FTI Consulting, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016. The filing also provides unaudited fourth-quarter results. FTI Consulting is a global business advisory firm operating in five segments: Corporate Finance & Restructuring, Forensic and Litigation Consulting, Economic Consulting, Technology, and Strategic Communications.
Financial results and liquidity
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $1,810.4 million | $1,779.1 million |
| Operating income | $142.2 million | $164.5 million |
| Net income | $85.5 million | $66.1 million |
| Diluted EPS | $2.05 | $1.58 |
| Adjusted EBITDA (non-GAAP) | $203.0 million | $205.8 million |
| Operating cash flow | $233.5 million | $139.9 million |
| Cash and cash equivalents | $216.2 million | $149.8 million |
| Long-term debt, net | $365.5 million | $494.8 million |
| Working capital | $404.7 million | $394.5 million |
- Revenue grew 1.8% as reported and 3.6% excluding an estimated $32.8 million negative foreign-exchange impact. Operating margin was approximately 7.9%, down from 9.2%; adjusted EBITDA margin was 11.2%, versus 11.6%.
- Net income rose 29.5%, while adjusted EBITDA declined 1.3%. The earnings increase reflected lower interest expense, the absence of 2015’s debt-extinguishment loss, and a lower effective tax rate; it did not reflect improvement in adjusted EBITDA.
- Operating cash flow increased 66.9%, mainly from stronger collections, lower interest payments, and timing of operating payments, partly offset by higher compensation payments. Days sales outstanding improved to 91 from 97.
- At year-end, the company had $70.0 million drawn on its $550 million revolving facility, $0.7 million of letters of credit, and $479.3 million of available borrowing capacity. It reported compliance with debt covenants.
Material changes and segment performance
- Corporate Finance & Restructuring: Revenue rose 9.7% to $483.3 million; adjusted segment EBITDA rose to $97.7 million from $90.1 million. Restructuring and EMEA tax demand were key drivers, while utilization fell to 65% from 69%.
- Forensic and Litigation Consulting: Revenue fell 5.1% to $457.7 million and adjusted segment EBITDA declined to $57.9 million from $64.3 million, reflecting weaker health solutions and dispute advisory demand. Utilization fell to 59% from 64%.
- Economic Consulting: Revenue increased 11.7% to $500.5 million and adjusted segment EBITDA increased to $74.1 million from $62.3 million, supported by antitrust and financial economics demand.
- Technology: Revenue declined 18.7% to $177.7 million; segment operating results shifted to a $2.2 million loss from $22.8 million income, and adjusted segment EBITDA fell to $25.8 million from $39.0 million. Lower demand and pricing in consulting and managed review, plus $3.8 million accelerated software amortization, weighed on results.
- Strategic Communications: Revenue increased 0.6% to $191.2 million; adjusted segment EBITDA rose to $30.5 million from $27.7 million.
- The company recorded $10.4 million of special charges, primarily for workforce reductions affecting Technology, health solutions, and corporate infrastructure; 158 employees were terminated. No goodwill impairment was recorded.
Fourth-quarter results
Unaudited fourth-quarter 2016 revenue was $441.9 million, compared with $442.2 million in fourth-quarter 2015. Operating income declined to $10.7 million from $23.8 million, net income was $7.1 million versus $10.3 million, and diluted EPS was $0.17 versus $0.25. Fourth-quarter 2016 included $3.6 million of special charges.
Outlook, risks, and other notable items
- Management expected 2017 capital expenditures of $30–$40 million and said it expected to use the remaining $81.4 million authorized under its 2016 repurchase program for share buybacks in 2017, subject to market conditions and future events. No earnings guidance is provided in the supplied filing text.
- The company planned to leave its current Washington, D.C. office and relocate in the second quarter of 2017. Expected lease termination charges, net of sublease income, were estimated to reduce 2017 diluted EPS by approximately $0.10–$0.15; management said these charges would be excluded from adjusted EPS.
- Management stated that operating cash flow, supplemented by revolver borrowings if needed, was expected to fund normal operating needs for at least the next 12 months. This assessment excluded the effects of future acquisitions and other unanticipated cash needs.
- Key risks include demand volatility tied to economic, financial-market, M&A, regulatory, and litigation conditions; professional utilization and retention; pricing and fee collection; competition and rapid technology change; Technology segment client concentration and cyber/data-security risks; foreign-exchange exposure; and debt covenants, variable-rate borrowing, and refinancing risk.
- Technology’s two largest clients represented approximately 12% and 11% of that segment’s revenue, although neither was material to consolidated revenue individually. No client accounted for 10% or more of consolidated revenue.
- The company reported no known legal proceedings or claims expected to have a material adverse effect. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- Whether Technology’s revenue, pricing, and margins stabilize after two years of declines and a 2016 segment operating loss.
- Whether the contrasting growth trends in Economic Consulting and Corporate Finance continue, and whether weaker FLC demand recovers.
- How much of the 2016 operating-cash-flow increase is sustainable, including the effect of collection timing, compensation payments, and receivables.
- Whether the planned 2017 buybacks, capital expenditures, and Washington office relocation costs proceed as described, and their effects on cash and adjusted EPS.
- Debt-covenant headroom, exposure to variable interest rates and foreign currencies, and the company’s ability to retain key professionals and protect client data.