FTI Consulting, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021, compared with the corresponding 2020 periods. FTI Consulting is a global advisory firm operating through Corporate Finance, Forensic and Litigation Consulting (FLC), Economic Consulting, Technology and Strategic Communications.
Financial performance and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $711.5 million | $607.9 million | $1,397.8 million | $1,212.4 million |
| Operating income | $84.0 million | $65.6 million | $172.5 million | $138.7 million |
| Net income | $62.8 million | $48.2 million | $127.3 million | $104.9 million |
| Diluted EPS | $1.77 | $1.27 | $3.61 | $2.76 |
| Adjusted EBITDA | $92.3 million | $75.8 million | $191.8 million | $159.0 million |
| Adjusted EBITDA margin | 13.0% | 12.5% | Not stated | Not stated |
- Q2 revenue rose 17.0%; management estimated 4.1 percentage points of positive foreign-exchange impact and $19.1 million of acquisition-related revenue. Excluding both, revenue increased 9.8%.
- Q2 net income increased 30.3%. Management attributed the improvement mainly to higher revenue and a lower tax rate, partly offset by increased compensation, SG&A and foreign-exchange remeasurement losses.
- Cash and cash equivalents were $256.9 million at June 30, 2021, down from $295.0 million at year-end 2020. Accounts receivable, net, increased to $846.1 million from $711.4 million; days sales outstanding was 102 days versus 98 a year earlier.
- Six-month operating cash flow was an outflow of $41.0 million, versus inflow of $29.4 million in 2020; free cash flow was negative $68.8 million versus positive $15.5 million. For Q2 alone, operating cash flow was $125.6 million and free cash flow was $105.8 million, both below the prior-year quarter.
- Gross debt was $416.3 million, including $316.3 million of 2.0% convertible notes due 2023 and $100.0 million drawn on the revolving credit facility. Long-term debt, net of discount and issuance costs, was $391.6 million. The company reported $448.9 million of available revolver capacity and compliance with debt covenants.
Material changes versus the prior comparable periods
- Growth was broad across four segments in Q2: FLC revenue rose 41.7%, Economic Consulting 21.0%, Technology 67.0% and Strategic Communications 19.2%. Corporate Finance revenue declined 6.1%.
- Corporate Finance Adjusted Segment EBITDA fell to $40.2 million from $76.3 million, reflecting weaker restructuring demand, lower utilization and higher employee costs. FLC returned to positive Adjusted Segment EBITDA of $18.0 million from a loss of $9.0 million. Technology Adjusted Segment EBITDA rose to $18.5 million from $6.4 million.
- For the first half, operating cash flow was pressured by higher compensation payments, including annual incentives, and headcount growth. Investing outflows also increased, including $27.7 million of capital expenditures and $9.8 million for an acquisition.
- The company acquired certain assets of The Rhodes Group, a construction consulting firm, during Q2; the acquisition contributed to FLC results and goodwill.
Outlook, commentary and risks
- No specific revenue or earnings guidance is provided in the filing. Management expects 2021 remaining capital expenditures of approximately $48–$58 million, including improvements to its new New York principal office.
- Management believes cash from operations, supplemented by revolver borrowings as needed, should fund requirements for at least the next 12 months. This assessment excludes potentially material adverse effects from worsening or prolonged COVID-19 disruption, future acquisitions and other unexpected cash needs.
- COVID-19 continued to affect service delivery through travel restrictions, court closures and government moratoriums. The company cited uncertainty around variants, vaccination efficacy and rollout.
- Convertible noteholders met conditions to convert during July 1–September 30, 2021. The company stated it intended and was able to refinance the principal on a long-term basis and continued to classify the notes as long-term debt.
- Q2’s 19.3% effective tax rate was favorably affected by discrete tax adjustments, including remeasurement related to the U.K. tax-rate increase scheduled for April 2023 and share-based compensation. A $3.1 million contingent-consideration remeasurement gain also affected reported results and was excluded from certain adjusted measures.
- Other risks highlighted include demand and utilization changes, hiring and retention, receivable collectability, acquisition integration, foreign-exchange movements, cybersecurity and data protection, and the transition away from LIBOR. Management reported no material change in previously disclosed risk factors, no legal proceedings believed likely to materially affect results, and no material change in market-risk exposure.
Important facts for investors to verify
- Whether Corporate Finance demand and utilization recover, given the segment’s Q2 revenue and profitability decline.
- Whether receivables, DSO and cash conversion improve after the first-half operating cash outflow.
- How the 2023 convertible notes are addressed, including potential conversion activity and refinancing plans.
- Whether growth in FLC, Economic Consulting and Technology is sustained and whether associated staffing and compensation costs affect margins.
- Actual capital spending relative to the $48–$58 million remaining-2021 estimate and any effects from COVID-19 or acquisitions on liquidity.