FTI Consulting, Inc. — Q1 2013 Form 10-Q
Reporting period: Three months ended March 31, 2013; comparisons are with Q1 2012 unless otherwise noted. FTI provides business advisory and consulting services through five segments: Corporate Finance/Restructuring, Forensic and Litigation Consulting, Economic Consulting, Technology, and Strategic Communications. Dollar figures below are in millions unless stated otherwise.
Financial performance
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $407.2 | $395.2 | +3.0% |
| Operating income | $45.3 | $40.9 | +$4.4 |
| Net income | $23.7 | $18.4 | +28.5% |
| Diluted EPS | $0.58 | $0.43 | +$0.15 |
| Adjusted EBITDA | $59.3 | $54.0 | +10.0% |
| Adjusted EBITDA margin | 14.6% | 13.7% | +0.9 percentage points |
| Operating cash flow | $(2.3) | $(57.8) | $55.5 less cash used |
Revenue growth was led by Economic Consulting; acquisition-related revenue contributed 1.8 percentage points to company growth. Management attributed improved Adjusted EBITDA to stronger Economic Consulting demand and lower corporate/regional overhead. Net income also benefited from lower interest expense and a favorable discrete tax item.
Segment performance
| Segment | Revenue, Q1 2013 | Revenue change | Adjusted Segment EBITDA, Q1 2013 | EBITDA change |
|---|---|---|---|---|
| Corporate Finance/Restructuring | $99.1 | +2.3% | $19.1 | −21.0% |
| Forensic and Litigation Consulting | $100.7 | −2.8% | $12.8 | −12.7% |
| Economic Consulting | $115.2 | +15.1% | $26.2 | +42.2% |
| Technology | $46.7 | −6.0% | $13.7 | +3.8% |
| Strategic Communications | $45.5 | +1.0% | $3.6 | −21.5% |
Economic Consulting benefited from stronger financial economics, antitrust, arbitration, regulatory and valuation work, as well as higher utilization and rates. Corporate Finance/Restructuring faced weaker North American bankruptcy and restructuring demand and lower utilization; its organic revenue declined 4.3%, partly offset by acquisitions. Forensic and Litigation Consulting cited slow regulatory and data-analytics case activity. Technology revenue was affected by the wind-down of large matters and fewer M&A second requests. Strategic Communications’ margins were pressured by pass-through revenue and regional mix.
Cash, liquidity and debt
- Cash and cash equivalents were $100.7 at March 31, 2013, down from $156.8 at year-end 2012. Net cash decreased $56.1 during the quarter.
- Operating activities used $2.3; investing activities used $22.0, including acquisitions and $7.3 of capital expenditures; financing activities used $30.2, including $28.8 of share repurchases.
- Management said first-quarter cash needs typically exceed operating cash flow, partly because of annual incentive compensation. Lower bonus payments, including $25.0 paid in Q4 2012 rather than Q1 2013, and lower tax and employee-loan payments reduced cash used year over year. Collections were described as comparable.
- Debt totaled $723.0, comprising $400.0 of 6.75% senior notes due 2020, $300.0 of 6.0% senior notes due 2022 and $23.0 payable to former owners of acquired businesses. Long-term debt and capital lease obligations, net of current portion, were $717.0. Debt was unchanged from December 2012; fair value was reported at $774.0.
- At quarter-end, the company had $100.7 cash, no revolving-credit borrowings and $348.6 available under its $350.0 revolving facility after $1.4 of letters of credit. After March 31, it borrowed $40.0, reducing availability to $308.6.
- Current assets were $651.7 versus current liabilities of $269.2. Net accounts receivable rose to $470.6 from $429.2 at year-end, including growth in both billed and unbilled receivables.
Material changes, outlook and notable items
- Tax benefit: Settlement of prior-year tax matters led to a reversal of approximately $2.2 of uncertain-tax-position liability. The effective tax rate was 29.4%, versus 36.5% in Q1 2012; excluding the discrete benefit, the 2013 rate would have been 37.1%.
- Restructuring charges: Q1 included a $0.4 adjustment to 2012 workforce and real-estate restructuring charges. Remaining liability was $14.0; expected cash payments span 2013 through 2025. No special charges were recorded in Q1 2012.
- Capital allocation: FTI repurchased 826,800 shares for $28.8 at an average $34.78 per share; $171.2 remained under the $250.0 two-year authorization. Shares outstanding were 40.3 million at March 31.
- Acquisitions: Q1 acquisitions included a $7.3 Strategic Communications acquisition and a $1.8 Forensic and Litigation Consulting acquisition. FTI also completed the C2 Group acquisition in March. In April, it acquired Australian advisory firm Taylor Woodings for approximately $26.0 plus contingent consideration; results begin in Q2. In May, FTI announced the Princeton Economics Group acquisition. Acquisition valuations remained preliminary where noted.
- Outlook: The filing gives no specific revenue or earnings guidance. Management expected 2013 capital expenditures of $31–$37 and stated that existing cash, operating cash flow and, if needed, short-term revolver borrowings should fund normal needs for at least twelve months. This assessment excludes future acquisitions and significant unexpected changes.
- Risks and contingencies: Results are exposed to shifts in demand, professional utilization and rates, client collections, hiring and retention, acquisition integration, foreign operations and currency, litigation and regulatory developments, competition, and client-data protection. The company reported ordinary-course legal matters but no known claims or proceedings expected to materially affect its financial position or results. It reported no material change to previously disclosed risk factors.
- Other: Foreign-currency translation produced a $15.5 comprehensive loss in Q1 2013, compared with $12.8 of translation income in Q1 2012. The report states disclosure controls were effective and there were no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Economic Consulting’s growth and margin improvement can offset weaker demand and declining EBITDA in other segments.
- Receivables quality and collection timing, given higher net receivables and negative operating cash flow in the quarter.
- Liquidity after the subsequent $40.0 revolver borrowing, and the cash requirements of acquisitions, repurchases and capital expenditures.
- The extent to which earnings growth depended on the one-time tax benefit and whether the lower interest expense continues.
- Final acquisition purchase-price allocations, contingent consideration, integration results and the remaining restructuring and stock-price-guarantee payments.