FTI Consulting, Inc. - 10-Q Summary (Period Ended September 30, 1999)
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 1999, and the nine-month period ended on the same date. FTI Consulting, Inc. is a provider of forensic, strategic consulting, and claims management advisory services. The company operates through three segments: Expert Financial Services, Applied Sciences, and Litigation Services. The reporting period reflects the integration of three major acquisitions completed in 1998 (KK&A, S.E.A., and KCI).
Key Financial Metrics
| Metric (in thousands) | 3 Months Ended Sep 30, 1999 | 9 Months Ended Sep 30, 1999 |
|---|---|---|
| Revenues | $20,855 | $62,127 |
| Net Income | $655 | $1,985 |
| Operating Income | $2,159 | $6,497 |
| Operating Margin | 10.4% | 10.5% |
| Net Cash from Operating Activities | N/A | $4,743 |
| Total Debt (Current + Long-term) | $42,635 | $42,635 |
| Cash and Cash Equivalents | $2,453 | $2,453 |
| Goodwill (Net) | $44,509 | $44,509 |
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 54.8% for the quarter and 57.2% for the nine-month period compared to 1998. This growth is primarily attributed to the 1998 acquisitions (KK&A, S.E.A., KCI). Excluding acquisitions, organic revenue growth was 16.7% for the quarter.
- Profitability: Net income for the quarter rose to $655,000 from $382,000. However, net income for the nine-month period slightly decreased to $1,985,000 from $2,056,000, despite higher revenues, due to increased interest expense and goodwill amortization.
- Expenses: Interest expense surged to $1.1 million for the quarter (from $336,000) and $2.8 million for the nine months (from $421,000) due to new subordinated debt and restructuring of seller notes. Goodwill amortization increased to $570,000 for the quarter and $1.7 million for the nine months.
- Segment Performance: Expert Financial Services revenue grew 109.5% (quarter) and 210.9% (nine months). Applied Sciences grew 50.8% (quarter) and 90.9% (nine months). Litigation Services grew 34.6% (quarter) but remained flat for the nine-month period.
Guidance, Outlook, and Risks
- Liquidity and Capital: The company generated $4.7 million in operating cash flow for the nine months. Management believes existing cash, operating cash flow, and financing arrangements (including a $27 million credit facility and $13 million in subordinated notes) are sufficient for working capital and debt obligations.
- Debt Covenants: The company is subject to financial covenants regarding operating performance and liquidity. Management expects to remain in compliance throughout 1999.
- Goodwill Risk: Unamortized goodwill totaled $44.5 million, representing 54.8% of total assets. The company periodically reviews goodwill for impairment; future adjustments could result in immediate charges against income.
- Year 2000 Compliance: The company has completed all four phases of its Y2K compliance program and believes it will not face significant operational problems, though unanticipated issues remain a risk.
- Forward-Looking Risks: Risks include loss of key employees, competition, revenue fluctuations, and the successful integration of acquired businesses.
Investor Verification Checklist
- Verify the sustainability of revenue growth excluding the impact of 1998 acquisitions.
- Monitor the company's ability to service its increased debt load, particularly the $13 million subordinated notes and seller promissory notes.
- Review future quarterly reports for any goodwill impairment charges given the high asset concentration in goodwill.
- Confirm compliance with financial covenants in the $27 million credit facility and subordinated debentures.
- Assess the integration progress of the 1998 acquisitions (KK&A, S.E.A., KCI) and their contribution to operating margins.