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FTI Consulting (FCN) Changing Disclosure Show the Importance of Reviewing SEC Filings

November 18, 2011 | About:
GuruFocus’ Buffett-Munger Screener has returned .93% YTD compared to -4.38% for the S&P 500 (relative outperformance of 5.31%). While choosing stocks blindly from the screener might look like a good idea, investors should read the SEC filings thoroughly before making any investments. It’s also very helpful to read the filings for the past several years as well.

The case in point for this is FTI Consulting (FCN) which recently appeared on the Buffett-Munger screener. FTI Consulting is a global business advisory firm which offers consulting services to clients in the areas of corporate finance and restructuring, forensic and litigation consulting, economic consulting, technology, and strategic communications.

The company frequently makes acquisitions and according to the company, “A substantial amount of our growth has resulted from acquisitions. (2010 10-K).” The company funds these acquisitions via cash on hand, stock and debt. With the most frequent funding sources being cash and stock.

When using stock for acquisitions, FTI, has included obligations that force them to pay additional amounts to the acquired company if FTI stock drops below a certain level.

The 2007 10-K details all the transactions they had entered in to for that year and any prior year’s contracts that were still in effect.

We granted certain sellers of an acquired business contractual protection against a decline in the value of the common stock we issued them as consideration for the acquisition of the share capital of the acquired business. Upon the lapse of restrictions on the common stock between December 31, 2007 and January 2, 2012, if the market price of our common stock per share is below $28.474, we have agreed to make an additional cash payments to the sellers equal to the difference between $28.474 per share and the price per share of our common stock on the date restrictions lapse multiplied by the number of released shares issued as purchase price consideration to such holder. If the market value of our common stock is lower than $28.474 per share on any date that restrictions lapse, then for every $1.00 that our stock price per share is below $28.474 per share, we may be required to make price protection payments of about $0.1 million. Based on the price of our common stock on December 31, 2007, we would not be obligated to make any price protection related payments.

We granted certain sellers of Cambio contractual protection against a decline in the value of the common stock we issued them as consideration for the acquisition. Upon the lapse of restrictions on the common stock, if the market price of our common stock is below $22.33, we have agreed to make an additional cash payment to the sellers equal to the deficiency. The price protection periods vary from one to four years after May 31, 2005. If the market value of our common stock is lower than $22.33 on any date that restrictions lapse, then for every $1.00 that our stock price is below $22.33, we may be required to make total price protection payments of about $0.6 million. Based on the price of our common stock on December 31, 2007, we would not be obligated to make any price protection related payments.

We granted certain sellers of Compass contractual protection against a decline in the value of the common stock we issued them as consideration for the acquisition. Upon the lapse of restrictions on the common stock between the years ending December 31, 2006 and December 31, 2013, if the market price of our common stock is below $27.61, we have agreed to make an additional cash payment to the sellers equal to the deficiency. If the market value of our common stock is lower than $27.61 on any date that restrictions lapse, then for every $1.00 that our stock price is below $27.61, we may be required to make price protection payments of about $0.9 million. Based on the price of our common stock on December 31, 2007, we would not be obligated to make any price protection related payments.

We granted certain sellers of FD contractual protection against a decline in the value of the common stock we issued them as consideration for the acquisition of the share capital of FD. Upon the lapse of restrictions on the common stock between the years ending December 31, 2007 and December 31, 2011, if the market price of our common stock is below $22.26, we have agreed to make an additional cash payment to the sellers equal to the deficiency. If the market value of our common stock is lower than $22.26 on any date that restrictions lapse, then for every $1.00 that our stock price is below $22.26, we may be required to make price protection payments of about $1.1 million. Based on the price of our common stock on December 31, 2007 we would not be obligated to make any price protection related payments.

The high and low sale prices per share for our common stock based on the closing sales price as reported on the New York Stock Exchange during 2007 were $62.78 and $26.09.
As you can see the company provided plenty of detail regarding the transactions which allowed for investors to model any potential payouts that might occur in the future.

Then in 2008 FTI reduced the transparency of the agreements in the 10-K filing. The passage from 2007 (above) now becomes the passage below in 2008.

Certain acquisition related restricted stock agreements contain stock price guarantees that may result in cash payments in the future if our share price falls below a specified per share market value on the date the stock restrictions lapse (“the determination date”). The future settlement of any contingency related to security price will be recorded as an adjustment to additional paid-in capital. The following table details by year the cash outflow that would result from the price protection payments assuming a share price equal to our closing share price at December 31, 2008 on the determination date and assuming a 20% decrease and increase in our share price from the December 31, 2008 closing share price on the determination date.


Cash outflow, assuming: (in thousands) 2009 2010 2011 2012 2013 Total
Closing share price of $44.68 at December 31, 2008 145 383 11,803 545 1,104 13,980
20% decrease in share price 212 628 16,047 796 1,830 19,513
20% increase in share price 78 139 7,559 293 377 8,446


Investors are now just given a vague idea of what potential payouts might instead of the explicit details regarding each deal.

In 2009, the 10-K omits even more language.

The following section appeared in the 2008 10-K but is now missing from the 2009 10-K.

As of December 31, 2008 we are not obligated to make any price protection related payments under existing contractual arrangements. However, we will be required to do so in the future if our share price falls below the price guarantee on the determination date.


The 2009 10-K now reads as follows.

Certain acquisition related restricted stock agreements contain stock price guarantees that may result in cash payments in the future if our share price falls below a specified per share market value on the date the stock restrictions lapse (“the determination date”). The future settlement of any contingency related to security price will be recorded as an adjustment to additional paid-in capital. The following table details by year the cash outflows that would result from the price protection payments if, on the applicable determination dates, our common stock price was at, 20% above or 20% below our common stock price on December 31, 2009 of $47.16 per share.
Cash outflow, assuming: (in thousands) 2010 2011 2012 2013 Total
Closing share price of $47.16 at December 31, 2009 315 10,625 475 902 12,317
20% decrease in share price 573 15,105 740 1,669 18,087
20% increase in share price 57 6,146 209 211 6,623


The current 10-K (2010) has the same language as the 2009 10-K with the only changes being to the potential payouts based on new acquisitions and fluctuations in FTI’s stock price.

With the changes to the language in the 10-K and the lack of detail it is no longer clear what the maximum payouts under the contracts might be in the event of a steep market decline. If the previous year’s events and high volatility have taught us anything it’s that a drop of more than 20% in the market value of a company can happen frequently.

No matter how good or successful a screening tool might be its always important to thoroughly review a company’s filings. That’s what we do for the Buffett-Munger monthly newsletters when we highlight our top picks from the screener.

The Buffett-Munger screener is designed to find Buffett-type investments with extraordinary profitability, consistency, and future prospects. Our monthly Buffett-Munger Best Bargains Newsletter picks one stock from the screener. Our in-depth analysis shares with you why a younger Buffett and Munger would like this stock. If you are a premium member, you can download it here. If you are not, we invite you for a 7-day Free Trial.

Disclosure: No positions

About the author:

Ben Strubel
President and Portfolio Manager of Strubel Investment Management, LLC a value oriented, independent, fee-only Registered Investment Advisor (RIA) based in Lancaster, PA.

Visit Ben Strubel's Website


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