FTI Consulting, Inc. 2007 Annual Report (10-K) Summary
Business Context and Reporting Period
Company: FTI Consulting, Inc.
Reporting Period: Fiscal year ended December 31, 2007
Business Overview: FTI is a leading global business advisory firm operating through five segments: Forensic and Litigation Consulting, Corporate Finance/Restructuring, Economic Consulting, Technology, and Strategic Communications. The company serves Fortune 500 corporations, law firms, and governments globally.
Key Developments: In 2007, FTI completed seven acquisitions, primarily in strategic communications, expanding its geographic reach to Latin America, Australia, and Asia. The company achieved a strategic milestone of $1 billion in annual revenue. In October 2007, the company completed a public equity offering, raising net proceeds of $231.4 million.
Key Financial Metrics
| Metric | 2007 | 2006 |
|---|---|---|
| Revenues | $1,001.3 million | $707.9 million |
| Operating Income | $187.0 million | $106.2 million |
| Net Income | $92.1 million | $42.0 million |
| Earnings Per Share (Diluted) | $2.00 | $1.04 |
| Cash and Cash Equivalents | $360.5 million | $91.9 million |
| Working Capital | $280.5 million | $116.5 million |
| Total Debt | $573.4 million | $570.4 million |
| Operating Cash Flow | $78.0 million | $64.0 million |
Note: Revenue growth of 41.4% was driven by both organic growth (19.2%) and acquisitions ($157.4 million contribution).
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased by $293.3 million (41.4%) compared to 2006. All five segments reported revenue growth. The Strategic Communications segment contributed a full year of results in 2007 versus only three months in 2006.
- Profitability: Operating income increased by $80.8 million (76.1%). Net income more than doubled to $92.1 million. The effective tax rate decreased from 46.9% in 2006 to 38.5% in 2007 due to tax planning strategies and reduced state taxes.
- Segment Performance:
- Corporate Finance/Restructuring: Revenue grew 23.0% to $261.6 million, driven by increased demand for restructuring services due to tightening credit markets and the sub-prime mortgage crisis.
- Technology: Revenue grew 38.9% to $162.8 million, fueled by demand for eDiscovery software and services.
- Forensic and Litigation: Revenue grew 12.3% to $217.0 million. Demand for forensic accounting weakened due to fewer large complex litigations, partially offset by strong demand for business intelligence services.
- Capital Structure: The company raised $231.4 million in equity in October 2007. Total debt remained relatively stable, though $150 million of convertible notes became convertible and were reclassified as current liabilities.
Guidance, Outlook, and Risks
Outlook: Management anticipates continued growth driven by global demand for independent expertise, regulatory complexity, and adverse credit market conditions. The company plans to use cash reserves and the new equity proceeds to fund acquisitions and general corporate purposes. Capital expenditures for 2008 are estimated between $42 million and $46 million.
Risks and Contingencies:
- Convertible Notes: $150 million of 3.75% convertible senior subordinated notes are currently convertible at the option of holders. Conversion could require significant cash payments or share issuance.
- Client Concentration: While no single client exceeded 10% of total revenue, one client accounted for approximately 23% of the Technology segment's revenue.
- Personnel Retention: The company relies heavily on senior professionals. A significant number of employment agreements for Senior Managing Directors expire in 2011 and 2012, creating potential retention risks and associated costs.
- Market Conditions: Demand is sensitive to economic factors, including credit availability, merger and acquisition activity, and litigation volumes.
Investor Verification Checklist
- Convertible Note Status: Verify the current conversion status and potential cash impact of the $150 million convertible notes due 2012.
- Acquisition Integration: Assess the integration progress and financial performance of the seven acquisitions completed in 2007, particularly in the Strategic Communications segment.
- Employee Retention Costs: Review the terms of the Senior Managing Director Incentive Compensation Program and the timeline for employment agreement expirations (2011-2012) to gauge future compensation expenses.
- Technology Segment Concentration: Monitor the dependency on the single client representing 23% of Technology segment revenue.
- Cash Flow Sustainability: Confirm that operating cash flows remain sufficient to service the $573.4 million debt load and fund the strategic acquisition program without further dilution.