FCN

FTI Consulting, Inc. - 10-Q Summary (Period Ended September 30, 2000)

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2000, and the nine-month period ended September 30, 2000. FTI Consulting, Inc. is a multi-disciplined consulting firm operating through three segments: Financial Consulting, Litigation Consulting, and Applied Sciences. The reporting period is significantly impacted by the acquisition of Policano & Manzo, L.L.C. ("P&M") on January 31, 2000, and a major debt refinancing completed in February 2000.

Key Financial Metrics

Margins (9 Months 2000 vs 1999):

• Operating Margin: 18.3% vs 10.5%
• Net Profit Margin: 4.5% vs 3.2%
• Direct Cost of Revenues: 50.5% vs 52.1%
• SG&A Expenses: 27.8% vs 34.7%

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 59.4% for the nine months ended September 30, 2000. The Financial Consulting segment drove this growth with a 221% increase, largely due to the P&M acquisition ($21.1 million contribution) and internal growth ($10.5 million).
• Profitability: Net income more than doubled to $4.4 million. Operating income increased to $18.1 million, aided by improved operating leverage and lower SG&A as a percentage of revenue.
• Debt Structure: Total debt increased from $42.7 million to $85.8 million to finance the P&M acquisition and refinance existing obligations. This included a new $61.0 million amortizing term loan and $30.0 million in subordinated notes.
• Extraordinary Items: The company recorded an extraordinary loss of $869,000 (net of tax) related to the early extinguishment of debt during the refinancing.
• Goodwill: Net goodwill nearly doubled to $92.5 million following the P&M acquisition, representing 59.4% of total assets.

Guidance, Outlook, and Risks

Management Commentary: Management anticipates cash flow from operations to increase for the remainder of 2000. The company believes cash generated will meet obligations and fund expansion. The effective tax rate is estimated at 44% for 2000, higher than the statutory rate due to state taxes and non-deductible goodwill.

Subsequent Events: In October and November 2000, the company completed an equity offering of 4,025,000 shares, raising net proceeds of $24 million. These proceeds were used to retire approximately $28.5 million of senior subordinated debt, resulting in an additional extraordinary loss of $3 million (net of tax) for prepayment penalties and write-offs.

Risks and Contingencies:

• Goodwill Impairment: With goodwill at $92.5 million, the company faces risks regarding future impairment charges if acquired businesses underperform.
• Interest Rate Risk: $58.9 million of debt bears variable interest rates. The company has hedged $41.0 million via swaps and caps.
• Key Personnel: Loss of key employees or officers could constitute an event of default under credit facilities.
• Accounting Changes: The company is adopting SAB 101 (Revenue Recognition) in Q4 2000 and FAS 133 (Derivatives) in 2001. Management expects no material impact from SAB 101 but estimates a $340,000 gain from FAS 133 adoption.

Investor Verification Checklist

• Verify the integration progress and revenue contribution of the Policano & Manzo (P&M) acquisition.
• Confirm compliance with financial covenants in the new $68.5 million senior credit facility.
• Monitor the impact of the $30 million subordinated notes (17% interest, including 5% PIK) on future cash flows.
• Review the subsequent equity offering details and the resulting reduction in subordinated debt.
• Assess the sustainability of the improved operating margins (18.3%) given the high leverage and goodwill amortization.