FTI Consulting, Inc. — Q2 2023 Form 10-Q
Business context and reporting period. FTI Consulting is a global business advisory firm with five segments: Corporate Finance, Forensic and Litigation Consulting (FLC), Economic Consulting, Technology, and Strategic Communications. This unaudited filing covers the quarter and six months ended June 30, 2023; comparisons are with the same 2022 periods. Dollar amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $864.6 | $755.0 | $1,671.3 | $1,478.6 |
| Operating income | $88.7 | $64.2 | $155.5 | $143.5 |
| Net income | $62.4 | $51.4 | $109.9 | $110.7 |
| Diluted EPS | $1.75 | $1.43 | $3.09 | $3.10 |
| Adjusted EBITDA | $100.2 | $76.2 | $178.7 | $166.6 |
| Cash from operations | $(11.0) | $35.0 | $(265.2) | $(168.7) |
| Free cash flow | $(22.0) | $22.0 | $(294.3) | $(194.4) |
Q2 revenue grew 14.5%, operating income 38.1%, net income 21.3%, and Adjusted EBITDA 31.6%. Adjusted EBITDA margin was 11.6%, compared with 10.1%. For the first half, revenue rose 13.0% and operating income 8.4%, while net income declined 0.7%; diluted EPS was nearly flat. Q2 operating margin was approximately 10.3% versus 8.5% a year earlier.
Segment highlights, Q2: Revenue increased in all five segments. Technology grew 25.3% to $97.4 million and Adjusted Segment EBITDA rose to $20.1 million from $8.4 million. Economic Consulting revenue rose 23.0% to $201.8 million and EBITDA to $35.5 million from $21.6 million. Corporate Finance revenue grew 8.4%, but EBITDA fell to $50.0 million from $55.0 million. FLC revenue rose 10.9% and EBITDA to $21.1 million from $16.7 million. Strategic Communications revenue grew 15.0%, while EBITDA increased modestly to $12.3 million from $11.5 million.
Balance sheet, liquidity and capital allocation
- Cash and cash equivalents were $203.5 million at June 30, 2023, down from $491.7 million at year-end 2022. Accounts receivable, net, increased to $1,138.1 million from $896.2 million.
- Long-term debt, net, was $340.5 million, including $315.8 million of 2.0% convertible notes due August 15, 2023 and $25.0 million drawn on the revolving credit facility. The $900 million facility had $874.6 million available, after borrowings and letters of credit. The company reported compliance with debt covenants.
- Management said operating cash flow and available facility borrowings should fund needs for at least 12 months, including repayment or refinancing of the notes. It stated it had the ability and intent to refinance the notes using the facility.
- Operating cash use in the first half increased by $96.5 million year over year, primarily from higher salaries and operating expenses, forgivable loan issuances, and tax payments, partly offset by higher collections. Days sales outstanding rose to 111 days from 102 a year earlier.
- First-half capital expenditures were $29.1 million; management expected another $22–$27 million for the remainder of 2023. The company paid $21.0 million for share repurchases in the first half and had $460.7 million remaining under its authorization.
Management commentary, outlook and risks
- Management attributed broad-based Q2 revenue growth to higher demand. Headcount increased 2.9% from year-end 2022 to 7,853; billable headcount was up 2.8% over that period.
- Q2 results faced higher direct compensation costs from billable headcount growth and higher SG&A costs from non-billable headcount growth. The effective tax rate rose to 26.7% from 20.6%, partly due to a less favorable share-based compensation tax benefit and higher foreign taxes.
- Interest income and other shifted to a $0.6 million expense from $3.0 million of income in Q2 2022, chiefly reflecting a $2.4 million foreign-exchange loss versus a $1.9 million gain. For the first half, the corresponding item was a $1.9 million expense versus $2.6 million of income.
- No specific revenue or earnings guidance is provided in the filing. The stated capital expenditure expectation is $22–$27 million for the rest of 2023. Management cautioned that demand, hiring and retention, utilization and billing rates, collections, FX, cyber and systems risks, economic conditions, and acquisitions could affect results and liquidity.
- The new ERP system was implemented during Q2. Management said disclosure controls were effective and the implementation was not expected to materially adversely affect internal control over financial reporting. It also identified the ERP transition as a factor in slower collections and higher DSO.
- The company reported no known legal proceedings or claims expected to have a material adverse effect and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Subsequent filings and disclosures on repayment or refinancing of the $315.8 million convertible notes due August 15, 2023.
- Whether receivables and DSO improve as billing activities transition to the new ERP system, and the related effect on operating cash flow.
- Whether revenue growth translates into sustainable margins, particularly in Corporate Finance and Strategic Communications, where first-half segment profitability weakened.
- Actual cash generation, capital expenditure spending, and use of the revolving facility and share repurchase authorization.
- Whether FX losses, higher taxes, headcount growth, and compensation costs continue to pressure reported earnings.