Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended September 30, 2013

OR

 

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

For the transition period from                     to                

Commission file number 001-14875

 

 

FTI CONSULTING, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Maryland   52-1261113

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

777 South Flagler Drive, Suite 1500 West Tower,

West Palm Beach, Florida

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

(561) 515-1900

(Registrant’s telephone number, including area code)

 

 

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

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

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

 

Large accelerated filer    x

   Accelerated filer                       ¨

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

   Smaller reporting company      ¨

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

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

 

Class

  

Outstanding at November 1, 2013

Common stock, par value $0.01 per share

   40,217,667

 

 

 


Table of Contents

FTI CONSULTING, INC. AND SUBSIDIARIES

INDEX

 

          Page  

PART I—FINANCIAL INFORMATION

  

Item 1.

   Financial Statements   
   Condensed Consolidated Balance Sheets—September 30, 2013 and December 31, 2012      3   
   Condensed Consolidated Statements of Comprehensive Income (Loss)—Three and
Nine Months Ended September 30, 2013 and 2012
     4   
   Condensed Consolidated Statement of Stockholders’ Equity—Nine Months Ended
September 30, 2013
     5   
   Condensed Consolidated Statements of Cash Flows—Nine Months Ended September 30, 2013 and 2012      6   
   Notes to Condensed Consolidated Financial Statements      7   

Item 2.

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

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk      50   

Item 4.

   Controls and Procedures      51   

PART II—OTHER INFORMATION

  

Item 1.

   Legal Proceedings      52   

Item 1A.

   Risk Factors      52   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      52   

Item 3.

   Defaults Upon Senior Securities      53   

Item 4.

   Mine Safety Disclosures      53   

Item 5.

   Other Information      53   

Item 6.

   Exhibits      53   

SIGNATURE

     54   

 

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Table of Contents

PART I—FINANCIAL INFORMATION

FTI Consulting, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except per share amounts)

 

Item 1. Financial Statements

 

     September 30,
2013
    December 31,
2012
 
     (Unaudited)        

Assets

    

Current assets

    

Cash and cash equivalents

   $ 147,926      $ 156,785   

Restricted cash

     —          1,190   

Accounts receivable:

    

Billed receivables

     345,407        314,491   

Unbilled receivables

     260,211        208,797   

Allowance for doubtful accounts and unbilled services

     (110,708     (94,048
  

 

 

   

 

 

 

Accounts receivable, net

     494,910        429,240   

Current portion of notes receivable

     32,112        33,194   

Prepaid expenses and other current assets

     40,334        50,351   

Current portion of deferred tax assets

     31,628        3,615   
  

 

 

   

 

 

 

Total current assets

     746,910        674,375   

Property and equipment, net of accumulated depreciation

     66,300        68,192   

Goodwill

     1,194,414        1,260,035   

Other intangible assets, net of amortization

     92,738        104,181   

Notes receivable, net of current portion

     112,194        101,623   

Other assets

     64,986        67,046   
  

 

 

   

 

 

 

Total assets

   $ 2,277,542      $ 2,275,452   
  

 

 

   

 

 

 

Liabilities and Stockholders’ Equity

    

Current liabilities

    

Accounts payable, accrued expenses and other

   $ 107,363      $ 98,109   

Accrued compensation

     164,585        168,392   

Current portion of long-term debt

     6,000        6,021   

Billings in excess of services provided

     26,186        31,675   
  

 

 

   

 

 

 

Total current liabilities

     304,134        304,197   

Long-term debt, net of current portion

     711,000        717,024   

Deferred income taxes

     140,746        105,751   

Other liabilities

     85,561        80,248   
  

 

 

   

 

 

 

Total liabilities

     1,241,441        1,207,220   
  

 

 

   

 

 

 

Commitments and contingent liabilities (notes 8, 10 and 11)

    

Stockholders’ equity

    

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

     —          —     

Common stock, $0.01 par value; shares authorized—75,000; shares issued and outstanding—40,089 (2013) and 40,755 (2012)

     401        408   

Additional paid-in capital

     349,417        367,978   

Retained earnings

     737,760        741,215   

Accumulated other comprehensive loss

     (51,477     (41,369
  

 

 

   

 

 

 

Total stockholders’ equity

     1,036,101        1,068,232   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 2,277,542      $ 2,275,452   
  

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements

 

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Table of Contents

FTI Consulting, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Loss)

(in thousands, except per share data)

Unaudited

 

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
    2013     2012     2013     2012  

Revenues

  $ 414,643      $ 386,055      $ 1,236,434      $ 1,177,526   
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

       

Direct cost of revenues

    255,152        241,614        773,160        735,452   

Selling, general and administrative expense

    94,513        88,909        287,485        283,958   

Special charges

    10,419        2,775        10,846        29,557   

Acquisition-related contingent consideration

    630        403        (6,091     (2,581

Amortization of other intangible assets

    5,776        5,766        17,293        16,773   

Goodwill impairment charge

    83,752        —          83,752        —     
 

 

 

   

 

 

   

 

 

   

 

 

 
    450,242        339,467        1,166,445        1,063,159   
 

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    (35,599     46,588        69,989        114,367   
 

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense)

       

Interest income and other

    1,152        1,584        1,702        4,503   

Interest expense

    (12,814     (13,208     (38,600     (43,607
 

 

 

   

 

 

   

 

 

   

 

 

 
    (11,662     (11,624     (36,898     (39,104
 

 

 

   

 

 

   

 

 

   

 

 

 

Income before income tax provision

    (47,261     34,964        33,091        75,263   

Income tax provision

    3,360        12,251        36,546        26,372   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (50,621   $ 22,713      $ (3,455   $ 48,891   
 

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per common share—basic

  $ (1.29   $ 0.56      $ (0.09   $ 1.21   
 

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per common share—diluted

  $ (1.29   $ 0.55      $ (0.09   $ 1.17   
 

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax:

       

Foreign currency translation adjustments, net of tax $0

  $ 17,115      $ 12,731      $ (10,108   $ 14,620   
 

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

    17,115        12,731        (10,108     14,620   
 

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

  $ (33,506   $ 35,444      $ (13,563   $ 63,511   
 

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements

 

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Table of Contents

FTI Consulting, Inc. and Subsidiaries

Condensed Consolidated Statement of Stockholders’ Equity

(in thousands)

Unaudited

 

    Common Stock     Additional
Paid-in
Capital
    Retained
Earnings
    Accumulated
Other

Comprehensive
Loss
    Total  
    Shares     Amount          

Balance December 31, 2012

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

Net income (loss)

    —          —          —          (3,455     —          (3,455

Other comprehensive income:

           

Cumulative translation adjustment

    —          —          —          —          (10,108     (10,108

Issuance of common stock in connection with:

           

Exercise of options, net of income tax expense from share-based awards of $489

    419        4        11,031        —          —          11,035   

Restricted share grants, less net settled shares of 147

    256        2        (5,080     —          —          (5,078

Stock units issued under incentive compensation plan

    —          —          3,005        —          —          3,005   

Business combinations

    81        1        (1,306     —          —          (1,305

Purchase and retirement of common stock

    (1,422     (14     (48,755     —          —          (48,769

Share-based compensation

    —          —          22,544        —          —          22,544   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance September 30, 2013

    40,089        401        349,417        737,760        (51,477     1,036,101   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

See accompanying notes to the condensed consolidated financial statements

 

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Table of Contents

FTI Consulting, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands)

Unaudited

 

     Nine Months Ended
September 30,
 
     2013     2012  

Operating activities

    

Net income (loss)

   $ (3,455   $ 48,891   

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

    

Depreciation and amortization

     24,218        26,475   

Amortization of other intangible assets

     17,293        16,948   

Goodwill impairment charge

     83,752        —     

Acquisition-related contingent consideration

     (6,091     (2,581

Provision for doubtful accounts

     10,404        9,387   

Non-cash share-based compensation

     22,544        24,465   

Non-cash interest expense

     2,024        4,505   

Other

     (286     10   

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

    

Accounts receivable, billed and unbilled

     (72,266     (62,466

Notes receivable

     (9,644     (20,732

Prepaid expenses and other assets

     (2,313     (3,701

Accounts payable, accrued expenses and other

     16,822        5,608   

Income taxes

     12,989        (5,595

Accrued compensation

     13,198        (33,734

Billings in excess of services provided

     (5,383     6,144   
  

 

 

   

 

 

 

Net cash provided by operating activities

     103,806        13,624   
  

 

 

   

 

 

 

Investing activities

    

Payments for acquisition of businesses, net of cash received

     (40,766     (26,453

Purchases of property and equipment

     (22,994     (20,534

Other

     24        (1,105
  

 

 

   

 

 

 

Net cash used in investing activities

     (63,736     (48,092
  

 

 

   

 

 

 

Financing activities

    

Borrowings under revolving line of credit

     —          75,000   

Payments of long-term debt

     (6,000     (156,487

Purchase and retirement of common stock

     (48,769     (20,013

Net issuance of common stock under equity compensation plans

     6,208        523   

Other

     (800     (1,982
  

 

 

   

 

 

 

Net cash used in financing activities

     (49,361     (102,959
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     432        (68
  

 

 

   

 

 

 

Net decrease in cash and cash equivalents

     (8,859     (137,495

Cash and cash equivalents, beginning of period

     156,785        264,423   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 147,926      $ 126,928   
  

 

 

   

 

 

 

Supplemental cash flow disclosures

    

Cash paid for interest

   $ 25,129      $ 31,343   

Cash paid for income taxes, net of refunds

     23,557        31,968   

Non-cash investing and financing activities:

    

Issuance of stock units under incentive compensation plans

     3,005        3,079   

Issuance of common stock to acquire businesses

     2,883        —     

See accompanying notes to the condensed consolidated financial statements

 

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Table of Contents

FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

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

Unaudited

1. Basis of Presentation and Significant Accounting Policies

The unaudited condensed consolidated financial statements of FTI Consulting, Inc., including its consolidated subsidiaries (collectively, the “Company,” “we,” “our” or “FTI Consulting”) presented herein, have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and under the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. Some of the information and footnote disclosures normally included in annual financial statements have been condensed or omitted pursuant to those rules and regulations. Certain prior period amounts have been reclassified to conform to the current period presentation. See Note 15 “Segment Reporting” for information on our segment reclassification. In management’s opinion, the interim financial statements reflect all adjustments that are necessary for a fair presentation of the results for the interim periods presented. All adjustments made were normal recurring accruals. Results of operations for the interim periods presented herein are not necessarily indicative of results of operations for a full year. These financial statements should be read in conjunction with the consolidated financial statements and the notes contained in our Annual Report on Form 10-K for the year ended December 31, 2012 filed with the SEC on February 28, 2013 and our Current Report on Form 8-K dated May 21, 2013, in which we reclassified historical segment information on a basis consistent with our current segment reporting structure.

2. Earnings (Loss) Per Common Share

Basic earnings (loss) per common share are calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings per common share adjust basic earnings per common share for the effects of potentially dilutive common shares. Potentially dilutive common shares include the dilutive effects of shares issuable under our equity compensation plans, including stock options and restricted stock, and, for the nine months ended September 30, 2012, shares issuable upon the potential conversion of our 33/4% senior subordinated convertible notes due on July 15, 2012 (“Convertible Notes”), each using the treasury stock method. The conversion feature of our Convertible Notes had a dilutive effect on our earnings per share for the nine months ended September 30, 2012, assuming the conversion premium was converted into common stock based on the average closing price per share of our stock during such period, because the average closing price per share of our common stock for such period was above the conversion price of the Convertible Notes of $31.25 per share. Due to a net loss applicable to common stockholders, we excluded 1,150 potentially dilutive securities for the three months ended September 30, 2013 and 1,173 potentially dilutive securities for the nine months ended September 30, 2013, as their effect would be anti-dilutive.

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2013     2012      2013     2012  

Numerator—basic and diluted

         

Net income (loss)

   $ (50,621   $ 22,713       $ (3,455   $ 48,891   
  

 

 

   

 

 

    

 

 

   

 

 

 

Denominator

         

Weighted average number of common shares outstanding—basic

     39,094        40,387         39,212        40,446   

Effect of dilutive stock options

     —          160         —          590   

Effect of dilutive convertible notes

     —          —           —          224   

Effect of dilutive restricted shares

     —          555         —          622   
  

 

 

   

 

 

    

 

 

   

 

 

 

Weighted average number of common shares outstanding—diluted

     39,094        41,102         39,212        41,882   
  

 

 

   

 

 

    

 

 

   

 

 

 

Earnings (loss) per common share—basic

   $ (1.29   $ 0.56       $ (0.09   $ 1.21   
  

 

 

   

 

 

    

 

 

   

 

 

 

Earnings (loss) per common share—diluted

   $ (1.29   $ 0.55       $ (0.09   $ 1.17   
  

 

 

   

 

 

    

 

 

   

 

 

 

Antidilutive stock options and restricted shares

     4,586        5,421         4,677        3,678   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

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3. New Accounting Standards Not yet Adopted

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

In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The provisions of the rule require an unrecognized tax benefit to be presented as a reduction to a deferred tax asset in the financial statements for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, with certain exceptions. This update is effective for annual periods, and interim periods within those years, beginning after December 15, 2013, with early adoption permitted. Retrospective application is also permitted. The adoption of this ASU would not have an impact on the Company’s consolidated financial position or results of operations.

4. Special Charges

During the year ended December 31, 2012, we recorded special charges totaling $29.6 million, of which $5.0 million was non-cash. The charges reflect actions we took to realign our workforce to address current business demands and global macro-economic conditions impacting our Forensic and Litigation Consulting, Strategic Communications and Technology segments, to address certain targeted practices within our Corporate Finance/Restructuring and Economic Consulting segments, and to reduce excess real estate capacity. These actions included the termination of 116 employees, the consolidation of leased office space within nine office locations and certain other actions.

During the three and nine months ended September 30, 2013, we recorded special charges of $10.4 million and $10.8 million, respectively, of which $3.1 million was non-cash. The charges primarily reflect actions we took to realign our workforce to address current business demands impacting our Corporate Finance/Restructuring and Forensic and Litigation Consulting segments and to reduce certain corporate overhead within our Europe, Middle East and Africa (“EMEA”) region. The special charges consist of $10.2 million of salary continuance and other contractual employee related costs associated with the reduction in workforce of 45 employees and $0.6 million of costs to consolidate leased office space within one location and to adjust prior year special charges for changes to sublease terms and employee termination costs.

 

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The following table details the special charges by segment for the three and nine months ended September 30, 2013 and 2012:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2013      2012      2013      2012  

Corporate Finance/Restructuring

   $ 6,331       $ 771       $ 6,399       $ 11,332   

Forensic and Litigation Consulting

     1,938         468         2,111         8,276   

Economic Consulting

     15         173         11         991   

Technology

     2         148         16         3,114   

Strategic Communications

     2         201         66         4,712   
  

 

 

    

 

 

    

 

 

    

 

 

 
     8,288         1,761         8,603         28,425   

Unallocated Corporate

     2,131         1,014         2,243         1,132   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 10,419       $ 2,775       $ 10,846       $ 29,557   
  

 

 

    

 

 

    

 

 

    

 

 

 

The total cash outflow associated with the special charges is expected to be $31.9 million, of which $18.4 million has been paid as of September 30, 2013. Approximately $3.8 million is expected to be paid during the remainder of 2013, $4.7 million is expected to be paid in 2014, $1.1 million is expected to be paid in 2015, $0.7 million is expected to be paid in 2016, and the remaining balance of $3.2 million related to lease costs will be paid from 2017 to 2025. A liability for the current and noncurrent portions of the amounts to be paid is included in “Accounts payable, accrued expenses and other” and “Other liabilities,” respectively, on the Condensed Consolidated Balance Sheets.

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

 

     Employee
Termination
Costs
    Lease
Costs
    Total  

Balance at December 31, 2012

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

Additions

     7,009        690        7,699   

Payments

     (6,566     (2,655     (9,221

Foreign currency translation adjustment and other

     (228     —          (228
  

 

 

   

 

 

   

 

 

 

Balance at September 30, 2013

   $ 6,911      $ 6,552      $ 13,463   
  

 

 

   

 

 

   

 

 

 

5. Provision for Doubtful Accounts

The provision for doubtful accounts is recorded after the related work has been billed to the client and we determine that full collectability is not reasonably assured. It is classified in “Selling, general and administrative expense” on the Condensed Consolidated Statements of Comprehensive Income (Loss). The provision for doubtful accounts totaled $2.9 million and $10.4 million for the three and nine months ended September 30, 2013, respectively, and $2.4 million and $9.4 million for the three and nine months ended September 30, 2012, respectively.

6. Research and Development Costs

Research and development costs related to software development totaled $4.2 million and $11.7 million for the three and nine months ended September 30, 2013, respectively, and $4.2 million and $16.1 million for the three and nine months ended September 30, 2012, respectively. Research and development costs are included in “Selling, general and administrative expense” on the Condensed Consolidated Statements of Comprehensive Income (Loss).

 

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7. Financial Instruments

Fair Value of Financial Instruments

We consider the recorded value of certain financial assets and liabilities, which consist primarily of cash equivalents, accounts receivable and accounts payable, to approximate the fair value of the respective assets and liabilities at September 30, 2013 and December 31, 2012, based on the short-term nature of the assets and liabilities. The fair value of our long-term debt at September 30, 2013 was $738.5 million compared to a carrying value of $717.0 million. At December 31, 2012, the fair value of our long-term debt was $762.0 million compared to a carrying value of $723.0 million. We determine the fair value of our long-term debt primarily based on quoted market prices for our 63/ 4% Senior Notes Due 2020 (“2020 Notes”) and 6.0% Senior Notes Due 2022 (“2022 Notes”). The fair value of our long-term debt is classified within Level 2 of the fair value hierarchy, because it is traded in less active markets.

For business combinations consummated on or after January 1, 2009, we estimate the fair value of acquisition-related contingent consideration based on management’s probability-weighted present value of the consideration expected to be transferred during the remainder of the earnout period, based on the acquired operations’ forecasted earnings. This fair value measure is based on significant inputs not observed in the market and thus represents a Level 3 measurement. Fair value measurements characterized within Level 3 of the fair value hierarchy are measured based on unobservable inputs that are supported by little or no market activity and reflect our own assumptions in measuring fair value.

The significant unobservable inputs used in the fair value measurements of our acquisition-related contingent consideration include our measures of the future profitability and related cash flows of the acquired business or assets, impacted by appropriate discount rates. Significant increases (decreases) in any of these inputs in isolation would result in a significantly lower (higher) fair value measurement. Generally, a change in the assumptions used for the discount rates is accompanied by a directionally opposite change in the fair value measurement and a change in the assumptions used for the future cash flows is accompanied by a directionally similar change in the fair value measurement. The fair value of the contingent consideration is reassessed on a quarterly basis by the Company based on a collaborative effort of the Company’s operations, finance and accounting groups using additional information as it becomes available.

Any change in the fair value of an acquisition’s contingent consideration liability results in a remeasurement gain or loss that is recorded as income or expense, respectively and is included within “Acquisition-related contingent consideration” in the Condensed Consolidated Statements of Comprehensive Income (Loss). During the nine months ended September 30, 2013, management determined that the fair value of the contingent consideration liability for one of its acquisitions had declined and recorded a remeasurement gain of $8.2 million, compared to a gain of $4.1 million for the nine months ended September 30, 2012. There was no remeasurement gain or loss in the three months ended September 30, 2013 or the three months ended September 30, 2012.

Accretion expense for acquisition-related contingent consideration totaled $0.6 million and $2.1 million for the three and nine months ended September 30, 2013 respectively, and $0.4 million and $1.5 million for the three and nine months ended September 30, 2012, respectively.

 

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

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 

(in thousands)

   2013     2012      2013     2012  

Beginning balance

   $ 13,285      $ 8,237       $ 16,426      $ 14,990   

Acquisition(1)

     (206     1,150         4,323        1,150   

Adjustments to fair value recorded in earnings(2)

     630        403         (6,091     (2,581

Payments

     (166     —           (401     (1,287

Elimination of contingency(3)

     —          —           —          (2,534

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

     73        60         (641     112   
  

 

 

   

 

 

    

 

 

   

 

 

 

Ending balance

   $ 13,616      $ 9,850       $ 13,616      $ 9,850   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) 

Includes adjustments during the purchase price allocation period.

 

(2) 

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

 

(3) 

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

The following table presents financial liabilities measured at fair value:

 

     Quoted Prices
in Active
Markets for
Identical Assets

(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
     Total  

As of September 30, 2013

           

Liabilities:

           

Acquisition-related contingent consideration, including current portion

   $ —         $ —         $ 13,616       $ 13,616   

As of December 31, 2012

           

Liabilities:

           

Acquisition-related contingent consideration, including current portion

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

8. Acquisitions

Certain acquisition-related restricted stock agreements entered into prior to January 1, 2009 contained common stock price guarantees that would result in cash payments if our closing per share price fell below a specified per share price on the date that the applicable stock restrictions lapsed (the “determination date”). For those acquisitions, the settlement of the stock price guarantees related to our common stock price was recorded as a reduction to additional paid-in capital as of the determination dates. During the three and nine months ended September 30, 2013, we paid $0.2 million and $4.1 million, respectively, in cash in relation to the stock price guarantees on certain shares of common stock that became unrestricted, which was recorded as a reduction to additional paid-in-capital on the Condensed Consolidated Balance Sheets. As of September 30, 2013, no further acquisition-related stock price guarantees are outstanding.

 

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2013 Acquisitions

On November 1, 2013, we completed the acquisition of certain insurance management consulting operations of WD Scott Limited, located in Dublin, Ireland and London, England. The acquired operations will be operated as part of the insurance practice of our Forensic and Litigation Consulting segment and will be included in our consolidated results of operations beginning as of the acquisition completion date, and therefore, are not included in our consolidated results of operations for the three and nine months ended September 30, 2013. We are currently evaluating the fair values of the assets acquired, liabilities assumed and acquisition-related contingent consideration.

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

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

For acquisitions completed during the nine months ended September 30, 2013, as part of the preliminary purchase price allocations, we recorded $7.4 million in identifiable intangible assets and $28.9 million in goodwill. The estimated fair value of the acquisition-related contingent consideration of $8.0 million is recorded in “Other liabilities” on the Condensed Consolidated Balance Sheets. Pro forma results of operations were not presented because these acquisitions were not material in relation to our consolidated financial position or results of operations for the periods presented.

9. Goodwill and Other Intangible Assets

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

 

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

Balances at December 31, 2012:

           

Goodwill

  $ 469,050      $ 198,957      $ 247,718      $ 118,035      $ 336,662      $ 1,370,422   

Accumulated goodwill impairment

    —          —          —          —          (110,387     (110,387
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Goodwill, net as of December 31, 2012

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Acquisitions(1)

    18,839        1,050        944        —          4,961        25,794   

Foreign currency translation adjustment and other

    (4,630     (349     (1     (1     (2,682     (7,663

Intersegment transfers in/(out)(2)

    (31,471     31,471        —          —          —          —     

Goodwill impairment

    —          —          —          —          (83,752     (83,752
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balances at September 30, 2013

  $ 451,788      $ 231,129      $ 248,661      $ 118,034      $ 144,802      $ 1,194,414   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

Includes adjustments during the purchase price allocation period.

 

(2) 

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

 

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During the third quarter of 2013, in addition to reduced levels of mergers and acquisitions activity, our Strategic Communications segment has continued to experience pricing pressure for certain discretionary communications services, including initial public offering support services where there is volume but also increasing competition. This has compressed segment margins and contributed to a change in the Company’s near-term outlook for this segment. This was considered an interim impairment indicator for the Strategic Communications segment at the Strategic Communications reporting unit level. As a result, we performed an interim impairment analysis with respect to the carrying value of goodwill in our Strategic Communications reporting unit. There were no interim impairment indicators identified for the goodwill in any other of the Company’s reporting units.

For the interim impairment test performed as of September 30, 2013, the fair value was estimated using a combination of appropriately weighted income and market approaches. The cash flow projections are based on our most recent forecasts and near term business plans developed in the third quarter, as well as various growth rate assumptions for years beyond the nine-month period. In the income approach, the cash flows were discounted using an estimated weighted average cost of capital “(WACC”) based on our assessment of the risk inherent in the future revenue streams and cash flows and our WACC. The WACC is comprised of (1) a risk free rate of return, (2) an equity risk premium that is based on the rate of return on equity of publicly traded companies with business characteristics comparable to our reporting units, (3) the current after-tax market rate of return on debt of companies with business characteristics similar to our reporting units, each weighted by the relative market value percentages of our equity and debt, and (4) an appropriate size premium. In the market approach, we utilize market multiples derived from comparable guideline companies and comparable market transactions to the extent available. These valuations are based on estimates and assumptions including projected future cash flows and the determination of appropriate market comparables and determination of whether a premium or discount should be applied to such comparables.

The results of the Step 1 goodwill impairment analysis indicated that the estimated fair value of our Strategic Communications reporting unit was less than its carrying value. Because our Strategic Communications reporting unit’s fair value estimate was lower than its carrying value, we applied the second step of the goodwill impairment test. The second step of the goodwill impairment analysis indicated that the carrying values of the goodwill associated with the Strategic Communications reporting unit exceeded its implied fair value, resulting in an $83.8 million non-deductible goodwill impairment charge which was recorded as a separate line item within operating income (loss) within the Condensed Consolidated Statements of Comprehensive Income (Loss). The impairment charge is non-cash in nature and does not affect the Company’s current liquidity, nor does it impact the debt covenants under the Company’s existing credit facility and the Indentures for the 2020 and 2022 Notes.

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 $17.3 million for the three and nine months ended September 30, 2013, respectively, and $5.8 million and $16.9 million for the three and nine months ended September 30, 2012, respectively. Based solely on the amortizable intangible assets recorded as of September 30, 2013, we estimate amortization expense to be $5.7 million during the remainder of 2013, $13.5 million in 2014, $11.8 million in 2015, $10.2 million in 2016, $9.5 million in 2017, $7.9 million in 2018, and $28.5 million in years after 2018. Actual amortization expense to be reported in future periods could differ from these estimates as a result of new intangible asset acquisitions, finalization of asset valuations for newly acquired assets, changes in useful lives, changes in value due to foreign currency translation, and other factors.

 

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

Finite lived intangible assets

              

Customer relationships

   1 to 15    $ 153,063       $ 70,106       $ 151,990       $ 64,095   

Non-competition agreements

   1 to 10      11,020         8,890         15,184         11,158   

Software

   3 to 10      33,953         32,075         33,979         27,424   

Tradenames

   1 to 2      450         277         180         75   
     

 

 

    

 

 

    

 

 

    

 

 

 
        198,486         111,348         201,333         102,752   

Indefinite-lived intangible assets

              

Tradenames

   Indefinite      5,600         —           5,600         —     
     

 

 

    

 

 

    

 

 

    

 

 

 
      $ 204,086       $ 111,348       $ 206,933       $ 102,752   
     

 

 

    

 

 

    

 

 

    

 

 

 

10. Long-term Debt and Capital Lease Obligations

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

 

    September 30,
2013
    December 31,
2012
 

6 3/4% senior notes due 2020

  $ 400,000      $ 400,000   

6.0% senior notes due 2022

    300,000        300,000   

Notes payable to former shareholders of acquired businesses

    17,000        23,000   
 

 

 

   

 

 

 

Total debt

    717,000        723,000   

Less current portion

    6,000        6,000   
 

 

 

   

 

 

 

Long-term debt, net of current portion

    711,000        717,000   
 

 

 

   

 

 

 

Total capital lease obligations

    —          45   

Less current portion

    —          21   
 

 

 

   

 

 

 

Capital lease obligations, net of current portion

    —          24   
 

 

 

   

 

 

 

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

  $ 711,000      $ 717,024   
 

 

 

   

 

 

 

6.0% Senior Notes Due 2022

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

11. Commitments and Contingencies

Contingencies

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

 

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12. Share-Based Compensation

Share-based Awards and Share-based Compensation Expense

Our officers, employees, non-employee directors and certain individual service providers are eligible to participate in the Company’s equity compensation plans, subject to the discretion of the administrator of the plans. During the nine months ended September 30, 2013, we granted an aggregate of 994,401 share-based awards, consisting primarily of restricted stock awards, restricted stock units and stock options.

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

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 

Comprehensive Income Statement Classification

   2013      2012      2013      2012  

Direct cost of revenues

   $ 2,532       $ 3,475       $ 13,231       $ 12,883   

Selling, general and administrative expense

     2,680         3,179         9,180         10,338   

Special charges

     209         —           209         814   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total share-based compensation expense

   $ 5,421       $ 6,654       $ 22,620       $ 24,035   
  

 

 

    

 

 

    

 

 

    

 

 

 

13. Income Taxes

During the second quarter of 2013, we determined that certain deferred tax assets associated with U.S. future foreign tax credits no longer met the “more-likely-than-not” test regarding the realization of those assets, primarily due to lower forecasted foreign earnings. Accordingly, the Company increased the valuation allowance against its U.S. future foreign tax credit assets, resulting in a discrete adjustment to the income tax provision in the amount of $6.9 million. As of September 30, 2013 and December 31, 2012, valuation allowances of $9.5 million and $1.9 million, respectively, were recorded against the Company’s net deferred tax assets. We have not established a valuation allowance for any of our other deferred tax assets as we expect that future taxable income as well as the reversal of temporary differences will enable us to fully utilize our deferred tax assets.

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

Our liability for uncertain tax positions was $2.9 million and $3.8 million at September 30, 2013 and December 31, 2012, respectively. During the first quarter of 2013, the Company effectively settled certain prior year tax matters. As a result, the Company reversed approximately $2.2 million of its liability for uncertain tax positions.

The Company has estimated its annual effective tax rate for the full fiscal year 2013 and applied that rate to its income before income taxes in determining its provision for income taxes for the three and nine months ended September 30, 2013. The Company also records discrete items in each respective period as appropriate. Our effective tax rate for the three and nine months ended September 30, 2013 was not meaningful due to the impact of the non-deductible goodwill impairment charge of $83.8 million.

The effective tax rate for the three months ended September 30, 2013 excluding the impact of the goodwill impairment charge would have been 38.8% as compared to 35.0% for the same prior year period. For the three months ended September 30, 2012, the effective tax rate was favorably impacted by a discrete item related to the

 

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recognition of foreign deferred tax assets. Excluding the impact of this discrete item, the effective tax rate for the three months ended September 30, 2012 would have been 38.5%.

The effective tax rate for the nine months ended September 30, 2013 excluding the impact of the goodwill impairment charge would have been 40.5% as compared to 35.0% for the same period in 2012. During the nine months ended September 30, 2013, we recorded a deferred tax valuation reserve related to foreign tax credits, primarily due to lower forecasted foreign earnings, resulting in a discrete increase to the income tax provision in the amount of $6.9 million. We also recognized the impact of a discrete benefit related to the favorable resolution of an income tax contingency in the amount of $2.2 million. For the nine months ended September 30, 2012, the effective tax rate was favorably impacted by a discrete item related to the recognition of foreign deferred tax assets. Excluding the impact of these discrete items on both periods, the effective tax rate for the nine months ended September 30, 2013 would have been 36.4% as compared to 36.6% in the same prior year period.

14. Stockholders’ Equity

On June 6, 2012, our Board of Directors authorized a two-year stock repurchase program of up to $250.0 million (the “2012 Repurchase Program”). During the three months ended September 30, 2013, we repurchased and retired 595,225 shares of our common stock for an average price of $33.62, with a value equivalent to approximately $20.0 million. During the nine months ended September 30, 2013, we repurchased and retired 1,422,025 shares of our common stock for an average price per share of $34.30, with a value equivalent to approximately $48.8 million. During the year ended December 31, 2012 we repurchased and retired 1,681,029 shares of our common stock for an average price per share of $29.76 with a value equivalent to approximately $50.0 million. As of September 30, 2013, a balance of approximately $151.2 million remained available under the 2012 Repurchase Program.

15. Segment Reporting

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

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

Our Forensic and Litigation Consulting segment provides law firms, companies, government clients and other interested parties with dispute advisory, investigations, forensic accounting, business intelligence assessments, data analytics, risk mitigation services as well as interim management and performance improvement services for our health solutions practice clients.

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

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

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

 

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Effective in the first quarter of 2013, we modified our reportable segments to reflect changes in how we operate our business and the related internal management reporting. The Company’s healthcare and life sciences practices from both our Corporate Finance/Restructuring segment and our Forensic and Litigation Consulting segment have been combined under a single organizational structure. This single integrated practice, our health solutions practice, is now aggregated in its entirety within the Forensic and Litigation Consulting reportable segment. Prior period Corporate Finance/Restructuring and Forensic and Litigation Consulting segment information has been reclassified to conform to the current period presentation.

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

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

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2013      2012      2013      2012  

Revenues

           

Corporate Finance/Restructuring

   $ 93,981       $ 93,123       $ 289,775       $ 286,184   

Forensic and Litigation Consulting

     113,068         100,460         318,912         310,351   

Economic Consulting

     113,069         96,375         339,277         295,882   

Technology

     51,201         50,286         149,101         147,643   

Strategic Communications

     43,324         45,811         139,369         137,466   
  

 

 

    

 

 

    

 

 

    

 

 

 

Revenues

   $ 414,643       $ 386,055       $ 1,236,434       $ 1,177,526   
  

 

 

    

 

 

    

 

 

    

 

 

 

Adjusted Segment EBITDA

           

Corporate Finance/Restructuring

   $ 19,402       $ 21,951       $ 62,610       $ 73,419   

Forensic and Litigation Consulting

     25,362         16,289         58,866         50,500   

Economic Consulting

     23,225         19,087         70,222         56,002   

Technology

     15,381         15,675         45,985         41,739   

Strategic Communications

     4,036         6,778         12,809         16,277   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total Adjusted Segment EBITDA(1)

   $ 87,406       $ 79,780       $ 250,492       $ 237,937   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) 

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

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

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2013     2012     2013     2012  

Total Adjusted Segment EBITDA(1)

   $ 87,406      $ 79,780      $ 250,492      $ 237,937   

Segment depreciation expense

     (7,112     (6,038     (20,932     (18,646

Amortization of other intangible assets

     (5,776     (5,766     (17,293     (16,773

Special Charges

     (10,419     (2,775     (10,846     (29,557

Goodwill impairment charge

     (83,752     —          (83,752     —     

Unallocated corporate expenses, excluding special charges

     (15,946     (18,613     (47,680     (58,594

Interest income and other

     1,152        1,584        1,702        4,503   

Interest expense

     (12,814     (13,208     (38,600     (43,607
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax provision

   $ (47,261   $ 34,964      $ 33,091      $ 75,263   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) 

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

 

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

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

Condensed Consolidating Balance Sheet Information as of September 30, 2013

 

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

Assets

         

Cash and cash equivalents

  $ 64,452      $ 359      $ 83,115      $ —        $ 147,926   

Accounts receivable, net

    164,158        175,254        155,498        —        $ 494,910   

Intercompany receivables

    —          789,858        19,307        (809,165   $ —     

Other current assets

    62,097        18,151        23,826        —        $ 104,074   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

    290,707        983,622        281,746        (809,165     746,910   

Property and equipment, net

    31,627        20,221        14,452        —        $ 66,300   

Goodwill

    559,519        394,304        240,591        —        $ 1,194,414   

Other intangible assets, net

    34,665        22,108        65,161        (29,196   $ 92,738   

Investments in subsidiaries

    1,736,165        496,840        —          (2,233,005   $ —     

Other assets

    83,343        62,128        31,709        —        $ 177,180   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $ 2,736,026      $ 1,979,223      $ 633,659      $ (3,071,366   $ 2,277,542   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

         

Intercompany payables

  $ 687,749      $ 94,330      $ 27,086      $ (809,165   $ —     

Other current liabilities

    110,038        93,931        100,165        —        $ 304,134   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

    797,787        188,261        127,251        (809,165     304,134   

Long-term debt, net

    700,000        11,000        —          —        $ 711,000   

Other liabilities

    202,138        23,126        1,043        —        $ 226,307   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

    1,699,925        222,387        128,294        (809,165     1,241,441   

Stockholders’ equity

    1,036,101        1,756,836        505,365        (2,262,201   $ 1,036,101   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

  $ 2,736,026      $ 1,979,223      $ 633,659      $ (3,071,366   $ 2,277,542   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

18


Table of Contents

Condensed Consolidating Balance Sheet Information as of December 31, 2012

 

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

Assets

         

Cash and cash equivalents

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

Restricted cash

    —          —          1,190        —          1,190   

Accounts receivable, net

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

Intercompany receivables

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

Other current assets

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current assets

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

Property and equipment, net

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

Goodwill

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

Other intangible assets, net

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

Investments in subsidiaries

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

Other assets

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities

         

Intercompany payables

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

Other current liabilities

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total current liabilities

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

Long-term debt, net

    700,024        17,000        —          —          717,024   

Other liabilities

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

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

Stockholders’ equity

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities and stockholders’ equity

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

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Condensed Consolidating Statement of Comprehensive Income (Loss) for the Three Months Ended September 30, 2013

 

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

Revenues

  $ 149,176      $ 243,186      $ 111,867      $ (89,586   $ 414,643   

Operating expenses

         

Direct cost of revenues

    89,410        181,561        73,678        (89,497     255,152   

Selling, general and administrative expense

    37,470        28,279        28,853        (89     94,513   

Special charges

    6,447        8        3,964        —          10,419   

Acquisition-related contingent consideration

    152        229        249        —          630   

Amortization of other intangible assets

    1,089        2,689        2,807        (809     5,776   

Goodwill impairment charge

    —          30,321        53,431        —          83,752   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    14,608        99        (51,115     809        (35,599

Other (expense) income

    (13,468     (1,165     2,971        —          (11,662
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax provision

    1,140        (1,066     (48,144     809        (47,261

Income tax (benefit) provision

    (3,530     14,070        (7,180     —          3,360   

Equity in net earnings of subsidiaries

    (55,291     (42,632     —          97,923        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    (50,621     (57,768     (40,964     98,732        (50,621
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax:

         

Foreign currency translation adjustments, net of tax $0

    (61     —          17,176        —          17,115   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

    (61     —          17,176        —          17,115   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

  $ (50,682   $ (57,768   $ (23,788   $ 98,732      $ (33,506
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

19


Table of Contents

Condensed Consolidating Statement of Comprehensive Income for the Three Months Ended September 30, 2012

 

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

Revenues

  $ 145,198      $ 233,300      $ 99,963      $ (92,406   $ 386,055   

Operating expenses

         

Direct cost of revenues

    93,428        175,160        65,052        (92,026     241,614   

Selling, general and administrative expense

    36,915        28,226        24,148        (380     88,909   

Special Charges

    2,295        451        29        —          2,775   

Acquisition-related contingent consideration

    63        —          340        —          403   

Amortization of other intangible assets

    1,590        2,488        2,512        (824     5,766   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    10,907        26,975        7,882        824        46,588   

Other (expense) income

    (15,921     5,514        (1,217     —          (11,624
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax provision

    (5,014     32,489        6,665        824        34,964   

Income tax (benefit) provision

    (675     10,598        2,328        —          12,251   

Equity in net earnings of subsidiaries

    27,052        4,710        —          (31,762     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    22,713        26,601        4,337        (30,938     22,713   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income, net of tax:

         

Foreign currency translation adjustments, net of tax $0

    —          —          12,731        —          12,731   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income, net of tax

    —          —          12,731        —          12,731   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

  $ 22,713      $ 26,601      $ 17,068      $ (30,938   $ 35,444   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Condensed Consolidating Statement of Comprehensive Income (Loss) for the Nine Months Ended September 30, 2013

 

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

Revenues

  $ 444,526      $ 744,241      $ 333,428      $ (285,761   $ 1,236,434   

Operating expenses

         

Direct cost of revenues

    283,028        561,434        212,376        (283,678     773,160   

Selling, general and administrative expense

    118,941        84,869        85,758        (2,083     287,485   

Special charges

    6,770        112        3,964        —          10,846   

Acquisition-related contingent consideration

    331        424        (6,846     —          (6,091

Amortization of other intangible assets

    3,411        7,637        8,636        (2,391     17,293   

Goodwill impairment charge

    —          30,321        53,431        —          83,752   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

    32,045        59,444        (23,891     2,391        69,989   

Other (expense) income

    (45,181     (634     8,917        —          (36,898
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax provision

    (13,136     58,810        (14,974     2,391        33,091   

Income tax (benefit) provision

    (10,751     48,132        (835     —          36,546   

Equity in net earnings of subsidiaries

    (1,070     (18,518     —          19,588        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

    (3,455     (7,840     (14,139     21,979        (3,455
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax:

         

Foreign currency translation adjustments, net of tax $0

    (61     —          (10,047     —          (10,108
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income (loss), net of tax

    (61     —          (10,047     —          (10,108
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

  $ (3,516   $ (7,840   $ (24,186   $ 21,979      $ (13,563
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

20


Table of Contents

Condensed Consolidating Statement of Comprehensive Income for the Nine Months Ended September 30, 2012

 

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

Revenues

  $ 450,221      $ 716,049      $ 303,472      $ (292,216   $ 1,177,526   

Operating expenses

         

Direct cost of revenues

    291,053        537,897        194,051        (287,549     735,452   

Selling, general and administrative expense

    123,350        85,785        79,490        (4,667     283,958   

Special charges

    19,026        4,738        5,793        —          29,557   

Acquisition-related contingent consideration

    63        —          (2,644     —          (2,581

Amortization of other intangible assets

    4,190        7,438        7,609        (2,464     16,773   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

    12,539        80,191        19,173        2,464        114,367   

Other (expense) income

    (46,377     41,501        657        (34,885     (39,104
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax provision

    (33,838     121,692        19,830        (32,421     75,263   

Income tax (benefit) provision

    (29,055     51,322        4,105        —          26,372   

Equity in net earnings of subsidiaries

    53,674        18,093        —          (71,767     —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income

    48,891        88,463        15,725        (104,188     48,891   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income, net of tax:

         

Foreign currency translation adjustments, net of tax $0

    —          —          14,620        —          14,620   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Other comprehensive income, net of tax

    —          —          14,620        —          14,620   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

  $ 48,891      $ 88,463      $ 30,345      $ (104,188   $ 63,511   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Condensed Consolidating Statement of Cash Flow for the Nine Months Ended September 30, 2013

 

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

Operating activities

       

Net cash (used in) provided by operating activities

  $ (37,182   $ 111,908      $ 29,080      $ 103,806   

Investing activities

       

Payments for acquisition of businesses, net of cash received

    (11,855     (7,157     (21,754   $ (40,766

Purchases of property and equipment

    (2,092     (16,064     (4,838   $ (22,994

Other

    24        —          —        $ 24   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

    (13,923     (23,221     (26,592     (63,736
 

 

 

   

 

 

   

 

 

   

 

 

 

Financing activities

       

Payments of long-term debt

    —          (6,000     —          (6,000

Net issuance of common stock and other

    6,437        —          (1,029     5,408   

Purchase and retirement of common stock

    (48,769     —          —          (48,769

Intercompany transfers

    91,226        (82,938     (8,288     —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

    48,894        (88,938     (9,317     (49,361
 

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

    —          —          432        432   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net decrease in cash and cash equivalents

    (2,211     (251     (6,397     (8,859

Cash and cash equivalents, beginning of period

    66,663        610        89,512        156,785   
 

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

  $ 64,452      $ 359      $ 83,115      $ 147,926   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

21


Table of Contents

Condensed Consolidating Statement of Cash Flow for the Nine Months Ended September 30, 2012

 

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

Operating activities

       

Net cash (used in) provided by operating activities

  $ (47,163   $ 36,366      $ 24,421      $ 13,624   

Investing activities

       

Payments for acquisition of businesses, net of cash received

    (26,089     —          (364     (26,453

Purchases of property and equipment

    (6,016     (11,689     (2,829     (20,534

Other

    (1,105     —          —          (1,105
 

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

    (33,210     (11,689     (3,193     (48,092
 

 

 

   

 

 

   

 

 

   

 

 

 

Financing activities

       

Borrowings under revolving line of credit

    75,000        —          —          75,000   

Payments of long-term debt and capital lease obligations

    (156,438     (49     —          (156,487

Purchase and retirement of common stock

    (20,013     —          —          (20,013

Net issuance of common stock and other

    513        —          (1,972     (1,459

Intercompany transfers

    51,398        (24,278     (27,120     —     
 

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in financing activities

    (49,540     (24,327     (29,092     (102,959
 

 

 

   

 

 

   

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

    —          —          (68     (68
 

 

 

   

 

 

   

 

 

   

 

 

 

Net decrease in cash and cash equivalents

    (129,913     350        (7,932     (137,495

Cash and cash equivalents, beginning of period

    161,180        197        103,046        264,423   
 

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

  $ 31,267      $ 547      $ 95,114      $ 126,928   
 

 

 

   

 

 

   

 

 

   

 

 

 

 

22


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

The following is a discussion and analysis of our consolidated financial condition and results of operations for the three and nine months ended September 30, 2013 and 2012 and significant factors that could affect our prospective financial condition and results of operations. This discussion should be read together with the accompanying unaudited condensed consolidated financial statements and related notes and with our Annual Report on Form 10-K for the year ended December 31, 2012 filed with the Securities and Exchange Commission (the “SEC”) on February 28, 2013 and our Current Report on Form 8-K dated May 21, 2013, in which we reclassified historical segment information on a basis consistent with our current segment reporting structure. Historical results and any discussion of prospective results may not indicate our future performance. See “—Forward-Looking Statements.”

BUSINESS OVERVIEW

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

We report financial results for the following five reportable segments:

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

Our Forensic and Litigation Consulting segment provides law firms, companies, government clients and other interested parties with dispute advisory, investigations, forensic accounting, business intelligence assessments, data analytics, risk mitigation services as well as interim management and performance improvement services for our health solutions practice clients.

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

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

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

 

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As of January 1, 2013, the Company’s financial results reflect a combination of the healthcare and life sciences focused personnel that were formerly included in the Corporate Finance/Restructuring and Forensic and Litigation Consulting segments, into a single integrated practice. The newly combined health solutions practice consists of over 200 professionals dedicated to serving this growth industry. In the first quarter of 2013, we modified our reportable segments to reflect the changes described above. The Company’s health solutions practice is now aggregated in its entirety in the Forensic and Litigation Consulting reportable segment. Prior period Corporate Finance/Restructuring and Forensic and Litigation Consulting segment information has been reclassified to conform to the current period presentation.

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

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

Over the past several years the growth in our revenues has resulted from our ability to attract new and recurring engagements and from the acquisitions we have completed. Seasonal factors, such as the timing of our employees’ and clients’ vacations and holidays, impact the timing of our revenues.

Our financial results are primarily driven by:

 

   

the number, size and type of engagements we secure;

 

   

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

 

   

the utilization of the revenue-generating professionals we employ;

 

   

the number and experience mix of revenue-generating professionals;

 

   

fees from clients on a retained basis or other;

 

   

licensing of our software products and other technology services;

 

   

the types of assignments we are working on at different times;

 

   

the length of the billing and collection cycles; and

 

   

the geographic locations of our clients or locations in which services are rendered.

 

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Non-GAAP Measures

In the accompanying analysis of financial information, we sometimes use information derived from consolidated and segment financial information that is not presented in our financial statements and prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). Certain of these measures are considered “non-GAAP financial measures” under the SEC rules. Specifically, we have referred to:

 

   

Segment Operating Income (Loss)

 

   

Total Segment Operating Income (Loss)

 

   

Adjusted EBITDA

 

   

Adjusted Segment EBITDA

 

   

Total Adjusted Segment EBITDA

 

   

Adjusted Net Income

 

   

Adjusted Earnings per Diluted Share

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

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

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

 

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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,
 
     2013     2012      2013     2012  
    

(dollars in thousands,

except per share amounts)

    

(dollars in thousands,

except per share amounts)

 

Revenues

   $ 414,643      $ 386,055       $ 1,236,434      $ 1,177,526   

Special charges

   $ 10,419      $ 2,775       $ 10,846      $ 29,557   

Goodwill impairment charge

   $ 83,752      $ —         $ 83,752      $ —     

Adjusted EBITDA

   $ 72,544      $ 62,281       $ 206,098      $ 182,857   

Net income (loss)

   $ (50,621   $ 22,713       $ (3,455   $ 48,891   

Earnings (loss) per common share—diluted

   $ (1.29   $ 0.55       $ (0.09   $ 1.17   

Adjusted EPS

   $ 0.72      $ 0.60       $ 1.90      $ 1.62   

Cash provided by operating activities

   $ 84,437      $ 70,912       $ 103,806      $ 13,624   

Total number of employees at September 30,

     4,130        3,819         4,130        3,819   

Third Quarter 2013 Executive Highlights

Revenues

Revenues for the quarter ended September 30, 2013 increased $28.6 million, or 7.4%, to $414.6 million, compared to $386.1 million in the same prior year period. Acquisition revenues accounted for $15.3 million or 4.0% of the growth with the remainder due to strong demand for the services of our Economic Consulting segment in the North America and Europe, Middle East and Africa (“EMEA”) regions as well as the impact of the collection of a success fee by our Forensic and Litigation Consulting segment.

Special Charges

There were $10.4 million of special charges recorded in the quarter ended September 30, 2013, compared to $2.8 million in special charges recorded in the same prior year period. The special charges recorded in the quarter ended September 30, 2013 were primarily related to actions we took to realign our workforce to address current business demands impacting our Corporate Finance/Restructuring and Forensic and Litigation Consulting segments and to reduce certain corporate overhead within our EMEA region.

Goodwill impairment charge

In connection with the preparation of the Company’s financial statements for the quarter ended September 30, 2013, the Company performed an impairment analysis with respect to the carrying value of goodwill in the Strategic Communications reporting unit. During the third quarter of 2013, in addition to reduced levels of M&A activity, our Strategic Communications segment has continued to experience pricing pressure for certain discretionary communications services, including initial public offering support services where there is volume but also increasing competition. This has compressed segment margins and contributed to a change in the Company’s near-term outlook for this segment. As a result, the Company determined there was a triggering event for a goodwill impairment assessment as of September 30, 2013. Based on this assessment, the Company concluded the implied fair value of the Strategic Communications reporting unit was below its carrying value, resulting in an $83.8 million goodwill impairment charge in the quarter. This charge represents 7% of our consolidated goodwill balance and only applies to the Strategic Communications segment. The impairment charge is non-cash in nature and does not affect the Company’s current liquidity, nor does it impact the debt covenants under the Company’s existing credit facility and the Indentures for the 2020 and 2022 Notes.

 

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Adjusted EBITDA

Adjusted EBITDA increased $10.3 million, or 16.5%, to $72.5 million, or 17.5% of revenues, compared to $62.3 million, or 16.1% of revenues, in the same prior year period. Adjusted EBITDA increased primarily from increased demand for our Economic Consulting segment and a success fee in our Forensic and Litigation Consulting segment, partially offset by weak demand in our Strategic Communications segment and under-utilization in our bankruptcy and restructuring practices in our Corporate Finance/Restructuring segment in the North America region.

Net Income (Loss)

Net income (loss) decreased $73.3 million to ($50.6) million compared to $22.7 million in the same prior year period including the impact of the $83.8 million goodwill impairment charge for our Strategic Communications segment and the impact of the $10.4 million special charges recorded in the quarter ended September 30, 2013 compared to the $2.8 million special charges recorded in the same prior year period.

Earnings (loss) per share and Adjusted EPS

Earnings (loss) per diluted common share for the quarter ended September 30, 2013 were ($1.29), compared to $0.55 in the prior year period, including the impact of the $83.8 million goodwill impairment charge for our Strategic Communications segment and the impact of the special charges of $10.4 million recorded in the quarter ended September 30, 2013 as compared to $2.8 million of special charges recorded in the prior year period. Adjusted earnings per diluted share, which excludes the goodwill impairment charge and impact of the special charge, were $0.72, compared to $0.60 in the same prior year period due to the impact of the operating results described above.

Operating cash flows

Cash provided by operating activities increased $13.5 million to $84.4 million for the quarter ended September 30, 2013 compared to $70.9 million for the same prior year period primarily as a result of an increase in cash collections on accounts receivable.

Headcount

Headcount at September 30, 2013 increased by 311, or 8.1%, to 4,130 from 3,819 at September 30, 2012. Billable headcount increased by 266 professionals, of which 111 professionals were added to the Corporate Finance/Restructuring segment as a result of acquisitions, 61 professionals were added to the Economic Consulting segment to support growing operations, 60 professionals were added to the Forensic and Litigation Consulting segment, primarily as a result of growth in our health solutions practice, and 20 professionals were added to the Strategic Communications segment as a result of acquisitions. Non-billable headcount increased 45 professionals primarily due to growth in our regional infrastructure and from acquisitions.

Other strategic activities

On June 6, 2012, our Board of Directors authorized a two-year stock repurchase program of up to $250.0 million (the “2012 Repurchase Program”). During the quarter the Company used $20.0 million to repurchase and retire 595,225 shares of the Company’s common stock at an average price of $33.62. For the nine months ended September 30, 2013, we used $48.8 million to repurchase and retire 1,422,025 shares of our common stock for an average price per share of $34.30. As of September 30, 2013, a balance of approximately $151.2 million remained available under the 2012 Repurchase Program.

Subsequent event

On November 4, 2013, the Company announced the addition of 41 professionals from affiliates of WD Scott Limited (collectively “Distinct”), providers of insurance management consulting services out of offices in Dublin and London. The acquisition will further expand the Company’s global insurance practice and will be included within the Company’s Forensic and Litigation Consulting segment. The impact of this acquisition will be recorded in the Company’s financial statements for the year ending December 31, 2013.

 

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CONSOLIDATED RESULTS OF OPERATIONS

Segment and Consolidated Operating Results:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2013     2012     2013     2012  
    

(in thousands, except

per share amounts)

   

(in thousands, except

per share amounts)

 

Revenues

        

Corporate Finance/Restructuring

   $ 93,981      $ 93,123      $ 289,775      $ 286,184   

Forensic and Litigation Consulting

     113,068        100,460        318,912        310,351   

Economic Consulting

     113,069        96,375        339,277        295,882   

Technology

     51,201        50,286        149,101        147,643   

Strategic Communications

     43,324        45,811        139,369        137,466   
  

 

 

   

 

 

   

 

 

   

 

 

 

Revenues

   $ 414,643      $ 386,055      $ 1,236,434      $ 1,177,526   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

        

Corporate Finance/Restructuring

   $ 10,590      $ 19,024      $ 48,725      $ 55,488   

Forensic and Litigation Consulting

     21,915        14,062        52,194        37,360   

Economic Consulting

     21,708        17,810        66,233        51,681   

Technology

     9,755        10,445        29,129        23,403   

Strategic Communications

     (81,490     4,874        (76,369     6,161   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total segment operating income (loss)

     (17,522     66,215        119,912        174,093   

Unallocated corporate expenses

     (18,077     (19,627     (49,923     (59,726
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (35,599     46,588        69,989        114,367   
  

 

 

   

 

 

   

 

 

   

 

 

 

Other income (expense)

        

Interest income and other

     1,152        1,584        1,702        4,503   

Interest expense

     (12,814     (13,208     (38,600     (43,607
  

 

 

   

 

 

   

 

 

   

 

 

 
     (11,662     (11,624     (36,898     (39,104
  

 

 

   

 

 

   

 

 

   

 

 

 

Income (loss) before income tax provision

     (47,261     34,964        33,091        75,263   

Income tax provision

     3,360        12,251        36,546        26,372   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (50,621   $ 22,713      $ (3,455   $ 48,891   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per common share—basic

   $ (1.29   $ 0.56      $ (0.09   $ 1.21   
  

 

 

   

 

 

   

 

 

   

 

 

 

Earnings (loss) per common share—diluted

   $ (1.29   $ 0.55      $ (0.09   $ 1.17   
  

 

 

   

 

 

   

 

 

   

 

 

 

Reconciliation of Net Income (Loss) to Adjusted EBITDA:

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2013     2012      2013     2012  
     (in thousands)      (in thousands)  

Net income (loss)

   $ (50,621   $ 22,713       $ (3,455   $ 48,891   

Add back:

         

Income tax provision

     3,360        12,251         36,546        26,372   

Other income (expense), net

     11,662        11,624         36,898        39,104   

Depreciation and amortization

     8,196        7,152         24,218        22,160   

Amortization of other intangible assets

     5,776        5,766         17,293        16,773   

Special charges

     10,419        2,775         10,846        29,557   

Goodwill impairment charge

     83,752        —           83,752        —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Adjusted EBITDA

   $   72,544      $   62,281       $    206,098      $    182,857   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

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Reconciliation of Net Income (Loss) to Adjusted Net Income and Earnings (Loss) Per Share to Adjusted Earnings Per Share

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
         2013             2012              2013             2012      

Net income (loss)

   $ (50,621   $ 22,713       $ (3,455   $ 48,891   

Add back:

         

Special charges, net of tax effect(1)

     6,847        1,794         7,100        19,115   

Goodwill impairment charges(2)

     83,752        —           83,752        —     

Less:

         

Interim period impact of including goodwill impairment charges in the annual effective tax rate

     (10,805     —           (10,805     —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Adjusted net income

   $ 29,173      $ 24,507       $ 76,592      $ 68,006   
  

 

 

   

 

 

    

 

 

   

 

 

 

Earnings (loss) per common share—diluted

   $ (1.29   $ 0.55       $ (0.09   $ 1.17   

Add back:

         

Special charges, net of tax effect (1)

     0.18        0.05         0.18        0.45   

Goodwill impairment charges(2)

     2.14        —           2.14        —     

Less:

         

Interim period impact of including goodwill impairment charges in the annual effective tax rate

     (0.27     —           (0.28     —     

Impact of denominator for diluted earnings per common share(3)

     (0.04     —           (0.05     —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Adjusted earnings per common share—diluted

   $ 0.72      $ 0.60       $ 1.90      $ 1.62   
  

 

 

   

 

 

    

 

 

   

 

 

 

Weighted average number of common shares outstanding—diluted(3)

     40,244        41,102         40,385        41,882   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

(1) 

The tax effect takes into account the tax treatment and related tax rate(s) that apply to each adjustment in the applicable tax jurisdiction(s). As a result, the effective tax rates related to the special charges for the three and nine months ended September 30, 2013 were 34.3% and 34.5%, respectively, and 35.3% for both of the three and nine months ended September 30, 2012. The tax expense related to the special charges for the three and nine months ended September 30, 2013 was $3.6 million, or $0.09 impact on diluted earnings per common share, and $3.7 million, or $0.10 impact on diluted earnings per common share, respectively. The tax expense related to the special charges for the three and nine months ended September 30, 2012 was $1.0 million, or $0.02 impact on diluted earnings per common share, and $10.4 million, or $0.25 impact on diluted earnings per common share.

(2) 

The goodwill impairment charge is non-deductible for income tax purposes and will result in no tax benefit for the year ending December 31, 2013.

(3) 

For the three and nine months ended September 30, 2013, the Company reported a net loss. For those periods, the number of basic weighted average common shares outstanding equals the number of diluted weighted average common shares outstanding for purposes of calculating U.S. GAAP earnings per share because potentially dilutive securities would be antidilutive. For non-GAAP purposes, the total per share and share amounts presented herein reflect the impact of the inclusion of share-based awards and convertible notes that are considered dilutive based on the impact of the add backs included in Adjusted Net Income above.

 

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

Revenues and operating income (loss)

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

Unallocated corporate expenses

Unallocated corporate expenses decreased $1.6 million, or 7.9%, to $18.1 million for the three months ended September 30, 2013 from $19.6 million for the same prior year period. Excluding the impact of unallocated corporate special charges of $2.1 million recorded in the three months ended September 30, 2013 and $1.0 million recorded in the three months ended September 30, 2012, unallocated corporate expenses decreased $2.7 million, or 14.3%. The decrease was primarily due to a reduction in performance-based compensation when compared to the same prior year period.

Interest income and other

Interest income and other, which includes foreign currency transaction gains and losses, decreased by $0.4 million to $1.2 million for the three months ended September 30, 2013 from $1.6 million for the same prior year period. The decrease is primarily due to net foreign currency transaction losses in the period ended September 30, 2013 as compared to net gains in the same prior year period. Transaction gains and losses, both realized and unrealized, relate to the remeasurement or settlement of monetary assets and liabilities that are denominated in a currency other than an entity’s functional currency. These monetary assets and liabilities include current intercompany receivables and payables. The foreign exchange losses in the three months ended September 30, 2013 were primarily the result of the weakening of the U.S. dollar relative to the British pound.

Interest expense

Interest expense was $12.8 million for the three months ended September 30, 2013 as compared to $13.2 million for the same prior year period. Interest expense in 2013 was favorably impacted by lower average borrowings in 2013 as compared to 2012, primarily due to the repayment in July 2012 of $150.0 million aggregate principal amount of 33/4% senior subordinated convertible notes (“Convertible Notes”) and the extinguishment of the $215.0 million aggregate principal amount of 73/4% senior notes due 2016 (“2016 Notes”) in the fourth quarter of 2012, which was partially offset by interest expense relating to the issuance of the $300.0 million aggregate principal amount of 6.0% senior notes due 2022 (“2022 Notes”) in the fourth quarter of 2012.

Special charges

During the three months ended September 30, 2013, we recorded special charges totaling $10.4 million, of which $3.1 million was non-cash. The charges primarily reflect actions we took to realign our workforce to address current business demands impacting our Corporate Finance/Restructuring and Forensic and Litigation Consulting segments and to reduce certain corporate overhead within our EMEA region. The special charges consist of $10.2 million of salary continuance and other contractual employee related costs associated with the reduction in workforce of 45 employees, and $0.2 million of costs to consolidate leased office space within one location and to adjust prior special charges for changes to sublease terms and associated costs.

During the three months ended September 30, 2012, we recorded special charges totaling $2.8 million, of which $0.4 million was non-cash. The charges reflected actions we took to reduce excess real estate capacity, by consolidating leased office space in three office locations in the U.S.

 

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

 

     Three Months  Ended
September 30,
     Three Months  Ended
September 30,
 
     2013      2012  
     Special Charges      Total
Headcount
     Special Charges  

Corporate Finance/Restructuring

   $ 6,331         25       $ 771   

Forensic and Litigation Consulting

     1,938         17         468   

Economic Consulting

     15         —           173   

Technology

     2         —           148   

Strategic Communications

     2         —           201   
  

 

 

    

 

 

    

 

 

 
     8,288         42         1,761   

Unallocated Corporate

     2,131         3         1,014   
  

 

 

    

 

 

    

 

 

 

Total

   $ 10,419         45       $ 2,775   
  

 

 

    

 

 

    

 

 

 

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. Our effective tax rate for the three months ended September 30, 2013 was not meaningful due to the impact of the non-deductible goodwill impairment charge of $83.8 million. The effective tax rate for the three months ended September 30, 2013 excluding the impact of the goodwill impairment charge would have been 38.8% as compared to 35.0% for the same prior year period. For the three months ended September 30, 2012, the effective tax rate was favorably impacted by a discrete item related to the recognition of foreign deferred tax assets. Excluding the impact of this discrete item, the effective tax rate for the three months ended September 30, 2012 would have been 38.5%.

Nine Months Ended September 30, 2013 Compared to Nine Months Ended September 30, 2012

Revenues and operating income (loss)

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

Unallocated corporate expenses

Unallocated corporate expenses decreased $9.8 million, or 16.4%, to $49.9 million for the nine months ended September 30, 2013 from $59.7 million for the same prior year period. Excluding the impact of unallocated corporate special charges of $2.2 million recorded in the nine months ended September 30, 2013 and $1.1 million recorded in the nine months ended September 30, 2012, unallocated corporate expenses decreased $10.9 million, or 18.6%. The decrease was primarily due to a reduction in performance-based compensation expense, lower spending on core marketing and lower costs related to strategic planning activities when compared to the same prior year period.

Interest income and other

Interest income and other, which includes foreign currency transaction gains and losses, decreased by $2.8 million to $1.7 million for the nine months ended September 30, 2013 from $4.5 million for the same prior year period. The decrease is primarily due to net foreign currency transaction losses in the period ended September 30, 2013 as compared to net gains in the same prior year period. Transaction gains and losses, both realized and unrealized, relate to the remeasurement or settlement of monetary assets and liabilities that are

 

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denominated in a currency other than an entity’s functional currency. These monetary assets and liabilities include current intercompany receivables and payables. The foreign exchange losses in the nine months ended September 30, 2013 were primarily due to the volatility of the British pound relative to the U.S. dollar during the nine months ended September 30, 2013, particularly in the third quarter of 2013. In addition, the strengthening of the U.S. dollar and Hong Kong dollar against the Australian dollar resulted in losses during the nine months ended September 30, 2013.

Interest expense

Interest expense was $38.6 million for the nine months ended September 30, 2013 as compared to $43.6 million for the same prior year period. Interest expense in 2013 was favorably impacted by lower average borrowings, lower interest expense and deferred financing fees in 2013 as compared to the same prior year period, primarily due to the repayment in July 2012 of $150.0 million aggregate principal amount of Convertible Notes and the extinguishment of the 2016 Notes in the fourth quarter of 2012, which was partially offset by interest expense relating to the issuance of the 2022 Notes in the fourth quarter of 2012.

Special charges

During the nine months ended September 30, 2013, we recorded special charges totaling $10.8 million, of which $3.1 million was non-cash. The charges primarily reflect actions we took to realign our workforce to address current business demands impacting our Corporate Finance/Restructuring and Forensic and Litigation Consulting segments and to reduce certain corporate overhead within our EMEA region. The special charges consist of $10.2 million of salary continuance and other contractual employee related costs associated with the reduction in workforce of 45 employees and $0.6 million of costs to consolidate leased office space within one location and to adjust prior special charges for changes to sublease terms and employee termination costs.

During the nine months ended September 30, 2012, we recorded special charges totaling $29.6 million, of which $5.0 million was non-cash. The charges reflected actions we took to realign our workforce to address current business demands and global macro-economic conditions impacting our Forensic and Litigation Consulting, Strategic Communications and Technology segments, to address certain targeted practices within our Corporate Finance/Restructuring and Economic Consulting segments, and to reduce excess real estate capacity. These actions included the termination of 116 employees, the consolidation of leased office space within nine office locations and certain other actions.

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

 

     Nine Months Ended      Nine Months Ended  
     September 30,      September 30,  
     2013      2012  
     Special Charges      Total
Headcount
     Special Charges      Total
Headcount
 

Corporate Finance/Restructuring

   $ 6,399         25       $ 11,332         4   

Forensic and Litigation Consulting

     2,111         17         8,276         43   

Economic Consulting

     11         —           991         8   

Technology

     16         —           3,114         42   

Strategic Communications

     66         —           4,712         15   
  

 

 

    

 

 

    

 

 

    

 

 

 
     8,603         42         28,425         112   

Unallocated Corporate

     2,243         3         1,132         4   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 10,846         45       $ 29,557         116   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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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. Our effective tax rate for the nine months ended September 30, 2013 was not meaningful due to the impact of the non-deductible goodwill impairment charge of $83.8 million. The effective tax rate for the nine months ended September 30, 2013, excluding the impact of the goodwill impairment charge would have been 40.5% as compared to 35.0% for the same period in 2012. During the nine months ended September 30, 2013, we recorded a deferred tax valuation reserve related to foreign tax credits, primarily due to lower forecasted foreign earnings, resulting in a discrete increase to the income tax provision in the amount of $6.9 million. We also recognized the impact of a discrete benefit related to the favorable resolution of an income tax contingency in the amount of $2.2 million. For the nine months ended September 30, 2012, the effective tax rate was favorably impacted by a discrete item related to the recognition of foreign deferred tax assets. Excluding the impact of these discrete items on both periods, the effective tax rate for the nine months ended September 30, 2013 would have been 36.4% as compared to 36.6% in the same prior year period.

SEGMENT RESULTS

Total Adjusted Segment EBITDA

The following table reconciles net income (loss) to Total Segment Operating Income (Loss) and Total Adjusted Segment EBITDA for the three and nine months ended September 30, 2013 and 2012.

 

     Three Months Ended
September 30,
     Nine Months Ended
September 30,
 
     2013     2012      2013     2012  
     (in thousands)      (in thousands)  

Net income (loss)

   $ (50,621   $ 22,713       $ (3,455   $ 48,891   

Add back:

         

Income tax provision

     3,360        12,251         36,546        26,372   

Other income (expense), net

     11,662        11,624         36,898        39,104   

Unallocated corporate expense

     18,077        19,627         49,923        59,726   
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Segment Operating Income (Loss)

   $ (17,522   $ 66,215       $ 119,912      $ 174,093   

Add back:

         

Segment depreciation expense

     7,112        6,038         20,932        18,646   

Amortization of other intangible assets

     5,776        5,766         17,293        16,773   

Segment special charges

     8,288        1,761         8,603        28,425   

Goodwill impairment charge

     83,752        —           83,752        —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Total Adjusted Segment EBITDA

   $ 87,406      $ 79,780       $ 250,492      $ 237,937   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

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Other Segment Operating Data

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2013      2012     2013      2012  

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

          

Corporate Finance/Restructuring

     732         621        732         621   

Forensic and Litigation Consulting

     999         939        999         939   

Economic Consulting

     528         467        528         467   

Technology

     297         283        297         283   

Strategic Communications

     617         597        617         597   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total revenue-generating professionals

     3,173         2,907        3,173         2,907   
  

 

 

    

 

 

   

 

 

    

 

 

 

Utilization rates of billable professionals:(1)

          

Corporate Finance/Restructuring

     64      72     66      75

Forensic and Litigation Consulting

     67      63     68      65

Economic Consulting

     79      79     84      82

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

          

Corporate Finance/Restructuring

   $ 396       $ 402      $ 407       $ 409   

Forensic and Litigation Consulting

     324         328        315         323   

Economic Consulting

     512         495        509         493   

 

(1) 

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

 

(2) 

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

 

(3) 

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

 

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CORPORATE FINANCE/RESTRUCTURING

 

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

Revenues

   $ 93,981      $ 93,123      $ 289,775      $ 286,184   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses:

        

Direct cost of revenues

     58,424        57,905        180,373        174,715   

Selling, general and administrative expenses

     16,779        13,689        54,199        42,815   

Special charges

     6,331        771        6,399        11,332   

Acquisition-related contingent consideration

     295        291        (4,866     (2,487

Amortization of other intangible assets

     1,562        1,443        4,945        4,321   
  

 

 

   

 

 

   

 

 

   

 

 

 
     83,391        74,099        241,050        230,696   
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment operating income

     10,590        19,024        48,725        55,488   

Add back:

        

Depreciation and amortization of intangible assets

     2,481        2,156        7,486        6,599