FTI Consulting, Inc. 2004 Annual Report (10-K) Summary
Business Context and Reporting Period
This Form 10-K covers the fiscal year ended December 31, 2004. FTI Consulting, Inc. is a leading provider of forensic and litigation consulting, corporate finance/restructuring, and economic consulting services. The company operates through three primary practice segments. During 2004, the company integrated acquisitions completed in late 2003 (Lexecon, KPMG Dispute Advisory Services, and Ten Eyck) and faced headwinds in its corporate finance practice due to a strengthening economy and the unanticipated departure of approximately 60 professionals in early 2004.
Key Financial Metrics
| Metric | 2004 | 2003 |
|---|---|---|
| Revenues | $427.0 million | $375.7 million |
| Operating Income | $78.5 million | $113.8 million |
| Net Income | $42.9 million | $59.5 million |
| Diluted EPS | $1.01 | $1.41 |
| Operating Cash Flow | $58.4 million | $100.2 million |
| Total Debt (Long-term) | $105.0 million | $121.3 million |
| Cash and Equivalents | $25.7 million | $5.8 million |
| Working Capital | $60.2 million | $14.9 million |
Segment Performance (2004):
- Forensic & Litigation: Revenues of $178.7 million (41.8% of total); Profit margin of 28.3%.
- Corporate Finance/Restructuring: Revenues of $162.5 million (38.1% of total); Profit margin of 31.2%.
- Economic Consulting: Revenues of $85.9 million (20.1% of total); Profit margin of 22.5%.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 13.7% year-over-year, driven by a 73.3% increase in Forensic & Litigation and a 397.5% increase in Economic Consulting due to 2003 acquisitions.
- Restructuring Decline: Corporate Finance/Restructuring revenues decreased 36.4% due to a stronger economy reducing bankruptcy demand and the departure of key staff.
- Profitability Compression: Operating income declined 31.1% and Net Income declined 27.9%. Segment profit margins dropped from 32.9% in 2003 to 22.1% in 2004.
- Utilization Rates: Overall professional utilization decreased from 83% in 2003 to 77% in 2004, primarily due to the restructuring practice slowdown and integration of new hires.
- One-Time Charges: A $4.7 million loss on abandoned facilities was recorded in Q4 2004 following office consolidations in New York and New Jersey.
Guidance, Outlook, and Risks
Outlook: Management anticipates capital expenditures of approximately $12.0 million for 2005. The company expects cash flows from operations, supplemented by its credit facility, to fund future needs. Demand is expected to remain strong driven by regulatory complexity (Sarbanes-Oxley) and corporate debt levels.
Recent Acquisitions: On February 28, 2005, FTI acquired the Ringtail group for $35.0 million ($20M cash, $15M stock) to enhance litigation support technology. The deal includes a potential $7.5 million earn-out.
Key Risks:
- Personnel Retention: High concentration of contract expirations between 2006 and 2008; risk of professionals leaving to form competing firms.
- Cyclicality: Corporate finance/restructuring demand is sensitive to economic conditions and debt default rates.
- Fee Nonpayment: Restructuring clients often face financial distress, increasing the risk of uncollectible fees (write-offs totaled $17.2 million over the prior three years).
- Accounting Changes: Adoption of FAS 123(R) in 2005 will require fair-value accounting for stock-based compensation, significantly impacting reported earnings.
Investor Verification Checklist
- Verify the impact of the Ringtail acquisition on future revenue growth and integration costs.
- Monitor utilization rates in the Corporate Finance/Restructuring segment to assess recovery from the 2004 decline.
- Review stock-based compensation expense projections under the new FAS 123(R) standard effective July 2005.
- Assess the debt covenant compliance given the $105 million outstanding debt and variable interest rates.
- Track days sales outstanding (DSO), which doubled in the restructuring practice to ~60 days due to retainer refunds.