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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| | | | | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2022
OR
| | | | | |
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number: 001-14875
FTI CONSULTING, INC.
(Exact Name of Registrant as Specified in its Charter)
| | | | | | | | | | | |
Maryland | | | 52-1261113 |
(State or Other Jurisdiction of Incorporation or Organization) | | | (I.R.S. Employer Identification No.) |
| | | |
555 12th Street NW | | | |
Washington, | | | |
DC | | | 20004 |
(Address of Principal Executive Offices) | | | (Zip Code) |
(202) 312-9100
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | | | | | | | |
Title of each class | | Trading Symbol | | Name of each exchange on which registered |
Common Stock, $0.01 par value | | FCN | | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| | | | | | | | | | | |
Large accelerated filer | ☒ | Accelerated filer | ☐ |
Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
| | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| | | | | |
Class | Outstanding at October 20, 2022 |
Common Stock, $0.01 par value | 34,423,110 |
FTI CONSULTING, INC. AND SUBSIDIARIES
INDEX
PART I—FINANCIAL INFORMATION
FTI Consulting, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in thousands, except per share data)
| | | | | |
Item 1. | Financial Statements |
| | | | | | | | | | | |
| September 30, | | December 31, |
| 2022 | | 2021 |
| (Unaudited) | | |
Assets | | | |
Current assets | | | |
Cash and cash equivalents | $ | 327,047 | | | $ | 494,485 | |
| | | |
| | | |
| | | |
| | | |
Accounts receivable, net | 947,993 | | | 754,120 | |
Current portion of notes receivable | 27,198 | | | 30,256 | |
Prepaid expenses and other current assets | 91,187 | | | 91,166 | |
Total current assets | 1,393,425 | | | 1,370,027 | |
Property and equipment, net | 144,713 | | | 142,163 | |
Operating lease assets | 195,339 | | | 215,995 | |
Goodwill | 1,212,541 | | | 1,232,791 | |
Intangible assets, net | 25,673 | | | 31,990 | |
Notes receivable, net | 54,144 | | | 53,539 | |
Other assets | 56,259 | | | 54,404 | |
Total assets | $ | 3,082,094 | | | $ | 3,100,909 | |
Liabilities and Stockholders' Equity | | | |
Current liabilities | | | |
Accounts payable, accrued expenses and other | $ | 175,491 | | | $ | 165,025 | |
Accrued compensation | 422,985 | | | 507,556 | |
Billings in excess of services provided | 50,523 | | | 45,535 | |
| | | |
Total current liabilities | 648,999 | | | 718,116 | |
Long-term debt, net | 314,756 | | | 297,158 | |
Noncurrent operating lease liabilities | 213,449 | | | 236,026 | |
Deferred income taxes | 161,486 | | | 170,612 | |
Other liabilities | 98,821 | | | 95,676 | |
Total liabilities | 1,437,511 | | | 1,517,588 | |
Commitments and contingencies (Note 10) | | | |
Stockholders' equity | | | |
Preferred stock, $0.01 par value; shares authorized — 5,000; none outstanding | — | | | — | |
Common stock, $0.01 par value; shares authorized — 75,000; shares issued and outstanding 34,422 (2022) and 34,333 (2021) | 344 | | | 343 | |
Additional paid-in capital | — | | | 13,662 | |
Retained earnings | 1,868,424 | | | 1,698,156 | |
Accumulated other comprehensive loss | (224,185) | | | (128,840) | |
Total stockholders' equity | 1,644,583 | | | 1,583,321 | |
Total liabilities and stockholders' equity | $ | 3,082,094 | | | $ | 3,100,909 | |
See accompanying notes to condensed consolidated financial statements
FTI Consulting, Inc. and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income
(in thousands, except per share data)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Revenues | $ | 775,865 | | | $ | 702,228 | | | $ | 2,254,477 | | | $ | 2,099,991 | |
Operating expenses | | | | | | | |
Direct cost of revenues | 526,654 | | | 472,235 | | | 1,539,838 | | | 1,431,381 | |
Selling, general and administrative expenses | 159,186 | | | 138,600 | | | 476,097 | | | 399,076 | |
| | | | | | | |
| | | | | | | |
Amortization of intangible assets | 2,315 | | | 2,860 | | | 7,320 | | | 8,515 | |
| 688,155 | | | 613,695 | | | 2,023,255 | | | 1,838,972 | |
Operating income | 87,710 | | | 88,533 | | | 231,222 | | | 261,019 | |
Other income (expense) | | | | | | | |
Interest income and other | 7,771 | | | 5,175 | | | 10,418 | | | 5,297 | |
Interest expense | (2,378) | | | (5,073) | | | (7,468) | | | (15,164) | |
| | | | | | | |
| 5,393 | | | 102 | | | 2,950 | | | (9,867) | |
Income before income tax provision | 93,103 | | | 88,635 | | | 234,172 | | | 251,152 | |
Income tax provision | 15,836 | | | 19,155 | | | 46,156 | | | 54,394 | |
Net income | $ | 77,267 | | | $ | 69,480 | | | $ | 188,016 | | | $ | 196,758 | |
Earnings per common share — basic | $ | 2.29 | | | $ | 2.07 | | | $ | 5.57 | | | $ | 5.88 | |
Earnings per common share — diluted | $ | 2.15 | | | $ | 1.96 | | | $ | 5.25 | | | $ | 5.58 | |
Other comprehensive loss, net of tax | | | | | | | |
Foreign currency translation adjustments, net of tax expense of $0 | $ | (48,475) | | | $ | (18,607) | | | $ | (95,345) | | | $ | (18,042) | |
Total other comprehensive loss, net of tax | (48,475) | | | (18,607) | | | (95,345) | | | (18,042) | |
Comprehensive income | $ | 28,792 | | | $ | 50,873 | | | $ | 92,671 | | | $ | 178,716 | |
See accompanying notes to condensed consolidated financial statements
FTI Consulting, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders’ Equity
(in thousands)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | Accumulated Other Comprehensive Loss | | |
| Common Stock | | Additional Paid-in Capital | | Retained Earnings | | | |
| Shares | | Amount | | | | | Total |
Balance at December 31, 2021 | 34,333 | | | $ | 343 | | | $ | 13,662 | | | $ | 1,698,156 | | | $ | (128,840) | | | $ | 1,583,321 | |
Net income | — | | | $ | — | | | $ | — | | | $ | 59,321 | | | $ | — | | | $ | 59,321 | |
Other comprehensive loss: | | | | | | | | | | | |
Cumulative translation adjustment | — | | | — | | | — | | | — | | | (6,191) | | | (6,191) | |
Issuance of common stock in connection with: | | | | | | | | | | | |
Exercise of options | 26 | | | — | | | 923 | | | — | | | — | | | 923 | |
Restricted share grants, less net settled shares of 54 | 134 | | | 2 | | | (7,836) | | | — | | | — | | | (7,834) | |
Stock units issued under incentive compensation plan | — | | | — | | | 1,664 | | | — | | | — | | | 1,664 | |
Purchase and retirement of common stock | (22) | | | — | | | (3,098) | | | — | | | — | | | (3,098) | |
Cumulative effect due to adoption of new accounting standard | — | | | — | | | (34,131) | | | 22,078 | | | — | | | (12,053) | |
Conversion of convertible senior notes due 2023 | — | | | — | | | (2) | | | — | | | — | | | (2) | |
Share-based compensation | — | | | — | | | 5,967 | | | — | | | — | | | 5,967 | |
Reclassification of negative additional paid-in capital | — | | | — | | | 22,851 | | | (22,851) | | | — | | | — | |
Balance at March 31, 2022 | 34,471 | | | $ | 345 | | | $ | — | | | $ | 1,756,704 | | | $ | (135,031) | | | $ | 1,622,018 | |
Net income | — | | | $ | — | | | $ | — | | | $ | 51,428 | | | $ | — | | | $ | 51,428 | |
Other comprehensive loss: | | | | | | | | | | | |
Cumulative translation adjustment | — | | | — | | | — | | | — | | | (40,679) | | | (40,679) | |
Issuance of common stock in connection with: | | | | | | | | | | | |
Exercise of options | 22 | | | — | | | 687 | | | — | | | — | | | 687 | |
Restricted share grants, less net settled shares of 55 | 47 | | | — | | | (8,907) | | | — | | | — | | | (8,907) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Conversion of convertible senior notes due 2023 | — | | | — | | | (11) | | | — | | | — | | | (11) | |
Share-based compensation | — | | | — | | | 6,083 | | | — | | | — | | | 6,083 | |
Reclassification of negative additional paid-in capital | — | | | — | | | 2,647 | | | (2,647) | | | — | | | — | |
Balance at June 30, 2022 | 34,540 | | | $ | 345 | | | $ | 499 | | | $ | 1,805,485 | | | $ | (175,710) | | | $ | 1,630,619 | |
Net income | — | | | $ | — | | | $ | — | | | $ | 77,267 | | | $ | — | | | $ | 77,267 | |
Other comprehensive loss: | | | | | | | | | | | |
Cumulative translation adjustment | — | | | — | | | — | | | — | | | (48,475) | | | (48,475) | |
Issuance of common stock in connection with: | | | | | | | | | | | |
| | | | | | | | | | | |
Restricted share grants, less net settled shares of 5 | 10 | | | — | | | (837) | | | — | | | — | | | (837) | |
| | | | | | | | | | | |
Purchase and retirement of common stock | (128) | | | (1) | | | (20,431) | | | — | | | — | | | (20,432) | |
| | | | | | | | | | | |
Share-based compensation | — | | | — | | | 6,441 | | | — | | | — | | | 6,441 | |
Reclassification of negative additional paid-in capital | — | | | — | | | 14,328 | | | (14,328) | | | — | | | — | |
Balance at September 30, 2022 | 34,422 | | | $ | 344 | | | $ | — | | | $ | 1,868,424 | | | $ | (224,185) | | | $ | 1,644,583 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Additional Paid-in Capital | | | | Accumulated Other Comprehensive Loss | | | |
| Common Stock | | | Retained Earnings | | | | |
| Shares | | Amount | | | | | Total | |
Balance at December 31, 2020 | 34,481 | | | $ | 345 | | | $ | — | | | $ | 1,506,271 | | | $ | (106,435) | | | $ | 1,400,181 | | |
Net income | — | | | $ | — | | | $ | — | | | $ | 64,496 | | | $ | — | | | $ | 64,496 | | |
Other comprehensive loss: | | | | | | | | | | | | |
Cumulative translation adjustment | — | | | — | | | — | | | — | | | (5,242) | | | (5,242) | | |
Issuance of common stock in connection with: | | | | | | | | | | | | |
Exercise of options | 12 | | | — | | | 434 | | | — | | | — | | | 434 | | |
Restricted share grants, less net settled shares of 63 | 157 | | | 1 | | | (7,232) | | | — | | | — | | | (7,231) | | |
Stock units issued under incentive compensation plan | — | | | — | | | 2,603 | | | — | | | — | | | 2,603 | | |
Purchase and retirement of common stock | (422) | | | (4) | | | (3,047) | | | (43,082) | | | — | | | (46,133) | | |
| | | | | | | | | | | | |
Share-based compensation | — | | | — | | | 7,242 | | | — | | | — | | | 7,242 | | |
Balance at March 31, 2021 | 34,228 | | | $ | 342 | | | $ | — | | | $ | 1,527,685 | | | $ | (111,677) | | | $ | 1,416,350 | | |
Net income | — | | | $ | — | | | $ | — | | | $ | 62,782 | | | $ | — | | | $ | 62,782 | | |
Other comprehensive income: | | | | | | | | | | | | |
Cumulative translation adjustment | — | | | — | | | — | | | — | | | 5,807 | | | 5,807 | | |
Issuance of common stock in connection with: | | | | | | | | | | | | |
Exercise of options | 33 | | | 1 | | | 1,136 | | | — | | | — | | | 1,137 | | |
Restricted share grants, less net settled shares of 13 | 21 | | | — | | | (1,814) | | | — | | | — | | | (1,814) | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Share-based compensation | — | | | — | | | 4,948 | | | — | | | — | | | 4,948 | | |
Balance at June 30, 2021 | 34,282 | | | $ | 343 | | | $ | 4,270 | | | $ | 1,590,467 | | | $ | (105,870) | | | $ | 1,489,210 | | |
Net income | — | | | $ | — | | | $ | — | | | $ | 69,480 | | | $ | — | | | $ | 69,480 | | |
Other comprehensive loss: | | | | | | | | | | | | |
Cumulative translation adjustment | — | | | — | | | — | | | — | | | (18,607) | | | (18,607) | | |
Issuance of common stock in connection with: | | | | | | | | | | | | |
Exercise of options | 4 | | | — | | | 126 | | | — | | | — | | | 126 | | |
Restricted share grants, less net settled shares of 6 | 9 | | | — | | | (866) | | | — | | | — | | | (866) | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Share-based compensation | — | | | — | | | 4,960 | | | — | | | — | | | 4,960 | | |
Balance at September 30, 2021 | 34,295 | | | $ | 343 | | | $ | 8,490 | | | $ | 1,659,947 | | | $ | (124,477) | | | $ | 1,544,303 | | |
See accompanying notes to condensed consolidated financial statements
FTI Consulting, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in thousands)
(Unaudited)
| | | | | | | | | | | |
| Nine Months Ended September 30, |
| 2022 | | 2021 |
Operating activities | | | |
Net income | $ | 188,016 | | | $ | 196,758 | |
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | | |
Depreciation and amortization | 27,045 | | | 25,631 | |
Amortization and impairment of intangible assets | 7,320 | | | 8,515 | |
Acquisition-related contingent consideration | 863 | | | (1,014) | |
Provision for expected credit losses | 13,101 | | | 14,816 | |
Share-based compensation | 18,491 | | | 17,150 | |
Amortization of debt discount and issuance costs and other | 1,588 | | | 8,551 | |
| | | |
Deferred income taxes | (9,140) | | | 5,128 | |
| | | |
Changes in operating assets and liabilities, net of effects from acquisitions: | | | |
Accounts receivable, billed and unbilled | (251,280) | | | (115,544) | |
Notes receivable | 838 | | | 4,392 | |
Prepaid expenses and other assets | (3,066) | | | 1,145 | |
Accounts payable, accrued expenses and other | 21,936 | | | (22,745) | |
Income taxes | 3,940 | | | 18,025 | |
Accrued compensation | (67,763) | | | 2,803 | |
Billings in excess of services provided | 7,672 | | | (7,691) | |
Net cash provided by (used in) operating activities | (40,439) | | | 155,920 | |
Investing activities | | | |
| | | |
Payments for acquisition of businesses, net of cash received | (6,742) | | | (9,833) | |
Purchases of property and equipment and other | (38,935) | | | (52,441) | |
| | | |
| | | |
Net cash used in investing activities | (45,677) | | | (62,274) | |
Financing activities | | | |
Borrowings under revolving line of credit | 165,000 | | | 377,500 | |
| | | |
Repayments under revolving line of credit | (165,000) | | | (352,500) | |
| | | |
Purchase and retirement of common stock | (23,530) | | | (46,133) | |
Share-based compensation tax withholdings and other | (15,663) | | | (8,277) | |
Payments for business acquisition liabilities | (4,848) | | | (7,496) | |
Deposits and other | 7,092 | | | 1,928 | |
| | | |
Net cash used in financing activities | (36,949) | | | (34,978) | |
Effect of exchange rate changes on cash and cash equivalents | (44,373) | | | (11,094) | |
Net increase (decrease) in cash and cash equivalents | (167,438) | | | 47,574 | |
Cash and cash equivalents, beginning of period | 494,485 | | | 294,953 | |
Cash and cash equivalents, end of period | $ | 327,047 | | | $ | 342,527 | |
Supplemental cash flow disclosures | | | |
Cash paid for interest | $ | 8,012 | | | $ | 8,756 | |
Cash paid for income taxes, net of refunds | $ | 51,353 | | | $ | 31,240 | |
Non-cash investing and financing activities: | | | |
Issuance of stock units under incentive compensation plans | $ | 1,664 | | | $ | 2,603 | |
| | | |
Business acquisition liabilities not yet paid | $ | 5,593 | | | $ | — | |
Non-cash additions to property and equipment | $ | 4,970 | | | $ | 4,435 | |
See accompanying notes to condensed consolidated financial statements
FTI Consulting, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(dollar and share amounts in tables in thousands, except per share data)
(Unaudited)
1. Basis of Presentation and Significant Accounting Policies
The unaudited condensed consolidated financial statements of FTI Consulting, Inc., including its consolidated subsidiaries (collectively, the “Company,” “we,” “our” or “FTI Consulting”), presented herein, have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”) and under the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. Some of the information and footnote disclosures normally included in annual financial statements have been condensed or omitted pursuant to those rules and regulations. Certain prior period amounts have been reclassified to conform to the current period presentation. In management’s opinion, the interim financial statements reflect all adjustments that are necessary for a fair presentation of the results for the interim periods presented. All adjustments made were normal recurring accruals. Results of operations for the interim periods presented herein are not necessarily indicative of results of operations for a full year. These financial statements should be read in conjunction with the consolidated financial statements and the notes thereto contained in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC.
2. New Accounting Standards
Recently Adopted Accounting Standards
In August 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2020-06 ("ASU 2020-06"), Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies accounting for convertible instruments by removing major separation models required under current GAAP. The ASU also removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception and simplifies the diluted earnings per share calculation in certain events. On January 1, 2022, we adopted ASU 2020-06 using the modified retrospective method and recorded a cumulative-effect adjustment of approximately $22.1 million to the beginning balance of retained earnings at the date of adoption and a $16.4 million net increase to "Long-term debt, net" on the Condensed Consolidated Balance Sheets. As permitted by the guidance, prior comparative periods were not adjusted under this method.
Pursuant to ASU 2020-06, we are no longer permitted to separately account for the liability and equity components of convertible debt instruments. As such, the carrying amount of our 2.0% convertible senior notes due 2023 ("2023 Convertible Notes") is recognized as a liability as of September 30, 2022 on the Condensed Consolidated Balance Sheets. The ASU 2020-06 adoption also resulted in the derecognition of the embedded conversion option, net of tax effects, of approximately $34.1 million, which is included in “Additional paid-in capital,” as well as the derecognition of the related deferred tax liabilities of approximately $4.3 million on the Condensed Consolidated Balance Sheets.
The net effect of the adoption in the current and future periods as compared to prior periods is to reduce non-cash interest expense, or increase net income, as there is no longer a discount from the separation of the conversion feature within equity. The discount from recognition of debt issuance costs will be amortized over the effective life of the 2023 Convertible Notes using the effective interest method.
ASU 2020-06 also no longer allows the use of the treasury stock method for convertible instruments for purposes of calculating diluted earnings per share and instead requires application of the if-converted method. Under that method, diluted earnings per share will generally be calculated assuming that all of the convertible debt instruments were converted solely into shares of common stock at the beginning of the reporting period unless the result would be anti-dilutive. Effective January 1, 2022, pursuant to the terms of the indenture, dated as of August 20, 2018, as amended by the first supplemental indenture, dated as of January 1, 2022 (the "First Supplemental Indenture"), between us and U.S. Bank National Association, as trustee (as so amended, the "Indenture"), the principal amount of the 2023 Convertible Notes being converted is required to be paid in cash and only the premium due upon conversion, if any, is permitted to be settled in shares, cash or a combination of shares and cash. Consequently, the if-converted method produces a similar result as the treasury stock method, which was used prior to the adoption of ASU 2020-06 for the 2023 Convertible Notes.
Accounting Standards Not Yet Adopted
In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832), Disclosures by Business Entities about Government Assistance, which requires entities to provide disclosures on significant government assistance transactions for annual reporting periods. The disclosures include information around the nature of the assistance, the related accounting policies used to account for government assistance, the effect of government assistance on the entity’s financial statements, and any significant terms and conditions of the agreements, including commitments and contingencies. The new standard is effective for annual periods beginning after December 15, 2021 and impacts only annual financial statement footnote disclosures. The Company is in the process of evaluating the impact of this new guidance on its consolidated financial statements.
3. Earnings per Common Share
Basic earnings per common share is calculated by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per common share adjusts basic earnings per common share for the effects of potentially dilutive common shares. Potentially dilutive common shares include the dilutive effects of shares issuable under our equity compensation plans, including stock options and share-based awards (restricted share awards, restricted stock units and performance stock units), each using the treasury stock method.
For the three and nine months ended September 30, 2022, we used the if-converted method for calculating the potential dilutive effect of the conversion feature of the principal amount of the 2023 Convertible Notes on earnings per common share, as required by the adoption of ASU 2020-06. Prior to the adoption of ASU 2020-06, we used the treasury stock method for calculating the potential dilutive effect of the conversion feature of the principal amount of the 2023 Convertible Notes on earnings per common share because we had the ability and intent to settle the principal amount of the outstanding 2023 Convertible Notes in cash. The conversion feature had a dilutive impact on earnings per common share for the three and nine months ended September 30, 2022 and 2021, as the average market price per share of our common stock for the periods exceeded the conversion price of $101.38 per share. See Note 8, "Debt" for additional information about the 2023 Convertible Notes.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Numerator — basic and diluted | | | | | | | |
Net income | $ | 77,267 | | | $ | 69,480 | | | $ | 188,016 | | | $ | 196,758 | |
Denominator | | | | | | | |
Weighted average number of common shares outstanding — basic | 33,812 | | | 33,495 | | | 33,741 | | | 33,478 | |
Effect of dilutive share-based awards | 545 | | | 662 | | | 607 | | | 697 | |
Effect of dilutive stock options | 322 | | | 363 | | | 330 | | | 369 | |
Effect of dilutive convertible notes | 1,239 | | | 842 | | | 1,147 | | | 721 | |
Weighted average number of common shares outstanding — diluted | 35,918 | | | 35,362 | | | 35,825 | | | 35,265 | |
Earnings per common share — basic | $ | 2.29 | | | $ | 2.07 | | | $ | 5.57 | | | $ | 5.88 | |
Earnings per common share — diluted | $ | 2.15 | | | $ | 1.96 | | | $ | 5.25 | | | $ | 5.58 | |
Antidilutive stock options and share-based awards | — | | | 2 | | | 10 | | | 5 | |
4. Revenues
We generate the majority of our revenues by providing consulting services to our clients. Most of our consulting service contracts are based on one of the following types of contract arrangements:
•Time and expense arrangements require the client to pay us based on the number of hours worked at contractually agreed-upon rates. We recognize revenues for these contract arrangements based on hours incurred and contracted rates utilizing a right-to-invoice practical expedient because we have a right to consideration for services completed to date. When a time and expense arrangement has a not-to-exceed or "cap" amount and we expect to perform work in excess of the cap, we recognize revenues up to the cap amount specified by the client, based on the efforts or hours incurred as a percentage of total efforts or hours expected to be incurred (i.e., proportional performance method).
•Fixed-fee arrangements require the client to pay a fixed fee in exchange for a predetermined set of professional services. We recognize revenues earned to date by applying the proportional performance method. Generally, these arrangements have one performance obligation.
•Performance-based or contingent arrangements represent forms of variable consideration. In these arrangements, our fees are based on the attainment of contractually defined objectives with our client, such as completing a business transaction or assisting the client in achieving a specific business objective. We recognize revenues earned to date in an amount that is probable not to reverse and by applying the proportional performance method when the criteria for over time revenue recognition are met.
Certain fees in our time and materials arrangements may be subject to approval by a third party, such as a bankruptcy court or other regulatory agency. In such cases, we record revenues based on the amount we estimate we will be entitled to in exchange for our services and only to the extent a significant reversal of revenues is not likely to occur when the uncertainty associated with the estimate is subsequently resolved. Potential fee reductions imposed by bankruptcy courts and other regulatory agencies or negotiated with specific clients are estimated on a specific identification basis. Our estimates may vary depending on the nature of the engagement, client economics, historical experience and other appropriate factors. When there are changes in our estimates of potential fee reductions, we record such changes to revenues with a corresponding offset to our billed and unbilled accounts receivable.
Revenues recognized during the current period may include revenues from performance obligations satisfied or partially satisfied in previous periods. This primarily occurs when the estimated transaction price has changed based on our current probability assessment over whether the agreed-upon outcome for our performance-based and contingent arrangements will be achieved. The aggregate amount of revenues recognized related to a change in the transaction price in the current period, which related to performance obligations satisfied or partially satisfied in a prior period, was immaterial for the three months ended September 30, 2022 and $12.5 million for the nine months ended September 30, 2022, and $11.5 million and $23.0 million for the three and nine months ended September 30, 2021, respectively.
Unfulfilled performance obligations primarily consist of fees not yet recognized on certain fixed-fee arrangements and performance-based and contingent arrangements. As of September 30, 2022 and December 31, 2021, the aggregate amount of the remaining contract transaction price allocated to unfulfilled performance obligations was $2.5 million and $3.7 million, respectively. We expect to recognize the majority of the related revenues over the next 24 months. We elected to utilize the optional exemption to exclude from this disclosure fixed-fee and performance-based and contingent arrangements with an original expected duration of one year or less and to exclude our time and expense arrangements for which revenues are recognized using the right-to-invoice practical expedient.
Contract assets are defined as assets for which we have recorded revenues but are not yet entitled to receive our fees because certain events, such as completion of the measurement period or client approval, must occur. The contract asset balance was immaterial as of September 30, 2022 and $3.8 million as of December 31, 2021.
Contract liabilities are defined as liabilities incurred when we have received consideration but have not yet performed the agreed-upon services. This may occur when clients pay fees before work begins. The contract liability balance was $1.0 million as of September 30, 2022 and immaterial as of December 31, 2021.
5. Accounts Receivable and Allowance for Expected Credit Losses
The following table summarizes the components of "Accounts receivable, net" as presented on the Condensed Consolidated Balance Sheets:
| | | | | | | | | | | |
| September 30, 2022 | | December 31, 2021 |
Accounts receivable: | | | |
Billed receivables | $ | 636,288 | | | $ | 542,056 | |
Unbilled receivables | 352,711 | | | 248,681 | |
Allowance for expected credit losses | (41,006) | | | (36,617) | |
Accounts receivable, net | $ | 947,993 | | | $ | 754,120 | |
We maintain an allowance for expected credit losses, which represents the estimated aggregate amount of credit risk arising from the inability or unwillingness of specific clients to pay our fees or disputes that may affect our ability to fully collect our billed accounts receivable. We record our estimate of lifetime expected credit losses concurrently with the initial recognition of the underlying receivable. Accounts receivable, net of the allowance for expected credit losses, represents the amount we expect to collect. At each reporting date, we adjust the allowance for expected credit losses to reflect our current estimate.
The following table summarizes the total provision for expected credit losses and write-offs:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Provision for expected credit losses (1) | $ | 4,348 | | | $ | 6,580 | | | $ | 13,101 | | | $ | 14,816 | |
Write-offs | $ | 3,877 | | | $ | 5,746 | | | $ | 9,917 | | | $ | 15,464 | |
(1) Adjustments to the allowance for expected credit losses are recorded to selling, general & administrative ("SG&A") expenses on the Condensed Consolidated Statements of Comprehensive Income.
We estimate the current-period provision for expected credit losses on a specific identification basis. Our judgments regarding a specific client’s credit risk considers factors such as the counterparty’s creditworthiness, knowledge of the specific client’s circumstances and historical collection experience for similar clients. Other factors include, but are not limited to, current economic conditions and forward-looking estimates. Our actual experience may vary from our estimates. If the financial condition of our clients were to deteriorate, resulting in their inability or unwillingness to pay our fees, we may need to record additional provisions for expected credit losses in future periods. The risk of credit losses may be mitigated to the extent that we received a retainer from some of our clients prior to performing services. Our provision for expected credit losses includes recoveries, direct write-offs and charges to other accounts. Billed accounts receivables are written off when the potential for recovery is considered remote.
6. Goodwill and Intangible Assets
Goodwill
The table below summarizes the changes in the carrying amount of goodwill by reportable segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Corporate Finance & Restructuring (1) | | Forensic and Litigation Consulting (1) | | Economic Consulting (1) | | Technology (1) | | Strategic Communications (2) | | Total |
Balance at December 31, 2021 | $ | 501,046 | | | $ | 237,929 | | | $ | 268,858 | | | $ | 96,811 | | | $ | 128,147 | | | $ | 1,232,791 | |
Acquisitions (3) | 11,332 | | | — | | | — | | | — | | | — | | | 11,332 | |
Foreign currency translation adjustment and other | (2,026) | | | (5,870) | | | (1,612) | | | (61) | | | (22,013) | | | (31,582) | |
Balance at September 30, 2022 | $ | 510,352 | | | $ | 232,059 | | | $ | 267,246 | | | $ | 96,750 | | | $ | 106,134 | | | $ | 1,212,541 | |
(1) There were no accumulated impairment losses for the Corporate Finance & Restructuring ("Corporate Finance"), Forensic and Litigation Consulting ("FLC"), Economic Consulting or Technology segments as of September 30, 2022 and December 31, 2021.
(2) Amounts for our Strategic Communications segment include gross carrying values of $300.3 million and $322.3 million as of September 30, 2022 and December 31, 2021, respectively, and accumulated impairment losses of $194.1 million as of September 30, 2022 and December 31, 2021.
(3) During the nine months ended September 30, 2022, we acquired a business that was assigned to the Corporate Finance segment. We recorded $11.3 million in goodwill based on a purchase price allocation as a result of the acquisition. We have included the results of the acquired business’s operations in the Corporate Finance segment since its acquisition date.
Intangible Assets
Intangible assets were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | September 30, 2022 | | December 31, 2021 |
| | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
Amortizing intangible assets | | | | | | | | | | | | |
Customer relationships (1) | | $ | 79,347 | | | $ | 63,546 | | | $ | 15,801 | | | $ | 83,101 | | | $ | 63,124 | | | $ | 19,977 | |
Trademarks (1) | | 8,886 | | | 4,648 | | | 4,238 | | | 10,965 | | | 4,732 | | | 6,233 | |
Acquired software and other (1) | | 967 | | | 433 | | | 534 | | | 3,114 | | | 2,434 | | | 680 | |
| | 89,200 | | | 68,627 | | | 20,573 | | | 97,180 | | | 70,290 | | | 26,890 | |
Non-amortizing intangible assets | | | | | | | | | | | | |
Trademarks | | 5,100 | | | — | | | 5,100 | | | 5,100 | | | — | | | 5,100 | |
Total | | $ | 94,300 | | | $ | 68,627 | | | $ | 25,673 | | | $ | 102,280 | | | $ | 70,290 | | | $ | 31,990 | |
(1)During the nine months ended September 30, 2022, we acquired a business, and its related intangible assets were assigned to the Corporate Finance segment.
Intangible assets with finite lives are amortized over their estimated useful lives. We recorded amortization expense of $2.3 million and $7.3 million for the three and nine months ended September 30, 2022, respectively, and $2.9 million and $8.5 million for the three and nine months ended September 30, 2021, respectively.
We estimate our future amortization expense for our intangible assets with finite lives to be as follows:
| | | | | | | | |
Year | | As of September 30, 2022 (1) |
2022 (remaining) | | $ | 2,277 | |
2023 | | 5,844 | |
2024 | | 3,692 | |
2025 | | 3,047 | |
2026 | | 1,988 | |
Thereafter | | 3,725 | |
| | $ | 20,573 | |
(1)Actual amortization expense to be reported in future periods could differ from these estimates as a result of new intangible asset acquisitions, impairments, changes in useful lives, or other relevant factors or changes.
Intercompany Intellectual Property Licensing Agreement
During the three months ended September 30, 2022, a U.S. subsidiary of the Company (the “Licensor”) entered into an intellectual property license agreement with certain foreign subsidiaries of the Company in consideration of royalty payments that have been partially prepaid (the "License Agreement"). The prepaid royalties remitted to the Licensor are taxable in the U.S. for the year ended December 31, 2022 and represent intangible assets in the foreign subsidiaries that are eliminated in consolidation. The impact on the U.S. current income tax provision was mainly offset by a deferred foreign income tax benefit related to the future tax deductions arising from amortization of intangible assets in the foreign subsidiaries. The License Agreement provides sufficient future taxable income in the U.S. to fully utilize the Company’s existing foreign tax credits in the U.S., which were previously subject to a valuation allowance. The impact on the tax rate for the three and nine months ended September 30, 2022 was a combined $8.3 million tax benefit.
7. Financial Instruments
The table below presents the carrying amounts and estimated fair values of our financial instruments by hierarchy level as of September 30, 2022 and December 31, 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 |
| | | Hierarchy Level (Fair Value) |
| Carrying Amount | | Level 1 | | Level 2 | | Level 3 |
Liabilities | | | | | | | |
Acquisition-related contingent consideration (1)(2) | $ | 12,847 | | | $ | — | | | $ | — | | | $ | 12,847 | |
2023 Convertible Notes (3) | 314,756 | | | — | | | 519,300 | | | — | |
Total | $ | 327,603 | | | $ | — | | | $ | 519,300 | | | $ | 12,847 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| | | Hierarchy Level (Fair Value) |
| Carrying Amount | | Level 1 | | Level 2 | | Level 3 |
Liabilities | | | | | | | |
Acquisition-related contingent consideration (1) | $ | 15,110 | | | $ | — | | | $ | — | | | $ | 15,110 | |
2023 Convertible Notes (3) | 297,158 | | | — | | | 466,619 | | | — | |
Total | $ | 312,268 | | | $ | — | | | $ | 466,619 | | | $ | 15,110 | |
(1)The short-term portion is included in “Accounts payable, accrued expenses and other” and the long-term portion is included in “Other liabilities” on the Condensed Consolidated Balance Sheets.
(2)During the nine months ended September 30, 2022, we acquired a business that was assigned to our Corporate Finance segment and recorded an acquisition-related contingent consideration liability.
(3)The carrying value as of September 30, 2022 includes unamortized deferred debt issuance costs. The carrying value as of December 31, 2021 includes unamortized deferred debt issuance costs and debt discount.
The fair values of financial instruments not included in the tables above are estimated to be equal to their carrying values as of September 30, 2022 and December 31, 2021.
We estimate the fair value of our 2023 Convertible Notes based on their last actively traded prices. The fair value of our 2023 Convertible Notes is classified within Level 2 of the fair value hierarchy because it is traded in less active markets.
We estimate the fair value of acquisition-related contingent consideration using either a probability-weighted discounted cash flow model or a Monte Carlo pricing model. These fair value estimates represent Level 3 measurements as they are based on significant inputs not observed in the market and reflect our own assumptions. Significant increases (or decreases) in these unobservable inputs in isolation would result in significantly lower (or higher) fair values. We reassess the fair value of our acquisition-related contingent consideration at each reporting period based on additional information as it becomes available.
The change in our liability for acquisition-related contingent consideration for our Level 3 financial instruments is as follows:
| | | | | |
| Contingent Consideration |
Balance at December 31, 2021 | $ | 15,110 | |
Additions | 5,370 | |
Accretion expense (1) | (979) | |
Payments | (4,430) | |
| |
Foreign currency translation adjustment (2) | (115) | |
Balance at March 31, 2022 | $ | 14,956 | |
| |
Accretion expense (1) | 1,112 | |
Payments | (2,240) | |
Foreign currency translation adjustment (2) | (465) | |
| |
Balance at June 30, 2022 | $ | 13,363 | |
| |
Accretion expense (1) | 730 | |
Payments | (1,000) | |
Foreign currency translation adjustment and other (2) | (246) | |
Balance at September 30, 2022 | $ | 12,847 | |
| | | | | |
| Contingent Consideration |
Balance at December 31, 2020 | $ | 20,118 | |
| |
Accretion expense (1) | 1,289 | |
| |
Payments | (1,000) | |
Foreign currency translation adjustment (2) | (612) | |
Balance at March 31, 2021 | $ | 19,795 | |
Additions | 1,093 | |
Accretion expense (1) | 676 | |
Payments | (4,122) | |
Foreign currency translation adjustment (2) | 264 | |
Remeasurement gain (3) | (3,095) | |
Balance at June 30, 2021 | $ | 14,611 | |
| |
Accretion expense (1) | 116 | |
| |
Foreign currency translation adjustment (2) | (159) | |
Balance at September 30, 2021 | $ | 14,568 | |
(1)Accretion expense is included in SG&A expenses on the Condensed Consolidated Statements of Comprehensive Income.
(2)Foreign currency translation adjustments are included in "Other comprehensive loss, net of tax" on the Condensed Consolidated Statements of Comprehensive Income.