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FTI Consulting, Inc. 2005 Annual Report (10-K) Summary

Business Context and Reporting Period

Company: FTI Consulting, Inc.
Reporting Period: Fiscal year ended December 31, 2005
Business Overview: FTI is a leading provider of problem-solving consulting and technology services to major corporations, financial institutions, and law firms. The company operates through three primary segments: Forensic/Litigation/Technology, Corporate Finance/Restructuring, and Economic Consulting. As of December 31, 2005, the company employed 1,338 people, including 1,005 revenue-generating professionals, across 25 U.S. cities and international offices in London and Melbourne.

Key Financial Metrics

Segment Performance (2005):

• Forensic/Litigation/Technology: $220.1 million revenue (40.8% of total); Segment profit $70.4 million.
• Corporate Finance/Restructuring: $211.0 million revenue (39.1% of total); Segment profit $70.8 million.
• Economic Consulting: $108.4 million revenue (20.1% of total); Segment profit $24.3 million.

Material Changes vs. Prior Period

• Revenue Growth: Driven by organic growth, improved utilization rates (79% in 2005 vs. 77% in 2004), and strategic acquisitions of Ringtail (Feb 2005) and Cambio (May 2005).
• Success Fee: A significant $22.5 million success fee was received in December 2005 related to a long-term bankruptcy case, contributing materially to the Corporate Finance/Restructuring segment's profit.
• Debt Structure: In August 2005, the company issued $200 million in 7.625% Senior Notes (due 2013) and $150 million in 3.75% Convertible Senior Subordinated Notes (due 2012). Proceeds were used to repay $142.5 million in term loans and fund a $125.3 million share repurchase program.
• Profitability: Operating margins improved as revenue growth outpaced cost increases. Direct cost of revenues decreased as a percentage of revenue to 54.0% from 55.0% in 2004.

Guidance, Outlook, and Risks

Outlook: Management anticipates that operating cash flows and liquidity (including $153.4 million cash on hand and $91.4 million available credit) are sufficient to fund needs for the next 12 months. Capital expenditures for 2006 are estimated between $20.0 million and $24.0 million.

Recent Acquisitions & Future Commitments:

• Compass Acquisition: Completed January 6, 2006, for approximately $73.9 million ($48.2 million cash + stock). This expands the Economic Consulting practice.
• Stock Repurchases: The board increased the remaining authorized repurchase balance to $50.0 million in February 2006.

Key Risks:

• Retention of Professionals: High concentration of employment contract expirations between 2006 and 2008 poses a risk of turnover and loss of clients.
• Fee Non-Payment: The Corporate Finance/Restructuring practice faces risks of non-payment from financially distressed clients; total write-offs were $18.8 million over the last three years.
• Debt Service: Substantial indebtedness requires significant cash flow for interest and principal payments, limiting flexibility.
• Accounting Changes: Adoption of FAS 123(R) in 2006 is expected to increase compensation expense by approximately $5.4 million, diluting EPS by about $0.13.

Investor Verification Checklist

• Success Fee Sustainability: Verify the extent to which the $22.5 million success fee impacts the comparability of 2005 earnings to future periods.
• Debt Covenants: Review compliance with financial covenants in the senior secured credit facility and indentures, particularly regarding leverage ratios.
• Employee Retention: Monitor the renewal rate of senior managing director contracts expiring between 2006 and 2008.
• Acquisition Integration: Assess the integration progress and performance of the Compass acquisition (closed Jan 2006) and Ringtail/Cambio (closed 2005).
• Stock-Based Compensation Impact: Confirm the actual impact of FAS 123(R) adoption on 2006 net income and EPS.