FTI Consulting, Inc. — Q2 2017 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, Economic Consulting, Technology, and Strategic Communications. This unaudited quarterly report covers the three and six months ended June 30, 2017; comparisons are with the corresponding 2016 periods.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Revenue | $444.7 million | $460.1 million | $891.1 million | $930.4 million |
| Operating income | $0.03 million | $44.2 million | $27.1 million | $96.4 million |
| Net income (loss) | $(5.2) million | $26.5 million | $8.9 million | $56.7 million |
| Diluted EPS | $(0.13) | $0.64 | $0.22 | $1.37 |
| Adjusted EBITDA (non-GAAP) | $40.8 million | $56.6 million | $79.1 million | $125.4 million |
| Operating cash flow | $10.9 million | $73.7 million | $(82.2) million | $40.6 million |
- Q2 revenue declined 3.4% year over year (1.6% excluding estimated foreign-exchange effects). First-half revenue fell 4.2%.
- Q2 adjusted EBITDA margin was 9.2%, versus 12.3% a year earlier. First-half adjusted EBITDA declined to $79.1 million from $125.4 million.
- At June 30, cash and equivalents were $138.5 million; current assets were $777.8 million and current liabilities $314.7 million. Net working capital was approximately $463.1 million.
- Total debt was $485.0 million, including $300.0 million of 6% notes due 2022 and $185.0 million drawn on the revolving credit facility. Net debt was $346.5 million. Revolver availability was $364.3 million, after $0.7 million of letters of credit.
- First-half operating cash flow was negative, principally reflecting receivables growth, annual incentive compensation payments, and payroll timing. Capital expenditures were $13.1 million; first-half free cash flow, as defined by the company, was negative $95.3 million. DSO was 103 days, compared with 100 days.
Material changes and segment trends
- The $30.1 million special charge was the primary unusual item in Q2, contributing to the quarterly net loss and near break-even operating income. It covered workforce reductions, office lease exit costs, and other office closures.
- Corporate Finance & Restructuring revenue fell 11.1% in Q2, with lower restructuring demand and utilization; adjusted segment EBITDA declined to $20.0 million from $32.0 million.
- Forensic and Litigation Consulting revenue decreased 5.7%, while adjusted segment EBITDA fell to $13.0 million from $15.2 million. Economic Consulting revenue rose 5.1%, but adjusted segment EBITDA was broadly flat at $15.5 million.
- Technology revenue increased 8.8% in Q2, and adjusted segment EBITDA rose to $5.4 million from $5.0 million. Strategic Communications revenue declined 7.4%, and adjusted segment EBITDA fell to $4.9 million from $8.4 million.
- The company repurchased and retired 2.77 million shares for approximately $102.5 million in the first half. It borrowed $115.0 million net under its revolver during the period; debt increased from $370.0 million at year-end 2016.
Outlook, management commentary, and risks
- Management expects approximately $23.0 million of cost savings in the second half of 2017 from the restructuring actions. It forecast $20–$30 million of additional capital expenditures for the remainder of 2017. The filing does not provide a clear updated annual revenue or earnings guidance figure.
- The special charge included $16.1 million of severance for 201 employees and $12.4 million of executive-office lease exit costs, alongside other costs and non-cash offsets. The company said $37.6 million of the net charge would be paid in cash; $40.8 million of related liabilities remained at June 30, with payments extending through 2025.
- Management stated that cash, operating cash flows, and revolver borrowing capacity should support normal operating needs for at least the next 12 months, while noting that acquisitions, unexpected spending, or weaker performance could require additional funding. The company reported $78.9 million remaining under its $200 million repurchase authorization.
- Key disclosed risks include variable demand and utilization, collection delays and bad debts, recruiting and retaining specialized professionals, client termination or fee pressure, foreign-exchange exposure, technology competition and cybersecurity, and leverage/covenant compliance. The company reported no legal matter it believed would materially affect its financial condition or results, and no significant change in market-risk exposure. Disclosure controls were reported effective.
- Accounting changes: the company adopted new share-based compensation guidance and early-adopted guidance on intra-entity asset transfers, recording a $3.2 million reduction to beginning retained earnings. It planned to adopt the revenue-recognition standard on January 1, 2018 and expected effects for certain success-fee and multi-performance-obligation engagements; the lease standard’s impact had not yet been determined.
Important facts for investors to verify
- Whether restructuring demand and utilization in Corporate Finance & Restructuring recover, and whether the expected second-half cost savings are realized.
- Whether receivables, DSO, and operating cash flow improve after the first-half cash outflow.
- How further repurchases are funded and how debt, interest expense, and credit-facility covenant headroom evolve.
- Whether weakness in Forensic and Litigation Consulting and Strategic Communications persists, and whether Technology and Economic Consulting growth continues.
- The eventual cash timing and total cost of restructuring and lease-exit obligations, and the impacts of upcoming revenue-recognition and lease accounting standards.