FTI Consulting, Inc. — FY2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. The filing also presents unaudited fourth-quarter results. FTI Consulting is a global advisory firm operating in Corporate Finance/Restructuring, Forensic and Litigation Consulting, Economic Consulting, Technology, and Strategic Communications.
Financial performance and liquidity
| Metric | FY2013 | FY2012 |
|---|---|---|
| Revenue | $1,652.4 million | $1,576.9 million |
| Operating income | $81.4 million | $59.0 million |
| Net income (loss) | $(10.6) million | $(37.0) million |
| Diluted EPS | $(0.27) | $(0.92) |
| Adjusted EBITDA | $259.1 million; 15.7% of revenue | $251.0 million; 15.9% of revenue |
| Operating cash flow | $193.3 million | $120.2 million |
| Cash and cash equivalents | $205.8 million | $156.8 million |
| Working capital | $419.5 million | $370.2 million |
| Long-term debt and capital leases | $717.0 million | $723.0 million |
Revenue rose 4.8%; acquisitions contributed $48.2 million of the increase. GAAP operating margin was approximately 4.9%, versus 3.7% in 2012. Adjusted EBITDA increased 3.2%, but its margin edged down from 15.9%. Management noted that adjusted EBITDA included a $13.6 million benefit from reduced expected acquisition earn-out payments; excluding that benefit, it was approximately flat year over year at $245.5 million versus $245.8 million.
Cash from operations increased primarily due to lower employee bonus and income tax payments. Capital expenditures were $42.5 million. Days sales outstanding rose to 97 from 90, reflecting a mix shift and slower collections in the Asia-Pacific restructuring business. The company reported $348.6 million of available capacity on its $350 million revolving credit facility, with no borrowings outstanding and $1.4 million used for letters of credit. It was in compliance with debt covenants at year-end.
Fourth-quarter results and changes from prior periods
Unaudited Q4 2013 revenue was $416.0 million, compared with $399.3 million in Q4 2012. Operating income was $11.5 million versus an operating loss of $55.3 million; net loss was $7.1 million versus $85.9 million. Q4 2013 included $27.6 million of special charges. The prior-year quarter included a $110.4 million goodwill impairment charge.
- Economic Consulting revenue grew 14.2% to $447.4 million, with stronger antitrust, financial economics, arbitration and regulatory work; adjusted segment EBITDA rose 19.0% to $92.2 million.
- Forensic and Litigation Consulting revenue rose 6.4% to $433.6 million, supported by health solutions and higher success fees; adjusted segment EBITDA increased 26.2% to $76.4 million.
- Technology revenue rose 3.8% to $202.7 million and adjusted segment EBITDA rose 6.0%, although gross margin declined to 52.2% from 54.9%.
- Corporate Finance/Restructuring revenue fell 3.1% to $382.5 million, with organic revenue down 13.0% amid weak bankruptcy and restructuring demand and lower success fees. Utilization declined to 65% from 71%.
- Strategic Communications revenue slipped 0.8% to $186.2 million; adjusted segment EBITDA fell 25.1% to $18.7 million. The segment recorded an $83.8 million non-cash, non-deductible goodwill impairment in Q3 2013.
Comparability is affected by acquisitions, special charges, goodwill impairment, contingent-consideration remeasurements, and the transfer of healthcare and life sciences practices into Forensic and Litigation Consulting in 2013.
Outlook, risks and unusual items
- The filing provides no formal revenue or earnings guidance. Management estimated 2014 capital expenditures of $40–$45 million and said operating cash flows, supplemented if needed by the revolver, were expected to fund normal long-term cash requirements; this assessment excludes future acquisitions or significant unexpected changes.
- Management cited continued weakness in restructuring/bankruptcy and capital-markets activity, while describing strength in Economic Consulting, health solutions and selected Technology services. Strategic Communications faces pricing pressure, competition and reduced M&A-related demand; further goodwill impairment is possible if forecasts or market conditions weaken.
- FY2013 special charges were $38.4 million, including executive leadership transition costs and workforce realignment. The company estimated $48.5 million of combined cash outflows related to 2012 and 2013 special charges, with $22.4 million paid by year-end 2013.
- Leadership changed materially: the Executive Chairman retired in December 2013, and Steven H. Gunby became CEO in January 2014, succeeding Jack B. Dunn IV. The filing notes uncertainty about effects on operations, client relationships and employee retention.
- Key risks include demand and utilization volatility, fee pressure and client cancellations, collection and bad-debt risk, reliance on key professionals and Technology clients, acquisition integration, data security and privacy, foreign exchange exposure, and debt service and covenant constraints. The $700 million senior notes mature in 2020 and 2022; total scheduled debt and interest obligations were substantial.
- The company reported no legal proceedings it believed would materially affect its financial position or results. KPMG issued unqualified opinions on the financial statements and internal controls; management also concluded internal control over financial reporting was effective.
Investor verification points
- Assess recurring operating performance excluding acquisition earn-out gains, special charges and goodwill impairment; reconcile the company’s non-GAAP measures to GAAP results.
- Track Strategic Communications and Corporate Finance/Restructuring demand, utilization, pricing and impairment assumptions.
- Monitor receivables, the allowance for doubtful accounts and unbilled services, and whether DSO improves from 97 days.
- Review debt maturities, interest costs, covenant headroom and the availability of the secured revolver.
- Evaluate integration and returns from the six 2013 acquisitions, and the effects of leadership succession and professional retention costs.