FTI Consulting, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. FTI Consulting provides advisory services through five segments: Corporate Finance, Forensic and Litigation Consulting (FLC), Economic Consulting, Technology, and Strategic Communications. Unless noted otherwise, figures below are in U.S. dollars.
Financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $775.9 million | $702.2 million | $2,254.5 million | $2,100.0 million |
| Operating income | $87.7 million | $88.5 million | $231.2 million | $261.0 million |
| Net income | $77.3 million | $69.5 million | $188.0 million | $196.8 million |
| Diluted EPS | $2.15 | $1.96 | $5.25 | $5.58 |
| Adjusted EBITDA | $99.0 million | $100.3 million | $265.6 million | $292.0 million |
| Adjusted EBITDA margin | 12.8% | 14.3% | Not stated | Not stated |
| Cash from operating activities | $128.3 million | $196.9 million | $(40.4) million | $155.9 million |
| Free cash flow | $115.0 million | $172.2 million | $(79.4) million | $103.5 million |
Q3 revenue increased 10.5% year over year; excluding estimated foreign-exchange effects, growth was 14.8%. Net income rose 11.2%, while operating income was slightly lower. The effective tax rate was 17.0% versus 21.6%. For the nine months, revenue increased 7.4%, but net income and adjusted EBITDA declined. Approximate consolidated operating margin was 11.3% in Q3 versus 12.6% a year earlier, and 10.3% for the nine months versus 12.4%.
At September 30, cash and cash equivalents were $327.0 million, down from $494.5 million at year-end 2021. Long-term debt, net, was $314.8 million; no revolver borrowings were outstanding, and $549.6 million of the $550 million revolving facility was available. Total liabilities were $1.44 billion and stockholders’ equity was $1.64 billion. Net accounts receivable was $948.0 million; DSO was 106 days, compared with 100 days a year earlier.
Material changes and segment performance
- Q3 revenue growth was broad-based. Technology grew 31.3%, Economic Consulting 12.0%, FLC 10.1%, Corporate Finance 6.0%, and Strategic Communications 4.3%. Management estimated a 4.3% negative FX impact on consolidated Q3 revenue.
- Q3 adjusted segment EBITDA increased to $128.8 million from $125.5 million, but consolidated adjusted EBITDA fell slightly as higher headcount-related compensation, SG&A, and unallocated corporate costs offset revenue growth. Total company headcount increased 12.4% year over year.
- For the nine months, Total Adjusted Segment EBITDA declined to $363.0 million from $371.8 million. Economic Consulting and Technology had lower segment EBITDA than the prior year; FLC also declined, while Corporate Finance and Strategic Communications increased.
- Operating cash flow for the nine months swung to an outflow, primarily reflecting higher compensation and bonus payments, increased operating costs, and a $251.3 million use of cash from accounts receivable. Cash was also reduced by $44.4 million from exchange-rate changes.
Outlook, commentary, risks, and unusual items
- No specific revenue or earnings guidance is provided in the filing. Management said operating cash flows and, if needed, the revolving facility are expected to fund requirements for at least the next 12 months, including the 2023 Convertible Notes. Planned capital expenditures for the remainder of 2022 were estimated at $13–$16 million.
- The $316.2 million principal amount of 2.0% Convertible Notes matures August 15, 2023. Holders could convert during Q4 2022; the notes’ September 30 if-converted value exceeded principal by $200.7 million. The company stated it had the ability and intent to refinance on a long-term basis under its revolving facility, which matures November 30, 2023.
- A combined $8.3 million tax benefit in 2022 related to release of a U.S. foreign tax-credit valuation allowance, use of current-year foreign tax credits, and an intercompany intellectual-property license. This benefit favorably affected the tax rate and is not necessarily recurring.
- Effective January 1, 2022, adoption of ASU 2020-06 changed accounting for the convertible notes, increasing reported debt and reducing non-cash interest expense. It also affected comparability with prior periods.
- Management cited risks including client demand and engagement timing, recruiting and retention, utilization and billing rates, collection delays and credit risk, acquisitions, foreign exchange, cybersecurity and systems, COVID-19-related disruption, and LIBOR transition. Management reported no legal proceedings believed likely to materially affect the company, no material change in previously reported risk factors, and effective disclosure controls.
Investor verification points
- Whether receivables and collections improve and DSO returns toward prior levels, given the nine-month operating cash outflow.
- Whether hiring and compensation growth translate into higher utilization and sustainable margins across segments.
- How the Convertible Notes will be settled or refinanced, and whether sufficient liquidity remains available around the 2023 maturities.
- The sustainability of earnings after the $8.3 million tax benefit and the accounting change affecting convertible-note interest.
- Whether FX movements, Economic Consulting and Technology profitability, and other segment trends materially affect future results.