FTI Consulting, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; financial statements are unaudited. Amounts below are in millions of dollars unless stated otherwise.
Business context and financial performance
FTI Consulting provides business advisory services through Corporate Finance & Restructuring, Forensic and Litigation Consulting (FLC), Economic Consulting, Technology, and Strategic Communications. It reported Q3 revenue of $622.2 million, up 4.9% from a year earlier; nine-month revenue was $1,834.7 million, up 4.8%.
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $622.2 | $593.1 | $1,834.7 | $1,750.5 |
| Operating income | $73.1 | $82.1 | $211.7 | $257.4 |
| Net income | $50.2 | $60.4 | $155.1 | $187.7 |
| Diluted EPS | $1.35 | $1.59 | $4.11 | $4.92 |
| Adjusted EBITDA (non-GAAP) | $90.9 | $92.3 | $249.9 | $285.6 |
| Adjusted EBITDA margin (non-GAAP) | 14.6% | 15.6% | Not stated | Not stated |
Q3 operating margin was approximately 11.7%, versus 13.8% a year earlier; net margin was approximately 8.1%, versus 10.2%. Adjusted diluted EPS was $1.54 for Q3 and $4.39 for nine months, compared with $1.63 and $4.99, respectively.
Segment results
| Q3 segment | Revenue, year over year | Adjusted Segment EBITDA, year over year |
|---|---|---|
| Corporate Finance | $236.6 million, +23.4% | $56.2 million, up from $48.1 million |
| FLC | $119.1 million, −16.5% | $13.6 million, down from $27.0 million |
| Economic Consulting | $155.0 million, +9.4% | $25.7 million, up from $19.4 million |
| Technology | $58.6 million, +2.6% | $11.9 million, down from $12.3 million |
| Strategic Communications | $53.0 million, −11.7% | $8.4 million, down from $12.6 million |
Cash flow, debt, and liquidity
- Nine-month operating cash flow was $141.0 million, versus $76.9 million; free cash flow, as defined by the company, was $115.3 million, versus $49.8 million. Q3 operating cash flow was $111.6 million, versus $131.3 million, and quarterly free cash flow was $99.8 million, versus $124.9 million.
- Cash and cash equivalents were $304.7 million at September 30, 2020, compared with $369.4 million at year-end 2019. Nine-month cash declined $64.7 million.
- Debt consisted of $316.3 million principal of 2.0% convertible notes due 2023 and $25.0 million drawn on the revolving credit facility; reported long-term debt, net, was $308.5 million. The $550 million facility had $523.9 million of available capacity, including the effect of outstanding letters of credit. The company reported compliance with debt covenants.
- DSO was 104 days, compared with 108 days at September 30, 2019. Net accounts receivable was $762.8 million; the allowance for doubtful accounts and unbilled services was $323.7 million.
Material changes and management commentary
- Q3 revenue growth reflected stronger Corporate Finance and Economic Consulting demand, partly offset by weaker FLC and Strategic Communications demand. Excluding estimated foreign-exchange and acquisition effects, revenue increased 2.5%.
- Profitability declined despite revenue growth. Management cited increased billable headcount and variable compensation; Q3 billable headcount was up 15.8% year over year. Q3 net income also reflected foreign-exchange remeasurement losses and a special charge.
- COVID-19 disrupted client service through travel restrictions, remote work, and postponements or moratoriums affecting legal proceedings and investigations. FLC was particularly affected. Corporate Finance restructuring demand remained above the prior year but declined sequentially from Q2 as government stimulus and other financing sources reduced activity; management cautioned that this demand may not offset broader pandemic effects.
- Q3 special charges totaled $7.1 million: $4.7 million for New York office abandonment and relocation, including $4.4 million of non-cash accelerated depreciation and amortization, and $2.4 million of FLC employee severance affecting 16 employees. The company expected the charges to be paid in cash within 12 months.
- FTI acquired certain assets of Delta Partners Group, a telecom, media, and technology strategy consulting and investment banking business. The acquisition added $8.5 million of Q3 revenue and $20.5 million of goodwill on a preliminary purchase-price allocation.
- The company repurchased $184.2 million of stock during the first nine months, including $82.9 million in Q3. It had $182.4 million remaining under its repurchase authorization at quarter-end.
- Management said operating cash flow and, if needed, revolver borrowings were expected to fund cash needs for the next 12 months or longer, but this assessment excluded a materially worsening or prolonged pandemic impact and other unexpected cash needs. Planned remaining-2020 capital expenditures were $10 million to $18 million.
- A material New York office lease was amended on October 26, 2020, after quarter-end. It has a 15-year initial term, with two five-year renewal options; fixed rent is expected to total approximately $145 million over the initial term, excluding incentives. Rent is scheduled to begin in April 2022. The lease was not recorded on the September 30 balance sheet because the company did not yet have the right to use the premises.
Risks, contingencies, and outlook
The filing gives no specific earnings or revenue guidance. Management identifies pandemic uncertainty, changes in demand, utilization and billing rates, talent retention, receivable collection, acquisition integration, foreign exchange, cybersecurity and data protection, and debt and capital-market conditions as risks. The company reported no legal proceedings it believed would materially adversely affect its financial condition or results. Its liquidity outlook depends on operating performance and could change materially if pandemic disruption worsens or other unexpected funding needs arise.
Important facts for investors to verify
- Whether Corporate Finance growth can persist as restructuring activity changes, and whether FLC demand and utilization recover.
- Whether headcount growth translates into billable utilization and sustainable margins, given the year-over-year decline in adjusted EBITDA margin.
- Receivable quality and collection trends, including the elevated allowance and bad-debt write-offs.
- Cash use from repurchases, acquisition obligations, debt service, and the new long-term office lease.
- The ongoing effects of COVID-19 on client engagements, deferred legal work, demand, and management’s liquidity assumptions.