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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 March 31, 2010

OR

 

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

 

   For the transition period from                      to                     

Commission file number 001-14875

 

 

FTI CONSULTING, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Maryland   52-1261113

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

777 South Flagler Drive, Suite 1500 West Tower,

West Palm Beach, Florida

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

(561) 515-1900

(Registrant’s telephone number, including area code)

 

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web Site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.    Yes  ¨    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 April 28, 2010

Common stock, par value $0.01 per share

   46,971,477

 

 

 


Table of Contents

FTI CONSULTING, INC. AND SUBSIDIARIES

INDEX

 

          Page

PART I—FINANCIAL INFORMATION

  

Item 1.

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

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations    19

Item 3.

   Quantitative and Qualitative Disclosures about Market Risk    38

Item 4.

   Controls and Procedures    38

PART II—OTHER INFORMATION

  

Item 1.

   Legal Proceedings    39

Item 1A.

   Risk Factors    39

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds    39

Item 3.

   Defaults Upon Senior Securities    39

Item 4.

   (Removed and Reserved)    39

Item 5.

   Other Information    39

Item 6.

   Exhibits    40

SIGNATURES

   41


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

 

     March 31,
2010
    December 31,
2009
 
     (Unaudited)        

Assets

    

Current assets

    

Cash and cash equivalents

   $ 80,878      $ 118,872   

Accounts receivable:

    

Billed receivables

     243,045        241,911   

Unbilled receivables

     135,911        104,959   

Allowance for doubtful accounts and unbilled services

     (63,728     (59,328
                

Accounts receivable, net

     315,228        287,542   

Notes receivable

     24,761        20,853   

Prepaid expenses and other current assets

     32,199        52,172   

Deferred income taxes

     25,444        20,476   
                

Total current assets

     478,510        499,915   

Property and equipment, net of accumulated depreciation

     79,645        80,678   

Goodwill

     1,185,552        1,195,949   

Other intangible assets, net of amortization

     168,012        175,962   

Notes receivable, net of current portion

     79,407        69,213   

Other assets

     54,496        55,621   
                

Total assets

   $ 2,045,622      $ 2,077,338   
                

Liabilities and Stockholders’ Equity

    

Current liabilities

    

Accounts payable, accrued expenses and other

   $ 74,468      $ 81,193   

Accrued compensation

     101,164        152,807   

Current portion of long-term debt and capital lease obligations

     143,613        138,101   

Billings in excess of services provided

     31,743        34,101   
                

Total current liabilities

     350,988        406,202   

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

     417,260        417,397   

Deferred income taxes

     99,954        95,704   

Other liabilities

     58,768        53,821   
                

Total liabilities

     926,970        973,124   
                

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

    

Stockholders’ equity

    

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

     —          —     

Common stock, $0.01 par value; shares authorized—75,000; shares issued and outstanding—46,967 (2010) and 46,985 (2009)

     470        470   

Additional paid-in capital

     552,198        535,754   

Retained earnings

     629,714        615,529   

Accumulated other comprehensive loss

     (63,730     (47,539
                

Total stockholders’ equity

     1,118,652        1,104,214   
                

Total liabilities and stockholders’ equity

   $ 2,045,622      $ 2,077,338   
                

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
March 31,
 
     2010     2009  

Revenues

   $ 350,040      $ 347,846   
                

Operating expenses

    

Direct cost of revenues

     197,460        192,412   

Selling, general and administrative expense

     84,401        88,753   

Special charges

     30,245        —     

Amortization of other intangible assets

     6,091        6,050   
                
     318,197        287,215   
                

Operating income

     31,843        60,631   
                

Other income (expense)

    

Interest income and other

     2,354        2,303   

Interest expense

     (11,318     (11,013
                
     (8,964     (8,710
                

Income before income tax provision

     22,879        51,921   

Income tax provision

     8,694        20,249   
                

Net income

   $ 14,185      $ 31,672   
                

Earnings per common share—basic

   $ 0.31      $ 0.63   
                

Earnings per common share—diluted

   $ 0.29      $ 0.60   
                

 

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

 

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

Balance January 1, 2010

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

Comprehensive income:

           

Cumulative translation adjustment, net of income taxes of $0

  —          —          —          —       (16,191     (16,191

Net income

  —          —          —          14,185     —          14,185   
                 

Total comprehensive loss

              (2,006

Issuance of common stock in connection with:

           

Exercise of options, including income tax benefit from share-based awards of $758

  136        1        3,376        —       —          3,377   

Restricted share grants, less net settled shares of 43

  427        5        (1,792     —       —          (1,787

Stock units issued under incentive compensation plan

  —          —          6,531        —       —          6,531   

Business combinations

  —          —          235        —       —          235   

Purchase and retirement of common stock

  (581     (6     6        —       —          —     

Share-based compensation

  —          —          8,088        —       —          8,088   
                                           

Balance March 31, 2010

  46,967      $ 470      $ 552,198      $ 629,714   $ (63,730   $ 1,118,652   
                                           

 

See accompanying notes to the condensed consolidated financial statements

 

5


Table of Contents

FTI Consulting, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands)

Unaudited

 

     Three Months Ended
March 31,
 
     2010     2009  

Operating activities

    

Net income

   $ 14,185      $ 31,672   

Adjustments to reconcile net income to net cash used in operating activities:

    

Depreciation and amortization

     7,703        7,032   

Amortization of other intangible assets

     6,091        6,050   

Provision for doubtful accounts

     3,010        6,788   

Non-cash share-based compensation

     7,394        6,445   

Excess tax benefits from share-based compensation

     (754     (185

Non-cash interest expense

     1,800        1,854   

Other

     (476     (604

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

    

Accounts receivable, billed and unbilled

     (32,291     (41,148

Notes receivable

     (14,971     (3,836

Prepaid expenses and other assets

     6,826        943   

Accounts payable, accrued expenses and other

     20,909        (2,896

Income taxes

     (13,182     9,614   

Accrued compensation

     (31,363     (28,953

Billings in excess of services provided

     (2,144     (2,526
                

Net cash used in operating activities

     (27,263     (9,750
                

Investing activities

    

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

     (17,544     (24,526

Purchases of property and equipment

     (5,168     (4,459

Proceeds from maturity of short-term investment

     15,000        —     

Other

     (2,976     173   
                

Net cash used in investing activities

     (10,688     (28,812
                

Financing activities

    

Borrowings under revolving line of credit

     20,000        —     

Payments of revolving line of credit

     (20,000     —     

Payments of long-term debt and capital lease obligations

     (527     (322

Issuance of common stock under equity compensation plans

     832        5,930   

Excess of tax benefits from share-based compensation

     754        185   

Other

     442        —     
                

Net cash provided by financing activities

     1,501        5,793   
                

Effect of exchange rate changes on cash and cash equivalents

     (1,544     (1,378
                

Net decrease in cash and cash equivalents

     (37,994     (34,147

Cash and cash equivalents, beginning of period

     118,872        191,842   
                

Cash and cash equivalents, end of period

   $ 80,878      $ 157,695   
                

Supplemental cash flow disclosures

    

Cash paid for interest

   $ 3,000      $ 3,024   

Cash paid for income taxes, net of refunds

     21,876        10,635   

Non-cash investing and financing activities:

    

Issuance of stock units under incentive compensation plans

     6,531        5,308   

Issuance of notes payable as contingent consideration

     4,772        12,778   

See accompanying notes to the condensed consolidated financial statements

 

6


Table of Contents

FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

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

Unaudited

1 . Basis of Presentation and Significant Accounting Policies

Our unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and under the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. Some of the information and footnote disclosures normally included in annual financial statements have been condensed or omitted pursuant to those rules 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, 2009.

Our Condensed Consolidated Statement of Cash Flows for the quarter ended March 31, 2009 includes an immaterial prior period reclassification to reflect a change in the categorization of certain contingent acquisition payments expensed in 2008 but paid in the quarter ended March 31, 2009. Cash used in operating activities for the three months ended March 31, 2009 was increased by $1.2 million with a corresponding decrease in cash used in investing activities.

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

2. Earnings Per Common Share

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

 

     Three Months Ended
March 31,
     2010    2009

Numerator—basic and diluted

     

Net income

   $ 14,185    $ 31,672
             

Denominator

     

Weighted average number of common shares outstanding—basic

     45,799      50,171

Effect of dilutive stock options

     954      1,105

Effect of dilutive convertible notes

     1,149      1,424

Effect of dilutive restricted shares

     226      279
             

Weighted average number of common shares outstanding—diluted

     48,128      52,979
             

Earnings per common share—basic

   $ 0.31    $ 0.63
             

Earnings per common share—diluted

   $ 0.29    $ 0.60
             

Antidilutive stock options and restricted shares

     1,302      931
             

 

7


Table of Contents

FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

3. Special Charges

During the quarter ended March 31, 2010, we recorded special charges totaling $30.2 million, of which $8.4 million is a non-cash charge, primarily related to a realignment of our workforce and a consolidation of four office locations. The charges reflect actions we took to better align capacity with expected demand, to eliminate certain redundancies resulting from acquisitions and to provide for appropriate levels of administrative support. These actions include the termination of 144 employees, the consolidation of four office locations and certain other actions. The special charges consist of:

 

   

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

 

   

$7.8 million of expense associated with lease terminations; and

 

   

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

The following table details the special charges by segment for the three months ended March 31, 2010:

 

Corporate Finance/Restructuring

   $ 6,589

Forensic and Litigation Consulting

     5,560

Economic Consulting

     6,814

Technology

     4,927

Strategic Communications

     1,260
      
     25,150

Unallocated Corporate

     5,095
      

Total

   $ 30,245
      

The total cash outflow associated with the special charges is expected to be $21.8 million, of which $3.6 million has been paid as of March 31, 2010, $13.9 million is expected to be paid during the remainder of 2010, $4.0 million is expected to be paid in 2011, and the balance of $0.3 million is expected to be paid in 2012 and 2013. A liability for the current and noncurrent portions of the amounts to be paid is included in “Accounts payable, accrued expenses and other” and “Other liabilities,” respectively, on the Condensed Consolidated Balance Sheets. Activity related to the liability for these costs for the three months ended March 31, 2010 is as follows:

 

     Employee
Costs
    Lease
Terminations
    Total  

Balance at January 1, 2010

   $ —        $ —        $ —     

Additions

     13,135        8,617        21,752   

Payments

     (1,832     (1,727     (3,559
                        

Balance at March 31, 2010

   $ 11,303      $ 6,890      $ 18,193   
                        

 

8


Table of Contents

FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

4. Comprehensive Income (Loss)

The following table sets forth the components of comprehensive income (loss):

 

     Three Months Ended
March 31,
 
     2010     2009  

Net income

   $ 14,185      $ 31,672   

Other comprehensive income (loss), net of tax:

    

Cumulative translation adjustment

     (16,191     (6,065
                

Comprehensive income (loss)

   $ (2,006   $ 25,607   
                

5. Provision for Doubtful Accounts

The provision for doubtful accounts is recorded after the related work has been billed to the client and we determine that full collectability is not reasonably assured. It is classified in “Selling, general and administrative expense” on the Condensed Consolidated Statements of Income. The provision for doubtful accounts totaled $3.0 million and $6.8 million for the three months ended March 31, 2010 and 2009, respectively.

6. Research and Development Costs

Research and development costs related to software development totaled $5.4 million for the three months ended March 31, 2010 and 2009. Research and development costs are included in “Selling, general and administrative expense” on the Condensed Consolidated Statements of Income.

7. Financial Instruments

Fair value of financial instruments

We consider the recorded value of certain of our financial assets and liabilities, which consist primarily of cash and cash equivalents, accounts receivable and accounts payable, to approximate the fair value of the respective assets and liabilities at March 31, 2010, based on the short-term nature of the assets and liabilities. The fair value of our long-term debt at March 31, 2010 was $632.5 million compared to a carrying value of $578.3 million. We determined the fair value of our long-term debt based on quoted market prices for our 7 5/8% senior notes due 2013, 7 3/4% senior notes due 2016 and Convertible Notes. The carrying value of long-term debt includes the $18.0 million equity component of our Convertible Notes which is recorded in “Additional paid-in capital” on the Condensed Consolidated Balance Sheets.

8. Acquisitions

Certain acquisition related restricted stock agreements entered into prior to January 1, 2009 contained stock price guarantees that may result in cash payments in the future if our share price falls below a specified per share market value on the date applicable stock restrictions lapse (the “determination date”). For those acquisitions, 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 2010, we paid $0.2 million in cash to the selling shareholders in relation to the price protection provision on certain shares of common stock that became unrestricted and accordingly recorded 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 2010 to 2013.

 

9


Table of Contents

FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

Additionally, on March 31, 2010 we transferred $3.0 million in cash to a third party in advance of an acquisition which closed on April 1, 2010. This advance is included in the Condensed Consolidated Balance Sheets in “Other assets” and is reflected in the Condensed Consolidated Statements of Cash Flows within “Other investing activities.”

9. Goodwill and Other Intangible Assets

The changes in the carrying amounts of goodwill by business segment for the three months ended March 31, 2010, are as follows:

 

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

Balances at January 1, 2010

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

Contingent consideration

    —       18        17     —          289        324   

Foreign currency translation adjustment and other

    104     (1,723     —       (95     (9,007     (10,721
                                           

Balances March 31, 2010

  $ 387,380   $ 192,524      $ 196,748   $ 117,916      $ 290,984      $ 1,185,552   
                                           

Other intangible assets with finite lives are amortized over their estimated useful lives. For intangible assets with finite lives, we recorded amortization expense of $6.1 million for each of the three months ended March 31, 2010 and 2009. Based solely on the amortizable intangible assets recorded as of March 31, 2010, we estimate amortization expense to be $17.1 million during the remainder of 2010, $21.2 million in 2011, $20.5 million in 2012, $17.7 million in 2013, $10.0 million in 2014, $9.7 million in 2015, and $46.1 million in years after 2015. Actual amortization expense to be reported in future periods could differ from these estimates as a result of new intangible asset acquisitions, finalization of asset valuations for newly acquired assets, changes in useful lives, changes in value due to foreign currency translation, or other factors.

 

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

Amortized intangible assets

              

Customer relationships

   1 to 15    $ 141,749    $ 35,796    $ 144,048    $ 33,016

Non-competition agreements

   1 to 10      18,281      9,521      18,268      8,788

Software

   5 to 6      37,700      14,995      37,700      13,335

Tradenames

   1 to 5      9,549      4,633      9,591      4,184

Contract Backlog

   1      327      327      317      317
                              
        207,606      65,272      209,924      59,640

Unamortized intangible assets

              

Tradenames

   Indefinite      25,678      —        25,678      —  
                              
      $ 233,284    $ 65,272    $ 235,602    $ 59,640
                              

 

10


Table of Contents

FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

10. Long-term Debt and Capital Lease Obligations

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

 

     March 31,
2010
   December 31,
2009

7 5/8 % senior notes due 2013(a)

   $ 201,881    $ 202,012

7 3/4 % senior notes due 2016

     215,000      215,000

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

     137,736      136,540

Notes payable to former shareholders of acquired business

     5,647      1,132
             

Total debt

     560,264      554,684

Less current portion

     143,383      137,672
             

Long-term debt, net of current portion

     416,881      417,012
             

Total capital lease obligations

     609      814

Less current portion

     230      429
             

Capital lease obligations, net of current portion

     379      385
             

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

   $ 417,260    $ 417,397
             

 

(a)

Balance includes $200 million principal amount of notes plus unamortized proceeds from interest rate swap terminations of $1.9 million at March 31, 2010 and $2.0 million at December 31, 2009.

 

(b)

Balance includes $149.9 million principal amount of notes net of discount of $12.2 million at March 31, 2010 and $13.4 million at December 31, 2009.

The 3 3/4% Convertible Notes are currently convertible at the option of the holders through July 15, 2010 as provided in the Indenture covering the Convertible Notes. The Convertible Notes became convertible as a result of the closing price per share of our common stock exceeding the conversion threshold price of $37.50 per share (120% of the applicable conversion price of $31.25 per share) for at least 20 trading days in the 30 consecutive trading day period ended April 15, 2010. There were no Convertible Note conversions during the quarter ended March 31, 2010.

11. Commitments and Contingencies

Contingencies

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

12. Share-Based Compensation

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 three months ended March 31, 2010, share-based awards included stock option grants exercisable for 352,863 shares of common stock upon vesting, restricted share awards of 456,920 shares of common stock and restricted share units equivalent to 169,289 shares of common stock.

 

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FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

Total share-based compensation expense for the three months ended March 31, 2010 and 2009 is detailed in the following table.

 

     Three Months Ended
March 31,

Income Statement Classification

       2010            2009    

Direct cost of revenues

   $ 2,579    $ 2,830

Selling, general and administrative expense

     2,341      3,615

Special charges

     2,474      —  
             

Total share-based compensation expense

   $ 7,394    $ 6,445
             

13. Segment Reporting

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

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

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

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

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

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

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

We evaluate the performance of our operating segments based on adjusted segment EBITDA. We define adjusted segment EBITDA as the segments’ share of consolidated operating income before depreciation, amortization of intangible assets and special charges plus non-operating litigation settlements. Although adjusted

 

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FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

segment EBITDA is not a measure of financial condition or performance determined in accordance with GAAP, we use adjusted segment EBITDA to evaluate and compare the operating performance of our segments and it is one of the primary measures used to determine segment employee incentive compensation.

The table below presents revenues and adjusted segment EBITDA for our reportable segments for the three months ended March 31, 2010 and 2009:

 

     Three Months Ended
March 31,
     2010    2009

Revenues

     

Corporate Finance/Restructuring

   $ 117,467    $ 127,542

Forensic and Litigation Consulting

     78,678      78,374

Economic Consulting

     67,307      54,836

Technology

     43,373      44,323

Strategic Communications

     43,215      42,771
             

Total revenues

   $ 350,040    $ 347,846
             

Adjusted segment EBITDA

     

Corporate Finance/Restructuring

   $ 34,719    $ 40,721

Forensic and Litigation Consulting

     19,784      21,941

Economic Consulting

     13,520      10,319

Technology

     17,261      13,098

Strategic Communications

     5,742      5,796
             

Total adjusted segment EBITDA

   $ 91,026    $ 91,875
             

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

 

     Three Months Ended
March 31,
 
     2010     2009  

Adjusted segment EBITDA

   $ 91,026      $ 91,875   

Segment depreciation expense

     (6,326     (5,443

Amortization of intangible assets

     (6,091     (6,050

Special charges

     (30,245     —     

Unallocated corporate expenses, excluding special charges

     (16,521     (19,751

Interest income and other

     2,354        2,303   

Interest expense

     (11,318     (11,013
                

Income before income tax provision

   $ 22,879      $ 51,921   
                

 

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FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

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

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

The following financial information presents condensed consolidating balance sheets, statements of income and statements of cash flows for FTI 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 March 31, 2010

 

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

Assets

             

Cash and cash equivalents

   $ 27,756    $ 842    $ 52,280    $ —        $ 80,878

Accounts receivable, net

     116,488      150,661      48,079      —          315,228

Intercompany receivables

     20,309      383,373      96,526      (500,208     —  

Other current assets

     54,013      17,307      15,444      (4,360     82,404
                                   

Total current assets

     218,566      552,183      212,329      (504,568     478,510

Property and equipment, net

     49,397      18,986      11,262      —          79,645

Goodwill

     426,332      530,719      228,501      —          1,185,552

Other intangible assets, net

     7,755      114,666      45,591      —          168,012

Investments in subsidiaries

     1,489,755      892,608      781,425      (3,163,788     —  

Other assets

     59,597      160,433      19,349      (105,476     133,903
                                   

Total assets

   $ 2,251,402    $ 2,269,595    $ 1,298,457    $ (3,773,832   $ 2,045,622
                                   

Liabilities

             

Intercompany payables

   $ 343,336    $ 55,753    $ 101,119    $ (500,208   $ —  

Other current liabilities

     257,757      73,089      24,502      (4,360     350,988
                                   

Total current liabilities

     601,093      128,842      125,621      (504,568     350,988

Long-term debt, net

     416,881      379      —        —          417,260

Other liabilities

     114,776      38,676      110,746      (105,476     158,722
                                   

Total liabilities

     1,132,750      167,897      236,367      (610,044     926,970

Stockholders’ equity

     1,118,652      2,101,698      1,062,090      (3,163,788     1,118,652
                                   

Total liabilities and stockholders’ equity

   $ 2,251,402    $ 2,269,595    $ 1,298,457    $ (3,773,832   $ 2,045,622
                                   

 

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FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

Condensed Consolidating Balance Sheet Information as of December 31, 2009

 

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

Assets

             

Cash and cash equivalents

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

Accounts receivable, net

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

Intercompany receivables

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

Other current assets

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

Total current assets

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

Property and equipment, net

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

Goodwill

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

Other intangible assets, net

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

Investments in subsidiaries

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

Other assets

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

Total assets

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

Liabilities

             

Intercompany payables

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

Other current liabilities

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

Total current liabilities

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

Long-term debt, net

     417,012      385      —        —          417,397

Other liabilities

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

Total liabilities

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

Stockholders’ equity

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

Total liabilities and stockholders’ equity

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

 

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FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

Condensed Consolidated Statement of Income for the Three Months Ended March 31, 2010

 

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

Revenues

   $ 135,109      $ 302,537    $ 72,648      $ (160,254   $ 350,040   

Operating expenses

           

Direct cost of revenues

     78,031        232,597      44,735        (157,903     197,460   

Selling, general and administrative expense

     37,718        34,183      14,851        (2,351     84,401   

Special charges

     18,558        10,842      845        —          30,245   

Amortization of other intangible assets

     710        4,090      1,291        —          6,091   
                                       

Operating income

     92        20,825      10,926        —          31,843   

Other (expense) income

     (9,541     2,725      (2,148     —          (8,964
                                       

Income before income tax provision

     (9,449     23,550      8,778        —          22,879   

Income tax provision

     (3,905     9,749      2,850        —          8,694   

Equity in net earnings of subsidiaries

     19,729        5,570      2,185        (27,484     —     
                                       

Net income

   $ 14,185      $ 19,371    $ 8,113      $ (27,484   $ 14,185   
                                       

Condensed Consolidated Statement of Income for the Three Months Ended March 31, 2009

 

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

Revenues

   $ 152,118      $ 301,633    $ 51,550      $ (157,455   $ 347,846   

Operating expenses

           

Direct cost of revenues

     82,974        233,136      32,505        (156,203     192,412   

Selling, general and administrative expense

     42,053        38,563      9,389        (1,252     88,753   

Amortization of other intangible assets

     259        4,569      1,222        —          6,050   
                                       

Operating income

     26,832        25,365      8,434        —          60,631   

Other (expense) income

     (10,760     4,237      (2,187     —          (8,710
                                       

Income before income tax provision

     16,072        29,602      6,247        —          51,921   

Income tax provision

     6,571        12,391      1,287        —          20,249   

Equity in net earnings of subsidiaries

     22,171        4,301      2,048        (28,520     —     
                                       

Net income

   $ 31,672      $ 21,512    $ 7,008      $ (28,520   $ 31,672   
                                       

 

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FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

Condensed Consolidating Statement of Cash Flows for the Three Months Ended March 31, 2010

 

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

Operating activities

        

Net cash provided by (used in) operating activities

   $ (12,548   $ 132      $ (14,847   $ (27,263

Investing activities

        

Payments for acquisition of businesses, net of cash received

     (17,544     —          —          (17,544

Purchases of property and equipment and other

     (4,926     (2,035     (1,183     (8,144

Proceeds from maturity of short-term investment

     15,000        —          —          15,000   
                                

Net cash used in investing activities

     (7,470     (2,035     (1,183     (10,688
                                

Financing activities

        

Borrowings under revolving line of credit

     20,000        —          —          20,000   

Payments of revolving line of credit

     (20,000     —          —          (20,000

Payments of long-term debt and capital leases

     (322     (205     —          (527

Issuance of common stock and other

     1,274        —          —          1,274   

Excess tax benefits from share based equity

     754        —          —          754   

Intercompany transfers

     (14,652     2,285        12,367        —     
                                

Net cash (used in) provided by financing activities

     (12,946     2,080        12,367        1,501   
                                

Effect of exchange rate changes on cash and cash equivalents

     —          —          (1,544     (1,544
                                

Net (decrease) increase in cash and cash equivalents

     (32,964     177        (5,207     (37,994

Cash and cash equivalents, beginning of period

     60,720        665        57,487        118,872   
                                

Cash and cash equivalents, end of period

   $ 27,756      $ 842      $ 52,280      $ 80,878   
                                

 

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FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements—(Continued)

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

Unaudited

 

Condensed Consolidating Statement of Cash Flows for the Three Months Ended March 31, 2009

 

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

Operating activities

        

Net cash (used in) provided by operating activities

   $ 1,593      $ (14,352   $ 3,009      $ (9,750

Investing activities

        

Payments for acquisition of businesses, net of cash received

     (23,032     —          (1,494     (24,526

Purchases of property and equipment and other

     (1,187     (1,809     (1,290     (4,286
                                

Net cash used in investing activities

     (24,219     (1,809     (2,784     (28,812
                                

Financing activities

        

Payments of long-term debt and capital leases

     (100     (222     —          (322

Issuance of common stock and other

     5,930        —          —          5,930   

Excess tax benefits from share based equity

     185        —          —          185   

Intercompany transfers

     (12,512     12,923        (411     —     
                                

Net cash (used in) provided by financing activities

     (6,497     12,701        (411     5,793   
                                

Effect of exchange rate changes on cash and cash equivalents

     —          —          (1,378     (1,378
                                

Net decrease in cash and cash equivalents

     (29,123     (3,460     (1,564     (34,147

Cash and cash equivalents, beginning of period

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

Cash and cash equivalents, end of period

   $ 102,289      $ 8,203      $ 47,203      $ 157,695   
                                

 

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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 month periods ended March 31, 2010 and 2009 and significant factors that could affect our prospective financial condition and results of operations. This discussion should be read together with the accompanying unaudited condensed consolidated financial statements and related notes and with our Annual Report on Form 10-K for the year ended December 31, 2009. Historical results and any discussion of prospective results may not indicate our future performance. See “Forward Looking Statements.”

BUSINESS OVERVIEW

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

We report financial results for the following five operating segments:

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

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

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

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

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

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

 

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

Most of our services are rendered under time and expense arrangements that obligate the client to pay us a fee for the hours that we incur at agreed upon rates. Under this arrangement, we typically bill our clients for reimbursable expenses, which may include the cost of producing our work product and other direct expenses that we incur on behalf of the client, such as travel costs. We also render services for which the client is required to pay us a fixed fee or recurring retainer. These arrangements are generally cancellable at any time. Some of our engagements contain performance-based arrangements in which we earn a success fee when and if certain predefined outcomes occur. This type of success fee may supplement a time-and-expense or fixed-fee arrangement. Success fee revenues may cause variations in our revenues and operating results due to the timing of achieving the performance-based criteria. In our Technology segment, certain clients are also billed based on the amount of data stored on our electronic systems, the volume of information processed and the number of users licensing our Ringtail® and Attenex® software products for installation within their own environments. We license these products directly to end users as well as indirectly through our channel partner relationships. Seasonal factors, such as the timing of our employees’ and clients’ vacations and holidays, impact the timing of our revenues.

Our financial results are primarily driven by:

 

   

the number, size and type of engagements we secure;

 

   

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

 

   

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

 

   

the number of revenue-generating professionals;

 

   

fees from clients on a retained basis or other; and

 

   

licensing of our software products and other technology services.

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

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

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

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

 

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EXECUTIVE HIGHLIGHTS

 

     Three Months Ended
March 31,
 
           2010                 2009        
     (dollars in thousands,
except per share amounts)
 

Revenues

   $ 350,040      $ 347,846   

Earnings per common share—diluted

     0.29        0.60   

Adjusted earnings per common share—diluted

     0.67        0.60   

Operating income

     31,843        60,631   

Adjusted EBITDA

     75,882        73,963   

Cash used in operating activities

     (27,263     (9,750

Total number of employees at March 31,

     3,399        3,353   

First Quarter 2010 Executive Highlights

Revenues

Revenues for the quarter ended March 31, 2010 increased $2.2 million, or 0.6%, to $350.0 million, compared to $347.8 million in the prior year. Excluding the estimated impact of foreign currency translation of the U.S. dollar against other currencies in the first quarter versus the prior year quarter, the Company’s revenues declined 1.3%.

Our financial results in the first quarter of 2010 were influenced by a global economy that is in transition from recession to recovery and growth. Revenues in the period reflect the continued strong momentum of the Economic Consulting segment, which benefited from the new European practice and two U.S. offices that opened in the second quarter of 2009 as well as rising demand for its services as a result of disputes stemming from the global financial crisis. Within an overall slow environment for discretionary spending, M&A and capital markets activity, the Strategic Communications segment reported a slight increase in revenue and recorded the second consecutive quarter of net annualized retainer wins. The Forensic and Litigation Consulting segment revenues were consistent with the prior year as the growth in the construction solutions and international investigations practices replaced revenue declines from several large financial fraud cases that arose last year and continue in the current year, but at reduced levels.

These increases offset a decline in revenues from the Corporate Finance/Restructuring segment, which saw market conditions slow from the record pace of 2009 due to improving credit market conditions and a stabilizing economy. In addition, the Technology segment experienced a slight year-over-year decrease in revenues as both unit hosting and processing demand from several large litigation and bankruptcy cases partially offset pricing pressures.

Earnings Per Share

First quarter 2010 earnings per diluted share was $0.29 and adjusted earnings per share, which excludes the impact of special charges, was $0.67 per diluted share. The estimated quarter-over-quarter foreign currency translation impact of a weaker U.S. dollar, primarily against the British pound and Australian dollar, increased earnings per diluted share by $0.02 in the quarter.

We recorded special charges in the first quarter of $30.2 million which reduced our fully diluted earnings per share by $0.38. These charges include $19.3 million of salary continuation and other contractual costs associated with the termination of 144 employees; $7.8 million of lease termination charges in connection with the consolidation of four office locations and $3.1 million of other costs. The charges reflect actions we took to better align capacity with expected demand, to eliminate certain redundancies resulting from acquisitions and to

 

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provide for appropriate levels of administrative support. The total cash outflow associated with the special charges is expected to be $21.8 million, of which $3.6 million has already been paid, $13.9 million is expected to be paid during the remainder of 2010, and the balance of $4.3 million is expected to be paid from 2011 through 2013.

Operating Income

Operating income in the first quarter was $31.8 million including the impact of special charges of $30.2 million. Operating income performance reflects improved profitability across several of our business segments, particularly Economic Consulting and Technology, as well as decreased corporate expenses, which combined to more than offset profitability declines in the Corporate Finance/Restructuring and Forensic Litigation Consulting segments.

Adjusted EBITDA

Adjusted EBITDA increased by $1.9 million to $75.9 million, or 21.7% of revenues compared to $74.0 million, or 21.3% of revenues, in the prior year period. This growth was due to profitability improvements within the Economic Consulting and Technology segments, as well as lower selling, general and administrative (“SG&A”) expenses, which more than offset the lower profit contribution from the Corporate Finance/Restructuring and Forensic and Litigation Consulting segments.

Operating Cash Flows

Cash used in operating activities in the first quarter of 2010 was $27.3 million and reflects our historical use of cash in the first quarter to fund employee compensation payments and contingent acquisition payments. Compared to a use of $9.8 million in the prior year, the current year operating cash flows reflect higher forgivable loan fundings, annual incentive compensation payments and income tax payments partially offset by stronger receivables collections.

Headcount

Headcount increased by 46, or 1.4% to 3,399, at March 31, 2010 as compared to March 31, 2009. The increase occurred largely in the Forensic Litigation Consulting and Economic Consulting segments to meet current and anticipated demand for services.

 

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CONSOLIDATED RESULTS OF OPERATIONS

 

     Three Months Ended
March 31,
 
     2010     2009  
     (in thousands, except
per share amounts)
 

Revenues

    

Corporate Finance/Restructuring

   $ 117,467      $ 127,542   

Forensic and Litigation Consulting

     78,678        78,374   

Economic Consulting

     67,307        54,836   

Technology

     43,373        44,323   

Strategic Communications

     43,215        42,771   
                

Total revenues

   $ 350,040      $ 347,846   
                

Operating income

    

Corporate Finance/Restructuring

   $ 25,644      $ 38,375   

Forensic and Litigation Consulting

     12,400        20,597   

Economic Consulting

     5,766        9,367   

Technology

     7,302        8,167   

Strategic Communications

     2,347        3,876   
                

Segment operating income

     53,459        80,382   

Unallocated corporate expenses

     (21,616     (19,751
                

Total operating income

     31,843        60,631   
                

Other income (expense)

    

Interest income and other

     2,354        2,303   

Interest expense

     (11,318     (11,013
                
     (8,964     (8,710
                

Income before income tax provision

     22,879        51,921   

Income tax provision

     8,694        20,249   
                

Net income

   $ 14,185      $ 31,672   
                

Earnings per common share—basic

   $ 0.31      $ 0.63   
                

Earnings per common share—diluted

   $ 0.29      $ 0.60   
                

Reconciliation of Operating Income to adjusted EBITDA:

 

     Three Months Ended
March 31,
     2010    2009
     (in thousands)

Operating income

   $ 31,843    $ 60,631

Depreciation and amortization

     7,703      7,032

Amortization of other intangible assets

     6,091      6,050

Special charges

     30,245      —  

Litigation settlement gains, net

     —        250
             

Adjusted EBITDA

   $ 75,882    $ 73,963
             

 

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Three Months Ended March 31, 2010 Compared to Three Months Ended March 31, 2009

Revenues and Operating Income

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

Special charges

During the quarter ended March 31, 2010, we recorded special charges totaling $30.2 million, of which $8.4 million is a non-cash charge, primarily related to a realignment of our workforce and a consolidation of four office locations. The charges reflect actions we took to better align capacity with expected demand, to eliminate certain redundancies resulting from acquisitions and to provide for appropriate levels of administrative support. These actions include the termination of 144 employees, the consolidation of four office locations and certain other actions. The special charges consist of:

 

   

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

 

   

$7.8 million of expense associated with lease terminations; and

 

   

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

The total cash outflow associated with the special charges is expected to be $21.8 million, of which $3.6 million has already been paid, $13.9 million is expected to be paid during the remainder of 2010, $4.0 million is expected to be paid in 2011, and the balance of $0.3 million is expected to be paid in 2012 and 2013.

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

 

     Special
Charges
   Total
Headcount
     (dollars in thousands)

Corporate Finance/Restructuring

   $ 6,589    71

Forensic and Litigation Consulting

     5,560    20

Economic Consulting

     6,814    19

Technology

     4,927    16

Strategic Communications

     1,260    1
           
     25,150    127

Unallocated Corporate

     5,095    17
           

Total

   $ 30,245    144
           

Unallocated corporate expenses

Unallocated corporate expenses increased $1.8 million to $21.6 million for the three months ended March 31, 2010, from $19.8 million for the three months ended March 31, 2009. Excluding the impact of special charges of $5.1 million, unallocated corporate expenses for the three months ended March 31, 2010 would have decreased $3.3 million, or 16.4%, to $16.5 million for the three months ended March 31, 2010 from $19.8 million for the three months ended March 31, 2009 primarily due to lower incentive based compensation costs and control of discretionary spending.

 

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Interest income and other

Interest income and other, which includes foreign currency transaction gains and losses, increased by $0.3 million to $2.4 million for the three months ended March 31, 2010 from $2.1 million for the three months ended March 31, 2009. The increase is primarily due to a $0.6 million net favorable impact from foreign exchange transaction gains and losses due to the remeasurement of receivables and payables required to be settled in a currency other than an entity’s functional currency. This favorable variance was partially offset by lower income from joint ventures accounted for as equity investments due to FTI’s acquisition of the balance of the ownership of its German joint venture in June 2009.

Interest expense

Interest expense increased $0.3 million to $11.3 million for the three months ended March 31, 2010 from $11.0 million for the three months ended March 31, 2009. The increase in interest expense is primarily driven by the cancellation of the Company’s interest rate swap contract in the second quarter of 2009.

Income tax provision

Our provision for income taxes in interim periods is computed by applying our estimated annual effective tax rate against income before income tax expense for the period. In addition, non-recurring or discrete items are recorded during the period in which they occur. The effective tax rate was 38.0% for the three months ended March 31, 2010 as compared to 39.0% for the three months ended March 31, 2009. The decrease in the rate is primarily due to an increase in the estimated amount of foreign earnings that are not subject to U.S. federal or state income tax as well as an increase in certain foreign deductions.

SEGMENT RESULTS

Adjusted Segment EBITDA

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

The following table reconciles segment operating income to adjusted segment EBITDA for the three months ended March 31, 2010 and 2009.

 

     Three Months Ended
March 31,
     2010    2009
     (in thousands)

Segment operating income

   $ 53,459    $ 80,382

Depreciation

     6,326      5,443

Amortization of other intangible assets

     6,091      6,050

Special charges

     25,150      —  
             

Total adjusted segment EBITDA

   $ 91,026    $ 91,875
             

 

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Other Segment Operating Data

 

     Three Months Ended
March 31,
 
         2010             2009      

Number of revenue-generating professionals:(1)

    

Corporate Finance/Restructuring

     701        715   

Forensic and Litigation Consulting

     771        702   

Economic Consulting

     302        275   

Technology

     242        259   

Strategic Communications

     569        566   
                

Total revenue-generating professionals

     2,585        2,517   
                

Utilization rates of billable professionals:(2)

    

Corporate Finance/Restructuring

     69     83

Forensic and Litigation Consulting

     78     82

Economic Consulting

     82     78

Average billable rate per hour:(3)

    

Corporate Finance/Restructuring

   $ 457      $ 418   

Forensic and Litigation Consulting

     325        319   

Economic Consulting

     470        454   

 

(1)

Revenue generating professionals are reflected as of the end of the applicable period. Substantially all of the revenue generating professionals impacted by the reduction in force have been reflected in the headcount as of March 31, 2010

 

(2)

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

 

(3)

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

 

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CORPORATE FINANCE/RESTRUCTURING

 

     Three Months Ended
March 31,
 
     2010     2009  
    

(dollars in thousands,

except rate per hour)

 

Revenues

   $ 117,467      $ 127,542   
                

Operating expenses:

    

Direct cost of revenues

     66,168        69,724   

Selling, general and administrative expenses

     17,574        17,861   

Special charges

     6,589        —     

Amortization of other intangible assets

     1,492        1,582   
                
     91,823        89,167   
                

Segment operating income

     25,644        38,375   

Add back: depreciation and amortization of intangible assets

     2,486        2,346   

Add back: special charges

     6,589        —     
                

Adjusted segment EBITDA

   $ 34,719      $ 40,721   
                

Gross profit(1)

   $ 51,299      $ 57,818   

Gross profit margin(2)

     43.7     45.3

Adjusted segment EBITDA as a percent of revenues

     29.6     31.9

Number of revenue generating professionals (at period end)

     701        715   

Utilization rates of billable professionals

     69     83

Average billable rate per hour

   $ 457      $ 418   

 

(1)

Revenues less direct cost of revenues

 

(2)

Gross profit as a percent of revenues

Three Months Ended March 31, 2010 Compared to Three Months Ended March 31, 2009

Revenues decreased $10.1 million, or 7.9%, to $117.5 million for the three months ended March 31, 2010 from $127.5 million for the three months ended March 31, 2009. Excluding the positive impact of foreign currency translation, which was primarily due to the strengthening of the British pound relative to the U.S. dollar, the decrease in revenue would have been approximately 10%. The decline in revenue is primarily due to softness in the U.S. bankruptcy and restructuring markets as evidenced by a decline in utilization from a peak of 83% for the three months ended March 31, 2009 to 69% for the three months ended March 31, 2010. Partially offsetting the decline in U.S. bankruptcy and restructuring revenue was an increase in restructuring revenues in certain international markets including Europe, Canada and Mexico relative to the first quarter of 2009.

Gross profit decreased $6.5 million to $51.3 million for the three months ended March 31, 2010 from $57.8 million for the three months ended March 31, 2009. Gross profit margin decreased 1.6 percentage points to 43.7% for the three months ended March 31, 2010 from 45.3% for the three months ended March 31, 2009. The segment has not yet realized the benefit of staff reductions made in the first quarter of 2010 to address the drop in demand. As a result, declining revenues, without a significant reduction in direct costs has resulted in lower margins in the quarter ended March 31, 2010. Partially offsetting the margin decline was a 1.9 percentage point positive margin impact in the quarter ended March 31, 2010 from a lower level of zero margin pass through revenue.

SG&A expense decreased $0.3 million to $17.6 million for the three months ended March 31, 2010 from $17.9 million for the three months ended March 31, 2009. As a percentage of revenues, SG&A expense was 15.0% of revenue for the three months ended March 31, 2010, up from 14.0% in 2009 primarily due to lower

 

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revenue in the current quarter. The decrease in SG&A expense in 2010 was primarily due to lower bad debt expense and recruiting costs partially offset by higher business development expenses and allocations of corporate costs incurred in direct support of segment operations. Bad debt expense was 0.1 % of revenue for the three months ended March 31, 2010 versus 2.0% of revenue for the three months ended March 31, 2009.

Amortization of other intangible assets decreased to $1.5 million for the three months ended March 31, 2010 from $1.6 million for the three months ended March 31, 2009.

Adjusted segment EBITDA decreased $6.0 million, or 14.7 %, to $34.7 million for the three months ended March 31, 2010 from $40.7 million for the three months ended March 31, 2009.

FORENSIC AND LITIGATION CONSULTING

 

     Three Months Ended
March 31,
 
         2010             2009      
     (dollars in thousands,
except rate per hour)
 

Revenues

   $ 78,678      $ 78,374   
                

Operating expenses:

    

Direct cost of revenues

     45,823        43,221   

Selling, general and administrative expenses

     13,900        13,872   

Special charges

     5,560        —     

Amortization of other intangible assets

     995        684   
                
     66,278        57,777   
                

Segment operating income

     12,400        20,597   

Add back: depreciation and amortization of intangible assets

     1,824        1,344   

Add back: special charges

     5,560        —     
                

Adjusted segment EBITDA

   $ 19,784      $ 21,941   
                

Gross profit(1)

   $ 32,855      $ 35,153   

Gross profit margin(2)

     41.8     44.9

Adjusted segment EBITDA as a percent of revenues

     25.1     28.0

Number of revenue generating professionals (at period end)

     771        702   

Utilization rates of billable professionals(3)

     78     82

Average billable rate per hour(3)

   $ 325      $ 319   

 

(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 March 31, 2010 Compared to Three Months Ended March 31, 2009

Revenues increased $0.3 million, or 0.4% to $78.7 million for the three months ended March 31, 2010 from $78.4 million for the three months ended March 31, 2009. Excluding the positive impact of foreign currency translation, revenues decreased approximately 0.6%. The $0.4 million decrease in revenue was attributed to lower consulting volumes and lower pass-through revenue in our North American consulting practice despite higher billable rates, and growth in our international risk, investigations and construction solutions practices.

 

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Gross profit declined by $2.3 million, or 6.5% to $32.9 million for the three months ended March 31, 2010 from $35.2 million for the three months ended March 31, 2009. Gross profit margin decreased by 3.1 percentage points to 41.8% for the three months ended March 31, 2010 from 44.9% for the three months ended March 31, 2009. The gross profit margin decline was mainly due to lower utilization on a higher cost base in the quarter ended March 31, 2010.

SG&A expense remained unchanged from the prior year at $13.9 million for the three months ended March 31, 2010. As a percentage of revenues, SG&A expense was 17.7% for the three months ended March 31, 2010, unchanged from 17.7% for the three months ended March 31, 2009. Higher internal allocations of corporate costs incurred in direct support of segment operations were offset by lower bad debt expense and personnel related costs in 2010. Bad debt expense was 1.1% of revenues for the three months ended March 31, 2010 versus 1.6% for the three months ended March 31, 2009.

Amortization of other intangible assets increased by $0.3 million to $1.0 million for the three months ended March 31, 2010 from $0.7 million for the three months ended March 31, 2009.

Adjusted segment EBITDA decreased by $2.1 million, or 9.8%, to $19.8 million for the three months ended March 31, 2010 from $21.9 million for the three months ended March 31, 2009.

ECONOMIC CONSULTING

 

     Three Months Ended
March 31,
 
     2010     2009  
     (dollars in thousands,
except rate per hour)
 

Revenues

   $ 67,307      $ 54,836   
                

Operating expenses:

    

Direct cost of revenues

     44,869        36,762   

Selling, general and administrative expenses

     9,548        8,162   

Special charges

     6,814        —     

Amortization of other intangible assets

     310        545   
                
     61,541        45,469   
                

Segment operating income

     5,766        9,367   

Add back: depreciation and amortization of intangible assets

     940        952   

Add back: special charges

     6,814        —     
                

Adjusted segment EBITDA

   $ 13,520      $ 10,319   
                

Gross profit(1)

   $ 22,438      $ 18,074   

Gross profit margin(2)

     33.3     33.0

Adjusted segment EBITDA as a percent of revenues

     20.1     18.8

Number of revenue generating professionals (at period end)

     302        275   

Utilization rates of billable professionals

     82     78

Average billable rate per hour

   $ 470      $ 454   

 

(1)

Revenues less direct cost of revenues

 

(2)

Gross profit as a percent of revenues

Three Months Ended March 31, 2010 Compared to Three Months Ended March 31, 2009

Revenues increased by $12.5 million, or 22.7%, to $67.3 million for the three months ended March 31, 2010 from $54.8 million for the three months ended March 31, 2009. Revenue growth for the three months ended March 31, 2010 included approximately $8 million in revenue from our European practice and two U.S. offices

 

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which opened in the second quarter of 2009. The remainder of revenue growth was primarily related to increased fees from financial economics consulting relative to the prior year, partially offset by lower energy litigation related consulting. Financial economics consulting includes consulting related to issues such as class action securities litigation, material adverse change clauses, purchase price premiums, ERISA lawsuits, complex valuations of assets, including financial instruments and criminal cases related to financial dealings.

Gross profit increased by $4.3 million, or 24.2%, to $22.4 million for the three months ended March 31, 2010 from $18.1 million for the three months ended March 31, 2009. Gross profit margin increased to 33.3% for the three months ended March 31, 2010 from 33.0% for the three months ended March 31, 2009. Margin improvement was due to improved utilization and a favorable impact from variable share-based compensation expense in the current quarter. However, our new European practice continues to create margin compression as operations have not yet achieved the scale at which revenues and staff leverage will offset fixed costs paid to senior hires.

SG&A expense increased by $1.3 million, or 17.0%, to $9.5 million for the three months ended March 31, 2010 from $8.2 million for the three months ended March 31, 2009. As a percentage of revenues, SG&A expense was 14.2% for the three months ended March 31, 2010 versus 14.9% for the three months ended March 31, 2009. The increase in SG&A expense in 2010 was primarily due to higher professional service fees in the current quarter and an increase in expenses, such as rent and other occupancy costs, associated with new offices that opened in the second quarter of 2009. Bad debt expense was 1.9% of revenue for the three months ended March 31, 2010 versus 2.3% of revenue for the three months ended March 31, 2009.

Amortization of other intangible assets was slightly lower than the prior year at $0.3 million for the three months ended March 31, 2010 versus $0.5 million for the three months ended March 31, 2009.

Adjusted segment EBITDA increased by $3.2 million, or 31.0%, to $13.5 million for the three months ended March 31, 2010 from $10.3 million for the three months ended March 31, 2009.

 

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TECHNOLOGY

 

     Three Months Ended
March 31,
 
     2010     2009  
     (dollars in thousands)  

Revenues

   $ 43,373      $ 44,323   
                

Operating expenses:

    

Direct cost of revenues

     13,881        15,670   

Selling, general and administrative expenses

     15,281        18,415   

Special charges

     4,927        —     

Amortization of other intangible assets

     1,982        2,071   
                
     36,071        36,156   
                

Segment operating income

     7,302        8,167   

Add back: depreciation and amortization of intangible assets

     5,032        4,931   

Add back: special charges

     4,927        —     
                

Adjusted segment EBITDA

   $ 17,261      $ 13,098   
                

Gross profit(1)

   $ 29,492      $ 28,653   

Gross profit margin(2)

     68.0     64.6

Adjusted segment EBITDA as a percent of revenues

     39.8     29.6

Number of revenue generating professionals (at period end)

     242        259   

 

(1)

Revenues less direct cost of revenues

 

(2)

Gross profit as a percent of revenues

Three Months Ended March 31, 2010 Compared to Three Months Ended March 31, 2009

Revenues decreased by $0.9 million, or 2.1%, to $43.4 million for the three months ended March 31, 2010 from $44.3 million for the three months ended March 31, 2009. Increased unit based revenues and revenue growth from the introduction of our new Acuity product offering, which combines E-discovery and document review into a single offering, were offset by decreased revenue from our channel partners and lower consulting revenue in the quarter versus the prior year. Channel partner revenues have declined due to a decrease in the volume of business with and the number of channel partners. Consulting revenues decreased due to declines in volume associated with two large financial investigative matters that have gradually slowed since the first quarter of 2009. The consulting practice experienced some rate pressure, though less dramatic in large complex engagements that require the expertise and scale of a well established market participant. Unit based revenues have increased due to higher volumes driven by a large bankruptcy matter, despite lower pricing.

Unit based revenue is defined as revenue billed on a per item, per page, or using some other unit based method and includes revenue from data processing and storage, software usage and software licensing. Unit based revenue includes revenue associated with our proprietary software that is made available to customers, either via a web browser (“on-demand”) or installed at our customer or partner locations (“on-premise”). On-demand revenue is charged on a unit or monthly basis and includes, but is not limited to, processing and review related functions. On-premise revenue is comprised of up-front license fees, with recurring support and maintenance.

Gross profit increased by $0.8 million to $29.5 million for the three months ended March 31, 2010 from $28.7 million for the three months ended March 31, 2009. Gross profit margin increased to 68.0% for the three months ended March 31, 2010 from 64.6% for the three months ended March 31, 2009. The increase in gross

 

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profit margin is due to a change in the mix of revenue relative to 2009, with higher margin unit based revenue comprising a larger percentage of total revenue as well as lower pass through and personnel related direct costs in the quarter ended March 31, 2010.

SG&A expense decreased by $3.1 million to $15.3 million for the three months ended March 31, 2010 from $18.4 million for the three months ended March 31, 2009. As a percentage of revenues, SG&A expense was 35.2% for the three months ended March 31, 2010, versus 41.5% for the three months ended March 31, 2009. The decrease in SG&A expense is primarily due to lower staff and staff related expenses, increased capitalization for certain software development costs and a decrease in bad debt expense. Research and development expense in the first quarter of 2010 was $5.4 million, consistent with the previous year. Bad debt expense was 0.8% of revenues for the three months ended March 31, 2010 versus 2.6% of revenues for the three months ended March 31, 2009.

Amortization of other intangible assets for the three months ended March 31, 2010 of $2.0 million remains level with the prior year amortization of $2.1 million.

Adjusted segment EBITDA increased $4.2 million, or 31.8%, to $17.3 million for the three months ended March 31, 2010 from $13.1 million for the three months ended March 31, 2009.

STRATEGIC COMMUNICATIONS

 

     Three Months Ended
March 31,
 
         2010             2009      
     (dollars in thousands)  

Revenues

   $ 43,215      $ 42,771   
                

Operating expenses:

    

Direct cost of revenues

     26,719        27,035   

Selling, general and administrative expenses

     11,577        10,692   

Special charges

     1,260        —     

Amortization of other intangible assets

     1,312        1,168   
                
     40,868        38,895   
                

Segment operating income

     2,347        3,876   

Add back: depreciation and amortization of intangible assets

     2,135        1,920   

Add back: special charges

     1,260        —     
                

Adjusted segment EBITDA

   $ 5,742      $ 5,796   
                

Gross profit(1)

   $ 16,496      $ 15,736   

Gross profit margin(2)

     38.2     36.8

Adjusted segment EBITDA as a percent of revenues

     13.3     13.6

Number of revenue generating professionals (at period end)

     569        566   

 

(1)

Revenues less direct cost of revenues

 

(2)

Gross profit as a percent of revenues

Three Months Ended March 31, 2010 Compared to Three Months Ended March 31, 2009

Revenues increased by $0.4 million, or 1.0%, to $43.2 million for the three months ended March 31, 2010 from $42.8 million for the three months ended March 31, 2009. Revenue growth from an acquisition was approximately $0.8 million, or 1.8%, offsetting an organic revenue decline of approximately $0.3 million, or 0.8%. Excluding the positive impact of foreign currency translation, which was primarily due to the strengthening of the British pound and Australian dollar relative to the U.S. dollar, organic revenue declined

 

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approximately 8%. This decrease in organic revenues is due to lower retainer based and pass through revenues, partially offset by higher project based revenues. Retainer based revenues, while stable relative to the fourth quarter of 2009, have declined relative to the first quarter of 2009 due to a reduction in corporate communications spending.

Gross profit increased by $0.8 million to $16.5 million for the three months ended March 31, 2010 from $15.7 million for the three months ended March 31, 2009 due to the impact of foreign currency translation. Gross profit margin increased to 38.2% for the three months ended March 31, 2010 from 36.8% for the three months ended March 31, 2009. The primary drivers of the improved gross profit margin in the quarter ended March 31, 2010 were lower levels of low margin pass through costs and lower direct costs that resulted from cost cutting measures undertaken in the first quarter of 2009.

SG&A expense increased by $0.9 million, or 8.3%, to $11.6 million for the three months ended March 31, 2010 from $10.7 million for the three months ended March 31, 2009. As a percentage of revenues, SG&A expense was 26.8% for the three months ended March 31, 2010, an increase from 25.0% for the three months ended March 31, 2009. The primary drivers of the increase in SG&A expense was the impact of foreign currency translation and certain SG&A costs added due to FTI’s acquisition of the balance of the ownership of its German joint venture in June 2009. Bad debt expense was 1.1% of revenues for the three months ended March 31, 2010 versus 1.3% of revenues for the three months ended March 31, 2009.

Amortization of other intangible assets increased slightly to $1.3 million for the three months ended March 31, 2010 from $1.2 million for the three months ended March 31, 2009.

Adjusted segment EBITDA decreased by $0.1 million, or 0.9%, to $5.7 million for the three months ended March 31, 2010 from $5.8 million for the three months ended March 31, 2009.

CRITICAL ACCOUNTING POLICIES

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

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

 

     Three Months Ended
March 31,
 
       2010             2009      
     (dollars in thousands)  

Net cash used in operating activities

   $ (27,263   $ (9,750

Net cash used in investing activities

     (10,688     (28,812

Net cash provided by financing activities

     1,501        5,793   

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

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

 

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Cash used in operating activities increased by $17.6 million to $27.3 million for the three months ended March 31, 2010 from $9.8 million for the three months ended March 31, 2009. This increase was attributable to higher forgivable loan fundings, annual incentive compensation payments and income tax payments in the quarter ended March 31, 2010, partially offset by better cash collections experience relative to our billed accounts receivable in the quarter ended March 31, 2010 as compared to the quarter ended March 31, 2009.

Net cash used in investing activities for the three months ended March 31, 2010 was $10.7 million as compared to $28.8 million for the three months ended March 31, 2009. The favorable change in cash used in investing activities was primarily due to $15.0 million in proceeds from the maturity of a short-term investment and lower contingent acquisition payments in the three months ended March 31, 2010. Contingent acquisition payments were $17.5 million in the three months ended March 31, 2010 versus $24.2 million in the three months ended March 31, 2009.

Capital expenditures were $5.2 million for the three months ended March 31, 2010 as compared to $4.5 million for the three months ended March 31, 2009. Capital expenditures in both 2010 and 2009 primarily related to leasehold improvements and the purchase of data processing equipment.

Our financing activities for the three months ended March 31, 2010 included $0.8 million received from the issuance of common stock under equity compensation plans. Our financing activities for the three months ended March 31, 2009 included $5.9 million received from the issuance of common stock under equity compensation plans.

Capital Resources

As of March 31, 2010, our capital resources included $80.9 million of cash and cash equivalents and available borrowing capacity of $171.2 million under a $175 million revolving line of credit under our senior secured bank credit facility (‘bank credit facility”). As of March 31, 2010, we had no outstanding indebtedness under our revolving line of credit, however, $3.8 million of outstanding letters of credit reduced the availability of borrowings under that line of credit. We use letters of credit primarily in lieu of security deposits for our office facilities.

Future Capital Needs

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

 

   

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

 

   

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

 

   

debt service requirements;

 

   

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

 

   

discretionary funding of our stock repurchase program;

 

   

potential earn-out obligations related to our acquisitions; and

 

   

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

We currently anticipate capital expenditures will range between $34 million to $40 million to support our organization during 2010, including direct support for specific client engagements. Our estimate takes into consideration the needs of our existing businesses but does not include the impact of any purchases that we make as a result of future acquisitions or specific client engagements that are not currently contemplated. Our capital expenditure requirements may change if our staffing levels or technology needs change significantly from what we currently anticipate, if we purchase additional equipment specifically to support a client engagement or if we pursue and complete additional acquisitions.

 

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In certain business combinations consummated prior to January 1, 2009, a portion of our purchase price is in the form of contingent consideration, often referred to as earn-outs. The use of contingent consideration allows us to shift some of the valuation risk, inherent at the time of acquisition, to the seller based upon the outcome of future financial targets that the seller contemplates in its valuation. Contingent consideration is payable annually as agreed upon performance targets are met and is generally subject to a maximum amount within a specified time period. Our obligations change from period-to-period primarily as a result of payments made during the current period, changes in the acquired entities’ performance and changes in foreign currency exchange rates. These differences could be significant.

In connection with our required adoption of the new accounting principles for business combinations, contingent purchase price obligations included in business combinations consummated subsequent to December 31, 2008 would be recorded as liabilities on our consolidated balance sheet and re-measured at fair value at each subsequent reporting date with an offset to current period earnings. We have no such contingent purchase price obligations accounted for under the new accounting principles for business combinations at March 31, 2010.

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

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

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

The Convertible Notes are registered securities. As of March 29, 2010 the last trade date before March 31, 2010, the Convertible Notes had a market price of $1,389 per $1,000 principal amount of Convertible Notes, compared to an estimated conversion value of approximately $1,258 per $1,000 principal amount of Convertible Notes. Because the Convertible Notes have historically traded at market prices above the estimated conversion values, we do not anticipate holders will elect to convert their Convertible Notes in the near future unless the value ratio should change. However, we believe we have adequate capital resources to fund potential conversions.

Off Balance Sheet Arrangements

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

 

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Future Contractual Obligations

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

Future Outlook

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

 

   

our $80.9 million of cash and cash equivalents at March 31, 2010;

 

   

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

 

   

funds required for capital expenditures during 2010 of about $34 million to $40 million;

 

   

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

 

   

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

 

   

the discretionary funding of our share repurchase program;

 

   

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

 

   

other known future contractual obligations.

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

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

 

   

our future profitability;

 

   

the quality of our accounts receivable;

 

   

our relative levels of debt and equity;

 

   

the volatility and overall condition of the capital markets; and

 

   

the market prices of our securities.

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

 

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Forward-Looking Statements

This Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of Section 21E of the Securities Exchange Act of 1934, or the Exchange Act. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues, future results and performance, future capital expenditures, expectations, plans or intentions relating to acquisitions and other matters, business trends and other information that is not historical and may appear under the headings “Part 1—Item 2. Managements’ Discussion and Analysis of Financial Condition and Results of Operations,” “Item 1A. Risk Factors” in our Form 10-K for the year ended December 31, 2009 filed with the SEC on February 26, 2010 and the other documents we file with the SEC. When used in this quarterly report, words such as estimates, expects, anticipates, projects, plans, intends, believes, or forecasts and variations of such words or similar expressions are intended to identify forward-looking statements. All forward-looking statements, including, without limitation, management’s examination of historical operating trends, are based upon our historical performance and our current plans, estimates and expectations at the time we make them and various assumptions. Our expectations, beliefs and projections are expressed in good faith and we believe there is a reasonable basis for them. There can be no assurance that management’s expectations, beliefs and projections will result or be achieved. Our actual financial results, performance or achievements could differ materially from those expressed in, or implied by, any forward-looking statements. The inclusion of any forward-looking information should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved. Given these risks, uncertainties and other factors, you should not place undue reliance on any forward-looking statements.

There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in, or implied by, this Quarterly Report on Form 10-Q. Important factors that could cause our actual results to differ materially from the forward-looking statements we make in this Quarterly Report on Form 10-Q, include the following:

 

   

changes in demand for our services;

 

   

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

 

   

conflicts resulting in our inability to represent certain clients;

 

   

our former employees joining competing businesses;

 

   

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

 

   

our ability to make acquisitions and integrate the operations of acquisitions as well as the costs of integration;

 

   

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

 

   

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

 

   

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

 

   

periodic fluctuations in revenues, operating income and cash flows;

 

   

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

 

   

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

 

   

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

 

   

competition;

 

   

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

 

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our ability to manage growth;

 

   

risk of non-payment of receivables;

 

   

our outstanding indebtedness; and

 

   

proposed changes in accounting principles.

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

 

Item 3. Quantitative And Qualitative Disclosures About Market Risk

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

Equity Price Sensitivity

Certain acquisition related restricted stock agreements contain stock price guarantees that may result in cash payments in the future if our share price falls below a specified per share market value on the date the stock restrictions lapse (“the determination date”). The future settlement of any contingency related to our common stock price will be recorded as an adjustment to additional paid-in capital. The following table details by year the cash outflows that would result from the price protection payments if, on the applicable determination dates, our common stock price was at, 20% above or 20% below our closing common stock price on March 31, 2010 of $39.32 per share.

 

     2010    2011    2012    2013    Total
     (in thousands)

Cash outflow, assuming:

  

Closing share price of $39.32 at March 31, 2010

   $ 3,057    $ 6,160    $ 3,516    $ 4,145    $ 16,878

20% decrease in share price

     3,920      7,772      4,472      5,463      21,627

20% increase in share price

     2,194      4,548      2,560      2,827      12,129

 

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures. An evaluation of the effectiveness of the design and operation of our “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Exchange Act), as of the end of the period covered by this Quarterly Report on Form 10-Q was made under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (a) were effective to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is timely recorded, processed, summarized and reported and (b) included, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting. There have not been any changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II—OTHER INFORMATION

 

Item 1. Legal Proceedings

From time to time in the ordinary course of business, we are subject to claims, asserted or unasserted, or named as a party to lawsuits or investigations. Litigation, in general, and intellectual property and securities litigation in particular, can be expensive and disruptive to normal business operations. Moreover, the results of legal proceedings cannot be predicted with any certainty and in the case of more complex legal proceedings such as intellectual property and securities litigation, the results are difficult to predict at all. We are not aware of any asserted or unasserted legal proceedings or claims that we believe would have a material adverse effect on our financial condition or results of our operations.

 

Item 1A. Risk Factors

There were no material changes in any risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2009, filed with the SEC on February 26, 2010, although we may disclose changes to such factors or disclose additional factors from time to time in our future filings with the SEC.

 

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

Unregistered sales of equity securities.

None

Repurchases of our common stock. The following table provides information with respect to purchases we made of our common stock during the first quarter of 2010 (in thousands, except per share amounts).

 

     Total
Number

of Shares
Purchased(1)
   Average
Price

Paid  Per
share
   Total Number of
Shares Purchased as
Part of Publically

Announced
Program
   Approximate
Dollar Value
That May Yet
Be Purchased

Under
the  Program(2)

January 1 through January 31, 2010

   594    $ 47.38    581    $ 250,000

February 1 through February 28, 2010

   4    $ 40.30    —      $ 250,000

March 1 through March 31, 2010

   26    $ 38.56    —      $ 250,000
               

Total

   624       581   
               

 

(1)

The difference between the total number of shares purchased and the number of shares purchased as part of a publically announced program is 42,775 shares of common stock withheld to cover payroll tax withholdings related to the lapse of restrictions on restricted stock.

 

(2)

On November 4, 2009 our Board of Directors authorized a two-year stock repurchase program of up to $500.0 million and terminated the $50.0 million stock repurchase program authorized in February 2009. As of March 31, 2010, a balance of $250.0 million for stock repurchases by the Company remains authorized under the program.

 

Item 3. Defaults Upon Senior Securities

None.

 

Item 4. (Removed and Reserved)

 

Item 5. Other Information

None.

 

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Item 6. Exhibits

(a) Exhibits

 

Exhibit
Number

  

Exhibit Description

  3.1    Articles of Incorporation of FTI Consulting, Inc., as amended and restated. (Filed with the SEC on May 23, 2003 as an exhibit to FTI Consulting, Inc.’s Current Report on Form 8-K dated May 21, 2003 and incorporated herein by reference.)
  3.2    By-laws of FTI Consulting, Inc., as amended and restated through September 17, 2004. (Filed with the SEC on November 9, 2004 as an exhibit to FTI Consulting, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004 and incorporated herein by reference.)
  3.3    Amendment No. 6 to By-Laws of FTI Consulting, Inc. dated December 18, 2008. (Filed with the SEC on December 22, 2008 as an exhibit to FTI Consulting, Inc.’s Current Report on Form 8-K dated December 18, 2008 and incorporated herein by reference.)
  3.4    Amendment No. 7 to the By-Laws of FTI Consulting, Inc. dated February 25, 2009. (Filed with the SEC on March 3, 2009 as an exhibit to FTI Consulting, Inc.’s Current Report on Form 8-K dated February 25, 2009 and incorporated herein by reference.)
10.1*    Separation Agreement dated March 24, 2010 between FTI Consulting, Inc. and Jorge A. Celaya (Filed with the SEC on March 26, 2010 as an exhibit to FTI Consulting, Inc.’s Current Report on Form 8-K dated March 24, 2010 and incorporated herein by reference.)
10.2*    FTI Consulting, Inc. 2009 Omnibus Incentive Compensation Plan Cash-Based Performance Award Agreement (Filed with the SEC on March 29, 2010 as an exhibit to FTI Consulting, Inc.’s Current Report on Form 8-K dated March 25, 2010 and incorporated herein by reference.)
10.3*†    Offer Letter, as amended, dated March 23, 2010, between FTI Consulting, Inc. and Eric B. Miller.
31.1†    Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and 15D-14(a) under the Securities Exchange Act of 1934, as amended (Section 302 of the Sarbanes-Oxley Act of 2002).
31.2†    Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and 15D-14(a) under the Securities Exchange Act of 1934, as amended (Section 302 of the Sarbanes-Oxley Act of 2002).
32.1†    Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002).
32.2†    Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002).

 

* Management or Director contract or compensatory plan or arrangement.
Filed herewith.

 

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SIGNATURES

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

Date: May 6, 2010

 

FTI CONSULTING, INC.
By  

/s/    CATHERINE M. FREEMAN        

 

  Catherine M. Freeman
 

Senior Vice President, Controller and

Chief Accounting Officer

  (principal accounting officer)

 

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