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FCN > SEC Filings for FCN > Form 10-Q on 8-Aug-2013All Recent SEC Filings

Show all filings for FTI CONSULTING INC

Form 10-Q for FTI CONSULTING INC


8-Aug-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 and six months ended June 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.

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


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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 Ringtailฎ 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.

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


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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

• Total Segment Operating Income

• Adjusted EBITDA

• Adjusted Segment EBITDA

• Total Adjusted Segment EBITDA

• Adjusted Net Income

• Adjusted Earnings per Diluted Share

We define Segment Operating Income as a segment's share of consolidated operating income. We define Total Segment Operating Income as the total of Segment Operating Income for all segments, which excludes unallocated corporate expenses. We use Segment Operating Income 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 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.

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.


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EXECUTIVE HIGHLIGHTS



                                            Three Months Ended                   Six Months Ended
                                                 June 30,                            June 30,
                                          2013               2012             2013               2012
                                          (dollars in thousands,              (dollars in thousands,
                                        except per share amounts)           except per share amounts)
Revenues                              $     414,613       $  396,243      $     821,791       $  791,471
Special charges                       $          -        $   26,782      $         427       $   26,782
Adjusted EBITDA                       $      74,228       $   66,616      $     133,554       $  120,576
Net income                            $      23,486       $    7,747      $      47,166       $   26,178
Earnings per common share-diluted     $        0.58       $     0.18      $        1.17       $     0.61
Adjusted EPS                          $        0.58       $     0.60      $        1.17       $     1.02
Cash provided by (used in)
operating activities                  $      21,673       $      533      $      19,369       $  (57,288 )
Total number of employees at
June 30,                                      4,040            3,855              4,040            3,855

Second Quarter 2013 Executive Highlights

Revenues

Revenues for the quarter ended June 30, 2013 increased $18.4 million, or 4.6%, to $414.6 million, compared to $396.2 million in the same prior year period. Revenues grew largely due to $13 million of revenue generated by acquired businesses in our Corporate Finance/Restructuring segment. Revenues increased organically 0.9% due to strong demand for our Economic Consulting and Strategic Communications segments in the North America and Europe, Middle East and Africa
("EMEA") regions as well as increased volumes for merger and acquisition ("M&A")
related second request document review services in our Technology segment. These increases were partially offset by weak demand for our bankruptcy and restructuring practices in our Corporate Finance/Restructuring segment in the North America and Asia Pacific regions.

Special Charges

There were no special charges recorded in the quarter ended June 30, 2013, compared to $26.8 million in special charges recorded in the same prior year period. The June 30, 2012 special charges were primarily related to staff reductions and leased real estate consolidations.

Adjusted EBITDA

Adjusted EBITDA increased $7.6 million, or 11.4%, to $74.2 million, or 17.9% of revenues, compared to $66.6 million, or 16.8% of revenues, in the same prior year period. The Company reduced its acquisition-related contingent consideration liability related to business operations in Asia that were acquired in 2010, based upon a revaluation of the consideration expected to be paid over the remaining earn out period. The $8.2 million non-cash valuation adjustment was recorded as a revaluation gain and is included within "Acquisition-related contingent consideration" in the Condensed Consolidated Statements of Comprehensive Income (Loss). Approximately $6.3 million of the revaluation gain was recorded in the Corporate Finance/Restructuring segment, with $1.9 million recorded in the Forensic and Litigation Consulting segment. A similar revaluation gain of $4.1 million was recorded in the same prior year period, of which $3.8 million was recorded in the Corporate Finance/Restructuring segment and $0.3 million was recorded in the Forensic and Litigation Consulting segment.

Excluding the impact of the revaluation gain, Adjusted EBITDA increased primarily from a reduction in performance-based compensation expense, increased volumes in our Technology segment and higher utilization in our Economic Consulting segment, partially offset by under-utilization in our bankruptcy and restructuring practices in our Corporate Finance/Restructuring segment in the North America region.


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Net Income

Net income increased $15.8 million to $23.5 million, compared to the $7.7 million in the same prior year period. The increase was primarily attributable to the $26.8 million special charge made in the quarter ended June 30, 2012 that was not present in the quarter ended June 30, 2013. Net income for the quarter ended June 30, 2013 included a favorable $7.1 million after-tax impact related to a revaluation gain, compared to a favorable after-tax impact of approximately $3.2 million related to a revaluation gain in the same prior year period. Additionally, a $6.9 million non-cash valuation reserve was recorded to reduce a deferred tax asset previously established to reflect the benefit of future foreign tax credits which, based on a current assessment, may not be realizable in the future. This valuation reserve was recorded as an increase in income tax expense for the quarter.

Earnings per share and Adjusted EPS

Earnings per diluted share for the quarter ended June 30, 2013 were $0.58, compared to $0.18 in the same prior year period, as the prior year period included a special charge of $26.8 million primarily related to staff reductions and leased real estate consolidations. Earnings per diluted share for the quarter ended June 30, 2013 included an $8.2 million revaluation gain resulting in a $0.18 increase in EPS and Adjusted EPS and an unfavorable $6.9 million deferred tax valuation reserve resulting in a $0.17 decrease in EPS and Adjusted EPS for the quarter compared to a favorable revaluation gain of $4.1 million resulting in a $0.08 increase in EPS and Adjusted EPS in the same prior year period. Adjusted earnings per diluted share, which exclude the impact of the special charge, were $0.58, 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 from operating activities for the quarter ended June 30, 2013 was $21.7 million compared to $0.5 million for the same prior year period. The increase was the result of higher cash collections on accounts receivable, partially offset by bonuses paid and higher tax payments. Cash collections for the quarter were strong at $396 million.

Headcount

Headcount increased by 185, or 4.8%, to 4,040.

Billable headcount increased in the Corporate Finance/Restructuring segment as a result of acquisitions, in the Economic Consulting segment to support growing operations, and Forensic and Litigation Consulting segment related to growth in our health solutions practice, partially offset by a decrease in our Technology segment.

Other strategic activities

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 expanded 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 Consulting Group acquisition added 10 professionals to the Company's Economic Consulting segment, enhancing capacity within antitrust and competition economics services.


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