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FTI CONSULTING, INC - Quarter Report: 2010 June (Form 10-Q)

Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

   For the quarterly period ended June 30, 2010

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.)

777 South Flagler Drive, Suite 1500 West Tower,

West Palm Beach, Florida

  33401
(Address of Principal Executive Offices)   (Zip Code)

(561) 515-1900

(Registrant’s telephone number, including area code)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web Site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer”, and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer    x

  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  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

  

Outstanding at July 28, 2010

Common stock, par value $0.01 per share

   46,814,018

 

 

 


Table of Contents

FTI CONSULTING, INC. AND SUBSIDIARIES

INDEX

 

          Page

PART I—FINANCIAL INFORMATION

  

Item 1.

   Financial Statements   
   Condensed Consolidated Balance Sheets—June 30, 2010 and December 31, 2009    3
   Condensed Consolidated Statements of Income—Three and six months ended
June 30, 2010 and 2009
   4
   Condensed Consolidated Statement of Stockholders’ Equity and Comprehensive
Income—Six months ended June 30, 2010
   5
   Condensed Consolidated Statements of Cash Flows—Six months ended June 30, 2010
and 2009
   6
   Notes to Condensed Consolidated Financial Statements    7

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    20

Item 3.

   Quantitative and Qualitative Disclosures about Market Risk    42

Item 4.

   Controls and Procedures    43

PART II—OTHER INFORMATION

  

Item 1.

   Legal Proceedings    44

Item 1A.

   Risk Factors    44

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds    44

Item 3.

   Defaults Upon Senior Securities    44

Item 4.

   (Removed and Reserved)    44

Item 5.

   Other Information    44

Item 6.

   Exhibits    45

SIGNATURES

   47


Table of Contents

PART I—FINANCIAL INFORMATION

FTI Consulting, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except per share amounts)

 

Item 1. Financial Statements

 

     June 30,
2010
    December 31,
2009
 
     (Unaudited)        

Assets

    

Current assets

    

Cash and cash equivalents

   $ 123,254      $ 118,872   

Accounts receivable:

    

Billed receivables

     249,511        241,911   

Unbilled receivables

     129,061        104,959   

Allowance for doubtful accounts and unbilled services

     (62,926     (59,328
                

Accounts receivable, net

     315,646        287,542   

Notes receivable

     24,945        20,853   

Prepaid expenses and other current assets

     33,158        45,157   

Income taxes receivable

     31,192        7,015   

Deferred income taxes

     4,476        20,476   
                

Total current assets

     532,671        499,915   

Property and equipment, net of accumulated depreciation

     77,744        80,678   

Goodwill

     1,197,763        1,195,949   

Other intangible assets, net of amortization

     161,254        175,962   

Notes receivable, net of current portion

     81,669        69,213   

Other assets

     53,639        55,621   
                

Total assets

   $ 2,104,740      $ 2,077,338   
                

Liabilities and Stockholders’ Equity

    

Current liabilities

    

Accounts payable, accrued expenses and other

   $ 71,239      $ 81,193   

Accrued compensation

     116,480        152,807   

Current portion of long-term debt and capital lease obligations

     144,705        138,101   

Billings in excess of services provided

     33,995        34,101   
                

Total current liabilities

     366,419        406,202   

Long-term debt and capital lease obligations, net of current portion

     417,124        417,397   

Deferred income taxes

     112,261        95,704   

Other liabilities

     61,017        53,821   
                

Total liabilities

     956,821        973,124   
                

Commitments and contingent liabilities (notes 8, 10 and 11)

    

Stockholders’ equity

    

Preferred stock, $0.01 par value; shares authorized—5,000; none outstanding

     —          —     

Common stock, $0.01 par value; shares authorized—75,000; shares issued and outstanding—47,150 (2010) and 46,985 (2009)

     472        470   

Additional paid-in capital

     559,244        535,754   

Retained earnings

     654,780        615,529   

Accumulated other comprehensive loss

     (66,577     (47,539
                

Total stockholders’ equity

     1,147,919        1,104,214   
                

Total liabilities and stockholders’ equity

   $ 2,104,740      $ 2,077,338   
                

See accompanying notes to the condensed consolidated financial statements

 

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Table of Contents

FTI Consulting, Inc. and Subsidiaries

Condensed Consolidated Statements of Income

(in thousands, except per share data)

Unaudited

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2010     2009     2010     2009  

Revenues

   $ 349,033      $ 360,525      $ 699,073      $ 708,371   
                                

Operating expenses

        

Direct cost of revenues

     209,031        194,181        406,491        386,593   

Selling, general and administrative expense

     82,202        88,842        166,603        177,595   

Special charges

     —          —          30,245        —     

Amortization of other intangible assets

     5,852        6,149        11,943        12,199   
                                
     297,085        289,172        615,282        576,387   
                                

Operating income

     51,948        71,353        83,791        131,984   
                                

Other income (expense)

        

Interest income and other

     (141     702        2,213        3,005   

Interest expense

     (11,378     (11,030     (22,696     (22,043
                                
     (11,519     (10,328     (20,483     (19,038
                                

Income before income tax provision

     40,429        61,025        63,308        112,946   

Income tax provision

     15,363        23,800        24,057        44,049   
                                

Net income

   $ 25,066      $ 37,225      $ 39,251      $ 68,897   
                                

Earnings per common share—basic

   $ 0.55      $ 0.74      $ 0.86      $ 1.37   
                                

Earnings per common share—diluted

   $ 0.52      $ 0.69      $ 0.82      $ 1.29   
                                

 

See accompanying notes to the condensed consolidated financial statements

 

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Table of Contents

FTI Consulting, Inc. and Subsidiaries

Condensed Consolidated Statement of Stockholders’ Equity and Comprehensive Income

(in thousands)

Unaudited

 

                 Additional
Paid-in
Capital
    Retained
Earnings
   Accumulated
Other

Comprehensive
Loss
    Total  
     Common Stock           
     Shares     Amount           

Balance January 1, 2010

   46,985      $ 470      $ 535,754      $ 615,529    $ (47,539   $ 1,104,214   

Comprehensive income:

             

Cumulative translation adjustment, net of income taxes of $0

   —          —          —          —        (19,038     (19,038

Net income

   —          —          —          39,251      —          39,251   
                   

Total comprehensive income

                20,213   

Issuance of common stock in connection with:

             

Exercise of options, including income tax benefit from share-based awards of $632

   271        3        7,356        —        —          7,359   

Restricted share grants, less net settled shares of 61

   475        5        (2,497     —        —          (2,492

Stock units issued under incentive compensation plan

   —          —          6,531        —        —          6,531   

Business combinations

   —          —          (2,515     —        —          (2,515

Purchase and retirement of common stock

   (581     (6     6        —        —          —     

Share-based compensation

   —          —          14,609        —        —          14,609   
                                             

Balance June 30, 2010

   47,150      $ 472      $ 559,244      $ 654,780    $ (66,577   $ 1,147,919   
                                             

 

See accompanying notes to the condensed consolidated financial statements

 

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Table of Contents

FTI Consulting, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands)

Unaudited

 

     Six Months Ended
June 30,
 
     2010     2009  

Operating activities

    

Net income

   $ 39,251      $ 68,897   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     15,361        14,109   

Amortization of other intangible assets

     11,943        12,199   

Provision for doubtful accounts

     4,618        12,212   

Non-cash share-based compensation

     14,651        13,349   

Excess tax benefits from share-based compensation

     (625     (2,761

Non-cash interest expense

     3,599        3,698   

Other

     (315     1,308   

Changes in operating assets and liabilities, net of effects from acquisitions:

    

Accounts receivable, billed and unbilled

     (34,895     (47,807

Notes receivable

     (17,789     (19,511

Prepaid expenses and other assets

     (2,240     2,976   

Accounts payable, accrued expenses and other

     11,262        (15,836

Income taxes

     (4,339     14,151   

Accrued compensation

     (18,671     (12,625

Billings in excess of services provided

     144        (679
                

Net cash provided by operating activities

     21,955        43,680   
                

Investing activities

    

Payments for acquisition of businesses, including contingent payments, net of cash received

     (22,834     (34,580

Purchases of property and equipment

     (11,632     (11,687

Proceeds from maturity of short-term investment

     15,000        —     

Other

     (475     307   
                

Net cash used in investing activities

     (19,941     (45,960
                

Financing activities

    

Borrowings under revolving line of credit

     20,000        —     

Payments of revolving line of credit

     (20,000     —     

Payments of long-term debt and capital lease obligations

     (465     (551

Cash received for settlement of interest rate swaps

     —          2,288   

Issuance of common stock under equity compensation plans

     4,235        13,098   

Excess of tax benefits from share-based compensation

     625        2,761   

Other

     442        —     
                

Net cash provided by financing activities

     4,837        17,596   
                

Effect of exchange rate changes on cash and cash equivalents

     (2,469     5,934   
                

Net increase in cash and cash equivalents

     4,382        21,250   

Cash and cash equivalents, beginning of period

     118,872        191,842   
                

Cash and cash equivalents, end of period

   $ 123,254      $ 213,092   
                

Supplemental cash flow disclosures

    

Cash paid for interest

   $ 19,144      $ 19,189   

Cash paid for income taxes, net of refunds

     28,396        29,898   

Non-cash investing and financing activities:

    

Issuance of common stock to acquire businesses

     —          707   

Issuance of stock units under incentive compensation plans

     6,531        5,308   

Issuance of notes payable as contingent consideration

     4,772        12,778   

See accompanying notes to the condensed consolidated financial statements

 

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Table of Contents

FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

(dollar and share amounts in tables expressed in thousands, except per share data)

Unaudited

1. Basis of Presentation and Significant Accounting Policies

Our unaudited condensed consolidated financial statements 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. In management’s opinion, the interim financial statements reflect all adjustments that are necessary for a fair presentation of the results for the interim periods presented. All adjustments made were normal recurring accruals. Results of operations for the interim periods presented herein are not necessarily indicative of results of operations for a full year. These financial statements should be read in conjunction with the consolidated financial statements and the notes contained in our Annual Report on Form 10-K for the year ended December 31, 2009.

Our Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2009 includes an immaterial prior period reclassification to reflect a change in the categorization of certain contingent acquisition payments expensed in 2008 but paid in the six months ended June 30, 2009. Cash provided by operating activities for the six months ended June 30, 2009 was decreased by $3.1 million with a corresponding decrease in cash used in investing activities.

Certain prior year amounts have been reclassified to conform to the current year presentation.

2. Earnings Per Common Share

Basic earnings per common share are calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per common share adjust basic earnings per share for the effects of potentially dilutive common shares. Potentially dilutive common shares primarily include the dilutive effects of shares issuable under our equity compensation plans, including stock options and restricted shares using the treasury stock method, and shares issuable upon conversion of our 3 3/4% senior subordinated convertible notes (“Convertible Notes”) assuming the conversion premium was converted into common stock based on the average closing price per share of our stock during the period. The conversion feature of our Convertible Notes had a dilutive effect on our earnings per share in 2010 and 2009 because the average closing price per share of our common stock for such periods was above the conversion price of the Convertible Notes of $31.25 per share.

 

    Three Months Ended
June 30,
  Six Months Ended
June 30,
    2010   2009   2010   2009

Numerator—basic and diluted

       

Net income

  $ 25,066   $ 37,225   $ 39,251   $ 68,897
                       

Denominator

       

Weighted average number of common shares outstanding—basic

    45,857     50,384     45,828     50,278

Effect of dilutive stock options

    954     1,302     954     1,203

Effect of dilutive convertible notes

    1,184     1,848     1,167     1,653

Effect of dilutive restricted shares

    181     301     204     290
                       

Weighted average number of common shares outstanding—diluted

    48,176     53,835     48,153     53,424
                       

Earnings per common share—basic

  $ 0.55   $ 0.74   $ 0.86   $ 1.37
                       

Earnings per common share—diluted

  $ 0.52   $ 0.69   $ 0.82   $ 1.29
                       

Antidilutive stock options and restricted shares

    1,653     1,092     1,478     1,012
                       

 

7


Table of Contents

FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(dollar and share amounts in tables expressed in thousands, except per share data)

Unaudited

 

3. Special Charges

During the quarter ended March 31, 2010, we recorded special charges totaling $30.2 million, primarily related to a realignment of our workforce and a consolidation of four office locations, of which $8.7 million was non-cash. The charges reflect actions we took to better align capacity with expected demand, to eliminate certain redundancies resulting from acquisitions and to provide for appropriate levels of administrative support. The special charges consist of:

 

   

$19.3 million of salary continuance and other contractual employee related costs associated with the reduction in workforce of 144 employees, including reserves against employee advances, costs related to loan forgiveness and accelerated vesting of share-based awards;

 

   

$7.8 million of expense associated with lease terminations related to the consolidation of four office locations; and

 

   

$3.1 million of accelerated amortization related to a software solution which will no longer be utilized by the Company.

The following table details the special charges by segment:

 

Corporate Finance/Restructuring

   $ 6,589

Forensic and Litigation Consulting

     5,560

Economic Consulting

     6,814

Technology

     4,927

Strategic Communications

     1,260
      
     25,150

Unallocated Corporate

     5,095
      

Total

   $ 30,245
      

The total cash outflow associated with the special charges is expected to be $21.5 million, of which $10.8 million has been paid as of June 30, 2010, $5.4 million is expected to be paid during the remainder of 2010, $4.9 million is expected to be paid in 2011, and the balance of $0.4 million is expected to be paid in 2012 and 2013. A liability for the current and noncurrent portions of the amounts to be paid is included in “Accounts payable, accrued expenses and other” and “Other liabilities,” respectively, on the Condensed Consolidated Balance Sheets. Activity related to the liability for these costs for the six months ended June 30, 2010 is as follows:

 

     Employee
Termination
Costs
    Lease
Termination
Costs
    Total  

Balance at January 1, 2010

   $ —        $ —        $ —     

Additions

     13,135        8,617        21,752   

Payments

     (7,147     (3,649     (10,796

Adjustments

     (24     (189     (213
                        

Balance at June 30, 2010

   $ 5,964      $ 4,779      $ 10,743   
                        

 

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Table of Contents

FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(dollar and share amounts in tables expressed in thousands, except per share data)

Unaudited

 

4. Comprehensive Income

The following table sets forth the components of comprehensive income:

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
     2010     2009    2010     2009

Net income

   $ 25,066      $ 37,225    $ 39,251      $ 68,897

Other comprehensive income (loss), net of tax:

         

Cumulative translation adjustment

     (2,847     47,087      (19,038     41,167
                             

Comprehensive income

   $ 22,219      $ 84,312    $ 20,213      $ 110,064
                             

5. Provision for Doubtful Accounts

The provision for doubtful accounts is recorded after the related work has been billed to the client and we determine that full collectability is not reasonably assured. It is classified in “Selling, general and administrative expense” on the Condensed Consolidated Statements of Income. The provision for doubtful accounts totaled $1.6 million and $4.6 million for the three and six months ended June 30, 2010, respectively, and $5.4 million and $12.2 million for the three and six months ended June 30, 2009, respectively.

6. Research and Development Costs

Research and development costs related to software development totaled $5.3 million and $10.7 million for the three and six months ended June 30, 2010, respectively, and $5.3 million and $10.7 million for the three and six months ended June 30, 2009, respectively. Research and development costs are included in “Selling, general and administrative expense” on the Condensed Consolidated Statements of Income.

7. Financial Instruments

Fair value of financial instruments

We consider the recorded value of certain of our financial assets and liabilities, which consist primarily of cash equivalents, accounts receivable and accounts payable, to approximate the fair value of the respective assets and liabilities at June 30, 2010, based on the short-term nature of the assets and liabilities. The fair value of our long-term debt at June 30, 2010 was $645.3 million compared to a carrying value of $579.3 million. We determined the fair value of our long-term debt based on quoted market prices for our 7 5/8% senior notes due 2013, 7 3/4% senior notes due 2016 and Convertible Notes. The carrying value of long-term debt includes the $18.0 million equity component of our Convertible Notes which is recorded in “Additional paid-in capital” on the Condensed Consolidated Balance Sheets.

8. Acquisitions

On April 1, 2010, we completed an acquisition in Hong Kong for our Forensic and Litigation Consulting segment. The acquisition price of $2.8 million consisted of $2.3 million in cash paid at closing and contingent consideration with an estimated fair value of $0.5 million, which is recorded in “Other liabilities” on the Condensed Consolidated Balance Sheets. As part of the purchase price allocation, we recorded $0.2 million in identifiable intangible assets and $2.6 million in goodwill. The business combination did not materially impact our results of operations; therefore, pro forma results have not been presented.

Certain acquisition related restricted stock agreements entered into prior to January 1, 2009 contained stock price guarantees that may result in cash payments in the future if our share price falls below a specified per share

 

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FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(dollar and share amounts in tables expressed in thousands, except per share data)

Unaudited

 

market value on the date that the applicable stock restrictions lapse (the “determination date”). For those acquisitions, the future settlement of any contingency related to our common stock price will be recorded as a reduction to additional paid-in capital. During the six months ended June 30, 2010, we paid $2.9 million in cash to the selling shareholders of two acquisitions in relation to price protection provision guarantees. Our remaining common stock price guarantee provisions have stock floor prices that range from $22.33 to $69.62 per share and have determination dates that range from 2010 to 2013.

9. Goodwill and Other Intangible Assets

The changes in the carrying amounts of goodwill by business segment for the six months ended June 30, 2010, are as follows:

 

    Corporate
Finance/
Restructuring
  Forensic and
Litigation
Consulting
    Economic
Consulting
  Technology     Strategic
Communications
    Total  

Balance at January 1, 2010

  $ 387,276   $ 194,229      $ 196,731   $ 118,011      $ 299,702      $ 1,195,949   

Goodwill acquired during the year

  $ —       2,598        —       —          —          2,598   

Contingent consideration(1)

    —       18        17     —          10,774        10,809   

Foreign currency translation adjustment and other

    3     (1,726     —       (95     (9,775     (11,593
                                           

Balance at June 30, 2010

  $ 387,279   $ 195,119      $ 196,748   $ 117,916      $ 300,701      $ 1,197,763   
                                           

 

(1)

Contingent consideration related to business combinations consummated prior to January 1, 2009.

Other intangible assets with finite lives are amortized over their estimated useful lives. For intangible assets with finite lives, we recorded amortization expense of $5.9 million and $11.9 million for the three and six months ended June 30, 2010, respectively, and $6.1 million and $12.2 million for the three and six months ended June 30, 2009, respectively. Based solely on the amortizable intangible assets recorded as of June 30, 2010, we estimate amortization expense to be $11.3 million during the remainder of 2010, $21.1 million in 2011, $20.5 million in 2012, $17.5 million in 2013, $9.9 million in 2014, $9.6 million in 2015, and $45.7 million in years after 2015. 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, or other factors.

 

          June 30, 2010    December 31, 2009
     Useful
Life
in Years
   Gross
Carrying
Amount
   Accumulated
Amortization
   Gross
Carrying
Amount
   Accumulated
Amortization

Amortized intangible assets

              

Customer relationships

   1 to 15    $ 140,740    $ 38,834    $ 144,048    $ 33,016

Non-competition agreements

   1 to 10      18,160      10,165      18,268      8,788

Software

   5 to 6      37,700      16,509      37,700      13,335

Tradenames

   1 to 5      9,488      5,004      9,591      4,184

Contract Backlog

   1      318      318      317      317
                              
        206,406      70,830      209,924      59,640

Unamortized intangible assets

              

Tradenames

   Indefinite      25,678      —        25,678      —  
                              
      $ 232,084    $ 70,830    $ 235,602    $ 59,640
                              

 

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Notes to Condensed Consolidated Financial Statements—(Continued)

(dollar and share amounts in tables expressed in thousands, except per share data)

Unaudited

 

10. Long-term Debt and Capital Lease Obligations

The components of long-term debt and capital lease obligations are presented in the table below:

 

     June 30,
2010
   December 31,
2009

7 5/8 % senior notes due 2013(a)

   $ 201,748    $ 202,012

7 3/4 % senior notes due 2016

     215,000      215,000

3 3/4 % senior subordinated convertible notes due 2012(b)

     138,954      136,540

Notes payable to former shareholders of acquired business

     5,617      1,132
             

Total debt

     561,319      554,684

Less current portion

     144,571      137,672
             

Long-term debt, net of current portion

     416,748      417,012
             

Total capital lease obligations

     510      814

Less current portion

     134      429
             

Capital lease obligations, net of current portion

     376      385
             

Long-term debt and capital lease obligations, net of current portion

   $ 417,124    $ 417,397
             

 

(a)

Balance includes $200.0 million principal amount of notes plus unamortized proceeds from interest rate swap terminations of $1.7 million at June 30, 2010 and $2.0 million at December 31, 2009.

 

(b)

Balance includes $149.9 million principal amount of notes net of discount of $11.0 million at June 30, 2010 and $13.4 million at December 31, 2009.

The Convertible Notes are currently convertible at the option of the holders through October 15, 2010 as provided in the Indenture covering the Convertible Notes. The Convertible Notes became convertible as a result of the closing price per share of our common stock exceeding the conversion threshold price of $37.50 per share (120% of the applicable conversion price of $31.25 per share) for at least 20 trading days in the 30 consecutive trading day period ended July 15, 2010. There were no Convertible Note conversions during the quarter ended June 30, 2010.

11. Commitments and Contingencies

Contingencies

We are subject to legal actions arising in the ordinary course of business. In management’s opinion, we believe we have adequate legal defenses and/or insurance coverage with respect to the eventuality of such actions. We do not believe any settlement or judgment would materially affect our financial position or results of operations.

12. Share-Based Compensation

Amendment of equity-based compensation plan

On March 31, 2010, the Board of Directors of FTI Consulting, Inc. (“FTI”) adopted an amendment to the FTI Consulting, Inc. 2009 Omnibus Incentive Compensation Plan (the “2009 Plan”), subject to stockholder approval, to increase the number of shares of FTI’s common stock that may be delivered pursuant to awards granted under the 2009 Plan by an additional 4,500,000 shares (the “Amendment”). The Amendment was approved by the stockholders of FTI at the 2010 Annual Meeting of Stockholders held on June 2, 2010.

 

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Notes to Condensed Consolidated Financial Statements—(Continued)

(dollar and share amounts in tables expressed in thousands, except per share data)

Unaudited

 

Share-based awards and share-based compensation expense

Our officers, employees, non-employee directors and certain individual service providers are eligible to participate in FTI’s equity compensation plans, subject to the discretion of the administrator of the plans. During the six months ended June 30, 2010, share-based awards included stock option grants exercisable for 580,863 shares of common stock upon vesting, restricted share awards of 519,119 shares of common stock and restricted share units equivalent to 193,900 shares of common stock.

Total share-based compensation expense for the three and six months ended June 30, 2010 and 2009 is detailed in the following table:

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,

Income Statement Classification

       2010            2009            2010            2009    

Direct cost of revenues

   $ 4,746    $ 3,167    $ 7,325    $ 5,997

Selling, general and administrative expense

     2,511      3,736      4,852      7,352

Special charges

     —        —        2,474      —  
                           

Total share-based compensation expense

   $ 7,257    $ 6,903    $ 14,651    $ 13,349
                           

13. Segment Reporting

We manage our business in five reportable operating segments: Corporate Finance/Restructuring, Forensic and Litigation Consulting, Economic Consulting, Technology and Strategic Communications.

Our Corporate Finance/Restructuring segment focuses on strategic, operational, financial and capital needs of businesses around the world and provides consulting and advisory services on a wide range of areas, such as restructuring (including bankruptcy), financings, claims management, mergers and acquisitions, post-acquisition integration, valuations, tax issues and performance improvement.

Our Forensic and Litigation Consulting segment provides law firms, companies, government clients and other interested parties with dispute advisory, investigations, forensic accounting, data analytics, business intelligence assessments and risk mitigation services.

Our Economic Consulting segment provides law firms, companies, government entities and other interested parties with analysis of complex economic issues for use in legal and regulatory proceedings, strategic decision making and public policy debates in the U.S. and around the world.

Our Technology segment provides electronic discovery (“e-discovery”) and information management software and service to its clients. It provides products, services and consulting to companies, law firms, courts and government agencies worldwide. Its comprehensive suite of software and services help clients locate, review and produce electronically stored information, including e-mail, computer files, voicemail, instant messaging, and financial and transactional data. In the fourth quarter of 2009, we introduced Acuity, a new product offering which combines e-discovery and document review into a single offering.

Our Strategic Communications segment provides advice and consulting services relating to financial communications, brand communications, public affairs and reputation management and business consulting.

 

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FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(dollar and share amounts in tables expressed in thousands, except per share data)

Unaudited

 

Effective January 1, 2010, we implemented a change in our organizational structure that resulted in the movement of our Financial and Enterprise Data Analytics (“FEDA”) subpractice from our Technology segment to our Forensic and Litigation Consulting segment. This change has been reflected in our segment reporting for all periods presented.

We evaluate the performance of our operating segments based on adjusted segment EBITDA. We define adjusted segment EBITDA as the segments’ share of consolidated operating income before depreciation, amortization of intangible assets and special charges plus non-operating litigation settlements. Although adjusted segment EBITDA is not a measure of financial condition or performance determined in accordance with GAAP, we use adjusted segment EBITDA to evaluate and compare the operating performance of our segments and it is one of the primary measures used to determine segment employee incentive compensation.

The table below presents revenues and adjusted segment EBITDA for our reportable segments for the three and six months ended June 30, 2010 and 2009:

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
     2010    2009    2010    2009

Revenues

           

Corporate Finance/Restructuring

   $ 111,095    $ 133,970    $ 228,562    $ 261,512

Forensic and Litigation Consulting

     80,754      76,346      159,432      154,720

Economic Consulting

     64,552      57,123      131,859      111,959

Technology

     42,791      48,536      86,164      92,859

Strategic Communications

     49,841      44,550      93,056      87,321
                           

Total revenues

   $ 349,033    $ 360,525    $ 699,073    $ 708,371
                           

Adjusted segment EBITDA

           

Corporate Finance/Restructuring

   $ 25,977    $ 47,445    $ 60,696    $ 88,166

Forensic and Litigation Consulting

     19,346      20,856      39,130      42,797

Economic Consulting

     11,453      10,345      24,973      20,664

Technology

     15,857      19,186      33,118      32,284

Strategic Communications

     8,635      5,879      14,377      11,675
                           

Total adjusted segment EBITDA

   $ 81,268    $ 103,711    $ 172,294    $ 195,586
                           

The table below reconciles adjusted segment EBITDA to income before income tax provision:

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2010     2009     2010     2009  

Adjusted segment EBITDA

   $ 81,268      $ 103,711      $ 172,294      $ 195,586   

Segment depreciation expense

     (6,312     (5,550     (12,638     (10,993

Amortization of intangible assets

     (5,852     (6,149     (11,943     (12,199

Special charges

     —          —          (30,245     —     

Unallocated corporate expenses, excluding special charges

     (17,156     (20,659     (33,677     (40,410

Interest income and other

     (141     702        2,213        3,005   

Interest expense

     (11,378     (11,030     (22,696     (22,043
                                

Income before income tax provision

   $ 40,429      $ 61,025      $ 63,308      $ 112,946   
                                

 

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Notes to Condensed Consolidated Financial Statements—(Continued)

(dollar and share amounts in tables expressed in thousands, except per share data)

Unaudited

 

14. Supplemental Condensed Consolidating Guarantor and Non-Guarantor Financial Information

Substantially all of our domestic subsidiaries are guarantors of borrowings under our senior bank credit facility, senior notes and our Convertible Notes. The 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 income and statements of cash flows for FTI, all the guarantor subsidiaries, all the non-guarantor subsidiaries and the eliminations necessary to arrive at the consolidated information for FTI 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 June 30, 2010

 

     FTI
Consulting, Inc.
   Guarantor
Subsidiaries
   Non-Guarantor
Subsidiaries
   Eliminations     Consolidated

Assets

             

Cash and cash equivalents

   $ 73,970    $ 664    $ 48,620    $ —        $ 123,254

Accounts receivable, net

     111,765      156,686      47,195      —          315,646

Intercompany receivables

     29,719      427,599      97,549      (554,867     —  

Other current assets

     61,612      21,601      17,027      (6,469     93,771
                                   

Total current assets

     277,066      606,550      210,391      (561,336     532,671

Property and equipment, net

     48,717      18,209      10,818      —          77,744

Goodwill

     426,332      530,719      240,712      —          1,197,763

Other intangible assets, net

     7,044      110,736      43,474      —          161,254

Investments in subsidiaries

     1,513,834      894,548      796,816      (3,205,198     —  

Other assets

     60,732      161,447      18,597      (105,468     135,308
                                   

Total assets

   $ 2,333,725    $ 2,322,209    $ 1,320,808    $ (3,872,002   $ 2,104,740
                                   

Liabilities

             

Intercompany payables

   $ 389,435    $ 74,656    $ 90,776    $ (554,867   $ —  

Other current liabilities

     251,346      84,663      36,879      (6,469     366,419
                                   

Total current liabilities

     640,781      159,319      127,655      (561,336     366,419

Long-term debt, net

     416,748      376      —        —          417,124

Other liabilities

     128,277      39,894      110,575      (105,468     173,278
                                   

Total liabilities

     1,185,806      199,589      238,230      (666,804     956,821

Stockholders’ equity

     1,147,919      2,122,620      1,082,578      (3,205,198     1,147,919
                                   

Total liabilities and stockholders’ equity

   $ 2,333,725    $ 2,322,209    $ 1,320,808    $ (3,872,002   $ 2,104,740
                                   

 

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Notes to Condensed Consolidated Financial Statements—(Continued)

(dollar and share amounts in tables expressed in thousands, except per share data)

Unaudited

 

Condensed Consolidating Balance Sheet Information as of December 31, 2009

 

     FTI
Consulting, Inc.
   Guarantor
Subsidiaries
   Non-Guarantor
Subsidiaries
   Eliminations     Consolidated

Assets

             

Cash and cash equivalents

   $ 60,720    $ 665    $ 57,487    $ —        $ 118,872

Accounts receivable, net

     102,768      143,146      41,628      —          287,542

Intercompany receivables

     58,969      335,933      120,210      (515,112     —  

Other current assets

     69,871      17,972      8,007      (2,349     93,501
                                   

Total current assets

     292,328      497,716      227,332      (517,461     499,915

Property and equipment, net

     46,298      22,728      11,652      —          80,678

Goodwill

     426,314      530,809      238,826      —          1,195,949

Other intangible assets, net

     8,465      118,756      48,741      —          175,962

Investments in subsidiaries

     1,382,550      882,833      778,478      (3,043,861     —  

Other assets

     60,396      161,813      14,104      (111,479     124,834
                                   

Total assets

   $ 2,216,351    $ 2,214,655    $ 1,319,133    $ (3,672,801   $ 2,077,338
                                   

Liabilities

             

Intercompany payables

   $ 319,905    $ 99,833    $ 95,374    $ (515,112   $ —  

Other current liabilities

     265,053      92,350      51,148      (2,349     406,202
                                   

Total current liabilities

     584,958      192,183      146,522      (517,461     406,202

Long-term debt, net

     417,012      385      —        —          417,397

Other liabilities

     110,167      37,671      113,166      (111,479     149,525
                                   

Total liabilities

     1,112,137      230,239      259,688      (628,940     973,124

Stockholders’ equity

     1,104,214      1,984,416      1,059,445      (3,043,861     1,104,214
                                   

Total liabilities and stockholders’ equity

   $ 2,216,351    $ 2,214,655    $ 1,319,133    $ (3,672,801   $ 2,077,338
                                   

 

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Notes to Condensed Consolidated Financial Statements—(Continued)

(dollar and share amounts in tables expressed in thousands, except per share data)

Unaudited

 

Condensed Consolidated Statement of Income for the Three Months Ended June 30, 2010

 

    FTI
Consulting, Inc.
    Guarantor
Subsidiaries
  Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Revenues

  $ 127,150      $ 300,309   $ 73,786      $ (152,212   $ 349,033   

Operating expenses

         

Direct cost of revenues

    76,463        234,633     48,141        (150,206     209,031   

Selling, general and administrative expense

    36,092        31,390     16,726        (2,006     82,202   

Amortization of other intangible assets

    710        3,931     1,211        —          5,852   
                                     

Operating income

    13,885        30,355     7,708        —          51,948   

Other (expense) income

    (10,909     2,017     (2,627     —          (11,519
                                     

Income before income tax provision

    2,976        32,372     5,081        —          40,429   

Income tax provision

    4,810        13,403     (2,850     —          15,363   

Equity in net earnings of subsidiaries

    26,900        7,416     2,088        (36,404     —     
                                     

Net income

  $ 25,066      $ 26,385   $ 10,019      $ (36,404   $ 25,066   
                                     

Condensed Consolidated Statement of Income for the Three Months Ended June 30, 2009

 

    FTI
Consulting, Inc.
    Guarantor
Subsidiaries
  Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Revenues

  $ 149,520      $ 298,482   $ 65,302      $ (152,779   $ 360,525   

Operating expenses

         

Direct cost of revenues

    80,309        224,933     39,985        (151,046     194,181   

Selling, general and administrative expense

    43,506        32,235     14,834        (1,733     88,842   

Amortization of other intangible assets

    260        4,650     1,239        —          6,149   
                                     

Operating income

    25,445        36,664     9,244        —          71,353   

Other (expense) income

    (9,575     3,726     (4,479     —          (10,328
                                     

Income before income tax provision

    15,870        40,390     4,765        —          61,025   

Income tax provision

    6,644        16,959     197        —          23,800   

Equity in net earnings of subsidiaries

    27,999        3,482     2,183        (33,664     —     
                                     

Net income

  $ 37,225      $ 26,913   $ 6,751      $ (33,664   $ 37,225   
                                     

 

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Notes to Condensed Consolidated Financial Statements—(Continued)

(dollar and share amounts in tables expressed in thousands, except per share data)

Unaudited

 

Condensed Consolidated Statement of Income for the Six Months Ended June 30, 2010

 

    FTI
Consulting, Inc.
    Guarantor
Subsidiaries
  Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Revenues

  $ 262,259      $ 602,846   $ 146,434      $ (312,466   $ 699,073   

Operating expenses

         

Direct cost of revenues

    154,494        467,230     92,876        (308,109     406,491   

Selling, general and administrative expense

    73,810        65,573     31,577        (4,357     166,603   

Special charges

    18,558        10,842     845        —          30,245   

Amortization of other intangible assets

    1,420        8,021     2,502        —          11,943   
                                     

Operating income

    13,977        51,180     18,634        —          83,791   

Other (expense) income

    (20,450     4,742     (4,775     —          (20,483
                                     

(Loss) income before income tax provision

    (6,473     55,922     13,859        —          63,308   

Income tax provision

    905        23,152     —          —          24,057   

Equity in net earnings of subsidiaries

    46,629        12,986     4,273        (63,888     —     
                                     

Net income

  $ 39,251      $ 45,756   $ 18,132      $ (63,888   $ 39,251   
                                     

Condensed Consolidated Statement of Income for the Six Months Ended June 30, 2009

 

    FTI
Consulting, Inc.
    Guarantor
Subsidiaries
  Non-Guarantor
Subsidiaries
    Eliminations     Consolidated  

Revenues

  $ 301,638      $ 600,115   $ 116,852      $ (310,234   $ 708,371   

Operating expenses

         

Direct cost of revenues

    163,283        458,069     72,490        (307,249     386,593   

Selling, general and administrative expense

    85,559        70,798     24,223        (2,985     177,595   

Amortization of other intangible assets

    519        9,219     2,461        —          12,199   
                                     

Operating income

    52,277        62,029     17,678        —          131,984   

Other (expense) income

    (20,335     7,963     (6,666     —          (19,038
                                     

Income before income tax provision

    31,942        69,992     11,012        —          112,946   

Income tax provision

    13,215        29,350     1,484        —          44,049   

Equity in net earnings of subsidiaries

    50,170        7,783     4,231        (62,184     —     
                                     

Net income

  $ 68,897      $ 48,425   $ 13,759      $ (62,184   $ 68,897   
                                     

 

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Notes to Condensed Consolidated Financial Statements—(Continued)

(dollar and share amounts in tables expressed in thousands, except per share data)

Unaudited

 

Condensed Consolidating Statement of Cash Flows for the Six Months Ended June 30, 2010

 

    FTI
Consulting, Inc.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Consolidated  

Operating activities

       

Net cash (used in) provided by operating activities

  $ (11,322   $ 42,592      $ (9,315   $ 21,955   

Investing activities

       

Payments for acquisition of businesses, including contingent payments, net of cash received

    (22,834     —          —          (22,834

Purchases of property and equipment and other

    (4,393     (5,644     (2,070     (12,107

Proceeds from maturity of short-term investment

    15,000        —          —          15,000   
                               

Net cash used in investing activities

    (12,227     (5,644     (2,070     (19,941
                               

Financing activities

       

Borrowings under revolving line of credit

    20,000        —          —          20,000   

Payments of revolving line of credit

    (20,000     —          —          (20,000

Payments of long-term debt and capital leases

    (161     (304     —          (465

Issuance of common stock and other

    4,677        —          —          4,677   

Excess tax benefits from share based equity

    625        —          —          625   

Intercompany transfers

    31,658        (36,645     4,987        —     
                               

Net cash provided by (used in) financing activities

    36,799        (36,949     4,987        4,837   
                               

Effect of exchange rate changes on cash

    —          —          (2,469     (2,469
                               

Net increase (decrease) in cash and cash equivalents

    13,250        (1     (8,867     4,382   

Cash and cash equivalents, beginning of period

    60,720        665        57,487        118,872   
                               

Cash and cash equivalents, end of period

  $ 73,970      $ 664      $ 48,620      $ 123,254   
                               

 

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FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

(dollar and share amounts in tables expressed in thousands, except per share data)

Unaudited

 

Condensed Consolidating Statement of Cash Flows for the Six Months Ended June 30, 2009

 

     FTI
Consulting, Inc.
    Guarantor
Subsidiaries
    Non-Guarantor
Subsidiaries
    Consolidated  

Operating activities

        

Net cash provided by (used in) operating activities

   $ 46,213      $ (8,171   $ 5,638      $ 43,680   

Investing activities

        

Payments for acquisition of businesses, including contingent payments, net of cash received

     (33,298     —          (1,282     (34,580

Purchases of property and equipment and other

     (3,178     (5,887     (2,315     (11,380
                                

Net cash used in investing activities

     (36,476     (5,887     (3,597     (45,960
                                

Financing activities

        

Payments of long-term debt and capital leases

     (108     (443     —          (551

Cash received for settlement of interest rate swaps

     2,288        —          —          2,288   

Issuance of common stock and other

     13,098        —          —          13,098   

Excess tax benefits from share based equity

     2,761        —          —          2,761   

Intercompany transfers

     (12,512     12,923        (411     —     
                                

Net cash provided by (used in) financing activities

     5,527        12,480        (411     17,596   
                                

Effect of exchange rate changes on cash

     —          —          5,934        5,934   

Net increase (decrease) in cash and cash equivalents

     15,264        (1,578     7,564        21,250   

Cash and cash equivalents, beginning of period

     131,412        11,663        48,767        191,842   
                                

Cash and cash equivalents, end of period

   $ 146,676      $ 10,085      $ 56,331      $ 213,092   
                                

15. Subsequent Event

In July 2010, we repurchased and retired 0.3 million shares of common stock through open market purchases under the two-year stock repurchase program authorized by the Board of Directors on November 4, 2009. The share repurchases totaled $11.1 million at an average price of $33.12 per share and were funded using cash on hand.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following is a discussion and analysis of our consolidated financial condition and results of operations for the three and six month periods ended June 30, 2010 and 2009 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, 2009. Historical results and any discussion of prospective results may not indicate our future performance. See “Forward Looking Statements.”

BUSINESS OVERVIEW

We are a leading global business advisory firm dedicated to helping organizations protect and enhance their enterprise value. We work closely with our clients to help them anticipate, understand, manage and overcome complex business matters arising from such factors as the economy, financial and credit markets, governmental regulation and legislation and litigation. We assist clients in addressing a broad range of business challenges, such as restructuring (including bankruptcy), financing and credit issues and indebtedness, interim business management, forensic accounting and litigation services, mergers and acquisitions (“M&A”), antitrust and competition matters, electronic discovery (“e-discovery”), management and retrieval of electronically stored information, reputation management and strategic communications. We also provide services to help our clients take advantage of economic, regulatory, financial and other business opportunities. Our experienced teams of professionals include many individuals who are widely recognized as experts in their respective fields. We believe clients retain us because of our recognized expertise and capabilities in highly specialized areas as well as our reputation for satisfying client needs.

We report financial results for the following five operating segments:

Our Corporate Finance/Restructuring segment focuses on strategic, operational, financial and capital needs of businesses around the world and provides consulting and advisory services on a wide range of areas, such as restructuring (including bankruptcy), financing, claims management, M&A, post-acquisition integration, valuations, tax issues and performance improvement.

Our Forensic and Litigation Consulting segment provides law firms, companies, government clients and other interested parties with dispute advisory, investigations, forensic accounting, data analytics, business intelligence assessments and risk mitigation services.

Our Economic Consulting segment provides law firms, companies, government entities and other interested parties with analysis of complex economic issues for use in legal and regulatory proceedings, strategic decision making and public policy debates in the U.S. and around the world.

Our Technology segment provides e-discovery and information management software and service to its clients. It provides products, services and consulting to companies, law firms, courts and government agencies worldwide. Its comprehensive suite of software and services help clients locate, review and produce electronically stored information, including e-mail, computer files, voicemail, instant messaging, and financial and transactional data. In the fourth quarter of 2009, we introduced AcuityTM, a new product offering which combines e-discovery and document review into a single offering.

Our Strategic Communications segment provides advice and consulting services relating to financial communications, brand communications, public affairs and reputation management and business consulting.

Effective January 1, 2010, we implemented a change in our organizational structure that resulted in the movement of our Financial and Enterprise Data Analytics (“FEDA”) subpractice from our Technology segment to our Forensic and Litigation Consulting segment. This change has been reflected in our segment reporting for all periods presented.

 

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We derive substantially all of our revenues from providing professional services to both U.S. and global clients. Over the past several years the growth in our revenues and profitability has resulted from our ability to attract new and recurring engagements and from the acquisitions we have completed.

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 the client is 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 and the number of users licensing our Ringtail® and Attenex® software products for installation within their own environments. We license these products directly to end users as well as indirectly through our channel partner relationships. 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; and

 

   

licensing of our software products and other technology services.

We define adjusted EBITDA as consolidated operating income before depreciation, amortization of intangible assets and special charges plus non-operating litigation settlements. We define adjusted segment EBITDA as the segments’ share of consolidated operating income before depreciation, amortization of intangible assets and special charges plus non-operating litigation settlements. Although adjusted EBITDA and adjusted segment EBITDA are not measures of financial condition or performance determined in accordance with generally accepted accounting principles (“GAAP”), we believe that these measures can be a useful operating performance measure for evaluating our results of operations as compared from period-to-period and as compared to our competitors. EBITDA is a common alternative measure of operating performance used by investors, financial analysts and rating agencies to value and compare the financial performance of companies in our industry. We use adjusted EBITDA and adjusted segment EBITDA to evaluate and compare the operating performance of our segments and it is one of the primary measures used to determine employee incentive compensation.

Adjusted EBITDA and adjusted segment EBITDA are not defined in the same manner by all companies and may not be comparable to other similarly titled measures of other companies unless the definition is the same. These non-GAAP measures should be considered in addition to, but not as a substitute for or superior to, the information contained in our statements of income.

We define adjusted earnings per diluted share as earnings per diluted share excluding the per share impact of the special charges that were incurred in that year.

We define acquisition growth as the results of operations of acquired companies in the first year following the effective date of an acquisition. Our definition of organic growth is the change in the results of operations excluding the impact of all such acquisitions.

 

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EXECUTIVE HIGHLIGHTS

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
     2010    2009    2010    2009
    

(dollars in thousands, except per share amounts)

Revenues

   $ 349,033    $ 360,525    $ 699,073    $ 708,371

Earnings per common share—diluted

     0.52      0.69      0.82      1.29

Adjusted earnings per common share—diluted

     0.52      0.69      1.19      1.29

Operating income

     51,948      71,353      83,791      131,984

Adjusted EBITDA

     65,458      84,579      141,340      158,542

Cash provided by operating activities

     49,218      53,430      21,955      43,680

Total number of employees at June 30,

     3,366      3,414      3,366      3,414

Second Quarter 2010 Executive Highlights

Revenues

Revenues for the quarter ended June 30, 2010 decreased $11.5 million, or 3.2%, to $349.0 million, compared to $360.5 million in the prior year. Excluding the estimated impact of foreign currency translation of the U.S. dollar against other currencies in the second quarter versus the prior year quarter, the Company’s revenues declined 3.5%.

Our business continues to follow the trajectory of the overall macroeconomic environment from recession to the early stages of recovery. Our “procyclical” activities, which tend to be driven by increased corporate spending, are showing signs of growth while our “countercyclical” activities, principally restructuring and bankruptcy, are declining. However, recent events such as the sovereign debt crisis in Europe, continued high unemployment and increased regulatory uncertainty have impacted business confidence and slowed discretionary corporate spending, which has hindered the recovery of our procyclical activities. At the same time, restructuring and bankruptcy activity declined more rapidly than expected due to the strengthening economy, reasonably open U.S. credit markets and greater willingness on the part of lenders to extend maturities. The net of these factors is that growth in the Economic Consulting, Strategic Communications and Forensic and Litigation Consulting segments was insufficient to offset revenue declines in the Corporate Finance/Restructuring and Technology segments, causing overall revenues to decline in the quarter compared to the prior year period.

Earnings Per Share

Second quarter 2010 earnings per diluted share were $0.52, compared to $0.69 in the prior year period. The estimated year-over-year foreign currency translation impact of a weaker U.S. dollar, primarily against the Canadian dollar, increased earnings per diluted share by $0.01 in the quarter.

Operating Income

Operating income in the second quarter was $51.9 million, compared to $71.4 million in the prior year period. The decline in operating income was primarily due to lower demand for services in several of the Company’s segments, as well as increased employee related cost in our Forensic and Litigation Consulting and Economic Consulting segments. These served to more than offset higher income of the Economic Consulting and Strategic Communications segments, as well as a 7.5% decrease of selling, general and administrative (“SG&A”) expense from year-ago levels.

 

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Adjusted EBITDA

Adjusted EBITDA decreased by $19.1 million to $65.5 million, or 18.8% of revenues compared to $84.6 million, or 23.5% of revenues, in the prior year period. As noted above, profit improvements in the Economic Consulting and Strategic Communications segments and lower SG&A expenses were not sufficient to offset lower profitability in the Corporate Finance/Restructuring, Forensic and Litigation Consulting and Technology segments.

Operating Cash Flows

The Company continues to generate positive cash flows from operations of $49.2 million for three months ended June 30, 2010 which was in line with the prior year cash flows of $53.4 million. Excluding the $7.2 million cash outflow in the second quarter of 2010 for severance and lease terminations related to the realignment of our workforce and consolidation of four office locations, cash flows from operating activities increased relative to the prior year. This increase was due to lower income tax payments and forgivable loan fundings in 2010, partially offset by lower cash collections on accounts receivable and an increase in compensation related costs relative to the prior year.

As a result of our strong cash collections, in July 2010, we repurchased and retired 336 thousand shares of common stock using $11.1 million of cash on hand at an average price of $33.12 per share. The share repurchases were made under the two-year stock repurchase program authorized by the Board of Directors on November 4, 2009.

Headcount

Headcount decreased by 48, or 1.4%, to 3,366, at June 30, 2010 as compared to June 30, 2009. The decrease occurred largely in the Corporate Finance/Restructuring and Technology segments to properly align resources in those segments with current and anticipated demand for their services.

 

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CONSOLIDATED RESULTS OF OPERATIONS

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2010     2009     2010     2009  
    

(in thousands, except per share amounts)

 

Revenues

        

Corporate Finance/Restructuring

   $ 111,095      $ 133,970      $ 228,562      $ 261,512   

Forensic and Litigation Consulting

     80,754        76,346        159,432        154,720   

Economic Consulting

     64,552        57,123        131,859        111,959   

Technology

     42,791        48,536        86,164        92,859   

Strategic Communications

     49,841        44,550        93,056        87,321   
                                

Total revenues

   $ 349,033      $ 360,525      $ 699,073      $ 708,371   
                                

Operating income

        

Corporate Finance/Restructuring

   $ 23,567      $ 45,042      $ 49,211      $ 83,417   

Forensic and Litigation Consulting

     17,537        19,572        29,937        40,169   

Economic Consulting

     10,459        9,373        16,225        18,740   

Technology

     10,991        14,283        18,293        22,450   

Strategic Communications

     6,550        3,742        8,897        7,618   
                                

Segment operating income

     69,104        92,012        122,563        172,394   

Unallocated corporate expenses

     (17,156     (20,659     (38,772     (40,410
                                

Total operating income

     51,948        71,353        83,791        131,984   
                                

Other income (expense)

        

Interest income and other

     (141     702        2,213        3,005   

Interest expense

     (11,378     (11,030     (22,696     (22,043
                                
     (11,519     (10,328     (20,483     (19,038
                                

Income before income tax provision

     40,429        61,025        63,308        112,946   

Income tax provision

     15,363        23,800        24,057        44,049   
                                

Net income

   $ 25,066      $ 37,225      $ 39,251      $ 68,897   
                                

Earnings per common share—basic

   $ 0.55      $ 0.74      $ 0.86      $ 1.37   
                                

Earnings per common share—diluted

   $ 0.52      $ 0.69      $ 0.82      $ 1.29   
                                

Reconciliation of Operating Income to adjusted EBITDA:

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
     2010    2009    2010    2009
    

(in thousands)

Operating income

   $ 51,948    $ 71,353    $ 83,791    $ 131,984

Depreciation and amortization

     7,658      7,077      15,361      14,109

Amortization of other intangible assets

     5,852      6,149      11,943      12,199

Special charges

     —        —        30,245      —  

Litigation settlement gains, net

     —        —        —        250
                           

Adjusted EBITDA

   $ 65,458    $ 84,579    $ 141,340    $ 158,542
                           

 

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Three Months Ended June 30, 2010 Compared to Three Months Ended June 30, 2009

Revenues and Operating Income

See “Segment Results” for an expanded discussion of segment operating revenues and operating income.

Unallocated corporate expenses

Unallocated corporate expenses decreased $3.5 million, or 17.0%, to $17.2 million for the three months ended June 30, 2010, from $20.7 million for the three months ended June 30, 2009, primarily due to lower performance based compensation costs.

Interest income and other

Interest income and other, which includes foreign currency transaction gains and losses, decreased by $0.8 million to a net expense of $0.1 million for the three months ended June 30, 2010 from income of $0.7 million for the three months ended June 30, 2009. The decrease is primarily due to a $0.5 million net unfavorable impact from foreign exchange transaction gains and losses due to the remeasurement of receivables and payables required to be settled in a currency other than an entity’s functional currency and a $0.3 million decrease in interest income in the current year quarter.

Interest expense

Interest expense increased $0.4 million to $11.4 million for the three months ended June 30, 2010 from $11.0 million for the three months ended June 30, 2009. The increase in interest expense is primarily driven by the cancellation of the Company’s interest rate swap contract in the second quarter of 2009.

Income tax provision

Our provision for income taxes in interim periods is computed by applying our estimated annual effective tax rate against income before income tax expense for the period. In addition, non-recurring or discrete items are recorded during the period in which they occur. The effective tax rate was 38.0% for the three months ended June 30, 2010 as compared to 39.0% for the three months ended June 30, 2009. The decrease in the rate is primarily related to the increased rate benefit from certain U.S. tax elections on foreign acquisitions as a result of a decrease in the estimated amount of consolidated earnings.

Six Months Ended June 30, 2010 Compared to Six Months Ended June 30, 2009

Revenues and Operating Income

See “Segment Results” for an expanded discussion of segment operating revenues and operating income.

Special charges

During the quarter ended March 31, 2010, we recorded special charges totaling $30.2 million, primarily related to a realignment of our workforce and a consolidation of four office locations, of which $8.7 million was non-cash. The charges reflect actions we took to better align capacity with expected demand, to eliminate certain redundancies resulting from acquisitions and to provide for appropriate levels of administrative support. The special charges consist of:

 

   

$19.3 million of salary continuance and other contractual employee related costs associated with the reduction in workforce of 144 employees, including reserves against employee advances, costs related to loan forgiveness and accelerated vesting of share-based awards;

 

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$7.8 million of expense associated with lease terminations related to the consolidation of four office locations; and

 

   

$3.1 million of accelerated amortization related to a software solution which will no longer be utilized by the Company.

The total cash outflow associated with the special charges is expected to be $21.5 million, of which $10.8 million has been paid as of June 30, 2010, $5.4 million is expected to be paid during the remainder of 2010, $4.9 million is expected to be paid in 2011, and the balance of $0.4 million is expected to be paid in 2012 and 2013.

The following table details the special charges by segment and the decrease in total headcount that resulted from the reduction in workforce:

 

     Special
Charges
   Total
Headcount
     (dollars in thousands)

Corporate Finance/Restructuring

   $ 6,589    71

Forensic and Litigation Consulting

     5,560    20

Economic Consulting

     6,814    19

Technology

     4,927    16

Strategic Communications

     1,260    1
           
     25,150    127

Unallocated Corporate

     5,095    17
           

Total

   $ 30,245    144
           

Unallocated corporate expenses

Unallocated corporate expenses decreased $1.6 million, or 4.1%, to $38.8 million for the six months ended June 30, 2010, from $40.4 million for the six months ended June 30, 2009. Excluding the impact of special charges of $5.1 million, unallocated corporate expenses for the six months ended June 30, 2010 would have decreased $6.7 million, or 16.7%, to $33.7 million for the six months ended June 30, 2010 from $40.4 million for the six months ended June 30, 2009, primarily due to lower performance based compensation costs.

Interest income and other

Interest income and other, which includes foreign currency transaction gains and losses, decreased by $0.8 million to $2.2 million for the six months ended June 30, 2010 from $3.0 million for the six months ended June 30, 2009. The decrease is primarily due to a $0.3 million decrease in interest income in the current year quarter, a $0.3 million litigation settlement gain in the prior year and lower income from joint ventures accounted for as equity investments due to FTI’s acquisition of the balance of the ownership of its German joint venture in June 2009.

Interest expense

Interest expense increased $0.7 million to $22.7 million for the six months ended June 30, 2010 from $22.0 million for the six months ended June 30, 2009. The increase in interest expense is primarily driven by the cancellation of the Company’s interest rate swap contract in the second quarter of 2009.

Income tax provision

Our provision for income taxes in interim periods is computed by applying our estimated annual effective tax rate against income before income tax expense for the period. In addition, non-recurring or discrete items are

 

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recorded during the period in which they occur. The effective tax rate was 38.0% for the six months ended June 30, 2010 as compared to 39.0% for the six months ended June 30, 2009. The decrease in the rate is primarily related to the increased rate benefit from certain U.S. tax elections on foreign acquisitions as a result of a decrease in the estimated amount of consolidated earnings.

SEGMENT RESULTS

Adjusted Segment EBITDA

The following table reconciles segment operating income to adjusted segment EBITDA for the three and six months ended June 30, 2010 and 2009.

 

     Three Months Ended
June 30,
   Six Months Ended
June 30,
     2010    2009    2010    2009
    

(in thousands)

Segment operating income

   $ 69,104    $ 92,012    $ 122,563    $ 172,394

Depreciation and amortization

     6,312      5,550      12,638      10,993

Amortization of other intangible assets

     5,852      6,149      11,943      12,199

Special charges

     —        —        25,150      —  
                           

Total adjusted segment EBITDA

   $ 81,268    $ 103,711    $ 172,294    $ 195,586
                           

Other Segment Operating Data

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
         2010             2009             2010             2009      

Number of revenue-generating professionals:(1)

        

Corporate Finance/Restructuring

     683        736        683        736   

Forensic and Litigation Consulting

     784        704        784        704   

Economic Consulting

     286        290        286        290   

Technology

     234        262        234        262   

Strategic Communications

     561        580        561        580   
                                

Total revenue-generating professionals

     2,548        2,572        2,548        2,572   
                                

Utilization rates of billable professionals:(2)

        

Corporate Finance/Restructuring

     65     76     67     80

Forensic and Litigation Consulting

     74     76     76     79

Economic Consulting

     77     75     80     76

Average billable rate per hour:(3)

        

Corporate Finance/Restructuring

   $ 438      $ 437      $ 448      $ 425   

Forensic and Litigation Consulting

     337        325        330        324   

Economic Consulting

     472        456        470        455   

 

(1)

Revenue generating professionals are reflected as of the end of the applicable period.

 

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(2)

We calculate the utilization rate for our billable professionals by dividing the number of hours that all of our billable professionals worked on client assignments during a period by the total available working hours for all of our billable professionals during the same period, assuming a 40-hour work week and a 52-week year. 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. Where presented, utilization is based on a 2,032 hour year. We have not presented a utilization rate for our Technology segment and Strategic Communications segment as most of the revenues of these segments are not generated on an hourly basis.

 

(3)

For engagements where revenues are based on number of hours worked by our billable professionals, average billable rate per hour is calculated by dividing revenues for a period by the number of hours worked on client assignments during the same period. We have not presented an average billable rate per hour for our Technology segment and Strategic Communications segment as most of the revenues of these segments are not generated on an hourly basis.

CORPORATE FINANCE/RESTRUCTURING

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2010     2009     2010     2009  
    

(dollars in thousands, except rate per hour)

 

Revenues

   $ 111,095      $ 133,970      $ 228,562      $ 261,512   
                                

Operating expenses:

        

Direct cost of revenues

     69,720        70,931        135,888        140,655   

Selling, general and administrative expenses

     16,325        16,409        33,899        34,270   

Special charges

     —          —          6,589        —     

Amortization of other intangible assets

     1,483        1,588        2,975        3,170   
                                
     87,528        88,928        179,351        178,095   
                                

Segment operating income

     23,567        45,042        49,211        83,417   

Add back: depreciation and amortization of intangible assets

     2,410        2,403        4,896        4,749   

Add back: special charges

     —          —          6,589        —     
                                

Adjusted segment EBITDA

   $ 25,977      $ 47,445      $ 60,696      $ 88,166   
                                

Gross profit(1)

   $ 41,375      $ 63,039      $ 92,674      $ 120,857   

Gross profit margin(2)

     37.2     47.1     40.5     46.2

Adjusted segment EBITDA as a percent of revenues

     23.4     35.4     26.6     33.7

Number of revenue generating professionals (at period end)

     683        736        683        736   

Utilization rates of billable professionals

     65     76     67     80

Average billable rate per hour

   $ 438      $ 437      $ 448      $ 425   

 

(1)

Revenues less direct cost of revenues

 

(2)

Gross profit as a percent of revenues

Three Months Ended June 30, 2010 Compared to Three Months Ended June 30, 2009

Revenues decreased $22.9 million, or 17.1%, to $111.1 million for the three months ended June 30, 2010 from $134.0 million for the three months ended June 30, 2009. Excluding the positive impact of foreign currency translation, primarily due to the strengthening of the Canadian dollar relative to the U.S. dollar, the decrease in revenue would have been approximately 18.0%. The decline in revenue is due to a decrease in consulting hours relative to 2009 as demand for bankruptcy, restructuring and transaction advisory services declined. Lower demand resulted in a decrease in utilization to 65% in the three months ended June 30, 2010 from 76% for the three months ended June 30, 2009.

 

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Gross profit decreased $21.6 million, or 34.4%, to $41.4 million for the three months ended June 30, 2010 from $63.0 million for the three months ended June 30, 2009. Gross profit margin decreased 9.9 percentage points to 37.2% for the three months ended June 30, 2010 from 47.1% for the three months ended June 30, 2009. The lower gross profit margin is primarily due to lower utilization and $1.5 million in severance expense recorded in the second quarter of 2010. The severance expense was related to an additional reduction of approximately 54 employees to address the continued decrease in utilization. The number of revenue generating professionals at June 30, 2010 does not reflect the total impact of second quarter staff reductions because 44 revenue generating professionals given notification in the second quarter will not separate from the company until the third quarter of 2010.

SG&A expense decreased $0.1 million to $16.3 million for the three months ended June 30, 2010 from $16.4 million for the three months ended June 30, 2009. As a percentage of revenues, SG&A expense was 14.7% of revenue for the three months ended June 30, 2010, up from 12.2% in 2009 primarily due to lower revenue in the current quarter. The decrease in SG&A expense in 2010 was primarily due to lower bad debt expense and recruiting costs partially offset by higher marketing/business development expenses and allocations of corporate costs incurred in direct support of segment operations.

Amortization of other intangible assets decreased slightly to $1.5 million for the three months ended June 30, 2010 from $1.6 million for the three months ended June 30, 2009.

Adjusted segment EBITDA decreased $21.4 million, or 45.2%, to $26.0 million for the three months ended June 30, 2010 from $47.4 million for the three months ended June 30, 2009.

Six Months Ended June 30, 2010 Compared to Six Months Ended June 30, 2009

Revenues decreased $32.9 million, or 12.6%, to $228.6 million for the six months ended June 30, 2010 from $261.5 million for the six months ended June 30, 2009. Excluding the positive impact of foreign currency translation, primarily due to the strengthening of the Canadian dollar and the British pound relative to the U.S. dollar, the decrease in revenue would have been approximately 13.9%. The decline in revenue is primarily due to a decrease in consulting hours relative to 2009 as demand for bankruptcy, restructuring and transaction advisory services declined. Lower demand resulted in a decrease in utilization to 67% for the six months ended June 30, 2010 from 80% for the six months ended June 30, 2009.

Gross profit decreased $28.2 million, or 23.3%, to $92.7 million for the six months ended June 30, 2010 from $120.9 million for the six months ended June 30, 2009. Gross profit margin decreased 5.7 percentage points to 40.5% for the six months ended June 30, 2010 from 46.2% for the six months ended June 30, 2009. The lower gross profit margins are primarily due to lower utilization and severance expense as a result of additional staff reductions made in the second quarter of 2010, partially offset by decreased low margin pass through revenue in 2010. Staff reductions in the second quarter of 2010 were made to address the continued decrease in utilization.

SG&A expense decreased $0.4 million to $33.9 million for the six months ended June 30, 2010 from $34.3 million for the six months ended June 30, 2009. As a percentage of revenues, SG&A expense was 14.8% of revenue for the six months ended June 30, 2010, up from 13.1% in 2009 primarily due to lower revenue. The decrease in SG&A expense in 2010 was primarily due to lower bad debt expense and recruiting costs partially offset by higher marketing/business development expenses and allocations of corporate costs incurred in direct support of segment operations. Bad debt expense was 0.1% and 1.3% of revenue for the six months ended June 30, 2010 and 2009, respectively. The improvement in bad debt expense as a percentage of revenue was primarily driven by favorable resolution or collections on previously reserved items.

Amortization of other intangible assets decreased to $3.0 million for the six months ended June 30, 2010 from $3.2 million for the six months ended June 30, 2009.

Adjusted segment EBITDA decreased $27.5 million, or 31.2%, to $60.7 million for the six months ended June 30, 2010 from $88.2 million for the six months ended June 30, 2009.

 

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FORENSIC AND LITIGATION CONSULTING

 

    Three Months Ended
June 30,
    Six Months Ended
June 30,
 
    2010     2009     2010     2009  
   

(dollars in thousands, except rate per hour)

 

Revenues

  $ 80,754      $ 76,346      $ 159,432      $ 154,720   
                               

Operating expenses:

       

Direct cost of revenues

    47,330        41,245        93,153        84,466   

Selling, general and administrative expenses

    14,921        14,916        28,821        28,788   

Special charges

    —          —          5,560        —     

Amortization of other intangible assets

    966        613        1,961        1,297   
                               
    63,217        56,774        129,495        114,551   
                               

Segment operating income

    17,537        19,572        29,937        40,169   

Add back: depreciation and amortization of intangible assets

    1,809        1,284        3,633        2,628   

Add back: special charges

    —          —          5,560        —     
                               

Adjusted segment EBITDA

  $ 19,346      $ 20,856      $ 39,130      $ 42,797   
                               

Gross profit(1)

  $ 33,424      $ 35,101      $ 66,279      $ 70,254   

Gross profit margin(2)

    41.4     46.0     41.6     45.4

Adjusted segment EBITDA as a percent of revenues

    24.0     27.3     24.5     27.7

Number of revenue generating professionals (at period end)

    784        704        784        704   

Utilization rates of billable professionals(3)

    74     76     76     79

Average billable rate per hour(3)

  $ 337      $ 325      $ 330      $ 324   

 

(1)

Revenues less direct cost of revenues

 

(2)

Gross profit as a percent of revenues

 

(3)

The calculation for utilization and average billable rate per hour excludes the impact of foreign offices and certain revenue billed on other than a time and materials basis.

Three Months Ended June 30, 2010 Compared to Three Months Ended June 30, 2009

Revenues increased $4.5 million, or 5.8%, to $80.8 million for the three months ended June 30, 2010 from $76.3 million for the three months ended June 30, 2009. Revenue growth from an acquisition in Hong Kong in April of 2010 was approximately $0.5 million, or 0.7%, and organic revenue growth was approximately $3.9 million, or 5.1%. The increase in organic revenue was attributed to an increase in both consulting hours and average bill rates in our North America consulting practice and growth in our international risk and investigations and data analytics practices.

Gross profit declined by $1.7 million, or 4.8%, to $33.4 million for the three months ended June 30, 2010 from $35.1 million for the three months ended June 30, 2009. Gross profit margin decreased by 4.6 percentage points to 41.4% for the three months ended June 30, 2010 from 46.0% for the three months ended June 30, 2009. The gross profit margin decline was primarily driven by higher personnel and benefit costs relative to revenues due to investments in certain key practices.

SG&A expense for the three months ended June 30, 2010 of $14.9 million was flat compared to prior year. As a percentage of revenues, SG&A expense was 18.5% of revenue for the three months ended June 30, 2010, down from 19.5% in 2009. Lower bad debt expense was offset by higher internal allocations of corporate costs incurred in direct support of segment operations. Bad debt expense was 1.1% of revenues for the three months ended June 30, 2010 versus 2.4% for the three months ended June 30, 2009.

 

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Amortization of other intangible assets increased by $0.4 million to $1.0 million for the three months ended June 30, 2010 from $0.6 million for the three months ended June 30, 2009.

Adjusted segment EBITDA decreased by $1.6 million, or 7.2%, to $19.3 million for the three months ended June 30, 2010 from $20.9 million for the three months ended June 30, 2009.

Six Months Ended June 30, 2010 Compared to Six Months Ended June 30, 2009

Revenues increased $4.7 million, or 3.0%, to $159.4 million for the six months ended June 30, 2010 from $154.7 million for the six months ended June 30, 2009. Revenue growth from an acquisition in Hong Kong was approximately $0.5 million, or 0.3%, and organic revenue growth was approximately $4.2 million, or 2.7%. Excluding the positive impact of foreign currency translation, which was primarily due to the strengthening of the Brazilian real and British pound relative to the U.S. dollar, organic revenue growth was approximately 2.2%. The increase in organic revenue was attributed to an increase in both consulting hours and the average bill rates in our North America consulting practice and growth in our international risk and investigations and data analytics practices.

Gross profit declined by $4.0 million, or 5.7%, to $66.3 million for the six months ended June 30, 2010 from $70.3 million for the six months ended June 30, 2009. Gross profit margin decreased by 3.8 percentage points to 41.6% for the six months ended June 30, 2010 from 45.4% for the six months ended June 30, 2009. The gross profit margin decline was primarily due to lower utilization on a higher cost base in the six months ended June 30, 2010.

SG&A expense for the six months ended June 30, 2010 of $28.8 million was flat compared to prior year. As a percentage of revenues, SG&A expense was 18.1% of revenue for the six months ended June 30, 2010, down from 18.6% in 2009. Lower bad debt expense was offset by higher internal allocations of corporate costs incurred in direct support of segment operations. Bad debt expense was 1.1% of revenues for the six months ended June 30, 2010 versus 2.0% for the six months ended June 30, 2009.

Amortization of other intangible assets increased by $0.7 million to $2.0 million for the six months ended June 30, 2010 from $1.3 million for the six months ended June 30, 2009.

Adjusted segment EBITDA decreased by $3.7 million, or 8.6%, to $39.1 million for the six months ended June 30, 2010 from $42.8 million for the six months ended June 30, 2009.

 

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ECONOMIC CONSULTING

 

    Three Months Ended
June 30,
    Six Months Ended
June 30,
 
    2010     2009     2010     2009  
   

(dollars in thousands, except rate per hour)

 

Revenues

  $ 64,552      $ 57,123      $ 131,859      $ 111,959   
                               

Operating expenses:

       

Direct cost of revenues

    44,398        38,542        89,267        75,304   

Selling, general and administrative expenses

    9,385        8,656        18,933        16,818   

Special charges

    —          —          6,814        —     

Amortization of other intangible assets

    310        552        620        1,097   
                               
    54,093        47,750        115,634        93,219   
                               

Segment operating income

    10,459        9,373        16,225        18,740   

Add back: depreciation and amortization of intangible assets

    994        972        1,934        1,924   

Add back: special charges

    —          —          6,814        —     
                               

Adjusted segment EBITDA

  $ 11,453      $ 10,345      $ 24,973      $ 20,664   
                               

Gross profit(1)

  $ 20,154      $ 18,581      $ 42,592      $ 36,655   

Gross profit margin(2)

    31.2     32.5     32.3     32.7

Adjusted segment EBITDA as a percent of revenues

    17.7     18.1     18.9     18.5

Number of revenue generating professionals (at period end)

    286        290        286        290   

Utilization rates of billable professionals

    77     75     80     76

Average billable rate per hour

  $ 472      $ 456      $ 470      $ 455   

 

(1)

Revenues less direct cost of revenues

 

(2)

Gross profit as a percent of revenues

Three Months Ended June 30, 2010 Compared to Three Months Ended June 30, 2009

Revenues increased by $7.5 million, or 13.0%, to $64.6 million for the three months ended June 30, 2010 from $57.1 million for the three months ended June 30, 2009. Revenue growth for the three months ended June 30, 2010 was due to an increase in both consulting hours and bill rates from financial economics consulting relative to the prior year. In addition, revenue from our European practice increased approximately $2.3 million versus the prior year.

Gross profit increased by $1.6 million, or 8.5%, to $20.2 million for the three months ended June 30, 2010 from $18.6 million for the three months ended June 30, 2009. Gross profit margin decreased to 31.2% for the three months ended June 30, 2010 from 32.5% for the three months ended June 30, 2009. Our new European and Canadian practices continue to create margin compression relative to 2009 as operations have not yet reached the scale at which revenues and staff leverage will offset fixed costs paid to higher salaried senior hires.

SG&A expense increased by $0.7 million, or 8.4%, to $9.4 million for the three months ended June 30, 2010 from $8.7 million for the three months ended June 30, 2009. As a percentage of revenues, SG&A expense was 14.5% for the three months ended June 30, 2010 versus 15.2% for the three months ended June 30, 2009. The increase in SG&A expense in 2010 was primarily due to higher overhead cost to support operations partially offset by lower bad debt expense. Bad debt expense was 1.8% of revenue for the three months ended June 30, 2010 versus 2.2% of revenue for the three months ended June 30, 2009.

Amortization of other intangible assets decreased to $0.3 million for the three months ended June 30, 2010 from $0.6 million for the three months ended June 30, 2009.

 

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Adjusted segment EBITDA increased by $1.2 million, or 10.7%, to $11.5 million for the three months ended June 30, 2010 from $10.3 million for the three months ended June 30, 2009.

Six Months Ended June 30, 2010 Compared to Six Months Ended June 30, 2009

Revenues increased by $19.9 million, or 17.8%, to $131.9 million for the six months ended June 30, 2010 from $112.0 million for the six months ended June 30, 2009. Revenue growth for the six months ended June 30, 2010 was primarily related to an increase in both consulting hours and bill rates from financial economics consulting relative to prior year. In addition, revenue from our European practice increased approximately $5.7 million versus the prior year.

Gross profit increased by $5.9 million, or 16.2%, to $42.6 million for the six months ended June 30, 2010 from $36.7 million for the six months ended June 30, 2009. Gross profit margin decreased to 32.3% for the six months ended June 30, 2010 from 32.7% for the six months ended June 30, 2009. The gross profit margin in 2010 benefitted from a favorable impact from variable share-based compensation expense. However, our European and Canadian practices continue to create margin compression relative to 2009 as operations have not yet reached the scale at which revenues and staff leverage will offset fixed costs paid to higher salaried senior hires.

SG&A expense increased by $2.1 million, or 12.6%, to $18.9 million for the six months ended June 30, 2010 from $16.8 million for the six months ended June 30, 2009. As a percentage of revenues, SG&A expense was 14.4% for the six months ended June 30, 2010 versus 15.0% for the six months ended June 30, 2009. The increase in SG&A expense in 2010 was primarily due to higher professional service and legal fees, an increase in expenses such as rent and other occupancy costs associated with new offices that opened in the second quarter of 2009 and higher internal allocations of corporate costs incurred in direct support of segment operations. Bad debt expense was 1.9% of revenue for the six months ended June 30, 2010 versus 2.3% of revenue for the six months ended June 30, 2009.

Amortization of other intangible assets decreased to $0.6 million for the six months ended June 30, 2010 from $1.1 million for the six months ended June 30, 2009.

Adjusted segment EBITDA increased by $4.3 million, or 20.9%, to $25.0 million for the six months ended June 30, 2010 from $20.7 million for the six months ended June 30, 2009.

 

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TECHNOLOGY

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2010     2009     2010     2009  
    

(dollars in thousands)

 

Revenues

   $ 42,791      $ 48,536      $ 86,164      $ 92,859   
                                

Operating expenses:

        

Direct cost of revenues

     17,094        15,545        30,975        31,215   

Selling, general and administrative expenses

     12,873        16,651        28,154        35,066   

Special charges

     —          —          4,927        —     

Amortization of other intangible assets

     1,833        2,057        3,815        4,128   
                                
     31,800        34,253        67,871        70,409   
                                

Segment operating income

     10,991        14,283        18,293        22,450   

Add back: depreciation and amortization of intangible assets

     4,866        4,903        9,898        9,834   

Add back: special charges

     —          —          4,927        —     
                                

Adjusted segment EBITDA

   $ 15,857      $ 19,186      $ 33,118      $ 32,284   
                                

Gross profit(1)

   $ 25,697      $ 32,991      $ 55,189      $ 61,644   

Gross profit margin(2)

     60.1     68.0     64.1     66.4

Adjusted segment EBITDA as a percent of revenues

     37.1     39.5     38.4     34.8

Number of revenue generating professionals (at period end)(3)

     234        262        234        262   

 

(1)

Revenues less direct cost of revenues

 

(2)

Gross profit as a percent of revenues

 

(3)

Includes both customer contact and support staff considered to be a direct cost of revenue

Three Months Ended June 30, 2010 Compared to Three Months Ended June 30, 2009

Revenues decreased by $5.7 million, or 11.8%, to $42.8 million for the three months ended June 30, 2010 from $48.5 million for the three months ended June 30, 2009. The decrease in revenue is due to lower unit based revenues and a decline in revenue from our channel partners, partially offset by an increase in revenue from our Acuity product offering, higher consulting revenue and an increase in pass through revenue. Unit based revenues have declined despite higher volumes due to competitive pricing pressures which have lowered per unit pricing. Consulting revenue has increased due to favorable bill rates relative to 2009 primarily due to the addition of a large complex litigation engagement in 2010.

Unit based revenue is defined as revenue billed on a per item, per page, or using some other unit based method and includes revenue from data processing and storage, 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.

Gross profit decreased by $7.3 million, or 22.1%, to $25.7 million for the three months ended June 30, 2010 from $33.0 million for the three months ended June 30, 2009. Gross profit margin decreased to 60.1% for the three months ended June 30, 2010 from 68.0% for the three months ended June 30, 2009. The decline in gross profit margin is due to a change in the mix of revenue relative to 2009 with high margin unit based and channel partner revenue comprising a lower percentage of the revenue in 2010. Lower unit based pricing due to competitive pressures more than offset the impact of higher consulting pricing. Margin compression is also due to an increase in pass through revenue in 2010 relative to the prior year.

 

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SG&A expense decreased by $3.8 million, or 22.7%, to $12.9 million for the three months ended June 30, 2010 from $16.7 million for the three months ended June 30, 2009. As a percentage of revenues, SG&A expense was 30.1% for the three months ended June 30, 2010, versus 34.3% for the three months ended June 30, 2009. The decrease in SG&A expense is primarily due to lower staff and staff related expenses and a decrease in bad debt expense. Research and development expense in the second quarter of 2010 was $5.3 million, flat compared to the second quarter of 2009. We had net recoveries of bad debt of $1.2 million for the three months ended June 30, 2010 compared to bad debt expense of $0.5 million or 1.1% of revenues for the three months ended June 30, 2009. The improvement in bad debt expense as a percentage of revenue was primarily driven by favorable resolution or collections on previously reserved items.

Amortization of other intangible assets was slightly lower than the prior year at $1.8 million for the three months ended June 30, 2010 versus $2.1 million for the three months ended June 30, 2009.

Adjusted segment EBITDA decreased $3.3 million, or 17.4%, to $15.9 million for the three months ended June 30, 2010 from $19.2 million for the three months ended June 30, 2009.

Six Months Ended June 30, 2010 Compared to Six Months Ended June 30, 2009

Revenues decreased by $6.7 million, or 7.2%, to $86.2 million for the six months ended June 30, 2010 from $92.9 million for the six months ended June 30, 2009. Increased revenues from our AcuityTM product offering, combined with increased pass through revenues, were more than offset by decreased channel partner revenue, lower unit based revenue and a decline in consulting revenue versus the prior year. Channel partner revenues have declined due to a lower volume of business. Unit based revenues have decreased due to lower pricing which more than offset the positive impact of higher volumes driven by a large bankruptcy matter. Consulting revenues have decreased as lower hours offset higher bill rates.

Gross profit decreased by $6.4 million, or 10.5%, to $55.2 million for the six months ended June 30, 2010 from $61.6 million for the six months ended June 30, 2009. Gross profit margin decreased to 64.1% for the six months ended June 30, 2010 from 66.4% for the six months ended June 30, 2009. The decline in gross profit margin is due to a change in the mix of revenue relative to 2009, with a lower proportion of revenue from high-margin unit based and channel partner revenue. Margin compression is also due to an increase in pass through revenue in 2010 relative to the prior year.

SG&A expense decreased by $6.9 million, or 19.7%, to $28.2 million for the six months ended June 30, 2010 from $35.1 million for the six months ended June 30, 2009. As a percentage of revenues, SG&A expense was 32.7% for the six months ended June 30, 2010, versus 37.8% for the six months ended June 30, 2009. The decrease in SG&A expense is primarily due to lower staff and staff related expenses, increased capitalization for certain R&D software development costs and a decrease in bad debt expense. Research and development expense for the six months ended June 30, 2010 was $10.7 million, unchanged from the prior year. We had net recoveries of bad debt of $0.9 million for the six months ended June 30, 2010 compared to bad debt expense of $1.7 million or 1.8% of revenues for the six months ended June 30, 2009. The improvement in bad debt expense as a percentage of revenue was primarily driven by favorable resolution or collections on previously reserved items.

Amortization of other intangible assets was slightly lower than the prior year at $3.8 million for the six months ended June 30, 2010 versus $4.1 million for the six months ended June 30, 2009.

Adjusted segment EBITDA increased $0.8 million, or 2.6%, to $33.1 million for the six months ended June 30, 2010 from $32.3 million for the six months ended June 30, 2009.

 

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STRATEGIC COMMUNICATIONS

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2010     2009     2010     2009  
    

(dollars in thousands)

 

Revenues

   $ 49,841      $ 44,550      $ 93,056      $ 87,321   
                                

Operating expenses:

        

Direct cost of revenues

     30,489        27,918        57,208        54,953   

Selling, general and administrative expenses

     11,542        11,551        23,119        22,243   

Special charges

     —          —          1,260        —     

Amortization of other intangible assets

     1,260        1,339        2,572        2,507   
                                
     43,291        40,808        84,159        79,703   
                                

Segment operating income

     6,550        3,742        8,897        7,618   

Add back: depreciation and amortization of intangible assets

     2,085        2,137        4,220        4,057   

Add back: special charges

     —          —          1,260        —     
                                

Adjusted segment EBITDA

   $ 8,635      $ 5,879      $ 14,377      $ 11,675   
                                

Gross profit(1)

   $ 19,352      $ 16,632      $ 35,848      $ 32,368   

Gross profit margin(2)

     38.8     37.3     38.5     37.1

Adjusted segment EBITDA as a percent of revenues

     17.3     13.2     15.4     13.4

Number of revenue generating professionals (at period end)

     561        580        561        580   

 

(1)

Revenues less direct cost of revenues

 

(2)

Gross profit as a percent of revenues

Three Months Ended June 30, 2010 Compared to Three Months Ended June 30, 2009

Revenues increased by $5.2 million, or 11.9%, to $49.8 million for the three months ended June 30, 2010 from $44.6 million for the three months ended June 30, 2009. Revenue growth from acquiring the balance of ownership of the German joint venture in June 2009 was approximately $1.2 million, or 2.8%, and organic revenue growth was approximately $4.1 million, or 9.1%. Excluding the positive impact of foreign currency translation, which was primarily due to the strengthening of the Australian dollar relative to the U.S. dollar, organic revenue growth was approximately 8.7%. The increase in organic revenues is primarily due to higher project based revenues including two large crisis communications engagements.

Gross profit increased by $2.8 million, or 16.4%, to $19.4 million for the three months ended June 30, 2010 from $16.6 million for the three months ended June 30, 2009. Gross profit margin increased to 38.8% for the three months ended June 30, 2010 from 37.3% for the three months ended June 30, 2009. The primary driver of the increase in gross profit margin is higher revenue on a stable cost base as compared to 2009.

SG&A expense for the three months ended June 30, 2010 remained level with the prior year at $11.5 million. As a percentage of revenues, SG&A expense was 23.2% for the three months ended June 30, 2010, a decrease from 25.9% for the three months ended June 30, 2009. A decline in bad debt expense was offset by the operating SG&A costs associated with the German joint venture acquisition. Bad debt expense was 1.2% of revenues for the three months ended June 30, 2010 versus 2.0% of revenues for the three months ended June 30, 2009.

Amortization of other intangible assets for the three months ended June 30, 2010 of $1.3 million remains flat compared to prior year amortization.

Adjusted segment EBITDA increased by $2.7 million, or 46.9%, to $8.6 million for the three months ended June 30, 2010 from $5.9 million for the three months ended June 30, 2009.

 

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Six Months Ended June 30, 2010 Compared to Six Months Ended June 30, 2009

Revenues increased by $5.8 million, or 6.6%, to $93.1 million for the six months ended June 30, 2010 from $87.3 million for the six months ended June 30, 2009. Revenue growth from acquiring the balance of ownership of the German joint venture in June 2009 was approximately $2.0 million, or 2.3%, and organic revenue growth was approximately $3.7 million, or 4.3%. Excluding the positive impact of foreign currency translation, which was primarily due to the strengthening of the Australian dollar and British pound relative to the U.S. dollar, organic revenue growth was approximately 0.5%.

Gross profit increased by $3.4 million, or 10.8%, to $35.8 million for the six months ended June 30, 2010 from $32.4 million for the six months ended June 30, 2009. Gross profit margin increased to 38.5% for the six months ended June 30, 2010 from 37.1% for the six months ended June 30, 2009. The primary driver of the increase in gross profit margin is higher revenue on a stable cost base and lower pass through revenue in 2010.

SG&A expense increased by $0.9 million, or 3.9%, to $23.1 million for the six months ended June 30, 2010 from $22.2 million for the six months ended June 30, 2009. As a percentage of revenues, SG&A expense was 24.8% for the six months ended June 30, 2010, a decrease from 25.5% for the six months ended June 30, 2009. The primary drivers of the increase in SG&A expense was the negative impact of foreign currency translation and the operating costs associated with the German joint venture acquisition, partially offset by lower bad debt expense. Bad debt expense was 1.2% of revenues for the six months ended June 30, 2010 versus 1.6% of revenues for the six months ended June 30, 2009.

Amortization of other intangible assets for the six months ended June 30, 2010 of $2.6 million was up $0.1 million compared to prior year amortization.

Adjusted segment EBITDA decreased by $2.7 million, or 23.1%, to $14.4 million for the six months ended June 30, 2010 from $11.7 million for the six months ended June 30, 2009.

CRITICAL ACCOUNTING POLICIES

There have been no material changes to our critical accounting policies and estimates from the information provided in Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2009.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

 

     Six Months Ended
June 30,
 
         2010             2009      
     (dollars in thousands)  

Net cash provided by operating activities

   $ 21,955      $ 43,680   

Net cash used in investing activities

     (19,941     (45,960

Net cash provided by financing activities

     4,837        17,596   

We have generally financed our day-to-day operations and capital expenditures through cash flows from operations. During the first quarter of our fiscal year, our working capital needs generally exceed our cash flows from operations due to the payments of annual incentive compensation and acquisition related contingent payment amounts. Our operating cash flows generally improve subsequent to the first quarter of each year.

Our operating assets and liabilities consist primarily of billed and unbilled accounts receivable, notes receivable (largely employee forgivable loans), 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.

 

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Cash provided by operating activities decreased by $21.7 million, or 49.7%, to $22.0 million for the six months ended June 30, 2010 from $43.7 million for the six months ended June 30, 2009. This decrease was primarily attributable to $10.8 million in cash outflows related to the realignment of our workforce and the consolidation of four office locations as discussed under “special charges” and an increase in cash payments for employee related incentive, forgivable loan and retention payments in 2010.

Net cash used in investing activities for the six months ended June 30, 2010 was $19.9 million as compared to $46.0 million for the six months ended June 30, 2009. The favorable change in cash used in investing activities was primarily due to $15.0 million in proceeds from the maturity of a short-term investment in the first quarter of 2010 and lower contingent acquisition payments made during the six months ended June 30, 2010. Contingent acquisition payments were $17.6 million in the six months ended June 30, 2010 versus $31.6 million in the six months ended June 30, 2009.

Capital expenditures were $11.6 million for the six months ended June 30, 2010 as compared to $11.7 million for the six months ended June 30, 2009. Capital expenditures in both 2010 and 2009 primarily related to leasehold improvements and the purchase of data processing equipment.

Cash provided by financing activities for the six months ended June 30, 2010 was $4.8 million as compared to $17.6 million for the six months ended June 30, 2009. Our financing activities for the six months ended June 30, 2010 included $4.2 million received from the issuance of common stock under equity compensation plans. Our financing activities for the six months ended June 30, 2009 included $13.1 million received from the issuance of common stock under equity compensation plans.

Capital Resources

As of June 30, 2010, our capital resources included $123.3 million of cash and cash equivalents and available borrowing capacity of $171.2 million under a $175 million revolving line of credit under our senior secured bank credit facility (“bank credit facility”). As of June 30, 2010, we had no outstanding indebtedness under our revolving line of credit, however, $3.8 million of outstanding letters of credit reduced the availability of borrowings under that line of credit. We use letters of credit primarily in lieu of security deposits for our 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;

 

   

funds required to compensate designated senior managing directors under our senior managing director incentive compensation program;

 

   

discretionary funding of our stock repurchase program;

 

   

potential earn-out obligations and stock floor guarantees related to our acquisitions; and

 

   

potential acquisitions of businesses that would allow us to diversify or expand our business.

We currently anticipate capital expenditures will range between $25 million to $30 million to support our organization during 2010, including direct support for specific client engagements. Our estimate takes into consideration the needs of our existing businesses but does not include the impact of any purchases that we make

 

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as a result of future acquisitions or specific client engagements that are not currently contemplated. Our capital expenditure requirements may change if our staffing levels or technology needs change significantly from what we currently anticipate, if we purchase additional equipment specifically to support a client engagement or if we pursue and complete additional acquisitions.

In certain business combinations consummated prior to January 1, 2009, a portion of our purchase price is in the form of contingent consideration, often referred to as earn-outs. The use of contingent consideration allows us to shift some of the valuation risk, inherent at the time of acquisition, to the seller based upon the outcome of future financial targets that the seller contemplates in its valuation. Contingent consideration is payable annually as agreed upon performance targets are met and is generally subject to a maximum amount within a specified time period. Our obligations change from period-to-period primarily as a result of payments made during the current period, changes in the acquired entities’ performance and changes in foreign currency exchange rates. In addition, certain acquisition related restricted stock agreements contain stock price guarantees that may result in cash payments in the future if our share price falls below a specified per share market value on the date the stock restrictions lapse.

In connection with our required adoption of the new accounting principles for business combinations, contingent purchase price obligations included in business combinations consummated subsequent to December 31, 2008 are recorded as liabilities on our consolidated balance sheet and re-measured to fair value at each subsequent reporting date with an offset to current period earnings. Contingent purchase price obligations accounted for under the new accounting principles for business combinations are $0.5 million at June 30, 2010.

Holders of our 3 3 /4% senior subordinated convertible notes (“Convertible Notes”) may convert them only under certain circumstances, including certain stock price related conversion contingencies. Upon conversion, the principal portion of the Convertible Notes will be paid in cash and any excess of the “conversion value” over the principal portion of the Convertible Notes will be paid either in cash, shares of our common stock or a combination of cash and shares of our common stock at our option. The “conversion value” of each note is the average closing price of our shares over the “conversion reference period,” as defined in the indenture, multiplied by the initial conversion rate of 31.998 shares of our common stock for each $1,000 principal amount of the notes, subject to adjustment upon specified events.

The Convertible Notes are currently convertible at the option of the holders through October 15, 2010 as provided in the indenture covering the notes. The notes are convertible as a result of the closing price per share of our common stock exceeding the conversion threshold price of $37.50 per share (120% of the applicable conversion price of $31.25 per share) for at least 20 trading days in the 30 consecutive trading day period ended July 15, 2010.

Upon surrendering any Convertible Note for conversion, in accordance with the indenture, the holder of such note shall receive cash in the amount of the lesser of (i) the $1,000 principal amount of such note or (ii) the “conversion value” of the note as defined in the indenture. The conversion feature results in a premium over the face amount of the notes equal to the difference between our stock price as determined by the calculation set forth in the indenture and the conversion price of $31.25 times the conversion ratio of 31.998 shares of our common stock for each $1,000 principal amount of the notes. We retain our option to satisfy any conversion value in excess of each $1,000 principal amount of the Convertible Notes with shares of common stock, cash or a combination of both cash and shares. The premium will be calculated using the stock price calculation defined in the indenture. Assuming conversion of the full $149.9 million principal amount of the Convertible Notes, for every $1.00 the market price of our common stock exceeds $31.25 per share, we will be required, at our option, either to pay an additional $4.8 million or to issue shares of our common stock with a then market price equivalent to $4.8 million to settle the conversion feature.

The Convertible Notes are registered securities. As of June 21, 2010, the date of the last trade prior to June 30, 2010, the Convertible Notes had a market price of $1,430 per $1,000 principal amount of Convertible

 

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Notes, compared to an estimated conversion value of approximately $1,423 per $1,000 principal amount of Convertible Notes. Because the Convertible Notes have historically traded at market prices above the estimated conversion values, we do not anticipate holders will elect to convert their Convertible Notes in the near future unless the value ratio should change. However, we believe we have adequate capital resources to fund potential conversions.

Off Balance Sheet Arrangements

We have no off-balance sheet arrangements other than operating leases and we have not entered into any transactions involving special purpose entities.

Future Contractual Obligations

There have been no significant changes in our future contractual obligations since December 31, 2009.

Future Outlook

We believe that our anticipated operating cash flows and our total liquidity, consisting of our cash on hand and $171.2 million of availability under our revolving bank line of credit are sufficient to fund our capital and liquidity needs for at least the next twelve months. In making this assessment, we have considered:

 

   

our $123.3 million of cash and cash equivalents at June 30, 2010;

 

   

funds required for debt service payments, including interest payments on our long-term debt;

 

   

funds required for capital expenditures during 2010 of about $25 million to $30 million;

 

   

funds required to satisfy potential contingent payments and other obligations in relation to our acquisitions;

 

   

funds required to compensate designated senior managing directors and other key professionals by issuing unsecured forgivable employee loans;

 

   

the discretionary funding of our share repurchase program;

 

   

the funds required to satisfy conversion of the Convertible Notes; and

 

   

other known future contractual obligations.

For the last several years, our cash flows from operations have exceeded our cash needs for capital expenditures and debt service requirements. We believe that our cash flows from operations, supplemented by short-term borrowings under our revolving bank line of credit, as necessary, will provide adequate cash to fund our long-term cash needs from normal operations.

Our conclusion that we will be able to fund our cash requirements by using existing capital resources and cash generated from operations does not take into account the impact of any future acquisition transactions or any unexpected changes in significant numbers of employees. The anticipated cash needs of our business 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 reasonably anticipated, or if other unexpected circumstances arise that have a material effect on the cash flow or profitability of our business. Any of these events or circumstances, including any new business opportunities, could involve significant additional funding needs in excess of the identified currently available sources and could require us to raise additional debt or equity funding to meet those needs. Our ability to raise additional capital, if necessary, is subject to a variety of factors that we cannot predict with certainty, including:

 

   

our future profitability;

 

   

the quality of our accounts receivable;

 

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our relative levels of debt and equity;

 

   

the volatility and overall condition of the capital markets; and

 

   

the market prices of our securities.

Any new debt funding, if available, may be on terms less favorable to us than our bank credit facility or the indentures that govern our senior notes. See “Forward Looking Statements.”

Forward-Looking Statements

This Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, or the Exchange Act. 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 and may appear under the headings “Part 1—Item 2. Managements’ Discussion and Analysis of Financial Condition and Results of Operations,” “Item 1A. Risk Factors” in our Form 10-K for the year ended December 31, 2009 filed with the SEC on February 26, 2010, and the other documents we file with the SEC. When used in this quarterly report, words such as estimates, expects, anticipates, projects, plans, intends, believes, or forecasts and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements, including, without limitation, management’s examination of historical operating trends, are based upon our historical performance and our current plans, estimates and expectations at the time we make them and various assumptions. Our expectations, beliefs and projections are expressed in good faith and we believe there is a reasonable basis for them. 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 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 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 make acquisitions and integrate the operations of acquisitions as well as the costs of integration;

 

   

our ability to adapt to and manage the risks associated with operating in non-U.S. markets;

 

   

our ability to replace senior managers and practice leaders who have highly specialized skills and experience;

 

   

our ability to identify suitable acquisition candidates, negotiate advantageous terms and take advantage of opportunistic acquisition situations;

 

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periodic fluctuations in revenues, operating income and cash flows;

 

   

damage to our reputation as a result of claims involving the quality of our services;

 

   

legislation or judicial rulings regarding data privacy and the discovery process;

 

   

fee discounting or renegotiation, lower pricing, less advantageous contract terms and unexpected terminations of client engagements;

 

   

competition;

 

   

general economic factors, industry trends, restructuring and bankruptcy rates, 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;

 

   

our outstanding indebtedness; and

 

   

proposed changes in accounting principles.

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 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.

 

Item 3. Quantitative And Qualitative Disclosures About Market Risk

For information regarding our exposure to certain market risks see “Item 7A Quantitative and Qualitative Disclosures about Market Risk,” in our Annual Report on Form 10-K for the year ended December 31, 2009. There have been no significant changes in our market risk exposure since December 31, 2009, except as noted below.

Equity Price Sensitivity

Certain acquisition related restricted stock agreements contain stock price guarantees that may result in cash payments in the future if our share price falls below a specified per share market value on the date the stock restrictions lapse (“the determination date”). The future settlement of any contingency related to our common stock price would require a cash outflow. The following table details by year the cash outflows that would result from the price protection payments if, on the applicable determination dates, our common stock price was at, 20% above, 20% below or 30% below our closing common stock price on June 30, 2010 of $43.59 per share.

 

     Remainder of
2010
   2011    2012    2013    Total
     (in thousands)

Cash outflow, assuming:

  

Closing share price of $43.59 at June 30, 2010

   $ 260    $ 5,284    $ 2,996    $ 3,429    $ 11,969

20% increase in share price

     86      3,496      1,936      1,967      7,485

20% decrease in share price

     433      7,072      4,057      4,891      16,453

30% decrease in share price

     519      7,966      4,587      5,622      18,694

 

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Item 4. Controls and Procedures

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 June 30, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II—OTHER INFORMATION

 

Item 1. Legal Proceedings

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.

 

Item 1A. Risk Factors

There has been no material change in any risk factor previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2009, filed with the SEC on February 26, 2010. 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.

 

Item 2. 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 second quarter ended June 30, 2010 (in thousands, except per share amounts).

 

     Total
Number
of  Shares
Purchased(1)
   Average
Price
Paid Per
share
   Total Number of
Shares Purchased as
Part of Publically
Announced
Program
   Approximate
Dollar Value
That May Yet
Be Purchased
Under
the Program(2)

April 1 through April 30, 2010

   12    $ 41.39    —      $ 250,000

May 1 through May 31, 2010

   4    $ 41.56    —      $ 250,000

June 1 through June 30, 2010

   1    $ 43.81    —      $ 250,000
               

Total

   17       —     
               

 

(1)

Represents 16,931 shares of common stock withheld to cover payroll tax withholdings related to the lapse of restrictions on restricted stock.

 

(2)

On November 4, 2009, our Board of Directors authorized a two-year stock repurchase program of up to $500.0 million and terminated the $50.0 million stock repurchase program authorized in February 2009. As of June 30, 2010, a balance of $250.0 million remains available under the program to fund stock repurchases by the Company. In July 2010, we repurchased and retired 336 thousand shares of common stock using $11.1 million in cash on hand.

 

Item 3. Defaults Upon Senior Securities

None.

 

Item 4. (Removed and Reserved)

 

Item 5. Other Information

None.

 

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Item 6. Exhibits

(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

   By-laws of FTI Consulting, Inc., as amended and restated through September 17, 2004. (Filed with the SEC on November 9, 2004 as an exhibit to FTI Consulting, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 and incorporated herein by reference.)

  3.3

   Amendment No. 6 to By-Laws of FTI Consulting, Inc. dated December 18, 2008. (Filed with the SEC on December 22, 2008 as an exhibit to FTI Consulting, Inc.’s Current Report on Form 8-K dated December 18, 2008 and incorporated herein by reference.)

  3.4

   Amendment No. 7 to the By-Laws of FTI Consulting, Inc. dated February 25, 2009. (Filed with the SEC on March 3, 2009 as an exhibit to FTI Consulting, Inc.’s Current Report on Form 8-K dated February 25, 2009 and incorporated herein by reference.)

10.1*

   The FTI Consulting, Inc. 2009 Omnibus Incentive Compensation Plan (Amended and Restated as of June 2, 2010). (Filed as Appendix A to FTI Consulting, Inc.’s Definitive Proxy Statement on Schedule 14A filed with the SEC on April 23, 2010 and incorporated herein by reference.)

10.2*

   Amendment No. 4 dated as of June 2, 2010 to Employment Agreement dated as of November 5, 2002, as amended, by and between FTI Consulting, Inc. and Jack B. Dunn, IV. (Filed with the SEC on June 8, 2010 as an exhibit to FTI Consulting, Inc.’s Current Report on Form 8-K dated June 2, 2010 and incorporated herein by reference.)

10.3*

   Amendment No. 4 dated as of June 2, 2010 to Employment Agreement dated as of September 20, 2004, as amended, by and between FTI Consulting, Inc. and Dennis J. Shaughnessy. (Filed with the SEC on June 8, 2010 as an exhibit to FTI Consulting, Inc.’s Current Report on Form 8-K dated June 2, 2010 and incorporated herein by reference.)

10.4*

   Amendment No. 2 dated as of June 2, 2010 to Employment Agreement dated as of November 1, 2005, as amended, by and between FTI Consulting, Inc. and Dominic DiNapoli. (Filed with the SEC on June 8, 2010 as an exhibit to FTI Consulting, Inc.’s Current Report on Form 8-K dated June 2, 2010 and incorporated herein by reference.)

10.5*

   Amendment dated June 2, 2010 to Offer Letter dated May 17, 2005 to David G. Bannister. (Filed with the SEC on June 8, 2010 as an exhibit to FTI Consulting, Inc.’s Current Report on Form 8-K dated June 2, 2010 and incorporated herein by reference.)

10.6*

   Amendment dated June 2, 2010 to Employment Letter dated December 31, 2008 to Roger D. Carlile. (Filed with the SEC on June 8, 2010 as an exhibit to FTI Consulting, Inc.’s Current Report on Form 8-K dated June 2, 2010 and incorporated herein by reference.)

10.7†*

   Second Amended Offer Letter dated June 2, 2010 to Eric B. Miller.

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 Executive Officer pursuant to 18 U.S.C. Section 1350 (Section 906 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).

 

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Exhibit
Number

  

Exhibit Description

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. for the quarter ended June 30, 2010, furnished electronically herewith, and formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets; (ii) Condensed Consolidated Statements of Income; (iii) Condensed Consolidated Statement of Stockholders’ Equity and Comprehensive Income; (iv) Condensed Consolidated Statements of Cash Flows; and (v) Notes to the Condensed Consolidated Financial Statements, tagged as blocks of text.

 

* Management or Director contract or compensatory plan or arrangement.
Filed herewith.
** In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: August 5, 2010

 

FTI CONSULTING, INC.
By   /s/    CATHERINE M. FREEMAN        
  Catherine M. Freeman
   

Senior Vice President, Controller and

Chief Accounting Officer

    (principal accounting officer)

 

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