Business context and reporting period
FTI Consulting, Inc. is a global business advisory firm providing professional services through five segments: Corporate Finance/Restructuring, Forensic and Litigation Consulting, Economic Consulting, Technology, and Strategic Communications. This unaudited Form 10-Q covers the three months ended March 31, 2014; comparisons are with the three months ended March 31, 2013. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q1 2014 | Q1 2013 |
|---|---|---|
| Revenue | $425.6 million | $407.2 million |
| Operating income | $40.1 million | $45.3 million |
| Net income | $18.1 million | $23.7 million |
| Diluted EPS | $0.45 | $0.58 |
| Adjusted EBITDA (non-GAAP) | $51.2 million | $59.3 million |
| Cash used in operations | $110.8 million | $2.3 million |
- Revenue increased 4.5%; management attributed $10.9 million, or 2.7%, to acquisitions, with the balance mainly reflecting organic growth.
- Operating margin was approximately 9.4%, versus 11.1% a year earlier; net margin was approximately 4.3%, versus 5.8%. Adjusted EBITDA margin declined to 12.0% from 14.6%.
- Cash and cash equivalents were $77.0 million at March 31, down from $205.8 million at year-end 2013. Current assets were $731.2 million and current liabilities $299.2 million.
- Accounts receivable, net, rose to $545.1 million from $476.4 million. Days sales outstanding was 106 days, versus 96 days a year earlier.
- Gross debt was $737.0 million, including $400 million of 6.75% senior notes due 2020, $300 million of 6.0% notes due 2022, $20 million drawn on the revolving facility, and $17 million payable to former acquisition shareholders. Long-term debt carrying value was $711.0 million. The filing reports fair value of long-term debt at $777.3 million.
- Operating cash outflow reflected seasonal bonus payments, increased funding of employee notes, and receivables timing. Investing cash outflow was $30.8 million, including $15.2 million of capital expenditures. Financing provided $13.0 million, including $20.0 million of net revolver borrowings.
Material changes versus the prior comparable period
- Forensic and Litigation Consulting revenue rose 20.6% to $121.4 million and adjusted segment EBITDA rose to $26.5 million from $12.8 million, supported by higher demand, utilization, and operating leverage.
- Technology revenue increased 28.6% to $60.1 million and adjusted segment EBITDA rose 26.5% to $17.3 million, although gross margin narrowed.
- Corporate Finance/Restructuring revenue declined 5.1% to $94.0 million and adjusted segment EBITDA fell to $11.0 million from $19.1 million, amid weak restructuring demand, lower realized rates, and fewer success fees.
- Economic Consulting revenue declined 7.2% to $106.9 million and adjusted segment EBITDA fell to $13.0 million from $26.2 million, reflecting weaker demand and utilization, especially in financial economics and EMEA practices.
- Strategic Communications revenue decreased 4.9% to $43.2 million and adjusted segment EBITDA declined to $2.7 million from $3.6 million, in part because of lower pass-through and retained income.
- Total adjusted segment EBITDA fell 6.4% to $70.6 million. Higher unallocated corporate expense, up $3.1 million to $20.4 million, also weighed on results.
Outlook, management commentary, risks, and unusual items
- No earnings or revenue guidance is provided. Management forecast 2014 capital expenditures of $40–$44 million, with $27–$31 million expected for the remainder of the year.
- Management said operating cash flows, supplemented by short-term revolver borrowings if needed, should fund normal cash needs for at least the next 12 months. This expectation excludes potential acquisitions and significant unexpected changes in staffing or business conditions.
- Management noted that first-quarter cash needs typically exceed operating cash generation, principally because of annual incentive compensation and acquisition-related payments. Cash collections were flat year over year despite revenue growth; revenue growth late in the quarter and milestone billing cycles contributed to higher receivables and DSO.
- Q1 2014 included a $2.1 million gain from remeasurement of acquisition-related contingent consideration, which increased reported income; adjusted measures exclude this gain. Q1 2013 included a favorable discrete tax item related to an IRS audit. The 2014 effective tax rate was 36.4%, versus 29.4% reported in 2013 (37.1% excluding that prior-year discrete item).
- No special charges were recorded in Q1 2014. Previously recorded restructuring and transition liabilities totaled $24.4 million at March 31; total expected cash outflow for those charges was $48.5 million, of which $24.1 million had been paid.
- Key disclosed risks include fluctuations in client demand and cash flows, professional retention and utilization, fee pressure, receivables collection, acquisition integration, international operations, data protection, and the company’s debt. Management reported no material change in previously disclosed risk factors, no material legal claims known to it, and effective disclosure controls.
Important facts for investors to verify
- Whether higher receivables and 106-day DSO convert into cash, and whether operating cash flow normalizes after seasonal compensation payments.
- Whether weakness in Corporate Finance/Restructuring and Economic Consulting persists, and whether growth and margin gains in Forensic and Litigation Consulting and Technology are sustainable.
- The trajectory of adjusted EBITDA and margins, including the impact of corporate costs and the distinction between GAAP results and management’s non-GAAP measures.
- Liquidity and debt capacity: the company reported $328.6 million of available revolver capacity after $20.0 million drawn and $1.4 million of letters of credit.
- Execution of the $40–$44 million capital expenditure plan and payment timing for acquisition-related and legacy restructuring obligations.