FTI Consulting, Inc. — Q1 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 filing covers the three months ended March 31, 2017; comparisons are with Q1 2016 unless noted. Amounts below are in U.S. dollars, generally millions.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $446.3 | $470.3 | -5.1% |
| Operating income | $27.1 | $52.2 | -48.2% |
| Operating margin | 6.1% | 11.1% | -5.0 percentage points |
| Net income | $14.0 | $30.2 | -53.6% |
| Diluted EPS | $0.34 | $0.73 | -$0.39 |
| Adjusted EBITDA (non-GAAP) | $38.3 | $68.9 | -44.3% |
| Adjusted EBITDA margin | 8.6% | 14.6% | -6.0 percentage points |
| Operating cash flow | $(93.1) | $(33.1) | Greater cash use |
| Free cash flow (non-GAAP) | $(98.9) | $(39.5) | Greater cash use |
Revenue declined $23.9 million, including an estimated $7.8 million adverse foreign-exchange impact. The effective tax rate was 36.0%, versus 37.9%. No special charges were recorded in Q1 2017; Q1 2016 included $5.1 million of Technology-segment employee termination charges. Adjusted EPS was $0.34 versus $0.83.
Segment revenue and Adjusted Segment EBITDA (a non-GAAP measure excluding unallocated corporate expenses) were: Corporate Finance & Restructuring, $105.9 million and $10.3 million; Forensic and Litigation Consulting, $111.4 million and $13.5 million; Economic Consulting, $139.2 million and $20.1 million; Technology, $46.1 million and $7.8 million; Strategic Communications, $43.7 million and $4.3 million. Revenue grew in Economic Consulting (+6.5%) and declined in the other four segments. Corporate Finance & Restructuring revenue fell 16.7% and its Adjusted Segment EBITDA fell to $10.3 million from $31.6 million.
At March 31, 2017, cash and cash equivalents were $121.0 million, down from $216.2 million at year-end 2016. Total debt was $407.0 million before deferred issuance costs ($402.7 million net), comprising $300 million of 6% senior notes due 2022 and $107 million drawn on the revolving facility. The company reported $442.3 million of available borrowing capacity under its $550 million facility, after outstanding borrowings and letters of credit. Total assets were $2.17 billion and stockholders’ equity was $1.20 billion. DSO was 98 days, unchanged year over year.
Material changes and management commentary
- Management attributed weaker results chiefly to reduced North American restructuring demand and weaker demand and realized pricing in FLC’s health solutions practice. Higher North American antitrust demand partly offset these declines.
- Adjusted EBITDA declined 44.3%; management cited lower demand, higher compensation, and higher SG&A. Corporate Finance utilization fell to 59% from 74%; FLC utilization fell to 60% from 64%; Economic Consulting utilization fell to 72% from 79%.
- Operating cash use rose by $60.0 million, primarily because of lower collections associated with lower revenue and higher annual bonus payments. Management noted first-quarter cash needs typically exceed operating cash flows due to annual incentive compensation, with operating cash flows generally positive after Q1.
- The company borrowed a net $37.0 million on its revolving facility and repurchased and retired 879,585 shares for $36.9 million, averaging $41.95 per share. It had $44.5 million remaining under its $100 million repurchase authorization at quarter-end; management expected, subject to market conditions and future events, to use the remaining amount during 2017.
Outlook, risks, and unusual items
- No specific revenue or earnings guidance is provided in the filing. Management expects capital expenditures of $35–$45 million for the remainder of 2017 and stated that existing cash, operating cash flows, and available revolver borrowings should fund normal needs for at least the next 12 months. These assessments exclude possible acquisitions and other unexpected cash needs.
- Key risks cited include demand and pricing changes, utilization and talent retention, client engagement terminations, receivable collection and bad debt, foreign exchange, economic and legal-market conditions, competition, data privacy and cybersecurity, and debt and capital-market conditions. Management reported no material change in previously disclosed risk factors.
- The allowance for doubtful accounts and unbilled services was $187.2 million at quarter-end; the related provision was $3.6 million, versus $0.4 million in Q1 2016. Goodwill was $1.18 billion. Management reported no Q1 event requiring an interim goodwill impairment test.
- Early adoption of the intra-entity asset transfer tax standard resulted in a $3.2 million cumulative reduction to opening retained earnings. Adoption of the share-based payment standard produced a $0.3 million tax benefit in Q1. The company expects the new revenue-recognition standard, to be adopted in 2018, to affect certain variable-fee and multiple-performance-obligation engagements; the impact of the 2019 lease standard had not yet been determined.
- Ordinary-course legal claims are disclosed; management did not believe pending matters would materially affect financial position or results. Disclosure controls were deemed effective, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether restructuring and health-solutions demand, utilization, and realized pricing recover, and how that affects segment margins.
- Whether collections and operating cash flow improve after the seasonal Q1 bonus outflow; monitor receivables, the allowance, and DSO.
- Debt levels, revolver availability, and the cash impact and timing of the remaining share repurchase authorization.
- Whether management’s $35–$45 million remaining-2017 capital expenditure estimate and stated liquidity expectations remain achievable.
- The effects of revenue-standard adoption on fee arrangements and any future goodwill impairment indicators.