XFRA:3DU1 Quarterly Report 10-Q Filing - 3/31/2012

Effective Date 3/31/2012


 

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549


FORM 10-Q


þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 
For the quarterly period ended March 31, 2012

OR

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


Commission File Number: 001-33693

DUFF & PHELPS CORPORATION
(Exact name of registrant as specified in its charter)

DELAWARE
20-8893559
(State of other jurisdiction or
incorporation or organization)
(I.R.S. employer
identification no.)

55 East 52nd Street, 31st Floor
New York, New York 10055
(Address of principal executive offices)
(Zip code)

(212) 871-2000
(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 þ No o

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 Regulations 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 þ No o
 
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.
Large accelerated filer o     Accelerated filer þ    Non-accelerated filer o Smaller reporting company o
 
Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
 
The number of shares outstanding of the registrant's Class A common stock, par value $0.01 per share, was 38,564,672 as of April 15, 2012. The number of shares outstanding of the registrant's Class B common stock, par value $0.0001 per share, was 3,970,422 as of April 15, 2012.

 




DUFF & PHELPS CORPORATION AND SUBSIDIARIES
CURRENT REPORT ON FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2012

TABLE OF CONTENTS







PART I – FINANCIAL INFORMATION

Item 1. Financial Statements.

DUFF & PHELPS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
 
 
Three Months Ended
 
 
March 31,
2012
 
March 31,
2011
Revenues
 
$
106,345

 
$
85,046

Reimbursable expenses
 
2,598

 
1,892

Total revenues
 
108,943

 
86,938

 
 
 
 
 
Direct client service costs
 
 
 
 
Compensation and benefits (includes $6,045 and $4,935 of equity-based compensation for the three months ended March 31, 2012 and 2011, respectively)
 
58,218

 
46,908

Other direct client service costs
 
2,884

 
1,429

Acquisition retention expenses (includes $722 and $82 of equity-based compensation for the three months ended March 31, 2012 and 2011, respectively)
 
2,043

 
82

Reimbursable expenses
 
2,609

 
1,937

 
 
65,754

 
50,356

Operating expenses
 
 
 
 
Selling, general and administrative (includes $1,055 and $1,523 of equity-based compensation for the three months ended March 31, 2012 and 2011, respectively)
 
27,337

 
24,322

Depreciation and amortization
 
3,897

 
2,489

Restructuring charges (Note 11)
 
1,179

 

Transaction and integration costs
 
1,035

 
194

 
 
33,448

 
27,005

 
 
 
 
 
Operating income
 
9,741

 
9,577

 
 
 
 
 
Other expense/(income), net
 
 
 
 
Interest income
 
(28
)
 
(28
)
Interest expense
 
154

 
57

Other expense
 
379

 
(7
)
 
 
505

 
22

 
 
 
 
 
Income before income taxes
 
9,236

 
9,555

Provision for income taxes
 
3,545

 
3,064

Net income
 
5,691

 
6,491

Less: Net income attributable to noncontrolling interest
 
1,786

 
2,378

Net income attributable to Duff & Phelps Corporation
 
$
3,905

 
$
4,113

 
 
 
 
 
Weighted average shares of Class A common stock outstanding
 
 
 
 
Basic
 
28,702

 
26,910

Diluted
 
30,077

 
27,615

 
 
 
 
 
Net income per share attributable to stockholders of Class A common stock of Duff & Phelps Corporation (Note 5)
 
 
 
 
Basic
 
$
0.13

 
$
0.15

Diluted
 
$
0.13

 
$
0.14

 
 
 
 
 
Cash dividends declared per common share
 
$
0.09

 
$
0.08


See accompanying notes to the condensed consolidated financial statements.


1



DUFF & PHELPS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
 
Three Months Ended
 
 
March 31, 2012
 
March 31, 2011
Net income
 
$
5,691

 
$
6,491

 
 
 
 
 
Other comprehensive income, net of tax
 
 
 
 
Currency translation adjustment
 
1,722

 
1,431

Amortization of post-retirement benefits (net of tax of $1 for the three months ended March 31, 2011)
 
(1
)
 
(39
)
Other comprehensive income, net of tax
 
1,721

 
1,392

 
 
 
 
 
Comprehensive income
 
7,412

 
7,883

Less: comprehensive income attributable to noncontrolling interest
 
(1,887
)
 
(3,488
)
Comprehensive income attributable to Duff & Phelps Corporation
 
$
5,525

 
$
4,395






































See accompanying notes to the condensed consolidated financial statements.


2



DUFF & PHELPS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
(Unaudited)
 
 
March 31,
2012
 
December 31,
2011
ASSETS
Current assets
 
 
 
 
Cash and cash equivalents
 
$
41,048

 
$
38,986

Accounts receivable (net of allowance for doubtful accounts of $1,576 and $1,753 at March 31, 2012 and December 31, 2011, respectively)
 
69,854

 
77,795

Unbilled services
 
53,745

 
51,427

Prepaid expenses and other current assets
 
12,324

 
8,257

Net deferred income taxes, current
 
1,306

 
2,545

        Total current assets
 
178,277

 
179,010

 
 
 
 
 
Property and equipment (net of accumulated depreciation of $34,074 and $32,516 at March 31, 2012 and December 31, 2011, respectively)
 
34,054

 
33,632

Goodwill
 
194,462

 
192,970

Intangible assets (net of accumulated amortization of $28,022 and $25,626 at March 31, 2012 and December 31, 2011, respectively)
 
38,548

 
40,977

Other assets
 
13,348

 
13,942

Investments related to deferred compensation plan (Note 12)
 
25,250

 
23,542

Net deferred income taxes, less current portion
 
141,306

 
115,826

Total non-current assets
 
446,968

 
420,889

        Total assets
 
$
625,245

 
$
599,899

 
 
 
 
 
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
 
 
 
 
Accounts payable
 
$
4,933

 
$
4,148

Accrued expenses
 
21,755

 
22,612

Accrued compensation and benefits
 
10,527

 
41,518

Liability related to deferred compensation plan, current portion (Note 12)
 
600

 
646

Deferred revenues
 
4,264

 
4,185

Due to noncontrolling unitholders, current portion
 
6,208

 
6,209

        Total current liabilities
 
48,287

 
79,318

 
 
 
 
 
Long-term debt (Note 7)
 
30,000

 

Liability related to deferred compensation plan, less current portion (Note 12)
 
27,141

 
23,083

Other long-term liabilities
 
27,118

 
32,248

Due to noncontrolling unitholders, less current portion
 
130,221

 
101,557

Total non-current liabilities
 
214,480

 
156,888

Total liabilities
 
262,767

 
236,206

 
 
 
 
 
Commitments and contingencies (Note 10)
 


 


 
 
 
 
 
Stockholders' equity
 
 
 
 
Preferred stock (50,000 shares authorized; zero issued and outstanding)
 

 

Class A common stock, par value $0.01 per share (100,000 shares authorized; 38,574 and 31,646 shares issued and outstanding at March 31, 2012 and December 31, 2011, respectively)
 
386

 
316

Class B common stock, par value $0.0001 per share (50,000 shares authorized; 3,971 and 10,488 shares issued and outstanding at March 31, 2012 and December 31, 2011, respectively)
 

 
1

Additional paid-in capital
 
301,857

 
252,572

Accumulated other comprehensive income
 
1,907

 
287

Retained earnings
 
26,359

 
25,631

Total stockholders' equity of Duff & Phelps Corporation
 
330,509

 
278,807

Noncontrolling interest
 
31,969

 
84,886

Total stockholders' equity
 
362,478

 
363,693

Total liabilities and stockholders' equity
 
$
625,245

 
$
599,899



See accompanying notes to the condensed consolidated financial statements.


3



DUFF & PHELPS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 
 
Three Months Ended
 
 
March 31,
2012
 
March 31,
2011
 
 
 
 
 
Cash flows from operating activities:
 
 
 
 
Net income
 
$
5,691

 
$
6,491

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
 
Depreciation and amortization
 
3,897

 
2,489

Equity-based compensation
 
7,822

 
6,540

Bad debt expense
 
41

 
856

Net deferred income taxes
 
4,422

 
5,966

Other
 
(160
)
 
15

Changes in assets and liabilities providing/(using) cash, net of acquired balances:
 
 
 
 
Accounts receivable
 
7,914

 
(1,657
)
Unbilled services
 
(2,102
)
 
(5,657
)
Prepaid expenses and other current assets
 
(214
)
 
(64
)
Other assets
 
1,767

 
(987
)
Accounts payable and accrued expenses
 
(4,072
)
 
(9,212
)
Accrued compensation and benefits
 
(24,869
)
 
(27,993
)
Deferred revenues
 
79

 
834

Other liabilities
 
(4,910
)
 
57

Net cash used in operating activities
 
(4,694
)
 
(22,322
)
 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
Purchases of property and equipment
 
(478
)
 
(769
)
Business acquisitions, net of cash acquired
 
(274
)
 
(466
)
Purchases of investments
 
(2,550
)
 
(3,000
)
Net cash used in investing activities
 
(3,302
)
 
(4,235
)
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
Borrowings under revolving line of credit
 
30,000

 

Net proceeds from issuance of Class A common stock
 
49,460

 

Redemption of noncontrolling unitholders
 
(58,972
)
 

Repurchases of Class A common stock
 
(4,979
)
 
(5,815
)
Dividends
 
(3,188
)
 
(2,492
)
Payments of contingent consideration related to acquisitions
 
(1,682
)
 

Distributions and other payments to noncontrolling unitholders
 
(830
)
 
(1,386
)
Proceeds from exercises of IPO Options
 

 
268

Net cash provided by/(used in) financing activities
 
9,809

 
(9,425
)
 
 
 
 
 
Effect of exchange rate on cash and cash equivalents
 
249

 
1,083

 
 
 
 
 
Net increase/(decrease) in cash and cash equivalents
 
2,062

 
(34,899
)
Cash and cash equivalents at beginning of year
 
38,986

 
113,328

Cash and cash equivalents at end of period
 
$
41,048

 
$
78,429





See accompanying notes to the condensed consolidated financial statements.


4



DUFF & PHELPS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(In thousands)
(Unaudited)

 
 
 
 
Stockholders of Duff & Phelps Corporation
 
 
 
 
Total Stockholders'
 
Common Stock - Class A
 
Common Stock - Class B
 
Additional Paid-in
 
Accumulated Other Comprehensive
 
Retained
 
Noncontrolling
 
 
Equity
 
Shares
 
Dollars
 
Shares
 
Dollars
 
Capital
 
Income
 
Earnings
 
Interest
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2011
 
$
363,693

 
31,646

 
$
316

 
10,488

 
$
1

 
$
252,572

 
$
287

 
$
25,631

 
$
84,886

Comprehensive income
 
7,412

 

 

 

 

 

 
1,620

 
3,905

 
1,887

Issuance of Class A Common Stock
 
49,244

 
3,707

 
37

 

 

 
36,785

 

 

 
12,422

Redemption of New Class A Units
 
(58,972
)
 

 

 
(4,407
)
 
(1
)
 
(44,170
)
 

 

 
(14,801
)
Exchange of New Class A Units
 

 
2,110

 
21

 
(2,110
)
 

 
(21
)
 

 

 

Net issuance of restricted stock awards
 
(4,964
)
 
1,215

 
12

 

 

 
(3,817
)
 

 

 
(1,159
)
Adjustment to Tax Receivable Agreement as a result of the exchange of New Class A Units
 
30

 

 

 

 

 
30

 

 

 

Forfeitures
 

 
(104
)
 

 

 

 

 

 

 

Equity-based compensation
 
7,759

 

 

 

 

 
6,147

 

 

 
1,612

Income tax windfall/(shortfall) on equity-based compensation
 
455

 

 

 

 

 
455

 

 

 

Distributions to noncontrolling unitholders
 
(593
)
 

 

 

 

 
(506
)
 

 

 
(87
)
Change in ownership interests between periods
 

 

 

 

 

 
52,797

 

 

 
(52,797
)
Deferred tax asset effective tax rate conversion
 
1,591

 

 

 

 

 
1,585

 

 

 
6

Dividends on Class A common stock
 
(3,177
)
 

 

 

 

 

 

 
(3,177
)
 

Balance as of March 31, 2012
 
$
362,478

 
38,574

 
$
386

 
3,971

 
$

 
$
301,857

 
$
1,907

 
$
26,359

 
$
31,969













See accompanying notes to the condensed consolidated financial statements.


5



DUFF & PHELPS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY—CONTINUED
(In thousands)
(Unaudited)

 
 
 
 
Stockholders of Duff & Phelps Corporation
 
 
 
 
Total Stockholders'
 
Common Stock - Class A
 
Common Stock - Class B
 
Additional Paid-in
 
Accumulated Other Comprehensive
 
Retained
 
Noncontrolling
 
 
Equity
 
Shares
 
Dollars
 
Shares
 
Dollars
 
Capital
 
Income
 
Earnings
 
Interest
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance as of December 31, 2010
 
$
342,564

 
30,166

 
$
302

 
11,151

 
$
1

 
$
232,644

 
$
1,400

 
$
16,923

 
$
91,294

Comprehensive income
 
7,883

 

 

 

 

 

 
282

 
4,113

 
3,488

Issuance of Class A common stock for acquisitions
 
289

 
18

 

 

 

 
211

 

 

 
78

Exchange of New Class A Units
 

 
77

 
1

 
(77
)
 

 
(1
)
 

 

 

Net issuance of restricted stock awards
 
(4,667
)
 
1,284

 
13

 

 

 
(3,452
)
 

 

 
(1,228
)
Adjustment to Tax Receivable Agreement as a result of the exchange of New Class A Units
 
76

 

 

 

 

 
76

 

 

 

Issuance for exercise of IPO Options
 
113

 
7

 

 

 

 
83

 

 

 
30

Forfeitures
 
(1
)
 
(75
)
 
(1
)
 
(1
)
 

 

 

 

 

Equity-based compensation
 
6,929

 

 

 

 

 
5,088

 

 

 
1,841

Income tax windfall/(shortfall) on equity-based compensation
 
817

 

 

 

 

 
817

 

 

 

Distributions to noncontrolling unitholders
 
(1,109
)
 

 

 

 

 
(816
)
 

 

 
(293
)
Change in ownership interests between periods
 

 

 

 

 

 
4,976

 

 

 
(4,976
)
Deferred tax asset effective tax rate conversion
 
359

 

 

 

 

 
341

 

 

 
18

Repurchases of Class A common stock pursuant to publicly announced program
 
(1,133
)
 
(75
)
 
(1
)
 

 

 
(835
)
 

 

 
(297
)
Dividends on Class A common stock
 
(2,474
)
 

 

 

 

 

 

 
(2,474
)
 

Balance as of March 31, 2011
 
$
349,646

 
31,402

 
$
314

 
11,073

 
$
1

 
$
239,132

 
$
1,682

 
$
18,562

 
$
89,955












See accompanying notes to the condensed consolidated financial statements.


6



DUFF & PHELPS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)

Note 1.
Description of Business

Duff & Phelps Corporation (the “Company”) is a leading provider of independent financial advisory and investment banking services. The firm balances analytical skills, market insight and independence to provide expertise in the areas of valuation, transactions, financial restructuring, alternative assets, disputes and taxation. Over 1,000 Duff & Phelps employees work out of more than 25 offices around the world—including Amsterdam, Atlanta, Austin, Beijing, Boston, Chicago, Dallas, Denver, Detroit, Houston, London, Los Angeles, Morristown, Munich, New York, Paris, Philadelphia, Plano, San Francisco, Seattle, Shanghai, Silicon Valley, Tokyo, Toronto and Washington, D.C.

Note 2.
Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and with the rules and regulations of the United States Securities and Exchange Commission (“SEC”) for interim financial reporting, and include all adjustments which are, in the opinion of management, necessary for a fair presentation. The financial statements require the use of management estimates and include the accounts of the Company, its controlled subsidiaries and other entities consolidated as required by accounting principles generally accepted in the United States of America (“GAAP”). References to the “Company,” “its” and “itself,” refer to Duff & Phelps Corporation and its subsidiaries, unless the context requires otherwise.

The balance sheet at December 31, 2011 was derived from audited financial statements, but does not include all disclosures required by GAAP. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. In management's opinion, all adjustments necessary for a fair presentation are reflected in the interim periods presented. All significant intercompany accounts and transactions have been eliminated in consolidation.

Follow-on Offering
In the three months ended March 31, 2012, the Company sold 3,707 shares of newly issued Class A common stock to an underwriter at a price of $13.38 per share for an aggregate amount of $49,606. The underwriter offered such shares to the public at a price of $13.75 per share for an aggregate amount of $50,978. Net proceeds from the transaction of $49,244, cash on the balance sheet and borrowings under the revolving credit facility were used to redeem 4,407 New Class A Units of D&P Acquisitions, LLC ("D&P Acquisitions") held by certain executive officers and entities affiliated with Lovell Minnick and Vestar Capital Partners. D&P Acquisitions represented the predecessor entity prior to the Company's IPO and currently represents the primary operating subsidiary of the Company. Units were redeemed at a price of $13.38 per unit or an aggregate amount of $58,972. In connection with the redemption, a corresponding number of shares of Class B common stock were cancelled.

As part of the offering, a shareholder of the Company, Shinsei Bank, Ltd., a Japanese corporation, sold 1,468 shares of Duff & Phelps Corporation Class A common stock to an underwriter at a price of $13.38 per share for an aggregate amount of $19,635. The underwriter offered such shares to the public at a price of $13.75 per share for an aggregate amount of $20,178. The Company did not receive any proceeds from the shares of the Class A common stock being sold by the selling shareholder.

Recent Accounting Pronouncements
Effective January 1, 2012, the Company adopted the Financial Accounting Standards Board's (“FASB”) Accounting Standards Update (“ASU”) No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, as amended by ASU 2011-12, Comprehensive Income (Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05. These updates revise the manner in which entities present comprehensive income in their financial statements. The guidance removes the presentation options in ASC 220 and requires entities to report components of comprehensive income in either (1) a continuous statement of


7



DUFF & PHELPS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)

comprehensive income or (2) two separate but consecutive statements. The adoption of these standards did not have a material effect on the Company's consolidated financial statements.

Effective January 1, 2012, the Company adopted ASU 2011-08, Intangibles–Goodwill and Other (Topic 350): Testing Goodwill for Impairment. The update permits an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step goodwill impairment test. If an entity determines based on qualitative factors that it is not more likely than not that a reporting unit's fair value is less than its carrying amount, then the two step impairment test will be unnecessary. The amendment will be effective for interim and annual goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company performs its impairment test as of October 31st of each year. The Company does not anticipate that the adoption of ASU 2011-08 will have a material effect on its consolidated financial statements.

In December 2011, the FASB issued ASU 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. The update requires an entity to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The amendment will be effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The Company does not anticipate that the adoption of ASU 2011-11 will have a material effect on its consolidated financial statements.

Critical Accounting Policies
There have been no significant changes in new accounting pronouncements or in our critical accounting policies and estimates from those that were disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011. The Company believes that the disclosures herein are adequate so that the information presented is not misleading; however, it is suggested that these financial statements be read in conjunction with the financial statements and the notes thereto in our Annual Report on Form 10-K for the year ended December 31, 2011. The financial data for the interim periods may not necessarily be indicative of results to be expected for the year.



8



DUFF & PHELPS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)

Note 3.
Noncontrolling Interest

D&P Acquisitions represented the predecessor entity prior to the Company's IPO and currently represents the operating subsidiaries of the Company. Immediately prior to the closing of the IPO on October 3, 2007, D&P Acquisitions effectuated certain transactions intended to simplify the capital structure of D&P Acquisitions (the “Recapitalization Transactions”).

Prior to the Recapitalization Transactions, D&P Acquisitions' capital structure consisted of seven different classes of membership interests (collectively, “Legacy Units”), each of which had different capital accounts and amounts of aggregate distributions above which its holders share in future distributions. Certain units were issued in conjunction with acquisitions and as long-term incentive compensation to management and independent members of the board of directors. The net effect of the Recapitalization Transactions was to convert the Legacy Units into a single new class of units called “New Class A Units.” The holders of New Class A Units, other than Duff & Phelps Corporation, also own one share of the Company's Class B common stock for each New Class A Unit.

The Company has sole voting power in and controls the management of D&P Acquisitions. As a result, the Company consolidates the financial results of D&P Acquisitions and records noncontrolling interest for the economic interest in D&P Acquisitions held by the existing unitholders to the extent the book value of their interest in D&P Acquisitions is greater than zero. The Company's economic interest in D&P Acquisitions totaled 90.7% at March 31, 2012. The noncontrolling unitholders' interest in D&P Acquisitions totaled 9.3% at March 31, 2012.

Net income attributable to the noncontrolling interest on the Consolidated Statement of Operations represents the portion of earnings or loss attributable to the economic interest in D&P Acquisitions held by the noncontrolling unitholders. Noncontrolling interest on the Consolidated Balance Sheets represents the portion of net assets of D&P Acquisitions attributable to the noncontrolling unitholders based on the portion of total units of D&P Acquisitions owned by such unitholders (“New Class A Units”). The ownership of the New Class A Units is summarized as follows:
 
 
 
Duff & Phelps
Corporation
 
Noncontrolling
Unitholders
 
Total
 
As of December 31, 2011
 
31,646

 
10,488

 
42,134

 
Sale of Class A common stock
 
3,707

 

 
3,707

 
Redemption of New Class A Units
 

 
(4,407
)
 
(4,407
)
 
Exchange to Class A common stock
 
2,110

 
(2,110
)
 

 
Net issuance of restricted stock awards
 
1,215

 

 
1,215

 
Forfeitures
 
(104
)
 

 
(104
)
 
As of March 31, 2012
 
38,574

 
3,971

 
42,545

 
 
 
 
 
 
 
 
 
Percent of total
 
 

 
 

 
 

 
December 31, 2011
 
75.1
%
 
24.9
%
 
100
%
 
March 31, 2012
 
90.7
%
 
9.3
%
 
100
%

A reconciliation from “Income before income taxes” to “Net income attributable to the noncontrolling interest” and “Net income attributable to Duff & Phelps Corporation” is detailed as follows:


9



DUFF & PHELPS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)

 
 
 
Three Months Ended
 
 
 
March 31,
2012
 
March 31,
2011
 
Income before income taxes
 
$
9,236

 
$
9,555

 
Less: provision for income taxes for entities other than Duff & Phelps Corporation(a)(b)
 
(593
)
 
(560
)
 
Income before income taxes, as adjusted
 
8,643

 
8,995

 
Ownership percentage of noncontrolling interest(d)
 
20.7
%
 
26.4
%
 
Net income attributable to noncontrolling interest
 
1,786

 
2,378

 
Income before income taxes, as adjusted, attributable to Duff & Phelps Corporation
 
6,857

 
6,617

 
Less: provision for income taxes of Duff & Phelps Corporation(a)(c)
 
(2,952
)
 
(2,504
)
 
Net income attributable to Duff & Phelps Corporation
 
$
3,905

 
$
4,113

 
_______________
 
(a)
The consolidated provision for income taxes is equal to the sum of (i) the provision for income taxes for entities other than Duff & Phelps Corporation and (ii) the provision for income taxes of Duff & Phelps Corporation. The consolidated provision for income taxes totaled $3,545 and $3,064 for the three months ended March 31, 2012 and 2011, respectively.
 
(b)
The provision for income taxes for entities other than Duff & Phelps Corporation represents taxes imposed directly on Duff & Phelps, LLC, a wholly-owned subsidiary of D&P Acquisitions, and its subsidiaries, such as taxes imposed on certain domestic subsidiaries (e.g., Rash & Associates, L.P.), taxes imposed by certain foreign jurisdictions, and taxes imposed by certain local and other jurisdictions (e.g., New York City). Since Duff & Phelps, LLC is taxed as a partnership and a flow-through entity for U.S. federal and state income tax purposes, there is no provision for these taxes on income allocable to the noncontrolling interest.
 
(c)
The provision of income taxes of Duff & Phelps Corporation includes all U.S. federal and state income taxes.
 
(d)
Income before income taxes, as adjusted, is allocated to the noncontrolling interest based on the total New Class A Units vested for income tax purposes (“Tax-Vested Units”) owned by the noncontrolling interest as a percentage of the aggregate amount of all Tax-Vested Units. This percentage may not necessarily correspond to the total number of New Class A Units at the end of each respective period.

Distributions and Other Payments to Noncontrolling Unitholders
The following table summarizes distributions and other payments to noncontrolling unitholders, as described more fully below:
 
 
 
Three Months Ended
 
 
 
March 31,
2012
 
March 31,
2011
 
Distributions for taxes
 
$
10

 
$
266

 
Other distributions
 
820

 
1,120

 
Payments pursuant to the Tax Receivable Agreement
 

 

 
 
 
$
830

 
$
1,386


Distributions for taxes
As a limited liability company, D&P Acquisitions does not incur significant federal or state and local taxes, as these taxes are primarily the obligations of the members of D&P Acquisitions. As authorized by the Third Amended and Restated LLC Agreement of D&P Acquisitions, D&P Acquisitions is required to distribute cash, generally, on a pro rata basis, to its members to the extent necessary to provide funds to pay the members' tax liabilities, if any, with respect to the earnings of D&P Acquisitions. The tax distribution rate has been set at 45% of each member's


10



DUFF & PHELPS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)

allocable share of taxable income of D&P Acquisitions. D&P Acquisitions is only required to make such distributions if cash is available for such purposes as determined by the Company. The Company expects cash will be available to make these distributions. Upon completion of its tax returns with respect to the prior year, D&P Acquisitions may make true-up distributions to its members, if cash is available for such purposes, with respect to actual taxable income for the prior year.
 
Other distributions
Concurrent with the payment of dividends to shareholders of Class A common stock, holders of New Class A Units receive a corresponding distribution per vested unit. These amounts will be treated as a reduction in basis of each member's ownership interests. Pursuant to the terms of the Third Amended and Restated LLC Agreement of D&P Acquisitions, a corresponding amount per unvested unit was deposited into a segregated account and will be distributed once a year with respect to units that vested during that year.  Any amounts related to unvested units that forfeit are returned to the Company.

Payments pursuant to the Tax Receivable Agreement
As a result of the Company's acquisition of New Class A Units of D&P Acquisitions, the Company expects to benefit from depreciation and other tax deductions reflecting D&P Acquisitions' tax basis for its assets. Those deductions will be allocated to the Company and will be taken into account in reporting the Company's taxable income. Further, as a result of a federal income tax election made by D&P Acquisitions applicable to a portion of the Company's acquisition of New Class A Units of D&P Acquisitions, the income tax basis of the assets of D&P Acquisitions underlying a portion of the units the Company has and will acquire (pursuant to the exchange agreement) will be adjusted based upon the amount that the Company has paid for that portion of its New Class A Units of D&P Acquisitions.

The Company has entered into a tax receivable agreement (“TRA”) with the existing unitholders of D&P Acquisitions (for the benefit of the existing unitholders of D&P Acquisitions) that provides for the payment by the Company to the unitholders of D&P Acquisitions of 85% of the amount of cash savings, if any, in U.S. federal, state and local income tax that the Company realizes (i) from the tax basis in its proportionate share of D&P Acquisitions' goodwill and similar intangible assets that the Company receives as a result of the exchanges and (ii) from the federal income tax election referred to above. D&P Acquisitions expects to make future payments under the TRA to the extent cash is available for such purposes.

As of March 31, 2012, the Company recorded a liability of $136,429, representing the payments due to D&P Acquisitions' unitholders under the TRA (see current and non-current portion of “Due to noncontrolling unitholders” on the Company's consolidated balance sheets).  

Within the next 12 month period, the Company expects to pay $6,208 of the total amount. The basis for determining the current portion of the payments due to D&P Acquisitions' unitholders under the TRA is the expected amount of payments to be made within the next 12 months.  The long-term portion of the payments due to D&P Acquisitions' unitholders under the tax receivable agreement is the remainder. Payments are anticipated to be made annually over 15 years, commencing from the date of each event that gives rise to the TRA benefits, beginning with the date of the closing of the IPO on October 3, 2007.  The payments are made in accordance with the terms of the TRA.  The timing of the payments is subject to certain contingencies including Duff & Phelps Corporation having sufficient taxable income to utilize all of the tax benefits defined in the TRA.

To determine the current amount of the payments due to D&P Acquisitions' unitholders under the TRA, the Company estimated the amount of taxable income that Duff & Phelps Corporation has generated over the previous fiscal year. Next, the Company estimated the amount of the specified TRA deductions at year end. This was used as a basis for determining the amount of tax reduction that generates a TRA obligation. In turn, this was used to calculate the estimated payments due under the TRA that the Company expects to pay in the next 12 months. These calculations are performed pursuant to the terms of the TRA.



11



DUFF & PHELPS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)

Obligations pursuant to the TRA are obligations of Duff & Phelps Corporation.  They do not impact the noncontrolling interest.  These obligations are not income tax obligations and have no impact on the tax provision or the allocation of taxes. Furthermore, the TRA has no impact on the allocation of the provision for income taxes to the Company's net income.  In general, items of income and expense are allocated on the basis of member's ownership interests pursuant to the Third Amended and Restated Limited Liability Company Agreement of Duff & Phelps Acquisitions, LLC.

Note 4.
Acquisitions

Acquisition of MCR
On October 31, 2011, the Company acquired certain assets of MCR and its subsidiaries, a United Kingdom-based partnership specializing in insolvency, turnaround and restructuring services ("MCR"). The addition of MCR enhances the Company's global restructuring advisory capabilities and expands its presence in Europe. The acquisition included 126 client service professionals, including 19 partners and directors. Its results have been included in the consolidated financial statements as part of the Investment Banking segment since the date of acquisition. Revenues and operating income included in the Company's Condensed Consolidated Statement of Operations totaled $8,749 and $1,475 during the three months ended March 31, 2012, respectively.

The fair value of the purchase price totaled $42,080 and comprised the following:
 
Cash
 
$
26,162

 
Class A common stock (714.314 shares)
 
9,065

 
Contingent consideration
 
6,106

 
Working capital settlement payable
 
747

 
 
 
$
42,080


The cash paid at closing was funded from existing balances. The fair value of the 714.314 shares of the Company's Class A common stock was determined based on the closing market price of the Company's Class A common shares on the date of acquisition. The sellers have the ability to earn up to £4,625 (approximately $7,400) of consideration contingent upon certain revenue and gross margin thresholds to be achieved in equal installments on the first and second anniversary dates of the closing. The Company estimated the fair value of the contingent consideration using a probability-weighted discounted cash flow model. The key assumptions used in this model were estimated by management, not observable in the market and considered Level 3 inputs within the fair value measurement hierarchy which required significant management judgments. The fair value of the contingent consideration will be recalculated each reporting period with any resulting gains or losses being recorded in the Consolidated Statement of Operations. During the three months ended March 31, 2012, an expense of $252 was recorded to transaction and integration costs to reflect the change in fair value of the estimated contingent consideration payable.

In addition, the sellers and certain employees were also granted certain retention incentives in conjunction with the closing of the transaction. These amounts total $9,672 and comprise (i) deferred cash payable on the third anniversary of the closing of the transaction contingent upon certain conditions which include employment, (ii) restricted stock awards which become non-forfeitable on the third anniversary of the closing of the transaction contingent upon certain conditions which include employment and (iii) consideration to non-equity partners contingent upon certain revenue and gross margin thresholds to be achieved in equal installments on the first and second anniversary dates of the closing. These amounts will be expensed over the requisite service periods and recorded to Acquisition Retention Expenses on the Consolidated Statement of Operations.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed:


12



DUFF & PHELPS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)

 
Unbilled services
 
$
13,047

 
Prepaid expenses and other current assets
 
1,432

 
Property and equipment
 
627

 
Intangible assets
 
7,710

 
Other assets
 
70

 
Total identifiable assets acquired
 
22,886

 
 
 
 
 
Accrued expenses
 
(1,202
)
 
Other liabilities
 
(110
)
 
Total liabilities assumed
 
(1,312
)
 
Net identifiable assets acquired
 
21,574

 
Goodwill
 
20,506

 
Net assets acquired
 
$
42,080


The intangible assets acquired included a fair value of $7,200 and $510 assigned to customer relationships (four-year useful life) and non-compete agreements (two to three-year useful lives), respectively. The goodwill was assigned to the Investment Banking segment and reflects the replacement cost of an assembled workforce associated with personal reputations, relationships and business specific knowledge, as well as the value of expected synergies. The total amount of goodwill is expected to be deductible for tax purposes.

Other
On June 30, 2011, the Company acquired Growth Capital Partners and its subsidiaries, a Houston-based investment banking firm focused on transactions in the middle market. The addition of Growth Capital Partners complements the Company's energy, mining and infrastructure expertise, and expands its presence in the southwest United States. The acquisition included 20 client service professionals, including seven managing directors. Its results have been included in the consolidated financial statements as part of the Investment Banking segment since the date of acquisition.

Effective December 9, 2011, the Company acquired the Toronto-based restructuring and insolvency practice from the RSM Richter group. The acquisition enhances the Company's global restructuring capabilities by expanding its presence into Canada. The acquisition added 12 client service professionals, including four managing directors. Its results have been included in the Company's Condensed Consolidated Statement of Operations as part of the Investment Banking segment since the date of acquisition.

Effective December 30, 2011, the Company acquired Pagemill Partners, a Silicon Valley-based investment banking firm. Pagemill provides M&A, private placement advisory and related services to global technology companies in the middle market, as well as emerging organizations. This acquisition enhances the Company's technical capabilities and industry expertise. The acquisition added 22 client service professionals, including 10 managing directors. Its results have been included in the Company's Consolidated Statement of Operations as part of the Investment Banking segment beginning January 1, 2012.

Aggregated revenues and operating income included in the Company's Consolidated Statement of Operations totaled $9,020 and $1,760 during the three months ended March 31, 2012, respectively.

The aggregate fair value of the purchase price of these acquisitions totaled $44,754 and comprised the following:


13



DUFF & PHELPS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)

 
Cash
 
$
27,086

 
Class A common stock (447.243 shares)
 
6,132

 
Contingent consideration
 
11,632

 
Working capital settlement receivable
 
(96
)
 
 
 
$
44,754


The cash paid at closing was funded from existing balances. The fair value of the 447.243 shares of the Company's Class A common stock was determined based on the closing market price of the Company's Class A common shares on the date of acquisition.

The sellers have the ability to earn up to $15,064 of consideration contingent upon achievement of certain thresholds including revenue and gross margin targets over a period of two to 15 years from the date of closing. The Company estimated the fair value of the contingent consideration using probability-weighted discounted cash flow models. The key assumptions used in these models were estimated by management, not observable in the market and considered Level 3 inputs within the fair value measurement hierarchy which required significant management judgments. The fair market value of the contingent consideration for each acquisition will be recalculated each reporting period with any resulting gains or losses being recorded in the Consolidated Statement of Operations. During the three months ended March 31, 2012, an expense of $361 was recorded to transaction and integration costs to reflect the change in fair value of the estimated contingent consideration payable.

In addition, the sellers and certain employees were also granted certain retention incentives in conjunction with the closing of the transaction. These amounts total $15,500 and comprise (i) restricted stock awards and (ii) upfront or deferred cash payments, contingent on certain conditions which include employment or certain revenue and gross margin thresholds. These amounts will be expensed over the requisite service periods and recorded to Acquisition Retention Expenses on the Consolidated Statement of Operations.

The following table summarizes the estimated fair values of the aggregated assets acquired and liabilities assumed:
 
Accounts receivable
 
$
937

 
Unbilled services
 
1,079

 
Prepaid expenses and other current assets
 
328

 
Property and equipment
 
113

 
Intangible assets
 
7,789

 
Other assets
 
280

 
Total identifiable assets acquired
 
10,526

 
 
 
 
 
Accrued expenses and other current liabilities
 
(445
)
 
Other liabilities
 
(68
)
 
Total liabilities assumed
 
(513
)
 
Net identifiable assets acquired
 
10,013

 
Goodwill
 
34,741

 
Net assets acquired
 
$
44,754


The intangible assets acquired included a fair value of $6,777 and $1,012 assigned to customer relationships (1.5 to three-year useful lives) and non-compete agreements (three-to-five year useful lives), respectively. The goodwill was assigned to the Investment Banking segment and reflects the replacement cost of an assembled workforce associated with personal reputations, relationships and business specific knowledge, as well as the value of expected synergies. The total amount of goodwill is expected to be deductible for tax purposes.


14



DUFF & PHELPS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)

Pro Forma Information (Unaudited)
The following table summarizes certain supplemental unaudited pro forma financial information which was prepared as if the acquisitions described above had occurred as of January 1, 2010. The unaudited pro forma financial information was prepared for comparative purposes only and does not purport to be indicative of what would have occurred had the acquisition been made at that time or of results which may occur in the future.
 
 
 
Three Months Ended
 
 
 
March 31, 2011
 
 
 
Pro Forma
 
Revenues
 
$
101,022

 
Reimbursable expenses
 
2,346

 
Total revenues
 
$
103,368

 
 
 
 
 
Net income attributable to Duff & Phelps Corporation
 
$
4,806

 
 
 
 
 
Net income per share attributable to stockholders of Class A common stock of Duff & Phelps Corporation
 
 
 
Basic
 
$
0.16

 
Diluted
 
$
0.16




15



DUFF & PHELPS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)

Note 5.
Earnings Per Share

Basic earnings per share (“EPS”) measures the performance of an entity over the reporting period. Diluted earnings per share measures the performance of an entity over the reporting period while giving effect to all potentially dilutive common shares that were outstanding during the period. The treasury stock method is used to determine the dilutive potential of stock options, restricted stock awards and units, performance-vesting restricted stock awards and units, and New Class A Units and Class B common stock that are exchangeable into the Company's Class A common stock.

In accordance with FASB ASC 260, Earnings Per Share, all outstanding unvested share-based payments that contain rights to nonforfeitable dividends participate in the undistributed earnings with the common stockholders and are therefore participating securities. Companies with participating securities are required to apply the two-class method in calculating basic and diluted net income per share.

The Company's restricted stock awards are considered participating securities as they receive nonforfeitable dividends at the same rate as the Company's Class A common stock. The computation of basic and diluted net income per share is reduced for a presumed hypothetical distribution of earnings to the holders of the Company's unvested restricted stock. Accordingly, the effect of the allocation reduces earnings available for common stockholders.

The Company's performance-vesting restricted stock awards are not considered participating securities as the related dividends are forfeitable to the extent the performance conditions are not met.

The following is a reconciliation of the numerator and denominator used in the basic and diluted EPS calculations:
 
 
 
Three Months Ended
 
 
 
March 31,
2012
 
March 31,
2011
 
Basic and diluted net income per share:
 
 
 
 
 
 
 
 
 
 
 
Numerator
 
 
 
 
 
Net income available to holders of Class A common stock
 
$
3,905

 
$
4,113

 
Earnings allocated to participating securities
 
(93
)
 
(193
)
 
Earnings available for common stockholders
 
$
3,812

 
$
3,920

 
 
 
 
 
 
 
Denominator for basic net income per share of Class A common stock
 
 

 
 

 
Weighted average shares of Class A common stock
 
28,702

 
26,910

 
 
 
 
 
 
 
Denominator for diluted net income per share of Class A common stock
 
 
 
 
 
Weighted average shares of Class A common stock
 
28,702

 
26,910

 
Add dilutive effect of the following:
 
 
 
 
 
Restricted stock awards and units
 
1,375

 
705

 
Dilutive weighted average shares of Class A common stock
 
30,077

 
27,615

 
 
 
 
 
 
 
Basic income per share of Class A common stock
 
$
0.13

 
$
0.15

 
 
 
 
 
 
 
Diluted income per share of Class A common stock
 
$
0.13

 
$
0.14



16



DUFF & PHELPS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)

Anti-dilution is the result of outstanding options exceeding those outstanding under the treasury stock method. Accordingly, the following shares were anti-dilutive and excluded from this calculation:
 
 
 
Three Months Ended
 
 
 
March 31,
2012
 
March 31,
2011
 
Weighted average IPO Options outstanding
 
1,592

 
1,650


The potential dilutive effect of the Company's performance-based restricted stock awards and units were excluded from the calculation as the performance conditions had not been met as of the period ended March 31, 2012.
 
 
 
Three Months Ended
 
 
 
March 31,
2012
 
March 31,
2011
 
Weighted average performance-based restricted stock awards
 
283

 
37


In addition, shares of Class B common stock and the underlying number of New Class A Units do not share in the earnings of the Company and are therefore not participating securities. Accordingly, basic and diluted earnings per share of Class B common stock and the underlying number of New Class A Units have not been presented. Accordingly, the following shares were excluded from this calculation:
 
 
 
Three Months Ended
 
 
 
March 31,
2012
 
March 31,
2011
 
Weighted average shares of Class B common stock and underlying New Class A Units outstanding
 
9,050

 
11,130




17



DUFF & PHELPS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)

Note 6.
Fair Value Measurements

The following table presents assets and liabilities measured at fair value on a recurring basis as of March 31, 2012:
 
Description
 
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
 
Investments held in conjunction with deferred compensation plan
 
$

 
$
25,250

 
$

 
$
25,250

 
Total assets
 
$

 
$
25,250

 
$

 
$
25,250

 
 
 
 
 
 
 
 
 
 
 
Benefits payable in conjunction with deferred compensation plan
 
$

 
$
27,741

 
$

 
$
27,741

 
Acquisition-related contingent consideration payable
 

 

 
16,711

 
16,711

 
Total liabilities
 
$

 
$
27,741

 
$
16,711

 
$
44,452


For comparative purposes, the following table presents assets and liabilities measured at fair value on a recurring basis as of December 31, 2011:
 
Description
 
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
 
Significant
Other
Observable
Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Total
 
Investments held in conjunction with deferred compensation plan
 
$

 
$
23,542

 
$

 
$
23,542

 
Total assets
 
$

 
$
23,542

 
$

 
$
23,542

 
 
 
 
 
 
 
 
 
 
 
Benefits payable in conjunction with deferred compensation plan
 
$

 
$
23,729

 
$

 
$
23,729

 
Acquisition-related contingent consideration payable
 

 

 
17,738

 
17,738

 
Total liabilities
 
$

 
$
23,729

 
$
17,738

 
$
41,467


The investments held and benefits payable to participants in conjunction with the deferred compensation plan were primarily based on quoted prices for similar assets in active markets. Changes in the fair value of the investments are recognized as an increase or decrease in compensation expense. Changes in the fair value of the benefits payables to participants are recognized as a corresponding offset to compensation expense. The net impact of changes in fair value is not material. The deferred compensation plan is further discussed in Note 12.

The Company estimated the fair value of the acquisition-related contingent consideration payable using probability-weighted discounted cash flow models. The Company's valuation process incorporates the use of valuation specialists to conduct the valuation and provide a report in accordance with professional standards. The Company utilizes these reports to determine fair value. Typically, a discount factor is applied to the present values of the present values of the calculated contingent consideration payable. The key assumptions used in these models are estimated by management, not observable in the market and considered Level 3 inputs within the fair value measurement hierarchy which required significant management judgments, including judgments involving forecasted


18



DUFF & PHELPS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)

revenues, gross margin levels and probability weightings. Key assumptions are assessed and updated on a quarterly basis to reflect changes in key assumptions.

The following table reconciles the changes in the acquisition-related contingent consideration payable:
 
 
 
Total
 
Balance as of December 31, 2011
 
$
17,738

 
Payment of contingent consideration
 
(1,682
)
 
Change in fair market value
 
613

 
Impact of foreign currency translation
 
42

 
Balance as of March 31, 2012
 
$
16,711


During the three months ended March 31, 2012, an expense of $613 was recorded to transaction and integration costs to reflect the change in fair value of the estimated contingent consideration payable. The current portion of the acquisition-related contingent consideration payable is reflected in "Accrued expenses" and the long-term portion in "Other long-term liabilities" on the Condensed Consolidated Balance Sheet.

The significant unobservable inputs used in the fair value measurement of the acquisition-related contingent consideration payable primarily comprise forecasted revenues. Significant changes in forecasted revenues would result in a significantly higher or lower fair value measurement. At March 31, 2012, the fair market value of acquisition-related contingent consideration totaled $16,711 compared to a maximum potential payout of $20,782.

The Company does not have any material financial assets in a market that is not active.


19



DUFF & PHELPS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)

Note 7.
Long-Term Debt

On July 15, 2009, Duff & Phelps, LLC entered into a credit agreement with Bank of America, N.A., as administrative agent and the lenders from time to time party thereto, as amended by (i) the first amendment to the credit agreement dated as of November 8, 2010, (ii) the second amendment to credit agreement dated as of February 23, 2011, (iii) the third amendment to credit agreement dated as of August 15, 2011 and (iv) the fourth amendment to credit agreement dated as of October 13, 2011 (collectively, the “Credit Agreement”). The Credit Agreement provides for a $75,000 senior secured revolving credit facility ("Credit Facility"), including a $10,000 sub-limit for the issuance of letters of credit.

The proceeds of the facility are permitted to be used for working capital, permitted acquisitions and general corporate purposes. The maturity date is October 13, 2016. Amounts borrowed may be voluntarily prepaid at any time without penalty or premium, subject to customary breakage costs. There was $30,000 outstanding under the Credit Facility at March 31, 2012. As of March 31, 2012, the Company had $2,129 of outstanding letters of credit issued against the Credit Facility. These letters of credit were issued in connection with real estate leases.

Loans under the Credit Facility will, at the Company's option, bear interest on the principal amount outstanding at either (a) a rate equal to LIBOR, plus an applicable margin or (b) a base rate, plus an applicable margin. The applicable margin rate is based on the Company's most recent consolidated leverage ratio and ranges from 1.25% to 2.25% per annum for the LIBOR rate or 0.25% to 1.25% per annum for the base rate. In addition, the Company is required to pay an unused commitment fee on the actual daily amount of the unutilized portion of the commitments of the lenders at a rate ranging from 0.30% to 0.50% per annum, based on the Company's most recent consolidated leverage ratio. Based on the Company's consolidated leverage ratio at March 31, 2012, the Company qualifies for the 1.25% applicable margin for the LIBOR rate or 0.25% applicable margin for the base rate, and 0.30% for the unused commitment fee.

The Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants, including, among others, limitations on (a) the incurrence of liens, (b) the incurrence of indebtedness, (c) the ability to make dividends and distributions, as well as redeem and repurchase equity interests and (d) acquisitions, mergers, consolidations and sales of assets. In addition, the Credit Agreement contains financial covenants that do not permit (i) a total leverage ratio of greater than 3.00 to 1.00 until the quarter ending March 31, 2013; and 2.75 to 1.00 thereafter and (ii) a consolidated fixed charge coverage ratio of less than 1.15 to 1.00 beginning July 1, 2011 through and including June 30, 2012; 1.20 to 1.00 beginning July 1, 2012 through and including September 30, 2013; and 1.25 to 1.00 thereafter. The financial covenants are tested on the last day of each fiscal quarter based on the last four fiscal quarter periods. Management believes that the Company was in compliance with all of its covenants as of March 31, 2012.

The obligation of the Company to pay amounts outstanding under the Credit Facility may be accelerated upon the occurrence of an "Event of Default" as defined in the Credit Agreement. The Company's obligations under the Credit Agreement are guaranteed by D&P Acquisitions, and certain domestic subsidiaries of the Company (collectively, the "Guarantors"). The Credit Agreement is secured by a lien on substantially all of the personal property of the Company and each of the Guarantors.



20



DUFF & PHELPS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)

Note 8.
Equity-Based Compensation

Equity-based compensation with respect to (a) grants of Legacy Units, (b) options to purchase shares of the Company's Class A common stock granted in connection with the IPO (“IPO Options”) and (c) restricted stock awards and units and performance-vesting restricted stock awards and units issued in connection with the Company's ongoing long-term compensation program (“Ongoing RSAs”) is detailed in the table below:
 
 
 
Three Months Ended
 
Three Months Ended
 
 
 
March 31, 2012
 
March 31, 2011
 
 
 
Client
Service
 
SG&A
 
Total
 
Client
Service
 
SG&A
 
Total
 
Legacy Units
 
$
4

 
$
67

 
$
71

 
$
95

 
$
130

 
$
225

 
IPO Options
 

 

 

 
138

 
54

 
192

 
Ongoing RSAs
 
6,763

 
988

 
7,751

 
4,784

 
1,339

 
6,123

 
Total
 
$
6,767

 
$
1,055

 
$
7,822

 
$
5,017

 
$
1,523

 
$
6,540


Legacy Units
Immediately prior to the closing of the IPO on October 3, 2007, D&P Acquisitions effectuated certain transactions intended to simplify the capital structure of D&P Acquisitions (the “Recapitalization Transactions”). Prior to the Recapitalization Transactions, D&P Acquisitions' capital structure consisted of seven different classes of membership interests (collectively, “Legacy Units”), each of which had different capital accounts and amounts of aggregate distributions above which its holders share in future distributions. Certain units were issued in conjunction with acquisitions and as long-term incentive compensation to management and independent members of the board of directors.

The net effect of the Recapitalization Transactions was to convert the Legacy Units into a single new class of units called “New Class A Units.” The holders of New Class A Units also own one share of the Company's Class B common stock for each New Class A Unit. Pursuant to an exchange agreement, the New Class A Units are exchangeable on a one-for-one basis for shares of the Company's Class A common stock. In connection with an exchange, a corresponding number of shares of the Company's Class B common stock are cancelled.

The Company accounts for equity-based compensation in accordance with the fair value provisions of FASB ASC 718. As of October 3, 2007, the value used for the purpose of FASB ASC 718 for the above referenced units was based on the price of $16.00 per share of Class A common stock sold in the IPO, which determined the conversion of Legacy Units of D&P Acquisitions into New Class A Units pursuant to the Recapitalization Transactions. In all cases of graded vesting, equity-based compensation expense is being accrued through charges to operations over the respective vesting periods of the equity grants using the accelerated method of amortization.

Generally, Legacy Units were vested upon grant or have certain vesting provisions on each anniversary date over a four to five year requisite service period assuming that the holder remains employed by the Company, as more precisely defined in the individual grant agreements. Accelerated vesting occurs in the case of a sale of the Company or a qualified liquidity event.



21



DUFF & PHELPS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)

The following table summarizes activity for New Class A Units attributable to equity-based compensation:
 
 
 
New
Class A Units
Attributable to
Equity-Based
Compensation
 
Balance as of December 31, 2011
 
867

 
Redeemed or exchanged
 
(68
)
 
Balance as of March 31, 2012
 
799

 
 
 
 

 
Vested
 
797

 
Unvested
 
2


Upon a termination of such holder's employment other than for cause, unvested units will be forfeited for no consideration and vested units may be exchanged at the option of the holder or repurchased for a repurchase price equal to the fair market value of such units at the option of the Company. Upon a termination of such holder's employment for cause or if the holder resigns without good reason and then competes with the Company, all vested and unvested units will be forfeited without any consideration.

A select group of senior executives hold units whereby 50% of the units time vest and 50% of the units contain certain performance conditions for fiscal years ending 2006, 2007 and 2008. These performance conditions were met. In addition, all of the time-vesting units will vest immediately upon the occurrence of a sale of the Company or a qualified liquidity event prior to the fifth anniversary of the date of issuance, so long as the holder remains employed with the Company.

IPO Options and Restricted Stock Awards
The Duff & Phelps Corporation Amended and Restated 2007 Omnibus Incentive Stock Plan (“Omnibus Plan”) permits the grant of 11,150 stock options, stock appreciation rights, deferred stock awards, restricted stock awards, dividend equivalent rights, and any other share-based awards that are valued in whole or in part by reference to the Company's Class A common stock, or any combination of these. This plan is administered and interpreted by the Compensation Committee of the Company's board of directors.

IPO Options
Options were granted in conjunction with the Company's IPO to employees with exercise prices equal to the market value of the Company's Class A common stock on the grant date and expire ten years subsequent to grant date. Vesting provisions for individual awards are established at the grant date at the discretion of the Compensation Committee of the Company's board of directors. Options granted under the Company's share-based incentive compensation plans vest annually over four years. The Company plans to issue new shares of the Company's Class A common stock whenever stock options are exercised or share awards are granted. The Company did not grant options prior to 2007.

The Company valued the IPO Options using the Black-Scholes method. Asset volatility was based on the historical mean of the Company's closest peer group. The following table details the weighted average assumptions used to determine fair value at the time of grant:
 
Asset volatility
 
 
39%
 
Expected dividends
 
 
None
 
Risk-free rate
 
 
4.28%
 
Expected term of options
 
 
6.25 years


22



DUFF & PHELPS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)

The following table summarizes option activity:
 
 
 
IPO
Options
 
Weighted
Average
Grant Date
Fair Value
 
Balance as of December 31, 2011
 
1,607

 
$
7.33

 
Forfeited
 
(29
)
 
7.33

 
Balance as of March 31, 2012
 
1,578

 
$
7.33

 
 
 
 
 
 
 
Vested
 
1,578

 
 

 
Unvested
 

 
 

 
 
 
 
 
 
 
Weighted average exercise price
 
$
16.00

 
 

 
Weighted average remaining contractual term
 
5.50

 
 

 
Total fair value of vested options
 
$
11,565

 
 

 
Aggregate intrinsic value of outstanding options
 
$

 
 


Restricted Stock
Restricted stock awards and restricted stock units are granted as a form of incentive compensation and are accounted for similarly.  Corresponding expense is recognized based on the fair market value of the Company's Class A common stock on the date of grant over the service period.  Restricted stock units are generally contingent on continued employment and are converted to common stock when restrictions on transfer lapse after three years.

Performance-based restricted stock awards and units are granted as a form of incentive compensation and accounted for similarly. Performance-based restricted stock awards and units will become non-forfeitable on the third anniversary of the date of grant if and to the extent certain targets of total shareholder return are attained. Expense for performance-based restricted stock awards and units is recognized based on their calculated fair market value as of the date of grant using a lattice model. They are expensed over a three year period from the date of grant.

During the three months ended March 31, 2012, the Company issued 1,624 Ongoing RSAs related to annual bonus incentive compensation, performance incentive initiatives, promotions and recruiting efforts. The restrictions on transfer and forfeiture provisions are generally eliminated after three years for all awards granted to non-executives with certain exceptions related to retiree eligible employees and termination of employees without cause. Of the 1,624 Ongoing RSAs granted, 237 awards are performance-based restricted stock awards or units and are subject to the vesting provisions described previously.

Of the 1,624 Ongoing RSAs granted, 72 restricted stock awards and 155 performance-based restricted stock awards were granted to executives on March 1, 2012. For grants made to executives, the restrictions on transfer and forfeiture provisions on restricted stock awards are eliminated annually over three years based on ratable vesting.



23



DUFF & PHELPS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)

The following table summarizes award activity:
 
 
 
Restricted
Stock
Awards
 
Weighted
Average
Grant Date
Fair Value
 
Restricted
Stock
Units
 
Weighted
Average
Grant Date
Fair Value
 
Balance as of December 31, 2011
 
4,219

 
$
15.33

 
450

 
$
15.29

 
Granted
 
1,267

 
13.75

 
120

 
13.75

 
Converted to Class A common stock upon lapse of restrictions
 
(949
)
 
14.10

 
(69
)
 
13.84

 
Forfeited
 
(104
)
 
16.14

 
(12
)
 
16.42

 
Balance as of March 31, 2012
 
4,433

 
$
15.12

 
489

 
$
15.09

 
 
 
 
 
 
 
 
 
 
 
Vested
 

 
 
 

 
 
 
Unvested
 
4,433

 
 
 
489

 
 
 
 
 
Performance-
Based
Restricted
Stock
Awards
 
Weighted
Average
Grant Date
Fair Value
 
Performance-
Based
Restricted
Stock
Units
 
Weighted
Average
Grant Date
Fair Value
 
Balance as of December 31, 2011
 
183

 
$
7.52

 
22

 
$
7.83

 
Granted
 
213

 
7.75

 
24

 
7.75

 
Balance as of March 31, 2012
 
396

 
$
7.65

 
46

 
$
7.79

 
 
 
 
 
 
 
 
 
 
 
Vested
 

 
 
 

 
 
 
Unvested
 
396

 
 
 
46

 
 

For all equity-based compensation awards, forfeitures are estimated at the time an award is granted and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Pre-vesting forfeitures were estimated to be between 3% and 15% as of March 31, 2012 based on historical experience and future expectations.

The total unamortized compensation cost related to all non-vested awards was $41,236 at March 31, 2012. The Company utilized a deferred tax benefit of $5,904 and $4,612 for IPO Options and Ongoing RSAs for the three months ended March 31, 2012 and 2011, respectively.



24



DUFF & PHELPS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)

Note 9.
Income Taxes

Components of the provision for income taxes consist of the following:
 
 
 
Three Months Ended
 
 
 
March 31, 2012
 
March 31, 2011
 
Provision for income taxes
 
$
3,545

 
$
3,064

 
Effective income tax rate
 
38.4
%
 
32.1
%

The tax provision for the current year period is based on our estimate of the Company's annualized income tax rate. The effective tax rate is calculated by dividing the provision for income taxes by income before income taxes.

The Company's effective tax rate includes a rate benefit attributable to the fact that the Company's subsidiaries operate as a series of limited liability companies and other flow-through entities which are not subject to federal income tax.  Accordingly, a portion of the Company's earnings are not subject to corporate level taxes.  This favorable impact is partially offset by the impact of certain permanent items, primarily attributable to certain compensation related expenses that are not deductible for tax purposes. 

The Company accounts for uncertainties in income tax positions in accordance with FASB ASC 740, Income Taxes. A reconciliation of the beginning and ending amount of unrecognized tax benefit is summarized as follows:
 
Balance as of December 31, 2011
 
$
423

 
Reduction based on tax positions related to the current year
 
(24
)
 
Balance as of March 31, 2012
 
$
399


The Company recognizes interest income and expense related to income taxes as a component of interest expense and penalties as a component of selling, general and administrative expenses.

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various states and foreign jurisdictions. Duff & Phelps, LLC and D&P Acquisitions are open for federal income tax purposes from 2008 forward. These entities are not subject to federal income taxes as they are flow-through entities. The Company is open for federal income tax purposes beginning in 2008.

With respect to state and local jurisdictions and countries outside of the United States, the Company and its subsidiaries are typically subject to examination for four to five years after the income tax returns have been filed. Although the outcome of tax audits is always uncertain, the Company believes that adequate amounts of tax, interest and penalties have been provided for in the accompanying consolidated financial statements for any adjustments that might be incurred due to state, local or foreign audits.

Note 10.
Commitments and Contingencies

The Company is involved in various claims or disputes arising in the normal course of business. Management does not believe that these matters would have a material adverse effect on the Company's financial position, results of operations or liquidity.




25



DUFF & PHELPS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)

Note 11.
Restructuring

In June 2011, the Company identified opportunities for cost savings through office consolidations of underutilized space and workforce reductions of non-client service professionals. The portion of the charges related to office consolidations was estimated based on the discounted future cash flows of rent expense that the Company is obligated to pay under the lease agreements, partially offset by projected sublease income which was calculated based on certain sublease assumptions. These assumptions may be revised in future periods as new information becomes available. The portion of the charges related to workforce reductions represent termination benefits. A reconciliation of the liabilities for restructuring charges is summarized as follows:
 
 
 
Liabilities for Restructuring Charges
 
 
 
Office Consolidations
 
Employee Severance and Benefits
 
Total
 
Balance as of December 31, 2011
 
$
3,399

 
$
93

 
$
3,492

 
Restructuring charges from changes in estimates of original assumptions
 
212

 
(37
)
 
175

 
Cash payments
 
(355
)
 
(56
)
 
(411
)
 
Balance as of March 31, 2012
 
$
3,256

 
$

 
$
3,256


In March 2012, the Company identified opportunities for cost savings through the elimination of the Company's M&A Advisory practice in France and certain other Investment Banking positions in France. As a result, the Company incurred restructuring charges of $1,004 during the three months ended March 31, 2012 related to termination benefits. The charges were primarily based on assumptions underlying anticipated assessments and payments, including those to be made in accordance with local statutory requirements. These assumptions may be revised in future periods as new information becomes available. A reconciliation of the liabilities for restructuring charges is summarized as follows:
 
 
 
Liabilities for
Restructuring Charges
 
 
 
Employee Severance and Benefits
 
Balance as of December 31, 2011
 
$

 
Restructuring charges
 
1,004

 
Cash payments
 
(463
)
 
Balance as of March 31, 2012
 
$
541


Note 12.
Deferred Compensation Plan

The Company maintains the Duff & Phelps Deferred Compensation Plan (“Deferred Compensation Plan”) for key employees. The purpose of the Deferred Compensation Plan is to attract and retain key employees by providing each participant with an opportunity to defer receipt of a portion of their salary, bonus and other specified compensation. The plan is not intended to meet the qualification requirements of Code Section 401(a), but is intended to meet the requirements of Code Section 409A, and is operated and interpreted consistent with that intent.

Under the terms of the plan, the Company established a “rabbi trust” as a vehicle for accumulating assets to pay benefits under the plan. Payments under the plan may be paid from the general assets of the Company or from the assets of any such rabbi trust. Payment from any such source reduces the obligation owed to the participant or beneficiary. The rabbi trust invests in an investment vehicle structured as a corporate-owned life insurance (“COLI”)


26



DUFF & PHELPS CORPORATION AND SUBSIDIARIES
NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share amounts)
(Unaudited)

policy with a cash surrender value that mirrors the payable to the participants of the plan and tracks the value of the plan assets. Participants can earn a return on their deferred compensation that is based on hypothetical investment funds. The policy is redeemable on demand in an amount equal to the cash surrender value. The cash surrender value approximates fair value.

The fair market valu