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

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Form 10-Q for FTI CONSULTING INC


8-Nov-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 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 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.


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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                   Nine Months Ended
                                                      September 30,                        September 30,
                                                  2013               2012             2013               2012
                                                  (dollars in thousands,              (dollars in thousands,
                                                except per share amounts)            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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