FTI Consulting, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. FTI Consulting is a global business advisory firm operating through Corporate Finance & Restructuring, Forensic and Litigation Consulting, Economic Consulting, Technology, and Strategic Communications. Dollar amounts below are in millions unless otherwise stated.
Financial results
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Revenue | $449.0 | $438.0 | $1,340.0 | $1,368.5 |
| Operating income | $47.1 | $35.1 | $74.2 | $131.5 |
| Net income | $32.2 | $21.7 | $41.1 | $78.4 |
| Diluted EPS | $0.85 | $0.52 | $1.03 | $1.88 |
| Adjusted EBITDA | $57.4 | $47.2 | $136.5 | $172.7 |
| Operating cash flow | $106.2 | $70.9 | $24.0 | $111.6 |
| Free cash flow | $99.3 | $60.1 | $4.0 | $88.7 |
Q3 operating margin was approximately 10.5%, versus 8.0% a year earlier; adjusted EBITDA margin was 12.8%, versus 10.8%. For the nine-month period, operating margin was approximately 5.5%, versus 9.6%. Adjusted EBITDA and free cash flow are non-GAAP measures as defined by the company.
Balance sheet and liquidity
- At September 30, 2017, cash and cash equivalents were $158.0; total debt was $465.0, comprising $300.0 of 6% senior notes due 2022 and $165.0 drawn on a $550.0 revolving credit facility. Net debt was approximately $307.0.
- Available revolver capacity was $384.3, after $165.0 of borrowings and $0.7 of letters of credit. Current assets were $788.2 and current liabilities $366.9.
- Cash declined $58.2 from year-end 2016. Debt increased $95.0, while stockholders’ equity declined to $1,130.9 from $1,207.4.
- Nine-month capital expenditures were $20.0; management expected an additional $5–$12 of capital expenditures for the remainder of 2017.
Changes and operating trends
- Q3 revenue rose 2.5%, operating income rose 34.2%, and net income rose 48.5% year over year. Management attributed the profit improvement to segment performance, higher-margin revenue including success fees, improved utilization in Corporate Finance and FLC, and a lower effective tax rate.
- Nine-month revenue fell 2.1%, operating income fell 43.6%, and net income fell 47.6%. Results included $30.1 of special charges in 2017, compared with $6.8 in 2016. The charges primarily reflected workforce reductions, office lease exit costs, and other office closures; 201 employees were affected. The remaining related liability was $28.8, with payments scheduled through 2025.
- Q3 segment revenue increased in Corporate Finance (+15.8%), FLC (+3.1%), and Strategic Communications (+5.1%); it decreased in Economic Consulting (-8.8%) and Technology (-4.1%). Economic Consulting’s lower demand also weighed on Q3 results.
- For the nine months, Corporate Finance revenue declined 5.0% and FLC declined 3.1%; Technology was nearly flat, Economic Consulting increased 1.0%, and Strategic Communications declined 1.9%. Total Adjusted Segment EBITDA declined to $190.3 from $230.3.
- Q3 effective tax rate was 22.2%, versus 32.2%; the nine-month rate was 30.0%, versus 36.0%. Management cited foreign earnings mix and other tax-related items.
Management outlook, risks, and notable items
- Management stated that operating cash flows, together with revolver borrowings if needed, should fund normal operating needs for at least the next 12 months. This assessment excludes unexpected significant cash needs, acquisitions, and other adverse changes.
- No specific revenue or earnings guidance was provided in the filing. Capital spending guidance for the remainder of 2017 was $5–$12.
- The company repurchased 4.366 million shares for approximately $155.2 during the first nine months; $26.1 remained authorized for repurchases at quarter-end. Q3 repurchases were 1.599 million shares at an average $32.98.
- FTI acquired a restructuring advisory business during Q3 for an initial cash payment of $8.9; 19 professionals joined Corporate Finance. The acquisition added $11.9 of goodwill.
- Revenue recognition standard ASC 606 was scheduled for adoption January 1, 2018 using the modified retrospective method. Management was still assessing the impact, particularly for success-fee and other variable-consideration contracts.
- Management reported no material pending legal proceedings, no significant change in market-risk exposure, and no material change to previously disclosed risk factors. It identified risks including demand and utilization changes, pricing pressure, receivable collection, competition for talent, acquisitions, foreign exchange, data protection, and indebtedness.
Important facts for investors to verify
- Whether Q3 improvement in utilization and success-fee revenue persists, especially given weaker nine-month segment earnings and lower Economic Consulting demand.
- How cash generation develops after nine-month operating cash flow fell to $24.0 and free cash flow to $4.0, and whether working-capital movements normalize.
- The cash cost and timing of the remaining $28.8 special-charge liability, and whether restructuring actions produce sustained savings.
- Debt, borrowing capacity, and capital allocation after $95.0 of additional revolver borrowing and $155.2 of year-to-date repurchases.
- The eventual financial and disclosure effects of ASC 606 adoption, which the filing said could not yet be quantified clearly.