FTI Consulting, Inc. — Q2 2013 Form 10-Q
Reporting period: Three and six months ended June 30, 2013; comparisons are with the same 2012 periods. FTI Consulting provides business advisory services through five segments: Corporate Finance/Restructuring, Forensic and Litigation Consulting, Economic Consulting, Technology, and Strategic Communications. Amounts below are in millions unless stated otherwise.
Financial results
| Metric | Q2 2013 | Q2 2012 | First half 2013 | First half 2012 |
|---|---|---|---|---|
| Revenue | $414.6 | $396.2 | $821.8 | $791.5 |
| Operating income | $60.3 | $26.8 | $105.6 | $67.8 |
| Net income | $23.5 | $7.7 | $47.2 | $26.2 |
| Diluted EPS | $0.58 | $0.18 | $1.17 | $0.61 |
| Adjusted EBITDA | $74.2 | $66.6 | $133.6 | $120.6 |
| Cash from operating activities | $21.7 | $0.5 | $19.4 | $(57.3) |
- Q2 revenue grew 4.6%; management attributed growth to acquisitions and 0.9% organic growth. First-half revenue rose 3.8%.
- Q2 GAAP operating margin was 14.5%, versus 6.8% a year earlier; net margin was 5.7%, versus 2.0%. First-half operating margin was 12.8%, versus 8.6%; net margin was 5.7%, versus 3.3%.
- Q2 adjusted EBITDA margin increased to 17.9% from 16.8%. Adjusted diluted EPS was $0.58, compared with $0.60; first-half adjusted EPS was $1.17 versus $1.02.
- At June 30, cash was $92.6, down from $156.8 at year-end 2012. Total current assets were $664.8 and current liabilities $261.8.
- Total debt was $723.0: $400.0 of 6.75% senior notes due 2020, $300.0 of 6.0% senior notes due 2022, and $23.0 payable to former acquisition shareholders. The company had no revolver borrowings and reported $348.6 of available capacity under its $350.0 revolving facility. Debt fair value was $743.0.
- First-half investing cash outflow was $54.6, including $40.5 for acquisitions and $14.1 for capital expenditures; financing outflow was $28.1, including $28.8 of share repurchases.
Changes and segment performance
- Q2 operating income and net income rose substantially year over year, but the comparison benefited from $26.8 of special charges in Q2 2012, primarily workforce reductions and office consolidations. Q2 2013 had no special charges.
- Economic Consulting led growth: Q2 revenue increased 11.6% and first-half revenue 13.4%; first-half adjusted segment EBITDA rose 27.3%. Technology’s Q2 revenue rose 7.3% and adjusted segment EBITDA 31.4%, while first-half revenue was nearly flat and adjusted EBITDA rose 17.4%.
- Corporate Finance/Restructuring revenue was nearly flat in Q2, with organic revenue down 13.1%; first-half organic revenue declined 8.7%. Lower restructuring demand and utilization weighed on performance. Forensic and Litigation Consulting revenue declined 1.1% in Q2 and 1.9% in the first half. Strategic Communications revenue increased, but first-half adjusted segment EBITDA declined 7.6%.
- Reported Q2 results included an $8.2 non-cash gain from revaluing acquisition-related contingent consideration, which increased EPS by $0.18. A $6.9 deferred-tax valuation allowance reduced EPS by $0.17. Adjusted EBITDA also includes the revaluation gain, so the reported improvement should be considered in that context.
- Organic growth was supported by Economic Consulting and Strategic Communications demand and increased Technology second-request document-review volumes; weak North American and Asia-Pacific restructuring demand partly offset gains.
Outlook, risks, and other notable items
- Management provided no revenue or earnings guidance in the supplied filing text. It expected 2013 capital expenditures of $42–$47 and said existing cash, operating cash flows, and potential revolver borrowings should cover normal cash needs for at least the next 12 months, excluding future acquisitions or unexpected changes.
- During the first half, FTI completed four acquisitions, including Taylor Woodings in Australia and Princeton Economics Group. Initial purchase consideration was $35.9, plus contingent consideration; acquisition spending, integration costs, and contingent payments remain relevant cash uses.
- The second-quarter tax valuation allowance reflected lower forecasts of foreign earnings and reduced the recognized value of future foreign tax credits. The Q2 effective tax rate was 49.8%; excluding the discrete item, management reported 34.6%.
- Goodwill was $1,263.2, including $221.5 in Strategic Communications. FTI reported no interim impairment trigger in the first half, but warned that lower projected cash flows could lead to future impairment; the segment had a $110.4 goodwill impairment in Q4 2012.
- Management cited risks including variable demand and utilization, receivable collection, competition and pricing, retaining professionals, acquisition integration, foreign-exchange movements, client-data protection, and economic, legal, and regulatory conditions. It reported no legal matters believed likely to materially affect financial condition or results, and no material change in previously disclosed risk factors.
- Disclosure controls were concluded effective; the filing reported no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- How much reported earnings and EBITDA growth depended on the contingent-consideration gain and the absence of prior-year special charges.
- Whether weak restructuring utilization and organic revenue trends improve, and whether Economic Consulting and Technology growth continues.
- Cash conversion and receivables collection, given the first-half operating cash flow and acquisition and capital-spending outflows.
- Actual tax rates and the recoverability of foreign tax credits, plus assumptions supporting the Strategic Communications goodwill valuation.
- Future acquisition spending, contingent obligations, buybacks, and debt service relative to available cash and revolver capacity.