FTI Consulting, Inc. — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. FTI Consulting is a global business advisory firm operating through Corporate Finance & Restructuring, Forensic and Litigation Consulting, Economic Consulting, Technology, and Strategic Communications. Unless noted otherwise, financial amounts below are in millions of dollars.
Financial results
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $470.3 | $432.3 | +8.8% |
| Operating income | $52.2 | $47.8 | +9.2% |
| Operating margin | 11.1% | 11.1% | Approximately flat |
| Net income | $30.2 | $23.7 | +27.4% |
| Diluted EPS | $0.73 | $0.57 | +$0.16 |
| Adjusted EBITDA (non-GAAP) | $68.9 | $58.7 | +17.4% |
| Adjusted EBITDA margin (non-GAAP) | 14.6% | 13.6% | +1.0 percentage point |
| Cash used in operating activities | $(33.1) | $(51.3) | $18.2 less cash used |
Revenue growth included an estimated $7.1 million negative foreign-currency impact; excluding currency, revenue rose 10.4%. Net income benefited from higher business results and lower interest expense following the 2015 debt restructuring. Offsetting factors included Technology restructuring charges, higher tax expense versus a favorable prior-year discrete tax item, and a contingent-consideration remeasurement expense.
Segments and material changes
| Segment | Revenue | Revenue change | Adjusted Segment EBITDA | Notable trend |
|---|---|---|---|---|
| Corporate Finance & Restructuring | $127.2 | +19.7% | $31.6 | Growth in North American distressed services, rates and success fees |
| Forensic and Litigation Consulting | $119.0 | -3.5% | $19.8 | Lower health solutions success fees and demand in certain practices |
| Economic Consulting | $130.7 | +23.2% | $21.3 | Higher antitrust, financial economics and litigation demand |
| Technology | $48.3 | -11.7% | $7.8 | Lower demand; $5.1 million special charge for workforce reductions |
| Strategic Communications | $45.1 | +7.1% | $6.1 | Higher project-based revenue, partly offset by fewer crisis mandates |
Total Adjusted Segment EBITDA increased to $86.7 million from $71.9 million. Unallocated corporate expenses rose to $18.7 million from $14.1 million, reflecting higher benefit-plan, infrastructure and legal costs. Segment EBITDA is a non-GAAP measure; it excludes certain items and unallocated corporate expenses.
Cash, debt and liquidity
- Cash and cash equivalents were $114.5 million at March 31, 2016, down from $149.8 million at December 31, 2015. Operating cash use reflected the seasonal timing of incentive compensation and working capital; receivables used $52.0 million of cash, while accrued compensation declined by $65.5 million.
- Capital expenditures were $6.4 million in Q1. Accounts receivable, net, was $553.2 million; days sales outstanding improved to 98 days from 101 days in Q1 2015.
- Total debt was $507.0 million: $300.0 million of 6% senior notes due 2022 and $207.0 million drawn on the revolving credit facility. Net debt, using reported cash, was approximately $392.5 million. Long-term debt, net of deferred issuance costs, was $502.0 million.
- The $550.0 million revolving facility had $341.6 million of available borrowing capacity after outstanding borrowings and letters of credit. Management stated existing resources and operating cash flows should fund normal needs for at least the next 12 months, subject to business conditions and other assumptions.
Outlook, risks and unusual items
- No specific revenue or earnings guidance was provided. Management estimated 2016 capital expenditures of $35 million to $45 million and described first-quarter cash use as seasonally typical.
- The $5.1 million Technology special charge related to terminating 53 employees; $4.9 million of associated cash outflow was expected, with payments primarily during the remainder of 2016. The segment reported an operating loss of $1.2 million, versus operating income of $6.2 million a year earlier.
- Acquisition-related contingent consideration generated a $1.0 million remeasurement expense; the fair value of future expected payments was $5.3 million, with payments extending through 2018.
- Management reported no material change in previously disclosed risk factors or market-risk exposure. It cited risks including demand volatility, utilization and pricing, talent retention, collections, competition, data privacy and security, international operations, and indebtedness. It reported no known legal matter expected to materially affect financial condition or results.
- Management found no triggering event requiring interim goodwill impairment testing. The filing cautions that future results, cash flows and impairment estimates may differ from assumptions. Disclosure controls were reported effective, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether growth in Corporate Finance and Economic Consulting continues and offsets contraction in Technology and Forensic and Litigation Consulting.
- Whether Technology demand and segment profitability recover after the workforce restructuring.
- Whether receivables, collections and first-quarter seasonal cash use normalize in subsequent quarters.
- Revolving-credit availability, debt levels, interest costs and compliance with financing terms.
- Cash payments for current and prior restructuring obligations, contingent consideration, and planned 2016 capital expenditures.