FTI Consulting, Inc. — Q3 2012 Form 10-Q
Business context and period. FTI Consulting is a global business advisory firm operating through Corporate Finance/Restructuring, Forensic and Litigation Consulting, Economic Consulting, Technology, and Strategic Communications. This unaudited filing covers the quarter and nine months ended September 30, 2012; amounts below are in millions unless noted.
Financial performance and liquidity
| Metric | Q3 2012 | Q3 2011 | Nine months 2012 | Nine months 2011 |
|---|---|---|---|---|
| Revenue | $386.1 | $413.8 | $1,177.5 | $1,176.1 |
| Operating income | $46.6 | $59.4 | $114.4 | $137.2 |
| Net income | $22.7 | $29.4 | $48.9 | $64.0 |
| Diluted EPS | $0.55 | $0.70 | $1.17 | $1.47 |
| Adjusted EBITDA | $62.3 | $72.7 | $182.9 | $190.8 |
| Cash from operations | $70.9 | $59.7 | $13.6 | $46.8 |
Q3 operating margin was approximately 12.1% (14.4% prior year); nine-month operating margin was approximately 9.7% (11.7%). Adjusted EBITDA margin was 16.1% in Q3 versus 17.6% and, for nine months, approximately 15.5% versus 16.2%. Adjusted EBITDA is a non-GAAP measure. Adjusted diluted EPS was $0.60 for Q3 and $1.62 for nine months, excluding special charges, versus $0.70 and $1.68, respectively.
At September 30, cash and cash equivalents were $126.9, total debt was $717.8 and stockholders’ equity was $1,173.7. Debt included $75.0 drawn on a $250.0 revolving credit facility; $173.6 of capacity remained available after letters of credit. Current assets were $692.8 and current liabilities $367.1. Cash declined $137.5 from year-end 2011. Nine-month investing outflows were $48.1, including $20.5 of capital expenditures; financing outflows were $103.0, including $156.5 of debt repayments and $20.0 of share repurchases, partly offset by $75.0 of revolving-credit borrowings.
Material changes and segment trends
- Q3 revenue fell 6.7% year over year, while nine-month revenue was nearly unchanged. Q3 weakness reflected lower Forensic and Litigation Consulting activity, Technology pricing and volume, and fewer Strategic Communications engagements.
- For Q3, Forensic and Litigation Consulting revenue fell 15.8% and Technology fell 11.7%; Strategic Communications fell 11.6%. Economic Consulting revenue was up 0.7%, while Corporate Finance/Restructuring was essentially flat.
- For the first nine months, Economic Consulting revenue rose 11.9% and Corporate Finance/Restructuring rose 5.2%; Forensic and Litigation Consulting fell 5.4%, Technology fell 10.6%, and Strategic Communications fell 9.4%.
- Management cited reduced utilization in Forensic and Litigation Consulting and Corporate Finance/Restructuring, Technology pricing pressure, fewer M&A-related engagements, and macroeconomic conditions. Q3 adjusted EBITDA fell 14.3%; net income fell 22.8%.
Outlook, unusual items and risks
- No specific revenue or earnings guidance is provided. Management expected 2012 capital expenditures of $25–$31 and stated that operating cash flow, supplemented if needed by the credit facility, should fund normal long-term cash needs. Future acquisitions, business changes or weaker economic conditions could increase funding needs.
- Special charges were $29.6 for the first nine months, including $26.8 in Q2 and $2.8 in Q3. They covered workforce realignment, lease consolidation and related actions; 116 employees were terminated. The Q3 charge reduced diluted EPS by $0.05. Estimated cash outflows for 2012 charges total $24.6, with $7.5 paid by quarter-end and remaining payments extending through 2025.
- The $149.9 principal amount of 3¾% convertible notes matured and was repaid in July 2012; total repayment was approximately $151.3 including accrued interest, funded with cash and a $75.0 facility draw. Q3 interest expense declined year over year partly because of this repayment.
- A reduction in acquisition-related contingent consideration fair value generated $4.1 of income in Q2; no remeasurement gain or loss was recorded in Q3. An October 2012 Australian acquisition, with approximately $25 initial consideration plus contingent consideration capped at approximately $16, was completed after the reporting date and is not included in Q3 results.
- Management identified risks including demand and pricing pressure, professional utilization and retention, client conflicts, collection and receivables risk, competition, economic and regulatory conditions, acquisitions, data confidentiality, and debt and capital-market access. Ordinary-course legal matters were not believed to be material; management reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether utilization, pricing and demand recover in the weaker segments, especially Forensic and Litigation Consulting and Technology.
- Cash conversion: nine-month operating cash flow fell to $13.6 despite nearly flat revenue; assess receivables, employee loans, compensation payments and collection timing.
- Debt terms, facility availability and capacity to meet future debt service after the convertible-note repayment.
- Actual restructuring savings and remaining cash costs, including lease obligations through 2025.
- Performance and integration of the post-quarter Australian acquisition, and the assumptions behind contingent consideration and goodwill valuations.
- Progress and funding of the $250 share-repurchase authorization; approximately $230 remained available at September 30, 2012.