UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
☒
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2017
OR
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-14875
FTI CONSULTING, INC.
(Exact Name of Registrant as Specified in its Charter)
Maryland
52-1261113
(State or Other Jurisdiction of
Incorporation or Organization)
(I.R.S. Employer
Identification No.)
1101 K Street NW,
Washington, D.C.
20005
(Address of Principal Executive Offices)
(Zip Code)
(202) 312-9100
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web Site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Non-accelerated filer
☐ (Do not check if a smaller reporting company)
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class
Outstanding at April 20, 2017
Common stock, par value $0.01 per share
41,323,337
FTI CONSULTING, INC. AND SUBSIDIARIES
INDEX
Page
PART I—FINANCIAL INFORMATION
Item 1.
Financial Statements
3
Condensed Consolidated Balance Sheets—March 31, 2017 and December 31, 2016
Condensed Consolidated Statements of Comprehensive Income—Three Months Ended March 31, 2017 and 2016
4
Condensed Consolidated Statement of Stockholders’ Equity—Three Months Ended March 31, 2017
5
Condensed Consolidated Statements of Cash Flows—Three Months Ended March 31, 2017 and 2016
6
Notes to Condensed Consolidated Financial Statements
7
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
16
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
33
Item 4.
Controls and Procedures
PART II—OTHER INFORMATION
Legal Proceedings
34
Item 1A.
Risk Factors
Unregistered Sales of Equity Securities and Use of Proceeds
Defaults Upon Senior Securities
35
Mine Safety Disclosures
Item 5.
Other Information
Item 6.
Exhibits
SIGNATURE
37
2
FTI Consulting, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except per share data)
March 31,
December 31,
2017
2016
Assets
(Unaudited)
Current assets
Cash and cash equivalents
$
120,959
216,158
Accounts receivable:
Billed receivables
383,268
365,385
Unbilled receivables
330,062
288,331
Allowance for doubtful accounts and unbilled services
(187,150
)
(178,819
Accounts receivable, net
526,180
474,897
Current portion of notes receivable
29,314
31,864
Prepaid expenses and other current assets
60,683
60,252
Total current assets
737,136
783,171
Property and equipment, net of accumulated depreciation
59,474
61,856
Goodwill
1,183,627
1,180,001
Other intangible assets, net of amortization
49,895
52,120
Notes receivable, net of current portion
100,288
104,524
Other assets
42,142
43,696
Total assets
2,172,562
2,225,368
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable, accrued expenses and other
87,411
87,320
Accrued compensation
172,593
261,500
Billings in excess of services provided
33,324
29,635
Total current liabilities
293,328
378,455
Long-term debt, net
402,717
365,528
Deferred income taxes
177,339
173,799
Other liabilities
102,649
100,228
Total liabilities
976,033
1,018,010
Stockholders' equity
Preferred stock, $0.01 par value; shares authorized — 5,000; none
outstanding
—
Common stock, $0.01 par value; shares authorized — 75,000;
shares issued and outstanding — 41,321 (2017) and 42,037 (2016)
413
420
Additional paid-in capital
387,797
416,816
Retained earnings
951,828
941,001
Accumulated other comprehensive loss
(143,509
(150,879
Total stockholders' equity
1,196,529
1,207,358
Total liabilities and stockholders' equity
See accompanying notes to condensed consolidated financial statements
Condensed Consolidated Statements of Comprehensive Income
Three Months Ended March 31,
Revenues
446,344
470,285
Operating expenses
Direct cost of revenues
309,072
305,636
Selling, general and administrative expenses
107,295
103,609
Special charges
5,061
Acquisition-related contingent consideration
395
1,134
Amortization of other intangible assets
2,493
2,606
419,255
418,046
Operating income
27,089
52,239
Other income (expense)
Interest income and other
605
2,557
Interest expense
(5,801
(6,229
(5,196
(3,672
Income before income tax provision
21,893
48,567
Income tax provision
7,877
18,386
Net income
14,016
30,181
Earnings per common share — basic
0.35
0.75
Earnings per common share — diluted
0.34
0.73
Other comprehensive income (loss), net of tax
Foreign currency translation adjustments, net of tax expense of $0
7,370
(358
Total other comprehensive income (loss), net of tax
Comprehensive income
21,386
29,823
Condensed Consolidated Statement of Stockholders’ Equity
(in thousands)
Accumulated
Additional
Other
Common Stock
Paid-in
Retained
Comprehensive
Shares
Amount
Capital
Earnings
Loss
Total
Balance at December 31, 2016
42,037
Other comprehensive income (loss):
Cumulative translation adjustment
Issuance of common stock in connection with:
Exercise of options
39
1,393
Restricted share grants, less net settled shares
of 51
125
1
(2,116
(2,115
Stock units issued under incentive compensation
plan
1,547
Purchase and retirement of common stock
(880
(8
(36,910
(36,918
Cumulative effect due to adoption of new accounting
standard
(3,189
Share-based compensation
7,067
Balance at March 31, 2017
41,321
Condensed Consolidated Statements of Cash Flows
Operating activities
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation and amortization
8,571
7,971
Amortization and impairment of other intangible assets
Provision for doubtful accounts
3,551
437
Non-cash share-based compensation
7,281
6,158
Non-cash interest expense
496
497
12
(81
Changes in operating assets and liabilities, net of effects from
acquisitions:
Accounts receivable, billed and unbilled
(52,489
(52,047
Notes receivable
7,153
3,853
Prepaid expenses and other assets
553
3,824
287
5,619
Income taxes
3,650
17,561
(92,561
(65,511
3,505
4,699
Net cash used in operating activities
(93,087
(33,099
Investing activities
Purchases of property and equipment
(5,831
(6,362
127
Net cash used in investing activities
(5,704
(6,328
Financing activities
Borrowings under revolving line of credit, net
37,000
7,000
Deposits
3,069
2,590
(2,903
Net issuance of common stock under equity compensation plans
(812
(1,371
(135
Net cash provided by financing activities
2,339
5,181
Effect of exchange rate changes on cash and cash equivalents
1,253
(1,063
Net decrease in cash and cash equivalents
(95,199
(35,309
Cash and cash equivalents, beginning of period
149,760
Cash and cash equivalents, end of period
114,451
Supplemental cash flow disclosures
Cash paid for interest
762
1,255
Cash paid for income taxes, net of refunds
4,246
824
Non-cash investing and financing activities:
Issuance of stock units under incentive compensation plans
1,842
(dollar and share amounts in tables in thousands, except per share data)
1. Basis of Presentation and Significant Accounting Policies
The unaudited condensed consolidated financial statements of FTI Consulting, Inc., including its consolidated subsidiaries (collectively, the “Company,” “we,” “our,” or “FTI Consulting”), presented herein, have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and under the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. Some of the information and footnote disclosures normally included in annual financial statements have been condensed or omitted pursuant to those rules and regulations. Certain prior period amounts have been reclassified to conform to the current period presentation. In management’s opinion, the interim financial statements reflect all adjustments that are necessary for a fair presentation of the results for the interim periods presented. All adjustments made were normal recurring accruals. Results of operations for the interim periods presented herein are not necessarily indicative of results of operations for a full year. These financial statements should be read in conjunction with the consolidated financial statements and the notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC.
2. Earnings Per Common Share
Basic earnings per common share are calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per common share adjust basic earnings per common share for the effects of potentially dilutive common shares. Potentially dilutive common shares include the dilutive effects of shares issuable under our equity compensation plans, including stock options and restricted shares, each using the treasury stock method.
Numerator — basic and diluted
Denominator
Weighted average number of common shares outstanding — basic
40,527
40,506
Effect of dilutive stock options
194
131
Effect of dilutive restricted shares
524
511
Weighted average number of common shares outstanding — diluted
41,245
41,148
Antidilutive stock options and restricted shares
903
2,657
3. New Accounting Standards
In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-04: Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. This standard requires entities to measure goodwill impairment using the difference between the carrying amount and the fair value of the reporting unit, instead of performing a hypothetical purchase price allocation. This guidance is effective beginning January 1, 2020, although early adoption is permitted. The adoption of this guidance would only impact the measurement of a future goodwill impairment to the extent applicable.
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory, which removes the prohibition against immediate recognition of current and deferred income tax effects on intra-entity transfers of assets other than inventory. We elected to early adopt this standard as of January 1, 2017, and recorded a $3.2 million cumulative effect adjustment to the beginning balance of retained earnings in the first quarter of 2017 for the net impact of increasing deferred tax assets by $2.6 million and decreasing a deferred tax charge in other assets by $5.8 million related to a prior period intra-entity transfer of intellectual property.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which clarifies how cash receipts and cash payments are classified in the statement of cash flows. This standard is effective January 1, 2018, although early adoption is permitted. We do not expect the adoption of this guidance to have a material impact on our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This standard makes several modifications to Topic 718, including the accounting for forfeitures, employer tax withholding on share-based compensation, income tax consequences, and clarifies the statement of cash flows presentation for certain components of share-based awards, all of which are intended to simplify various aspects of the accounting for share-based compensation. The ASU requires that the difference between the actual tax expense or benefit realized upon option exercise or restricted share or restricted stock unit release and the tax expense or benefit recorded based on the fair value of the stock award at the time of grant (the “excess tax benefits or detriment”) is to be reflected as an increase or reduction to the current period provision for income taxes rather than as a component of changes to additional paid-in capital. We adopted this standard as of January 1, 2017, and recorded $0.3 million benefit related to the excess benefits realized from stock compensation transactions during the three months ended March 31, 2017. The actual benefit or detriment realized in future periods cannot be precisely estimated and will vary based on the timing and relative value realized for future share-based transactions. Additionally, we elected to recognize forfeiture expense as forfeitures occur, rather than estimating forfeitures based on historical data. This election had no impact on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), that replaces existing lease guidance. Under this ASU, we will be required to record right-of-use assets and corresponding lease liabilities on the balance sheet. This guidance is effective beginning January 1, 2019. The new standard is required to be applied with a modified retrospective approach to each prior reporting period presented. We have not yet determined the impact that the adoption of this guidance will have on our consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). Under this ASU and subsequently issued amendments, revenues are recognized at the time when goods or services are transferred to a customer in an amount that reflects the consideration it expects to receive in exchange for those goods or services. Companies may use either a full retrospective or a modified retrospective approach to adopt this ASU. We believe that the adoption of this standard will impact engagements that contain variable fee arrangements including those in which we earn a completion fee when and if certain predefined outcomes occur, and certain engagements with fixed-fees that have multiple performance obligations. We will adopt this standard using the modified retrospective method effective January 1, 2018.
4. Special Charges
There were no special charges recorded during the three months ended March 31, 2017. During the three months ended March 31, 2016, we recorded special charges totaling $5.1 million related to employee terminations in our Technology segment. The charges consisted of salary continuance and other contractual employee-related costs.
Activity related to the liability for the special charges for the three months ended March 31, 2017 is as follows:
Employee
Lease
Termination
Costs
8,225
3,335
11,560
Additions
Payments
(2,358
(35
(2,393
Foreign currency translation adjustment and other
Balance at March 31, 2017 (1)
5,867
3,300
9,167
(1)
Of the $9.2 million remaining liability for special charges, $3.6 million is expected to be paid in the remainder of 2017, $2.6 million is expected to be paid in 2018, $1.2 million is expected to be paid in 2019, $0.4 million is expected to be paid in 2020 and the remaining balance of $1.4 million is expected to be paid from 2021 to 2025.
8
5. Allowance for Doubtful Accounts and Unbilled Services
We record adjustments to the allowance for doubtful accounts and unbilled services as a reduction in revenues when there are changes in estimates of fee reductions that may be imposed by bankruptcy courts and other regulatory institutions for both billed and unbilled receivables. The allowance for doubtful accounts and unbilled services is also adjusted after the related work has been billed to the client and we discover that collectability is not reasonably assured. These adjustments are recorded to “Selling, general and administrative expenses” on the Condensed Consolidated Statements of Comprehensive Income and totaled $3.6 million and $0.4 million for the three months ended March 31, 2017 and 2016, respectively.
6. Research and Development Costs
Research and development costs related to software development totaled $4.2 million and $4.0 million for the three months ended March 31, 2017 and 2016, respectively. Research and development costs are included in “Selling, general and administrative expenses” on the Condensed Consolidated Statements of Comprehensive Income.
7. Financial Instruments
Fair Value of Financial Instruments
We consider the recorded value of certain financial assets and liabilities, which consist primarily of cash equivalents, accounts receivable and accounts payable, to approximate the fair value of the respective assets and liabilities at March 31, 2017 and December 31, 2016, based on the short-term nature of the assets and liabilities. The fair value of our borrowings on our $107.0 million senior secured bank revolving credit facility (“Senior Bank Credit Facility”) approximates the carrying amount. The fair value of our long-term debt at March 31, 2017, which includes the Senior Bank Credit Facility, was $416.8 million compared with a carrying value of $407.0 million. At December 31, 2016, the fair value of our long-term debt was $382.8 million compared with a carrying value of $370.0 million. We determine the fair value of our long-term debt primarily based on quoted market prices for our 6% Senior Notes Due 2022 (“2022 Notes”) as of March 31, 2017. The fair value of our long-term debt is classified within Level 2 of the fair value hierarchy, because it is traded in less active markets.
8. Goodwill and Other Intangible Assets
The table below summarizes the changes in the carrying amount of goodwill by reportable segment:
Corporate
Forensic and
Finance &
Litigation
Economic
Strategic
Restructuring
Consulting
Technology
Communications
440,666
230,544
268,209
117,607
317,114
1,374,140
Accumulated goodwill impairment
(194,139
Goodwill, net at December 31, 2016
122,975
Foreign currency translation adjustment and
other
1,593
503
104
17
1,409
3,626
Goodwill, net at March 31, 2017
442,259
231,047
268,313
117,624
124,384
Other Intangible Assets
Other intangible assets with finite lives are amortized over their estimated useful lives. We recorded amortization expense of $2.5 million and $2.6 million for the three months ended March 31, 2017 and 2016, respectively. Based solely on the amortizable intangible assets recorded as of March 31, 2017, we estimate amortization expense to be $7.1 million during the remainder of 2017, $7.9 million in 2018, $7.3 million in 2019, $7.1 million in 2020, $6.6 million in 2021, $4.9 million in 2022 and an aggregate of $3.4 million in years after 2022. Actual amortization expense to be reported in future periods could differ from these estimates as a result of new intangible asset acquisitions, changes in useful lives, or other relevant factors or changes.
9
9. Long-Term Debt
The components of debt obligations are presented in the table below:
2022 Notes
300,000
Senior Bank Credit Facility
107,000
70,000
Total debt
407,000
370,000
Less deferred debt issue costs
(4,283
(4,472
There were $107.0 million in borrowings outstanding under the Company’s Senior Bank Credit Facility as of March 31, 2017. The Company has classified these borrowings as long-term debt in the accompanying Condensed Consolidated Balance Sheets as the Company has the intent and ability, as supported by availability under the credit agreement entered into as of June 26, 2015, which expires on June 26, 2020, to refinance these borrowings for more than one year from the applicable balance sheet date. Additionally, $0.7 million of the borrowing limit was utilized for letters of credit (and, therefore, unavailable) as of March 31, 2017.
For further information on our 2022 Notes and Senior Bank Credit Facility, see Note 12, “Long-Term Debt” in Part II, Item 8, of our Annual Report on Form 10-K filed with the SEC for the year ended December 31, 2016.
10. Commitments and Contingencies
Contingencies
We are subject to legal actions arising in the ordinary course of business. In management’s opinion, we believe we have adequate legal defenses and/or insurance coverage with respect to the eventuality of such actions. We do not believe any settlement or judgment relating to any pending legal action would materially affect our financial position or results of operations.
11. Share-Based Compensation
Share-based Awards and Share-based Compensation Expense
During the three months ended March 31, 2017, we granted 144,989 restricted stock awards, stock options exercisable for up to 130,650 shares, 38,487 restricted stock units, and 100,052 performance stock units. These awards are recorded as equity on the Condensed Consolidated Balance Sheets. During the three months ended March 31, 2017, stock options exercisable for up to 3,147 shares and 5,841 restricted stock awards were forfeited prior to the completion of the vesting requirements.
Total share-based compensation expense, net of forfeitures, for the three months ended March 31, 2017 and 2016 is detailed in the following table:
Income Statement Classification
5,838
3,848
843
2,709
105
Total share-based compensation expense
6,681
6,662
12. Stockholders’ Equity
On June 2, 2016, our Board of Directors authorized a stock repurchase program of up to $100.0 million (the “Stock Repurchase Program”). No time limit has been established for the completion of the program, and the program may be suspended, discontinued or replaced by the Board of Directors at any time without prior notice. During the three months ended March 31, 2017, we repurchased and retired 879,585 shares of our common stock for an average price per share of $41.95, at a total cost of $36.9 million, which was paid in full. As of March 31, 2017, we have $44.5 million available under this program to repurchase additional shares. During the three months ended March 31, 2016, we repurchased and retired 85,100 shares of our common stock for an average per share price of $34.12, at a total cost of $2.9 million under the previous stock repurchase program that expired on May 5, 2016.
10
13. Segment Reporting
We manage our business in five reportable segments: Corporate Finance & Restructuring, Forensic and Litigation Consulting, Economic Consulting, Technology and Strategic Communications.
Our Corporate Finance & Restructuring segment focuses on the strategic, operational, financial and capital needs of our clients around the world and delivers a wide range of distressed and non-distressed practice offerings. Our distressed practice offerings include corporate restructuring (and bankruptcy) and interim management services. Our non-distressed practice offerings include financings, mergers and acquisitions (“M&A”), M&A integration, valuations and tax advice, as well as financial, operational and performance improvement services.
Our Forensic and Litigation Consulting segment provides law firms, companies, government clients and other interested parties with multidisciplinary, independent dispute advisory, investigations, data analytics, forensic accounting, business intelligence and risk mitigation services, as well as interim management and performance improvement services for our health solutions practice clients.
Our Economic Consulting segment provides law firms, companies, government entities and other interested parties with analysis of complex economic issues for use in legal, regulatory and international arbitration proceedings, strategic decision making and public policy debates in the U.S. and around the world.
Our Technology segment offers a comprehensive portfolio of information governance and e-discovery software, services and consulting support to companies, law firms, courts and government agencies worldwide. Our services allow our clients to control the risk and expense of e-discovery events, as well as manage their data in the context of compliance and risk.
Our Strategic Communications segment designs and executes communications strategies for management teams and boards of directors to help them seize opportunities, manage financial, regulatory and reputational challenges, navigate market disruptions, articulate their brand, stake a competitive position, and preserve and grow their operations.
We evaluate the performance of our operating segments based on Adjusted Segment EBITDA. We define Adjusted Segment EBITDA as a segment’s share of consolidated operating income before depreciation, amortization of intangible assets, remeasurement of acquisition-related contingent consideration, special charges and goodwill impairment charges. We define Total Adjusted Segment EBITDA, a non-GAAP financial measure, as the total of Adjusted Segment EBITDA for all segments, which excludes unallocated corporate expenses. We use Adjusted Segment EBITDA to internally evaluate the financial performance of our segments because we believe it reflects current core operating performance and provides an indicator of the segment’s ability to generate cash.
The table below presents revenues and Adjusted Segment EBITDA for our reportable segments:
Corporate Finance & Restructuring
105,901
127,156
Forensic and Litigation Consulting
111,406
119,004
Economic Consulting
139,221
130,731
46,087
48,281
Strategic Communications
43,729
45,113
Total revenues
Adjusted Segment EBITDA
10,325
31,603
13,521
19,808
20,110
21,319
7,804
7,823
4,257
6,108
Total Adjusted Segment EBITDA
56,017
86,661
11
The table below reconciles Net income to Total Adjusted Segment EBITDA:
Add back:
(605
(2,557
5,801
6,229
Unallocated corporate expenses
19,053
18,746
Segment depreciation expense
7,216
7,029
Amortization of intangible assets
Segment special charges
Remeasurement of acquisition-related contingent consideration
166
980
14. Supplemental Condensed Consolidating Guarantor and Non-Guarantor Financial Information
Substantially all of our domestic subsidiaries are guarantors of borrowings under our Senior Bank Credit Facility and 2022 Notes. The guarantees are full and unconditional and joint and several. All of our guarantors are wholly owned, direct or indirect, subsidiaries.
The following financial information presents condensed consolidating balance sheets, statements of comprehensive income and statements of cash flows for FTI Consulting, all the guarantor subsidiaries, all the non-guarantor subsidiaries and the eliminations necessary to arrive at the consolidated information for FTI Consulting and its subsidiaries. For purposes of this presentation, we have accounted for our investments in our subsidiaries using the equity method of accounting. The principal eliminating entries eliminate investment in subsidiary and intercompany balances and transactions.
Condensed Consolidating Balance Sheet as of March 31, 2017
FTI
Guarantor
Non-Guarantor
Subsidiaries
Eliminations
Consolidated
18,371
157
102,431
150,859
195,389
179,932
Intercompany receivables
1,012,679
52,036
(1,064,715
Other current assets
39,235
24,973
25,789
89,997
208,465
1,233,198
360,188
Property and equipment, net
23,956
13,249
22,269
558,978
416,053
208,596
Other intangible assets, net
21,058
12,852
33,223
(17,238
Investments in subsidiaries
2,105,159
507,788
(2,612,947
39,316
63,396
39,718
142,430
2,956,932
2,246,536
663,994
(3,694,900
Liabilities
Intercompany payables
1,064,715
Other current liabilities
79,899
118,884
94,545
1,144,614
213,072
17,503
49,413
279,988
1,760,403
136,387
143,958
2,110,149
520,036
(2,630,185
Condensed Consolidating Balance Sheet as of December 31, 2016
47,420
156
168,582
137,523
163,820
173,554
1,029,800
(1,029,800
44,708
24,944
22,464
92,116
229,651
1,218,720
364,600
25,466
14,118
22,272
204,970
21,959
13,393
34,725
(17,957
2,065,819
490,634
(2,556,453
47,308
65,398
35,514
148,220
2,949,181
2,218,316
662,081
(3,604,210
1,027,050
2,750
137,710
129,810
110,935
1,164,760
113,685
211,535
16,411
46,081
274,027
1,741,823
146,221
159,766
2,072,095
502,315
(2,574,410
Condensed Consolidating Statement of Comprehensive Income for the Three Months Ended March 31, 2017
151,807
171,026
126,103
(2,592
111,258
117,786
82,561
(2,533
45,798
30,984
30,572
(59
902
540
1,770
(719
157,958
149,705
114,903
(3,311
(6,151
21,321
11,200
719
Other (expense) income
(5,252
(427
483
Income (loss) before income tax provision
(11,403
20,894
11,683
Income tax (benefit) provision
(5,583
10,918
2,542
Equity in net earnings of subsidiaries
19,836
8,573
(28,409
18,549
9,141
(27,690
Other comprehensive income, net of tax:
Foreign currency translation adjustments, net of
tax expense of $0
Other comprehensive income, net of tax
16,511
13
Condensed Consolidating Statement of Comprehensive Income for the Three Months Ended March 31, 2016
182,994
162,563
127,066
(2,338
114,429
109,190
84,315
(2,298
44,667
30,721
28,261
(40
4,563
498
1,128
986
558
1,879
(817
160,088
146,160
114,953
(3,155
22,906
16,403
12,113
817
(5,077
(710
2,115
17,829
15,693
14,228
8,149
6,859
3,378
20,501
9,882
(30,383
18,716
10,850
(29,566
Other comprehensive loss, net of tax:
Other comprehensive loss, net of tax
10,492
Condensed Consolidating Statement of Cash Flows for the Three Months Ended March 31, 2017
(64,127
(14,723
(14,237
Payments for acquisition of businesses, net of cash received
(1,985
(2,396
(1,450
(1,858
Net issuance of common stock under equity compensation
plans
Intercompany transfers
37,666
17,120
(54,786
Net cash provided by (used in) financing activities
36,936
(51,717
Effects of exchange rate changes on cash and cash equivalents
Net (decrease) increase in cash and cash equivalents
(29,049
(66,151
Cash and cash equivalents, beginning of year
Cash and cash equivalents, end of year
14
Condensed Consolidating Statement of Cash Flows for the Three Months Ended March 31, 2016
(7,700
(8,956
(16,443
(788
(3,945
(1,629
(754
(15,356
12,899
2,457
Net cash (used in) provided by financing activities
(12,765
5,047
(21,219
(2
(14,088
35,211
165
114,384
13,992
163
100,296
15
The following is a discussion and analysis of our consolidated financial condition, results of operations, liquidity and capital resources for the three months ended March 31, 2017 and 2016 and significant factors that could affect our prospective financial condition and results of operations. This discussion should be read in conjunction with the accompanying unaudited condensed consolidated financial statements and related notes and with our Annual Report on Form 10-K for the year ended December 31, 2016 filed with the Securities and Exchange Commission (“SEC”). In addition to historical information, the following discussion includes forward-looking statements based on current expectations that involve risks, uncertainties and assumptions, such as our plans, objectives, expectations and intentions. Although we believe that the expectations reflected in the forward-looking statements contained herein are reasonable, these expectations or any of the forward-looking statements could prove to be incorrect, and actual results could differ materially from those projected or assumed in the forward-looking statements.
BUSINESS OVERVIEW
FTI Consulting is a global business advisory firm dedicated to helping organizations manage change, mitigate risk and resolve disputes: financial, legal, operational, political and regulatory, reputational and transactional. Individually, each of our practices is staffed with experts recognized for the depth of their knowledge and a track record of making an impact. Collectively, FTI Consulting offers a comprehensive suite of services designed to assist clients across the business cycle, from proactive risk management to rapid response to unexpected events and dynamic environments.
We report financial results for the following five reportable segments:
Our Corporate Finance & Restructuring (“Corporate Finance”) segment focuses on the strategic, operational, financial and capital needs of our clients around the world and delivers a wide range of distressed and non-distressed practice offerings. Our distressed practice offerings include corporate restructuring (and bankruptcy) and interim management services. Our non-distressed practice offerings include financings, M&As, M&A integration, valuations and tax advice, as well as financial, operational and performance improvement services.
Our Forensic and Litigation Consulting (“FLC”) segment provides law firms, companies, government clients and other interested parties with multidisciplinary, independent dispute advisory, investigations, data analytics, forensic accounting, business intelligence and risk mitigation services, as well as interim management and performance improvement services for our health solutions practice clients.
We derive substantially all of our revenues from providing professional services to both U.S. and global clients. Most of our services are rendered under time-and-expense arrangements that obligate the client to pay us a fee for the hours that we incur at agreed-upon rates. Under this arrangement, we typically bill our clients for reimbursable expenses, which may include the cost of producing our work product and other direct expenses that we incur on behalf of the client, such as travel costs. We also render services for which certain clients may be required to pay us a fixed fee or recurring retainer. These arrangements are generally cancelable at any time. Some of our engagements contain performance-based arrangements in which we earn a success fee when and if certain predefined outcomes occur. This type of success fee may supplement a time-and-expense or fixed-fee arrangement. Success fee revenues may cause variations in our revenues and operating results due to the timing of achieving the performance-based criteria. In our Technology segment, certain clients are also billed based on the amount of data stored on our electronic systems, the volume of information processed or the number of users licensing our Ringtail ® software products for use or installation within their own environments. We license certain products directly to end users, as well as indirectly through our channel partner relationships. Unit-based revenues are defined as revenues billed on a per-item, per-page or some other unit-based method and include revenues from data processing and hosting, software usage and software licensing. Unit-based revenues include revenues associated with our proprietary software that are made available to customers, either via a web browser (“on-demand”) or installed at our customer or partner locations (“on-premise”). On-demand revenues are charged on a unit or monthly basis and include, but are not limited to, processing and review related functions. On-premise revenues are comprised of upfront license fees, with recurring support and maintenance. Seasonal factors, such as the timing of our employees’ and clients’ vacations and holidays, impact the timing of our revenues.
Our financial results are primarily driven by:
•
the number, size and type of engagements we secure;
the rate per hour or fixed charges we charge our clients for services;
the utilization rates of the revenue-generating professionals we employ;
the number of revenue-generating professionals;
licensing of our software products and other technology services;
the types of assignments we are working on at different times;
the length of the billing and collection cycles; and
the geographic locations of our clients or locations in which services are rendered.
We define acquisition growth as revenues of acquired companies in the first 12 months following the effective date of an acquisition. Our definition of organic growth is the change in revenues excluding the impact of all such acquisitions.
When significant, we identify the estimated impact of foreign currency translation (“FX”) driven by our businesses with functional currencies other than the U.S. dollar (“USD”), on the period-to-period performance results. The estimated impact of FX is calculated as the difference between the prior period results multiplied by the average foreign currency exchange rates to USD in the current period and the prior period results multiplied by the average foreign currency rates to USD in the prior period.
Non-GAAP Financial Measures
In the accompanying analysis of financial information, we sometimes use information derived from consolidated and segment financial information that may not be presented in our financial statements or prepared in accordance with GAAP. Certain of these measures are considered “non-GAAP financial measures” under the SEC rules. Specifically, we have referred to the following non-GAAP measures:
Total Segment Operating Income (Loss)
Adjusted EBITDA
Adjusted EBITDA Margin
Adjusted Net Income (Loss)
Adjusted Earnings per Diluted Share
Free Cash Flow
We have included the definitions of Segment Operating Income (Loss) and Adjusted Segment EBITDA below in order to more fully define the components of certain non-GAAP financial measures in the accompanying analysis of financial information. As described in Note 13, “Segment Reporting” in Part 1, Item 1, of this Quarterly Report on Form 10-Q, we evaluate the performance of our operating segments based on Adjusted Segment EBITDA, and Segment Operating Income (Loss) is a component of the definition of Adjusted Segment EBITDA.
We define Segment Operating Income (Loss) as a segment’s share of consolidated operating income (loss). We define Total Segment Operating Income (Loss), which is a non-GAAP financial measure, as the total of Segment Operating Income (Loss) for all segments, which excludes unallocated corporate expenses. We use Segment Operating Income (Loss) for the purpose of calculating Adjusted Segment EBITDA. We define Adjusted Segment EBITDA as a segment’s share of consolidated operating income (loss) before depreciation, amortization of intangible assets, remeasurement of acquisition-related contingent consideration, special charges and goodwill impairment charges. We use Adjusted Segment EBITDA as a basis to internally evaluate the financial performance of our segments because we believe it reflects current core operating performance and provides an indicator of the segment’s ability to generate cash. We define Adjusted Segment EBITDA Margin as Adjusted Segment EBITDA as a percentage of a segment’s revenues.
We define Total Adjusted Segment EBITDA, which is a non-GAAP financial measure, as the total of Adjusted Segment EBITDA for all segments, which excludes unallocated corporate expenses. We define Adjusted EBITDA, which is a non-GAAP financial measure, as consolidated net income before income tax provision, other non-operating income (expense), depreciation, amortization of intangible assets, remeasurement of acquisition-related contingent consideration, special charges, goodwill impairment charges and losses on early extinguishment of debt. We believe that the non-GAAP financial measures, which exclude the effects of remeasurement of acquisition-related contingent consideration, special charges and goodwill impairment charges, when considered together with our GAAP financial results and GAAP measures, provide management and investors with a more complete understanding of our operating results, including underlying trends. In addition, EBITDA is a common alternative measure of operating performance used by many of our competitors. It is used by investors, financial analysts, rating agencies and others to value and compare the financial performance of companies in our industry. Therefore, we also believe that these measures, considered along with corresponding GAAP measures, provide management and investors with additional information for comparison of our operating results with the operating results of other companies.
We define Adjusted Net Income and Adjusted Earnings per Diluted Share (“Adjusted EPS”), which are non-GAAP financial measures, as net income and earnings per diluted share, respectively, excluding the impact of remeasurement of acquisition-related contingent consideration, special charges, goodwill impairment charges and losses on early extinguishment of debt. We use Adjusted Net Income for the purpose of calculating Adjusted EPS. Management uses Adjusted EPS to assess total Company operating performance on a consistent basis. We believe that this non-GAAP financial measure, which excludes the effects of the remeasurement of acquisition-related contingent consideration, special charges, goodwill impairment charges and losses on early extinguishment of debt, when considered together with our GAAP financial results, provides management and investors with an additional understanding of our business operating results, including underlying trends.
We define Free Cash Flow as net cash provided by operating activities less cash payments for purchases of property and equipment. We believe this non-GAAP financial measure, when considered together with our GAAP financial results, provides management and investors with an additional understanding of the Company’s ability to generate cash for ongoing business operations and other capital deployment.
Non-GAAP financial measures are not defined in the same manner by all companies and may not be comparable with other similarly titled measures of other companies. Non-GAAP financial measures should be considered in addition to, but not as a substitute for or superior to, the information contained in our Condensed Consolidated Statements of Comprehensive Income. Reconciliations of non-GAAP financial measures to the most directly comparable GAAP financial measures are included elsewhere in this report.
EXECUTIVE HIGHLIGHTS
(dollar amounts in thousands,
except per share data)
Special charges(1)
38,319
68,857
Adjusted earnings per common share — diluted
0.83
Total number of employees as of March 31
4,742
4,610
Excluded from non-GAAP measures.
18
First Quarter 2017 Executive Highlights
Revenues for the three months ended March 31, 2017 decreased $23.9 million, or 5.1%, which included a $7.8 million, or 1.7%, estimated negative impact of foreign currency translation (“FX”). Excluding the estimated impact of FX, revenues decreased $16.1 million, or 3.4%. The decrease in revenues was primarily driven by lower demand for restructuring services in our Corporate Finance & Restructuring segment in North America and lower demand for the health solutions practice in our Forensics and Litigation Consulting segment. This was partially offset by higher demand for antitrust services in our Economic Consulting segment in North America.
There were no special charges recorded during the three months ended March 31, 2017.
Net income for the three months ended March 31, 2017 decreased $16.2 million, or 53.6%. This decrease was due to lower operating results in the current period, partially offset by the lower provision for income taxes in the three months ended March 31, 2017.
Adjusted EBITDA for the three months ended March 31, 2017 decreased $30.5 million, or 44.3%. Adjusted EBITDA was 8.6% of revenues for the three months ended March 31, 2017 compared with 14.6% of revenues for the three months ended March 31, 2016. The decrease in Adjusted EBITDA was primarily due to lower demand for restructuring services in the Corporate Finance & Restructuring segment in North America and lower demand and realized pricing in the health solutions practice within our Forensics and Litigation Consulting segment. The decline in Adjusted EBITDA was also impacted to a lesser extent by higher compensation and higher selling, general and administrative expenses.
Earnings per diluted share and Adjusted EPS
Earnings per diluted share for the three months ended March 31, 2017 decreased $0.39 to $0.34 compared with $0.73 for the three months ended March 31, 2016, which included a special charge and a fair value increase to an acquisition-related contingent consideration liability, which reduced earnings per diluted share by $0.10.
Adjusted EPS for the three months ended March 31, 2017 decreased $0.49 to $0.34 compared with $0.83 for the three months ended March 31, 2016. Adjusted EPS for the three months ended March 31, 2016 excluded a special charge and a fair value increase to an acquisition-related contingent consideration liability described above.
Liquidity and capital allocation
Net cash used in operating activities for the three months ended March 31, 2017 increased $60.0 million, or 181.2%, to $93.1 million compared with $33.1 million for the three months ended March 31, 2016. The increase was primarily due to lower cash collections due to lower revenues and higher annual bonus payments. Days sales outstanding (“DSO”), which is one measure of the collections cycle, was 98 days at both March 31, 2017 and March 31, 2016. Free cash flow for the three months ended March 31, 2017 was an outflow of $98.9 million compared with an outflow of $39.5 million for the three months ended March 31, 2016.
Financing activities in the three months ended March 31, 2017 included $37.0 million of additional borrowings under the Company’s senior secured bank revolving credit facility (“Senior Bank Credit Facility”). Total debt outstanding, net of deferred debt issue costs, was $402.7 million as of March 31, 2017, down from $502.0 million as of March 31, 2016.
On June 2, 2016, our Board of Directors authorized a stock repurchase program (the “Stock Repurchase Program”) under which FTI Consulting may repurchase up to $100.0 million of its outstanding common stock. No time limit has been established for the completion of the program, and the program may be suspended, discontinued or replaced by the Board of Directors at any time without prior notice. We repurchased and retired 879,585 shares of our common stock for an average price per share of $41.95, at a total cost of $36.9 million. As of March 31, 2017, we have $44.5 million available under this program to repurchase additional shares. Subject to market conditions and future events that may be beyond our control, we expect to use the remaining $44.5 million available under the Stock Repurchase Program during the remainder of 2017.
19
Headcount
Our total headcount increased 0.5% from 4,718 as of December 31, 2016 to 4,742 as of March 31, 2017. The following table includes the net billable headcount additions for the three months ended March 31, 2017.
Billable Headcount
December 31, 2016
895
1,110
656
288
647
3,596
Additions, net
27
March 31, 2017
900
660
296
657
3,623
Percentage change in billiable headcount
0.6
%
0.0
2.8
1.5
0.8
CONSOLIDATED RESULTS OF OPERATIONS
Segment and Consolidated Operating Results:
Segment operating income (loss)
8,749
30,076
11,924
18,213
18,502
20,211
4,440
(1,180
2,527
3,665
Total segment operating income
46,142
70,985
(19,053
(18,746
20
Reconciliation of Net Income to Adjusted EBITDA:
Remeasurement of acquisition-related contingent
consideration
Reconciliation of Net Income and Earnings Per Share to Adjusted Net Income and Adjusted Earnings Per Share:
Tax impact of special charges
(1,792
Tax impact of remeasurement of acquisition-related contingent
(65
(380
Adjusted net income
14,117
34,050
0.12
(0.04
consideration(1)
0.02
Weighted average number of common shares
outstanding — diluted
Impact of remeasurement of acquisition-related contingent consideration on earnings per common share for three months ended March 31, 2017 and related tax impact for three months ended March 31, 2017 and 2016 round to $0.00 per share.
Reconciliation of Net Cash Used in Operating Activities to Free Cash Flow:
(98,918
(39,461
21
Three Months Ended March 31, 2017 Compared with Three Months Ended March 31, 2016
Revenues and operating income
See “Segment Results” for an expanded discussion of Revenues and Adjusted Segment EBITDA.
Unallocated corporate expenses for the three months ended March 31, 2017 increased $0.3 million, or 1.6%, to $19.1 million compared with $18.7 million for the three months ended March 31, 2016.
Interest income and other, which includes foreign currency transaction gains and losses, decreased $2.0 million to income of $0.6 million for the three months ended March 31, 2017 compared with income of $2.6 million for the three months ended March 31, 2016. The decrease was primarily due to net unrealized foreign currency transaction losses, which were $0.4 million for the three months ended March 31, 2017 compared with a $1.4 million gain for the three months ended March 31, 2016. Transaction gains and losses, both realized and unrealized, relate to the remeasurement or settlement of monetary assets and liabilities that are denominated in a currency other than an entity’s functional currency. These monetary assets and liabilities include cash as well as third party and intercompany receivables and payables.
Interest expense for the three months ended March 31, 2017 decreased $0.4 million, or 6.5%, to $5.8 million compared with $6.2 million for the three months ended March 31, 2016. Interest expense for the three months ended March 31, 2017 was favorably impacted by lower average debt balances reflecting the net repayments of borrowings under the Senior Bank Credit Facility in 2016.
The effective tax rate for the three months ended March 31, 2017 was 36.0% compared with 37.9% for the three months ended March 31, 2016. The effective tax rate for the three months ended March 31, 2017 was unfavorably impacted by the mix of earnings in our international jurisdictions. This was partially offset by a $0.3 million reduction of tax expense related to excess benefits realized from stock compensation transactions during the three months ended March 31, 2017, as required by the new accounting standard for share-based payments. The effective tax rate for the three months ended March 31, 2016 was unfavorably impacted by 1.5% for discrete tax adjustments.
We recorded a $0.2 million and $1.0 million expense for the three months ended March 31, 2017 and 2016, respectively, related to the increase in the liability for future expected contingent consideration payments in our Strategic Communications segment.
22
SEGMENT RESULTS
We evaluate the performance of our operating segments based on Adjusted Segment EBITDA. We define Total Adjusted Segment EBITDA, which is a non-GAAP financial measure, as the total of Adjusted Segment EBITDA for all segments, which excludes unallocated corporate expenses. The following table reconciles Net Income to Total Adjusted Segment EBITDA for the three months ended March 31, 2017 and 2016.
Other Segment Operating Data
Number of revenue-generating professionals:
(at period end)
857
1,132
607
Technology (1)
313
601
Total revenue-generating professionals
3,510
Utilization rates of billable professionals: (2)
59
74
60
64
72
79
Average billable rate per hour: (3)
377
384
330
333
554
531
The number of revenue-generating professionals for the Technology segment excludes as-needed professionals who we employ based on demand for the segment’s services. We employed an average of 378 as-needed employees during the three months ended March 31, 2017, as compared with 353 as-needed employees during the three months ended March 31, 2016.
23
(2)
We calculate the utilization rate for our billable professionals by dividing the number of hours that all of our billable professionals worked on client assignments during a period by the total available working hours for all of our billable professionals during the same period. Available hours are determined by the standard hours worked by each employee, adjusted for part-time hours, local country standard work weeks and local country holidays. Available working hours include vacation and professional training days, but exclude holidays. Utilization rates are presented for our segments that primarily bill clients on an hourly basis. We have not presented utilization rates for our Technology and Strategic Communications segments as most of the revenues of these segments are not generated on an hourly basis.
(3)
For engagements where revenues are based on number of hours worked by our billable professionals, average billable rate per hour is calculated by dividing revenues (excluding revenues from success fees, pass-through revenues and outside consultants) for a period by the number of hours worked on client assignments during the same period. We have not presented average billable rates per hour for our Technology and Strategic Communications segments as most of the revenues of these segments are not based on billable hours.
CORPORATE FINANCE & RESTRUCTURING
(dollars in thousands,
except rate per hour)
Percentage change in revenues from prior year
-16.7
19.7
74,665
75,452
21,692
20,823
795
805
97,152
97,080
Segment operating income
Percentage change in segment operating income
from prior year
-70.9
44.8
Depreciation and amortization of intangible assets
1,576
1,527
Gross profit (1)
31,236
51,704
Percentage change in gross profit from prior year
-39.6
22.3
Gross profit margin (2)
29.5
40.7
Adjusted Segment EBITDA as a percent of revenues
9.7
24.9
Number of revenue-generating professionals (at period
end)
Percentage change in number of revenue-generating
professionals from prior year
5.0
16.6
Utilization rates of billable professionals
Average billable rate per hour
Revenues less direct cost of revenues
Gross profit as a percent of revenues
Revenues decreased $21.3 million, or 16.7%, to $105.9 million for the three months ended March 31, 2017. This decrease was primarily driven by lower demand for restructuring services in North America.
Gross profit decreased $20.5 million, or 39.6%, to $31.2 million for the three months ended March 31, 2017. Gross profit margin decreased 11.2 percentage points for the three months ended March 31, 2017. This decrease was primarily due to lower utilization as a result of a decline in demand for restructuring services in North America.
24
Selling, general and administrative (“SG&A”) expenses increased $0.9 million, or 4.2%, to $21.7 million for the three months ended March 31, 2017. SG&A expenses were 20.5% of revenues for the three months ended March 31, 2017 compared with 16.4% for the three months ended March 31, 2016.
FORENSIC AND LITIGATION CONSULTING
-6.4
-3.5
76,878
80,077
22,180
20,192
424
516
99,482
100,791
-34.5
-11.0
1,597
1,595
34,528
38,927
-11.3
-12.9
31.0
32.7
12.1
-1.9
-1.1
Revenues less direct cost of revenues.
Gross profit as a percent of revenues.
Revenues decreased $7.6 million, or 6.4%, to $111.4 million for the three months ended March 31, 2017. The decrease was primarily driven by lower demand in the health solutions and global investigations practices, which was partially offset by higher demand in the construction solutions practice.
Gross profit decreased $4.4 million, or 11.3%, to $34.5 million for the three months ended March 31, 2017. Gross profit margin decreased 1.7 percentage points for the three months ended March 31, 2017. This decrease was primarily due to lower demand and lower realized pricing in the health solutions practice. This decline was partially offset by lower compensation in the health solutions practice resulting from headcount reductions in 2016 and higher utilization in the construction solutions practice.
SG&A expenses increased $2.0 million, or 9.8%, to $22.2 million for the three months ended March 31, 2017. SG&A expenses were 19.9% of revenues for the three months ended March 31, 2017 compared with 17.0% for the three months ended March 31, 2016. The increase in SG&A expenses was primarily a result of higher bad debt expense.
25
ECONOMIC CONSULTING
6.5
23.2
103,273
93,895
17,285
16,426
154
183
120,719
110,520
-8.5
96.3
1,608
1,108
35,948
36,836
-2.4
40.9
25.8
28.2
14.4
16.3
Number of revenue-generating professionals (at period end)
8.7
7.2
Revenues increased $8.5 million, or 6.5%, to $139.2 million for the three months ended March 31, 2017, which included a 2.5% estimated negative impact from FX. Excluding the estimated impact of FX, revenues increased $11.8 million, or 9.0%, primarily due to higher demand for antitrust services in North America.
Gross profit decreased $0.9 million, or 2.4%, to $35.9 million for the three months ended March 31, 2017. Gross profit margin decreased 2.4 percentage points for the three months ended March 31, 2017. This decrease was primarily due to lower utilization related to international arbitration and other litigation services in EMEA.
SG&A expenses increased $0.9 million, or 5.2%, to $17.3 million for the three months ended March 31, 2017. SG&A expenses were 12.4% of revenues for the three months ended March 31, 2017 compared with 12.6% for the three months ended March 31, 2016. The increase in SG&A expenses was primarily due to higher bad debt and depreciation expense, partially offset by lower legal fees.
26
TECHNOLOGY
(dollars in thousands)
-4.5
-11.7
25,607
28,228
15,882
16,014
158
41,647
49,461
476.3
-119.0
3,364
3,942
20,480
20,053
2.1
-17.9
44.4
41.5
16.9
16.2
end) (3)
-5.4
-13.1
Includes personnel involved in direct client assistance and revenue generating consultants
Revenues decreased $2.2 million, or 4.5%, to $46.1 million for the three months ended March 31, 2017, which included a 1.1% estimated negative impact from FX. Excluding the estimated impact of FX, revenues decreased $1.7 million, or 3.4%, due to reduced demand for cross-border investigations and M&A related second request activity, partially offset by increases in litigation and class action related engagements.
Gross profit increased $0.4 million, or 2.1%, to $20.5 million for the three months ended March 31, 2017. Gross profit margin increased 2.9 percentage points for the three months ended March 31, 2017. The increase in gross profit margin was due to lower compensation as a result of headcount reductions taken in 2016 and lower data center operation expense. The decrease in expenses was partially offset by lower revenues.
SG&A expenses decreased $0.1 million, or 0.8%, to $15.9 million for the three months ended March 31, 2017. SG&A expenses were 34.5% of revenues for the three months ended March 31, 2017 compared with 33.2% for the three months ended March 31, 2016. The decrease in SG&A expenses was due to lower costs related to headcount reductions taken in 2016. Research and development expense related to software was $4.2 million for the three months ended March 31, 2017 compared with $4.0 million for the three months ended March 31, 2016.
STRATEGIC COMMUNICATIONS
-3.1
7.1
28,649
27,984
11,203
11,408
222
132
962
944
41,202
41,448
-31.1
-12.7
1,564
1,463
Fair value remeasurement of contingent consideration
15,080
17,129
-12.0
34.5
38.0
13.5
9.3
8.1
Revenues decreased $1.4 million, or 3.1%, to $43.7 million for the three months ended March 31, 2017, which included a 4.3% estimated negative impact from FX. Excluding the estimated impact of FX, revenues increased $0.6 million, or 1.2%, primarily due to higher project based revenues and retainer-based revenues in EMEA, particularly in public affairs related engagements. These increases were partially offset by a reduction in project-based financial communication revenues in North America.
Gross profit decreased $2.0 million, or 12.0%, to $15.1 million for the three months ended March 31, 2017. Gross profit margin decreased 3.5 percentage points for the three months ended March 31, 2017. The decrease was primarily due to higher compensation related to an increase in billable professionals and fewer high margin project engagements in North America.
SG&A expenses decreased $0.2 million, or 1.8%, to $11.2 million for the three months ended March 31, 2017. SG&A expenses were 25.6% of revenue for the three months ended March 31, 2017 compared with 25.3% for the three months ended March 31, 2016.
28
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of operations are based on our condensed consolidated financial statements, which we have prepared in accordance with GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Note 1 to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC describes the significant accounting policies and methods used in preparation of the Consolidated Financial Statements. We evaluate our estimates, including those related to allowance for doubtful accounts and unbilled services, goodwill, income taxes and contingencies on an ongoing basis. We base our estimates on current facts and circumstances, historical experience and on various other assumptions that we believe are reasonable. These results form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The accounting policies that reflect our more significant estimates, judgments and assumptions and which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:
Revenue recognition
Goodwill and other intangible assets
There have been no material changes to our critical accounting policies and estimates from the information provided in “Critical Accounting Policies” in Part II, Item 7, of our Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC.
Goodwill and Other Intangible Assets
On a quarterly basis, we monitor the key drivers of fair value to detect events or other changes that would warrant an interim impairment test of our goodwill and intangible assets. Factors we consider important that could trigger an interim impairment review include, but are not limited to, the following: significant underperformance relative to historical or projected future operating results; a significant change in the manner of our use of the acquired asset or strategy for our overall business; a significant negative industry or economic trend; and our market capitalization relative to net book value. When we evaluate these factors and determine that a triggering event has occurred, we perform an interim impairment analysis.
As of October 1, 2016, the date of our last annual goodwill impairment test, the estimated fair value of each of our reporting units significantly exceeded their respective carrying values and no further testing was required. Through our quarterly assessment, we determined that there were no events or circumstances that more likely than not would reduce the fair value of any of our reporting units below their carrying value.
There can be no assurance that the estimates and assumptions used in our goodwill impairment testing will prove to be accurate predictions of the future. If our assumptions regarding forecasted cash flows are not achieved, we may be required to perform the two-step quantitative goodwill impairment analysis prior to our next annual impairment test. In addition, if the aforementioned factors have the effect of changing one of the critical assumptions or estimates we use to calculate the value of our goodwill or intangible assets, we may be required to record goodwill and/or intangible asset impairment charges in future periods, whether in connection with our next annual impairment test or if a triggering event occurs outside of the quarter during which the annual goodwill impairment test is performed. It is not possible at this time to determine if any future impairment charge would result or, if it does, whether such charge would be material.
SIGNIFICANT NEW ACCOUNTING PRONOUNCEMENTS
See Note 3, “New Accounting Standards” in Part I, Item 1, of this Quarterly Report on Form 10-Q.
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LIQUIDITY AND CAPITAL RESOURCES
Cash Flows
Cash flows
DSO
98
We have generally financed our day-to-day operations, capital expenditures and acquisitions through cash flows from operations. During the first quarter of our fiscal year, our cash needs generally exceed our cash flows from operations due to the payment of annual incentive compensation. Our operating cash flows are generally positive subsequent to the first quarter of each year.
Our operating assets and liabilities consist primarily of billed and unbilled accounts receivable, notes receivable from employees, accounts payable, accrued expenses and accrued compensation expenses. The timing of billings and collections of receivables, as well as compensation and vendor payments, affect the changes in these balances.
DSO is a performance measure used to assess how quickly revenues are collected by the Company. We calculate DSO at the end of each reporting period by dividing net accounts receivable reduced by billings in excess of services provided, by revenues for the quarter, adjusted for changes in foreign exchange rates. We multiply the result by the number of days in the quarter.
Net cash used in operating activities for the three months ended March 31, 2017 was $93.1 million compared with $33.1 million for the three months ended March 31, 2016. The increase in the use of cash was primarily due to lower cash collections as a result of lower revenues and increased annual bonus payments. DSO was 98 days at March 31, 2017 and March 31, 2016.
Net cash used in investing activities for the three months ended March 31, 2017 was $5.7 million compared with net cash used in investing activities of $6.3 million for the three months ended March 31, 2016. Capital expenditures were $5.8 million for the three months ended March 31, 2017 compared with $6.4 million for the three months ended March 31, 2016.
Net cash provided by financing activities for the three months ended March 31, 2017 was $2.3 million compared with $5.2 million for the three months ended March 31, 2016. Cash used in financing activities in the three months ended March 31, 2017 included $37.0 million of net borrowings under our Senior Bank Credit Facility and payments of $36.9 million to settle repurchases of our common stock, and $3.1 million of refundable deposits related to one of our foreign entities. Our financing activities for the three months ended March 31, 2016 included net borrowings under our Senior Bank Credit Facility of $7.0 million, payments of $2.9 million to settle repurchases of our common stock and $1.4 million related to cash paid from the issuance of common stock under our equity compensation plan.
Capital Resources
As of March 31, 2017, our capital resources included $121.0 million of cash and cash equivalents and available borrowing capacity of $442.3 million under our five-year $550.0 million Senior Bank Credit Facility. As of March 31, 2017, we had $107.0 million of borrowing outstanding under our Senior Bank Credit Facility and $0.7 million of outstanding letters of credit, which reduced the availability of borrowings. We primarily use letters of credit in lieu of security deposits for our leased office facilities.
Future Capital Needs
We anticipate that our future capital needs will principally consist of funds required for:
operating and general corporate expenses relating to the operation of our businesses;
capital expenditures, primarily for information technology equipment, office furniture and leasehold improvements;
debt service requirements, including interest payments on our long-term debt;
30
compensating designated executive management and senior managing directors under our various long-term incentive compensation programs;
discretionary funding of the Stock Repurchase Program;
contingent obligations related to our acquisitions;
potential acquisitions of businesses that would allow us to diversify or expand our service offerings; and
other known future contractual obligations.
During the three months ended March 31, 2017, we spent $5.8 million in capital expenditures to support our organization, including direct support for specific client engagements. We expect to make additional expenditures in an aggregate amount between $35 million and $45 million for the remainder of 2017. Our estimate takes into consideration the needs of our existing businesses but does not include the impact of any purchases that we may be required to make as a result of future acquisitions or specific client engagements that are not currently contemplated. Our capital expenditure requirements may change if our staffing levels or technology needs change significantly from what we currently anticipate, if we are required to purchase additional equipment specifically to support new client engagements, or if we pursue and complete additional acquisitions.
Our cash flows from operations have historically exceed our cash needs for capital expenditures and debt service requirements. We believe that our cash flows from operations, supplemented by borrowings under our Senior Bank Credit Facility, as necessary, will provide adequate cash to fund our long-term cash needs from normal operations for the next 12 months or longer.
Our conclusion that we will be able to fund our cash requirements by using existing capital resources and cash generated from operations does not take into account the impact of any future acquisitions, unexpected significant changes in numbers of employees or other unanticipated uses of cash. The anticipated cash needs of our business could change significantly if we pursue and complete additional business acquisitions, if our business plans change, if economic conditions change from those currently prevailing or from those now anticipated, or if other unexpected circumstances arise that may have a material effect on the cash flow or profitability of our business, including material negative changes in the operating performance or financial results of our business. Any of these events or circumstances, including any new business opportunities, could involve significant additional funding needs in excess of the identified currently available sources and could require us to raise additional debt or equity funding to meet those needs. Our ability to raise additional capital, if necessary, is subject to a variety of factors that we cannot predict with certainty, including:
our future profitability;
the quality of our accounts receivable;
our relative levels of debt and equity;
the volatility and overall condition of the capital markets; and
the market prices of our securities.
Any new debt funding, if available, may be on terms less favorable to us than our Senior Bank Credit Facility or the Indenture that governs our 2022 Notes. See “Forward-Looking Statements” of this Quarterly Report on Form 10-Q and “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements, other than operating leases, and we have not entered into any transactions involving unconsolidated subsidiaries or special purpose entities.
Future Contractual Obligations
There have been no significant changes in our future contractual obligations information as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC.
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Forward-Looking Statements
This Quarterly Report on Form 10-Q includes “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that involve uncertainties and risks. Forward-looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues, future results and performance, future capital allocations and expenditures, expectations, plans or intentions relating to acquisitions, share repurchases and other matters, business trends and other information that is not historical. Forward-looking statements often contain words such as “estimates,” “expects,” “anticipates,” “projects,” “plans,” “intends,” “believes,” “forecasts” and variations of such words or similar expressions. All forward-looking statements, including, without limitation, management’s financial guidance and examination of operating trends, are based upon our historical performance and our current plans, estimates and expectations at the time we make them and various assumptions. There can be no assurance that management’s expectations, beliefs and projections will result or be achieved. Our actual financial results, performance or achievements could differ materially from those expressed in, or implied by, any forward-looking statements. The inclusion of any forward-looking information should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved. Given these risks, uncertainties and other factors, you should not place undue reliance on any forward-looking statements.
There are a number of risks and uncertainties that could cause our actual results to differ materially from the forward-looking statements contained in, or implied by, this Quarterly Report on Form 10-Q. Important factors that could cause our actual results to differ materially from the forward-looking statements we make in this Quarterly Report on Form 10-Q include those set forth under the heading “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC. Important factors that could cause our actual results to differ materially from the forward-looking statements we make in this Quarterly Report on Form 10-Q include, but are not limited to, the following:
changes in demand for our services;
our ability to attract and retain qualified professionals and senior management;
conflicts resulting in our inability to represent certain clients;
our former employees joining or forming competing businesses;
our ability to manage our professionals’ utilization and billing rates and maintain or increase the pricing of our services and products;
our ability to identify suitable acquisition candidates, negotiate favorable terms, take advantage of opportunistic acquisition situations and integrate the operations of acquisitions as well as the costs of integration;
our ability to adapt to and manage the risks associated with operating in non-U.S. markets;
our ability to replace key personnel, including former executives, officers, senior managers and practice and regional leaders who have highly specialized skills and experience;
our ability to protect the confidentiality of internal and client data and proprietary and confidential information;
legislation or judicial rulings, including rulings regarding data privacy and the discovery process;
periodic fluctuations in revenues, operating income and cash flows;
damage to our reputation as a result of claims involving the quality of our services;
fee discounting or renegotiation, lower pricing, less advantageous contract terms and unexpected terminations of client engagements;
competition for clients and key personnel;
general economic factors, industry trends, restructuring and bankruptcy rates, legal or regulatory requirements, capital market conditions, merger and acquisition activity, major litigation activity and other events outside of our control;
our ability to manage growth;
risk of non-payment of receivables;
the amount and terms of our outstanding indebtedness;
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risks relating to the obsolescence of, changes to, or the protection of, our proprietary software products and intellectual property rights;
foreign currency disruptions and currency fluctuations between the U.S. dollar and foreign currencies; and
fluctuations in the mix of our services and the geographic locations in which our clients are located or our services are rendered.
There may be other factors that may cause our actual results to differ materially from our forward-looking statements. All forward-looking statements attributable to us or persons acting on our behalf apply only as of the date of this Quarterly Report on Form 10-Q and are expressly qualified in their entirety by the cautionary statements included herein. We undertake no obligation to publicly update or revise any forward-looking statements to reflect subsequent events or circumstances and do not intend to do so.
Quantitative and Qualitative Disclosures about Market Risk
For information regarding our exposure to certain market risks see “Quantitative and Qualitative Disclosures about Market Risk” in Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2016 filed with the SEC. There have been no significant changes in our market risk exposure during the period covered by this Quarterly Report on Form 10-Q.
Evaluation of Disclosure Controls and Procedures. An evaluation of the effectiveness of the design and operation of our “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Exchange Act), as of the end of the period covered by this Quarterly Report on Form 10-Q was made under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Based upon this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures (a) were effective to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is timely recorded, processed, summarized and reported and (b) included, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting. There have not been any changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
From time to time in the ordinary course of business, we are subject to claims, asserted or unasserted, or named as a party to lawsuits or investigations. Litigation, in general, and intellectual property and securities litigation in particular, can be expensive and disruptive to normal business operations. Moreover, the results of legal proceedings cannot be predicted with any certainty and in the case of more complex legal proceedings such as intellectual property and securities litigation, the results are difficult to predict at all. We are not aware of any asserted or unasserted legal proceedings or claims that we believe would have a material adverse effect on our financial condition or results of our operations.
There has been no material change in any risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2016, filed with the Securities and Exchange Commission (the “SEC”) on February 28, 2017. We may disclose changes to risk factors or disclose additional factors from time to time in our future filings with the SEC. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations.
Unregistered sales of equity securities.
None.
Repurchases of our common stock.
The following table provides information with respect to purchases we made of our common stock during the three months ended March 31, 2017:
Number of
Purchased
Average
Price
Paid per
Share
Total Number of
Purchased as
Part of Publicly
Announced
Program
Approximate
Dollar Value
that May Yet Be
Under the
January 1 through January 31, 2017
604
42.06
596
56,375
February 1 through February 28, 2017
285
41.80
284
(4)
44,505
March 1 through March 31, 2017
42
(5)
40.67
(6)
44,495
931
880
Includes 8,598 shares of common stock withheld to cover payroll tax withholdings related to the lapse of restrictions on restricted stock.
On June 2, 2016, our Board of Directors authorized the Stock Repurchase Program for up to $100.0 million of our outstanding common stock. No time limit has been established for the completion of the program. During the month ended January 31, 2017, we repurchased and retired 595,543 shares of common stock, at an average per share price of $42.02, for an aggregate cost of $25.0 million.
Includes 707 shares of common stock withheld to cover payroll tax withholdings related to the lapse of restrictions on restricted stock.
During the month ended February 28, 2017, we repurchased and retired 283,800 shares of common stock, at an average per share price of $41.80, for an aggregate cost of $11.9 million.
Includes 41,863 shares of common stock withheld to cover payroll tax withholdings related to the lapse of restrictions on restricted stock.
During the month ended March 31, 2017, we repurchased and retired 242 shares of common stock, at an average per share price of $39.98, for an aggregate cost of $9,681.
Not applicable.
Exhibit
Number
Description
3.1
Articles of Incorporation of FTI Consulting, Inc., as amended and restated. (Filed with the Securities and Exchange Commission on May 23, 2003 as an exhibit to FTI Consulting, Inc.’s Current Report on Form 8-K dated May 21, 2003 and incorporated herein by reference.)
3.2
Articles of Amendment of FTI Consulting, Inc. (Filed with the Securities and Exchange Commission on June 2, 2011 as an exhibit to FTI Consulting, Inc.’s Current Report on Form 8-K dated June 1, 2011 and incorporated herein by reference.)
3.3
Bylaws of FTI Consulting, Inc., as amended and restated on June 1, 2011. (Filed with the Securities and Exchange Commission on June 2, 2011 as an exhibit to FTI Consulting, Inc.’s Current Report on Form 8-K dated June 1, 2011 and incorporated herein by reference.)
3.4
Amendment No. 1 to Bylaws of FTI Consulting, Inc. (Filed with the Securities and Exchange Commission on December 16, 2013 as an exhibit to FTI Consulting, Inc.’s Current Report on Form 8-K dated December 13, 2013 and incorporated herein by reference.)
3.5
Amendment No. 2 to Amended and Restated Bylaws of FTI Consulting, Inc. (Filed with the Securities and Exchange Commission on September 22, 2014 as an exhibit to FTI Consulting, Inc.’s Current Report on Form 8-K dated September 17, 2014 and incorporated herein by reference.)
10.1*
Amendment No. 2 effective as of March 21, 2017 to Employment Agreement dated as of December 13, 2013, as amended, by and between FTI Consulting, Inc. and Steven Gunby. (Filed with the Securities and Exchange Commission on March 23, 2017 as an exhibit to FTI Consulting, Inc.’s Current Report on Form 8-K dated March 21, 2017 and incorporated herein by reference.)
10.2*
Amendment No. 1 effective as of March 21, 2017 to Offer of Employment Letter dated as of July 5, 2016, by and between FTI Consulting, Inc. and Ajay Sabherwal. (Filed with the Securities and Exchange Commission on March 23, 2017 as an exhibit to FTI Consulting, Inc.’s Current Report on Form 8-K dated March 21, 2017 and incorporated herein by reference.)
10.3*
Amendment No. 1 effective as of March 21, 2017 to Offer of Employment Letter dated July 15, 2014, by and between FTI Consulting, Inc. and Paul Linton. (Filed with the Securities and Exchange Commission on March 23, 2017 as an exhibit to FTI Consulting, Inc.’s Current Report on Form 8-K dated March 21, 2017 and incorporated herein by reference.)
10.4*
Amendment No. 1 effective as of March 21, 2017 to Employment Letter dated May 14, 2015, by and between FTI Consulting, Inc. and Curtis Lu. (Filed with the Securities and Exchange Commission on March 23, 2017 as an exhibit to FTI Consulting, Inc.’s Current Report on Form 8-K dated March 21, 2017 and incorporated herein by reference.)
10.5*
Amendment No. 2 effective as of March 21, 2017 to Offer of Employment Letter dated July 15, 2014, by and between FTI Consulting, Inc. and Holly Paul (Filed with the Securities and Exchange Commission on March 23, 2017 as an exhibit to FTI Consulting, Inc.’s Current Report on Form 8-K dated March 21, 2017 and incorporated herein by reference.)
31.1†
Certification of Principal Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended (Section 302 of the Sarbanes-Oxley Act of 2002).
31.2†
Certification of Principal Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) under the Securities Exchange Act of 1934, as amended (Section 302 of the Sarbanes-Oxley Act of 2002).
32.1†**
Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002).
32.2†**
Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350 (Section 906 of the Sarbanes-Oxley Act of 2002).
101
The following financial information from the Quarterly Report on Form 10-Q of FTI Consulting, Inc., included herewith, and formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets as of March 31, 2017 and December 31, 2016; (ii) Condensed Consolidated Statements of Comprehensive Income for the three ended March 31, 2017 and 2016; (iii) Condensed Consolidated Statement of Stockholders’ Equity for the three months ended March 31, 2017; (iv) Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016; and (v) Notes to the Condensed Consolidated Financial Statements, tagged as blocks of text.
†
Filed herewith.
*
Management contract or compensatory plan or arrangement.
**
This certification is deemed not filed for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section, nor shall it be deemed incorporated by reference into any filing under the Securities Act of 1933, as amended, or the Exchange Act.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: April 27, 2017
By:
/s/ Catherine M. Freeman
Catherine M. Freeman
Senior Vice President, Controller and
Chief Accounting Officer
(principal accounting officer)