FTI Consulting, Inc. — Q3 2019 Form 10-Q
Business context and reporting period
Global business advisory firm reporting for the quarter and nine months ended September 30, 2019, compared with the corresponding 2018 periods. Its five segments are Corporate Finance & Restructuring, Forensic and Litigation Consulting (FLC), Economic Consulting, Technology, and Strategic Communications.
Financial performance and liquidity
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $593.1m | $513.0m | $1,750.5m | $1,522.9m |
| Operating income | $82.1m | $57.1m | $257.4m | $181.2m |
| Net income | $60.4m | $44.3m | $187.7m | $126.9m |
| Diluted EPS | $1.59 | $1.14 | $4.92 | $3.32 |
| Adjusted EBITDA (non-GAAP) | $92.3m | $67.4m | $285.6m | $212.0m |
| Adjusted diluted EPS (non-GAAP) | $1.63 | $1.00 | $4.99 | $3.18 |
| Operating cash flow | $131.3m | $120.9m | $76.9m | $86.3m |
| Free cash flow (non-GAAP) | $124.9m | $109.2m | $49.8m | $58.4m |
Q3 revenue rose 15.6%; management attributed growth to higher demand across all segments, especially Corporate Finance and FLC. Q3 Adjusted EBITDA margin improved to 15.6% from 13.1%. Consolidated operating margin was approximately 13.8%, versus 11.1%. For the first nine months, revenue increased 14.9% and operating margin was approximately 14.7%, versus 11.9%.
Q3 segment revenue growth was strongest in Corporate Finance (+41.6%) and FLC (+12.6%). Economic Consulting revenue grew 1.8%, but its Q3 Adjusted Segment EBITDA declined to $19.4m from $23.2m amid weaker realization and higher variable compensation. Nine-month revenue increased in all five segments.
At September 30, cash and cash equivalents were $258.5m, current assets $1,096.2m, and current liabilities $546.8m. Long-term debt, net of discount and issuance costs, was $273.1m; the convertible notes’ principal amount was $316.3m. The $550m revolving facility had no borrowings outstanding, $1.0m in letters of credit, and $549.0m available. The company reported compliance with debt covenants. DSO was 108 days, up from 104 a year earlier.
Material changes and unusual items
- Q3 net income increased 36.3%; nine-month net income increased 47.9%. Lower interest expense contributed, reflecting replacement of 6.0% notes with 2.0% convertible notes, as well as operating growth.
- 2018 comparisons include a $13.0m gain on the Ringtail business sale (including a $6.2m after-tax Q3 gain). There was no corresponding 2019 sale gain. Q3 2019 interest income and other included net foreign-exchange gains of $2.0m.
- Q3 and nine-month cash from operations differed notably: nine-month operating cash flow fell 10.9%, primarily due to higher annual bonus payments and salaries associated with headcount growth. Receivables also used $191.6m of cash in the nine-month period.
- The company acquired Andersch AG, a German restructuring advisory firm, in Q3. The acquisition used $18.8m net cash, added 95 revenue-generating professionals, and resulted in $30.8m of preliminary goodwill and $14.4m of contingent consideration.
- Adoption of lease accounting on January 1, 2019 added operating lease assets and liabilities; at September 30, lease assets were $152.1m and lease liabilities were $203.3m. The filing says adoption had no material income statement or cash-flow impact.
Outlook, commentary, and risks
No formal revenue or earnings guidance is provided in the supplied filing text. Management expected $9m–$11m of additional capital expenditures for the remainder of 2019 and stated that existing resources and expected operating cash flows should fund normal needs for at least the next 12 months. That assessment excludes potential acquisitions, unexpected staffing changes, and other unanticipated cash needs.
Management cited broad demand growth, higher utilization and realization in key practices, and rising billable headcount. Total employees increased to 5,456 from 4,768 at year-end 2018; billable headcount increased 15.4% over that period. Q3 compensation and SG&A costs also rose, and slower collection on certain large engagements contributed to higher DSO.
Risks highlighted include changes in demand and economic conditions; attracting and retaining professionals; utilization, pricing and engagement mix; acquisition integration; receivables collection; currency movements; cybersecurity and data privacy; competition; and debt and benchmark-rate transition risks. The company reported no material change in previously disclosed risk factors, no known legal proceedings expected to materially affect its financial condition or results, and no material change in market-risk exposure. Management judged disclosure controls effective and reported no material change in internal control over financial reporting.
Key facts for investors to verify
- Whether strong Corporate Finance and FLC growth and the improved consolidated margins persist, especially as billable headcount and compensation costs rise.
- Receivables quality, collection timing, allowance adequacy, and the elevated 108-day DSO.
- Andersch’s ongoing contribution, integration costs, and the assumptions underlying contingent consideration and purchase accounting.
- Cash generation across the full year: nine-month operating cash flow and free cash flow declined despite higher earnings, while buybacks used $77.9m and cash fell to $258.5m.
- The distinction between $273.1m carrying debt and $316.3m note principal, and the dilution, conversion, and repayment implications of the 2023 convertible notes.
- Non-GAAP reconciliations and comparability, particularly Adjusted EBITDA, Adjusted EPS, and free cash flow, including the effects of Ringtail-related items and tax adjustments.