FTI Consulting, Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended September 30, 2015. Unless stated otherwise, financial amounts are in U.S. dollars and millions. FTI 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 | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $455.5 | $451.2 | $1,336.9 | $1,331.1 |
| Operating income | $45.7 | $46.5 | $140.7 | $125.5 |
| Net income | $10.3 | $22.5 | $55.7 | $57.9 |
| Diluted EPS | $0.25 | $0.55 | $1.34 | $1.43 |
| Adjusted EBITDA (non-GAAP) | $56.1 | $63.4 | $170.6 | $174.5 |
| Adjusted EPS (non-GAAP) | $0.53 | $0.63 | $1.60 | $1.60 |
- Q3 revenue rose 1.0% reported and 4.1% excluding estimated foreign-exchange effects. Nine-month revenue rose 0.4% reported.
- Q3 adjusted EBITDA margin declined to 12.3% from 14.1%. Nine-month adjusted EBITDA was down about 2.3%, while adjusted EPS was unchanged.
- Nine-month operating cash flow was $43.3 million, versus $20.5 million a year earlier; investing cash outflow was $25.2 million and financing cash outflow was $192.9 million. Q3 operating cash flow was $74.0 million, down from $97.6 million.
- At September 30, cash was $105.0 million, total debt $520.0 million, and net debt approximately $415.0 million. Current assets were $788.5 million and current liabilities $334.5 million. Available borrowing capacity under the revolving facility was $328.6 million; $220.0 million was drawn and $1.4 million of letters of credit was outstanding.
- DSO was 105 days, compared with 107 days one year earlier. Net accounts receivable was $554.4 million, including substantial unbilled receivables; the allowance for doubtful accounts and unbilled services was $183.3 million.
Material changes and segment trends
- Corporate Finance & Restructuring was the main growth and profit bright spot: Q3 revenue increased 13.4% and adjusted segment EBITDA increased 71.6%, supported by North American distressed work. Nine-month adjusted segment EBITDA increased 56.0%.
- Forensic and Litigation Consulting Q3 revenue declined 4.6% and adjusted segment EBITDA fell 39.8%; lower demand and utilization weighed on results. Nine-month adjusted segment EBITDA declined 21.9%.
- Economic Consulting Q3 revenue declined 4.9% and adjusted segment EBITDA declined 9.6%, reflecting weaker demand in financial economics and non-M&A antitrust work. Nine-month revenue fell 4.4%.
- Technology Q3 revenue declined 10.9% and adjusted segment EBITDA fell 39.4%, with lower consulting and licensing revenue, utilization, and realized pricing. Nine-month adjusted segment EBITDA declined 34.3%.
- Strategic Communications Q3 revenue increased 19.7%, substantially due to pass-through income, and adjusted segment EBITDA increased 32.0%. Nine-month revenue declined 1.3% reported, while adjusted segment EBITDA increased 32.5%.
- Foreign-currency translation reduced Q3 revenue by an estimated $14.0 million. Nine-month other comprehensive loss included a $24.4 million foreign-currency translation loss.
Debt, outlook, risks, and unusual items
- FTI retired its $400 million principal amount of 6.75% notes due 2020 for approximately $414.7 million, funded with $164.7 million of cash and $250 million of revolver borrowings; it later repaid $30 million of revolver borrowings. The transaction generated a $19.6 million early-extinguishment loss, including a $14.3 million premium and $4.9 million non-cash financing-cost write-off. The remaining notes were discharged in September and redeemed October 1, 2015.
- A new $550 million secured revolving credit facility, entered into June 2015, matures in September 2020. FTI reported compliance with the facility and 2022 notes covenants at quarter-end. Interest rates and fees are variable under the agreement.
- Management said operating cash flows, supplemented by facility borrowings if needed, should fund normal long-term cash needs for at least the next 12 months. Full-year 2015 capital expenditures were expected to be $30–$33 million, including $7–$10 million in Q4. No specific revenue or earnings guidance is provided in the filing.
- Management attributed weaker consolidated adjusted EBITDA to lower-margin revenue and underutilization in certain segments, partly offset by stronger Corporate Finance and Strategic Communications results. Q3 cash flow was also affected by lower collections and $12.3 million of accelerated interest payments.
- Key risks include changing demand for advisory services, utilization and pricing pressure, collection and receivable risk, foreign-exchange movements, retaining key professionals, client conflicts, data security and privacy, competition, and acquisition execution. The filing reports no known legal matters expected to materially affect financial condition or results, and no material changes to previously disclosed risk factors.
- No special charges were recorded in 2015; the comparable 2014 periods included special charges. Goodwill was approximately $1.20 billion, and management reported no interim impairment trigger at the latest assessment. Adoption of new revenue-recognition guidance was not yet evaluated; the company expected the standard to apply beginning in fiscal 2018.
Important facts for investors to verify
- Whether weaker utilization and profitability in Forensic and Litigation Consulting, Economic Consulting, and Technology persist, and whether Corporate Finance growth is sustainable.
- Cash conversion and collections trends, including the large billed and unbilled receivable balances and the allowance for doubtful accounts and unbilled services.
- Post-refinancing interest expense, revolver usage, covenant headroom, and liquidity after the 2020 notes redemption.
- The quality and comparability of non-GAAP adjusted EBITDA and adjusted EPS relative to GAAP earnings, including the treatment of the debt-extinguishment loss.
- Exposure to foreign exchange and the potential for future goodwill or intangible-asset impairment if forecasts or business conditions weaken.