FTI CONSULTING, INC quarterly report, Q2 FY2016

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FTI Consulting, Inc. — Q2 2016 Form 10-Q

Business context and reporting period. FTI Consulting is a global business advisory firm with five reportable segments: Corporate Finance & Restructuring, Forensic and Litigation Consulting (FLC), Economic Consulting, Technology, and Strategic Communications. This unaudited report covers the quarter and six months ended June 30, 2016, compared with the same 2015 periods. Amounts below are in U.S. dollars and rounded to millions unless stated otherwise.

Financial performance

  • Q2 revenue: $460.1 million, up 2.5% year over year; management estimated foreign exchange reduced growth by 1.2%. Revenue excluding that estimated impact grew 3.7%.
  • Q2 earnings: Operating income was $44.2 million, down from $47.2 million; operating margin was approximately 9.6%, versus 10.5%. Net income rose 22.3% to $26.5 million; diluted EPS was $0.64 versus $0.52. Adjusted EBITDA, a non-GAAP measure, increased 1.4% to $56.6 million, while its margin eased to 12.3% from 12.4%. Adjusted diluted EPS was $0.66 versus $0.50.
  • Six-month results: Revenue increased 5.6% to $930.4 million. Operating income was $96.4 million versus $95.0 million; net income rose to $56.7 million from $45.4 million. Diluted EPS was $1.37 versus $1.09; Adjusted EBITDA was $125.4 million versus $114.5 million, and adjusted diluted EPS was $1.49 versus $1.07.
  • Segment trends, Q2 year over year: Corporate Finance revenue rose 21.1% to $132.1 million, with operating income up 39.1%. Economic Consulting revenue grew 8.6% to $118.0 million, while operating income was nearly flat. Strategic Communications revenue increased 15.1% to $49.9 million and operating income rose 69.4%. FLC revenue fell 6.3% to $118.2 million and operating income declined 35.5%. Technology revenue dropped 32.3% to $41.9 million and operating income fell to $0.9 million from $8.5 million.
  • Cash flow and liquidity: Operating cash flow was $73.7 million in Q2 versus $20.6 million a year earlier. For the first half, it was $40.6 million versus cash used of $30.7 million. Management cited stronger collections and lower interest and other operating payments, partly offset by compensation payments. DSO improved to 100 days from 104 days year over year. Cash and equivalents were $182.7 million at June 30, 2016, up from $149.8 million at year-end 2015.
  • Debt and capital: Gross debt was $500.0 million: $300.0 million of 6% senior notes due 2022 and $200.0 million drawn on a $550.0 million revolving credit facility. Available borrowing capacity was $348.6 million after outstanding letters of credit. The company reported $1.20 billion in stockholders’ equity.
  • Other balance-sheet items: Net accounts receivable increased to $547.3 million from $499.8 million at year-end; unbilled receivables were $330.7 million. Goodwill was $1.19 billion. Total assets were $2.29 billion.

Material changes and management commentary

  • Growth was led by Corporate Finance, helped by higher demand for distressed services in North America and EMEA, and Economic Consulting, supported by financial economics and antitrust work. Currency movements reduced reported revenue growth.
  • Technology faced sharply lower demand for M&A-related second requests, cross-border investigations, and managed review; utilization, pricing, headcount, and margins were under pressure. FLC weakness reflected lower health-solutions demand and success fees, with lower utilization; management also noted strength in risk and investigations services.
  • Interest expense fell about 49.5% in both the quarter and first half compared with 2015, reflecting lower average rates and borrowings following the 2015 debt restructuring. Foreign-currency transaction gains also supported earnings: $3.0 million in Q2 and $4.4 million for the first half, principally associated with a weaker British pound.
  • Special charges were $1.8 million in Q2 and $6.8 million year to date, primarily for employee terminations in FLC’s health-solutions practice and earlier Technology reductions. The company said the FLC actions followed elimination of offerings no longer aligned with the practice’s strategic focus. The remaining special-charge liability was $14.1 million at June 30, with payments expected through 2026.
  • Other comprehensive loss was $18.8 million in Q2 and $19.2 million for the first half, principally from foreign-currency translation; Q2 comprehensive income was $7.7 million.
  • The board authorized a $100 million share repurchase program on June 2, 2016; no shares were purchased under the program through June 30. The company repurchased and retired $2.9 million of shares during the first half, separately reported in the filing.

Outlook, risks, and contingencies

  • No specific revenue or earnings guidance was provided. Management estimated 2016 capital expenditures of $35 million to $45 million and said operating cash flow, supplemented by revolver borrowings if needed, should fund normal cash needs for at least the next 12 months.
  • Management cautioned that cash needs could rise with acquisitions, changing business plans or economic conditions, weaker-than-expected performance, staffing changes, or other unexpected spending. Future capital needs could require additional financing, potentially on less favorable terms.
  • Key stated risks include changes in demand, professional utilization and billing rates, client collection and non-payment risk, competition and talent retention, client conflicts, economic and legal-market conditions, foreign operations and currency movements, data privacy and security, software obsolescence or intellectual-property risks, and the amount and terms of debt.
  • The company said ordinary-course legal matters were not expected to materially affect financial condition or results, and reported no material change to previously disclosed risk factors. It identified no interim goodwill impairment trigger at June 30, but noted future impairment could result if forecasts or assumptions are not achieved.
  • Management was evaluating the effects of new accounting standards, including revenue recognition (effective for the company beginning in 2018), leases (2019), and credit losses (2020); impacts had not yet been determined for several standards.

Important facts for investors to verify

  • Whether Technology’s steep revenue and margin declines stabilize, and whether FLC demand and utilization recover.
  • Whether revenue growth converts into sustainable operating profit, given lower Q2 operating income and the modest decline in adjusted EBITDA margin.
  • Receivable quality and collection trends, particularly the increase in unbilled receivables; monitor DSO and allowance levels.
  • How much of earnings growth depends on reduced interest expense and foreign-currency transaction gains, and how currency translation affects equity and comprehensive income.
  • Debt capacity, covenant headroom, debt-service costs, and actual use of the authorized $100 million repurchase program.
  • Actual capital expenditures versus the $35–$45 million estimate, and the timing and amount of special-charge payments and acquisition-related contingent consideration.