FTI Consulting, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. 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. Dollar figures below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Revenue | $606.1 | $512.1 | $1,157.4 | $1,009.9 |
| Operating income | $88.1 | $61.8 | $175.3 | $124.1 |
| Net income | $64.6 | $43.6 | $127.2 | $82.6 |
| Diluted EPS | $1.69 | $1.14 | $3.33 | $2.18 |
| Adjusted EBITDA (non-GAAP) | $97.2 | $72.4 | $193.3 | $144.7 |
- Q2 revenue rose 18.4% year over year (20.0% excluding estimated adverse foreign exchange effects); net income rose about 48%. Management attributed growth to higher demand across all segments and more Corporate Finance success fees.
- Q2 Adjusted EBITDA margin increased to 16.0% from 14.1%. Adjusted diluted EPS was $1.73 versus $1.14; the 2019 figure excludes $2.1 million of non-cash convertible-note interest expense.
- For the first half, operating cash flow was negative $54.4 million and free cash flow (non-GAAP) was negative $75.1 million, compared with negative $34.6 million and negative $50.8 million, respectively, in the prior-year period. Management cited annual incentive payments and salary costs from headcount growth, partly offset by stronger collections. Q2 operating cash flow alone was positive $47.6 million.
Segments and material changes
- Q2 revenue increased in every segment: Corporate Finance $190.0 million (+34.4%); FLC $145.9 million (+9.2%); Economic Consulting $155.5 million (+16.6%); Technology $55.6 million (+19.8%); and Strategic Communications $59.1 million (+2.8%). Corporate Finance growth included a $15.4 million increase in success fees.
- Corporate Finance and Economic Consulting were particularly strong. Technology also improved substantially, with higher managed-review demand and a higher-margin service mix. Strategic Communications grew more slowly, and its Q2 segment operating income declined 4.0%.
- Billable headcount was 3,930 at quarter end, up 4.6% from December 31, 2018; total employees were 4,999. DSO was 103 days versus 101 days a year earlier.
- Cash and cash equivalents were $189.1 million at June 30, down from $312.1 million at year-end. Net accounts receivable increased to $743.4 million from $554.6 million, including billed receivables of $557.4 million and unbilled receivables of $429.3 million before allowances.
Debt, liquidity and capital allocation
- Long-term debt, net of discount and issuance costs, was $290.5 million; this comprised $316.3 million principal of 2.0% convertible notes due 2023 and $20.0 million drawn on the revolving facility. The $550 million facility had $529.0 million of available borrowing capacity, including the effect of letters of credit. The company reported compliance with debt covenants.
- Total assets were $2.57 billion and total liabilities were $1.15 billion. The company recorded operating lease assets of $155.1 million and lease liabilities of $206.8 million at June 30.
- First-half capital expenditures were $20.7 million. Management expected an additional $18–$22 million of capital expenditures during the rest of 2019. First-half financing cash outflow included $66.9 million of share repurchases, partly offset by $20.0 million of revolver borrowings. $102.4 million remained under the $400 million repurchase authorization.
Outlook, commentary and risks
- No formal earnings or revenue guidance is provided in the filing. Management stated that existing cash, operating cash flows and, if needed, revolver borrowings should fund normal operations for at least the next 12 months; this assessment excludes potential acquisitions and unexpected cash needs.
- During Q2, FTI signed a definitive agreement to acquire German restructuring advisory firm Andersch AG, expected to close in Q3 2019 subject to regulatory approval and other conditions.
- Management highlighted variable success-fee timing, demand and utilization, hiring and retention, receivable collection, competition, foreign exchange, cybersecurity and data protection, and acquisition execution as factors that could affect results. It reported no material change to previously disclosed risk factors and no known legal proceedings expected to materially affect financial condition or results.
- Adoption of lease accounting (ASC 842) on January 1, 2019 added $148.5 million of right-of-use assets and $206.7 million of lease liabilities at adoption; management reported no material effect on income or cash flows. The filing also notes a discrete tax adjustment related to the Ringtail software-business sale in the first half.
Important facts for investors to verify
- Whether demand, utilization and success-fee activity remain strong, particularly in Corporate Finance and Economic Consulting, and whether recent margin improvements persist.
- Receivable growth, collection timing, DSO and unbilled receivables, given the negative first-half operating cash flow.
- Actual cash use for repurchases, capital expenditures and any acquisition, along with remaining revolver availability and covenant compliance.
- Andersch acquisition approval, closing, purchase terms and integration effects; also monitor lease obligations and the 2023 convertible notes’ terms and potential dilution.