FTI Consulting, Inc. 2006 Annual Report (10-K) Summary
Business Context and Reporting Period
Company: FTI Consulting, Inc.
Reporting Period: Fiscal year ended December 31, 2006.
Business Overview: FTI is a leading global consulting firm specializing in forensic/litigation, corporate finance/restructuring, economic, technology, and strategic/financial communications consulting. The firm serves corporations, financial institutions, and law firms facing critical legal, financial, and reputational issues.
Key Developments: In October 2006, FTI acquired FD International (Holdings) Limited, a global strategic business and financial communications firm, establishing a new operating segment. In January 2006, the firm acquired Competition Policy Associates, Inc. (Compass). The company operates in 29 U.S. cities and 11 countries outside the U.S.
Key Financial Metrics
| Metric | 2006 | 2005 |
|---|---|---|
| Revenues | $707.9 million | $539.5 million |
| Operating Income | $106.2 million | $113.7 million |
| Net Income | $42.0 million | $56.4 million |
| Diluted EPS | $1.04 | $1.35 |
| Cash and Cash Equivalents | $91.9 million | $153.4 million |
| Total Debt | $570.4 million | $348.4 million |
| Operating Cash Flow | $64.0 million | $99.4 million |
Margins: Operating margin decreased to 15.0% in 2006 from 21.1% in 2005. Net margin decreased to 5.9% from 10.4%.
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 31.2% to $707.9 million, driven primarily by the acquisition of FD ($40.7 million revenue contribution) and Compass, as well as organic growth in the Technology and Forensic/Litigation segments.
- Profitability Decline: Despite revenue growth, Net Income declined 25.5% to $42.0 million. This was primarily due to:
- Special Charges: $23.0 million in restructuring charges recorded in Q3 2006 related to workforce reductions in the U.K. and non-core U.S. practices.
- Increased Interest Expense: Interest expense rose 95.2% to $29.4 million due to new debt issuances ($215 million in senior notes) to fund the FD acquisition.
- Share-Based Compensation: Adoption of FAS 123(R) in 2006 resulted in $14.7 million of non-cash expense, reducing net income by approximately $8.1 million compared to prior accounting methods.
- One-Time Fee Absence: 2005 included a $22.5 million success fee from a bankruptcy case resolution, which was not repeated in 2006.
- Debt Levels: Total indebtedness increased significantly from $348.4 million to $570.4 million to finance acquisitions.
Guidance, Outlook, and Risks
Outlook: Management anticipates capital expenditures of $20.0 million to $24.0 million for 2007. The company expects to fund liquidity needs through operating cash flows and its $150.0 million revolving credit facility (with $140.7 million available after letters of credit).
Management Commentary:
- Utilization rates in the Corporate Finance/Restructuring practice declined due to a stronger economy and fewer large bankruptcy cases, though the firm is offsetting this with middle-market engagements.
- The Technology practice continues to grow driven by demand for electronically stored information (ESI) services.
- Integration of FD is ongoing, with challenges related to cultural differences and different billing models (retainer-based vs. hourly).
Key Risks:
- Retention of Professionals: High concentration of employment agreement expirations in 2011 and 2012 for senior managing directors.
- Acquisition Integration: Risks associated with integrating FD and Compass, including cultural clashes and regulatory compliance.
- Debt Service: Substantial indebtedness limits flexibility and requires significant cash flow for debt service.
- Client Termination: Clients can terminate engagements with little notice, impacting profitability.
Investor Verification Checklist
- Debt Covenants: Verify compliance with financial ratios (Total Indebtedness to EBITDA) under the senior secured credit facility given the increased leverage.
- FD Integration: Monitor the performance of the new Strategic and Financial Communications segment and the realization of cross-selling synergies.
- Restructuring Costs: Track the cash outflow for the $23.0 million special charges (severance) expected to be paid through 2008.
- Utilization Rates: Watch for recovery in utilization rates within the Corporate Finance/Restructuring segment as the U.K. operations stabilize.
- Share-Based Compensation: Assess the ongoing impact of FAS 123(R) on future earnings, particularly regarding the $27.6 million of unrecognized compensation cost for unvested options.