FTI Consulting, Inc. — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015; comparisons are with the corresponding 2014 periods. FTI Consulting is a global business advisory firm with five segments: Corporate Finance/Restructuring, Forensic and Litigation Consulting, Economic Consulting, Technology, and Strategic Communications. Amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $449.1 million | $454.3 million | $881.5 million | $879.9 million |
| Operating income | $47.2 million | $38.9 million | $95.0 million | $79.0 million |
| Net income | $21.7 million | $17.2 million | $45.4 million | $35.4 million |
| Diluted EPS | $0.52 | $0.42 | $1.09 | $0.87 |
| Adjusted EBITDA | $55.8 million | $59.9 million | $114.5 million | $111.1 million |
| Adjusted EBITDA margin | 12.4% | 13.2% | 13.0% | 12.6% |
| Cash from (used in) operations | $20.6 million | $33.7 million | $(30.7) million | $(77.1) million |
Q2 reported revenue declined 1.1%, but increased 2.0% excluding an estimated $14.2 million adverse foreign-currency impact. For the first half, revenue rose 0.2%. Q2 GAAP operating margin was approximately 10.5%, versus 8.6% a year earlier; the prior-year quarter included $9.4 million of special charges. Adjusted EPS was $0.50 in Q2, down from $0.55, despite higher GAAP EPS; the 2015 result included a favorable contingent-consideration adjustment, while the 2014 result included the special charge.
At June 30, cash and cash equivalents were $240.0 million, down from $283.7 million at year-end. Total debt was $711.0 million, unchanged from year-end; the company reported approximately $471 million of net debt. Current assets were $904.4 million and current liabilities $314.6 million. Net accounts receivable was $549.3 million, including billed and unbilled receivables. Operating cash use improved year over year, with management citing higher collections and lower forgivable-loan funding; DSO was 104 days versus 108 days at June 30, 2014.
Segment performance and notable changes
| Segment | Q2 revenue, year over year | Q2 Adjusted Segment EBITDA, year over year | Management’s explanation |
|---|---|---|---|
| Corporate Finance/Restructuring | $109.1 million; up 4.9% | $22.0 million; up 15.2% | Stronger North American distressed and non-distressed demand and EMEA transaction advisory activity. |
| Forensic and Litigation Consulting | $126.1 million; up 5.9% | $20.0 million; down 10.3% | Higher health-solutions demand and success fees, offset by lower utilization and higher costs. |
| Economic Consulting | $108.7 million; down 7.3% | $15.3 million; down 15.2% | Weaker non-M&A antitrust and financial economics demand; lower utilization. |
| Technology | $61.8 million; up 1.8% | $12.2 million; down 19.5% | Higher M&A-related second requests were offset by pricing, mix, and investment costs. |
| Strategic Communications | $43.4 million; down 18.6% | $5.6 million; down 3.5% | Lower pass-through and project revenue; improved margin mix partly offset the decline. |
For the first half, Corporate Finance/Restructuring Adjusted Segment EBITDA rose to $44.5 million from $30.1 million; FLC fell to $42.1 million from $48.8 million, Economic Consulting to $26.8 million from $31.1 million, and Technology to $22.2 million from $32.5 million. Strategic Communications increased to $11.4 million from $8.6 million. Total Adjusted Segment EBITDA was $147.0 million, down from $150.9 million.
Outlook, risks, and unusual items
- Management estimated 2015 capital expenditures of $33 million to $37 million. The filing does not provide a full-year revenue or earnings forecast.
- On June 26, FTI replaced its $350 million revolving facility with a $550 million secured revolving credit facility maturing June 26, 2020. There were no borrowings outstanding at quarter-end; approximately $548.6 million was available after letters of credit. FTI reported compliance with its debt covenants.
- Management said it intended, subject to market conditions, further review, and board approval, to retire $400 million of 6.75% notes due 2020 on or before October 1, 2015, potentially using about $275 million of facility borrowings and $140 million of cash. It estimated an approximately $19 million pre-tax early-retirement charge if completed. This was an intention, not a commitment.
- Operating cash flow remains subject to seasonal compensation payments, receivable collection timing, and working-capital movements. The filing identifies risks including changes in demand, professional utilization and billing rates, client nonpayment, foreign operations and currency, competition, data security, litigation and regulatory developments, and acquisition execution.
- No material legal proceeding was identified by management; ordinary-course claims and litigation remain possible. The company reported no material change in previously disclosed risk factors. The allowance for doubtful accounts and unbilled services was $169.6 million, versus $144.8 million at year-end. Uncertain tax-position liabilities increased to $7.9 million from $2.8 million.
- No special charges were recorded in 2015. The company recorded a $1.7 million Q2 gain from contingent-consideration remeasurement, including $1.5 million related to termination of an arrangement. Prior-year Q2 included $9.4 million of charges for an airplane lease termination and office closure.
- Management stated that it expected existing cash, operating cash flows, and potential short-term borrowings to cover normal operating needs for at least the next 12 months. It cautioned that acquisitions, economic changes, or unanticipated spending could require additional funding.
Key investor verification points
- Track conversion of net income into cash, receivable collections, DSO, and the substantial billed and unbilled receivables and related allowance.
- Assess whether Corporate Finance/Restructuring strength can offset continued utilization and margin pressure in FLC, Economic Consulting, and Technology.
- Verify whether the proposed 2020 note retirement was approved and completed, including actual funding mix, refinancing cost, and any early-retirement charge.
- Monitor segment hiring and utilization, foreign-currency effects, and the uncertain tax-position liability.
- Distinguish GAAP earnings from adjusted measures: Q2 GAAP EPS increased year over year, while adjusted EPS declined.