FTI Consulting, Inc. — 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015. This is an annual filing; quarterly figures below are included only where useful. FTI Consulting is a global business advisory firm operating in Corporate Finance & Restructuring, Forensic and Litigation Consulting, Economic Consulting, Technology, and Strategic Communications.
Financial performance
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Revenue | $1.779 billion | $1.756 billion | +1.3% |
| Operating income | $164.5 million | $147.4 million | +11.6% |
| Operating margin | 9.2% | 8.4% | +0.8 percentage points |
| Net income | $66.1 million | $58.8 million | +12.3% |
| Diluted EPS | $1.58 | $1.44 | +9.7% |
| Adjusted EBITDA | $205.8 million | $210.6 million | -2.3% |
| Operating cash flow | $139.9 million | $135.4 million | +3.3% |
Adjusted diluted EPS, a non-GAAP measure, was $1.84 versus $1.64. Adjusted EBITDA margin was approximately 11.6%, compared with 12.0%. Revenue grew 4.1% excluding an estimated 2.8% adverse foreign-currency impact; prior-year acquisition activity contributed $7.4 million to growth. Fourth-quarter 2015 revenue was $442.2 million and net income was $10.3 million; the quarter included no special charge, while the $19.6 million debt-extinguishment loss was recorded in Q3.
Segment results
| Segment | 2015 revenue | 2015 adjusted segment EBITDA | Notable comparison |
|---|---|---|---|
| Corporate Finance & Restructuring | $440.4 million | $90.1 million | Revenue +12.6%; EBITDA increased from $55.5 million |
| Forensic and Litigation Consulting | $482.3 million | $64.3 million | Revenue -0.2%; EBITDA declined from $90.5 million |
| Economic Consulting | $447.9 million | $62.3 million | Revenue -0.7%; EBITDA increased from $59.3 million |
| Technology | $218.6 million | $39.0 million | Revenue -9.4%; EBITDA declined from $63.5 million |
| Strategic Communications | $190.0 million | $27.7 million | Revenue +0.3%; EBITDA increased from $22.6 million |
Corporate Finance benefited from stronger North American distressed work and improved utilization and realized pricing. FLC profitability was pressured by lower utilization and practitioner severance. Technology faced weaker investigation and financial-services litigation demand, lower pricing, and reduced utilization.
Cash flow, liquidity and debt
- Cash and cash equivalents were $149.8 million at year-end, down $133.9 million. Working capital was $394.5 million, versus $489.7 million in 2014; DSO remained 97 days.
- Cash from operations was $139.9 million; capital expenditures were $31.4 million. Investing activities used $31.7 million and financing activities used $236.0 million, principally reflecting debt retirement and share repurchases.
- Gross debt was $500.0 million: $300.0 million of 6% senior notes due 2022 and $200.0 million drawn on the revolving credit facility. Debt net of cash was approximately $350.2 million. The company reported $494.8 million of long-term debt net of issuance costs.
- The $550 million secured revolving facility matures in September 2020; $348.6 million was available at year-end, after outstanding borrowings and letters of credit. FTI reported compliance with its debt covenants.
- FTI retired $400 million of 6.75% notes due 2020, funded with cash and revolver borrowings. The transaction generated a $19.6 million extinguishment loss, including a $14.3 million redemption premium and a $4.9 million non-cash write-off of financing costs. Interest expense fell 15.6% to $42.8 million.
- FTI repurchased 764,545 shares for $26.5 million under a $50 million program; $23.5 million remained available at year-end. The company reported no cash dividends and no expected near-term dividend payments.
Material changes, outlook and risks
- Management attributed revenue growth mainly to higher North American distressed engagements, partly offset by reduced Technology demand. Adjusted EBITDA declined because of FLC underutilization and Technology weakness, partly offset by improved Corporate Finance restructuring demand.
- Following a strategic review, FTI planned to eliminate approximately 50 Technology positions, about 10% of that segment’s workforce, with an estimated $4.5–$5.5 million pre-tax special charge expected in Q1 2016. No consolidated revenue or earnings guidance is provided in the filing.
- Management expected 2016 capital expenditures of $35–$45 million and stated that operating cash flow, supplemented if needed by the revolver, should fund normal operating needs. This expectation excludes potential acquisitions and significant unexpected changes.
- Key risks include cyclical demand for restructuring, M&A and litigation services; competition and pricing pressure, especially in Technology and Strategic Communications; retention and utilization of specialized professionals; foreign-exchange exposure; cybersecurity and client-data protection; and debt service, variable interest rates and covenant restrictions.
- One Technology client represented approximately 19% of that segment’s revenue, though no client represented 10% or more of consolidated revenue. The filing states that loss of this client could materially affect Technology if the work were not replaced.
- The allowance for doubtful accounts and unbilled services rose to $185.8 million from $144.8 million; related 2015 provision was $15.6 million. Management reported no known legal proceeding expected to materially affect financial condition or results. KPMG gave unqualified opinions on the financial statements and internal controls; management also concluded controls were effective.
Most important facts for investors to verify
- Whether Technology stabilizes after its 2015 revenue and EBITDA decline, and whether the planned workforce reduction and new Radiance product support recovery.
- Whether FLC can restore utilization and segment profitability, and whether Corporate Finance’s stronger restructuring demand is sustainable.
- Cash conversion and receivables quality: the rising allowance, 97-day DSO, and collection trends merit monitoring.
- Debt repayment capacity, revolver usage, interest-rate exposure and continued covenant compliance.
- The actual timing and amount of the expected 2016 Technology restructuring charge, alongside forecast capital spending of $35–$45 million.