FTI Consulting, Inc. - 10-Q Summary (Period Ended Sept 30, 2008)
Business Context and Reporting Period
This report covers the quarterly period ended September 30, 2008. FTI Consulting, Inc. is a global business advisory firm operating through five segments: Technology, Corporate Finance/Restructuring, Economic Consulting, Strategic Communications, and Forensic and Litigation Consulting. The company reported strong revenue growth driven by both organic demand related to the global credit crisis and significant acquisition activity.
Key Financial Metrics
| Metric | Three Months Ended Sept 30, 2008 | Nine Months Ended Sept 30, 2008 |
|---|---|---|
| Revenues | $325.5 million | $970.3 million |
| Operating Income | $53.8 million | $180.2 million |
| Net Income | $27.5 million | $94.2 million |
| Diluted EPS | $0.51 | $1.76 |
| EBITDA (Non-GAAP) | $66.0 million | $211.6 million |
| Cash and Equivalents | $146.2 million | (Balance Sheet Item) |
| Total Debt | $568.5 million | (Balance Sheet Item) |
| Operating Cash Flow | N/A | $108.7 million |
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 28.5% year-over-year for the quarter and 34.6% for the nine-month period. Growth was split roughly evenly between organic growth (13.6% in Q3) and acquisitions (14.9% in Q3).
- Profitability: Operating income rose 10.0% in the quarter and 37.5% for the nine months. However, EBITDA margins declined slightly in the quarter (20.3% vs. 22.3% prior year) due to lower margins in the Technology and Forensic segments.
- Acquisitions: The company completed 11 business combinations in 2008 with a total cost of approximately $330 million (cash and stock), significantly impacting asset bases and goodwill.
- Cash Position: Cash and cash equivalents decreased from $360.5 million at year-end 2007 to $146.2 million at Sept 30, 2008, primarily due to $315.6 million used for acquisitions.
Guidance, Outlook, and Risks
- Technology IPO Delay: Due to the unprecedented decline and instability of equity capital markets, the company delayed the planned Initial Public Offering (IPO) of its Technology business until 2009.
- Market Conditions: While the global credit crisis drove demand for restructuring and crisis management services, it also caused a precipitous decline in capital markets activity, negatively impacting Strategic Communications and reducing demand for M&A-related technology services.
- Convertible Notes: The company's $150 million convertible senior subordinated notes due 2012 are currently convertible. Management believes they have adequate resources to fund potential conversions but notes that market prices have historically exceeded conversion values.
- Liquidity: The company maintains $165.8 million in available credit under its senior secured bank credit facility (increased to $175 million in August 2008) and believes current liquidity is sufficient for the next 12 months.
- Accounting Changes: Adoption of FSP APB 14-1 in 2009 will retroactively increase interest expense for 2007 and 2008, reducing diluted EPS by approximately $0.05 for those years.
Investor Verification Checklist
- Acquisition Integration: Verify the realization of synergies and margin recovery in recently acquired businesses, particularly in the Technology and Forensic segments where margins compressed.
- Technology Segment Margins: Monitor the impact of increased R&D spending and competitive pricing pressure on the Technology segment's profitability.
- Convertible Note Conversion: Assess the potential cash outflow or dilution if holders elect to convert the $150 million notes, given the stock price remains above the conversion threshold.
- Receivables Quality: Review the allowance for doubtful accounts ($45.6 million) given the economic downturn and bankruptcies in the financial services sector.
- Capital Markets Exposure: Evaluate the sensitivity of the Strategic Communications segment to the continued volatility in IPO and M&A markets.