FTI Consulting Inc.’s (FCN) first quarter 2011 adjusted earnings of 48 cents per share were in line the Zacks Consensus Estimate but deteriorated from the year-ago performance of 67 cents. Earnings were lower than expected due to a host of factors like LECG Corporation acquisition-related cost, lower adjusted segment EBITDA in the corporate finance/restructuring segment as well as some incremental investments in headcount in other segments.
On a GAAP basis, earnings were the same as the adjusted earnings, indicating an improvement from 29 cents in the prior-year quarter.
FTI Consulting’s total revenue increased 3.4% year over year to $361.8 million, which outpaced the Zacks Consensus Estimate of $354.0 million. Notably, the company generated the highest quarterly revenue in its history during first quarter 2011. The increase in revenue was driven by improvements in Forensic and Litigation Consulting, Technology, Strategic Communications Businesses and Economic Consulting Revenue, partially offset by a decrease in revenues at the Corporate Finance/Restructuring segment.
Segment Details
Corporate Finance/Restructuring revenues fell 8.9% year over year to $107.3 million in the first quarter due to sluggish demand for restructuring activities and bankruptcy services resulting from continued improvements in the credit markets and the macroeconomic environment. However, the segment benefited from the health care practice and contributions from its Asia operations.
Forensic and Litigation Consulting quarterly revenues grew 5.4% year over year to $82.9 million. This upside in revenues was driven by increased momentum in Europe and Asia as well as continued strong performance in North America. However, utilization and margin were adversely affected by an $8.5 million decrease in revenues from two high profile financial fraud cases.
Quarterly revenues in the Technology segment jumped 17.7% year over year to $51.0 million. The upside was primarily attributable to benefits from higher litigation activity and increased investigation matters.
Economic Consulting revenues increased 10.3% year over year to $74.3 million in the quarter aided by strong demand for financial economics and growth in its European practices. The segment’s merger and acquisition (M&A) activities also strengthened in the quarter.
Strategic Communications revenues improved 7.3% year over year to $46.4 million in the quarter. Geographically, the three key markets, namely the Americas, Asia-Pacific and UK, contributed to the growth.
Financials
At quarter end, FTI Consulting’s cash and cash equivalents (excluding restricted cash) totaled $112.4 million, compared with $384.6 million on December 31, 2010. Shareholders’ equity totaled $1,005.0 million as of March 31, 2011, compared with $1,167.3 million on December 31, 2010.
During the first quarter of 2011, the company repurchased 4.4 million shares and expects to receive and retire approximately 600 thousand shares in May.
Guidance
FTI Consulting expects total revenue for 2011 to range between $1.50 billion and $1.54 billion (previously $1.43 billion to $1.49 billion). Diluted earnings per share are expected to remain within the range of $2.30 and $2.45 (previously $2.00 to $2.20).
Our Take
FTI Consulting’s first quarter was a mixed bag with earnings per share meeting our estimate and the top line showing an outperformance.
The company has been active in inorganic expansion. It has made over 26 acquisitions over the past five years. In January, the company announced plans to bring all its acquired firms under one brand i.e. FTI Consulting, while retaining their key professionals and brand equity, by November 2011. The strategy would help gain traction in new markets.
We believe FTI Consulting will strengthen its advisory team in U.K. and Europe via the LEGC acquisition. The company expects to add a billion dollars in revenue over the next four years through growth and acquisitions, most of which will be from Europe, Asia and Latin America. However, there are lingering concerns for the near term. The company’s organic revenue growth is expected to be muted as trends seen in the last several quarters are expected to continue.
Moreover, management expects bankruptcy and restructuring activities to remain subdued owing to easy accessibility to the debt market in an improving economy, which in turn reduced default rates. However, this factor will serve as a tailwind to the company’s M&A activities.
FTI Consulting competes mainly with CRA International Inc. (CRAI) and Navigant Consulting Inc.(NCI). FTI Consulting currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. We are also maintaining our long-term “Neutral” recommendation on the stock.
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