UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

For the quarterly period ended June 30, 2016

OR

For the transition period from                    to                    

Commission file number 001-14875

 

FTI CONSULTING, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

(202) 312-9100

(Registrant’s telephone number, including area code)

 

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web Site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

 

 

 

 

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FTI CONSULTING, INC. AND SUBSIDIARIES

INDEX

 

 

 

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PART I—FINANCIAL INFORMATION

FTI Consulting, Inc. and Subsidiaries

Condensed Consolidated Balance Sheets

(in thousands, except per share data)

(Unaudited)

 

 

See accompanying notes to condensed consolidated financial statements

 

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FTI Consulting, Inc. and Subsidiaries

Condensed Consolidated Statements of Comprehensive Income

(in thousands, except per share data)

(Unaudited)

 

 

See accompanying notes to condensed consolidated financial statements

 

 

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FTI Consulting, Inc. and Subsidiaries

Condensed Consolidated Statement of Stockholders’ Equity

(in thousands)

(Unaudited)

 

 

See accompanying notes to condensed consolidated financial statements

 

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FTI Consulting, Inc. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

 

See accompanying notes to condensed consolidated financial statements

 

 

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FTI Consulting, Inc. and Subsidiaries

Notes to Condensed Consolidated Financial Statements

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

(Unaudited)

 

1. Basis of Presentation and Significant Accounting Policies

The unaudited condensed consolidated financial statements of FTI Consulting, Inc., including its consolidated subsidiaries (collectively, the “Company,” “we,” “our,” or “FTI Consulting”), presented herein, have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and under the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. Some of the information and footnote disclosures normally included in annual financial statements have been condensed or omitted pursuant to those rules and regulations. Certain prior period amounts have been reclassified to conform to the current period presentation. In management’s opinion, the interim financial statements reflect all adjustments that are necessary for a fair presentation of the results for the interim periods presented. All adjustments made were normal recurring accruals. Results of operations for the interim periods presented herein are not necessarily indicative of results of operations for a full year. These financial statements should be read in conjunction with the consolidated financial statements and the notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2015 filed with the SEC.

 

 

2. Earnings Per Common Share

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

 

 

 

3. New Accounting Standards

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires the estimation and recording of expected credit losses on financial assets based on historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount.  This guidance is effective beginning January 1, 2020.  We have not yet determined the impact that the adoption of this guidance will have on our consolidated financial statements and disclosures.  

In March 2016, the FASB issued ASU 2016-09, Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This standard makes several modifications to Topic 718, including the accounting for forfeitures, employer tax withholding on share-based compensation and income tax consequences, which are intended to simplify various aspects of the accounting for share-based compensation. ASU 2016-09 also clarifies the statement of cash flows presentation for certain components of share-based awards. The standard is effective beginning January 1, 2017, although early adoption is permitted. We have not yet determined the impact that the adoption of this guidance will have on our consolidated financial statements.

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In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), that replaces existing lease guidance. Under this ASU, leases will be required to record right-of-use assets and corresponding lease liabilities on the balance sheet. This guidance is effective beginning January 1, 2019. The new standard is required to be applied with a modified retrospective approach to each prior reporting period presented. We have not yet determined the impact that the adoption of this guidance will have on our consolidated financial statements.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). Under this ASU and subsequently issued amendments, revenue is recognized at the time when goods or services are transferred to a customer in an amount that reflects the consideration it expects to receive in exchange for those goods or services. Companies may use either a full retrospective or a modified retrospective approach to adopt this ASU. This guidance is effective beginning January 1, 2018. We are currently evaluating how the adoption of this accounting standard will impact our consolidated financial statements and related disclosures, including the transition approach.

 

 

4. Special Charges

During the three months ended June 30, 2016, we recorded special charges totaling $1.7 million related to the termination of 19 employees in the health solutions practice of our Forensic and Litigation Consulting (“FLC”) segment. The termination actions resulted from the elimination of certain specialized offerings which no longer support the strategic focus of this practice. The special charges consisted of salary continuance and other contractual employee-related costs, net of the reversal of accelerated expense of a forgivable loan.

During the six months ended June 30, 2016, we recorded special charges of $6.8 million related to the employee terminations in the health solutions practice of our FLC segment as described above, and special charges recorded during the three months ended March 31, 2016 related to employee terminations in our Technology segment.  

Activity related to the liability for these costs for the six months ended June 30, 2016 is as follows:

 

 

 

A liability for the current and noncurrent portions of the amounts to be paid is included in “Accounts payable, accrued expenses and other” and “Other liabilities,” respectively, on the Condensed Consolidated Balance Sheets. Of the $14.1 million liability for special charges, $4.5 million is expected to be paid during the remainder of 2016, $4.1 million is expected to be paid in 2017, $2.6 million is expected to be paid in 2018, $1.2 million is expected to be paid in 2019 and the remaining balance of $1.7 million is expected to be paid between 2020 and 2026.

 

 

5. Allowance for Doubtful Accounts and Unbilled Services

We record adjustments to the allowance for doubtful accounts and unbilled services as a reduction in revenue when there are changes in estimates of fee reductions that may be imposed by bankruptcy courts and other regulatory institutions, for both billed and unbilled receivables. The allowance for doubtful accounts and unbilled services is also adjusted after the related work has been billed to the client and we discover that collectability is not reasonably assured. These adjustments are included in “Selling, general and administrative expenses” on the Condensed Consolidated Statements of Comprehensive Income and totaled $3.9 million and $4.3 million for the three and six months ended June 30, 2016, respectively, and $3.6 million and $6.6 million for the three and six months ended June 30, 2015, respectively.

 

 

6. Research and Development Costs

Research and development costs related to software development totaled $4.5 million and $8.5 million for the three and six months ended June 30, 2016, respectively, and $4.8 million and $10.7 million for the three and six months ended June 30, 2015,

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respectively. Research and development costs are included in “Selling, general and administrative expenses” on the Condensed Consolidated Statements of Comprehensive Income.

 

 

7. Financial Instruments

Fair Value of Financial Instruments

We consider the recorded value of certain financial assets and liabilities, which consist primarily of cash equivalents, accounts receivable and accounts payable, to approximate the fair value of the respective assets and liabilities at June 30, 2016 and December 31, 2015, based on the short-term nature of the assets and liabilities. The fair value of our long-term debt at June 30, 2016 was $516.5 million compared to a carrying value of $500.0 million. At December 31, 2015, the fair value of our long-term debt was $513.5 million compared to a carrying value of $500.0 million. We determine the fair value of our long-term debt primarily based on quoted market prices for our 6% Senior Notes Due 2022 (“2022 Notes”). The fair value of our borrowings on our $550.0 million senior secured bank revolving credit facility (“Senior Bank Credit Facility”) approximates the carrying amount. The fair value of our long-term debt is classified within Level 2 of the fair value hierarchy, because it is traded in less active markets.

We estimate the fair value of acquisition-related contingent consideration based on the present value of the consideration expected to be paid during the remainder of the earn-out period, based on management’s assessment of the acquired operations’ forecasted earnings. This fair value measure is based on significant inputs not observed in the market and thus represents a Level 3 measurement.

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

Any change in the fair value of an acquisition’s contingent consideration liability results in a remeasurement gain or loss that is recorded as income or expense, respectively, and is included in “Acquisition-related contingent consideration” on the Condensed Consolidated Statements of Comprehensive Income. There was no remeasurement gain or loss recorded during the three months ended June 30, 2016.  During the six months ended June 30, 2016, we recorded a $1.0 million expense related to the increase in the liability for future expected contingent consideration payments, driven by improved business results in the current period as well as expected results during the remainder of the earn-out period.  During the three and six months ended June 30, 2015, we recorded a $1.7 million gain related to the change in fair value of future contingent consideration payments, of which $1.5 million related to a termination of a contingent consideration arrangement for which no future payments will be made.  

 

 

8. Goodwill and Other Intangible Assets

Goodwill

The changes in the carrying amounts of goodwill by operating segment for the six months ended June 30, 2016, are as follows:

 

 

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Other Intangible Assets

Other intangible assets with finite lives are amortized over their estimated useful lives. For intangible assets with finite lives, we recorded amortization expense of $2.6 million and $5.2 million for the three and six months ended June 30, 2016, respectively, and $3.0 million and $6.0 million for the three and six months ended June 30, 2015 respectively. Based solely on the amortizable intangible assets recorded as of June 30, 2016, we estimate amortization expense to be $5.1 million during the remainder of 2016, $9.4 million in 2017, $7.9 million in 2018, $7.2 million in 2019, $7.1 million in 2020, $6.6 million in 2021 and $8.7 million in years after 2021. Actual amortization expense to be reported in future periods could differ from these estimates as a result of new intangible asset acquisitions, finalization of asset valuations for newly acquired assets, changes in useful lives, changes in value due to foreign currency translation, and other factors.

 

 

9. Long-Term Debt

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

 

 

There were $200.0 million in borrowings outstanding under the Company’s Senior Bank Credit Facility as of June 30, 2016. The Company has classified these borrowings as long-term debt in the accompanying Condensed Consolidated Balance Sheets as the Company has the intent and ability, as supported by availability under the credit agreement entered into as of June 26, 2015, to refinance these borrowings for more than one year from the applicable balance sheet date. Additionally, $1.4 million of the borrowing limit was utilized (and, therefore, unavailable) as of June 30, 2016 for letters of credit.

For further information on our 2022 Notes and Senior Bank Credit Facility, see footnote “12. Long-Term Debt” in Part II, Item 8 of our Annual Report on Form 10-K filed with the SEC for the year ended December 31, 2015.

 

 

10. Commitments and Contingencies

Contingencies

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

 

 

11. Share-Based Compensation

Share-based Awards and Share-based Compensation Expense

During the three months ended June 30, 2016, we awarded 271,064 restricted stock awards and 11,844 restricted stock units. During the six months ended June 30, 2016, we granted stock options exercisable for up to 118,865 shares, 496,336 restricted stock awards, 64,948 restricted stock units and 83,914 performance stock units. These awards are recorded as equity on the Condensed Consolidated Balance Sheets. During the three months ended June 30, 2016, stock options exercisable for up to 73,832 shares and 14,022 restricted stock awards were forfeited prior to the completion of the vesting requirements.

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Total share-based compensation expense, net of forfeitures, for the three months ended June 30, 2016 and 2015 is detailed in the following table:

 

 

 

12. Segment Reporting

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

Our Corporate Finance & Restructuring segment focuses on the strategic, operational, financial and capital needs of businesses around the world and provides consulting and advisory services on a wide range of areas, such as restructuring (including bankruptcy), interim management, financings, mergers and acquisitions (“M&A”), M&A integration, valuations and tax issues, as well as financial, operational and performance improvement. Our distressed service offerings generally include corporate restructurings and interim management, and our non-distressed service offerings generally include all other services mentioned above.  

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

Our Economic Consulting segment provides law firms, companies, government entities and other interested parties with analysis of complex economic issues for use in legal, 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 governance, hosting and consulting services and software to its clients. It provides products, services and consulting to companies, law firms, courts and government agencies worldwide. Its comprehensive suite of software and services help clients locate, review and produce electronically stored information (“ESI”), including e-mail, computer files, voicemail, instant messaging, cloud and social media data, as well as financial and transactional data.

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

We evaluate the performance of our operating segments based on Adjusted Segment EBITDA. We define Adjusted Segment EBITDA as a segment’s share of consolidated operating income before depreciation, amortization of intangible assets, remeasurement of acquisition-related contingent consideration, special charges and goodwill impairment charges. We define Total Adjusted Segment EBITDA, a non-GAAP measure, 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.

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The table below presents Revenues and Adjusted Segment EBITDA for our reportable segments:

 

 

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

 

 

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

Substantially all of our domestic subsidiaries are guarantors of borrowings under our Senior Bank Credit Facility and 2022 Notes. The guarantees are full and unconditional and joint and several. All of our guarantors are wholly owned, direct or indirect, subsidiaries.

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

Condensed Consolidating Balance Sheet Information as of June 30, 2016

 

 

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Condensed Consolidating Balance Sheet Information as of December 31, 2015

 

 

Condensed Consolidating Statement of Comprehensive Income for the Three Months Ended June 30, 2016

 

 

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Condensed Consolidating Statement of Comprehensive Income for the Three Months Ended June 30, 2015

 

 

Condensed Consolidating Statement of Comprehensive Income for the Six Months Ended June 30, 2016

 

 

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Condensed Consolidating Statement of Comprehensive Income for the Six Months Ended June 30, 2015

 

 

Condensed Consolidating Statement of Cash Flows for the Six Months Ended June 30, 2016

 

 

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Condensed Consolidating Statement of Cash Flows for the Six Months Ended June 30, 2015

 

 

 

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The following is a discussion and analysis of our consolidated financial condition and results of operations for the three and six months ended June 30, 2016 and 2015 and significant factors that could affect our prospective financial condition and results of operations. This discussion should be read together with the accompanying unaudited condensed consolidated financial statements and related notes and with our Annual Report on Form 10-K for the year ended December 31, 2015 filed with the Securities and Exchange Commission (“SEC”). In addition to historical information, the following discussion includes forward-looking statements based on current expectations that involve risks, uncertainties and assumptions, such as our plans, objectives, expectations and intentions.  Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, these expectations or any of the forward-looking statements could prove to be incorrect, and actual results could differ materially from those projected or assumed in the forward-looking statements.  

BUSINESS OVERVIEW

We are a 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), capital market issues and indebtedness, interim business management, forensic accounting and litigation matters, international arbitrations, mergers & acquisitions (“M&A”), antitrust and competition matters, securities litigation, e-discovery, management and retrieval of electronically stored information ("ESI"), reputation management and strategic communications. We also provide services to help our clients take advantage of economic, regulatory, financial and other business opportunities. Our experienced teams of professionals include many individuals who are widely recognized as experts in their respective fields. We believe clients retain us because of our recognized expertise and capabilities in highly specialized areas, as well as our reputation for satisfying client needs.

We report financial results for the following five reportable segments:

Our Corporate Finance & Restructuring (“Corporate Finance”) segment focuses on the 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, M&A integration, valuations and tax issues, as well as financial, operational and performance improvement. Our distressed service offerings generally include corporate restructurings and interim management, and our non-distressed service offerings generally include all other services mentioned above.  

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

Our Economic Consulting segment provides law firms, companies, government entities and other interested parties with analysis of complex economic issues for use in legal, 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 governance, hosting and consulting services and software 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, cloud and social media data, as well as financial and transactional data.

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

We derive substantially all of our revenues from providing professional services to both U.S. and global clients. 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

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our Technology segment, certain clients are also billed based on the amount of data stored on our electronic systems, the volume of information processed or the number of users licensing our Ringtail^® software products for use or installation within their own environments. We license certain products directly to end users, as well as indirectly through our channel partner relationships. Unit-based revenue is defined as revenue billed on a per-item, per-page, or some other unit-based method and includes revenue from data processing and hosting, software usage and software licensing. Unit-based revenue includes revenue associated with our proprietary software that is made available to customers, either via a web browser (“on-demand”) or installed at our customer or partner locations (“on-premise”). On-demand revenue is charged on a unit or monthly basis and includes, but is not limited to, processing and review related functions. On-premise revenue is comprised of up-front license fees, with recurring support and maintenance. Seasonal factors, such as the timing of our employees’ and clients’ vacations and holidays, impact the timing of our revenues.

Our financial results are primarily driven by:

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

When significant, we identify the estimated impact of foreign currency translation driven by our businesses with functional currencies other than the U.S. dollar, on the period-to-period performance results. The estimated impact of foreign currency translation is calculated as (i) the difference between the prior period results multiplied by (ii) the change in average foreign currency exchange rates in the current period and the average foreign currency rates in the prior period.

Non-GAAP Measures

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

We have included the definitions of Segment Operating Income (Loss) and Adjusted Segment EBITDA in order to more fully define the components of the non-GAAP measures in the accompanying analysis of financial information.  As described in Note 12 – Segment Reporting in Part 1, Item 1 of this Quarterly Report on Form 10-Q, we evaluate the performance of our operating segments based on Adjusted Segment EBITDA.

We define Segment Operating Income (Loss) as a segment’s share of consolidated operating income (loss). We define Total Segment Operating Income (Loss) as the total of Segment Operating Income (Loss) for all segments, which excludes unallocated corporate expenses. We use Segment Operating Income (Loss) for the purpose of calculating Adjusted Segment EBITDA. We define

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Adjusted Segment EBITDA as a segment’s share of consolidated operating income (loss) before depreciation, amortization of intangible assets, remeasurement of acquisition-related contingent consideration, special charges and goodwill impairment charges. 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 define Adjusted Segment EBITDA Margin as Adjusted Segment EBITDA as a percentage of a segment’s revenues.

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

We define Adjusted Net Income (Loss) and Adjusted Earnings per Diluted Share (“Adjusted EPS”) as net income (loss) and earnings per diluted share, respectively, excluding the impact of remeasurement of acquisition-related contingent consideration, special charges, goodwill impairment charges and losses on early extinguishment of debt. We use Adjusted Net Income (Loss) for the purpose of calculating Adjusted EPS. Management uses Adjusted EPS 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 an additional understanding of our business operating results, including underlying trends, by excluding the effects of the remeasurement of acquisition-related contingent consideration, special charges, goodwill impairment charges and losses on early extinguishment of debt.

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

EXECUTIVE HIGHLIGHTS

 

 

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Second Quarter 2016 Executive Highlights

Revenues

Revenues for the three months ended June 30, 2016 increased $11.0 million, or 2.5%, to $460.1 million, which included a $5.4 million, or 1.2%, estimated negative impact of foreign currency translation. Excluding the estimated impact of foreign currency translation, revenues increased $16.4 million, or 3.7%.  The increase in revenues was largely due to higher demand in distressed service offerings in North America and Europe, Middle East and Africa (“EMEA”) in our Corporate Finance segment, and higher demand in financial economics and non-M&A antitrust services in our Economics Consulting segment.  These increases were offset by lower demand for M&A related second request and cross-border investigation services in our Technology segment and lower demand in our FLC segment related to our health solutions services.

Special Charges

During the three months ended June 30, 2016, we recorded special charges of $1.7 million related to the termination of 19 employees in the health solutions practice of our FLC segment.  The termination actions resulted from the elimination of certain specialized offerings which no longer support the strategic focus of this practice. The special charges consisted of salary continuance and other contractual employee-related costs, net of the reversal of accelerated expense of a forgivable loan.

Net Income

Net income for the three months ended June 30, 2016 increased $4.8 million, or 22.3%, to $26.5 million compared to $21.7 million for the three months ended June 30, 2015. This increase was driven by lower interest expense due to the debt restructuring completed in the third quarter of 2015, net foreign currency unrealized transaction gains, and lower income tax expense. 

Adjusted EBITDA

Adjusted EBITDA for the three months ended June 30, 2016 increased $0.8 million, or 1.4%, to $56.6 million compared to $55.8 million for the three months ended June 30, 2015.  Adjusted EBITDA was 12.3% of revenues for the three months ended June 30, 2016 compared to 12.4% of revenues for the three months ended June 30, 2015. The increase in Adjusted EBITDA was driven by higher demand for services in our Corporate Finance segment, offset by declines in our Technology and FLC segments.

Earnings per diluted share and Adjusted EPS

Earnings per diluted share for the three months ended June 30, 2016 increased $0.12 to $0.64 compared to $0.52 for the three months ended June 30, 2015. Earnings per diluted share for the three months ended June 30, 2016 were impacted by the results as outlined above.

Adjusted EPS for the three months ended June 30, 2016 increased $0.16 to $0.66 compared to $0.50 for the three months ended June 30, 2015.  Adjusted EPS for the three months ended June 30, 2016 excludes the $0.02 impact of special charges and Adjusted EPS for the three months ended June 30, 2015 excludes the $0.02 remeasurement gain of acquisition-related contingent consideration described above.

Liquidity and Capital Allocation

Cash provided by operating activities for the three months ended June 30, 2016 increased $53.1 million to $73.7 million compared to $20.6 million for the three months ended June 30, 2015. The increase was primarily due to higher cash collections, lower payments for interest expense and other operating expenses, partially offset by increased payments for compensation. Days sales outstanding (“DSO”), which is one measure of the collections cycle, was 100 days at June 30, 2016 compared to 104 days at June 30, 2015, reflecting improved collections. 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.

Financing activities in the three months ended June 30, 2016 included a $7.0 million repayment of borrowings under the Company’s senior secured bank revolving credit facility (“Senior Bank Credit Facility”). On June 2, 2016, our Board of Directors authorized a stock repurchase program under which FTI Consulting may repurchase up to $100.0 million of its outstanding common stock. No time limit has been established for the completion of the program, and the program may be suspended, discontinued or replaced by the Board at any time without prior notice.  As of June 30, 2016, we have $100.0 million available under this program to repurchase additional shares.

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Headcount

As of June 30, 2016, our total net headcount of 4,603 decreased by 31 from 4,634 as of December 31, 2015.

We increased the number of non-billable employees by 4, from 1,118 as of December 31, 2015 to 1,122 as of June 30, 2016. Net change to billable headcount for the six months ended June 30, 2016 is summarized in the table below.

 

 

⁽¹⁾There where 83 revenue-generating professionals as of June 30, 2015 related to a business in Latin America that was disposed at the end of 2015.  Excluding these professionals, percentage growth in headcount from June 30, 2015 to June 30, 2016 would have been 2.9%.

 

CONSOLIDATED RESULTS OF OPERATIONS

Segment and Consolidated Operating Results:

 

 

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Reconciliation of Net Income to Adjusted EBITDA:

 

 

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

 

 

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Three Months Ended June 30, 2016 Compared to Three Months Ended June 30, 2015

Revenues and operating income

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

Unallocated corporate expenses

Unallocated corporate expenses for the three months ended June 30, 2016 increased $0.3 million, or 1.5%, to $20.4 million compared to $20.1 million for the three months ended June 30, 2015. The increase was primarily due to higher costs related to strategic initiatives and increased costs related to our U.S. health and welfare plans, which were partially offset by lower unallocated human resources department costs.

Interest income and other

Interest income and other, which includes foreign currency transaction gains and losses, increased $3.1 million to income of $4.1 million for the three months ended June 30, 2016 compared to income of $1.0 million for the three months ended June 30, 2015. The increase was primarily due to an increase in net foreign currency unrealized transaction gains, which were $3.0 million for the three months ended June 30, 2016, resulting principally from the weakening of the British pound against the U.S. Dollar and Euro, compared to a $0.3 million loss for the three months ended June 30, 2015. 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 both client and current intercompany receivables and payables.

Interest expense

Interest expense for the three months ended June 30, 2016 decreased $6.2 million, or 49.5%, to $6.3 million compared to $12.5 million for the three months ended June 30, 2015. Interest expense for the three months ended June 30, 2016 was favorably impacted by lower average interest rates and borrowings subsequent to the debt restructuring completed in the third quarter of 2015.  

Income tax provision

The effective tax rate for the three months ended June 30, 2016 was 36.8% compared to 39.1% for the three months ended June 30, 2015. The decrease in the effective tax rate for the three months ended June 30, 2016 was a result of certain unfavorable discrete tax adjustments recorded in the three months ended June 30, 2015.  

Six Months Ended June 30, 2016 Compared to Six Months Ended June 30, 2015

Revenues and operating income

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

Unallocated corporate expenses

Unallocated corporate expenses for the six months ended June 30, 2016 increased $5.0 million, or 14.5%, to $39.2 million compared to $34.2 million for the six months ended June 30, 2015. The increase was primarily due to increased costs related to our U.S. health and welfare plan, increased legal costs, increase in executive search fees and increased costs related to strategic initiatives.  These increases were partially offset by lower unallocated human resources support costs in 2016.  

Interest income and other

Interest income and other, which includes foreign currency transaction gains and losses, increased $5.9 million to income of $6.7 million for the six months ended June 30, 2016 compared to income of $0.8 million for the six months ended June 30, 2015. The increase was primarily due to an increase in net foreign currency transaction gains, which were $4.4 million for the six months ended June 30, 2016, resulting principally from the weakening of the British pound against the U.S. Dollar and Euro, compared to a $1.7 million loss for the six months ended June 30, 2015. 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 both client and current intercompany receivables and payables.

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Interest expense

Interest expense for the six months ended June 30, 2016 decreased $12.3 million, or 49.5%, to $12.5 million compared to $24.8 million for the six months ended June 30, 2015. Interest expense for the six months ended June 30, 2016 was favorably impacted by lower average interest rates and borrowings subsequent to the debt restructuring completed in the third quarter of 2015.  

Income tax provision

The effective tax rate for the six months ended June 30, 2016 was 37.4% compared to 36.0% for the six months ended June 30, 2015. The effective tax rate for the six months ended June 30, 2015 was favorably impacted by a $1.4 million discrete item related to the impact of 2015 state tax law changes on our deferred state tax liabilities as of December 31, 2014.  

 

 

SEGMENT RESULTS

Total Adjusted Segment EBITDA

We evaluate the performance of our operating segments based on Net Income and Adjusted Segment EBITDA, which is a non-GAAP measure. The following table reconciles Net Income to Total Adjusted Segment EBITDA for the three and six months ended June 30, 2016 and 2015.

 

 

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Other Segment Operating Data

 

 

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 CORPORATE FINANCE & RESTRUCTURING

 

 

Three Months Ended June 30, 2016 Compared to Three Months Ended June 30, 2015

Revenues increased $23.0 million, or 21.1%, to $132.1 million for the three months ended June 30, 2016, which included a 1.4% estimated negative impact from foreign currency translation. Excluding the estimated impact of foreign currency translation, revenues increased by $24.5 million, or 22.5%. This increase was primarily due to higher demand for the segment’s distressed service offerings in North America and higher demand for distressed, tax and transaction advisory services in EMEA.  

Gross profit increased $10.2 million, or 24.9%, to $51.3 million for the three months ended June 30, 2016. Gross profit margin increased 1.2 percentage points for the three months ended June 30, 2016. The increase was primarily due to higher realized rates and improved utilization in EMEA, partially offset by lower utilization in North America non-distressed services.

Selling, general and administrative (“SG&A”) expense increased $0.3 million, or to $20.0 million for the three months ended June 30, 2016. SG&A expense was 15.1% of revenue for the three months ended June 30, 2016 compared to 18.1% for the three months ended June 30, 2015.

Six Months Ended June 30, 2016 Compared to Six Months Ended June 30, 2015

Revenues increased $44.0 million, or 20.4%, to $259.3 million for the six months ended June 30, 2016, which included a 1.6% estimated negative impact from foreign currency translation. Excluding the estimated impact of foreign currency translation, revenues

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increased by $47.5 million, or 22.1%. This increase was primarily due to higher demand for the segment’s distressed service offerings in North America and higher demand for distressed, tax and transaction advisory services in EMEA.  

Gross profit increased $19.6 million, or 23.6%, to $103.0 million for the six months ended June 30, 2016. Gross profit margin increased 1.0 percentage points for the six months ended June 30, 2016. The increase was primarily due to improved utilization in EMEA, partially offset by lower utilization in North America.

SG&A expense increased $0.6 million, or 1.4%, to $40.8 million for the six months ended June 30, 2016. SG&A expense was 15.7% of revenue for the six months ended June 30, 2016 compared to 18.7% for the six months ended June 30, 2015. The increase is SG&A expense was due to higher infrastructure charges and recruiting expense to support additional headcount.  These expenses were partially offset by collections of prior period bad debts.  

FORENSIC AND LITIGATION CONSULTING

 

 

Three Months Ended June 30, 2016 Compared to Three Months Ended June 30, 2015

Revenues decreased $7.9 million, or 6.3%, to $118.2 million for the three months ended June 30, 2016, which included a 1.0% estimated negative impact from foreign currency translation. Excluding the estimated impact of foreign currency translation, revenues decreased by $6.7 million, or 5.3%, largely due to lower demand and success fees in our health solutions practice. These decreases were partially offset by increased demand in our global risk and investigations practice.

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Gross profit decreased $7.7 million, or 17.3%, to $36.7 million for the three months ended June 30, 2016. Gross profit margin decreased 4.1 percentage points for the three months ended June 30, 2016. This decrease was primarily due to the lower utilization and lower success fees in our health solutions practice. This was partially offset by higher average realization in our global risk and investigations practice.

SG&A expense decreased $2.8 million, or 11.1%, to $22.5 million for the three months ended June 30, 2016. SG&A expense was 19.1% of revenue for the three months ended June 30, 2016 compared to 20.1% for the three months ended June 30, 2015. The decrease in SG&A expense was a result of higher severance and legal costs in 2015.

Six Months Ended June 30, 2016 Compared to Six Months Ended June 30, 2015

Revenues decreased $12.2 million, or 4.9%, to $237.2 million for the six months ended June 30, 2016, which included a 1.2% estimated negative impact from foreign currency translation. Excluding the estimated impact of foreign currency translation, revenues decreased by $9.2 million, or 3.7%, due to lower demand and success fees in our health solutions practice and lower demand in our global dispute advisory services practice. These decreases were partially offset by increased demand in our global risk and investigations practice and our global financial and enterprise data analytics practice.

Gross profit decreased $13.5 million, or 15.1%, to $75.6 million for the six months ended June 30, 2016. Gross profit margin decreased 3.8 percentage points for the six months ended June 30, 2016. This decrease was primarily due to a decrease in demand and success fees in our health solution practice, and lower utilization in our global dispute advisory services practice. This decline was partially offset by higher average realization in our global risk and investigations practice and higher utilization in our global financial and enterprise data analytics practice.

SG&A expense decreased $6.3 million, or 12.8%, to $42.7 million for the six months ended June 30, 2016. SG&A expense was 18.0% of revenue for the six months ended June 30, 2016 compared to 19.6% for the six months ended June 30, 2015. The decrease in SG&A expense was a result of higher severance and legal costs in 2015 and lower bad debt expense.

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ECONOMIC CONSULTING

 

 

Three Months Ended June 30, 2016 Compared to Three Months Ended June 30, 2015

Revenues increased $9.3 million, or 8.6%, to $118.0 million for the three months ended June 30, 2016, which included a 1.0% estimated negative impact from foreign currency translation. Excluding the estimated impact of foreign currency translation, revenues increased by $10.4 million, or 9.6%, primarily due to higher demand for financial economics services in North America and non-M&A antitrust services in North America and EMEA.

Gross profit increased $2.8 million, or 9.6%, to $32.1 million for the three months ended June 30, 2016. Gross profit margin increased 0.3 percentage points for the three months ended June 30, 2016. This increase was primarily due to higher utilization in North America and higher average realization in EMEA, partially offset by lower utilization in EMEA

SG&A expense increased $2.7 million, or 18.5%, to $17.6 million for the three months ended June 30, 2016. SG&A expense was 14.9% of revenue for the three months ended June 30, 2016 compared to 13.7% for the three months ended June 30, 2015. The increase in SG&A expense was primarily due to higher bad debt expense and overhead support costs.

Six Months Ended June 30, 2016 Compared to Six Months Ended June 30, 2015

Revenues increased $34.0 million, or 15.8%, to $248.7 million for the six months ended June 30, 2016, which included a 1.1% estimated negative impact from foreign currency translation. Excluding the estimated impact of foreign currency translation, revenues increased by $36.3 million, or 16.9%, primarily due to higher demand for our financial economics services in North America and M&A related antitrust services in North America and EMEA.

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Gross profit increased $13.5 million, or 24.4%, to $68.9 million for the six months ended June 30, 2016. Gross profit margin increased 1.9 percentage points for the six months ended June 30, 2016. This increase was primarily due to by higher utilization in North America and higher average realization in EMEA.

SG&A expense increased $3.7 million, or 12.1%, to $34.0 million for the six months ended June 30, 2016. SG&A expense was 13.7% of revenue for the six months ended June 30, 2016 compared to 14.1% for the six months ended June 30, 2015. The increase in SG&A expense was driven primarily due to higher outside services, overhead support costs and compensation.

TECHNOLOGY

 

 

Three Months Ended June 30, 2016 Compared to Three Months Ended June 30, 2015

Revenues decreased $19.9 million, or 32.3%, to $41.9 million for the three months ended June 30, 2016. This decrease was largely due to a decrease in M&A related second request activity and reduced demand for cross-border investigations.

Gross profit decreased $9.7 million, or 36.0%, to $17.3 million for the three months ended June 30, 2016. Gross profit margin decreased 2.4 percentage points for the three months ended June 30, 2016. The decrease was primarily due to lower demand for managed review services and lower realized pricing for consulting based on our mix of clients.

SG&A expense decreased $2.1 million, or 11.4%, to $16.2 million for the three months ended June 30, 2016. SG&A expense was 38.7% of revenue for the three months ended June 30, 2016 compared to 29.6% for the three months ended June 30, 2015. The decrease in SG&A expense was due to lower compensation as a result of headcount reduction and lower occupancy costs. Research and development expense related to software development was $4.5 million for the three months ended June 30, 2016 compared to $4.9 million for the three months ended June 30, 2015.

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Six Months Ended June 30, 2016 Compared to Six Months Ended June 30, 2015

Revenues decreased $26.3 million, or 22.6%, to $90.2 million for the six months ended June 30, 2016, which included a 1.0% estimated negative impact from foreign currency translation. Excluding the estimated impact of foreign currency translation, revenues decreased by $25.2 million, or 21.6%, largely due to reduced demand for cross-border investigations and decrease in M&A related second request activity.

Gross profit decreased $14.1 million, or 27.4%, to $37.3 million for the six months ended June 30, 2016. Gross profit margin decreased 2.7 percentage points for the six months ended June 30, 2016. The decrease in gross profit margin was due to lower demand for managed review services and lower realized pricing and utilization in consulting services.

SG&A expense decreased $4.1 million, or 11.3%, to $32.2 million for the six months ended June 30, 2016. SG&A expense was 35.7% of revenue for the six months ended June 30, 2016 compared to 31.2% for the six months ended June 30, 2015. The decrease in SG&A expense was due to lower compensation as a result of headcount reduction and lower occupancy costs, partially offset by higher bad debt expense. Research and development expense related to software development was $8.6 million for the six months ended June 30, 2016 compared to $10.7 million for the six months ended June 30, 2015.

 

 

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STRATEGIC COMMUNICATIONS

 

 

Three Months Ended June 30, 2016 Compared to Three Months Ended June 30, 2015

Revenues increased $6.6 million, or 15.1%, to $49.9 million for the three months ended June 30, 2016, which included a 2.5% estimated negative impact from foreign currency translation. Excluding the estimated impact of foreign currency translation, revenues increased by $7.6 million, or 17.6%, primarily due to increased project-based revenues in North America and EMEA, predominantly in financial communications and public affairs-related engagements.

Gross profit increased $3.7 million, or 22.9%, to $19.7 million for the three months ended June 30, 2016. Gross profit margin increased 2.5 percentage points for the three months ended June 30, 2016. The increase was primarily due to the mix of higher margin large project engagements with improved utilization across North America.

SG&A expense increased $0.8 million, or 7.2%, to $11.5 million for the three months ended June 30, 2016. SG&A expense was 23.1% of revenue for the three months ended June 30, 2016 compared to 24.8% for the three months ended June 30, 2015. The increase in SG&A expense was primarily due to higher overhead support costs, partially offset by a positive impact from foreign currency translation.

Six Months Ended June 30, 2016 Compared to Six Months Ended June 30, 2015

Revenues increased $9.5 million, or 11.2%, to $95.0 million for the six months ended June 30, 2016, which included a 2.9% estimated negative impact from foreign currency translation. Excluding the estimated impact of foreign currency translation, revenues

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increased by $12.0 million, or 14.1%, primarily due to increased project-based revenues in North America and EMEA, predominantly in public affairs and financial communications-related engagements, and increased pass-through income.

Gross profit increased $5.0 million, or 15.8%, to $36.8 million for the six months ended June 30, 2016. Gross profit margin increased 1.6 percentage points for the six months ended June 30, 2016. The increase was primarily due to the mix of higher margin large project engagements with improved utilization across North America, partially offset by a higher proportion of revenues from lower margin pass-through income.

SG&A expense increased $1.7 million, or 8.2%, to $22.9 million for the six months ended June 30, 2016. SG&A expense was 24.1% of revenue for the six months ended June 30, 2016 compared to 24.8% for the six months ended June 30, 2015. The increase in SG&A expense was primarily due to higher infrastructure charges, compensation and bad debt expense.

 

 

CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements, which we have prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Note 1 to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2015 filed with the SEC describes the significant accounting policies and methods used in preparation of the Consolidated Financial Statements. We evaluate our estimates, including those related to bad debts, goodwill, income taxes and contingencies on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances. These results form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The accounting policies that reflect our more significant estimates, judgments and assumptions and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:

There have been no material changes to our critical accounting policies and estimates from the information provided in “Critical Accounting Policies” in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2015 filed with the SEC.

Goodwill and Other Intangible Assets

On a quarterly basis, we monitor the key drivers of fair value to detect events or other changes that would warrant an interim impairment test of our goodwill and intangible assets. Factors we consider important that 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. When we evaluate these factors and determine that a triggering event has occurred, we perform an interim impairment analysis.

As of October 1, 2015, the date of our last annual goodwill impairment test, the estimated fair value of each of our reporting units significantly exceeded their respective carrying values and no further testing was required. Through our quarterly assessment, we determined that there were no events or circumstances that more likely than not would reduce the fair value of any of our reporting units below their carrying value.

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

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SIGNIFICANT NEW ACCOUNTING PRONOUNCEMENTS

See “Note 3 – New Accounting Standards” in Part I, Item 1 of this Quarterly Report on Form 10-Q.

LIQUIDITY AND CAPITAL RESOURCES

Cash Flows

 

 

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

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

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

Six Months Ended June 30, 2016 Compared to Six Months Ended June 30, 2015

Cash provided by operating activities for the six months ended June 30, 2016 was $40.6 million as compared to net cash used in operating activities of $30.7 million for the six months ended June 30, 2015. The increase was primarily due to higher cash collections and lower payments for interest expense and other operating expenses, which were partially offset by increased payments for compensation. DSO was 100 days at June 30, 2016 compared to 104 days at June 30, 2015, reflecting improved collections.

Net cash used in investing activities for the six months ended June 30, 2016 was $11.9 million compared to net cash used in investing activities of $18.0 million for the six months ended June 30, 2015. Capital expenditures were $12.0 million for the six months ended June 30, 2016 compared to $17.5 million for the six months ended June 30, 2015.

Net cash provided by financing activities for the six months ended June 30, 2016 was $8.9 million compared to $7.7 million for the six months ended June 30, 2015. Cash provided by financing activities in the six months ended June 30, 2016 included $9.4 million in cash received from the issuance of common stock under our equity compensation plan, the receipt of $2.6 million of refundable deposits related to one of our foreign entities and payments of $2.9 million to settle repurchases of our common stock.  Our financing activities for the six months ended June 30, 2015 included $8.7 million in cash received from the issuance of common stock under our equity compensation plan, the receipt of $2.4 million of refundable deposits related to one of our foreign entities and the payment of $3.1 million in debt financing fees related to the Senior Bank Credit Facility.

Capital Resources

As of June 30, 2016, our capital resources included $182.7 million of cash and cash equivalents and available borrowing capacity of $348.6 million under our five-year $550.0 million Senior Bank Credit Facility. As of June 30, 2016, we had $200.0 million of borrowing outstanding under our Senior Bank Credit Facility and $1.4 million of outstanding letters of credit, which reduced the availability of borrowings. We use letters of credit primarily in lieu of security deposits for our leased office facilities.

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Future Capital Needs

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

For the full fiscal year ending December 31, 2016, we anticipate aggregate capital expenditures will range between $35 million and $45 million to support our organization, including direct support for specific client engagements. Our estimate takes into consideration the needs of our existing businesses but does not include the impact of any purchases that we make as a result of future acquisitions or specific client engagements that are not currently contemplated. Our capital expenditure requirements may change if our staffing levels or technology needs change significantly from what we currently anticipate, if we purchase additional equipment specifically to support a client engagement or if we pursue and complete future acquisitions.

Contingent consideration obligations are recorded as liabilities on our Condensed Consolidated Balance Sheets and remeasured to fair value at each subsequent reporting date with an offset to current period earnings. During the six months ended June 30, 2016, we recorded a $1.0 million expense related to the increase in the liability for future expected contingent consideration payments, driven by improved business results in the first quarter as well as expected results during the remainder of the earn-out period. The fair value of future expected contingent purchase price obligations for these business combinations was $5.0 million at June 30, 2016, with payment dates extending through 2018. For the last several years, our cash flows from operations have exceeded our cash needs for capital expenditures and debt service requirements. We believe that our cash flows from operations, supplemented by borrowings under our Senior Bank Credit Facility, as necessary, will provide adequate cash to fund our cash needs from normal operations for at least the next twelve months.

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

Any new debt funding, if available, may be on terms less favorable to us than our Senior Bank Credit Facility or the indenture that governs our 6% Senior Notes due 2022. See “Forward-Looking Statements” of this Quarterly Report on Form 10-Q and “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2015 filed with the SEC.

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Off-Balance Sheet Arrangements

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

Future Contractual Obligations

There have been no significant changes in our future contractual obligations information as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2015 filed with the SEC.

Forward-Looking Statements

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

There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in, or implied by, this Quarterly Report on Form 10-Q. Important factors that could cause our actual results to differ materially from the forward-looking statements we make in this Quarterly Report on Form 10-Q are set forth under the heading “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2015 filed with the SEC. Important factors that could cause our actual results to differ materially from the forward-looking statements we make in this Quarterly Report on Form 10-Q include, but are not limited to, the following:

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

For information regarding our exposure to certain market risks see “Quantitative and Qualitative Disclosures about Market Risk” in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2015 filed with the SEC. There have been no significant changes in our market risk exposure during the period covered by this Quarterly Report on Form 10-Q.

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

Changes in Internal Control over Financial Reporting. There have not been any changes in our internal control over financial reporting that occurred during the quarter ended June 30, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II—OTHER INFORMATION

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

There has been no material change in any risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2015, filed with the Securities and Exchange Commission (the “SEC”) on February 25, 2016. We may disclose changes to risk factors or disclose additional factors from time to time in our future filings with the SEC. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations.

Unregistered sales of equity securities.

None

Repurchases of our common stock.

The following table provides information with respect to purchases we made of our common stock during the quarter ended June 30, 2016.

 

 

None

Not Applicable

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None

(a) Exhibits.

 

 

 

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SIGNATURES

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

Date: July 28, 2016

 

 

 

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