FTI Consulting, Inc. 2003 Annual Report (10-K) Summary
Business Context and Reporting Period
This report covers the fiscal year ended December 31, 2003. FTI Consulting, Inc. is a leading provider of forensic accounting and litigation, corporate finance/restructuring, and economic consulting services. The company's strategy focuses on high utilization rates, retaining qualified professionals, and selective acquisitions. In 2003, the company completed three major strategic acquisitions in the fourth quarter: Lexecon (economic consulting), the Dispute Advisory Services (DAS) business of KPMG LLP, and Ten Eyck Associates (SEC investigations and fraud). Additionally, the company divested its applied sciences practice, which is reported as discontinued operations.
Key Financial Metrics
| Metric | 2003 | 2002 | Change |
|---|---|---|---|
| Revenues | $375.7 million | $224.1 million | +67.6% |
| Operating Income | $113.8 million | $63.3 million | +80.0% |
| Net Income | $59.5 million | $37.2 million | +59.9% |
| Diluted EPS | $1.41 | $1.09 | +29.4% |
| Cash from Operations | $96.1 million | $77.6 million | +23.8% |
| Long-Term Debt | $121.3 million | $97.8 million | +24.0% |
| Goodwill | $514.5 million | $299.2 million | +71.9% |
Margins: Operating margin improved to approximately 30.3% in 2003 compared to 28.3% in 2002. Direct cost of revenues decreased as a percentage of total revenue to 46.9% from 48.2%.
Material Changes vs. Prior Period
- Acquisition Impact: Revenue growth was primarily driven by the acquisition of the Business Recovery Services (BRS) division from PwC in 2002 and the three acquisitions closed in Q4 2003 (Lexecon, DAS, Ten Eyck). These acquisitions added approximately 293 billable professionals.
- Discontinued Operations: The company sold its applied sciences practice in 2003, resulting in a net loss of $5.3 million from discontinued operations for the year, compared to a net income of $2.3 million in 2002.
- Debt Structure: Long-term debt increased to fund the Lexecon acquisition ($104.1 million term loan) and other working capital needs. The company amended its credit facility to provide up to $225 million in secured financing.
- Utilization Rates: Overall utilization of billable professionals declined to 83% in 2003 from 88% in 2002, attributed to a slowdown in corporate finance/restructuring demand and lower initial utilization in newly acquired practices.
Guidance, Outlook, and Risks
Outlook: Management expects total revenues to increase in 2004, driven by forensic accounting and economic consulting growth. However, they anticipate overall utilization rates will decline to approximately 78% in 2004 due to the departure of senior professionals.
Material Risks and Contingencies:
- Staff Departures: In Q1 2004, approximately 60 senior professionals from the corporate finance/restructuring practice departed to form a competing firm. This is expected to have a significant negative impact on 2004 operating income and may lead to client attrition and retainer refunds.
- Legal Proceedings: The company filed suit in February 2004 against the departing professionals and their new entity for breach of fiduciary duty and solicitation. Additionally, there is ongoing litigation with PwC regarding non-competition covenants from the 2002 BRS acquisition.
- Fee Nonpayment: The corporate finance/restructuring practice faces inherent risks of nonpayment from clients in financial distress. The company wrote off approximately $13.7 million in uncollectible fees over the three years ended 2003.
- Integration Risks: Integrating the three Q4 2003 acquisitions poses challenges regarding culture, client consent for contract novation, and maintaining profitability.
Investor Verification Checklist
- Client Retention: Verify the extent of client attrition and retainer refunds resulting from the Q1 2004 departure of 60 restructuring professionals.
- Utilization Trends: Monitor Q1 and Q2 2004 utilization rates to confirm if the projected 78% rate holds or if the decline is more severe.
- Acquisition Integration: Assess the revenue contribution and profitability of the Lexecon, DAS, and Ten Eyck acquisitions in 2004 to ensure they meet pro forma expectations.
- Legal Outcomes: Track the status of the litigation against the former employees and the PwC non-compete dispute for potential financial impacts.
- Debt Covenants: Confirm continued compliance with the amended credit facility covenants, particularly the total indebtedness to EBITDA ratio, given the increased debt load and potential earnings pressure.