FTI Consulting, Inc. — Q1 2012 Form 10-Q
Reporting period: Three months ended March 31, 2012; comparisons are to Q1 2011 unless noted. FTI is a global business advisory firm operating in Corporate Finance/Restructuring, Forensic and Litigation Consulting, Economic Consulting, Technology, and Strategic Communications. Figures below are in U.S. dollars; financial amounts are in millions except per-share data.
Financial performance and position
| Metric | Q1 2012 | Q1 2011 / comparison |
|---|---|---|
| Revenue | $395.2 | $361.8; up 9.2% |
| Operating income | $40.9 | $44.2; down 7.3% |
| Operating margin | 10.4% | 12.2% |
| Net income | $18.4 | $19.3 |
| Diluted EPS | $0.43 | $0.42 |
| Adjusted EBITDA (non-GAAP) | $54.0; 13.7% of revenue | $56.6; 15.6% of revenue |
| Cash from operating activities | $(57.8) | $(39.2) |
| Cash and cash equivalents at quarter end | $182.4 | $264.4 at Dec. 31, 2011 |
| Total debt | $797.9 | $796.9 at Dec. 31, 2011 |
Gross profit and margin are not presented as consolidated measures in the filing. The effective tax rate was 36.5%, compared with 37.6%. Total assets were $2.37 billion and stockholders’ equity was $1.15 billion at March 31, 2012.
Changes and segment performance
- Revenue growth included $24.8 million from acquisitions (LECG practices and Think First); organic revenue grew 2.7%, while foreign exchange reduced growth by approximately 0.3 percentage points.
- Economic Consulting revenue rose 34.7% to $100.1 million, including acquired revenue and 11.0% organic growth. Adjusted Segment EBITDA increased to $18.4 million from $13.2 million.
- Corporate Finance/Restructuring revenue rose 5.8% to $113.5 million; Adjusted Segment EBITDA increased to $26.8 million from $17.6 million, supported by improved utilization and margins.
- Forensic and Litigation Consulting revenue rose 5.0% to $87.0 million, largely from acquisitions, but Adjusted Segment EBITDA fell 24.5% to $12.1 million as utilization, pricing, and margins weakened.
- Technology revenue fell 2.7% to $49.7 million; Adjusted Segment EBITDA fell 28.3% to $13.2 million amid lower licensing revenue, higher personnel and infrastructure costs, and increased investment.
- Strategic Communications revenue declined 2.9% to $45.0 million, and Adjusted Segment EBITDA fell 16.1% to $4.5 million.
Consolidated Adjusted EBITDA declined despite revenue growth, primarily because of revenue mix, higher Technology personnel costs, lower Forensic and Litigation Consulting utilization, and higher corporate overhead. Diluted EPS increased slightly, aided by a 6.0% reduction in fully diluted shares and favorable foreign currency transaction gains.
Cash, debt, liquidity, and outlook
- Operating cash use increased year over year, mainly reflecting annual incentive payments, compensation and operating costs, payroll timing, and higher income-tax payments; higher collections partly offset these uses. Management notes that Q1 typically has elevated cash needs.
- Investing cash use was $23.3 million, including $18.6 million for acquisitions; capital expenditures were $4.8 million. Financing cash use was $1.1 million. The prior-year financing outflow included $209.4 million of share repurchases.
- At March 31, cash was $182.4 million, and $248.6 million was available under the $250 million revolving credit facility; there were no revolver borrowings and $1.4 million of letters of credit.
- Convertible notes with $149.9 million principal were due July 15, 2012 and classified as current. The notes met the stock-price conversion threshold in January and remained convertible in April; management expected all to convert before maturity. At the March 30 share price, the estimated conversion premium on full conversion was approximately $30.1 million. Management stated available liquidity was sufficient to fund the principal and any premium.
- Management expected 2012 capital expenditures of approximately $35–$40 million and stated that anticipated operating cash flows and liquidity should cover needs for at least the next 12 months. The filing gives no revenue or earnings guidance.
Risks, contingencies, and unusual items
- Management cited risks including demand and pricing changes, utilization and talent retention, client conflicts, receivable collection, acquisition integration, international operations, data confidentiality, litigation and regulatory developments, software obsolescence, and economic and capital-market conditions.
- Legal proceedings arise in the ordinary course; management did not believe any known claim or proceeding would materially affect financial condition or results. The filing reported no material changes to previously disclosed risk factors.
- Acquisition-related contingent consideration liabilities were $15.3 million at quarter end. The company also had stock-price guarantee arrangements; it reported $3.6 million of related payments from January through April and estimated remaining payments of $4.4 million at the March 30 share price, all due in 2013 under that scenario.
- A $1.0 million foreign currency translation gain from liquidation of a foreign subsidiary contributed to the increase in interest income and other. The company reported no derivative instruments at March 31, 2012.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Investor facts to verify
- Whether the convertible notes converted or were repaid by July 15, 2012, including the cash-versus-share settlement of any premium.
- Whether subsequent-quarter cash generation recovered from Q1 operating cash use and whether receivables and compensation-payment timing normalized.
- Whether Technology and Forensic and Litigation Consulting margins and Adjusted EBITDA stabilized, and whether Economic Consulting growth persisted.
- Actual 2012 capital expenditures, acquisition spending, contingent consideration payments, and remaining stock-price guarantee obligations.
- Performance excluding acquisitions and currency effects, alongside the company’s non-GAAP Adjusted EBITDA measure and its reconciliation to GAAP results.