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FTI CONSULTING INC - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) The following is a discussion and analysis of our consolidated financial condition, results of operations, liquidity and capital resources for each of the three years in the period ended December 31, 2013 and significant factors that could affect our prospective financial condition and results of operations. You should read this discussion together with our consolidated financial statements and notes included in "- Item 8. Financial Statements and Supplementary Data." Historical results and any discussion of prospective results may not indicate our future performance. Business Overview We are a leading global business advisory firm dedicated to helping organizations protect and enhance their enterprise value. We work closely with our clients to help them anticipate, understand, manage and overcome complex business matters arising from such factors as the economy, financial and credit markets, governmental regulation and legislation and litigation. We assist clients in addressing a broad range of business challenges, such as restructuring (including bankruptcy), financing and credit issues and indebtedness, interim business management, forensic accounting and litigation matters, international arbitrations, M&A, antitrust and competition matters, e-discovery, management and retrieval of electronically stored information, reputation management and strategic communications. We also provide services to help our clients take advantage of economic, regulatory, financial and other business opportunities. Our experienced teams of professionals include many individuals who are widely recognized as experts in their respective fields. We believe clients retain us because of our recognized expertise and capabilities in highly specialized areas as well as our reputation for satisfying client needs. We report financial results for the following five 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 and 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. As of January 1, 2013, the Company's financial results reflect a combination of the healthcare and life sciences focused personnel that were formerly included in the Corporate Finance/Restructuring and Forensic and Litigation Consulting segments, into a single integrated practice. The newly combined health solutions practice 45 -------------------------------------------------------------------------------- consists of over 200 professionals dedicated to serving this growth industry. In the first quarter of 2013, we modified our reportable segments to reflect the changes described above. The Company's health solutions practice is now aggregated in its entirety in the Forensic and Litigation Consulting reportable segment. Prior period Corporate Finance/Restructuring and Forensic and Litigation Consulting segment information has been reclassified to conform to the current period presentation. We derive substantially all of our revenues from providing professional services to both U.S. and global clients. Over the past several years the growth in our revenues and profitability has resulted from our ability to attract new and recurring engagements and the acquisitions we have completed. Most of our services are rendered under time-and-expense arrangements that obligate the client to pay us a fee for the hours that we incur at agreed upon rates. Under this arrangement, we typically bill our clients for reimbursable expenses, which may include the cost of producing our work product and other direct expenses that we incur on behalf of the client, such as travel costs. We also render services for which certain clients may be required to pay us a fixed fee or recurring retainer. These arrangements are generally cancellable at any time. Some of our engagements contain performance-based arrangements in which we earn a success fee when and if certain predefined outcomes occur. This type of success fee may supplement a time-and-expense or fixed-fee arrangement. Success fee revenues may cause variations in our revenues and operating results due to the timing of achieving the performance-based criteria. In our Technology segment, certain clients are also billed based on the amount of data stored on our electronic systems, the volume of information processed and the number of users licensing our Ringtail® software products for use or installation within their own environments. We license these 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. 46 -------------------------------------------------------------------------------- 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 We define Segment Operating Income as a segment's share of consolidated operating income. We define Total Segment Operating Income as the total of Segment Operating Income for all segments, which excludes unallocated corporate expenses. We use Segment Operating Income for the purpose of calculating Adjusted Segment EBITDA. We define Adjusted EBITDA as consolidated net income (loss) before income tax provision, other non-operating income (expense), depreciation, amortization of intangible assets, special charges, loss on early extinguishment of debt and goodwill impairment charges. We define Adjusted Segment EBITDA as a segment's share of consolidated operating income before depreciation, amortization of intangible assets, special charges and goodwill impairment charges. We define Total Adjusted Segment EBITDA as the total of Adjusted Segment EBITDA for all segments, which excludes unallocated corporate expenses. We use Adjusted Segment EBITDA to internally evaluate the financial performance of our segments because we believe it is a useful supplemental measure which reflects current core operating performance and provides an indicator of the segment's ability to generate cash. We also believe that these measures, when considered together with our GAAP financial results, provide management and investors with a more complete understanding of our operating results, including underlying trends, by excluding the effects of 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 (loss) and earnings per diluted share, respectively, excluding the impact of 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 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 (Loss). Reconciliations of GAAP to non-GAAP financial measures are included elsewhere in this filing. 47 -------------------------------------------------------------------------------- We define acquisition growth as the results of operations of acquired companies in the first twelve months following the effective date of an acquisition. Our definition of organic growth is the change in the results of operations excluding the impact of all such acquisitions. Full Year 2013 Executive Highlights Leadership Succession On December 16, 2013 the Company announced its Board of Directors had elected Steve Gunby as the next President and Chief Executive Officer ("CEO") of the Company. Mr. Gunby was elected to the positions of President and CEO of the Company and appointed as a director of the Company effective January 20, 2014, succeeding Jack B. Dunn IV, who left his positions as President and CEO and director after 21 years of service with the Company. The selection of Mr. Gunby culminates the Board's CEO succession process. The Board believes Mr. Gunby's extensive consulting industry experience, his understanding of the opportunities and challenges of a global consulting brand and his success in leading growth and profitability initiatives represent a strong combination of capability and track record from which to lead the Company. On December 13, 2013, the Board accepted Mr. Shaughnessy's resignation as a director, which was effective upon his retirement as Executive Chairman of the Board of the Company following the Board's December 17, 2013 meeting. The Board appointed Gerard E. Holthaus, previously the Presiding Director, to become non-executive Chairman of the Board effective December 17, 2013. Financial Highlights Year Ended December 31, 2013 2012 % Growth (dollar amounts in thousands, except per share amounts) Revenues $ 1,652,432 $ 1,576,871 4.8 % Special charges (1) $ 38,414 $ 29,557 30.0 % Goodwill impairment charge (1) $ 83,752 $ 110,387 -24.1 % Adjusted EBITDA $ 259,100 $ 250,991 3.2 % Net income (loss) $ (10,594 ) $ (36,986 ) 71.4 % Earnings (loss) per common share - diluted $ (0.27 ) $ (0.92 ) 70.7 % Adjusted earnings per common share - diluted $ 2.39 $ 2.30 3.9 % Net cash provided by operating activities $ 193,271 $ 120,188 60.8 % Total number of employees at December 31, 4,207 3,915 7.5 % (1) Excluded from non-GAAP measures. Revenues Revenues for the year ended December 31, 2013 increased $75.6 million, or 4.8%, to $1,652.4 million, compared to $1,576.9 million in the prior year period. Acquisitions contributed $48.2 million, and represented 3.1% of the year-over-year growth. Revenues grew organically primarily due to strength in the Company's Economic Consulting segment's antitrust litigation and financial economics practices in the North America and EMEA regions. The Forensic and Litigation Consulting segment also contributed to organic growth, primarily from demand for the Company's health solutions services. Additionally, the Technology segment experienced increased demand for its services offering. These revenue increases were partially offset by continued weak restructuring and bankruptcy and capital markets activity, which adversely impacted the Company's Corporate Finance/Restructuring and Strategic Communications segments, respectively. 48-------------------------------------------------------------------------------- Special Charges Special charges for the years ended December 31, 2013 and 2012 were $38.4 million and $29.6 million, respectively. The non-cash portions of the special charges for the years ended December 31, 2013 and 2012 were $14.1 million and $5.0 million, respectively. The 2013 special charges reflect certain executive leadership transition costs 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 EMEA region. The 2013 special charges consisted of: • $23.7 million of contractual post-employment severance and transition services, equity award and retention bonus expense acceleration primarily related to the transition of the Company's Executive Chairman and the Company's President and Chief Executive Officer. In addition, we incurred $3.9 million of 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. $10.9 million of these charges are non-cash; • $10.2 million of severance costs and other contractual employee related costs, including loan forgiveness and accelerated recognition of compensation cost of share-based awards, associated with the reduction in workforce of 45 employee. $3.2 million of these charges are non-cash; and • $0.6 million of costs to consolidate leased office space within one office location to adjust prior year special charges for changes to sublease terms and employee termination costs. Goodwill Impairment Charge In the third quarter of 2013, in addition to reduced levels of M&A activity, our Strategic Communications segment experienced pricing pressure for certain discretionary communications services, including initial public offering support services where there is volume but also increasing competition. These factors compressed segment margins and contributed to a change in the Company's near-term outlook for this segment. This was considered an interim impairment indicator for the Strategic Communications segment at the Strategic Communications reporting unit level. As a result, we performed an interim impairment analysis with respect to the carrying value of goodwill in our Strategic Communications reporting unit in connection with the preparation of our financial statements for the quarter ended September 30, 2013. Based on this assessment, the Company concluded the implied fair value of the Strategic Communications reporting unit was below its carrying value resulting in an $83.8 million goodwill impairment charge in the third quarter. The impairment charge was non-cash in nature and did not affect the Company's current liquidity, nor did it impact the debt covenants under the Company's existing credit facility and the Indentures for the 2020 and 2022 Notes. Adjusted EBITDA Adjusted EBITDA for the year ended December 31, 2013 increased $8.1 million, or 3.2% to $259.1 million, or 15.7% of revenues, compared to $251.0 million or 15.9% of revenues, in the prior year period. Adjusted EBITDA included gains in 2013 of $13.6 million related to expectations that the Company would pay reduced amounts of contingent consideration for several of its acquisitions in the Asia Pacific region. Similarly, the Company recorded a gain of $5.2 million in 2012. Excluding these amounts, the Adjusted EBITDA was stable at $245.5 million in 2013 vs $245.8 million in 2012 as revenue increases in the Company's Economics Consulting, Forensic and Litigation Consulting and Technology segments as described above, were offset by under-utilization in the Company's bankruptcy and restructuring practices in its Corporate Finance/Restructuring segment and lower demand from weak capital markets in the Company's Strategic Communications segment. Net Income (Loss) Net loss for the year ended December 31, 2013 decreased $26.4 million to ($10.6) million, compared to ($37.0) million in the prior year period. The current period included a goodwill impairment charge and special charges of $83.8 million and $38.4 million, respectively, as compared to $110.4 million and $29.6 million in the prior year period. Net loss was also impacted by the operating results described above. 49 -------------------------------------------------------------------------------- Earnings (loss) per share and Adjusted Earnings Per Share Loss per share for the year ended December 31, 2013 decreased $0.65 to ($0.27) compared to ($0.92) in the prior year period. The decrease of the loss per share of $0.65 was primarily related to a decrease in the impact of the goodwill impairment charge of $0.60 and a decrease in the loss on early extinguishment of debt of $0.07, partially offset by an increase in special charges of $0.12. Earnings (loss) per share were also impacted by the operating results described above. Adjusted earnings per diluted share, which excludes the impact of the goodwill impairment charge and special charges, increased $0.09 to $2.39, compared to $2.30 in the prior year period. Cash Cash balances increased by $49.0 million to $205.8 million for the year ended December 31, 2012 due to increased cash flow from operating activities. Cash flow from operations increased $73.1 million to $193.3 million as compared to $120.2 million for the same prior year period primarily as a result of lower employee bonus payments and income tax payments. Cash collections were also slightly higher compared to the prior year as a result of increased revenues in the quarter ended December 31, 2013 compared to the same prior year period, offset by the impact of a slower collection cycle as indicated by an increase in days sales outstanding (DSO). 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. DSO was 97 days at December 31, 2013 compared to 90 days at December 31, 2012. The 7 day increase in DSO was largely driven by a shift in both service and geographic mix. Our receivables grew in our Corporate Finance/Restructuring business in the Asia Pacific region, relative to growth in our other segments and regions. This growth was primarily a result of the acquisition of the corporate finance advisory and restructuring businesses in Australia, where billing and collections are subject to lengthy regulatory procedures. Headcount Billable headcount increased by 231 professionals to 3,224 primarily due to acquisition growth, especially in the Corporate Finance restructuring business in our Asia Pacific region, as outlined below. Corporate Forensic and Finance/ Litigation Economic Strategic Billiable Headcount Restructuring Consulting Consulting Technology Communications Total December 31, 2012 697 952 474 277 593 2,993 Terminations related to special charge (25 ) (17 ) - - - (42 ) Acquisitions 72 49 6 - 8 135 Net other headcount additions (reductions) (7 ) 77 50 29 (11 ) 138 December 31, 2013 737 1,061 530 306 590 3,224 Other strategic activities Share repurchase In June 2012, our Board of Directors authorized the 2012 Repurchase Program. During the year ended December 31, 2013, we repurchased and retired 1,956,900 shares of our common stock for an average price per share of $36.35, at a cost of $71.1 million, of which $66.7 million was paid at December 31, 2013. $4.4 million was accrued and included in "Accounts payable, accrued expenses and other" on the Consolidated Balance 50-------------------------------------------------------------------------------- Sheets. At December 31, 2013, a balance of approximately $128.8 million remained available under the 2012 Repurchase Program. Acquisitions In fiscal 2013, the Company invested $51.0 million on six acquisitions. Each of these acquisitions enhanced the Company's practice offerings, geographic footprint or industry expertise. In Corporate Finance/Restructuring, the Company acquired Taylor Woodings, an Australian specialist corporate advisory firm with offices in Sydney, Melbourne, Perth and Brisbane on April 4, 2013. This acquisition expanded the geographic footprint and service offerings of FTI Consulting in Australia. In Forensic and Litigation Consulting, the Company acquired Alliance on February 7, 2013. Alliance provides claims consulting, CPM scheduling, quantity surveying and project controls services to all sectors of the construction industry. The Company also acquired Distinct on November 4, 2013. Distinct provides insurance management consulting services with offices in Dublin, London and New York. The Company also acquired RSI, an independent provider of solutions to operational risks that organizations face with an office in New York on December 18, 2013. In Economic Consulting, the Company acquired Princeton Economic Group, an economic consulting firm based in Princeton, NJ on May 1, 2013. In Strategic Communications, the Company acquired C2 Group, a bipartisan government relations and lobbying firm based in Washington, D.C. on March 19, 2013. Critical Accounting Policies General. Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which we have prepared in accordance with accounting principles generally accepted in the US. 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. We evaluate our estimates, including those related to allowance for doubtful accounts and unbilled services, goodwill, share based compensation, income taxes and contingencies on an ongoing basis. We base our estimates on current facts and circumstances, historical experience and on various other assumptions that we believe are reasonable. 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. We believe that the following critical accounting policies reflect our more significant judgments and estimates used in the preparation of our consolidated financial statements. Revenue Recognition.Revenue is recognized when persuasive evidence of an arrangement exists, the related services are provided, the price is fixed or determinable and collectability is reasonably assured. If at the outset of an arrangement we determine that the arrangement fee is not fixed or determinable, revenue is deferred until all criteria for recognizing revenue are met. Provisions are recorded for the estimated realization adjustments on all engagements, including engagements for which fees are subject to review by the bankruptcy courts and other regulatory institutions. If the client is in bankruptcy, fees for our services may be subject to approval by the court. In some cases, a portion of the fees to be paid to us by a client is required by a court to be held until completion of our work and final fee settlements have been negotiated. We make a determination whether to record all or a portion of such holdback as revenue prior to collection on a case-by-case basis. We generate the majority of our revenues from providing professional services under four types of billing arrangements: time-and-expense, fixed-fee, performance-based and unit-based. 51 -------------------------------------------------------------------------------- Time-and-expense billing arrangements require the client to pay based on the number of hours worked by our revenue-generating professionals at contractually agreed-upon rates. We recognize revenues for our professional services rendered under time-and-expense engagements based on the hours incurred at agreed-upon rates as work is performed. In some cases, time-and-expense arrangements are subject to a cap, in which case we assess work performed on a periodic basis to ensure that the cap has not been exceeded. In fixed-fee billing arrangements, we agree to a pre-established fee in exchange for a pre-determined set of professional services. Generally, the client agrees to pay a fixed fee every month over the specified contract term. These contracts are for varying periods and generally permit the client to cancel the contract before the end of the term. We recognize revenues for our professional services rendered under these fixed-fee billing arrangements monthly over the specified contract term or, in certain cases, revenue is recognized on the proportional performance method of accounting based on the ratio of labor hours incurred to estimated total labor hours, which we consider to be the best available indicator of the pattern and timing in which such contract obligations are fulfilled. In performance-based or contingent billing arrangements, fees are tied to the attainment of contractually defined objectives. Often this type of arrangement supplements a time-and-expense or fixed-fee engagement, where payment of a performance-based fee is deferred until the conclusion of the matter or upon the achievement of performance-based criteria. We do not recognize revenues under performance-based billing arrangements until all related performance criteria are met and collection of the fee is reasonably assured. In our Technology segment, unit-based revenues are based on either the amount of data stored or processed, the number of concurrent users accessing the information, or the number of pages or images processed for a client. We recognize revenues for our professional services rendered under unit-based engagements as the services are provided based on agreed-upon rates. We also generate certain revenue from software licenses and maintenance. We have vendor-specific objective evidence of fair value for support and maintenance separate from software for the majority of our products. Accordingly, when licenses of certain offerings are included in an arrangement with support and maintenance, we recognize the license revenue upon delivery of the license and recognize the support and maintenance revenue over the term of the maintenance service period. Substantially all of our software license agreements do not include any acceptance provisions. If an arrangement allows for customer acceptance of the software, we defer revenue until the earlier of customer acceptance or when the acceptance provisions lapse. Revenues from hosting fees are recognized ratably over the term of the hosting agreement. We have certain arrangements with clients in which we provide multiple elements of services under one engagement contract. Revenues under these types of arrangements are accounted for in accordance ASC 605-25, Multiple-Element Arrangements, and recognized pursuant to the criteria described above. Some clients pay us retainers before we begin work for them. We hold retainers on deposit until we have completed the work. We generally apply these retainers to final billings and refund any excess over the final amount billed to clients, as appropriate. Reimbursable expenses, including those relating to travel, out-of pocket expenses, outside consultants and other similar costs, are generally included in revenues, and an equivalent amount of reimbursable expenses is included in costs of services in the period in which the expense is incurred. Revenues recognized, but not yet billed to clients, have been recorded as "Unbilled receivables" in the Consolidated Balance Sheets. Allowance for Doubtful Accounts and Unbilled Services. We maintain an allowance for doubtful accounts and unbilled services for estimated losses resulting from disputes that affect our ability to fully collect our billed accounts receivable, potential fee reductions negotiated by clients or imposed by bankruptcy courts as well as the inability of clients to pay our fees. Even if a bankruptcy court approves our services, the court has the discretion to require us to refund all or a portion of our fees due to the outcome of the case or a variety of other factors. We estimate the allowance for all receivable risks by reviewing the status of each matter and recording reserves based 52 -------------------------------------------------------------------------------- on our experience and knowledge of the particular client and historical collection patterns. However, our actual experience may vary significantly from our estimates. If the financial condition of our clients were to deteriorate, resulting in their inability or unwillingness to pay our fees, or bankruptcy courts require us to refund certain fees, we may need to record additional allowances or write-offs in future periods. This risk related to a client's inability to pay is mitigated to the extent that we may receive retainers from some of our clients prior to performing 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 an 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 later discover that collectability is not reasonably assured. These adjustments are recorded to "Selling, general and administrative expense" on the Consolidated Statements of Comprehensive Income (Loss), and totaled $13.3 million, $14.2 million, and $12.6 million for the years ended December 31, 2013, 2012 and 2011, respectively. Goodwill and Other Intangible Assets.Goodwill represents the purchase price of acquired businesses in excess of the fair market value of net assets acquired. Other intangible assets include trade names, customer relationships, non-competition agreements and software. We test our goodwill and other indefinite-lived intangible assets for impairment annually as of the first day of the fourth quarter or whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. Factors we consider important that could trigger an interim impairment review include, but are not limited to, the following: • significant underperformance relative to expected historical or projected future operating results; • a significant change in the manner of our use of the acquired asset or the strategy for our overall business; • a significant market decline related to negative industry or economic trends; and/or • our market capitalization relative to net carrying value. We assess our goodwill for impairment using a fair value approach at the reporting unit level. The goodwill impairment test is a two-step process, if necessary. The provisions for the accounting standard of goodwill provide an entity with the option to assess qualitative factors to determine whether the existence of events or circumstances leads to the determination that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount. This qualitative assessment is referred to as a "step zero" approach. If, based on the review of the qualitative factors, an entity determines it is not more-likely-than-not that the fair value of a reporting unit is less than its carrying value, the entity may skip the two-step impairment test required by prior accounting guidance. If an entity determines otherwise, Step 1 of the two-step impairment test is required. Step 1 involves determining whether the estimated fair value of the reporting units exceeds the respective carrying value. If the fair value exceeds the carrying value, goodwill of that reporting unit is not impaired. However, if the carrying value exceeds the fair value of the reporting unit, goodwill may be impaired and additional analysis is required. Step 2 of the goodwill impairment test compares the implied fair value of a reporting unit's goodwill to its carrying value. The implied fair value of goodwill is derived by performing a hypothetical purchase price allocation for the reporting unit as of the measurement date, allocating the reporting unit's estimated fair value to its net assets and identifiable intangible assets. The residual amount from performing this allocation represents the implied fair value of goodwill. To the extent this amount is below the carrying value of goodwill, an impairment charge is recorded. In performing Step 1 of the goodwill impairment test, we compare the carrying amount of our reporting units to their estimated fair values. When available and as appropriate, we use market multiples derived from a set of competitors with comparable market characteristics and/or guideline transactions to establish the fair value (market approaches) for a particular reporting unit. We also estimate fair value using a combination of the market approaches and discounted cash flows (an income approach), using appropriate weighting factors. 53 -------------------------------------------------------------------------------- The cash flows employed in the income approach are based on our most recent budgets, forecasts and business plans, as well as various growth rate assumptions for years beyond the current business plan period. In the income approach, the cash flows were discounted using an estimated WACC based on our assessment of the risk inherent in the future revenue streams and cash flows and our WACC. The WACC is comprised of (1) a risk free rate of return, (2) an equity risk premium that is based on the rate of return on equity of publicly traded companies with business characteristics comparable to our reporting units, (3) the current after-tax market rate of return on debt of companies with business characteristics similar to our reporting units, each weighted by the relative market value percentages of our equity and debt, and (4) an appropriate size premium. In the market approach, we utilize market multiples derived from comparable guideline companies and comparable market transactions to the extent available. These valuations are based on estimates and assumptions including projected future cash flows and the determination of appropriate market comparables and determination of whether a premium or discount should be applied to such comparables. The process of evaluating the potential impairment of goodwill is highly subjective and requires significant judgment and estimates, as our businesses operate in a number of markets and geographical regions. The assumptions utilized in the evaluation of the impairment of goodwill under the market approach include the selection of comparable or "guideline" companies, which are subject to change based on the economic characteristics of our reporting units and the selection of reference transactions, if any, for which a fair value impact may be assessed based on market prices realized in an actual transaction. The assumptions utilized in the evaluation of the impairment of goodwill under the income approach include revenue growth and EBITDA (earnings before interest expense, income taxes, depreciation and amortization), tax rates, capital expenditures, weighted average cost of capital (WACC) and related discount rates and expected long-term growth rates. The assumptions which have the most significant effect on our valuations derived using the income approach are: (1) the expected long-term growth rate of our reporting units' cash flows and (2) the discount rate. 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. In the third quarter of 2013, in addition to reduced levels of M&A activity, our Strategic Communications segment experienced pricing pressure for certain discretionary communications services, including initial public offering support services where there is volume but also increasing competition. These factors compressed segment margins and contributed to a change in the Company's near-term outlook for this segment. This was considered an interim impairment indicator for the Strategic Communications segment at the Strategic Communications reporting unit level. As a result, we performed an interim impairment analysis with respect to the carrying value of goodwill in our Strategic Communications reporting unit in connection with the preparation of our financial statements for the quarter ended September 30, 2013. The results of the Step 1 goodwill impairment analysis indicated that the estimated fair value of our Strategic Communications reporting unit was less than its carrying value; therefore we applied Step 2 of the goodwill impairment test. The results of Step 2 indicated that the carrying values of the goodwill associated with the Strategic Communications reporting unit exceeded its implied fair value, resulting in a $83.8 million non-deductible goodwill impairment charge which is recorded as a separate line item within operating income (loss) within the Consolidated Statements of Comprehensive Income (Loss). The impairment charge was non-cash in nature and did not affect the Company's current liquidity, cash flows, borrowing capability or operations; nor did it impact the debt covenants under the Company's existing credit facility and the Indentures for the 2020 and 2022 Notes. If our long-term future growth rates and associated cash flows were to decline from current estimates, the Strategic Communications reporting unit could potentially experience future impairment charges. For the 2013 annual goodwill impairment test performed as of the Company's measurement date of October 1, 2013, we utilized the quantitative tests described above for our other reporting units. The results of the Step 1 54 -------------------------------------------------------------------------------- goodwill impairment analysis indicated that the estimated fair values of our other reporting units exceeded their respective carrying values and no further impairment testing was required. Each other reporting unit, with the exception of our Corporate Finance/Restructuring reporting unit, had a fair value which significantly exceeded its carrying value. The Corporate Finance/Restructuring reporting unit's fair value has declined recently as a result of the reduced demand and utilization in the restructuring practice. The estimated fair value is highly dependent on assumptions related to the future cash flow generation of this business. Significant reductions in our current estimates of cash flows for this reporting unit could materially affect the results of our reviews for impairment of goodwill in the future. We evaluate the reasonableness of the fair value calculations of our reporting units by reconciling the total of the fair values of all of our reporting units to our total market capitalization, taking into account a reasonable control premium for our industry. 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 or market conditions significantly deteriorate, we may be required to record goodwill impairment charges in future periods, whether in connection with our next annual impairment test or prior to that, 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. Intangible assets with definite lives are amortized over their estimated useful lives and reviewed for impairment whenever events or changes in circumstances indicate an asset's carrying value may not be recoverable. We amortize our acquired definite-lived intangible assets on a straight-line basis over periods ranging from 1 to 15 years. Business Combinations. For business combinations consummated on or after January 1, 2009, accounting principles require that identifiable assets acquired, liabilities assumed and any non-controlling interest in the acquiree be recognized and measured at fair value as of the acquisition date. Fair value measurements related to contingent consideration obligations require use of estimates and assumptions, including estimates of future cash flows adjusted for the expected timing of each payment. These obligations are classified as liabilities and are remeasured at fair value at each reporting period. Accretion expense is recorded to adjust the discounted value of acquisition contingent consideration liabilities to their present value. Any remeasurement gain or loss resulting from a change in the obligation as a result of changes in expected performance and the accretion expense related to the increase in the net present value of the contingent liability are included in "Acquisition-related contingent consideration" on our Consolidated Statements of Comprehensive Income (Loss).The remeasurement process requires significant management judgment regarding future performance of the assets acquired and could impact our financial results as those estimates change over time. For business combinations consummated prior to January 1, 2009, we record contingent consideration when the actual liability is probable. Share-Based Compensation. We recognize share-based compensation using a fair value based recognition method. Share-based compensation cost is estimated at the grant date based on the fair value of the award and is recognized as expense over the requisite service period or performance period of the award. The amount of share-based compensation expense recognized at any date must at least equal the portion of grant date value of the award that is vested at that date. We use the Black-Scholes pricing model to determine the fair value of stock options on the dates of grant. The Black-Scholes pricing model requires various assumptions, including volatility and expected term, which are based on our historical experience. We also make assumptions regarding the risk-free interest rate and the expected dividend yield. The risk-free interest rate is based on the U.S. Treasury interest rate whose term is consistent with the expected term of the share-based award. The dividend yield on our common stock is assumed to be zero since we do not pay dividends and have no current plans to do so in the future. 55 -------------------------------------------------------------------------------- Restricted stock is measured based on the fair market values of the underlying stock on the dates of grant. Awards with performance-based vesting conditions require the achievement of specific financial targets at the end of the specified performance period and the employee's continued employment. We recognize the estimated fair value of performance-based awards as share-based compensation expense over the performance period. We consider each performance period separately, based upon our determination of whether it is probable that the performance target will be achieved. At each reporting period, we reassess the probability of achieving the performance targets. If a performance target is not met, no compensation cost is ultimately recognized against that target, and, to the extent previously recognized, compensation expense is reversed. For all our share-based awards, we estimate the expected forfeiture rate and recognize expense only for those shares expected to vest. We estimate the forfeiture rate based on historical experience. Groups of share-based award holders that have similar historical behavior with regard to option exercise timing and forfeiture rates are considered separately for valuation and attribution purposes. Forfeitures are estimated at the time an award is granted and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Income Taxes. Our income tax provision consists principally of federal, state and international income taxes. We generate income in a significant number of states located throughout the U.S., as well as foreign countries in which we conduct business. Our effective income tax rate may fluctuate due to changes in the mix of earnings between higher and lower state or country tax jurisdictions and the impact of non-deductible expenses. Additionally, we record deferred tax assets and liabilities using the asset and liability method of accounting, which requires us to measure these assets and liabilities using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance is recognized if, based on the weight of available evidence, it is more-likely-than-not that some portion, or all, of the deferred tax asset will not be realized. In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative evidence, including scheduled reversals of temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. The evaluation of the need for a valuation allowance requires management judgment and could impact our financial results and effective tax rate. Significant New Accounting Pronouncements In March 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 2013-05, Foreign Currency Matters (Topic 830): Parent's Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity ("ASU 2013-05"). ASU 2013-05 updates accounting guidance related to the application of consolidation guidance and foreign currency matters, and resolves the diversity in practice about what guidance applies to the release of the cumulative translation adjustment into net income. ASU 2013-05 requires that the entire amount of a cumulative translation adjustment related to an entity's investment in a foreign entity should be released when there has been a: (i) sale of a subsidiary or group of net assets within a foreign entity and the sale represents a substantially complete liquidation of the investment in the foreign entity, (ii) loss of a controlling financial interest in an investment in a foreign entity, and (iii) step acquisition for a foreign entity. This guidance is effective for interim and annual periods beginning after December 15, 2013. This ASU would impact the Company's consolidated results of operations and financial condition only in the instance of an event or transaction as described above. In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The provisions of the rule require an unrecognized tax benefit to be presented as a reduction to a deferred tax asset in the financial statements for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, with certain exceptions. This update is effective for annual periods, and interim periods within those years, beginning after December 15, 2013, with early adoption permitted. Retrospective application is also permitted. The adoption of this ASU would not have an impact on the Company's consolidated financial position or results of operations. 56-------------------------------------------------------------------------------- RESULTS OF OPERATIONS Segment and Consolidated Operating Results: Year Ended December 31, 2013 2012 2011 (in thousands, except per share amounts) Revenues Corporate Finance/Restructuring $ 382,526 $ 394,719 $ 364,409 Forensic and Litigation Consulting 433,632 407,586 428,730 Economic Consulting 447,366 391,622 353,981 Technology 202,663 195,194 218,738 Strategic Communications 186,245 187,750 200,910 Total revenues $ 1,652,432 $ 1,576,871 $ 1,566,768 Operating income (loss) Corporate Finance/Restructuring $ 58,594 $ 80,970 $ 66,591 Forensic and Litigation Consulting 68,211 45,809 74,831 Economic Consulting 86,714 71,992 60,890 Technology 38,038 33,642 57,917 Strategic Communications (72,129 ) (97,298 ) 19,066 Segment operating income 179,428 135,115 279,295 Unallocated corporate expenses (97,989 ) (76,079 ) (73,848 ) Operating income 81,439 59,036 205,447 Other income (expense) Interest income and other 1,748 5,659 6,304 Interest expense (51,376 ) (56,731 ) (58,624 ) Loss on early extinguishment of debt - (4,850 ) - (49,628 ) (55,922 ) (52,320 ) Income before income tax provision 31,811 3,114 153,127 Income tax provision 42,405 40,100 49,224 Net income (loss) $ (10,594 ) $ (36,986 ) $ 103,903 Earnings (loss) per common share - basic $ (0.27 ) $ (0.92 ) $ 2.53 Earnings (loss) per common share - diluted $ (0.27 ) $ (0.92 ) $ 2.39 Reconciliation of Net Income (Loss) to Adjusted EBITDA: Year Ended December 31, 2013 2012 2011 (in thousands) Net income (loss) $ (10,594 ) $ (36,986 ) $ 103,903 Add back: Income tax provision 42,405 40,100 49,224 Other income (expense), net 49,628 51,072 52,320 Depreciation and amortization 32,541 29,604 28,582 Amortization of other intangible assets 22,954 22,407 22,371 Special charges 38,414 29,557 15,212 Loss on early extinguishment of debt - 4,850 - Goodwill impairment charge 83,752 110,387 - Adjusted EBITDA $ 259,100 $ 250,991 $ 271,612 57 -------------------------------------------------------------------------------- Reconciliation of Net Income (Loss) and Earnings (Loss) Per Share to Adjusted Net Income and Adjusted Earnings Per Share: Year Ended December 31, 2013 2012 2011 Net income (loss) $ (10,594 ) $ (36,986 ) $ 103,903 Add back: Special charges, net of tax (1) 23,267 19,115 9,285 Goodwill impairment charge (2) 83,752 110,387 - Loss on early extinguishment of debt, net of tax (3) - 2,910 - Adjusted Net Income $ 96,425 $ 95,426 $ 113,188 Earnings (loss) per common share - diluted $ (0.27 ) $ (0.92 ) 2.39 Add back: Special charges, net of tax (1) 0.59 0.47 0.21 Goodwill impairment charge (2) 2.14 2.74 - Loss on early extinguishment of debt, net of tax (3) - 0.07 - Impact of denominator for diluted adjusted earnings per common share (4) (0.07 ) (0.06 ) - Adjusted earnings per common share - diluted $ 2.39 $ 2.30 $ 2.60 Weighted average number of common shares outstanding - diluted (4) 40,421 41,578 43,473 (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 rates for the adjustments related to special charges for the years ended December 31, 2013, 2012 and 2011 were 39.4%, 35.3% and 39.0%, respectively. The tax expense related to the adjustments related to special charges for the years ended December 31, 2013, 2012 and 2011 were $15.1 million or $0.39 impact on diluted earnings per share, $10.4 million or $0.26 impact on diluted earnings per share, and $5.9 million or $0.14 impact on diluted earnings per share, respectively. (2) The goodwill impairment charge is non-deductible for income tax purposes and resulted in no tax benefit for the years ended December 31, 2013 and 2012. (3) 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 adjustment for the year ended December 31, 2012 was 40.0%. The tax expense related to the adjustment for the year ended December 31, 2012 was $1.9 million or $0.05 impact on diluted earnings per share. There was no loss on early extinguishment of debt in either of the years ended December 31, 2013 or December 31, 2011. (4) For the years ended December 31, 2013 and 2012, the Company reported a net loss. For the period, the basic weighted average common shares outstanding equals the diluted weighted average common shares outstanding for purposes of calculating U.S. GAAP earnings per share because potentially dilutive securities would be antidilutive. For non-GAAP purposes, the per share and share amounts presented herein reflect the impact of the inclusion of share-based awards and convertible notes that are considered dilutive based on the impact of the add backs included in Adjusted Net Income above.Year Ended December 31, 2013 compared to December 31, 2012 Revenues and Operating income See "Segment Results" for an expanded discussion of Revenue and Adjusted Segment EBITDA. 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 certain executive leadership transition costs and costs related to actions we took to realign our workforce to address current business demands and global macro-economic conditions impacting our Corporate Finance/Restructuring and Forensic and Litigation Consulting segments, and to reduce certain corporate overhead within our EMEA region. The special charges consisted of: • $23.7 million of contractual post-employment severance and transition services, equity award and retention bonus expense acceleration primarily related to the transition of the Company's 58 -------------------------------------------------------------------------------- Executive Chairman and the Company's President and Chief Executive Officer. In addition, we incurred $3.9 million of 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. $10.9 million of these charges are non-cash; • $10.2 million of severance costs and other contractual employee related costs, including loan forgiveness and accelerated recognition of compensation cost of share-based awards, associated with the reduction in workforce of 45 employees. $3.2 million of these charges are non-cash; and • $0.6 million of costs to consolidate leased office space within one office location and to adjust prior year special charges for changes to sublease terms and employee termination costs. During the year ended December 31, 2012, we recorded special charges of $29.6 million, of which $5.0 million was non-cash. The charges reflect actions we took to realign our workforce to address current business demands and global macro-economic conditions impacting our Forensic and Litigation Consulting, Strategic Communications and Technology segments, to address certain targeted practices within our Corporate Finance/Restructuring and Economic Consulting segments, and to reduce excess real estate capacity. The total cash outflow associated with the 2012 and 2013 special charges is expected to be $48.5 million, of which $22.4 million has been paid as of December 31, 2013. $9.5 million is expected to be paid in 2014, $5.0 million is expected to be paid in 2015, $3.0 million is expected to be paid in 2016, and the remaining balance of $8.6 million will be paid from 2017 to 2025. A liability for the current and noncurrent portions of the amounts has been included in "Accounts payable, accrued expenses and other" and "Other liabilities," respectively, on the Consolidated Balance Sheets. The following table details the special charges by segment and the decrease in total headcount: 2013 2012 Special Special Charges Headcount Charges Headcount (dollars in thousands) (dollars in thousands) Corporate Finance/Restructuring $ 10,274 25 $ 11,332 4 Forensic and Litigation Consulting $ 2,111 17 $ 8,276 43 Economic Consulting 11 - 991 8 Technology 16 - 3,114 42 Strategic Communications 66 - 4,712 15 12,478 42 28,425 112 Unallocated Corporate 25,936 3 1,132 4 Total $ 38,414 45 $ 29,557 116 Unallocated corporate expenses Unallocated corporate expenses increased $21.9 million, or 28.8%, to $98.0 million for 2013 from $76.1 million for 2012. Excluding the impact of special charges of $25.9 million recorded in 2013 and $1.1 million recorded in 2012, unallocated corporate expenses decreased $2.9 million in 2013, or 3.9%. The decrease was primarily due to lower spending on core marketing and lower costs related to strategic planning activities when compared to the prior year. The decrease was partially offset by executive search fees incurred in 2013 as part of our leadership transition. Interest income and other Interest income and other, which includes foreign currency transaction gains and losses, decreased by $4.0 million, or 70.2%, to $1.7 million for 2013 from $5.7 million for 2012. The decrease is primarily due to a decrease in interest income and net foreign currency transaction losses in the period ended December 31, 2013 as 59 -------------------------------------------------------------------------------- compared to net gains in the same prior period. Transaction gains and losses, both realized and unrealized, relate to the remeasurement or settlement of monetary assets and liabilities that are denominated in a currency other than an entity's functional currency. These monetary assets and liabilities include current intercompany receivables and payables. The foreign exchange losses in the year ended December 31, 2013 were primarily due to the volatility of the British pound relative to the US dollar. In addition, the strengthening of the US dollar and Hong Kong dollar against the Australian dollar also resulted in losses during the year. Interest expense Interest expense decreased $5.3 million, or 9.3%, to $51.4 million for 2013 from $56.7 million for 2012. Interest expense in 2013 was favorably impacted by lower average borrowings, interest rates and amortization of deferred financing fees in 2013 as compared to 2012, primarily due to the repayment, in full, of our outstanding 3 3/4% senior subordinated convertible notes ("Convertible Notes") in July 2012 and the extinguishment of our 7 3/4% senior notes due 2016 Notes (the "2016 Notes") in the fourth quarter of 2012, which was partially offset by interest expense relating to the issuance of the 2022 Notes in the fourth quarter of 2012. Income tax provision Our effective tax rates for the years ended December 31, 2013 and 2012 were not meaningful due to the impact of the non-deductible goodwill impairment charges of $83.8 million and $110.4 million, respectively. The effective tax rate for 2013 excluding goodwill impairment charges from pre-tax income was 36.7%. The effective tax rate for 2012 excluding goodwill impairment charges from pre-tax income was 35.3%. The effective tax rate in the current year was unfavorably impacted by valuation allowances on foreign net operating loss and foreign tax credit carry forwards, partially offset by favorable settlement of the IRS audit, an increase in non-taxable contingent consideration remeasurement and a decrease in non-deductible expenses. Year Ended December 31, 2012 compared to December 31, 2011 Revenues and Operating income See "Segment Results" for an expanded discussion of segment operating revenues and operating income. Special charges During the year ended December 31, 2012, we recorded special charges totaling $29.6 million, of which $5.0 million was non-cash. The charges reflect actions we took to realign our workforce to address current business demands and global macro-economic conditions impacting our Forensic and Litigation Consulting, Strategic Communications and Technology segments, to address certain targeted practices within our Corporate Finance/Restructuring and Economic Consulting segments, and to reduce excess real estate capacity. These actions included the termination of 116 employees, the consolidation of leased office space within nine office locations and certain other actions. The special charges consisted of: • $18.4 million of severance costs and other contractual employee related costs, including loan forgiveness and accelerated recognition of compensation cost of share-based awards, associated with the reduction in workforce of 116 employees; and • $11.2 million of expense associated with lease costs related to the consolidation of leased office space in nine office locations During the year ended December 31, 2011, we recorded special charges of $15.2 million, of which $4.8 million was non-cash. The charges reflect actions we took to reduce overhead in connection with the realignment of certain senior management on a global basis and to align our workforce with expected market trends, primarily in our Corporate Finance/Restructuring segment. 60 -------------------------------------------------------------------------------- The following table details the special charges by segment and the decrease in total headcount: 2012 2011 Special Special Charges Headcount Charges Headcount (dollars in thousands) (dollars in thousands) Corporate Finance/Restructuring $ 11,332 4 $ 9,440 22 Forensic and Litigation Consulting $ 8,276 43 839 7 Economic Consulting 991 8 2,093 6 Technology 3,114 42 - - Strategic Communications 4,712 15 - - 28,425 112 12,372 35 Unallocated Corporate 1,132 4 2,840 2 Total $ 29,557 116 $ 15,212 37 Unallocated corporate expenses Unallocated corporate expenses increased $2.2 million, or 3.0%, to $76.1 million for 2012 from $73.8 million for 2011. Excluding the impact of special charges of $1.1 million recorded in 2012 and $2.8 million recorded in 2011, unallocated corporate expenses increased $3.9 million in 2012, or 5.5%. The increase was primarily due to an increase related to our global leadership costs, higher compensation and benefit costs, and strategic planning activities that took place in the three months ended March 31, 2012. The increase was partially offset by lower marketing event spending and a higher allocation of regional shared office costs in 2012. Interest income and other Interest income and other, which includes foreign currency transaction gains and losses, decreased by $0.6 million, or 10%, to $5.7 million for 2012 from $6.3 million for 2011. The decrease includes a write-off of certain liabilities related to unclaimed property which favorably impacted other income in 2011 and lower income from joint ventures in 2012, partially offset by a favorable movement in foreign currency transaction gains and losses in 2012 relative to 2011. Interest expense Interest expense decreased $1.9 million, or 3%, to $56.7 million for 2012 from $58.6 million for 2011. Interest expense in 2012 was favorably impacted by lower average borrowings in 2012 as compared to 2011, primarily due to the repayment, in full, of our outstanding 3 3/4% senior subordinated convertible notes ("Convertible Notes") in July 2012, redemption of the aggregate principal amount of $215.0 million of our 2016 Notes, and a decrease in notes payable to former shareholders of acquired businesses. This was partially offset by lower interest rates in 2011 due to an interest rate swap agreement which was entered into in March 2011 and terminated in December 2011. Income tax provision Our effective tax rate for the year ended December 31, 2012 was not meaningful due to the impact of the non-deductible goodwill impairment charge of $110.4 million. The effective tax rate for 2012 excluding goodwill impairment charges from pre-tax income was 35.3%. Our effective tax rate was 32.1% for the year ended December 31, 2011. The effective tax rate in the current year was unfavorably impacted by a higher effective U.S. state income tax rate due to the mix of earnings by jurisdiction in 2012 as compared to 2011, and an increase in non-deductible expenses. In addition, the effective tax rate in the prior year included a larger benefit related to income from changes in the fair value of acquisition-related contingent consideration, which was not taxable. 61-------------------------------------------------------------------------------- SEGMENT RESULTS Total Adjusted Segment EBITDA We evaluate the performance of our operating segments based on Adjusted Segment EBITDA which is a non-GAAP measure. The following table reconciles Net Income (Loss) to Total Adjusted Segment EBITDA for the years ended December 31, 2013, 2012, and 2011. Year Ended December 31, 2013 2012 2011 (in thousands) Net income (loss) $ (10,594 ) $ (36,986 ) $ 103,903 Add back: Income tax provision 42,405 40,100 49,224 Other income (expense), net 49,628 51,072 52,320 Loss on early extinguishment of debt - 4,850 - Unallocated corporate expense 97,989 76,079 73,848 Total segment operating income $ 179,428 $ 135,115 $ 279,295 Add back: Segment depreciation expense 28,203 25,058 23,620 Amortization of other intangible assets 22,954 22,407 22,371 Segment special charges 12,478 28,425 12,372 Goodwill impairment charge 83,752 110,387 - Total Adjusted Segment EBITDA $ 326,815 $ 321,392 $ 337,658 Other Segment Operating Data Year Ended December 31, 2013 2012 2011 Number of revenue-generating professionals: (at period end) Corporate Finance/Restructuring 737 697 587 Forensic and Litigation Consulting 1,061 952 957 Economic Consulting 530 474 433 Technology 306 277 290 Strategic Communications 590 593 582 Total revenue-generating professionals 3,224 2,993 2,849 Utilization rates of billable professionals: (1) (3) Corporate Finance/Restructuring 65 % 71 % 73 % Forensic and Litigation Consulting 68 % 66 % 72 % Economic Consulting 81 % 81 % 85 % Average billable rate per hour: (2) (3) Corporate Finance/Restructuring $ 410 $ 416 $ 445 Forensic and Litigation Consulting 317 314 356 Economic Consulting 503 493 477 (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 and Strategic Communications segments as most of the revenues of these segments are not based on billable hours. (2) For engagements where revenues are based on number of hours worked by our billable professionals, average billable rate per hour is calculated by dividing revenues for a period by the number of hours worked on client assignments during the same period. We have not presented an average billable rate per hour for our Technology and Strategic Communications segments as most of the revenues of these segments are not based on billable hours. (3) 2013, 2012 and 2011 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. 62 -------------------------------------------------------------------------------- CORPORATE FINANCE/RESTRUCTURING Year Ended December 31, 2013 2012 2011 (dollars in thousands, except rate per hour) Revenues $ 382,526 $ 394,719 $ 364,409 Operating expenses: Direct cost of revenues 245,112 238,982 228,028 Selling, general and administrative expense 71,966 61,027 60,499 Special charges 10,274 11,332 9,440 Acquisition-related contingent consideration (9,900 ) (3,361 ) (5,890 ) Amortization of other intangible assets 6,480 5,769 5,741 323,932 313,749 297,818 Segment operating income 58,594 80,970 66,591 Add back: Depreciation and amortization of intangible assets 9,929 8,835 8,902 Special charges 10,274 11,332 9,440 Adjusted Segment EBITDA $ 78,797 $ 101,137 $ 84,933 Gross profit (1) $ 137,414 $ 155,737 $ 136,381 Gross profit margin (2) 35.9 % 39.5 % 37.4 % Adjusted Segment EBITDA as a percent of revenues 20.6 % 25.6 % 23.3 % Number of revenue generating professionals (at period end) 737 697 587 Utilization rates of billable professionals (3) 65 % 71 % 73 % Average billable rate per hour (3) $ 410 $ 416 $ 445 (1) Revenues less direct cost of revenues. (2) Gross profit as a percent of revenues. (3) 2013, 2012 and 2011 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. Year ended December 31, 2013 compared to December 31, 2012 Revenues decreased $12.2 million, or 3.1%, to $382.5 million for the year ended December 31, 2013 compared to $394.7 million for the same prior year period. Acquisition-related revenues from KMQ, Taylor Woodings and Salter were $39.0 million, or 9.9% growth as compared to the same prior year period. Revenues decreased organically $51.2 million, or 13.0%, primarily due to lower demand in our North America bankruptcy and restructuring and Asia Pacific restructuring practices and lower success fees. 63 -------------------------------------------------------------------------------- Gross profit decreased $18.3 million, or 11.8%, to $137.4 million for the year ended December 31, 2013 compared to $155.7 million for the same prior year period. Gross profit margin decreased 3.6 percentage points to 35.9% for the year ended December 31, 2013 compared to 39.5% for the same prior year period. The decrease in gross profit margin was due to lower utilization in our North America region and Asia Pacific region restructuring practices, lower success fees, and an organic investment in EMEA, partially offset by favorable margins from our acquired practices. SG&A expense increased $10.9 million, or 17.9%, to $72.0 million for the year ended December 31, 2013 compared to $61.0 million for the same prior year period. SG&A expense was 18.8% of revenues for the year ended December 31, 2013, compared to 15.5% for the same prior year period. The increase in SG&A expense was primarily due to the overhead costs related to the acquired practices as well as acquisition costs of $1.8 million. Acquisition related contingent consideration income was $9.9 million for the year ended December 31, 2013 compared to income of $3.4 million for the year ended December 31, 2012. It included accretion expense of $1.7 million in 2013 compared to $1.8 million in 2012. In 2013, management assessed the performance of its Australia and Hong Kong acquisitions during their earn-out periods and determined that future contingent payments would be less than originally recorded based on declines in the projected restructuring revenue streams. As a result a reduction in the fair value of the contingent consideration payments was recorded, which resulted in a gain of $11.6 million. Similarly, in 2012 a reduction in the expected payment for the Hong Kong acquisition was recorded which resulted in a gain of $5.2 million. Amortization of other intangible assets was $6.5 million for the year ended December 31, 2013 compared to $5.8 million for the same prior year period. Adjusted Segment EBITDA decreased $22.3 million, or 22.1%, to $78.8 million for the year ended December 31, 2013 compared to $101.1 million for the same prior year period. 2013 Adjusted Segment EBITDA included a gain of $11.6 million related to the reduction of the liability for estimated future contingent consideration payments associated with acquisitions in the Asia Pacific region. Year ended December 31, 2012 compared to December 31, 2011 Revenues increased $30.3 million, or 8.3%, to $394.7 million in 2012 compared to $364.4 million in 2011. Acquisition-related revenue from KMQ and business acquired from LECG Corporation ("LECG") was $6.9 million, or 1.9% growth from the prior year. Revenue increased organically $23.4 million, or 6.4%, primarily due to higher realization and demand in our bankruptcy and restructuring practice in North America, greater demand for our restructuring practice in the EMEA region, higher success fees, and higher average bill rates in our communications, media and entertainment practice. Gross profit increased $19.3 million, or 14.2%, to $155.7 million in 2012 compared to $136.4 million for 2011. Gross profit margin increased 2.1 percentage points to 39.5% for 2012 compared to 37.4% for 2011 primarily due to higher revenue and lower average personnel costs. SG&A expense increased $0.5 million, or 0.9%, to $61.0 million for 2012 compared to $60.5 million for 2011. SG&A expense was 15.5% of revenue for 2012, down from 16.6% for 2011. The increase in SG&A expense included a $2.4 million Australian valuation tax related to the transfer of assets associated with the KMQ acquisition. Acquisition related contingent consideration income was $3.4 million for the year ended December 31, 2012 compared to $5.9 million for the year ended December 31, 2011. It included accretion expense of $1.8 million in 2012 compared to $3.1 million in 2011. As a result of management's determination that future performance 64 -------------------------------------------------------------------------------- during the earn-out period had declined from previous expectations, reductions in the contingent liability for a Hong Kong acquisition were recorded resulting in a gain of $5.2 million in 2012 and $9.0 million in 2011. Amortization of other intangible assets increased to $5.8 million for 2012 compared to $5.7 million for 2011. Adjusted Segment EBITDA increased $16.2 million, or 19.1%, to $101.1 million for 2012 compared to $84.9 million for 2011. 2011 Adjusted Segment EBITDA included a gain of $9.0 million related to the reduction of the liability for estimated future contingent consideration payments associated with acquisitions in the Asia Pacific region, compared to a similar gain of $5.2 million in 2012. FORENSIC AND LITIGATION CONSULTING Year Ended December 31, 2013 2012 2011 (dollars in thousands, except rate per hour) Revenues $ 433,632 $ 407,586 $ 428,730 Operating expenses: Direct cost of revenues 278,174 269,948 272,417 Selling, general and administrative expense 84,616 80,842 78,745 Special charges 2,111 8,276 839 Acquisition-related contingent consideration (1,622 ) 297 (575 ) Amortization of other intangible assets 2,142 2,414 2,473 365,421 361,777 353,899 Segment operating income 68,211 45,809 74,831 Add back: Depreciation and amortization of intangible assets 6,100 6,487 6,215 Special charges 2,111 8,276 839 Adjusted Segment EBITDA $ 76,422 $ 60,572 $ 81,885 Gross profit (1) $ 155,458 $ 137,638 $ 156,313 Gross profit margin (2) 35.9 % 33.8 % 36.5 % Adjusted Segment EBITDA as a percent of revenues 17.6 % 14.9 % 19.1 % Number of revenue generating professionals (at period end) 1,061 952 957 Utilization rates of billable professionals (3) 68 % 66 % 72 % Average billable rate per hour (3) $ 317 $ 314 $ 356 (1) Revenues less direct cost of revenues. (2) Gross profit as a percent of revenues. (3) 2013, 2012 and 2011 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. Year Ended December 31, 2013 compared to December 31, 2012 Revenues increased $26.0 million, or 6.4%, to $433.6 million for the year ended December 31, 2013 from $407.6 million for the same prior year period. Revenues increased primarily due to higher demand and realized bill rates in our health solutions practice and higher success fees for the segment. 65 -------------------------------------------------------------------------------- Gross profit increased $17.8 million, or 12.9%, to $155.5 million for the year ended December 31, 2013 from $137.6 million for the same prior year period. Gross profit margin increased 2.1 percentage points to 35.9% for the year ended December 31, 2013 from 33.8% for the same prior year period. The gross profit margin increase was primarily due to higher margin success fees and higher utilization in our health solutions, global financial and enterprise data analytics and North America investigations practice, partially offset by lower demand in our EMEA forensic accounting and advisory services practice. SG&A expense increased $3.8 million, or 4.7%, to $84.6 million for the year ended December 31, 2013 from $80.8 million for the same prior year period. SG&A expense was 19.5% of revenues for the year ended December 31, 2013, down from 19.8% for the same prior year period. The increase in SG&A expense was primarily due to higher personnel and marketing expenses, partially offset by lower bad debt, business development and facilities expenses. Bad debt expense was 0.8% of revenues for the year ended December 31, 2013 down from 1.3% for the same prior year period. Acquisition related contingent consideration income was $1.6 million for the year ended December 31, 2013 compared to $0.3 million expense for the same prior year period. It included accretion expense $0.3 million for the years ended December 2013 and 2012. In 2013, management assessed the performance of its Hong Kong acquisition during its earn-out period and determined that future contingent payments would be less than originally recorded based on declines in the projected revenue streams. As a result a reduction in the fair value of the contingent consideration payments was recorded, which resulted in a gain of $1.9 million. Amortization of other intangible assets decreased by $0.3 million to $2.1 million for the year ended December 31, 2013 from $2.4 million for the same prior year period. Adjusted Segment EBITDA increased by $15.9 million, or 26.2%, to $76.4 million for the year ended December 31, 2013 from $60.6 million for the same prior year period. 2013 Adjusted Segment EBITDA includes a gain of $1.9 million related to the reduction of the liability for estimated future contingent consideration payments associated with acquisitions in the Asia Pacific region. Year Ended December 31, 2012 compared to December 31, 2011 Revenues decreased $21.1 million, or 4.9%, to $407.6 million for 2012 from $428.7 million for 2011. Acquisition-related revenue from the disputes and forensic accounting and environmental solutions practices in North America acquired from LECG late in the first quarter of 2011 and ThinkFirst was $7.7 million, or 1.8% of the segment revenue change from the prior year period. Revenue declined organically $28.8 million, or 6.7%, primarily due to weak demand in our North America and data analytics practices, partially offset by growth in our health solutions practice and our global risk and investigations practice in the Latin America region. The revenue decline is also largely impacted by the decline of certain large event-driven investigative matters. Gross profit decreased $18.7 million, or 11.9%, to $137.6 million for 2012 from $156.3 million for 2011. Gross profit margin decreased 2.7 percentage points to 33.8% for 2012 from 36.5% for 2011. The decrease in gross profit margin was due to lower utilization, partially offset by lower personnel costs in our North America practice as a result of headcount reductions taken in the second quarter of 2012. SG&A expense increased $2.1 million to $80.8 million from $78.7 million for 2011. SG&A expense was 19.8% of revenue for 2012, compared to 18.4% for 2011. The increase in bad debt, business development and marketing expense was partially offset by lower personnel costs. Bad debt expense was 1.3% of revenues for 2012 up from 0.9% for 2011. Acquisition related contingent consideration was $0.3 million expense for the year ended December 31, 2012 compared to income of $0.6 million for the year ended December 31, 2011. It included accretion expense of 66 -------------------------------------------------------------------------------- $0.3 million in 2012 compared to $0.4 million in 2011. In 2011, management assessed the performance of its Hong Kong acquisition during its earn-out period and determined that future contingent payments would be less than originally recorded based on declines in the projected revenue streams. As a result a reduction in the fair value of the contingent consideration payments was recorded, which resulted in a gain of $1.0 million. Amortization of other intangible assets decreased to $2.4 million for 2012, compared to $2.5 million for 2011. Adjusted Segment EBITDA decreased $21.3 million, or 26.0%, to $60.6 million for 2012, compared to $81.9 million for 2011. ECONOMIC CONSULTING Year Ended December 31, 2013 2012 2011 (dollars in thousands, except rate per hour) Revenues $ 447,366 $ 391,622 $ 353,981 Operating expenses: Direct cost of revenues 300,293 265,112 242,703 Selling, general and administrative expense 58,282 51,912 46,802 Special charges 11 991 2,093 Acquisition-related contingent consideration 258 - - Amortization of other intangible assets 1,808 1,615 1,493 360,652 319,630 293,091 Segment operating income 86,714 71,992 60,890 Add back: Depreciation and amortization of intangible assets 5,479 4,478 4,045 Special charges 11 991 2,093 Adjusted Segment EBITDA $ 92,204 $ 77,461 $ 67,028 Gross profit (1) $ 147,073 $ 126,510 $ 111,278 Gross profit margin (2) 32.9 % 32.3 % 31.4 % Adjusted Segment EBITDA as a percent of revenues 20.6 % 19.8 % 18.9 % Number of revenue generating professionals (at period end) 530 474 433 Utilization rates of billable professionals (3) 81 % 81 % 85 % Average billable rate per hour (3) $ 503 $ 493 $ 477 (1) Revenues less direct cost of revenues. (2) Gross profit as a percent of revenues. (3) 2013, 2012 and 2011 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. Year ended December 31, 2013 compared to December 31, 2012 Revenues increased $55.8 million, or 14.2%, to $447.4 million for the year ended December 31, 2013 compared to $391.6 million for the same prior year period. Revenues grew primarily due to increased demand and a higher realized bill rate in our antitrust litigation and financial economics practices in the North America region due to pre-M&A activity as well as increased demand in our international arbitration, regulatory and valuation practices in the EMEA region. 67 -------------------------------------------------------------------------------- Gross profit increased $20.6 million, or 16.3%, to $147.1 million for the year ended December 31, 2013 compared to $126.5 million for the same prior year period. Gross profit margin increased 0.6 percentage points to 32.9% for the year ended December 31, 2013 from 32.3% for the same prior year period. The increase in gross profit margin was due to higher realized bill rates and utilization in our antitrust litigation and financial economics practices in the North America region, partially offset by higher performance-based compensation expense. SG&A expense increased $6.4 million, or 12.3%, to $58.3 million for the year ended December 31, 2013 compared to $51.9 million for the same prior year period. SG&A expense was 13.0% of revenues for the year ended December 31, 2013 compared to 13.3% for the same prior year period. The increase in SG&A expense was due to higher facilities costs, personnel expenses with increased headcount, depreciation and computer hardware/software expenses. Acquisition related contingent consideration for the year ended December 31, 2013 included accretion expense of $0.3 million related to a business combination completed in 2013. Amortization of other intangible assets was $1.8 million for the year ended December 31, 2013, compared to $1.6 million for the same prior year period. Adjusted Segment EBITDA increased $14.7 million, or 19.0%, to $92.2 million for the year ended December 31, 2013, compared to $77.5 million for the same prior year period. Year ended December 31, 2012 compared to December 31, 2011 Revenues increased $37.6 million, or 10.6%, to $391.6 million for 2012 compared to $354.0 million for 2011. Acquisition-related revenue from the competition policy, financial advisory, international arbitration and electric power and airline competition practices acquired from LECG late in the first quarter of 2011 was $17.6 million, or 5.0%, of segment revenue growth from the prior year period. Revenue grew organically $20.0 million, or 5.6%, primarily due to increased demand in our antitrust litigation & financial economics practices in North America, coupled with higher average bill rates in our antitrust and litigation practice in North America. Gross profit increased $15.2 million, or 13.7%, to $126.5 million for 2012 compared to $111.3 million for 2011. Gross profit margin increased 0.9 percentage points to 32.3% for 2012 from 31.4% for 2011. The increase in gross margin was impacted by lower variable compensation expense. SG&A expense increased $5.1 million, or 10.9%, to $51.9 million for 2012 compared to $46.8 million for 2011. SG&A was 13.3% of revenue for 2012 and compared to 13.2% for 2011. The increase in SG&A expense was due to higher corporate allocations in support of growing operations, facilities costs and bad debt expense partially offset by lower legal expense. Bad debt expense was 1.7% of revenue for 2012 compared to 1.5% for 2011. Amortization of other intangible assets was $1.6 million for 2012, compared to $1.5 million for 2011. Adjusted Segment EBITDA increased $10.4 million, or 15.6%, to $77.5 million for 2012, compared to $67.0 million for 2011. 68-------------------------------------------------------------------------------- TECHNOLOGY Year Ended December 31, 2013 2012 2011 (dollars in thousands) Revenues $ 202,663 $ 195,194 $ 218,738 Operating expenses: Direct cost of revenues 96,779 88,056 87,573 Selling, general and administrative expense 59,890 62,436 65,322 Special charges 16 3,114 - Amortization of other intangible assets 7,940 7,946 7,926 164,625 161,552 160,821 Segment operating income 38,038 33,642 57,917 Add back: Depreciation and amortization of intangible assets 22,601 20,447 19,094 Special charges 16 3,114 - Adjusted Segment EBITDA $ 60,655 $ 57,203 $ 77,011 Gross profit (1) $ 105,884 $ 107,138 $ 131,165 Gross profit margin (2) 52.2 % 54.9 % 60.0 % Adjusted Segment EBITDA as a percent of revenues 29.9 % 29.3 % 35.2 % Number of revenue generating professionals (at period end) (3) 306 277 290 (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. Year Ended December 31, 2013 compared to December 31, 2012 Revenues increased by $7.5 million, or 3.8%, to $202.7 million for the year ended December 31, 2013 from $195.2 million for the same prior year period. Revenues increased primarily due to higher demand for services primarily in FCPA driven matters and complex regulatory investigations and litigation in the financial services industry, partially offset by reduced pricing for certain services and the decline of a large litigation-related matter. Gross profit decreased by $1.2 million, or 1.2%, to $105.9 million for the year ended December 31, 2013 from $107.1 million for the same prior year period. Gross profit margin decreased 2.7 percentage points to 52.2% for the year ended December 31, 2013 from 54.9% for the same prior year period due to an increased proportion of revenue related to certain lower margin services as well as higher variable compensation expense, amortization of capitalized software, infrastructure costs and the reclassification of certain costs from SG&A. SG&A expense decreased by $2.5 million, or 4.1%, to $59.9 million for the year ended December 31, 2013 from $62.4 million for the same prior year period. SG&A expense was 29.6% of revenues for the year ended December 31, 2013, down from 32.0% for the same prior year period. The decrease in SG&A expense was primarily due to lower personnel expense, the reclassification of certain costs to direct costs, outside services, and facilities expenses, partially offset by higher bad debt expense. Bad debt expense was $1.3 million for the year ended December 31, 2013 compared to bad debt recoveries of $0.2 million for the same prior year period. Research and development expense for the year ended December 31, 2013 was $15.8 million, compared to $20.2 million for the same prior year period. Amortization of other intangible assets remained flat at $7.9 million for the year ended December 31, 2013 compared to the same prior year period. 69-------------------------------------------------------------------------------- Adjusted Segment EBITDA increased $3.5 million, or 6.0%, to $60.7 million for the year ended December 31, 2013 from $57.2 million for the same prior year period. Year Ended December 31, 2012 compared to December 31, 2011 Revenues decreased $23.5 million, or 10.8%, to $195.2 million in 2012 from $218.7 million in 2011. Revenue declined due to lower pricing for hosting and processing, lower volume for consulting, and lower licensing revenues related to several settlements received in the prior year. The revenue decline is also largely impacted by the decline of certain large matters. Gross profit decreased by $24.0 million, or 18.3%, to $107.1 million in 2012 from $131.1 million in 2011. Gross profit margin decreased 5.1 percentage points to 54.9% for 2012 from 60.0% for 2011 due to the related revenue declines in our higher margin services. SG&A expense decreased by $2.9 million, or 4.4%, to $62.4 million in 2012 from $65.3 million in 2011. SG&A expense was 32.0% of revenue in 2012, up from 29.9% in 2011. The decrease in SG&A expense was primarily due to lower personnel costs for fewer headcount and lower variable compensation, bad debt expense, and legal costs, partially offset by higher facilities expense. Bad debt recoveries were $0.2 million in 2012 compared to bad debt expense of $0.7 million in 2011. Research and development expense was $20.2 million in 2012, compared to $23.7 million in 2011. Amortization of other intangible assets of $7.9 million was unchanged for 2012 compared to 2011. Adjusted Segment EBITDA decreased $19.8 million, or 25.7%, to $57.2 million in 2012 from $77.0 million in 2011. STRATEGIC COMMUNICATIONS Year Ended December 31, 2013 2012 2011 (dollars in thousands) Revenues $ 186,245 $ 187,750 $ 200,910 Operating expenses: Direct cost of revenues 121,703 118,434 126,187 Selling, general and administrative expense 47,874 46,852 50,919 Special charges 66 4,712 - Acquisition-related contingent consideration 395 - - Amortization of other intangible assets 4,584 4,663 4,738 Goodwill impairment charge 83,752 110,387 - 258,374 285,048 181,844 Segment operating income (loss) (72,129 ) (97,298 ) 19,066 Add back: Depreciation and amortization of intangible assets 7,048 7,218 7,735 Special charges 66 4,712 - Goodwill impairment charge 83,752 110,387 - Adjusted Segment EBITDA $ 18,737 $ 25,019 $ 26,801 Gross profit (1) $ 64,542 $ 69,316 $ 74,723 Gross profit margin (2) 34.7 % 36.9 % 37.2 % Adjusted Segment EBITDA as a percent of revenues 10.1 % 13.3 % 13.3 % Number of revenue generating professionals (at period end) 590 593 582 (1) Revenues less direct cost of revenues. (2) Gross profit as a percent of revenues. 70 -------------------------------------------------------------------------------- Year Ended December 31, 2013 compared to December 31, 2012 Revenues decreased $1.6 million, or 0.8%, to $186.2 million for the year ended December 31, 2013 from $187.8 million for the same prior year period. Acquisition-related revenues from C2 were $4.8 million, or 2.6% growth as compared to the same prior year period. Revenues decreased organically by $6.3 million due to reduced capital markets activity in the Asia Pacific region, lower pass-through revenue in the EMEA region, and lower revenue from a large client in North America, partially offset by higher pass-through and project revenue in North America. Gross profit decreased $4.8 million, or 6.9%, to $64.5 million for the year ended December 31, 2013 from $69.3 million for the same prior year period. Gross profit margin decreased 2.2 percentage points to 34.7% for the year ended December 31, 2013 from 36.9% for the same prior year period. The decline in gross profit margin was primarily due to a lower high-margin capital markets activity in the Asia Pacific region and mix of project work in North America, partially offset by the impact of acquisitions. SG&A expense increased $1.0 million, or 2.2%, to $47.9 million for the year ended December 31, 2013 from $46.9 million for the same prior year period. SG&A expense was 25.7% of revenues for the year ended December 31, 2013, up from 25.0% of revenues for the same prior year period. The increase in SG&A expense was primarily due to higher facilities and overhead costs related to an acquired practice, partially offset by lower personnel costs due to lower headcount. Acquisition related contingent consideration for the year ended December 31, 2013 included accretion expense of $0.4 million related to a business combination completed in 2013. Amortization of other intangible assets of $4.6 million decreased $0.1 million for the year ended December 31, 2013 compared to $4.7 million for the same prior year period. Adjusted Segment EBITDA, which excludes the impact of the goodwill impairment charge, decreased $6.3 million, or 25.1%, to $18.7 million for the year ended December 31, 2013 from $25.0 million for the same prior year period. In the third quarter of 2013, in addition to reduced levels of M&A activity, our Strategic Communications segment experienced pricing pressure for certain discretionary communications services, including initial public offering support services where there is volume but also increasing competition. These factors compressed segment margins and contributed to a change in the Company's near-term outlook for this segment. This was considered an interim impairment indicator for the Strategic Communications segment at the Strategic Communications reporting unit level. As a result, we performed an interim impairment analysis with respect to the carrying value of goodwill in our Strategic Communications reporting unit. Our analysis indicated that the estimated fair value of our Strategic Communications reporting unit was less than its carrying value. As a result, we recorded an $83.8 million non-deductible goodwill impairment charge related to the Strategic Communications segment. Year Ended December 31, 2012 compared to December 31, 2011 Revenues decreased $13.1 million, or 6.6%, to $187.8 million for 2012 from $200.9 million for 2011 with 1.4% decline from the estimated negative impact of foreign currency translation, which was primarily due to the weakening of the Euro and British pound relative to the U.S. dollar. Excluding the impact of foreign currency translation, revenue declined $10.3 million, or 5.2%, due to fewer M&A-related projects in the Asia Pacific region, lower project income in North America and pricing pressures on retainer fees in the North America and EMEA regions, offset by higher project income in EMEA and higher retainer income in Latin America. Gross profit decreased $5.4 million, or 7.2%, to $69.3 million for 2012 from $74.7 million for 2011. Gross profit margin decreased 0.3 percentage points to 36.9% for 2012 from 37.2% for 2011. The decline in gross 71-------------------------------------------------------------------------------- profit margin was primarily due to fewer high-margin project engagements partially offset by lower variable compensation expenses compared to prior year. SG&A expense decreased $4.0 million, or 8.0%, to $46.9 million for 2012 from $50.9 million for 2011. SG&A expense was 25.0% of revenue for 2012, down from 25.3% of revenue for 2011. The decrease in SG&A expense was primarily related to lower personnel costs from reduced headcount. Amortization of other intangible assets of $4.7 million was unchanged for 2012 compared to 2011. Adjusted segment EBITDA, which excludes the impact of the goodwill impairment charge, decreased $1.8 million, or 6.6%, to $25.0 million for 2012 from $26.8 million for 2011. During the fourth quarter of 2012, we conducted our annual impairment analysis with respect to the carrying value of our goodwill. Our analysis indicated that the estimated fair value of our Strategic Communications reporting unit was less than its carrying value. The Strategic Communications reporting unit's fair value was unfavorably impacted by a combination of lower current and projected cash flows. Because our Strategic Communications reporting unit's fair value estimate was lower than its carrying value, we applied the second step of the goodwill impairment test. As a result, we recorded a $110.4 million non-deductible charge related to the Strategic Communications segment. The Strategic Communications reporting unit fair value was unfavorably impacted by a combination of lower current and projected cash flows. Liquidity and Capital Resources Cash Flows Year Ended December 31, 2013 2012 2011 (dollars in thousands, except for DSO) Net cash provided by operating activities $ 193,271 $ 120,188 $ 173,828 Net cash used in investing activities (103,091 ) (90,406 ) (93,648 ) Net cash used in financing activities (43,129 ) (138,246 ) (198,729 ) DSO 97 90 91 We have generally financed our day-to-day operations, capital expenditures and acquisitions through cash flows from operations. During the first quarter of our fiscal year, our cash needs generally exceed our cash flows from operations due to the payment 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 compensation and vendor payments 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. Year Ended December 31, 2013 Compared to Year Ended December 31, 2012 Net cash flow provided by operating activities increased $73.1 million to $193.3 million as compared to $120.2 million for the same prior year period primarily as a result of lower employee bonus payments and income tax payments. Cash collections were also slightly higher compared to the prior year as a result of increased revenues in the quarter ended December 31, 2013 compared to the same prior year period, offset by the 72 -------------------------------------------------------------------------------- impact of a slower collection cycle as indicated by an increase in DSO. DSO was 97 days at December 31, 2013 compared to 90 days at December 31, 2012. The 7 day increase in DSO was largely driven by a shift in both service and geographic mix. Our receivables grew in our Corporate Finance/Restructuring business in the Asia Pacific region, relative to growth in our other segments and regions. This growth was primarily a result of the acquisition of the corporate finance advisory and restructuring businesses in Australia, where billing and collections are subject to lengthy regulatory procedures. Net cash used in investing activities for 2013 was $103.1 million as compared to $90.4 million for 2012. Payments for acquisitions of businesses were $55.5 million in the current year as compared to $62.9 million for 2012. Payments for acquisitions completed in 2013 were $45.1 million, net of cash received, related to the acquisitions by our Corporate Finance/Restructuring, Economic Consulting, Forensic and Litigation Consulting, and Strategic Communications segments. Payments for acquisitions completed in 2012 included $30.0 million, net of cash received, related to the acquisition of practices by our Corporate Finance/Restructuring segment. Payments of acquisition-related contingent consideration and stock floors were $6.2 million and $4.1 million, respectively for 2013 as compared to $28.8 million and $4.1 million, respectively for 2012. Capital expenditures were $42.5 million for 2013 as compared to $27.8 million for 2012. Net cash used in financing activities for 2013 was $43.1 million as compared to $138.2 million for 2012. Our financing activities for 2013 included cash outflows of $6.0 million for the repayment of long-term debt, $66.7 million in cash used to purchase and retire 1,956,900 shares of the Company's common stock pursuant to the 2012 Repurchase Program, partially offset by the $29.4 million received from the issuance of common stock under equity compensation plans. Our financing activities for 2012 include cash outflows of $377.9 million for the repayment of long-term debt and capital lease obligations and $50.0 million in cash used to purchase and retire 1,681,029 shares of the Company's common stock pursuant to the 2012 Repurchase Program, partially offset by proceeds of $292.6 million from the issuance of the 6.0% senior notes due in 2022. Year Ended December 31, 2012 Compared to Year Ended December 31, 2011 Net cash provided by operating activities decreased by $53.6 million to $120.2 million in 2012 from $173.8 million in 2011. Increased cash collections versus the prior year were offset by higher variable compensation and employee forgivable loan payments as well as the timing of accounts payable disbursements. DSO was 90 days at December 31, 2012 compared to 91 days at December 31, 2011. Net cash used in investing activities for 2012 was $90.4 million as compared to $93.6 million for 2011. Payments for acquisitions of businesses were $62.9 million in the current year as compared to $62.3 million for 2011. Payments for acquisitions for 2012 included $30.0 million of payments, net of cash received, related to the acquisitions of businesses by our Corporate Finance/Restructuring segment. Payments for acquisitions for 2011 included $25.7 million of payments, net of cash received, related to the acquisition of practices from LECG in the first quarter of 2011 and $3.8 million of purchase price adjustments related to prior year acquisitions. Payments of acquisition-related contingent consideration and stock floors were $28.8 million and $4.1 million, respectively, for 2012 as compared to $26.5 million and $6.3 million, respectively, for 2011. Capital expenditures were $27.8 million for 2012 as compared to $31.1 million for 2011. Net cash used in financing activities for 2012 was $138.2 million as compared to $198.7 million for 2011. Our financing activities for 2012 included cash outflows of $377.9 million for the repayment of long-term debt, including repayment of our 2016 Notes and our Convertible Notes and $50.0 million in cash used to purchase and retire 1,681,029 shares of the Company's common stock pursuant to the Repurchase Program, partially offset by proceeds of $292.6 million from the issuance of the 6.0% senior notes due in 2022. Our financing activities for 2011 included $209.4 million in cash used to repurchase and retire 5,733,205 million shares of the Company's common stock pursuant to the 2011 ASB. Capital Resources As of December 31, 2013, our capital resources included $205.8 million of cash and cash equivalents and available borrowing capacity of $348.6 million under a $350 million revolving line of credit under our Senior 73 -------------------------------------------------------------------------------- Bank Credit Facility. As of December 31, 2013, we had no outstanding borrowings under our Senior Bank Credit Facility; however, $1.4 million of outstanding letters of credit reduced the availability of borrowings under the Senior Bank Credit Facility by such amount. We use letters of credit primarily in lieu of security deposits for our leased office facilities. The $350 million revolving line of credit under the Senior Bank Credit Facility includes a $75 million sublimit for borrowings in currencies other than U.S. dollars, including Euro, Sterling, Australian dollars and Canadian dollars. The availability of borrowings, as well as issuances and extensions of letters of credit, under our Senior Bank Credit Facility are subject to specified conditions. We may choose to repay outstanding borrowings under the Senior Bank Credit Facility at any time before maturity without premium or penalty. Borrowings under the Senior Bank Credit Facility in U.S. dollars, Euros, Sterling and Australian dollars, bear interest at an annual rate equal to the LIBOR plus an applicable margin or an alternative base rate plus an applicable margin. The alternative base rate means a fluctuating rate per annum equal to the highest of (1) the rate of interest in effect for such day as the prime rate announced by Bank of America, (2) the federal funds rate plus the sum of 50 basis points and (3) the one-month LIBOR plus 100 basis points. Borrowings under the Senior Bank Credit Facility in Canadian dollars bear interest at an annual rate equal to the Canadian bankers' acceptance rate plus an applicable margin or the Canadian prime rate plus an applicable margin. The Canadian prime rate means a fluctuating rate per annum equal to the higher of (1) the rate of interest in effect for such day as the prime rate for loans in Canadian dollars announced by Bank of America and (2) the Canadian bankers' acceptance rate plus 100 basis points. Under the Senior Bank Credit Facility, the lenders have a security interest in substantially all of the assets of FTI Consulting, Inc. and substantially all of our domestic subsidiaries. Subject to certain conditions, at any time prior to maturity, we will be able to invite existing and new lenders to increase the size of the facility up to a maximum of $425.0 million. Our Senior Bank Credit Facility and the indentures governing our Notes contain covenants that, among other things, may limit our ability to: incur additional indebtedness; create liens; pay dividends on our capital stock, make distributions or repurchases of our capital stock or make specified other restricted payments; consolidate, merge or sell all or substantially all of our assets; guarantee obligations of other entities or our foreign subsidiaries; enter into hedging agreements; enter into transactions with affiliates or related persons; or engage in any business other than consulting-related businesses. In addition, the Senior Bank Credit Facility includes financial covenants that require us to (i) not exceed a maximum leverage ratio, (ii) not exceed a maximum senior secured leverage ratio and (iii) maintain a minimum fixed charge coverage ratio. At December 31, 2013, we were in compliance with all covenants as stipulated in the Senior Bank Credit Facility and the indentures governing our Notes. 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. 74 -------------------------------------------------------------------------------- We currently anticipate capital expenditures of $40 million to $45 million to support our organization during 2014, including direct support for specific client engagements. Our estimate takes into consideration the needs of our existing businesses but does not include the impact of any purchases that we may be required to 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 are required to 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 acquisition, to the sellers based upon the outcome of future financial targets that the sellers contemplate in the valuations of the companies, assets or businesses they sell. Contingent consideration is payable annually as agreed upon performance targets are met and is generally subject to a maximum amount within a specified time period. Our obligations change from period-to-period primarily as a result of payments made during the current period, changes in the acquired entities' performance and changes in foreign currency exchange rates. In addition, certain acquisition related restricted stock agreements contain stock price guarantees that may result in cash payments in the future if our share price falls below a specified per share market value on the date the stock restrictions lapse. As of December 31, 2013, the Company accrued $14.6 million in contingent consideration payments which represents our estimate of the payments which will be made in the first half of 2014. The Company had no remaining 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 sheet and are re-measured 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 obligations are $13.3 million at December 31, 2013, with payment dates through 2018. We expect to pay $6.4 million in 2014. 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 Senior Bank Credit Facility, as necessary, will provide adequate cash to fund our long-term cash needs from normal operations. Our conclusion that we will be able to fund our cash requirements by using existing capital resources and cash generated from operations does not take into account the impact of any future acquisitions or any unexpected significant changes in numbers of employees. The anticipated cash needs of our business could change significantly if we pursue and complete additional business acquisitions, if our business plans change, if economic conditions change from those currently prevailing or from those now anticipated, or if other unexpected circumstances arise that may have a material effect on the cash flow or profitability of our business. Any of these events or circumstances, including any new business opportunities, could involve significant additional funding needs in excess of the identified currently available sources and could require us to raise additional debt or equity funding to meet those needs. Our ability to raise additional capital, if necessary, is subject to a variety of factors that we cannot predict with certainty, including: • our future profitability; • the quality of our accounts receivable; • our relative levels of debt and equity; • the volatility and overall condition of the capital markets; and • the market prices of our securities. 75 -------------------------------------------------------------------------------- Any new debt funding, if available, may be on terms less favorable to us than our Senior Bank Credit Facility or the indentures that govern our senior notes. 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 The following table sets forth our estimates as to the amounts and timing of contractual payments for our most significant contractual obligations as of December 31, 2013. The information in the table reflects future unconditional payments and is based on the terms of the relevant agreements, appropriate classification of items under GAAP currently in effect and certain assumptions such as interest rates. Future events could cause actual payments to differ from these amounts. Future contractual obligations related to our long-term debt assume that payments will be made based on the current payment schedule and exclude any additional revolving line of credit borrowings or repayments subsequent to December 31, 2013 and prior to the November 2017 maturity date of our Senior Bank Credit Facility. The interest obligation on our long-term debt assumes that our Notes will bear interest at their stated rates. Contractual Obligations Total 2014 2015 2016 2017 2018 Thereafter (in thousands) Long-term debt $ 717,014 $ 6,014 $ 11,000 $ - $ - $ - $ 700,000 Interest on long-term debt 343,743 46,185 45,558 45,000 45,000 45,000 117,000 Operating leases 334,857 44,987 37,726 36,879 39,719 32,389 143,157 Total obligations $ 1,395,614 $ 97,186 $ 94,284 $ 81,879 $ 84,719 $ 77,389 $ 960,157 Effect of Inflation. Inflation is not generally a material factor affecting our business. General operating expenses such as salaries, employee benefits and lease costs are, however, subject to normal inflationary pressures. |