FTI Consulting, Inc. Q1 2007 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2007. FTI Consulting, Inc. is a global business advisory firm providing services in forensic/litigation, corporate finance/restructuring, economic consulting, technology, and strategic/financial communications. The company operates with over 2,100 employees globally. A significant portion of the current period's results is driven by the integration of FD International (Holdings) Limited, acquired in October 2006, which established the new Strategic and Financial Communications segment.
Key Financial Metrics
| Metric (in thousands) | Q1 2007 | Q1 2006 |
|---|---|---|
| Revenues | $227,725 | $169,264 |
| Operating Income | $38,449 | $27,825 |
| Net Income | $15,262 | $12,287 |
| Diluted EPS | $0.36 | $0.31 |
| Cash and Equivalents | $38,183 | $47,640 |
| Total Debt (Long-term + Current) | $578,828 | $570,358 |
| Net Cash Used in Operating Activities | $(26,918) | $(37,797) |
Margins: Operating margin improved to approximately 16.9% in Q1 2007 compared to 16.4% in Q1 2006. The effective income tax rate decreased to 44.0% from 45.6%.
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 34.5% ($58.5 million) year-over-year. This growth was primarily attributable to acquisition activity, specifically the inclusion of the FD International segment ($38.2 million in revenue) and growth in the Corporate Finance/Restructuring and Technology practices.
- Profitability: Net income increased 24.2%. Segment profits rose 32.3% to $44.4 million, driven by a $10.0 million contribution from the FD acquisition, partially offset by a $2.9 million increase in corporate costs.
- Cash Flow: Net cash used in operating activities improved by $10.9 million compared to the prior year, aided by a $10.5 million receipt from a landlord for tenant improvements. Net cash used in investing activities decreased by $21.8 million due to lower acquisition spending ($19.0 million vs. $51.5 million in 2006), though capital expenditures increased by $10.6 million.
- Debt Structure: Total long-term debt increased slightly due to the issuance of notes payable to former shareholders of acquired businesses ($8.1 million) and the reclassification of current portions. The company issued $215.0 million in 7 3/4% senior notes in October 2006, increasing interest expense.
Outlook, Risks, and Management Commentary
- Guidance and Capital Needs: Management anticipates capital expenditures of $25.0 million to $30.0 million for 2007. They project forgivable employee loans for senior managing directors to range between $30 million and $35 million in 2007. The company believes existing cash ($38.1 million) and available credit ($140.7 million) are sufficient for the next 12 months.
- Convertible Notes: The company has $150.0 million in 3 3/4% convertible senior subordinated notes due 2012. As of March 31, 2007, the stock price did not meet the contingent conversion trigger ($37.50), so the notes remain classified as long-term debt.
- Risks: Key risks include the ability to integrate FD International, retention of qualified professionals, fluctuations in utilization rates, and the impact of economic conditions on client demand. The company also faces equity price sensitivity regarding price protection agreements with sellers of acquired businesses (Cambio, Competition Policy Associates, and FD), though no payments were required as of March 31, 2007.
- Unusual Items: Litigation settlement losses were $0.741 million, primarily related to an arbitration settlement. Special termination charges from a 2006 workforce reduction resulted in a remaining liability of $11.1 million as of March 31, 2007.
Investor Verification Checklist
- Acquisition Integration: Verify the ongoing integration progress and revenue contribution of the FD International acquisition, which now represents a significant portion of total revenue.
- Utilization Rates: Monitor the decline in utilization rates for the Forensic/Litigation segment (dropped to 77% from 84%) and assess if this is a temporary anomaly or a trend.
- Debt Covenants: Confirm continued compliance with financial covenants under the senior secured credit facility, specifically the total indebtedness to EBITDA ratio.
- Convertible Note Triggers: Track the company's stock price relative to the $31.25 conversion price and $37.50 contingent conversion trigger to assess potential dilution or cash outflow risks.
- Capital Expenditures: Review actual capital spending against the $25-$30 million guidance, particularly regarding leasehold improvements and technology investments.