FTI Consulting, Inc. — Q3 2018 Form 10-Q
Business context and period. FTI Consulting is a global business advisory firm with five segments: Corporate Finance & Restructuring, Forensic and Litigation Consulting, Economic Consulting, Technology, and Strategic Communications. This unaudited filing covers the quarter and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods. Amounts below are in U.S. dollars.
Financial performance and liquidity
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $513.0M | $449.0M | $1,522.9M | $1,340.0M |
| Operating income | $57.1M | $47.1M | $181.2M | $74.2M |
| Net income | $44.3M | $32.2M | $126.9M | $41.1M |
| Diluted EPS | $1.14 | $0.85 | $3.32 | $1.03 |
| Adjusted EBITDA (non-GAAP) | $67.4M | $57.4M | $212.0M | $136.5M |
- Q3 revenue grew 14.3%; operating margin was approximately 11.1%, versus 10.5% a year earlier. Adjusted EBITDA margin rose to 13.1% from 12.8%.
- For the nine months, revenue grew 13.6%; operating margin was approximately 11.9%, versus 5.5%. Adjusted EBITDA margin was approximately 13.9%, versus 10.2%.
- Q3 operating cash flow was $120.9M versus $106.2M; free cash flow, as defined by the company, was $109.2M versus $99.3M. For the nine months, operating cash flow was $86.3M versus $24.0M and free cash flow was $58.4M versus $4.0M. Nine-month cash generation was affected by working capital, including a $130.4M use of cash from billed and unbilled receivables.
- Cash and cash equivalents were $505.9M at September 30, compared with $190.0M at year-end 2017. Current assets were $1,206.5M and current liabilities $737.4M. DSO was 104 days, versus 105 a year earlier.
- Gross debt was $616.3M: $300.0M of 6% senior notes due 2022 and $316.3M of 2% convertible notes due 2023. No revolving-credit borrowings were outstanding; $549.0M of the $550.0M revolver was available. The notes’ reported carrying values are affected by discounts and issuance costs.
Material changes versus prior period
- All five segments recorded higher Q3 revenue. Economic Consulting rose 24.5% and Technology 34.1%, the strongest Q3 growth rates. Segment Adjusted EBITDA increased in four segments; FLC declined slightly.
- The company sold its Ringtail e-discovery software and related business in Q3 for net proceeds of $50.3M, recording a $13.0M gain. The sale contributed to reported earnings; adjusted EPS excludes the gain.
- FTI issued $316.3M of 2% convertible senior notes in August and used part of the proceeds to repay $100.0M drawn on its revolver. It also repurchased $15.0M of shares in a separate transaction tied to the notes offering.
- No special charges were recorded in 2018; the prior-year nine-month period included $30.1M of restructuring and real estate charges. This is an important factor in year-over-year profit comparisons.
- Unallocated corporate expenses increased to $27.8M in Q3 from $18.8M, primarily due to variable compensation and business-development costs. Nine-month expenses rose to $77.6M, reflecting compensation, business-development and legal costs.
Outlook, commentary and risks
- Management said operating cash flows, together with the revolver if needed, should fund normal operating needs for at least the next 12 months. Planned capital expenditures were $7M–$10M for the remainder of 2018, following $27.8M in the first nine months. The filing does not provide a specific revenue or earnings forecast.
- After quarter-end, the company gave notice to redeem all $300.0M of its 2022 notes on November 15, 2018, at 102% of principal plus accrued interest. The filing reclassified the notes as current at September 30 because the notice created a legal redemption obligation.
- Management cited risks including demand variability, attracting and retaining professionals, utilization and pricing pressure, receivable collection, client conflicts, international and currency exposures, competition, data privacy and security, and dependence on contingent or success-fee revenue. Debt covenants and the ability to meet cash obligations on convertible-note conversions or repurchases are also risks. The company reported compliance with debt covenants at September 30.
- Management reported no legal proceeding believed likely to materially affect financial condition or results. Adoption of ASC 606 had an immaterial impact. The company expected ASC 842 lease accounting adoption in 2019 and did not expect a material impact on results or cash-flow presentation.
Important facts for investors to verify
- Confirm the November 2018 redemption price, accrued interest, funding source and resulting post-redemption cash and debt balances.
- Assess recurring operating performance apart from the $13.0M Ringtail gain and the absence of prior-year restructuring charges; compare GAAP results with the company’s non-GAAP measures.
- Track receivables, collections, allowance for doubtful accounts and unbilled services; receivables rose materially during the nine-month period.
- Monitor whether segment demand, utilization and margins—particularly in Economic Consulting and Technology—persist, and whether rising corporate costs moderate.
- Review the convertible notes’ cash-settlement, conversion and potential dilution implications, as well as debt covenant headroom and the company’s ability to fund repurchases and other capital needs.