FTI Consulting, Inc. — Q2 2020 Form 10-Q
Business context and reporting period. FTI Consulting is a global advisory firm operating in Corporate Finance & Restructuring, Forensic and Litigation Consulting (FLC), Economic Consulting, Technology, and Strategic Communications. This unaudited filing covers the quarter and six months ended June 30, 2020; comparisons are with 2019. COVID-19 materially affected demand and service delivery across the business.
Financial performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $607.9 million | $606.1 million | $1,212.4 million | $1,157.4 million |
| Operating income | $65.6 million | $88.1 million | $138.7 million | $175.3 million |
| Net income | $48.2 million | $64.6 million | $104.9 million | $127.2 million |
| Diluted EPS | $1.27 | $1.69 | $2.76 | $3.33 |
| Adjusted EBITDA (non-GAAP) | $75.8 million | $97.2 million | $159.0 million | $193.3 million |
| Adjusted EBITDA margin (non-GAAP) | 12.5% | 16.0% | Not stated | Not stated |
| Operating cash flow | $153.0 million | $47.6 million | $29.4 million | $(54.4) million |
| Free cash flow (non-GAAP) | $147.3 million | $37.1 million | $15.5 million | $(75.1) million |
Q2 operating margin was approximately 10.8%, versus 14.5% a year earlier; net margin was approximately 7.9%, versus 10.7%. The six-month operating and net margins were approximately 11.4% and 8.7%, respectively, versus 15.1% and 11.0%.
Balance sheet and liquidity at June 30, 2020
- Cash and cash equivalents were $304.2 million, down from $369.4 million at year-end 2019.
- Total debt principal was $351.3 million, including $316.3 million of 2.0% convertible notes due 2023 and $35.0 million drawn on the revolving facility. Debt, net of discount and issuance costs, was $315.8 million. Cash exceeded debt principal by approximately $47 million.
- The $550 million revolving facility had $514.0 million of available borrowing capacity after outstanding borrowings and letters of credit. The company reported compliance with debt covenants.
- Total assets were $2.705 billion; total liabilities were $1.226 billion. Operating lease liabilities totaled $201.3 million.
- DSO was 98 days, compared with 103 days at June 30, 2019.
Material changes and segment trends
- Q2 revenue was nearly flat year over year, while six-month revenue increased 4.8%. Q2 net income fell 25.4%, diluted EPS fell 24.9%, and Adjusted EBITDA fell 22.0%.
- Corporate Finance revenue rose 29.5% in Q2 to $246.0 million, reflecting stronger restructuring demand; segment Adjusted EBITDA rose to $76.3 million.
- FLC revenue fell 27.1% to $106.4 million, and its Adjusted EBITDA swung to a $9.0 million loss from $28.2 million profit. Utilization declined to 46% from 65%, amid weaker investigations and disputes demand.
- Economic Consulting revenue declined 2.6% to $151.5 million; Technology revenue declined 15.4% to $47.1 million. Strategic Communications revenue declined 3.8% to $56.9 million.
- Management attributed lower profitability mainly to higher compensation, including an 18.2% increase in billable headcount, and higher variable compensation. Reduced travel and other SG&A costs partly offset the pressure.
- Six-month operating cash flow improved versus 2019, principally because of higher collections and lower non-compensation operating costs, partly offset by compensation payments and headcount growth. The second-quarter cash generation was substantially stronger than the first-half total.
Outlook, risks, and unusual items
- The filing provides no specific financial guidance. Management said COVID-19’s eventual impact was difficult to predict: travel restrictions, remote work, regulatory moratoriums, and postponed proceedings hurt service delivery and demand, especially in FLC. Restructuring and bankruptcy demand increased, but management cautioned this might not offset pandemic-related weakness in future quarters.
- Management expected $26–$32 million of additional capital expenditures for the remainder of 2020 and stated that existing capital resources and operating cash flows were expected to fund needs for at least the next 12 months. That assessment excludes a severe or prolonged pandemic disruption, future acquisitions, and other unexpected cash needs.
- The company entered an agreement to acquire certain Delta Partners Group assets; the acquisition closed in Q3 2020, after the reporting period.
- FTI repurchased approximately 921,000 shares for $101.3 million in the first half, including approximately $51.0 million in Q2. $65.3 million remained under the repurchase authorization at June 30.
- Bad debt expense was $7.8 million in Q2 and $11.6 million for the first half, versus $2.5 million and $6.3 million, respectively, in 2019. The allowance for doubtful accounts and unbilled services was $299.0 million at quarter-end.
- Ordinary-course legal matters were disclosed; management did not expect pending matters to materially affect financial position or results. No material change in previously disclosed risk factors was reported. The filing identified risks including COVID-19, demand and utilization, professional retention, receivable collection, cyber and data-security incidents, acquisitions, and debt and interest-rate exposures.
Investor facts to verify
- Whether Corporate Finance’s restructuring growth can offset continued weakness in FLC and other practices, and whether FLC utilization recovers.
- Whether elevated receivables and the allowance result in further collection issues or fee reductions; track DSO, bad debt expense, and cash conversion.
- Whether Q2 cash generation is sustained, given first-half operating cash flow of only $29.4 million and substantial seasonal compensation payments.
- Debt-facility availability, covenant compliance, and the company’s capacity to fund repurchases, capital spending, and acquisitions under adverse COVID-19 scenarios.
- The contribution, integration costs, and financing implications of the Delta Partners acquisition, which closed after quarter-end.