FTI Consulting, Inc. — Q3 2023 Form 10-Q
Business context and reporting period. FTI Consulting is a global business advisory firm with five reporting segments: Corporate Finance, Forensic and Litigation Consulting (FLC), Economic Consulting, Technology and Strategic Communications. This unaudited report covers the three and nine months ended September 30, 2023, compared with the corresponding 2022 periods.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $893.3 million | $775.9 million | $2,564.6 million | $2,254.5 million |
| Operating income | $107.0 million | $87.7 million | $262.5 million | $231.2 million |
| Net income | $83.3 million | $77.3 million | $193.3 million | $188.0 million |
| Diluted EPS | $2.34 | $2.15 | $5.43 | $5.25 |
| Adjusted EBITDA (non-GAAP) | $118.7 million | $99.0 million | $297.4 million | $265.6 million |
| Adjusted EBITDA margin (non-GAAP) | 13.3% | 12.8% | Not stated | Not stated |
| Operating cash flow | $106.7 million | $128.3 million | $(158.5) million | $(40.4) million |
| Free cash flow (non-GAAP) | $92.5 million | $115.0 million | $(201.8) million | $(79.4) million |
Q3 revenue rose 15.1% year over year (13.6% excluding estimated foreign-exchange effects); nine-month revenue increased 13.8%. Q3 net income rose 7.8%, while nine-month net income increased 2.8%. Operating margin was approximately 12.0% in Q3 versus 11.3% a year earlier, and 10.2% for the nine-month period versus 10.3%.
At September 30, cash and cash equivalents were $201.1 million, with a $24.4 million short-term certificate of deposit. Debt was $285.0 million, all under the revolving credit facility; $614.9 million of borrowing capacity remained available. The $900 million facility matures November 21, 2027. The company reported compliance with its debt covenants. Total assets were $3.32 billion and total liabilities were $1.45 billion.
Material changes and operating performance
- All five segments grew revenue in Q3. Corporate Finance revenue grew 23.2%, FLC 15.9%, Technology 16.4%, Strategic Communications 19.9%, and Economic Consulting 0.4%.
- Q3 segment Adjusted EBITDA improved at Corporate Finance, FLC, Technology and Strategic Communications, but declined at Economic Consulting. For the nine months, Strategic Communications Adjusted EBITDA fell to $35.3 million from $40.1 million, while FLC and Technology increased materially.
- Headcount reached 8,089, up 5.9% from December 2022; billable headcount increased 6.8%. Management cited headcount growth and higher compensation and operating expenses as offsets to revenue growth.
- Days sales outstanding increased to 114 days from 106 days a year earlier. Accounts receivable, net, rose to $1.21 billion from $896.2 million at year-end; the allowance for expected credit losses was $59.9 million, compared with $45.8 million.
- Effective July 1, 2023, 127 health-solutions professionals moved from FLC to Corporate Finance; 83 remained in FLC. Prior-period segment figures were recast for comparability.
Outlook, risks and unusual items
- Management expects cash flows from operations, supplemented by the credit facility if needed, to fund requirements for at least the next 12 months. No specific revenue or earnings guidance is provided in the filing. Remaining 2023 capital expenditures were estimated at $6 million to $8 million.
- Nine-month operating cash outflow widened to $158.5 million, primarily because collections did not keep pace with revenue growth and employee compensation, operating expenses and tax payments increased. The company attributed the higher DSO to slower collections relative to revenue.
- The $315.8 million principal balance of 2.0% convertible notes was repaid in cash at maturity in August 2023, using cash and credit-facility borrowings. Holders also received 1,460,740 common shares for the conversion premium. No convertible notes remained outstanding at quarter-end; common shares outstanding were approximately 35.5 million.
- The Q3 effective tax rate was 22.6%, versus 17.0% in Q3 2022; the prior-year quarter benefited from $8.3 million in specified tax benefits. The nine-month rates were 24.3% and 19.7%, respectively.
- Revenue may fluctuate with engagement demand, success-fee timing, utilization, billing rates and collections. The filing also identifies risks involving retention and recruitment, receivable collectability, competition, cyber and data security, foreign exchange, economic conditions and indebtedness. Management reported no known legal proceedings expected to materially affect financial condition or results.
- Disclosure controls were reported effective. A new ERP system was implemented during the second quarter; the company said the implementation had not had, and was not expected to have, a material adverse effect on internal control over financial reporting.
Important facts for investors to verify
- Whether receivable growth and the 114-day DSO reverse, and how credit-loss provisions and collections evolve.
- Whether revenue growth converts into operating cash flow, particularly given the nine-month cash outflow and higher headcount and compensation costs.
- Segment utilization, pricing and margins—especially Corporate Finance’s lower nine-month gross margin and Strategic Communications’ lower nine-month Adjusted EBITDA.
- The cost and leverage implications of revolving-credit borrowings, including variable interest rates, remaining capacity and covenant headroom.
- The sustainability of success-fee revenue and the effect of the prior-year tax benefits on comparisons; the filing provides no specific earnings guidance.