FTI Consulting, Inc. — Q2 2014 Form 10-Q
Reporting period: Three and six months ended June 30, 2014; year-over-year comparisons are to the corresponding 2013 periods. Dollar amounts are in millions unless otherwise noted.
Business context
FTI Consulting is a global business advisory firm with five segments: Corporate Finance/Restructuring, Forensic and Litigation Consulting, Economic Consulting, Technology, and Strategic Communications. Revenue is primarily from professional services, including hourly, fixed-fee, retainer, success-fee, and technology-based arrangements.
Financial performance
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Revenue | $454.3 | $414.6 | $879.9 | $821.8 |
| Operating income | $38.9 | $60.3 | $79.0 | $105.6 |
| Net income | $17.2 | $23.5 | $35.4 | $47.2 |
| Diluted EPS | $0.42 | $0.58 | $0.87 | $1.17 |
| Adjusted EBITDA | $59.9 | $66.0 | $111.1 | $125.3 |
| Adjusted EBITDA margin | 13.2% | 15.9% | 12.6% | 15.3% |
| Operating cash flow | $33.7 | $21.7 | $(77.1) | $19.4 |
Q2 revenue increased 9.6%, while operating income fell 35.4% and net income fell 26.6%. The $9.4 million special charge reduced Q2 diluted EPS by $0.14; adjusted diluted EPS was $0.55 versus $0.38 a year earlier. For the first half, revenue rose 7.1%, but operating income and net income declined. Adjusted EBITDA fell 11.4% for the half.
Segment trends
- Forensic and Litigation Consulting: Q2 revenue grew 13.3%; six-month revenue grew 16.8%, supported by disputes and investigations demand. Six-month adjusted segment EBITDA rose 54.5% to $48.8 million.
- Technology: Q2 revenue rose 18.6% and first-half revenue 23.4%, driven by complex global investigations. Profitability lagged revenue growth: Q2 adjusted segment EBITDA declined 10.6%, and gross margin fell to 45.7% from 54.8%.
- Corporate Finance/Restructuring: Q2 revenue increased 7.6%, but first-half adjusted segment EBITDA declined 18.5% to $30.1 million; management cited weak global bankruptcy activity, compensation costs, and investment in European transaction advisory.
- Economic Consulting: Q2 revenue rose 5.6%, but first-half revenue declined 0.9% and adjusted segment EBITDA fell 33.9% to $31.1 million, reflecting lower North American financial economics demand and higher senior-professional compensation.
- Strategic Communications: Q2 revenue rose 5.4%; first-half revenue was broadly flat. First-half adjusted segment EBITDA declined 2.4% to $8.6 million.
Balance sheet, debt and liquidity
- At June 30, cash and cash equivalents were $94.4 million, down from $205.8 million at year-end 2013. Total assets were $2.37 billion and stockholders’ equity was $1.11 billion.
- Total debt was $717.0 million, including $400 million of 6.75% senior notes due 2020 and $300 million of 6.0% senior notes due 2022. No borrowings were outstanding under the $350 million senior secured credit facility; $348.6 million remained available after letters of credit.
- Six-month operating cash use was $77.1 million, versus $19.4 million provided in 2013. Management attributed the deterioration chiefly to salary and bonus payment timing, higher salary costs, and headcount additions. Accounts receivable and unbilled receivables also used cash.
- Days sales outstanding rose to 108 days from 99 days a year earlier. Management cited increased unbilled receivables in Asia-Pacific liquidation work subject to lengthy regulatory proceedings and extended payment terms on large engagements.
- Six-month investing cash use was $37.4 million, including $21.8 million in capital expenditures. Financing activities provided $3.6 million, including $11.6 million of refundable deposits related to a foreign entity.
Management outlook, unusual items and risks
- Management expects full-year 2014 capital expenditures of $37–$40 million and believes operating cash flows, supplemented by credit-facility borrowings if needed, will fund normal cash requirements for at least the next 12 months. This assessment excludes potential acquisitions and unexpected significant changes.
- Q2 special charges of $9.4 million comprised $7.9 million for termination of the corporate airplane lease and $1.5 million for closure of the West Palm Beach executive office and related lease termination; $0.6 million was non-cash.
- Management cited performance-based compensation, corporate initiatives, and targeted hiring and investment as pressures on margins. A $6.9 million tax valuation allowance for U.S. foreign tax credits had raised the prior-year Q2 tax expense; the company’s Q2 2014 effective tax rate was 37.2%.
- The filing identifies risks including service-demand fluctuations, professional retention and utilization, client conflicts, pricing pressure, receivable collection, acquisitions and integration, international operations, data confidentiality, and changes in legal, regulatory, economic, and capital-market conditions. Management reported no material change in previously disclosed risk factors and no known legal proceeding expected to materially affect financial condition or results.
- FTI was evaluating the impact and transition approach for new revenue-recognition guidance effective for periods beginning after December 15, 2016. Management reported no interim goodwill impairment trigger and no material change in market-risk exposure.
Important facts for investors to verify
- Whether elevated DSO and Asia-Pacific unbilled receivables convert to cash on expected timelines, and how collection quality develops.
- Whether first-half operating cash use reflects timing and seasonal payments or persists, given the decline in cash balances.
- Whether revenue growth can translate into stronger margins, particularly in Technology, Economic Consulting, and Corporate Finance/Restructuring.
- The effects of the $9.4 million lease-related charges and continuing payments for previously recorded special charges; the filing estimates $6.2 million of such payments for the remainder of 2014.
- Execution of the $37–$40 million capital expenditure plan, available credit capacity, and debt service on the senior notes.
- Management’s assumptions behind its 12-month liquidity assessment and the eventual effect of the new revenue-recognition standard.