FTI Consulting, Inc. — Third-Quarter 2014 Form 10-Q
Business context and period. FTI Consulting is a global business advisory firm with five reporting segments: Corporate Finance/Restructuring, Forensic and Litigation Consulting, Economic Consulting, Technology, and Strategic Communications. This filing covers the quarter and nine months ended September 30, 2014; comparisons are with the same 2013 periods. Dollar amounts below are in millions unless noted.
Financial results and liquidity
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Revenue | $451.2 | $414.6 | $1,331.1 | $1,236.4 |
| Operating income (loss) | $46.5 | $(35.6) | $125.5 | $70.0 |
| Net income (loss) | $22.5 | $(50.6) | $57.9 | $(3.5) |
| Diluted EPS | $0.55 | $(1.29) | $1.43 | $(0.09) |
| Adjusted EBITDA (non-GAAP) | $63.4 | $72.5 | $174.5 | $197.9 |
| Adjusted EPS (non-GAAP) | $0.63 | $0.72 | $1.60 | $1.69 |
Q3 revenue rose 8.8%; nine-month revenue rose 7.7%. Q3 GAAP operating margin was about 10.3%, compared with a loss in the prior-year quarter; adjusted EBITDA margin declined to 14.1% from 17.5%. Nine-month adjusted EBITDA fell despite higher revenue. The 2013 comparisons included an $83.8 million goodwill impairment charge in Strategic Communications, which materially depressed reported 2013 operating and net results.
Cash flow and balance sheet. Nine-month operating cash flow was $20.5 million versus $103.8 million in 2013, a substantial decline attributed mainly to higher salary payments and bonus-payment timing. Capital expenditures were $31.8 million, compared with $23.0 million. The filing separately reports Q3 operating cash flow of $97.6 million versus $84.4 million in Q3 2013. Cash at September 30 was $178.8 million, down from $205.8 million at year-end 2013. Total debt was $711.0 million, including $705.0 million long-term debt; no borrowings were outstanding on the $350 million bank facility, with $348.6 million available after letters of credit. Management said cash flow and available credit were expected to fund normal needs for at least twelve months.
Current assets were $857.0 million and current liabilities $345.9 million. Net accounts receivable was $565.7 million; DSO increased to 107 days from 102 days a year earlier, partly reflecting business mix and extended payment terms on certain large engagements. The allowance for doubtful accounts and unbilled services was $141.6 million, compared with $109.3 million at year-end.
Material changes and segment performance
- Technology: Q3 revenue increased 21.8% to $62.4 million, driven by complex investigations and financial-services work. Nine-month revenue rose 22.8% to $183.1 million. Margin pressure reflected service mix, third-party review costs, and investment in infrastructure.
- Forensic and Litigation Consulting: Q3 revenue rose 7.7% to $121.7 million; nine-month revenue rose 13.6% to $362.2 million. Nine-month adjusted segment EBITDA increased 24.8% to $71.0 million, while Q3 EBITDA declined 12.2% to $22.3 million, reflecting lower success fees, health-solutions weakness, and compensation costs.
- Corporate Finance/Restructuring: Q3 revenue grew 6.4% to $100.0 million, but adjusted segment EBITDA declined 19.9% to $15.5 million. The company cited weaker higher-margin restructuring work and increased performance-based compensation. Nine-month EBITDA fell 19.0% to $45.6 million.
- Economic Consulting: Q3 revenue increased 6.6% to $120.5 million, but adjusted segment EBITDA fell 20.7% to $18.4 million. Nine-month EBITDA declined 29.5% to $49.5 million, with employment-contract extensions for senior professionals among the cited cost pressures.
- Strategic Communications: Q3 revenue rose 7.5% to $46.6 million and adjusted segment EBITDA increased to $6.6 million from $4.0 million. The prior-year period included the $83.8 million impairment charge.
Total adjusted segment EBITDA was $80.7 million in Q3 versus $87.4 million, and $231.6 million for nine months versus $242.3 million. Unallocated corporate expenses rose, excluding special charges, 13.8% in Q3 and 25.7% for the nine-month period, principally due to performance compensation and strategic-initiative costs.
Management commentary, outlook, risks, and unusual items
- Q3 special charges were $5.3 million, including $4.5 million associated with departures of three senior executives and $0.8 million for revised estimates of sublease income. Nine-month special charges totaled $14.7 million and also included the termination of the corporate aircraft lease and closure of a former executive office.
- Management forecast 2014 capital expenditures of $40–$44 million, including $8–$12 million in Q4. Expected acquisition-related contingent consideration was $6.7 million, payable through 2018.
- Management identified service demand, utilization and billing rates, hiring and retention, client conflicts, collections, competition, international operations, data confidentiality, software and intellectual-property risks, and economic and legal-market conditions as factors that could affect results. It warned that acquisitions or unexpected changes in business needs could require additional funding.
- The company reported ordinary-course legal claims and proceedings but said it knew of none expected to have a material adverse effect. It reported no material change in previously disclosed risk factors and no significant change in market-risk exposure.
- Management reported disclosure controls as effective and no material change in internal control over financial reporting during the quarter. The filing notes that interim results are not necessarily indicative of full-year results.
Most important facts for investors to verify
- Whether the sharp decline in nine-month operating cash flow, alongside higher receivables and DSO, reverses as collections and compensation-payment timing normalize.
- Whether adjusted EBITDA and margins recover, particularly in Corporate Finance/Restructuring and Economic Consulting, and whether Technology growth can offset its cost and mix pressures.
- How much of reported earnings and segment performance depends on non-GAAP adjustments, special charges, and the prior-year impairment comparison.
- Whether the $40–$44 million capital-expenditure forecast, debt service, and remaining contingent obligations fit within cash generation and available credit.
- The effect of executive departures and elevated corporate costs, and whether the filing’s stated risks or contingencies change in subsequent reports.