FTI Consulting, Inc. — FY2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; the filing also reports unaudited fourth-quarter results. FTI Consulting is a global business advisory firm operating in Corporate Finance/Restructuring, Forensic and Litigation Consulting, Economic Consulting, Technology, and Strategic Communications.
Financial results and liquidity
| Metric | FY2011 | FY2010 | Change |
|---|---|---|---|
| Revenue | $1.567 billion | $1.401 billion | +11.8% |
| Operating income | $205.4 million | $158.4 million | +29.7% |
| Operating margin | 13.1% | 11.3% | +1.8 percentage points |
| Net income | $103.9 million | $66.0 million | +57.5% |
| Diluted EPS | $2.39 | $1.38 | +72.6% |
| Adjusted EBITDA | $271.6 million | $264.8 million | +2.6% |
| Operating cash flow | $173.8 million | $195.1 million | -10.9% |
- Organic revenue growth was 4.2%; acquisitions and currency translation also contributed to reported growth. Adjusted EBITDA margin declined to 17.3% from 18.9%.
- Revenue by segment: Corporate Finance/Restructuring $427.8 million (-5.3%); Forensic and Litigation Consulting $365.3 million (+12.6%); Economic Consulting $354.0 million (+38.5%); Technology $218.7 million (+23.9%); Strategic Communications $200.9 million (+4.0%).
- Cash and cash equivalents were $264.4 million; working capital was $273.1 million. The $250 million revolving credit facility had $248.6 million available, with no borrowings outstanding at year-end. Management reported compliance with debt covenants.
- Total debt and capital lease obligations were approximately $797.0 million. This included $149.9 million principal of 3.75% convertible notes due July 2012, $215.0 million of 7.75% senior notes due 2016, and $400.0 million of 6.75% senior notes due 2020. The convertible notes were expected to convert before maturity; at the year-end share price, the estimated conversion premium was $53.6 million, payable in cash, shares, or both at the company’s option.
- Cash flow from investing was -$93.6 million, including $62.3 million for acquisitions and $31.1 million in capital expenditures. Financing cash flow was -$198.7 million, primarily reflecting the $209.4 million accelerated share repurchase.
- Fourth-quarter 2011 revenue was $390.7 million, operating income $68.2 million, net income $39.9 million, and diluted EPS $0.93.
Material changes and management commentary
- Demand for restructuring and bankruptcy work continued to decline as credit availability improved and debt modifications became more accessible. Corporate Finance/Restructuring revenue fell, and its Adjusted Segment EBITDA declined to $97.6 million from $108.6 million.
- Growth in Economic Consulting, Technology, and Forensic and Litigation Consulting more than offset the restructuring decline. Economic Consulting and Forensic and Litigation Consulting benefited partly from practices acquired from LECG; Technology growth reflected hosting, review, consulting, and the Acuity offering.
- Segment margins were pressured in several businesses: lower utilization and investment spending affected Forensic and Litigation Consulting; acquired-practice costs and variable compensation affected Economic Consulting; revenue mix and third-party costs affected Technology; and competitive fee pressure weighed on Strategic Communications.
- In March 2011, FTI adopted a four-region matrix organizational structure. LECG practice acquisitions added capabilities and approximately 200 professionals. Revenue-generating professionals increased 7% to 2,849.
- The company completed a $209.4 million accelerated stock repurchase, retiring approximately 5.7 million shares and completing its previously authorized $500 million repurchase program.
Outlook, risks, and unusual items
- Management expected operating cash flows and available liquidity to fund capital and liquidity needs for at least the next 12 months. Planned 2012 capital expenditures were approximately $35 million to $40 million. No specific revenue or earnings guidance was provided.
- Key risks include cyclical demand for restructuring, litigation, M&A, and consulting services; utilization, billing rates, fee pressure and collections; retention of senior professionals; acquisition integration; international, currency, and data-security risks; and Technology product competition or obsolescence.
- FY2011 included $15.2 million of special charges, including workforce and management realignment costs; $4.8 million was non-cash. In 2010, special charges were $51.1 million, largely including non-cash branding-related impairment and amortization. A $10.0 million reduction in estimated contingent consideration, principally related to the FS Asia acquisition, contributed to FY2011 income.
- The company revised prior-period financial information after reviewing accounting for its senior managing director incentive program. The correction reduced reported net income by $5.9 million for 2010 and $3.2 million for 2009; management characterized the prior-period error as immaterial. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
- Management said ordinary-course legal matters were not expected to materially affect financial position or results. The company paid no cash dividends and did not anticipate doing so in the foreseeable future.
Important facts for investors to verify
- How the 2012 maturity or conversion of the $149.9 million convertible notes was ultimately funded, including any cash conversion premium or share dilution.
- Whether operating cash flow and receivable collections improved after the 2011 increase in billed and unbilled receivables, particularly in Economic Consulting and Asia-Pacific.
- Whether organic growth and profitability strengthened enough to offset continued weakness in higher-margin restructuring work and the reported decline in Adjusted EBITDA margin.
- Whether acquired LECG practices delivered expected growth and margins, and whether contingent consideration estimates or other acquisition obligations changed.
- Whether the reported incentive-program accounting revision and related disclosures have any further implications for compensation expense or prior-period comparability.