Form 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended September 30, 2011

OR

 

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

For the transition period from                      to                     

Commission file number 001-14875

 

 

FTI CONSULTING, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Maryland   52-1261113

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

777 South Flagler Drive, Suite 1500 West Tower,

West Palm Beach, Florida

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

(561) 515-1900

(Registrant’s telephone number, including area code)

 

 

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

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

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

 

Large accelerated filer    x

   Accelerated filer                       ¨

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

   Smaller reporting company      ¨

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

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

 

Class

  

Outstanding at November 2, 2011

Common stock, par value $0.01 per share

   40,971,306

 

 

 


FTI CONSULTING, INC. AND SUBSIDIARIES

INDEX

 

          Page  

PART I—FINANCIAL INFORMATION

  

Item 1.

   Financial Statements   
   Condensed Consolidated Balance Sheets—September 30, 2011 and December 31, 2010      3   
   Condensed Consolidated Statements of Income—Three and Nine months ended September 30, 2011 and 2010      4   
   Condensed Consolidated Statement of Stockholders’ Equity and Comprehensive Income—Nine months ended September 30, 2011      5   
   Condensed Consolidated Statements of Cash Flows—Nine months ended September 30, 2011 and 2010      6   
   Notes to Condensed Consolidated Financial Statements      7   

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      23   

Item 3.

   Quantitative and Qualitative Disclosures about Market Risk      47   

Item 4.

   Controls and Procedures      47   

PART II—OTHER INFORMATION

  

Item 1.

   Legal Proceedings      48   

Item 1A.

   Risk Factors      48   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      48   

Item 3.

   Defaults Upon Senior Securities      49   

Item 4.

   (Removed and Reserved)      49   

Item 5.

   Other Information      49   

Item 6.

   Exhibits      50   

SIGNATURES

     51   


PART I—FINANCIAL INFORMATION

FTI Consulting, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except per share amounts)

Unaudited

 

Item 1. Financial Statements

 

     September 30,
2011
    December 31,
2010
 
          

As Revised

(Note 2)

 

Assets

    

Current assets

    

Cash and cash equivalents

   $ 128,230      $ 384,570   

Restricted cash

     10,231        10,518   

Accounts receivable:

    

Billed receivables

     348,480        268,386   

Unbilled receivables

     200,999        120,896   

Allowance for doubtful accounts and unbilled services

     (80,443     (63,205
  

 

 

   

 

 

 

Accounts receivable, net

     469,036        326,077   

Current portion of notes receivable

     26,558        28,397   

Prepaid expenses and other current assets

     30,784        28,174   

Income taxes receivable

     11,997        13,246   

Deferred income taxes

     667        —     
  

 

 

   

 

 

 

Total current assets

     677,503        790,982   

Property and equipment, net of accumulated depreciation

     75,027        73,238   

Goodwill

     1,295,679        1,269,447   

Other intangible assets, net of amortization

     124,623        134,970   

Notes receivable, net of current portion

     83,370        76,539   

Other assets

     70,317        60,312   
  

 

 

   

 

 

 

Total assets

   $ 2,326,519      $ 2,405,488   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Current liabilities

    

Accounts payable, accrued expenses and other

   $ 108,050      $ 105,864   

Accrued compensation

     158,263        143,971   

Current portion of long-term debt and capital lease obligations

     152,047        7,559   

Billings in excess of services provided

     27,726        27,836   

Deferred income taxes

     —          1,072   
  

 

 

   

 

 

 

Total current liabilities

     446,086        286,302   

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

     645,488        785,563   

Deferred income taxes

     96,801        85,956   

Other liabilities

     86,375        80,061   
  

 

 

   

 

 

 

Total liabilities

     1,274,750        1,237,882   
  

 

 

   

 

 

 

Commitments and contingent liabilities (notes 9, 11 and 12)

    

Stockholders’ equity

    

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

     —          —     

Common stock, $0.01 par value; shares authorized—75,000; shares issued and outstanding—40,954 (2011) and 46,144 (2010)

     410        461   

Additional paid-in capital

     365,746        546,336   

Retained earnings

     738,321        674,299   

Accumulated other comprehensive loss

     (52,708     (53,490
  

 

 

   

 

 

 

Total stockholders’ equity

     1,051,769        1,167,606   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 2,326,519      $ 2,405,488   
  

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements

 

3


FTI Consulting, Inc. and Subsidiaries

Condensed Consolidated Statements of Income

(in thousands, except per share data)

Unaudited

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2011     2010     2011     2010  
          

As Revised

(Note 2)

         

As Revised

(Note 2)

 

Revenues

   $ 413,802      $ 346,140      $ 1,176,055      $ 1,045,213   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

        

Direct cost of revenues

     249,975        206,831        723,903        617,640   

Selling, general and administrative expense

     98,562        86,115        282,902        253,196   

Special charges

     —          —          15,212        29,356   

Amortization of other intangible assets

     5,843        6,286        16,795        18,229   
  

 

 

   

 

 

   

 

 

   

 

 

 
     354,380        299,232        1,038,812        918,421   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     59,422        46,908        137,243        126,792   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense)

        

Interest income and other

     486        2,527        5,409        4,740   

Interest expense

     (14,319     (11,904     (44,129     (34,600

Loss on early extinguishment of debt

     —          (5,161     —          (5,161
  

 

 

   

 

 

   

 

 

   

 

 

 
     (13,833     (14,538     (38,720     (35,021
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax provision

     45,589        32,370        98,523        91,771   

Income tax provision

     16,150        12,206        34,501        34,642   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 29,439      $ 20,164      $ 64,022      $ 57,129   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share—basic

   $ 0.73      $ 0.44      $ 1.54      $ 1.25   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share—diluted

   $ 0.70      $ 0.43      $ 1.47      $ 1.19   
  

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements

 

4


FTI Consulting, Inc. and Subsidiaries

Condensed Consolidated Statement of Stockholders’ Equity and Comprehensive Income

(in thousands)

Unaudited

 

           Additional
Paid-in
Capital
    Retained
Earnings
     Accumulated
Other

Comprehensive
Loss
    Total  
   Common Stock           
   Shares     Amount           

Balance January 1, 2011––As
Revised
(Note 2)

     46,144      $ 461      $ 546,336      $ 674,299       $ (53,490   $ 1,167,606   

Comprehensive income:

             

Cumulative translation adjustment, including income tax benefit of $1,568

     —          —          —          —           782        782   

Net income

     —          —          —          64,022         —          64,022   
             

 

 

 

Total comprehensive income

                64,804   

Issuance of common stock in connection with:

             

Exercise of options, including income tax benefit from share-based awards of $75

     174        2        4,411        —           —          4,413   

Restricted share grants, less net settled shares of 97

     369        4        (3,545     —           —          (3,541

Stock units issued under incentive compensation plan

     —          —          4,241        —           —          4,241   

Business combinations

     —          —          (5,455     —           —          (5,455

Purchase and retirement of common stock

     (5,733     (57     (209,343     —           —          (209,400

Share-based compensation

     —          —          29,101        —           —          29,101   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Balance September 30, 2011

     40,954      $ 410      $ 365,746      $ 738,321       $ (52,708   $ 1,051,769   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements

 

5


FTI Consulting, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands)

Unaudited

 

     Nine Months Ended
September 30,
 
     2011     2010  
          

As Revised

(Note 2)

 

Operating activities

    

Net income

   $ 64,022      $ 57,129   

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

    

Depreciation, amortization and accretion

     24,046        24,317   

Amortization of other intangible assets

     16,795        18,229   

Provision for doubtful accounts

     9,483        7,179   

Non-cash share-based compensation

     29,043        25,205   

Excess tax benefits from share-based compensation

     (198     (761

Non-cash interest expense

     6,322        10,132   

Other

     (559     454   

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

    

Accounts receivable, billed and unbilled

     (130,132     (34,845

Notes receivable

     (4,914     (20,091

Prepaid expenses and other assets

     (3,670     1,994   

Accounts payable, accrued expenses and other

     14,489        9,120   

Income taxes

     1,061        6,164   

Accrued compensation

     21,098        (4,188

Billings in excess of services provided

     (38     (4,172
  

 

 

   

 

 

 

Net cash provided by operating activities

     46,848        95,866   
  

 

 

   

 

 

 

Investing activities

    

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

     (62,346     (60,273

Purchases of property and equipment

     (24,595     (14,833

Proceeds from sale or maturity of short-term investment

     —          15,000   

Other

     (127     (467
  

 

 

   

 

 

 

Net cash used in investing activities

     (87,068     (60,573
  

 

 

   

 

 

 

Financing activities

    

Borrowings under revolving line of credit

     25,000        20,000   

Payments of revolving line of credit

     (25,000     (20,000

Payments of long-term debt and capital lease obligations

     (6,967     (190,452

Issuance of debt securities, net

     —          391,647   

Payments of debt financing fees

     —          (2,843

Purchase and retirement of common stock

     (209,400     (26,138

Net issuance of common stock under equity compensation plans

     797        4,604   

Excess tax benefits from share-based compensation

     198        761   

Other

     (1     442   
  

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (215,373     178,021   
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (747     (1,004
  

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (256,340     212,310   

Cash and cash equivalents, beginning of period

     384,570        118,872   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 128,230      $ 331,182   
  

 

 

   

 

 

 

Supplemental cash flow disclosures

    

Cash paid for interest

   $ 31,725      $ 34,504   

Cash paid for income taxes, net of refunds

     33,443        28,124   

Non-cash investing and financing activities:

    

Issuance of notes payable to acquire businesses

     —          39,772   

Issuance of stock units under incentive compensation plans

     4,241        6,531   

See accompanying notes to the condensed consolidated financial statements

 

6


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

Our unaudited condensed consolidated financial statements 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, except as otherwise disclosed. 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, 2010.

2. Revision to Previously Reported Financial Information

During the third quarter of 2011, we conducted a re-examination of our accounting related to our Senior Managing Director Incentive Compensation Program and related agreements (“ICP”). As a result of this review, we revised our accounting to reflect an acceleration of expense related to certain forgivable loans and/or share-based awards and corrected an immaterial error in our previously reported results for the six-months ended June 30, 2011 and for the annual reporting periods 2006 through 2010. As previously disclosed in the Current Report on Form 8-K that we filed with the SEC on November 2, 2011, we are revising our previously reported financial information in the third quarter 2011 filing to reflect the impact of the correction of the immaterial error. We intend to revise our previously reported consolidated financial statements for certain comparative quarterly and annual periods through subsequent periodic filings.

The ICP is a program designed to compensate and retain the Company’s top senior managing directors. There are currently 82 employees who participate in this program. Employees who are invited to participate in the program are eligible to receive share-based awards and forgivable loans on a discretionary and periodic basis. As a result of a re-examination of the ICP provisions related to retirement and non-renewal or resignation by the employee, and the corresponding non-compete periods, the Company determined that it should have recorded compensation expense for certain forgivable loans and/or share-based awards over a shorter period.

We assessed the materiality of these errors in accordance with SEC Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements (“SAB 108”), and determined the error was immaterial to the previously reported amounts contained in our periodic filings. Although the error was immaterial to prior periods, recording the cumulative impact of the out-of-period correction in the third quarter of 2011 would be material. Therefore, we applied the guidance for accounting changes and error corrections and revised our prior period financial statements presented per SAB 108. The impact of the correction of the immaterial error was a decrease to net income of $4.1 million in the six months ended June 30, 2011 and $5.9 million, $3.2 million, $2.0 million, $1.6 million and $0.5 million in the annual reporting periods 2010, 2009, 2008, 2007 and 2006, respectively.

 

7


FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

The effect of recording the correction of the immaterial error on impacted line items of the consolidated statements of income for the three and nine months ended September 30, 2010 is presented below:

 

     For the Three Months Ended      For the Nine Months Ended  
     September 30,
2010
     September 30,
2010
 

(in thousands, except per share data)

   As Reported      As Revised      As Reported      As Revised  

Direct cost of revenues

   $ 204,095       $ 206,831       $ 610,586       $ 617,640   

Selling, general and administrative expense

     85,796         86,115         252,399         253,196   

Special charges

     —           —           30,245         29,356   

Operating income

     49,963         46,908         133,754         126,792   

Income before income tax provision

     35,425         32,370         98,733         91,771   

Income tax provision

     13,462         12,206         37,519         34,642   

Net income

     21,963         20,164         61,214         57,129   

Earnings per common share:

           

Basic

   $ 0.48       $ 0.44       $ 1.34       $ 1.25   

Diluted

   $ 0.47       $ 0.43       $ 1.28       $ 1.19   

The effect of recording the correction of the immaterial error on impacted line items of the consolidated balance sheet at December 31, 2010 is presented below:

 

     December 31,
2010
 

(in thousands)

   As Reported      As Revised  

Current portion notes receivable

   $ 26,130       $ 28,397   

Total current assets

     788,715         790,892   

Notes receivable, net of current portion

     87,677         76,539   

Total assets

     2,414,359         2,405,488   

Deferred income taxes

     4,052         1,072   

Total current liabilities

     289,282         286,302   

Deferred income taxes

     92,134         85,956   

Total liabilities

     1,247,040         1,237,882   

Additional paid-in capital

     532,929         546,336   

Retained earnings

     687,419         674,299   

Total stockholders’ equity

     1,167,319         1,167,606   

Total liabilities and stockholders’ equity

     2,414,359         2,405,488   

3. New Accounting Standards Not Yet Adopted

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income, which amends current comprehensive income guidance. This accounting update eliminates the option to present the components of other comprehensive income as part of the statement of shareholders’ equity. Instead, an entity must report comprehensive income in either a single continuous statement of comprehensive income which contains two sections, net income and other comprehensive income, or in two separate but consecutive statements. This guidance will be effective for us beginning in the first quarter of 2012. We do not expect the guidance to impact our consolidated financial statements, as it only requires a change in the format of presentation.

 

8


FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

In September 2011, the FASB issued Accounting Standards Update No. 2011-08, Testing Goodwill for Impairment. This accounting update is intended to simplify goodwill impairment testing by adding a qualitative review step to assess whether the required quantitative impairment analysis that exists today is necessary. An entity no longer will be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amended goodwill impairment guidance does not affect the manner in which a company estimates fair value. The new standard is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted. The Company plans to adopt this update early. The value of the Company’s goodwill will not be affected by the adoption of this standard.

4. 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 September 30,
     Nine Months
Ended September 30,
 
     2011      2010      2011      2010  

Numerator—basic and diluted

           

Net income

   $ 29,439       $ 20,164       $ 64,022       $ 57,129   
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator

           

Weighted average number of common shares outstanding—basic

     40,182         45,471         41,535         45,708   

Effect of dilutive stock options

     884         803         895         947   

Effect of dilutive convertible notes

     647         449         722         950   

Effect of dilutive restricted shares

     554         258         519         285   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of common shares outstanding—diluted

     42,267         46,981         43,671         47,890   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per common share—basic

   $ 0.73       $ 0.44       $ 1.54       $ 1.25   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per common share—diluted

   $ 0.70       $ 0.43       $ 1.47       $ 1.19   
  

 

 

    

 

 

    

 

 

    

 

 

 

Antidilutive stock options and restricted shares

     2,612         2,059         2,330         1,671   
  

 

 

    

 

 

    

 

 

    

 

 

 

5. Special Charges

During the year ended December 31, 2010, we recorded special charges of $51.1 million, of which $31.4 million was non-cash. The non-cash charges primarily included trade name impairment charges related to our global FTI Consulting branding strategy and other strategic branding decisions. The remaining charges related to

 

9


FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

a realignment of our workforce and a consolidation of four office locations. The charges reflect actions we took to support our corporate positioning, as well as actions taken to better align capacity with expected demand, to eliminate certain redundancies resulting from acquisitions and to provide for appropriate levels of administrative support.

During the nine months ended September 30, 2011, we recorded special charges of $15.2 million, of which $4.8 million was non-cash. The charges reflect actions we took to reduce senior management related overhead in connection with our realignment of our segment management on a global basis and to align our workforce with expected market trends. These actions included a reduction in workforce totaling 37 employees. The special charges consisted of:

 

   

$10.4 million of salary continuance and other contractual employee related costs associated with the reduction in workforce;

 

   

$2.0 million related to loan forgiveness and accelerated recognition of compensation cost of share-based awards related to the reduction in workforce; and

 

   

$2.8 million of deferred costs under a service contract without a substantive future economic benefit to the Company.

The following table details the special charges by segment for the nine months ended September 30, 2011:

 

Corporate Finance/Restructuring

   $ 9,440   

Forensic and Litigation Consulting

     839   

Economic Consulting

     2,093   
  

 

 

 
     12,372   

Unallocated Corporate

     2,840   
  

 

 

 

Total

   $ 15,212   
  

 

 

 

The total cash outflow associated with the 2010 special charges is expected to be $19.7 million, of which $19.2 million has been paid as of September 30, 2011. The total cash outflow associated with the 2011 special charges is expected to be $10.4 million, of which $3.8 million has been paid as of September 30, 2011. Of the remaining liability of $7.1 million at September 30, 2011, $2.7 million is expected to be paid during the remainder of 2011 and the balance of approximately $4.4 million is expected to be paid during 2012. A liability for the amounts to be paid is included in “Accounts payable, accrued expenses and other” on the Condensed Consolidated Balance Sheets. Activity related to the liability for these costs for the nine months ended September 30, 2011 is as follows:

 

     Employee
Termination
Costs
    Lease
Termination
Costs
    Total  

Balances at January 1, 2011

   $ 1,920      $ 2,762      $ 4,682   

Additions

     10,370        —          10,370   

Payments

     (5,111     (2,646     (7,757

Foreign currency translation adjustment and other

     (73     (116     (189
  

 

 

   

 

 

   

 

 

 

Balances at September 30, 2011

   $ 7,106      $ —        $ 7,106   
  

 

 

   

 

 

   

 

 

 

 

10


FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

6. 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 Income. The provision for doubtful accounts totaled $3.7 million and $9.5 million for the three and nine months ended September 30, 2011, respectively, and $2.6 million and $7.2 million for the three and nine months ended September 30, 2010, respectively.

7. Research and Development Costs

Research and development costs related to software development totaled $5.1 million and $16.9 million for the three and nine months ended September 30, 2011, respectively, and $8.1 million and $18.8 million for the three and nine months ended September 30, 2010, respectively. Research and development costs are included in “Selling, general and administrative expense” on the Condensed Consolidated Statements of Income.

8. Financial Instruments

Fair Value of Financial Instruments

We consider the recorded value of certain of our financial assets and liabilities, which consist primarily of cash equivalents, accounts receivable and accounts payable, to approximate the fair value of the respective assets and liabilities at September 30, 2011, based on the short-term nature of the assets and liabilities. The fair value of our long-term debt at September 30, 2011 was $816.1 million compared to a carrying value of $815.4 million. At December 31, 2010, the fair value of our long-term debt was $847.2 million compared to a carrying value of $810.8 million. We determine the fair value of our long-term debt primarily based on quoted market prices for our 7 3/4% senior notes due 2016 (“7 3/4% Senior Notes”), 6 3/4% senior notes due 2020 (“6 3/4% Senior Notes”) and Convertible Notes. 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.

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 qualify and have been designated as fair value hedges. The interest rate swaps mature on October 1, 2016. Under the terms of the interest rate swaps, we receive interest on the $215.0 million notional amount of the 7 3/4% Senior Notes at a fixed rate of 7 3/4% and pay a variable rate of interest, based on LIBOR as the benchmark interest rate. For the three months ended September 30, 2011, our variable interest rate was 5.43%. The maturity, payment dates and other critical terms of these swaps exactly match those of the hedged 7 3/4% Senior Notes. These interest rate swaps qualified for hedge accounting using the short-cut method under ASC 815-20-25, Derivatives and Hedging (formerly SFAS No. 133), which assumes no hedge ineffectiveness. As a result, changes in the fair value of the interest rate swaps and changes in the fair value of the hedged debt were assumed to be equal and offsetting. As of September 30, 2011, the fair value of our interest rate swaps was an asset of $7.5 million, which is recorded in “Other assets” on the Condensed

 

11


FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

Consolidated Balance Sheets. The impact of effectively converting the interest rate of the 7 3/4% Senior Notes from fixed rate to variable rate decreased interest expense by $2.6 million for the nine months ended September 30, 2011 and $1.2 million for the three months ended September 30, 2011.

9. Acquisitions

In March 2011, we completed acquisitions of certain practices of LECG Corporation in Europe, the United States and Latin America with services relating to those provided through our Economic Consulting, Forensic and Litigation Consulting, and Corporate Finance/Restructuring segments. The acquisition-date fair value of the total consideration transferred is approximately $30.0 million, which consisted of $27.0 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 $3.0 million. As part of the preliminary purchase price allocation, we recorded an aggregate of $24.1 million in accounts receivable, $6.3 million in identifiable intangible assets, $20.7 million of assumed liabilities and $15.0 million in goodwill. Aggregate acquisition-related costs of approximately $1.5 million have been recognized in earnings in 2011. Pro forma results of operations have not been presented because the acquisitions were not material in relation to our consolidated financial position or results of operations for the periods presented.

Certain acquisition-related restricted stock agreements entered into prior to January 1, 2009 contain stock price guarantees that may result in cash payments in the future if our share price falls below a specified per share market value on the date that the applicable stock restrictions lapse (the “determination date”). For those acquisitions, the future settlement of any contingency related to our common stock price will be recorded as a reduction to additional paid-in capital. During the nine months ended September 30, 2011, we paid $6.2 million in cash in relation to the stock price guarantees on certain shares of common stock that became unrestricted, which was recorded as a reduction to additional paid-in capital. We did not make any stock price guarantee payments during the three months ended September 30, 2011. Our remaining common stock price guarantee provisions have stock floor prices that range from $28.47 to $69.48 per share and have determination dates that range from 2012 to 2013.

10. Goodwill and Other Intangible Assets

The changes in the carrying amounts of goodwill by business segment for the nine months ended September 30, 2011, are as follows:

 

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

Balances at January 1, 2011

   $ 434,439      $ 197,234      $ 202,689      $ 117,960       $ 317,125       $ 1,269,447   

Goodwill acquired during the period

     2,154        976        11,884        —           —           15,014   

Contingent consideration(1)

     —          32        —          —           11,687         11,719   

Foreign currency translation adjustment and other

     (563     (60     (267     18         371         (501
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

Balances at September 30, 2011

   $ 436,030      $ 198,182      $ 214,306      $ 117,978       $ 329,183       $ 1,295,679   
  

 

 

   

 

 

   

 

 

   

 

 

    

 

 

    

 

 

 

 

(1) 

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

 

12


FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

Other intangible assets with finite lives are amortized over their estimated useful lives. For intangible assets with finite lives, we recorded amortization expense of $5.8 million and $16.8 million for the three and nine months ended September 30, 2011, respectively, and $6.3 million and $18.2 million for the three and nine months ended September 30, 2010, respectively. Based solely on the amortizable intangible assets recorded as of September 30, 2011, we estimate amortization expense to be $5.5 million during the remainder of 2011, $21.8 million in 2012, $20.1 million in 2013, $11.6 million in 2014, $10.7 million in 2015, $9.2 million in 2016 and $40.1 million in years after 2016. 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. During the nine months ended September 30, 2011, we wrote-off $26.5 million of fully amortized intangible assets related to our customer relationships, non-competition agreements, tradenames and contract backlog with a net book value of zero.

 

     Useful Life
in Years
   September 30, 2011      December 31, 2010  
      Gross
Carrying
Amount
     Accumulated
Amortization
     Gross
Carrying
Amount
     Accumulated
Amortization
 

Amortized intangible assets

              

Customer relationships

   1 to 15    $ 147,791       $ 48,595       $ 149,278       $ 46,146   

Non-competition agreements

   1 to 10      15,422         9,218         19,796         11,722   

Software

   5 to 6      33,300         19,677         37,700         19,536   

Tradenames

   1 to 5      —           —           9,610         9,610   

Contract backlog

   1      —           —           333         333   
     

 

 

    

 

 

    

 

 

    

 

 

 
        196,513         77,490         216,717         87,347   

Unamortized intangible assets

              

Tradenames

   Indefinite      5,600         —           5,600         —     
     

 

 

    

 

 

    

 

 

    

 

 

 
      $ 202,113       $ 77,490       $ 222,317       $ 87,347   
     

 

 

    

 

 

    

 

 

    

 

 

 

11. Long-Term Debt and Capital Lease Obligations

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

 

     September 30,
2011
     December 31,
2010
 

7 3/4% senior notes due 2016(a)

   $ 222,464       $ 215,000   

6 3/4% senior notes due 2020

     400,000         400,000   

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

     145,491         141,515   

Notes payable to former shareholders of acquired businesses

     29,458         36,307   
  

 

 

    

 

 

 

Total debt

     797,413         792,822   

Less current portion

     151,949         7,307   
  

 

 

    

 

 

 

Long-term debt, net of current portion

     645,464         785,515   
  

 

 

    

 

 

 

Total capital lease obligations

     122         300   

Less current portion

     98         252   
  

 

 

    

 

 

 

Capital lease obligations, net of current portion

     24         48   
  

 

 

    

 

 

 

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

   $ 645,488       $ 785,563   
  

 

 

    

 

 

 

 

13


FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

 

(a)

Balance includes a fair value hedge adjustment of $7.5 million relating to interest rate swaps entered into on March 9, 2011.

 

(b)

Balance includes $149.9 million principal amount of Convertible Notes net of discount of $4.5 million at September 30, 2011 and $8.4 million at December 31, 2010.

Convertible Notes

Our Convertible Notes are convertible at the option of the holder during any conversion period if the per share closing price of our common stock exceeds the conversion threshold price of $37.50 for at least 20 trading days in the 30 consecutive trading day period ending on the first day of such conversion period. A conversion period is the period from and including the eleventh trading day in a fiscal quarter up to but not including the eleventh trading day of the following fiscal quarter.

When the Convertible Notes are convertible at the option of the holder, they are classified as current on our Consolidated Balance Sheet. When the Convertible Notes are not convertible at the option of the holder, and the scheduled maturity is not within one year after the balance sheet date, they are classified as long-term. As of September 30, 2011, the Convertible Notes are classified as short-term given that the scheduled maturity is within one year of the balance sheet date.

6 3/4% Senior Notes Due 2020

On September 27, 2010, we issued $400.0 million in aggregate principal amount of 6 3/4% Senior Notes in a private offering (the “Offering”) that was exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”). The 6  3/4% Senior Notes were sold to “qualified institutional buyers” as defined in Rule 144A under the Securities Act and non-U.S. persons outside the United States under Regulation S under the Securities Act. The net proceeds from the Offering were $390.4 million after deducting debt issuance costs. On March 25, 2011, the Company filed a Registration Statement on Form S-4 with the SEC to register the exchange offer of the 6 3/4% Senior Notes for publicly registered 6 3/4% Senior Notes with identical terms, which was declared effective on May 24, 2011. The Company completed the exchange offer of all outstanding 6 3/4% Senior Notes on June 24, 2011.

12. 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 settlement or judgment would materially affect our financial position or results of operations.

13. Share-Based Compensation

Share-based Awards and Share-based Compensation Expense

Our officers, employees, non-employee directors and certain individual service providers are eligible to participate in the Company’s equity compensation plans, subject to the discretion of the administrator of the plans. During the nine months ended September 30, 2011, aggregate share-based awards granted included stock

 

14


FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

options exercisable for up to 802,147 shares of common stock upon vesting, restricted stock awards of up to 451,611 shares of common stock upon vesting, restricted stock units equivalent to up to 378,209 shares of common stock upon vesting and 63,000 stock appreciation rights. The stock appreciation rights will be settled with cash upon vesting and exercise.

Total share-based compensation expense for the three and nine months ended September 30, 2011 and 2010 is detailed in the following table:

 

Income Statement Classification

   Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
   2011      2010      2011      2010  

Direct cost of revenues

   $ 4,111       $ 5,264       $ 19,932       $ 15,746   

Selling, general and administrative expense

     3,029         2,668         8,667         7,940   

Special charges(a)

     —           —           833         1,932   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total share-based compensation expense

   $ 7,140       $ 7,932       $ 29,432       $ 25,618   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) 

Expense relates to accelerated recognition of compensation cost of share-based awards.

14. Stockholders’ Equity

Common Stock Repurchase Program

In November 2009, our Board of Directors authorized a two-year stock repurchase program of up to $500.0 million (the “Repurchase Program”) and terminated the $50.0 million stock repurchase program authorized in February 2009. Also in November 2009, we entered into a collared accelerated stock buyback master confirmation agreement (the “Master Agreement”) with Goldman, Sachs & Co. (“Goldman Sachs”). Through December 31, 2010, we repurchased and retired 6,633,680 shares of our common stock with a value equivalent to approximately $290.6 million at the time of repurchase under the Repurchase Program, including a $250.0 million accelerated stock buyback transaction pursuant to a supplemental confirmation under the Master Agreement. As of December 31, 2010, a balance of $209.4 million remained available under the Repurchase Program to fund stock repurchases by the Company.

On March 2, 2011, we entered into a supplemental confirmation with Goldman Sachs for a $209.4 million accelerated stock buyback transaction (the “2011 ASB”), pursuant to the Master Agreement. On March 7, 2011, we paid $209.4 million to Goldman Sachs using available cash on hand and received 4,433,671 shares of FTI Consulting common stock, representing a majority of the total number of shares expected to be delivered pursuant to the 2011 ASB. On May 17, 2011, the Company received additional shares bringing the total number of shares of our common stock delivered pursuant to the 2011 ASB to 5,061,558 shares. As permitted by the Master Agreement and the 2011 ASB, on September 2, 2011, Goldman Sachs accelerated the termination date of the 2011 ASB which was to occur no later than December 2, 2011. On September 8, 2011, the Company received an additional 671,647 shares of FTI Consulting common stock, bringing the total number of shares of our common stock delivered pursuant to the 2011 ASB to 5,733,205. The repurchase of shares was accounted for as a share retirement resulting in a reduction of common stock issued and outstanding of 5,733,205 shares and a corresponding reduction in common stock and additional paid-in capital of $209.4 million. The completion of the 2011 ASB completed the Repurchase Program.

 

15


FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

15. 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 matters, such as restructuring (including bankruptcy), financings, claims management, mergers and acquisitions, post-acquisition integration, valuations, tax issues and performance improvement.

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

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

Our Strategic Communications segment provides advice and consulting services relating to financial communications, brand communications, public affairs and reputation management and business consulting.

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, accretion of contingent consideration and special charges. Adjusted Segment EBITDA for 2010 has been presented in a consistent manner. 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.

 

16


FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

The table below presents revenues and Adjusted Segment EBITDA for our reportable segments for the three and nine months ended September 30, 2011 and 2010:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2011      2010      2011      2010  

Revenues

           

Corporate Finance/Restructuring

   $ 110,311       $ 109,736       $ 319,461       $ 338,298   

Forensic and Litigation Consulting

     99,064         84,023         275,345         243,455   

Economic Consulting

     95,662         59,417         264,401         191,276   

Technology

     56,972         42,721         165,137         128,885   

Strategic Communications

     51,793         50,243         151,711         143,299   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total revenues

   $ 413,802       $ 346,140       $ 1,176,055       $ 1,045,213   
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted Segment EBITDA

           

Corporate Finance/Restructuring

   $ 28,350       $ 24,739       $ 61,443       $ 82,031   

Forensic and Litigation Consulting

     19,202         19,528         53,285         57,663   

Economic Consulting

     18,650         11,853         50,635         36,682   

Technology

     19,619         13,754         58,362         46,643   

Strategic Communications

     7,429         7,210         19,267         21,563   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Adjusted Segment EBITDA

   $ 93,250       $ 77,084       $ 242,992       $ 244,582   
  

 

 

    

 

 

    

 

 

    

 

 

 

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

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2011     2010     2011     2010  

Total Adjusted Segment EBITDA

   $ 93,250      $ 77,084      $ 242,992      $ 244,582   

Segment depreciation expense

     (6,115     (7,476     (17,729     (20,114

Amortization of other intangible assets

     (5,843     (6,286     (16,795     (18,229

Special charges

     —          —          (15,212     (29,356

Accretion of contingent consideration

     (944     (179     (2,539     (179

Unallocated corporate expenses, excluding special charges

     (20,926     (16,235     (53,474     (49,912

Interest income and other

     486        2,527        5,409        4,740   

Interest expense

     (14,319     (11,904     (44,129     (34,600

Loss on early extinguishment of debt

     —          (5,161     —          (5,161
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax provision

   $ 45,589      $ 32,370      $ 98,523      $ 91,771   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

Substantially all of our domestic subsidiaries are guarantors of borrowings under our senior bank credit facility, 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.

 

17


FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

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

Condensed Consolidating Balance Sheet Information as of September 30, 2011

 

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

Assets

             

Cash and cash equivalents

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

Restricted cash

     8,632         —           1,599         —          10,231   

Accounts receivable, net

     172,452         176,418         120,166         —          469,036   

Intercompany receivables

     133,156         509,991         66,338         (709,485     —     

Other current assets

     26,413         14,782         28,811         —          70,006   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     398,583         701,601         286,804         (709,485     677,503   

Property and equipment, net

     45,070         13,041         16,916         —          75,027   

Goodwill

     547,784         423,557         324,338         —          1,295,679   

Other intangible assets, net

     40,279         37,270         47,074         —          124,623   

Investments in subsidiaries

     1,492,271         524,135         —           (2,016,406     —     

Other assets

     68,283         63,968         21,436         —          153,687   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 2,592,270       $ 1,763,572       $ 696,568       $ (2,725,891   $ 2,326,519   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Liabilities

             

Intercompany payables

   $ 529,628       $ 97,857       $ 82,000       $ (709,485   $ —     

Other current liabilities

     275,148         106,377         64,561         —          446,086   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     804,776         204,234         146,561         (709,485     446,086   

Long-term debt, net

     622,488         23,000         —           —          645,488   

Other liabilities

     113,237         44,107         25,832         —          183,176   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     1,540,501         271,341         172,393         (709,485     1,274,750   

Stockholders’ equity

     1,051,769         1,492,231         524,175         (2,016,406     1,051,769   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 2,592,270       $ 1,763,572       $ 696,568       $ (2,725,891   $ 2,326,519   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

18


FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

Condensed Consolidating Balance Sheet Information as of December 31, 2010

 

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

Assets

             

Cash and cash equivalents

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

Restricted cash

     8,633         —           1,885         —          10,518   

Accounts receivable, net

     109,663         140,328         76,086         —          326,077   

Intercompany receivables

     51,702         495,306         96,160         (643,168     —     

Other current assets

     28,374         15,533         25,910         —          69,817   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     491,110         652,597         290,443         (643,168     790,982   

Property and equipment, net

     47,091         13,893         12,254         —          73,238   

Goodwill

     426,866         541,395         301,186         —          1,269,447   

Other intangible assets, net

     5,906         79,984         49,080         —          134,970   

Investments in subsidiaries

     1,618,032         512,070         —           (2,130,102     —     

Other assets

     57,998         58,560         20,293         —          136,851   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 2,647,003       $ 1,858,499       $ 673,256       $ (2,773,270   $ 2,405,488   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Liabilities

             

Intercompany payables

   $ 488,860       $ 70,622       $ 83,686       $ (643,168   $ —     

Other current liabilities

     132,765         103,983         49,554         —          286,302   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current liabilities

     621,625         174,605         133,240         (643,168     286,302   

Long-term debt, net

     756,515         29,048         —           —          785,563   

Other liabilities

     101,257         39,813         24,947         —          166,017   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     1,479,397         243,466         158,187         (643,168     1,237,882   

Stockholders’ equity

     1,167,606         1,615,033         515,069         (2,130,102     1,167,606   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 2,647,003       $ 1,858,499       $ 673,256       $ (2,773,270   $ 2,405,488   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

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

 

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

Revenues

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

Operating expenses

           

Direct cost of revenues

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

Selling, general and administrative expense

     43,053        31,347        27,243         (3,081     98,562   

Amortization of other intangible assets

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

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Operating income

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

Other (expense) income

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

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Income (loss) before income tax provision

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

Income tax provision

     209        15,082        859         —          16,150   

Equity in net earnings of subsidiaries

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

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Net income

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

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

 

19


FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

Condensed Consolidating Statement of Income for the Three Months Ended September 30, 2010

 

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

Revenues

   $ 126,096      $ 284,454       $ 78,860      $ (143,270   $ 346,140   

Operating expenses

           

Direct cost of revenues

     74,811        221,606         51,209        (140,795     206,831   

Selling, general and administrative expense

     36,458        34,287         17,845        (2,475     86,115   

Amortization of other intangible assets

     698        3,912         1,676        —          6,286   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Operating income

     14,129        24,649         8,130        —          46,908   

Other (expense) income

     (15,134     3,627         (3,031     —          (14,538
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) before income tax provision

     (1,005     28,276         5,099        —          32,370   

Income tax provision (benefit)

     (4,067     12,949         3,324        —          12,206   

Equity in net earnings of subsidiaries

     17,102        1,497         2,168        (20,767     —     
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income

   $ 20,164      $ 16,824       $ 3,943      $ (20,767   $ 20,164   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

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

 

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

Revenues

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

Operating expenses

          

Direct cost of revenues

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

Selling, general and administrative expense

     119,639        96,038        75,261        (8,036     282,902   

Special charges

     8,561        228        6,423        —          15,212   

Amortization of other intangible assets

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

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

Other (expense) income

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax provision

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

Income tax (benefit) provision

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

Equity in net earnings of subsidiaries

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

20


FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

Condensed Consolidating Statement of Income for the Nine Months Ended September 30, 2010

 

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

Revenues

   $ 388,355      $ 887,300       $ 225,294      $ (455,736   $ 1,045,213   

Operating expenses

           

Direct cost of revenues

     233,467        688,992         144,085        (448,904     617,640   

Selling, general and administrative expense

     110,917        99,656         49,455        (6,832     253,196   

Special charges

     17,669        10,842         845        —          29,356   

Amortization of other intangible assets

     2,118        11,933         4,178        —          18,229   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Operating income

     24,184        75,877         26,731        —          126,792   

Other (expense) income

     (35,584     8,369         (7,806     —          (35,021
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Income (loss) before income tax provision

     (11,400     84,246         18,925        —          91,771   

Income tax provision

     (4,788     36,119         3,311        —          34,642   

Equity in net earnings of subsidiaries

     63,741        14,463         6,441        (84,645     —     
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Net income

   $ 57,129      $ 62,590       $ 22,055      $ (84,645   $ 57,129   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

 

Condensed Consolidating Statement of Cash Flows for the Nine Months Ended September 30, 2011

 

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

Operating activities

        

Net cash (used in) provided by operating activities

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

Investing activities

        

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

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

Purchases of property and equipment

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

Other

     (127     —          —          (127
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

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

 

 

   

 

 

   

 

 

   

 

 

 

Financing activities

        

Borrowings under revolving line of credit

     25,000        —          —          25,000   

Payments under revolving line of credit

     (25,000     —          —          (25,000

Payments of long-term debt and capital lease obligations

     (6,806     (161     —          (6,967

Net issuance of common stock and other

     796        —          —          796   

Purchase and retirement of common stock

     (209,400     —          —          (209,400

Excess tax benefits from share-based compensation

     198        —          —          198   

Intercompany transfers

     40,555        (67,857     27,302        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by financing activities

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

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     —          —          (747     (747
  

 

 

   

 

 

   

 

 

   

 

 

 

Net decrease in cash and cash equivalents

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

Cash and cash equivalents, beginning of period

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

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

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

 

 

   

 

 

   

 

 

   

 

 

 

 

21


FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

Condensed Consolidating Statement of Cash Flows for the Nine Months Ended September 30, 2010

 

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

Operating activities

        

Net cash provided by (used in) operating activities

   $ 21,428      $ 80,032      $ (5,594   $ 95,866   

Investing activities

        

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

     (60,273     —          —          (60,273

Purchases of property and equipment and other

     (5,907     (6,338     (3,055     (15,300

Proceeds from sale or maturity of short-term investments

     15,000        —          —          15,000   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

     (51,180     (6,338     (3,055     (60,573
  

 

 

   

 

 

   

 

 

   

 

 

 

Financing activities

        

Borrowings under revolving line of credit

     20,000        —          —          20,000   

Payments of revolving linet of credit

     (20,000     —          —          (20,000

Payments of long-term debt and capital lease obligations

     (190,024     (428     —          (190,452

Issuance of debt securities, net

     391,647        —          —          391,647   

Payments of debt financing fees

     (2,843     —          —          (2,843

Purchase and retirement of common stock

     (26,138     —          —          (26,138

Net issuance of common stock and other

     5,046        —          —          5,046   

Excess tax benefits from share-based compensation

     761        —          —          761   

Intercompany transfers

     48,625        (72,148     23,523        —     
  

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     227,074        (72,576     23,523        178,021   
  

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash

     —          —          (1,004     (1,004
  

 

 

   

 

 

   

 

 

   

 

 

 

Net increase in cash and cash equivalents

     197,322        1,118        13,870        212,310   

Cash and cash equivalents, beginning of period

     60,720        665        57,487        118,872   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 258,042      $ 1,783      $ 71,357      $ 331,182   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

22


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

The following is a discussion and analysis of our consolidated financial condition and results of operations for the three and nine month periods ended September 30, 2011 and 2010 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, 2010. Historical results and any discussion of prospective results may not indicate our future performance. See “Forward Looking Statements.”

Revision to Previously Reported Financial Information

During the third quarter of 2011, we conducted a re-examination of our accounting related to our Senior Managing Director Incentive Compensation Program and related agreements. The re-examination arose as part of a review of the treatment of unamortized compensation expense under the ICP in respect of two employees who retired during the quarter. As a result of this review, we revised our accounting to reflect an acceleration of expense related to certain forgivable loans and/or share-based awards and corrected the resulting immaterial error in our previously reported results for the six-months ended June 30, 2011 and for the annual reporting periods 2006 through 2010. As previously disclosed in the Current Report on Form 8-K that we filed with the Securities Exchange Commission on November 2, 2011, we are revising our previously reported financial information in the third quarter 2011 filing to reflect the impact of the correction of the immaterial error. We intend to revise our previously reported consolidated financial statements for certain comparative quarterly and annual periods through subsequent periodic filings.

The following table presents the impact of the correction of the immaterial error on earnings per share, Adjusted Earnings Per Diluted Share, Adjusted EBITDA and Adjusted Segment EBITDA for the three and nine months ended September 30, 2010:

 

    Three Months Ended September 30, 2010     Nine Months Ended September 30, 2010  
    As Reported     Revision     As Revised     As Reported     Revision     As Revised  

Earnings per common share—basic

  $ 0.48      $ (0.04   $ 0.44      $ 1.34      $ (0.09   $ 1.25   

Earnings per common share—diluted

  $ 0.47      $ (0.04   $ 0.43      $ 1.28      $ (0.09   $ 1.19   

Adjusted earnings per common share—diluted

  $ 0.54      $ (0.04   $ 0.50      $ 1.73      $ (0.10   $ 1.63   

Adjusted EBITDA

  $ 65,026      $ (2,876   $ 62,150      $ 206,366      $ (7,672   $ 198,694   

Adjusted Segment EBITDA

           

Corporate Finance/Restructuring

  $ 26,708      $ (1,969   $ 24,739      $ 87,404      $ (5,373   $ 82,031   

Forensic and Litigation Consulting

    20,189        (661     19,528        59,319        (1,656     57,663   

Economic Consulting

    11,932        (79     11,853        36,905        (223     36,682   

Technology

    13,908        (154     13,754        47,026        (383     46,643   

Strategic Communications

    7,223        (13     7,210        21,600        (37     21,563   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Adjusted Segment EBITDA

  $ 79,960      $ (2,876   $ 77,084      $ 252,254      $ (7,672   $ 244,582   

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 and legislation and litigation. We assist clients in addressing a broad range of business challenges, such as restructuring (including bankruptcy), financings and credit issues and indebtedness, interim business management, forensic accounting and litigation services, mergers and acquisitions (“M&A”), antitrust and

 

23


competition matters, electronic discovery (“e-discovery”), management and retrieval of electronically stored information, 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 matters, such as restructuring (including bankruptcy), financings, claims management, M&A, post-acquisition integration, valuations, tax issues and performance improvement.

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

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

Our Strategic Communications segment provides advice and consulting services relating to financial communications, brand communications, public affairs and reputation management and business consulting.

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

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

 

24


   

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; and

 

   

licensing of our software products and other technology services.

We define Adjusted EBITDA as consolidated operating income before depreciation, amortization of intangible assets, accretion of contingent consideration and special charges. We define Adjusted Segment EBITDA as a segment’s share of consolidated operating income before depreciation, amortization of intangible assets, accretion of contingent consideration and special charges. Adjusted EBITDA and Adjusted Segment EBITDA are not defined in the same manner by all companies and may not be comparable to other similarly titled measures of other companies unless the definition is the same. We define Adjusted Net Income and Adjusted Earnings Per Diluted Share as net income and earnings per diluted share, respectively, excluding the impact of the special charges and loss on early extinguishment of debt that were incurred in that period, and their related income tax effects. These non-GAAP measures should be considered in addition to, but not as a substitute for or superior to, the information contained in our statements of income. We believe that each of these measures can be a useful operating performance measure for evaluating our results of operations as compared from period-to-period and as compared to our competitors.

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

EXECUTIVE HIGHLIGHTS

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2011      2010      2011      2010  
     (dollars in thousands, except per share amounts)  

Revenues

   $ 413,802       $ 346,140       $ 1,176,055       $ 1,045,213   

Earnings per common share—diluted

   $ 0.70       $ 0.43       $ 1.47       $ 1.19   

Adjusted earnings per common share—diluted

   $ 0.70       $ 0.50       $ 1.68       $ 1.63   

Operating income

   $ 59,422       $ 46,908       $ 137,243       $ 126,792   

Adjusted EBITDA

   $ 73,628       $ 62,150       $ 193,296       $ 198,694   

Cash provided by operating activities

   $ 59,672       $ 73,911       $ 46,848       $ 95,866   

Total number of employees at September 30,

     3,824         3,514         3,824         3,514   

Third Quarter 2011 Executive Highlights

Revenues

Revenues for the quarter ended September 30, 2011 increased by 19.5%, or $67.7 million, to $413.8 million, compared to $346.1 million in the same prior year period, with approximately 10.1% of the increase due to organic growth and 8.4% due to acquisition growth. The remainder of approximately 1.1% is due to favorable currency translation related primarily to our UK based operations.

Our third quarter revenue results reflected growth in our Economic Consulting, Technology and FLC segments which included the impact from our acquisitions of several practices from LECG Corporation (“LECG”) at the end of March 2011. Our Corporate Finance/Restructuring segment saw growth in the communication, media and entertainment and healthcare practices, although the segment continues to be affected by a decline in restructuring activity compared to the prior year.

 

25


Adjusted EBITDA

Adjusted EBITDA, as previously defined, increased 18.5%, or $11.5 million, to $73.6 million, or 17.8% of revenues, compared to $62.2 million, or 18.0% of revenues, in the same prior year period. Adjusted EBITDA margins were impacted by strong revenue performance offset by the impact of integrating the acquired practices, investment in other senior professionals and the investment in our regional infrastructure. Adjusted EBITDA for the quarter ended September 30, 2010 included a charge of $1.4 million related to the Company’s decision to expense certain previously capitalized development efforts and prepaid software licensing costs for an offering that was replaced with alternative technologies.

Earnings per common share and adjusted earnings per common share - diluted

Earnings per diluted share for the three months ended September 30, 2011 were $0.70 compared to $0.43 in the same prior year period, which included a $5.2 million loss on early extinguishment of debt. Adjusted Earnings Per Diluted Share, as previously defined, for the three months ended September 30, 2011 were $0.70, compared to $0.50 in the same prior year period due to the improvement in the operating results described above and the impact of a reduction of 5.7 million shares outstanding as a result of our completion of a share repurchase program.

Cash provided by operating activities

Cash provided by operating activities for the three months ended September 30, 2011 was $59.7 million as compared to $73.9 million for the three months ended September 30, 2010. The decline was primarily a result of a shift in the relative mix of receivables towards clients and geographic regions that traditionally have longer billing and collection cycles. Overall, cash collections for the quarter were strong at approximately $383 million.

Headcount

Headcount of 3,824 at September 30, 2011 increased by 310, or 8.8%, compared to the same period a year ago primarily related to the approximate 200 professionals who joined the Company from LECG in the first quarter of 2011. Additionally, headcount increased most notably in our Economic Consulting and FLC segments, through hiring to support the growth of these segments. Headcount in the Corporate Finance/Restructuring segment decreased primarily due to the staff reductions made in 2011 to balance current demands with resource requirements.

Other strategic activities

On March 3, 2011, we announced that we had entered into a $209.4 million accelerated stock buyback transaction with Goldman, Sachs. On September 2, 2011, Goldman Sachs accelerated the termination date of the 2011 accelerated stock buyback transaction (“2011 ASB”) which was to occur no later than December 2, 2011. On September 8, 2011, we received an additional 671,647 shares bringing the total shares delivered pursuant to the 2011 ASB to 5,733,205 shares of FTI Consulting common stock for an average price per share of $36.52.

 

26


CONSOLIDATED RESULTS OF OPERATIONS

Segment and Consolidated Operating Results:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2011     2010     2011     2010  
     (in thousands, except per share amounts)  

Revenues

        

Corporate Finance/Restructuring

   $ 110,311      $ 109,736      $ 319,461      $ 338,298   

Forensic and Litigation Consulting

     99,064        84,023        275,345        243,455   

Economic Consulting

     95,662        59,417        264,401        191,276   

Technology

     56,972        42,721        165,137        128,885   

Strategic Communications

     51,793        50,243        151,711        143,299   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

   $ 413,802      $ 346,140      $ 1,176,055      $ 1,045,213   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

        

Corporate Finance/Restructuring

   $ 25,141      $ 21,798      $ 42,770      $ 68,135   

Forensic and Litigation Consulting

     17,581        17,751        47,746        46,898   

Economic Consulting

     17,469        10,998        45,565        27,079   

Technology

     14,662        7,480        44,026        25,544   

Strategic Communications

     5,495        5,116        13,449        13,989   
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment operating income

     80,348        63,143        193,556        181,645   

Unallocated corporate expenses

     (20,926     (16,235     (56,313     (54,853
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating income

     59,422        46,908        137,243        126,792   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense)

        

Interest income and other

     486        2,527        5,409        4,740   

Interest expense

     (14,319     (11,904     (44,129     (34,600

Loss on early extinguishment of debt

     —          (5,161     —          (5,161
  

 

 

   

 

 

   

 

 

   

 

 

 
     (13,833     (14,538     (38,720     (35,021
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax provision

     45,589        32,370        98,523        91,771   

Income tax provision

     16,150        12,206        34,501        34,642   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 29,439      $ 20,164      $ 64,022      $ 57,129   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share—basic

   $ 0.73      $ 0.44      $ 1.54      $ 1.25   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings per common share—diluted

   $ 0.70      $ 0.43      $ 1.47      $ 1.19   
  

 

 

   

 

 

   

 

 

   

 

 

 

Reconciliation of Total Operating Income to Adjusted EBITDA:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2011      2010      2011      2010  
     (in thousands)  

Total operating income

   $ 59,422       $ 46,908       $ 137,243       $ 126,792   

Add back:

           

Depreciation and amortization

     7,419         8,777         21,507         24,138   

Amortization of other intangible assets

     5,843         6,286         16,795         18,229   

Accretion of contingent consideration

     944         179         2,539         179   

Special charges

     —           —           15,212         29,356   
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted EBITDA

   $ 73,628       $ 62,150       $ 193,296       $ 198,694   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

27


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

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2011      2010      2011      2010  

Net income

   $ 29,439       $ 20,164       $ 64,022       $ 57,129   

Add back: Special charges, net of tax

     —           —           9,285         17,549   

Add back: Loss on early extinguishment of debt, net of tax

     —           3,200         —           3,200   
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted Net Income

   $ 29,439       $ 23,364       $ 73,307       $ 77,878   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings per common share—diluted

   $ 0.70       $ 0.43       $ 1.47       $ 1.19   
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted earnings per common share—diluted

   $ 0.70       $ 0.50       $ 1.68       $ 1.63   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of common shares outstanding—diluted

     42,267         46,981         43,671         47,890   
  

 

 

    

 

 

    

 

 

    

 

 

 

Three Months Ended September 30, 2011 Compared to Three Months Ended September 30, 2010

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 28.9%, to $20.9 million for the three months ended September 30, 2011, from $16.2 million for the three months ended September 30, 2010. The increase was primarily due to $2.4 million of higher performance-based compensation costs and $2.4 million of investment in regional infrastructure.

Interest income and other

Interest income and other, which includes foreign currency transaction gains and losses, decreased by $2.0 million to $0.5 million for the three months ended September 30, 2011 from $2.5 million for the three months ended September 30, 2010. The decrease is primarily due to a $2.9 million unfavorable impact from net foreign currency transaction gains and losses resulting from the remeasurement of receivables and payables required to be settled in a currency other than an entity’s functional currency, partially offset by equity in earnings of affiliates.

Interest expense

Interest expense increased $2.4 million to $14.3 million for the three months ended September 30, 2011 from $11.9 million for the three months ended September 30, 2010. The increase is due to additional senior debt from the issuance of $400.0 million aggregate principal amount of 6 3/4% senior notes due 2020 in the third quarter of 2010 and the loan notes issued as a portion of the consideration in connection with the business in Asia, which we acquired in August 2010. This increase was partially offset by a $1.2 million favorable impact of lower interest rates on interest rate swap agreements entered into in March 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 35.4% for the three months ended September 30, 2011 as compared to 37.7% for the three months ended September 30, 2010. For

 

28


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

Nine Months Ended September 30, 2011 Compared to Nine Months Ended September 30, 2010

Revenues and operating income

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

Unallocated corporate expenses

Unallocated corporate expenses increased $1.5 million, or 2.7%, to $56.3 million for the nine months ended September 30, 2011, from $55.0 million for the nine months ended September 30, 2010. Excluding the impact of special charges of $2.8 million recorded in the nine months ended September 30, 2011 and $4.9 million recorded in the nine months ended September 30, 2010, unallocated corporate expenses increased $3.6 million, or 7.1%, from the prior year. The increase was primarily due to $4.4 million of higher performance-based compensation costs, $4.1 million of regional infrastructure investment and $1.2 million related to global brand integration. These increases were partially offset by a $2.4 million increase in allocation of certain system development and support costs and a $2.3 million reclassification of certain personnel to operating segments.

Interest income and other

Interest income and other, which includes foreign currency transaction gains and losses, increased by $0.7 million to $5.4 million for the nine months ended September 30, 2011 from $4.7 million for the nine months ended September 30, 2010. This increase is primarily due to increased interest income and equity in earnings of affiliates in the current year partially offset by a $1.0 million unfavorable impact from net foreign currency transaction gains and losses resulting from the remeasurement of receivables and payables required to be settled in a currency other than an entity’s functional currency.

Interest expense

Interest expense increased $9.5 million to $44.1 million for the nine months ended September 30, 2011 from $34.6 million for the nine months ended September 30, 2010. The increase is due to additional senior debt from the issuance of $400.0 million aggregate principal amount of 6 3/4% senior notes due 2020 in the third quarter of 2010 and the loan notes issued as a portion of the consideration in connection with the business in Asia, which we acquired in August 2010. This increase was partially offset by a $2.6 million favorable impact of lower interest rates on interest rate swap agreements entered into in March 2011.

Special charges

During the nine months ended September 30, 2011, we recorded special charges of $15.2 million, of which $4.8 million was non-cash. The charges reflect actions we took to reduce senior management related overhead in connection with our realignment of our segment management on a global basis and to align our workforce with expected market trends. These actions included a reduction in workforce totaling 37 employees. The special charges consisted of:

 

   

$10.4 million of salary continuance and other contractual employee related costs associated with the reduction in workforce;

 

   

$2.0 million related to loan forgiveness and accelerated recognition of compensation cost of share-based awards related to the reduction in workforce; and

 

   

$2.8 million of deferred costs under a service contract without a substantive future economic benefit to the Company.

 

29


The following table details the special charges by segment and the decreases in headcount that resulted from the reduction in workforce during the nine months ended September 30, 2011:

 

      Special
Charges
     Total
Headcount
 

(dollars in thousands)

             

Corporate Finance/Restructuring

   $ 9,440         22   

Forensic and Litigation Consulting

     839         7   

Economic Consulting

     2,093         6   
  

 

 

    

 

 

 
     12,372         35   

Unallocated Corporate

     2,840         2   
  

 

 

    

 

 

 

Total

   $ 15,212         37   
  

 

 

    

 

 

 

During the nine months ended September 30, 2010, we recorded special charges totaling $29.4 million, primarily related to a realignment of our workforce and a consolidation of four office locations, of which $8.0 million was non-cash. The charges reflected actions we took to better align capacity with expected demand, to eliminate certain redundancies resulting from acquisitions and to provide for appropriate levels of administrative support. The special charges consisted of:

 

   

$18.5 million of salary continuance and other contractual employee related costs associated with the reduction in workforce of 144 employees, including reserves against employee advances, costs related to loan forgiveness and accelerated recognition of compensation cost of share-based awards;

 

   

$7.8 million of expense associated with lease terminations related to the consolidation of four office locations; and

 

   

$3.1 million of accelerated amortization related to a software solution which will no longer be utilized by the Company.

The following table details the special charges by segment and the decreases in headcount that resulted from the reduction in workforce during the nine months ended September 30, 2010:

 

     Special
Charges
     Total
Headcount
 

(dollars in thousands)

             

Corporate Finance/Restructuring

   $ 6,059         71   

Forensic and Litigation Consulting

     5,355         20   

Economic Consulting

     6,814         19   

Technology

     4,927         16   

Strategic Communications

     1,260         1   
  

 

 

    

 

 

 
     24,415         127   

Unallocated Corporate

     4,941         17   
  

 

 

    

 

 

 

Total

   $ 29,356         144   
  

 

 

    

 

 

 

Income tax provision

Our provision for income taxes in interim periods is computed by applying our estimated annual effective tax rate against income before income tax expense for the period. In addition, non-recurring or discrete items are recorded during the period in which they occur or become known. The effective tax rate was 35.0% for the nine months ended September 30, 2011 as compared to 37.7% for the nine months ended September 30, 2010. For the nine months ended September 30, 2011, the effective tax rate was favorably impacted by lower taxes on foreign earnings and tax benefits recognized for discrete items primarily related to the reversal of previously recognized deferred tax liabilities which are no longer required. In addition, our effective average U.S. state income tax rate was lower due to the mix of earnings by jurisdiction.

 

30


SEGMENT RESULTS

Adjusted Segment EBITDA

The following table reconciles segment operating income to Adjusted Segment EBITDA for the three and nine months ended September 30, 2011 and 2010.

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2011      2010      2011      2010  
     (in thousands)  

Segment operating income

   $ 80,348       $ 63,143       $ 193,556       $ 181,645   

Add back:

           

Depreciation and amortization

     6,115         7,476         17,729         20,114   

Amortization of other intangible assets

     5,843         6,286         16,795         18,229   

Accretion of contingent consideration

     944         179         2,539         179   

Special charges

     —           —           12,373         24,415   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Adjusted Segment EBITDA

   $ 93,250       $ 77,084       $ 242,992       $ 244,582   
  

 

 

    

 

 

    

 

 

    

 

 

 

Other Segment Operating Data

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
         2011             2010             2011             2010      

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

        

Corporate Finance/Restructuring

     711        740        711        740   

Forensic and Litigation Consulting

     872        799        872        799   

Economic Consulting

     424        292        424        292   

Technology

     284        248        284        248   

Strategic Communications

     590        579        590        579   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenue-generating professionals

     2,881        2,658        2,881        2,658   
  

 

 

   

 

 

   

 

 

   

 

 

 

Utilization rates of billable professionals:(1)

        

Corporate Finance/Restructuring

     75     71     70     70

Forensic and Litigation Consulting

     69     69     69     72

Economic Consulting

     85     70     86     78

Average billable rate per hour:(2)

        

Corporate Finance/Restructuring

   $ 406      $ 421      $ 422      $ 440   

Forensic and Litigation Consulting

     331        338        331        327   

Economic Consulting

     487        481        486        472   

 

(1) 

We calculate the utilization rate for our billable professionals by dividing the number of hours that all of our billable professionals worked on client assignments during a period by the total available working hours for all of our billable professionals during the same period. Available hours are determined by the standard hours worked by each employee, adjusted for part-time hours, local country standard work weeks and local country holidays. Available working hours include vacation and professional training days, but exclude holidays. Utilization rates are presented for our segments that primarily bill clients on an hourly basis. We have not presented a utilization rate for our Technology segment and Strategic Communications segment as most of the revenues of these segments are not generated on an hourly basis.

 

(2) 

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

 

31


CORPORATE FINANCE/RESTRUCTURING

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2011     2010     2011     2010  
     (dollars in thousands, except rate per hour)  

Revenues

   $ 110,311      $ 109,736      $ 319,461      $ 338,298   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Direct cost of revenues

     65,862        68,134        206,730        207,184   

Selling, general and administrative expenses

     17,801        17,909        56,175        52,050   

Special charges

     —          —          9,441        6,059   

Amortization of other intangible assets

     1,507        1,895        4,345        4,870   
  

 

 

   

 

 

   

 

 

   

 

 

 
     85,170        87,938        276,691        270,163   
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment operating income

     25,141        21,798        42,770        68,135   

Add back:

        

Depreciation and amortization of intangible assets

     2,354        2,770        6,962        7,666   

Accretion of contingent consideration

     855        171        2,270        171   

Special charges

     —          —          9,441        6,059   
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Segment EBITDA

   $ 28,350      $ 24,739      $ 61,443      $ 82,031   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit(1)

   $ 44,449      $ 41,602      $ 112,731      $ 131,114   

Gross profit margin(2)

     40.3     37.9     35.3     38.8

Adjusted Segment EBITDA as a percent of revenues

     25.7     22.5     19.2     24.2

Number of revenue-generating professionals (at period end)

     711        740        711        740   

Utilization rates of billable professionals

     75     71     70     70

Average billable rate per hour

   $ 406      $ 421      $ 422      $ 440   

 

(1) 

Revenues less direct cost of revenues

 

(2) 

Gross profit as a percent of revenues

Three Months Ended September 30, 2011 Compared to Three Months Ended September 30, 2010

Revenues increased $0.6 million, or 0.5%, to $110.3 million for the three months ended September 30, 2011 from $109.7 million for the three months ended September 30, 2010 with 0.7% growth from the estimated positive impact of foreign currency translation, primarily due to the strengthening of the British pound, Canadian dollar and the Euro relative to the U.S. dollar. Acquisition related revenue from the Asia practice acquired in the third quarter of 2010 and the European Tax Group from LECG acquired in the first quarter of 2011 totaled $4.1 million, or 3.7%. Organic revenue declined $4.2 million, or 3.9%, due to fewer consulting hours and lower average billable rates per hour in North America bankruptcy and restructuring practices along with lower volumes in the real estate practice. These declines were partially offset by higher communications, media and entertainment, healthcare and transaction advisory services revenues.

Gross profit increased $2.8 million, or 6.8%, to $44.4 million for the three months ended September 30, 2011 from $41.6 million for the three months ended September 30, 2010. Gross profit margin increased 2.4 percentage points to 40.3% for the three months ended September 30, 2011 from 37.9% for the three months ended September 30, 2010. The increase in gross profit margin is due to better utilization as a result of headcount reductions taken in 2010 and 2011 and reduced compensation expense as a result of the completion of the amortization periods of certain forgivable loan and equity awards, partially offset by lower pricing as the mix of business shifted from large core restructuring bankruptcy matters to middle market engagements and other subpractices.

SG&A expense decreased $0.1 million, or 0.6%, to $17.8 million for the three months ended September 30, 2011 from $17.9 million for the three months ended September 30, 2010. SG&A expense was

 

32


16.1% of revenue for the three months ended September 30, 2011, down from 16.3% for the three months ended September 30, 2010. The decrease in SG&A expense was primarily due to lower outside legal services and marketing expenses partially offset by higher overhead expenses related to the acquired practices. Bad debt expense was 0.5% of revenue for the three months ended September 30, 2011, compared to no bad debt for the three months ended September 30, 2010.

Amortization of other intangible assets decreased to $1.5 million for the three months ended September 30, 2011 from $1.9 million for the three months ended September 30, 2010.

Adjusted Segment EBITDA increased $3.6 million, or 14.6%, to $28.4 million for the three months ended September 30, 2011 from $24.7 million for the three months ended September 30, 2010.

Nine Months Ended September 30, 2011 Compared to Nine Months Ended September 30, 2010

Revenues decreased $18.8 million, or 5.6%, to $319.5 million for the nine months ended September 30, 2011 from $338.3 million for the nine months ended September 30, 2010 with 0.6% growth from the estimated positive impact of foreign currency translation, primarily due to the strengthening of the British pound, Canadian dollar and the Euro relative to the U.S. dollar. Acquisition related revenue from the Asia practice acquired in the third quarter of 2010 and the European Tax Group from LECG acquired in the first quarter of 2011 totaled was $18.0 million, or 5.3%. Organic revenue declined $38.9 million, or 11.5%, due to fewer consulting hours and lower average billable rates per hour as the demand for bankruptcy and restructuring services decreased in North America and Europe along with lower volumes in the real estate practice. These declines were partially offset by higher healthcare services revenues.

Gross profit decreased $18.4 million, or 14.0%, to $112.7 million for the nine months ended September 30, 2011 from $131.1 million for the nine months ended September 30, 2010. Gross profit margin decreased 3.5 percentage points to 35.3% for the nine months ended September 30, 2011 from 38.8% for the nine months ended September 30, 2010. The gross profit margin decline was primarily due to lower revenues from the higher margin bankruptcy and restructuring practices in North America and Europe, coupled with lower gross profit in the real estate practice. These declines were partially offset by improvements in healthcare services and from the acquired Asia practice.

SG&A expense increased $4.1 million, or 7.9%, to $56.2 million for the nine months ended September 30, 2011 from $52.1 million for the nine months ended September 30, 2010. SG&A expense was 17.6% of revenue for the nine months ended September 30, 2011, up from 15.4% for the nine months ended September 30, 2010. The increase in SG&A expense was due to overhead related to the acquired practices partially offset by lower marketing expenses. Bad debt expense was 0.3% of revenue for the nine months ended September 30, 2011, compared to 0.1% of revenue for the nine months ended September 30, 2010.

Amortization of other intangible assets decreased to $4.3 million for the nine months ended September 30, 2011 from $4.9 million for the nine months ended September 30, 2010.

Adjusted Segment EBITDA decreased $20.6 million, or 25.1%, to $61.4 million for the nine months ended September 30, 2011 from $82.0 million for the nine months ended September 30, 2010.

 

33


FORENSIC AND LITIGATION CONSULTING

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
    
     2011     2010     2011     2010  
     (dollars in thousands, except rate per hour)  

Revenues

   $ 99,064      $ 84,023      $ 275,345      $ 243,455   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Direct cost of revenues

     63,249        50,284        173,738        144,338   

Selling, general and administrative expenses

     17,569        15,019        51,170        43,934   

Special charges

     —          —          839        5,355   

Amortization of other intangible assets

     665        969        1,852        2,930   
  

 

 

   

 

 

   

 

 

   

 

 

 
     81,483        66,272        227,599        196,557   
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment operating income

     17,581        17,751        47,746        46,898   

Add back:

        

Depreciation and amortization of intangible assets

     1,532        1,769        4,431        5,402   

Accretion of contingent consideration

     89        8        269        8   

Special charges

     —          —          839        5,355   
  

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Segment EBITDA

   $ 19,202      $ 19,528      $ 53,285      $ 57,663   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit(1)

   $ 35,815      $ 33,739      $ 101,607      $ 99,117   

Gross profit margin(2)

     36.2     40.2     36.9     40.7

Adjusted Segment EBITDA as a percent of revenues

     19.4     23.2     19.4     23.7

Number of revenue-generating professionals (at period end)

     872        799        872        799   

Utilization rates of billable professionals

     69     69     69     72

Average billable rate per hour

   $ 331      $ 338      $ 331      $ 327   

 

(1) 

Revenues less direct cost of revenues

 

(2) 

Gross profit as a percent of revenues

Three Months Ended September 30, 2011 Compared to Three Months Ended September 30, 2010

Revenues increased $15.0 million, or 17.9%, to $99.1 million for the three months ended September 30, 2011 from $84.0 million for the three months ended September 30, 2010 with 0.7% growth from the estimated positive impact foreign currency translation, which was primarily due to the strengthening of the British pound and Brazilian real relative to the U.S. dollar. Revenue from the practices acquired from LECG in the first quarter of 2011 was $6.8 million, or 8.1%, primarily driven by the disputes and forensic accounting and environmental solution practices in North America. The organic revenue growth of $7.7 million, or 9.1%, was due to an increase in consulting hours and higher average billable rates per hour in the data analytics practice, more consulting hours in the North America construction solutions and greater demand in the Asia Pacific region for our construction solutions, global risk, forensic accounting and litigation support services. These improvements were partially offset by a decline in the core North America practice from lower average billable rates per hour.

Gross profit increased $2.1 million, or 6.2%, to $35.8 million for the three months ended September 30, 2011 from $33.7 million for the three months ended September 30, 2010. Gross profit margin decreased 4.0 percentage points to 36.2% for the three months ended September 30, 2011 from 40.2% for the three months ended September 30, 2010. The gross profit margin decline was due to increased headcount which offset higher consulting volume.

SG&A expense increased $2.6 million, or 17.0%, to $17.6 million for the three months ended September 30, 2011 from $15.0 million for the three months ended September 30, 2010. SG&A expense was 17.7% of revenue for the three months ended September 30, 2011, down from 17.9% for the three months ended September 30,

 

34


2010. The increase in SG&A expense was due to overhead expenses related to the acquired practices, increased facilities and information technology costs to support growing operations. Bad debt expense was 0.7% of revenues for the three months ended September 30, 2011 compared to 1.0% for the three months ended September 30, 2010.

Amortization of other intangible assets decreased to $0.7 million for the three months ended September 30, 2011 from $1.0 million for the three months ended September 30, 2010. The decrease in amortization of other intangible assets was due primarily to the timing of certain acquired intangible assets becoming fully amortized in 2010.

Adjusted Segment EBITDA decreased $0.3 million, or 1.7%, to $19.2 million for the three months ended September 30, 2011 from $19.5 million for the three months ended September 30, 2010.

Nine Months Ended September 30, 2011 Compared to Nine Months Ended September 30, 2010

Revenues increased $31.9 million, or 13.1%, to $275.3 million for the nine months ended September 30, 2011 from $243.5 million for the nine months ended September 30, 2010 with 0.8% growth from the estimated positive impact foreign currency translation, which was primarily due to the strengthening of the British pound and Brazilian real relative to the U.S. dollar. Revenue from the practices acquired from LECG in the first quarter of 2011 was $12.8 million, or 5.3%, primarily driven by the disputes and forensic accounting and environmental solution practices in North America. The organic revenue growth of $17.1 million, or 7.0%, was attributed to increases in demand for construction solutions, global risk, forensic accounting and litigation support services in the Asia Pacific and Europe, Middle East and Africa regions, an increase in consulting hours and higher average billable rates per hour in the data analytics practice and more consulting hours in the North America construction solutions practice. These improvements were partially offset by a decline in the core North America practice from lower average billable rates per hour.

Gross profit increased $2.5 million, or 2.5%, to $101.6 million for the nine months ended September 30, 2011 from $99.1 million for the nine months ended September 30, 2010. Gross profit margin decreased 3.8 percentage points to 36.9% for the nine months ended September 30, 2011 from 40.7% for the nine months ended September 30, 2010. The gross profit margin decline was due to lower utilization and increased headcount from investments in key practices which offset higher consulting volume.

SG&A expense increased $7.2 million, or 16.5%, to $51.2 million for the nine months ended September 30, 2011 from $43.9 million for the nine months ended September 30, 2010. SG&A expense was 18.6% of revenue for the nine months ended September 30, 2011, up from 18.0% for the nine months ended September 30, 2010. The increase in SG&A expense was due to overhead expenses related to the acquired practices, increased facilities and information technology costs to support growing operations. Bad debt expense was 0.9% of revenues for the nine months ended September 30, 2011 compared to 1.1% for the nine months ended September 30, 2010.

Amortization of other intangible assets decreased to $1.9 million for the nine months ended September 30, 2011 from $2.9 million for the nine months ended September 30, 2010. The decrease in amortization of other intangible assets was due primarily to the timing of certain acquired intangible assets becoming fully amortized in 2010.

Adjusted Segment EBITDA decreased $4.4 million, or 7.6%, to $53.3 million for the nine months ended September 30, 2011 from $57.7 million for the nine months ended September 30, 2010.

 

35


ECONOMIC CONSULTING

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2011     2010     2011     2010  
     (dollars in thousands, except rate per hour)  

Revenues

   $ 95,662      $ 59,417      $ 264,401      $ 191,276   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Direct cost of revenues

     64,770        39,119