FTI Consulting, Inc. — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; comparisons are to Q1 2010 unless otherwise noted. Balance-sheet comparisons are to December 31, 2010. FTI is a global business advisory firm with five segments: Corporate Finance/Restructuring, Forensic and Litigation Consulting, Economic Consulting, Technology, and Strategic Communications. Financial amounts below are in millions, except per-share data.
Key financial results
| Metric | Q1 2011 | Q1 2010 / prior date |
|---|---|---|
| Revenue | $361.8 | $350.0 |
| Operating income | $48.5 | $31.8 |
| Net income | $21.8 | $14.2 |
| Diluted EPS | $0.48 | $0.29 |
| Adjusted diluted EPS, company-defined | $0.48 | $0.67 |
| Adjusted EBITDA, company-defined | $61.7; 17.0% of revenue | $75.9; 21.7% of revenue |
| Cash used in operating activities | $39.2 | $27.3 |
| Cash and cash equivalents, quarter-end | $112.4 | $384.6 at Dec. 31, 2010 |
| Total debt | $815.6 | $792.8 at Dec. 31, 2010 |
Interest expense rose to $15.3 million from $11.3 million, principally reflecting the $400 million of 6.75% senior notes issued in 2010 and acquisition-related notes. The effective tax rate was 38.0% in both periods. No consolidated gross margin figure is clearly provided in the filing text.
Changes and operating performance
- Revenue increased 3.4%; acquired businesses contributed $6.9 million. Four of five segments grew, while Corporate Finance/Restructuring revenue fell 8.7% to $107.3 million.
- Corporate Finance/Restructuring adjusted segment EBITDA decreased to $21.5 million from $34.7 million, amid weaker demand and lower rates in restructuring and bankruptcy work. Forensic and Litigation Consulting revenue grew 5.4%, but lower utilization contributed to reduced segment EBITDA. Economic Consulting revenue rose 10.3%; Technology revenue grew 17.7%, benefiting from its Acuity offering; Strategic Communications revenue increased 7.3%.
- Adjusted EBITDA fell 18.7% and its margin declined 4.7 percentage points. Management cited lower restructuring revenue and investment in additional professionals; higher compensation and lower utilization weighed on some segments.
- Reported operating income and diluted EPS increased year over year, but Q1 2010 included $30.2 million of special charges, mainly workforce realignment and office consolidation. On the company’s adjusted basis, diluted EPS declined from $0.67 to $0.48.
- Operating cash outflow increased, with higher accounts-receivable investment and annual compensation timing among the drivers. Investing cash outflow was $47.3 million, including acquisition payments; financing cash outflow was $186.1 million, mainly the $209.4 million accelerated share repurchase.
Liquidity, debt, and capital allocation
At March 31, cash was $112.4 million and accounts receivable, net, was $396.3 million, up from $326.1 million at year-end; unbilled receivables increased to $181.2 million from $120.9 million. Debt totaled $815.6 million, including $25.0 million drawn on the revolving facility; long-term debt and capital lease obligations, net of current portions, were $784.1 million. The company reported $221.4 million of remaining availability under its $250 million revolver, after outstanding borrowings and letters of credit.
FTI repurchased and retired 4.43 million shares for $209.4 million through an accelerated buyback, completing its $500 million repurchase program. Management said cash, expected operating cash flows, and revolver availability were sufficient for capital and liquidity needs for at least 12 months. Planned 2011 capital expenditures were $24–$30 million. The first quarter is typically a period of higher cash needs due to annual incentive compensation and acquisition-related payments.
Outlook, risks, and unusual items
- The filing provides no specific revenue or earnings guidance. Management described market conditions as challenging, while noting improved M&A and corporate investment and encouraging revenue growth in four segments.
- In March, FTI acquired certain LECG practices in Europe, the U.S., and Latin America, adding approximately 200 professionals. Cash consideration was approximately $27 million; acquisition-related costs of about $1.4 million were expensed. Purchase accounting was preliminary.
- FTI entered into interest-rate swaps on $215 million of 7.75% notes due 2016, converting that notional amount to a variable rate based on LIBOR. The swaps reduced Q1 interest expense by $0.3 million; the reported variable rate was 5.49%.
- Acquisition-related stock-price guarantees may require future cash payments. The company reported $6.2 million paid through April 2011; estimated remaining outflows at the March 31 share price were $7.9 million, with scenario estimates of $5.7–$10.2 million for a 20% price increase or decrease.
- Convertible notes have $149.9 million principal, are due 2012, and are convertible only if specified share-price conditions are met. They were classified as long-term at quarter-end and were expected to remain non-convertible through at least July 14, 2011 based on the stated test.
- Management said ordinary-course legal matters were not expected to materially affect financial position or results. The filing cautions about demand fluctuations, professional retention and utilization, pricing pressure, receivable collectability, acquisitions and integration, international operations, indebtedness, and economic and capital-market conditions.
Important facts for investors to verify
- Whether the decline in adjusted EBITDA and adjusted EPS persists, particularly if restructuring and bankruptcy demand remains weak.
- Collections and conversion of the larger billed and unbilled receivable balances into cash, and the trend in operating cash flow after the seasonally cash-intensive first quarter.
- Debt service, revolver availability, and the cash or share settlement implications if convertible-note conversion conditions are met.
- Integration and performance of the LECG practices, including their effect on headcount, margins, and acquisition-related costs.
- Final share delivery and settlement under the accelerated buyback, and remaining cash exposure from stock-price guarantees and other acquisition contingencies.