FTI Consulting, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; comparisons are with the three months ended March 31, 2017 unless stated otherwise. FTI Consulting provides global business advisory services through five segments: Corporate Finance & Restructuring, Forensic and Litigation Consulting (FLC), Economic Consulting, Technology, and Strategic Communications.
Financial results and liquidity
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Revenue | $497.8 million | $446.3 million | Up 11.5%; includes estimated 2.7% favorable FX impact |
| Operating income | $62.3 million | $27.1 million | Operating margin 12.5%, versus 6.1% |
| Net income | $38.9 million | $14.0 million | Up 177.9% |
| Diluted EPS | $1.04 | $0.34 | Up $0.70 |
| Adjusted EBITDA | $72.3 million | $38.3 million | Margin 14.5%, versus 8.6% |
| Net cash used in operations | $69.2 million | $93.1 million | Cash outflow narrowed |
| Free cash flow | $(76.9) million | $(98.9) million | Cash outflow narrowed |
Revenue and earnings growth reflected stronger segment performance, particularly in Corporate Finance and FLC. The effective tax rate fell to 28.2% from 36.0%, largely due to the 2017 Tax Act. Lower diluted share count, partly reflecting repurchases, also supported EPS growth. Adjusted EBITDA is a non-GAAP measure; the filing reports Total Adjusted Segment EBITDA of $95.3 million, which excludes unallocated corporate expenses and is not the same measure.
At March 31, cash was $152.0 million, total debt was $445.0 million ($300.0 million of 6% senior notes due 2022 and $145.0 million drawn on the revolving credit facility), and net debt was approximately $293.0 million. The company reported $404.0 million of available revolver capacity, subject to facility conditions, and compliance with debt covenants. Current assets were $815.8 million and current liabilities $343.5 million. Total assets were $2.28 billion and stockholders’ equity $1.24 billion.
Material changes and segment performance
- Corporate Finance: Revenue rose 35.0% to $142.9 million; Adjusted Segment EBITDA increased to $34.8 million from $10.3 million. Management cited higher restructuring and business transformation demand, improved utilization, and higher realized rates.
- FLC: Revenue rose 14.9% to $128.0 million; Adjusted Segment EBITDA increased to $25.8 million from $13.5 million, reflecting demand growth and improved utilization.
- Economic Consulting: Revenue declined 4.4% to $133.1 million and Adjusted Segment EBITDA declined to $19.1 million from $20.1 million. Lower North American antitrust demand was partly offset by financial economics work.
- Technology: Revenue declined 11.2% to $40.9 million and Adjusted Segment EBITDA fell to $5.7 million from $7.8 million. Management cited reduced managed-review demand, including lower M&A second-request activity, and higher data-center costs.
- Strategic Communications: Revenue increased 20.7% to $52.8 million and Adjusted Segment EBITDA rose to $9.9 million from $4.3 million, aided by project and retainer growth and a success fee.
Cash from operations remained negative, as is typically the case in Q1 because of annual incentive compensation payments. The outflow improved year over year, primarily due to higher collections; DSO improved to 95 days from 98. Receivables, billed and unbilled, were $583.6 million, while the allowance for doubtful accounts and unbilled services was $201.0 million. Bad debt expense rose to $5.7 million from $3.6 million.
Outlook, risks, and notable items
- Management expects cash flows from operations, supplemented if needed by the revolver, to fund normal operating needs for the next 12 months or longer. This assessment excludes unanticipated spending, acquisitions, or material adverse business changes.
- Capital expenditures were $7.7 million in Q1; the company expected another $21 million to $26 million for the remainder of 2018. No specific revenue or earnings guidance is provided in the filing.
- Management identifies demand, utilization and pricing, talent retention, client conflicts, collections, acquisitions, foreign currency, technology and data risks, and economic, legal and regulatory conditions as factors that could affect results. It reports no material change to previously disclosed risk factors.
- Legal matters arise in the ordinary course; management did not believe pending matters would materially affect financial position or results. No material off-balance-sheet arrangements were reported other than operating leases.
- ASC 606 was adopted January 1, 2018 using the modified retrospective method; the transition impact was immaterial. Q1 included $3.7 million of revenue catch-up adjustments from changes in estimated transaction prices for performance-based or contingent arrangements. Tax accounting for the Tax Act remained provisional, with completion expected in the second half of 2018.
- Interest income and other was a net expense of $1.8 million, primarily reflecting $2.4 million of net unrealized foreign-currency transaction losses. Interest expense increased to $6.2 million, reflecting higher average borrowing balances and rates.
Key facts for investors to verify
- Whether demand and utilization gains in Corporate Finance and FLC persist, and whether weakness in Technology and Economic Consulting continues.
- Whether receivables and collections remain controlled, given the sizable allowance and higher bad debt expense.
- How seasonal Q1 cash outflows convert to cash generation during the rest of the year, alongside planned capital expenditures and repurchases.
- Changes in revolver borrowings, interest costs, covenant headroom, and the remaining share-repurchase authorization ($99.1 million at quarter-end).
- Final Tax Act accounting and the effect of contingent or success-fee revenue timing on reported results.