FTI Consulting, Inc. 10-Q Summary: Quarter Ended March 31, 2000
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2000. FTI Consulting, Inc. is a multi-disciplined consulting firm operating through three segments: Expert Financial Services, Litigation Services, and Applied Sciences. The quarter was defined by the acquisition of Policano & Manzo, L.L.C. ("P&M") on January 31, 2000, for approximately $54.0 million, and a significant refinancing of the company's debt structure on February 4, 2000.
Key Financial Metrics
| Metric (in thousands) | Q1 2000 | Q1 1999 |
|---|---|---|
| Revenues | $31,013 | $20,000 |
| Income from Operations | $5,708 | $1,812 |
| Net Income | $1,011 | $559 |
| Net Income (Pro Forma) | $1,338 | $927 |
| EPS (Basic, Net Income) | $0.17 | $0.12 |
| Cash and Equivalents (Ending) | $2,360 | $2,136 |
| Total Debt (Current + Long-term) | $89,092 | $42,727 |
| Goodwill (Net) | $94,821 | $43,658 |
Margins: Direct cost of revenues improved to 49.6% of revenue (down from 52.2% in Q1 1999). Selling, general, and administrative (SG&A) expenses decreased to 28.7% of revenue (down from 35.9%).
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 55.0% year-over-year. The Expert Financial Services division saw the most significant growth (146.6%), driven largely by the P&M acquisition which contributed $5.4 million in revenue.
- Acquisition Impact: The acquisition of P&M added $52.2 million in goodwill. Total assets increased from $84.3 million to $149.1 million.
- Debt Restructuring: Total debt more than doubled to $89.1 million to finance the P&M acquisition and refinance existing obligations. This included a new $61.0 million amortizing term loan, a $7.5 million revolving credit facility, and $30.0 million in subordinated notes.
- Extraordinary Item: The company recorded an extraordinary loss of $869,000 (net of tax) related to the early extinguishment of debt and write-off of unamortized debt discounts.
- Cash Flow: Net cash used in operating activities increased to $1.276 million (compared to $0.096 million in Q1 1999), primarily due to increases in working capital balances. Net cash provided by financing activities was $53.9 million, driven by new debt proceeds and equity issuance.
Guidance, Outlook, and Risks
Management Commentary: Management anticipates cash flow from operations will increase for the remainder of 2000 due to the P&M acquisition and expected decreases in net working capital balances. The company believes it will remain in compliance with all financial covenants throughout 2000.
Risks and Contingencies:
- Goodwill Impairment: Goodwill represents 63.6% of total assets. Management periodically reviews recoverability; impairment could result in immediate charges against income.
- Interest Rate Risk: $61.0 million of long-term debt bears variable interest rates. The company has hedged $41.0 million of this exposure using interest rate swaps and caps.
- Key Personnel: The business is labor-intensive; the loss of key employees or officers could constitute an event of default under credit facilities.
- Integration: Risks associated with the successful integration of P&M and future acquisitions.
Investor Verification Checklist
- Verify the integration progress and revenue contribution of the Policano & Manzo, L.L.C. acquisition.
- Monitor compliance with financial covenants in the new $68.5 million senior credit facility and $30.0 million subordinated notes.
- Assess the impact of the $94.8 million goodwill balance on future earnings, specifically regarding amortization and potential impairment charges.
- Review the company's ability to generate sufficient operating cash flow to service the increased debt load ($89.1 million total).
- Confirm the status of the new New York City facility lease and associated capital expenditures.