UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
For the quarterly period ended September 30, 2014
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.)
1101 K Street NW,
Washington, D.C.
(202) 312-9100
(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):
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 October 24, 2014
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.
SIGNATURE
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FTI Consulting, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except per share amounts)
Assets
Current assets
Cash and cash equivalents
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
Current portion of deferred tax assets
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
Billings in excess of services provided
Total current liabilities
Long-term debt, net of current portion
Deferred income taxes
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—41,027 (2014) and 40,526 (2013)
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
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Condensed Consolidated Statements of Comprehensive Income (Loss)
(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
Goodwill impairment charge
Operating income (loss)
Other income (expense)
Interest income and other
Interest expense
Income (loss) before income tax provision
Income tax provision
Net income (loss)
Earnings (loss) per common share—basic
Earnings (loss) per common share—diluted
Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments, net of tax $0
Total other comprehensive income (loss), net of tax
Comprehensive income (loss)
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Condensed Consolidated Statement of Stockholders’ Equity
(in thousands)
Common Stock
Balance December 31, 2013
Net income
Other comprehensive income (loss):
Cumulative translation adjustment
Issuance of common stock in connection with:
Exercise of options, net of income tax benefit from share-based awards of $323
Restricted share grants, less net settled shares of 159
Stock units issued under incentive compensation plan
Non-employee vesting of stock options
Share-based compensation
Balance September 30, 2014
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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
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
Payments of long-term debt
Purchase and retirement of common stock
Net issuance of common stock under equity compensation plans
Deposits
Net cash provided by (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
Issuance of common stock to acquire businesses
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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., including its consolidated subsidiaries (collectively, the “Company,” “we,” “our” or “FTI Consulting”) 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, 2013.
2. Earnings (Loss) Per Common Share
Basic earnings (loss) per common share are calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings per common share adjust basic earnings per common 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, each using the treasury stock method. Due to a net loss applicable to common stockholders, we excluded 1,150,404 potentially dilutive securities for the three months ended September 30, 2013 and 1,172,602 potentially dilutive securities for the nine months ended September 30, 2013, as their effect would be anti-dilutive.
Numerator—basic and diluted
Denominator
Weighted average number of common shares outstanding—basic
Effect of dilutive stock options
Effect of dilutive restricted shares
Weighted average number of common shares outstanding—diluted
Antidilutive stock options and restricted shares
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3. New Accounting Standards Not Yet Adopted
In August 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (“ASU”) 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (ASU 2014-15), to provide guidance on management’s responsibility in evaluating whether there is substantial doubt about a company’s ability to continue as a going concern and to provide related footnote disclosures. The new guidance is effective for annual periods ending after December 15, 2016 and interim periods thereafter, with early adoption permitted. The adoption of this ASU is not expected to have an impact on the Company’s consolidated financial position or results of operations.
In May 2014, the Financial Accounting Standards Board issued ASU 2014-09, Revenue from Contracts with Customers, or ASU 2014-09. ASU 2014-09 is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. This guidance is effective for interim and annual periods beginning after December 15, 2016 and early adoption is not permitted. Companies may use either a full retrospective or a modified retrospective approach to adopt this ASU. The Company is currently evaluating which transition approach to use and the impact of the adoption of this accounting standard update on its condensed consolidated financial statements.
In April 2014, the FASB issued ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, or ASU 2014-08. ASU 2014-08 amends the criteria for reporting a discontinued operation. The amended guidance requires that a disposal representing a strategic shift that has (or will have) a major effect on an entity’s operations and financial results or a business activity classified as held for sale should be reported as discontinued operations. The amendments also expand the disclosure requirements for discontinued operations and add new disclosures for individually significant dispositions that do not qualify as discontinued operations. This guidance is effective for interim and annual periods beginning after December 15, 2014, with early adoption permitted. ASU 2014-08 would impact the Company’s consolidated results of operations and financial condition only in the instance of an event or transaction described above.
4. Special Charges
During the three months ended September 30, 2014, we recorded special charges of $5.3 million. The special charges consisted of $4.5 million contractual post-employment payments and equity award expense acceleration, net of forfeitures of unvested equity and liability awards and annual bonus payments, related to the departures of the Company’s former Chief Financial Officer, former Executive Vice President and Chairman of North America and former Chairman of Europe the Middle East and Africa (“EMEA”) region, and $0.8 million related to updated forecasts of expected sublease income for corporate and segment offices previously vacated.
During the nine months ended September 30, 2014, we recorded special charges of $14.7 million. The special charges consisted of:
$4.5 million contractual post-employment payments and equity award expense acceleration, net of forfeitures of unvested equity and liability awards and annual bonus payments, related to the departures of the Company’s former Chief Financial Officer, former Executive Vice President and Chairman of North America and former Chairman of the EMEA region.
$7.9 million related to the termination of the Company’s corporate airplane lease;
$2.3 million related to the closure of the Company’s former West Palm Beach executive office and related lease termination, and updated forecasts of expected sublease income for corporate and segment offices previously vacated. $0.7 million of these charges were non-cash.
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During the three and nine months ended September 30, 2013, we recorded special charges of $10.4 million and $10.8 million, respectively, of which $3.1 million was non-cash. The charges primarily reflect actions we took to realign our workforce to address current business demands impacting our Corporate Finance/Restructuring and Forensic and Litigation Consulting segments and to reduce certain corporate overhead within our EMEA region. The special charges consisted of $10.2 million of salary continuance and other contractual employee related costs associated with the reduction in workforce of 45 employees and $0.6 million of costs to consolidate leased office space within one location and to adjust prior year special charges for changes to sublease terms and employee termination costs.
The following table details the special charges by segment for the three and nine months ended September 30, 2014 and 2013.
Corporate Finance/Restructuring
Forensic and Litigation Consulting
Economic Consulting
Technology
Strategic Communications
Unallocated Corporate
Total
The total cash outflow associated with the special charges recorded in 2014, 2013 and 2012 is expected to be $63.5 million, of which $44.2 million has been paid as of September 30, 2014. Approximately $2.1 million is expected to be paid during the remainder of 2014, $5.1 million is expected to be paid in 2015, $3.2 million is expected to be paid in 2016, $3.1 million is expected to be paid in 2017, and the remaining balance of $5.8 million will be paid from 2018 to 2025. 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, 2014 is as follows:
Balance at December 31, 2013
Additions
Payments
Foreign currency translation adjustment and other
Balance at September 30, 2014
5. Allowance for Doubtful Accounts and Unbilled Services
We record adjustments to the allowance for doubtful accounts and unbilled services as a reduction in revenue when there are changes in estimates of fee reductions that may be imposed by bankruptcy courts and other regulatory institutions, for both billed and unbilled receivables. The allowance for doubtful accounts and unbilled services is also adjusted after the related work has been billed to the client and we discover that collectability is not reasonably assured. These adjustments are recorded to “Selling, general and administrative expense” on the Condensed Consolidated Statements of Comprehensive Income (Loss) and totaled $3.2 million and $11.9 million for the three and nine months ended September 30, 2014, respectively, and $2.9 million and $10.4 million for the three and nine months ended September 30, 2013, respectively.
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6. Research and Development Costs
Research and development costs related to software development totaled $4.7 million and $13.8 million for the three and nine months ended September 30, 2014, respectively, and $4.2 million and $11.7 million for the three and nine months ended September 30, 2013, respectively. Research and development costs are included in “Selling, general and administrative expense” on the Condensed Consolidated Statements of Comprehensive Income (Loss).
7. Financial Instruments
Fair Value of Financial Instruments
We consider the recorded value of certain 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, 2014 and December 31, 2013, based on the short-term nature of the assets and liabilities. The fair value of our long-term debt at September 30, 2014 was $735.0 million compared to a carrying value of $711.0 million. At December 31, 2013, the fair value of our long-term debt was $752.8 million compared to a carrying value of $717.0 million. We determine the fair value of our long-term debt primarily based on quoted market prices for our 63/4% Senior Notes Due 2020 (“2020 Notes”) and 6.0% Senior Notes Due 2022 (“2022 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.
For business combinations consummated on or after January 1, 2009, we estimate the fair value of acquisition-related contingent consideration based on the present value of the consideration expected to be paid during the remainder of the earnout period, based on management’s assessment of the acquired operations’ forecasted earnings. 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 include our measures of the future profitability and related cash flows of the acquired business or assets, impacted by appropriate 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. The fair value of the contingent consideration is reassessed on a quarterly basis by the Company using additional information as it becomes available.
Any change in the fair value of an acquisition’s contingent consideration liability results in a remeasurement gain or loss that is recorded as income or expense, respectively, and is included within “Acquisition-related contingent consideration” in the Condensed Consolidated Statements of Comprehensive Income (Loss). During the nine months ended September 30, 2014, management determined that the fair value of the contingent consideration liability for certain of its acquisitions had declined and recorded a remeasurement gain of $2.4 million compared to a remeasurement gain of $8.2 million for the nine months ended September 30, 2013. There was no remeasurement gain or loss for the three months ended September 30, 2014, or three months ended September 30, 2013.
Accretion expense for acquisition-related contingent consideration totaled $0.3 million and $0.8 million for the three and nine months ended September 30, 2014, respectively, and $0.6 million and $2.1 million for the three and nine months ended September 30, 2013, respectively.
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The following table represents the changes in the acquisition-related contingent consideration liability during the three and nine months ended September 30, 2014 and 2013:
Beginning balance
Acquisition (1)
Accretion of acquisition-related contingent consideration
Remeasurement of acquisition-related contingent consideration
Unrealized gains (losses) related to currency translation in other comprehensive income
Ending balance
Includes adjustments during the purchase price allocation period.
8. Acquisitions
Certain purchase price allocations were preliminary at December 31, 2013. For these acquisitions, we recorded $4.7 million of acquisition related contingent consideration, $9.5 million of identifiable intangible assets, $1.2 million of deferred taxes and $10.1 million of goodwill in the year ended December 31, 2013. During the first and second quarter of 2014 we finalized the purchase price allocations and recorded adjustments to the preliminary purchase price for certain acquisitions completed during the fourth quarter of 2013. These adjustments were immaterial; therefore no retrospective adjustments were made to the fair value of the assets acquired and liabilities assumed in the Condensed Consolidated Balance Sheet as of December 31, 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, 2014, are as follows:
Balances at December 31, 2013:
Accumulated goodwill impairment
Goodwill, net at December 31, 2013
Acquisitions (1)
Goodwill, net at September 30, 2014
Includes adjustments during the purchase price measurement period.
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Other intangible assets with finite lives are amortized over their estimated useful lives. For intangible assets with finite lives, we recorded amortization expense of $3.4 million and $11.5 million for the three and nine months ended September 30, 2014, respectively, and $5.8 million and $17.3 million for the three and nine months ended September 30, 2013, respectively. Based solely on the amortizable intangible assets recorded as of September 30, 2014, we estimate amortization expense to be $3.2 million during the remainder of 2014, $11.9 million in 2015, $10.7 million in 2016, $10.0 million in 2017, $8.4 million in 2018, $7.7 million in 2019, and $23.4 million in years after 2019. Actual amortization expense to be reported in future periods could differ from these estimates as a result of new intangible asset acquisitions, finalization of asset valuations for newly acquired assets, changes in useful lives, changes in value due to foreign currency translation, and other factors.
10. Debt
The components of debt obligations are presented in the table below:
6 3/4% senior notes due 2020
6.0% senior notes due 2022
Notes payable to former shareholders of acquired businesses
Total debt
Less current portion
There were no borrowings outstanding under the Company’s senior secured bank credit facility as of September 30, 2014.
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 resolutions 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 three months ended September 30, 2014, we granted 223,944 stock options and 49,124 restricted stock awards. During the nine months ended September 30, 2014, we granted 594,943 stock options, 422,269 restricted stock awards and 84,554 restricted stock units. These awards are recorded as equity on the Condensed Consolidated Balance Sheet. During the three months ended September 30, 2014, 88,705 performance stock awards and 34,693 restricted stock awards were forfeited prior to the completion of the vesting requirements.
On April 1, 2014, certain executive officers of the Company were granted an aggregate of 234,536 cash-settled awards under the Company’s 2014 executive officer long-term incentive program. These awards include 97,752 cash-settled stock appreciation rights (the “Executive SARs”) and 36,851 cash-settled units, which vest
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pro rata on the first through third anniversaries of the date of grant, and 99,933 cash-settled performance units. The Executive SARs expire ten years from the date of grant. The cash-settled performance units are, subject to performance conditions based on the adjusted total shareholder return of the Company as compared to the adjusted total shareholder return of the adjusted S&P 500 for the three-year period ending March 31, 2017. The Executive SAR represents the right to receive cash upon exercise equal to the product of (i) the aggregate number of shares with respect to which the Executive SAR is exercised and (ii) the excess of (A) the closing price per share as reported on the New York Stock Exchange (the “NYSE”) of a share of our common stock as of the date of exercise over (B) the exercise price of such Executive SAR. The cash-settled units and performance units will have a value equivalent to the closing price per share of our common stock as reported on the NYSE for the applicable vesting or performance measurement date, as the case may be. As these awards will be settled in cash, they have been recorded as liabilities and are included in “Other Liabilities” on the Company’s Condensed Consolidated Balance Sheet at fair value. Subsequent changes in the fair value of these awards will be included in the related share-based compensation expense recorded over the vesting period. During the three months ended September 30, 2014, 34,842 Executive SARs, 13,134 cash-settled units and 35,620 cash-settled performance units were forfeited prior to the completion of the vesting requirements.
Total share-based compensation expense, net of forfeitures, for the three and nine months ended September 30, 2014 and 2013 is detailed in the following table:
Comprehensive Income (Loss) Statement Classification
Special charges (1)
Total share-based compensation expense
Special charges of $0.2 million equity award expense acceleration are net of forfeitures of $1.2 million for the three and nine months ended September 30, 2014.
13. Income Taxes
The Company has estimated its annual effective tax rate for the full fiscal year 2014 and applied that rate to its income before income taxes in determining its provision for income taxes for the three and nine months ended September 30, 2014. The Company also records discrete items in each respective period as appropriate.
The effective tax rate for the three months ended September 30, 2014 is 35.4%. For the three months ended September 30, 2014, there were no discrete items recorded. The effective tax rate for the three months ended September 30, 2013 was not meaningful due to the impact of the non-deductible goodwill impairment charge of $83.8 million. The effective tax rate for the three months ended September 30, 2013, excluding the impact of the goodwill impairment charge, and a discrete item related to the settlement of a foreign audit would have been 38.0%.
The effective tax rate for the nine months ended September 30, 2014 is 36.2%. For the nine months ended September 30, 2014, the effective tax rate was not materially impacted by discrete items recorded. The effective tax rate for the nine months ended September 30, 2013 was not meaningful due to the impact of the non-deductible goodwill impairment charge of $83.8 million. For the nine months ended September 30, 2013, we recorded a deferred tax valuation reserve related to foreign tax credits, primarily due to lower forecasted foreign earnings, resulting in a discrete increase to the income tax provision in the amount of $6.9 million. We also recognized the impact of a discrete benefit related to the favorable resolution of an income tax contingency in the amount of $2.2 million. Excluding the impact of this discrete item and the non-deductible goodwill impairment charge, the effective tax rate for the nine months ended September 30, 2013 would have been 36.4%.
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During the second quarter of 2013, we determined that certain deferred tax assets associated with U.S. future foreign tax credits no longer met the “more-likely-than-not” test regarding the realization of those assets primarily due to lower forecasted foreign earnings. Accordingly, the Company increased the valuation allowance against its U.S. future foreign tax credit assets, resulting in a discrete adjustment to the income tax provision in the amount of $6.9 million for the nine months ended September 30, 2013. As of September 30, 2014 and December 31, 2013, valuation allowances of $9.8 million and $10.2 million, respectively, were recorded against the Company’s net deferred tax assets. During the nine months ended September 30, 2014, the company decreased its valuation allowance on its foreign deferred tax assets by $0.4 million associated with future foreign tax credits and foreign net operating loss carry forwards. As of September 30, 2013, valuation allowances of $9.5 million were recorded.
As of September 30, 2014, all of the Company’s undistributed non-U.S. subsidiary earnings are considered indefinitely invested. Accordingly, as of September 30, 2014, we have not provided for deferred taxes on $22.5 million of the undistributed non-U.S. subsidiary earnings. A deferred tax liability will be recognized if and when the Company is no longer able to demonstrate that it plans to indefinitely reinvest undistributed earnings. If these earnings were repatriated, the Company would be subject to U.S. income taxes. The amount of the unrecognized deferred U.S. income tax liability associated with the indefinitely reinvested undistributed earnings is estimated to be approximately $7.9 million as of September 30, 2014.
As of September 30, 2014 and December 31, 2013, the liability for uncertain tax positions was $2.2 million and $2.9 million, respectively. During the first nine months of 2014, the Company effectively settled certain prior year tax matters. As a result, the Company reversed approximately $1.2 million of its liability for uncertain tax positions.
14. Stockholder’s Equity
On June 6, 2012, our Board of Directors authorized a two-year stock repurchase program of up to $250.0 million (the “2012 Repurchase Program”). During the year ended December 31, 2013, we repurchased and retired 1,956,900 shares of our common stock for an average price per share of $36.35, at a cost of $71.1 million, of which $4.4 million was accrued and included in the Condensed Consolidated Balance Sheet, and $66.7 million was paid at December 31, 2013. In January 2014, we paid the balance due of $4.4 million on our 2013 share repurchases. No shares were repurchased during the nine months ended September 30, 2014. The 2012 Repurchase Program expired on June 5, 2014.
15. Segment Reporting
We manage our business in five reportable 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, post-acquisition integration, valuations, tax issues and performance improvement.
Our Forensic and Litigation Consulting segment provides law firms, companies, government clients and other interested parties with dispute advisory, investigations, forensic accounting, business intelligence assessments, data analytics, risk mitigation services as well as interim management and performance improvement services for our health solutions practice clients.
Our Economic Consulting segment provides law firms, companies, government entities and other interested parties with analysis of complex economic issues for use in legal, regulatory and international arbitration proceedings, strategic decision making and public policy debates in the U.S. and around the world.
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Our Technology segment provides electronic 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, 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. Beginning with the quarter ended March 31, 2014, the definition of Adjusted Segment EBITDA has been updated to exclude the impact of changes in the fair value of acquisition-related contingent consideration liabilities. Prior period amounts have been reclassified to conform to the current period’s presentation.
We define Adjusted Segment EBITDA as a segment’s share of consolidated operating income before depreciation, amortization of intangible assets, remeasurement of acquisition-related contingent consideration, special charges and goodwill impairment charges. We define Total Adjusted Segment EBITDA as the total of Adjusted Segment EBITDA for all segments, which excludes unallocated corporate expenses. Although Adjusted Segment EBITDA is not a measure of financial condition or performance determined in accordance with GAAP, we use Adjusted Segment EBITDA to internally evaluate the financial performance of our segments because we believe it is a useful supplemental measure which reflects current core operating performance and provides an indicator of the segment’s ability to generate cash.
The table below presents revenues and Adjusted Segment EBITDA for our reportable segments for the three and nine months ended September 30, 2014 and 2013:
Adjusted Segment EBITDA
Total Adjusted Segment EBITDA
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The table below reconciles Total Adjusted Segment EBITDA to income before income tax provision:
Segment depreciation expense
Unallocated corporate expenses, excluding special charges
16. 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 and 2020 Notes and 2022 Notes (collectively, the “Senior Notes”). The guarantees are full and unconditional and joint and several. All of the guarantors are 100%-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.
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Condensed Consolidating Balance Sheet Information as of September 30, 2014
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
Condensed Consolidating Balance Sheet Information as of December 31, 2013
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Condensed Consolidating Statement of Comprehensive Income for the Three Months Ended
September 30, 2014
Operating income
Other (expense) income
Income tax (benefit) provision
Equity in net earnings of subsidiaries
Other comprehensive income, net of tax:
Total other comprehensive income, net of tax
Comprehensive income
September 30, 2013
Special Charges
Other comprehensive loss, net of tax:
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Condensed Consolidating Statement of Comprehensive Income for the Nine Months Ended
Condensed Consolidating Statement of Comprehensive Income for Nine Months Ended
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Condensed Consolidating Statement of Cash Flows for the Nine Months Ended September 30, 2014
Net cash used in operating activities
Intercompany transfers
Net cash (used in) provided by financing activities
Condensed Consolidating Statement of Cash Flows for the Nine Months Ended September 30, 2013
Net cash (used in) provided by operating activities
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The following is a discussion and analysis of our consolidated financial condition and results of operations for the three and nine months ended September 30, 2014 and 2013 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, 2013. Historical results and any discussion of prospective results may not indicate our future performance. See “—Forward-Looking Statements.”
BUSINESS OVERVIEW
We are a leading global business advisory firm dedicated to helping organizations protect and enhance their enterprise value. We work closely with our clients to help them anticipate, understand, manage and overcome complex business matters arising from such factors as the economy, financial and credit markets, governmental regulation, legislation and litigation. We assist clients in addressing a broad range of business challenges, such as restructuring (including bankruptcy), financing and credit issues and indebtedness, interim business management, forensic accounting and litigation matters, international arbitrations, mergers and acquisitions (“M&A”), antitrust and competition matters, securities litigation, electronic discovery (“e-discovery”), management and retrieval of electronically stored information (“ESI”), reputation management and strategic communications. We also provide services to help our clients take advantage of economic, regulatory, financial and other business opportunities. Our experienced teams of professionals include many individuals who are widely recognized as experts in their respective fields. We believe clients retain us because of our recognized expertise and capabilities in highly specialized areas as well as our reputation for satisfying client needs.
We report financial results for the following five reportable segments:
Our Corporate Finance/Restructuring segment focuses on strategic, operational, financial and capital needs of businesses around the world and provides consulting and advisory services on a wide range of areas, such as restructuring (including bankruptcy), interim management, financings, M&A, post-acquisition integration, valuations, tax issues and performance improvement.
Our 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. Over the past several years the growth in our revenues and profitability has resulted from our ability to attract new and recurring engagements and the acquisitions we have completed.
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Most of our services are rendered under time-and-expense arrangements that obligate the client to pay us a fee for the hours that we incur at agreed upon rates. Under this arrangement, we typically bill our clients for reimbursable expenses, which may include the cost of producing our work product and other direct expenses that we incur on behalf of the client, such as travel costs. We also render services for which certain clients may be required to pay us a fixed fee or recurring retainer. These arrangements are generally cancellable at any time. Some of our engagements contain performance-based arrangements in which we earn a success fee when and if certain predefined outcomes occur. This type of success fee may supplement a time-and-expense or fixed-fee arrangement. Success fee revenues may cause variations in our revenues and operating results due to the timing of achieving the performance-based criteria. In our Technology segment, certain clients are also billed based on the amount of data stored on our electronic systems, the volume of information processed or the number of users licensing our Ringtail® software products for use or installation within their own environments. We license certain 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. 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 rates of the revenue-generating professionals we employ;
the number of revenue-generating professionals;
fees from clients on a retained basis or other;
licensing of our software products and other technology services;
the types of assignments we are working on at different times;
the length of the billing and collection cycles; and
the geographic locations of our clients or locations in which services are rendered.
Non-GAAP Measures
In the accompanying analysis of financial information, we sometimes use information derived from consolidated and segment financial information that is not presented in our financial statements and prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). Certain of these measures are considered “non-GAAP financial measures” under the SEC rules. Specifically, we have referred to:
Segment Operating Income
Total Segment Operating Income
Adjusted EBITDA
Adjusted Net Income
Adjusted Earnings per Diluted Share
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Beginning with the quarter ended March 31, 2014, the definitions of each of these non-GAAP measures have been updated to exclude the impact of changes in the fair value of acquisition-related contingent consideration liabilities. Prior period amounts have been reclassified to conform to the current period’s presentation.
We define Segment Operating Income (Loss) as a segment’s share of consolidated operating income. We define Total Segment Operating Income (Loss) as the total of Segment Operating Income (Loss) for all segments, which excludes unallocated corporate expenses. We use Segment Operating Income (Loss) for the purpose of calculating Adjusted Segment EBITDA. We define Adjusted EBITDA as consolidated net income (loss) before income tax provision, other non-operating income (expense), depreciation, amortization of intangible assets, remeasurement of acquisition-related contingent consideration, special charges, goodwill impairment charges and losses on early extinguishment of debt. We define Adjusted Segment EBITDA as a segment’s share of consolidated operating income before depreciation, amortization of intangible assets, remeasurement of acquisition-related contingent consideration, special charges and goodwill impairment charges. We define Total Adjusted Segment EBITDA as the total of Adjusted Segment EBITDA for all segments, which excludes unallocated corporate expenses. We use Adjusted Segment EBITDA to internally evaluate the financial performance of our segments because we believe it is a useful supplemental measure which reflects current core operating performance and provides an indicator of the segment’s ability to generate cash. We also believe that these measures, when considered together with our GAAP financial results, provide management and investors with a more complete understanding of our operating results, including underlying trends, by excluding the effects of remeasurement of acquisition-related contingent consideration, special charges and goodwill impairment charges. In addition, EBITDA is a common alternative measure of operating performance used by many of our competitors. It is used by investors, financial analysts, rating agencies and others to value and compare the financial performance of companies in our industry. Therefore, we also believe that these measures, considered along with corresponding GAAP measures, provide management and investors with additional information for comparison of our operating results to the operating results of other companies.
We define Adjusted Net Income and Adjusted Earnings per Diluted Share (“Adjusted EPS”) as net income and earnings per diluted share, respectively, excluding the impact of remeasurement of acquisition-related contingent consideration, special charges, goodwill impairment charges and losses on early extinguishment of debt. We use Adjusted Net Income for the purpose of calculating Adjusted EPS. Management uses Adjusted EPS to assess total company operating performance on a consistent basis. We believe that this measure, when considered together with our GAAP financial results, provides management and investors with a more complete understanding of our business operating results, including underlying trends, by excluding the effects of the remeasurement of acquisition-related contingent consideration, special charges, goodwill impairment charges and losses on early extinguishment of debt.
Non-GAAP financial measures are not defined in the same manner by all companies and may not be comparable to other similarly titled measures of other companies. Non-GAAP financial measures should be considered in addition to, but not as a substitute for or superior to, the information contained in our Consolidated Statements of Comprehensive Income. Reconciliations of GAAP to non-GAAP financial measures are included elsewhere in this filing.
We define acquisition growth as revenue of acquired companies in the first twelve months following the effective date of an acquisition. Our definition of organic growth is the change in revenue excluding the impact of all such acquisitions.
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EXECUTIVE HIGHLIGHTS
(dollars in thousands,
except per share amounts)
Adjusted EPS
Cash provided by operating activities
Total number of employees
Third Quarter 2014 Executive Highlights
Revenues for the three months ended September 30, 2014 increased $36.5 million, or 8.8%, to $451.2 million, compared to $414.6 million in the same prior year period. The revenue increase largely resulted from organic growth in all segments, with the most significant revenue growth due to higher demand for complex global investigations and financial services industry investigations in our Technology segment, as well as, increased demand in our global construction solutions, data analytics and North America investigation and disputes practices in our in Forensic and Litigation Consulting (“FLC”) segment. Additionally, our results reflected improved demand in our European practice and in our North American non-distressed service offerings in the Corporate Finance/Restructuring (“Corporate Finance”) segment, and the international arbitration, valuation and financial advisory offerings in the Europe, Middle East and Africa (“EMEA”) region, in our Economics Consulting segment.
During the three months ended September 30, 2014, we recorded special charges of $5.3 million. The special charges consisted of $4.5 million contractual post-employment payments and equity award expense acceleration, net of forfeitures of unvested equity and liability awards and annual bonus payments, related to the departures of the Company’s former Chief Financial Officer, former Executive Vice President and Chairman of North America and former Chairman of the EMEA region, and $0.8 million related to updated forecasts of expected sublease income for corporate and segment offices previously vacated.
Adjusted EBITDA in the third quarter decreased $9.1 million, or 12.6%, to $63.4 million, or 14.1% of revenues, compared to $72.5 million, or 17.5% of revenues, in the same prior year period. Adjusted EBITDA was unfavorably impacted by increases in performance-based compensation costs, investments in certain global corporate initiatives, the impact of employment contract extensions of certain key senior client-service professionals in our Economics Consulting segment, and investments in hiring key personnel in our FLC health solutions practice.
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Net Income (Loss)
Net income for the three months ended September 30, 2014 increased $73.1 million to $22.5 million, compared to a net loss of $50.6 million in the same prior year period. Net income for the quarter was impacted by the segment results and the special charges described above. Net loss for the prior year quarter was impacted by $10.4 million of special charges as well as by an $83.8 million goodwill impairment charge for our Strategic Communications segment.
Earnings per diluted share and Adjusted EPS
Earnings per diluted share for the three months ended September 30, 2014 increased $1.85 to $0.55 from a loss per diluted share of $1.29 in the same prior year period. Earnings per diluted share for the quarter ended September 30, 2014 were impacted by the results as outlined above, including the impact of the special charge of $5.3 million recorded in the quarter. Loss per diluted common share for the quarter ended September 30, 2013 of $1.29 included the impact of the $83.8 million goodwill impairment charge for our Strategic Communications segment and the impact of the special charges of $6.8 million.
Adjusted earnings per diluted share for the three months ended September 30, 2014 were $0.63 as compared to $0.72 in the same prior year period.
Liquidity highlights
Cash provided by operating activities increased $13.2 million, or 15.6%, to $97.6 million for the three months ended September 30, 2014 compared to $84.4 million for the same prior year period, primarily as a result of higher revenue driven cash collections partially offset by increased payments for compensation and other operating expenses. Days sales outstanding (“DSO”), which is one measure of the collections cycle, was 107 days at September 30, 2014 and 102 days at September 30, 2013. DSO for the third quarter compared to the same prior year period has been impacted by the mix of revenues between our segments and extended payment terms, which have been granted to certain large scale engagements.
Headcount
As of September 30, 2014, our total headcount of 4,336 increased by 206 employees from 4,130 as of September 30, 2013.
We increased the number of non-billable employees by 61, from 983 as of December 31, 2013 to 1,044 as of September 30, 2014. Billable headcount additions for the nine-months ended September 30, 2014 are referenced in the table below.
Billable Headcount
December 31, 2013
Additions (reductions), net
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CONSOLIDATED RESULTS OF OPERATIONS
Segment and Consolidated Operating Results:
(in thousands, except
per share amounts)
Total segment operating income (loss)
Unallocated corporate expenses
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Reconciliation of Net Income to Adjusted EBITDA:
Add back:
Other income (expense), net
Reconciliation of Net Income to Adjusted Net Income and Earnings Per Share to Adjusted EPS:
Special charges, net of tax effect (1)
Goodwill impairment charges (2)
Remeasurement of acquisition-related contingent consideration, net of tax effect (3)
Less:
Interim period impact of including goodwill impairment charges in the annual effective tax rate, net of tax
Impact of denominator for diluted EPS (4)
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 rate for the adjustments related to special charges for
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The goodwill impairment charge was non-deductible for income tax purposes and resulted in no tax benefit for the year ended December 31, 2013.
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 related to the remeasurement of acquisition-related contingent consideration for the nine months ended September 30, 2014 was 36.5%. The tax expense related to the remeasurement of acquisition-related contingent consideration for the nine months ended September 30, 2014 was $0.9 million, or a $0.02 impact on diluted earnings per share. The adjustment related to remeasurement of acquisition-related contingent consideration for the nine months ended September 30, 2013 was not taxable. There were no adjustments related to remeasurement of acquisition-related contingent consideration for the three months ended September 30, 2014 and 2013.
For the three and nine months ended September 30, 2013, the Company reported a net loss. For those periods, the number of basic weighted average shares outstanding equals the number of diluted weighted average shares outstanding for purposes of calculating GAAP earnings per share because potentially dilutive securities would be antidilutive. For non-GAAP purposes, the total per share and share amounts presented herein reflect the impact of the inclusion of share-based awards that are considered dilutive based on the impact of the add backs included in Adjusted Net Income above.
Three Months Ended September 30, 2014 Compared to Three Months Ended September 30, 2013
Revenues and operating income
See “Segment Results” for an expanded discussion of segment revenues and operating income.
Unallocated corporate expenses increased $5.0 million, or 27.6%, to $23.1 million for the three months ended September 30, 2014 from $18.1 million for the same prior year period. Excluding the impact of special charges of $4.9 million in the three months ended September 30, 2014 and $2.1 million in the three months ended September 30, 2013, unallocated corporate expenses increased $2.2 million, or 13.8%. The increase was primarily due to higher costs related to performance based compensation for U.S. and regional personnel and increased resources to assess and evaluate certain strategic initiatives, partially offset by lower costs related to corporate executives and the termination of the airplane lease.
Interest income and other, which includes foreign currency transaction gains and losses, decreased by $0.2 million, or 16.7%, to $1.0 million for the three months ended September 30, 2014 from $1.2 million for the same prior year period. The decrease was primarily due to an increase in net foreign currency transaction losses of $2.2 million in the period ended September 30, 2014 as compared to the net losses of $0.1 million in the same prior year period. Transaction gains and losses, both realized and unrealized, relate to the remeasurement or settlement of monetary assets and liabilities that are denominated in a currency other than an entity’s functional currency. These monetary assets and liabilities include both client and current intercompany receivables and payables. In addition, the quarter ended September 30, 2014 included a $1.2 million gain related to an insurance settlement.
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Interest expense decreased $0.2 million, or 1.6%, to $12.6 million for the three months ended September 30, 2014 from $12.8 million for the same prior year period. Interest expense in 2014 was favorably impacted by lower average borrowings.
During the three months ended September 30, 2013, we recorded special charges totaling $10.4 million, of which $3.1 million was non-cash. The charges primarily reflect actions we took to realign our workforce to address current business demands impacting our Corporate Finance and FLC segments and to reduce certain corporate overhead within our EMEA region. The special charges consisted of $10.2 million of salary continuance and other contractual employee related costs associated with the reduction in workforce of 45 employees, and $0.2 million of costs to consolidate leased office space within one location and to adjust prior special charges for changes to sublease terms and associated costs. The following table details the special charges by segment for the three months ended September 30, 2014 and 2013:
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 for the three months ended September 30, 2014 is 35.4%. For the three months ended September 30, 2014, there were no discrete items recorded. The effective tax rate for the three months ended September 30, 2013 was not meaningful due to the impact of the non-deductible goodwill impairment charge of $83.8 million. The effective tax rate for the three months ended September 30, 2013, excluding the impact of the goodwill impairment charge, and a discrete item related to the settlement of a foreign audit would have been 38.0%.
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Nine Months Ended September 30, 2014 Compared to Nine Months Ended September 30, 2013
Unallocated corporate expenses increased $24.3 million, or 48.7%, to $74.2 million for the nine months ended September 30, 2014 from $49.9 million for the same prior year period. Excluding the impact of special charges of $14.3 million in the nine months ended September 30, 2014 and $2.2 million in the nine months ended September 30, 2013, unallocated corporate expenses increased $12.3 million, or 25.7%. The increase was primarily due to higher costs related to performance based compensation for U.S. and regional personnel and increased resources to assess and evaluate certain strategic initiatives, partially offset by lower costs related to corporate executives and the termination of the airplane lease.
Interest income and other, which includes foreign currency transaction gains and losses, increased by $1.8 million, or 105.9%, to $3.5 million for the nine months ended September 30, 2014 from $1.7 million for the same prior year period. The increase in interest income and other was primarily due to $1.2 million gain related to an insurance settlement in the nine months ended September 30, 2014.
Interest expense decreased $0.4 million, or 1%, to $38.2 million, for the nine months ended September 30, 2014, from $38.6 million for the same prior year period. Interest expense in 2014 was favorably impacted by lower average borrowings.
During the nine months ended September 30, 2013, we recorded special charges totaling $10.8 million, of which $3.1 million was non-cash. The charges primarily reflect actions we took to realign our workforce to address current business demands impacting our Corporate Finance and FLC segments and to reduce certain corporate overhead within our EMEA region. The special charges consist of $10.2 million of salary continuance and other contractual employee related costs associated with the reduction in workforce of 45 employees and $0.6 million of costs to consolidate leased office space within one location and to adjust prior special charges for changes to sublease terms and employee termination costs.
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The following table details the special charges by segment for the nine months ended September 30, 2014 and 2013:
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 for the nine months ended September 30, 2014 is 36.2%. For the nine months ended September 30, 2014, the effective tax rate was not materially impacted by discrete items recorded. The effective tax rate for the nine months ended September 30, 2013 was not meaningful due to the impact of the non-deductible goodwill impairment charge of $83.8 million. For the nine months ended September 30, 2013, we recorded a deferred tax valuation reserve related to foreign tax credits, primarily due to lower forecasted foreign earnings, resulting in a discrete increase to the income tax provision in the amount of $6.9 million. We also recognized the impact of a discrete benefit related to the favorable resolution of an income tax contingency in the amount of $2.2 million. Excluding the impact of this discrete item and the non-deductible goodwill impairment charge, the effective tax rate for the nine months ended September 30, 2013 would have been 36.4%.
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SEGMENT RESULTS
The following table reconciles net income to Total Segment Operating Income and Total Adjusted Segment EBITDA for the three and nine months ended September 30, 2014 and 2013.
Unallocated corporate expense
Total Segment Operating Income (Loss)
Segment special charges
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
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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 (excluding revenues from success fees, pass-through and outside consultants) 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.
CORPORATE FINANCE/RESTRUCTURING
Operating expenses:
Selling, general and administrative expenses
Segment operating income
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 billable rate per hour (3)
Revenues less direct cost of revenues
Gross profit as a percent of revenues
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Revenues increased $6.1 million, or 6.4%, to $100.0 million for the quarter ended September 30, 2014 compared to $94.0 million for the same prior year period. The increase in revenues was due to increased demand for non-distressed work in our North America businesses and growth in our European transaction advisory and tax practices; partially offset by declines in global bankruptcy and restructuring work.
Gross profit decreased $1.8 million, or 5.0%, to $33.8 million for the quarter ended September 30, 2014 compared to $35.6 million for the same prior year period. Gross profit margin decreased to 33.8% for the quarter ended September 30, 2014 compared to 37.8% for the same prior year period. The decrease in gross profit margin was due to the overall decline on higher margin global bankruptcy and restructuring work and increased performance based compensation, partially offset by increased demand for non-distressed engagements.
Selling, general and administrative (“SG&A”) expense increased $2.3 million, or 13.5%, to $19.0 million for the quarter ended September 30, 2014 compared to $16.8 million for the same prior year period. SG&A expense was 19.0% of revenues for the quarter ended September 30, 2014, compared to 17.9% for the same prior year period. The increase in SG&A expense was due to higher bad debt expense and higher legal costs in Asia Pacific and EMEA related to regional restructuring.
Amortization of other intangible assets was $1.2 million for the quarter ended September 30, 2014 compared to $1.6 million for the same prior year period.
Adjusted Segment EBITDA decreased $3.9 million, or 19.9%, to $15.5 million for the quarter ended September 30, 2014 compared to $19.4 million for the same prior year period.
Revenues increased $8.3 million, or 2.9%, to $298.0 million for the nine months ended September 30, 2014 compared to $289.8 million for the same prior year period, including $4.4 million, or 1.5%, from acquisitions as compared to the same prior year period. Revenues increased organically $3.9 million, or 1.3%, primarily due to higher volume in our EMEA practice and growth in non-distressed engagements in North America, partially offset by continued slowdown in our global bankruptcy and restructuring practices and lower average realized bill rates in our North America, Asia Pacific and EMEA practices.
Gross profit decreased $9.1 million, or 8.3%, to $100.3 million for the nine months ended September 30, 2014 compared to $109.4 million for the same prior year period. Gross profit margin decreased to 33.6% for the nine months ended September 30, 2014 compared to 37.8% for the same prior year period. The decrease in gross profit margin was due to slowdown in global bankruptcy and restructuring activity, continued investments in our European transaction advisory practice, and higher performance-based compensation expense.
SG&A expense increased $2.8 million, or 5.2%, to $57.0 million for the nine months ended September 30, 2014 compared to $54.2 million for the same prior year period. SG&A expense was 19.1% of revenues for the nine months ended September 30, 2014, compared to 18.7% for the same prior year period. The increase in SG&A expense was due to increased bad debt expense, additional overhead costs related to acquired practices, and the investment in the European transaction advisory practice partially offset by the absence of the non-recurring acquisition costs of $1.8 million recorded in the same prior year period.
Amortization of other intangible assets was $4.6 million for the nine months ended September 30, 2014 compared to $4.9 million for the same prior year period.
Adjusted Segment EBITDA decreased $10.7 million, or 19.0%, to $45.6 million for the nine months ended September 30, 2014 compared to $56.3 million for the same prior year period.
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FORENSIC AND LITIGATION CONSULTING
Average billable rate per hour
Revenues increased $8.7 million, or 7.7%, to $121.7 million for the three months ended September 30, 2014 from $113.1 million for the same prior year period. $3.3 million of this increase, or 2.9%, was due to acquisitions as compared to the same prior year period. Revenues increased organically $5.4 million, or 4.8%, due to higher demand in our North America investigations practice and global construction and disputes practices, partially offset by lower success fees and lower revenues in our heath solutions practice.
Gross profit declined $1.9 million, or 4.3%, to $42.7 million for the three months ended September 30, 2014 from $44.6 million for the same prior year period. Gross profit margin decreased 4.4 percentage points to 35.0% for the three months ended September 30, 2014 from 39.4% for the same prior year period. The decrease in gross profit margin was due to lower success fees, weaker performance in our health solutions practice and increased performance-based compensation partially offset by higher utilization in our global disputes, investigations, construction solutions and data analytics practices.
SG&A expense increased $1.3 million, or 6.5%, to $21.4 million for the three months ended September 30, 2014 from $20.1 million for the same prior year period. SG&A expense was 17.6% of revenue for the three months ended September 30, 2014, down from 17.8% for the same prior year period. The increase in SG&A expense was primarily due to increased corporate allocations and incremental overhead expenses from our acquired business partially offset by the collection on a previous period bad debt.
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Amortization of other intangible assets increased $0.1 million to $0.7 million for the three months ended September 30, 2014 compared to $0.5 million for the same prior year period.
Adjusted Segment EBITDA decreased by $3.1 million, or 12.2%, to $22.3 million for the three months ended September 30, 2014 from $25.4 million for the same prior year period.
Revenues increased $43.3 million, or 13.6%, to $362.2 million for the nine months ended September 30, 2014 from $318.9 million for the same prior year period. Revenues increased $9.3 million, or 2.9%, due to acquisitions as compared to the same prior year period. Revenues increased organically $34.1 million, or 10.7%, due to higher demand in our global disputes, construction solutions and data analytics practices, and in investigation practices in the North America and Asia Pacific regions, partially offset by lower success fees and lower revenues in our heath solutions practice.
Gross profit increased $18.4 million, or 16.0%, to $134.0 million for the nine months ended September 30, 2014 from $115.6 million for the same prior year period. Gross profit margin increased 0.8 percentage points to 37.0% for the nine months ended September 30, 2014 from 36.2% for the same prior year period. The increase in gross profit margin is related to higher utilization in our construction solutions, data analytics and investigations practices, partially offset by increased performance based compensation and continued investments in the health solutions practice.
SG&A expense increased $4.7 million, or 7.6%, to $66.0 million for the nine months ended September 30, 2014 from $61.3 million for the same prior year period. SG&A expense was 18.2% of revenues for the nine months ended September 30, 2014, down from 19.2% for the same prior year period. The increase in SG&A expense was due to incremental overhead expenses from our acquired business and an increase in corporate allocations, partially offset by the collection on a previous period bad debt.
Amortization of other intangible assets increased $0.5 million to $2.1 million for the nine months ended September 30, 2014 compared to $1.6 million for the same prior year period.
Adjusted Segment EBITDA increased by $14.1 million, or 24.8%, to $71.0 million for the nine months ended September 30, 2014 from $56.9 million for the same prior year period.
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ECONOMIC CONSULTING
Revenues increased $7.4 million, or 6.6%, to $120.5 million for the three months ended September 30, 2014 compared to $113.1 million for the same prior year period. Revenues increased organically $7.4 million, or 6.6%, including a 1.1% increase from the estimated positive impact from foreign currency translation. The remaining increase in revenue is due to higher demand for M&A related services and higher realized rates for our international arbitration services.
Gross profit decreased $3.8 million, or 10.3%, to $33.2 million for the three months ended September 30, 2014 compared to $37.1 million for the same prior year period. Gross profit margin decreased to 27.6% for the three months ended September 30, 2014 from 32.8% for the same prior year period. The decrease in gross profit margin was the result of increased compensation expense related to employment contract extensions of certain key senior client-service professionals, partially offset by higher realized bill rates that were partially related to staff mix.
SG&A expense increased $1.0 million, or 6.7%, to $15.7 million for the three months ended September 30, 2014 compared to $14.7 million for the same prior year period. SG&A expense was 13.0% of revenues for the three months ended September 30, 2014 compared to 13.0% for the same prior year period. The increase in SG&A expense was due to higher overall employee related support expenses. Bad debt expense was $1.8 million or 1.5% of revenues for the three months ended September 30, 2014 compared to $1.6 million or 1.4% of revenues for the same prior year period.
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Amortization of other intangible assets decreased to $0.2 million for the three months ended September 30, 2014, from $0.5 million for the same prior year period.
Adjusted Segment EBITDA decreased $4.8 million, or 20.7%, to $18.4 million for the three months ended September 30, 2014, compared to $23.2 million for the same prior year period.
Revenues increased $5.3 million, or 1.6%, to $344.6 million for the nine months ended September 30, 2014 compared to $339.3 million for the same prior year period. Revenues increased $2.2 million, or 0.7%, due to acquisitions as compared to the same prior year period. Revenues increased organically $3.1 million, or 0.9%, which includes a 1.2% increase from the estimated positive impact of foreign currency translation, primarily due to higher demand for our antitrust practice and higher average realized bill rates in our international arbitration practice offset by a decline in our financial economics practice.
Gross profit decreased $16.1 million, or 14.6%, to $94.5 million for the nine months ended September 30, 2014 compared to $110.6 million for the same prior year period. Gross profit margin decreased to 27.4% for the nine months ended September 30, 2014 from 32.6% for the same prior year period. The decrease in gross profit margin was the result of employment contract extensions of key senior client-service professionals
SG&A expense increased $4.9 million, or 11.4%, to $47.8 million for the nine months ended September 30, 2014 compared to $42.9 million for the same prior year period. SG&A expense was 13.9% of revenues for the nine months ended September 30, 2014 compared to 12.6% for the same prior year period. The increase in SG&A expense was due to higher employee driven expenses, higher cost for IT services, higher travel and entertainment expenses related to marketing and business development and higher bad debt expense. Bad debt expense was $6.4 million or 1.9% of revenues for the nine months ended September 30, 2014 compared to $5.5 million or 1.6% of revenues for the same prior year period.
Amortization of other intangible assets decreased to $0.8 million for the nine months ended September 30, 2014, compared to $1.3 million for the same prior year period.
Adjusted Segment EBITDA decreased $20.7 million, or 29.5%, to $49.5 million for the nine months ended September 30, 2014, compared to $70.2 million for the same prior year period.
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TECHNOLOGY
Number of revenue generating professionals (at period end) (3)
Includes personnel involved in direct client assistance and revenue generating consultants
Revenue increased by $11.2 million, or 21.8%, to $62.4 million for the three months ended September 30, 2014 compared to $51.2 million for the same prior year period. The increase in revenue is due to continued higher demand from complex global investigations and financial services industry investigations that more than offset lower services pricing.
Gross profit increased by $3.7 million to $31.0 million for the three months ended September 30, 2014 compared to the $27.3 million for the same prior year period. Gross profit margin decreased to 49.7% of revenue from 53.3% of revenue compared to the same prior year period. The gross profit margin decline is due to an increased mix of lower margin services and investments in global data centers and operations support.
SG&A increased by $1.5 million, or 9.4%, to $17.0 million for the three months ended September 30, 2014 compared to $15.6 million for the same prior year period. SG&A expense was 27.3% of revenue for the three months ended September 30, 2014 compared to 30.4% of revenue for the same prior year period. SG&A expense increased due to hiring to support increased research and development, marketing and business development activities partially offset by bad debt recoveries of previously reserved balances. Research and development expense was $4.7 million for the three months ended September 30, 2014 compared to $4.1 million for the same prior year period.
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Amortization of other intangible assets decreased $1.8 million to $0.2 million for the three months ended September 30, 2014 compared to $2.0 million for the same prior year period. The decrease was due to the impact of certain intangible assets being fully amortized at the end of 2013.
Adjusted Segment EBITDA increased by $2.5 million, or 16.0%, for the three months ended September 30, 2014, compared to $15.4 million for the same prior year period.
Revenue increased by $34.0 million, or 22.8%, to $183.1 million for the nine months ended September 30, 2014 compared to the $149.1 million for the same prior year period. The increase was due to higher services volumes in complex global investigations and financial services industry matters as well as an increase in consulting volume partially offset by lower services pricing.
Gross profit increased by $7.9 million, or 9.9%, to $88.1 million for the nine months ended September 30, 2014 compared to the $80.2 million for the same prior year period. Gross profit margin percentage decreased to 48.1% of revenue from 53.8%, or down 5.7 percentage points compared to the same prior year period. The gross profit margin percentage decrease was due to a change in the mix of revenue with higher margin unit-based revenue comprising a smaller percentage of total revenue, higher third party costs to support increased document review volumes, increased infrastructure costs as part of the global expansion of certain services capabilities and increased amortization of previously capitalized software development costs.
SG&A increased by $4.6 million, or 10.3%, to $49.7 million for the nine months ended September 30, 2014 compared to the $45.1 million for the same prior year period. SG&A expense was 27.2% of revenue for the nine months ended September 30, 2014 compared to 30.3% of revenue for the same prior year period. The SG&A expense increase was related to higher personnel costs in research and development and business development and marketing, corporate allocations in support of operations, reduced capitalization of software development costs, and higher rent in support of the additional personnel. Research and development expense was $13.7 million for the nine months ended September 30, 2014 compared to $11.6 million for the same prior year period. Bad debt expense decreased by $1.3 million due to increased recoveries of previously reserved balances.
Amortization of other intangible assets decreased $5.3 million to $0.7 million for the nine months ended September 30, 2014, compared to $6.0 million for the same prior year period. The decrease is due to the impact of certain intangible assets being fully amortized at the end of 2013.
Adjusted Segment EBITDA increased by $4.3 million, or 9.4%, to $50.3 million for the nine months ended September 30, 2014, compared to $46.0 million for the same prior year period.
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STRATEGIC COMMUNICATIONS
Segment operating income (loss)
Revenues increased $3.2 million, or 7.5%, to $46.6 million for the three months ended September 30, 2014 from $43.3 million for the same prior year period, including a 2.3% estimated positive impact from foreign currency translation, primarily due to the strengthening of the British pound relative to the U.S. dollar. The remaining revenue increase was primarily due to an increase in project revenues in North America and Asia Pacific.
Gross profit increased $2.3 million, or 15.1%, to $17.3 million for the three months ended September 30, 2014 from $15.0 million for the same prior year period. Gross profit margin increased to 37.1% for the three months ended September 30, 2014 from 34.6% for the same prior year period due to the mix of project engagements.
SG&A expense decreased $0.3 million, or 2.4%, to $11.2 million for the three months ended September 30, 2014 from $11.4 million for the same prior year period, including a 2.0% increase from the estimated impact of foreign currency translation. SG&A expense was 24.0% of revenue for the three months ended September 30, 2014, down from 26.4% of revenue for the same prior year period. The SG&A decrease was the result of lower facilities costs, partially offset by higher bad debt expense.
Amortization of other intangible assets decreased to $1.1 million for the three months ended September 30, 2014 from $1.2 million for the same prior year period.
Adjusted Segment EBITDA increased $2.6 million, or 63.7%, to $6.6 million for the three months ended September 30, 2014, from $4.0 million for the same prior year period.
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During the third quarter of 2013, we recorded an $83.8 million non-deductible goodwill impairment charge related to the Strategic Communications segment.
Revenues increased $3.7 million, or 2.6%, to $143.1 million for the nine months ended September 30, 2014 from $139.4 million for the same prior year period, which included a 2.1% estimated increase from the positive impact of foreign currency translation, which was primarily due to the strengthening of the British pound relative to the U.S. dollar. The revenue increase was primarily due to an increase in retainer-based revenue in our EMEA region, increased project revenue in North America and Asia Pacific, partially offset by lower pass-through revenues in our North America and EMEA regions.
Gross profit increased $3.6 million, or 7.6%, to $51.0 million for the nine months ended September 30, 2014 from $47.4 million for the same prior year period. Gross profit margin increased 1.7 percentage points to 35.7% for the nine months ended September 30, 2014 from 34.0% for the same prior year period. The increase in gross profit margin was primarily due to improved revenue growth and mix involving higher margin engagements and lower proportion of low margin pass through revenues.
SG&A expense increased $1.1 million, or 3.0%, to $37.4 million for the nine months ended September 30, 2014 from $36.3 million for the same prior year period. SG&A expense was 26.1% of revenue for the nine months ended September 30, 2014, up from 26.0% of revenue for the same prior year period. The increase in SG&A was primarily due to higher facilities expenses related to the transition to our new London office and severance expense recorded in the EMEA region.
Amortization of other intangible assets decreased to $3.4 million for the nine months ended September 30, 2014 from $3.5 million for the same prior year period.
Adjusted Segment EBITDA increased $2.4 million, or 18.4%, to $15.2 million for the nine months ended September 30, 2014 from $12.8 million for the same prior year period.
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 U.S. 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, 2013 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 which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:
Revenue recognition
Goodwill and other intangible assets
Business combinations
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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, 2013 filed with the SEC on February 24, 2014.
Goodwill and Other Intangible Assets
On a quarterly basis, we monitor the key drivers of fair value to detect events or other changes that would warrant an interim impairment test of our goodwill and intangible assets. Factors we consider important which could trigger an interim impairment review include, but are 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. When we evaluate these factors and determine that a triggering event has occurred, we perform an interim impairment analysis.
As of October 1, 2013, the date of our last annual goodwill impairment test, the fair value of all of our reporting units, with the exception of the Strategic Communications reporting unit, substantially exceeded the carrying value. The Strategic Communications reporting unit carrying value was adjusted to fair value through an $83.3 million goodwill impairment charge as of September 30, 2013. Through our quarterly 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.
There can be no assurance that the estimates and assumptions used in our goodwill impairment testing will prove to be accurate predictions of the future. If our assumptions regarding forecasted cash flows are not achieved, we may be required to perform the two-step quantitative goodwill impairment analysis prior to our next annual impairment test. 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.
SIGNIFICANT NEW ACCOUNTING PRONOUNCEMENTS
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LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
DSO
We have generally financed our day-to-day operations, capital expenditures and acquisition-related contingent payments through cash flows from operations. Generally, during our first quarter of each fiscal year, our cash needs exceed our cash flows from operations due to the payments of annual incentive compensation and acquisition-related contingent payments. Our operating cash flows generally exceed our cash needs subsequent to the first quarter of each year.
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.
DSO is a performance measure used to assess how quickly revenues are collected by the Company. We calculate DSO at the end of each reporting period by dividing net accounts receivable reduced by billings in excess of services provided, by revenue for the quarter, adjusted for changes in foreign exchange rates. We multiply the result by the number of days in the quarter. Our DSO typically reaches its lowest point at December 31 each year and has consistently increased during the following quarters.
Cash provided by operating activities was $20.5 million for the nine months ended September 30, 2014 compared to $103.8 million for the same prior year period. The primary driver for the $83.3 million decrease in operating cash flows relative to the prior year was higher salary payments driven by the impact of salary increases and headcount additions, and the timing of bonus payments. DSO, which is one measure of the collections cycle, was 107 days at September 30, 2014 and 102 days at September 30, 2013. Current DSO compared to the prior year has been impacted by the mix of revenues between our segments and extended payment terms which have been granted to certain large scale engagements.
Net cash used in investing activities for the nine months ended September 30, 2014 was $47.4 million compared to $63.7 million for the same prior year period. Payments for acquisitions completed during the nine
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months ended September 30, 2014 were $1.0 million, net of cash received, compared to $30.4 million for the same prior year period. Payments of acquisition-related contingent consideration were $14.6 million for the nine months ended September 30, 2014 compared to payments of acquisition-related contingent consideration and stock price guarantees of $6.2 million and $4.1 million, respectively, for the same prior year period. Capital expenditures were $31.8 million for the nine months ended September 30, 2014 compared to $23.0 million for the same prior year period.
Net cash provided by financing activities for the nine months ended September 30, 2014 was $1.5 million compared to net cash used in financing activities of $49.4 million for the same prior year period. Our financing activities for the nine months ended September 30, 2014 included payments of $4.4 million to settle repurchases of the Company’s common stock that were made, but not settled in the fourth quarter of 2013, and the receipt of $13.0 million of refundable deposits related to one of our foreign entities. Our financing activities for the nine months ended September 30, 2013 included the purchase and retirement of 1,422,025 shares of our common stock, at an aggregate cost of $48.8 million.
Capital Resources
As of September 30, 2014, our capital resources included $178.8 million of cash and cash equivalents and available borrowing capacity of $348.6 million under our $350.0 senior secured bank credit facility (“bank credit facility”). As of September 30, 2014, we had no outstanding borrowings 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;
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.
For the full fiscal year ending December 31, 2014, we anticipate aggregate capital expenditures will range between $40.0 million and $44.0 million to support our organization, including direct support for specific client engagements of which we currently anticipate capital expenditures will range between $8.0 million and $12.0 million in the fourth quarter of 2014. 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.
For business combinations consummated on or after January 1, 2009, contingent consideration obligations are recorded as liabilities on our Condensed Consolidated Balance Sheets and remeasured to fair value at each subsequent reporting date with an offset to current period earnings. The fair value of future expected contingent purchase price obligations for these business combinations are $6.7 million at September 30, 2014 with payment dates extending through 2018.
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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 for at least the next twelve months.
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 or other expenditures that are currently not contemplated. 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;
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 63/4% Senior Notes Due 2020 and 6.0% Senior Notes Due 2022. 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, 2013.
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, 2013.
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 estimates, 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
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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, 2013. 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;
our ability to identify suitable acquisition candidates, negotiate favorable terms, take advantage of opportunistic acquisition situations 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 practice and regional leaders who have highly specialized skills and experience;
our ability to protect the confidentiality of internal and client data and proprietary and confidential 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 for clients and key personnel;
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;
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 our services are rendered.
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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, 2013. There have been no significant changes in our market risk exposure during the period covered by this Quarterly Report on Form 10-Q.
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, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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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 has been no material change in any risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the Securities and Exchange Commission (the “SEC”) on February 24, 2014. 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, 2014.
July 1 through July 31, 2014
August 1 through August 31, 2014
September 1 through September 30, 2014
Represents shares of common stock withheld to cover payroll tax withholdings related to the lapse of restrictions on restricted stock.
Not applicable
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(a) Exhibits.
ExhibitNumber
Exhibit Description
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SIGNATURES
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: October 30, 2014
Senior Vice President, Controller and
Chief Accounting Officer
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