FTI Consulting, Inc. — Q3 2013 Form 10-Q
Reporting period: Three and nine months ended September 30, 2013; comparisons are with the corresponding 2012 periods. Amounts are in millions unless stated otherwise. FTI provides business advisory services through five segments: Corporate Finance/Restructuring, Forensic and Litigation Consulting, Economic Consulting, Technology, and Strategic Communications.
Financial performance and liquidity
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $414.6 | $386.1 | $1,236.4 | $1,177.5 |
| Operating income (loss) | $(35.6) | $46.6 | $70.0 | $114.4 |
| Net income (loss) | $(50.6) | $22.7 | $(3.5) | $48.9 |
| Diluted EPS | $(1.29) | $0.55 | $(0.09) | $1.17 |
| Adjusted EBITDA (non-GAAP) | $72.5 | $62.3 | $206.1 | $182.9 |
| Adjusted diluted EPS (non-GAAP) | $0.72 | $0.60 | $1.90 | $1.62 |
- Q3 revenue grew 7.4%; management attributed growth to acquisitions, strong Economic Consulting demand in North America and EMEA, and a Forensic and Litigation Consulting success fee. Nine-month revenue grew 5.0%.
- The $83.8 goodwill impairment charge drove the Q3 GAAP operating and net losses. It was non-cash and non-deductible, related solely to Strategic Communications, and reduced that segment’s goodwill to $144.8. Adjusted EBITDA and adjusted EPS exclude specified charges; they are non-GAAP measures.
- Q3 Adjusted EBITDA was 17.5% of revenue, versus 16.1% a year earlier. Nine-month total Adjusted Segment EBITDA was $250.5, up from $237.9.
- Operating cash flow was $84.4 in Q3, versus $70.9; for nine months it was $103.8, versus $13.6. The nine-month improvement reflected stronger receivable collections, lower bonus payments, and lower employee-loan, tax, and interest payments. Investing cash use was $63.7 and financing cash use was $49.4 in the nine-month period.
- Cash and cash equivalents were $147.9 at September 30, down from $156.8 at year-end 2012. Net accounts receivable was $494.9, up from $429.2; billed and unbilled receivables, before allowances, were $345.4 and $260.2, respectively.
- Total debt was $717.0, compared with $723.0 at December 31, 2012. It included $400.0 of 6.75% notes due 2020, $300.0 of 6.0% notes due 2022, and $17.0 payable to former owners of acquired businesses. No revolver borrowings were outstanding; $348.6 of the $350.0 revolving facility was available, after letters of credit.
Segment trends and changes versus prior period
- Economic Consulting: Q3 revenue rose 17.3% to $113.1; nine-month revenue rose 14.7% to $339.3, primarily on demand in antitrust, arbitration, regulatory, and valuation work. Nine-month Adjusted Segment EBITDA increased 25.4% to $70.2.
- Forensic and Litigation Consulting: Q3 revenue rose 12.6% to $113.1 and Adjusted Segment EBITDA rose 55.7% to $25.4, supported by health solutions, data and analytics, improved utilization, and a success fee. Nine-month Adjusted Segment EBITDA increased 16.6% to $58.9.
- Corporate Finance/Restructuring: Q3 revenue was nearly flat at $94.0, but organic revenue fell 12.9% as North American bankruptcy and restructuring demand and certain bill rates weakened. Utilization declined to 64% from 72%; Q3 Adjusted Segment EBITDA fell 11.6% to $19.4. Nine-month Adjusted Segment EBITDA fell 14.7% to $62.6.
- Technology: Q3 revenue increased 1.8% to $51.2 while Adjusted Segment EBITDA declined 1.9% to $15.4. Nine-month revenue rose 1.0%, and Adjusted Segment EBITDA rose 10.2% to $46.0. Growth in investigations partly offset the decline of a large litigation matter.
- Strategic Communications: Q3 revenue fell 5.4% to $43.3 and Adjusted Segment EBITDA fell 40.5% to $4.0. Management cited reduced M&A and capital-markets activity, pricing pressure, and greater competition in discretionary communications services. These factors compressed margins and changed the segment’s near-term outlook.
Management commentary, outlook, risks, and unusual items
- FTI recorded $10.4 of Q3 special charges ($10.8 for nine months), primarily workforce reductions and EMEA corporate overhead actions. The nine-month actions included a reduction of 45 employees. Management estimated total cash outflows associated with special charges at $31.9, of which $18.4 had been paid by September 30.
- The company recorded a $6.9 tax valuation allowance against U.S. foreign tax credit assets because of lower forecast foreign earnings. The impairment charge made reported effective tax rates not meaningful; excluding impairment, management reported a 40.5% nine-month effective rate.
- Management expected 2013 capital expenditures of $38–$43, including $15–$20 in Q4. It stated that cash flows and, if needed, revolver borrowings should cover normal cash needs for at least the next 12 months. No full-year revenue or earnings guidance is provided in the supplied filing text.
- FTI repurchased $48.8 of stock during the first nine months of 2013; approximately $151.2 remained available under its $250.0 two-year repurchase authorization at September 30.
- After quarter-end, FTI completed an acquisition of insurance management consulting operations of WD Scott Limited in Dublin and London; the acquired operations were not included in Q3 results. FTI was still evaluating purchase accounting at the filing date.
- Management identified risks including demand changes, utilization and pricing pressure, competition, professional retention, acquisition integration, client conflicts, receivable collection, foreign-currency movements, and data confidentiality. It warned that goodwill impairment could recur if forecasts or market conditions deteriorate. The company reported no legal proceedings believed likely to materially affect financial condition or results, no significant change in market-risk exposure, and no material change in previously disclosed risk factors.
Important facts for investors to verify
- Whether Strategic Communications pricing, demand, margins, and goodwill valuation stabilize or deteriorate further.
- Whether improvement in operating cash flow is sustained, given the increase in billed and unbilled receivables and the role of collection and bonus-payment timing.
- Whether Corporate Finance/Restructuring utilization and organic demand recover, and whether Economic Consulting and Forensic and Litigation Consulting growth persists.
- Whether the $31.9 estimated special-charge cash outflow, acquisition-related contingent payments, and planned capital expenditures remain consistent with forecasts.
- How the WD Scott acquisition affects results, goodwill, and contingent consideration, and whether the share-repurchase pace and debt levels change.