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FTI Consulting, Inc. - 10-Q Summary (Period Ended June 30, 2008)

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2008, for FTI Consulting, Inc., a global consulting firm specializing in legal, financial, and reputational issues. The company operates through five segments: Technology, Corporate Finance/Restructuring, Economic Consulting, Strategic Communications, and Forensic and Litigation Consulting. The filing reflects strong market demand driven by the global credit crisis and continued M&A activity.

Key Financial Metrics

Note: EBITDA is defined by the company as operating income before depreciation, amortization of intangible assets, and litigation settlements.

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 40.9% year-over-year for the quarter and 38% for the six-month period. Organic growth was approximately 25% for the quarter and 27% for the six months, with the remainder attributed to acquisitions.
• Profitability: Net income rose 53% for the quarter and 74% for the six months compared to the prior year periods. Operating margins improved due to higher margins in the Corporate Finance/Restructuring segment and leverage of corporate expenses.
• Cash Flow: Operating cash flow turned positive significantly, providing $56.9 million for the six months ended June 30, 2008, compared to a use of $20.5 million in the prior year period. This was driven by higher net income and the receipt of $15 million in 2007 income tax refunds.
• Investing Activities: Cash used in investing activities increased to $244.1 million for the six months ended June 30, 2008, primarily due to $184.5 million paid for acquisitions and $40.7 million in contingent payments.

Guidance, Outlook, and Risks

• Acquisitions: The company completed two business combinations in Q2 2008 totaling $159.7 million. Subsequently, on July 2, 2008, the company closed the acquisition of Attenex Corporation for approximately $88.0 million.
• Technology Spin-off: On August 6, 2008, FTI announced plans to sell a minority interest in its Technology business via an IPO, with the intent to distribute remaining shares to stockholders within 12 months. Proceeds are expected to be used to retire indebtedness.
• Convertible Notes: The company's $150 million 3 3/4% convertible senior subordinated notes due 2012 are currently convertible. Management believes it has adequate resources to fund potential conversions but notes that market prices have historically exceeded conversion values.
• Accounting Changes: The company anticipates the retroactive adoption of FSP APB 14-1 in 2009 will increase interest expense by $4.2 million for 2008, reducing diluted EPS by approximately $0.05.
• Risks: Key risks include the ability to integrate acquisitions, volatility in capital markets, the success of the proposed Technology IPO, and general economic conditions affecting demand for restructuring and M&A services.

Investor Verification Checklist

• Acquisition Integration: Verify the financial performance and integration costs of recent acquisitions (Attenex, Schonbraun McCann Group) and their impact on future margins.
• Convertible Note Conversion: Monitor the stock price relative to the $31.25 conversion price to assess the likelihood of cash outflows or dilution from the $150 million convertible notes.
• Technology IPO Execution: Track the progress of the proposed IPO and spin-off of the Technology segment, including regulatory filings and market reception.
• Receivables Quality: Review the allowance for doubtful accounts, which increased to $42.4 million, in the context of the global credit crisis and potential client payment delays.
• EBITDA Reconciliation: Confirm the non-GAAP EBITDA adjustments, specifically the treatment of litigation settlement losses and amortization, to ensure comparability with peers.