FTI CONSULTING, INC annual report, FY2014

FTI Consulting, Inc. — FY 2014 Form 10-K

Business and period: Global business advisory firm operating in Corporate Finance/Restructuring, Forensic and Litigation Consulting, Economic Consulting, Technology, and Strategic Communications. This annual report covers the fiscal year ended December 31, 2014; quarterly figures below refer to Q4 2014.

Financial performance

Metric20142013Change
Revenue$1,756.2 million$1,652.4 million+6.3%
Operating income$147.4 million$81.4 million+81.0%
Net income (loss)$58.8 million$(10.6) millionReturned to profit
Diluted EPS$1.44$(0.27)Returned to profit
Adjusted EBITDA$210.6 million$245.5 million-14.3%
Adjusted diluted EPS$1.64$2.09-21.5%
Operating cash flow$135.4 million$193.3 million-29.9%

Revenue growth was primarily organic, led by Forensic and Litigation Consulting and Technology; acquisitions contributed $20.5 million, or 1.2% of year-over-year growth. Operating margin was approximately 8.4%, compared with 4.9% in 2013; the comparison benefits from the absence of the prior-year $83.8 million goodwill impairment. Adjusted EBITDA margin fell to 12.0% from 14.9%.

By segment, 2014 revenue and adjusted segment EBITDA were: Corporate Finance/Restructuring $391.1 million and $55.5 million; Forensic and Litigation Consulting $483.4 million and $90.5 million; Economic Consulting $451.0 million and $59.3 million; Technology $241.3 million and $63.5 million; Strategic Communications $189.4 million and $22.6 million. Adjusted segment EBITDA is a non-GAAP measure and excludes unallocated corporate expenses.

Q4: Revenue was $425.2 million, versus $416.0 million in Q4 2013; net income was $0.9 million, versus a $7.1 million loss. Q4 operating income was $21.9 million. The filing notes seasonality, including reduced activity during the fourth quarter.

Liquidity, debt and cash flow

  • Year-end cash and cash equivalents were $283.7 million; working capital was $517.1 million. Current assets were $884.2 million and current liabilities $367.1 million.
  • Total debt was $711.0 million, including $400 million of 6.75% notes due 2020, $300 million of 6.0% notes due 2022, and $11 million of notes payable to former shareholders. Interest expense was $50.7 million.
  • No revolver borrowings were outstanding; $348.6 million was available under the $350 million revolving facility after letters of credit. The company reported compliance with its debt covenants at year-end.
  • Operating cash flow declined mainly because of higher compensation and operating expense payments. Capital expenditures were $39.3 million, and DSO was 97 days, unchanged from 2013.

Material changes, outlook and risks

  • Forensic and Litigation Consulting revenue grew 11.5% and adjusted segment EBITDA 21.5%, driven by disputes, construction solutions, data analytics and investigations. Technology revenue increased 19.1%, but lower-margin service mix and price reductions reduced gross margin.
  • Corporate Finance/Restructuring adjusted segment EBITDA declined 17.4%, reflecting reduced higher-margin bankruptcy and restructuring work and a shift toward lower-margin non-distressed engagements. Economic Consulting adjusted segment EBITDA fell 35.7%, substantially affected by increased compensation costs for key professionals and lower antitrust demand and realization.
  • Special charges totaled $16.3 million, down from $38.4 million. They included $6.1 million for executive departures and related compensation, $7.9 million for terminating the corporate aircraft lease, and $2.3 million for office closure and lease matters. The company recorded no goodwill impairment in 2014; 2013 included an $83.8 million Strategic Communications impairment.
  • The 2014 tax provision was $42.6 million, an effective rate of 42.0%; it was affected by foreign-loss valuation allowances and the mix of state earnings. A $4.6 million valuation reserve related to Australian deferred tax assets also affected the year.
  • Management estimated 2015 capital expenditures of $37–$40 million and stated that operating cash flows, supplemented by revolver borrowings if needed, were expected to meet normal operating needs. The filing provides no specific revenue or earnings guidance.
  • Key risks include fluctuating demand tied to economic conditions, litigation and M&A; pricing pressure and utilization; reliance on retaining senior professionals; collection risk and elevated receivables allowances; client concentration in Technology (one client represented 25% of segment revenue); international and foreign-exchange exposure; data security; and debt service and covenant constraints. The company reported no known legal proceeding expected to materially affect its financial position or results.

Important facts for investors to verify

  • Whether the decline in adjusted EBITDA and margins persists, particularly in Economic Consulting and Corporate Finance/Restructuring.
  • Technology’s ability to sustain growth while managing price competition, service mix and its significant single-client concentration.
  • Cash conversion and collection quality: operating cash flow fell 29.9%, DSO remained 97 days, and the allowance for doubtful accounts and unbilled services rose to $144.8 million from $109.3 million.
  • Debt maturities, interest costs, covenant headroom, and the company’s ability to fund acquisitions and compensation obligations while preserving liquidity.
  • Future realizability of deferred tax assets and exposure to additional goodwill impairment, particularly in Strategic Communications.