FTI Consulting, Inc. — FY2018 Form 10-K
Business context and reporting period. FTI Consulting is a global business advisory firm with five segments: Corporate Finance & Restructuring, Forensic and Litigation Consulting (FLC), Economic Consulting, Technology, and Strategic Communications. This annual report covers the fiscal year ended December 31, 2018; quarterly figures below include the fourth quarter. Approximately 68% of revenue came from professionals assigned to U.S. locations and 32% from professionals assigned outside the U.S.
Financial performance
Unless otherwise noted, amounts are in millions of dollars. Growth comparisons are with 2017.
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Revenue | $2,027.9 | $1,807.7 | +12.2% |
| Operating income | $226.0 | $108.7 | +107.8% |
| Operating margin | 11.1% | 6.0% | +5.1 percentage points |
| Net income | $150.6 | $108.0 | +39.5% |
| Diluted EPS | $3.93 | $2.75 | +42.9% |
| Adjusted EBITDA (non-GAAP) | $265.7 | $192.0 | +38.4% |
| Adjusted EBITDA margin (non-GAAP) | 13.1% | 10.6% | +2.5 percentage points |
| Operating cash flow | $230.7 | $147.6 | +56.3% |
| Free cash flow (non-GAAP) | $198.4 | $115.6 | +71.6% |
Cash and cash equivalents were $312.1 million at year-end, versus $190.0 million a year earlier. Working capital was $482.8 million. Long-term debt, net of discount and issuance costs, was $265.6 million; the company had no revolver borrowings and reported $549.0 million of available borrowing capacity. Stockholders’ equity was $1,348.8 million. DSO rose to 93 days from 91 days.
Segment revenue and operating trends
- Corporate Finance: revenue $564.5 million, up 17.1%; operating income $115.1 million. Demand for restructuring, business transformation and transaction services strengthened; higher utilization and realization improved margins.
- FLC: revenue $520.3 million, up 12.5%; operating income $91.3 million. Growth reflected demand for construction solutions, investigations and disputes, with improved utilization.
- Economic Consulting: revenue $534.0 million, up 7.7%; operating income $64.1 million. Antitrust demand in EMEA and financial economics in North America contributed, while lower North American antitrust demand and lower EMEA realization were offsets.
- Technology: revenue $185.8 million, up 6.2%; operating income $14.9 million. Consulting and hosting demand improved, but gross margin declined as the revenue mix shifted away from higher-margin hosting and software licensing.
- Strategic Communications: revenue $223.3 million, up 16.0%; operating income $37.3 million. Public affairs and financial communications growth supported results; favorable foreign exchange contributed an estimated 1.6 percentage points to revenue growth.
Fourth-quarter context
Fourth-quarter 2018 revenue was $505.0 million, compared with $467.7 million in the fourth quarter of 2017. Operating income was $44.8 million versus $34.5 million. Net income was $23.7 million versus $66.9 million, and diluted EPS was $0.61 versus $1.78. The prior-year quarter included a large tax benefit from the 2017 Tax Act; the 2018 quarter also included a $9.1 million loss on early debt extinguishment. The filing notes that fourth-quarter vacation patterns can affect results.
Material changes and unusual items
- Revenue increased across all five segments. Company-wide billable headcount rose 5.1% to 3,756, while total employees increased 3.4% to 4,768.
- There were no special charges in 2018; 2017 included $40.9 million of workforce, office and other restructuring charges. Their absence contributed to the year-over-year operating profit improvement.
- In September 2018, FTI sold its Ringtail e-discovery software business for net proceeds of $50.3 million and recorded a $13.0 million pre-tax gain. The sale also reduced Technology goodwill by $20.9 million.
- FTI issued $316.3 million of 2.0% convertible senior notes due 2023 and redeemed $300.0 million of 6.0% senior notes due 2022, recording a $9.1 million extinguishment loss. The convertible notes’ effective interest rate was 5.45%; $3.0 million of non-cash interest expense was recorded in 2018.
- Reported 2017 net income benefited from a $44.9 million net tax benefit related to the Tax Act, while 2018 reflected a $57.2 million income tax provision. Excluding the discrete 2017 Tax Act benefit, the effective tax rates were 27.5% in 2018 and 27.6% in 2017.
- FTI repurchased $40.7 million of stock under its existing program in 2018 and separately repurchased $15.0 million using convertible-note proceeds. $72.6 million remained authorized under the program at year-end.
Outlook, risks and contingencies
Management stated that operating cash flows, supplemented if needed by the revolving credit facility, were expected to fund normal cash requirements for at least the next 12 months. The company anticipated 2019 capital expenditures of $31 million to $38 million. The filing does not provide clear 2019 revenue or earnings guidance.
Key risks include cyclical and event-driven demand, changing M&A and financial-market activity, utilization and pricing pressure, client termination or nonpayment, and the ability to recruit and retain specialized professionals. Technology faces competition, price pressure, rapid change and intellectual-property risks. The company also highlights cybersecurity and client-data confidentiality, international and foreign-exchange exposure, acquisition integration, goodwill impairment, and debt covenant, refinancing and interest-rate risks. The $316.3 million convertible notes may require cash settlement or repurchase in specified circumstances; conversion or accounting treatment could affect liquidity, reported interest expense and dilution.
FTI reported ordinary-course legal claims and proceedings but stated it was not aware of matters expected to have a material adverse effect on its financial condition or results. Management and KPMG reported effective internal control over financial reporting, and KPMG issued unqualified opinions on the financial statements and controls.
Effective January 1, 2019, the company adopted the new lease standard. It estimated recognition of $145 million to $155 million of additional right-of-use assets and $210 million to $220 million of additional lease liabilities; it did not expect a material effect on results of operations or cash-flow presentation.
Important facts for investors to verify
- Reconcile year-over-year earnings and EPS using the 2017 Tax Act benefit, 2017 special charges, 2018 Ringtail gain, and 2018 debt-extinguishment and convertible-note interest costs; distinguish GAAP results from non-GAAP adjusted measures.
- Review the 2023 notes’ conversion, cash-settlement and fundamental-change repurchase terms, and assess potential dilution and future interest expense.
- Monitor collections and receivables: DSO rose to 93 days, and the allowance for doubtful accounts and unbilled services reached $202.4 million.
- Assess whether broad segment growth and higher utilization can be sustained, especially given headcount growth, compensation costs, and Technology’s lower gross margin.
- Confirm the financial and operating effects of the Ringtail divestiture and the 2019 lease-standard balance-sheet increase.
- Track capital allocation, including remaining repurchase authorization, liquidity needs, and compliance with credit-facility covenants.