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FCN > SEC Filings for FCN > Form 10-Q on 9-May-2013All Recent SEC Filings

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Form 10-Q for FTI CONSULTING INC


9-May-2013

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 months ended March 31, 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. 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.

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


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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.

We define Adjusted EBITDA as net income before income tax provision, other income (expense), depreciation, amortization of intangible assets, special charges and goodwill impairment charges. We define


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Adjusted Segment EBITDA as a segment's share of consolidated operating income 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. We define Adjusted Net Income and Adjusted Earnings Per Diluted Share as net income and earnings per diluted share, respectively, excluding the impact of the special charges, goodwill impairment charges and loss on early extinguishment of debt that were incurred in that period. Adjusted EBITDA, Adjusted Segment EBITDA, Total Adjusted Segment EBITDA, Adjusted Earnings Per Share 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 unless the definition is the same. 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 a useful operating performance measure 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. We use Adjusted EBITDA and Adjusted Segment EBITDA to evaluate and compare the operating performance of our segments. Reconciliations of GAAP to non-GAAP financial measures are included elsewhere in this MD&A.

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
                                                           March 31,
                                                  2013                     2012
                                                 (dollar amounts in thousands,
                                                   except per share amounts)
     Revenues                                 $     407,178              $ 395,228
     Adjusted EBITDA                          $      59,326              $  53,960
     Net income                               $      23,680              $  18,431
     Earnings per common share-diluted        $        0.58              $    0.43
     Adjusted EPS                             $        0.59              $    0.43
     Cash used in operating activities        $      (2,304 )            $ (57,821 )
     Total number of employees at March 31,           3,944                  3,865


First Quarter 2013 Executive Highlights

Revenues

Revenues for the quarter ended March 31, 2013 increased $12.0 million, or 3%, to $407.2 million, compared to $395.2 million in the same prior year period. Acquisition-related revenue primarily in our Corporate Finance/Restructuring segment contributed 1.8% of the revenue growth. Our Economic Consulting segment contributed $15 million of increased revenue with continued strong demand for financial economics and anti-trust work. Revenue declined in our Forensic and Litigation Consulting segment due to a continued slowness in regulatory cases. Revenues in our Technology segment were also negatively impacted by the winding down of certain large litigation and investigation related matters and our mix of clients.

Adjusted EBITDA

Adjusted EBITDA increased $5.4 million, or 10%, to $59.3 million, or 14.6% of revenues, compared to $54.0 million, or 13.7% of revenues, in the same prior year period. Adjusted EBITDA increased primarily as a result of increased demand for our Economic Consulting segment and lower overhead expenses in our corporate/regional departments.


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Net income

Net income increased $5.3 million, or 28.5%, to $23.7 million, compared to $18.4 million in the same prior year period. This increase was attributable to positive operating results described above, lower interest expense as a result of our refinancing of our debt arrangement in the fourth quarter of 2012, and lower income tax expense as a result of a discrete favorable tax contingency effectively settled during the period.

Earnings per common share and Adjusted EPS

Earnings per diluted share for the three months ended March 31, 2013 were $0.58 which included $0.4 million (or $0.01 per diluted share) of adjustments to previously recorded special charges, compared to $0.43 in the same prior year period. Adjusted earnings per diluted share, which exclude the impact of the special charge, were $0.59, compared to $0.43 in the same prior year period.

Cash used in operating activities

Cash used in operating activities for the three months ended March 31, 2013 was $2.3 million compared to $57.8 million for the three months ended March 31, 2012. The year-over-year reduction in cash used in operating activities was the result of reduced bonus payments, $25 million of which were accelerated and paid in the fourth quarter of 2012, and lower income tax and employee loan payments. Cash collections for the quarter were comparable to the same prior year period.

Headcount

Headcount of 3,944 at March 31, 2013 increased by 79 employees, as the Company continues to manage growth against commercial demand on a segment-by-segment basis. Billable headcount increased due to acquisitions as well as higher headcount in the Corporate Finance/Restructuring, Strategic Communications, Economic Consulting and Forensic and Litigation Consulting segments, partially offset by a decrease in the Technology segment in part as a result of the special charge taken in the second quarter of 2012. Headcount increased by 58 year-over-year as a result of acquisitions during this period.

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 three months ended March 31, 2013, we repurchased and retired 826,800 shares of our common stock for approximately $28.8 million at an average price per share of $34.78. As of March 31, 2013, a balance of approximately $171.2 million remained available under the 2012 Repurchase Program.

On March 19, 2013 the Company announced the acquisition of the operations of C2 Group, a highly regarded bipartisan government relations and lobbying firm based in Washington, D.C. The addition of the services offered by C2 Group will be part of the public affairs offering of our Strategic Communications segment and will expand this segment's services into government relations and direct advocacy.

Subsequent events

On April 4, 2013, the Company announced the acquisition of the operations of Taylor Woodings partnership, an Australian specialist corporate advisory firm with offices in Sydney, Melbourne, Perth and Brisbane. On May 1, 2013, the Company announced the acquisition of the operations of Princeton Economics Group, an economic consulting firm based in Princeton, N.J. The Taylor Woodings' acquisition will expand the geographic footprint and service offerings of FTI Consulting in Australia, adding nearly 80 professionals into the Company's Corporate Finance/Restructuring segment, and the Princeton Economics Group acquisition will add 10 professionals to the Company's Economic Consulting segment, enhancing capacity within antitrust and competition economics services. The impact of these acquisitions will be recorded in the Company's financial statements for the quarterly period ending June 30, 2013.


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