FTI Consulting, Inc. — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. FTI Consulting is a global business advisory firm operating through Corporate Finance/Restructuring, Forensic and Litigation Consulting, Economic Consulting, Technology, and Strategic Communications.
Financial performance and liquidity
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Revenue | $1,576.9 million | $1,566.8 million |
| Operating income | $59.0 million | $205.4 million |
| Net income (loss) | $(37.0) million | $103.9 million |
| Diluted EPS | $(0.92) | $2.39 |
| Adjusted EBITDA (non-GAAP) | $251.0 million; 15.9% of revenue | $271.6 million; 17.3% of revenue |
| Adjusted diluted EPS (non-GAAP) | $2.30 | $2.60 |
| Operating cash flow | $120.2 million | $173.8 million |
At year-end, cash and cash equivalents were $156.8 million, working capital was $370.2 million, total assets were $2.28 billion, and debt and capital lease obligations were approximately $723.0 million. The company had no borrowings under its $350 million revolving credit facility and reported $348.6 million of available capacity. It was in compliance with debt covenants.
Segments and changes versus prior year
| Segment | 2012 revenue | 2012 Adjusted Segment EBITDA | Revenue change |
|---|---|---|---|
| Corporate Finance/Restructuring | $459.2 million | $109.0 million | +7.3% |
| Forensic and Litigation Consulting | $343.1 million | $52.7 million | -6.1% |
| Economic Consulting | $391.6 million | $77.5 million | +10.6% |
| Technology | $195.2 million | $57.2 million | -10.8% |
| Strategic Communications | $187.8 million | $25.0 million | -6.6% |
Revenue was nearly flat overall. Growth in restructuring and economic consulting offset declines in Forensic and Litigation Consulting, Technology, and Strategic Communications. Management attributed weakness to slower regulatory and investigative activity, lower hosting and processing prices and licensing revenue, fewer M&A assignments, and pricing pressure. Adjusted EBITDA declined 7.6%, reflecting lower revenue, utilization and pricing pressure in certain segments.
Significant items, outlook, and risks
- Goodwill impairment: A non-cash, non-deductible $110.4 million charge in Strategic Communications followed lower current and projected cash flows. It reduced reported operating income and net income but did not affect liquidity or debt covenants. Remaining goodwill in that reporting unit was $226.3 million.
- Restructuring charges: FY 2012 special charges were $29.6 million, including workforce and compensation costs and office lease consolidation; 116 employees were terminated. The company expected $24.3 million of related cash outflows in total, with $9.3 million paid by year-end.
- Fourth quarter: Revenue was $399.3 million; the quarter recorded an operating loss of $55.3 million and net loss of $85.9 million, including the goodwill impairment and a $4.9 million debt-extinguishment loss.
- Debt actions: FTI issued $300 million of 6.0% senior notes due 2022, redeemed its 2016 notes, and repaid its convertible notes at maturity. Most year-end debt was due after 2017. Variable-rate revolver borrowing would expose the company to interest-rate increases.
- Capital allocation and outlook: The company repurchased about $50 million of stock in 2012, with approximately $200 million remaining under its authorized program. It paid no cash dividends and did not anticipate doing so in the foreseeable future. Management expected 2013 capital expenditures of approximately $31–$37 million and stated operating cash flow, supplemented by revolver borrowings if needed, should fund normal needs. No revenue or earnings guidance is provided in the filing.
- Key risks: Demand is sensitive to economic conditions, litigation, regulatory investigations and M&A activity; engagements can end without notice and fee pressure can impair margins. Retaining senior professionals and managing utilization are important. Two clients represented approximately 46% of Technology segment revenue, although no single client exceeded 10% of consolidated revenue. International operations represented about 26% of revenue and carry currency, regulatory, tax, collection and operating risks. The filing also identifies data security, software obsolescence, acquisition integration, receivables and leverage risks.
- The company reported no known legal proceedings expected to have a material adverse effect. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- Whether operating performance and cash generation stabilize after FY 2012 declines, particularly in Forensic and Litigation Consulting and Technology.
- Assumptions behind Strategic Communications forecasts and the potential for further goodwill impairment.
- Technology’s reliance on two clients and its ability to sustain pricing, hosting demand, and software revenue.
- Debt maturities, covenant headroom, interest costs, and the effect of the 2022 notes and ongoing repurchases on financial flexibility.
- Collection quality and the adequacy of the $94.0 million allowance for doubtful accounts and unbilled services; unbilled receivables were $208.8 million before that allowance.
- Execution of workforce and office restructuring, including remaining cash payments, and the filing’s non-GAAP adjustments when assessing underlying performance.