FTI Consulting, Inc. — Q2 2010 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2010. FTI 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 millions except per-share data.
Financial performance
| Metric | Q2 2010 | Q2 2009 | Six months 2010 | Six months 2009 |
|---|---|---|---|---|
| Revenue | $349.0 | $360.5 | $699.1 | $708.4 |
| Operating income | $51.9 | $71.4 | $83.8 | $132.0 |
| Net income | $25.1 | $37.2 | $39.3 | $68.9 |
| Diluted EPS | $0.52 | $0.69 | $0.82 | $1.29 |
| Adjusted EBITDA | $65.5 | $84.6 | $141.3 | $158.5 |
- Q2 revenue declined 3.2%; operating income fell 27.2% and net income 32.7% year over year. Operating margin was approximately 14.9%, versus 19.8%.
- Q2 adjusted EBITDA margin was 18.8%, down from 23.5%. Six-month adjusted EBITDA excludes the $30.2 million special charge recorded in Q1.
- For the six months, revenue declined 1.3%, operating income declined 36.5%, and diluted EPS declined 36.4%. The six-month operating results include the Q1 special charge.
- Operating cash flow was $22.0 million for the first half, versus $43.7 million a year earlier. Q2 operating cash flow was $49.2 million, versus $53.4 million.
- At June 30, cash was $123.3 million; total debt was $561.3 million and capital lease obligations were $0.5 million. Cash less total debt was approximately negative $438.1 million. The company had no revolver borrowings and reported $171.2 million of availability under its $175 million facility, net of letters of credit.
- Total assets were $2.10 billion, including $1.20 billion of goodwill. Current assets were $532.7 million and current liabilities $366.4 million.
Material changes and segment trends
- Corporate Finance/Restructuring was the main drag: Q2 revenue fell 17.1% to $111.1 million; utilization declined to 65% from 76%, and adjusted segment EBITDA fell 45.2% to $26.0 million. Management attributed weakness to declining restructuring, bankruptcy, and transaction-advisory demand.
- Technology Q2 revenue fell 11.8% to $42.8 million and adjusted segment EBITDA fell 17.4% to $15.9 million. Competitive pricing and lower channel-partner and unit-based revenue pressured results and margins.
- Forensic and Litigation Consulting Q2 revenue rose 5.8% to $80.8 million, but adjusted segment EBITDA declined 7.2% to $19.3 million as personnel and benefit costs grew. Economic Consulting revenue rose 13.0% to $64.6 million and adjusted segment EBITDA rose 10.7% to $11.5 million. Strategic Communications revenue rose 11.9% to $49.8 million and adjusted segment EBITDA rose 46.9% to $8.6 million.
- SG&A fell 7.5% in Q2, partly offsetting lower demand and higher employee-related costs in certain segments. Headcount was 3,366, down 48 (1.4%) year over year.
Outlook, risks, and unusual items
- Management described the economy as moving from recession toward early recovery: procyclical activities showed signs of growth, while restructuring and bankruptcy work declined faster than expected. European sovereign-debt concerns, unemployment, and regulatory uncertainty were cited as constraints on corporate spending. No specific revenue or earnings guidance was provided.
- Management expected 2010 capital expenditures of $25–$30 million and stated that cash and available revolver capacity should meet needs for at least the next 12 months. That assessment excludes future acquisitions and unexpected material changes in business conditions or staffing.
- Q1 included $30.2 million of special charges for a 144-person workforce reduction, four office consolidations, and accelerated software amortization; $8.7 million was noncash. Expected related cash outflow was $21.5 million, of which $10.8 million had been paid by June 30.
- The $149.9 million principal amount of 3¾% convertible notes became convertible through October 15, 2010 after the share-price conversion condition was met in July. Conversion could require cash, shares, or both at FTI’s option for value above principal.
- Acquisition-related share-price guarantees could produce cash payments; the filing estimates total outflows of $12.0 million under the June 30 share-price scenario and $18.7 million if the share price were 30% lower. Ordinary-course legal matters were not expected by management to materially affect results.
- In July, FTI repurchased and retired 336,000 shares for $11.1 million, funded from cash. Management identified risks including demand, utilization and pricing, professional retention, receivable collection, competition, acquisitions, international operations, indebtedness, and economic and market conditions.
Important facts for investors to verify
- Whether demand, utilization, and margins stabilize in Corporate Finance/Restructuring and Technology, and whether growth in other segments can offset further weakness.
- Cash conversion and working-capital trends, particularly receivables and employee-related payments, given the first-half operating-cash-flow decline.
- The timing and form of any convertible-note conversions, related cash or share dilution, and subsequent repurchase activity.
- Actual cash payments against the restructuring charges and potential acquisition earn-outs or share-price guarantees.
- Whether capital expenditures, acquisitions, and repurchases remain consistent with liquidity and debt-service capacity.