FTI Consulting, Inc. — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011; comparisons are with the corresponding 2010 periods. FTI provides business advisory, consulting, technology and communications services through five segments.
Financial performance
| Metric | Q2 2011 | Q2 2010 | H1 2011 | H1 2010 |
|---|---|---|---|---|
| Revenue | $400.4m | $349.0m | $762.3m | $699.1m |
| Operating income | $36.3m | $51.9m | $84.8m | $83.8m |
| Net income | $16.9m | $25.1m | $38.7m | $39.3m |
| Diluted EPS | $0.40 | $0.52 | $0.88 | $0.82 |
| Adjusted diluted EPS | $0.64 | $0.52 | $1.11 | $1.19 |
| Adjusted EBITDA | $66.5m | $65.5m | $128.2m | $141.3m |
| Operating cash flow | $26.4m | $49.2m | $(12.8)m | $22.0m |
Q2 revenue rose 14.7% (about 4.3% organic growth and 8.6% acquisition growth; approximately 2% reflected favorable currency). Adjusted EBITDA margin was 16.6%, versus 18.8% a year earlier. Reported Q2 diluted EPS included $16.8m of special charges; adjusted EPS excludes those charges. For H1, the effective tax rate was 35.4%, compared with 38.0%.
Segments and material changes
- Corporate Finance/Restructuring: Q2 revenue fell 8.3% to $101.9m and adjusted segment EBITDA fell 33.4% to $17.3m. Management attributed weakness to reduced North American bankruptcy and restructuring demand; the segment also recorded $11.0m of Q2 special charges.
- Forensic and Litigation Consulting: Q2 revenue grew 15.6% to $93.4m, while adjusted segment EBITDA was broadly flat at $19.2m. Growth included LECG practices; lower utilization and added staffing weighed on margins.
- Economic Consulting: Q2 revenue rose 46.4% to $94.5m and adjusted segment EBITDA rose 65.1% to $18.9m, reflecting LECG acquisitions and organic growth.
- Technology: Q2 revenue grew 33.5% to $57.1m and adjusted segment EBITDA grew 30.5% to $20.7m, supported by Acuity and higher unit-based and licensing revenues. Margin was pressured by revenue mix and third-party costs.
- Strategic Communications: Q2 revenue increased 7.5% to $53.6m, but adjusted segment EBITDA declined 25.2% to $6.5m. Management cited personnel costs and competitive pricing; most reported revenue growth reflected currency.
Across H1, adjusted segment EBITDA declined to $158.3m from $172.3m. Revenue-generating professionals increased to 2,825 from 2,548 at the prior-year quarter-end. The March 2011 acquisition of selected LECG practices had approximately $30m of acquisition-date consideration, including estimated contingent consideration.
Cash, debt and liquidity
- At June 30, cash and cash equivalents were $98.7m, down from $384.6m at December 31, 2010. Net accounts receivable increased to $446.2m from $326.1m, including a substantial increase in unbilled receivables.
- H1 operating cash flow was negative $12.8m, versus positive $22.0m in H1 2010. Management attributed the decline mainly to receivables mix and longer billing and collection cycles, particularly in Economic Consulting and Asia. Q2 collections were approximately $349m, and management said collection experience had not materially changed.
- H1 investing cash outflow was $64.0m, including $50.9m for acquisitions and related contingent or purchase-price payments; capital expenditures were $12.7m. Financing cash outflow was $209.5m, primarily the $209.4m accelerated share buyback.
- Total debt was $796.8m, including $400m of 6.75% senior notes due 2020, $217.2m of 7.75% senior notes due 2016, and $144.1m carrying value of 3.75% convertible notes due 2012. Long-term debt and lease obligations, net of current portion, were $790.3m. Fair value of long-term debt was $849.0m versus carrying value of $814.8m.
- No borrowings were outstanding under the $250m revolving facility; $247.2m was available after letters of credit. Management said cash, operating cash flows and facility availability should meet needs for at least 12 months. Planned capital expenditures for the remainder of 2011 were $27m–$35m.
Outlook, risks and unusual items
- The filing provides no specific revenue or earnings guidance. Management’s outlook assumes adequate liquidity for at least 12 months, subject to business conditions and potential acquisition or other unanticipated funding needs.
- Q2 special charges of $16.8m included $10.4m of employee-related costs, $3.6m for loan forgiveness and accelerated equity vesting, and $2.8m of deferred service-contract costs. They related to realignment and a 37-person workforce reduction; $6.4m was noncash. Expected cash outflow was $10.4m, with most remaining payments expected in 2011 and the balance in 2012.
- The $209.4m accelerated buyback had delivered 5.1m shares by June 30; final settlement was contemplated for December 2011 and could result in additional shares. Shares outstanding were 41.6m at July 28, 2011, versus 46.1m at December 31, 2010.
- The $149.9m principal amount of convertible notes was not convertible at June 30 under the specified share-price test. The filing stated the notes would become classified as current when within one year of maturity, in July 2011. Conversion or repayment terms could affect future cash needs.
- Risks cited include demand and engagement mix, utilization and billing rates, professional retention, competition and pricing, acquisition integration, international operations, receivable collection, indebtedness, and economic, restructuring and litigation trends. Ordinary-course legal matters were not expected by management to materially affect financial position or results; no material changes to previously disclosed risk factors were reported.
Key facts for investors to verify
- Whether higher unbilled receivables convert to cash and operating cash flow recovers after the first half.
- Whether Corporate Finance/Restructuring demand and segment margins stabilize, and whether growth in Economic Consulting and Technology persists.
- How much of revenue and profit growth reflects acquired businesses, organic performance or currency effects, particularly after LECG integration.
- Final share count and settlement of the accelerated buyback, and the timing and funding of convertible notes as they approach maturity.
- Actual special-charge cash payments, acquisition-related contingent obligations, and capital spending versus management’s stated range.