FTI Consulting, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparisons are with Q1 2019. FTI Consulting is a global business advisory firm operating through five segments: Corporate Finance & Restructuring, Forensic and Litigation Consulting (FLC), Economic Consulting, Technology, and Strategic Communications.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $604.6 million | $551.3 million | +9.7% |
| Operating income | $73.1 million | $87.2 million | Down $14.1 million |
| Net income | $56.7 million | $62.6 million | Down $5.9 million |
| Diluted EPS | $1.49 | $1.64 | Down $0.15 |
| Adjusted EBITDA | $83.2 million | $96.1 million | Down 13.4% |
| Adjusted EBITDA margin | 13.8% | 17.4% | Down 3.6 percentage points |
| Adjusted diluted EPS | $1.53 | $1.63 | Down $0.10 |
Revenue growth included $13.5 million of acquisition-related revenue. Management attributed lower earnings and adjusted EBITDA primarily to higher compensation, including an 18.5% increase in billable headcount and increased variable compensation, as well as higher SG&A. A $3.7 million net foreign-exchange gain and a lower effective tax rate partly offset these pressures. The effective tax rate was 22.5%, compared with 24.1%.
Segment trends
- Corporate Finance: Revenue rose 29.1% to $207.7 million; Adjusted Segment EBITDA increased to $48.9 million from $37.4 million. Demand for restructuring and business transformation and transactions services grew.
- FLC: Revenue increased 6.2% to $147.6 million, but Adjusted Segment EBITDA fell to $21.2 million from $31.8 million. Lower utilization contributed to gross margin falling to 31.0% from 39.5%.
- Economic Consulting: Revenue declined 7.1% to $132.1 million and Adjusted Segment EBITDA fell to $12.7 million from $24.0 million, amid weaker demand, lower realized rates, and utilization of 68% versus 77%.
- Technology: Revenue rose 14.4% to $58.7 million and Adjusted Segment EBITDA increased to $14.5 million from $12.7 million.
- Strategic Communications: Revenue increased 1.2% to $58.4 million, while Adjusted Segment EBITDA declined to $8.8 million from $11.5 million.
Cash flow, liquidity, and debt
- Operating cash flow was a use of $123.6 million, versus a $102.1 million use in Q1 2019; capital expenditures were $8.2 million. Free cash flow, as defined by the company, was a $131.8 million outflow, compared with $112.2 million.
- Management said first-quarter cash use is generally seasonal because of annual incentive compensation payments. Higher bonus payments and salaries associated with headcount growth drove the year-over-year increase in operating cash use.
- Cash and cash equivalents were $223.1 million at March 31, down from $369.4 million at year-end 2019. DSO increased to 104 days from 97 days a year earlier; the company cited revenue growth outpacing collections and slower collection on certain large engagements.
- Debt totaled $366.3 million in principal, including $316.3 million of 2.0% convertible notes due 2023 and $50.0 million borrowed under the revolving credit facility. Long-term debt, net, was $328.2 million. The company reported $499.0 million of available revolver capacity and compliance with debt covenants at quarter-end.
- Repurchased approximately 450,000 shares for $50.3 million during the quarter; $116.3 million remained authorized under the repurchase program at March 31.
Outlook, risks, and notable items
- The filing provides no specific earnings or revenue guidance. Management said it was too early to assess the full effects of COVID-19 and expected disruption to continue for a sustained period.
- COVID-19 risks include delayed or canceled legal and regulatory proceedings, reduced M&A and capital-markets activity, travel and remote-work constraints, client payment delays, and cybersecurity or operational issues. Management noted that restructuring and bankruptcy work could benefit from counter-cyclical demand, but might not offset broader weakness.
- Management expected $35 million to $43 million of additional capital expenditures for the remainder of 2020 and stated that cash, operating cash flows, and revolver borrowings were expected to fund needs for at least the next 12 months, excluding a material worsening of COVID-19-related disruptions and other contingencies.
- Comprehensive income was $25.6 million, including a $31.1 million foreign-currency translation loss. Net income included a $3.7 million FX remeasurement gain. The filing reported no legal proceedings expected to materially affect financial condition or results.
Key investor verification points
- Track post-quarter COVID-19 effects on segment demand, utilization, margins, and the counter-cyclical restructuring opportunity.
- Monitor receivable collections, DSO, bad-debt exposure, and working-capital cash use.
- Assess whether headcount and compensation growth translate into revenue and margin recovery, particularly in FLC and Economic Consulting.
- Verify liquidity, revolver usage, covenant compliance, and capital allocation, including share repurchases, as conditions evolve.
- Distinguish recurring operating performance from FX effects and the company’s non-GAAP adjusted measures.