FTI CONSULTING, INC - Quarter Report: 2014 June (Form 10-Q)

Form 10-Q

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, 2014

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

For the transition period from to

Commission file number 001-14875

FTI CONSULTING, INC.

(Exact Name of Registrant as Specified in its Charter)


Maryland		52-1261113
(State or Other Jurisdiction of Incorporation or Organization)		(I.R.S. Employer Identification No.)

1101 K Street NW, Washington, D.C.		20005
(Address of Principal Executive Offices)		(Zip Code)

(202) 312-9100

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes 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, 2014
Common stock, par value $0.01 per share		40,946,943

FTI CONSULTING, INC. AND SUBSIDIARIES

INDEX


		Page
PART I—FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets—June 30, 2014 and December 31, 2013		3

	Condensed Consolidated Statements of Comprehensive Income—Three and Six Months Ended June 30, 2014 and 2013		4

	Condensed Consolidated Statement of Stockholders’ Equity—Six Months Ended June 30, 2014		5

	Condensed Consolidated Statements of Cash Flows—Six Months Ended June 30, 2014 and 2013		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		45

Item 4.	Controls and Procedures		45

PART II—OTHER INFORMATION

Item 1.	Legal Proceedings		47

Item 1A.	Risk Factors		47

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		47

Item 3.	Defaults Upon Senior Securities		47

Item 4.	Mine Safety Disclosures		47

Item 5.	Other Information		48

Item 6.	Exhibits		48

SIGNATURE			49

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, 2014			December 31, 2013
	(Unaudited)
Assets
Current assets
Cash and cash equivalents	$	94,412		$	205,833
Accounts receivable:
Billed receivables		423,058			352,411
Unbilled receivables		296,299			233,307
Allowance for doubtful accounts and unbilled services		(139,620	)		(109,273	)

Accounts receivable, net		579,737			476,445
Current portion of notes receivable		29,911			33,093
Prepaid expenses and other current assets		52,162			61,800
Current portion of deferred tax assets		29,046			26,690

Total current assets		785,268			803,861
Property and equipment, net of accumulated depreciation		83,495			79,007
Goodwill		1,225,403			1,218,733
Other intangible assets, net of amortization		86,270			97,148
Notes receivable, net of current portion		131,707			108,298
Other assets		61,097			57,900

Total assets	$	2,373,240		$	2,364,947

Liabilities and Stockholders’ Equity
Current liabilities
Accounts payable, accrued expenses and other	$	96,005		$	126,886
Accrued compensation		169,923			222,738
Current portion of long-term debt		6,000			6,014
Billings in excess of services provided		36,946			28,692

Total current liabilities		308,874			384,330
Long-term debt, net of current portion		711,000			711,000
Deferred income taxes		149,130			137,697
Other liabilities		96,316			89,661

Total liabilities		1,265,320			1,322,688

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—40,936 (2014) and 40,526 (2013)		409			405
Additional paid-in capital		380,193			362,322
Retained earnings		765,985			730,621
Accumulated other comprehensive loss		(38,667	)		(51,089	)

Total stockholders’ equity		1,107,920			1,042,259

Total liabilities and stockholders’ equity	$	2,373,240		$	2,364,947

See accompanying notes to the condensed consolidated financial statements

FTI Consulting, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(in thousands, except per share data)

Unaudited


	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Revenues	$	454,324		$	414,613		$	879,876		$	821,791

Operating expenses
Direct cost of revenues		295,549			259,528			569,824			518,008
Selling, general and administrative expense		107,032			96,325			215,419			192,972
Special charges		9,364			—			9,364			427
Acquisition-related contingent consideration		(5	)		(7,452	)		(1,848	)		(6,721	)
Amortization of other intangible assets		3,452			5,953			8,068			11,517

		415,392			354,354			800,827			716,203

Operating income		38,932			60,259			79,049			105,588

Other income (expense)
Interest income and other		1,448			(387	)		2,451			550
Interest expense		(12,908	)		(13,071	)		(25,563	)		(25,786	)

		(11,460	)		(13,458	)		(23,112	)		(25,236	)

Income before income tax provision		27,472			46,801			55,937			80,352
Income tax provision		10,225			23,315			20,573			33,186

Net income	$	17,247		$	23,486		$	35,364		$	47,166

Earnings per common share—basic	$	0.43		$	0.60		$	0.89		$	1.20

Earnings per common share—diluted	$	0.42		$	0.58		$	0.87		$	1.17

Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments, net of tax $0	$	7,694		$	(11,714	)	$	12,422		$	(27,223	)

Total other comprehensive income (loss), net of tax		7,694			(11,714	)		12,422			(27,223	)

Comprehensive income	$	24,941		$	11,772		$	47,786		$	19,943

See accompanying notes to the condensed consolidated financial statements

FTI Consulting, Inc. and Subsidiaries

Condensed Consolidated Statement of Stockholders’ Equity

(in thousands)

Unaudited


	Common Stock				Additional Paid-in Capital			Retained Earnings		Accumulated Other Comprehensive (Loss)			Total
	Shares		Amount		Additional Paid-in Capital			Retained Earnings		Accumulated Other Comprehensive (Loss)			Total
Balance December 31, 2013		40,526	$	405	$	362,322		$	730,621	$	(51,089	)	$	1,042,259
Net income		—		—		—			35,364		—			35,364
Other comprehensive income:
Cumulative translation adjustment		—		—		—			—		12,422			12,422
Issuance of common stock in connection with:
Exercise of options		148		2		3,145			—		—			3,147
Restricted share grants		262		2		(5,093	)		—		—			(5,091	)
Stock units issued under incentive compensation plan		—		—		1,674			—		—			1,674
Non-employee vesting of stock options		—		—		2,951			—		—			2,951
Share-based compensation		—		—		15,194			—		—			15,194

Balance June 30, 2014		40,936	$	409	$	380,193		$	765,985	$	(38,667	)	$	1,107,920

See accompanying notes to the condensed consolidated financial statements

FTI Consulting, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands)

Unaudited


	Six Months Ended June 30,
	2014			2013
Operating activities
Net income	$	35,364		$	47,166
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization		18,138			16,022
Amortization of other intangible assets		8,068			11,517
Acquisition-related contingent consideration		(1,848	)		(6,721	)
Provision for doubtful accounts		8,671			7,478
Non-cash share-based compensation		15,194			17,046
Non-cash interest expense		1,348			1,349
Other		(368	)		(197	)
Changes in operating assets and liabilities, net of effects from acquisitions:
Accounts receivable, billed and unbilled		(115,787	)		(58,827	)
Notes receivable		(22,559	)		(11,113	)
Prepaid expenses and other assets		8,860			(1,485	)
Accounts payable, accrued expenses and other		2,645			(1,354	)
Income taxes		4,832			14,740
Accrued compensation		(47,418	)		(10,467	)
Billings in excess of services provided		7,756			(5,785	)

Net cash (used in) provided by operating activities		(77,104	)		19,369

Investing activities
Payments for acquisition of businesses, net of cash received		(15,611	)		(40,512	)
Purchases of property and equipment		(21,778	)		(14,130	)
Other		(6	)		21

Net cash used in investing activities		(37,395	)		(54,621	)

Financing activities
Purchase and retirement of common stock		(4,367	)		(28,758	)
Net issuance of common stock under equity compensation plans		(2,692	)		1,245
Deposits		11,580			—
Other		(891	)		(616	)

Net cash provided by (used in) financing activities		3,630			(28,129	)

Effect of exchange rate changes on cash and cash equivalents		(552	)		(850	)

Net decrease in cash and cash equivalents		(111,421	)		(64,231	)
Cash and cash equivalents, beginning of period		205,833			156,785

Cash and cash equivalents, end of period	$	94,412		$	92,554

Supplemental cash flow disclosures
Cash paid for interest	$	23,541		$	22,903
Cash paid for income taxes, net of refunds		15,743			18,446
Non-cash investing and financing activities:
Issuance of stock units under incentive compensation plans		1,674			3,005
Issuance of common stock to acquire businesses		—			2,883

See accompanying notes to the condensed consolidated financial statements

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

The unaudited condensed consolidated financial statements of FTI Consulting, Inc., including its consolidated subsidiaries (collectively, the “Company,” “we,” “our” or “FTI Consulting”) presented herein, have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and under the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. Some of the information and footnote disclosures normally included in annual financial statements have been condensed or omitted pursuant to those rules and regulations. Certain prior period amounts have been reclassified to conform to the current period presentation. In management’s opinion, the interim financial statements reflect all adjustments that are necessary for a fair presentation of the results for the interim periods presented. All adjustments made were normal recurring accruals. Results of operations for the interim periods presented herein are not necessarily indicative of results of operations for a full year. These financial statements should be read in conjunction with the consolidated financial statements and the notes contained in our Annual Report on Form 10-K for the year ended December 31, 2013.

2. Earnings Per Common Share

Basic earnings per common share are calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per common share adjust basic earnings per common share for the effects of potentially dilutive common shares. Potentially dilutive common shares include the dilutive effects of shares issuable under our equity compensation plans, including stock options and restricted stock, each using the treasury stock method.


	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
Numerator—basic and diluted
Net income	$	17,247	$	23,486	$	35,364	$	47,166

Denominator
Weighted average number of common shares outstanding—basic		39,681		39,143		39,560		39,272
Effect of dilutive stock options		288		589		322		592
Effect of dilutive restricted shares		781		561		722		592

Weighted average number of common shares outstanding—diluted		40,750		40,293		40,604		40,456

Earnings per common share—basic	$	0.43	$	0.60	$	0.89	$	1.20

Earnings per common share—diluted	$	0.42	$	0.58	$	0.87	$	1.17

Antidilutive stock options and restricted shares		3,637		3,593		3,408		3,541

3. New Accounting Standards Not Yet Adopted

services. This guidance is effective for interim and annual periods beginning after December 15, 2016 and early adoption is not permitted. Companies may use either a full retrospective or a modified retrospective approach to adopt this ASU. The Company is currently evaluating which transition approach to use and the impact of the adoption of this accounting standard update on its condensed consolidated financial statements.

In April 2014, the FASB issued Accounting Standards Update 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, or ASU 2014-08. ASU 2014-08 amends the criteria for reporting a discontinued operation. The amended guidance requires that a disposal representing a strategic shift that has (or will have) a major effect on an entity’s operations and financial results or a business activity classified as held for sale should be reported as discontinued operations. The amendments also expand the disclosure requirements for discontinued operations and add new disclosures for individually significant dispositions that do not qualify as discontinued operations. This guidance is effective for interim and annual periods beginning after December 15, 2014, with early adoption permitted. ASU 2014-08 would impact the Company’s consolidated results of operations and financial condition only in the instance of an event or transaction described above.

4. Special Charges

During the three months ended June 30, 2014, we recorded special charges totaling $9.4 million, of which $0.6 million was non-cash. The charges consisted of $7.9 million related to the termination of the Company’s corporate airplane lease and $1.5 million related to the closure of the Company’s West Palm Beach executive office and related lease termination.

During the three months ended March 31, 2013, we recorded adjustments to the special charges for office spaces vacated prior to the end of the second quarter of 2012 of approximately $0.4 million. These charges reflected the changes to sublease terms and associated costs for those locations for which subleases were entered into during the three months ended March 31, 2013.

The following table details the special charges by segment for the three months ended June 30, 2014 and six months ended June 30, 2014 and 2013. We did not record any special charges for the three months ended June 30, 2013.


	Three Months Ended June 30,		Six Months Ended June 30,
	2014		2014		2013
Corporate Finance/Restructuring	$	—	$	—	$	68
Forensic and Litigation Consulting		—		—		173
Economic Consulting		—		—		(4	)
Technology		—		—		14
Strategic Communications		—		—		64

		—		—		315
Unallocated Corporate		9,364		9,364		112

Total	$	9,364	$	9,364	$	427

During the year ended December 31, 2013, we recorded special charges totaling $38.4 million, of which $14.1 million was non-cash. The charges reflect contractual post-employment severance and transition services, equity award and retention bonus expense acceleration primarily related to the transition of the Company’s former Executive Chairman and former President and Chief Executive Officer. Special charges also included accelerated expenses related to future payments required to be made under a contractual transition service agreement with a Corporate Finance/Restructuring segment senior client facing professional. We also incurred costs related to actions we took to realign our workforce to address current business demands impacting our

Corporate Finance/Restructuring and Forensic and Litigation Consulting segments, and to reduce certain corporate overhead within our Europe, Middle East and Africa (“EMEA”) region, most of which were recorded in the third and fourth quarters of 2013.

The total cash outflow associated with the special charges recorded in 2014, 2013 and 2012 is expected to be $57.3 million, of which $34.5 million has been paid as of June 30, 2014. Approximately $6.2 million is expected to be paid during the remainder of 2014, $5.0 million is expected to be paid in 2015, $3.1 million is expected to be paid in 2016, $3.1 million is expected to be paid in 2017, and the remaining balance of $5.4 million will be paid from 2018 to 2025. A liability for the current and noncurrent portions of the amounts to be paid is included in “Accounts payable, accrued expenses and other” and “Other liabilities,” respectively, on the Condensed Consolidated Balance Sheets.

Activity related to the liability for these costs for the three months ended June 30, 2014 is as follows:


	Employee Termination Costs			Lease Costs			Total
Balance at December 31, 2013	$	19,965		$	6,096		$	26,061
Additions		—			8,770			8,770
Payments		(2,397	)		(9,645	)		(12,042	)
Foreign currency translation adjustment and other		12			—			12

Balance at June 30, 2014	$	17,580		$	5,221		$	22,801

5. Allowance for Doubtful Accounts and Unbilled Services

We record adjustments to the allowance for doubtful accounts and unbilled services as a reduction in revenue when there are changes in estimates of fee reductions that may be imposed by bankruptcy courts and other regulatory institutions, for both billed and unbilled receivables. The allowance for doubtful accounts and unbilled services is also adjusted after the related work has been billed to the client and we discover that collectability is not reasonably assured. These adjustments are recorded to “Selling, general and administrative expense” on the Condensed Consolidated Statements of Comprehensive Income and totaled $4.2 million and $8.7 million for the three and six months ended June 30, 2014, respectively, and $3.4 million and $7.5 million for the three and six months ended June 30, 2013, respectively.

6. Research and Development Costs

Research and development costs related to software development totaled $4.6 million and $9.1 million for the three and six months ended June 30, 2014, respectively, and $3.5 million and $7.5 million for the three and six months ended June 30, 2013, respectively. Research and development costs are included in “Selling, general and administrative expense” on the Condensed Consolidated Statements of Comprehensive Income.

7. Financial Instruments

Fair Value of Financial Instruments

We consider the recorded value of certain financial assets and liabilities, which consist primarily of cash equivalents, accounts receivable and accounts payable, to approximate the fair value of the respective assets and liabilities at June 30, 2014 and December 31, 2013, based on the short-term nature of the assets and liabilities. The fair value of our long-term debt at June 30, 2014 was $753.8 million compared to a carrying value of $717.0 million. At December 31, 2013, the fair value of our long-term debt was $752.8 million compared to a carrying value of $717.0 million. We determine the fair value of our long-term debt primarily based on quoted market prices for our 6³/₄% Senior Notes Due 2020 (“2020 Notes”) and 6.0% Senior Notes Due 2022 (“2022 Notes”). The fair value of our long-term debt is classified within Level 2 of the fair value hierarchy, because it is traded in less active markets.

For business combinations consummated on or after January 1, 2009, we estimate the fair value of acquisition-related contingent consideration based on the present value of the consideration expected to be paid during the remainder of the earnout period, based on management’s assessment of the acquired operations’ forecasted earnings. This fair value measure is based on significant inputs not observed in the market and thus represents a Level 3 measurement. Fair value measurements characterized within Level 3 of the fair value hierarchy are measured based on unobservable inputs that are supported by little or no market activity and reflect our own assumptions in measuring fair value.

The significant unobservable inputs used in the fair value measurements of our acquisition-related contingent consideration include our measures of the future profitability and related cash flows of the acquired business or assets, impacted by appropriate discount rates. Significant increases (decreases) in any of these inputs in isolation would result in a significantly lower (higher) fair value measurement. Generally, a change in the assumptions used for the discount rates is accompanied by a directionally opposite change in the fair value measurement and a change in the assumptions used for the future cash flows is accompanied by a directionally similar change in the fair value measurement. The fair value of the contingent consideration is reassessed on a quarterly basis by the Company using additional information as it becomes available.

Any change in the fair value of an acquisition’s contingent consideration liability results in a remeasurement gain or loss that is recorded as income or expense, respectively, and is included within “Acquisition-related contingent consideration” in the Condensed Consolidated Statements of Comprehensive Income. During the three and six months ended June 30, 2014, management determined that the fair value of the contingent consideration liability for certain of its acquisitions had declined and recorded a remeasurement gain of $0.3 million and $2.4 million, respectively, compared to a remeasurement gain of $8.2 million for the three and six months ended June 30, 2013.

Accretion expense for acquisition-related contingent consideration totaled $0.3 million and $0.5 million for the three and six months ended June 30, 2014, respectively, and $0.8 million and $1.5 million for the three and six months ended June 30, 2013, respectively.

The following table represents the changes in the acquisition-related contingent consideration liability during the three and six months ended June 30, 2014 and 2013:


	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Beginning balance	$	6,903		$	16,296		$	13,329		$	16,426
Acquisition ⁽¹⁾		—			5,377			(4,495	)		4,528
Accretion of acquisition-related contingent consideration		255			764			535			1,495
Remeasurement of acquisition-related contingent consideration		(261	)		(8,216	)		(2,383	)		(8,216	)
Payments		(314	)		(235	)		(378	)		(235	)
Unrealized losses related to currency translation in other comprehensive income		18			(701	)		(7	)		(713	)

Ending balance	$	6,601		$	13,285		$	6,601		$	13,285

⁽¹⁾	Includes adjustments during the purchase price allocation period.

8. Acquisitions

Certain purchase price allocations were preliminary at December 31, 2013. For these acquisitions, we recorded $4.7 million of acquisition related contingent consideration, $9.5 million of identifiable intangible assets, $1.2 million of deferred taxes and $10.1 million of goodwill in the year ended December 31, 2013. During the first and second quarter of 2014 we finalized the purchase price allocations and recorded adjustments to the

preliminary purchase price for certain acquisitions completed during the fourth quarter of 2013. These adjustments were immaterial; therefore no retrospective adjustments were made to the fair value of the assets acquired and liabilities assumed in the Condensed Consolidated Balance Sheet as of December 31, 2013.

9. Goodwill and Other Intangible Assets

The changes in the carrying amounts of goodwill by operating segment for the six months ended June 30, 2014, are as follows:


	Corporate Finance/ Restructuring		Forensic and Litigation Consulting			Economic Consulting		Technology		Strategic Communications			Total
Balances at December 31, 2013:
Goodwill	$	449,710	$	241,651		$	263,474	$	118,073	$	339,964		$	1,412,872
Accumulated goodwill impairment		—		—			—		—		(194,139	)		(194,139	)

Goodwill, net at December 31, 2013		449,710		241,651			263,474		118,073		145,825			1,218,733

Acquisitions⁽¹⁾		—		(224	)		—		—		—			(224	)
Foreign currency translation adjustment and other		2,088		1,179			205		62		3,360			6,894

Goodwill		451,798		242,606			263,679		118,135		343,324			1,419,542
Accumulated goodwill impairment		—		—			—		—		(194,139	)		(194,139	)

Goodwill, net at June 30, 2014	$	451,798	$	242,606		$	263,679	$	118,135	$	149,185		$	1,225,403

⁽¹⁾	Includes adjustments during the purchase price measurement period.

Other intangible assets with finite lives are amortized over their estimated useful lives. For intangible assets with finite lives, we recorded amortization expense of $3.5 million and $8.1 million for the three and six months ended June 30, 2014, respectively, and $6.0 million and $11.5 million for the three and six months ended June 30, 2013, respectively. Based solely on the amortizable intangible assets recorded as of June 30, 2014, we estimate amortization expense to be $6.7 million during the remainder of 2014, $12.2 million in 2015, $11.0 million in 2016, $10.3 million in 2017, $8.6 million in 2018, $7.9 million in 2019, and $23.9 million in years after 2019. Actual amortization expense to be reported in future periods could differ from these estimates as a result of new intangible asset acquisitions, finalization of asset valuations for newly acquired assets, changes in useful lives, changes in value due to foreign currency translation, and other factors.

10. Debt

The components of debt obligations are presented in the table below:


	June 30, 2014		December 31, 2013
6³/₄% senior notes due 2020	$	400,000	$	400,000
6.0% senior notes due 2022		300,000		300,000
Notes payable to former shareholders of acquired businesses		17,000		17,000
Other		—		14

Total debt		717,000		717,014
Less current portion		6,000		6,014

Long-term debt, net of current portion	$	711,000	$	711,000

There were no borrowings outstanding under the Company’s senior secured bank credit facility as of June 30, 2014.

11. Commitments and Contingencies

Contingencies

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

12. Share-Based Compensation

Share-based Awards and Share-based Compensation Expense

Our officers, employees, non-employee directors and certain individual service providers are eligible to participate in the Company’s equity compensation plans, subject to the discretion of the administrator of the plans. During the three months ended June 30, 2014 and March 31, 2014 we granted 183,105 and 645,593, respectively, of share-based awards consisting primarily of restricted stock awards, restricted stock units, and stock options. These awards are recorded as equity on the Company’s balance sheet.

On April 1, 2014, certain executive officers of the Company were granted an aggregate of 234,536 cash-based awards under the Company’s 2014 executive officer long-term incentive program. These awards include cash-based stock appreciation rights (the “Executive SARs”) and cash-based units, which vest pro rata on the first through third anniversaries of the date of grant. The Executive SARs expire ten years from the date of grant. The awards also consist of cash-based performance units, subject to performance conditions based on the adjusted total shareholder return of the Company as compared to the adjusted total shareholder return of the adjusted S&P 500 for the three-year period ending March 31, 2017. The Executive SAR represents the right to receive cash upon exercise equal to the product of (i) the aggregate number of shares with respect to which the Executive SAR is exercised and (ii) the excess of (A) the closing price per share as reported on the New York Stock Exchange (the “NYSE”) of a share of our common stock as of the date of exercise over (B) the exercise price of such Executive SAR. The cash-based units and performance units will have a value equivalent to the closing price per share of our common stock as reported on the NYSE for the applicable vesting or performance measurement date, as the case may be. As these awards will be settled in cash, they have been recorded as liabilities on the Company’s balance sheet at fair value. Subsequent changes in the fair value of these awards based on fluctuations in the value of our common stock will be included in the related cash-based compensation expense recorded over the vesting period.

Total share-based compensation expense for the three and six months ended June 30, 2014 and 2013 is detailed in the following table:


	Three Months Ended June 30,				Six Months Ended June 30,
Comprehensive Income Statement Classification	2014		2013		2014		2013
Direct cost of revenues	$	3,548	$	3,742	$	9,370	$	10,699
Selling, general and administrative expense		2,773		3,524		6,027		6,500

Total share-based compensation expense	$	6,321	$	7,266	$	15,397	$	17,199

13. Income Taxes

The Company has estimated its annual effective tax rate for the full fiscal year 2014 and applied that rate to its income before income taxes in determining its provision for income taxes for the three and six months ended

June 30, 2014. The Company also records discrete items in each respective period as appropriate. During the second quarter of 2013, we determined that certain deferred tax assets associated with United States (“U.S.”) future foreign tax credits no longer met the “more-likely-than-not” test regarding the realization of those assets primarily due to lower forecasted foreign earnings. Accordingly, the Company increased the valuation allowance against its U.S. future foreign tax credit assets, resulting in a discrete adjustment to the income tax provision in the amount of $6.9 million. As of June 30, 2014 and December 31, 2013, valuation allowances of $9.6 million and $10.2 million, respectively, were recorded against the Company’s net deferred tax assets.

14. Stockholder’s Equity

On June 6, 2012, our Board of Directors authorized a two-year stock repurchase program of up to $250.0 million (the “2012 Repurchase Program”). During the year ended December 31, 2013, we repurchased and retired 1,956,900 shares of our common stock for an average price per share of $36.35, at a cost of $71.1 million, of which $4.4 million was accrued and included in the Condensed Consolidated Balance Sheet, and $66.7 million was paid at December 31, 2013. In January 2014, we paid the balance due of $4.4 million on our 2013 share repurchases. No shares were repurchased during the six months ended June 30, 2014. The 2012 Repurchase Program expired on June 5, 2014, with an unused balance of $128.8 million.

15. Segment Reporting

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

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

Our Forensic and Litigation Consulting segment provides law firms, companies, government clients and other interested parties with dispute advisory, investigations, forensic accounting, business intelligence assessments, data analytics, risk mitigation services as well as interim management and performance improvement services for our health solutions practice clients.

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

Our Technology segment provides electronic discovery and information management consulting, software and services to its clients. It provides products, services and consulting to companies, law firms, courts and government agencies worldwide. Its comprehensive suite of software and services help clients locate, review and produce electronically stored information, including e-mail, computer files, voicemail, instant messaging, and financial and transactional data.

Our Strategic Communications segment provides advice and consulting services relating to financial and corporate communications and investor relations, reputation management and brand communications, public affairs, business consulting and digital design and marketing.

We evaluate the performance of our operating segments based on Adjusted Segment EBITDA. Beginning with the quarter ended March 31, 2014, the definition of Adjusted Segment EBITDA has been updated to exclude the impact of changes in the fair value of acquisition-related contingent consideration liabilities. Prior period amounts have been reclassified to conform to the current period’s presentation.

We define Adjusted Segment EBITDA as a segment’s share of consolidated operating income before depreciation, amortization of intangible assets, remeasurement of acquisition-related contingent consideration, special charges and goodwill impairment charges. We define Total Adjusted Segment EBITDA as the total of Adjusted Segment EBITDA for all segments, which excludes unallocated corporate expenses. Although Adjusted Segment EBITDA is not a measure of financial condition or performance determined in accordance with GAAP, we use Adjusted Segment EBITDA to internally evaluate the financial performance of our segments because we believe it is a useful supplemental measure which reflects current core operating performance and provides an indicator of the segment’s ability to generate cash.

The table below presents revenues and Adjusted Segment EBITDA for our reportable segments for the three and six months ended June 30, 2014 and 2013:


	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014		2013
Revenues
Corporate Finance/Restructuring	$	104,020	$	96,714	$	198,002	$	195,794
Forensic and Litigation Consulting		119,081		105,120		240,510		205,844
Economic Consulting		117,227		111,014		224,078		226,208
Technology		60,720		51,196		120,783		97,900
Strategic Communications		53,276		50,569		96,503		96,045

Revenues	$	454,324	$	414,613	$	879,876	$	821,791

Adjusted Segment EBITDA
Corporate Finance/Restructuring	$	19,133	$	17,848	$	30,084	$	36,933
Forensic and Litigation Consulting		22,271		18,752		48,765		31,563
Economic Consulting		18,043		20,803		31,073		46,997
Technology		15,104		16,888		32,452		30,604
Strategic Communications		5,834		5,219		8,563		8,773

Total Adjusted Segment EBITDA	$	80,385	$	79,510	$	150,937	$	154,870

The table below reconciles Total Adjusted Segment EBITDA to income before income tax provision:


	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Total Adjusted Segment EBITDA	$	80,385		$	79,510		$	150,937		$	154,870
Segment depreciation expense		(7,512	)		(6,944	)		(15,060	)		(13,820	)
Amortization of other intangible assets		(3,452	)		(5,953	)		(8,068	)		(11,517	)
Special charges		(9,364	)		—			(9,364	)		(427	)
Unallocated corporate expenses, excluding special charges		(21,386	)		(14,570	)		(41,779	)		(31,734	)
Interest income and other		1,448			(387	)		2,451			550
Interest expense		(12,908	)		(13,071	)		(25,563	)		(25,786	)
Remeasurement of acquisition-related contingent consideration		261			8,216			2,383			8,216

Income before income tax provision	$	27,472		$	46,801		$	55,937		$	80,352

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

Substantially all of our domestic subsidiaries are guarantors of borrowings under our senior bank credit facility and 2020 Notes and 2022 Notes (collectively, the “Senior Notes”). The guarantees are full and unconditional and joint and several. All of the guarantors are 100%-owned, direct or indirect, subsidiaries. The

following financial information presents condensed consolidating balance sheets, statements of comprehensive income and statements of cash flows for FTI Consulting, all the guarantor subsidiaries, all the non-guarantor subsidiaries and the eliminations necessary to arrive at the consolidated information for FTI Consulting and its subsidiaries. For purposes of this presentation, we have accounted for our investments in our subsidiaries using the equity method of accounting. The principal eliminating entries eliminate investment in subsidiary and intercompany balances and transactions.

Condensed Consolidating Balance Sheet Information as of June 30, 2014


	FTI Consulting, Inc.		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations			Consolidated
Assets
Cash and cash equivalents	$	33,141	$	156	$	61,115	$	—		$	94,412
Accounts receivable, net		179,545		208,622		191,570		—			579,737
Intercompany receivables		—		775,962		15,247		(791,209	)
Other current assets		63,841		21,281		25,997		—			111,119

Total current assets		276,527		1,006,021		293,929		(791,209	)		785,268
Property and equipment, net		32,063		14,875		36,557		—			83,495
Goodwill		559,318		408,903		257,182		—			1,225,403
Other intangible assets, net		31,883		18,163		62,648		(26,424	)		86,270
Investments in subsidiaries		1,873,211		516,819		—		(2,390,030	)		—
Other assets		66,738		79,341		46,725		—			192,804

Total assets	$	2,839,740	$	2,044,122	$	697,041	$	(3,207,663	)	$	2,373,240

Liabilities
Intercompany payables	$	705,096	$	39,257	$	46,856	$	(791,209	)	$	—
Other current liabilities		121,886		88,773		98,215		—			308,874

Total current liabilities		826,982		128,030		145,071		(791,209	)		308,874
Long-term debt, net		700,000		11,000		—		—			711,000
Other liabilities		204,838		13,335		27,273		—			245,446

Total liabilities		1,731,820		152,365		172,344		(791,209	)		1,265,320
Stockholders’ equity		1,107,920		1,891,757		524,697		(2,416,454	)		1,107,920

Total liabilities and stockholders’ equity	$	2,839,740	$	2,044,122	$	697,041	$	(3,207,663	)	$	2,373,240

Condensed Consolidating Balance Sheet Information as of December 31, 2013


	FTI Consulting, Inc.		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations			Consolidated
Assets
Cash and cash equivalents	$	111,943	$	494	$	93,396	$	—		$	205,833
Accounts receivable, net		154,357		162,505		159,583		—			476,445
Intercompany receivables		—		820,158		18,881		(839,039	)		—
Other current assets		68,292		20,932		32,359		—			121,583

Total current assets		334,592		1,004,089		304,219		(839,039	)		803,861
Property and equipment, net		31,304		19,047		28,656		—			79,007
Goodwill		559,820		408,903		250,010		—			1,218,733
Other intangible assets, net		33,746		19,534		72,221		(28,353	)		97,148
Investments in subsidiaries		1,772,130		498,001		—		(2,270,131	)		—
Other assets		75,561		56,949		33,688		—			166,198

Total assets	$	2,807,153	$	2,006,523	$	688,794	$	(3,137,523	)	$	2,364,947

Liabilities
Intercompany payables	$	709,628	$	74,813	$	54,598	$	(839,039	)	$	—
Other current liabilities		154,049		114,883		115,398		—			384,330

Total current liabilities		863,677		189,696		169,996		(839,039	)		384,330
Long-term debt, net		700,000		11,000		—		—			711,000
Other liabilities		201,217		15,009		11,132		—			227,358

Total liabilities		1,764,894		215,705		181,128		(839,039	)		1,322,688
Stockholders’ equity		1,042,259		1,790,818		507,666		(2,298,484	)		1,042,259

Total liabilities and stockholders’ equity	$	2,807,153	$	2,006,523	$	688,794	$	(3,137,523	)	$	2,364,947

Condensed Consolidating Statement of Comprehensive Income for the Three Months Ended

June 30, 2014


	FTI Consulting, Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Revenues	$	155,457		$	269,329		$	131,805		$	(102,267	)	$	454,324
Operating expenses
Direct cost of revenues		98,574			210,455			88,439			(101,919	)		295,549
Selling, general and administrative expense		45,864			30,077			31,439			(348	)		107,032
Special charges		9,364			—			—			—			9,364
Acquisition-related contingent consideration		2			200			(207	)		—			(5	)
Amortization of other intangible assets		1,086			641			2,697			(972	)		3,452

Operating income		567			27,956			9,437			972			38,932
Other (expense) income		(12,262	)		(1,969	)		2,771			—			(11,460	)

Income (loss) before income tax provision		(11,695	)		25,987			12,208			972			27,472
Income tax (benefit) provision		(4,847	)		11,858			3,214			—			10,225
Equity in net earnings of subsidiaries		24,095			8,357			—			(32,452	)		—

Net income		17,247			22,486			8,994			(31,480	)		17,247

Other comprehensive income, net of tax:
Foreign currency translation adjustments, net of tax $0		—			—			7,694			—			7,694

Total other comprehensive income, net of tax		—			—			7,694			—			7,694

Comprehensive income	$	17,247		$	22,486		$	16,688		$	(31,480	)	$	24,941

Condensed Consolidating Statement of Comprehensive Income for the Three Months Ended

June 30, 2013


	FTI Consulting, Inc.			Guarantor Subsidiaries		Non-Guarantor Subsidiaries			Eliminations			Consolidated
Revenues	$	144,390		$	254,394	$	113,565		$	(97,736	)	$	414,613
Operating expenses
Direct cost of revenues		92,781			192,526		70,725			(96,504	)		259,528
Selling, general and administrative expense		38,575			28,614		30,367			(1,231	)		96,325
Acquisition-related contingent consideration		92			195		(7,739	)		—			(7,452	)
Amortization of other intangible assets		1,095			2,501		3,146			(789	)		5,953

Operating income		11,847			30,558		17,066			788			60,259
Other (expense) income		(16,773	)		202		3,113			—			(13,458	)

Income (loss) before income tax provision		(4,926	)		30,760		20,179			788			46,801
Income tax (benefit) provision		(4,290	)		24,090		3,515			—			23,315

Equity in net earnings of subsidiaries		24,122			15,679		—			(39,801	)		—

Net income		23,486			22,349		16,664			(39,013	)		23,486

Other comprehensive loss, net of tax:

Foreign currency translation adjustments, net of tax $0		—			—		(11,714	)		—			(11,714	)

Total other comprehensive income, net of tax		—			—		(11,714	)		—			(11,714	)

Comprehensive income	$	23,486		$	22,349	$	4,950		$	(39,013	)	$	11,772

Condensed Consolidating Statement of Comprehensive Income for the Six Months Ended

June 30, 2014


	FTI Consulting, Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Revenues	$	306,489		$	521,412		$	252,332		$	(200,357	)	$	879,876
Operating expenses
Direct cost of revenues		198,072			406,154			165,296			(199,698	)		569,824
Selling, general and administrative expense		91,162			58,577			66,339			(659	)		215,419
Special charges		9,364			—			—			—			9,364
Acquisition-related contingent consideration		(596	)		(403	)		(849	)		—			(1,848	)
Amortization of other intangible assets		2,159			1,370			6,468			(1,929	)		8,068

Operating income		6,328			55,714			15,078			1,929			79,049
Other (expense) income		(25,576	)		(4,235	)		6,699			—			(23,112	)

Income (loss) before income tax provision		(19,248	)		51,479			21,777			1,929			55,937
Income tax (benefit) provision		(7,705	)		22,904			5,374			—			20,573
Equity in net earnings of subsidiaries		46,907			14,690			—			(61,597	)		—

Net income		35,364			43,265			16,403			(59,668	)		35,364

Other comprehensive income (loss), net of tax:
Foreign currency translation adjustments, net of tax $0		—			—			12,422			—			12,422

Total other comprehensive income, net of tax		—			—			12,422			—			12,422

Comprehensive income	$	35,364		$	43,265		$	28,825		$	(59,668	)	$	47,786

Condensed Consolidating Statement of Comprehensive Income for the Six Months Ended

June 30, 2013


	FTI Consulting, Inc.			Guarantor Subsidiaries		Non-Guarantor Subsidiaries			Eliminations			Consolidated
Revenues	$	295,350		$	501,055	$	221,561		$	(196,175	)	$	821,791
Operating expenses
Direct cost of revenues		193,618			379,873		138,698			(194,181	)		518,008
Selling, general and administrative expense		81,471			56,590		56,905			(1,994	)		192,972
Special charges		323			104		—			—			427
Acquisition-related contingent consideration		179			195		(7,095	)		—			(6,721	)
Amortization of other intangible assets		2,322			4,948		5,829			(1,582	)		11,517

Operating income		17,437			59,345		27,224			1,582			105,588
Other (expense) income		(31,713	)		531		5,946			—			(25,236	)

Income (loss) before income tax provision		(14,276	)		59,876		33,170			1,582			80,352
Income tax (benefit) provision		(7,221	)		34,062		6,345			—			33,186

Equity in net earnings of subsidiaries		54,221			24,114		—			(78,335	)		—

Net income		47,166			49,928		26,825			(76,753	)		47,166

Other comprehensive income, net of tax:
Foreign currency translation adjustments, net of tax $0		—			—		(27,223	)		—			(27,223	)

Total other comprehensive income, net of tax		—			—		(27,223	)		—			(27,223	)

Comprehensive income	$	47,166		$	49,928	$	(398	)	$	(76,753	)	$	19,943

Condensed Consolidating Statement of Cash Flows for the Six Months Ended June 30, 2014


	FTI Consulting, Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidated
Operating activities
Net cash used in operating activities	$	(26,238	)	$	(33,013	)	$	(17,853	)	$	(77,104	)
Investing activities
Payments for acquisition of businesses, net of cash received		(14,656	)		—			(955	)		(15,611	)
Purchases of property and equipment		(7,140	)		(3,890	)		(10,748	)		(21,778	)
Other		(6	)		—			—			(6	)

Net cash used in investing activities		(21,802	)		(3,890	)		(11,703	)		(37,395	)

Financing activities
Purchase and retirement of common stock		(4,367	)		—			—			(4,367	)
Net issuance of common stock under equity compensation plans		(2,692	)		—			—			(2,692	)
Deposits		—			—			11,580			11,580
Other		444			(378	)		(957	)		(891	)
Intercompany transfers		(24,147	)		36,943			(12,796	)		—

Net cash (used in) provided by financing activities		(30,762	)		36,565			(2,173	)		3,630

Effect of exchange rate changes on cash and cash equivalents		—			—			(552	)		(552	)

Net decrease in cash and cash equivalents		(78,802	)		(338	)		(32,281	)		(111,421	)
Cash and cash equivalents, beginning of period		111,943			494			93,396			205,833

Cash and cash equivalents, end of period	$	33,141		$	156		$	61,115		$	94,412

Condensed Consolidating Statement of Cash Flows for the Six Months Ended June 30, 2013


	FTI Consulting, Inc.			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Consolidated
Operating activities
Net cash (used in) provided by operating activities	$	(59,591	)	$	50,836		$	28,124		$	19,369
Investing activities
Payments for acquisition of businesses, net of cash received		(11,601	)		(7,157	)		(21,754	)		(40,512	)
Purchases of property and equipment		(1,505	)		(10,386	)		(2,239	)		(14,130	)
Other		21			—			—			21

Net cash used in investing activities		(13,085	)		(17,543	)		(23,993	)		(54,621	)

Financing activities
Purchase and retirement of common stock		(28,758	)		—			—			(28,758	)
Net issuance of common stock under equity compensation plans		1,245			—			—			1,245
Other		29			—			(645	)		(616	)
Intercompany transfers		53,168			(33,595	)		(19,573	)		—

Net cash provided by (used in) financing activities		25,684			(33,595	)		(20,218	)		(28,129	)

Effect of exchange rate changes on cash and cash equivalents		—			—			(850	)		(850	)

Net decrease in cash and cash equivalents		(46,992	)		(302	)		(16,937	)		(64,231	)
Cash and cash equivalents, beginning of period		66,663			610			89,512			156,785

Cash and cash equivalents, end of period	$	19,671		$	308		$	72,575		$	92,554

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 months ended June 30, 2014 and 2013 and significant factors that could affect our prospective financial condition and results of operations. This discussion should be read together with the accompanying unaudited condensed consolidated financial statements and related notes and with our Annual Report on Form 10-K for the year ended December 31, 2013. Historical results and any discussion of prospective results may not indicate our future performance. See “—Forward-Looking Statements.”

BUSINESS OVERVIEW

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

We report financial results for the following five reportable segments:

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

Our Forensic and Litigation Consulting segment provides law firms, companies, government clients and other interested parties with dispute advisory, investigations, forensic accounting, business intelligence assessments, data analytics, risk mitigation services as well as interim management and performance improvement services for our health solutions practice clients.

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

Our Technology segment provides e-discovery and information management consulting, software and services to its clients. It provides products, services and consulting to companies, law firms, courts and government agencies worldwide. Its comprehensive suite of software and services help clients locate, review and produce ESI, including e-mail, computer files, voicemail, instant messaging and financial and transactional data.

Our Strategic Communications segment provides advice and consulting services relating to financial and corporate communications and investor relations, reputation management and brand communications, public affairs, business consulting and digital design and marketing.

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

Most of our services are rendered under time-and-expense arrangements that obligate the client to pay us a fee for the hours that we incur at agreed upon rates. Under this arrangement, we typically bill our clients for reimbursable expenses, which may include the cost of producing our work product and other direct expenses that we incur on behalf of the client, such as travel costs. We also render services for which certain clients may be required to pay us a fixed fee or recurring retainer. These arrangements are generally cancellable at any time. Some of our engagements contain performance-based arrangements in which we earn a success fee when and if certain predefined outcomes occur. This type of success fee may supplement a time-and-expense or fixed-fee arrangement. Success fee revenues may cause variations in our revenues and operating results due to the timing of achieving the performance-based criteria. In our Technology segment, certain clients are also billed based on the amount of data stored on our electronic systems, the volume of information processed or the number of users licensing our Ringtail^® software products for use or installation within their own environments. We license certain products directly to end users as well as indirectly through our channel partner relationships. Unit-based revenue is defined as revenue billed on a per-item, per-page, or some other unit-based method and includes revenue from data processing and hosting, software usage and software licensing. Unit-based revenue includes revenue associated with our proprietary software that is made available to customers, either via a web browser (“on-demand”) or installed at our customer or partner locations (“on-premise”). On-demand revenue is charged on a unit or monthly basis and includes, but is not limited to, processing and review related functions. On-premise revenue is comprised of up-front license fees, with recurring support and maintenance. Seasonal factors, such as the timing of our employees’ and clients’ vacations and holidays, impact the timing of our revenues.

Our financial results are primarily driven by:

•

the number, size and type of engagements we secure;

•

the rate per hour or fixed charges we charge our clients for services;

•

the utilization rates of the revenue-generating professionals we employ;

•

the number of revenue-generating professionals;

•

fees from clients on a retained basis or other;

•

licensing of our software products and other technology services;

•

the types of assignments we are working on at different times;

•

the length of the billing and collection cycles; and

•

the geographic locations of our clients or locations in which services are rendered.

Non-GAAP Measures

In the accompanying analysis of financial information, we sometimes use information derived from consolidated and segment financial information that is not presented in our financial statements and prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). Certain of these measures are considered “non-GAAP financial measures” under the SEC rules. Specifically, we have referred to:

•

Segment Operating Income

•

Total Segment Operating Income

•

Adjusted EBITDA

•

Adjusted Segment EBITDA

•

Total Adjusted Segment EBITDA

•

Adjusted Net Income

•

Adjusted Earnings per Diluted Share

Beginning with the quarter ended March 31, 2014, the definitions of each of these non-GAAP measures have been updated to exclude the impact of changes in the fair value of acquisition-related contingent consideration liabilities. Prior period amounts have been reclassified to conform to the current period’s presentation.

We define Segment Operating Income as a segment’s share of consolidated operating income. We define Total Segment Operating Income as the total of Segment Operating Income for all segments, which excludes unallocated corporate expenses. We use Segment Operating Income for the purpose of calculating Adjusted Segment EBITDA. We define Adjusted EBITDA as consolidated net income before income tax provision, other non-operating income (expense), depreciation, amortization of intangible assets, remeasurement of acquisition-related contingent consideration, special charges, goodwill impairment charges and losses on early extinguishment of debt. We define Adjusted Segment EBITDA as a segment’s share of consolidated operating income before depreciation, amortization of intangible assets, remeasurement of acquisition-related contingent consideration, special charges and goodwill impairment charges. We define Total Adjusted Segment EBITDA as the total of Adjusted Segment EBITDA for all segments, which excludes unallocated corporate expenses. We use Adjusted Segment EBITDA to internally evaluate the financial performance of our segments because we believe it is a useful supplemental measure which reflects current core operating performance and provides an indicator of the segment’s ability to generate cash. We also believe that these measures, when considered together with our GAAP financial results, provide management and investors with a more complete understanding of our operating results, including underlying trends, by excluding the effects of remeasurement of acquisition-related contingent consideration, special charges and goodwill impairment charges. In addition, EBITDA is a common alternative measure of operating performance used by many of our competitors. It is used by investors, financial analysts, rating agencies and others to value and compare the financial performance of companies in our industry. Therefore, we also believe that these measures, considered along with corresponding GAAP measures, provide management and investors with additional information for comparison of our operating results to the operating results of other companies.

We define Adjusted Net Income and Adjusted Earnings per Diluted Share as net income and earnings per diluted share, respectively, excluding the impact of remeasurement of acquisition-related contingent consideration, special charges, goodwill impairment charges and losses on early extinguishment of debt. We use Adjusted Net Income for the purpose of calculating Adjusted Earnings per Diluted Share. Management uses Adjusted Earnings per Diluted Share to assess total company operating performance on a consistent basis. We believe that this measure, when considered together with our GAAP financial results, provides management and investors with a more complete understanding of our business operating results, including underlying trends, by excluding the effects of the remeasurement of acquisition-related contingent consideration, special charges, goodwill impairment charges and losses on early extinguishment of debt.

Non-GAAP financial measures are not defined in the same manner by all companies and may not be comparable to other similarly titled measures of other companies. Non-GAAP financial measures should be considered in addition to, but not as a substitute for or superior to, the information contained in our Consolidated Statements of Comprehensive Income. Reconciliations of GAAP to non-GAAP financial measures are included elsewhere in this filing.

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

EXECUTIVE HIGHLIGHTS


	Three Months Ended June 30,				Six Months Ended June 30,
	2014		2013		2014			2013
	(dollars in thousands, except per share amounts)				(dollars in thousands, except per share amounts)
Revenues	$	454,324	$	414,613	$	879,876		$	821,791
Special charges	$	9,364	$	—	$	9,364		$	427
Adjusted EBITDA	$	59,903	$	66,012	$	111,099		$	125,338
Net income	$	17,247	$	23,486	$	35,364		$	47,166
Earnings per common share—diluted	$	0.42	$	0.58	$	0.87		$	1.17
Adjusted EPS	$	0.55	$	0.38	$	0.97		$	0.97
Cash provided by (used in) operating activities	$	33,691	$	21,673	$	(77,104	)	$	19,369
Total number of employees at June 30,		4,223		4,040		4,223			4,040

Second Quarter 2014 Executive Highlights

Revenues

Revenues for the three months ended June 30, 2014 increased $39.7 million, or 9.6%, to $454.3 million, compared to $414.6 million in the same prior year period. The revenue increase largely resulted from organic growth in all segments, with the most significant revenue growth due to higher demand related to disputes and investigations in our North America and Asia Pacific regions in our Forensic and Litigation Consulting (“FLC”) segment, as well as, complex global investigation matters in our Technology segment. Additionally, our results reflected improved demand in the Corporate Finance/Restructuring (“Corporate Finance”) North American non-distressed service offerings and our Economics Consulting segment’s international arbitration and financial service offering in the Europe, Middle East and Africa (“EMEA”) region.

Special Charges

We recorded $9.4 million of special charges in the second quarter, related to the termination of the Company’s corporate airplane lease and to the closure of our West Palm Beach executive office and related lease termination.

Adjusted EBITDA (excluding special charges)

Adjusted EBITDA in the second quarter decreased $6.1 million, or 9.3%, to $59.9 million, or 13.2% of revenues, compared to $66.0 million, or 15.9% of revenues, in the same prior year period. Adjusted EBITDA was favorably impacted by revenue increases across the segments but were offset by a related increase in performance-based compensation costs, investments in certain global corporate initiatives, the impact of employment contract extensions of key senior client-service professionals in our Economics Consulting segment, investments in hiring key personnel in our FLC health solutions, Corporate Finance EMEA transaction advisory sub-practices and our Technology segment.

Net Income

Net income for the three months ended June 30, 2014 decreased $6.2 million to $17.2 million, compared to $23.5 million in the same prior year period. Net income for the quarter was impacted by the segment results and the special charges described above. Net income for the prior year quarter was impacted by a $8.2 million fair value adjustment related to contingent consideration offset by a $6.9 million income tax valuation allowance against our U.S. future foreign tax credits.

Earnings per diluted share and Adjusted EPS

Earnings per diluted share for the three months ended June 30, 2014 decreased $0.16 to $0.42 from $0.58 in the same prior year period. Earnings per diluted share were impacted by the results as outlined above, including the impact of the special charge of $9.4 million recorded in the quarter, which reduced earnings per share by $0.14. Adjusted earnings per diluted share for the three months ended June 30, 2014 were $0.55 as compared to $0.38 in the same prior year period.

Liquidity highlights

Cash provided by operating activities increased $12.0 million to $33.7 million for the three months ended June 30, 2014 compared to $21.7 million for the same prior year period primarily as a result of lower funding of employee notes receivable and higher revenue driven cash collections partially offset by increased compensation payments and the lease termination payment for our corporate airplane. Days sales outstanding (“DSO”), which is one measure of the collections cycle, was 108 days at June 30, 2014 and 99 days at June 30, 2013. Current DSO compared to the prior year has been impacted by the mix of revenues between our segments, an increase in unbilled receivables related to our Asia Pacific liquidation business which is subject to lengthy regulatory proceedings and extended payment terms which have been granted to certain large scale engagements.

Our financing activities during the three months ended June 30, 2014, included the repayment of short-term net borrowings of $20.0 million on our revolving line of credit under our senior secured bank credit facility, and $11.6 million of refundable deposits related to one of our foreign entities. The Company did not repurchase any common stock during the second quarter of 2014.

Headcount

As of June 30, 2014 our total headcount of 4,223 increased by 183 employees from June 30, 2013 largely driven by investments in our FLC segment, which includes the impact of acquisitions, as well as our Technology segment, and growth in our regional support teams. For the six months ended June 30, 2014 net total headcount increased by 16. Billable headcount additions for the same periods, by segment are referenced in the table below.


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

December 31, 2013		737			1,061			530			306		590			3,224
Additions (reductions)		(11	)		15			8			15		(6	)		21

March 31, 2014		726			1,076			538			321		584			3,245

Additions (reductions)		(13	)		(17	)		(13	)		7		(18	)		(54	)

June 30, 2014		713			1,059			525			328		566			3,191

CONSOLIDATED RESULTS OF OPERATIONS

Segment and Consolidated Operating Results:


	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
	(in thousands, except per share amounts)						(in thousands, except per share amounts)
Revenues
Corporate Finance/Restructuring	$	104,020		$	96,714		$	198,002		$	195,794
Forensic and Litigation Consulting		119,081			105,120			240,510			205,844
Economic Consulting		117,227			111,014			224,078			226,208
Technology		60,720			51,196			120,783			97,900
Strategic Communications		53,276			50,569			96,503			96,045

Revenues	$	454,324		$	414,613		$	879,876		$	821,791

Operating income
Corporate Finance/Restructuring	$	17,068		$	21,436		$	25,675		$	38,135
Forensic and Litigation Consulting		20,839			19,177			46,241			30,279
Economic Consulting		16,840			19,530			29,270			44,525
Technology		10,905			11,292			23,971			19,374
Strategic Communications		4,030			3,394			5,035			5,121

Total segment operating income		69,682			74,829			130,192			137,434
Unallocated corporate expenses		(30,750	)		(14,570	)		(51,143	)		(31,846	)

Operating income		38,932			60,259			79,049			105,588

Other income (expense)
Interest income and other		1,448			(387	)		2,451			550
Interest expense		(12,908	)		(13,071	)		(25,563	)		(25,786	)

		(11,460	)		(13,458	)		(23,112	)		(25,236	)

Income before income tax provision		27,472			46,801			55,937			80,352
Income tax provision		10,225			23,315			20,573			33,186

Net income	$	17,247		$	23,486		$	35,364		$	47,166

Earnings per common share—basic	$	0.43		$	0.60		$	0.89		$	1.20

Earnings per common share—diluted	$	0.42		$	0.58		$	0.87		$	1.17

Reconciliation of Net Income to Adjusted EBITDA:


	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
	(in thousands)						(in thousands)
Net income	$	17,247		$	23,486		$	35,364		$	47,166
Add back:
Income tax provision		10,225			23,315			20,573			33,186
Other income (expense), net		11,460			13,458			23,112			25,236
Depreciation and amortization		8,416			8,016			17,001			16,022
Amortization of other intangible assets		3,452			5,953			8,068			11,517
Special charges		9,364			—			9,364			427
Remeasurement of acquisition-related contingent consideration		(261	)		(8,216	)		(2,383	)		(8,216	)

Adjusted EBITDA	$	59,903		$	66,012		$	111,099		$	125,338

Reconciliation of Net Income to Adjusted Net Income and Earnings Per Share to Adjusted Earnings Per Share:


	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
	(in thousands, except per share amounts)						(in thousands, except per share amounts)
Net income	$	17,247		$	23,486		$	35,364		$	47,166
Add back:
Special charges, net of tax effect ⁽¹⁾		5,523			—			5,523			253
Remeasurement of acqusition-related contingent consideration, net of tax effect⁽²⁾		(164	)		(8,216	)		(1,514	)		(8,216	)

Adjusted net income	$	22,606		$	15,270		$	39,373		$	39,203

Earnings per common share—diluted	$	0.42		$	0.58		$	0.87		$	1.17
Add back:
Special charges, net of tax effect ⁽¹⁾		0.14			—			0.14			—
Remeasurement of acqusition-related contingent consideration, net of tax effect⁽²⁾		(0.01	)		(0.20	)		(0.04	)		(0.20	)

Adjusted earnings per common share—diluted	$	0.55		$	0.38		$	0.97		$	0.97

Weighted average number of common shares outstanding—diluted		40,750			40,293			40,604			40,456

⁽¹⁾

The tax effect takes into account the tax treatment and related tax rate(s) that apply to each adjustment in the applicable tax jurisdiction(s). As a result, the effective tax rate for the adjustments related to special charges for the three and six months ended June 30, 2014 was 41.0%. The tax expense related to the adjustment for special charges for the three and six months ended June 30, 2014 were $3.8 million, or a $0.09 impact on diluted earnings per share. The effective tax rate for the adjustments related to special charges for the six months ended June 30, 2013 was 40.7%. The tax expense related to the adjustment for special charges for the six months ended June 30, 2013 was $0.2 million with no impact on diluted earnings per share. In the three months ended June 30, 2013, there were no special charges.

⁽²⁾

The tax effect takes into account the tax treatment and related tax rate(s) that apply to each adjustment in the applicable tax jurisdiction(s). As a result, the effective tax rates for the adjustments related to the remeasurement of acquisition-related contingent consideration for the three and six months ended June 30, 2014 were 37.2% and 36.5%, respectively. The tax expense related to the remeasurement of acquisition-related contingent consideration for the three and six months ended June 30, 2014 was $0.1 million with no impact on diluted earnings per share and, $0.9 million, or a $0.02 impact on diluted earnings per share. The adjustments related to remeasurement of acquisition-related contingent consideration for the three and six months ended June 30, 2013 were not taxable.

Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013

Revenues and operating income

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

Unallocated corporate expenses

Unallocated corporate expenses increased $16.2 million to $30.8 million for the three months ended June 30, 2014 from $14.6 million for the same prior year period. Excluding the impact of special charges of $9.4 million in the three months ended June 30, 2014; unallocated corporate expenses increased $6.8 million. The increase was primarily due to higher costs related to performance based compensation for U.S. and regional teams, increased third party costs related to executive search activities and strategic development efforts.

Interest income and other

Interest income and other, which includes foreign currency transaction gains and losses, increased by $1.8 million to $1.4 million for the three months ended June 30, 2014 from a loss of $0.4 million for the same prior year period. The increase was primarily due to net foreign currency transaction gains in the period ended June 30, 2014 as compared to net losses in the same prior year period. Transaction gains and losses, both realized and unrealized, relate to the remeasurement or settlement of monetary assets and liabilities that are denominated in a currency other than an entity’s functional currency. These monetary assets and liabilities include current intercompany receivables and payables.

Interest expense

Interest expense decreased $0.2 million to $12.9 million for the three months ended June 30, 2014 from $13.1 million for the same prior year period. Interest expense in 2014 was favorably impacted by lower average borrowings.

Special charges

We did not record any special charges for the three months ended June 30, 2013.

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 or become known. The effective tax rate was 37.2% for the three months ended June 30, 2014 as compared to 49.8% for the same prior year period. During the second quarter of 2013, we recorded a deferred tax valuation reserve related to foreign tax credits, primarily due to lower forecasted foreign earnings, resulting in an increase to the income tax provision in the amount of $6.9 million. Excluding the impact of the discrete item, the effective tax rate for the three months ended June 30, 2013 would have been 34.6%.

Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013

Revenues and operating income

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

Unallocated corporate expenses

Unallocated corporate expenses increased $19.3 million to $51.1 million for the six months ended June 30, 2014 from $31.8 million for the same prior year period. Excluding the impact of special charges of $9.4 million in the six months ended June 30, 2014; unallocated corporate expenses increased $10.0 million. The increase was primarily due to higher performance-based compensation costs and increased costs to support certain global corporate initiatives.

Interest income and other

Interest income and other, which includes foreign currency transaction gains and losses, increased by $1.9 million to $2.5 million for the six months ended June 30, 2014 from $0.6 million for the same prior year period. The increase was primarily due to lower net foreign currency transaction losses in the period ended June 30, 2014 as compared to net losses in the same prior year period. Transaction gains and losses, both realized and unrealized, relate to the remeasurement or settlement of monetary assets and liabilities that are denominated in a currency other than an entity’s functional currency. These monetary assets and liabilities include current intercompany receivables and payables.

Interest expense

Interest expense was $25.6 million for the six months ended June 30, 2014, which decreased from $25.8 million for the same prior year period. Interest expense in 2014 was favorably impacted by lower average borrowings.

Special charges

During the six months ended June 30, 2014, we recorded special charges totaling $9.4 million, of which $0.6 million was non-cash. The charges consisted of $7.9 million related to the termination of the Company’s corporate airplane lease and $1.5 million related to the closure of the Company’s West Palm Beach executive office and related lease termination.

During the six months ended June 30, 2013, we recorded adjustments to the special charges recorded in 2012 of approximately $0.4 million, primarily related to the consolidation of office spaces previously vacated. These charges reflect the changes to sublease terms and associated costs for those locations for which actual subleases were entered into during the six months ended June 30, 2013, as well as the impact of updated forecasts of expected sublease income and employee termination costs.

The following table details the special charge adjustments by segment for the six months ended June 30, 2014 and 2013:


	Six Months Ended June 30,
	2014		2013
	(in thousands)
Corporate Finance/Restructuring	$	—	$	68
Forensic and Litigation Consulting		—		173
Economic Consulting		—		(4	)
Technology		—		14
Strategic Communications		—		64

		—		315
Unallocated Corporate		9,364		112

Total	$	9,364	$	427

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 or become known. The effective tax rate was 36.8% for the six months ended June 30, 2014 as compared to 41.3% for the same prior year period. During the six months ended June 30, 2013, we recorded a deferred tax valuation reserve related to foreign tax credits, primarily due to lower forecasted foreign earnings, resulting in a discrete increase to the income tax provision in the amount of $6.9 million. We also recognized the impact of a discrete benefit related to the favorable resolution of an income tax contingency in the amount of $2.2 million. Excluding the impact of these discrete items, the effective tax rate for the six months ended June 30, 2013 would have been 35.6%.

SEGMENT RESULTS

Total Adjusted Segment EBITDA

The following table reconciles net income to Total Segment Operating Income and Total Adjusted Segment EBITDA for the three and six months ended June 30, 2014 and 2013.


	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
	(in thousands)						(in thousands)
Net income	$	17,247		$	23,486		$	35,364		$	47,166
Add back:
Income tax provision		10,225			23,315			20,573			33,186
Other income (expense), net		11,460			13,458			23,112			25,236
Unallocated corporate expense		30,750			14,570			51,143			31,846

Total Segment Operating Income	$	69,682		$	74,829		$	130,192		$	137,434
Add back:
Segment depreciation expense		7,512			6,944			15,060			13,820
Amortization of other intangible assets		3,452			5,953			8,068			11,517
Segment special charges		—			—			—			315
Remeasurement of acquisition-related contingent consideration		(261	)		(8,216	)		(2,383	)		(8,216	)

Total Adjusted Segment EBITDA	$	80,385		$	79,510		$	150,937		$	154,870

Other Segment Operating Data


	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
Number of revenue-generating professionals (at period end):
Corporate Finance/Restructuring		713			718			713			718
Forensic and Litigation Consulting		1,059			969			1,059			969
Economic Consulting		525			499			525			499
Technology		328			285			328			285
Strategic Communications		566			611			566			611

Total revenue-generating professionals		3,191			3,082			3,191			3,082

Utilization rates of billable professionals:⁽¹⁾
Corporate Finance/Restructuring		71	%		62	%		71	%		66	%
Forensic and Litigation Consulting		71	%		67	%		73	%		65	%
Economic Consulting		78	%		82	%		75	%		86	%
Average billable rate per hour:⁽²⁾
Corporate Finance/Restructuring	$	412		$	416		$	396		$	412
Forensic and Litigation Consulting		323			307			319			314
Economic Consulting		522			505			519			501

⁽¹⁾

We calculate the utilization rate for our billable professionals by dividing the number of hours that all of our billable professionals worked on client assignments during a period by the total available working hours for all of our billable professionals during the same period. Available hours are determined by the standard hours worked by each employee, adjusted for part-time hours, local country standard work weeks and local country holidays. Available working hours include vacation and professional training days, but exclude holidays. Utilization rates are presented for our segments that primarily bill clients on an hourly basis. We have not presented a utilization rate for our Technology segment and Strategic Communications segment as most of the revenues of these segments are not generated on an hourly basis.

⁽²⁾

For engagements where revenues are based on number of hours worked by our billable professionals, average billable rate per hour is calculated by dividing revenues (excluding revenues from success fees, pass-through and outside consultants) for a period by the number of hours worked on client assignments during the same period. We have not presented an average billable rate per hour for our Technology and Strategic Communications segments as most of the revenues of these segments are not based on billable hours.

CORPORATE FINANCE/RESTRUCTURING


	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
	(dollars in thousands, except rate per hour)						(dollars in thousands, except rate per hour)
Revenues	$	104,020		$	96,714		$	198,002		$	195,794

Operating expenses:
Direct cost of revenues		67,510			59,516			131,479			121,949
Selling, general and administrative expenses		18,191			19,730			37,977			37,420
Special charges		—			—			—			68
Acquisition-related contingent consideration		40			(5,800	)		(555	)		(5,161	)
Amortization of other intangible assets		1,211			1,832			3,426			3,383

		86,952			75,278			172,327			157,659

Segment operating income		17,068			21,436			25,675			38,135
Add back:
Depreciation and amortization of intangible assets		2,065			2,687			5,071			5,005
Special charges		—			—			—			68
Remeasurement of acquisition-related contingent consideration		—			(6,275	)		(662	)		(6,275	)

Adjusted Segment EBITDA	$	19,133		$	17,848		$	30,084		$	36,933

Gross profit ⁽¹⁾	$	36,510		$	37,198		$	66,523		$	73,845
Gross profit margin ⁽²⁾		35.1	%		38.5	%		33.6	%		37.7	%
Adjusted Segment EBITDA as a percent of revenues		18.4	%		18.5	%		15.2	%		18.9	%
Number of revenue generating professionals (at period end)		713			718			713			718
Utilization rates of billable professionals		71	%		62	%		71	%		66	%
Average billable rate per hour	$	412		$	416		$	396		$	412

⁽¹⁾	Revenues less direct cost of revenues

⁽²⁾	Gross profit as a percent of revenues

Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013

Revenues increased $7.3 million, or 7.6%, to $104.0 million for the quarter ended June 30, 2014 compared to $96.7 million for the same prior year period. The increase in revenues was due to growth in our non-distressed engagements in our North America core business; partially offset by continued slowness in global bankruptcy restructuring.

Gross profit decreased $0.7 million, or 1.8%, to $36.5 million for the quarter ended June 30, 2014 compared to $37.2 million for the same prior year period. Gross profit margin decreased to 35.1% for the quarter ended June 30, 2014 compared to 38.5% for the same prior year period. The decrease in gross profit margin was due to higher demand and net average realized bill rates in North America bankruptcy and restructuring; more than offset by higher performance-based compensation expense and the investment in the European transaction advisory practice.

Selling, general and administrative (“SG&A”) expense decreased $1.5 million, or 7.8%, to $18.2 million for the quarter ended June 30, 2014 compared to $19.7 million for the same prior year period. SG&A expense was 17.5% of revenues for the quarter ended June 30, 2014, compared to 20.4% for the same prior year period. The decrease in SG&A expense was due to the absence of non-recurring acquisition costs recorded in the same prior year period.

Amortization of other intangible assets was $1.2 million for the quarter ended June 30, 2014 compared to $1.8 million for the same prior year period.

Adjusted Segment EBITDA increased $1.3 million, or 7.2%, to $19.1 million for the quarter ended June 30, 2014 compared to $17.8 million for the same prior year period.

Six Months Ended June 30, 2013 Compared to Six Months Ended June 30, 2012

Revenues increased $2.2 million, or 1.1%, to $198.0 million for the six months ended June 30, 2014 compared to $195.8 million for the same prior year period. Revenues increased $4.4 million, or 2.2%, due to acquisitions as compared to the same prior year period. Revenues decreased organically $2.2 million, or 1.1%, primarily due to continued slowness in global bankruptcy restructuring practice; partially offset by the increase in non-distressed engagements in North America.

Gross profit decreased $7.3 million, or 9.9%, to $66.5 million for the six months ended June 30, 2014 compared to $73.8 million for the same prior year period. Gross profit margin decreased 4.1% to 33.6% for the six months ended June 30, 2014 compared to 37.7% for the same prior year period. The decrease in gross profit margin was due to the investment in the European transaction advisory practice, higher performance-based compensation expense, and slowness in global bankruptcy restructuring.

SG&A expense increased $0.6 million, or 1.5%, to $38.0 million for the six months ended June 30, 2014 compared to $37.4 million for the same prior year period. SG&A expense was 19.2% of revenues for the six months ended June 30, 2014, compared to 19.1% for the same prior year period. The increase in SG&A expense was due to the overhead costs related to the acquired practices and the investment in the European transaction advisory practice partially offset by absence of the non-recurring acquisition costs of $1.8 million recorded in the same prior year period.

Amortization of other intangible assets was $3.4 million for the six months ended June 30, 2014 compared to $3.4 million for the same prior year period.

Adjusted Segment EBITDA decreased $6.8 million, or 18.5%, to $30.1 million for the six months ended June 30, 2014 compared to $36.9 million for the same prior year period.

FORENSIC AND LITIGATION CONSULTING


	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
	(dollars in thousands, except rate per hour)						(dollars in thousands, except rate per hour)
Revenues	$	119,081		$	105,120		$	240,510		$	205,844

Operating expenses:
Direct cost of revenues		75,332			66,861			149,133			134,835
Selling, general and administrative expenses		22,481			20,351			44,602			41,222
Special charges		—			—			—			173
Acquisition-related contingent consideration		(245	)		(1,848	)		(890	)		(1,756	)
Amortization of other intangible assets		674			579			1,424			1,091

		98,242			85,943			194,269			175,565

Segment operating income		20,839			19,177			46,241			30,279
Add back:
Depreciation and amortization of intangible assets		1,693			1,516			3,458			3,052
Special charges		—			—			—			173
Remeasurement of acquisition-related contingent consideration		(261	)		(1,941	)		(934	)		(1,941	)

Adjusted Segment EBITDA	$	22,271		$	18,752		$	48,765		$	31,563

Gross profit ⁽¹⁾	$	43,749		$	38,259		$	91,377		$	71,009
Gross profit margin ⁽²⁾		36.7	%		36.4	%		38.0	%		34.5	%
Adjusted Segment EBITDA as a percent of revenues		18.7	%		17.8	%		20.3	%		15.3	%
Number of revenue generating professionals (at period end)		1,059			969			1,059			969
Utilization rates of billable professionals		71	%		67	%		73	%		65	%
Average billable rate per hour	$	323		$	307		$	319		$	314

⁽¹⁾	Revenues less direct cost of revenues

⁽²⁾	Gross profit as a percent of revenues

Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013

Revenues increased $14.0 million, or 13.3%, to $119.1 million for the three months ended June 30, 2014 from $105.1 million for the same prior year period which included 2.9% from acquisitions. Revenues increased organically $10.9 million, or 10.4%, due to higher demand related primarily to disputes and investigations in our North America and Asia Pacific regions.

Gross profit increased $5.4 million, or 14.1%, to $43.7 million for the three months ended June 30, 2014 from $38.3 million for the same prior year period. Gross profit margin increased to 36.7% for the three months ended June 30, 2014 from 36.4% for the same prior year period. The increase in gross profit margin was related to higher utilization and improved leverage in our North America and Asia Pacific regions partially offset by increased performance based compensation, lower utilization on increased headcount, and the impact of lower success fees in our health solutions practice.

SG&A expense increased $2.1 million, or 10.5%, to $22.5 million for the three months ended June 30, 2014 from $20.4 million for the same prior year period. SG&A expense was 18.9% of revenue for the three months ended June 30, 2014, down from 19.4% for the same prior year period. The increase in SG&A expense was due to higher overhead expenses due to acquired businesses and higher administrative expenses.

Amortization of other intangible assets increased $0.1 million to $0.7 million for the three months ended June 30, 2014 compared to $0.6 million for the same prior year period.

Adjusted Segment EBITDA increased by $3.5 million, or 18.8%, to $22.3 million for the three months ended June 30, 2014 from $18.8 million for the same prior year period.

Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013

Revenues increased $34.7 million, or 16.8%, to $240.5 million for the six months ended June 30, 2014 from $205.8 million for the same prior year period. Revenues increased $6.0 million, or 2.9%, due to acquisitions as compared to the same prior year period. Revenues increased organically $28.7 million, or 13.9%, due to higher demand in our North America and Asia Pacific regions; partially offset by the impact of lower success fees in our health solutions practice.

Gross profit increased $20.4 million, or 28.7%, to $91.4 million for the six months ended June 30, 2014 from $71.0 million for the same prior year period. Gross profit margin increased to 38.0% for the six months ended June 30, 2014 from 34.5% for the same prior year period. The increase in gross profit margin was related to higher utilization and improved leverage in our practices in North America and Asia Pacific regions; partially offset by the impact of lower success fees in our health solutions practice and increased performance based compensation.

SG&A expense increased $3.4 million, or 8.2%, to $44.6 million for the six months ended June 30, 2014 from $41.2 million for the same prior year period. SG&A expense was 18.5% of revenue for the six months ended June 30, 2014, down from 20.0% for the same prior year period. The increase in SG&A expense was due to acquired overhead expense, increased compensation costs, and higher administrative expenses; partially offset by lower bad debt expense.

Amortization of other intangible assets increased $0.3 million to $1.4 million for the six months ended June 30, 2014 compared to $1.1 million for the same prior year period.

Adjusted Segment EBITDA increased by $17.2 million, or 54.5%, to $48.8 million for the six months ended June 30, 2014 from $31.6 million for the same prior year period.

ECONOMIC CONSULTING


	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
	(dollars in thousands, except rate per hour)						(dollars in thousands, except rate per hour)
Revenues	$	117,227		$	111,014		$	224,078		$	226,208

Operating expenses:
Direct cost of revenues		84,855			76,671			162,825			152,622
Selling, general and administrative expenses		15,242			14,356			32,122			28,210
Special charges		—			—			—			(4	)
Acquisition-related contingent consideration		68			47			(667	)		47
Amortization of other intangible assets		222			410			528			808

		100,387			91,484			194,808			181,683

Segment operating income		16,840			19,530			29,270			44,525
Add back:
Depreciation and amortization of intangible assets		1,203			1,273			2,590			2,476
Special charges		—			—			—			(4	)
Remeasurement of acquisition-related contingent consideration		—			—			(787	)		—

Adjusted Segment EBITDA	$	18,043		$	20,803		$	31,073		$	46,997

Gross profit ⁽¹⁾	$	32,372		$	34,343		$	61,253		$	73,586
Gross profit margin ⁽²⁾		27.6	%		30.9	%		27.3	%		32.5	%
Adjusted Segment EBITDA as a percent of revenues		15.4	%		18.7	%		13.9	%		20.8	%
Number of revenue generating professionals (at period end)		525			499			525			499
Utilization rates of billable professionals		78	%		82	%		75	%		86	%
Average billable rate per hour	$	522		$	505		$	519		$	501

⁽¹⁾	Revenues less direct cost of revenues

⁽²⁾	Gross profit as a percent of revenues

Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013

Revenues increased $6.2 million, or 5.6%, to $117.2 million for the three months ended June 30, 2014 compared to $111.0 million for the same prior year period. Revenues increased organically $5.7 million, or 5.2%, partially due to a 1.5% increase from the estimated positive impact from foreign currency translation. The increase in revenue was primarily due to increased demand in our EMEA antitrust litigation practice and international arbitration and valuation practices, along with higher net realized average bill rates in our EMEA international arbitration and valuation practices; partially offset by lower demand in our financial economics practice.

Gross profit decreased $2.0 million, or 5.7%, to $32.4 million for the three months ended June 30, 2014 compared to $34.3 million for the same prior year period. Gross profit margin decreased to 27.6% for the three months ended June 30, 2014 from 30.9% for the same prior year period. The decrease in gross profit margin was the result of increased demand in EMEA offset by increased compensation expense related to employment contract extensions of key senior client-service professionals, and lower utilization on increased headcount in our North American financial economics practice.

SG&A expense increased $0.9 million, or 6.2%, to $15.2 million for the three months ended June 30, 2014 compared to $14.4 million for the same prior year period. SG&A expense was 13.0% of revenues for the three months ended June 30, 2014 compared to 12.9% for the same prior year period. The increase in SG&A expense was due to higher administrative costs and travel and entertainment expenses related to marketing and business development.

Bad debt expense was $2.0 million or 1.7% of revenues for the three months ended June 30, 2014 compared to $1.9 million or 1.7% of revenues for the same prior year period.

Amortization of other intangible assets decreased to $0.2 million for the three months ended June 30, 2014, compared to $0.4 million for the same prior year period.

Adjusted Segment EBITDA decreased $2.8 million, or 13.3%, to $18.0 million for the three months ended June 30, 2014, compared to $20.8 million for the same prior year period.

Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013

Revenues decreased $2.1 million, or 0.9%, to $224.1 million for the six months ended June 30, 2014 compared to $226.2 million for the same prior year period, which included a 1.2% increase from the estimated positive impact of foreign currency translation. Revenues increased $2.2 million, or 1.0%, due to acquisitions as compared to the same prior year period. Revenues decreased organically $4.4 million, or 1.9%, primarily due to decreased demand in our financial economics practice in the North America region; partially offset by higher demand for our antitrust practice in the EMEA region.

Gross profit decreased $12.3 million, or 16.8%, to $61.3 million for the six months ended June 30, 2014 compared to $73.6 million for the same prior year period. Gross profit margin decreased to 27.3% for the six months ended June 30, 2014 from 32.5% for the same prior year period. The decrease in gross profit margin was the result of employment contract extensions of key senior client-service professionals and lower demand for the financial economics practice in the North America region; partially offset by higher demand for our antitrust practice in the EMEA region.

SG&A expense increased $3.9 million, or 13.9%, to $32.1 million for the six months ended June 30, 2014 compared to $28.2 million for the same prior year period. SG&A expense was 14.3% of revenues for the six months ended June 30, 2014 compared to 12.5% for the same prior year period. The increase in SG&A expense was due to higher administrative costs, bad debt expense, and facilities costs. Bad debt expense was $4.6 million or 2.0% of revenues for the six months ended June 30, 2014 compared to $3.9 million or 1.7% of revenues for the same prior year period.

Amortization of other intangible assets decreased to $0.5 million for the six months ended June 30, 2014, compared to $0.8 million for the same prior year period.

Adjusted Segment EBITDA decreased $15.9 million, or 33.9%, to $31.1 million for the six months ended June 30, 2014, compared to $47.0 million for the same prior year period.

TECHNOLOGY


	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
	(dollars in thousands)						(dollars in thousands)
Revenues	$	60,720		$	51,196		$	120,783		$	97,900

Operating expenses:
Direct cost of revenues		32,949			23,126			63,649			44,987
Selling, general and administrative expenses		16,648			14,793			32,727			29,555
Special charges		—			—			—			14
Amortization of other intangible assets		218			1,985			436			3,970

		49,815			39,904			96,812			78,526

Segment operating income		10,905			11,292			23,971			19,374
Add back:
Depreciation and amortization of intangible assets		4,199			5,596			8,481			11,216
Special charges		—			—			—			14

Adjusted Segment EBITDA	$	15,104		$	16,888		$	32,452		$	30,604

Gross profit ⁽¹⁾	$	27,771		$	28,070		$	57,134		$	52,913
Gross profit margin ⁽²⁾		45.7	%		54.8	%		47.3	%		54.0	%
Adjusted Segment EBITDA as a percent of revenues		24.9	%		33.0	%		26.9	%		31.3	%
Number of revenue generating professionals (at period end) ⁽³⁾		328			285			328			285

⁽¹⁾	Revenues less direct cost of revenues

⁽²⁾	Gross profit as a percent of revenues

⁽³⁾	Includes personnel involved in direct client assistance and revenue generating consultants

Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013

Revenue increased by $9.5 million, or 18.6%, to $60.7 million for the three months ended June 30, 2014 compared to $51.2 million for the same prior year period. The increase in revenue is due to higher demand for complex global investigation matters.

Gross profit decreased by $0.3 million to $27.8 million for the three months ended June 30, 2014 compared to the $28.1 million for the same prior year period. Gross profit margin decreased to 45.7% of revenue from 54.8% of revenue compared to the same period in the same prior year period. The gross profit margin percentage decline was due to an increased mix of lower margin services.

SG&A increased by $1.9 million, or 12.5%, to $16.6 million for the three months ended June 30, 2014 compared to $14.8 million for the same prior year period. SG&A expense was 27.4% of revenue for the three months ending June 30, 2014 compared to 28.9% of revenue for the same prior year period. The SG&A expense increase was related to hiring to support research and development and business development activities. Research and development expense was $4.6 million for the three months ended June 30, 2014 compared to $3.5 million for the same prior year period. Bad debt expense decreased by $0.3 million due to the recoveries of previously reserved balances.

Amortization of other intangible assets decreased $1.8 million for the three months ended June 30, 2014 compared to the same prior year period. The decrease was due to the impact of certain acquisition costs being fully amortized at the end of 2013.

Adjusted Segment EBITDA decreased by $1.8 million, or 10.6%, for the three months ended June 30, 2014 compared to the same prior year period.

Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013

Revenue increased by $22.9 million, or 23.4%, to $120.8 million for the six months ended June 30, 2014 compared to the $97.9 million for the same prior year period. The increase was due to higher volumes on complex global investigation matters, as well as an increase in consulting volume partially offset by reduced pricing for services.

Gross profit increased by $4.2 million, or 8.0%, to $57.1 million for the six months ended June 30, 2014 compared to the $52.9 million for the same prior year period. Gross profit margin percentage decreased to 47.3% of revenue from 54.0%, or by 6.7% compared to the same prior year period. The gross profit margin percentage decrease was due to a change in the mix of revenue with higher margin unit-based revenue comprising a smaller percentage of total revenue, higher third party costs to support the increased document review volumes, and higher personnel costs.

SG&A increased by $3.2 million, or 10.7%, to $32.7 million for the six months ended June 30, 2014 compared to the $29.6 million for the same prior year period. SG&A expense was 27.1% of revenue for the six months ending June 30, 2014 compared to 30.2% of revenue for the same prior year period. The SG&A expense increase was related to higher personnel costs in research and development, corporate allocations in support of growing operations, rent in support of the additional personnel, and reduced capitalization of software development costs. Research and development expense was $9.1 million for the six months ended June 30, 2014 compared to $7.5 million for the same prior year period. Bad debt expense decreased by $0.3 million due to increased recoveries of previously reserved balances.

Amortization of other intangible assets decreased $3.5 million for the six months ended June 30, 2014 compared to the same prior year period. The decrease is due to the impact of certain acquisition costs being fully amortized at the end of 2013.

Adjusted Segment EBITDA increased by $1.8 million, or 6.0%, to $32.5 million for the six months ended June 30, 2014 compared to $30.6 million for the same prior year period.

STRATEGIC COMMUNICATIONS


	Three Months Ended June 30,						Six Months Ended June 30,
	2014			2013			2014			2013
	(dollars in thousands)						(dollars in thousands)
Revenues	$	53,276		$	50,569		$	96,503		$	96,045

Operating expenses:
Direct cost of revenues		34,903			33,354			62,738			63,615
Selling, general and administrative expenses		13,084			12,525			26,212			24,831
Special charges		—			—			—			64
Acquisition-related contingent consideration		132			149			264			149
Amortization of other intangible assets		1,127			1,147			2,254			2,265

		49,246			47,175			91,468			90,924

Segment operating income		4,030			3,394			5,035			5,121
Add back:
Depreciation and amortization of intangible assets		1,804			1,825			3,528			3,588
Special charges		—			—			—			64

Adjusted Segment EBITDA	$	5,834		$	5,219		$	8,563		$	8,773

Gross profit ⁽¹⁾	$	18,373		$	17,215		$	33,765		$	32,430
Gross profit margin ⁽²⁾		34.5	%		34.0	%		35.0	%		33.8	%
Adjusted Segment EBITDA as a percent of revenues		10.9	%		10.3	%		8.9	%		9.1	%
Number of revenue generating professionals (at period end)		566			611			566			611

⁽¹⁾	Revenues less direct cost of revenues

⁽²⁾	Gross profit as a percent of revenues

Three Months Ended June 30, 2014 Compared to Three Months Ended June 30, 2013

Revenues increased $2.7 million, or 5.4%, to $53.3 million for the three months ended June 30, 2014 from $50.6 million for the same prior year period, including a 2.8% increase from the estimated positive impact of foreign currency translation, which was primarily due to the strengthening of the British pound relative to the U.S. dollar. The revenue increase was primarily due to an increase in the number of retained relationships in our EMEA region.

Gross profit increased $1.2 million, or 6.7%, to $18.4 million for the three months ended June 30, 2014 from $17.2 million for the same prior year period. Gross profit margin increased 0.5 percentage points to 34.5% for the three months ended June 30, 2014 from 34.0% for the same prior year period. The increase in gross profit margin was primarily due to the estimated impact of foreign currency translation and higher margin pass-through revenue.

SG&A expense increased $0.6 million, or 4.5%, to $13.1 million for the three months ended June 30, 2014 from $12.5 million for the same prior year period, including a 2.5% increase from the estimated impact of foreign currency translation. SG&A expense was 24.6% of revenue for the three months ended June 30, 2014, down from 24.8% of revenue for the same prior year period. The increase in SG&A was primarily due to severance expense recorded in the EMEA region.

Amortization of other intangible assets was $1.1 million for the three months ended June 30, 2014 which was in line with the corresponding charge for the same prior year period.

Adjusted Segment EBITDA increased $0.6 million, or 11.8%, to $5.8 million for the three months ended June 30, 2014 from $5.2 million for the same prior year period.

Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013

Revenues increased $0.5 million, or 0.5%, to $96.5 million for the six months ended June 30, 2014 from $96.0 million for the same prior year period, which included a 2.0% increase from the estimated positive impact of foreign currency translation, which was primarily due to the strengthening of the British pound relative to the U.S. dollar. The remaining revenue increase was primarily due to an increase in retainer-based revenue in our EMEA region offset by lower pass-through revenues in our North America and EMEA regions.

Gross profit increased $1.3 million, or 4.1%, to $33.8 million for the six months ended June 30, 2014 from $32.4 million for the same prior year period. Gross profit margin increased 1.2% to 35.0% for the six months ended June 30, 2014 from 33.8% for the same prior year period. The increase in gross profit margin was primarily due to higher margin on pass-through revenues in our EMEA and North America regions.

SG&A expense increased $1.4 million, or 5.6%, to $26.2 million for the six months ended June 30, 2014 from $24.8 million for the same prior year period. SG&A expense was 27.2% of revenue for the six months ended June 30, 2014, up from 25.9% of revenue for the same prior year period. The increase in SG&A was primarily due to higher facilities expenses related to the transition to our new London office and severance expense recorded in the EMEA region.

Amortization of other intangible assets was $2.3 million for the six months ended June 30, 2014 which was in line with the corresponding charge for the same prior year period.

Adjusted Segment EBITDA decreased $0.2 million, or 2.4%, to $8.6 million for the six months ended June 30, 2014 from $8.8 million for the same prior year period.

CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements, which we have prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Note 1 to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2013 describes the significant accounting policies and methods used in preparation of the Consolidated Financial Statements and is hereby incorporated by reference herein. We evaluate our estimates, including those related to bad debts, goodwill, income taxes and contingencies on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. These results form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The accounting policies that reflect our more significant estimates, judgments and assumptions and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:

•

Revenue recognition

•

Allowance for doubtful accounts and unbilled services

•

Goodwill and other intangible assets

•

Business combinations

•

Share-based compensation

•

Income taxes

There have been no material changes to our critical accounting policies and estimates from the information provided in Part II, “Management’s Discussion and Analysis of Financial Condition and Results of Operations— Critical Accounting Policies,” as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC on February 24, 2014.

Goodwill and Other Intangible Assets

On a quarterly basis, we monitor the key drivers of fair value to detect events or other changes that would warrant an interim impairment test of our goodwill and intangible assets. Factors we consider important which could trigger an interim impairment review include, but are not limited to the following: significant underperformance relative to historical or projected future operating results; a significant change in the manner of our use of the acquired asset or strategy for our overall business; a significant negative industry or economic trend; and our market capitalization relative to net book value. Through our assessment, we determined that there were no events or circumstances that more likely than not would reduce the fair value of any of our reporting units below their carrying value. Accordingly, we did not perform an interim impairment test in either of the quarters in the six months ended June 30, 2014.

There can be no assurance that the estimates and assumptions used in our goodwill impairment testing will prove to be accurate predictions of the future. If our assumptions regarding forecasted cash flows are not achieved, we may be required to perform the two-step quantitative goodwill impairment analysis prior to our next annual impairment test. In addition, if the aforementioned factors have the effect of changing one of the critical assumptions or estimates we use to calculate the value of our goodwill or intangible assets, we may be required to record goodwill and/or intangible asset impairment charges in future periods, whether in connection with our next annual impairment test or if a triggering event occurs outside of the quarter during which the annual goodwill impairment test is performed. It is not possible at this time to determine if any future impairment charge would result or, if it does, whether such charge would be material.

SIGNIFICANT NEW ACCOUNTING PRONOUNCEMENTS

In May 2014, the Financial Accounting Standards Board issued Accounting Standards Update 2014-09, Revenue from Contracts with Customers, or ASU 2014-09. ASU 2014-09 is a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. This guidance is effective for interim and annual periods beginning after December 15, 2016 and early adoption is not permitted. Companies may use either a full retrospective or a modified retrospective approach to adopt this ASU and management is currently evaluating which transition approach to use. The Company is currently evaluating the impact of the adoption of this accounting standard update on its condensed consolidated financial statements.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows


	Six Months Ended June 30,
	2014			2013
	(dollars in thousands)
Net cash (used in) provided by operating activities	$	(77,104	)	$	19,369
Net cash used in investing activities	$	(37,395	)	$	(54,621	)
Net cash used in financing activities	$	3,630		$	(28,129	)
DSO		108			99

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

Our operating assets and liabilities consist primarily of billed and unbilled accounts receivable, notes receivable from employees, accounts payable, accrued expenses and accrued compensation expense. The timing of billings and collections of receivables as well as payments for compensation arrangements affect the changes in these balances.

DSO is a performance measure used to assess how quickly revenues are collected by the Company. We calculate DSO at the end of each reporting period by dividing net accounts receivable reduced by billings in excess of services provided, by revenue for the quarter, adjusted for changes in foreign exchange rates. We multiply the result by the number of days in the quarter. Our DSO typically reaches its lowest point at December 31 each year and has consistently increased during the following quarters.

Six Months Ended June 30, 2014 Compared to Six Months Ended June 30, 2013

Cash used in operating activities was $77.1 million for the six months ended June 30, 2014 compared to cash provided by operating activities of $19.4 million for the same prior year period. The primary driver for the $84.9 million decrease in operating cash flows relative to the prior year was higher salary payments driven by the impact of salary increases and headcount additions, and the timing of bonus payments. Days sales outstanding (“DSO”), which is one measure of the collections cycle, was 108 days at June 30, 2014 and 99 days at June 30, 2013. Current DSO compared to the prior year has been impacted by the mix of revenues between our segments, an increase in unbilled receivables related to our Asia Pacific liquidation business which is subject to lengthy regulatory proceedings and extended payment terms which have been granted to certain large scale engagements.

Net cash used in investing activities for the six months ended June 30, 2014 was $37.4 million compared to $54.6 million for the same prior year period. Payments for acquisitions completed during the six months ended June 30, 2014 were $1.0 million, net of cash received, compared to $30.4 million for the same prior year period. Payments of acquisition-related contingent consideration were $14.6 million for the six months ended June 30, 2014 compared to payments of acquisition-related contingent consideration and stock price guarantees of $6.2 million and $3.9 million, respectively, for the same prior year period. Capital expenditures were $21.8 million for the six months ended June 30, 2014 compared to $14.1 million for the same prior year period.

Net cash provided by financing activities for the six months ended June 30, 2014 was $3.6 million compared to net cash used in financing activities of $28.1 million for the same prior year period. Our financing activities for the six months ended June 30, 2014 included payments of $4.4 million to settle repurchases of the Company’s common stock that were made, but not settled in the fourth quarter of 2013, and the receipt of $11.6 million of refundable deposits related to one of our foreign entities. Our financing activities for the six months ended June 30, 2013 included the purchase and retirement of 826,800 shares of our common stock, at an aggregate cost of $28.8 million.

Capital Resources

As of June 30, 2014, our capital resources included $94.4 million of cash and cash equivalents and available borrowing capacity of $348.6 million under our $350.0 senior secured bank credit facility (“bank credit facility”). As of June 30, 2014, we had no outstanding borrowings under our bank credit facility and $1.4 million of outstanding letters of credit, which reduced the availability of borrowings under the bank credit facility. We use letters of credit primarily in lieu of security deposits for our leased office facilities.

Future Capital Needs

We anticipate that our future capital needs will principally consist of funds required for:

•

operating and general corporate expenses relating to the operation of our businesses;

•

capital expenditures, primarily for information technology equipment, office furniture and leasehold improvements;

•

debt service requirements, including interest payments on our long-term debt;

•

compensating designated executive management and senior managing directors under our various long-term incentive compensation programs;

•

contingent obligations related to our acquisitions;

•

potential acquisitions of businesses that would allow us to diversify or expand our service offerings; and

•

other known future contractual obligations.

For the full fiscal year 2014, we anticipate aggregate capital expenditures will range between $37 million and $40 million to support our organization, including direct support for specific client engagements. Our estimate takes into consideration the needs of our existing businesses but does not include the impact of any purchases that we make as a result of future acquisitions or specific client engagements that are not currently contemplated. Our capital expenditure requirements may change if our staffing levels or technology needs change significantly from what we currently anticipate, if we purchase additional equipment specifically to support a client engagement or if we pursue and complete additional acquisitions.

In certain business combinations consummated prior to January 1, 2009, a portion of our purchase price was in the form of contingent consideration, often referred to as earn-outs. The use of contingent consideration allows us to shift some of the valuation risk, inherent at the time of acquisitions, to the sellers based upon the outcome of future financial targets that the sellers contemplate in the valuations of the companies, assets or businesses they sell. Contingent consideration is payable annually as agreed upon performance targets are met and is generally subject to a maximum amount within a specified time period. Our obligations change from period-to-period primarily as a result of payments made during the current period, changes in the acquired entities’ performance and changes in foreign currency exchange rates. In addition, certain acquisition-related restricted stock agreements contain common stock price guarantees that may result in cash payments in the future if our closing per share price falls below a specified per share price on the date the stock restrictions lapse. As of June 30, 2014, we had no accrued contingent consideration liabilities for business combinations consummated prior to January 1, 2009 and no remaining restricted stock agreements with common stock price guarantees.

For business combinations consummated on or after January 1, 2009, contingent consideration obligations are recorded as liabilities on our Condensed Consolidated Balance Sheets and remeasured to fair value at each subsequent reporting date with an offset to current period earnings. The fair value of future expected contingent purchase price obligations for these business combinations are $6.6 million at June 30, 2014 with payment dates extending through 2018.

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

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

•

our future profitability;

•

the quality of our accounts receivable;

•

our relative levels of debt and equity;

•

the volatility and overall condition of the capital markets; and

•

the market prices of our securities.

Any new debt funding, if available, may be on terms less favorable to us than our bank credit facility or the indentures that govern our senior notes. See “—Forward-Looking Statements” in this Quarterly Report on Form 10-Q and “Risk Factors” included in Part I—Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2013.

Off-Balance Sheet Arrangements

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

Future Contractual Obligations

There have been no significant changes in our future contractual obligations since December 31, 2013.

Forward-Looking Statements

This Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act, that involve uncertainties and risks. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues, future results and performance, future capital expenditures, expectations, plans or intentions relating to acquisitions and other matters, business trends and other information that is not historical. Forward-looking statements often contain words such as estimates, expects, anticipates, projects, plans, intends, believes, forecasts and variations of such words or similar expressions. All forward-looking statements, including, without limitation, management’s examination of historical operating trends, are based upon our historical performance and our current plans, estimates and expectations at the time we make them and various assumptions. There can be no assurance that management’s expectations, beliefs and projections will result or be achieved. Our actual financial results, performance or achievements could differ materially from those expressed in, or implied by, any forward-looking statements. The inclusion of any forward-looking information should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved. Given these risks, uncertainties and other factors, you should not place undue reliance on any forward-looking statements.

There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in, or implied by, this Quarterly Report on Form 10-Q. Important factors that could cause our actual results to differ materially from the forward-looking statements we make in this Quarterly Report on Form 10-Q are set forth under the heading “Risk Factors” included in Part I—Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2013. Important factors that could cause our actual results to differ materially from the forward-looking statements we make in this Quarterly Report on Form 10-Q include the following:

•

changes in demand for our services;

•

our ability to attract and retain qualified professionals and senior management;

•

conflicts resulting in our inability to represent certain clients;

•

our former employees joining or forming competing businesses;

•

our ability to manage our professionals’ utilization and billing rates and maintain or increase the pricing of our services and products;

•

our ability to identify suitable acquisition candidates, negotiate favorable terms, take advantage of opportunistic acquisition situations and integrate the operations of acquisitions as well as the costs of integration;

•

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

•

our ability to replace key personnel, including senior managers and practice and regional leaders who have highly specialized skills and experience;

•

our ability to protect the confidentiality of internal and client data and proprietary and confidential information;

•

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

•

periodic fluctuations in revenues, operating income and cash flows;

•

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

•

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

•

competition for clients and key personnel;

•

general economic factors, industry trends, restructuring and bankruptcy rates, legal or regulatory requirements, capital market conditions, merger and acquisition activity, major litigation activity and other events outside of our control;

•

our ability to manage growth;

•

risk of non-payment of receivables;

•

the amount and terms of our outstanding indebtedness;

•

risks relating to the obsolescence of, changes to, or the protection of, our proprietary software products and intellectual property rights; and

•

fluctuations in the mix of our services and the geographic locations in which our clients are located or our services are rendered.

There may be other factors that may cause our actual results to differ materially from our forward-looking statements. All forward-looking statements attributable to us or persons acting on our behalf apply only as of the date of this Quarterly Report on Form 10-Q and are expressly qualified in their entirety by the cautionary statements included herein. We undertake no obligation to publicly update or revise any forward-looking statements to reflect subsequent events or circumstances and do not intend to do so.

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, 2013. There have been no significant changes in our market risk exposure during the period covered by this Quarterly Report on Form 10-Q.

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, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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 factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the SEC on February 24, 2014. We may disclose changes to risk factors or disclose additional factors from time to time in our future filings with the 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, 2014.


	Total Number of Shares Purchased ⁽¹⁾		Average Price Paid per Share		Shares Purchased as Part of Publicly Announced Program		Approximate Dollar Value that May Yet Be Purchased Under the Program ⁽²⁾
April 1 through April 30, 2014		213	$	34.26		—	$	128,838,000
May 1 through May 31, 2014		4,386	$	30.68		—	$	128,838,000
June 1 through June 30, 2014		8,702	$	32.84		—	$	—

Total		13,301				—

⁽¹⁾	Represents shares of common stock withheld to cover payroll tax withholdings related to the lapse of restrictions on restricted stock.

⁽²⁾

In June 2012, our Board of Directors authorized a two-year stock repurchase program of up to $250.0 million (the “2012 Repurchase Program”). There were no shares repurchased under the 2012 Repurchase Program during the quarter ended June 30, 2014. On June 5, 2014, the 2012 Repurchase Program expired with an unused balance of approximately $128.8 million.

Item 3.

Defaults Upon Senior Securities.

None

Item 4.

Mine Safety Disclosures.

Not applicable

Item 5.

Other Information.

None

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		Articles of Amendment of FTI Consulting, Inc. (Filed with the SEC on June 2, 2011 as an exhibit to FTI Consulting, Inc.’s Current Report on Form 8-K dated June 1, 2011 and incorporated herein by reference.)

3.3		Bylaws of FTI Consulting, Inc., as amended and restated on June 1, 2011. (Filed with the SEC on June 2, 2011 as an exhibit to FTI Consulting, Inc.’s Current Report on Form 8-K dated June 1, 2011 and incorporated herein by reference.)

3.4		Amendment No. 1 to Bylaws of FTI Consulting, Inc. (Filed with the Securities and Exchange Commission on December 16, 2013 as an exhibit to FTI Consulting, Inc.’s Current Report on Form 8-K dated December 13, 2013 and incorporated herein by reference.)

31.1†		Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended (Section 302 of the Sarbanes-Oxley Act of 2002).

31.2†		Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended (Section 302 of the Sarbanes-Oxley Act of 2002).

32.1†		Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002).

32.2†		Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002).

101**		The following financial information from the Quarterly Report on Form 10-Q of FTI Consulting, Inc. for the quarter ended June 30, 2014, furnished electronically herewith, and formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets; (ii) Condensed Consolidated Statements of Comprehensive Income; (iii) Condensed Consolidated Statement of Stockholders’ Equity; (iv) Condensed Consolidated Statements of Cash Flows; and (v) Notes to the Condensed Consolidated Financial Statements, tagged as blocks of text.

†	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.

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: July 31, 2014


FTI CONSULTING, INC.

By		/s/ Catherine M. Freeman
		Catherine M. Freeman
		Senior Vice President, Controller and Chief Accounting Officer
		(principal accounting officer)