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, 2014
OR
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 001-14875
FTI CONSULTING, INC.
(Exact Name of Registrant as Specified in its Charter)
Maryland | 52-1261113 | |
(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) | |
1101 K Street NW, Washington, D.C. 20005 |
33401 | |
(Address of Principal Executive Offices) | (Zip Code) |
(202) 312-9100
(Registrants telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web Site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x | Accelerated filer ¨ | |
Non-accelerated filer ¨ (Do not check if a smaller reporting company) | Smaller reporting company ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x
Indicate the number of shares outstanding of each of the issuers classes of common stock, as of the latest practicable date.
Class |
Outstanding at April 25, 2014 | |
Common stock, par value $0.01 per share | 40,852,724 |
FTI CONSULTING, INC. AND SUBSIDIARIES
Page | ||||||
PART IFINANCIAL INFORMATION |
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Item 1. |
Financial Statements | |||||
Condensed Consolidated Balance SheetsMarch 31, 2014 and December 31, 2013 | 3 | |||||
Condensed Consolidated Statements of Comprehensive IncomeThree Months Ended March 31, 2014 and 2013 | 4 | |||||
Condensed Consolidated Statement of Stockholders EquityThree Months Ended March 31, 2014 | 5 | |||||
Condensed Consolidated Statements of Cash FlowsThree Months Ended March 31, 2014 and 2013 | 6 | |||||
Notes to Condensed Consolidated Financial Statements | 7 | |||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations | 18 | ||||
Item 3. |
Quantitative and Qualitative Disclosures About Market Risk | 38 | ||||
Item 4. |
Controls and Procedures | 38 | ||||
PART IIOTHER INFORMATION |
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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. |
Mine Safety Disclosures | 40 | ||||
Item 5. |
Other Information | 40 | ||||
Item 6. |
Exhibits | 40 | ||||
42 |
2
PART IFINANCIAL INFORMATION
FTI Consulting, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except per share amounts)
Item 1. | Financial Statements |
March 31, 2014 |
December 31, 2013 |
|||||||
(Unaudited) | ||||||||
Assets |
||||||||
Current assets |
||||||||
Cash and cash equivalents |
$ | 77,005 | $ | 205,833 | ||||
Accounts receivable: |
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Billed receivables |
375,176 | 352,411 | ||||||
Unbilled receivables |
296,838 | 233,307 | ||||||
Allowance for doubtful accounts and unbilled services |
(126,942 | ) | (109,273 | ) | ||||
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Accounts receivable, net |
545,072 | 476,445 | ||||||
Current portion of notes receivable |
33,592 | 33,093 | ||||||
Prepaid expenses and other current assets |
49,014 | 61,800 | ||||||
Current portion of deferred tax assets |
26,543 | 26,690 | ||||||
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Total current assets |
731,226 | 803,861 | ||||||
Property and equipment, net of accumulated depreciation |
85,993 | 79,007 | ||||||
Goodwill |
1,221,318 | 1,218,733 | ||||||
Other intangible assets, net of amortization |
88,871 | 97,148 | ||||||
Notes receivable, net of current portion |
130,721 | 108,298 | ||||||
Other assets |
54,438 | 57,900 | ||||||
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Total assets |
$ | 2,312,567 | $ | 2,364,947 | ||||
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Liabilities and Stockholders Equity |
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Current liabilities |
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Accounts payable, accrued expenses and other |
$ | 112,808 | $ | 126,886 | ||||
Accrued compensation |
124,870 | 222,738 | ||||||
Current portion of long-term debt |
26,000 | 6,014 | ||||||
Billings in excess of services provided |
35,532 | 28,692 | ||||||
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Total current liabilities |
299,210 | 384,330 | ||||||
Long-term debt, net of current portion |
711,000 | 711,000 | ||||||
Deferred income taxes |
142,390 | 137,697 | ||||||
Other liabilities |
82,939 | 89,661 | ||||||
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Total liabilities |
1,235,539 | 1,322,688 | ||||||
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Commitments and contingent liabilities (notes 8, 10 and 11) |
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Stockholders equity |
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Preferred stock, $0.01 par value; shares authorized5,000; none outstanding |
| | ||||||
Common stock, $0.01 par value; shares authorized75,000; shares issued and outstanding40,854 (2014) and 40,526 (2013) |
409 | 405 | ||||||
Additional paid-in capital |
374,242 | 362,322 | ||||||
Retained earnings |
748,738 | 730,621 | ||||||
Accumulated other comprehensive loss |
(46,361 | ) | (51,089 | ) | ||||
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Total stockholders equity |
1,077,028 | 1,042,259 | ||||||
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Total liabilities and stockholders equity |
$ | 2,312,567 | $ | 2,364,947 | ||||
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See accompanying notes to the condensed consolidated financial statements
3
FTI Consulting, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(in thousands, except per share data)
Unaudited
Three Months Ended March 31, |
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2014 | 2013 | |||||||
Revenues |
$ | 425,552 | $ | 407,178 | ||||
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Operating expenses |
||||||||
Direct cost of revenues |
274,275 | 258,480 | ||||||
Selling, general and administrative expense |
108,387 | 96,647 | ||||||
Special charges |
| 427 | ||||||
Acquisition-related contingent consideration |
(1,843 | ) | 731 | |||||
Amortization of other intangible assets |
4,616 | 5,564 | ||||||
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385,435 | 361,849 | |||||||
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Operating income |
40,117 | 45,329 | ||||||
Other income (expense) |
||||||||
Interest income and other |
1,003 | 937 | ||||||
Interest expense |
(12,655 | ) | (12,715 | ) | ||||
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(11,652 | ) | (11,778 | ) | |||||
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Income before income tax provision |
28,465 | 33,551 | ||||||
Income tax provision |
10,348 | 9,871 | ||||||
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Net income |
$ | 18,117 | $ | 23,680 | ||||
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Earnings per common sharebasic |
$ | 0.46 | $ | 0.60 | ||||
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Earnings per common sharediluted |
$ | 0.45 | $ | 0.58 | ||||
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Other comprehensive income (loss), net of tax: |
||||||||
Foreign currency translation adjustments, net of tax $0 |
$ | 4,728 | $ | (15,509 | ) | |||
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Total other comprehensive income (loss), net of tax |
4,728 | (15,509 | ) | |||||
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Comprehensive income |
$ | 22,845 | $ | 8,171 | ||||
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See accompanying notes to the condensed consolidated financial statements
4
FTI Consulting, Inc. and Subsidiaries
Condensed Consolidated Statement of Stockholders Equity
(in thousands)
Unaudited
Common Stock | Additional Paid-in Capital |
Retained Earnings |
Accumulated Other Comprehensive (Loss) |
Total | ||||||||||||||||||||
Shares | Amount | |||||||||||||||||||||||
Balance December 31, 2013 |
40,526 | $ | 405 | $ | 362,322 | $ | 730,621 | $ | (51,089 | ) | $ | 1,042,259 | ||||||||||||
Net income |
| | | 18,117 | | 18,117 | ||||||||||||||||||
Other comprehensive income: |
||||||||||||||||||||||||
Cumulative translation adjustment |
| | | | 4,728 | 4,728 | ||||||||||||||||||
Issuance of common stock in connection with: |
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Exercise of options, net of income tax expense from share-based awards of $258 |
117 | 2 | 2,393 | | | 2,395 | ||||||||||||||||||
Restricted share grants, less net settled shares of 133 |
211 | 2 | (4,559 | ) | | | (4,557 | ) | ||||||||||||||||
Stock units issued under incentive compensation plan |
| | 1,632 | | | 1,632 | ||||||||||||||||||
Non-employee vesting of stock options |
| | 2,951 | | | 2,951 | ||||||||||||||||||
Share-based compensation |
| | 9,503 | | | 9,503 | ||||||||||||||||||
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Balance March 31, 2014 |
40,854 | $ | 409 | $ | 374,242 | $ | 748,738 | $ | (46,361 | ) | $ | 1,077,028 | ||||||||||||
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See accompanying notes to the condensed consolidated financial statements
5
FTI Consulting, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
Unaudited
Three Months Ended March 31, |
||||||||
2014 | 2013 | |||||||
Operating activities |
||||||||
Net income |
$ | 18,117 | $ | 23,680 | ||||
Adjustments to reconcile net income to net cash used in operating activities: |
||||||||
Depreciation and amortization |
8,585 | 8,006 | ||||||
Amortization of other intangible assets |
4,616 | 5,564 | ||||||
Acquisition-related contingent consideration |
(1,843 | ) | 731 | |||||
Provision for doubtful accounts |
4,442 | 4,094 | ||||||
Non-cash share-based compensation |
9,503 | 10,055 | ||||||
Non-cash interest expense |
675 | 670 | ||||||
Other |
(443 | ) | (135 | ) | ||||
Changes in operating assets and liabilities, net of effects from acquisitions: |
||||||||
Accounts receivable, billed and unbilled |
(71,474 | ) | (47,711 | ) | ||||
Notes receivable |
(26,088 | ) | (227 | ) | ||||
Prepaid expenses and other assets |
11,927 | 531 | ||||||
Accounts payable, accrued expenses and other |
18,815 | 16,603 | ||||||
Income taxes |
(684 | ) | 2,937 | |||||
Accrued compensation |
(93,573 | ) | (28,862 | ) | ||||
Billings in excess of services provided |
6,630 | 1,760 | ||||||
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Net cash used in operating activities |
(110,795 | ) | (2,304 | ) | ||||
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Investing activities |
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Payments for acquisition of businesses, net of cash received |
(15,611 | ) | (14,676 | ) | ||||
Purchases of property and equipment |
(15,179 | ) | (7,323 | ) | ||||
Other |
(10 | ) | 12 | |||||
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Net cash used in investing activities |
(30,800 | ) | (21,987 | ) | ||||
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Financing activities |
||||||||
Borrowings under revolving line of credit, net |
20,000 | | ||||||
Purchase and retirement of common stock |
(4,367 | ) | (28,758 | ) | ||||
Net issuance of common stock under equity compensation plans |
(2,490 | ) | (1,335 | ) | ||||
Other |
(101 | ) | (100 | ) | ||||
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Net cash provided by (used in) financing activities |
13,042 | (30,193 | ) | |||||
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Effect of exchange rate changes on cash and cash equivalents |
(275 | ) | (1,598 | ) | ||||
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Net decrease in cash and cash equivalents |
(128,828 | ) | (56,082 | ) | ||||
Cash and cash equivalents, beginning of period |
205,833 | 156,785 | ||||||
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Cash and cash equivalents, end of period |
$ | 77,005 | $ | 100,703 | ||||
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Supplemental cash flow disclosures |
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Cash paid for interest |
$ | 391 | $ | 321 | ||||
Cash paid for income taxes, net of refunds |
11,034 | 6,970 | ||||||
Non-cash investing and financing activities: |
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Issuance of stock units under incentive compensation plans |
1,632 | 2,825 |
See accompanying notes to the condensed consolidated financial statements
6
FTI Consulting, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(dollar and share amounts in tables expressed in thousands, except per share data)
Unaudited
1. Basis of Presentation and Significant Accounting Policies
The unaudited condensed consolidated financial statements of FTI Consulting, Inc., including its consolidated subsidiaries (collectively, the Company, we, our or FTI Consulting) presented herein, have been prepared in accordance with accounting principles generally accepted in the United States (GAAP) and under the rules and regulations of the Securities and Exchange Commission (SEC) for interim financial information. Some of the information and footnote disclosures normally included in annual financial statements have been condensed or omitted pursuant to those rules and regulations. Certain Adjusted EBITDA prior period amounts have been reclassified to conform to the current period presentation. In managements opinion, the interim financial statements reflect all adjustments that are necessary for a fair presentation of the results for the interim periods presented. All adjustments made were normal recurring accruals. Results of operations for the interim periods presented herein are not necessarily indicative of results of operations for a full year. These financial statements should be read in conjunction with the consolidated financial statements and the notes contained in our Annual Report on Form 10-K for the year ended December 31, 2013.
2. Earnings Per Common Share
Basic earnings per common share are calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per common share adjust basic earnings per common share for the effects of potentially dilutive common shares. Potentially dilutive common shares include the dilutive effects of shares issuable under our equity compensation plans, including stock options and restricted stock, each using the treasury stock method.
Three Months Ended | ||||||||
March 31, | ||||||||
2014 | 2013 | |||||||
Numeratorbasic and diluted |
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Net income |
$ | 18,117 | $ | 23,680 | ||||
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Denominator |
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Weighted average number of common shares outstandingbasic |
39,438 | 39,403 | ||||||
Effect of dilutive stock options |
356 | 595 | ||||||
Effect of dilutive restricted shares |
663 | 622 | ||||||
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Weighted average number of common shares outstandingdiluted |
40,457 | 40,620 | ||||||
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Earnings per common sharebasic |
$ | 0.46 | $ | 0.60 | ||||
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Earnings per common sharediluted |
$ | 0.45 | $ | 0.58 | ||||
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Antidilutive stock options and restricted shares |
3,177 | 3,486 | ||||||
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3. New Accounting Standards Not Yet Adopted
In April 2014, the FASB issued Accounting Standards Update 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, or ASU 2014-08. ASU 2014-08 amends the criteria for reporting a discontinued operation. The amended guidance requires that a disposal representing a strategic shift that has (or will have) a major effect on an entitys operations and financial results or a business activity classified as held for sale should be reported as discontinued operations. The amendments also expand the
7
disclosure requirements for discontinued operations and add new disclosures for individually significant dispositions that do not qualify as discontinued operations. This guidance is effective for interim and annual periods beginning after December 15, 2014, with early adoption permitted. ASU 2014-08 would impact the Companys consolidated results of operations and financial condition only in the instance of an event or transaction described above.
4. Special Charges
During the year ended December 31, 2013, we recorded special charges totaling $38.4 million, of which $14.1 million was non-cash. The charges reflect contractual post-employment severance and transition services, equity award and retention bonus expense acceleration primarily related to the transition of the Companys former Executive Chairman and former President and Chief Executive Officer, accelerated expense related to future payments required to be made under a contractual transition service agreement with a Corporate Finance/Restructuring segment senior client facing professional, and costs related to actions we took to realign our workforce to address current business demands impacting our Corporate Finance/Restructuring and Forensic and Litigation Consulting segments, and to reduce certain corporate overhead within our Europe, Middle East and Africa (EMEA) region, most of which were recorded in the third and fourth quarters of 2013.
During the three months ended March 31, 2013, we recorded adjustments to the special charges for office spaces vacated prior to the end of the second quarter of 2012 of approximately $0.4 million. These charges reflected the changes to sublease terms and associated costs for those locations for which subleases were entered into during the three months ended March 31, 2013.
We did not record any special charges for the three months ended March 31, 2014.
The total cash outflow associated with the previously recorded special charges is expected to be $48.5 million, of which $24.1 million has been paid as of March 31, 2014. Approximately $7.8 million is expected to be paid during the remainder of 2014, $5.0 million is expected to be paid in 2015, $3.1 million is expected to be paid in 2016, $3.1 million is expected to be paid in 2017, and the remaining balance of $5.4 million will be paid from 2018 to 2025. A liability for the current and noncurrent portions of the amounts to be paid is included in Accounts payable, accrued expenses and other and Other liabilities, respectively, on the Condensed Consolidated Balance Sheets.
Activity related to the liability for these costs for the three months ended March 31, 2014 is as follows:
Employee | ||||||||||||
Termination | Lease | |||||||||||
Costs | Costs | Total | ||||||||||
Balance at December 31, 2013 |
$ | 19,965 | $ | 6,096 | $ | 26,061 | ||||||
Payments |
(1,324 | ) | (374 | ) | (1,698 | ) | ||||||
Foreign currency translation adjustment and other |
4 | | 4 | |||||||||
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Balance at March 31, 2014 |
$ | 18,645 | $ | 5,722 | $ | 24,367 | ||||||
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5. Allowance for Doubtful Accounts and Unbilled Services
We record adjustments to the allowance for doubtful accounts and unbilled services as a reduction in revenue when there are changes in estimates of fee reductions that may be imposed by bankruptcy courts and other regulatory institutions, for both billed and unbilled receivables. The allowance for doubtful accounts and unbilled services is also adjusted after the related work has been billed to the client and we discover that collectability is not reasonably assured. These adjustments are recorded to Selling, general and administrative expense on the Condensed Consolidated Statements of Comprehensive Income and totaled $4.4 million and $4.1 million for the three months ended March 31, 2014 and 2013, respectively.
8
6. Research and Development Costs
Research and development costs related to software development totaled $4.5 million and $4.0 million for the three months ended March 31, 2014 and 2013, respectively. Research and development costs are included in Selling, general and administrative expense on the Condensed Consolidated Statements of Comprehensive Income.
7. Financial Instruments
Fair Value of Financial Instruments
We consider the recorded value of certain financial assets and liabilities, which consist primarily of cash equivalents, accounts receivable and accounts payable, to approximate the fair value of the respective assets and liabilities at March 31, 2014 and December 31, 2013, based on the short-term nature of the assets and liabilities. The fair value of our long-term debt at March 31, 2014 was $777.3 million compared to a carrying value of $737.0 million. At December 31, 2013, the fair value of our long-term debt was $752.8 million compared to a carrying value of $717.0 million. We determine the fair value of our long-term debt primarily based on quoted market prices for our 63/4% Senior Notes Due 2020 (2020 Notes) and 6.0% Senior Notes Due 2022 (2022 Notes). The fair value of our long-term debt is classified within Level 2 of the fair value hierarchy, because it is traded in less active markets.
For business combinations consummated on or after January 1, 2009, we estimate the fair value of acquisition-related contingent consideration based on the present value of the consideration expected to be paid during the remainder of the earnout period, based on managements assessment of the acquired operations forecasted earnings. This fair value measure is based on significant inputs not observed in the market and thus represents a Level 3 measurement. Fair value measurements characterized within Level 3 of the fair value hierarchy are measured based on unobservable inputs that are supported by little or no market activity and reflect our own assumptions in measuring fair value.
The significant unobservable inputs used in the fair value measurements of our acquisition-related contingent consideration include our measures of the future profitability and related cash flows of the acquired business or assets, impacted by appropriate discount rates. Significant increases (decreases) in any of these inputs in isolation would result in a significantly lower (higher) fair value measurement. Generally, a change in the assumptions used for the discount rates is accompanied by a directionally opposite change in the fair value measurement and a change in the assumptions used for the future cash flows is accompanied by a directionally similar change in the fair value measurement. The fair value of the contingent consideration is reassessed on a quarterly basis by the Company based on a collaborative effort of the Companys operations, finance and accounting groups using additional information as it becomes available.
Any change in the fair value of an acquisitions contingent consideration liability results in a remeasurement gain or loss that is recorded as income or expense, respectively and is included within Acquisition-related contingent consideration in the Condensed Consolidated Statements of Comprehensive Income. During the three months ended March 31, 2014, management determined that the fair value of the contingent consideration liability for three of its acquisitions had declined and recorded a remeasurement gain of $2.1 million. There was no remeasurement gain or loss recognized during the three months ended March 31, 2013.
Accretion expense for acquisition-related contingent consideration totaled $0.3 million and $0.7 million for the three months ended March 31, 2014 and 2013, respectively.
9
The following table represents the changes in the acquisition-related contingent consideration liability during the three months ended March 31, 2014 and 2013:
Three Months Ended | ||||||||
March 31, | ||||||||
(in thousands) |
2014 | 2013 | ||||||
Beginning balance |
$ | 13,329 | $ | 16,426 | ||||
Acquisition (1) |
(4,495 | ) | (848 | ) | ||||
Accretion of acquisition-related contingent consideration |
279 | 731 | ||||||
Remeasurement of acquisition-related contingent consideration |
(2,122 | ) | | |||||
Payments |
(63 | ) | | |||||
Unrealized losses related to currency translation in other comprehensive income |
(25 | ) | (13 | ) | ||||
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Ending balance |
$ | 6,903 | $ | 16,296 | ||||
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(1) | Includes adjustments during the purchase price allocation period. |
The following table presents financial liabilities measured at fair value:
Quoted Prices in Active Markets for Identical Assets (Level 1) |
Significant Other Observable Inputs (Level 2) |
Significant Unobservable Inputs (Level 3) |
Total | |||||||||||||
As of March 31, 2014 |
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Liabilities: |
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Acquisition-related contingent consideration, including current portion |
$ | | $ | | $ | 6,903 | $ | 6,903 | ||||||||
As of December 31, 2013 |
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Liabilities: |
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Acquisition-related contingent consideration, including current portion |
$ | | $ | | $ | 13,329 | $ | 13,329 |
8. Acquisitions
Certain purchase price allocations were preliminary at December 31, 2013. For these acquisitions, we recorded $4.7 million of acquisition related contingent consideration, $9.5 million of identifiable intangible assets, $1.2 million of deferred taxes and $10.1 million of goodwill in the year ended December 31, 2013. During the first quarter of 2014, we finalized the purchase price and purchase price allocation for one of these acquisitions. In the first quarter of 2014, we recorded adjustments to the preliminary purchase price for certain acquisitions completed during the fourth quarter of 2013. These adjustments were immaterial; therefore no retrospective adjustments were made to the fair value of the assets acquired and liabilities assumed in the condensed consolidated balance sheet as of December 31, 2013.
10
9. Goodwill and Other Intangible Assets
The changes in the carrying amounts of goodwill by operating segment for the three months ended March 31, 2014, are as follows:
Corporate | Forensic and | |||||||||||||||||||||||
Finance/ | Litigation | Economic | Strategic | |||||||||||||||||||||
Restructuring | Consulting | Consulting | Technology | Communications | Total | |||||||||||||||||||
Balances at December 31, 2013: |
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Goodwill |
$ | 449,710 | $ | 241,651 | $ | 263,474 | $ | 118,073 | $ | 339,964 | $ | 1,412,872 | ||||||||||||
Accumulated goodwill impairment |
| | | | (194,139 | ) | (194,139 | ) | ||||||||||||||||
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Goodwill, net at December 31, 2013 |
449,710 | 241,651 | 263,474 | 118,073 | 145,825 | 1,218,733 | ||||||||||||||||||
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Acquisitions (1) |
| 71 | | | | 71 | ||||||||||||||||||
Foreign currency translation adjustment and other |
939 | 388 | 60 | 17 | 1,110 | 2,514 | ||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|||||||||||||
Goodwill |
450,649 | 242,110 | 263,534 | 118,090 | 341,074 | 1,415,457 | ||||||||||||||||||
Accumulated goodwill impairment |
| | | | (194,139 | ) | (194,139 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Goodwill, net at March 31, 2014 |
$ | 450,649 | $ | 242,110 | $ | 263,534 | $ | 118,090 | $ | 146,935 | $ | 1,221,318 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
(1) | Includes adjustments during the purchase price measurement period. |
Other intangible assets with finite lives are amortized over their estimated useful lives. For intangible assets with finite lives, we recorded amortization expense of $4.6 million and $5.6 million for the three months ended March 31, 2014 and 2013, respectively. Based solely on the amortizable intangible assets recorded as of March 31, 2014, we estimate amortization expense to be $10.0 million during the remainder of 2014, $12.1 million in 2015, $10.9 million in 2016, $10.1 million in 2017, $8.5 million in 2018, $7.9 million in 2019, and $23.8 million in years after 2019. Actual amortization expense to be reported in future periods could differ from these estimates as a result of new intangible asset acquisitions, finalization of asset valuations for newly acquired assets, changes in useful lives, changes in value due to foreign currency translation, and other factors.
March 31, 2014 | December 31, 2013 | |||||||||||||||||
Useful Life in Years |
Gross Carrying Amount |
Accumulated Amortization |
Gross Carrying Amount |
Accumulated Amortization |
||||||||||||||
Finite lived intangible assets |
||||||||||||||||||
Customer relationships |
1 to 15 | $ | 153,856 | $ | 75,975 | $ | 157,064 | $ | 73,977 | |||||||||
Non-competition agreements |
1 to 10 | 10,994 | 9,369 | 10,922 | 9,051 | |||||||||||||
Software |
3 to 10 | 37,542 | 33,822 | 40,095 | 33,625 | |||||||||||||
Tradenames |
1 to 2 | 485 | 440 | 485 | 365 | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
202,877 | 119,606 | 208,566 | 117,018 | |||||||||||||||
Indefinite-lived intangible assets |
||||||||||||||||||
Tradenames |
Indefinite | 5,600 | | 5,600 | | |||||||||||||
|
|
|
|
|
|
|
|
|||||||||||
$ | 208,477 | $ | 119,606 | $ | 214,166 | $ | 117,018 | |||||||||||
|
|
|
|
|
|
|
|
11
10. Debt
The components of debt and capital lease obligations are presented in the table below:
March 31, | December 31, | |||||||
2014 | 2013 | |||||||
6 3/4% senior notes due 2020 |
$ | 400,000 | $ | 400,000 | ||||
6.0% senior notes due 2022 |
300,000 | 300,000 | ||||||
Revolving line of credit |
20,000 | | ||||||
Notes payable to former shareholders of acquired businesses |
17,000 | 17,000 | ||||||
|
|
|
|
|||||
Total debt |
737,000 | 717,000 | ||||||
Less current portion |
26,000 | 6,000 | ||||||
|
|
|
|
|||||
Long-term debt, net of current portion |
711,000 | 711,000 | ||||||
|
|
|
|
|||||
Total capital lease obligations |
| 14 | ||||||
Less current portion |
| 14 | ||||||
|
|
|
|
|||||
Capital lease obligations, net of current portion |
| | ||||||
|
|
|
|
|||||
Long-term debt and capital lease obligations, net of current portion |
$ | 711,000 | $ | 711,000 | ||||
|
|
|
|
11. Commitments and Contingencies
Contingencies
We are subject to legal actions arising in the ordinary course of business. In managements opinion, we believe we have adequate legal defenses and/or insurance coverage with respect to the resolutions of such actions. We do not believe any potential settlement or judgment would materially affect our financial position or results of operations.
12. Share-Based Compensation
Share-based Awards and Share-based Compensation Expense
Our officers, employees, non-employee directors and certain individual service providers are eligible to participate in the Companys equity compensation plans, subject to the discretion of the administrator of the plans. During the three months ended March 31, 2014, we granted an aggregate of 645,593 share-based awards, consisting primarily of restricted stock awards, restricted stock units and stock options.
Total share-based compensation expense for the three months ended March 31, 2014 and 2013 is detailed in the following table:
Three Months Ended | ||||||||
March 31, | ||||||||
Comprehensive Income Statement Classification |
2014 | 2013 | ||||||
Direct cost of revenues |
$ | 5,822 | $ | 6,957 | ||||
Selling, general and administrative expense |
3,254 | 2,976 | ||||||
|
|
|
|
|||||
Total share-based compensation expense |
$ | 9,076 | $ | 9,933 | ||||
|
|
|
|
13. Stockholders Equity
On June 6, 2012, our Board of Directors authorized a two-year stock repurchase program of up to $250.0 million (the 2012 Repurchase Program). During the year ended December 31, 2013 we repurchased and retired 1,956,900 shares of our common stock for an average price per share of $36.35, at a cost of $71.1 million,
12
of which $4.4 million was accrued and included in the Condensed Consolidated Balance Sheet, and $66.7 million was paid at December 31, 2013. In January 2014, we paid the balance due of $4.4 million on our 2013 share repurchases. No shares were repurchased during the three months ended March 31, 2014. As of March 31, 2014, $128.8 million remained available under the 2012 Repurchase Program.
14. Segment Reporting
We manage our business in five reportable segments: Corporate Finance/Restructuring, Forensic and Litigation Consulting, Economic Consulting, Technology and Strategic Communications.
Our Corporate Finance/Restructuring segment focuses on strategic, operational, financial and capital needs of businesses around the world and provides consulting and advisory services on a wide range of areas, such as restructuring (including bankruptcy), interim management, financings, mergers and acquisitions, post-acquisition integration, valuations, tax issues and performance improvement.
Our Forensic and Litigation Consulting segment provides law firms, companies, government clients and other interested parties with dispute advisory, investigations, forensic accounting, business intelligence assessments, data analytics, risk mitigation services as well as interim management and performance improvement services for our health solutions practice clients.
Our Economic Consulting segment provides law firms, companies, government entities and other interested parties with analysis of complex economic issues for use in legal, regulatory and international arbitration proceedings, strategic decision making and public policy debates in the United States (U.S.) and around the world.
Our Technology segment provides electronic discovery and information management consulting, software and services to its clients. It provides products, services and consulting to companies, law firms, courts and government agencies worldwide. Its comprehensive suite of software and services help clients locate, review and produce electronically stored information, including e-mail, computer files, voicemail, instant messaging, and financial and transactional data.
Our Strategic Communications segment provides advice and consulting services relating to financial and corporate communications and investor relations, reputation management and brand communications, public affairs, business consulting and digital design and marketing.
We evaluate the performance of our operating segments based on Adjusted Segment EBITDA. Beginning with the quarter ended March 31, 2014, the definition of Adjusted Segment EBITDA has been updated to exclude the impact of changes in the fair value of acquisition-related contingent consideration liabilities. Prior period amounts have been reclassified to conform to the current periods presentation.
We define Adjusted Segment EBITDA as a segments share of consolidated operating income before depreciation, amortization of intangible assets, remeasurement of acquisition-related contingent consideration, special charges and goodwill impairment charges. We define Total Adjusted Segment EBITDA as the total of Adjusted Segment EBITDA for all segments, which excludes unallocated corporate expenses. Although Adjusted Segment EBITDA is not a measure of financial condition or performance determined in accordance with GAAP, we use Adjusted Segment EBITDA to internally evaluate the financial performance of our segments because we believe it is a useful supplemental measure which reflects current core operating performance and provides an indicator of the segments ability to generate cash.
13
The table below presents revenues and Adjusted Segment EBITDA for our reportable segments for the three months ended March 31, 2014 and 2013:
Three Months Ended | ||||||||
March 31, | ||||||||
2014 | 2013 | |||||||
Revenues |
||||||||
Corporate Finance/Restructuring |
$ | 93,982 | $ | 99,080 | ||||
Forensic and Litigation Consulting |
121,429 | 100,724 | ||||||
Economic Consulting |
106,851 | 115,194 | ||||||
Technology |
60,063 | 46,704 | ||||||
Strategic Communications |
43,227 | 45,476 | ||||||
|
|
|
|
|||||
Revenues |
$ | 425,552 | $ | 407,178 | ||||
|
|
|
|
|||||
Adjusted Segment EBITDA |
||||||||
Corporate Finance/Restructuring |
$ | 10,951 | $ | 19,085 | ||||
Forensic and Litigation Consulting |
26,494 | 12,811 | ||||||
Economic Consulting |
13,030 | 26,194 | ||||||
Technology |
17,348 | 13,716 | ||||||
Strategic Communications |
2,729 | 3,554 | ||||||
|
|
|
|
|||||
Total Adjusted Segment EBITDA |
$ | 70,552 | $ | 75,360 | ||||
|
|
|
|
The table below reconciles Total Adjusted Segment EBITDA to income before income tax provision:
Three Months Ended | ||||||||
March 31, | ||||||||
2014 | 2013 | |||||||
Total Adjusted Segment EBITDA |
$ | 70,552 | $ | 75,360 | ||||
Segment depreciation expense |
(7,548 | ) | (6,876 | ) | ||||
Amortization of other intangible assets |
(4,616 | ) | (5,564 | ) | ||||
Special charges |
| (427 | ) | |||||
Unallocated corporate expenses, excluding special charges |
(20,393 | ) | (17,164 | ) | ||||
Interest income and other |
1,003 | 937 | ||||||
Interest expense |
(12,655 | ) | (12,715 | ) | ||||
Remeasurement of acquisition-related contingent consideration |
2,122 | | ||||||
|
|
|
|
|||||
Income before income tax provision |
$ | 28,465 | $ | 33,551 | ||||
|
|
|
|
15. Supplemental Condensed Consolidating Guarantor and Non-Guarantor Financial Information
Substantially all of our domestic subsidiaries are guarantors of borrowings under our senior bank credit facility and 2020 Notes and 2022 Notes (collectively, the Senior Notes). The guarantees are full and unconditional and joint and several. All of the guarantors are 100%-owned, direct or indirect, subsidiaries. The following financial information presents condensed consolidating balance sheets, statements of comprehensive income and statements of cash flows for FTI Consulting, all the guarantor subsidiaries, all the non-guarantor subsidiaries and the eliminations necessary to arrive at the consolidated information for FTI Consulting and its subsidiaries. For purposes of this presentation, we have accounted for our investments in our subsidiaries using the equity method of accounting. The principal eliminating entries eliminate investment in subsidiary and intercompany balances and transactions.
14
Condensed Consolidating Balance Sheet Information as of March 31, 2014
FTI Consulting, Inc. |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Consolidated | ||||||||||||||||
Assets |
||||||||||||||||||||
Cash and cash equivalents |
$ | 23,393 | $ | 155 | $ | 53,457 | $ | | $ | 77,005 | ||||||||||
Accounts receivable, net |
172,000 | 200,057 | 173,015 | | 545,072 | |||||||||||||||
Intercompany receivables |
| 744,461 | 18,299 | (762,760 | ) | | ||||||||||||||
Other current assets |
59,876 | 22,353 | 26,920 | | 109,149 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total current assets |
255,269 | 967,026 | 271,691 | (762,760 | ) | 731,226 | ||||||||||||||
Property and equipment, net |
33,706 | 16,110 | 36,177 | | 85,993 | |||||||||||||||
Goodwill |
559,613 | 408,904 | 252,801 | | 1,221,318 | |||||||||||||||
Other intangible assets, net |
32,674 | 18,805 | 64,789 | (27,397 | ) | 88,871 | ||||||||||||||
Investments in subsidiaries |
1,841,421 | 500,769 | | (2,342,190 | ) | | ||||||||||||||
Other assets |
68,315 | 80,253 | 36,591 | | 185,159 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total assets |
$ | 2,790,998 | $ | 1,991,867 | $ | 662,049 | $ | (3,132,347 | ) | $ | 2,312,567 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Liabilities |
||||||||||||||||||||
Intercompany payables |
$ | 685,394 | $ | 31,833 | $ | 45,533 | $ | (762,760 | ) | $ | | |||||||||
Other current liabilities |
128,071 | 75,460 | 95,679 | | 299,210 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total current liabilities |
813,465 | 107,293 | 141,212 | (762,760 | ) | 299,210 | ||||||||||||||
Long-term debt, net |
700,000 | 11,000 | | | 711,000 | |||||||||||||||
Other liabilities |
200,505 | 11,998 | 12,826 | | 225,329 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total liabilities |
1,713,970 | 130,291 | 154,038 | (762,760 | ) | 1,235,539 | ||||||||||||||
Stockholders equity |
1,077,028 | 1,861,576 | 508,011 | (2,369,587 | ) | 1,077,028 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total liabilities and stockholders equity |
$ | 2,790,998 | $ | 1,991,867 | $ | 662,049 | $ | (3,132,347 | ) | $ | 2,312,567 | |||||||||
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Balance Sheet Information as of December 31, 2013
FTI Consulting, Inc. |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Consolidated | ||||||||||||||||
Assets |
||||||||||||||||||||
Cash and cash equivalents |
$ | 111,943 | $ | 494 | $ | 93,396 | $ | | $ | 205,833 | ||||||||||
Accounts receivable, net |
154,357 | 162,505 | 159,583 | | 476,445 | |||||||||||||||
Intercompany receivables |
| 820,158 | 18,881 | (839,039 | ) | | ||||||||||||||
Other current assets |
68,292 | 20,932 | 32,359 | | 121,583 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total current assets |
334,592 | 1,004,089 | 304,219 | (839,039 | ) | 803,861 | ||||||||||||||
Property and equipment, net |
31,304 | 19,047 | 28,656 | | 79,007 | |||||||||||||||
Goodwill |
559,820 | 408,903 | 250,010 | | 1,218,733 | |||||||||||||||
Other intangible assets, net |
33,746 | 19,534 | 72,221 | (28,353 | ) | 97,148 | ||||||||||||||
Investments in subsidiaries |
1,772,130 | 498,001 | | (2,270,131 | ) | | ||||||||||||||
Other assets |
75,561 | 56,949 | 33,688 | | 166,198 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total assets |
$ | 2,807,153 | $ | 2,006,523 | $ | 688,794 | $ | (3,137,523 | ) | $ | 2,364,947 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Liabilities |
||||||||||||||||||||
Intercompany payables |
$ | 709,628 | $ | 74,813 | $ | 54,598 | $ | (839,039 | ) | $ | | |||||||||
Other current liabilities |
154,049 | 114,883 | 115,398 | | 384,330 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total current liabilities |
863,677 | 189,696 | 169,996 | (839,039 | ) | 384,330 | ||||||||||||||
Long-term debt, net |
700,000 | 11,000 | | | 711,000 | |||||||||||||||
Other liabilities |
201,217 | 15,009 | 11,132 | | 227,358 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total liabilities |
1,764,894 | 215,705 | 181,128 | (839,039 | ) | 1,322,688 | ||||||||||||||
Stockholders equity |
1,042,259 | 1,790,818 | 507,666 | (2,298,484 | ) | 1,042,259 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total liabilities and stockholders equity |
$ | 2,807,153 | $ | 2,006,523 | $ | 688,794 | $ | (3,137,523 | ) | $ | 2,364,947 | |||||||||
|
|
|
|
|
|
|
|
|
|
15
Condensed Consolidating Statement of Comprehensive Income for the Three Months Ended
March 31, 2014
FTI Consulting, Inc. |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Consolidated | ||||||||||||||||
Revenues |
$ | 151,032 | $ | 252,083 | $ | 120,527 | $ | (98,090 | ) | $ | 425,552 | |||||||||
Operating expenses |
||||||||||||||||||||
Direct cost of revenues |
99,498 | 195,699 | 76,857 | (97,779 | ) | 274,275 | ||||||||||||||
Selling, general and administrative expense |
45,298 | 28,500 | 34,900 | (311 | ) | 108,387 | ||||||||||||||
Acquisition-related contingent consideration |
(598 | ) | (603 | ) | (642 | ) | | (1,843 | ) | |||||||||||
Amortization of other intangible assets |
1,073 | 729 | 3,771 | (957 | ) | 4,616 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Operating income |
5,761 | 27,758 | 5,641 | 957 | 40,117 | |||||||||||||||
Other (expense) income |
(13,314 | ) | (2,266 | ) | 3,928 | | (11,652 | ) | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income before income tax provision |
(7,553 | ) | 25,492 | 9,569 | 957 | 28,465 | ||||||||||||||
Income tax (benefit) provision |
(2,858 | ) | 11,046 | 2,160 | | 10,348 | ||||||||||||||
Equity in net earnings of subsidiaries |
22,812 | 6,333 | | (29,145 | ) | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income |
$ | 18,117 | $ | 20,779 | $ | 7,409 | $ | (28,188 | ) | $ | 18,117 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Other comprehensive income (loss), net of tax: |
||||||||||||||||||||
Foreign currency translation adjustments, net of tax $0 |
| | 4,728 | | 4,728 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total other comprehensive income, net of tax |
| | 4,728 | | 4,728 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Comprehensive income |
$ | 18,117 | $ | 20,779 | $ | 12,137 | $ | (28,188 | ) | $ | 22,845 | |||||||||
|
|
|
|
|
|
|
|
|
|
Condensed Consolidating Statement of Comprehensive Income for the Three Months Ended
March 31, 2013
FTI Consulting, Inc. |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Eliminations | Consolidated | ||||||||||||||||
Revenues |
$ | 150,960 | $ | 246,661 | $ | 107,996 | $ | (98,439 | ) | $ | 407,178 | |||||||||
Operating expenses |
||||||||||||||||||||
Direct cost of revenues |
100,837 | 187,347 | 67,973 | (97,677 | ) | 258,480 | ||||||||||||||
Selling, general and administrative expense |
42,896 | 27,976 | 26,538 | (763 | ) | 96,647 | ||||||||||||||
Special Charges |
323 | 104 | | | 427 | |||||||||||||||
Acquisition-related contingent consideration |
87 | | 644 | | 731 | |||||||||||||||
Amortization of other intangible assets |
1,227 | 2,447 | 2,683 | (793 | ) | 5,564 | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Operating income |
5,590 | 28,787 | 10,158 | 794 | 45,329 | |||||||||||||||
Other (expense) income |
(14,940 | ) | 329 | 2,833 | | (11,778 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Income before income tax provision |
(9,350 | ) | 29,116 | 12,991 | 794 | 33,551 | ||||||||||||||
Income tax (benefit) provision |
(2,931 | ) | 9,972 | 2,830 | 9,871 | |||||||||||||||
Equity in net earnings of subsidiaries |
30,099 | 8,435 | | (38,534 | ) | | ||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Net income |
$ | 23,680 | $ | 27,579 | $ | 10,161 | $ | (37,740 | ) | $ | 23,680 | |||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Other comprehensive income, net of tax: |
||||||||||||||||||||
Foreign currency translation adjustments, net of tax $0 |
| | (15,509 | ) | | (15,509 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total other comprehensive income (loss), net of tax |
| | (15,509 | ) | | (15,509 | ) | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Comprehensive income |
$ | 23,680 | $ | 27,579 | $ | (5,348 | ) | $ | (37,740 | ) | $ | 8,171 | ||||||||
|
|
|
|
|
|
|
|
|
|
16
Condensed Consolidating Statement of Cash Flow for the Three Months Ended March 31, 2014
FTI Consulting, Inc. |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Consolidated | |||||||||||||
Operating activities |
||||||||||||||||
Net cash (used in) provided by operating activities |
$ | (16,876 | ) | $ | (80,076 | ) | $ | (13,843 | ) | $ | (110,795 | ) | ||||
Investing activities |
||||||||||||||||
Payments for acquisition of businesses, net of cash received |
(14,616 | ) | | (995 | ) | (15,611 | ) | |||||||||
Purchases of property and equipment |
(5,008 | ) | (1,047 | ) | (9,124 | ) | (15,179 | ) | ||||||||
Other |
(10 | ) | | | (10 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net cash used in investing activities |
(19,634 | ) | (1,047 | ) | (10,119 | ) | (30,800 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Financing activities |
||||||||||||||||
Borrowings under revolving line of credit, net |
20,000 | | | 20,000 | ||||||||||||
Issuance of common stock |
(2,490 | ) | | | (2,490 | ) | ||||||||||
Purchase and retirement of common stock |
(4,367 | ) | | | (4,367 | ) | ||||||||||
Other |
442 | (63 | ) | (480 | ) | (101 | ) | |||||||||
Intercompany transfers |
(65,625 | ) | 80,847 | (15,222 | ) | | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net cash provided by (used in) financing activities |
(52,040 | ) | 80,784 | (15,702 | ) | 13,042 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Effect of exchange rate changes on cash and cash equivalents |
| | (275 | ) | (275 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net decrease in cash and cash equivalents |
(88,550 | ) | (339 | ) | (39,939 | ) | (128,828 | ) | ||||||||
Cash and cash equivalents, beginning of period |
111,943 | 494 | 93,396 | 205,833 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Cash and cash equivalents, end of period |
$ | 23,393 | $ | 155 | $ | 53,457 | $ | 77,005 | ||||||||
|
|
|
|
|
|
|
|
Condensed Consolidating Statement of Cash Flow for the Three Months Ended March 31, 2013
FTI Consulting, Inc. |
Guarantor Subsidiaries |
Non-Guarantor Subsidiaries |
Consolidated | |||||||||||||
Operating activities |
||||||||||||||||
Net cash (used in) provided by operating activities |
$ | (17,853 | ) | $ | 2,610 | $ | 12,939 | $ | (2,304 | ) | ||||||
Investing activities |
||||||||||||||||
Payments for acquisition of businesses, net of cash received |
(8,078 | ) | (6,598 | ) | | (14,676 | ) | |||||||||
Purchases of property and equipment |
(754 | ) | (5,338 | ) | (1,231 | ) | (7,323 | ) | ||||||||
Other |
12 | | | 12 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net cash used in investing activities |
(8,820 | ) | (11,936 | ) | (1,231 | ) | (21,987 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Financing activities |
||||||||||||||||
Purchase and retirement of common stock |
(28,758 | ) | | | (28,758 | ) | ||||||||||
Net issuance of common stock and other |
(1,335 | ) | | | (1,335 | ) | ||||||||||
Other |
105 | (205 | ) | (100 | ) | |||||||||||
Intercompany transfers |
18,039 | 8,997 | (27,036 | ) | | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net cash (used in) provided by financing activities |
(11,949 | ) | 8,997 | (27,241 | ) | (30,193 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Effect of exchange rate changes on cash and cash equivalents |
| | (1,598 | ) | (1,598 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net decrease in cash and cash equivalents |
(38,622 | ) | (329 | ) | (17,131 | ) | (56,082 | ) | ||||||||
Cash and cash equivalents, beginning of period |
66,663 | 610 | 89,512 | 156,785 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Cash and cash equivalents, end of period |
$ | 28,041 | $ | 281 | $ | 72,381 | $ | 100,703 | ||||||||
|
|
|
|
|
|
|
|
17
Item 2. | Managements 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 months ended March 31, 2014 and 2013 and significant factors that could affect our prospective financial condition and results of operations. This discussion should be read together with the accompanying unaudited condensed consolidated financial statements and related notes and with our Annual Report on Form 10-K for the year ended December 31, 2013. Historical results and any discussion of prospective results may not indicate our future performance. See Forward-Looking Statements.
BUSINESS OVERVIEW
We are a leading global business advisory firm dedicated to helping organizations protect and enhance their enterprise value. We work closely with our clients to help them anticipate, understand, manage and overcome complex business matters arising from such factors as the economy, financial and credit markets, governmental regulation, legislation and litigation. We assist clients in addressing a broad range of business challenges, such as restructuring (including bankruptcy), financing and credit issues and indebtedness, interim business management, forensic accounting and litigation matters, international arbitrations, mergers and acquisitions (M&A), antitrust and competition matters, securities litigation, electronic discovery (e-discovery), management and retrieval of electronically stored information (ESI), reputation management and strategic communications. We also provide services to help our clients take advantage of economic, regulatory, financial and other business opportunities. Our experienced teams of professionals include many individuals who are widely recognized as experts in their respective fields. We believe clients retain us because of our recognized expertise and capabilities in highly specialized areas as well as our reputation for satisfying client needs.
We report financial results for the following five reportable segments:
Our Corporate Finance/Restructuring segment focuses on strategic, operational, financial and capital needs of businesses around the world and provides consulting and advisory services on a wide range of areas, such as restructuring (including bankruptcy), interim management, financings, M&A, post-acquisition integration, valuations, tax issues and performance improvement.
Our Forensic and Litigation Consulting segment provides law firms, companies, government clients and other interested parties with dispute advisory, investigations, forensic accounting, business intelligence assessments, data analytics, risk mitigation services as well as interim management and performance improvement services for our health solutions practice clients.
Our Economic Consulting segment provides law firms, companies, government entities and other interested parties with analysis of complex economic issues for use in legal, regulatory and international arbitration proceedings, strategic decision making and public policy debates in the U.S. and around the world.
Our Technology segment provides e-discovery and information management consulting, software and services to its clients. It provides products, services and consulting to companies, law firms, courts and government agencies worldwide. Its comprehensive suite of software and services help clients locate, review and produce ESI, including e-mail, computer files, voicemail, instant messaging and financial and transactional data.
Our Strategic Communications segment provides advice and consulting services relating to financial and corporate communications and investor relations, reputation management and brand communications, public affairs, business consulting and digital design and marketing.
We derive substantially all of our revenues from providing professional services to both U.S. and global clients. Over the past several years the growth in our revenues and profitability has resulted from our ability to attract new and recurring engagements and the acquisitions we have completed.
18
Most of our services are rendered under time-and-expense arrangements that obligate the client to pay us a fee for the hours that we incur at agreed upon rates. Under this arrangement, we typically bill our clients for reimbursable expenses, which may include the cost of producing our work product and other direct expenses that we incur on behalf of the client, such as travel costs. We also render services for which certain clients may be required to pay us a fixed fee or recurring retainer. These arrangements are generally cancellable at any time. Some of our engagements contain performance-based arrangements in which we earn a success fee when and if certain predefined outcomes occur. This type of success fee may supplement a time-and-expense or fixed-fee arrangement. Success fee revenues may cause variations in our revenues and operating results due to the timing of achieving the performance-based criteria. In our Technology segment, certain clients are also billed based on the amount of data stored on our electronic systems, the volume of information processed or the number of users licensing our Ringtail® software products for use or installation within their own environments. We license certain products directly to end users as well as indirectly through our channel partner relationships. Unit-based revenue is defined as revenue billed on a per-item, per-page, or some other unit-based method and includes revenue from data processing and hosting, software usage and software licensing. Unit-based revenue includes revenue associated with our proprietary software that is made available to customers, either via a web browser (on-demand) or installed at our customer or partner locations (on-premise). On-demand revenue is charged on a unit or monthly basis and includes, but is not limited to, processing and review related functions. On-premise revenue is comprised of up-front license fees, with recurring support and maintenance. Seasonal factors, such as the timing of our employees and clients vacations and holidays, impact the timing of our revenues.
Our financial results are primarily driven by:
| the number, size and type of engagements we secure; |
| the rate per hour or fixed charges we charge our clients for services; |
| the utilization rates of the revenue-generating professionals we employ; |
| the number of revenue-generating professionals; |
| fees from clients on a retained basis or other; |
| licensing of our software products and other technology services; |
| the types of assignments we are working on at different times; |
| the length of the billing and collection cycles; and |
| the geographic locations of our clients or locations in which services are rendered. |
Non-GAAP Measures
In the accompanying analysis of financial information, we sometimes use information derived from consolidated and segment financial information that is not presented in our financial statements and prepared in accordance with U.S. generally accepted accounting principles (GAAP). Certain of these measures are considered non-GAAP financial measures under the SEC rules. Specifically, we have referred to:
| Segment Operating Income |
| Total Segment Operating Income |
| Adjusted EBITDA |
| Adjusted Segment EBITDA |
| Total Adjusted Segment EBITDA |
| Adjusted Net Income |
| Adjusted Earnings per Diluted Share |
19
Beginning with the quarter ended March 31, 2014, the definitions of each of these non-GAAP measures have been updated to exclude the impact of changes in the fair value of acquisition-related contingent consideration liabilities. Prior period amounts have been reclassified to conform to the current periods presentation.
We define Segment Operating Income as a segments share of consolidated operating income. We define Total Segment Operating Income as the total of Segment Operating Income for all segments, which excludes unallocated corporate expenses. We use Segment Operating Income for the purpose of calculating Adjusted Segment EBITDA. We define Adjusted EBITDA as consolidated net income before income tax provision, other non-operating income (expense), depreciation, amortization of intangible assets, remeasurement of acquisition-related contingent consideration, special charges, goodwill impairment charges and losses on early extinguishment of debt. We define Adjusted Segment EBITDA as a segments share of consolidated operating income before depreciation, amortization of intangible assets, remeasurement of acquisition-related contingent consideration, special charges and goodwill impairment charges. We define Total Adjusted Segment EBITDA as the total of Adjusted Segment EBITDA for all segments, which excludes unallocated corporate expenses. We use Adjusted Segment EBITDA to internally evaluate the financial performance of our segments because we believe it is a useful supplemental measure which reflects current core operating performance and provides an indicator of the segments ability to generate cash. We also believe that these measures, when considered together with our GAAP financial results, provide management and investors with a more complete understanding of our operating results, including underlying trends, by excluding the effects of remeasurement of acquisition-related contingent consideration, special charges and goodwill impairment charges. In addition, EBITDA is a common alternative measure of operating performance used by many of our competitors. It is used by investors, financial analysts, rating agencies and others to value and compare the financial performance of companies in our industry. Therefore, we also believe that these measures, considered along with corresponding GAAP measures, provide management and investors with additional information for comparison of our operating results to the operating results of other companies.
We define Adjusted Net Income and Adjusted Earnings per Diluted Share as net income and earnings per diluted share, respectively, excluding the impact of remeasurement of acquisition-related contingent consideration, special charges, goodwill impairment charges and losses on early extinguishment of debt. We use Adjusted Net Income for the purpose of calculating Adjusted Earnings per Diluted Share. Management uses Adjusted Earnings per Diluted Share to assess total company operating performance on a consistent basis. We believe that this measure, when considered together with our GAAP financial results, provides management and investors with a more complete understanding of our business operating results, including underlying trends, by excluding the effects of the remeasurement of acquisition-related contingent consideration, special charges, goodwill impairment charges and losses on early extinguishment of debt.
Non-GAAP financial measures are not defined in the same manner by all companies and may not be comparable to other similarly titled measures of other companies. Non-GAAP financial measures should be considered in addition to, but not as a substitute for or superior to, the information contained in our Consolidated Statements of Comprehensive Income. Reconciliations of GAAP to non-GAAP financial measures are included elsewhere in this filing.
We define acquisition growth as revenue of acquired companies in the first twelve months following the effective date of an acquisition. Our definition of organic growth is the change in revenue excluding the impact of all such acquisitions.
20
EXECUTIVE HIGHLIGHTS
Three Months Ended March 31, |
||||||||
2014 | 2013 | |||||||
(dollars in thousands, except per share amounts) |
||||||||
Revenues |
$ | 425,552 | $ | 407,178 | ||||
Adjusted EBITDA |
$ | 51,196 | $ | 59,326 | ||||
Net income |
$ | 18,117 | $ | 23,680 | ||||
Earnings per common sharediluted |
$ | 0.45 | $ | 0.58 | ||||
Adjusted EPS |
$ | 0.41 | $ | 0.59 | ||||
Cash used in operating activities |
$ | (110,795 | ) | $ | (2,304 | ) | ||
Total number of employees at March 31, |
4,250 | 3,944 |
Third Quarter 2013 Executive Highlights
Revenues
Revenues for the three months ended March 31, 2014 increased $18.4 million, or 4.5%, to $425.6 million, compared to $407.2 million in the same prior year period, of which, acquisitions contributed $10.9 million, or 2.7%. The balance of the revenue increase resulted from organic growth primarily due to higher demand in our Forensic and Litigation Consulting segment. Additionally, our Technology segment experienced increased demand for its services offering. These revenue increases were partially offset by weaker demand in financial economics and antitrust litigation practices in our Economics Consulting segments North America and Europe, Middle East and Africa (EMEA) regions, and continued weak demand in bankruptcy and restructuring activity impacting our Corporate Finance/Restructuring segment and lower pass-through revenue for our Strategic Communications segment.
Adjusted EBITDA
Adjusted EBITDA for the three months ended March 31, 2014 decreased $8.1 million, or 13.7%, to $51.2 million, or 12.0% of revenues, compared to $59.3 million, or 14.6% of revenues, in the same prior year period. Adjusted EBITDA was impacted by weaker demand in our Economic Consulting segments antitrust litigation and financial economics practices in the North America and EMEA regions and employment contract extensions of key senior client-service professionals, under-utilization in our bankruptcy and restructuring practices in our Corporate Finance/Restructuring segment in the North America and Asia Pacific regions and lower demand in our Strategic Communications segment, partially offset by leverage increases in Forensic and Litigation Consulting and demand for Technology services as described above.
Net Income
Net income for the three months ended March 31, 2014 decreased $5.6 million to $18.1 million, compared to $23.7 million in the same prior year period. Net income was impacted by the operating results described above as well as higher unallocated corporate expenses for regional support costs and increased outside consultant costs for global corporate initiatives. The three months ended March 31, 2014 also included a $2.1 million remeasurement gain related to the reduction in fair value of estimated future contingent consideration payments for prior acquisitions. Net income in the three months ended March 31, 2013 was impacted by a favorable discrete tax item for the reversal of a liability for uncertain tax positions related to an IRS audit.
Earnings per share and Adjusted EPS
Earnings per share for the three months ended March 31, 2014 decreased $0.13 to $0.45 from $0.58 in the same prior year period. Earnings per share were impacted by the results as outlined above. Adjusted earnings per
21
diluted share for the three months ended March 31, 2014 were $0.41 as compared to $0.59 in the same prior year period, and excludes the remeasurement gain related to the fair value of estimated future contingent consideration payments for prior acquisitions.
Liquidity highlights
Cash used in operating activities increased $108.5 million to $110.8 million for the three months ended March 31, 2014 compared to $2.3 million for the same prior year period primarily as a result of higher bonus payments and an increase in the funding of employee notes in 2014. Cash collections were flat compared to the same prior year period, despite higher revenues in the three months ended March 31, 2014 primarily due to the timing of revenues in the current quarter with most of the year-over-year revenue growth occurring at the end of the quarter, which is reflected in the increase in accounts receivable. Days sales outstanding (DSO) was 106 days at March 31, 2014 and 96 days at March 31, 2013. DSO for the three months ended March 31, 2014 was impacted by the increase in accounts receivable discussed above, as well as, the cycle time of billings and collections on several large engagements, which are subject to certain milestones for billing and collections.
Our financing activities during the three months ended March 31, 2014, included short-term net borrowings of $20.0 million on our revolving line of credit under our senior secured bank credit facility and payments of $4.4 million to settle repurchases of the Companys common stock that were made, but not settled, in the fourth quarter of 2013. The Company did not repurchase any common stock during the first quarter of 2014.
Headcount
Headcount for the three months ended March 31, 2014 increased by 306, or 7.8%, to 4,250 from 3,944 in the same prior year period. Billable headcount increased by 227 professionals. Non-billable headcount increased 79 professionals primarily due to growth in our regional infrastructure and from acquisitions.
Corporate Finance/ Restructuring |
Forensic and Litigation Consulting |
Economic Consulting |
Technology | Strategic Communications |
Total | |||||||||||||||||||
Billable Headcount |
||||||||||||||||||||||||
March 31, 2013 |
683 | 965 | 476 | 275 | 619 | 3,018 | ||||||||||||||||||
Terminations related to special charge |
(25 | ) | (17 | ) | | | | (42 | ) | |||||||||||||||
Acquisitions |
63 | 49 | 6 | | | 118 | ||||||||||||||||||
Net other headcount additions (reductions) |
5 | 79 | 56 | 46 | (35 | ) | 151 | |||||||||||||||||
|
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|
|
|
|
|
|
|
|
|
|
|||||||||||||
March 31, 2014 |
726 | 1,076 | 538 | 321 | 584 | 3,245 | ||||||||||||||||||
|
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22
CONSOLIDATED RESULTS OF OPERATIONS
Segment and Consolidated Operating Results:
Three Months Ended March 31, |
||||||||
2014 | 2013 | |||||||
(in thousands, except per share amounts) |
||||||||
Revenues |
||||||||
Corporate Finance/Restructuring |
$ | 93,982 | $ | 99,080 | ||||
Forensic and Litigation Consulting |
121,429 | 100,724 | ||||||
Economic Consulting |
106,851 | 115,194 | ||||||
Technology |
60,063 | 46,704 | ||||||
Strategic Communications |
43,227 | 45,476 | ||||||
|
|
|
|
|||||
Revenues |
$ | 425,552 | $ | 407,178 | ||||
|
|
|
|
|||||
Operating income |
||||||||
Corporate Finance/Restructuring |
$ | 8,607 | $ | 16,699 | ||||
Forensic and Litigation Consulting |
25,402 | 11,102 | ||||||
Economic Consulting |
12,430 | 24,995 | ||||||
Technology |
13,066 | 8,082 | ||||||
Strategic Communications |
1,005 | 1,727 | ||||||
|
|
|
|
|||||
Total segment operating income |
60,510 | 62,605 | ||||||
Unallocated corporate expenses |
(20,393 | ) | (17,276 | ) | ||||
|
|
|
|
|||||
Operating income |
40,117 | 45,329 | ||||||
|
|
|
|
|||||
Other income (expense) |
||||||||
Interest income and other |
1,003 | 937 | ||||||
Interest expense |
(12,655 | ) | (12,715 | ) | ||||
|
|
|
|
|||||
(11,652 | ) | (11,778 | ) | |||||
|
|
|
|
|||||
Income before income tax provision |
28,465 | 33,551 | ||||||
Income tax provision |
10,348 | 9,871 | ||||||
|
|
|
|
|||||
Net income |
$ | 18,117 | $ | 23,680 | ||||
|
|
|
|
|||||
Earnings per common sharebasic |
$ | 0.46 | $ | 0.60 | ||||
|
|
|
|
|||||
Earnings per common sharediluted |
$ | 0.45 | $ | 0.58 | ||||
|
|
|
|
Reconciliation of Net Income to Adjusted EBITDA:
Three Months Ended March 31, |
||||||||
2014 | 2013 | |||||||
(in thousands) | ||||||||
Net income |
$ | 18,117 | $ | 23,680 | ||||
Add back: |
||||||||
Income tax provision |
10,348 | 9,871 | ||||||
Other income (expense), net |
11,652 | 11,778 | ||||||
Depreciation and amortization |
8,585 | 8,006 | ||||||
Amortization of other intangible assets |
4,616 | 5,564 | ||||||
Special charges |
| 427 | ||||||
Remeasurement of acquisition-related contingent consideration |
(2,122 | ) | | |||||
|
|
|
|
|||||
Adjusted EBITDA |
$ | 51,196 | $ | 59,326 | ||||
|
|
|
|
23
Reconciliation of Net Income to Adjusted Net Income and Earnings Per Share to Adjusted Earnings Per Share:
Three Months Ended March 31, |
||||||||
2014 | 2013 | |||||||
(in thousands, except per share amounts) |
||||||||
Net income |
$ | 18,117 | $ | 23,680 | ||||
Add back: |
||||||||
Special charges, net of tax effect (1) |
| 253 | ||||||
Remeasurement of acqusition-related contingent consideration, net of tax effect (2) |
(1,350 | ) | | |||||
|
|
|
|
|||||
Adjusted net income |
$ | 16,767 | $ | 23,933 | ||||
|
|
|
|
|||||
Earnings per common sharediluted |
$ | 0.45 | $ | 0.58 | ||||
Add back: |
||||||||
Special charges, net of tax effect (1) |
| 0.01 | ||||||
Remeasurement of acquisition-related contingent consideration, net of tax effect (2) |
(0.04 | ) | | |||||
|
|
|
|
|||||
Adjusted earnings per common sharediluted |
$ | 0.41 | $ | 0.59 | ||||
|
|
|
|
|||||
Weighted average number of common shares outstandingdiluted |
40,457 | 40,620 | ||||||
|
|
|
|
(1) | The tax effect takes into account the tax treatment and related tax rate(s) that apply to each adjustment in the applicable tax jurisdiction(s). As a result, the effective tax rate for the adjustments related to special charges for the three months ended March 31, 2013 was 40.7%. The tax expense related to the adjustment for special charges for the three months ended March 31, 2013 was $0.2 million with no impact on diluted earnings per share. In the three months ended March 31, 2014, there were no special charges. |
(2) | The tax effect takes into account the tax treatment and related tax rate(s) that apply to each adjustment in the applicable tax jurisdiction(s). As a result, the effective tax rates for the adjustments related to the remeasurement of acquisition-related contingent consideration for the three months ended March 31, 2014 was 36.4%. The tax expense related to the remeasurement of acquisition-related contingent consideration for the three months ended March 31, 2014 was $0.8 million or a $0.02 impact on diluted earnings per share. In the three months ended March 31, 2013 there was no remeasurement of acquisition-related contingent consideration. |
Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013
Revenues and operating income
See Segment Results for an expanded discussion of segment revenues and operating income.
Unallocated corporate expenses
Unallocated corporate expenses increased $3.1 million, or 18%, to $20.4 million for the three months ended March 31, 2014 from $17.3 million for the same prior year period. The increase was primarily due to added headcount that occurred during 2013 in our regional centers to support international operations growth and increased third party costs to support certain global corporate initiatives.
Interest expense
Interest expense was $12.7 million for the three months ended March 31, 2014, which was unchanged from $12.7 million for the same prior year period.
24
Special charges
We did not record any special charges in the three months ended March 31, 2014.
During the three months ended March 31, 2013, we recorded adjustments to the special charges for office spaces vacated prior to the end of the second quarter of 2012 of approximately $0.4 million. These charges reflected the changes to sublease terms and associated costs for those locations for which actual subleases were entered into during the three month ended March 31, 2013.
Income tax provision
Our provision for income taxes in interim periods is computed by applying our estimated annual effective tax rate against income before income tax expense for the period. In addition, non-recurring or discrete items are recorded during the period in which they occur or become known. The effective tax rate for the three months ended March 31, 2014 was 36.4% as compared to 29.4% for the same prior year period. For the three months ended March 31, 2013, the effective tax rate was favorably impacted by a discrete item for the reversal of the liability for uncertain tax provisions related to an IRS Audit. Excluding the impact of this discrete item, the effective tax rate for the three months ended March 31, 2013 would have been 37.1%.
SEGMENT RESULTS
Total Adjusted Segment EBITDA
The following table reconciles net income to Total Segment Operating Income and Total Adjusted Segment EBITDA for the three months ended March 31, 2014 and 2013.
Three Months Ended March 31, |
||||||||
2014 | 2013 | |||||||
(in thousands) | ||||||||
Net income |
$ | 18,117 | $ | 23,680 | ||||
Add back: |
||||||||
Income tax provision |
10,348 | 9,871 | ||||||
Other income (expense), net |
11,652 | 11,778 | ||||||
Unallocated corporate expense |
20,393 | 17,276 | ||||||
|
|
|
|
|||||
Total Segment Operating Income |
$ | 60,510 | $ | 62,605 | ||||
Add back: |
||||||||
Segment depreciation expense |
7,548 | 6,876 | ||||||
Amortization of other intangible assets |
4,616 | 5,564 | ||||||
Segment special charges |
| 315 | ||||||
Remeasurement of acquisition-related contingent consideration |
(2,122 | ) | | |||||
|
|
|
|
|||||
Total Adjusted Segment EBITDA |
$ | 70,552 | $ | 75,360 | ||||
|
|
|
|
25
Other Segment Operating Data
Three Months Ended March 31, |
||||||||
2014 | 2013 | |||||||
Number of revenue-generating professionals (at period end): |
||||||||
Corporate Finance/Restructuring |
726 | 683 | ||||||
Forensic and Litigation Consulting |
1,076 | 965 | ||||||
Economic Consulting |
538 | 476 | ||||||
Technology |
321 | 275 | ||||||
Strategic Communications |
584 | 619 | ||||||
|
|
|
|
|||||
Total revenue-generating professionals |
3,245 | 3,018 | ||||||
|
|
|
|
|||||
Utilization rates of billable professionals: (1) (3) |
||||||||
Corporate Finance/Restructuring |
70 | % | 71 | % | ||||
Forensic and Litigation Consulting |
75 | % | 66 | % | ||||
Economic Consulting |
72 | % | 89 | % | ||||
Average billable rate per hour:(2) (3) |
||||||||
Corporate Finance/Restructuring |
$ | 362 | $ | 409 | ||||
Forensic and Litigation Consulting |
317 | 319 | ||||||
Economic Consulting |
523 | 493 |
(1) | We calculate the utilization rate for our billable professionals by dividing the number of hours that all of our billable professionals worked on client assignments during a period by the total available working hours for all of our billable professionals during the same period. Available hours are determined by the standard hours worked by each employee, adjusted for part-time hours, local country standard work weeks and local country holidays. Available working hours include vacation and professional training days, but exclude holidays. Utilization rates are presented for our segments that primarily bill clients on an hourly basis. We have not presented a utilization rate for our Technology segment and Strategic Communications segment as most of the revenues of these segments are not generated on an hourly basis. |
(2) | For engagements where revenues are based on number of hours worked by our billable professionals, average billable rate per hour is calculated by dividing revenues (excluding revenues from success fees, pass-through and outside consultants) for a period by the number of hours worked on client assignments during the same period. We have not presented an average billable rate per hour for our Technology and Strategic Communications segments as most of the revenues of these segments are not based on billable hours. |
(3) | 2013 utilization and average bill rate calculations for our Corporate Finance/Restructuring, Forensic and Litigation Consulting and Economic Consulting segments were updated to reflect the realignment of certain practices as well as information related to non-U.S. operations that was not previously available. |
26
CORPORATE FINANCE/RESTRUCTURING
Three Months Ended March 31, |
||||||||
2014 | 2013 | |||||||
(dollars in thousands, except rate per hour) |
||||||||
Revenues |
$ | 93,982 | $ | 99,080 | ||||
|
|
|
|
|||||
Operating expenses: |
||||||||
Direct cost of revenues |
63,969 | 62,433 | ||||||
Selling, general and administrative expenses |
19,786 | 17,690 | ||||||
Special charges |
| 68 | ||||||
Acquisition-related contingent consideration |
(595 | ) | 639 | |||||
Amortization of other intangible assets |
2,215 | 1,551 | ||||||
|
|
|
|
|||||
85,375 | 82,381 | |||||||
|
|
|
|
|||||
Segment operating income |
8,607 | 16,699 | ||||||
Add back: |
||||||||
Depreciation and amortization of intangible assets |
3,006 | 2,318 | ||||||
Special charges |
| 68 | ||||||
Remeasurement of acquisition-related contingent consideration |
(662 | ) | | |||||
|
|
|
|
|||||
Adjusted Segment EBITDA |
$ | 10,951 | $ | 19,085 | ||||
|
|
|
|
|||||
Gross profit (1) |
$ | 30,013 | $ | 36,647 | ||||
Gross profit margin (2) |
31.9 | % | 37.0 | % | ||||
Adjusted Segment EBITDA as a percent of revenues |
11.7 | % | 19.3 | % | ||||
Number of revenue generating professionals (at period end) |
726 | 683 | ||||||
Utilization rates of billable professionals (3) |
70 | % | 71 | % | ||||
Average billable rate per hour (3) |
$ | 362 | $ | 409 |
(1) | Revenues less direct cost of revenues |
(2) | Gross profit as a percent of revenues |
(3) | 2013 utilization and average bill rate calculations for our Corporate Finance/Restructuring, Forensic and Litigation Consulting and Economic Consulting segments were updated to reflect the realignment of certain practices as well as information related to non-U.S. operations that was not previously available. |
Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013
Revenues decreased $5.1 million, or 5.1%, to $94.0 million for the three months ended March 31, 2014 compared to $99.1 million for the same prior year period. Revenues increased $4.4 million, or 4.4%, in 2014 due to acquisitions as compared to the same prior year period. Revenue decreased organically $9.5 million, or 9.6%, primarily due to lower demand in our bankruptcy and restructuring practices in North America, lower average realized bill rates due to mix of services in our telecom, media and technology, EMEA-based restructuring and transaction advisory services practices as well as lower success fees in North America.
Gross profit decreased $6.6 million, or 18.1%, to $30.0 million for the three months ended March 31, 2014 compared to $36.6 million for the same prior year period. Gross profit margin decreased 5.1 percentage points to 31.9% for 2014 compared to 37.0% for 2013 primarily due to lower demand in our bankruptcy and restructuring practices in North America, lower average realized bill rates due to mix of services in our telecom, media and technology, EMEA-based restructuring, and transaction advisory practices, lower margin from our Australia based businesses, coupled with an investment in our EMEA transaction services practice.
27
SG&A expense increased $2.1 million, or 11.8%, to $19.8 million for the three months ended March 31, 2014 compared to $17.7 million for the same prior year period. SG&A expense was 21.1% of revenue for the three months ended March 31, 2014, up from 17.9% for the same prior year period. The increase in SG&A expense is primarily due to acquired overhead costs.
Amortization of other intangible assets increased to $2.2 million for the three months ended March 31, 2014 compared to $1.6 million for the same prior year period.
Adjusted Segment EBITDA decreased $8.1 million, or 42.6%, to $11.0 million for the three months ended March 31, 2014 compared to $19.1 million for the same prior year period.
FORENSIC AND LITIGATION CONSULTING
Three Months Ended March 31, |
||||||||
2014 | 2013 | |||||||
(dollars in thousands, except rate per hour) |
||||||||
Revenues |
$ | 121,429 | $ | 100,724 | ||||
|
|
|
|
|||||
Operating expenses: |
||||||||
Direct cost of revenues |
73,801 | 67,974 | ||||||
Selling, general and administrative expenses |
22,121 | 20,871 | ||||||
Special charges |
| 173 | ||||||
Acquisition-related contingent consideration |
(645 | ) | 92 | |||||
Amortization of other intangible assets |
750 | 512 | ||||||
|
|
|
|
|||||
96,027 | 89,622 | |||||||
|
|
|
|
|||||
Segment operating income |
25,402 | 11,102 | ||||||
Add back: |
||||||||
Depreciation and amortization of intangible assets |
1,765 | 1,536 | ||||||
Special charges |
| 173 | ||||||
Remeasurement of acquisition-related contingent consideration |
(673 | ) | | |||||
|
|
|
|
|||||
Adjusted Segment EBITDA |
$ | 26,494 | $ | 12,811 | ||||
|
|
|
|
|||||
Gross profit (1) |
$ | 47,628 | $ | 32,750 | ||||
Gross profit margin (2) |
39.2 | % | 32.5 | % | ||||
Adjusted Segment EBITDA as a percent of revenues |
21.8 | % | 12.7 | % | ||||
Number of revenue generating professionals (at period end) |
1,076 | 965 | ||||||
Utilization rates of billable professionals (3) |
75 | % | 66 | % | ||||
Average billable rate per hour (3) |
$ | 317 | $ | 319 |
(1) | Revenues less direct cost of revenues |
(2) | Gross profit as a percent of revenues |
(3) | 2013 utilization and average bill rate calculations for our Corporate Finance/Restructuring, Forensic and Litigation Consulting and Economic Consulting segments were updated to reflect the realignment of certain practices as well as information related to non-U.S. operations that was not previously available. |
Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013
Revenues increased $20.7 million, or 20.6%, to $121.4 million for the three months ended March 31, 2014 from $100.7 million for the same prior year period. Revenues increased $3.0 million, or 2.9%, due to
28
acquisitions as compared to the same prior year period. Revenues increased organically $17.8 million, or 17.6%, due to higher demand in our global data analytics, health solutions, disputes and insurance practices in the North America region, and our forensic accounting and global risk and investigations practices in the Asia Pacific region, partially offset by lower success fees in our health solutions practice.
Gross profit increased $14.9 million, or 45.4%, to $47.6 million for the three months ended March 31, 2014 from $32.8 million for the same prior year period. Gross profit margin increased 6.7 percentage points to 39.2% for the three months ended March 31, 2014 from 32.5% for the same prior year period. The increase in gross profit is related to higher utilization and improved leverage in our global data analytics, disputes and insurance practices in the North America region, and forensic accounting and global risk and investigations practices in the Asia Pacific region.
SG&A expense increased $1.3 million, or 6.0%, to $22.1 million for the three months ended March 31, 2014 from $20.9 million for the same prior year period. SG&A expense was 18.2% of revenue for the three months ended March 31, 2014, down from 20.7% for the same prior year period. The increase in SG&A expense was due to higher equity compensation expense in our health solutions practice, acquired overhead and increased corporate overhead allocations, partially offset by lower bad debt expense.
Amortization of other intangible assets increased $0.2 million to $0.8 million for the three months ended March 31, 2014 compared to $0.5 million for the same prior year period.
Adjusted Segment EBITDA increased by $13.7 million, or 106.8%, to $26.5 million for the three months ended March 31, 2014 from $12.8 million for the same prior year period.
ECONOMIC CONSULTING
Three Months Ended | ||||||||
March 31, | ||||||||
2014 | 2013 | |||||||
(dollars in thousands, except rate per hour) |
||||||||
Revenues |
$ | 106,851 | $ | 115,194 | ||||
|
|
|
|
|||||
Operating expenses: |
||||||||
Direct cost of revenues |
77,970 | 75,951 | ||||||
Selling, general and administrative expenses |
16,880 | 13,854 | ||||||
Special charges |
| (4 | ) | |||||
Acquisition-related contingent consideration |
(735 | ) | | |||||
Amortization of other intangible assets |
306 | 398 | ||||||
|
|
|
|
|||||
94,421 | 90,199 | |||||||
|
|
|
|
|||||
Segment operating income |
12,430 | 24,995 | ||||||
Add back: |
||||||||
Depreciation and amortization of intangible assets |
1,387 | 1,203 | ||||||
Special charges |
| (4 | ) | |||||
Remeasurement of acquisition-related contingent consideration |
(787 | ) | | |||||
|
|
|
|
|||||
Adjusted Segment EBITDA |
$ | 13,030 | $ | 26,194 | ||||
|
|
|
|
|||||
Gross profit (1) |
$ | 28,881 | $ | 39,243 | ||||
Gross profit margin (2) |
27.0 | % | 34.1 | % | ||||
Adjusted Segment EBITDA as a percent of revenues |
12.2 | % | 22.7 | % | ||||
Number of revenue generating professionals (at period end) |
538 | 476 | ||||||
Utilization rates of billable professionals (3) |
72 | % | 89 | % | ||||
Average billable rate per hour (3) |
$ | 523 | $ | 493 |
(1) | Revenues less direct cost of revenues |
(2) | Gross profit as a percent of revenues |
(3) | 2013 utilization and average bill rate calculations for our Corporate Finance/Restructuring, Forensic and Litigation Consulting and Economic Consulting segments were updated to reflect the realignment of certain practices as well as information related to non-U.S. operations that was not previously available. |
29
Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013
Revenues decreased $8.3 million, or 7.2%, to $106.9 million for the three months ended March 31, 2014 compared to $115.2 million for the same prior year period. Revenues increased $1.7 million, or 1.5 percent, due to acquisitions as compared to the same prior year period. Revenues declined organically $10.1 million, or 8.8%, primarily due to decreased demand in our financial economics practice in the North America region as well as lower demand and realization in our international arbitration, regulatory and valuation practice in the EMEA region, partially offset by higher demand in our antitrust practice in the EMEA region.
Gross profit decreased $10.4 million, or 26.4%, to $28.9 million for the three months ended March 31, 2014 compared to $39.2 million for the same prior year period. Gross profit margin decreased 7.1 percentage points to 27.0% for the three months ended March 31, 2014 from 34.1% for the same prior year period. The decrease in gross profit margin was the result of lower utilization in the financial economics practice in the North America region, employment contract extensions of key senior client-service professionals, and lower utilization and realization in the international arbitration, regulatory and valuation practice in the EMEA region, partially offset by higher utilization in our antitrust practice in the EMEA region.
SG&A expense increased $3.0 million, or 21.8%, to $16.9 million for the three months ended March 31, 2014 compared to $13.9 million for the same prior year period. SG&A expense was 15.8% of revenues for the three months ended March 31, 2014 compared to 12.0% for the same prior year period. The increase in SG&A expense was due to higher facilities, bad debt, marketing, corporate overhead allocations and depreciation expenses. Bad debt expense was $2.5 million or 2.4 percent of revenues for the three months ended March 31, 2014 compared to $2.0 million or 1.7 percent of revenues for the same prior year period.
Amortization of other intangible assets decreased to $0.3 million for the three months ended March 31, 2014, compared to $0.4 million for the same prior year period.
Adjusted Segment EBITDA decreased $13.2 million, or 50.3%, to $13.0 million for the three months ended March 31, 2014, compared to $26.2 million for the same prior year period.
30
TECHNOLOGY
Three Months Ended | ||||||||
March 31, | ||||||||
2014 | 2013 | |||||||
(dollars in thousands) | ||||||||
Revenues |
$ | 60,063 | $ | 46,704 | ||||
|
|
|
|
|||||
Operating expenses: |
||||||||
Direct cost of revenues |
30,700 | 21,861 | ||||||
Selling, general and administrative expenses |
16,079 | 14,762 | ||||||
Special charges |
| 14 | ||||||
Amortization of other intangible assets |
218 | 1,985 | ||||||
|
|
|
|
|||||
46,997 | 38,622 | |||||||
|
|
|
|
|||||
Segment operating income |
13,066 | 8,082 | ||||||
Add back: |
||||||||
Depreciation and amortization of intangible assets |
4,282 | 5,620 | ||||||
Special charges |
| 14 | ||||||
|
|
|
|
|||||
Adjusted Segment EBITDA |
$ | 17,348 | $ | 13,716 | ||||
|
|
|
|
|||||
Gross profit (1) |
$ | 29,363 | $ | 24,843 | ||||
Gross profit margin (2) |
48.9 | % | 53.2 | % | ||||
Adjusted Segment EBITDA as a percent of revenues |
28.9 | % | 29.4 | % | ||||
Number of revenue generating professionals (at period end) (3) |
321 | 275 |
(1) | Revenues less direct cost of revenues |
(2) | Gross profit as a percent of revenues |
(3) | Includes personnel involved in direct client assistance and revenue generating consultants |
Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013
Revenues increased $13.4 million, or 28.6%, to $60.1 million for the three months ended March 31, 2014 from $46.7 million for the same prior year period. Revenue increased due to higher volume for services, partially offset by lower pricing of services. The revenue increase is largely attributable to FCPA and financial services industry investigations as well as merger and acquisition related second request services.
Gross profit increased by $4.5 million, or 18.2%, to $29.4 million for the three months ended March 31, 2014 from $24.8 million for the same prior year period. Gross profit margin decreased 4.3 percentage points to 48.9% for 2014 from 53.2% for 2013 due to an increase in lower margin services.
SG&A expense increased by $1.3 million, or 8.9%, to $16.1 million for the three months ended March 31, 2014 from $14.8 million for the same prior year period. SG&A expense was 26.8% of revenue for the three months ended March 31, 2014, down from 31.6% for the same prior year period. The increase in SG&A expense was primarily due to higher personnel expense to support business development initiatives and increased facilities expense. Bad debt expense remained flat at $0.4 million for the three months ended March 31, 2014 compared to the same prior year period. Research and development expense was $4.5 million for the three months ended March 31, 2014 compared to $4.0 million for the same prior year period.
Amortization of other intangible assets decreased by $1.8 million to $0.2 million for the three months ended March 31, 2014 compared to the same prior year period. The decrease is due to the impact of certain acquisition costs fully amortized at the end of 2013.
31
Adjusted Segment EBITDA increased $3.6 million, or 26.5%, to $17.3 million for the three months ended March 31, 2014 from $13.7 million for the same prior year period.
STRATEGIC COMMUNICATIONS
Three Months Ended | ||||||||
March 31, | ||||||||
2014 | 2013 | |||||||
(dollars in thousands) | ||||||||
Revenues |
$ | 43,227 | $ | 45,476 | ||||
|
|
|
|
|||||
Operating expenses: |
||||||||
Direct cost of revenues |
27,835 | 30,261 | ||||||
Selling, general and administrative expenses |
13,128 | 12,306 | ||||||
Special charges |
| 64 | ||||||
Acquisition-related contingent consideration |
132 | | ||||||
Amortization of other intangible assets |
1,127 | 1,118 | ||||||
|
|
|
|
|||||
42,222 | 43,749 | |||||||
|
|
|
|
|||||
Segment operating income (loss) |
1,005 | 1,727 | ||||||
Add back: |
||||||||
Depreciation and amortization of intangible assets |
1,724 | 1,763 | ||||||
Special charges |
| 64 | ||||||
|
|
|
|
|||||
Adjusted Segment EBITDA |
$ | 2,729 | $ | 3,554 | ||||
|
|
|
|
|||||
Gross profit (1) |
$ | 15,392 | $ | 15,215 | ||||
Gross profit margin (2) |
35.6 | % | 33.5 | % | ||||
Adjusted Segment EBITDA as a percent of revenues |
6.3 | % | 7.8 | % | ||||
Number of revenue generating professionals (at period end) |
584 | 619 |
(1) | Revenues less direct cost of revenues |
(2) | Gross profit as a percent of revenues |
Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013
Revenues decreased $2.2 million, or 4.9%, to $43.2 million for the three months ended March 31, 2014 from $45.5 million for the same prior year period, which included a 1.1 percent increase from the estimated positive impact of foreign currency translation, which was primarily due to the strengthening of British pound relative to the U.S. dollar. Revenues increased $1.8 million, or 3.9%, from an acquisition as compared to the same prior year period. Revenue decreased organically $4.0 million, or 8.9%, due to lower pass-through revenues in the North America and EMEA regions as well as lower retained income from the North America region, partially offset by higher retained income in EMEA.
Gross profit increased $0.2 million, or 1.2%, to $15.4 million for the three months ended March 31, 2014 from $15.2 million for the same prior year period. Gross profit margin increased 2.1 percentage points to 35.6% for the three months ended March 31, 2014 from 33.5% for the same prior year period. The increase in gross profit margin was primarily due to the decline in low-margin pass through income in the North America and EMEA regions relative to the same prior year period.
SG&A expense increased $0.8 million, or 6.7%, to $13.1 million for the three months ended March 31, 2014 from $12.3 million for the same prior year period. SG&A expense was 30.4% of revenue for the three months ended March 31, 2014, up from 27.1% of revenue for the same prior year period. The increase in SG&A expense was primarily related to higher facilities expenses related to the transition to our new London office and acquired overhead expenses.
32
Amortization of other intangible assets was $1.1 million for the three months ended March 31, 2014 in line with the corresponding charge for the same prior year period.
Adjusted Segment EBITDA decreased $0.8 million, or 23.2%, to $2.7 million for the three months ended March 31, 2014 from $3.6 million for the same prior year period.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements, which we have prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Note 1 to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2013 describes the significant accounting policies and methods used in preparation of the Consolidated Financial Statements. We evaluate our estimates, including those related to bad debts, goodwill, income taxes and contingencies on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. These results form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The accounting policies that reflect our more significant estimates, judgments and assumptions and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:
| Revenue recognition |
| Allowance for doubtful accounts and unbilled services |
| Goodwill and other intangible assets |
| Business combinations |
| Share-based compensation |
| Income taxes |
There have been no material changes to our critical accounting policies and estimates from the information provided in Part II, Managements Discussion and Analysis of Financial Condition and Results of Operations Critical Accounting Policies, as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013 filed with the SEC on February 24, 2014.
Goodwill and Other Intangible Assets
On a quarterly basis, we monitor the key drivers of fair value to detect events or other changes that would warrant an interim impairment test of our goodwill and intangible assets. Factors we consider important which could trigger an interim impairment review include, but are not limited to the following: significant underperformance relative to historical or projected future operating results; a significant change in the manner of our use of the acquired asset or strategy for our overall business; a significant negative industry or economic trend; and our market capitalization relative to net book value. Through our assessment, we determined that there were no events or circumstances that more likely than not would reduce the fair value of any of our reporting units below their carrying value. Accordingly, we did not perform an interim impairment test for the three-months ended March 31, 2014.
There can be no assurance that the estimates and assumptions used in our goodwill impairment testing will prove to be accurate predictions of the future. If our assumptions regarding forecasted cash flows are not achieved, we may be required to perform the two-step quantitative goodwill impairment analysis prior to our
33
next annual impairment test. In addition, if the aforementioned factors have the effect of changing one of the critical assumptions or estimates we use to calculate the value of our goodwill or intangible assets, we may be required to record goodwill and/or intangible asset impairment charges in future periods, whether in connection with our next annual impairment test or if a triggering event occurs outside of the quarter during which the annual goodwill impairment test is performed. It is not possible at this time to determine if any future impairment charge would result or, if it does, whether such charge would be material.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Three Months Ended | ||||||||
March 31, | ||||||||
2014 | 2013 | |||||||
(dollars in thousands) | ||||||||
Net cash used in operating activities |
$ | (110,795 | ) | $ | (2,304 | ) | ||
Net cash used in investing activities |
$ | (30,800 | ) | $ | (21,987 | ) | ||
Net cash provided by (used in) financing activities |
$ | 13,042 | $ | (30,193 | ) |
We have generally financed our day-to-day operations, capital expenditures and acquisition-related contingent payments through cash flows from operations. Generally, during our first quarter of each fiscal year, our cash needs exceed our cash flows from operations due to the payments of annual incentive compensation and acquisition-related contingent payments. Our operating cash flows generally exceed our cash needs subsequent to the first quarter of each year.
Our operating assets and liabilities consist primarily of billed and unbilled accounts receivable, notes receivable from employees, accounts payable, accrued expenses and accrued compensation expense. The timing of billings and collections of receivables as well as payments for compensation arrangements affect the changes in these balances.
DSO is a performance measure used to assess how quickly revenues are collected by the Company. We calculate DSO at the end of each reporting period by dividing net accounts receivable reduced by billings in excess of services provided, by revenue for the quarter, adjusted for changes in foreign exchange rates. We multiply the result by the number of days in the quarter. Our DSO typically reaches its lowest point at December 31 each year and has consistently increased during the following quarter.
Three Months Ended March 31, 2014 Compared to Three Months Ended March 31, 2013
Cash used in operating activities increased $108.5 million to $110.8 million for the three months ended March 31, 2014 compared to $2.3 million for the same prior year period primarily as a result of higher bonus payments and an increase in the funding of employee notes in 2014. Cash collections were flat compared to the same prior year period, despite higher revenues in the three months ended March 31, 2014 primarily due to the timing of revenues in the current quarter with most of the year-over-year revenue growth occurring at the end of the quarter, which is reflected in the increase in accounts receivable. DSO was 106 days at March 31, 2014 and 96 days at March 31, 2013. DSO for the three months ended March 31, 2014 was impacted by the increase in accounts receivable discussed above, as well as, the cycle time of billings and collections on several large engagements, which are subject to certain milestones for billing and collections.
Net cash used in investing activities for the three months ended March 31, 2014 was $30.8 million compared to $22.0 million for the same prior year period. Payments for acquisitions completed during the three months ended March 31, 2014 were $1.0 million, net of cash received, compared to $8.1 million for the same prior year period. Payments of acquisition-related contingent consideration were $14.6 million for the three months ended March 31, 2014 as compared to payments of acquisition-related contingent consideration and stock price guarantees of $5.8 million and $0.8 million, respectively, for the same prior year period. Capital expenditures were $15.2 million for the three months ended March 31, 2014 as compared to $7.3 million for the same prior year period.
34
Net cash provided by financing activities for the three months ended March 31, 2014 was $13.0 million as compared to net cash used in financing activities of $30.2 million for the same prior year period. Our financing activities for the three months ended March 31, 2014 included short-term net borrowings of $20.0 million on our revolving line of credit under our senior secured bank credit facility and payments of $4.4 million to settle repurchases of the Companys common stock that were made, but not settled in the fourth quarter of 2013. Our financing activities for the three months ended March 31, 2013 included the purchase and retirement of 826,800 shares of our common stock, at an aggregate cost of $28.8 million.
Capital Resources
As of March 31, 2014, our capital resources included $77.0 million of cash and cash equivalents and available borrowing capacity of $328.6 million under our $350.0 million revolving line of credit under our senior secured bank credit facility (bank credit facility). As of March 31, 2014, we had $20.0 million outstanding under our bank credit facility and $1.4 million of outstanding letters of credit, which reduced the availability of borrowings under the bank credit facility. We use letters of credit primarily in lieu of security deposits for our leased office facilities.
Future Capital Needs
We anticipate that our future capital needs will principally consist of funds required for:
| operating and general corporate expenses relating to the operation of our businesses; |
| capital expenditures, primarily for information technology equipment, office furniture and leasehold improvements; |
| debt service requirements, including interest payments on our long-term debt; |
| compensating designated executive management and senior managing directors under our various long-term incentive compensation programs; |
| discretionary funding of our 2012 Repurchase Program; |
| contingent obligations related to our acquisitions; |
| potential acquisitions of businesses that would allow us to diversify or expand our service offerings; and |
| other known future contractual obligations. |
For the full fiscal year 2014, we anticipate aggregate capital expenditures will range between $40 million and $44 million to support our organization, including direct support for specific client engagements and funding for leasehold improvements related to a regional office consolidation of which we currently anticipate capital expenditures will range between $27 million and $31 million for the remainder of the year. Our estimate takes into consideration the needs of our existing businesses but does not include the impact of any purchases that we make as a result of future acquisitions or specific client engagements that are not currently contemplated. Our capital expenditure requirements may change if our staffing levels or technology needs change significantly from what we currently anticipate, if we purchase additional equipment specifically to support a client engagement or if we pursue and complete additional acquisitions.
In certain business combinations consummated prior to January 1, 2009, a portion of our purchase price was in the form of contingent consideration, often referred to as earn-outs. The use of contingent consideration allows us to shift some of the valuation risk, inherent at the time of acquisitions, to the sellers based upon the outcome of future financial targets that the sellers contemplate in the valuations of the companies, assets or businesses they sell. Contingent consideration is payable annually as agreed upon performance targets are met and is generally subject to a maximum amount within a specified time period. Our obligations change from period-to-period primarily as a result of payments made during the current period, changes in the acquired entities performance and changes in foreign currency exchange rates. In addition, certain acquisition-related restricted
35
stock agreements contain common stock price guarantees that may result in cash payments in the future if our closing per share price falls below a specified per share price on the date the stock restrictions lapse. As of March 31, 2014, we had no accrued contingent consideration liabilities for business combinations consummated prior to January 1, 2009 and no remaining restricted stock agreements with common stock price guarantees.
For business combinations consummated on or after January 1, 2009, contingent consideration obligations are recorded as liabilities on our Condensed Consolidated Balance Sheets and remeasured to fair value at each subsequent reporting date with an offset to current period earnings. The fair value of future expected contingent purchase price obligations for these business combinations are $6.9 million at March 31, 2014 with payment dates extending through 2018.
For the last several years, our cash flows from operations have exceeded our cash needs for capital expenditures and debt service requirements. We believe that our cash flows from operations, supplemented by short-term borrowings under our bank credit facility, as necessary, will provide adequate cash to fund our long-term cash needs from normal operations for at least the next twelve months.
Our conclusion that we will be able to fund our cash requirements by using existing capital resources and cash generated from operations does not take into account the impact of any future acquisition transactions or any unexpected significant changes in the number of employees. The anticipated cash needs of our businesses could change significantly if we pursue and complete additional business acquisitions, if our business plans change, if economic conditions change from those currently prevailing or from those now anticipated, or if other unexpected circumstances arise that have a material effect on the cash flow or profitability of our business. Any of these events or circumstances, including any new business opportunities, could involve significant additional funding needs in excess of the identified currently available sources and could require us to raise additional debt or equity funding to meet those needs. Our ability to raise additional capital, if necessary, is subject to a variety of factors that we cannot predict with certainty, including:
| our future profitability; |
| the quality of our accounts receivable; |
| our relative levels of debt and equity; |
| the volatility and overall condition of the capital markets; and |
| the market prices of our securities. |
Any new debt funding, if available, may be on terms less favorable to us than our bank credit facility or the indentures that govern our senior notes. See Forward-Looking Statements in this Quarterly Report on Form 10-Q and Risk Factors included in Part I Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2013.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements other than operating leases, and we have not entered into any transactions involving unconsolidated subsidiaries or special purpose entities.
Future Contractual Obligations
There have been no significant changes in our future contractual obligations since December 31, 2013.
Forward-Looking Statements
This Quarterly Report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
36
as amended, or the Exchange Act, that involve uncertainties and risks. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues, future results and performance, future capital expenditures, expectations, plans or intentions relating to acquisitions and other matters, business trends and other information that is not historical. Forward-looking statements often contain words such as estimates, expects, anticipates, projects, plans, intends, believes, forecasts and variations of such words or similar expressions. All forward-looking statements, including, without limitation, managements examination of historical operating trends, are based upon our historical performance and our current plans, estimates and expectations at the time we make them and various assumptions. There can be no assurance that managements expectations, beliefs and projections will result or be achieved. Our actual financial results, performance or achievements could differ materially from those expressed in, or implied by, any forward-looking statements. The inclusion of any forward-looking information should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved. Given these risks, uncertainties and other factors, you should not place undue reliance on any forward-looking statements.
There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in, or implied by, this Quarterly Report on Form 10-Q. Important factors that could cause our actual results to differ materially from the forward-looking statements we make in this Quarterly Report on Form 10-Q are set forth under the heading Risk Factors included in Part I Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2013. Important factors that could cause our actual results to differ materially from the forward-looking statements we make in this Quarterly Report on Form 10-Q include the following:
| changes in demand for our services; |
| our ability to attract and retain qualified professionals and senior management; |
| conflicts resulting in our inability to represent certain clients; |
| our former employees joining or forming competing businesses; |
| our ability to manage our professionals utilization and billing rates and maintain or increase the pricing of our services and products; |
| our ability to identify suitable acquisition candidates, negotiate favorable terms, take advantage of opportunistic acquisition situations and integrate the operations of acquisitions as well as the costs of integration; |
| our ability to adapt to and manage the risks associated with operating in non-U.S. markets; |
| our ability to replace key personnel, including senior managers and practice and regional leaders who have highly specialized skills and experience; |
| our ability to protect the confidentiality of internal and client data and proprietary and confidential information; |
| legislation or judicial rulings, including rulings regarding data privacy and the discovery process; |
| periodic fluctuations in revenues, operating income and cash flows; |
| damage to our reputation as a result of claims involving the quality of our services; |
| fee discounting or renegotiation, lower pricing, less advantageous contract terms and unexpected terminations of client engagements; |
| competition for clients and key personnel; |
| general economic factors, industry trends, restructuring and bankruptcy rates, legal or regulatory requirements, capital market conditions, merger and acquisition activity, major litigation activity and other events outside of our control; |
37
| our ability to manage growth; |
| risk of non-payment of receivables; |
| the amount and terms of our outstanding indebtedness; |
| risks relating to the obsolescence of, changes to, or the protection of, our proprietary software products and intellectual property rights; and |
| fluctuations in the mix of our services and the geographic locations in which our clients are located or our services are rendered. |
There may be other factors that may cause our actual results to differ materially from our forward-looking statements. All forward-looking statements attributable to us or persons acting on our behalf apply only as of the date of this Quarterly Report on Form 10-Q and are expressly qualified in their entirety by the cautionary statements included herein. We undertake no obligation to publicly update or revise any forward-looking statements to reflect subsequent events or circumstances and do not intend to do so.
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
For information regarding our exposure to certain market risks see Item 7A. Quantitative and Qualitative Disclosures about Market Risk, in our Annual Report on Form 10-K for the year ended December 31, 2013. There have been no significant changes in our market risk exposure during the period covered by this Quarterly Report on Form 10-Q.
Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures. An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act), as of the end of the period covered by this Quarterly Report on Form 10-Q was made under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (a) were effective to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is timely recorded, processed, summarized and reported and (b) included, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting. There have not been any changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
38
PART IIOTHER 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 have been no material changes in any risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013 filed with the Securities and Exchange Commission (SEC) on February 24, 2014. We may disclose changes to risk factors or disclose additional factors from time to time in our future filings with the SEC. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
Unregistered sales of equity securities.
None
Repurchases of our common stock. The following table provides information with respect to purchases we made of our common stock during the first quarter ended March 31, 2014 (in thousands, except per share amounts).
Total Number of Shares Purchased |
Average Price Paid per Share |
Shares Purchased as Part of Publicly Announced Program |
Approximate Dollar Value that May Yet Be Purchased Under the Program (4) |
|||||||||||||
January 1 through January 31, 2014 |
45 | (1) | $ | 41.26 | | $ | 128,838 | |||||||||
February 1 through February 28, 2014 |
2 | (2) | $ | 29.68 | | $ | 128,838 | |||||||||
March 1 through March 31, 2014 |
87 | (3) | $ | 30.52 | | $ | 128,838 | |||||||||
|
|
|
|
|||||||||||||
Total |
134 | | ||||||||||||||
|
|
|
|
(1) | Represents 45,106 shares of common stock withheld to cover payroll tax withholdings related to the lapse of restrictions on restricted stock. |
(2) | Represents 1,815 shares of common stock withheld to cover payroll tax withholdings related to the lapse of restrictions on restricted stock. |
(3) | Represents 86,568 shares of common stock withheld to cover payroll tax withholdings related to the lapse of restrictions on restricted stock. |
(4) | In June 2012, our Board of Directors authorized a two-year stock repurchase program of up to $250.0 million (the 2012 Repurchase Program). At March 31, 2014, a balance of approximately $128.8 million remained available under the 2012 Repurchase Program. |
Item 3. | Defaults Upon Senior Securities. |
None
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Item 4. | Mine Safety Disclosures. |
Not applicable
Item 5. | Other Information. |
None
Item 6. | Exhibits |
(a) Exhibits.
Exhibit Number |
Exhibit Description | |
3.1 | Articles of Incorporation of FTI Consulting, Inc., as amended and restated. (Filed with the SEC on May 23, 2003 as an exhibit to FTI Consulting, Inc.s Current Report on Form 8-K dated May 21, 2003 and incorporated herein by reference.) | |
3.2 | Articles of Amendment of FTI Consulting, Inc. (Filed with the SEC on June 2, 2011 as an exhibit to FTI Consulting, Inc.s Current Report on Form 8-K dated June 1, 2011 and incorporated herein by reference.) | |
3.3 | Bylaws of FTI Consulting, Inc., as amended and restated on June 1, 2011. (Filed with the SEC on June 2, 2011 as an exhibit to FTI Consulting, Inc.s Current Report on Form 8-K dated June 1, 2011 and incorporated herein by reference.) | |
3.4 | Amendment No. 1 to Bylaws of FTI Consulting, Inc. (Filed with the Securities and Exchange Commission on December 16, 2013 as an exhibit to FTI Consulting, Inc.s Current Report on Form 8-K dated December 13, 2013 and incorporated herein by reference.) | |
10.1* | Retention Bonus Letter Agreement dated January 15, 2014 by and between FTI Consulting, Inc. and David G. Bannister (Filed with the Securities and Exchange Commission on February 20, 2014 as an exhibit to FTI Consulting, Inc.s Current Report on Form 8-K dated February 18, 2014 and incorporated herein by reference.) | |
10.2* | Retention Bonus Letter Agreement dated January 15, 2014 by and between FTI Consulting, Inc. and Roger C. Carlile (Filed with the Securities and Exchange Commission on February 20, 2014 as an exhibit to FTI Consulting, Inc.s Current Report on Form 8-K dated February 18, 2014 and incorporated herein by reference.) | |
10.3* | Retention Bonus Letter Agreement dated January 15, 2014 by and between FTI Consulting, Inc. and Eric B. Miller (Filed with the Securities and Exchange Commission on February 20, 2014 as an exhibit to FTI Consulting, Inc.s Current Report on Form 8-K dated February 18, 2014 and incorporated herein by reference.) | |
10.4* | Form of Cash-Based Stock Appreciation Right Award Agreement (Filed with the Securities and Exchange Commission on March 27, 2014 as an exhibit to FTI Consulting, Inc.s Current Report on Form 8-K dated March 26, 2014 and incorporated herein by reference.) | |
10.5* | Form of Cash Unit Award Agreement (Filed with the Securities and Exchange Commission on March 27, 2014 as an exhibit to FTI Consulting, Inc.s Current Report on Form 8-K dated March 26, 2014 and incorporated herein by reference.) | |
10.6* | Form of Cash-Based Performance Award Agreement (Filed with the Securities and Exchange Commission on March 27, 2014 as an exhibit to FTI Consulting, Inc.s Current Report on Form 8-K dated March 26, 2014 and incorporated herein by reference.) |
40
Exhibit Number |
Exhibit Description | |
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). | |
99.1 | Insider Trading Policy, Amended and Restated Effective February 19, 2014 | |
99.2 | Anti-Corruption Policy, Amended and Restated Effective February 19, 2014 | |
101** | The following financial information from the Quarterly Report on Form 10-Q of FTI Consulting, Inc. for the quarter ended March 31, 2014, furnished electronically herewith, and formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets; (ii) Condensed Consolidated Statements of Comprehensive Income; (iii) Condensed Consolidated Statement of Stockholders Equity; (iv) Condensed Consolidated Statements of Cash Flows; and (v) Notes to the Condensed Consolidated Financial Statements. |
| Filed herewith. |
* | Management contract or compensatory plan or arrangement. |
** | In accordance with Rule 406T of Regulation S-T, the XBRL related information in Exhibit 101 to this Quarterly Report on Form 10-Q shall not be deemed to be filed for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, and shall not be incorporated by reference into any registration statement or other document filed under the Securities Act of 1933, as amended, or the Exchange Act, except as shall be expressly set forth by specific reference in such filing. |
41
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 1, 2014
FTI CONSULTING, INC. | ||
By | /s/ Catherine M. Freeman | |
Catherine M. Freeman | ||
Senior Vice President, Controller and Chief Accounting Officer | ||
(principal accounting officer) |
42
Exhibit 31.1
Certification of Principal Executive Officer
Pursuant to Rule 13a-14(a) and 15d-14(a)
(Section 302 of the Sarbanes-Oxley Act of 2002)
I, Steven H. Gunby, certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q of FTI Consulting, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: May 1, 2014
By: | /s/ STEVEN H. GUNBY | |
Steven H. Gunby | ||
President and Chief Executive Officer | ||
(principal executive officer) |
Exhibit 31.2
Certification of Principal Financial Officer
Pursuant to Rule 13a-14(a) and 15d-14(a)
(Section 302 of the Sarbanes-Oxley Act of 2002)
I, Roger D. Carlile, certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q of FTI Consulting, Inc.; |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
(a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of registrants board of directors (or persons performing the equivalent functions): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: May 1, 2014
By: | /s/ ROGER D. CARLILE | |
Roger D. Carlile | ||
Executive Vice President and Chief Financial Officer | ||
(principal financial officer) |
Exhibit 32.1
Certification of Principal Executive Officer
Pursuant to 18 U.S.C. Section 1350
(Section 906 of the Sarbanes-Oxley Act of 2002)
In connection with the Quarterly Report of FTI Consulting, Inc. (the Company) on Form 10-Q for the quarter ended March 31, 2014, as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Steven H. Gunby, President and Chief Executive Officer (principal executive officer) of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
1. | the Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934; and |
2. | the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: May 1, 2014
By: | /s/ STEVEN H. GUNBY | |
Steven H. Gunby | ||
President and Chief Executive Officer | ||
(principal executive officer) |
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 32.2
Certification of Principal Financial Officer
Pursuant to 18 U.S.C. Section 1350
(Section 906 of the Sarbanes-Oxley Act of 2002)
In connection with the Quarterly Report of FTI Consulting, Inc. (the Company) on Form 10-Q for the quarter ended March 31, 2014, as filed with the Securities and Exchange Commission on the date hereof (the Report), I, Roger D. Carlile, Executive Vice President and Chief Financial Officer (principal financial officer) of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
1. | the Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934; and |
2. | the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: May 1, 2014
By: | /s/ ROGER D. CARLILE | |
Roger D. Carlile | ||
Executive Vice President and Chief Financial Officer | ||
(principal financial officer) |
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
Exhibit 99.1
FTI CONSULTING, INC.
POLICY ON INSIDE INFORMATION AND INSIDER TRADING
I. | Overview |
FTI Consulting, Inc., together with its subsidiaries and affiliates (FTI Consulting or the Company), are committed to upholding both the letter and the spirit of the securities laws, rules and regulations of the United States. Such laws, among other things, prohibit insider trading on material, non-public information (described in further detail below), as well as the applicable laws, rules and regulations of the other jurisdictions in which we conduct business. This Policy explains the stringent ethical and legal prohibitions against insider trading and tipping. It establishes the expected standards of conduct for us all with respect to these highly sensitive matters. Finally, it describes the Companys commitment to protecting our own material, non-public information, as well as that of our clients.
This Policy applies to our Company, its subsidiaries and affiliates worldwide. Where specific conduct may be permitted under local law, but is prohibited by this Policy, we must comply with this Policy. This Policy has been filed publicly with the SEC and is available on FTI Consultings public website.
You are expected to become familiar with and comply with this Policy, to participate in training and to communicate the values underlying this Policy in your interactions with colleagues and third parties.
II. | Who is Subject to this Policy? |
To avoid even the appearance of impropriety, this Policy applies to all of us at FTI Consulting. It includes all former, temporary or retired officers and non-employee directors of FTI Consulting, Inc.; present officers and non-employee directors of FTI Consulting, Inc., Company employees, consultants and contractors; as well as all family members (including in-laws) who reside in the same household. It also applies to any other person or entity (such as a company or partnership) over whom the officer, non-employee director, employee, consultant or contractor has significant influence as it relates to securities trading decisions. Further, this Policy applies to:
Any trust or other ownership arrangement in which an officer, non-employee director, employee, consultant or contractor has a substantial beneficial interest.
[Amended and Restated Effective February 19, 2014]
1
| Any trust or other ownership arrangement as to which he or she serves as a trustee (or in a similar fiduciary capacity). |
| Any trust or other ownership arrangement in which an officer, non-employee director, employee, consultant or contractor otherwise has investment control. |
III. | What is FTI Consultings Policy on Securities Trading in General? |
We encourage our officers, employees and non-employee directors to become stockholders of FTI Consulting, Inc. In addition, FTI Consulting respects the right of employees and others to engage in investment activities generally. However, it is important that these activities do not create the appearance of any impropriety, and that all investment activities comply with all applicable laws and regulations.
IV. | What is FTI Consultings Policy on Insider Trading? |
Insider trading is the act of buying or selling stock or other securities, including derivative securities, based on inside, or material, non-public, information. You may not use material, non-public information to trade in the securities of FTI Consulting or any client.
Information is material if it would be considered important by a reasonable investor in determining whether to buy, hold or sell the stock of the company to which the information relates. Insider trading includes actions that are intended to make a profit or avoid a loss.
Information relating to FTI Consulting is considered non-public until any necessary disclosure, and the opening of the trading window as described elsewhere in this Policy, whether through a press release or other Company disseminated public announcement or disclosure. This includes any filing with the U.S. Securities and Exchange Commission (the SEC). In other words, it is assumed that the public needs the period of time between public disclosure and the opening of the trading window to receive and absorb information relating to FTI Consulting.
i. | What is Inside Information? |
Trading in securities based on material, non-public information (inside information) is prohibited and violates the law. This holds true whether information is obtained in the course of employment, from friends, relatives, acquaintances or strangers, or from overhearing the conversations of others. The U.S. Congress enacted this prohibition because the integrity of the securities markets would be seriously undermined if the deck were stacked against persons not aware of such information.
[Amended and Restated Effective February 19, 2014]
2
Common examples of FTI Consulting inside information include:
| A merger or acquisition involving FTI Consulting or another public company. |
| Information regarding FTI Consultings revenues or earnings. |
| Pending regulatory action or major litigation concerning FTI Consulting. |
| Unannounced stock offerings. |
| Major changes in management. |
| The awarding or loss of a significant contract. |
| Any other information which if made public would be likely to have an effect on the price of publicly traded stock, financial instruments or related derivative securities. |
In addition, inside information includes material, non-public information in our possession regarding our clients and vendors whose securities are traded on a public market. Particularly with respect to client inside information, any failure to maintain the confidentiality of material, non-public information could seriously damage our reputation and impair our ability to conduct and grow our business. Care should be taken to disclose client inside information obtained during the course of an engagement to other engagement team members on a need to know basis.
Determining whether information is material can be tricky. When doubt exists, the information should be presumed to be material. If you are unsure whether information in your possession is material or non-public, you should consult with FTI Consultings General Counsel and Chief Risk Officer.
ii. | What are My Obligations Under this Policy? |
You may not buy or sell the securities of FTI Consulting (or any other publicly-traded company) when you are in possession of material, non-public information about the Company. Such information may be acquired through your association with FTI Consulting or your work for one of our clients. Insider trading rules apply both to securities purchases (to make a profit based on good news) and securities sales (to avoid a loss based on bad news). They apply regardless of how or from whom the material, non-public information has been obtained.
FTI Consultings Policy regarding insider trading can be summarized by these six cardinal rules:
| You may never trade in securities of FTI Consulting at any time that you possess inside information about our Company. |
[Amended and Restated Effective February 19, 2014]
3
| You may never trade in securities of any other public company at any time that you possess inside information about such public company that you acquired directly or indirectly through your association with FTI Consulting, or your work on a client engagement. |
| You may not provide any other person or entity with inside information regarding FTI Consulting (or any other public company)what is commonly referred to as tipping. |
| You may not trade in securities of any client during the pendency of an engagement in which you are providing services to such client, and may not buy or sell securities issued by a company which is the subject of a litigation proceeding or transaction engagement in which you are providing services, whether or not you are in the possession of inside information, without the prior written approval of FTI Consultings General Counsel and Chief Risk Officer. |
| You may not trade in any client securities, if you work for certain subsidiaries, business segments and practices that have adopted stricter policies relating to trading in client securities as a function of the business conducted by such subsidiary, segment or practice or because of local jurisdictional requirements, whether or not you are in the possession of material, non-public information. |
| In addition to the general prohibition on trading on the basis of material, non-public information, Restricted Employees may trade in securities of FTI Consulting only during prescribed trading windows, as described below. |
Restricted Employees include:
| Members of the FTI Consulting, Inc. Board of Directors. |
| Officers of FTI Consulting, Inc. holding the office of Vice President or higher. |
| Employees who are members of FTI Consultings Executive Committee. |
| Other employees or consultants designated by management who have access to a range of financial and other sensitive information about FTI Consulting, or who gain access to material, non-public information in connection with a specific project or transaction. |
The trading window for Restricted Employees begins immediately before the stock market opens on the third business day after the release of FTI Consultings quarterly and annual earnings, and ends after the stock market
[Amended and Restated Effective February 19, 2014]
4
closes on the last trading day prior to the 28th day of the last month of each fiscal quarter and fiscal year. (To determine the day earnings are released by our Company, if they are released before the market opens, use the actual date of release. If earnings are released after the market opens, use the following day.) The trading window is also open from the first business day after any public release of material information (other than financial information) and during any other period when not closed by FTI Consulting and Restricted Employees are not aware of material non-public information or that FTI Consulting expects to make a public release of material information in the near future. The Company may, on occasion, close the trading window at different times, or keep the trading window closed for a longer period. If you have any doubts, you should check with the Companys General Counsel and Chief Risk Officer before acting.
Non-Employee directors of FTI Consulting, Inc., officers and Restricted Employees (as defined below) must always obtain prior approval from FTI Consultings General Counsel and Chief Risk Officer before making any trade in the securities of FTI Consulting, Inc. The General Counsel and Chief Risk Officers decision should be kept confidential by the person who requested it. In addition, such individuals must report any trades in FTI Consulting securities no later than one day after such trade has been executed.
You may not convey or tip inside information to any other person. Unlawful tipping includes providing inside information to friends, family members or acquaintances under circumstances that suggest that you or they were trying to help them make a profit or avoid a loss. Even when providing such information to other FTI Consulting employees, make sure to only do so on a need-to-know basis in the course of performing your job.
Derivative securities and hedging activities may put your personal interests and objectives in conflict with the best interests of the Company and its stockholders. No executive officer and non-employee director may engage in derivative and hedging activities with respect to FTI Consulting, Inc. securities. Unless a non-executive officer, other employee, consultant or contractor has obtained the prior written consent of FTI Consultings Chief Executive Officer, such persons may not engage in derivative securities and hedging transactions with respect to FTI Consulting, Inc. securities. By way of example and not limitation, derivative transactions and hedging activities include:
| The purchase, sale and trading in options (including publicly-traded options), warrants, puts and calls or similar instruments involving or relating to FTI Consulting, Inc. securities; |
| engaging in derivative securities transactions involving or relating to FTI Consulting, Inc. securities; and |
| conducting hedging or monetization transactions involving or relating to FTI Consulting, Inc. securitiessuch as zero-cost collars and forward sale contractsthat allow for locking in a portion of the value of a persons shares, often in exchange for all or part of the potential for upside appreciation in those shares. |
[Amended and Restated Effective February 19, 2014]
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Anyone who wishes to request a waiver of these prohibitions must submit their request through the Companys General Counsel and Chief Risk Officer at least one week prior to executing any documents that relate to the proposed transaction. Please note that the Chief Executive Officer may deny any request for a waiver without explanation.
Likewise, no officer, non-employee director, employee, consultant or contractor may engage in a short sale or take an equivalent position in FTI Consulting, Inc. shares of common stock. A short sale is a sale of securities not owned by the seller, or if owned, not delivered against such sale within 20 days. Moreover, transactions in certain put and call options for the Companys securities may in some instances constitute a short sale. The U.S. securities laws also prohibit short sales by Section 16 Persons.
Furthermore, no executive officer and non-employee director may hold Company securities in a margin account or pledge (or hypothecate) as collateral any Company securities. No non-executive officer, other employee, consultant or contractor may hold FTI Consulting, Inc. securities in a margin account or pledge (or hypothecate) as collateral any FTI Consulting, Inc. securities, without the prior consent of the Compensation Committee of the Board of Directors of the Company. Margin securities may be sold without the customers consent if the customer fails to meet a margin call. Similarly, securities pledged (or hypothecated) as collateral for a loan may be sold in foreclosure if the borrower defaults on the loan. A margin sale or foreclosure sale may occur at a time when the pledgor is aware of material, non-public information or is otherwise not permitted to trade in FTI Consulting, Inc. securities.
Notwithstanding the above restrictions on trading in FTI Consulting, Inc. securities, the exercise of stock options for cash and bona fide gifts of FTI Consulting, Inc. securities are generally permitted at all times. However, the following guidelines should be observed:
| If you are an officer, non-employee director or Restricted Employee, you may make bona fide gifts of FTI Consulting, Inc. securities regardless of whether the trading window is open, so long as you obtain the prior approval of FTI Consultings General Counsel and Chief Risk Officer. |
| If the gift is to a charitable organization, neither you nor any of your immediate family members (including in-laws and anyone residing in your household) may be a trustee, director, officer or employee of that organization. |
| If the gift is to a family member, that person must agree not to sell the FTI Consulting securities except during an open trading window. |
[Amended and Restated Effective February 19, 2014]
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If you become aware of or have reason to believe that any of your colleagues have violated this Policy, U.S. securities laws or applicable laws of any other jurisdiction, the Company encourages you to promptly report your concerns to FTI Consultings General Counsel and Chief Risk Officer, to the extent not prohibited by local laws. Such reportable activities may include any trading in FTI Consulting securities during a closed trading window or the disclosure of material, non-public information. You will not be retaliated against for making a report in good faith (as noted in our Code of Ethics and Business Conduct, good faith means that you believe your report to be true and that you shared all of the information you had consistent with local laws).
iii. | What are the Reasons for Maintaining the Confidentiality of Information? |
We have a duty to protect the confidential information developed by or entrusted to us, and to ensure that FTI Consulting personnel do not receive improper benefits through the misuse of Company assets or client information which is material and has not been publicly disclosed. In addition, certain of our businesses and business units are required to maintain lists for each client specifying the names of employees and contractors who have access to confidential information relating to that client (insider lists). The personnel named on an insider list are prohibited from trading in the securities of such client.
Access to inside information should be restricted to those who require the information to carry out their job. In particular:
| Careful consideration should be given prior to making someone an insider and, where practical, the most senior member of the project team should always be consulted prior to making someone an insider. The number of insiders should always be kept to the practical minimum. |
| If possible, limit an insiders access to that part of the inside information which they need to know. |
| Insider employees are required to know about their legal and regulatory duties and must be aware of the sanctions of market abuse. |
| You must also ensure that any consultants and independent contractors have taken necessary measures to ensure that their own employees similarly understand and acknowledge the implications of the misuse or improper circulation of inside information. |
| FTI Consultings General Counsel and Chief Risk Officer must be informed immediately if inside information is disclosed to any person (internal or external) who is not authorized to receive such inside information. |
[Amended and Restated Effective February 19, 2014]
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If you have any questions as to whether you possess inside information or are named on any insider list, please contact FTI Consultings General Counsel and Chief Risk Officer.
iv. | What is the Penalty for Insider Trading? |
Trading on inside information is a crime. Penalties for insider trading could include steep fines, as well as prison time for the individuals involved. Those who trade on inside information must also return any profits made amongst other penalties. Under some circumstances, those who trade on inside information may be sued by private entities in addition to the government. Employers and supervisors are also at risk under U.S. federal law and may face substantial civil or criminal penalties if they fail to take preventive steps to control insider trading.
The SEC and the U.S. Department of Justice have committed large staffs, investigative techniques and other resources to the detection and prosecution of insider trading cases. Criminal prosecution and the imposition of fines and/or imprisonment is commonplace.
For these reasons, both you and FTI Consulting have a significant interest in ensuring that insider trading is strictly avoided.
v. | How Should Material Information be Safeguarded? |
Before material information relating to FTI Consulting or its business has been disclosed to the public, it must be kept confidential. We all have a duty to exercise the utmost care in protecting such information. To do this, it is important that we only discuss such information with persons who have a business need to know it. Particular care should be taken to ensure that communications are received by the appropriate authorized personnel only, such as those on an insider list or those persons externally who you know are already insiders. Further, you should confine discussions to as small a group as possible. Care should be taken about committing sensitive information to paper and such information should only be recorded or circulated to the extent that is really necessary. Remember to limit your conversations in public placessuch as elevators, restaurants and airplanesto matters that do not involve sensitive or confidential information. Take care to safeguard written materials and your computer, PDAs, smart phones and other technology. When electronically transmitting inside information, use encryption.
[Amended and Restated Effective February 19, 2014]
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We have a responsibility to ensure that Company confidences are protected to the maximum extent possible. Therefore, only specifically authorized personnel may release material information to the public or respond to inquiries from the media, analysts or others outside of our Company. If you have not been expressly authorized to provide information to those outside the Company, and you are contacted by the media or an analyst seeking information about FTI Consulting, Inc. or its subsidiaries or affiliates, you should refer the matter to one of the following persons:
| Chairman of the Board |
| Chief Executive Officer |
| President |
| Chief Financial Officer |
As part of FTI Consultings work for clients, we may find ourselves in a position where the client will delegate the dissemination of inside information to the Company. This is a very serious duty and all employees carrying out this function must ensure that they comply with the procedures set out below. You should always remember that it is the clients responsibility to decide whether or not to disclose inside information.
In certain circumstances the dissemination of inside information must be reported in advance to regulatory authorities. For example, in the U.S., the New York Stock Exchange requires the advance disclosure of certain material information relating to a listed company to the exchange. In other jurisdictions, such advance disclosure may be required by governmental regulators such as the Regulatory Information Service (RIS) in the UK, which requires that client inside information only be sent to third parties via the RIS and only after the Company has obtained the express written or e-mail consent of the client. The release of inside information relating to a client may only be made upon the verbal consent of the client, if you have the approval of the engagement manager and if the verbal consent is promptly confirmed in writing or by e-mail.
Employees should not provide inside information to journalists or others under an embargo that seeks to prevent them from using the clients inside information until it has been released to the RIS. By disclosing the information to third parties prior to an RIS announcement, there is a risk that control over the information has been lost. This approach may constitute selective disclosure and may be illegal.
[Amended and Restated Effective February 19, 2014]
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Exhibit 99.2
Anti-Corruption Policy | ||
Issued By: Ethics & Compliance | Policy No.: | |
Region: Global | Supersedes: Previous version issued 9/12/2012 | |
Segment: All Employees | Issue Date: February 19, 2014 | |
Policy Owner: Matt Pachman | Effective Date: February 19, 2014 | |
Policy Approver: Board of Directors |
Overview
FTI Consulting, Inc. (FTI or the Company) policy prohibits bribery in any form. It is FTIs policy to comply with the letter and the spirit of anti-corruption laws in the United States and every other jurisdiction in which we do business. FTIs Anti-Corruption Policy demonstrates and reflects our commitment to the highest prevailing international anti-corruption standards.
In particular, as a corporation domiciled in the United States, the Company is subject to the United States Foreign Corrupt Practices Act (the FCPA). The UK Bribery Act 2010 applies to FTIs operations in the UK and has broad extra-territorial effect. Finally, laws implementing the OECD Convention Against Corruption, the United Nations Convention Against Corruption, and additional laws in countries throughout the world govern the conduct of FTI employees in various jurisdictions. Virtually, all of these laws prohibit bribery of Government Officials. The UK Bribery Act, and various laws in many jurisdictions (including certain U.S. states) also criminalize bribery of private persons.
This Policy is applicable to the Company, its subsidiaries and affiliates worldwide. Where specific conduct may be permitted under this Policy but is prohibited by local law, FTI employees must comply with local law. Managers are responsible for ensuring that their teams comply with this Policy. Where additional guidance is needed, please contact the Chief Ethics and Compliance Officer.
All employees of the Company and its direct and indirect subsidiaries are subject to this Policy. As discussed more fully below, it also applies to third parties acting on the Companys behalf and for its benefit. You are expected to become familiar with and comply with this Policy, to participate in training, and to communicate the values underlying this policy in your interactions with colleagues and third parties.
The Company strictly prohibits engaging in or tolerating bribery or any other form of corruption. No employee will be penalized for failing to pay a bribe. If employees have any doubts or questions as to whether their conduct is permissible under governing law or this Policy, they should contact the Chief Ethics and Compliance Officer, or the FTI Consulting Integrity Helpline (specific contact information appears at the end of this Policy).
February 19, 2014
Summary of the Policy
A. | Public Bribery Prohibition of Bribery of Government Officials |
This Policy strictly prohibits the Company and its officers, directors, employees and agents from offering, promising or giving anything of value to a Government Official, directly or indirectly, with the intention of influencing him or her in his or her capacity as a Government Official to obtain or retain business or obtain or retain a business advantage.
This Policy prohibits an offer or promise of a bribe, even if the Government Official rejects the offer, or it fails to bring about the desired outcome.
1. | What is Anything of Value? |
Under our Policy the term anything of value is broadly defined to include both financial and other non-financial advantages. Things of value include, for example, gifts, entertainment, favors, services, loans and loan guarantees, the use of property or equipment, job offers, transportation, and the payment of expenses or debts.
Importantly, this Policy does not recognize any small payment exception for payments made with an intention to bribe. Specifically, this Policy prohibits speed, grease or facilitation payments, which include payments made solely to expedite or secure the performance of routine actions such as: (1). obtaining licenses, permits and other official documents to qualify to do business in a foreign country; (2) processing governmental papers, such as visas and work orders; (3) providing police protection, mail services and inspection of goods or of contract performance; (4) providing telephone service, utilities, loading or unloading cargo and protecting perishable goods from deteriorating; and (5) actions of a similar nature.
It may be permissible, in relation to Company business with a Government Official, to incur expenses in connection with the legitimate promotion or demonstration of the Companys services and products. Such expenses are discussed more fully below.
2. | Who is a Government Official? |
The term Government Official is broadly defined to include any individual who holds a legislative, administrative or judicial position of any kind, whether appointed or elected; who exercises a public function; or who is an official or agent of a public international organization (such as the United Nations, the World Bank or the International Monetary Fund). Government Official also includes any official of a political party, and any candidate for political office.
In addition, under our Policy, Government Official includes any executive, officer, agent or employee of a government-owned or government-controlled business (such as a state-owned bank or utility, a sovereign wealth fund, or a public university).
Finally, under our Policy, Government Official includes any person who is acting in an official capacity for the entities described above, including a private consultant who also holds a position with, or acts on behalf of, a government or with a public international organization, or with an enterprise owned or controlled by a government.
February 19, 2014
3. | What is an Improper Advantage? |
Giving or agreeing to give a Government Official a thing of value that could violate this Policy may arise in varied settings. Bribery concerns do not arise solely in the context of trying to win a contract or business. Governing law and our Policy prohibit payments to secure any business advantage. By way of example, improper payments or benefits may not be conveyed to a Government Official:
| to influence the award of a government contract; |
| to prevent some governmental action, such as the imposition of a tax or fine; |
| to obtain confidential information about business opportunities, bids or the activities of competitors; |
| to obtain a permit or license, other than to cover appropriate application fees; |
| to obtain relief or exemption from government controls or regulations of any kind; or |
| to affect the nature of regulations or the application of regulatory provisions. |
B. | Private Bribery: Prohibition of Bribery in the Private Sector |
This Policy strictly prohibits the Company and its officers, directors, employees and third party agents from offering, promising or giving anything of value to a private person, directly or indirectly, with the intention of inducing a person to improperly perform a relevant function or activity (such as his or her work) or to reward a person for having improperly performed a relevant function or activity.
This Policy prohibits an offer or promise of a bribe, even if the private person rejects the offer, or it fails to bring about the desired outcome.
It is permissible, in relation to Company business with private persons, to incur reasonable, proportionate and good faith expenses in connection with the promotion of the Companys services and products and in the provision of corporate hospitality. Such expenses are discussed more fully below.
C. | Solicitation, Extortion, Health and Safety |
This Policy prohibits bribery payments even where they have been requested or demanded by a Government Official or if the Government Official threatens adverse action against the Company unless a payment is made.
If a payment is made to protect an individuals health and safety, it must be immediately reported to the Chief Ethics and Compliance Officer and must be accurately recorded in the Companys books and records to reflect the amount and purpose of the payment. If at all practicable, contact should be made with the Chief Ethics and Compliance Officer before such a payment is made. If prior consultation is not practicable, the fact of payment and the circumstances should be reported as soon as possible thereafter.
D. | Conflicts of Interest and Kickbacks |
Conflicts of interest arise when a personal interest interferes or even appears to interfere, with the best interests of the Company. It is a duty for all employees to at all times act in the best interests of the Company. You are required to familiarize yourself with the Companys policies on conflicts of interest (see the Code of Ethics and Business Conduct).
February 19, 2014
A conflict of interest can develop into a bribery problem when an employee requests, agrees to receive or receives anything of value (whether financial or otherwise), in a manner that interferes with the employees judgment in performing his or her functions on behalf of the Company. Company policy strictly prohibits receiving bribes, kickbacks, or improper benefits.
E. | Books, Records and Accounting |
FTI is required to maintain books and accounting records of the Company so that they accurately reflect all transactions in reasonable detail. These record-keeping requirements apply to all payments, not merely those that would be material in the traditional financial sense.
Officers, directors, employees and third parties are prohibited from manipulating books or records in an effort to mask transactions, either by characterizing them in some oblique way, or by omitting them from the Companys books or records entirely. Accordingly, no undisclosed or unrecorded accounts may be maintained for any purpose.
F. | Penalties Are Severe |
Companies whose employees are found to have violated the law may face harsh penalties, including significant fines. In addition, such a company may be precluded from doing business with government entities in the US, Europe and elsewhere. Individuals who violate the law may be subject to imprisonment.
Violation of this Policy and/or relevant laws will result in discipline by the Company, up to and including termination of employment, as appropriate.
Meals, Entertainment, Travel, and Gifts
It is permissible under this Policy to incur certain expenses for a Government Official that are directly related to the promotion or demonstration of the Companys services and products. In addition, this Policy allows reasonable meal and entertainment expenses for private persons in the context of establishing and maintaining appropriate business relationships. As discussed more fully below, any such expenses must be reasonable and appropriate.
In all interactions both in the public and private sector hospitality and promotional expenses may not be used to exert improper influence. Thus, even reasonable expenses are prohibited if they are for the purpose of improperly influencing a business or regulatory decision, or if they are to reward a person for having improperly performed a relevant function or activity.
Finally, a benefit (even if considered reasonable under this policy) may not be conveyed if the recipient is not permitted to accept it; for example because the recipients company policy forbids it or it is prohibited under local law or regulation.
All promotional expenses must also be fully documented, supported by original receipts, properly approved, and submitted in accordance with the following procedures, and any other procedures governing expense authorization and approval policies and procedures.