FTI Consulting, Inc. — Q1 2019 Form 10-Q
Business context and period: Unaudited results for the three months ended March 31, 2019, compared with Q1 2018. FTI Consulting provides business advisory services through five segments: Corporate Finance & Restructuring, Forensic and Litigation Consulting, Economic Consulting, Technology, and Strategic Communications.
Financial performance
| Metric | Q1 2019 | Q1 2018 |
|---|---|---|
| Revenue | $551.3 million | $497.8 million |
| Operating income | $87.2 million | $62.3 million |
| Net income | $62.6 million | $38.9 million |
| Diluted EPS | $1.64 | $1.04 |
| Adjusted EBITDA (non-GAAP) | $96.1 million | $72.3 million |
| Adjusted EBITDA margin (non-GAAP) | 17.4% | 14.5% |
| Cash used in operating activities | $102.1 million | $69.2 million |
| Free cash flow (non-GAAP) | $(112.2) million | $(76.9) million |
Revenue grew 10.7% year over year, or 12.6% excluding estimated foreign-exchange effects. Operating income rose 40.0%; net income rose $23.7 million. The effective tax rate declined to 24.1% from 28.2%, benefiting from discrete tax adjustments, including a change in estimate related to the Ringtail sale. Interest expense fell to $4.7 million from $6.2 million.
Balance sheet, liquidity and capital allocation
- Cash and cash equivalents were $179.2 million at March 31, 2019, down from $312.1 million at December 31, 2018. The quarterly cash decline was $132.8 million.
- Net accounts receivable was $656.1 million, up from $554.6 million at year-end; days sales outstanding was 97 days versus 95 days a year earlier.
- Debt consisted of $316.3 million principal amount of 2.0% convertible senior notes due 2023, carried net at $268.0 million. No revolver borrowings were outstanding; $549.0 million of the $550.0 million facility was available, subject to conditions.
- The company repurchased approximately 328,000 shares for $21.9 million in the quarter; $150.7 million remained available under its repurchase authorization.
- Adoption of the new lease standard resulted in $146.4 million of operating lease assets and $202.8 million of lease liabilities at quarter-end.
Management attributed the seasonal first-quarter operating cash outflow mainly to annual incentive compensation payments and higher salaries associated with headcount growth, partly offset by increased collections. The company stated that cash flows from operations and, if needed, the credit facility should fund normal requirements for at least the next 12 months. It expected $22 million to $29 million of capital expenditures for the remainder of 2019.
Material changes and segment trends
Revenue increased across all five segments. Adjusted Segment EBITDA rose to $117.5 million from $95.3 million; this measure excludes unallocated corporate expenses.
- Corporate Finance: Revenue +12.6%; Adjusted Segment EBITDA $37.4 million versus $34.8 million. Higher demand and success fees helped, while compensation costs reduced gross margin.
- Forensic and Litigation Consulting: Revenue +8.6%; Adjusted Segment EBITDA $31.8 million versus $25.8 million. Investigations and construction solutions demand supported growth; health solutions was weaker.
- Economic Consulting: Revenue +6.9%; Adjusted Segment EBITDA $24.0 million versus $19.1 million, supported by antitrust demand, particularly in EMEA.
- Technology: Revenue +25.5%; Adjusted Segment EBITDA $12.7 million versus $5.7 million. Managed review, hosting, processing and consulting grew; software licensing was lower following the 2018 Ringtail divestiture.
- Strategic Communications: Revenue +9.3%; Adjusted Segment EBITDA $11.5 million versus $9.9 million. Higher project work was partly offset by a less favorable mix of pass-through revenue.
Total employees increased to 4,893 from 4,629 a year earlier. Billable professionals increased 7.7% year over year, contributing to higher compensation and benefits expense.
Outlook, risks and notable items
- The filing provides no specific revenue or earnings guidance. Management cited broad demand growth and expected normal operating cash flows to be positive after the first quarter, while cautioning that results and cash needs can vary.
- Key disclosed risks include changes in demand, talent attraction and retention, utilization and billing rates, receivables collection, client conflicts, competition, economic and market conditions, foreign exchange, cybersecurity and data protection, and acquisition execution.
- Management reported compliance with debt covenants. The $316.3 million notes mature in August 2023 and are convertible under specified conditions; conversion circumstances were not met at quarter-end.
- The company reported no legal proceedings believed to have a material adverse effect, no significant change in previously disclosed risk factors, and no material changes to internal control over financial reporting.
Important facts for investors to verify
- Whether receivables growth and DSO remain manageable, including the collectability of billed and unbilled balances.
- Whether first-quarter cash use is seasonal as management describes and reverses in subsequent quarters.
- Whether segment demand and margins remain strong as headcount and compensation costs rise.
- The effect of the Ringtail divestiture and related tax estimate changes on comparisons and adjusted results.
- Future cash allocation among share repurchases, capital spending, debt service and potential acquisitions, alongside lease obligations and convertible-note terms.