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FCN > SEC Filings for FCN > Form 10-Q on 8-Nov-2012All Recent SEC Filings

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Form 10-Q for FTI CONSULTING INC


8-Nov-2012

Quarterly Report


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

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

BUSINESS OVERVIEW

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

We report financial results for the following five operating segments:

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

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

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

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

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

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


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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.

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


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

EXECUTIVE HIGHLIGHTS



                                              Three Months Ended                       Nine Months Ended
                                                September 30,                            September 30,
                                           2012                 2011                2012                2011
                                            (dollars in thousands,                   (dollars in thousands,
                                          except per share amounts)                except per share amounts)
Revenues                               $    386,055           $ 413,802         $  1,177,526         $ 1,176,055
Special charges                        $      2,775           $      -          $     29,557         $    15,212
Adjusted EBITDA                        $     62,281           $  72,684         $    182,857         $   190,757
Net income                             $     22,713           $  29,439         $     48,891         $    64,022
Earnings per common share-diluted      $       0.55           $    0.70         $       1.17         $      1.47
Adjusted EPS                           $       0.60           $    0.70         $       1.62         $      1.68
Cash provided by operating
activities                             $     70,912           $  59,672         $     13,624         $    46,848
Total number of employees at
September 30,                                 3,819               3,824                3,819               3,824


Third Quarter 2012 Executive Highlights

Revenues

Revenues for the quarter ended September 30, 2012 decreased $27.7 million, or 6.7%, to $386.1 million, compared to $413.8 million in the same prior year period. Revenue declined in our Forensic and Litigation Consulting segment due to a slowdown in regulatory cases. Revenues in our Technology segment were impacted by unit-based service price declines relative to our mix of clients. Additionally, revenue from our Strategic Communications segment declined with fewer M&A engagements and pricing pressure on portions of our retained business.

Special charges

We recorded a $2.8 million special charge in the three months ended September 30, 2012, which reduced our fully diluted earnings per share by $0.05. This charge relates to net curtailment costs related to three real estate leases in North America as we continue our efforts to make more efficient use of office space.

Adjusted EBITDA

Adjusted EBITDA decreased $10.4 million, or 14.3%, to $62.3 million, or 16.1% of revenues, compared to $72.7 million, or 17.6% of revenues, in the prior year period. Adjusted EBITDA decreased primarily as a result of underutilization in our Forensic and Litigation Consulting and Corporate Finance/Restructuring segments coupled with pricing pressures in our Technology segment. These impacts were partially offset by reduced unallocated corporate and regional infrastructure expense.

Net income

Net income decreased $6.7 million, or 22.8%, to $22.7 million, compared to $29.4 million in the prior year period. The decrease was primarily attributable to the decrease in revenues described above and the special charge recorded in the three months ended September 30, 2012 partially offset by reduced interest expense.

Earnings per common share and Adjusted EPS

Earnings per diluted share for the three months ended September 30, 2012 were $0.55, which included $2.8 million of special charges, compared to $0.70 in the prior year period. Adjusted earnings per diluted share, which exclude the impact of the special charge, were $0.60, compared to $0.70 in the prior year period due to the impact of the operating results described above.


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Cash provided by operating activities

Cash provided by operating activities for the three months ended September 30, 2012 was $70.9 million compared to $59.7 million for the three months ended September 30, 2011. The increase was the result of lower income tax and employee loan payments and a reduction of overhead spending. Cash collections for the quarter were comparable to the prior year period; however, our collection experience continues to be affected by the mix of business largely related to the payment conditions of key matters, such as, receivables that are subject to court approval.

Headcount

Headcount of 3,819 at September 30, 2012 decreased slightly from the prior year, as the Company continues to manage growth against commercial demand on a segment by segment basis. Non-billable headcount decreased as Corporate infrastructure staff is realigned to support international expansion. Billable headcount increased in the Economic Consulting and Corporate Finance/Restructuring segments to support growing operations.

Other strategic activities

On June 6, 2012, our Board of Directors authorized a $250 million stock repurchase program (the "Repurchase Program") to be executed over a two year period. During the three months ended September 30, 2012 we repurchased and retired 757,650 shares of our common stock for an average price per share of $26.40, with a value equivalent to approximately $20.0 million. At September 30, 2012, a balance of approximately $230 million remained available under the Repurchase Program.


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