FTI Consulting, Inc. — Q3 2016 Form 10-Q
Business context and period: Global business advisory firm with five reporting segments: Corporate Finance & Restructuring, Forensic and Litigation Consulting, Economic Consulting, Technology, and Strategic Communications. This report covers the quarter and nine months ended September 30, 2016; comparisons are with the corresponding 2015 periods. Dollar amounts below are in millions unless otherwise noted.
Financial performance and position
- Q3 revenue: $438.0, down 3.8% year over year; management estimated foreign exchange reduced revenue by $8.4 (1.8%). Operating income was $35.1 versus $45.7; net income was $21.7 versus $10.3. Diluted EPS was $0.52 versus $0.25.
- Q3 adjusted measures: Adjusted EBITDA, a non-GAAP measure, was $47.2 versus $56.1, and its margin was 10.8% versus 12.3%. Adjusted diluted EPS was $0.52 versus $0.53.
- Nine-month results: Revenue was $1,368.5, up 2.4%; operating income was $131.5 versus $140.7; net income was $78.4 versus $55.7; diluted EPS was $1.88 versus $1.34. Adjusted EBITDA was $172.7 versus $170.6, and adjusted diluted EPS was $2.00 versus $1.60.
- Cash flow: Nine-month operating cash flow was $111.6 versus $43.3; investing cash outflow was $22.8, including $22.9 of capital expenditures; financing cash outflow was $6.3. Q3 operating cash flow was $70.9 versus $74.0. DSO was 106 days versus 105 a year earlier.
- Liquidity and debt: September 30 cash was $225.2. Debt principal totaled $475.0 ($300.0 of 2022 notes and $175.0 drawn on the $550.0 revolving facility); reported long-term debt, net of issuance costs, was $470.3. Available facility capacity was $373.6 after borrowings and letters of credit. Cash plus available capacity provided substantial stated liquidity.
- Balance sheet: Total assets were $2,341.6; stockholders’ equity was $1,231.6. Net accounts receivable was $547.6, including $326.3 of unbilled receivables, and goodwill was $1,188.2. Cash increased from $149.8 at December 31, 2015.
Material changes and segment trends
- Q3 revenue weakness was led by Technology, down 20.7%, and Strategic Communications, down 17.7%; Economic Consulting rose 6.9%. Corporate Finance revenue fell 2.5%, while FLC fell 1.0%.
- Technology remained the principal pressure point: nine-month revenue fell 22.0% and adjusted segment EBITDA fell to $20.3 from $33.1, reflecting lower M&A second-request and cross-border investigation activity and weaker managed-review demand and pricing.
- Economic Consulting strengthened: nine-month revenue rose 12.7% and adjusted segment EBITDA rose to $55.1 from $43.5. Corporate Finance nine-month revenue rose 12.5% and adjusted segment EBITDA to $81.4 from $71.2, although Q3 profit was pressured by lower utilization and hiring costs.
- Q3 net income benefited from the absence of the prior-year $19.6 debt-extinguishment loss and lower interest expense; those items make the GAAP earnings comparison more favorable than underlying Q3 operating performance. Interest expense fell to $6.3 from $11.7 in Q3 and to $18.8 from $36.5 for nine months.
- Nine-month results included $6.8 of special charges for employee terminations in FLC health solutions and Technology. No special charges were recorded in Q3. A remaining $11.5 special-charge liability was expected to be paid through 2026.
Outlook, commentary, and risks
- No full-year revenue or earnings guidance is provided. Management expected 2016 capital expenditures of $30–$33, including $8–$10 in Q4, and said operating cash flow and available revolver capacity should fund normal needs for at least the next 12 months, excluding acquisitions or significant unexpected changes.
- Management attributed Q3 revenue decline to lower Technology M&A and litigation-related demand and lower Strategic Communications pass-through revenue, partly offset by non-M&A antitrust demand in Economic Consulting. Adjusted EBITDA fell mainly from Corporate Finance hiring costs and Technology demand and pricing pressure.
- Key disclosed risks include volatile client demand and engagement timing, utilization and billing rates, talent retention, fee pressure, collection risk, acquisitions, foreign exchange, client-data protection, and indebtedness. Management reported no material change to previously disclosed risk factors and no legal proceedings believed likely to materially affect financial condition or results.
- Goodwill was about $1.19 billion; management reported no impairment-triggering events identified in its quarterly assessment, while noting future impairment could follow if forecasts or assumptions are not achieved. New lease accounting requirements were not yet assessed; adoption of other listed standards was not expected to have a material impact.
Important facts for investors to verify
- Whether Technology demand and pricing stabilize, and how this affects segment margins and staffing.
- Whether the recent growth in Economic Consulting and Corporate Finance revenue and profitability is sustained, including utilization trends.
- Receivable quality, unbilled receivable conversion, allowance adequacy, and DSO, which rose to 106 days.
- Debt principal, revolver availability, interest costs, and actual capital spending relative to management’s 2016 range.
- Underlying performance excluding the prior-year debt-extinguishment loss and current-year special charges; reconcile non-GAAP adjusted measures to GAAP results.