FTI Consulting, Inc. — Q2 2012 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2012. Unless otherwise noted, financial amounts are in millions of dollars. FTI provides business advisory and consulting services through five segments: Corporate Finance/Restructuring, Forensic and Litigation Consulting, Economic Consulting, Technology, and Strategic Communications.
Financial performance and liquidity
| Metric | Q2 2012 | Q2 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $396.2 | $400.4 | $791.5 | $762.3 |
| Operating income | $26.8 | $33.6 | $67.8 | $77.8 |
| Net income | $7.7 | $15.3 | $26.2 | $34.6 |
| Diluted EPS | $0.18 | $0.36 | $0.61 | $0.78 |
| Adjusted EBITDA | $66.6 | $61.5 | $120.6 | $118.1 |
| Adjusted diluted EPS | $0.60 | $0.57 | $1.02 | $0.99 |
- Q2 operating margin was approximately 6.8% (8.4% prior year); net margin was approximately 2.0% (3.8% prior year). For the six-month period, operating margin was approximately 8.6% (10.2% prior year) and net margin approximately 3.3% (4.5% prior year).
- Q2 Adjusted EBITDA margin improved to 16.8% from 15.4%; management attributed the increase to segment performance, particularly Corporate Finance/Restructuring. Adjusted EBITDA is a non-GAAP measure.
- Operating cash flow was $0.5 million in Q2, versus $26.4 million in Q2 2011. For the first six months, cash used in operations was $57.3 million, compared with $12.8 million used in 2011. Management cited compensation and incentive payments, forgivable loans, and taxes; Q2 cash collections were approximately $360 million, though some receivables depend on court approval.
- Six-month investing cash outflow was $35.2 million, including $21.6 million for acquisitions and $13.7 million of capital expenditures. Financing cash outflow was $4.1 million. Cash declined by $98.4 million to $166.0 million at June 30.
- At June 30, total debt was $797.3 million, including $148.3 million of convertible notes due July 15. On July 16, the notes were repaid in cash for approximately $151.3 million, funded with cash on hand and a $75 million draw on the bank facility. After that draw and letters of credit, reported revolver capacity was $173.6 million. Before repayment, June 30 availability was $248.6 million.
- Current assets were $724.4 million and current liabilities $415.4 million at June 30. Accounts receivable, net, was $472.7 million; the filing highlights collection timing and bad-debt risk. Management expected available cash and borrowing capacity to meet needs for at least the next 12 months. 2012 capital expenditures were estimated at $27–$35 million.
Material changes and segment trends
- Q2 revenue declined 1.0% year over year, with estimated foreign exchange impact of about 1.1%; organic revenue declined 0.2%. Six-month revenue increased 3.8%.
- Q2 segment revenue increased in Corporate Finance/Restructuring (10.2%) and Economic Consulting (5.3%), but declined in Forensic and Litigation Consulting (3.5%), Technology (16.5%), and Strategic Communications (12.9%). Corporate Finance/Restructuring also posted substantial operating improvement, supported by stronger demand and utilization.
- Technology weakness reflected reduced processing demand, lower realized pricing, staff mix, and lower licensing revenue compared with prior-year settlements. Strategic Communications faced fewer M&A projects and pricing pressure. Forensic and Litigation Consulting cited lower consulting hours and bill rates. Economic Consulting grew revenue, but Q2 margin and Adjusted Segment EBITDA were pressured by lower utilization and personnel costs.
- For the six-month period, Economic Consulting revenue grew 18.2%, including acquisition-related growth; Corporate Finance/Restructuring grew 8.0%. Technology revenue fell 10.0% and Strategic Communications fell 8.3%.
Management commentary, unusual items, and risks
- FTI recorded $26.8 million of Q2 special charges, compared with $15.2 million in Q2 2011. The 2012 charges covered employee-related costs and lease consolidation, including 116 terminations and six office locations; $4.6 million was noncash. Expected cash outflow was $22.2 million, with payments extending through 2025. Management estimated approximately $14.9 million of operating savings over the remainder of 2012.
- Q2 net income included a $4.1 million gain from remeasurement of acquisition-related contingent consideration. The liability was $8.2 million at June 30. Adjusted EPS excludes special charges but does not remove every unusual or nonrecurring effect.
- The board authorized a two-year stock repurchase program of up to $250 million on June 6; none of the authorization had been used by June 30. The filing reports no formal revenue or earnings guidance.
- Management identified risks including changing demand and economic conditions, utilization and pricing pressure, hiring and retention, client conflicts, acquisition execution, foreign currency exposure, receivable collectability, data confidentiality and privacy, competition, and fluctuations in engagement timing and cash flows. No material legal proceedings or material changes to previously disclosed risk factors were reported. Disclosure controls were deemed effective, with no material changes in internal control reported.
Important facts for investors to verify
- Whether collections and working-capital trends improve after the first-half operating cash outflow, particularly for unbilled and court-approval-dependent receivables.
- Progress in reversing Technology and Strategic Communications declines and sustaining Corporate Finance/Restructuring growth and utilization.
- Actual realization and timing of the stated $14.9 million cost savings, and total cash payments for the 2012 restructuring and lease charges.
- Post-maturity debt and liquidity after the convertible-note repayment, including revolver usage, interest expense, and remaining capacity.
- How much of Adjusted EBITDA and earnings reflects the contingent-consideration gain and other adjustments, compared with GAAP results.
- Potential cash payments under acquisition-related stock-price guarantees; the filing’s scenario estimates for 2013 ranged from $5.0 million to $6.9 million.