FTI Consulting, Inc. — Q3 2011 Form 10-Q
Reporting period: Three and nine months ended September 30, 2011; filed November 9, 2011. Amounts below are in millions unless stated otherwise. FTI is a global business advisory firm with five segments: Corporate Finance/Restructuring, Forensic and Litigation Consulting, Economic Consulting, Technology, and Strategic Communications.
Financial performance and position
| Metric | Q3 2011 | Q3 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Revenue | $413.8 | $346.1 | $1,176.1 | $1,045.2 |
| Operating income | $59.4 | $46.9 | $137.2 | $126.8 |
| Net income | $29.4 | $20.2 | $64.0 | $57.1 |
| Diluted EPS | $0.70 | $0.43 | $1.47 | $1.19 |
| Adjusted EBITDA | $73.6 | $62.2 | $193.3 | $198.7 |
Q3 revenue rose 19.5%, including estimated organic growth of 10.1%, acquisition growth of 8.4%, and favorable currency effects of about 1.1%. Operating margin was approximately 14.4% versus 13.6%; adjusted EBITDA margin was 17.8% versus 18.0%. Nine-month revenue increased 12.5%, but adjusted EBITDA declined about 2.7%. Adjusted EBITDA is a non-GAAP measure as defined by the company.
- Segment trends: Q3 revenue grew notably in Economic Consulting (+61%), Technology (+33%), and Forensic and Litigation Consulting (+18%). Corporate Finance/Restructuring was nearly flat for the quarter and down 5.6% for the nine-month period, reflecting weaker restructuring demand. Strategic Communications revenue grew modestly, but its nine-month adjusted segment EBITDA fell 10.6%.
- Cash flow: Nine-month operating cash flow was $46.8, down from $95.9; investing cash outflow was $87.1 and financing cash outflow was $215.4. Management reported Q3 operating cash flow of $59.7 versus $73.9 in Q3 2010. Receivables and slower collection cycles were significant cash-flow pressures.
- Liquidity and debt: September 30 cash was $128.2, down from $384.6 at year-end 2010. Total debt was $797.4, versus $792.8 at year-end; cash less total debt was approximately negative $669.2. Current debt included $149.9 principal amount of convertible notes due in 2012. The company had $249.3 available under its $250 revolving facility and no revolver borrowings outstanding. Current assets were $677.5 and current liabilities $446.1.
- Other balance-sheet items: Net receivables were $469.0 versus $326.1 at year-end; goodwill was $1,295.7 and total assets were $2,326.5. The company spent $209.4 on its completed accelerated share buyback, receiving 5.73 million shares at an average $36.52 per share.
Material changes and notable items
- FTI revised prior-period financial information after reviewing its Senior Managing Director Incentive Compensation Program. It determined certain forgivable-loan and share-award costs should have been expensed over shorter periods. The company described the prior-period error as immaterial, but said recording the cumulative correction in Q3 would be material; it revised comparative information and planned further revisions in subsequent filings. The correction reduced 2011 first-half net income by $4.1 and reduced prior-year net income by $5.9 in 2010, with smaller reductions for 2006–2009.
- The March 2011 acquisitions of LECG practices involved approximately $30.0 of consideration, including $27.0 cash and estimated $3.0 contingent consideration. FTI also recorded $1.5 of acquisition-related costs in 2011.
- Nine-month special charges were $15.2, including workforce and senior-management realignment costs, accelerated compensation expense, and deferred contract costs. The actions included a 37-person workforce reduction. About $7.1 remained payable at September 30, with approximately $2.7 expected in the rest of 2011 and $4.4 in 2012.
- Interest expense increased to $44.1 for nine months from $34.6, primarily reflecting the 2020 senior notes issued in 2010 and acquisition-related notes. Interest-rate swaps partly offset the increase.
Outlook, risks, and contingencies
FTI provided no specific revenue or earnings guidance in the supplied filing text. Management said cash on hand, expected operating cash flows, and available revolver capacity should fund capital and liquidity needs for at least the next 12 months. It estimated remaining-2011 capital expenditures of $4–$11. Management cautioned that acquisitions, changing economic conditions, unexpected costs, or business-plan changes could increase funding needs and potentially require additional financing.
Key stated risks include demand and engagement mix, utilization and pricing, professional retention, acquisition integration, receivable collection, economic and capital-market conditions, competition, foreign operations, indebtedness, and data-privacy or e-discovery rules. Management said ordinary-course legal matters were not expected to materially affect results and reported no material changes to previously disclosed risk factors. Remaining acquisition-related stock-price guarantees were estimated at $8.4 under the September 30 share-price scenario and $10.5 if the share price were 20% lower. Contingent consideration liabilities from post-2008 acquisitions totaled $24.7. Management reported disclosure controls effective and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Review the accounting revision, related comparative restatements, and any later filings revising additional periods.
- Track receivables, collection timing, and operating cash flow, which weakened despite strong revenue growth.
- Assess the near-term convertible-note maturity, total debt service, and liquidity after the large share repurchase.
- Monitor segment profitability: nine-month Corporate Finance/Restructuring and Strategic Communications adjusted EBITDA declined, while other segments grew.
- Check acquisition integration, remaining contingent consideration and stock-price guarantees, and the company’s ability to sustain margins amid hiring and infrastructure investment.