Business context and reporting period
FTI Consulting, Inc. is a global business advisory firm operating in Corporate Finance/Restructuring, Forensic and Litigation Consulting, Economic Consulting, Technology, and Strategic Communications. This Form 10-K covers the fiscal year ended December 31, 2010. Quarterly figures are unaudited; the filing reports full-year results and selected fourth-quarter data.
Financial performance and liquidity
Amounts below are in millions except per-share data. Annual comparisons are 2010 versus 2009.
| Metric | 2010 | 2009 | Change |
|---|---|---|---|
| Revenue | $1,401.5 | $1,399.9 | 0.1% |
| Operating income | $168.4 | $263.5 | (36.1%) |
| Operating margin | 12.0% | 18.8% | Down 6.8 percentage points |
| Adjusted EBITDA (non-GAAP) | $275.7 | $317.3 | (13.1%) |
| Adjusted EBITDA margin | 19.7% | 22.7% | Down 3.0 percentage points |
| Net income | $71.9 | $143.0 | (49.7%) |
| Diluted EPS | $1.51 | $2.70 | (44.1%) |
| Operating cash flow | $195.1 | $250.8 | (22.2%) |
Adjusted diluted EPS, excluding 2010 special charges and the debt-extinguishment loss, was $2.29, down 15.2%. The reported 2010 effective tax rate was 38.8%, versus 37.0% in 2009.
Fourth-quarter revenue was $356.2 million versus $342.9 million in 2009; operating income was $34.7 million versus $67.3 million, and net income was $10.7 million versus $36.6 million. Fourth-quarter 2010 included $21.8 million of special charges; the comparable 2009 quarter had none.
Segment revenue and adjusted segment EBITDA (2010 versus 2009): Corporate Finance/Restructuring $451.5 million / $116.3 million versus $514.3 million / $175.6 million; Forensic and Litigation Consulting $324.5 million / $78.2 million versus $300.7 million / $77.9 million; Economic Consulting $255.7 million / $49.8 million versus $234.7 million / $47.8 million; Technology $176.6 million / $64.9 million versus $170.2 million / $57.4 million; Strategic Communications $193.2 million / $29.0 million versus $180.1 million / $24.9 million. Adjusted segment EBITDA is a non-GAAP measure.
At year-end, cash and cash equivalents were $384.6 million, working capital was $499.4 million, and total assets were $2.41 billion. Total debt was $792.8 million, excluding capital lease obligations; the balance-sheet total including leases was approximately $793.1 million. The company reported $246.4 million of undrawn availability on its $250 million revolving facility and no revolver borrowings outstanding. Operating cash flow declined mainly due to slower receivable collections and increased incentive and retention payments. Capital expenditures were $22.6 million.
Material changes versus the prior period
- Revenue was essentially flat: organic revenue declined 1.1%, offset by acquisitions. Restructuring demand moderated as credit availability improved; growth in other practices partly offset the Corporate Finance/Restructuring decline.
- Operating income included $52.0 million in special charges, $32.3 million of which was non-cash. Charges included trade-name impairment and accelerated amortization, workforce realignment, office consolidations, and discontinued software costs. Cash outflow was expected to total $19.8 million; $15.1 million had been paid by year-end.
- In 2010, FTI acquired Baker Tilly Hong Kong Business Recovery and FS Asia Advisory, expanding its Asian presence. FS Asia Advisory’s initial purchase price was $86.4 million, including cash, loan notes, escrow, and estimated contingent consideration.
- The company issued $400 million of 6.75% senior notes due 2020 and used part of the proceeds to tender for and redeem its 2013 notes; it recorded a $5.2 million loss on early extinguishment. It also replaced its $175 million revolver with a $250 million facility maturing in 2015.
- Cash and working capital increased materially from 2009, while reported debt rose following the 2020 note issuance. FTI repurchased approximately 1.18 million shares for $40.6 million during 2010.
Outlook, commentary, and risks
Management stated that cash on hand, expected operating cash flows, and revolver availability were sufficient for anticipated capital and liquidity needs for at least the next 12 months. It estimated 2011 capital expenditures of $24 million to $30 million. The filing provides no specific revenue or earnings guidance. Management planned a firm-wide transition to the FTI Consulting brand by November 2011.
Key risks include the cyclical and event-driven demand for advisory work; utilization, pricing and employee retention; client termination, payment delays and fee renegotiations; Technology competition and software obsolescence; acquisition integration and contingent payments; international operating and currency exposure; and leverage, debt covenants, refinancing and potential cash requirements on conversion of $149.9 million principal amount of convertible notes due in 2012. At December 31, 2010, FTI reported compliance with debt covenants. The company reported no legal proceedings it believed would materially adversely affect its financial condition or results. KPMG issued unqualified opinions on the financial statements and internal controls; management also concluded internal controls were effective.
Important facts for investors to verify
- Whether receivable collection and cash conversion improve after the 2010 slowdown, and how the allowance for doubtful accounts and unbilled services develops.
- Whether restructuring demand and Corporate Finance/Restructuring profitability stabilize, and whether growth in other segments is sustainable.
- The recurring versus one-time nature of special charges, their cash costs, and the impact of the branding transition.
- Debt maturities, interest costs, covenant headroom, and the cash or share settlement exposure on the convertible notes due 2012.
- Performance and integration of the Asian acquisitions, including earn-out obligations; also monitor Technology pricing pressure and client concentration within that segment.