FTI Consulting, Inc. — 2017 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017. The filing also provides unaudited fourth-quarter results. FTI Consulting is a global business advisory firm with five segments: Corporate Finance & Restructuring, Forensic and Litigation Consulting, Economic Consulting, Technology, and Strategic Communications.
Financial performance and liquidity
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Revenue | $1.808 billion | $1.810 billion |
| Operating income | $108.7 million | $142.2 million |
| Net income | $108.0 million | $85.5 million |
| Diluted EPS | $2.75 | $2.05 |
| Adjusted EBITDA (non-GAAP) | $192.0 million | $203.0 million |
| Adjusted EBITDA margin (non-GAAP) | 10.6% | 11.2% |
| Cash from operating activities | $147.6 million | $233.5 million |
| Free cash flow (non-GAAP) | $115.6 million | $204.6 million |
| Cash and cash equivalents at year-end | $190.0 million | $216.2 million |
| Long-term debt, net of issuance costs | $396.3 million | $365.5 million |
| Working capital | $383.9 million | $404.7 million |
Operating margin was approximately 6.0% in 2017 versus 7.9% in 2016. The 2017 net income included a $44.9 million net tax benefit from the Tax Cuts and Jobs Act; adjusted diluted EPS, which excludes that benefit and specified other items, was $2.32 versus $2.24.
At year-end, the company had $100 million drawn under its $550 million revolving credit facility, $1 million of letters of credit, and $449 million of available borrowing capacity. It reported compliance with debt covenants. The $300 million of 6% senior notes mature in 2022; the revolving facility matures in 2020. DSO was 91 days, unchanged from 2016.
Fourth-quarter results
Fourth-quarter 2017 revenue was $467.7 million versus $441.9 million in the prior-year quarter. Net income was $66.9 million versus $7.1 million, and operating income was $34.5 million versus $10.7 million. Fourth-quarter 2017 net income included a $38.5 million income tax benefit; results therefore reflect a substantial tax-related benefit.
Material changes versus prior year
- Revenue was essentially flat, down 0.1%. FLC revenue rose 1.0%, while Corporate Finance & Restructuring declined 0.3%, Economic Consulting declined 0.9%, Technology declined 1.6%, and Strategic Communications increased 0.7%.
- Adjusted EBITDA declined 5.4%, and adjusted EBITDA margin fell 0.6 percentage points. Management cited lower revenue and higher compensation in Corporate Finance and Economic Consulting, partly offset by lower FLC compensation.
- Operating income fell 23.5%, reflecting special charges of $40.9 million, compared with $10.4 million in 2016. The 2017 charges primarily related to workforce reductions, office lease exit costs, and other restructuring actions.
- Operating cash flow decreased 36.8%, primarily due to higher compensation payments, including bonuses and severance, and lower collections; lower income tax payments partly offset the decline.
- Net income increased 26.2%, primarily because of the $44.9 million Tax Act benefit, despite lower operating income. The tax benefit included a $65.1 million deferred-tax remeasurement benefit and $18.7 million transition-tax expense.
- The company repurchased 4.7 million shares for approximately $168.0 million during 2017. It had $113.3 million remaining under its repurchase authorization at year-end.
Outlook, commentary, risks, and unusual items
- Management expected 2018 capital expenditures of $28 million to $38 million and stated that operating cash flows, supplemented by the credit facility if needed, were expected to fund normal operating needs for at least the next 12 months. The filing does not provide a specific revenue or earnings forecast.
- Management expected the newly adopted revenue-recognition standard to have an immaterial financial-statement impact, apart from increased disclosures; some contingent or success-fee revenue may be recognized earlier. The company planned to finalize Tax Act calculations in the second half of 2018.
- Key risks include fluctuating demand and utilization, pricing pressure and fee collection risk, competition and technology change in e-discovery, cybersecurity and client-data protection, retention and recruitment of senior professionals, international and foreign-exchange exposure, and debt covenant and variable-rate interest risks.
- Management reported no known pending legal proceeding expected to materially affect financial condition or operating results. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting.
- The company did not anticipate cash dividends in the foreseeable future; debt agreements may also restrict dividends.
Important facts for investors to verify
- How much of reported earnings growth reflects the one-time Tax Act benefit, and how do adjusted earnings reconcile to GAAP results?
- Whether operating cash flow and collections recover after the significant 2017 decline; review the receivables allowance and the $15.4 million doubtful-account provision.
- Whether segment profitability stabilizes, particularly in Economic Consulting, Corporate Finance, Technology, and Strategic Communications, where utilization or segment earnings weakened.
- How the Technology segment addresses declining hosting prices, competition, and software-market changes.
- The timing and cash cost of the remaining restructuring obligations, debt maturities, and share repurchases relative to free cash flow and liquidity.