UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-14875
FTI CONSULTING, INC.
(Exact Name of Registrant as Specified in its Charter)
Maryland
52-1261113
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
1101 K Street NW,
Washington, D.C.
20005
(Address of Principal Executive Offices)
(Zip Code)
(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 ☒ 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 ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Accelerated filer
Non-accelerated filer
☐ (Do not check if a smaller reporting company)
Smaller reporting company
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
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 20, 2016
Common stock, par value $0.01 per share
42,376,005
FTI CONSULTING, INC. AND SUBSIDIARIES
INDEX
Page
PART I—FINANCIAL INFORMATION
Item 1.
Financial Statements
3
Condensed Consolidated Balance Sheets—September 30, 2016 and December 31, 2015
Condensed Consolidated Statements of Comprehensive Income—Three and Nine Months Ended September 30, 2016 and 2015
4
Condensed Consolidated Statement of Stockholders’ Equity—Nine Months Ended September 30, 2016
5
Condensed Consolidated Statements of Cash Flows—Nine Months Ended September 30, 2016 and 2015
6
Notes to Condensed Consolidated Financial Statements
7
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
18
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
38
Item 4.
Controls and Procedures
PART II—OTHER INFORMATION
Legal Proceedings
39
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
Mine Safety Disclosures
Item 5.
Other Information
40
Item 6.
Exhibits
SIGNATURE
41
2
FTI Consulting, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except per share data)
September 30,
December 31,
2016
2015
Assets
(Unaudited)
Current assets
Cash and cash equivalents
$
225,184
149,760
Accounts receivable:
Billed receivables
416,960
405,000
Unbilled receivables
326,297
280,538
Allowance for doubtful accounts and unbilled services
(195,669
)
(185,754
Accounts receivable, net
547,588
499,784
Current portion of notes receivable
32,490
36,115
Prepaid expenses and other current assets
58,804
55,966
Total current assets
864,066
741,625
Property and equipment, net of accumulated depreciation
66,422
74,760
Goodwill
1,188,230
1,198,298
Other intangible assets, net of amortization
54,493
63,935
Notes receivable, net of current portion
112,364
106,882
Other assets
56,043
43,518
Total assets
2,341,618
2,229,018
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable, accrued expenses and other
97,144
89,845
Accrued compensation
229,611
227,783
Billings in excess of services provided
38,774
29,449
Total current liabilities
365,529
347,077
Long-term debt, net
470,339
494,772
Deferred income taxes
170,768
139,787
Other liabilities
103,397
99,779
Total liabilities
1,110,033
1,081,415
Commitments and contingent liabilities (note 10)
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 — 42,367 (2016) and 41,234 (2015)
423
412
Additional paid-in capital
429,902
400,705
Retained earnings
933,900
855,481
Accumulated other comprehensive loss
(132,640
(108,995
Total stockholders' equity
1,231,585
1,147,603
Total liabilities and stockholders' equity
See accompanying notes to condensed consolidated financial statements
Condensed Consolidated Statements of Comprehensive Income
Three Months Ended September 30,
Nine Months Ended September 30,
Revenues
438,042
455,470
1,368,474
1,336,945
Operating expenses
Direct cost of revenues
293,702
301,609
902,532
872,108
Selling, general and administrative expenses
106,220
105,058
318,074
316,317
Special charges
6,811
Acquisition-related contingent consideration
201
159
1,541
(1,145
Amortization of other intangible assets
2,845
2,900
8,041
8,919
402,968
409,726
1,236,999
1,196,199
Operating income
35,074
45,744
131,475
140,746
Other income (expense)
Interest income and other
3,213
2,027
9,895
2,840
Interest expense
(6,304
(11,696
(18,836
(36,537
Loss on early extinguishment of debt
(19,589
(3,091
(29,258
(8,941
(53,286
Income before income tax provision
31,983
16,486
122,534
87,460
Income tax provision
10,292
6,177
44,115
31,756
Net income
21,691
10,309
78,419
55,704
Earnings per common share — basic
0.53
0.25
1.92
1.37
Earnings per common share — diluted
0.52
1.88
1.34
Other comprehensive loss, net of tax
Foreign currency translation adjustments, net of tax expense
of $0
(4,478
(17,229
(23,645
(24,412
Total other comprehensive loss, net of tax
Comprehensive income (loss)
17,213
(6,920
54,774
31,292
Condensed Consolidated Statement of Stockholders’ Equity
(in thousands)
Accumulated
Additional
Other
Common Stock
Paid-in
Retained
Comprehensive
Shares
Amount
Capital
Earnings
Loss
Total
Balance at December 31, 2015
41,234
Other comprehensive income (loss):
Foreign currency translation adjustment
Issuance of common stock in connection with:
Exercise of options, net of income tax benefit
from share-based awards of $1,145
693
21,472
21,479
Restricted share grants, less net settled shares
of 106
525
(3,953
(3,948
Stock units issued under incentive compensation
plan
1,842
Purchase and retirement of common stock
(85
(1
(2,902
(2,903
Share-based compensation
12,738
Balance at September 30, 2016
42,367
Condensed Consolidated Statements of Cash Flows
Operating activities
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization
25,359
22,569
Amortization and impairment of other intangible assets
Provision for doubtful accounts
5,903
10,364
Non-cash share-based compensation
13,381
14,356
Non-cash interest expense
1,489
2,029
19,589
(1,159
(674
Changes in operating assets and liabilities, net of effects from
acquisitions:
Accounts receivable, billed and unbilled
(67,318
(84,411
Notes receivable
(3,674
(334
Prepaid expenses and other assets
(3,575
(4,396
10,900
10,158
Income taxes
28,204
15,371
4,486
(19,518
9,578
(5,278
Net cash provided by operating activities
111,575
43,303
Investing activities
Payments for acquisition of businesses, net of cash received
(56
(575
Purchases of property and equipment
(22,855
(24,674
74
94
Net cash used in investing activities
(22,837
(25,155
Financing activities
Borrowings (repayments) under revolving line of credit, net
(25,000
220,000
Payments of long-term debt
(425,671
Payments of debt issue costs
(3,701
Deposits
2,806
2,406
Net issuance of common stock under equity compensation plans
18,394
13,931
357
124
Net cash used in financing activities
(6,346
(192,911
Effect of exchange rate changes on cash and cash equivalents
(6,968
(3,943
Net increase (decrease) in cash and cash equivalents
75,424
(178,706
Cash and cash equivalents, beginning of period
283,680
Cash and cash equivalents, end of period
104,974
Supplemental cash flow disclosures
Cash paid for interest
12,590
37,031
Cash paid for income taxes, net of refunds
15,909
16,386
Non-cash investing and financing activities:
Issuance of stock units under incentive compensation plans
2,124
(dollar and share amounts in tables 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 thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2015 filed with the SEC.
2. Earnings Per Common Share
Basic earnings per common share are calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per common share adjust basic earnings per 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 using the treasury stock method.
Numerator—basic and diluted
Denominator
Weighted average number of common shares
outstanding — basic
41,239
41,094
40,856
40,771
Effect of dilutive stock options
350
426
266
418
Effect of dilutive restricted shares
476
462
483
493
outstanding — diluted
42,065
41,982
41,605
41,682
Antidilutive stock options and restricted shares
753
1,360
1,595
1,685
3. New Accounting Standards
In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which clarifies how cash receipts and cash payments are classified in the statement of cash flows. This standard is effective January 1, 2018, although early adoption is permitted. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This standard makes several modifications to Topic 718, including the accounting for forfeitures, employer tax withholding on share-based compensation and income tax consequences, which are intended to simplify various aspects of the accounting for share-based compensation. ASU 2016-09 also clarifies the statement of cash flows presentation for certain components of share-based awards. The standard is effective beginning January 1, 2017, although early adoption is permitted. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), that replaces existing lease guidance. Under this ASU, leases will be required to record right-of-use assets and corresponding lease liabilities on the balance sheet. This guidance is effective
beginning January 1, 2019. The new standard is required to be applied with a modified retrospective approach to each prior reporting period presented. We have not yet determined the impact that the adoption of this guidance will have on our consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). Under this ASU and subsequently issued amendments, revenue is recognized at the time when goods or services are transferred to a customer in an amount that reflects the consideration it expects to receive in exchange for those goods or services. Companies may use either a full retrospective or a modified retrospective approach to adopt this ASU. This guidance is effective beginning January 1, 2018. We are currently evaluating how the adoption of this accounting standard will impact our consolidated financial statements and related disclosures, including the transition approach.
4. Special Charges
There were no special charges recorded during the three months ended September 30, 2016.
During the nine months ended September 30, 2016, we recorded special charges of $6.8 million related to the employee terminations in the health solutions practice of our Forensic and Litigation Consulting segment and employee terminations in our Technology segment.
Activity related to the liability for special charges recorded prior to 2016 and for the nine months ended September 30, 2016 is as follows:
Employee
Lease
Termination
Costs
7,768
4,045
11,813
Additions (1)
7,023
Payments
(6,799
(663
(7,462
Foreign currency translation adjustment and other
(3
148
145
7,989
3,530
11,519
(1)
Excludes $0.2 million in net non-cash expense reversals.
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. Of the $11.5 million liability for special charges, $1.9 million is expected to be paid during the remainder of 2016, $4.1 million is expected to be paid in 2017, $2.6 million is expected to be paid in 2018, $1.2 million is expected to be paid in 2019 and the remaining balance of $1.7 million is expected to be paid between 2020 and 2026.
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 included in “Selling, general and administrative expenses” on the Condensed Consolidated Statements of Comprehensive Income and totaled $1.6 million and $5.9 million for the three and nine months ended September 30, 2016, respectively, and $3.8 million and $10.4 million for the three and nine months ended September 30, 2015, respectively.
6. Research and Development Costs
Research and development costs related to software development totaled $4.5 million and $13.0 million for the three and nine months ended September 30, 2016, respectively, and $4.0 million and $14.7 million for the three and nine months ended September 30, 2015, respectively. Research and development costs are included in “Selling, general and administrative expenses” on the Condensed Consolidated Statements of Comprehensive Income.
8
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, 2016 and December 31, 2015, based on the short-term nature of the assets and liabilities. The fair value of our long-term debt at September 30, 2016 was $490.8 million compared to a carrying value of $475.0 million. At December 31, 2015, the fair value of our long-term debt was $513.5 million compared to a carrying value of $500.0 million. We determine the fair value of our 6% Senior Notes Due 2022 (“2022 Notes”) primarily based on quoted market prices. The fair value of our borrowings on our $550.0 million senior secured bank revolving credit facility (“Senior Bank Credit Facility”) approximates the carrying amount. 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.
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 earn-out 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. The fair value of future expected acquisition-related contingent consideration obligations was $5.2 million at September 30, 2016, with payment dates extending through 2018.
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 in “Acquisition-related contingent consideration” on the Condensed Consolidated Statements of Comprehensive Income. There was no remeasurement gain or loss recorded during the three months ended September 30, 2016. During the nine months ended September 30, 2016, we recorded a $1.0 million expense related to the increase in the liability for future expected contingent consideration payments, driven by improved business results in the current period as well as expected results during the remainder of the earn-out period. No remeasurement gain or loss was recorded for the three months ended September 30, 2015. During the nine months ended September 30, 2015, we recorded a $1.7 million gain related to the change in fair value of future contingent consideration payments, of which $1.5 million related to a termination of a contingent consideration arrangement for which no future payments will be made.
8. Goodwill and Other Intangible Assets
The changes in the carrying amounts of goodwill by operating segment for the nine months ended September 30, 2016 are as follows:
Corporate
Forensic and
Finance &
Litigation
Economic
Strategic
Restructuring
Consulting
Technology
Communications
441,548
235,211
269,341
117,888
328,449
1,392,437
Accumulated goodwill impairment
(194,139
Goodwill, net at December 31, 2015
134,310
Foreign currency translation adjustment and
other
1,203
(2,850
(700
(202
(7,519
(10,068
442,751
232,361
268,641
117,686
320,930
1,382,369
Goodwill, net at September 30, 2016
126,791
9
Other Intangible Assets
Other intangible assets with finite lives are amortized over their estimated useful lives. For intangible assets with finite lives, we recorded amortization expense of $2.8 million and $8.0 million for the three and nine months ended September 30, 2016, respectively, and $2.9 million and $8.9 million for the three and nine months ended September 30, 2015 respectively. Based solely on the amortizable intangible assets recorded as of September 30, 2016, we estimate amortization expense to be $2.5 million during the remainder of 2016, $9.4 million in 2017, $7.8 million in 2018, $7.2 million in 2019, $7.0 million in 2020, $6.5 million in 2021 and $8.5 million in years after 2021. 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.
9. Long-Term Debt
The components of debt obligations are presented in the table below:
2022 Notes
300,000
Senior Bank Credit Facility
175,000
200,000
Total debt
475,000
500,000
Less deferred debt issue costs
(4,661
(5,228
There were $175.0 million in borrowings outstanding under the Company’s Senior Bank Credit Facility as of September 30, 2016. The Company has classified these borrowings as long-term debt in the accompanying Condensed Consolidated Balance Sheets as the Company has the intent and ability, as supported by availability under the credit agreement entered into as of June 26, 2015 which expires on June 26, 2020, to refinance these borrowings for more than one year from the applicable balance sheet date. Additionally, $1.4 million of the borrowing limit was utilized for letters of credit (and, therefore, unavailable) as of September 30, 2016.
For further information on our 2022 Notes and Senior Bank Credit Facility, see footnote “12. Long-Term Debt” in Part II, Item 8 of our Annual Report on Form 10-K filed with the SEC for the year ended December 31, 2015.
10. Commitments and Contingencies
Contingencies
We are subject to legal actions arising in the ordinary course of business. In management’s opinion, we believe we have adequate legal defenses and/or insurance coverage with respect to the eventuality of such actions. We do not believe any settlement or judgment relating to any pending legal action would materially affect our financial position or results of operations.
11. Share-Based Compensation
Share-based Awards and Share-based Compensation Expense
During the three months ended September 30, 2016, we awarded 19,053 shares of restricted stock. During the nine months ended September 30, 2016, we granted stock options exercisable for up to 118,865 shares, and awarded 515,389 shares of restricted stock, 64,948 restricted stock units and 83,914 performance stock units. These awards are recorded as equity on the Condensed Consolidated Balance Sheets. During the three months ended September 30, 2016, stock options exercisable for up to 1,084 shares and 8,277 shares of restricted stock were forfeited prior to compliance with the applicable vesting requirements.
10
Total share-based compensation expense, net of forfeitures, for the three and nine months ended September 30, 2016 and 2015 is detailed in the following table:
Income Statement Classification
2,243
2,263
8,370
8,396
2,617
2,308
7,825
7,484
105
Total share-based compensation expense
4,860
4,571
16,300
15,880
12. 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 the strategic, operational, financial and capital needs of businesses around the world and provides consulting and advisory services on a wide range of areas, such as restructuring (including bankruptcy), interim management, financings, mergers and acquisitions (“M&A”), M&A integration, valuations and tax issues, as well as financial, operational and performance improvement. Our distressed service offerings generally include corporate restructurings and interim management, and our non-distressed service offerings generally include all other services mentioned above.
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 and interim management services, as well as performance improvement services for our health solutions practice clients, as well as interim management services.
Our Economic Consulting segment provides law firms, companies, government entities and other interested parties with analysis of complex economic issues for use in legal, regulatory and international arbitration proceedings, strategic decision making and public policy debates in the U.S. and around the world.
Our Technology segment provides e-discovery and information governance, hosting and consulting services and software to its clients. It provides products, services and consulting to companies, law firms, courts and government agencies worldwide. Its comprehensive suite of software and services help clients locate, review and produce electronically stored information (“ESI”), including e-mail, computer files, voicemail, instant messaging, cloud and social media data, as well as financial and transactional data.
Our Strategic Communications segment provides advice and consulting services relating to financial and corporate communications, investor relations, reputation management, brand communications, public affairs, business consulting, digital design and marketing.
We evaluate the performance of our operating segments based on Adjusted Segment EBITDA. We define Adjusted Segment EBITDA as a segment’s share of consolidated operating income before depreciation, amortization of intangible assets, remeasurement of acquisition-related contingent consideration, special charges and goodwill impairment charges. We define Total Adjusted Segment EBITDA, a non-GAAP financial measure, 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 reflects current core operating performance and provides an indicator of the segment’s ability to generate cash.
11
The table below presents Revenues, Adjusted Segment EBITDA and Total Adjusted Segment EBITDA for our reportable segments:
Corporate Finance & Restructuring
110,617
113,487
369,915
328,812
Forensic and Litigation Consulting
115,045
116,158
352,242
365,554
Economic Consulting
122,480
114,541
371,217
329,320
44,072
55,568
134,235
172,048
Strategic Communications
45,828
55,716
140,865
141,211
Total revenues
Adjusted Segment EBITDA
17,762
26,662
81,406
71,174
16,554
13,406
51,552
55,456
18,354
16,654
55,054
43,502
7,398
10,813
20,256
33,052
7,509
8,717
22,057
20,100
Total Adjusted Segment EBITDA
67,577
76,252
230,325
223,284
The table below reconciles Total Adjusted Segment EBITDA to income before income tax provision:
Segment depreciation expense
(7,920
(6,733
(22,128
(20,237
Amortization of intangible assets
(2,845
(2,900
(8,041
(8,919
(6,811
Unallocated corporate expenses, excluding special charges
(21,738
(20,875
(60,890
(55,057
Remeasurement of acquisition-related contingent
consideration
(980
1,675
12
13. 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 2022 Notes. The guarantees are full and unconditional and joint and several. All of our guarantors are wholly owned, direct or indirect, subsidiaries.
The following financial information presents condensed consolidating balance sheets, statements of comprehensive income (loss) and statements of cash flows for FTI Consulting, all the guarantor subsidiaries, all the non-guarantor subsidiaries and the eliminations necessary to arrive at the consolidated information for FTI Consulting and its subsidiaries. For purposes of this presentation, we have accounted for our investments in our subsidiaries using the equity method of accounting. The principal eliminating entries eliminate investment in subsidiary and intercompany balances and transactions
Condensed Consolidating Balance Sheet Information as of September 30, 2016
FTI
Guarantor
Non-Guarantor
Consulting, Inc.
Subsidiaries
Eliminations
Consolidated
86,467
161
138,556
180,723
177,972
188,893
Intercompany receivables
981,561
29,452
(1,011,013
Other current assets
44,938
24,953
21,403
91,294
312,128
1,184,647
378,304
Property and equipment, net
28,112
14,358
23,952
558,978
416,053
213,199
Other intangible assets, net
22,905
13,932
36,556
(18,900
Investments in subsidiaries
2,060,592
502,698
(2,563,290
46,734
72,451
49,222
168,407
3,029,449
2,204,139
701,233
(3,593,203
Liabilities
Intercompany payables
975,871
35,142
Other current liabilities
141,881
118,292
105,356
1,117,752
140,498
209,773
15,131
49,261
274,165
1,797,864
133,423
189,759
2,070,716
511,474
(2,582,190
13
Condensed Consolidating Balance Sheet Information as of December 31, 2015
35,211
165
114,384
159,121
169,488
171,175
936,452
62,651
(999,103
44,086
25,627
22,368
92,081
238,418
1,131,732
370,578
33,699
13,409
27,652
223,267
25,863
15,571
43,542
(21,041
1,995,409
486,462
(2,481,871
40,359
72,981
37,060
150,400
2,892,726
2,136,208
702,099
(3,502,015
930,066
8,921
60,116
135,421
107,188
104,468
1,065,487
116,109
164,584
184,864
12,562
42,140
239,566
1,745,123
128,671
206,724
2,007,537
495,375
(2,502,912
Condensed Consolidating Statement of Comprehensive Income for the Three Months Ended September 30, 2016
159,431
153,986
126,995
(2,370
107,579
104,109
84,313
(2,299
47,388
30,704
28,199
(71
986
541
1,823
(505
155,953
135,555
114,335
(2,875
3,478
18,431
12,660
505
Other (expense) income
(6,913
(794
4,616
Income (loss) before income tax provision
(3,435
17,637
17,276
(1,402
8,194
3,500
Equity in net earnings of subsidiaries
23,724
11,878
(35,602
21,321
13,776
(35,097
Other comprehensive loss, net of tax:
Foreign currency translation adjustments, net of
tax expense of $0
Total other comprehensive loss, net of tax:
Comprehensive income
9,298
14
Condensed Consolidating Statement of Comprehensive Income (Loss) for the Three Months Ended September 30, 2015
166,290
168,307
124,288
(3,415
106,366
113,660
84,939
(3,356
45,973
30,449
28,695
(59
153
715
2,085
(886
153,331
144,977
115,719
(4,301
12,959
23,330
8,569
886
(32,412
(735
3,889
(19,453
22,595
12,458
(6,663
9,481
3,359
23,099
7,899
(30,998
21,013
9,099
(30,112
Other comprehensive income, net of tax:
Total other comprehensive income, net of tax:
(47,341
Condensed Consolidating Statement of Comprehensive Income for the Nine Months Ended September 30, 2016
517,703
463,152
394,618
(6,999
337,262
312,921
259,184
(6,835
138,038
92,490
87,710
(164
1,750
4,563
498
1,535
2,958
1,639
5,584
(2,140
480,014
413,148
352,976
(9,139
37,689
50,004
41,642
2,140
(18,882
(3,063
13,004
18,807
46,941
54,646
9,781
21,918
12,416
69,393
38,867
(108,260
63,890
42,230
(106,120
18,585
15
Condensed Consolidating Statement of Comprehensive Income for the Nine Months Ended September 30, 2015
508,324
601,877
371,624
(144,880
317,946
448,433
250,277
(144,548
137,561
91,288
87,800
(332
(1,414
269
2,146
6,468
(2,653
457,051
542,136
344,545
(147,533
51,273
59,741
27,079
2,653
(57,987
(3,798
8,499
(6,714
55,943
35,578
24
23,474
8,258
62,442
24,575
(87,017
57,044
27,320
(84,364
(108,776
Condensed Consolidating Statement of Cash Flows for the Nine Months Ended September 30, 2016
16,670
70,744
24,161
(2,714
(16,145
(3,996
(2,640
(4,052
Repayments under revolving line of credit, net
Net issuance of common stock under equity compensation
plans
930
(573
Intercompany transfers
45,805
(54,030
8,225
Net cash provided by (used in) financing activities
37,226
(54,603
11,031
Effects of exchange rate changes on cash and cash equivalents
51,256
(4
24,172
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
16
Condensed Consolidating Statement of Cash Flows for the Nine Months Ended September 30, 2015
8,976
26,113
8,214
(7,800
(12,877
(3,997
70
(7,776
(4,502
Borrowings under revolving line of credit, net
Payments of debt financing fees
336
(212
40,181
(13,027
(27,154
(154,924
(13,239
(24,748
Net decrease in cash and cash equivalents
(153,724
(24,979
171,090
112,431
17,366
156
87,452
17
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, 2016 and 2015 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, 2015 filed with the Securities and Exchange Commission (“SEC”). In addition to historical information, the following discussion includes forward-looking statements based on current expectations that involve risks, uncertainties and assumptions, such as our plans, objectives, expectations and intentions. Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, these expectations or any of the forward-looking statements could prove to be incorrect, and actual results could differ materially from those projected or assumed in the forward-looking statements.
BUSINESS OVERVIEW
FTI Consulting is a global business advisory firm, dedicated to helping organizations manage change, mitigate risk and resolve disputes: financial, legal, operational, political and regulatory, reputational and transactional. Individually, each of our practices are staffed with experts recognized for the depth of their knowledge and a track record of making an impact. Collectively, FTI Consulting offers a comprehensive suite of services designed to assist clients across the business cycle, from proactive risk management to rapid response to unexpected events and dynamic environments.
We report financial results for the following five reportable segments:
Our Corporate Finance & Restructuring (“Corporate Finance”) segment focuses on the 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 & Acquisitions (“M&A”), M&A integration, valuations and tax issues, as well as financial, operational and performance improvement. Our distressed service offerings generally include corporate restructurings and interim management, and our non-distressed service offerings generally include all other services mentioned above.
Our Forensic and Litigation Consulting (“FLC”) segment provides law firms, companies, government clients and other interested parties with dispute advisory, investigations, forensic accounting, business intelligence assessments, data analytics, risk mitigation and interim management services, as well as performance improvement services for our health solutions practice clients, as well as interim management services.
Our Technology segment provides e-discovery and information governance, hosting and consulting services and software 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, cloud and social media data, as well as financial and transactional data.
We derive substantially all of our revenues from providing professional services to both U.S. and global clients. Most of our services are rendered under time-and-expense arrangements that obligate the client to pay us a fee for the hours that we incur at agreed upon rates. Under this arrangement, we typically bill our clients for reimbursable expenses, which may include the cost of producing our work product and other direct expenses that we incur on behalf of the client, such as travel costs. We also render services for which certain clients may be 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.
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.
When significant, we identify the estimated impact of foreign currency translation driven by our businesses with functional currencies other than the U.S. dollar, on the period-to-period performance results. The estimated impact of foreign currency translation is calculated as (i) the difference between the prior period results multiplied by (ii) the change in average foreign currency exchange rates in the current period and the average foreign currency rates in the prior period.
Non-GAAP Financial Measures
In the accompanying analysis of financial information, we sometimes use information derived from consolidated and segment financial information that may not be presented in our financial statements or prepared in accordance with accounting principles generally accepted in the United States (“GAAP”). Certain of these measures are considered “non-GAAP financial measures” under the SEC rules. Specifically, we have referred to the following non-GAAP financial measures:
Total Segment Operating Income (Loss)
Adjusted EBITDA
Adjusted EBITDA Margin
Adjusted Net Income (Loss)
Adjusted Earnings per Diluted Share
We have included the definitions of Segment Operating Income (Loss) and Adjusted Segment EBITDA below in order to more fully define the components of certain non-GAAP financial measures in the accompanying analysis of financial information. As described in Note 12 – Segment Reporting in Part 1, Item 1 of this Quarterly Report on Form 10-Q, we evaluate the performance of our operating segments based on Adjusted Segment EBITDA, and Segment Operating Income (Loss) is a component of the definition of Adjusted Segment EBITDA.
We define Segment Operating Income (Loss) as a segment’s share of consolidated operating income (loss). We define Total Segment Operating Income (Loss), which is a non-GAAP financial measure, 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 Segment EBITDA as a segment’s share of consolidated operating income (loss) before depreciation, amortization of intangible assets, remeasurement of acquisition-related contingent consideration, special charges and goodwill impairment charges. We use Adjusted Segment EBITDA to internally evaluate the financial performance of our
19
segments because we believe it reflects current core operating performance and provides an indicator of the segment’s ability to generate cash. We define Adjusted Segment EBITDA Margin as Adjusted Segment EBITDA as a percentage of a segment’s revenues.
We define Total Adjusted Segment EBITDA, which is a non-GAAP financial measure, as the total of Adjusted Segment EBITDA for all segments, which excludes unallocated corporate expenses. We define Adjusted EBITDA, which is a non-GAAP financial measure, 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 believe that the non-GAAP financial measures, which exclude the effects of remeasurement of acquisition-related contingent consideration, special charges and goodwill impairment charges, when considered together with our GAAP financial results and GAAP measures, provide management and investors with a more complete understanding of our operating results, including underlying trends. 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 (Loss) and Adjusted Earnings per Diluted Share (“Adjusted EPS”), which are non-GAAP financial measures, as net income (loss) 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 (Loss) 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 non-GAAP financial measure, which excludes the effects of the remeasurement of acquisition-related contingent consideration, special charges, goodwill impairment charges and losses on early extinguishment of debt, when considered together with our GAAP financial results, provides management and investors with an additional understanding of our business operating results, including underlying trends.
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 Condensed Consolidated Statements of Comprehensive Income. Reconciliations of non-GAAP financial measures to the most directly comparable GAAP financial measures are included elsewhere in this filing.
EXECUTIVE HIGHLIGHTS
(dollar amounts in thousands,
except per share data)
Special charges (1)
Loss on early extinguishment of debt (1)
47,229
56,102
172,666
170,559
Adjusted earnings per common share — diluted
2.00
1.60
70,942
74,034
Total number of employees
4,767
4,703
Excluded from non-GAAP financial measures.
20
Third Quarter 2016 Executive Highlights
Revenues for the three months ended September 30, 2016 decreased $17.4 million, or 3.8%, to $438.0 million, which included a $8.4 million, or 1.8%, estimated negative impact of foreign currency translation (“FX”). Excluding the estimated impact of FX, revenues decreased $9.0 million, or 2.0%. The decrease in revenues was largely due to a decline in demand for M&A related second request activity and litigation services in our Technology segment and lower pass-through revenues in our Strategic Communications segment, partially offset by higher revenues from non-M&A related antitrust services in North America in our Economic Consulting segment.
In order to more effectively utilize the Company’s growing cash balances, maintain financial flexibility and reduce interest expense, we retired our $400 million principal amount of 6 ¾% senior notes due 2020 (“2020 Notes”) during the three months ended September 30, 2015. We recognized a $19.6 million loss on early extinguishment of debt for the three and nine months ended September 30, 2015, consisting primarily of a redemption premium of $14.3 million and a $4.9 million non-cash write-off of unamortized deferred financing costs. There was no loss on early extinguishment of debt during the three months ended September 30, 2016.
Net income for the three months ended September 30, 2016 increased $11.4 million, or 110.4%, to $21.7 million compared to $10.3 million for the three months ended September 30, 2015. This increase was due to the absence of the loss on early extinguishment of debt from the debt restructuring recorded in the third quarter of 2015 and lower interest expense in 2016 resulting from the 2015 debt restructuring, partially offset by lower operating results in the three months ended September 30, 2016.
Adjusted EBITDA for the three months ended September 30, 2016 decreased $8.9 million, or 15.8%, to $47.2 million compared to $56.1 million for the three months ended September 30, 2015. Adjusted EBITDA was 10.8% of revenues for the three months ended September 30, 2016 compared to 12.3% of revenues for the three months ended September 30, 2015. The decrease in Adjusted EBITDA was driven by a decline in profits in our Corporate Finance segment as a result of higher costs related to the ramp up of new hires and in our Technology segment as a result of reduced demand and lower pricing for managed review services. This was partially offset by favorable operating results in our Economic Consulting and Strategic Communications segments.
Earnings per diluted share and Adjusted EPS
Earnings per diluted share for the three months ended September 30, 2016 increased $0.27 to $0.52 compared to $0.25 for the three months ended September 30, 2015, which included an impact from loss on extinguishment of debt, reducing Earnings per diluted share by $0.28.
Adjusted EPS for the three months ended September 30, 2016 decreased $0.01 to $0.52 compared to $0.53 for the three months ended September 30, 2015. Adjusted EPS for the three months ended September 30, 2015 excludes the $0.28 per share impact of the loss on early extinguishment of debt described above.
Liquidity and capital allocation
Cash provided by operating activities for the three months ended September 30, 2016 decreased $3.1 million, or 4.2%, to $70.9 million compared to $74.0 million for the three months ended September 30, 2015. The decrease was primarily due to lower cash collections and increased funding of employee notes receivables, partially offset by lower payments for interest expense. Days sales outstanding (“DSO”), which is one measure of the collections cycle, was 106 days at September 30, 2016 compared to 105 days at September 30, 2015.
21
Financing activities in the three months ended September 30, 2016 included a $25.0 million repayment of borrowings under the Company’s senior secured bank revolving credit facility (“Senior Bank Credit Facility”). Total debt outstanding as of September 30, 2016 was $475.0 million, down from $520.0 million as of September 30, 2015.
On June 2, 2016, our Board of Directors authorized a stock repurchase program (the “Stock Repurchase Program”) under which FTI Consulting may repurchase up to $100.0 million of its outstanding common stock. No time limit has been established for the completion of the program, and the program may be suspended, discontinued or replaced by the Board of Directors at any time without prior notice. As of September 30, 2016, we have $100.0 million available under this program to repurchase additional shares.
Headcount
As of September 30, 2016, our total net headcount of 4,767 increased by 133 from 4,634 as of December 31, 2015.
We increased the number of non-billable employees by 31, from 1,118 as of December 31, 2015 to 1,149 as of September 30, 2016. Net change to billable headcount for the nine months ended September 30, 2016 is summarized in the table below.
Billable Headcount
Forensic and Litigation Consulting (1)
December 31, 2015
838
1,131
599
349
3,516
Additions (reductions), net
1
(36
(6
March 31, 2016
857
1,132
607
313
601
3,510
(15
(12
(29
June 30, 2016
853
1,117
604
301
606
3,481
51
28
43
137
September 30, 2016
904
1,145
647
298
624
3,618
Percentage change in headcount from
7.9
%
1.2
8.0
-14.6
4.2
2.9
September 30, 2015
8.9
-5.3
-15.8
5.1
1.0
There were 71 revenue-generating professionals as of September 30, 2015 related to a business in Latin America that was disposed at the end of 2015. Excluding these professionals, percentage growth in headcount from September 30, 2015 to September 30, 2016 would have been 0.6%.
22
CONSOLIDATED RESULTS OF OPERATIONS
Segment and Consolidated Operating Results:
Operating income (loss)
16,182
25,112
76,740
67,782
14,867
11,944
45,005
50,894
16,888
15,498
51,390
40,076
2,869
6,830
2,569
21,493
6,006
7,235
16,661
15,558
Segment operating income
56,812
66,619
192,365
195,803
Unallocated corporate expenses
Reconciliation of Net Income to Adjusted EBITDA:
Add back:
Other income (expense), net
3,091
9,669
8,941
33,697
9,310
7,458
980
(1,675
23
Reconciliation of Net Income to Adjusted Net Income and Earnings Per Share to Adjusted Earnings Per Share:
Special charges, net of tax (1)
4,328
Loss on early extinguishment of debt, net of tax (2)
11,881
consideration, net of tax (3)
600
(1,005
Adjusted net income
22,190
83,347
66,580
0.10
0.28
0.02
(0.02
The tax effect takes into account the tax treatment and related tax rates that apply to each adjustment in the applicable tax jurisdiction. As a result, the effective tax rates for the adjustments related to special charges for the nine months ended September 30, 2016 was 36.5%. The tax expense related to the adjustments for special charges for the nine months ended September 30, 2016 was $2.5 million, or $0.06 impact on Adjusted EPS. There were no special charges for the three and nine months ended September 30, 2015.
(2)
The tax effect takes into account the tax treatment and related tax rates that apply to each adjustment in the applicable tax jurisdiction. As a result, the effective tax rate for the loss on early extinguishment of debt for the three and nine months ended September 30, 2015 was 39.3%. The tax expense related to the loss on early extinguishment of debt for the three and nine months ended September 30, 2015 was $7.7 million, or $0.18 impact on Adjusted EPS. There were no adjustments related to the early extinguishment of debt in the three and nine months ended September 30, 2016.
(3)
The tax effect takes into account the tax treatment and related tax rates that apply to each adjustment in the applicable tax jurisdiction. As a result, the effective tax rate for the adjustments related to the remeasurement of acquisition-related contingent consideration for the nine months ended September 30, 2016 and 2015 were 38.8% and 40.0%, respectively. The tax expense related to the adjustment for the remeasurement of acquisition-related contingent consideration for the nine months ended September 30, 2016 and 2015 were $0.4 million, or $0.01 impact on Adjusted EPS, and $0.7 million, or a $0.02 impact on Adjusted EPS, respectively. There were no adjustments related to the remeasurement of acquisition-related contingent consideration in the three months ended September 30, 2016 and 2015.
Three Months Ended September 30, 2016 Compared to Three Months Ended September 30, 2015
Revenues and operating income
See “Segment Results” for an expanded discussion of segment revenues and operating income.
Unallocated corporate expenses for the three months ended September 30, 2016 increased $0.9 million, or 4.1%, to $21.7 million compared to $20.9 million for the three months ended September 30, 2015. The increase was primarily due to higher outside legal costs and higher costs for infrastructure departments largely to support growth in the business and new initiatives. These increases were partially offset by a decrease in corporate costs compared to the third quarter of 2015. In the third quarter of 2015, we transferred to our segments previously recognized cost favorability related to our self-insured benefit plans.
Interest income and other, which includes foreign currency transaction gains and losses, increased $1.2 million to income of $3.2 million for the three months ended September 30, 2016 compared to income of $2.0 million for the three months ended September 30, 2015. The increase was due, in part, to an acquisition-related liability, as well as an increase in net unrealized foreign currency transaction gains, resulting principally from the weakening of the British Pound. 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.
Interest expense for the three months ended September 30, 2016 decreased $5.4 million, or 46.1%, to $6.3 million compared to $11.7 million for the three months ended September 30, 2015. Interest expense for the three months ended September 30, 2016 was favorably impacted by lower average interest rates and borrowings subsequent to the debt restructuring completed in the third quarter of 2015.
The effective tax rate for the three months ended September 30, 2016 was 32.2% compared to 37.5% for the three months ended September 30, 2015. The effective tax rate for the three months ended September 30, 2016 was favorably impacted by higher foreign earnings in 2016.
Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2015
Unallocated corporate expenses for the nine months ended September 30, 2016 increased $5.8 million, or 10.6%, to $60.9 million compared to $55.1 million for the nine months ended September 30, 2015. The increase was primarily due to higher outside legal costs and higher costs for infrastructure departments to support growth in the business and new initiatives.
Interest income and other, which includes foreign currency transaction gains and losses, increased $7.1 million to income of $9.9 million for the nine months ended September 30, 2016 compared to income of $2.8 million for the nine months ended September 30, 2015. The increase was due, in part, to an adjustment of an acquisition-related liability, as well as an increase in net unrealized foreign currency transaction gains. These foreign currency transaction gains were $5.7 million for the nine months ended September 30, 2016, resulting principally from the weakening of the British Pound, compared to a $1.0 million loss for the nine months ended September 30, 2015. 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.
Interest expense for the nine months ended September 30, 2016 decreased $17.7 million, or 48.4%, to $18.8 million compared to $36.5 million for the nine months ended September 30, 2015. Interest expense for the nine months ended September 30, 2016 was favorably impacted by lower average interest rates and borrowings subsequent to the debt restructuring completed in the third quarter of 2015.
The effective tax rate for the nine months ended September 30, 2016 was 36.0% compared to 36.3% for the nine months ended September 30, 2015. The effective tax rate for the nine months ended September 30, 2016 was favorably impacted by higher foreign earnings and lower state taxes, partially offset by the impact of discrete items in 2016.
25
SEGMENT RESULTS
We evaluate the performance of our operating segments based on Adjusted Segment EBITDA. The following table reconciles Net income to Total segment operating income and Total Adjusted Segment EBITDA, which are non-GAAP financial measures, for the three and nine months ended September 30, 2016 and 2015.
21,738
20,875
60,890
55,057
Total segment operating income
7,920
6,733
22,128
20,237
Segment special charges
Other Segment Operating Data
Number of revenue-generating professionals:
(at period end)
830
1,209
594
Technology (2)
354
Total revenue-generating professionals
3,581
Utilization rates of billable professionals: (3)
61
69
68
71
57
60
65
72
Average billable rate per hour: (4)
379
390
388
382
330
318
329
315
534
523
516
506
There were 71 revenue-generating professionals as of September 30, 2015 related to a business in Latin America that was disposed at the end of 2015. Excluding these professionals, the total number of revenue-generating professionals of our Forensic and Litigation Consulting segment would have been 1,138 as of September 30, 2015.
The number of revenue-generating professionals for the Technology segment excludes as-needed professionals who we employ based on demand for the segment’s services. We employed an average of 258 as-needed employees during the three months ended September 30, 2016, as compared to 411 as-needed employees during the three months ended September 30, 2015.
26
We calculate the utilization rate for our billable professionals by dividing the number of hours that all of our billable professionals worked on client assignments during a period by the total available working hours for all of our billable professionals during the same period. Available hours are determined by the standard hours worked by each employee, adjusted for part-time hours, local country standard work weeks and local country holidays. Available working hours include vacation and professional training days, but exclude holidays. Utilization rates are presented for our segments that primarily bill clients on an hourly basis. We have not presented utilization rates for our Technology and Strategic Communications segments as most of the revenues of these segments are not generated on an hourly basis.
(4)
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 average billable rates 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
(dollars in thousands,
except rate per hour)
Percentage change in revenues from prior year
-2.5
13.4
12.5
10.3
Operating expenses:
73,444
68,650
229,769
200,651
20,109
18,852
60,915
59,075
(1,438
882
873
2,491
2,742
94,435
88,375
293,175
261,030
Percentage change in segment operating income
from prior year
-35.6
87.3
13.2
73.4
Depreciation and amortization of intangible assets
1,580
1,550
4,666
4,883
(1,491
Gross profit (1)
37,173
44,837
140,146
128,161
Percentage change in gross profit from prior year
-17.1
32.8
9.4
27.8
Gross profit margin (2)
33.6
39.5
37.9
39.0
Adjusted Segment EBITDA margin
16.1
23.5
22.0
21.6
Number of revenue-generating professionals (at period
end)
Percentage change in number of revenue-generating
professionals from prior year
15.0
Utilization rates of billable professionals
Average billable rate per hour
Revenues less direct cost of revenues
Gross profit as a percent of revenues
Revenues decreased $2.9 million, or 2.5%, to $110.6 million for the three months ended September 30, 2016, which included a 1.6% estimated negative impact from FX. Excluding the estimated impact of FX, revenues decreased by $1.0 million, or 0.9%.
27
Gross profit decreased $7.7 million, or 17.1%, to $37.2 million for the three months ended September 30, 2016. Gross profit margin decreased 5.9 percentage points for the three months ended September 30, 2016. The decrease was primarily due to lower utilization and higher costs related to the ramp up of experienced hires, which contributed to 5.2 percentage points of the gross profit margin decrease.
Selling, general and administrative (“SG&A”) expense increased $1.3 million, or 6.7%, to $20.1 million for the three months ended September 30, 2016. SG&A expense was 18.2% of revenue for the three months ended September 30, 2016 compared to 16.6% for the three months ended September 30, 2015. This increase in SG&A expense was due to higher infrastructure support costs and recruiting expense to support additional headcount.
Revenues increased $41.1 million, or 12.5%, to $369.9 million for the nine months ended September 30, 2016, which included a 1.6% estimated negative impact from FX. Excluding the estimated impact of FX, revenues increased by $46.5 million, or 14.1%. This increase was primarily due to higher demand and higher success fees in distressed service offerings in North America and higher demand in distressed, tax and transaction advisory services in Europe, Middle East and Africa (“EMEA”).
Gross profit increased $12.0 million, or 9.4%, to $140.1 million for the nine months ended September 30, 2016. Gross profit margin decreased 1.1 percentage points for the nine months ended September 30, 2016. The decrease was primarily due to lower utilization with increased headcount in North America, partially offset by improved utilization in EMEA.
SG&A expense increased $1.8 million, or 3.1%, to $60.9 million for the nine months ended September 30, 2016. SG&A expense was 16.5% of revenue for the nine months ended September 30, 2016 compared to 18.0% for the nine months ended September 30, 2015. The increase in SG&A expense was due to higher infrastructure support costs and recruiting expense to support additional headcount. This increase was partially offset by collections of prior period bad debts.
FORENSIC AND LITIGATION CONSULTING
-1.0
-4.6
-3.6
0.9
77,140
81,322
238,693
241,606
22,554
22,349
65,269
71,330
484
537
1,519
1,700
100,178
104,214
307,237
314,660
24.5
-41.1
-11.6
-23.5
1,687
1,462
4,797
4,562
37,905
34,836
113,549
123,948
8.8
-18.3
-8.4
-7.5
32.9
30.0
32.2
33.9
14.4
11.5
14.6
15.2
6.5
Revenues less direct cost of revenues.
Gross profit as a percent of revenues.
Revenues decreased $1.1 million, or 1.0%, to $115.0 million for the three months ended September 30, 2016, and were flat to the prior year excluding the estimated impact of FX. Higher success fees were offset by lower demand in our health solutions practice.
Gross profit increased $3.1 million, or 8.8%, to $37.9 million for the three months ended September 30, 2016. Gross profit margin increased 2.9 percentage points for the three months ended September 30, 2016. This increase was primarily due to higher success fees realized in our health solutions practice.
SG&A expense increased $0.2 million, or 0.9%, to $22.6 million for the three months ended September 30, 2016. SG&A expense was 19.6% of revenue for the three months ended September 30, 2016 compared to 19.2% for the three months ended September 30, 2015.
Revenues decreased $13.3 million, or 3.6%, to $352.2 million for the nine months ended September 30, 2016, which included a 1.0% estimated negative impact from FX. Excluding the estimated impact of FX, revenues decreased by $9.5 million, or 2.6%, due to lower demand in our health solutions and global dispute advisory services practices. These decreases were partially offset by higher demand in our financial and enterprise data analytics and global risk and investigations practices.
29
Gross profit decreased $10.4 million, or 8.4%, to $113.5 million for the nine months ended September 30, 2016. Gross profit margin decreased 1.7 percentage points for the nine months ended September 30, 2016. This decrease was primarily due to lower demand and lower utilization in our health solutions practice, partially offset by higher utilization in our global financial and enterprise data analytics practice.
SG&A expense decreased $6.1 million, or 8.5%, to $65.3 million for the nine months ended September 30, 2016. SG&A expense was 18.5% of revenue for the nine months ended September 30, 2016 compared to 19.5% for the nine months ended September 30, 2015. The decrease in SG&A expense was a result of higher severance expenses recorded in 2015 related to the departure of a senior managing director and lower bad debt expense, partially offset by higher infrastructure support costs.
ECONOMIC CONSULTING
6.9
-4.9
12.7
-4.4
88,682
83,176
268,517
242,549
16,745
15,538
50,775
45,897
(126
154
308
492
924
105,592
99,043
319,827
289,244
9.0
-10.1
28.2
-13.8
1,466
1,156
3,664
3,610
(184
33,798
31,365
102,700
86,771
7.8
-5.6
18.4
-8.2
27.6
27.4
27.7
26.3
14.5
14.8
Revenues increased $7.9 million, or 6.9%, to $122.5 million for the three months ended September 30, 2016, which included a 2.5% estimated negative impact from FX. Excluding the estimated impact of FX, revenues increased by $10.8 million, or 9.4%, primarily due to higher demand and higher average realization in non-M&A antitrust services in North America, partially offset by lower average realization in financial economics services in North America.
Gross profit increased $2.4 million, or 7.8%, to $33.8 million for the three months ended September 30, 2016. Gross profit margin increased 0.2 percentage points for the three months ended September 30, 2016. This increase was due to improved utilization in North America, partially offset by lower utilization in EMEA.
30
SG&A expense increased $1.2 million, or 7.8%, to $16.7 million for the three months ended September 30, 2016. SG&A expense was 13.7% of revenue for the three months ended September 30, 2016 compared to 13.6% for the three months ended September 30, 2015. The increase in SG&A expense was primarily due to higher outside services and depreciation expense.
Revenues increased $41.9 million, or 12.7%, to $371.2 million for the nine months ended September 30, 2016, which included a 1.6% estimated negative impact from FX. Excluding the estimated impact of FX, revenues increased by $47.1 million, or 14.3%, primarily due to higher demand for our M&A related antitrust services and financial economics services in North America, and due to higher demand for non-M&A antitrust services in North America and in EMEA.
Gross profit increased $15.9 million, or 18.4%, to $102.7 million for the nine months ended September 30, 2016. Gross profit margin increased 1.4 percentage points for the nine months ended September 30, 2016. This increase was primarily due to higher average realization in EMEA and higher utilization in North America.
SG&A expense increased $4.9 million, or 10.6%, to $50.8 million for the nine months ended September 30, 2016. SG&A expense was 13.7% of revenue for the nine months ended September 30, 2016 compared to 13.9% for the nine months ended September 30, 2015. The increase in SG&A expense was driven primarily by higher outside services and infrastructure support costs.
TECHNOLOGY
(dollars in thousands)
-20.7
-10.9
-22.0
-6.1
25,666
31,153
78,526
96,256
15,129
17,386
47,354
53,709
5,061
408
199
725
590
41,203
48,738
131,666
150,555
Segment operating loss (income)
-58.0
-50.3
-88.0
-43.0
4,529
3,983
12,626
11,559
18,406
24,415
55,709
75,792
-24.6
-21.2
-26.5
-14.0
41.8
43.9
41.5
44.1
16.8
19.5
15.1
19.2
end) (3)
5.7
Includes personnel involved in direct client assistance and revenue generating consultants
31
Revenues decreased $11.5 million, or 20.7%, to $44.1 million for the three months ended September 30, 2016, due to a decline in M&A related second request activity and reduced demand for services related to litigations.
Gross profit decreased $6.0 million, or 24.6%, to $18.4 million for the three months ended September 30, 2016. Gross profit margin decreased 2.1 percentage points for the three months ended September 30, 2016. The decrease was primarily due to lower demand and realized pricing for managed review services.
SG&A expense decreased $2.3 million, or 13.0%, to $15.1 million for the three months ended September 30, 2016. SG&A expense was 34.3% of revenue for the three months ended September 30, 2016 compared to 31.3% for the three months ended September 30, 2015. The decrease in SG&A expense was due to lower infrastructure support and occupancy costs, lower bad debt expense, and lower costs realized from the headcount reduction taken in the first quarter of 2016. Research and development expense related to software was $4.5 million for the three months ended September 30, 2016 compared to $4.0 million for the three months ended September 30, 2015.
Revenues decreased $37.8 million, or 22.0%, to $134.2 million for the nine months ended September 30, 2016, which included a 1.1% estimated negative impact from FX. Excluding the estimated impact of FX, revenues decreased by $35.9 million, or 20.9%, largely due to declines in M&A related second request activity and in large cross-border investigations.
Gross profit decreased $20.1 million, or 26.5%, to $55.7 million for the nine months ended September 30, 2016. Gross profit margin decreased 2.6 percentage points for the nine months ended September 30, 2016. The decrease in gross profit margin was due to lower demand and pricing for managed review and consulting services.
SG&A expense decreased $6.4 million, or 11.8%, to $47.4 million for the nine months ended September 30, 2016. SG&A expense was 35.3% of revenue for the nine months ended September 30, 2016 compared to 31.2% for the nine months ended September 30, 2015. The decrease in SG&A expense was due to lower costs realized from the headcount reduction taken in the first quarter of 2016, as well as lower occupancy costs, infrastructure support costs and research and development expense. Research and development expense related to software was $13.1 million for the nine months ended September 30, 2016 compared to $14.7 million for the nine months ended September 30, 2015.
32
STRATEGIC COMMUNICATIONS
-17.7
19.7
-0.2
-1.3
28,770
37,308
87,027
91,046
9,945
10,058
32,871
31,249
190
132
512
395
917
983
2,814
2,963
39,822
48,481
124,204
125,653
-17.0
48.4
7.1
57.0
1,503
1,482
4,416
4,542
17,058
18,408
53,838
50,165
-7.3
7.3
-1.7
37.2
33.0
38.2
35.5
16.4
15.6
15.7
14.2
8.2
Revenues decreased $9.9 million, or 17.7%, to $45.8 million for the three months ended September 30, 2016, which included a 3.8% estimated negative impact from FX. Excluding the estimated impact of FX, revenues decreased by $7.8 million, or 14.0%. This decline was primarily due to an $8.5 million reduction in pass-through revenues.
Gross profit decreased $1.4 million, or 7.3%, to $17.1 million for the three months ended September 30, 2016. Gross profit margin increased 4.2 percentage points for the three months ended September 30, 2016. The increase was primarily due to lower pass-through revenues in the three months ended September 30, 2016. Excluding the impact of net pass-through revenues, gross profit margin declined 2.0 percentage points due to higher costs related to ramp up of new hires.
SG&A expense decreased $0.1 million, or 1.1%, to $9.9 million for the three months ended September 30, 2016. SG&A expense was 21.7% of revenue for the three months ended September 30, 2016 compared to 18.1% for the three months ended September 30, 2015.
Revenues decreased $0.3 million, or 0.2%, to $140.9 million for the nine months ended September 30, 2016, which included a 3.2% estimated negative impact from FX. Excluding the estimated impact of FX, revenues increased by $4.2 million, or 3.0%, primarily due to higher project-based revenues in North America and higher retainer and project-based revenues in EMEA,
33
predominantly in public affairs and financial communications-related engagements. These increases were partially offset by a $7.2 million reduction in pass-through revenues.
Gross profit increased $3.7 million, or 7.3%, to $53.8 million for the nine months ended September 30, 2016. Gross profit margin increased 2.7 percentage points for the nine months ended September 30, 2016. Excluding the impact of net pass-through revenues, gross profit margin improved 0.9% due to the mix of higher margin large project engagements with improved utilization across North America.
SG&A expense increased $1.6 million, or 5.2%, to $32.9 million for the nine months ended September 30, 2016. SG&A expense was 23.3% of revenue for the nine months ended September 30, 2016 compared to 22.1% for the nine months ended September 30, 2015. The increase in SG&A expense was primarily due to higher infrastructure support costs and compensation, partially offset by lower legal costs.
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 GAAP. 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, 2015 filed with the SEC 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
There have been no material changes to our critical accounting policies and estimates from the information provided in “Critical Accounting Policies” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2015 filed with the SEC.
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 that 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, 2015, the date of our last annual goodwill impairment test, the estimated fair value of each of our reporting units significantly exceeded their respective carrying values and no further testing was required. 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
34
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
See “Note 3 – New Accounting Standards” in Part I, Item 1 of this Quarterly Report on Form 10-Q.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Cash flows
DSO
106
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 in the second half 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 31st each year and has consistently increased during the following quarters.
Cash provided by operating activities for the nine months ended September 30, 2016 was $111.6 million compared to $43.3 million for the nine months ended September 30, 2015. The increase was primarily due to higher cash collections and lower payments for interest expense and other operating expenses, which were partially offset by increased payments for compensation. DSO was 106 days at September 30, 2016 compared to 105 days at September 30, 2015.
Net cash used in investing activities for the nine months ended September 30, 2016 was $22.8 million compared to net cash used in investing activities of $25.2 million for the nine months ended September 30, 2015. Capital expenditures were $22.9 million for the nine months ended September 30, 2016 compared to $24.7 million for the nine months ended September 30, 2015.
Net cash used in financing activities for the nine months ended September 30, 2016 was $6.3 million compared to $192.9 million for the nine months ended September 30, 2015. Cash used in financing activities in the nine months ended September 30, 2016 included a $25.0 million repayment of borrowings under our Senior Bank Credit Facility and repayments in a total amount of $2.9 million to settle repurchases of our common stock, partially offset by $18.4 million in cash received from the issuance of common stock under our equity compensation plan and the receipt of $2.8 million of refundable deposits related to one of our foreign entities. Our financing activities for the nine months ended September 30, 2015 included the retirement of the $400 million principal amount of our 2020 Notes for $414.7 million using cash on hand of $164.7 million and borrowings under our Senior Bank Credit Facility of $250 million. Subsequent to the debt retirement we repaid $30 million of the borrowings under our Senior Bank Credit Facility. In addition, we repaid the final $11.0 million in notes payable to former shareholders of an acquired business in 2015. Financing activities in 2015 also included $13.9 million received from the issuance of common stock under our equity compensation plans and $2.4 million of refundable deposits related to one of our foreign entities, offset by the payment of $3.7 million in debt financing fees related to our Senior Bank Credit Facility.
35
Capital Resources
As of September 30, 2016, our capital resources included $225.2 million of cash and cash equivalents and available borrowing capacity of $373.6 million under our five-year $550.0 million Senior Bank Credit Facility. As of September 30, 2016, we had $175.0 million of borrowing outstanding under our Senior Bank Credit Facility and $1.4 million of outstanding letters of credit, which reduced the availability of borrowings. We use letters of credit primarily in lieu of security deposits for our leased office facilities.
Future Capital Needs
We anticipate that our future capital needs will principally consist of funds required for:
operating and general corporate expenses relating to the operation of our businesses;
capital expenditures, primarily for information technology equipment, office furniture and leasehold improvements;
debt service requirements, including interest payments on our long-term debt;
compensating designated executive management and senior managing directors under our various long-term incentive compensation programs;
discretionary funding of the Stock Repurchase Program;
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, 2016, we anticipate aggregate capital expenditures will range between $30 million and $33 million to support our organization, including direct support for specific client engagements. We currently anticipate capital expenditures will range between $8 million and $10 million for the fourth quarter of 2016. 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 future acquisitions.
Our cash flows from operations have generally exceeded our cash needs for capital expenditures and debt services requirements. We believe that our cash flows from operations, supplemented by borrowings under our Senior Bank Credit Facility, as necessary, will provide adequate cash to fund our 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, if our business does not perform at expected levels or is less profitable than expected, 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 Senior Bank Credit Facility or the indenture that governs our 2022 Notes. See “Forward-Looking Statements” of this Quarterly Report on Form 10-Q and “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2015 filed with the SEC.
36
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 information as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2015 filed with the SEC.
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 operating trends, are based upon our historical performance and our current plans, estimates and expectations at the time we make them and various assumptions. There can be no assurance that management’s expectations, beliefs and projections will result or be achieved. Our actual financial results, performance or achievements could differ materially from those expressed in, or implied by, any forward-looking statements. The inclusion of any forward-looking information should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved. Given these risks, uncertainties and other factors, you should not place undue reliance on any forward-looking statements.
There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in, or implied by, this Quarterly Report on Form 10-Q. Important factors that could cause our actual results to differ materially from the forward-looking statements we make in this Quarterly Report on Form 10-Q include those set forth under the heading “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2015 filed with the SEC. 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, but are not limited to, 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 former executives, officers, 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;
37
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;
foreign currency disruptions and currency fluctuations between the U.S. dollar and foreign currencies; and
fluctuations in the mix of our services and the geographic locations in which our clients are located or our services are rendered.
There may be other factors that may cause our actual results to differ materially from our forward-looking statements. All forward-looking statements attributable to us or persons acting on our behalf apply only as of the date of this Quarterly Report on Form 10-Q and are expressly qualified in their entirety by the cautionary statements included herein. We undertake no obligation to publicly update or revise any forward-looking statements to reflect subsequent events or circumstances and do not intend to do so.
Quantitative and Qualitative Disclosures about Market Risk
For information regarding our exposure to certain market risks see “Quantitative and Qualitative Disclosures about Market Risk” in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2015 filed with the SEC. 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, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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, 2015, filed with the Securities and Exchange Commission (the “SEC”) on February 25, 2016. We may disclose changes to risk factors or disclose additional factors from time to time in our future filings with the SEC. 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 and Use of Proceeds.
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 three months ended September 30, 2016.
Number of
Purchased
Average
Price
Paid per
Share
Total Number of
Purchased as
Part of Publicly
Announced
Program
Approximate
Dollar Value
that May Yet Be
Under the
Program(4)
July 1 through July 31, 2016
41.94
August 1 through August 31, 2016
44.58
September 1 through September 30, 2016
42.35
100,000
Represents 3,057 shares of common stock withheld to cover payroll tax withholdings related to the lapse of restrictions on restricted stock.
Represents 22,705 shares of common stock withheld to cover payroll tax withholdings related to the lapse of restrictions on restricted stock.
Represents 649 shares of common stock withheld to cover payroll tax withholdings related to the lapse of restrictions on restricted stock.
On June 2, 2016, our Board of Directors authorized the Stock Repurchase Program for up to $100.0 million of our outstanding common stock. No shares of common stock were repurchased under the Stock Repurchase Program during the three months ended September 30, 2016. No time limit has been established for the completion of the program, and the program may be suspended, discontinued or replaced by the Board of Directors at any time without prior notice.
Defaults Upon Senior Securities.
Mine Safety Disclosures.
Not Applicable
Other Information.
(a) Exhibits.
Exhibit
Number
Exhibit Description
3.1
Articles of Incorporation of FTI Consulting, Inc., as amended and restated. (Filed with the SEC on May 23, 2003 as an exhibit to FTI Consulting, Inc.’s Current Report on Form 8-K dated May 21, 2003 and incorporated herein by reference.)
3.2
Articles of Amendment of FTI Consulting, Inc. (Filed with the SEC on June 2, 2011 as an exhibit to FTI Consulting, Inc.’s Current Report on Form 8-K dated June 1, 2011 and incorporated herein by reference.)
3.3
Bylaws of FTI Consulting, Inc., as amended and restated on June 1, 2011. (Filed with the SEC on June 2, 2011 as an exhibit to FTI Consulting, Inc.’s Current Report on Form 8-K dated June 1, 2011 and incorporated herein by reference.)
3.4
Amendment No. 1 to Bylaws of FTI Consulting, Inc. (Filed with the SEC on December 16, 2013 as an exhibit to FTI Consulting, Inc.’s Current Report on Form 8-K dated December 13, 2013 and incorporated herein by reference.)
3.5
Amendment No. 2 to Amended and Restated Bylaws of FTI Consulting, Inc. (Filed with the SEC on September 22, 2014 as an exhibit to FTI Consulting, Inc.’s Current Report on Form 8-K dated September 17, 2014 and incorporated herein by reference.)
10.1*
Offer of Employment Letter dated as of July 5, 2016, by and between FTI Consulting, Inc. and Ajay Sabherwal. (Filed with the SEC on July 18, 2016 as an exhibit to FTI Consulting, Inc.’s Current Report on Form 8-K dated July 14, 2016 and incorporated herein by reference.)
31.1†
Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended (Section 302 of the Sarbanes-Oxley Act of 2002)
31.2†
Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended (Section 302 of the Sarbanes-Oxley Act of 2002)
32.1†**
Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002)
32.2†**
Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002)
101
The following financial information from the Quarterly Report on Form 10-Q of FTI Consulting, Inc., included herewith, and formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015; (ii) Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2016 and 2015; (iii) Condensed Consolidated Statement of Stockholders’ Equity for the nine months ended September 30, 2016; (iv) Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2016 and 2015; and (v) Notes to the Condensed Consolidated Financial Statements, tagged as blocks of text.
†
Filed herewith
*
Management contract or compensatory plan or arrangement.
**
This certification is deemed not filed for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: October 27, 2016
By:
/s/ Catherine M. Freeman
Catherine M. Freeman
Senior Vice President, Controller and
Chief Accounting Officer
(principal accounting officer)