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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

 

  For the quarterly period ended September 30, 2009

OR

 

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

 

  For the transition period from                    to                    

Commission file number 001-14875

 

 

FTI CONSULTING, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Maryland   52-1261113

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

777 South Flagler Drive, Suite 1500 West Tower,

West Palm Beach, Florida

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

(561) 515-1900

(Registrant’s telephone number, including area code)

 

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web Site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.    Yes  ¨    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 October 28, 2009

Common stock, par value $0.01 per share

   51,813,225

 

 

 


Table of Contents

FTI CONSULTING, INC. AND SUBSIDIARIES

INDEX

 

          Page

PART I—FINANCIAL INFORMATION

  

Item 1.

   Financial Statements   
   Condensed Consolidated Balance Sheets—September 30, 2009 and December 31, 2008    3
   Condensed Consolidated Statements of Income—Three and nine months ended September 30, 2009 and 2008    4
   Condensed Consolidated Statement of Stockholders’ Equity and Comprehensive Income—Nine months ended September 30, 2009    5
   Condensed Consolidated Statements of Cash Flow—Nine months ended September 30, 2009 and 2008    6
   Notes to Condensed Consolidated Financial Statements    7

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    27

Item 3.

   Quantitative and Qualitative Disclosures about Market Risk    51

Item 4.

   Controls and Procedures    52

PART II—OTHER INFORMATION

  

Item 1.

   Legal Proceedings    53

Item 1A.

   Risk Factors    53

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds    53

Item 3.

   Defaults Upon Senior Securities    53

Item 4.

   Submission of Matters to a Vote of Security Holders    54

Item 5.

   Other Information    54

Item 6.

   Exhibits    54

SIGNATURES

   55


Table of Contents

PART I—FINANCIAL INFORMATION

FTI Consulting, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except per share amounts)

Unaudited

 

Item 1. Financial Statements

 

     September 30,
2009
    December 31,
2008
 
           As Adjusted
(Note 2)
 

Assets

    

Current assets

    

Cash and cash equivalents

   $ 277,969      $ 191,842   

Short-term investments

     35,655        —     

Accounts receivable:

    

Billed receivables

     254,601        237,009   

Unbilled receivables

     119,172        98,340   

Allowance for doubtful accounts and unbilled services

     (63,590     (45,309
                

Accounts receivable, net

     310,183        290,040   

Notes receivable

     20,472        15,145   

Prepaid expenses and other current assets

     28,376        34,989   

Deferred income taxes

     24,742        24,372   
                

Total current assets

     697,397        556,388   

Property and equipment, net of accumulated depreciation

     74,792        78,575   

Goodwill

     1,173,552        1,143,461   

Other intangible assets, net of amortization

     180,597        189,304   

Notes receivable, net of current portion

     71,093        56,500   

Other assets

     54,348        59,349   
                

Total assets

   $ 2,251,779      $ 2,083,577   
                

Liabilities and Stockholders’ Equity

    

Current liabilities

    

Accounts payable, accrued expenses and other

   $ 60,026      $ 108,905   

Accrued compensation

     149,409        135,922   

Current portion of long-term debt and capital lease obligations

     137,613        132,915   

Billings in excess of services provided

     28,635        30,872   
                

Total current liabilities

     375,683        408,614   

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

     417,532        418,592   

Deferred income taxes

     98,255        83,777   

Other liabilities

     48,970        45,037   
                

Total liabilities

     940,440        956,020   
                

Commitments and contingent liabilities (notes 10, 12 and 13)

    

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—51,815 (2009) and 50,903 (2008)

     518        509   

Additional paid-in capital

     776,870        733,520   

Retained earnings

     578,956        472,503   

Accumulated other comprehensive income

     (45,005     (78,975
                

Total stockholders’ equity

     1,311,339        1,127,557   
                

Total liabilities and stockholders’ equity

   $ 2,251,779      $ 2,083,577   
                

See accompanying notes to the condensed consolidated financial statements

 

3


Table of Contents

FTI Consulting, Inc. and Subsidiaries

Condensed Consolidated Statements of Income

(in thousands, except per share data)

Unaudited

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009     2008     2009     2008  
           As Adjusted
(Note 2)
          As Adjusted
(Note 2)
 

Revenues

   $ 348,637      $ 325,497      $ 1,057,008      $ 970,269   
                                

Operating expenses

        

Direct cost of revenues

     193,204        175,309        579,797        537,703   

Selling, general and administrative expense

     84,976        91,513        262,571        241,989   

Amortization of other intangible assets

     6,171        5,664        18,370        13,019   
                                
     284,351        272,486        860,738        792,711   
                                

Operating income

     64,286        53,011        196,270        177,558   
                                

Other income (expense)

        

Interest income and other

     3,330        1,942        6,085        7,536   

Interest expense

     (11,434     (10,942     (33,477     (33,848

Litigation settlement gains (losses), net

     —          (275     250        (711
                                
     (8,104     (9,275     (27,142     (27,023
                                

Income before income tax provision

     56,182        43,736        169,128        150,535   

Income tax provision

     18,626        17,383        62,675        59,778   
                                

Net income

   $ 37,556      $ 26,353      $ 106,453      $ 90,757   
                                

Earnings per common share—basic

   $ 0.74      $ 0.53      $ 2.11      $ 1.85   
                                

Earnings per common share—diluted

   $ 0.70      $ 0.48      $ 1.99      $ 1.69   
                                

 

See accompanying notes to the condensed consolidated financial statements

 

4


Table of Contents

FTI Consulting, Inc. and Subsidiaries

Condensed Consolidated Statement of Stockholders’ Equity and Comprehensive Income

(in thousands)

Unaudited

 

            Additional
Paid-in
Capital
    Retained
Earnings
  Accumulated
Other
Comprehensive
Income
    Total  
    Common Stock        
    Shares   Amount        

Balance January 1, 2009—As Adjusted (Note 2)

  50,903   $ 509   $ 733,520      $ 472,503   $ (78,975   $ 1,127,557   

Comprehensive income:

           

Cumulative translation adjustment, net of income taxes of $0

  —       —       —          —       33,980        33,980   

Unrealized loss on marketable securities, net of income taxes of $7

  —       —       —          —       (10     (10

Net income

  —       —       —          106,453     —          106,453   
                 

Total comprehensive income

              140,423   

Issuance of common stock in connection with:

           

Exercise of options, including income tax benefit of $3,762

  471     5     15,456        —       —          15,461   

Employee stock purchase plan

  138     1     5,236        —       —          5,237   

Restricted share grants, less net settled shares of 26

  273     3     (1,268     —       —          (1,265

Stock units issued under incentive compensation plan

  —       —       5,308        —       —          5,308   

Business combinations

  30     —       577        —       —          577   

Reacquisition of equity component of convertible debt

  —       —       (3     —       —          (3

Share-based compensation

  —       —       18,044        —       —          18,044   
                                       

Balance September 30, 2009

  51,815   $ 518   $ 776,870      $ 578,956   $ (45,005   $ 1,311,339   
                                       

 

See accompanying notes to the condensed consolidated financial statements

 

5


Table of Contents

FTI Consulting, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flow

(in thousands)

Unaudited

 

    Nine Months Ended
September 30,
 
    2009     2008  
          As Adjusted
(Note 2)
 

Operating activities

   

Net income

  $ 106,453      $ 90,757   

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

   

Depreciation

    21,523        19,099   

Amortization of other intangible assets

    18,370        13,019   

Provision for doubtful accounts

    15,040        13,107   

Non-cash share-based compensation

    18,439        21,392   

Excess tax benefits from share-based compensation

    (3,647     (5,653

Non-cash interest expense

    5,449        5,311   

Other

    (1,801     3,022   

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

   

Accounts receivable, billed and unbilled

    (30,120     (81,898

Notes receivable

    (19,638     (6,322

Prepaid expenses and other assets

    3,451        (8,319

Accounts payable, accrued expenses and other

    (16,218     (4,382

Income taxes

    30,761        20,812   

Accrued compensation

    18,017        25,224   

Billings in excess of services provided

    (2,535     1,279   
               

Net cash provided by operating activities

    163,544        106,448   
               

Investing activities

   

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

    (38,152     (313,402

Purchases of property and equipment

    (17,975     (24,385

Purchases of short-term investments

    (35,717     —     

Other

    303        991   
               

Net cash used in investing activities

    (91,541     (336,796
               

Financing activities

   

Payments of short-term borrowings of acquired subsidiary

    —          (2,275

Payments of long-term debt and capital lease obligations

    (13,459     (7,511

Cash received for settlement of interest rate swaps

    2,288        —     

Net issuance of common stock under equity compensation plans

    15,671        22,476   

Excess of tax benefits from share-based compensation

    3,647        5,653   

Other

    (4     (171
               

Net cash provided by financing activities

    8,143        18,172   
               

Effect of exchange rate changes and fair value adjustments on cash and cash equivalents

    5,981        (2,110
               

Net increase (decrease) in cash and cash equivalents

    86,127        (214,286

Cash and cash equivalents, beginning of period

    191,842        360,463   
               

Cash and cash equivalents, end of period

  $ 277,969      $ 146,177   
               

Supplemental cash flow disclosures

   

Cash paid for interest

  $ 30,692      $ 22,626   

Cash paid for income taxes, net of refunds

    31,913        38,175   

Non-cash investing and financing activities:

   

Issuance of common stock to acquire businesses

    707        47,605   

Issuance of stock units under incentive compensation plans

    5,308        3,496   

Issuance of notes payable as contingent consideration

    12,789        506   

See accompanying notes to the condensed consolidated financial statements

 

6


Table of Contents

FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

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

Unaudited

1. Basis of Presentation and Significant Accounting Policies

Our unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) and under the rules and regulations of the Securities and Exchange Commission (SEC) for interim financial information. Some of the information and footnote disclosures normally included in annual financial statements have been condensed or omitted pursuant to those rules or regulations. In management’s opinion, the interim financial statements reflect all adjustments that are necessary for a fair presentation of the results for the interim periods presented. All adjustments made were normal recurring accruals. Results of operations for the interim periods presented herein are not necessarily indicative of results of operations for a full year. These financial statements should be read in conjunction with the consolidated financial statements and the notes contained in our Annual Report on Form 10-K for the year ended December 31, 2008. Subsequent events have been evaluated through November 5, 2009, the date the financial statements were issued.

2. Revision to Previously Reported Financial Information

Correction of Immaterial Error

In the third quarter of 2009, we concluded an internal re-examination of our contingent acquisition payments and related accounting treatment. As a result of this review, we discovered an immaterial error which impacts previously reported results for 2006, 2007 and 2008. As previously disclosed in the Current Report on Form 8-K that we filed with the Securities and Exchange Commission on August 10, 2009, we are revising our previously reported financial information in the third quarter 2009 filing to reflect the impact of the correction of the immaterial error. The immaterial error that we noted relates to certain contingent acquisition payments made to the owners of five businesses acquired within the Strategic Communications segment, upon the achievement of required performance conditions as specified in their related purchase contracts. These purchase contracts allowed for a small portion of the contingent payment to be paid to employee benefit trusts (EBT) or to a designated employee group or other employees who at the time were deemed to be shareholders. After further analysis, we concluded that neither the EBT nor the designated employees who received contingent payments qualified as original selling shareholders of the acquired businesses. As such, distributions made from an EBT or to these designated employee groups should have been recorded as compensation expense and not capitalized as part of the purchase price of the applicable acquisition.

We assessed the materiality of these errors in accordance with SEC Staff Accounting Bulletin No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” and determined that the error was immaterial to the previously reported amounts contained in our periodic filings. The impact of the correction of the immaterial error was a decrease to net income and diluted earnings per share of $2.1 million and $0.04 per share; $3.5 million and $0.08 per share; and $0.8 million and $0.02 per share in 2008, 2007 and 2006, respectively. The correction of the immaterial error resulted in a decrease in cash flows from operations of $2.2 million and a corresponding increase in cash flows from investing activities for the nine months ended September 30, 2008. In addition, we determined that one of the EBT’s meets the criteria for consolidation and accordingly, the consolidation of the EBT is reflected in all periods presented.

Change in Accounting Principle

On January 1, 2009 we adopted the provisions of Accounting Standards Codification (“ASC”) 470-20, Debt with Conversion and Other Options (formerly FSP APB 14-1) for convertible debt instruments that have cash settlement features. ASC 470-20 requires issuers of convertible debt securities within its scope to separate those securities into a debt component and an equity component, resulting in the debt component being recorded at fair

 

7


Table of Contents

FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

value without consideration given to the conversion feature. Issuance costs are also allocated between the debt and equity components. We are required to record interest expense using our nonconvertible debt borrowing rate. The provisions of ASC 470-20 are retrospective upon adoption, and prior period amounts have been adjusted to apply the new method of accounting. This new guidance applies to our 3 3/4% Convertible Senior Subordinated Notes due 2012 (“Convertible Notes”) issued in August 2005. The cumulative impact of the accounting change on retained earnings for years prior to 2006 was $0.8 million. The impact of the adoption of this accounting change was a decrease to net income and diluted earnings per share of $2.4 million and $0.05 per share; $2.3 million and $0.05 per share; and $2.1 million and $0.05 per share in 2008, 2007 and 2006, respectively.

The combined effect of recording the correction of the immaterial error and the change in accounting principle in our consolidated statement of income is presented in the following table:

 

     For the Year Ended  
     December 31,
2008
    December 31,
2007
    December 31,
2006
 

(In thousands, except per share data)

   As
Reported
    As
Revised
    As
Reported
    As
Revised
    As
Reported
    As
Revised
 

Direct cost of revenues

   $ 705,611      $ 708,782      $ 548,407      $ 552,347      $ 389,032      $ 389,089   

Selling, general and administrative expense

     330,052        330,192        255,238        255,876        178,572        179,360   

Operating income

     238,658        235,347        187,010        182,432        106,182        105,337   

Interest income and other

     8,685        8,840        7,639        8,091        2,119        2,198   

Interest expense

     (41,051     (45,105     (43,857     (47,639     (28,949     (32,441

Income before income tax provision

     205,631        198,421        149,790        141,883        79,165        74,906   

Income tax provision

     80,196        77,515        57,669        55,548        37,141        35,744   

Net income

     125,435        120,906        92,121        86,334        42,024        39,162   

Earnings per common share:

            

Basic

   $ 2.55      $ 2.46      $ 2.14      $ 2.01      $ 1.06      $ 0.99   

Diluted

   $ 2.34      $ 2.26      $ 2.00      $ 1.88      $ 1.04      $ 0.97   

The combined effect of recording the correction of the immaterial error and the change in accounting principle in our consolidated statement of income for each of the quarters in 2008 is presented in the following table:

 

    For the Three Months Ended       For the Nine Months Ended    
    March 31,
2008
    June 30,
2008
    September 30,
2008
    December 31,
2008
    September 30,
2008
 

(In thousands, except per
share data)

  As
Reported
    As
Revised
    As
Reported
    As
Revised
    As
Reported
    As
Revised
    As
Reported
    As
Revised
    As
Reported
    As
Revised
 

Direct cost of revenues

  $ 172,521      $ 173,404      $ 188,166      $ 188,990      $ 174,514      $ 175,309      $ 170,410      $ 171,079      $ 535,201      $ 537,703   

Selling, general and administrative expense

    72,572        72,697        77,773        77,779        91,508        91,513        88,199        88,203        241,853        241,989   

Operating Income

    59,111        58,103        67,274        66,444        53,811        53,011        58,462        57,789        180,196        177,558   

Interest income and other

    3,311        3,545        2,089        2,049        1,980        1,942        1,305        1,304        7,380        7,536   

Interest expense

    (10,618     (11,599     (10,303     (11,307     (9,914     (10,942     (10,216     (11,257     (30,835     (33,848

Income before income tax provision

    51,803        50,048        58,625        56,751        45,602        43,736        49,601        47,886        156,030        150,535   

Income tax provision

    20,514        19,852        23,215        22,543        18,059        17,383        18,408        17,737        61,788        59,778   

Net income

    31,289        30,196        35,410        34,208        27,543        26,353        31,193        30,149        94,242        90,757   

Earnings per common share:

                   

Basic

  $ 0.65      $ 0.62      $ 0.72      $ 0.70      $ 0.56      $ 0.53      $ 0.63      $ 0.61      $ 1.92      $ 1.85   

Diluted

  $ 0.59      $ 0.57      $ 0.66      $ 0.64      $ 0.51      $ 0.48      $ 0.58      $ 0.56      $ 1.76      $ 1.69   

 

8


Table of Contents

FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

The combined effect of recording the correction of the immaterial error and the change in accounting principle on the consolidated balance sheet at December 31, 2008 is presented in the following table:

 

     December 31, 2008  

(In thousands)

   As
Reported
    As
Revised
 

Prepaid expenses and other current assets

   $ 31,055      $ 34,989   

Total current assets

     552,454        556,388   

Goodwill

     1,151,388        1,143,461   

Other assets—noncurrent

     59,948        59,349   

Total assets

     2,088,169        2,083,577   

Accounts payable, accrued expenses and other

     109,036        108,905   

Accrued compensation

     133,103        135,922   

Current portion of long-term debt and capital lease obligations

     150,898        132,915   

Total current liabilities

     423,909        408,614   

Deferred income taxes—noncurrent

     76,804        83,777   

Total liabilities

     964,342        956,020   

Additional paid-in capital

     717,158        733,520   

Retained earnings

     486,493        472,503   

Accumulated other comprehensive (loss) income

     (80,333     (78,975

Total stockholders’ equity

     1,123,827        1,127,557   

Total liabilities and stockholders’ equity

     2,088,169        2,083,577   

The Notes to the Condensed Consolidated Financial Statements have also been updated to reflect the correction of the immaterial errors and the retrospective adoption of the change in accounting principle.

3. Recent Accounting Pronouncements

In July 2009, the FASB Accounting Standards Codification (the “Codification”) officially became the single source of authoritative U.S. GAAP used by nongovernmental entities in the preparation of financial statements, except for rules and interpretive releases of the SEC under authority of federal securities laws, which are sources of authoritative accounting guidance for SEC registrants. The Codification is meant to simplify user access to authoritative accounting guidance by reorganizing U.S. GAAP pronouncements into roughly 90 accounting topics within a consistent structure, and does not create new accounting and reporting guidance. The Codification was effective as of July 1, 2009. The impact on our financial statements is limited to disclosures. All references to authoritative accounting literature will now be referenced in accordance with the Codification.

In October 2009, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2009-13, Multiple-Deliverable Revenue Arrangements (ASU 2009-13), which affects ASC Topic 605, Revenue Recognition. ASU 2009-13 amends the criteria for separating consideration in multiple-deliverable arrangements. It eliminates the requirement under previous guidance that all undelivered elements have vendor-specific objective evidence (VSOE) or third-party evidence (TPE) of fair value before recognizing a portion of revenue related to the delivered items, and establishes that revenue be allocated to each element based on its relative selling price, as determined by VSOE, TPE, or the entity’s estimated selling price if neither of the aforementioned is available. Additionally, ASU 2009-13 eliminates the residual method of allocation and expands required disclosures about multiple-element revenue arrangements. It will be effective prospectively for revenue arrangements entered into beginning January 1, 2011, with early adoption permitted.

 

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FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

In June 2009, the FASB issued guidance included in ASC Topic 810, Consolidation (formerly Statement of Financial Accounting Standards (SFAS) No. 167). The provisions of ASC Topic 810 amend previous guidance set forth by FASB Interpretation No. 46(R) “Consolidation of Variable Interest Entities” to address the elimination of the concept of a qualifying special purpose entity. It also replaces the quantitative-based risks and rewards calculation for determining which enterprise has a controlling financial interest in a variable interest entity with an approach focused on identifying which enterprise has the power to direct the activities of a variable interest entity and the obligation to absorb losses or right to receive benefits from the entity. ASC Topic 810 requires additional disclosures aimed at providing more timely and useful information about an enterprise’s involvement with a variable interest entity. These new provisions will become effective as of January 1, 2010 for calendar year-end companies. We will adopt the new provisions of ASC Topic 810 in January 2010, and do not anticipate any material impact on our consolidated financial statements.

In May 2009, the FASB issued guidance included in ASC Topic 855, Subsequent Events (formerly SFAS No. 165). ASC Topic 855 provides general standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. The new guidance sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements. It also sets forth the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements. Furthermore, ASC Topic 855 identifies the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. It is effective for interim or annual financial periods ending after June 15, 2009.

In April 2009, the FASB issued guidance included in ASC Topic 805, Business Combinations (formerly FSP FAS 141(R)-1), which amends and clarifies SFAS No. 141(R), “Business Combinations” (“Statement 141(R)”). ASC Topic 805 requires that assets acquired and liabilities assumed in a business combination that arise from contingencies be recognized at fair value if fair value can be reasonably estimated. If fair value cannot be reasonably estimated, the asset or liability would generally be recognized in accordance with ASC Topic 450, Contingencies. Further, the FASB decided to remove the subsequent accounting guidance for assets and liabilities arising from contingencies from Statement 141(R), and carry forward without significant revision the guidance in FASB Statement No. 141, “Business Combinations.” The new provisions of ASC Topic 805 are effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.

 

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FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

4. Earnings Per Common Share

Basic earnings per common share are calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per common share adjust basic earnings per share for the effects of potentially dilutive common shares. Potentially dilutive common shares primarily include the dilutive effects of shares issuable under our equity compensation plans, including restricted shares using the treasury stock method, and shares issuable upon conversion of our Convertible Notes assuming the conversion premium was converted into common stock based on the average closing price per share of our stock during the period. The conversion feature of our Convertible Notes had a dilutive effect on our earnings per share in 2009 and 2008 because the average closing price per share of our common stock for such periods was above the conversion price of the Convertible Notes of $31.25 per share.

 

    Three Months Ended
September 30,
  Nine Months Ended
September 30,
    2009   2008   2009   2008

Numerator—basic and diluted

       

Net income

  $ 37,556   $ 26,353   $ 106,453   $ 90,757
                       

Denominator

       

Weighted average number of common shares outstanding—basic

    50,696     49,541     50,419     49,009

Effect of dilutive stock options

    1,196     1,747     1,202     1,677

Effect of dilutive convertible notes

    1,689     2,676     1,665     2,485

Effect of dilutive restricted shares

    315     496     298     469
                       
    53,896     54,460     53,584     53,640
                       

Earnings per common share—basic

  $ 0.74   $ 0.53   $ 2.11   $ 1.85
                       

Earnings per common share—diluted

  $ 0.70   $ 0.48   $ 1.99   $ 1.69
                       

Antidilutive stock options and restricted shares

    1,221     515     1,081     367
                       

5. Comprehensive Income

The following table sets forth the components of comprehensive income.

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009     2008     2009     2008  

Net income

   $ 37,556      $ 26,353      $ 106,453      $ 90,757   

Other comprehensive income, net of tax:

        

Cumulative translation adjustment

     (7,186     (19,759     33,980        (19,159

Unrealized loss on marketable securities

     (10     —          (10     —     

Unrealized gain on cash equivalents

     —          —          —          55   
                                

Comprehensive income

   $ 30,360      $ 6,594      $ 140,423      $ 71,653   
                                

6. Provision for Doubtful Accounts

The provision for doubtful accounts relates to a client’s inability or unwillingness to make required payments, and is classified in selling, general and administrative expense. The provision for doubtful accounts totaled $2.8 million and $15.0 million for the three and nine months ended September 30, 2009, respectively and $4.5 million and $13.1 million for the three and nine months ended September 30, 2008, respectively.

 

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FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

7. Research and Development Costs

Research and development costs related to software development charged to expense totaled $5.3 million and $16.0 million for the three and nine months ended September 30, 2009, respectively, and $6.5 million and $12.6 million for the three and nine months ended September 30, 2008, respectively. Research and development costs are included in selling, general and administrative expense on the Condensed Consolidated Statements of Income.

8. Short-term Investments

Short-term investments consist primarily of certificates of deposit and treasury bills. Our investments in treasury bills are classified as available-for-sale and are carried at fair value, based on quoted market prices or other readily available market information. Unrealized gains and losses, net of taxes, are included in accumulated other comprehensive income, which is reflected as a separate component of stockholders’ equity.

Short-term investments consisted of the following at September 30, 2009:

 

      Amortized
Cost
   Unrealized
Gains
(Losses)
    Estimated
Fair
Value

Certificates of Deposit

   $ 15,000    $ —        $ 15,000

Treasury Bills

     20,672      (17     20,655
                     

Total

   $ 35,672    $ (17   $ 35,655
                     

As of December 31, 2008, we had no short-term investments.

9. Financial Instruments

Derivative financial instruments

We enter into derivative contracts to manage our exposure to interest rate changes by achieving a desired proportion of fixed rate versus variable rate debt. In June 2009, the counterparties to our two interest rate swaps, with an aggregate $60.0 million notional amount, exercised their right to terminate these agreements. Prior to their termination, these interest rate swaps effectively converted $60.0 million of our 7 5/8% Senior Notes due 2013 (“7 5/8% Notes”) from a fixed rate to a variable rate instrument. (See Note 12 to the condensed consolidated financial statements for information on the swap termination). These interest rate swaps were previously designated as fair value hedges of fixed rate debt. The interest rate swaps qualified for hedge accounting using the short-cut method under ASC 815-20-25, Derivatives and Hedging (formerly SFAS No. 133), which assumes no hedge ineffectiveness. As a result, changes in the fair value of the interest rate swaps and changes in the fair value of the hedged debt were assumed to be equal and offsetting and had no effect on our results of operations.

Fair value of financial instruments

We consider the recorded value of certain of our financial assets and liabilities, which consist primarily of cash and cash equivalents, accounts receivable and accounts payable, to approximate the fair value of the respective assets and liabilities at September 30, 2009, based on the short-term nature of the assets and liabilities. The fair value of our long-term debt at September 30, 2009 was $633.1 million compared to a carrying value of $554.2 million. We determined the fair value of our long-term debt based on quoted market prices for our 7 5/8% Notes, 7 3/4% senior notes due 2016 (7 3/4% Notes) and Convertible Notes.

 

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FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

At September 30, 2009, treasury bills totaling $20.7 million were carried at fair value based on quoted market prices, and were included in short-term investments on the condensed consolidated balance sheet.

At December 31, 2008, interest rate swaps with an aggregate $60.0 million notional amount were carried at fair value based on estimates to settle the agreements as of the balance sheet date.

The following table presents financial assets measured at fair value as of September 30, 2009 and December 31, 2008:

 

      Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs

(Level 3)
   Total

As of September 30, 2009

           

Treasury bills (recorded in short-term investments)

   $ 20,655    $ —      $  —      $ 20,655
                           

Total

   $ 20,655    $ —      $  —      $ 20,655
                           
      Quoted Prices
in Active
Markets for
Identical Assets
(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
   Total

As of December 31, 2008

           

Interest rate swaps (recorded in other assets)

   $ —      $ 2,884    $  —      $ 2,884
                           

Total

   $ —      $ 2,884    $  —      $ 2,884
                           

10. Acquisitions

Under the guidance in ASC Topic 805, Business Combinations, when control of a business combination is achieved in stages, acquisition method accounting is applied on the date that control is obtained. In addition, the acquirer remeasures its previously acquired non-controlling equity investment in the acquiree at fair value as of the acquisition date, and recognizes any gain or loss on that remeasurement in current period earnings. In June 2009, we acquired the remaining 50% interest in a joint venture owned by the Strategic Communications segment resulting in a controlling interest and consolidation of this entity. During the third quarter of 2009, we completed the valuation of the joint venture and recorded a $2.3 million gain on remeasuring our existing investment in the joint venture to fair value. The $2.3 million gain is included in interest income and other on the Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2009.

Certain acquisition related restricted stock agreements contain stock price guarantees that may result in cash payments in the future if our share price falls below a specified per share market value on the date applicable stock restrictions lapse (the “determination date”). The future settlement of any contingency related to common stock price will be recorded as a reduction to additional paid-in capital. During the first quarter of 2009, we paid $0.1 million in cash in relation to the price protection provision on certain shares of common stock that became unrestricted, which was recorded as a reduction to additional paid-in capital. Our remaining common stock price guarantee provisions have stock floor prices that range from $22.26 to $69.62 per share and have determination dates that range from 2009 to 2013.

 

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FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

11. Goodwill and Other Intangible Assets

The changes in the carrying amounts of goodwill by business segment for the nine months ended September 30, 2009, are as follows:

 

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

Balance January 1, 2009

  $ 389,934      $ 189,129   $ 254,813   $ 118,541      $ 191,044      $ 1,143,461   

Goodwill acquired during the period

    —          —       3,148     —          —          3,148   

Contingent consideration

    —          66     9,818     —          (112     9,772   

Adjustments to allocation of purchase price

    (3,066     —       935     (934       (3,065

Foreign currency translation adjustment and other

    393        3,625     15,746     404        68        20,236   
                                           

Balance September 30, 2009

  $ 387,261      $ 192,820   $ 284,460   $ 118,011      $ 191,000      $ 1,173,552   
                                           

Other intangible assets with finite lives are amortized over their estimated applicable useful lives. For intangible assets with finite lives, we recorded amortization expense of $6.2 million and $18.4 million for the three and nine months ended September 30, 2009, respectively, and $5.6 million and $13.0 million for the three and nine months ended September 30, 2008, respectively. Based solely on the amortizable intangible assets recorded as of September 30, 2009, we estimate amortization expense to be $6.0 million during the remainder of 2009, $22.1 million in 2010, $21.3 million in 2011, $20.7 million in 2012, $17.8 million in 2013, $10.1 million in 2014, and $56.9 million in years after 2014. Actual amortization expense to be reported in future periods could differ from these estimates as a result of new intangible asset acquisitions, finalization of asset valuations for newly acquired assets, changes in useful lives, changes in value due to foreign currency translation, or other factors.

 

     Useful
Life
in Years
   September 30, 2009    December 31, 2008
      Gross
Carrying
Amount
   Accumulated
Amortization
   Gross
Carrying
Amount
   Accumulated
Amortization

Amortized intangible assets

              

Contract backlog

   1    $ 307    $ 255    $ 273    $ 23

Customer relationships

   3 to 15      142,412      29,729      133,113      19,897

Non-competition agreements

   1 to 10      18,220      8,038      17,194      5,735

Software

   5 to 6      37,700      11,602      37,700      6,401

Tradenames

   1 to 5      9,595      3,691      9,555      2,153
                              
        208,234      53,315      197,835      34,209

Unamortized intangible assets

              

Tradenames

   Indefinite      25,678      —        25,678      —  
                              
      $ 233,912    $ 53,315    $ 223,513    $ 34,209
                              

 

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FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

12. Long-term Debt and Capital Lease Obligations

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

 

    September 30,
2009
  December 31,
2008

7 5/8% senior notes due 2013(a)(b)

  $ 202,140   $ 202,884

7 3/4% senior notes due 2016

    215,000     215,000

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

    135,369     131,968

Notes payable to former shareholders of acquired business

    1,685     47
           

Total debt

    554,194     549,899

Less current portion

    137,054     132,015
           

Long-term debt, net of current portion

    417,140     417,884
           

Total capital lease obligations

    951     1,608

Less current portion

    559     900
           

Capital lease obligations, net of current portion

    392     708
           

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

  $ 417,532   $ 418,592
           

 

(a)

Includes unamortized proceeds from interest rate swap terminations of $2.1 million at September 30, 2009 on our $200 million face value 7 5/8% senior notes.

 

(b)

Includes a fair value hedge adjustment of $2.9 million at December 31, 2008 on our $200 million face value 7 5/8% senior notes.

 

(c)

Includes discount of $14.6 million at September 30, 2009 and $18.0 million at December 31, 2008.

Convertible Notes

As of January 1, 2009, we adopted the provisions of ASC 470-20, Debt with Conversion and Other Options (formerly FSP APB 14-1) with retrospective application to prior periods. ASC 470-20 addresses the accounting and disclosure requirements for convertible debt that may be settled in cash upon conversion. It requires an issuer to separately account for the liability and equity components of convertible debt in a manner that reflects the issuer’s nonconvertible borrowing rate, resulting in higher interest expense over the life of the instrument due to the amortization of the discount. Our Convertible Notes are subject to ASC 470-20. We applied this guidance retrospectively to all periods presented.

The following table summarizes the liability and equity components of our Convertible Notes:

 

     September 30,
2009
    December 31,
2008
 

Liability component:

    

Principal

   $ 149,942      $ 149,951   

Unamortized discount

     (14,573     (17,983
                

Balance of Convertible Notes

     135,369        131,968   
                

Equity component (recorded in additional paid-in capital)

     18,019        18,022   

 

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FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

The discount on the liability component will be amortized over the remaining term of the Convertible Notes through July 15, 2012 using the effective interest method. The effective interest rate on the Convertible Notes is 7 5/ 8%. The components of interest cost on the Convertible Notes for the three and nine months ended September 30, 2009 and 2008 were as follows:

 

     Three Months Ended
September 30,
   Nine Months Ended
September 30,
         2009        2008    2009    2008

Contractual interest

   $ 1,406    $ 1,406    $ 4,218    $ 4,219

Amortization of debt discount

     1,153      1,076      3,409      3,168

Amortization of deferred note issue costs

     160      160      481      481
                           

Total interest expense

   $ 2,719    $ 2,642    $ 8,108    $ 7,868
                           

On October 15, 2007, the $150.0 million aggregate principal amount of the Convertible Notes became convertible at the option of the holders and is currently convertible through January 15, 2010 as provided in the Indenture covering the Convertible Notes. The Convertible Notes became convertible as a result of the closing price per share of our common stock exceeding the conversion threshold price of $37.50 per share (120% of the applicable conversion price of $31.25 per share) for at least 20 days in the 30 consecutive trading days of each of the periods ended October 15, 2007, January 15, 2008, April 15, 2008, July 15, 2008, October 15, 2008, January 15, 2009, April 15, 2009, July 15, 2009, and October 15, 2009.

Upon surrendering any Convertible Note for conversion, in accordance with the Indenture, the holder of such Convertible Note shall receive cash in the amount of the lesser of (i) the $1,000 principal amount of such Convertible Note or (ii) the “conversion value” of the Convertible Note as defined in the indenture. The conversion feature results in a premium over the face amount of the Convertible Notes equal to the excess of our stock price as determined by the calculation set forth in the Indenture and the conversion price per share of $31.25 multiplied by the conversion ratio of 31.998 shares of common stock for each $1,000 principal amount of the Convertible Notes. We retain our option to satisfy any conversion value in excess of each $1,000 principal amount of the Convertible Notes with shares of common stock, cash or a combination of both cash and shares. The premium will be calculated using the stock price calculation defined in the Indenture. Based on our closing stock price at September 30, 2009, the aggregate Convertible Notes conversion value exceeds their aggregate principal amount by $54.5 million.

Interest Rate Swaps

In August 2005, we entered into two interest rate swap contracts with an aggregate notional amount of $60.0 million to receive interest at 7 5/ 8% and pay a variable rate of interest based upon LIBOR. We designated these swaps as fair value hedges of the changes in fair value of $60.0 million of our 7 5/8% Notes. The counterparties to the swaps exercised their right to terminate the swaps as of June 15, 2009 which resulted in a $2.3 million gain on termination. This gain has been recorded in Long-term debt and capital lease obligations, and will be amortized as a reduction to interest expense over the remaining term of the 7 5/8% Notes, resulting in an effective interest rate of 6.5% per annum on $60.0 million of 7 5/8% Notes.

 

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Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

13. Commitments and Contingencies

Commitments

Future contractual obligations related to operating leases entered into during 2009 have resulted in an increase in our total contractual obligations under operating leases of $1.8 million for 2010, $2.7 million for 2011, $3.3 million for 2012, $3.2 million for 2013 and $29.7 million thereafter.

Contingencies

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

14. Share-Based Compensation

Amendment and restatement of equity-based compensation plan

On March 31, 2009, the Board of Directors (the “Board”) of FTI Consulting, Inc. (“FTI”) approved the amendment and restatement of the FTI Consulting, Inc. Deferred Compensation Plan for Key Employees and Non-Employee Directors, as previously amended (the “Deferred Compensation Plan”), (to be renamed the FTI Consulting, Inc. 2009 Omnibus Incentive Compensation Plan (the “Omnibus Plan”)), subject to the approval of our stockholders. On April 8, 2009, the Board confirmed its approval and authorized that the proposal to amend and restate the Deferred Compensation Plan (and rename it the Omnibus Plan) be submitted to stockholders for approval at the 2009 annual meeting of stockholders held June 3, 2009. The Omnibus Plan was approved by the stockholders of FTI on June 3, 2009 at the 2009 annual meeting.

The 2009 Omnibus Plan provides incentive compensation in the form of equity and equity-based awards. The Omnibus Plan also provides for the issuance of stock units or restricted stock units on account of certain eligible compensation electively deferred by our non-employee directors and certain key employees (excluding executive officers of FTI). All employees, officers, non-employee directors and individual service providers of FTI are eligible to participate in the Omnibus Plan, subject to the discretion of the administrator to make awards. The Omnibus Plan provides for the grants of incentive and non-qualified stock options and stock appreciation rights and stock-based awards, including restricted stock, unrestricted stock, performance stock, phantom stock, stock unit and restricted stock unit awards, of which an aggregate of 900,000 shares of common stock would be available for restricted and unrestricted stock awards as well as other stock-based awards, including phantom stock, performance awards, stock units, restricted stock units and performance units.

Share-based awards and share-based compensation expense

Our officers, employees, non-employee directors and certain individual service providers are eligible to participate in FTI’s equity compensation plans, subject to the discretion of the administrator of the plans. During the nine months ended September 30, 2009, share-based awards included stock option grants exercisable for 484,089 shares of common stock upon vesting, restricted stock awards of 313,837 shares of common stock and deferred stock units equivalent to 115,827 shares of common stock.

 

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FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

Total share-based compensation expense for the three and nine months ended September 30, 2009 and 2008 is detailed in the following table.

 

     Three Months Ended
September 30,
   Nine Months Ended
September 30,

Income Statement Classification

       2009            2008        2009    2008

Direct cost of revenues

   $ 2,242    $ 3,292    $ 8,239    $ 11,009

Selling, general and administrative expense

     2,848      3,928      10,200      10,383
                           

Total share-based compensation expense

   $ 5,090    $ 7,220    $ 18,439    $ 21,392
                           

15. Income Taxes

The effective tax rate was 33.2% and 37.1% for the three and nine months ended September 30, 2009, respectively, and 39.7% and 39.7% for the three and nine months ended September 30, 2008, respectively. The decrease in the effective tax rates for the three and nine months ended September 30, 2009 as compared to the previous year were primarily due to discrete items recorded in the third quarter of 2009, including a non-tax effected gain realized in connection with the purchase of the remaining 50% interest in a German joint venture in the third quarter of 2009 (See Note 10 to the Condensed Consolidated Financial Statements for information on the acquisition), and changes in estimate related to prior year tax provisions. The change in estimate was primarily attributable to the completion of tax projects with respect to our ability to qualify for technical income tax positions surrounding certain tax credits and deductions.

We are not aware of any tax positions for which it is reasonably possible that the total amounts of unrecognized tax benefits would significantly increase or decrease within the next twelve months. As of September 30, 2009, there have been no material changes to the liability for uncertain tax positions. Interest and penalties related to uncertain tax positions are classified as such and excluded from the income tax provision. As of September 30, 2009, our accrual for the payment of tax-related interest and penalties was not material.

We file numerous consolidated and separate income tax returns in the U.S. federal jurisdiction and in many city, state and foreign jurisdictions. We are no longer subject to U.S. federal income tax examinations for years prior to 2006 and are no longer subject to state and local or foreign tax examinations for years prior to 2000. In addition, open tax years related to state and foreign jurisdictions remain subject to examination.

16. Segment Reporting

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

 

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FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

The Corporate Finance/Restructuring segment focuses on strategic, operational, financial and capital needs of businesses around the world and provides consulting and advisory services relating to turnaround, bankruptcy, performance improvement, lending solutions, financial and operational restructuring, restructuring advisory, mergers and acquisitions, transaction advisory and interim management. The Forensic and Litigation Consulting segment provides law firms, companies, government clients and other interested parties with dispute advisory, investigations, forensic accounting, business intelligence assessments and risk mitigation services. The Strategic Communications segment provides advice and consulting services relating to financial communications, brand communications, public affairs and reputation management and business consulting. The Technology segment provides products, services and consulting to law firms, companies, courts and government agencies worldwide with the principal business focus on the collection, preservation, review and production of electronically stored information. The Economic Consulting segment provides law firms, companies, government entities and other interested parties with analysis of complex economic issues for use in legal and regulatory proceedings, anti-trust and competition matters, strategic decision making, international arbitration and public policy debates in the U.S. and internationally.

We evaluate the performance of our operating segments based on operating income excluding depreciation, amortization of other intangible assets, unallocated corporate expenses plus non-operating litigation settlements, which we refer to as “segment EBITDA.” Segment EBITDA consists of the revenues generated by that segment, less the direct costs of revenues and selling, general and administrative expense that are incurred directly by that segment as well as an allocation of certain centrally managed expenses, such as information technology services, accounting, marketing and facility costs. Although segment EBITDA is not a measure of financial condition or performance determined in accordance with GAAP, we use it to evaluate and compare the operating performance of our segments and it is one of the primary measures used to determine employee incentive compensation. Unallocated corporate expenses include costs related to centrally managed administrative functions which have not been allocated to the segments. These administrative costs include corporate office support costs, human resources, legal, finance, information technology and company-wide business development functions, as well as costs related to overall corporate management.

 

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FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

The table below presents revenues and segment EBITDA for our reportable segments for the three and nine months ended September 30, 2009 and 2008.

 

     Three Months Ended
September 30,
   Nine Months Ended
September 30,
     2009    2008    2009    2008

Revenues

           

Corporate Finance/Restructuring

   $ 127,808    $ 91,818    $ 389,320    $ 267,224

Forensic and Litigation Consulting

     65,040      65,786      197,392      195,351

Strategic Communications

     47,493      56,099      134,814      172,910

Technology

     48,708      55,385      163,935      168,195

Economic Consulting

     59,588      56,409      171,547      166,589
                           

Total Revenues

   $ 348,637    $ 325,497    $ 1,057,008    $ 970,269
                           

Segment EBITDA

           

Corporate Finance/Restructuring

   $ 43,584    $ 25,463    $ 131,750    $ 76,997

Forensic and Litigation Consulting

     14,867      14,932      46,818      45,305

Strategic Communications

     6,557      12,405      18,232      39,674

Technology

     15,230      15,371      58,360      59,906

Economic Consulting

     13,957      15,751      34,621      43,054
                           

Total segment EBITDA

   $ 94,195    $ 83,922    $ 289,781    $ 264,936
                           

The table below reconciles segment EBITDA to income before income tax provision.

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009     2008     2009     2008  

Segment EBITDA

   $ 94,195      $ 83,922      $ 289,781      $ 264,936   

Segment depreciation expense

     (5,939     (5,403     (16,932     (14,885

Amortization of intangible assets

     (6,171     (5,664     (18,370     (13,019

Unallocated corporate expenses

     (17,799     (19,894     (58,209     (59,960

Interest income and other

     3,330        1,942        6,085        7,536   

Interest expense

     (11,434     (10,942     (33,477     (33,848

Corporate litigation settlement gains (losses)

     —          (225     250        (225
                                

Income before income tax provision

   $ 56,182      $ 43,736      $ 169,128      $ 150,535   
                                

 

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FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

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

Substantially all of our domestic subsidiaries are guarantors of borrowings under our senior bank credit facility, senior notes and our convertible notes. The guarantees are full and unconditional and joint and several. All of our guarantors are wholly-owned subsidiaries.

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

Condensed Consolidating Balance Sheet Information as of September 30, 2009

 

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

Assets

         

Cash and cash equivalents

  $ 201,366   $ 10,149   $ 66,454   $ —        $ 277,969

Short-term investments

    35,655     —       —       —          35,655

Accounts receivable, net

    109,513     153,160     47,510     —          310,183

Intercompany receivables

    51,546     289,495     80,207     (421,248     —  

Other current assets

    46,310     22,630     13,544     (8,894     73,590
                               

Total current assets

    444,390     475,434     207,715     (430,142     697,397

Property and equipment, net

    42,167     22,264     10,361     —          74,792

Goodwill

    416,081     527,855     229,616     —          1,173,552

Other intangible assets, net

    3,505     127,158     49,934     —          180,597

Investments in subsidiaries

    1,361,531     868,661     772,957     (3,003,149     —  

Other assets

    58,668     163,215     14,995     (111,437     125,441
                               

Total assets

  $ 2,326,342   $ 2,184,587   $ 1,285,578   $ (3,544,728   $ 2,251,779
                               

Liabilities

         

Intercompany payables

  $ 241,669   $ 92,579   $ 87,000   $ (421,248   $ —  

Other current liabilities

    253,122     93,816     37,639     (8,894     375,683
                               

Total current liabilities

    494,791     186,395     124,639     (430,142     375,683

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

    417,140     392     —       —          417,532

Other liabilities

    103,072     38,924     116,666     (111,437     147,225
                               

Total liabilities

    1,015,003     225,711     241,305     (541,579     940,440

Stockholders’ equity

    1,311,339     1,958,876     1,044,273     (3,003,149     1,311,339
                               

Total liabilities and stockholders’ equity

  $ 2,326,342   $ 2,184,587   $ 1,285,578   $ (3,544,728   $ 2,251,779
                               

 

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FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

Condensed Consolidating Balance Sheet Information as of December 31, 2008

 

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

Assets

         

Cash and cash equivalents

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

Short-term investments

    —       —       —       —          —  

Accounts receivable, net

    87,859     164,198     37,983     —          290,040

Intercompany receivables

    74,743     173,048     91,030     (338,821     —  

Other current assets

    51,748     22,512     8,111     (7,865     74,506
                               

Total current assets

    345,762     371,421     185,891     (346,686     556,388

Property and equipment, net

    45,089     24,457     9,029     —          78,575

Goodwill

    416,302     534,100     193,059     —          1,143,461

Other intangible assets, net

    4,284     138,976     46,044     —          189,304

Investments in subsidiaries

    1,194,329     820,163     742,167     (2,756,659     —  

Other assets

    62,188     146,431     8,538     (101,308     115,849
                               

Total assets

  $ 2,067,954   $ 2,035,548   $ 1,184,728   $ (3,204,653   $ 2,083,577
                               

Liabilities

         

Intercompany payables

  $ 178,994   $ 83,024   $ 76,803   $ (338,821   $ —  

Other current liabilities

    251,939     111,581     52,959     (7,865     408,614
                               

Total current liabilities

    430,933     194,605     129,762     (346,686     408,614

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

    417,883     709     —       —          418,592

Other liabilities

    91,581     35,557     102,984     (101,308     128,814
                               

Total liabilities

    940,397     230,871     232,746     (447,994     956,020

Stockholders’ equity

    1,127,557     1,804,677     951,982     (2,756,659     1,127,557
                               

Total liabilities and stockholders’ equity

  $ 2,067,954   $ 2,035,548   $ 1,184,728   $ (3,204,653   $ 2,083,577
                               

 

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FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

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

 

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

Revenues

  $ 145,869      $ 289,064   $ 69,095      $ (155,391   $ 348,637   

Operating expenses

         

Direct cost of revenues

    79,095        226,552     40,359        (152,802     193,204   

Selling, general and administrative expense

    38,042        35,226     14,297        (2,589     84,976   

Amortization of other intangible assets

    259        4,530     1,382        —          6,171   
                                     

Operating income

    28,473        22,756     13,057        —          64,286   

Other (expense) income

    (9,976     2,729     (857     —          (8,104
                                     

Income before income tax provision

    18,497        25,485     12,200        —          56,182   

Income tax provision

    7,046        9,339     2,241        —          18,626   

Equity in net earnings of subsidiaries

    26,105        8,999     2,321        (37,425     —     
                                     

Net income

  $ 37,556      $ 25,145   $ 12,280      $ (37,425   $ 37,556   
                                     

Condensed Consolidated Statement of Income for the Three Months Ended September 30, 2008

 

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

Revenues

  $ 46,295      $ 363,487   $ 60,070      $ (144,355   $ 325,497   

Operating expenses

         

Direct cost of revenues

    35,070        246,869     36,636        (143,266     175,309   

Selling, general and administrative expense

    24,099        53,982     14,521        (1,089     91,513   

Amortization of other intangible assets

    281        3,992     1,391        —          5,664   
                                     

Operating income

    (13,155     58,644     7,522        —          53,011   

Other (expense) income

    (11,060     2,429     (644     —          (9,275
                                     

Income before income tax provision

    (24,215     61,073     6,878        —          43,736   

Income tax (benefit) provision

    (10,602     26,663     1,322        —          17,383   

Equity in net earnings of subsidiaries

    39,966        5,717     2,652        (48,335     —     
                                     

Net income

  $ 26,353      $ 40,127   $ 8,208      $ (48,335   $ 26,353   
                                     

 

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FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

Condensed Consolidated Income Statement for the Nine Months Ended September 30, 2009

 

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

Revenues

   $ 447,507      $ 889,179    $ 185,947      $ (465,625   $ 1,057,008   

Operating expenses

           

Direct cost of revenues

     242,378        684,621      112,849        (460,051     579,797   

Selling, general and administrative expense

     123,601        106,024      38,520        (5,574     262,571   

Amortization of other intangible assets

     778        13,749      3,843        —          18,370   
                                       

Operating income

     80,750        84,785      30,735        —          196,270   

Other (expense) income

     (30,311     10,692      (7,523     —          (27,142
                                       

Income before income tax provision

     50,439        95,477      23,212        —          169,128   

Income tax provision

     20,261        38,689      3,725        —          62,675   

Equity in net earnings of subsidiaries

     76,275        16,782      6,552        (99,609     —     
                                       

Net income

   $ 106,453      $ 73,570    $ 26,039      $ (99,609   $ 106,453   
                                       

Condensed Consolidated Income Statement for the Nine Months Ended September 30, 2008

 

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

Revenues

   $ 366,873      $ 840,071    $ 182,569      $ (419,244   $ 970,269   

Operating expenses

           

Direct cost of revenues

     206,040        641,893      106,461        (416,691     537,703   

Selling, general and administrative expense

     123,937        84,511      36,094        (2,553     241,989   

Amortization of other intangible assets

     844        8,191      3,984        —          13,019   
                                       

Operating income

     36,052        105,476      36,030        —          177,558   

Other (expense) income

     (29,768     6,174      (3,429     —          (27,023
                                       

Income before income tax provision

     6,284        111,650      32,601        —          150,535   

Income tax provision

     2,864        49,087      7,827        —          59,778   

Equity in net earnings of subsidiaries

     87,337        24,473      8,213        (120,023     —     
                                       

Net income

   $ 90,757      $ 87,036    $ 32,987      $ (120,023   $ 90,757   
                                       

 

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FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

Condensed Consolidating Statement of Cash Flow for the Nine Months Ended September 30, 2009

 

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

Operating activities

        

Net cash provided by (used in) operating activities

   $ 245,024      $ (102,956   $ 21,476      $ 163,544   

Investing activities

        

Payments for acquisition of businesses, net of cash received

     (37,822     952        (1,282     (38,152

Purchases of short-term investments

     (35,717     —          —          (35,717

Purchases of property and equipment and other

     (4,799     (9,265     (3,608     (17,672
                                

Net cash used in investing activities

     (78,338     (8,313     (4,890     (91,541
                                

Financing activities

        

Payments of long-term debt and capital leases

     (12,802     (657     —          (13,459

Cash received for settlement of interest rate swaps

     2,288        —          —          2,288   

Issuance of common stock and other

     15,667        —          —          15,667   

Excess tax benefits from share based equity

     3,647        —          —          3,647   

Intercompany transfers

     (105,532     110,412        (4,880     —     
                                

Net cash (used in) provided by financing activities

     (96,732     109,755        (4,880     8,143   
                                

Effects of exchange rate changes and fair value adjustments on cash

     —          —          5,981        5,981   
                                

Net increase (decrease) in cash and cash equivalents

     69,954        (1,514     17,687        86,127   

Cash and cash equivalents, beginning of period

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

Cash and cash equivalents, end of period

   $ 201,366      $ 10,149      $ 66,454      $ 277,969   
                                

 

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Table of Contents

FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

Condensed Consolidating Statement of Cash Flow for the Nine Months Ended September 30, 2008

 

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

Operating activities

        

Net cash provided by operating activities

   $ 13,888      $ 55,099      $ 37,461      $ 106,448   

Investing activities

        

Payments for acquisition of businesses, net of cash received

     (306,284     (2,835     (4,283     (313,402

Purchases of property and equipment and other

     (10,919     (7,451     (5,024     (23,394
                                

Net cash used in investing activities

     (317,203     (10,286     (9,307     (336,796
                                

Financing activities

        

Payment of short-term borrowings of acquired subsidiary

     —          (2,275     —          (2,275

Payments of long-term debt and capital leases

     (7,180     (331     —          (7,511

Issuance of common stock and other

     22,305        —          —          22,305   

Excess tax benefits from share based equity

     5,653        —          —          5,653   

Intercompany transfers

     45,267        (33,329     (11,938     —     
                                

Net cash (used in) provided by financing activities

     66,045        (35,935     (11,938     18,172   
                                

Effect of exchange rate changes on cash

     55        —          (2,165     (2,110
                                

Net (decrease) increase in cash and cash equivalents

     (237,215     8,878        14,051        (214,286

Cash and cash equivalents, beginning of period

     328,505        1,273        30,685        360,463   
                                

Cash and cash equivalents, end of period

   $ 91,290      $ 10,151      $ 44,736      $ 146,177   
                                

18. Subsequent Event

On November 4, 2009, our Board of Directors authorized a new two-year stock repurchase program of up to $500 million. The $50 million stock repurchase program authorized in February 2009 was terminated. It is our intention to execute an accelerated stock buyback agreement covering $250 million of repurchases as soon as practicable. The timing and amount of any repurchases under the program will be determined based on market conditions and other factors. We expect to fund the repurchases through cash on hand and internally generated cash flow. The repurchase program may be suspended or discontinued at any time.

 

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Table of Contents
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 nine month periods ended September 30, 2009 and 2008 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, 2008. Historical results and any discussion of prospective results may not indicate our future performance. See “Forward Looking Statements.”

Immaterial Revision to Previously Reported Financial Information

Change in Accounting Principle

On January 1, 2009 we adopted the provisions of Accounting Standards Codification (“ASC”) 470-20, Debt with Conversion and Other Options (formerly FSP APB 14-1) for convertible debt instruments that have cash settlement features. The provisions of ASC 470-20 are retrospective upon adoption.

Correction of Immaterial Error

In the third quarter of 2009, we concluded an internal re-examination of our contingent acquisition payments and related accounting treatment. As a result of this review, we discovered an immaterial error which impacts previously reported results for 2006, 2007 and 2008. As previously disclosed in the Current Report on Form 8-K that we filed with the Securities and Exchange Commission on August 10, 2009, we are revising certain of our previously reported financial information in the third quarter 2009 filing to reflect the impact of the correction of the immaterial error. The immaterial error that we noted relates to certain contingent acquisition payments made to the owners of five businesses acquired within the Strategic Communications segment upon the achievement of required performance conditions as specified in their related purchase contracts. The purchase contracts allowed for a small portion of the contingent payment to be paid to employee benefit trusts (EBT) or to a designated employee group or other employees who at the time were deemed to be shareholders. After further analysis, we concluded that neither the EBT nor the designated employees who received contingent payments qualified as original selling shareholders of the acquired businesses. As such, distributions made from an EBT or to these designated employee groups should have been recorded as compensation expense and not capitalized as part of the purchase price of the applicable acquisition.

The following table presents the impact of both the change in accounting principle and the correction of the immaterial error on earnings per share for the three and nine months ended September 30, 2008:

 

    Three Months Ended September 30, 2008   Nine Months Ended September 30, 2008
    As
Previously
Reported
  Effect of
Change in
Accounting
Principle
    Impact of
Correction of
Immaterial
Errors
    As
Adjusted
  As
Previously
Reported
  Effect of
Change in
Accounting
Principle
    Impact of
Correction of
Immaterial
Errors
    As
Adjusted

Earnings per common share—basic

  $ 0.56   $ (0.02   $ (0.01   $ 0.53   $ 1.92   $ (0.04   $ (0.03   $ 1.85

Earnings per common share—diluted

    0.51     (0.02     (0.01     0.48     1.76     (0.04     (0.03     1.69

 

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BUSINESS OVERVIEW

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

We report financial results for the following five operating segments:

The Corporate Finance/Restructuring segment focuses on strategic, operational, financial and capital needs of businesses around the world and provides consulting and advisory services relating to turnaround, bankruptcy, performance improvement, lending solutions, financial and operational restructuring, restructuring advisory, M&A, transaction advisory and interim management.

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

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

The Technology segment provides products, services and consulting to law firms, companies, courts and government agencies worldwide with the principal business focus on the collection, preservation, review and production of electronically stored information.

The Economic Consulting segment provides law firms, companies, government entities and other interested parties with analysis of complex economic issues for use in legal and regulatory proceedings, anti-trust and competition matters, strategic decision making, international arbitration and public policy debates in the U.S. and internationally.

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 require the client to pay us a fee for the hours that we incur at agreed upon rates. Under this arrangement we also bill our clients for reimbursable expenses, which may include the cost of producing our work product and other direct expenses that we incur on behalf of the client, such as travel costs. We also render services for which the client is required to pay us a fixed monthly 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 significant variations in our revenues and operating results due to the timing of achieving the performance-based criteria. In our Technology segment, certain clients are also billed based on the amount of data stored on our electronic systems, the volume of information processed and the number of users licensing our Ringtail® and Attenex® products for installation within their own environments. The licensing of these products is sold directly to end users as well as indirectly through our channel partner relationships. While our business has evolved over the last several years, seasonal factors, such as the timing of our employees’ and clients’ vacations and holidays, continue to impact the timing of our revenues.

 

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Our financial results are primarily driven by:

 

   

the number and size 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; and

 

   

licensing of our software products and other technology services.

We define EBITDA as operating income before depreciation and amortization of intangible assets plus non-operating litigation settlements. Although EBITDA is not a measure of financial condition or performance determined in accordance with generally accepted accounting principles (GAAP), we believe that it can be a useful operating performance measure for evaluating our results of operations as compared from period to period and as compared to our competitors. EBITDA is a common alternative measure of operating performance used by investors, financial analysts and credit rating agencies to value and compare the financial performance of companies in our industry. We use EBITDA to evaluate and compare the operating performance of our segments and it is one of the primary measures used to determine employee bonuses. We also use EBITDA to value the businesses we acquire or anticipate acquiring. EBITDA is not defined in the same manner by all companies and may not be comparable to other similarly titled measures of other companies unless the definition is the same. This non-GAAP measure should be considered in addition to, but not as a substitute for or superior to, the information contained in our statements of income.

We evaluate the performance of our operating segments based on operating income excluding depreciation, amortization of other intangible assets, unallocated corporate expenses plus non-operating litigation settlements, which we refer to as “segment EBITDA.” Segment EBITDA consists of the revenues generated by that segment, less the direct costs of revenues and selling, general and administrative expense that are incurred directly by that segment as well as an allocation of certain centrally managed expenses, such as information technology services, accounting, marketing and facility costs. Although segment EBITDA is not a measure of financial condition or performance determined in accordance with GAAP, we use it to evaluate and compare the operating performance of our segments and it is one of the primary measures used to determine employee incentive compensation. Unallocated corporate expenses include costs related to centrally managed administrative functions which have not been allocated to the segments. These administrative costs include corporate office support costs, human resources, legal, finance, information technology and company-wide business development functions, as well as costs related to overall corporate management.

EXECUTIVE HIGHLIGHTS

 

     Three Months Ended
September 30,
   Nine Months Ended
September 30,
     2009    2008    2009    2008
     (in thousands, except per share amounts)

Revenues

   $ 348,637    $ 325,497    $ 1,057,008    $ 970,269

Operating income

     64,286      53,011      196,270      177,558

Net income

     37,556      26,353      106,453      90,757

Earnings per common share—diluted

     0.70      0.48      1.99      1.69

EBITDA

     77,871      65,213      236,413      208,965

Cash provided by operating activities

     119,703      51,490      163,544      106,448

Total number of employees at September 30,

     3,500      3,399      3,500      3,399

 

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Throughout the following discussion, we refer to organic and acquisition revenue growth. We define acquisition growth as the results of operations of acquired companies in the twelve months following the effective date of an acquisition. Our definition of organic growth is the change in the results of operations excluding the impact of acquisitions.

Third Quarter 2009 Executive Highlights

Compared to the prior year period, we reported higher revenues, operating and EBITDA margins and earnings per diluted share. Revenues for the quarter ended September 30, 2009 increased $23.1 million, or 7.1%, to $348.6 million, compared to $325.5 million in the prior year. Excluding the estimated negative impact of foreign currency translation of the U.S. dollar against other currencies in the third quarter versus the prior year quarter, we experienced a 9.0% revenue growth rate. We grew organically at 3.9% (5.8% excluding the impact of foreign exchange), with the balance of $10.4 million coming from contributions from companies acquired since the second quarter of 2008, particularly in the Corporate Finance/Restructuring and Strategic Communications segments.

Many of the drivers of third quarter performance were continuations of those that impacted results in the first half of 2009. The revenue increase in the quarter was driven primarily by continued robust growth in our restructuring practice, as the global recession continued to impact organizations across a broad range of economic sectors. This served to offset continued pressures on clients’ discretionary activities such as corporate communications and litigation, as well as weaker activity levels of the global capital markets such as M&A communications, initial public offerings (IPOs) and real estate transactions. Operating income increased 21.3% in the quarter to $64.3 million compared to $53.0 million in the prior year mainly due to higher income of the Corporate Finance/Restructuring segment and lower selling, general and administrative (SG&A) expense, which offset flat or negative comparisons in the other segments. Net income and EPS included a one-time non-tax effected gain of $2.3 million in connection with the purchase of the remaining 50% interest in our Strategic Communications segment’s German joint venture which is included in interest income and other.

The strong organic revenue growth experienced by our Corporate Finance/Restructuring segment over the past several quarters continued through the third quarter of 2009 and was supplemented by revenue from businesses acquired since September 30, 2008. The segment continued to be active in restructuring assignments in a broad range of industries being impacted by the global credit crisis, principally financial services, automotive, utility/energy, communications and media, and telecommunications sectors. Segment growth was also enhanced by continued strong contributions from its global expansion into markets outside the U.S., specifically the U.K. and Canada. Profitability in the segment was strong as the robust demand drove higher chargeable hours and billing rates.

Revenues of the Forensic and Litigation Consulting segment, which relies on litigation and regulatory investigations and proceedings, were relatively flat compared to the same period last year on a constant currency basis but declined slightly as reported due to appreciation in the U.S. dollar against foreign currencies. Activities related to large financial fraud investigations and strong performances by the segment’s intellectual property and regulated industry practices were offset by lower levels of litigation and investigations as the challenging global economic environment continued to restrain discretionary spending and caused companies and law firms to retain more work in-house. The segment continued its focus on specialized practices and industry expertise which increased demand for our services resulting in higher utilization and slightly improved margins relative to 2008.

The Strategic Communications segment, which derives a significant amount of revenue from the capital markets and corporate communications activity, continued to be challenged by the dramatically slower volume of M&A transactions and the continued impact of the global recession on discretionary spending, which caused a decline in revenues related to M&A and capital markets engagements and pressure on fees from retained clients.

 

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In addition, the segment, which has the greatest proportion of revenues outside the United States, experienced a significant impact from foreign exchange fluctuations. Margins declined due to the lower revenues, as the segment has retained most of its professionals to meet an expected increase in demand.

Revenues in the Technology segment decreased year-over-year as contributions from large investigation cases and M&A second requests were offset by significant declines in revenues from product liability cases and lower pricing compared to a year ago. Segment margins improved as lower direct expenses from improved operating efficiencies and cost controls mostly offset the decline in revenues.

Economic Consulting generated higher revenues due to continued growth in the segment’s new offices in New York and Los Angeles, acceleration in the level of engagement work in its recently-formed European practice based in London, and improved activity in strategic M&A and financial economics matters. The segment commenced work on engagements that had previously been on hold, which drove rising utilization toward the end of the quarter ended September 30, 2009. Margins in the segment were negatively impacted by a slower than normal commencement of new engagements early in the period, the cost of expansion of activities into new markets and the hiring of additional professionals to meet anticipated future demand.

As a result of the strong growth and margin performance of the Corporate Finance/Restructuring segment and lower SG&A spending, EBITDA increased by $12.7 million, or 19.4%, to $77.9 million compared to $65.2 million in the same period last year. EBITDA was 22.3% of revenue in the 2009 third quarter compared to 20.0% of revenue in the comparable 2008 period.

Third quarter 2009 earnings per diluted share were $0.70 compared to $0.48 in the prior year period reflecting increased operating earnings. The estimated quarter over quarter foreign currency translation impact of a stronger U.S. dollar, primarily against the British pound, reduced earnings per diluted share by $0.01 in the quarter.

During the quarter, we completed certain income tax projects and recognized a non-tax effected gain which reduced our effective income tax rate to 33.2% for the third quarter and 37.1% for the first nine months of 2009. This compares favorably to tax rates of 39.7% for the third quarter of last year and 39.0% for the second quarter of 2009.

Cash provided by operating activities in the nine months ended September 30, 2009 was $163.5 million compared to $106.4 million provided in the prior year, reflecting higher earnings and stronger accounts receivable collections, offset by an increase in compensation-related costs and income tax payments.

Headcount increased by 101, or 3.0%, to 3,500 largely in the Corporate Finance/Restructuring and Economic Consulting segments to meet current and anticipated demand for services.

 

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CONSOLIDATED RESULTS OF OPERATIONS

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009     2008     2009     2008  
     (in thousands, except per share amounts)  

Revenues

        

Corporate Finance/Restructuring

   $ 127,808      $ 91,818      $ 389,320      $ 267,224   

Forensic and Litigation Consulting

     65,040        65,786        197,392        195,351   

Strategic Communications

     47,493        56,099        134,814        172,910   

Technology

     48,708        55,385        163,935        168,195   

Economic Consulting

     59,588        56,409        171,547        166,589   
                                

Total revenues

   $ 348,637      $ 325,497      $ 1,057,008      $ 970,269   
                                

Operating income

        

Corporate Finance/Restructuring

   $ 41,058      $ 23,904      $ 124,475      $ 72,745   

Forensic and Litigation Consulting

     13,656        13,521        43,164        41,318   

Strategic Communications

     4,267        10,163        11,885        33,703   

Technology

     10,179        10,519        43,290        49,656   

Economic Consulting

     12,925        14,798        31,665        40,096   
                                

Segment operating income

     82,085        72,905        254,479        237,518   

Unallocated corporate expenses

     (17,799     (19,894     (58,209     (59,960
                                

Operating income

     64,286        53,011        196,270        177,558   
                                

Other income (expense)

        

Interest income and other

     3,330        1,942        6,085        7,536   

Interest expense

     (11,434     (10,942     (33,477     (33,848

Litigation settlement gains (losses), net

     —          (275     250        (711
                                
     (8,104     (9,275     (27,142     (27,023
                                

Income before income tax provision

     56,182        43,736        169,128        150,535   

Income tax provision

     18,626        17,383        62,675        59,778   
                                

Net income

   $ 37,556      $ 26,353      $ 106,453      $ 90,757   
                                

Earnings per common share—basic

   $ 0.74      $ 0.53      $ 2.11      $ 1.85   
                                

Earnings per common share—diluted

   $ 0.70      $ 0.48      $ 1.99      $ 1.69   
                                

Reconciliation of Operating Income to EBITDA:

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009    2008     2009    2008  
     (in thousands)  

Operating income

   $ 64,286    $ 53,011      $ 196,270    $ 177,558   

Depreciation

     7,414      6,813        21,523      19,099   

Amortization of other intangible assets

     6,171      5,664        18,370      13,019   

Litigation settlement gains (losses), net

     —        (275     250      (711
                              

EBITDA

   $ 77,871    $ 65,213      $ 236,413    $ 208,965   
                              

 

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Three Months Ended September 30, 2009 compared to Three Months Ended September 30, 2008

Revenues and Operating Income

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

Unallocated Corporate Expenses

Unallocated corporate expenses decreased $2.1 million, or 10.5%, to $17.8 million for the three months ended September 30, 2009 from $19.9 million for the three months ended September 30, 2008. The primary drivers for the decrease were increased allocations to our operating segments for direct costs of information technology and systems and segment marketing, and lower professional services due to expenses associated with a proposed IPO of our Technology segment in 2008. These decreases were partially offset by increases for higher compensation, benefit and support costs for expanded infrastructure staffing, and increased marketing spending related to the launch of our new corporate branding strategy in 2009.

Interest Income and Other

Interest income and other, which includes foreign currency transaction gains and losses, increased by $1.4 million to $3.3 million for the three months ended September 30, 2009 as compared to the same period last year. The increase in other income is due to a $2.3 million remeasurement gain in 2009 related to the acquisition of the remaining 50% interest in a German joint venture, partially offset by a decrease in investment income related to the same joint venture which was accounted for as an equity investment prior to its consolidation in the third quarter of 2009.

Interest expense

Interest expense increased $0.5 million to $11.4 million for the three months ended September 30, 2009 from $10.9 million for the three months ended September 30, 2008. Interest expense for the quarter ended September 30, 2008 benefited from the favorable impact of lower interest rates on variable rate hedge contracts. These contracts were terminated in June 2009.

Income Tax Provision

Our provision for income taxes in interim periods is computed by applying our estimated annual effective tax rate against income before income tax expense for the period. In addition, non-recurring or discrete items are recorded during the period in which they occur. The effective tax rate was 33.2% for the three months ended September 30, 2009 as compared to 39.7% for the three months ended September 30, 2008. The decrease in the effective tax rate from the previous year is primarily due to discrete items recorded in the third quarter of 2009, including a non-tax effected gain in connection with the purchase of the remaining 50% interest in a German joint venture in the third quarter of 2009, and a change in estimate related to the prior year tax provisions. Such changes in estimate were primarily attributable to the completion of tax projects with respect to our ability to qualify for technical income tax positions surrounding certain tax credits and deductions.

Nine Months Ended September 30, 2009 compared to Nine Months Ended September 30, 2008

Revenues and Operating Income

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

 

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Unallocated Corporate Expenses

Unallocated corporate expenses decreased $1.8 million, or 2.9%, to $58.2 million for the nine months ended September 30, 2009 from $60.0 million for the nine months ended September 30, 2008. The primary drivers for the decrease were increased allocations to our operating segments for direct costs of information technology and systems and segment marketing, and lower professional services due to expenses associated with a proposed IPO of our Technology segment in 2008. These decreases were partially offset by increases for higher compensation, benefit and support costs for expanded infrastructure staffing, and increased marketing spending related to the launch of our new corporate branding strategy in 2009.

Interest Income and Other

Interest income and other, which includes foreign currency transaction gains and losses, decreased by $1.5 million to $6.1 million for the nine months ended September 30, 2009 as compared to the same period last year. The decrease is primarily due to lower interest rates earned on cash balances in the nine months ended September 30, 2009 relative to the nine months ended September 30, 2008 which resulted in a $1.9 million decrease in interest income. In addition, there was a $1.3 million net negative impact relative to 2008 from foreign exchange transaction gains and losses due to the remeasurement of receivables and payables required to be settled in a currency other than an entity’s functional currency. Interest income and other also included a $2.3 million remeasurement gain in 2009 related to the acquisition of the remaining 50% interest in our German joint venture, partially offset by a decrease in investment income related to the same joint venture which was accounted for as an equity investment prior to its consolidation in the third quarter of 2009.

Interest expense

Interest expense decreased $0.3 million to $33.5 million for the nine months ended September 30, 2009 from $33.8 million for the nine months ended September 30, 2008. The decrease was primarily due to the favorable impact of lower interest rates on variable rate hedge contracts. These contracts were terminated in June 2009.

Income Tax Provision

Our provision for income taxes in interim periods is computed by applying our estimated annual effective tax rate against income before income tax expense for the period. In addition, non-recurring or discrete items are recorded during the period which they occur. The effective tax rate was 37.1% for the nine months ended September 30, 2009 as compared to 39.7% for the nine months ended September 30, 2008. The decrease in the effective tax rate from the previous year is primarily due to discrete items recorded in the third quarter of 2009, including a non-tax effected gain in connection with the purchase of the remaining 50% interest in a German joint venture in the third quarter of 2009, and change in estimate related to the prior year tax provisions. Such changes in estimate were primarily attributable to the completion of tax projects with respect to our ability to qualify for technical income tax positions surrounding certain tax credits and deductions.

 

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SEGMENT RESULTS

Segment EBITDA

We evaluate the performance of our operating segments based on segment EBITDA which is a non-GAAP measure. The following table reconciles segment operating income to segment EBITDA for the three and nine months ended September 30, 2009 and 2008.

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009    2008     2009    2008  
     (dollars in thousands)  

Segment operating income

   $ 82,085    $ 72,905      $ 254,479    $ 237,518   

Depreciation

     5,939      5,403        16,932      14,885   

Amortization of other intangible assets

     6,171      5,664        18,370      13,019   

Litigation settlement losses, net

     —        (50     —        (486
                              

Total Segment EBITDA

   $ 94,195    $ 83,922      $ 289,781    $ 264,936   
                              

Other Segment Operating Data

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
         2009             2008             2009             2008      

Number of revenue-generating professionals: (at period end)

        

Corporate Finance/Restructuring

     776        646        776        646   

Forensic and Litigation Consulting

     656        668        656        668   

Strategic Communications

     547        599        547        599   

Technology

     350        357        350        357   

Economic Consulting

     302        253        302        253   
                                

Total revenue-generating professionals

     2,631        2,523        2,631        2,523   
                                

Utilization rates of billable professionals:(1)

        

Corporate Finance/Restructuring

     68     72     76     76

Forensic and Litigation Consulting

     73     68     74     72

Economic Consulting

     73     86     75     86

Average billable rate per hour:(2)

        

Corporate Finance/Restructuring

   $ 455      $ 439      $ 436      $ 433   

Forensic and Litigation Consulting

     329        332        337        332   

Economic Consulting

     460        444        457        447   

 

(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, assuming a 40-hour work week and a 52-week year. Available working hours include vacation and professional training days, but exclude holidays. Utilization rates are presented for our segments that primarily bill clients on an hourly basis. Where presented, utilization is based on a 2,032 hour year. We have not presented a utilization rate for our Technology segment and Strategic Communications segment as most of the revenues of these segments are not generated on an hourly basis.

 

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

 

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CORPORATE FINANCE/RESTRUCTURING

 

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
    2009     2008     2009     2008  
    (dollars in thousands, except rate per hour)  

Revenues

  $ 127,808      $ 91,818      $ 389,320      $ 267,224   
                               

Operating expenses:

       

Direct cost of revenues

    69,698        52,797        210,353        151,305   

Selling, general and administrative expense

    15,460        14,251        49,730        40,802   

Amortization of other intangible assets

    1,592        866        4,762        2,372   
                               
    86,750        67,914        264,845        194,479   
                               

Segment operating income

    41,058        23,904        124,475        72,745   

Add back: depreciation and amortization of intangible assets

    2,526        1,559        7,275        4,252   
                               

Segment EBITDA

  $ 43,584      $ 25,463      $ 131,750      $ 76,997   
                               

Gross profit(1)

  $ 58,110      $ 39,021      $ 178,967      $ 115,919   

Gross profit margin(2)

    45.5     42.5     46.0     43.4

Segment EBITDA as a percent of revenues

    34.1     27.7     33.8     28.8

Number of revenue generating professionals (at period end)

    776        646        776        646   

Utilization rates of billable professionals

    68     72     76     76

Average billable rate per hour

  $ 455      $ 439      $ 436      $ 433   

 

(1)

Revenues less direct cost of revenues

 

(2)

Gross profit as a percent of revenues

Three Months Ended September 30, 2009 compared to Three Months Ended September 30, 2008

Revenues increased $36.0 million, or 39.2%, to $127.8 million for the three months ended September 30, 2009 from $91.8 million for the three months ended September 30, 2008. Revenue growth from acquisitions was approximately $7 million, or 8%. Organic revenue growth was approximately $29 million, or 31%. Excluding the negative impact of foreign currency translation, which was primarily due to the weakening of the British pound relative to the U.S. dollar, organic revenue growth would have been approximately 33%. Organic revenue increased due to significant activity in the U.S. and UK practices for both bankruptcy and non-bankruptcy cases which offset declines in capital markets related engagements. In addition, the segment benefited from higher average billable rates. From an industry perspective, the demand for restructuring services was broad based in 2009 with significant engagements in the financial services, automotive, utility/energy, communications and media, and telecommunications sectors. This is in contrast to the demand for restructuring services in the prior year, which was primarily concentrated in the mortgage, financial institution and housing related markets.

Gross profit increased $19.1 million to $58.1 million for the three months ended September 30, 2009 from $39.0 million for the three months ended September 30, 2008. Gross profit margin increased 3.0 percentage points to 45.5% for the three months ended September 30, 2009 from 42.5% for the three months ended September 30, 2008. While average billable rates have increased as a result of higher utilization of more senior restructuring professionals in 2009, overall utilization is down relative to the prior year. In response to higher demand for restructuring services, we increased revenue generating headcount by 130 at September 30, 2009 as compared to September 30, 2008.

SG&A expense increased $1.2 million to $15.5 million for the three months ended September 30, 2009 from $14.3 million for the three months ended September 30, 2008. As a percentage of revenues, SG&A expense was 12.1% of revenue for the three months ended September 30, 2009, down favorably from 15.5% in 2008. The

 

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increase in SG&A expense in 2009 was primarily due to higher internal allocations of corporate costs incurred in direct support of segment operations and an increase in rent and occupancy costs offset by lower bad debt expense in 2009. Bad debt expense was insignificant in 2009 versus 1.5 % of revenue for the three months ended September 30, 2008, partially due to collections of previously reserved amounts.

Amortization of other intangible assets increased to $1.6 million for the three months ended September 30, 2009 from $0.9 million for the three months ended September 30, 2008 due to the amortization of intangible assets acquired in business combinations completed in the second and fourth quarters of 2008.

Segment EBITDA increased $18.1 million, or 71.2 %, to $43.6 million for the three months ended September 30, 2009 from $25.5 million for the three months ended September 30, 2008.

Nine Months Ended September 30, 2009 compared to Nine Months Ended September 30, 2008

Revenues increased $122.1 million, or 45.7%, to $389.3 million for the nine months ended September 30, 2009 from $267.2 million for the nine months ended September 30, 2008. Revenue growth from acquisitions was approximately $35 million, or 13% due to our 2008 acquisitions. Organic revenue growth was approximately $87 million, or 33%. Excluding the negative impact of foreign currency translation, which was primarily due to the weakening of the British pound relative to the U.S. dollar, organic revenue growth would have been approximately 35%. Organic revenue increased due to significant activity in the U.S. restructuring practice for both bankruptcy and non-bankruptcy cases, which offset declines in capital markets related engagements. From an industry perspective, the demand for restructuring services was broad based in 2009 with significant engagements in the financial services, automotive, retail, real estate, communications and media and construction sectors. This is in contrast to the demand for restructuring services in the prior year which was primarily concentrated in the mortgage, monoline insurance, financial institution and housing related markets.

Gross profit increased $63.1 million to $179.0 million for the nine months ended September 30, 2009 from $115.9 million for the nine months ended September 30, 2008. Gross profit margin increased to 46.0% for the nine months ended September 30, 2009 from 43.4% for the nine months ended September 30, 2008. Utilization and billing rates related to restructuring work have improved relative to the prior year due to increased volumes, offsetting the impact of the addition of our general advisory real estate sub-practice in the second quarter of 2008. Correspondingly, we increased revenue generating headcount by 130 at September 30, 2009 as compared to September 30, 2008.

SG&A expense increased $8.9 million to $49.7 million for the nine months ended September 30, 2009 from $40.8 million for the nine months ended September 30, 2008. As a percentage of revenues, SG&A expense was 12.8% for the nine months ended September 30, 2009, down from 15.3% in 2008. The increase in SG&A expense in 2009 was primarily due to higher internal allocations of corporate costs incurred in direct support of segment operations and an increase in rent and occupancy costs offset partially offset by lower bad debt expense. Bad debt expense was 0.9% of revenues for the nine months ended September 30, 2009 versus 1.5% for the nine months ended September 30, 2008.

Amortization of other intangible assets increased to $4.8 million for the nine months ended September 30, 2009 from $2.4 million for the nine months ended September 30, 2009 due to the amortization of intangible assets acquired in business combinations completed in 2008.

Segment EBITDA increased $54.8 million, or 71.1%, to $131.8 million for the nine months ended September 30, 2009 from $77.0 million for the nine months ended September 30, 2008.

 

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FORENSIC AND LITIGATION CONSULTING

 

    Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
    2009     2008     2009     2008  
    (dollars in thousands, except rate per hour)  

Revenues

  $ 65,040      $ 65,786      $ 197,392      $ 195,351   
                               

Operating expenses:

       

Direct cost of revenues

    37,784        38,482        112,895        113,635   

Selling, general and administrative expense

    12,971        12,993        39,407        38,296   

Amortization of other intangible assets

    629        790        1,926        2,102   
                               
    51,384        52,265        154,228        154,033   
                               

Segment operating income

    13,656        13,521        43,164        41,318   

Add back: depreciation and amortization of intangible
assets

    1,211        1,411        3,654        3,987   
                               

Segment EBITDA

  $ 14,867      $ 14,932      $ 46,818      $ 45,305   
                               

Gross profit(1)

  $ 27,256      $ 27,304      $ 84,497      $ 81,716   

Gross profit margin(2)

    41.9     41.5     42.8     41.8

Segment EBITDA as a percent of revenues

    22.9     22.7     23.7     23.2

Number of revenue generating professionals (at period end)

    656        668        656        668   

Utilization rates of billable professionals(3)

    73     68     74     72

Average billable rate per hour(3)

  $ 329      $ 332      $ 337      $ 332   

 

(1)

Revenues less direct cost of revenues

 

(2)

Gross profit as a percent of revenues

 

(3)

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

Three Months Ended September 30, 2009 compared to Three Months Ended September 30, 2008

Revenues decreased $0.8 million, or 1.1%, to $65.0 million for the three months ended September 30, 2009 from $65.8 million for the three months ended September 30, 2008. Excluding the negative impact of foreign currency translation, revenues increased approximately 0.4%. Growth in our Latin American investigations practice and our construction solutions business offset declines in revenue from our U.S. investigations and dispute and trial services practices. Revenue from the U.S. investigations and dispute practice is down slightly from 2008, but has continued to benefit from high profile fraud cases, which have replaced a significant portion of the revenues generated from other investigations cases during the same period in 2008. Our trial services practice continues to be impacted by a market contraction due to a decline in tort litigation, which has resulted in lower demand and increasing price sensitivity relative to 2008. Revenue in our Asia Pacific international risk practice has declined relative to the prior year due to the continuing impact of the U.S. economic downturn on its financial services customer base.

Gross profit remained unchanged from 2008 at $27.3 million for the three months ended September 30, 2009. Gross profit margin increased by 0.4 percentage points to 41.9% for the three months ended September 30, 2009 from 41.5% for the three months ended September 30, 2008. Gross profit margin improvements were mainly due to higher utilization as the segment continued its focus on specialized practices and industry expertise.

SG&A expense remained unchanged from the prior year at $13.0 million for the three months ended September 30, 2009. As a percentage of revenues, SG&A expense was 19.9% for the three months ended September 30, 2009, up from 19.8% for the three months ended September 30, 2008. Higher internal allocations

 

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of corporate costs incurred in direct support of segment operations were offset by lower bad debt expense and personnel related costs in 2009. Bad debt expense was 1.5% of revenues for the three months ended September 30, 2009 versus 2.5% for the three months ended September 30, 2008.

Amortization expense decreased by $0.2 million to $0.6 million for the three months ended September 30, 2009 from $0.8 million for the three months ended September 30, 2008.

Segment EBITDA remained unchanged at $14.9 million for the three months ended September 30, 2009.

Nine Months Ended September 30, 2009 compared to Nine Months Ended September 30, 2008

Revenues increased $2.0 million, or 1.0%, to $197.4 million for the nine months ended September 30, 2009 from $195.4 million for the nine months ended September 30, 2008, due to revenue growth attributable to our 2008 acquisitions of approximately $6 million, or 3%, primarily driven by our UK forensic accounting practices and UK construction consulting practices. Organic revenues declined approximately $4 million, or 2%. Excluding the negative impact of foreign currency translation, which was primarily due to the weakening of the British pound relative to the U.S. dollar, organic revenue declined approximately 0.6%. Our construction services business has continued to expand, and our Latin American investigations and forensic accounting practices revenue has also grown over the prior year. This revenue growth was partially offset by a decline in revenue from trial services and our Asia Pacific international risk practice. Revenue from our U.S. investigations practice is down slightly from 2008, but benefited from revenue associated with two high profile fraud cases which began in the first quarter of 2009 and replaced a significant amount of the revenues generated in other investigation cases for the same period in the prior year.

Gross profit increased $2.8 million to $84.5 million for the nine months ended September 30, 2009 from $81.7 million for the nine months ended September 30, 2008. Gross profit margin increased by 1.0 percentage point to 42.8% for the nine months ended September 30, 2009 from 41.8% for the nine months ended September 30, 2008. The primary drivers of the margin improvement were higher utilization as the segment continued its focus on specialized practices and industry expertise combined with cost containment efforts.

SG&A expense increased $1.1 million to $39.4 million for the nine months ended September 30, 2009 from $38.3 million for the nine months ended September 30, 2008. As a percentage of revenues, SG&A expense was 20.0% for the nine months ended September 30, 2009, up from 19.6% for the nine months ended September 30, 2008. The increase in SG&A expense in 2009 was primarily due to higher internal allocations of corporate costs incurred in direct support of segment operations and higher bad debt partially offset by lower personnel related costs. Bad debt expense increased to 2.0% of revenues for the nine months ended September 30, 2009 versus 1.9% for the nine months ended September 30, 2008.

Amortization expense decreased by $0.2 million to $1.9 million for the three months ended September 30, 2009 from $2.1 million for the three months ended September 30, 2008.

Segment EBITDA increased $1.5 million, or 3.3%, to $46.8 million for the nine months ended September 30, 2009 from $45.3 million for the nine months ended September 30, 2008.

 

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STRATEGIC COMMUNICATIONS

 

     Three Months Ended
September 30,
    Nine Months Ended
September 30,
 
     2009     2008     2009     2008  
     (dollars in thousands)  

Revenues

   $ 47,493      $ 56,099      $ 134,814      $ 172,910   
                                

Operating expenses:

        

Direct cost of revenues

     29,336        32,165        84,289        99,106   

Selling, general and administrative expense

     12,549        12,434        34,792        36,192   

Amortization of other intangible assets

     1,341        1,337        3,848        3,909   
                                
     43,226        45,936        122,929        139,207   
                                

Segment operating income

     4,267        10,163        11,885        33,703   

Litigation settlement losses

     —          (50     —          (251

Add back: depreciation and amortization of intangible assets

     2,290        2,292        6,347        6,222   
                                

Segment EBITDA

   $ 6,557      $ 12,405      $ 18,232      $ 39,674   
                                

Gross profit(1)

   $ 18,157      $ 23,934      $ 50,525      $ 73,804   

Gross profit margin(2)

     38.2     42.7     37.5     42.7

Segment EBITDA as a percent of revenues

     13.8     22.1     13.5     22.9

Number of revenue generating professionals (at period end)

     547