FTI Consulting, Inc. — Q1 2022 Form 10-Q
Business context and reporting period
FTI Consulting is a global business advisory firm with five reportable segments: Corporate Finance, Forensic and Litigation Consulting (FLC), Economic Consulting, Technology, and Strategic Communications. This unaudited report covers the three months ended March 31, 2022, compared with the same period in 2021.
Key financial metrics
| Metric | Q1 2022 | Q1 2021 |
|---|---|---|
| Revenue | $723.6 million | $686.3 million |
| Operating income | $79.3 million | $88.5 million |
| Operating margin | 11.0% | 12.9% |
| Net income | $59.3 million | $64.5 million |
| Diluted EPS | $1.66 | $1.84 |
| Adjusted EBITDA | $90.5 million | $99.5 million |
| Adjusted EBITDA margin | 12.5% | 14.5% |
| Net cash used in operating activities | $203.8 million | $166.6 million |
| Free cash flow | $(216.4) million | $(174.6) million |
At March 31, 2022, cash and cash equivalents were $271.1 million, compared with $494.5 million at year-end 2021. Accounts receivable, net, was $823.9 million. Long-term debt, net, was $328.9 million, including $316.2 million of 2.0% convertible notes due in 2023 and $15.0 million borrowed under the revolving credit facility. The company reported $534.6 million of available credit capacity and compliance with its debt covenants. DSO was 96 days, versus 97 days a year earlier.
Material changes versus the prior comparable period
- Revenue increased 5.4%. Management attributed underlying growth primarily to demand in Corporate Finance and Strategic Communications; estimated FX impact was negative 1.3%, and acquisition-related revenue was $6.0 million.
- Net income declined 8.0% and Adjusted EBITDA declined 9.1%, as higher direct compensation and SG&A costs, including costs associated with an 8.4% increase in billable headcount, outweighed revenue growth.
- Corporate Finance revenue rose 12.0% and Adjusted Segment EBITDA rose to $53.5 million from $37.4 million. Strategic Communications revenue rose 15.6% and Adjusted Segment EBITDA rose to $15.7 million from $10.4 million.
- Profitability weakened in FLC, Economic Consulting, and Technology. Adjusted Segment EBITDA was $17.3 million in FLC (from $29.4 million), $21.2 million in Economic Consulting (from $26.6 million), and $13.4 million in Technology (from $21.6 million). Lower utilization and higher compensation and operating costs were cited among the drivers.
- Operating cash outflow increased by $37.2 million, mainly due to annual bonus payments, salary costs from headcount growth, and higher operating expenses. Cash generation is typically weakest in Q1 because of annual incentive compensation payments.
Outlook, risks, contingencies, and unusual items
- Management said operating cash flows, supplemented as needed by the revolving facility, are expected to fund cash needs for at least the next 12 months. Planned remaining-2022 capital expenditures were estimated at $39 million to $47 million.
- The company completed an acquisition in the Netherlands assigned to Corporate Finance. It paid $6.7 million net of cash acquired and recorded $5.4 million of contingent consideration; purchase accounting was preliminary.
- Effective January 1, 2022, FTI adopted ASU 2020-06 for convertible debt. Adoption increased opening retained earnings by approximately $22.1 million and long-term debt by $16.4 million, and eliminated non-cash amortization of the convertible notes’ debt discount. Comparative periods were not restated.
- The 2023 Convertible Notes became convertible during Q2 2022 under the indenture’s stock-price conditions; principal upon conversion must be paid in cash. The notes mature August 15, 2023. The reported March 31 if-converted value exceeded principal by $174.2 million.
- COVID-19-related travel restrictions, court closures and backlogs, and government restructuring moratoriums continued to affect some services. Management identified uncertainty around future pandemic effects, recruiting and retention, demand, utilization and billing rates, collections, acquisitions, cybersecurity, foreign exchange, and the transition away from LIBOR.
- Management reported no material legal proceedings or changes to previously disclosed risk factors. It stated that disclosure controls were effective and that there were no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the margin decline and weaker segment profitability—particularly in FLC, Economic Consulting, and Technology—persist or recover as staffing and utilization change.
- How quickly the Q1 operating cash outflow reverses seasonally, and whether receivables and collections remain consistent with the reported 96-day DSO.
- The cash funding implications of the 2023 Convertible Notes, including potential conversion and the August 2023 maturity, alongside revolving-credit use and covenant headroom.
- Whether the Netherlands acquisition’s preliminary allocation, contingent consideration, and integration contribute to expected results.
- Whether management’s stated liquidity outlook and remaining-2022 capital expenditure estimate change; the filing provides no specific revenue or earnings guidance.