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FTI Consulting, Inc. 2008 Annual Report (10-K) Summary

Business Context and Reporting Period

Company: FTI Consulting, Inc.
Reporting Period: Fiscal year ended December 31, 2008
Business Overview: FTI is a global business advisory firm operating through five segments: Corporate Finance/Restructuring, Forensic and Litigation Consulting, Strategic Communications, Technology, and Economic Consulting. The firm assists clients with complex challenges including bankruptcy, restructuring, M&A, electronic discovery, and strategic communications.
Operations: As of December 31, 2008, FTI operated in 37 U.S. cities and 22 foreign countries with 3,378 total employees (2,523 revenue-generating professionals).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Driven by 17.4% organic growth and 11.8% acquisition growth. The Corporate Finance/Restructuring segment saw a 43.1% revenue increase due to the global credit crisis driving demand for restructuring services. The Technology segment grew 35.3% organically.
• Acquisitions: Completed 16 acquisitions in 2008 with a total cost of $368.9 million (cash and stock). Key acquisitions included The Schonbraun-McCann Group (Real Estate), Attenex Corporation (Technology), and Forensic Accounting Partners (UK).
• Profitability: EBITDA margin improved to 21.9% from 21.6%. Higher margins in Corporate Finance/Restructuring offset lower margins in other segments.
• Cash Flow: Operating cash flow surged by $131.1 million, primarily due to improved collections and working capital management. However, cash balances decreased significantly due to $376.5 million used in investing activities (primarily acquisitions).
• Headcount: Total employees increased 32.5% to 3,378, with revenue-generating professionals up 29%.

Guidance, Outlook, and Risks

Outlook: Management believes cash flows and liquidity (including $165.8 million available under the revolving credit facility) are sufficient for the next 12 months. Capital expenditures for 2009 are estimated at $40–$43 million. The company delayed a planned IPO/spin-off of its Technology business due to unstable equity markets in late 2008.

Risks and Contingencies:

• Economic Sensitivity: Demand is heavily influenced by the global credit crisis, M&A activity, and litigation volumes. While restructuring demand is high, M&A and capital markets activity slowed in the second half of 2008.
• Convertible Notes: $150 million in 3.75% convertible senior notes are currently convertible at the option of holders. The company has adequate resources to fund potential conversions but faces cash outflow risks if stock prices remain high.
• Debt Covenants: The company is in compliance with all covenants under its senior secured credit facility and indentures, but substantial indebtedness limits flexibility for future acquisitions or dividends.
• Personnel Retention: Significant reliance on senior professionals; 45 Senior Managing Director (SMD) employment agreements expire in 2011 and 31 in 2012, creating potential retention costs and turnover risks.

Key Facts for Investor Verification

• Convertible Note Conversion: Verify the current status of the $150 million convertible notes and the company's cash reserves relative to potential conversion premiums.
• Acquisition Integration: Assess the integration progress and financial performance of the 16 businesses acquired in 2008, particularly Attenex and The Schonbraun-McCann Group.
• Utilization Rates: Monitor utilization rates for billable professionals, which declined in Corporate Finance/Restructuring (75% vs 80% in 2007) and Forensic/Litigation (70% vs 75% in 2007) due to market conditions.
• Bad Debt Provisions: Review the allowance for doubtful accounts, which increased to $45.3 million (from $30.5 million in 2007) as bad debt expense rose to $22.5 million.
• Stock Price Guarantees: Note the existence of stock price guarantees on certain acquisition-related restricted stock agreements that could trigger future cash payments if the share price falls below specified levels.