FTI Consulting, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018; comparisons are with the same periods in 2017. FTI Consulting is a global business advisory firm with five segments: Corporate Finance & Restructuring, Forensic and Litigation Consulting, Economic Consulting, Technology, and Strategic Communications. Dollar amounts below are in millions unless stated otherwise.
Financial performance and liquidity
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $512.1 | $444.7 | $1,009.9 | $891.1 |
| Operating income | $61.8 | $0.03 | $124.1 | $27.1 |
| Net income (loss) | $43.6 | $(5.2) | $82.6 | $8.9 |
| Diluted EPS | $1.14 | $(0.13) | $2.18 | $0.22 |
| Adjusted EBITDA, non-GAAP | $72.4 | $40.8 | $144.7 | $79.1 |
| Cash from operating activities | $34.6 | $10.9 | $(34.6) | $(82.2) |
| Free cash flow, non-GAAP | $26.1 | $3.6 | $(50.8) | $(95.3) |
- Q2 revenue increased 15.2% (13.8% excluding estimated foreign-exchange impact). Adjusted EBITDA margin rose to 14.1% from 9.2%; GAAP operating margin was approximately 12.1% versus near zero, and net margin was approximately 8.5% versus a loss.
- For the first half, revenue increased 13.3%; adjusted EBITDA margin was approximately 14.3% versus 8.9%. GAAP operating margin was approximately 12.3% versus 3.0%, and net margin was approximately 8.2% versus 1.0%.
- At June 30, cash was $116.6; total debt was $375.0, consisting of $300.0 of 6% notes due 2022 and $75.0 drawn on the revolving credit facility. Net debt was approximately $258.4. The balance-sheet carrying value of long-term debt, net of issuance costs, was $371.7.
- Available revolver capacity was $474.0, with $1.0 of letters of credit outstanding. The company reported compliance with debt covenants. Current assets were $807.4 and current liabilities $352.3.
- Net accounts receivable was $607.5, including billed receivables of $455.7 and unbilled receivables of $368.4, offset by a $216.6 allowance. DSO was 101 days, compared with 103 a year earlier.
Material changes and segment trends
- All segments except Technology grew revenue in Q2. Corporate Finance revenue rose 20.3%, FLC 19.9%, Economic Consulting 7.5%, Technology 1.9%, and Strategic Communications 24.3% year over year.
- Corporate Finance and FLC were key profit-growth contributors, supported by stronger demand, utilization, and realization. Strategic Communications also reported higher revenue and margins. Economic Consulting’s first-half revenue was up only 1.2%, while its adjusted segment EBITDA declined to $34.6 from $35.6.
- Technology’s first-half revenue fell 4.7%, largely due to weaker managed-review demand, including fewer M&A second requests; adjusted segment EBITDA was essentially flat at $13.2.
- No special charges were recorded in 2018. The 2017 comparative period included $30.1 of workforce, office-lease, and other restructuring charges. This materially affects year-over-year comparisons, although adjusted measures also improved.
- Cash and cash equivalents declined $73.4 in the first half. Operating cash use improved from $82.2 in 2017 to $34.6 in 2018, but remained negative, primarily reflecting receivables growth and annual incentive-compensation payments. The company says operating cash flows are generally positive after Q1.
Outlook, commentary, and risks
- The filing does not provide a specific revenue or earnings forecast. Management expects operating cash flows and, if needed, revolver borrowings to fund normal operations, debt service, and capital needs for at least the next 12 months.
- Management expected $20–$27 of additional capital expenditures for the remainder of 2018. It noted that acquisitions, business changes, economic conditions, staffing changes, or other unexpected cash needs could require additional financing.
- Management attributed the improved Q2 results mainly to higher demand and improved utilization in several segments, with a favorable impact from lower U.S. tax rates under the 2017 Tax Act and a discrete state-tax adjustment. First-half tax accounting for the Tax Act remained provisional and was expected to be finalized in the second half of 2018.
- ASC 606 was adopted January 1, 2018 using the modified retrospective method; the transition impact was described as immaterial. Q2 and first-half revenue included $4.5 and $6.5, respectively, of catch-up adjustments for changes in estimated contingent-fee transaction prices.
- Key disclosed risks include variability in demand, utilization and billing rates; client engagement cancellations or fee changes; receivable collection and contingent-fee uncertainty; competition and retention of professionals; acquisition execution; data security and privacy; foreign exchange; and economic, legal, and regulatory changes. The company reported no material change in previously disclosed risk factors, no known legal matter expected to materially affect results, and no significant change in market-risk exposure.
- Disclosure controls were reported effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the strong Q2 growth and utilization gains are sustainable, especially in Corporate Finance, FLC, and Strategic Communications, and whether Technology’s managed-review weakness persists.
- Receivables quality and collection timing: net receivables increased to $607.5, and first-half operating cash flow remained negative despite improved DSO.
- How much reported earnings improvement reflects underlying operations versus the absence of the $30.1 million 2017 special charge and the lower 2018 tax rate.
- Whether contingent-fee estimates, including the reported revenue catch-up adjustments, convert to billings and cash collections as expected.
- Capital allocation and funding: planned remaining-2018 capital expenditures, any share repurchases or acquisitions, debt repayment, and continued covenant compliance.
- The final 2017 Tax Act accounting and the balance-sheet effects of adopting lease accounting (ASC 842) in 2019; the company had not yet determined the latter’s balance-sheet impact.