UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
For the quarterly period ended September 30, 2012
OR
For the transition period from to
Commission file number 001-14875
FTI CONSULTING, INC.
(Exact Name of Registrant as Specified in its Charter)
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
777 South Flagler Drive, Suite 1500 West Tower,
West Palm Beach, Florida
(561) 515-1900
(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
Non-accelerated filer ¨ (Do not check if a 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 November 1, 2012
Common stock, par value $0.01 per share
FTI CONSULTING, INC. AND SUBSIDIARIES
INDEX
PART I—FINANCIAL INFORMATION
Item 1.
Item 2.
Item 3.
Item 4.
PART II—OTHER INFORMATION
Item 1A.
Item 5.
Item 6.
SIGNATURES
2
FTI Consulting, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except per share amounts)
Assets
Current assets
Cash and cash equivalents
Restricted cash
Accounts receivable:
Billed receivables
Unbilled receivables
Allowance for doubtful accounts and unbilled services
Accounts receivable, net
Current portion of notes receivable
Prepaid expenses and other current assets
Income taxes receivable
Total current assets
Property and equipment, net of accumulated depreciation
Goodwill
Other intangible assets, net of amortization
Notes receivable, net of current portion
Other assets
Total assets
Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable, accrued expenses and other
Accrued compensation
Current portion of long-term debt and capital lease obligations
Billings in excess of services provided
Deferred income taxes
Total current liabilities
Long-term debt and capital lease obligations, net of current portion
Other liabilities
Total liabilities
Commitments and contingent liabilities (notes 8, 10 and 11)
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—41,355 (2012) and 41,484 (2011)
Additional paid-in capital
Retained earnings
Accumulated other comprehensive loss
Total stockholders’ equity
Total liabilities and stockholders’ equity
See accompanying notes to the condensed consolidated financial statements
3
Condensed Consolidated Statements of Comprehensive Income
(in thousands, except per share data)
Unaudited
Revenues
Operating expenses
Direct cost of revenues
Selling, general and administrative expense
Special charges
Acquisition-related contingent consideration
Amortization of other intangible assets
Operating income
Other income (expense)
Interest income and other
Interest expense
Income before income tax provision
Income tax provision
Net income
Earnings per common share—basic
Earnings per common share—diluted
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments, net of tax expense (benefit) of $0 for the three and nine months ended September 30, 2012, and $500 and ($1,568) for the three and nine months ended September 30, 2011, respectively
Other comprehensive income (loss), net of tax
Comprehensive income
4
Condensed Consolidated Statement of Stockholders’ Equity
(in thousands)
Balance December 31, 2011
Other comprehensive income:
Cumulative translation adjustment
Issuance of common stock in connection with:
Exercise of options, net of income tax expense from share-based awards of $270
Restricted share grants, less net settled shares of 129
Stock units issued under incentive compensation plan
Business combinations
Reacquisition of equity component of convertible debt
Purchase and retirement of common stock
Share-based compensation
Balance September 30, 2012
5
Condensed Consolidated Statements of Cash Flows
Operating activities
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Provision for doubtful accounts
Non-cash share-based compensation
Excess tax benefits from share-based compensation
Non-cash interest expense
Other
Changes in operating assets and liabilities, net of effects from acquisitions:
Accounts receivable, billed and unbilled
Notes receivable
Prepaid expenses and other assets
Income taxes
Net cash provided by operating activities
Investing activities
Payments for acquisition of businesses, net of cash received
Purchases of property and equipment
Net cash used in investing activities
Financing activities
Borrowings under revolving line of credit
Payments of revolving line of credit
Payments of long-term debt and capital lease obligations
Net issuance of common stock under equity compensation plans
Net cash used in financing activities
Effect of exchange rate changes on cash and cash equivalents
Net decrease in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Supplemental cash flow disclosures
Cash paid for interest
Cash paid for income taxes, net of refunds
Non-cash investing and financing activities:
Issuance of stock units under incentive compensation plans
6
Notes to Condensed Consolidated Financial Statements
(dollar and share amounts in tables expressed in thousands, except per share data)
1. Basis of Presentation and Significant Accounting Policies
The unaudited condensed consolidated financial statements of FTI Consulting, Inc. and its wholly owned subsidiaries (“FTI Consulting,” the “Company,” “we,” or “our”) 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 contained in our Annual Report on Form 10-K for the year ended December 31, 2011.
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 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, and shares issuable upon the potential conversion of our 3 3/4% senior subordinated convertible notes due 2012 (“Convertible Notes”) prior to their maturity on July 15, 2012 and payment in full on July 16, 2012 assuming the conversion premium was converted into common stock based on the average closing price per share of our stock during the period, each using the treasury stock method. The conversion feature of our Convertible Notes had a dilutive effect on our earnings per share for the three months ended September 30, 2011 and the nine months ended September 30, 2012 and 2011, respectively, because the average closing price per share of our common stock for such periods was above the conversion price of the Convertible Notes of $31.25 per share.
Numerator—basic and diluted
Denominator
Weighted average number of common shares outstanding—basic
Effect of dilutive stock options
Effect of dilutive convertible notes
Effect of dilutive restricted shares
Weighted average number of common shares outstanding—diluted
Antidilutive stock options and restricted shares
7
3. New Accounting Standards Not yet Adopted
In July 2012, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update 2012-02, Intangibles—Goodwill and Other (Topic 350): Testing Indefinite—Lived Intangible Assets for Impairment (“ASU 2012-02”). ASU 2012-02 permits an entity to make a qualitative assessment to determine whether it is more likely than not that an indefinite-lived intangible asset, other than goodwill, is impaired. If the entity determines, on the basis of all relevant qualitative factors, that it is not more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount, it will not be required to perform a quantitative impairment test for that asset. ASU 2012-02 is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, with early adoption permitted. The adoption of this ASU will not have an impact on the Company’s consolidated financial position, results of operations or cash flows.
4. Special Charges
During the quarter ended June 30, 2011, we recorded special charges of $15.2 million. The charges reflect actions we took to reduce overhead in connection with the realignment of certain senior management on a global basis and to align our workforce with expected market trends, primarily in our Corporate Finance/Restructuring segment.
During the quarter ended June 30, 2012, we recorded special charges totaling $26.8 million, of which $4.6 million was non-cash. The charges reflect actions we took to realign our workforce to address current business demands and global macro-economic conditions impacting our Forensic and Litigation Consulting, Strategic Communications and Technology segments, to address certain targeted practices within our Corporate Finance/Restructuring and Economic Consulting segments, and to reduce excess real estate capacity. These actions include the termination of 116 employees, the consolidation of leased office space within six office locations and certain other actions. The special charges consisted of:
$18.4 million of salary continuance and other contractual employee related costs, including loan forgiveness and accelerated recognition of compensation cost of share-based awards, associated with the reduction in workforce of 116 employees; and
$8.4 million of expense associated with lease costs related to the consolidation of leased office space in six office locations.
During the quarter ended September 30, 2012, we recorded special charges totaling $2.8 million, of which $0.4 million was non-cash. The charges reflect further actions to reduce excess real estate capacity by consolidating leased office space in three additional locations.
The following table details the special charges by segment for the three months ended September 30, 2012 and nine months ended September 30, 2012 and 2011.There were no special charges for the three months ended September 30, 2011.
Corporate Finance/Restructuring
Forensic and Litigation Consulting
Economic Consulting
Technology
Strategic Communications
Unallocated Corporate
Total
8
The total cash outflow associated with the 2012 special charges is expected to be $24.6 million, of which $7.5 million has been paid as of September 30, 2012, $3.5 million is expected to be paid during the remainder of 2012, $5.9 million is expected to be paid in 2013, $2.6 million is expected to be paid in 2014, and the remaining balance of $5.1 million related to lease costs will be paid from 2015 to 2025. In addition, the remaining balance of $0.3 million related to the 2011 special charges is expected to be paid during the remainder of 2012. 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. Activity related to the liability for these costs for the nine months ended September 30, 2012 is as follows:
Balance at December 31, 2011
Additions
Payments
Foreign currency translation adjustment and other
Balance at September 30, 2012
5. Provision for Doubtful Accounts
The provision for doubtful accounts is recorded after the related work has been billed to the client and we determine that full collectability is not reasonably assured. It is classified in “Selling, general and administrative expense” on the Condensed Consolidated Statements of Comprehensive Income. The provision for doubtful accounts totaled $2.4 million and $9.4 million for the three and nine months ended September 30, 2012, respectively, and $3.7 million and $9.5 million for the three and nine months ended September 30, 2011, respectively.
6. Research and Development Costs
Research and development costs related to software development totaled $4.2 million and $16.1 million for the three and nine months ended September 30, 2012, respectively, and $5.1 million and $16.9 million for the three and nine months ended September 30, 2011, respectively. Research and development costs are included in “Selling, general and administrative expense” on the Condensed Consolidated Statements of Comprehensive Income.
7. Financial Instruments
Derivative Financial Instruments
From time to time, we hedge the cash flows and fair values of some of our long-term debt using interest rate swaps. We enter into these derivative contracts to manage our exposure to interest rate changes by achieving a desired proportion of fixed rate versus variable rate debt.
Accordingly, to achieve the desired mix of fixed and floating interest rate debt, we entered into four interest rate swap agreements in March 2011, which we designated as fair value hedges of our 7 3/4% senior notes due 2016 (“2016 Notes”). Under the terms of the interest rate swaps, we received interest on the $215.0 million notional amount at a fixed rate of 7 3/4% and paid a variable rate of interest, which varied between 5.43% and 5.56% for the year ended December 31, 2011. The variable rate was based on the London Interbank Offered Rate (“LIBOR”) as the benchmark interest rate. The maturity, payment dates and other critical terms of these swaps exactly matched those of the hedged 2016 Notes. These interest rate swaps qualified for hedge accounting using the short-cut method under ASC 815-20-25, Derivatives and Hedging, which assumes no hedge ineffectiveness. As a result, the changes in the fair value of the interest rate swaps and the changes in fair value of the hedged debt were assumed to be equal and offsetting.
9
On December 16, 2011, we negotiated the right to terminate the interest rate swap agreements. Upon termination of these interest rate swap agreements we received cash proceeds of approximately $6.6 million, including $1.0 million of accrued interest. The net proceeds of $5.6 million have been recorded in “Long-term debt and capital lease obligations” on the Condensed Consolidated Balance Sheets and will be amortized as a reduction to interest expense over the remaining term of the 2016 Notes, resulting in an effective interest rate of 7.1% per annum. For the nine months ended September 30, 2012, $0.8 million of the net proceeds have been amortized as a reduction of interest expense, with a remaining balance of $4.8 million at September 30, 2012. At September 30, 2012, we had no derivative instruments.
Fair Value of Financial Instruments
We consider the recorded value of certain of our 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 September 30, 2012 and December 31, 2011, based on the short-term nature of the assets and liabilities. The fair value of our long-term debt at September 30, 2012 was $747 million compared to a carrying value of $718 million. At December 31, 2011, the fair value of our long-term debt was $882 million compared to a carrying value of $815 million. We determine the fair value of our long-term debt primarily based on quoted market prices for our 2016 Notes, 6 3/4% senior notes due 2020 and Convertible Notes. 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. At December 31, 2011, the carrying value of long-term debt includes the $18.0 million equity component of our Convertible Notes which is recorded in “Additional paid-in capital” on the Condensed Consolidated Balance Sheets. Our Convertible Notes matured on July 15, 2012 and were paid in full on July 16, 2012.
For business combinations consummated on or after January 1, 2009, we estimate the fair value of acquisition-related contingent consideration using a probability-weighted discounted cash flow model. This fair value measure is based on significant inputs not observed in the market and thus represents a Level 3 measurement. Fair value measurements characterized within Level 3 of the fair value hierarchy are measured based on unobservable inputs that are supported by little or no market activity and reflect our own assumptions in measuring fair value.
The significant unobservable inputs used in the fair value measurements of our acquisition-related contingent consideration are our measures of the future profitability and related cash flows and 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.
During the second quarter of 2012, management determined that the fair value of the acquisition-related contingent consideration liability had declined. This remeasurement of the contingent consideration was based on management’s probability-adjusted present value of the consideration expected to be transferred during the remainder of the earnout period, based on the acquired operations’ forecasted results. The resulting reduction in the liability of $4.1 million is recorded as income and is included within “Acquisition-related contingent consideration” in the Condensed Consolidated Statements of Comprehensive Income. There were no remeasurement gains or losses for the quarter ended September 30, 2012.
Accretion expense for acquisition-related contingent consideration totaled $0.4 million and $1.5 million for the three and nine months ended September 30, 2012, respectively, and $0.9 million and $2.5 million for the three and nine months ended September 30, 2011, respectively.
10
The following table represents the change in the acquisition-related contingent consideration liability during the three and nine months ended September 30, 2012 and 2011:
Beginning balance
Acquisition date fair value measurement
Adjustments to fair value recorded in earnings(a)
Elimination of contingency(b)
Unrealized gains (losses) related to currency translation in other comprehensive income
Ending balance
Adjustments to fair value related to accretion and remeasurement of contingent consideration are recorded in “Acquisition-related contingent consideration” on the Condensed Consolidated Statements of Comprehensive Income.
During the three months ended June 30, 2012, we fixed an acquisition-related contingent consideration liability in the amount of $2.5 million. The non-contingent consideration liability is no longer required to be remeasured to fair value and, accordingly, is not classified as a Level 3 measurement.
The following table presents financial liabilities measured at fair value:
As of September 30, 2012
Liabilities:
Acquisition-related contingent consideration, including current portion
As of December 31, 2011
8. Acquisitions
In October 2012, we completed an acquisition in Australia for our Corporate Finance/Restructuring segment. In advance of the acquisition closing, we transferred a portion of the purchase price in the amount of $1.2 million in cash to a third party in September 2012. This purchase price advance is included in the Condensed Consolidated Balance Sheets in “Other assets” and is reflected in the Condensed Consolidated Statements of Cash Flows within “Other investing activities.” The purchase price includes initial consideration with an approximate value of $25 million plus acquisition-related contingent consideration, which is payable annually through December 31, 2017 if the acquired business meets certain performance measures, and is subject to an approximate $16 million aggregate cap. The results of the acquired business will be included in our consolidated results of operations beginning on October 2, 2012, the date of the completion of the acquisition, and therefore are not included in our consolidated results of operations for the three and nine months ended September 30, 2012. We are currently evaluating the fair values of the consideration transferred, assets acquired and liabilities assumed.
In March 2012, we completed an acquisition in the United States for our Corporate Finance/Restructuring segment. The acquisition price of $3.1 million consisted of $2.0 million in cash and contingent consideration
11
with an estimated fair value of $1.1 million. The fair value of the acquisition related contingent consideration is recorded in “Other liabilities” on the Condensed Consolidated Balance Sheets. As part of the purchase price allocation, we recorded $0.9 million in identifiable intangible assets and $2.2 million in goodwill.
In March 2011, we completed acquisitions of certain practices of LECG Corporation (“LECG”) in Europe, the United States and Latin America with services relating to those provided through our Economic Consulting, Forensic and Litigation Consulting, and Corporate Finance/Restructuring segments. The acquisition-date fair value of the total consideration transferred is approximately $30.0 million, which consisted of $27.1 million of cash paid at the closings of these acquisitions and contingent consideration with an estimated fair value of $2.9 million. As part of the purchase price allocation, we recorded an aggregate of $24.2 million of accounts receivable, $6.3 million of identifiable intangible assets, $20.6 million of assumed liabilities and $14.8 million of goodwill. The identifiable intangible assets consisted of customer relationships with a weighted average amortization period of 12.4 years. Aggregate acquisition-related costs of approximately $1.5 million have been recognized in earnings in 2011.
Certain acquisition-related restricted stock agreements entered into prior to January 1, 2009 contain stock price guarantees that may result in cash payments in the future if our share price falls below a specified per share market value on the date that the applicable stock restrictions lapse (the “determination date”). For those acquisitions, the future settlement of any contingency related to our common stock price will be recorded as a reduction to additional paid-in capital. During the nine months ended September 30, 2012, we paid $3.6 million in cash in relation to the stock price guarantees on certain shares of common stock that became unrestricted, which was recorded as a reduction to additional paid-in-capital on the Condensed Consolidated Balance Sheets. We did not make any stock price guarantee payments during the three months ended September 30, 2012. Our remaining common stock price guarantee provisions have stock floor prices that range from $54.33 to $69.48 per share and have determination dates through 2013.
9. Goodwill and Other Intangible Assets
The changes in the carrying amounts of goodwill by operating segment for the nine months ended September 30, 2012, are as follows:
Balances at December 31, 2011
Goodwill acquired during the period
Contingent Consideration(a)
Balances at September 30, 2012
Contingent consideration related to business combinations consummated prior to January 1, 2009.
Other intangible assets with finite lives are amortized over their estimated useful lives. For intangible assets with finite lives, we recorded amortization expense of $5.8 million and $16.9 million for the three and nine months ended September 30, 2012, respectively, and $5.8 million and $16.8 million for the three and nine months ended September 30, 2011, respectively. Based solely on the amortizable intangible assets recorded as of September 30, 2012, we estimate amortization expense to be $5.6 million during the remainder of 2012, $20.4 million in 2013, $11.9 million in 2014, $10.9 million in 2015, $9.3 million in 2016, $8.6 million in 2017, and $31.8 million in years after 2017. Actual amortization expense to be reported in future periods could differ from
12
these estimates as a result of new intangible asset acquisitions, finalization of asset valuations for newly acquired assets, changes in useful lives, change in value due to foreign currency translation, or other factors.
Finite lived intangible assets
Customer relationships
Non-competition agreements
Software
Tradenames
Indefinite-lived intangible assets
We test our goodwill and other indefinite-lived intangible assets for impairment annually as of the first day of the fourth quarter. We also consider factors that could trigger an interim impairment review. Through our assessment, we determined that there were no events or circumstances that more likely than not would reduce the fair value of any of our reporting units below their carrying value. Accordingly, we did not perform an interim impairment test.
10. Long-term Debt and Capital Lease Obligations
The components of long-term debt and capital lease obligations are presented in the table below:
7 3/4% senior notes due 2016(a)
6 3/4% senior notes due 2020
3 3/4% senior subordinated convertible notes due 2012(b)
Revolving line of credit
Notes payable to former shareholders of acquired business
Total debt
Less current portion
Long-term debt, net of current portion
Total capital lease obligations
Capital lease obligations, net of current portion
Balance includes $215.0 million principal amount of 2016 Notes and a premium of $4.8 million at September 30, 2012 and $5.6 million at December 31, 2011.
Balance includes $149.9 million principal amount of Convertible Notes, net of discount of $3.1 million at December 31, 2011.
Convertible Notes
The Convertible Notes matured on July 15, 2012. On July 16, 2012, we repaid all amounts due on our outstanding Convertible Notes. The total repayment of approximately $151.3 million, including $2.8 million of accrued interest, was made using cash on hand and the proceeds of a $75.0 million borrowing under our senior secured bank credit facility.
13
11. 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 potential settlement or judgment would materially affect our financial position or results of operations.
12. Share-Based Compensation
Share-based Awards and Share-based Compensation Expense
Our officers, employees, non-employee directors and certain individual service providers are eligible to participate in the Company’s equity compensation plans, subject to the discretion of the administrator of the plans. During the nine months ended September 30, 2012, we granted an aggregate of 1,373,113 share-based awards, consisting primarily of restricted stock awards and stock options.
Total share-based compensation expense for the three and nine months ended September 30, 2012 and 2011 is detailed in the following table:
Comprehensive Income Statement Classification
Total share-based compensation expense
13. Stockholders’ Equity
On June 6, 2012, our Board of Directors authorized a two-year stock repurchase program of up to $250 million (the “Repurchase Program”). 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, using cash on hand, with a value equivalent to approximately $20 million. As of September 30, 2012, a balance of approximately $230 million remained available under the Repurchase Program.
14. Segment Reporting
We manage our business in five reportable operating segments: Corporate Finance/Restructuring, Forensic and Litigation Consulting, Economic Consulting, Technology and Strategic Communications.
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, mergers and acquisitions (“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 and around the world.
14
Our Technology segment provides electronic discovery (“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 electronically stored information (“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 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 and special charges. Although Adjusted Segment EBITDA is not a measure of financial condition or performance determined in accordance with GAAP, we use Adjusted Segment EBITDA to evaluate and compare the operating performance of our segments.
The table below presents revenues and Adjusted Segment EBITDA for our reportable segments for the three and nine months ended September 30, 2012 and 2011:
Adjusted Segment EBITDA
Total Adjusted Segment EBITDA
The table below reconciles Total Adjusted Segment EBITDA to income before income tax provision:
Total Adjusted Segment EBITDA(1)
Segment depreciation expense
Special Charges
Unallocated corporate expenses, excluding special charges
Total Adjusted Segment EBITDA is the total of Adjusted Segment EBITDA for all segments.
15
15. Supplemental Condensed Consolidating Guarantor and Non-Guarantor Financial Information
Substantially all of our domestic subsidiaries are guarantors of borrowings under our senior bank credit facility, senior notes and our Convertible Notes. The Convertible Notes matured on July 15, 2012. The guarantees are full and unconditional and joint and several. All of our guarantors are wholly-owned, direct or indirect, subsidiaries. The following financial information presents condensed consolidating balance sheets, statements of comprehensive income and statements of cash flows for FTI Consulting, all the guarantor subsidiaries, all the non-guarantor subsidiaries and the eliminations necessary to arrive at the consolidated information for FTI Consulting and its subsidiaries. For purposes of this presentation, we have accounted for our investments in our subsidiaries using the equity method of accounting. The principal eliminating entries eliminate investment in subsidiary and intercompany balances and transactions.
Condensed Consolidating Balance Sheet Information as of September 30, 2012
Intercompany receivables
Other current assets
Property and equipment, net
Other intangible assets, net
Investments in subsidiaries
Liabilities
Intercompany payables
Other current liabilities
Long-term debt, net
16
Condensed Consolidating Balance Sheet Information as of December 31, 2011
Condensed Consolidating Statement of Comprehensive Income for the Three Months Ended September 30, 2012
Other (expense) income
Income (loss) before income tax provision
Income tax (benefit) provision
Equity in net earnings of subsidiaries
Foreign currency translation adjustments including tax benefit of $0
17
Condensed Consolidating Statement of Comprehensive Income for the Three Months Ended September 30, 2011
Other comprehensive loss, net of tax:
Foreign currency translation adjustments including tax expense of $500
Other comprehensive loss, net of tax
Comprehensive income (loss)
Condensed Consolidating Statement of Comprehensive Income for the Nine months ended September 30, 2012
Other comprehensive income, net of tax:
Foreign currency translation adjustments net of tax benefit of $0
Other comprehensive income, net of tax
18
Condensed Consolidating Statement of Comprehensive Income for the Nine Months Ended September 30, 2011
Foreign currency translation adjustments net of tax benefit of $1,568
Condensed Consolidating Statement of Cash Flow for the Nine months ended September 30, 2012
Net cash (used in) provided by operating activities
Net issuance of common stock and other
Intercompany transfers
Net increase (decrease) in cash and cash equivalents
19
Condensed Consolidating Statement of Cash Flow for the Nine months ended September 30, 2011
Payments for acquisition of businesses, including contingent payments, net of cash received
Net cash (used in) provided by financing activities
20
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 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.
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
21
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.
22
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
(dollars in thousands,
except per share amounts)
Adjusted EBITDA
Adjusted EPS
Cash provided by operating activities
Total number of employees at September 30,
Third Quarter 2012 Executive Highlights
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.
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 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 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.
23
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.
24
CONSOLIDATED RESULTS OF OPERATIONS
Segment and Consolidated Operating Results:
(in thousands, except per
share amounts)
Segment operating income
Unallocated corporate expenses
Reconciliation of Net Income to Adjusted EBITDA:
Add back:
Other income (expense), net
25
Reconciliation of Net Income to Adjusted Net Income and Earnings Per Share to Adjusted Earnings Per Share
Add back: Special charges, net of tax effect(1)
Adjusted net income
Adjusted earnings per common share—diluted
The tax effect takes into account the tax treatment and related tax rate(s) that apply to each adjustment in the applicable tax jurisdiction(s). As a result, the effective tax rates for the adjustments for both the three and nine months ended September 30, 2012 were 35.3% and 39% for the nine months ended September 30, 2011. The tax expense related to the adjustments for the three and nine months ended September 30, 2012 was $1.0 million or $0.02 impact on diluted earnings per share and $10.4 million or $0.25 impact on diluted earnings per share. The tax expense for the nine months ended September 30, 2011 was $5.9 million or $0.14 impact on diluted earnings per share.
Three Months Ended September 30, 2012 Compared to Three Months Ended September 30, 2011
Revenues and operating income
See “Segment Results” for an expanded discussion of segment revenues and operating income.
Unallocated corporate expenses decreased $1.3 million, or 6.2%, to $19.6 million for the three months ended September 30, 2012, from $20.9 million for the three months ended September 30, 2011. Excluding the impact of unallocated corporate special charges of $1.0 million recorded in the three months ended September 30, 2012, unallocated corporate expenses decreased $2.3 million, or 11.1%. The decrease was due to lower marketing event spending in the current year and regional infrastructure investment in 2011, which did not occur during the three months ended September 30, 2012.
Interest income and other, which includes foreign currency transaction gains and losses, increased by $1.1 million to $1.6 million for the three months ended September 30, 2012 from $0.5 million for the three months ended September 30, 2011. The increase is primarily due to net foreign currency transaction gains in the months ended September 30, 2012 as compared to net losses in the three months ended September 30, 2011. Transaction gains and losses, both realized and unrealized, occur as either payments are made or month end remeasurement occurs relative to the Company’s receivables and payables which have been or will be received or paid in a currency that is different from the entity’s functional currency.
Interest expense was $13.2 million for the three months ended September 30, 2012 as compared to $14.3 million for the three months ended September 30, 2011. Interest expense in 2012 was favorably impacted by the repayment, in full, of our outstanding Convertible Notes in July 2012.
26
During the quarter ended September 30, 2012, we recorded a special charge of $2.8 million, of which $0.4 million was non-cash. The charge reflects actions we took to reduce excess real estate capacity, by consolidating leased office space in three office locations in the U.S.
The following table details the special charges by segment:
We did not record any special charges in the three months ended September 30, 2011.
Our provision for income taxes in interim periods is computed by applying our estimated annual effective tax rate against income before income tax expense for the period. In addition, non-recurring or discrete items are recorded during the period in which they occur or become known. The effective tax rate was 35.0% for the three months ended September 30, 2012 as compared to 35.4% for the three months ended September 30, 2011. For the three months ended September 30, 2012, the effective tax rate was favorably impacted by lower taxes on foreign earnings. For the three months ended September 30, 2011, the effective tax rate was favorably impacted by lower taxes on foreign earnings and a discrete item recorded in the quarter for a change in estimate related to the prior year tax provision.
Nine months ended September 30, 2012 Compared to Nine Months Ended September 30, 2011
Unallocated corporate expenses increased $3.4 million, or 6.1%, to $59.7 million for the nine months ended September 30, 2012, from $56.3 million for the nine months ended September 30, 2011. Excluding the impact of unallocated corporate special charges of $1.1 million recorded in the nine months ended September 30, 2012 and $2.8 million recorded in the nine months ended September 30, 2011, unallocated corporate expenses increased $5.1 million, or 9.6% from the nine months ended September 30, 2011. The increase was due to a $3.4 million increase in global leadership costs, $1.1 million of strategic planning activities that took place in the three months ended March 31, 2012, $1.0 million of higher compensation and benefit costs and a $0.5 million decrease in allocations of certain system development and support costs. The increase was partially offset by $1.1 million of regional infrastructure investment in 2011, which did not occur during the nine months ended September 30, 2012.
Interest income and other, which includes foreign currency transaction gains and losses, decreased by $0.9 million to $4.5 million for the nine months ended September 30, 2012 from $5.4 million for the nine months
27
ended September 30, 2011. The decrease is primarily due to reduced earnings of affiliates recognized in the nine months ended September 30, 2012. In addition, there was a positive impact on other non-operating income due to the write-off of certain liabilities related to unclaimed property, in the prior year period.
Interest expense was $43.6 million for the nine months ended September 30, 2012 as compared to $44.1 million for the nine months ended September 30, 2011. Interest expense in 2012 was favorably impacted by the repayment, in full, of our outstanding Convertible Notes in July 2012. This impact was offset by lower interest rates in 2011 due to an interest rate swap agreement which was entered into in March 2011 and terminated in December 2011.
During the quarter ended June 30, 2011, we recorded special charges of $15.2 million. The charges reflect actions we took to reduce senior management overhead in connection with the realignment of certain senior management on a global basis and to align our workforce with expected market trends, primarily in our Corporate Finance/Restructuring segment.
During the quarter ended June 30, 2012, we recorded special charges totaling $26.8 million, of which $4.6 million was non-cash. The charges reflect actions we took to realign our workforce to address current business demands and global macro-economic conditions impacting our Forensic and Litigation Consulting, Strategic Communications and Technology segments and address certain targeted practices within our Corporate Finance/ Restructuring and Economic Consulting segments, and to reduce excess real estate capacity. These actions include the termination of 116 employees, the consolidation of leased office space within six office locations and certain other actions. The special charges consisted of:
During the quarter ended September 30, 2012, we recorded special charges totaling $2.8 million, of which $0.4 million was non-cash. The charges reflect actions we took to reduce excess real estate capacity, including the consolidation of leased office space in three additional locations.
The following table details the special charges by segment and the decrease in total headcount:
28
Our provision for income taxes in interim periods is computed by applying our estimated annual effective tax rate against income before income tax expense for the period. In addition, non-recurring or discrete items are recorded during the period in which they occur or become known. The effective tax rate was 35.0% for the nine months ended September 30, 2012 and 2011. For the nine months ended September 30, 2012, the effective tax rate was favorably impacted by lower taxes on foreign earnings and the benefit related to income from a reduction in the fair value of acquisition-related contingent consideration, which is not taxable. For the nine months ended September 30, 2011, the effective tax rate was favorably impacted by lower provisions for foreign income taxes and tax benefits recognized for discrete items primarily related to the reversal of previously recognized deferred tax liabilities which were no longer required.
SEGMENT RESULTS
The following table reconciles net income to Total Adjusted Segment EBITDA for the three and nine months ended September 30, 2012 and 2011.
Unallocated corporate expense
29
Other Segment Operating Data
Number of revenue-generating professionals (at period end):
Total revenue-generating professionals
Utilization rates of billable professionals:(1)
Average billable rate per hour:(2)
We calculate the utilization rate for our billable professionals by dividing the number of hours that all of our billable professionals worked on client assignments during a period by the total available working hours for all of our billable professionals during the same period. Available hours are determined by the standard hours worked by each employee, adjusted for part-time hours, local country standard work weeks and local country holidays. Available working hours include vacation and professional training days, but exclude holidays. Utilization rates are presented for our segments that primarily bill clients on an hourly basis. We have not presented a utilization rate for our Technology segment and Strategic Communications segment as most of the revenues of these segments are not generated on an hourly basis.
For engagements where revenues are based on number of hours worked by our billable professionals, average billable rate per hour is calculated by dividing revenues for a period by the number of hours worked on client assignments during the same period. We have not presented an average billable rate per hour for our Technology and Strategic Communications segments as most of the revenues of these segments are not based on billable hours.
30
CORPORATE FINANCE/RESTRUCTURING
except rate per hour)
Operating expenses:
Selling, general and administrative expenses
Depreciation and amortization of intangible assets
Gross profit(1)
Gross profit margin(2)
Adjusted Segment EBITDA as a percent of revenues
Number of revenue generating professionals (at period end)
Utilization rates of billable professionals
Average realized billable rate per hour(3)
Revenues less direct cost of revenues
Gross profit as a percent of revenues
Excludes impact of healthcare practice
Revenues decreased $0.1 million, or 0.1%, to $110.2 million for the three months ended September 30, 2012 compared to $110.3 million for the three months ended September 30, 2011. Revenue was impacted by lower chargeable hours in our North America bankruptcy and restructuring and real estate consulting practices and pricing pressure in our UK restructuring practice, partially offset by higher success fees in our North America bankruptcy and restructuring practice and higher volume in our healthcare practice.
Gross profit decreased $3.6 million, or 8.0%, to $40.9 million for the three months ended September 30, 2012 compared to $44.4 million for the three months ended September 30, 2011. Gross profit margin decreased 3.2 percentage points to 37.1% for the three months ended September 30, 2012 compared to 40.3% for the three months ended September 30, 2011. The decrease in gross profit margin was impacted by lower utilization in both North America restructuring and real estate practices and increased fixed compensation costs largely in our European business.
SG&A expense decreased $0.6 million, or 3.8%, to $16.3 million for the three months ended September 30, 2012 compared to $16.9 million for the three months ended September 30, 2011. SG&A expense was 14.8% of revenue for the three months ended September 30, 2012, down from 15.4% for the three months ended September 30, 2011.
Amortization of other intangible assets increased to $1.7 million for the three months ended September 30, 2012 compared to $1.5 million for the three months ended September 30, 2011.
Adjusted segment EBITDA decreased $2.5 million, or 9.0%, to $25.0 million for the three months ended September 30, 2012 compared to $27.5 million for the three months ended September 30, 2011.
31
Nine Months Ended September 30, 2012 Compared to Nine Months Ended September 30, 2011
Revenues increased $16.6 million, or 5.2%, to $336.0 million for the nine months ended September 30, 2012 compared to $319.5 million for the nine months ended September 30, 2011. Acquisition-related revenue from LECG and Think First was $4.0 million, or 1.3% growth from the prior year. Revenue increased organically $12.6 million, or 3.9%, primarily due to greater demand for our bankruptcy and restructuring practice in North America and Europe, as well as higher revenues in our healthcare, transaction advisory and Asia practices, partially offset by lower average bill rates and volume for our real estate consulting practice.
Gross profit increased $15.1 million, or 13.4%, to $127.8 million for the nine months ended September 30, 2012 compared to $112.7 million for the nine months ended September 30, 2011. Gross profit margin increased 2.8 percentage points to 38.0% for the nine months ended September 30, 2012 compared to 35.3% for the nine months ended September 30, 2011 primarily due to higher staff utilization.
SG&A expense decreased $2.1 million, or 4.0%, to $51.8 million for the nine months ended September 30, 2012 compared to $53.9 million for the nine months ended September 30, 2011. SG&A expense was 15.4% of revenue for the nine months ended September 30, 2012, down from 16.9% for the nine months ended September 30, 2011. The decrease in SG&A expense was primarily due to lower personnel and non-billable travel and entertainment costs.
Amortization of other intangible assets increased to $4.7 million for the three months ended September 30, 2012 compared to $4.3 million the three months ended September 30, 2011.
Adjusted segment EBITDA increased $21.8 million, or 36.9%, to $81.0 million for the nine months ended September 30, 2012 compared to $59.2 million for the nine months ended September 30, 2011.
32
FORENSIC AND LITIGATION CONSULTING
Average realized billable rate per hour
Revenues decreased $15.7 million, or 15.8%, to $83.4 million for the three months ended September 30, 2012 from $99.1 million for the three months ended September 30, 2011. Revenue declined due to fewer chargeable hours in our North America and global financial and enterprise data analytics practices related to declines in significant regulatory matters compared to the prior year quarter, partially offset by strong growth in our global risk and investigations practice in the Latin America region.
Gross profit decreased $7.1 million, or 19.8%, to $28.7 million for the three months ended September 30, 2012 from $35.8 million for the three months ended September 30, 2011. Gross profit margin decreased 1.7 percentage points to 34.4% for the three months ended September 30, 2012 from 36.2% for the three months ended September 30, 2011. The decrease in gross profit related to lower utilization in our data analytics and North America practices, partially offset by lower personnel costs in our North America practice as a result of headcount reductions taken in the second quarter of 2012.
SG&A expense decreased $1.1 million, or 6.5 %, to $16.4 million for the three months ended September 30, 2012 from $17.5 million for the three months ended September 30, 2011. SG&A expense was 19.6% of revenue for the three months ended September 30, 2012, up from 17.6% for the three months ended September 30, 2011. The decrease in SG&A expense was due to lower personnel costs related to fewer non-billable personnel.
Amortization of other intangible assets decreased to $0.5 million for the three months ended September 30, 2012 from $0.7 million for the three months ended September 30, 2011.
33
Adjusted segment EBITDA decreased by $5.9 million, or 30.9%, to $13.2 million for the three months ended September 30, 2012 from $19.1 million for the three months ended September 30, 2011.
Revenues decreased $14.8 million, or 5.4%, to $260.5 million for the nine months ended September 30, 2012 from $275.3 million for the nine months ended September 30, 2011. Revenue from the practices acquired from LECG in the first quarter of 2011 was $4.7 million, or 1.7% of segment revenue growth, primarily driven by the disputes and forensic accounting and environmental solution practices in North America. Revenue declined organically $19.6 million, or 7.1%, primarily due to fewer consulting hours in our North America and data analytics practices, partially offset by growth in our global risk and investigations practice in the Latin America region.
Gross profit decreased $9.9 million, or 9.7%, to $91.7 million for the nine months ended September 30, 2012 from $101.6 million for the nine months ended September 30, 2011. Gross profit margin decreased 1.7 percentage points to 35.2% for the nine months ended September 30, 2012 from 36.9% for the nine months ended September 30, 2011. The decrease in gross profit margin was due to lower utilization, partially offset by lower personnel costs in our North America practice as a result of headcount reductions taken in the second quarter of 2012.
SG&A expense increased $0.9 million, or 1.7%, to $51.8 million for the nine months ended September 30, 2012 from $50.9 million for the nine months ended September 30, 2011. SG&A expense was 19.9% of revenue for the nine months ended September 30, 2012, up from 18.5% for the nine months ended September 30, 2011. The increase in SG&A expense was due to higher facility and bad debt expenses. Bad debt expense was 1.2% of revenues for the nine months ended September 30, 2012 up from 0.9% the nine months ended September 30, 2011.
Amortization of other intangible assets decreased to $1.5 million for the nine months ended September 30, 2012 from $1.9 million for the nine months ended September 30, 2011.
Adjusted segment EBITDA decreased by $10.1 million, or 19.1%, to $42.9 million for the nine months ended September 30, 2012 from $53.0 million for the nine months ended September 30, 2011.
34
ECONOMIC CONSULTING
Revenues increased $0.7 million, or 0.7%, to $96.4 million for the three months ended September 30, 2012 from $95.7 million for the three months ended September 30, 2011. Revenue grew, due to increased demand for antitrust litigation, financial economics, international arbitration and regulatory consulting engagements in the North America and EMEA regions, partially offset by a slow M&A market and pricing pressures in our EMEA international arbitration and valuation practices.
Gross profit decreased $0.5 million, or 1.6%, to $30.4 million for the three months ended September 30, 2012 from $30.9 million for the three months ended September 30, 2011. Gross profit margin decreased 0.8 percentage points to 31.5% for the three months ended September 30, 2012 from 32.3% for the three months ended September 30, 2011. The decline in gross profit margin was attributed to lower utilization with increased headcount and higher variable compensation for key employees.
SG&A expense decreased $0.9 million, or 7.2%, to $12.0 million for the three months ended September 30, 2012 from $12.9 million for the three months ended September 30, 2011. SG&A expense was 12.4% of revenue for the three months ended September 30, 2012 compared to 13.5% for the three months ended September 30, 2011. The decrease in SG&A expense was due to lower bad debt and outside services partially offset by higher facilities costs and corporate allocations in support of growing operations. Bad debt expense was 1.3% of revenue for the three months ended September 30, 2012 compared to 2.1% of revenue for the three months ended September 30, 2011.
35
Amortization of other intangible assets was $0.4 million for the three months ended September 30, 2012, compared to $0.5 million for the three months ended September 30, 2011.
Adjusted segment EBITDA increased $0.4 million, or 2.3%, to $19.1 million for the three months ended September 30, 2012, compared to $18.7 million for the three months ended September 30, 2011.
Revenues increased $31.5 million, or 11.9%, to $295.9 million for the nine months ended September 30, 2012 compared to $264.4 million for the nine months ended September 30, 2011. Acquisition-related revenue from the competition policy, financial advisory, international arbitration and electric power and airline competition practices acquired from LECG late in the first quarter of 2011 was $17.6 million, or 6.7 %, of segment revenue growth from the prior year period. Revenue grew organically $13.9 million, or 5.2%, primarily due to increased demand in our antitrust litigation, financial economics, international arbitration and regulatory consulting engagements in the North America and EMEA regions, partially offset by a slow M&A market and pricing pressures in our EMEA international arbitration and valuation practices compared to the nine months ended September 30, 2011.
Gross profit increased $9.4 million, or 11.3%, to $93.0 million for the nine months ended September 30, 2012 compared to $83.6 million for the nine months ended September 30, 2011. Gross profit margin decreased 0.2 percentage points to 31.4% for the nine months ended September 30, 2012 from 31.6% for the nine months ended September 30, 2011. The decrease in gross profit margin was due to lower utilization with increased headcount and higher variable compensation for key employees.
SG&A expense increased $4.3 million, or 12.3%, to $39.1 million for the nine months ended September 30, 2012 compared to $34.8 million for the nine months ended September 30, 2011. SG&A expense was 13.2% of revenue for the nine months ended September 30, 2012 and was unchanged compared to the nine months ended September 30, 2011. The increase in SG&A expense was due to higher corporate allocations in support of growing operations, facilities and bad debt. Bad debt expense was 1.7% of revenue for the nine months ended September 30, 2012 and was unchanged compared to the nine months ended September 30, 2011.
Amortization of other intangible assets was $1.2 million for the nine months ended September 30, 2012, compared to $1.1 million for the nine months ended September 30, 2011.
Adjusted segment EBITDA increased $5.4 million, or 10.6%, to $56.0 million for the nine months ended September 30, 2012, compared to $50.6 million for the nine months ended September 30, 2011.
36
TECHNOLOGY
Number of revenue generating professionals (at period end)(3)
Includes personnel involved in direct client assistance and revenue generating consultants
Revenues decreased by $6.7 million, or 11.7%, to $50.3 million for the three months ended September 30, 2012 from $57.0 million for the three months ended September 30, 2011. Revenue declined primarily due to lower pricing due to competitive factors for processing and hosting, as well as the decline of a few large investigative and litigation related matters.
Gross profit decreased by $6.2 million, or 18.5%, to $27.1 million for the three months ended September 30, 2012 from $33.3 million for the three months ended September 30, 2011. Gross profit margin decreased 4.5 percentage points to 53.9% for the three months ended September 30, 2012 from 58.4% for the three months ended September 30, 2011 due to the related pricing declines in our high margin services.
SG&A expense decreased by $2.1 million, or 12.7%, to $14.5 million for the three months ended September 30, 2012 from $16.7 million for the three months ended September 30, 2011. SG&A expense was 28.9% of revenue for the three months ended September 30, 2012, down from 29.2% for the three months ended September 30, 2011. The decrease in SG&A expense was due to lower personnel costs for fewer headcount, and lower research and development expense. Research and development expense for the three months ended September 30, 2012 was $4.2 million, compared to $5.1 million in the three months ended September 30, 2011.
Amortization of other intangible assets remained flat at $2.0 million for the three months ended September 30, 2012 compared to the three months ended September 30, 2011.
37
Adjusted segment EBITDA decreased $3.9 million, or 20.1%, to $15.7 million for the three months ended September 30, 2012 from $19.6 million for the three months ended September 30, 2011.
Nine Months ended September 30, 2012 Compared to Nine Months Ended September 30, 2011
Revenues decreased by $17.5 million, or 10.6%, to $147.6 million for the nine months ended September 30, 2012 from $165.1 million for the nine months ended September 30, 2011. Revenue declined due to lower pricing for processing and hosting, lower licensing related to several settlements received in the prior year and lower volume for consulting.
Gross profit decreased by $18.6 million, or 18.8%, to $80.3 million for the nine months ended September 30, 2012 from $98.9 million for the nine months ended September 30, 2011. Gross profit margin decreased 5.5 percentage points to 54.4% for the nine months ended September 30, 2012 from 59.9% for the nine months ended September 30, 2011 due to the related revenue declines in our higher margin services.
SG&A expense decreased by $1.2 million, or 2.4%, to $47.8 million for the nine months ended September 30, 2012 from $49.0 million for the nine months ended September 30, 2011. SG&A expense was 32.4% of revenue for the nine months ended September 30, 2012, up from 29.7% for the nine months ended September 30, 2011. The decrease in SG&A expense was primarily due to lower legal costs, bad debt expense, and personnel costs for fewer headcount and lower variable costs, partially offset by higher facility expense. Bad debt recoveries were $0.2 million for the nine months ended September 30, 2012 compared to bad debt expense of $0.4 million for the nine months ended September 30, 2011. Research and development expense in the nine months ended September 2012 was $16.1 million, compared to $16.9 million in the nine months ended September 30, 2011.
Amortization of other intangible assets remained flat at $6.0 million for the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011.
Adjusted segment EBITDA decreased $16.6 million, or 28.5%, to $41.7 million for the nine months ended September 30, 2012 from $58.4 million for the nine months ended September 30, 2011.
38
STRATEGIC COMMUNICATIONS
Revenues decreased $6.0 million, or 11.6%, to $45.8 million for the three months ended September 30, 2012 from $51.8 million for the three months ended September 30, 2011 with a 2.3% decline from the estimated negative impact of foreign currency translation, which was primarily due to the weakening of the Euro and the British pound relative to the U.S. dollar. Excluding the impact of foreign currency translation, revenue declined $4.8 million, or 9.3%, due to fewer M&A and natural resource related projects in the Asia Pacific region, lower project income in the North America region and pricing pressures on retainer fees in the North America and EMEA regions.
Gross profit decreased $2.0 million, or 10.4%, to $17.4 million for the three months ended September 30, 2012 from $19.4 million for the three months ended September 30, 2011. Gross profit margin increased 0.5 percentage points to 37.9% for the three months ended September 30, 2012 from 37.4% for the three months ended September 30, 2011. The increase in gross profit margin was primarily due to lower variable compensation expenses compared to the same quarter in the prior year.
SG&A expense decreased $1.6 million, or 12.3%, to $11.1 million for the three months ended September 30, 2012 from $12.7 million for the three months ended September 30, 2011. SG&A expense was 24.3% of revenue for the three months ended September 30, 2012, down from 24.5% of revenue for the three months ended September 30, 2011. The decrease in SG&A expense was primarily related to lower personnel costs from reduced headcount.
Amortization of other intangible assets of $1.2 million was unchanged for the three months ended September 30, 2012 compared to the three months ended September 30, 2011.
Adjusted segment EBITDA decreased $0.7 million, or 8.8%, to $6.8 million for the three months ended September 30, 2012 from $7.4 million for the three months ended September 30, 2011.
39
Revenues decreased $14.2 million, or 9.4%, to $137.5 million for the nine months ended September 30, 2012 from $151.7 million for the nine months ended September 30, 2011 with 2.1% decline from the estimated negative impact of foreign currency translation, which was primarily due to the weakening of the Euro, the British pound and the South African rand relative to the U.S. dollar. Excluding the impact of foreign currency translation, revenue declined $11.1 million, or 7.3%, due to fewer M&A-related projects in the Asia Pacific region, lower project income in the North America region and pricing pressures on retainer fees in the EMEA and North America regions.
Gross profit decreased $6.0 million, or 10.9%, to $49.3 million for the nine months ended September 30, 2012 from $55.3 million for the nine months ended September 30, 2011. Gross profit margin decreased 0.6 percentage points to 35.8% for the nine months ended September 30, 2012 from 36.4% for the nine months ended September 30, 2011. The decline in gross profit margin was primarily due to fewer high-margin project engagements partially offset by lower variable compensation expenses compared to prior year.
SG&A expense decreased $3.4 million, or 8.8%, to $34.9 million for the nine months ended September 30, 2012 from $38.3 million for the nine months ended September 30, 2011. SG&A expense was 25.4% of revenue for the nine months ended September 30, 2012, up from 25.2% of revenue for the nine months ended September 30, 2011. The decrease in SG&A expense was primarily related to lower personnel costs from reduced headcount.
Amortization of other intangible assets decreased to $3.5 million for the nine months ended September 30, 2012 from $3.6 million for the nine months ended September 30, 2011.
Adjusted segment EBITDA decreased $3.0 million, or 15.5%, to $16.3 million for the nine months ended September 30, 2012 from $19.3 million for the nine months ended September 30, 2011.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements, which we have prepared in accordance with accounting principles generally accepted in the US. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Note 1 to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2011 describes the significant accounting policies and methods used in preparation of the Consolidated Financial Statements. We evaluate our estimates, including those related to bad debts, goodwill, income taxes and contingencies on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. These results form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The accounting policies that reflect our more significant estimates, judgments and assumptions and for which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:
Revenue Recognition
Allowance for Doubtful Accounts and Unbilled Services
Goodwill and Other Intangible Assets
Business Combinations
Share-Based Compensation
Income Taxes
40
There have been no material changes to our critical accounting policies and estimates from the information provided in Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations— Critical Accounting Policies,” as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011 filed with the SEC on February 24, 2012.
We test our goodwill and other indefinite-lived intangible assets for impairment annually as of the first day of the fourth quarter or whenever events or changes in circumstances indicate that it is more likely than not that the carrying value of an asset may not be recoverable. We performed our annual impairment test as of October 1, 2011, and concluded that there was no impairment based on procedures performed and the estimates and assumptions used.
We also consider factors that could trigger an interim impairment review, including, but not limited to, the following: significant underperformance relative to historical or projected future operating results; a significant change in the manner of our use of the acquired asset or strategy for our overall business; a significant negative industry or economic trend; and our market capitalization relative to net book value. Through our assessment, we determined that there were no events or circumstances that more likely than not would reduce the fair value of any of our reporting units below their carrying value. Accordingly, we did not perform an interim impairment test in any of the quarters in the nine-months ended September 30, 2012.
There can be no assurance, however, that the estimates and assumptions used in our goodwill impairment testing will prove to be accurate predictions of the future. Our next evaluation of goodwill by reporting unit will be performed during the three months ended December 31, 2012. If our assumptions regarding forecasted cash flows are not achieved, we may be required to perform the two-step quantitative goodwill impairment analysis. In addition, if the aforementioned factors have the effect of changing one of the critical assumptions or estimates we use to calculate the value of our goodwill or intangible assets, we may be required to record goodwill and/or intangible asset impairment charges in future periods, whether in connection with our next annual impairment test or if a triggering event occurs outside of the quarter during which the annual goodwill impairment test is performed. It is not possible at this time to determine if any future impairment charge would result or, if it does, whether such charge would be material.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
We have generally financed our day-to-day operations, capital expenditures and acquisition-related contingent payments through cash flows from operations. During the first quarter of our fiscal year, our cash needs generally exceed our cash flows from operations due to the payments of annual incentive compensation and acquisition-related contingent payment amounts. Our operating cash flows generally exceed our cash needs subsequent to the first quarter of each year.
41
Our operating assets and liabilities consist primarily of billed and unbilled accounts receivable, notes receivable from employees, accounts payable, accrued expenses and accrued compensation expense. The timing of billings and collections of receivables as well as payments for compensation arrangements affect the changes in these balances.
Net cash provided by operating activities decreased by $33.2 million to $13.6 million for the nine months ended September 30, 2012 from $46.8 million for the nine months ended September 30, 2011. The decrease in net cash provided by operating activities was primarily due to higher compensation and other operating expenses and the funding of forgivable loans, partially offset by higher cash collections in the nine months ended September 30, 2012 relative to the same prior year period.
Net cash used in investing activities for the nine months ended September 30, 2012 was $48.1 million as compared to $87.1 million for the nine months ended September 30, 2011. The prior year included $25.7 million of payments related to the acquisition of practices from LECG and $3.8 million of purchase price adjustments related to prior year acquisitions. Payments related to acquisition-related contingent consideration were $24.5 million for the nine months ended September 30, 2012 as compared to $32.8 million for the nine months ended September 30, 2011. Capital expenditures were $20.5 million for the nine months ended September 30, 2012 as compared to $24.6 million for the nine months ended September 30, 2011.
Net cash used in financing activities for the nine months ended September 30, 2012 was $103.0 million as compared to $215.4 million for the nine months ended September 30, 2011. Our financing activities for the nine months ended September 30, 2012 included the repayment of $156.5 million of long-term debt and capital lease obligations, including $149.9 million of Convertible Notes. The repayment was made using cash on hand and the proceeds of a $75.0 million borrowing under our senior secured bank credit facility. In addition, our financing activities for the nine months ended September 30, 2012 included $20.0 million in cash used to repurchase and retire 757,650 shares of the Company’s common stock. Our financing activities for the nine months ended September 30, 2011 included $209.4 million in cash used to repurchase and retire 5,733,205 shares of the Company’s common stock.
Capital Resources
As of September 30, 2012, our capital resources included $126.9 million of cash and cash equivalents and available borrowing capacity of $173.6 million under a $250 million revolving line of credit under our senior secured bank credit facility (“bank credit facility”). As of September 30, 2012, we had $75.0 million outstanding under our bank credit facility and $1.4 million of outstanding letters of credit which reduced the availability of borrowings under the bank credit facility. We use letters of credit primarily in lieu of security deposits for our leased office facilities.
Future Capital Needs
We anticipate that our future capital needs will principally consist of funds required for:
operating and general corporate expenses relating to the operation of our businesses;
capital expenditures, primarily for information technology equipment, office furniture and leasehold improvements;
debt service requirements, including interest payments on our long-term debt;
compensating designated executive management and senior managing directors under our various long-term incentive compensation programs;
discretionary funding of our Repurchase Program;
42
contingent obligations related to our acquisitions;
potential acquisitions of businesses that would allow us to diversify or expand our service offerings; and
other known future contractual obligations.
We currently anticipate aggregate capital expenditures will range between $25 million to $31 million to support our organization during 2012, including direct support for specific client engagements. Our estimate takes into consideration the needs of our existing businesses but does not include the impact of any purchases that we make as a result of future acquisitions or specific client engagements that are not currently contemplated. Our capital expenditure requirements may change if our staffing levels or technology needs change significantly from what we currently anticipate, if we purchase additional equipment specifically to support a client engagement or if we pursue and complete additional acquisitions.
In certain business combinations consummated prior to January 1, 2009, a portion of our purchase price was in the form of contingent consideration, often referred to as earn-outs. The use of contingent consideration allows us to shift some of the valuation risk, inherent at the time of acquisition, to the sellers based upon the outcome of future financial targets that the sellers contemplate in the valuations of the companies, assets or businesses they sell. Contingent consideration is payable annually as agreed upon performance targets are met and is generally subject to a maximum amount within a specified time period. Our obligations change from period-to-period primarily as a result of payments made during the current period, changes in the acquired entities’ performance and changes in foreign currency exchange rates. In addition, certain acquisition-related restricted stock agreements contain stock price guarantees that may result in cash payments in the future if our share price falls below a specified per share market value on the date the stock restrictions lapse. As of September 30, 2012, we had no accrued contingent consideration liabilities for business combinations consummated prior to January 1, 2009.
For business combinations consummated on or after January 1, 2009, contingent consideration obligations are recorded as liabilities on our condensed consolidated balance sheet and re-measured to fair value at each subsequent reporting date with an offset to current period earnings. Contingent purchase price obligations for these business combinations are $9.9 million at September 30, 2012.
For the last several years, our cash flows from operations have exceeded our cash needs for capital expenditures and debt service requirements. We believe that our cash flows from operations, supplemented by short-term borrowings under our bank credit facility, as necessary, will provide adequate cash to fund our long-term cash needs from normal operations.
Our conclusion that we will be able to fund our cash requirements by using existing capital resources and cash generated from operations does not take into account the impact of any future acquisition transactions or any unexpected significant changes in the number of employees. The anticipated cash needs of our businesses could change significantly if we pursue and complete additional business acquisitions, if our business plans change, if economic conditions change from those currently prevailing or from those now anticipated, or if other unexpected circumstances arise that have a material effect on the cash flow or profitability of our business. Any of these events or circumstances, including any new business opportunities, could involve significant additional funding needs in excess of the identified currently available sources and could require us to raise additional debt or equity funding to meet those needs. Our ability to raise additional capital, if necessary, is subject to a variety of factors that we cannot predict with certainty, including:
our future profitability;
the quality of our accounts receivable;
our relative levels of debt and equity;
43
the volatility and overall condition of the capital markets; and
the market prices of our securities.
Any new debt funding, if available, may be on terms less favorable to us than our bank credit facility or the indentures that govern our senior notes. See “Forward-Looking Statements” in this Quarterly Report on Form 10-Q and “Risk Factors” included in Part I – Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2011 filed with the SEC on February 24, 2012.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements other than operating leases and we have not entered into any transactions involving unconsolidated subsidiaries or special purpose entities.
Future Contractual Obligations
There have been no significant changes in our future contractual obligations since December 31, 2011.
Forward-Looking Statements
This Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, that involve uncertainties and risks. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues, future results and performance, future capital expenditures, expectations, plans or intentions relating to acquisitions and other matters, business trends and other information that is not historical. Forward-looking statements often contain words such as estimate, expects, anticipates, projects, plans, intends,believes, forecasts and variations of such words or similar expressions. All forward-looking statements, including, without limitation, management’s examination of historical operating trends, are based upon our historical performance and our current plans, estimates and expectations at the time we make them and various assumptions. There can be no assurance that management’s expectations, beliefs and projections will result or be achieved. Our actual financial results, performance or achievements could differ materially from those expressed in, or implied by, any forward-looking statements. The inclusion of any forward-looking information should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved. Given these risks, uncertainties and other factors, you should not place undue reliance on any forward-looking statements.
There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in, or implied by, this Quarterly Report on Form 10-Q. Important factors that could cause our actual results to differ materially from the forward-looking statements we make in this Quarterly Report on Form 10-Q are set forth under the heading “Risk Factors” included in Part I– Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2011 filed with the SEC on February 24, 2012. Important factors that could cause our actual results to differ materially from the forward-looking statements we make in this Quarterly Report on Form 10-Q include the following:
changes in demand for our services;
our ability to attract and retain qualified professionals and senior management;
conflicts resulting in our inability to represent certain clients;
our former employees joining or forming competing businesses;
our ability to manage our professionals’ utilization and billing rates and maintain or increase the pricing of our services and products;
44
our ability to make acquisitions and integrate the operations of acquisitions as well as the costs of integration;
our ability to adapt to and manage the risks associated with operating in non-U.S. markets;
our ability to replace key personnel, including senior managers and regional and practice leaders who have highly specialized skills and experience;
our ability to identify suitable acquisition candidates, negotiate favorable terms and take advantage of opportunistic acquisition situations;
our ability to protect the confidentiality of internal and client data and proprietary information;
legislation or judicial rulings, including rulings regarding data privacy and the discovery process;
periodic fluctuations in revenues, operating income and cash flows;
damage to our reputation as a result of claims involving the quality of our services;
fee discounting or renegotiation, lower pricing, less advantageous contract terms and unexpected terminations of client engagements;
competition;
general economic factors, industry trends, restructuring and bankruptcy rates, legal or regulatory requirements, capital market conditions, merger and acquisition activity, major litigation activity and other events outside of our control;
our ability to manage growth;
risk of non-payment of receivables;
the amount and terms of our outstanding indebtedness;
changes in accounting principles;
risks relating to the obsolescence of, changes to, or the protection of, our proprietary software products and intellectual property rights; and
fluctuations in the mix of our services and the geographic locations in which our clients are located or services are rendered.
There may be other factors that may cause our actual results to differ materially from our forward-looking statements. All forward-looking statements attributable to us or persons acting on our behalf apply only as of the date of this Quarterly Report on Form 10-Q and are expressly qualified in their entirety by the cautionary statements included herein. We undertake no obligation to publicly update or revise any forward-looking statements to reflect subsequent events or circumstances and do not intend to do so.
For information regarding our exposure to certain market risks see “Item 7A Quantitative and Qualitative Disclosures about Market Risk,” in our Annual Report on Form 10-K for the year ended December 31, 2011 filed with the SEC on February 24, 2012. There have been no significant changes in our market risk exposure since December 31, 2011, except as noted below.
Equity Price Sensitivity
Certain acquisition-related restricted stock agreements contain stock price guarantees that may result in cash payments in the future if our share price falls below a specified per share market value on the date the applicable stock restrictions lapse (“the determination date”). The future settlement of any contingency related to our
45
common stock price would require a cash outflow. There are no determination dates remaining in 2012. The following table details by year the cash outflows that would result from the remaining stock price guarantee payments if, on the applicable determination dates, our common stock price was at $26.68 per share (our closing share price on September 28, 2012, the last trading day of September 2012), 20% above or 20% below that price.
Cash outflow, assuming:
Closing share price of $26.68 at September 28, 2012
20% increase in share price
20% decrease in share price
Evaluation of Disclosure Controls and Procedures. An evaluation of the effectiveness of the design and operation of our “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Exchange Act), as of the end of the period covered by this Quarterly Report on Form 10-Q was made under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (a) were effective to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is timely recorded, processed, summarized and reported and (b) included, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting. There have not been any changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
46
From time to time in the ordinary course of business, we are subject to claims, asserted or unasserted, or named as a party to lawsuits or investigations. Litigation, in general, and intellectual property and securities litigation in particular, can be expensive and disruptive to normal business operations. Moreover, the results of legal proceedings cannot be predicted with any certainty and in the case of more complex legal proceedings such as intellectual property and securities litigation, the results are difficult to predict at all. We are not aware of any asserted or unasserted legal proceedings or claims that we believe would have a material adverse effect on our financial condition or results of our operations.
There have been no material changes in any risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2011, filed with the Securities and Exchange Commission (the “SEC”) on February 24, 2012. We may disclose changes to risk factors or disclose additional factors from time to time in our future filings with the Securities and Exchange Commission. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations.
Unregistered sales of equity securities.
None
Repurchases of our common stock. The following table provides information with respect to purchases we made of our common stock during the third quarter ended September 30, 2012 (in thousands, except per share amounts).
July 1 through July 31, 2012
August 1 through August 31, 2012
September 1 through September 30, 2012
Represents 3,715 shares of common stock withheld to cover payroll tax withholdings related to the lapse of restrictions on restricted stock.
Represents 404,176 shares of common stock repurchased pursuant to our stock repurchase program announced in June 2012 and 3,994 shares of common stock withheld to cover payroll tax withholdings related to the lapse of restrictions on restricted stock.
Represents 353,474 shares of common stock repurchased pursuant to our stock repurchase program announced in June 2012 and 4,021 shares of common stock withheld to cover payroll tax withholdings related to the lapse of restrictions on restricted stock.
In June 2012, our Board of Directors authorized a two-year stock repurchase program of up to $250.0 million (the “Repurchase Program”). As of September 30, 2012, a balance of approximately $230 million remains available under the program to fund stock repurchases by the Company.
47
Not applicable
(a) Exhibits.
Exhibit
Number
Exhibit Description
48
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: November 8, 2012
Senior Vice President, Controller and
Chief Accounting Officer
49