fcn-10q_20160630.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

x

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

For the quarterly period ended June 30, 2016

OR

¨

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

For the transition period from                    to                    

Commission file number 001-14875

 

FTI CONSULTING, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

Maryland

52-1261113

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

 

 

1101 K Street NW,

Washington, D.C.

20005

(Address of Principal Executive Offices)

(Zip Code)

(202) 312-9100

(Registrant’s telephone number, including area code)

 

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

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

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

 

Large accelerated filer

x

Accelerated filer

¨

 

 

 

 

Non-accelerated filer

¨  (Do not check if a smaller reporting company)

Smaller reporting company

¨

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

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

 

Class

Outstanding at July 22, 2016

Common stock, par value $0.01 per share

42,179,584

 

 

 

 


 

FTI CONSULTING, INC. AND SUBSIDIARIES

INDEX

 

 

 

Page 

PART I—FINANCIAL INFORMATION

 

 

 

Item 1.

Financial Statements

3

 

 

 

 

Condensed Consolidated Balance Sheets—June 30, 2016 and December 31, 2015

3

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income—Three and Six Months Ended June 30, 2016 and 2015

4

 

 

 

 

Condensed Consolidated Statement of Stockholders’ Equity—Six Months Ended June 30, 2016

5

 

 

 

 

Condensed Consolidated Statements of Cash Flows—Six Months Ended June 30, 2016 and 2015

6

 

 

 

 

Notes to Condensed Consolidated Financial Statements

7

 

 

 

Item 2.

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

18

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

38

 

 

 

Item 4.

Controls and Procedures

38

 

 

PART II—OTHER INFORMATION

 

 

 

 

Item 1.

Legal Proceedings

39

 

 

 

Item 1A.

Risk Factors

39

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

39

 

 

 

Item 3.

Defaults Upon Senior Securities

39

 

 

 

Item 4.

Mine Safety Disclosures

39

 

 

 

Item 5.

Other Information

40

 

 

 

Item 6.

Exhibits

40

 

 

SIGNATURE

41

 

 

2


 

PART I—FINANCIAL INFORMATION

FTI Consulting, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except per share data)

(Unaudited)

Item 1.

Financial Statements

 

 

 

June 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

Assets

 

(Unaudited)

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

182,665

 

 

$

149,760

 

Accounts receivable:

 

 

 

 

 

 

 

 

Billed receivables

 

 

415,750

 

 

 

405,000

 

Unbilled receivables

 

 

330,730

 

 

 

280,538

 

Allowance for doubtful accounts and unbilled services

 

 

(199,182

)

 

 

(185,754

)

Accounts receivable, net

 

 

547,298

 

 

 

499,784

 

Current portion of notes receivable

 

 

34,418

 

 

 

36,115

 

Prepaid expenses and other current assets

 

 

47,361

 

 

 

55,966

 

Total current assets

 

 

811,742

 

 

 

741,625

 

Property and equipment, net of accumulated depreciation

 

 

68,764

 

 

 

74,760

 

Goodwill

 

 

1,189,602

 

 

 

1,198,298

 

Other intangible assets, net of amortization

 

 

57,568

 

 

 

63,935

 

Notes receivable, net of current portion

 

 

112,095

 

 

 

106,882

 

Other assets

 

 

47,693

 

 

 

43,518

 

Total assets

 

$

2,287,464

 

 

$

2,229,018

 

Liabilities and Stockholders' Equity

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable, accrued expenses and other

 

$

94,782

 

 

$

89,845

 

Accrued compensation

 

 

193,826

 

 

 

227,783

 

Billings in excess of services provided

 

 

36,434

 

 

 

29,449

 

Total current liabilities

 

 

325,042

 

 

 

347,077

 

Long-term debt, net

 

 

495,150

 

 

 

494,772

 

Deferred income taxes

 

 

161,433

 

 

 

139,787

 

Other liabilities

 

 

102,596

 

 

 

99,779

 

Total liabilities

 

 

1,084,221

 

 

 

1,081,415

 

Commitments and contingent liabilities (note 10)

 

 

 

 

 

 

 

 

Stockholders' equity

 

 

 

 

 

 

 

 

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

   outstanding

 

 

 

 

 

 

Common stock, $0.01 par value; shares authorized — 75,000;

   shares issued and outstanding —  42,083 (2016) and 41,234 (2015)

 

 

420

 

 

 

412

 

Additional paid-in capital

 

 

418,776

 

 

 

400,705

 

Retained earnings

 

 

912,209

 

 

 

855,481

 

Accumulated other comprehensive loss

 

 

(128,162

)

 

 

(108,995

)

Total stockholders' equity

 

 

1,203,243

 

 

 

1,147,603

 

Total liabilities and stockholders' equity

 

$

2,287,464

 

 

$

2,229,018

 

 

See accompanying notes to condensed consolidated financial statements

 

3


 

FTI Consulting, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(in thousands, except per share data)

(Unaudited)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Revenues

 

$

460,147

 

 

$

449,137

 

 

$

930,432

 

 

$

881,475

 

Operating expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Direct cost of revenues

 

 

303,194

 

 

 

291,469

 

 

 

608,830

 

 

 

570,499

 

Selling, general and administrative expenses

 

 

108,245

 

 

 

109,045

 

 

 

211,854

 

 

 

211,259

 

Special charges

 

 

1,750

 

 

 

 

 

 

6,811

 

 

 

 

Acquisition-related contingent consideration

 

 

206

 

 

 

(1,538

)

 

 

1,340

 

 

 

(1,304

)

Amortization of other intangible assets

 

 

2,590

 

 

 

3,007

 

 

 

5,196

 

 

 

6,019

 

 

 

 

415,985

 

 

 

401,983

 

 

 

834,031

 

 

 

786,473

 

Operating income

 

 

44,162

 

 

 

47,154

 

 

 

96,401

 

 

 

95,002

 

Other income (expense)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income and other

 

 

4,125

 

 

 

950

 

 

 

6,682

 

 

 

813

 

Interest expense

 

 

(6,303

)

 

 

(12,473

)

 

 

(12,532

)

 

 

(24,841

)

 

 

 

(2,178

)

 

 

(11,523

)

 

 

(5,850

)

 

 

(24,028

)

Income before income tax provision

 

 

41,984

 

 

 

35,631

 

 

 

90,551

 

 

 

70,974

 

Income tax provision

 

 

15,437

 

 

 

13,922

 

 

 

33,823

 

 

 

25,579

 

Net income

 

$

26,547

 

 

$

21,709

 

 

$

56,728

 

 

$

45,395

 

Earnings per common share — basic

 

$

0.65

 

 

$

0.53

 

 

$

1.40

 

 

$

1.12

 

Earnings per common share — diluted

 

$

0.64

 

 

$

0.52

 

 

$

1.37

 

 

$

1.09

 

Other comprehensive (loss) income, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments, net of tax expense

   of $0

 

$

(18,809

)

 

$

13,298

 

 

$

(19,167

)

 

$

(7,184

)

Total other comprehensive (loss) income, net of tax

 

 

(18,809

)

 

 

13,298

 

 

 

(19,167

)

 

 

(7,184

)

Comprehensive income

 

$

7,738

 

 

$

35,007

 

 

$

37,561

 

 

$

38,211

 

 

See accompanying notes to condensed consolidated financial statements

 

 

4


 

FTI Consulting, Inc. and Subsidiaries

Condensed Consolidated Statement of Stockholders’ Equity

(in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

Common Stock

 

 

Paid-in

 

 

Retained

 

 

Comprehensive

 

 

 

 

 

 

 

Shares

 

 

Amount

 

 

Capital

 

 

Earnings

 

 

Loss

 

 

Total

 

Balance at December 31, 2015

 

 

41,234

 

 

$

412

 

 

$

400,705

 

 

$

855,481

 

 

$

(108,995

)

 

$

1,147,603

 

Net income

 

 

 

 

 

 

 

 

 

 

$

56,728

 

 

 

 

 

$

56,728

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(19,167

)

 

 

(19,167

)

Issuance of common stock in connection with:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exercise of options, net of income tax benefit

   from share-based awards of $946

 

 

423

 

 

 

4

 

 

 

12,657

 

 

 

 

 

 

 

 

 

12,661

 

Restricted share grants, less net settled shares

   of 79

 

 

511

 

 

 

5

 

 

 

(2,764

)

 

 

 

 

 

 

 

 

(2,759

)

Stock units issued under incentive compensation

   plan

 

 

 

 

 

 

 

 

1,842

 

 

 

 

 

 

 

 

 

1,842

 

Purchase and retirement of common stock

 

 

(85

)

 

 

(1

)

 

 

(2,902

)

 

 

 

 

 

 

 

 

(2,903

)

Share-based compensation

 

 

 

 

 

 

 

 

9,238

 

 

 

 

 

 

 

 

 

9,238

 

Balance at June 30, 2016

 

 

42,083

 

 

$

420

 

 

$

418,776

 

 

$

912,209

 

 

$

(128,162

)

 

$

1,203,243

 

 

See accompanying notes to condensed consolidated financial statements

 

5


 

FTI Consulting, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

 

 

Six Months Ended June 30,

 

Operating activities

 

2016

 

 

2015

 

Net income

 

$

56,728

 

 

$

45,395

 

Adjustments to reconcile net income to net cash used in operating

   activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

16,049

 

 

 

15,111

 

Amortization and impairment of other intangible assets

 

 

5,196

 

 

 

6,019

 

Acquisition-related contingent consideration

 

 

1,340

 

 

 

(1,304

)

Provision for doubtful accounts

 

 

4,344

 

 

 

6,571

 

Non-cash share-based compensation

 

 

9,667

 

 

 

10,581

 

Non-cash interest expense

 

 

992

 

 

 

1,343

 

Other

 

 

(639

)

 

 

(223

)

Changes in operating assets and liabilities, net of effects from

   acquisitions:

 

 

 

 

 

 

 

 

Accounts receivable, billed and unbilled

 

 

(57,501

)

 

 

(70,710

)

Notes receivable

 

 

(4,640

)

 

 

(6,626

)

Prepaid expenses and other assets

 

 

(943

)

 

 

(5,120

)

Accounts payable, accrued expenses and other

 

 

1,932

 

 

 

(2,435

)

Income taxes

 

 

29,329

 

 

 

16,458

 

Accrued compensation

 

 

(28,518

)

 

 

(40,587

)

Billings in excess of services provided

 

 

7,297

 

 

 

(5,204

)

Net cash provided by (used in) operating activities

 

 

40,633

 

 

 

(30,731

)

Investing activities

 

 

 

 

 

 

 

 

Payments for acquisition of businesses, net of cash received

 

 

(56

)

 

 

(576

)

Purchases of property and equipment

 

 

(11,983

)

 

 

(17,533

)

Other

 

 

96

 

 

 

64

 

Net cash used in investing activities

 

 

(11,943

)

 

 

(18,045

)

Financing activities

 

 

 

 

 

 

 

 

Payments of debt issue costs

 

 

 

 

 

(3,090

)

Deposits

 

 

2,557

 

 

 

2,423

 

Purchase and retirement of common stock

 

 

(2,903

)

 

 

 

Net issuance of common stock under equity compensation plans

 

 

9,353

 

 

 

8,662

 

Other

 

 

(154

)

 

 

(326

)

Net cash provided by financing activities

 

 

8,853

 

 

 

7,669

 

Effect of exchange rate changes on cash and cash equivalents

 

 

(4,638

)

 

 

(2,585

)

Net increase (decrease) in cash and cash equivalents

 

 

32,905

 

 

 

(43,692

)

Cash and cash equivalents, beginning of period

 

 

149,760

 

 

 

283,680

 

Cash and cash equivalents, end of period

 

$

182,665

 

 

$

239,988

 

Supplemental cash flow disclosures

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

11,242

 

 

$

23,047

 

Cash paid for income taxes, net of refunds

 

 

4,493

 

 

 

9,121

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Issuance of stock units under incentive compensation plans

 

 

1,842

 

 

 

2,124

 

 

See accompanying notes to condensed consolidated financial statements

 

 

6


 

FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

1. Basis of Presentation and Significant Accounting Policies

The unaudited condensed consolidated financial statements of FTI Consulting, Inc., including its consolidated subsidiaries (collectively, the “Company,” “we,” “our,” or “FTI Consulting”), presented herein, have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and under the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. Some of the information and footnote disclosures normally included in annual financial statements have been condensed or omitted pursuant to those rules and regulations. Certain prior period amounts have been reclassified to conform to the current period presentation. In management’s opinion, the interim financial statements reflect all adjustments that are necessary for a fair presentation of the results for the interim periods presented. All adjustments made were normal recurring accruals. Results of operations for the interim periods presented herein are not necessarily indicative of results of operations for a full year. These financial statements should be read in conjunction with the consolidated financial statements and the notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2015 filed with the SEC.

 

 

2. Earnings Per Common Share

Basic earnings per common share are calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per common share adjust basic earnings per common share for the effects of potentially dilutive common shares. Potentially dilutive common shares include the dilutive effects of shares issuable under our equity compensation plans, including stock options and restricted stock using the treasury stock method.

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Numerator—basic and diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

26,547

 

 

$

21,709

 

 

$

56,728

 

 

$

45,395

 

Denominator

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares

   outstanding — basic

 

 

40,820

 

 

 

40,792

 

 

 

40,663

 

 

 

40,607

 

Effect of dilutive stock options

 

 

316

 

 

 

451

 

 

 

223

 

 

 

414

 

Effect of dilutive restricted shares

 

 

463

 

 

 

453

 

 

 

487

 

 

 

508

 

Weighted average number of common shares

   outstanding — diluted

 

 

41,599

 

 

 

41,696

 

 

 

41,373

 

 

 

41,529

 

Earnings per common share — basic

 

$

0.65

 

 

$

0.53

 

 

$

1.40

 

 

$

1.12

 

Earnings per common share — diluted

 

$

0.64

 

 

$

0.52

 

 

$

1.37

 

 

$

1.09

 

Antidilutive stock options and restricted shares

 

 

1,374

 

 

 

1,524

 

 

 

2,016

 

 

 

1,849

 

 

 

3. New Accounting Standards

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires the estimation and recording of expected credit losses on financial assets based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount.  This guidance is effective beginning January 1, 2020.  We have not yet determined the impact that the adoption of this guidance will have on our consolidated financial statements and disclosures.  

In March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This standard makes several modifications to Topic 718, including the accounting for forfeitures, employer tax withholding on share-based compensation and income tax consequences, which are intended to simplify various aspects of the accounting for share-based compensation. ASU 2016-09 also clarifies the statement of cash flows presentation for certain components of share-based awards. The standard is effective beginning January 1, 2017, although early adoption is permitted. We have not yet determined the impact that the adoption of this guidance will have on our consolidated financial statements.

7


 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), that replaces existing lease guidance. Under this ASU, leases will be required to record right-of-use assets and corresponding lease liabilities on the balance sheet. This guidance is effective beginning January 1, 2019. The new standard is required to be applied with a modified retrospective approach to each prior reporting period presented. We have not yet determined the impact that the adoption of this guidance will have on our consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). Under this ASU and subsequently issued amendments, revenue is recognized at the time when goods or services are transferred to a customer in an amount that reflects the consideration it expects to receive in exchange for those goods or services. Companies may use either a full retrospective or a modified retrospective approach to adopt this ASU. This guidance is effective beginning January 1, 2018. We are currently evaluating how the adoption of this accounting standard will impact our consolidated financial statements and related disclosures, including the transition approach.

 

 

4. Special Charges

During the three months ended June 30, 2016, we recorded special charges totaling $1.7 million related to the termination of 19 employees in the health solutions practice of our Forensic and Litigation Consulting (“FLC”) segment. The termination actions resulted from the elimination of certain specialized offerings which no longer support the strategic focus of this practice. The special charges consisted of salary continuance and other contractual employee-related costs, net of the reversal of accelerated expense of a forgivable loan.

During the six months ended June 30, 2016, we recorded special charges of $6.8 million related to the employee terminations in the health solutions practice of our FLC segment as described above, and special charges recorded during the three months ended March 31, 2016 related to employee terminations in our Technology segment.  

Activity related to the liability for these costs for the six months ended June 30, 2016 is as follows:

 

 

 

Employee

 

 

Lease

 

 

 

 

 

 

 

Termination

 

 

Termination

 

 

 

 

 

 

 

Costs

 

 

Costs

 

 

Total

 

Balance at December 31, 2015

 

$

7,768

 

 

$

4,045

 

 

$

11,813

 

Additions (1)

 

 

7,023

 

 

 

 

 

 

7,023

 

Payments

 

 

(4,345

)

 

 

(386

)

 

 

(4,731

)

Foreign currency translation adjustment and other

 

 

(3

)

 

 

 

 

 

(3

)

Balance at June 30, 2016

 

$

10,443

 

 

$

3,659

 

 

$

14,102

 

 

(1)

Excludes $0.2 million in net non-cash expense reversals.

 

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. Of the $14.1 million liability for special charges, $4.5 million is expected to be paid during the remainder of 2016, $4.1 million is expected to be paid in 2017, $2.6 million is expected to be paid in 2018, $1.2 million is expected to be paid in 2019 and the remaining balance of $1.7 million is expected to be paid between 2020 and 2026.

 

 

5. Allowance for Doubtful Accounts and Unbilled Services

We record adjustments to the allowance for doubtful accounts and unbilled services as a reduction in revenue when there are changes in estimates of fee reductions that may be imposed by bankruptcy courts and other regulatory institutions, for both billed and unbilled receivables. The allowance for doubtful accounts and unbilled services is also adjusted after the related work has been billed to the client and we discover that collectability is not reasonably assured. These adjustments are included in “Selling, general and administrative expenses” on the Condensed Consolidated Statements of Comprehensive Income and totaled $3.9 million and $4.3 million for the three and six months ended June 30, 2016, respectively, and $3.6 million and $6.6 million for the three and six months ended June 30, 2015, respectively.

 

 

6. Research and Development Costs

Research and development costs related to software development totaled $4.5 million and $8.5 million for the three and six months ended June 30, 2016, respectively, and $4.8 million and $10.7 million for the three and six months ended June 30, 2015,

8


 

respectively. Research and development costs are included in “Selling, general and administrative expenses” on the Condensed Consolidated Statements of Comprehensive Income.

 

 

7. Financial Instruments

Fair Value of Financial Instruments

We consider the recorded value of certain financial assets and liabilities, which consist primarily of cash equivalents, accounts receivable and accounts payable, to approximate the fair value of the respective assets and liabilities at June 30, 2016 and December 31, 2015, based on the short-term nature of the assets and liabilities. The fair value of our long-term debt at June 30, 2016 was $516.5 million compared to a carrying value of $500.0 million. At December 31, 2015, the fair value of our long-term debt was $513.5 million compared to a carrying value of $500.0 million. We determine the fair value of our long-term debt primarily based on quoted market prices for our 6% Senior Notes Due 2022 (“2022 Notes”). The fair value of our borrowings on our $550.0 million senior secured bank revolving credit facility (“Senior Bank Credit Facility”) approximates the carrying amount. 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.

We estimate the fair value of acquisition-related contingent consideration based on the present value of the consideration expected to be paid during the remainder of the earn-out period, based on management’s assessment of the acquired operations’ forecasted earnings. This fair value measure is based on significant inputs not observed in the market and thus represents a Level 3 measurement.

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

Any change in the fair value of an acquisition’s contingent consideration liability results in a remeasurement gain or loss that is recorded as income or expense, respectively, and is included in “Acquisition-related contingent consideration” on the Condensed Consolidated Statements of Comprehensive Income. There was no remeasurement gain or loss recorded during the three months ended June 30, 2016.  During the six months ended June 30, 2016, we recorded a $1.0 million expense related to the increase in the liability for future expected contingent consideration payments, driven by improved business results in the current period as well as expected results during the remainder of the earn-out period.  During the three and six months ended June 30, 2015, we recorded a $1.7 million gain related to the change in fair value of future contingent consideration payments, of which $1.5 million related to a termination of a contingent consideration arrangement for which no future payments will be made.  

 

 

8. Goodwill and Other Intangible Assets

Goodwill

The changes in the carrying amounts of goodwill by operating segment for the six months ended June 30, 2016, are as follows:

 

 

 

Corporate

 

 

Forensic and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Finance &

 

 

Litigation

 

 

Economic

 

 

 

 

 

 

Strategic

 

 

 

 

 

 

 

Restructuring

 

 

Consulting

 

 

Consulting

 

 

Technology

 

 

Communications

 

 

Total

 

Balance at December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Goodwill

 

 

441,548

 

 

 

235,211

 

 

 

269,341

 

 

 

117,888

 

 

 

328,449

 

 

 

1,392,437

 

Accumulated goodwill impairment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(194,139

)

 

 

(194,139

)

Goodwill, net at December 31, 2015

 

$

441,548

 

 

$

235,211

 

 

$

269,341

 

 

$

117,888

 

 

$

134,310

 

 

$

1,198,298

 

Foreign currency translation adjustment and

   other

 

 

435

 

 

 

(2,255

)

 

 

(565

)

 

 

(159

)

 

 

(6,152

)

 

 

(8,696

)

Goodwill

 

 

441,983

 

 

 

232,956

 

 

 

268,776

 

 

 

117,729

 

 

 

322,297

 

 

 

1,383,741

 

Accumulated goodwill impairment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(194,139

)

 

 

(194,139

)

Goodwill, net at June 30, 2016

 

$

441,983

 

 

$

232,956

 

 

$

268,776

 

 

$

117,729

 

 

$

128,158

 

 

$

1,189,602

 

 

9


 

Other Intangible Assets

Other intangible assets with finite lives are amortized over their estimated useful lives. For intangible assets with finite lives, we recorded amortization expense of $2.6 million and $5.2 million for the three and six months ended June 30, 2016, respectively, and $3.0 million and $6.0 million for the three and six months ended June 30, 2015 respectively. Based solely on the amortizable intangible assets recorded as of June 30, 2016, we estimate amortization expense to be $5.1 million during the remainder of 2016, $9.4 million in 2017, $7.9 million in 2018, $7.2 million in 2019, $7.1 million in 2020, $6.6 million in 2021 and $8.7 million in years after 2021. 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.

 

 

9. Long-Term Debt

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

 

 

 

June 30,

 

 

December 31,

 

 

 

2016

 

 

2015

 

6% senior notes due 2022

 

 

300,000

 

 

 

300,000

 

Senior Bank Credit Facility

 

 

200,000

 

 

 

200,000

 

Total debt

 

 

500,000

 

 

 

500,000

 

Less deferred debt issue costs

 

 

(4,850

)

 

 

(5,228

)

Long-term debt, net

 

$

495,150

 

 

$

494,772

 

 

There were $200.0 million in borrowings outstanding under the Company’s Senior Bank Credit Facility as of June 30, 2016. The Company has classified these borrowings as long-term debt in the accompanying Condensed Consolidated Balance Sheets as the Company has the intent and ability, as supported by availability under the credit agreement entered into as of June 26, 2015, to refinance these borrowings for more than one year from the applicable balance sheet date. Additionally, $1.4 million of the borrowing limit was utilized (and, therefore, unavailable) as of June 30, 2016 for letters of credit.

For further information on our 2022 Notes and Senior Bank Credit Facility, see footnote “12. Long-Term Debt” in Part II, Item 8 of our Annual Report on Form 10-K filed with the SEC for the year ended December 31, 2015.

 

 

10. Commitments and Contingencies

Contingencies

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

 

 

11. Share-Based Compensation

Share-based Awards and Share-based Compensation Expense

During the three months ended June 30, 2016, we awarded 271,064 restricted stock awards and 11,844 restricted stock units. During the six months ended June 30, 2016, we granted stock options exercisable for up to 118,865 shares, 496,336 restricted stock awards, 64,948 restricted stock units and 83,914 performance stock units. These awards are recorded as equity on the Condensed Consolidated Balance Sheets. During the three months ended June 30, 2016, stock options exercisable for up to 73,832 shares and 14,022 restricted stock awards were forfeited prior to the completion of the vesting requirements.

10


 

Total share-based compensation expense, net of forfeitures, for the three months ended June 30, 2016 and 2015 is detailed in the following table:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

Income Statement Classification

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Direct cost of revenues

 

$

2,279

 

 

$

2,234

 

 

$

6,127

 

 

$

6,133

 

Selling, general and administrative expenses

 

 

2,499

 

 

 

2,134

 

 

 

5,208

 

 

 

5,177

 

Special charges

 

 

 

 

 

 

 

 

105

 

 

 

 

Total share-based compensation expense

 

$

4,778

 

 

$

4,368

 

 

$

11,440

 

 

$

11,310

 

 

 

12. 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 the strategic, operational, financial and capital needs of businesses around the world and provides consulting and advisory services on a wide range of areas, such as restructuring (including bankruptcy), interim management, financings, mergers and acquisitions (“M&A”), M&A integration, valuations and tax issues, as well as financial, operational and performance improvement. Our distressed service offerings generally include corporate restructurings and interim management, and our non-distressed service offerings generally include all other services mentioned above.  

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 and interim management services, as well as performance improvement services for our health solutions practice clients, as well as interim management services.

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

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

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

We evaluate the performance of our operating segments based on Adjusted Segment EBITDA. We define Adjusted Segment EBITDA as a segment’s share of consolidated operating income before depreciation, amortization of intangible assets, remeasurement of acquisition-related contingent consideration, special charges and goodwill impairment charges. We define Total Adjusted Segment EBITDA, a non-GAAP measure, 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.

11


 

The table below presents Revenues and Adjusted Segment EBITDA for our reportable segments:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate Finance & Restructuring

 

$

132,142

 

 

$

109,113

 

 

$

259,298

 

 

$

215,325

 

Forensic and Litigation Consulting

 

 

118,193

 

 

 

126,131

 

 

 

237,197

 

 

 

249,396

 

Economic Consulting

 

 

118,006

 

 

 

108,698

 

 

 

248,737

 

 

 

214,779

 

Technology

 

 

41,882

 

 

 

61,826

 

 

 

90,163

 

 

 

116,480

 

Strategic Communications

 

 

49,924

 

 

 

43,369

 

 

 

95,037

 

 

 

85,495

 

Total revenues

 

$

460,147

 

 

$

449,137

 

 

$

930,432

 

 

$

881,475

 

Adjusted Segment EBITDA

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate Finance & Restructuring

 

$

32,041

 

 

$

22,032

 

 

$

63,644

 

 

$

44,512

 

Forensic and Litigation Consulting

 

 

15,190

 

 

 

19,979

 

 

 

34,998

 

 

 

42,050

 

Economic Consulting

 

 

15,381

 

 

 

15,292

 

 

 

36,700