FTI Consulting, Inc. — FY 2022 Form 10-K
Business context and reporting period. FTI Consulting (NYSE: FCN) is a global business advisory firm reporting results for the fiscal year ended December 31, 2022, compared primarily with FY 2021. Its five segments are Corporate Finance & Restructuring, Forensic and Litigation Consulting (FLC), Economic Consulting, Technology and Strategic Communications. Approximately 63% of revenue was generated by professionals assigned to U.S. locations and 37% by professionals assigned outside the U.S.
Financial performance and liquidity
| Metric | FY 2022 | FY 2021 | Change |
|---|---|---|---|
| Revenue | $3.029 billion | $2.776 billion | +9.1% |
| Operating income | $303.9 million | $312.0 million | -2.6% |
| Net income | $235.5 million | $235.0 million | +0.2% |
| Diluted EPS | $6.58 | $6.65 | -1.1% |
| Adjusted EBITDA | $357.6 million | $354.0 million | +1.0% |
| Adjusted EBITDA margin | 11.8% | 12.8% | -1.0 percentage point |
| Operating cash flow | $188.8 million | $355.5 million | -46.9% |
| Free cash flow | $135.7 million | $286.9 million | Down $151.2 million |
Revenue growth excluding estimated foreign-exchange effects was 12.2%. Higher compensation, including increased billable and non-billable headcount, resumed travel and entertainment, outside services and special charges weighed on profitability. The effective tax rate was 20.9%, versus 21.1%.
Segment revenue and Adjusted Segment EBITDA: Corporate Finance revenue was $1,088.6 million (+15.9%) and EBITDA was $212.4 million; FLC revenue was $638.5 million (+9.2%) and EBITDA was $65.9 million; Economic Consulting revenue was $695.2 million (-0.3%) and EBITDA was $103.1 million; Technology revenue was $320.0 million (+11.4%) and EBITDA was $46.7 million; Strategic Communications revenue was $286.7 million (+7.1%) and EBITDA was $50.6 million. EBITDA declined year over year in all segments other than Corporate Finance.
At year-end, cash and cash equivalents were $491.7 million, accounts receivable net was $896.2 million, and total assets were $3.241 billion. Debt, net, was $315.2 million, comprising the 2.0% convertible notes due August 15, 2023; there were no borrowings under the $900 million revolving credit facility, with $899.6 million available. The company reported compliance with debt covenants. DSO increased to 97 days from 94 days.
Material changes and unusual items
- Operating cash flow fell primarily due to higher compensation and operating costs and income taxes paid, despite increased cash collections. Accounts receivable rose to $896.2 million from $754.1 million.
- FY 2022 included $8.3 million of cash severance and employee-related special charges, primarily for workforce reductions in FLC and Corporate Finance; the filing said payment was expected within 12 months.
- Corporate Finance was the strongest segment, with 34.0% growth in segment operating income. FLC, Economic Consulting, Technology and Strategic Communications reported lower segment operating income than in 2021.
- Adoption of ASU 2020-06 reduced reported non-cash interest expense on the convertible notes; interest expense fell to $10.0 million from $20.3 million. The notes’ principal is required to be settled in cash upon conversion under the amended terms.
- The company repurchased 574,418 shares for approximately $88.6 million during 2022 and had $478.5 million remaining under its repurchase authorization at year-end. It acquired a Netherlands advisory firm and recorded $5.6 million of acquisition-related contingent consideration.
Outlook, risks and contingencies
Management stated that operating cash flows, supplemented if needed by the revolving facility, were expected to fund business requirements for at least the next 12 months, including the convertible notes’ August 2023 maturity. It classified the notes as long-term at year-end based on its ability and intent to refinance under the facility. The filing provides expected 2023 capital expenditures of $54 million to $66 million; it does not provide a clear revenue or earnings guidance range in the supplied text.
Management said COVID-19 did not materially adversely affect the company as a whole in 2022, while travel-related costs rose and continuing restrictions in parts of Asia affected business. Key risks include demand changes tied to economic and credit conditions, M&A and litigation activity; retaining and utilizing skilled professionals; client cancellations, fee reductions and collection delays; cybersecurity and protection of client information; competition and pricing pressure in Technology; foreign-exchange exposure; and compliance with debt covenants and refinancing or cash settlement of convertible notes. The company also disclosed ongoing ERP-system replacement and risks from implementation delays or system failure.
The company reported no known legal proceeding or claim expected to have a material adverse effect. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting. KPMG identified changes in estimates of potential fee reductions—such as those imposed by bankruptcy courts or negotiated with clients—as a critical audit matter, citing the judgment involved.
Important facts for investors to verify
- How the $316.2 million convertible-note principal due in August 2023 was repaid, converted or refinanced after the reporting date, and the resulting liquidity and dilution effects.
- Whether the sharp decline in operating cash flow and higher DSO were temporary, including subsequent-period collections and credit-loss provisions.
- Whether revenue growth converts into improved margins, given lower consolidated Adjusted EBITDA margin and weaker EBITDA in four of five segments.
- Utilization, hiring and compensation trends, particularly in FLC and Economic Consulting, and the cash cost and timing of the workforce-reduction charges.
- Subsequent share repurchases, acquisition spending and capital expenditures relative to available cash and borrowing capacity.
- Potential sensitivity of revenue and receivables to contingent fees, bankruptcy-court fee reductions and other client negotiations; FY 2022 revenue included $24.4 million from changes in transaction-price estimates relating to prior-period performance obligations.