

Share-based compensation

    —          —          17,805        —          —          17,805   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance June 30, 2012

    42,039      $ 420      $ 400,027      $ 804,379      $ (54,503   $ 1,150,323   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements

 

5


Table of Contents

FTI Consulting, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands)

Unaudited

 

     Six Months Ended
June 30,
 
     2012     2011  

Operating activities

    

Net income

   $ 26,178      $ 34,583   

Adjustments to reconcile net income to net cash used in operating activities:

    

Depreciation and amortization

     18,449        14,088   

Amortization of other intangible assets

     11,186        10,952   

Acquisition-related contingent consideration

     (2,984     1,595   

Provision for doubtful accounts

     7,027        5,768   

Non-cash share-based compensation

     17,805        22,283   

Excess tax benefits from share-based compensation

     (71     (124

Non-cash interest expense

     3,887        4,190   

Other

     141        136   

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

    

Accounts receivable, billed and unbilled

     (50,190     (99,137

Notes receivable

     (23,834     (4,638

Prepaid expenses and other assets

     (4,363     (5,893

Accounts payable, accrued expenses and other

     (1,216     227   

Income taxes

     (17,108     (8,599

Accrued compensation

     (43,081     4,093   

Billings in excess of services provided

     886        7,652   
  

 

 

   

 

 

 

Net cash used in operating activities

     (57,288     (12,824
  

 

 

   

 

 

 

Investing activities

    

Payments for acquisition of businesses, net of cash received

     (21,550     (50,888

Purchases of property and equipment

     (13,728     (12,705

Other

     93        (405
  

 

 

   

 

 

 

Net cash used in investing activities

     (35,185     (63,998
  

 

 

   

 

 

 

Financing activities

    

Borrowings under revolving line of credit

     —          25,000   

Payments of revolving line of credit

     —          (25,000

Payments of long-term debt and capital lease obligations

     (1,974     (937

Purchase and retirement of common stock

     —          (209,400

Net issuance of common stock under equity compensation plans

     (840     685   

Excess tax benefits from share-based compensation

     71        124   

Other

     (1,395     51   
  

 

 

   

 

 

 

Net cash used in financing activities

     (4,138     (209,477
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (1,831     474   
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (98,442     (285,825

Cash and cash equivalents, beginning of period

     264,423        384,570   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 165,981      $ 98,745   
  

 

 

   

 

 

 

Supplemental cash flow disclosures

    

Cash paid for interest

   $ 25,367      $ 25,711   

Cash paid for income taxes, net of refunds

     31,230        27,016   

Non-cash investing and financing activities:

    

Issuance of stock units under incentive compensation plans

     3,079        4,241   

See accompanying notes to the condensed consolidated financial statements

 

6


Table of Contents

FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

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

Unaudited

1. Basis of Presentation and Significant Accounting Policies

The unaudited condensed consolidated financial statements of FTI Consulting, Inc. and its wholly owned subsidiaries (“FTI Consulting,” the “Company,” “we,” or “our”) presented herein have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and under the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. Some of the information and footnote disclosures normally included in annual financial statements have been condensed or omitted pursuant to those rules and regulations. In management’s opinion, the interim financial statements reflect all adjustments that are necessary for a fair presentation of the results for the interim periods presented. All adjustments made were normal recurring accruals. Results of operations for the interim periods presented herein are not necessarily indicative of results of operations for a full year. These financial statements should be read in conjunction with the consolidated financial statements and the notes contained in our Annual Report on Form 10-K for the year ended December 31, 2011.

2. Earnings Per Common Share

Basic earnings per common share are calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per common share adjust basic earnings per share for the effects of potentially dilutive common shares. Potentially dilutive common shares include the dilutive effects of shares issuable under our equity compensation plans, including stock options and restricted stock, and shares issuable upon conversion of our 3 3/4% senior subordinated convertible notes due 2012 (“Convertible Notes”) assuming the conversion premium was converted into common stock based on the average closing price per share of our stock during the period, each using the treasury stock method. The conversion feature of our Convertible Notes had a dilutive effect on our earnings per share for the periods presented below because the average closing price per share of our common stock for such periods was above the conversion price of the Convertible Notes of $31.25 per share.

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2012      2011      2012      2011  

Numerator—basic and diluted

           

Net income

   $ 7,747       $ 15,325       $ 26,178       $ 34,583   
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator

           

Weighted average number of common shares outstanding—basic

     40,592         40,587         40,475         42,223   

Effect of dilutive stock options

     646         949         804         918   

Effect of dilutive convertible notes

     229         836         737         759   

Effect of dilutive restricted shares

     607         540         656         520   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of common shares outstanding—diluted

     42,074         42,912         42,672         44,420   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per common share—basic

   $ 0.19       $ 0.38       $ 0.65       $ 0.82   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per common share—diluted

   $ 0.18       $ 0.36       $ 0.61       $ 0.78   
  

 

 

    

 

 

    

 

 

    

 

 

 

Antidilutive stock options and restricted shares

     3,530         2,162         2,806         2,091   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

3. Special Charges

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

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

 

   

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

 

   

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

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

 

Corporate Finance/Restructuring

   $ 11,116   

Forensic and Litigation Consulting

     7,253   

Economic Consulting

     818   

Technology

     2,966   

Strategic Communications

     4,511   
  

 

 

 
     26,664   

Unallocated Corporate

     118   
  

 

 

 

Total

   $ 26,782   
  

 

 

 

The total cash outflow associated with the 2012 special charges is expected to be $22.2 million, of which $1.1 million has been paid as of June 30, 2012, $9.4 million is expected to be paid during the remainder of 2012, $5.1 million is expected to be paid in 2013, $2.4 million is expected to be paid in 2014, and the remaining balance of $4.2 million related to lease costs will be paid from 2015 to 2025. In addition, the remaining balance of $0.9 million related to the 2011 special charges is expected to be paid during the remainder of 2012. A liability for the current and noncurrent portions of the amounts to be paid is included in “Accounts payable, accrued expenses and other” and “Other liabilities,” respectively, on the Condensed Consolidated Balance Sheets. Activity related to the liability for these costs for the six months ended June 30, 2012 is as follows:

 

     Employee
Termination
Costs
    Lease
Costs
    Total  

Balance at December 31, 2011

   $ 4,758      $ —        $ 4,758   

Additions

     14,086        8,067        22,153   

Payments

     (4,372     (171     (4,543

Foreign currency translation adjustment and other

     (266     —          (266
  

 

 

   

 

 

   

 

 

 

Balance at June 30, 2012

   $ 14,206      $ 7,896      $ 22,102   
  

 

 

   

 

 

   

 

 

 

4. Provision for Doubtful Accounts

The provision for doubtful accounts is recorded after the related work has been billed to the client and we determine that full collectability is not reasonably assured. It is classified in “Selling, general and administrative expense” on the Condensed Consolidated Statements of Comprehensive Income (Loss). The provision for

 

8


Table of Contents

doubtful accounts totaled $2.5 million and $7.0 million for the three and six months ended June 30, 2012, respectively and $3.2 million and $5.8 million for the three and six months ended June 30, 2011, respectively.

5. Research and Development Costs

Research and development costs related to software development totaled $5.1 million and $11.9 million for the three and six months ended June 30, 2012, respectively, and $6.0 million and $11.8 million for the three and six months ended June 30, 2011, respectively. Research and development costs are included in “Selling, general and administrative expense” on the Condensed Consolidated Statements of Comprehensive Income (Loss).

6. Financial Instruments

Derivative Financial Instruments

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

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

On December 16, 2011, we negotiated the right to terminate the interest rate swap agreements. Upon termination of these interest rate swap agreements we received cash proceeds of approximately $6.6 million, including $1.0 million of accrued interest. The net proceeds of $5.6 million have been recorded in “Long-term debt and capital lease obligations” on the Condensed Consolidated Balance Sheets and will be amortized as a reduction to interest expense over the remaining term of the 2016 Notes, resulting in an effective interest rate of 7.1% per annum. For the six months ended June 30, 2012, $0.5 million of the net proceeds have been amortized as a reduction of interest expense, with a remaining balance of $5.1 million at June 30, 2012. At June 30, 2012, we had no derivative instruments.

Fair Value of Financial Instruments

We consider the recorded value of certain of our financial assets and liabilities, which consist primarily of cash equivalents, accounts receivable and accounts payable, to approximate the fair value of the respective assets and liabilities at June 30, 2012 and December 31, 2011, based on the short-term nature of the assets and liabilities. The fair value of our long-term debt at June 30, 2012 was $825 million compared to a carrying value of $815 million. At December 31, 2011, the fair value of our long-term debt was $882 million compared to a carrying value of $815 million. We determine the fair value of our long-term debt primarily based on quoted market prices for our 2016 Notes, 6 3/4% senior notes due 2020 and Convertible Notes. The fair value of our long-term debt is classified within Level 2 of the fair value hierarchy, because it is traded in less active markets. The carrying value of long-term debt includes the $18.0 million equity component of our Convertible Notes which is recorded in “Additional paid-in capital” on the Condensed Consolidated Balance Sheets.

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

 

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

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

 

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

(in thousands)

   2012     2011      2012     2011  

Beginning balance

   $ 15,276      $ 20,076       $ 14,990      $ 19,864   

Acquisition date fair value measurement

     —          3,000         —          3,000   

Adjustments to fair value recorded in earnings(a)

     (3,541     799         (2,984     1,595   

Payments

     (917     —           (1,287     (577

Elimination of contingency(b)

     (2,534     —           (2,534     —     

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

     (47     7         52        —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Ending balance

   $ 8,237      $ 23,882       $ 8,237      $ 23,882   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

(a) 

Adjustments to fair value related to accretion and remeasurement of contingent consideration are recorded in “Acquisition-related contingent consideration” on the Condensed Consolidated Statements of Comprehensive Income (Loss). We recognized a gain on remeasurement of contingent consideration of $4.1 million during the three and six months ended June 30, 2012, and accretion expense of $0.6 million and $1.1 million, respectively.

 

(b) 

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

The following table presents financial liabilities measured at fair value:

 

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

As of June 30, 2012

           

Liabilities:

           

Acquisition-related contingent consideration, including current portion

   $ —         $ —         $ 8,237       $ 8,237   

As of December 31, 2011

           

Liabilities:

           

Acquisition-related contingent consideration, including current portion

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

7. Acquisitions

In March 2012, we completed an acquisition in the United States for our Corporate Finance/Restructuring segment. We paid aggregate cash consideration of approximately $1.9 million at closing, which is recorded in goodwill as of June 30, 2012 as part of the preliminary purchase price allocation. Pro forma results of operations have not been presented because the acquisition was not material in relation to our consolidated financial position or results of operations for the periods presented.

In March 2011, we completed acquisitions of certain practices of LECG Corporation (“LECG”) in Europe, the United States and Latin America with services relating to those provided through our Economic Consulting, Forensic and Litigation Consulting, and Corporate Finance/Restructuring segments. The acquisition-date fair

 

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value of the total consideration transferred is approximately $30.0 million, which consisted of $27.0 million of cash paid at the closings of these acquisitions, a portion of which is subject to certain working capital and other adjustments, and contingent consideration with an estimated fair value of $2.9 million. As part of the purchase price allocation, we recorded an aggregate of $24.2 million of accounts receivable, $6.3 million of identifiable intangible assets, $20.6 million of assumed liabilities and $14.8 million of goodwill. The identifiable intangible assets consisted of customer relationships with a weighted average amortization period of 12.4 years. Aggregate acquisition-related costs of approximately $1.5 million have been recognized in earnings in 2011.

In August 2010, we acquired FS Asia Advisory Limited (formerly Ferrier Hodgson Hong Kong Group). The initial acquisition price included a contingent consideration liability. During the second quarter of 2012, management determined that the fair value of the acquisition-related contingent consideration liability had declined. This remeasurement of the contingent consideration was based on management’s probability-adjusted present value of the consideration expected to be transferred during the remainder of the earnout period, based on the acquired operations’ forecasted results. The resulting reduction in the liability of $4.1 million was recorded as income and is included within “Acquisition-related contingent consideration” in the Condensed Consolidated Statements of Comprehensive Income (Loss).

Certain acquisition-related restricted stock agreements entered into prior to January 1, 2009 contain stock price guarantees that may result in cash payments in the future if our share price falls below a specified per share market value on the date that the applicable stock restrictions lapse (the “determination date”). For those acquisitions, the future settlement of any contingency related to our common stock price will be recorded as a reduction to additional paid-in capital. During the three and six months ended June 30, 2012, we paid $2.9 million and $3.6 million, respectively, in cash in relation to the stock price guarantees on certain shares of common stock that became unrestricted, which was recorded as a reduction to additional paid-in-capital on the Condensed Consolidated Balance Sheets. Our remaining common stock price guarantee provisions have stock floor prices that range from $56.66 to $69.48 per share and have determination dates through 2013.

8. Goodwill and Other Intangible Assets

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

 

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

Balances at December 31, 2011

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

Goodwill acquired during the period

    1,900        —          —          —          —          1,900   

Foreign currency translation adjustment and other

    (4     (158     172        18        2,096        2,124   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at June 30, 2012

  $ 437,939      $ 197,889      $ 229,659      $ 117,976      $ 329,919      $ 1,313,382   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other intangible assets with finite lives are amortized over their estimated useful lives. For intangible assets with finite lives, we recorded amortization expense of $5.7 million and $11.2 million for the three and six months ended June 30, 2012, respectively, and $5.5 million and $11.0 million for the three and six months ended June 30, 2011, respectively. Based solely on the amortizable intangible assets recorded as of June 30, 2012, we estimate amortization expense to be $11.0 million during the remainder of 2012, $20.0 million in 2013, $11.6 million in 2014, $10.6 million in 2015, $9.1 million in 2016, $8.4 million in 2017, and $31.5 million in years after 2017. Actual amortization expense to be reported in future periods could differ from these estimates as a result of new intangible asset acquisitions, finalization of asset valuations for newly acquired assets, changes in useful lives, changes in value due to foreign currency translation, or other factors.

 

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

Finite lived intangible assets

              

Customer relationships

   1 to 15    $ 144,795       $ 56,244       $ 144,696       $ 49,381   

Non-competition agreements

   1 to 10      14,395         10,036         14,601         8,965   

Software

   3 to 6      33,554         24,282         33,549         21,211   
     

 

 

    

 

 

    

 

 

    

 

 

 
        192,744         90,562         192,846         79,557   

Indefinite-lived intangible assets

              

Tradenames

   Indefinite      5,600         —           5,600         —     
     

 

 

    

 

 

    

 

 

    

 

 

 
      $ 198,344       $ 90,562       $ 198,446       $ 79,557   
     

 

 

    

 

 

    

 

 

    

 

 

 

9. Long-term Debt and Capital Lease Obligations

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

 

     June 30,
2012
     December 31,
2011
 

7 3/4% senior notes due 2016(a)

   $ 220,054       $ 220,555   

6 3/4% senior notes due 2020

     400,000         400,000   

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

     148,276         146,867   

Notes payable to former shareholders of acquired business

     29,005         29,445   
  

 

 

    

 

 

 

Total debt

     797,335         796,867   

Less current portion

     154,281         153,312   
  

 

 

    

 

 

 

Long-term debt, net of current portion

     643,054         643,555   
  

 

 

    

 

 

 

Total capital lease obligations

     48         94   

Less current portion

     24         70   
  

 

 

    

 

 

 

Capital lease obligations, net of current portion

     24         24   
  

 

 

    

 

 

 

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

   $ 643,078       $ 643,579   
  

 

 

    

 

 

 

 

(a) 

Balance includes $215.0 million principal amount of 2016 Notes including a premium of $5.1 million at June 30, 2012 and $5.6 million at December 31, 2011.

 

(b) 

Balance includes $148.5 million principal amount of Convertible Notes, net of discount of $0.2 million at June 30, 2012 and $149.9 million principal amount of Convertible Notes, net of discount of $3.1 million at December 31, 2011.

Convertible Notes

The Convertible Notes outstanding on June 30, 2012 matured on July 15, 2012. On July 16, 2012, we repaid in full in cash all amounts due on our outstanding Convertible Notes. The total repayment of approximately $151.3 million, including $2.8 million of accrued interest, was made using cash on hand and the proceeds of a $75.0 million borrowing under our senior secured bank credit facility.

10. Commitments and Contingencies

Contingencies

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

 

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Table of Contents

11. Share-Based Compensation

Share-based Awards and Share-based Compensation Expense

Our officers, employees, non-employee directors and certain individual service providers are eligible to participate in the Company’s equity compensation plans, subject to the discretion of the administrator of the plans. During the six months ended June 30, 2012, we granted an aggregate of 1,168,375 share-based awards, consisting primarily of restricted stock awards and stock options.

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

 

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

Comprehensive Income Statement Classification

   2012      2011      2012      2011  

Direct cost of revenues

   $ 3,025       $ 7,975       $ 9,408       $ 15,821   

Selling, general and administrative expense

     3,239         3,101         7,159         5,637   

Special charges

     814         833         814         833   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total share-based compensation expense

   $ 7,078       $ 11,909       $ 17,381       $ 22,291   
  

 

 

    

 

 

    

 

 

    

 

 

 

12. Stockholders’ Equity

On June 6, 2012, our Board of Directors authorized a two-year stock repurchase program of up to $250 million (the “Repurchase Program”). As of June 30, 2012, the full program authorization of $250 million remained available under the Repurchase Program.

13. Segment Reporting

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

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

Our Forensic and Litigation Consulting segment provides law firms, companies, government clients and other interested parties with dispute advisory, investigations, forensic accounting, business intelligence assessments, data analytics and risk mitigation services.

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

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

Our Strategic Communications segment provides advice and consulting services relating to financial and corporate communications and investor relations, reputation management and brand communications, public affairs, business consulting and digital design and marketing.

 

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Table of Contents

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

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

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2012      2011      2012      2011  

Revenues

           

Corporate Finance/Restructuring

   $ 112,336       $ 101,896       $ 225,814       $ 209,150   

Forensic and Litigation Consulting

     90,107         93,368         177,138         176,281   

Economic Consulting

     99,455         94,480         199,507         168,739   

Technology

     47,697         57,130         97,357         108,165   

Strategic Communications

     46,648         53,563         91,655         99,918   
  

 

 

    

 

 

    

 

 

    

 

 

 

Revenues

   $ 396,243       $ 400,437       $ 791,471       $ 762,253   
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted Segment EBITDA

           

Corporate Finance/Restructuring

   $ 29,210       $ 14,075       $ 55,974       $ 31,677   

Forensic and Litigation Consulting

     17,628         17,932         29,705         33,924   

Economic Consulting

     18,491         18,823         36,915         31,985   

Technology

     12,849         20,313         26,064         38,743   

Strategic Communications

     4,970         6,443         9,499         11,839   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Adjusted Segment EBITDA

   $ 83,148       $ 77,586       $ 158,157       $ 148,168   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2012     2011     2012     2011  

Total Adjusted Segment EBITDA(1)

   $ 83,148      $ 77,586      $ 158,157      $ 148,168   

Segment depreciation expense

     (6,335     (5,866     (12,608     (11,614

Amortization of other intangible assets

     (5,490     (5,498     (11,007     (10,952

Special Charges

     (26,782     (15,212     (26,782     (15,212

Unallocated corporate expenses, excluding special charges

     (17,709     (17,368     (39,981     (32,569

Interest income and other

     (363     2,923        2,919        4,923   

Interest expense

     (15,195     (14,500     (30,399     (29,810
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax provision

   $ 11,274      $ 22,065      $ 40,299      $ 52,934   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

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

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

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

 

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Table of Contents

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

Condensed Consolidating Balance Sheet Information as of June 30, 2012

 

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

Assets

         

Cash and cash equivalents

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

Restricted cash

    —          —          1,152        —          1,152   

Accounts receivable, net

    177,752        175,309        119,598        —          472,659   

Intercompany receivables

    —          562,935        139,409        (702,344     —     

Other current assets

    30,472        23,039        31,133        —          84,644   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    280,301        761,376        385,103        (702,344     724,436   

Property and equipment, net

    38,163        15,910        14,734        —          68,807   

Goodwill

    549,271        439,070        325,041        —          1,313,382   

Other intangible assets, net

    36,312        28,953        75,762        (33,245     107,782   

Investments in subsidiaries

    1,624,119        533,424        —          (2,157,543     —     

Other assets

    77,911        104,457        23,858        (46,552     159,674   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 2,606,077      $ 1,883,190      $ 824,498      $ (2,939,684   $ 2,374,081   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

         

Intercompany payables

  $ 457,320      $ 87,916      $ 157,108      $ (702,344   $ —     

Other current liabilities

    262,793        85,562        67,082        —          415,437   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    720,113        173,478        224,190        (702,344     415,437   

Long-term debt, net

    620,078        23,000        —          —          643,078   

Other liabilities

    115,563        36,185        60,047        (46,552     165,243   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    1,455,754        232,663        284,237        (748,896     1,223,758   

Stockholders’ equity

    1,150,323        1,650,527        540,261        (2,190,788     1,150,323   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

  $ 2,606,077      $ 1,883,190      $ 824,498      $ (2,939,684   $ 2,374,081   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

15


Table of Contents

Condensed Consolidating Balance Sheet Information as of December 31, 2011

 

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

Assets

         

Cash and cash equivalents

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

Restricted cash

    8,632        —          1,581        —          10,213   

Accounts receivable, net

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

Intercompany receivables

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

Other current assets

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

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

Property and equipment, net

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

Goodwill

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

Other intangible assets, net

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

Investments in subsidiaries

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

Other assets

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

         

Intercompany payables

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

Other current liabilities

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

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

Long-term debt, net

    620,579        23,000        —          —          643,579   

Other liabilities

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

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

Stockholders’ equity

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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

Revenues

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

Operating expenses

         

Direct cost of revenues

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

Selling, general and administrative expense

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

Special Charges

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

Acquisition-related contingent consideration

    —          —          (3,541     —          (3,541

Amortization of other intangible assets

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

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

Other (expense) income

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax provision

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

Income tax (benefit) provision

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

Equity in net earnings of subsidiaries

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax:

         

Foreign currency translation adjustments including tax benefit of $0

    —          —          (10,960     —          (10,960
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

    —          —          (10,960     —          (10,960
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

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

 

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

Revenues

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

Operating expenses

         

Direct cost of revenues

    98,220        182,954        68,010        (98,340     250,844   

Selling, general and administrative expense

    40,697        30,565        26,184        (3,004     94,442   

Special Charges

    8,561        228        6,423          15,212   

Acquisition-related contingent consideration

    —          —          799        —          799   

Amortization of other intangible assets

    605        3,264        1,629        —          5,498   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    (3,983     37,278        347        —          33,642   

Other (expense) income

    (12,595     759        259        —          (11,577
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax provision

    (16,578     38,037        606        —          22,065   

Income tax (benefit) provision

    (7,658     16,830        (2,432     —          6,740   

Equity in net earnings of subsidiaries

    24,245        2,944        —          (27,189     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    15,325        24,151        3,038        (27,189     15,325   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income, net of tax:

         

Foreign currency translation adjustments including tax expense of $100

    (100     —          1,936        —          1,836   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income, net of tax

    (100     —          1,936        —          1,836   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

  $ 15,225      $ 24,151      $ 4,974      $ (27,189   $ 17,161   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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

Revenues

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

Operating expenses

         

Direct cost of revenues

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

Selling, general and administrative expense

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

Special charges

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

Acquisition-related contingent consideration

    —          —          (2,984     —          (2,984

Amortization of other intangible assets

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

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

Other (expense) income

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax provision

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

Income tax (benefit) provision

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

Equity in net earnings of subsidiaries

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income, net of tax:

         

Foreign currency translation adjustments net of tax benefit of $0

    —          —          1,889        —          1,889   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income, net of tax

    —          —          1,889        —          1,889   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

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

 

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

Revenues

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

Operating expenses

         

Direct cost of revenues

    181,941        363,720        119,589        (191,322     473,928   

Selling, general and administrative expense

    76,585        64,818        46,297        (4,955     182,745   

Special charges

    8,561        228        6,423        —          15,212   

Acquisition-related contingent consideration

    —          —          1,595        —          1,595   

Amortization of other intangible assets

    879        6,859        3,214        —          10,952   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    2,785        71,763        3,273        —          77,821   

Other (expense) income

    (25,680     557        236        —          (24,887
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax provision

    (22,895     72,320        3,509        —          52,934   

Income tax (benefit) provision

    (10,208     30,088        (1,529     —          18,351   

Equity in net earnings of subsidiaries

    47,270        4,455        —          (51,725     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    34,583        46,687        5,038        (51,725     34,583   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income, net of tax:

         

Foreign currency translation adjustments net of tax benefit of $2,068

    2,068        —          14,587        —          16,655   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income, net of tax

    2,068        —          14,587        —          16,655   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

  $ 36,651      $ 46,687      $ 19,625      $ (51,725   $ 51,238   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

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

Operating activities

       

Net cash (used in) provided by operating activities

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

Investing activities

       

Payments for acquisition of businesses, net of cash received

    (21,186     —          (364     (21,550

Purchases of property and equipment

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

Other

    93        —          —          93   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

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

 

 

   

 

 

   

 

 

   

 

 

 

Financing activities

       

Payments of long-term debt and capital lease obligations

    (1,929     (45     —          (1,974

Net issuance of common stock and other

    (948     —          (1,287     (2,235

Excess tax benefits from share-based compensation

    71        —          —          71   

Intercompany transfers

    8,906        7,955        (16,861     —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

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

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

    —          —          (1,831     (1,831
 

 

 

   

 

 

   

 

 

   

 

 

 

Net decrease in cash and cash equivalents

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

Cash and cash equivalents, beginning of period

    161,180        197        103,046        264,423   
 

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

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

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents

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

 

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

Operating activities

        

Net cash (used in) provided by operating activities

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

Investing activities

        

Payments for acquisition of businesses, net of cash received

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

Purchases of property and equipment

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

Other

     (405     —          —          (405
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

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

 

 

   

 

 

   

 

 

   

 

 

 

Financing activities

        

Borrowings under revolving line of credit

     25,000        —          —          25,000   

Payments of revolving line of credit

     (25,000     —          —          (25,000

Payments of long-term debt and capital lease obligations

     (776     (161     —          (937

Issuance of common stock and other

     736        —          —          736   

Purchase and retirement of common stock

     (209,400     —          —          (209,400

Excess tax benefits from share-based compensation

     124        —          —          124   

Intercompany transfers

     12,285        (36,862     24,577        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by financing activities

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

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     —          —          474        474   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net decrease in cash and cash equivalents

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

Cash and cash equivalents, beginning of period

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

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

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

 

 

   

 

 

   

 

 

   

 

 

 

 

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

The following is a discussion and analysis of our consolidated financial condition and results of operations for the three and six month periods ended June 30, 2012 and 2011 and significant factors that could affect our prospective financial condition and results of operations. This discussion should be read together with the accompanying unaudited condensed consolidated financial statements and related notes and with our Annual Report on Form 10-K for the year ended December 31, 2011. Historical results and any discussion of prospective results may not indicate our future performance. See “Forward Looking Statements.”

BUSINESS OVERVIEW

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

We report financial results for the following five operating segments:

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

Our Forensic and Litigation Consulting segment provides law firms, companies, government clients and other interested parties with dispute advisory, investigations, forensic accounting, business intelligence assessments, data analytics and risk mitigation services.

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

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

Our Strategic Communications segment provides advice and consulting services relating to financial and corporate communications and investor relations, reputation management and brand communications, public affairs, business consulting and digital design and marketing.

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

 

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Table of Contents

certain predefined outcomes occur. This type of success fee may supplement a time-and-expense or fixed-fee arrangement. Success fee revenues may cause variations in our revenues and operating results due to the timing of achieving the performance-based criteria.

In our Technology segment, certain clients are billed based on the amount of data stored on our electronic systems, the volume of information processed and the number of users licensing our Ringtail® software products for installation within their own environments. We license these products directly to end users as well as indirectly through our channel partner relationships. Unit-based revenue is defined as revenue billed on a per-item, per-page, or some other unit-based method and includes revenue from data processing and storage, software usage and software licensing. Unit-based revenue includes revenue associated with our proprietary software that is made available to customers, either via a web browser (“on-demand”) or installed at our customer or partner locations (“on-premise”). On-demand revenue is charged on a unit or monthly basis and includes, but is not limited to, processing and review related functions. On-premise revenue is comprised of up-front license fees, with recurring support and maintenance.

Over the past several years the growth in our revenues and profitability has resulted from our ability to attract new and recurring engagements and from the acquisitions we have completed. 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.

 

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

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

 

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Table of Contents

EXECUTIVE HIGHLIGHTS

 

     Three Months Ended
June 30,
          Six Months Ended
June 30,
 
     2012           2011           2012          2011  
     (dollars in thousands,
except per share amounts)
          (dollars in thousands,
except per share amounts)
 

Revenues

   $ 396,243          $ 400,437          $ 791,471         $ 762,253   

Special charges

   $ 26,782          $ 15,212          $ 26,782         $ 15,212   

Adjusted EBITDA

   $ 66,616          $ 61,496          $ 120,576         $ 118,074   

Net income

   $ 7,747          $ 15,325          $ 26,178         $ 34,583   

Earnings per common share—diluted

   $ 0.18          $ 0.36          $ 0.61         $ 0.78   

Adjusted EPS

   $ 0.60          $ 0.57          $ 1.02         $ 0.99   

Cash provided by (used in) operating activities

   $ 533          $ 26,373          $ (57,288      $ (12,824

Total number of employees at June 30,

     3,855            3,740            3,855           3,740   

Second Quarter 2012 Executive Highlights

Revenues

Revenues for the quarter ended June 30, 2012 decreased $4.2 million, or 1.0%, to $396.2 million, compared to $400.4 million in the prior year period, with approximately 1.1% of the decline due to the estimated unfavorable foreign currency translation impact related primarily to our European based operations. Revenue declined organically 0.2% as weakness in our Technology, Strategic Communications and Forensic and Litigation Consulting segments was partially offset by strength in our Corporate Finance/Restructuring and Economic Consulting segments. Acquisition-related revenue growth of 0.3% made up the remainder.

Special charges

We recorded special charges in the three months ended June 30, 2012 of $26.8 million which reduced our diluted earnings per share by $0.42. These charges are primarily comprised of salary continuation, loan forgiveness and equity acceleration associated with a reduction in workforce totaling 116 employees. These staff reductions primarily targeted specific regions and practices where demand has weakened due to economic conditions, particularly in the Technology, Forensic and Litigation Consulting and Strategic Communications segments and address certain targeted practices within Corporate Finance/Restructuring. In addition, the charge included $8.4 million related to space consolidation opportunities identified with six leased office properties. The charges reflect actions we took to align capacity with expected market trends. The total cash outflow associated with the special charges is expected to be $22.2 million, while the noncash charges are $4.6 million. The Company expects that these actions in combination with other actions taken in the quarter will result in operational savings of approximately $14.9 million over the remainder of 2012.

Adjusted EBITDA

Adjusted EBITDA, as previously defined, increased $5.1 million, or 8.3%, to $66.6 million, or 16.8% of revenues, compared to $61.5 million, or 15.4% of revenues, in the prior year period. Adjusted EBITDA increased with strong revenue performance in the Corporate Finance/Restructuring segment, which was partially offset by pricing pressures in the Technology segment, fewer high margin engagements in the Strategic Communications segment, lower utilization and higher personnel costs in the Economic Consulting segment and weaker demand in the Forensic and Litigation Consulting segment. Adjusted EBITDA also included a $4.1 million income adjustment related to a reduction in the fair value of acquisition-related contingent consideration of FS Asia Advisory Limited, which was acquired in the third quarter of 2010.

Net income

Net income decreased $7.6 million, or 49.4%, to $7.7 million, compared to $15.3 million in the prior year period. The decrease in net income was primarily attributable to the special charges recorded in the three months

 

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ended June 30, 2012 and the decrease in revenues, each described above. Net income for the quarter ended June 30, 2012 included a $4.1 million income adjustment related to a reduction in the fair value of acquisition-related contingent consideration also described above.

Earnings per common share and Adjusted EPS

Earnings per diluted share for the three months ended June 30, 2012 were $0.18, which included $26.8 million, or $0.42 per diluted share, of special charges primarily related to staff reductions and leased real estate consolidations and a $4.1 million fair value remeasurement, which impacted earnings per diluted share by $0.10, both described above, compared to $0.36 in the prior year period which included $15.2 million, or $0.21 per diluted share, of special charges. Adjusted EPS, as previously defined, were $0.60, compared to $0.57 in the prior year period due to the impact of the operating results as described in “Adjusted EBITDA” above.

Operating cash flows

Cash provided by operating activities for the three months ended June 30, 2012 was $0.5 million compared to $26.4 million for the three months ended June 30, 2011. The decline was primarily a result of higher salary and personnel costs, including variable compensation and payments related to the retention of key individuals. Overall, cash collections for the quarter were strong at approximately $360 million; however our collection experience continues to be affected by the mix of business largely related to the payment conditions of key matters, for example, receivables which are subject to court approval.

Headcount

Headcount of 3,855 at June 30, 2012 increased 115, or 3.1%, compared to June 30, 2011 in order to align resources with anticipated demand in certain service offerings. Headcount as of June 30, 2012 does not fully reflect the impact of the personnel reductions included in the special charges as a result of the applicable notice periods.

Other activities

On June 6, 2012, our Board of Directors authorized a $250 million stock repurchase program to be executed over two years from the authorization date. The specific timing and amount of repurchases will be determined by our management, at their discretion, and will vary based on market conditions, securities law limitations and other factors. As of June 30, 2012, the full program authorization of $250 million remained available under the program.

 

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CONSOLIDATED RESULTS OF OPERATIONS

Segment and Consolidated Operating Results:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2012     2011     2012     2011  
     (in thousands, except per
share amounts)
    (in thousands, except per
share amounts)
 

Revenues

        

Corporate Finance/Restructuring

   $ 112,336      $ 101,896      $ 225,814      $ 209,150   

Forensic and Litigation Consulting

     90,107        93,368        177,138        176,281   

Economic Consulting

     99,455        94,480        199,507        168,739   

Technology

     47,697        57,130        97,357        108,165   

Strategic Communications

     46,648        53,563        91,655        99,918   
  

 

 

   

 

 

   

 

 

   

 

 

 

Revenues

   $ 396,243      $ 400,437      $ 791,471      $ 762,253   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

        

Corporate Finance/Restructuring

   $ 15,783      $ 2,321      $ 40,230      $ 17,629   

Forensic and Litigation Consulting

     8,938        15,640        19,532        30,186   

Economic Consulting

     16,551        15,798        33,871        28,096   

Technology

     4,757        15,594        12,958        29,364   

Strategic Communications

     (1,370     4,497        1,287        7,955   
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment operating income

     44,659        53,850        107,878        113,230   

Unallocated corporate expenses

     (17,827     (20,208     (40,099     (35,409
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     26,832        33,642        67,779        77,821   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense)

        

Interest income and other

     (363     2,923        2,919        4,923   

Interest expense

     (15,195     (14,500     (30,399     (29,810
  

 

 

   

 

 

   

 

 

   

 

 

 
     (15,558     (11,577     (27,480     (24,887
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax provision

     11,274        22,065        40,299        52,934   

Income tax provision

     3,527        6,740        14,121        18,351   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 7,747      $ 15,325      $ 26,178      $ 34,583   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share—basic

   $ 0.19      $ 0.38      $ 0.65      $ 0.82   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share—diluted

   $ 0.18      $ 0.36      $ 0.61      $ 0.78   
  

 

 

   

 

 

   

 

 

   

 

 

 

Reconciliation of Net Income to Adjusted EBITDA:

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2012      2011      2012      2011  
     (in thousands)      (in thousands)  

Net income

   $ 7,747       $ 15,325       $ 26,178       $ 34,583   

Add back:

           

Income tax provision

     3,527         6,740         14,121         18,351   

Other income (expense), net

     15,558         11,577         27,480         24,887   

Depreciation and amortization

     7,512         7,144         15,008         14,089   

Amortization of other intangible assets

     5,490         5,498         11,007         10,952   

Special charges

     26,782         15,212         26,782         15,212   
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ 66,616       $ 61,496       $ 120,576       $ 118,074   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

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,
 
     2012      2011      2012      2011  

Net income

   $ 7,747       $ 15,325       $ 26,178       $ 34,583   

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

     17,320         9,285         17,320         9,285   
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted net income

   $ 25,067       $ 24,610       $ 43,498       $ 43,868   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per common share—diluted

   $ 0.18       $ 0.36       $ 0.61       $ 0.78   

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

     0.42         0.21         0.41         0.21   
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted earnings per common share—diluted

   $ 0.60       $ 0.57       $ 1.02       $ 0.99   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of common shares outstanding—diluted

     42,074         42,912         42,672         44,420   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

The tax effect takes into account the tax treatment and related tax rate(s) that apply to each adjustment in the applicable tax jurisdiction(s). As a result, the effective tax rates for the adjustments for the second quarter of 2012 and 2011 were 35.3% and 39.0%, respectively. The tax expense for the three and six months ended June 30, 2012 was $9,462 and $0.22 per share. The tax expense for the three and six months ended June 30, 2011 was $5,927 and $0.14 and $0.13 per share, respectively.

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

Revenues and operating income

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

Unallocated corporate expenses

Unallocated corporate expenses decreased $2.4 million, or 11.8%, to $17.8 million for the three months ended June 30, 2012, from $20.2 million for the three months ended June 30, 2011. Excluding the impact of special charges of $0.1 million recorded in the three months ended June 30, 2012 and $2.8 million recorded in the three months ended June 30, 2011, unallocated corporate expenses were relatively flat at $17.7 million in 2012 compared to $17.4 million in 2011.

Interest income and other

Interest income and other, which includes foreign currency transaction gains and losses, decreased by $3.3 million to a loss of $0.4 million for the three months ended June 30, 2012 from $2.9 million in income for the three months ended June 30, 2011. The decrease is primarily due to net foreign currency transaction losses in the three months ended June 30, 2012 as compared to gains in the three months ended June 30, 2011. Transaction gains and losses both realized and unrealized, occur as either payments are made or month end remeasurement occurs relative to the Company’s receivables and payables which have been or will be received or paid in a currency that is different from the entity’s functional currency.

Interest expense

Interest expense was $15.2 million for the three months ended June 30, 2012 as compared to $14.5 million for the three months ended June 30, 2011. Interest expense in 2011 was favorably impacted by lower interest rates due to an interest rate swap agreement which was entered into in March 2011 and terminated in December 2011.

 

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Table of Contents

Special charges

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

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

 

   

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

 

   

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

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

 

     Three Months Ended
June 30,
     Three Months Ended
June 30,
 
     2012      2011  
     Special
Charges
     Total
Headcount
     Special
Charges
     Total
Headcount
 

Corporate Finance/Restructuring

   $ 11,116         6         9,440         22   

Forensic and Litigation Consulting

     7,253         41         839         7   

Economic Consulting

     818         8         2,093         6   

Technology

     2,966         42         —           —     

Strategic Communications

     4,511         15         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 
     26,664         112         12,372         35   

Unallocated Corporate

     118         4         2,840         2   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 26,782         116       $ 15,212         37   
  

 

 

    

 

 

    

 

 

    

 

 

 

Income tax provision

Our provision for income taxes in interim periods is computed by applying our estimated annual effective tax rate against income before income tax expense for the period. In addition, non-recurring or discrete items are recorded during the period in which they occur or become known. The effective tax rate was 31.3% for the three months ended June 30, 2012 as compared to 30.5% for the three months ended June 30, 2011. For the three months ended June 30, 2012, the effective tax rate was favorably impacted by the benefit related to income from changes in the fair value of acquisition-related contingent consideration, which is not taxable. For the three months ended June 30, 2011, the effective tax rate was favorably impacted by lower provisions for foreign income taxes. In addition, we recognized tax benefits in the three months ended June 30, 2011 for discrete items primarily related to the reversal of previously recognized deferred tax liabilities which were no longer required.

 

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Table of Contents

Six Months Ended June 30, 2012 Compared to Six Months Ended June 30, 2011

Revenues and operating income

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

Unallocated corporate expenses

Unallocated corporate expenses increased $4.7 million, or 13.3%, to $40.1 million for the six months ended June 30, 2012, from $35.4 million for the six months ended June 30, 2011. Excluding the impact of special charges of $0.1 million recorded in the six months ended June 30, 2012 and $2.8 million recorded in the six months ended June 30, 2011, unallocated corporate expenses increased $7.4 million, or 22.8% from the six months ended June 30, 2011. The increase was due to a $3.4 million increase in global leadership costs, $1.3 million of higher compensation and benefit costs, $1.1 million of strategic planning activities that took place in the three months ended March 31, 2012, and a $0.8 million decrease in allocations of certain system development and support costs.

Interest income and other

Interest income and other, which includes foreign currency transaction gains and losses, decreased by $2.0 million to $2.9 million for the six months ended June 30, 2012 from $4.9 million for the six months ended June 30, 2011. The decrease is primarily due to lower net foreign currency transaction gains in the six months ended June 30 2012 as compared to the six months ended June 30, 2011. Transaction gains and losses both realized and unrealized, occur as either payments are made or month end remeasurement occurs relative to the Company’s receivables and payables which have been or will be received or paid in a currency that is different from the entity’s functional currency.

Interest expense

Interest expense was $30.4 million for the six months ended June 30, 2012 as compared to $29.8 million for the six months ended June 30, 2011. Interest expense in 2011 was favorably impacted by lower interest rates due to an interest rate swap agreement which was entered into in March 2011 and terminated in December 2011.

Special charges

During the six months ended June 30, 2012 and 2011, we recorded special charges of $26.8 million and $15.2 million, respectively. See the “Special charges” discussion above for the Three Months Ended June 30, 2012 Compared to Three Months Ended June 30, 2011 for an expanded discussion of the special charges recorded in 2012 and 2011.

Income tax provision

Our provision for income taxes in interim periods is computed by applying our estimated annual effective tax rate against income before income tax expense for the period. In addition, non-recurring or discrete items are recorded during the period in which they occur or become known. The effective tax rate was 35.0% for the six months ended June 30, 2012 as compared to 34.7% for the six months ended June 30, 2011. For the six months ended June 30, 2012, the effective tax rate was favorably impacted by the benefit related to income from changes in the fair value of acquisition-related contingent consideration, which is not taxable. For the six months ended June 30, 2011, the effective tax rate was favorably impacted by lower provisions for foreign income taxes. In addition, we recognized tax benefits in the six months ended June 30, 2011 for discrete items primarily related to the reversal of previously recognized deferred tax liabilities which were no longer required.

 

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Table of Contents

SEGMENT RESULTS

Total Adjusted Segment EBITDA

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

 

     Three Months Ended
June 30,
     Six Months Ended
June 30,
 
     2012      2011      2012      2011  
     (in thousands)      (in thousands)  

Net income

   $ 7,747       $ 15,325       $ 26,178       $ 34,583   

Add back:

           

Income tax provision

     3,527         6,740         14,121         18,351   

Other income (expense), net

     15,558         11,577         27,480         24,887   

Unallocated corporate expense

     17,827         20,208         40,099         35,409   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total segment operating income

   $ 44,659       $ 53,850       $ 107,878       $ 113,230   

Add back:

           

Segment depreciation expense

     6,335         5,866         12,608         11,614   

Amortization of other intangible assets

     5,490         5,498         11,007         10,952   

Special charges

     26,664         12,372         26,664         12,372   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Adjusted Segment EBITDA

   $ 83,148       $ 77,586       $ 158,157       $ 148,168   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other Segment Operating Data

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
       2012           2011         2012     2011  

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

        

Corporate Finance/Restructuring

     718        730        718        730   

Forensic and Litigation Consulting

     808        863        808        863   

Economic Consulting

     467        409        467        409   

Technology

     311        261        311        261   

Strategic Communications

     599        562        599        562   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue-generating professionals

     2,903        2,825        2,903        2,825   
  

 

 

   

 

 

   

 

 

   

 

 

 

Utilization rates of billable professionals:(1)

        

Corporate Finance/Restructuring

     72     65     74     68

Forensic and Litigation Consulting

     65     71     68     70

Economic Consulting

     80     86     83     87

Average billable rate per hour:(2)

        

Corporate Finance/Restructuring

   $ 400      $ 420      $ 399      $ 426   

Forensic and Litigation Consulting

     326        330        326        330   

Economic Consulting

     509        496        493        487   

 

(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.

 

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Table of Contents
(2) 

For engagements where revenues are based on number of hours worked by our billable professionals, average billable rate per hour is calculated by dividing revenues for a period by the number of hours worked on client assignments during the same period. We have not presented an average billable rate per hour for our Technology and Strategic Communications segments as most of the revenues of these segments are not based on billable hours.

CORPORATE FINANCE/RESTRUCTURING

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2012     2011     2012     2011  
     (dollars in thousands,
except rate per hour)
    (dollars in thousands,
except rate per hour)
 

Revenues

   $ 112,336      $ 101,896      $ 225,814      $ 209,150   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Direct cost of revenues

     69,793        69,564        138,862        140,869   

Selling, general and administrative expenses

     17,469        18,443        35,479        36,959   

Special charges

     11,116        9,440        11,116        9,440   

Acquisition-related contingent consideration

     (3,278     708        (2,778     1,415   

Amortization of other intangible assets

     1,453        1,420        2,905        2,838   
  

 

 

   

 

 

   

 

 

   

 

 

 
     96,553        99,575        185,584        191,521   
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment operating income

     15,783        2,321        40,230        17,629   

Add back:

        

Depreciation and amortization of intangible assets

     2,311        2,314        4,628        4,608   

Special charges

     11,116        9,440        11,116        9,440   
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Segment EBITDA

   $ 29,210      $ 14,075      $ 55,974      $ 31,677   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit(1)

   $ 42,543      $ 32,332      $ 86,952      $ 68,281   

Gross profit margin(2)

     37.9     31.7     38.5     32.6

Adjusted Segment EBITDA as a percent of revenues

     26.0     13.8     24.8     15.1

Number of revenue generating professionals (at period end)

     718        730        718        730   

Utilization rates of billable professionals

     72     65     74     68

Average billable rate per hour

   $ 400      $ 420      $ 399      $ 426   

 

(1) 

Revenues less direct cost of revenues

 

(2) 

Gross profit as a percent of revenues

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

Revenues increased $10.4 million, or 10.2%, to $112.3 million for the three months ended June 30, 2012 compared to $101.9 million for the three months ended June 30, 2011. Acquisition-related revenue from Think First, acquired near the end of the first quarter of 2012, was $1.0 million, or 1.0% of the growth from the prior year. Revenue increased organically $9.4 million, or 9.2%, due to higher volumes in our North America bankruptcy and restructuring practice as well as increased demand in our Asia practice and for our transaction advisory services.

Gross profit increased $10.2 million, or 31.6%, to $42.5 million for the three months ended June 30, 2012 compared to $32.3 million for the three months ended June 30, 2011. Gross profit margin increased 6.2 percentage points to 37.9% for the three months ended June 30, 2012 compared to 31.7% for the three months ended June 30, 2011. The increase in gross profit margin was primarily due to improved utilization.

 

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Table of Contents

SG&A expense decreased $1.0 million, or 5.3%, to $17.5 million for the three months ended June 30, 2012 compared to $18.4 million for the three months ended June 30, 2011. SG&A expense was 15.6% of revenue for the three months ended June 30, 2012, down from 18.1% for the three months ended June 30, 2011. The decrease in SG&A expense was primarily due to lower personnel and facilities costs.

Amortization of other intangible assets increased to $1.5 million for the three months ended June 30, 2012 compared to $1.4 million for the three months ended June 30, 2011.

Adjusted segment EBITDA increased $15.1 million, or 107.5%, to $29.2 million for the three months ended June 30, 2012 compared to $14.1 million for the three months ended June 30, 2011.

Six Months Ended June 30, 2012 Compared to Six Months Ended June 30, 2011

Revenues increased $16.7 million, or 8.0%, to $225.8 million for the six months ended June 30, 2012 compared to 209.2 million for the six months ended June 30, 2011. Acquisition-related revenue from LECG and Think First was $3.5 million, or 1.7% growth from the prior year. Revenue increased organically $13.2 million, or $6.3%, primarily due to greater demand for our bankruptcy and restructuring practice in North America and Europe, as well as higher revenues in transaction advisory services, the Asia practice and healthcare services.

Gross profit increased $18.7 million, or 27.3%, to $87.0 million for the six months ended June 30, 2012 compared to $68.3 million for the six months ended June 30, 2011. Gross profit margin increased 5.9 percentage points to 38.5% for the six months ended June 30, 2012 compared to 32.6% for the six months ended June 30, 2011. The increase in gross profit margin was primarily due to higher staff utilization.

SG&A expense decreased $1.5 million, or 4.0%, to $35.5 million for the six months ended June 30, 2012 compared to 37.0 million for the six months ended June 30, 2011. SG&A expense was 15.7% of revenue for the six months ended June 30, 2012, down from 17.7% for the six months ended June 30, 2011. The decrease in SG&A expense was primarily due to lower personnel costs.

Amortization of other intangible assets increased to $2.9 million for the three months ended June 30, 2012 compared to $2.8 million the three months ended June 30, 2011.

Adjusted segment EBITDA increased $24.3 million, or 76.7%, to $56.0 million for the six months ended June 30, 2012 compared to $31.7 million for the six months ended June 30, 2011.

 

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Table of Contents

FORENSIC AND LITIGATION CONSULTING

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2012     2011     2012     2011  
     (dollars in thousands,
except rate per hour)
    (dollars in thousands,
except rate per hour)
 

Revenues

   $ 90,107      $ 93,368      $ 177,138      $ 176,281   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Direct cost of revenues

     56,415        59,057        114,145        110,489   

Selling, general and administrative expenses

     17,269        17,145        35,417        33,400   

Special charges

     7,253        839        7,253        839   

Acquisition-related contingent consideration

     (263     91        (206     180   

Amortization of other intangible assets

     495        596        997        1,187   
  

 

 

   

 

 

   

 

 

   

 

 

 
     81,169        77,728        157,606        146,095   
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment operating income