FTI CONSULTING, INC quarterly report, Q3 FY2010

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FTI Consulting, Inc. — Q3 2010 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2010. FTI provides global business advisory services through five segments: Corporate Finance/Restructuring, Forensic and Litigation Consulting, Economic Consulting, Technology, and Strategic Communications. Financial amounts below are in U.S. dollars; millions unless noted.

Financial performance

  • Q3 revenue: $346.1 million, down 0.7% year over year. Operating income was $50.0 million versus $64.3 million; net income was $22.0 million versus $37.6 million. Diluted EPS was $0.47 versus $0.70; adjusted diluted EPS was $0.54 versus $0.70.
  • Q3 margins and EBITDA: Operating margin was approximately 14.4%, compared with 18.4% a year earlier. Adjusted EBITDA was $65.0 million, or 18.8% of revenue, versus $77.9 million, or 22.3%.
  • Nine-month results: Revenue was $1,045.2 million, down 1.1%; operating income was $133.8 million versus $196.3 million; net income was $61.2 million versus $106.5 million. Diluted EPS was $1.28 versus $1.99; adjusted diluted EPS was $1.73 versus $1.99. Adjusted EBITDA declined to $206.4 million from $236.4 million.
  • Cash flow: Nine-month cash from operations was $95.9 million, down from $163.5 million. Investing used $60.6 million and financing provided $178.0 million. Cash and cash equivalents ended at $331.2 million, up from $118.9 million at year-end 2009. Management also reported Q3 operating cash flow of $73.9 million versus $119.9 million in Q3 2009.
  • Liquidity and debt: At September 30, cash was $331.2 million and available capacity on the new $250 million revolving facility was $246.4 million; there were no revolver borrowings and $3.6 million of letters of credit reduced availability. Total debt was $810.3 million, excluding capital leases. Debt fair value was $869.8 million versus carrying value of $828.3 million.
  • Balance sheet: Total assets were $2.404 billion and stockholders’ equity was $1.168 billion. Net accounts receivable was $346.3 million, including $148.2 million of unbilled receivables.

Material changes and segment trends

  • Corporate Finance/Restructuring was the main source of weakness: Q3 revenue fell 14.1% to $109.7 million and adjusted segment EBITDA fell 38.7% to $26.7 million. Management cited reduced demand for restructuring and bankruptcy work, as challenged borrowers continued operating amid active debt markets.
  • Q3 revenue increased in Forensic and Litigation Consulting (11.9%), Technology (10.4%), and Strategic Communications (5.8%); Economic Consulting was nearly flat. Growth in those businesses was offset by Corporate Finance/Restructuring.
  • For the nine months, Forensic and Litigation Consulting, Economic Consulting and Strategic Communications grew revenue, while Corporate Finance/Restructuring and Technology declined. Total adjusted segment EBITDA fell to $252.3 million from $289.8 million.
  • Cash from operations weakened due principally to slower receivable collections and a mix shift away from restructuring clients with upfront payment requirements, as well as workforce-related and compensation payments.

Outlook, significant items and risks

  • Management stated that cash, expected operating cash flow and revolver availability should cover capital and liquidity needs for at least the next 12 months. 2010 capital expenditures were estimated at $25–$30 million. The filing provides no specific revenue or earnings forecast.
  • FTI issued $400 million of 6.75% senior notes due 2020 and used part of the proceeds to tender for its 7.625% notes due 2013. It also refinanced its revolving facility, increasing it from $175 million to $250 million and extending maturity to September 2015. A $5.2 million loss on early debt extinguishment was recorded.
  • The August acquisition of FS Asia Advisory had an estimated purchase price of $82 million, including cash, seller notes and contingent consideration; it added 130 professionals and expanded the company’s Asian restructuring and advisory presence.
  • Nine-month special charges totaled $30.2 million, principally for workforce reductions, office consolidation and accelerated software amortization. Expected cash outflow was $21.3 million, of which $13.5 million had been paid by September 30. Q3 also included a $2.8 million Technology-segment charge for development and prepaid licensing costs tied to an offering to be replaced by alternative technologies.
  • Management described an uneven economic recovery, restrained discretionary spending and reduced restructuring demand. Other risks include lower utilization or billing rates, collection and nonpayment risk, acquisition integration, competition, and substantial indebtedness. Debt covenants, variable-rate exposure and possible Convertible Note conversion cash requirements are relevant. FTI reported no legal matters it believed would materially affect results and said disclosure controls were effective.

Key investor verification points

  • Assess whether Corporate Finance/Restructuring demand and profitability recover, and whether growth in other segments can offset further weakness.
  • Track receivables, unbilled balances, collection timing and operating cash flow conversion.
  • Verify debt maturities, covenant compliance, refinancing effects and the potential cash or dilution impact of Convertible Notes.
  • Review FS Asia Advisory integration, contingent consideration and whether expected acquisition performance supports the recorded goodwill.
  • Monitor remaining restructuring-related cash payments, the impact of Technology’s replacement offering, and actual capital expenditures against the $25–$30 million estimate.