FTI Consulting, Inc. — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a standalone fourth-quarter filing. FTI Consulting is a global business advisory firm operating through Corporate Finance & Restructuring, Forensic and Litigation Consulting, Economic Consulting, Technology, and Strategic Communications.
Financial performance and liquidity
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Revenue | $2,352.7 million | $2,027.9 million | +16.0% |
| Operating income | $305.6 million | $226.0 million | +35.2% |
| Net income | $216.7 million | $150.6 million | +43.9% |
| Diluted EPS | $5.69 | $3.93 | +44.8% |
| Adjusted EBITDA | $343.9 million | $265.7 million | +29.4% |
| Cash from operations | $217.9 million | $230.7 million | -5.5% |
| Free cash flow (non-GAAP) | $175.8 million | $198.4 million | -11.4% |
Operating margin increased to approximately 13.0% from 11.1%; adjusted EBITDA margin rose to 14.6% from 13.1%. Net margin was approximately 9.2%, compared with 7.4%. The effective tax rate declined to 24.9% from 27.5%, helping lift earnings.
Revenue and segment operating income increased across all five segments. Corporate Finance led revenue growth, supported by restructuring, business transformation and transactions demand and higher success fees. Technology’s segment operating income rose sharply, while Strategic Communications’ gross margin declined. Billable headcount grew 17.8% to 4,424.
Cash and cash equivalents were $369.4 million; working capital was $566.1 million. Long-term debt, net of discount and issuance costs, was $275.6 million, representing $316.3 million principal of 2.0% convertible notes due 2023. The $550 million revolving facility was undrawn except for $1.0 million of letters of credit, leaving $549.0 million available. The company reported compliance with debt covenants.
Material changes and fourth-quarter results
- Revenue rose 16.0%, including an estimated 1.3% negative foreign-exchange impact; acquisition-related revenue contributed $19.6 million. Management attributed underlying growth mainly to higher demand across segments.
- Operating cash flow and free cash flow declined despite higher earnings. Receivables grew, and days sales outstanding increased to 97 from 93; management said revenue growth outpaced collections.
- FTI acquired German restructuring advisory firm Andersch AG, paying $18.8 million net of cash acquired and recording $27.4 million of goodwill.
- The company repurchased 1.26 million shares for approximately $105.9 million at an average $84.16 per share; $66.6 million remained authorized at year-end.
- Fourth-quarter revenue was $602.2 million, operating income $48.2 million, and net income $29.1 million, versus $505.0 million, $44.8 million, and $23.7 million, respectively, in fourth-quarter 2018. Revenue increased sequentially from Q3, while operating income and net income declined from Q3 levels.
Outlook, risks, contingencies and unusual items
The filing does not provide a specific 2020 revenue or earnings forecast. Management estimated 2020 capital expenditures of $40 million to $49 million and said operating cash flows, supplemented if needed by the revolving facility, were expected to fund normal operating cash needs for at least the next 12 months. That assessment excludes potential acquisitions, unexpected staffing changes and other unanticipated cash needs.
- Demand, utilization, bill rates and results may vary with economic conditions, credit and M&A activity, litigation, regulation, client engagement timing and success-fee outcomes. Restructuring demand may rise in weaker markets while other practices may soften.
- Key operating risks include recruiting and retaining professionals, compensation and hiring costs, client fee renegotiation or non-payment, engagement cancellations, Technology-segment price competition and rapid technological change, cybersecurity and confidentiality threats, and international and foreign-exchange exposure.
- The allowance for doubtful accounts and unbilled services was $265.5 million, up from $202.4 million; 2019 bad debt expense was $19.6 million. KPMG identified estimation of receivable losses as a critical audit matter. Management said no known legal proceedings were expected to materially affect financial condition or results.
- The company adopted lease accounting in 2019, recognizing $159.8 million of operating lease assets and $212.1 million of lease liabilities at year-end. These are distinct from funded debt.
- 2018 included a $13.0 million gain on the Ringtail sale and a $9.1 million debt-extinguishment loss; neither recurred in 2019. 2019 earnings also benefited from a lower effective tax rate and included $8.6 million of non-cash convertible-note interest expense.
Most important facts for investors to verify
- Whether cash collections improve and DSO stabilizes, given rising receivables, the larger allowance and lower operating cash flow.
- Whether elevated revenue growth and margins can be sustained as headcount and compensation costs expand, especially in Corporate Finance and Technology.
- The conversion, dilution and potential cash-settlement terms of the $316.3 million convertible notes due 2023, and continued compliance with facility covenants.
- Whether Andersch meets expected growth and integration objectives, and whether planned capital expenditures and share repurchases remain consistent with cash generation.
- How much of 2019 performance depended on success fees, foreign exchange, tax benefits and other timing-sensitive or nonrecurring factors; adjusted EBITDA and free cash flow are non-GAAP measures.