FTI Consulting, Inc. 10-Q Summary: Period Ended September 30, 1998
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended September 30, 1998, and the nine-month period ended on that date. FTI Consulting, Inc. is a professional services firm providing strategic, economic, and litigation consulting. The reporting period was significantly impacted by three major acquisitions: Klick, Kent & Allen, Inc. (KK&A) in June 1998, S.E.A., Inc. (SEA) in September 1998, and Kahn Consulting Inc. (KCI) in September 1998.
Key Financial Metrics
| Metric (in thousands) | Q3 1998 | Q3 1997 | 9 Months 1998 | 9 Months 1997 |
|---|---|---|---|---|
| Revenues | $13,501 | $10,675 | $39,470 | $29,686 |
| Net Income | $382 | $973 | $2,056 | $2,322 |
| Operating Income | $1,027 | $1,653 | $3,935 | $3,811 |
| Operating Margin | 7.6% | 15.5% | 10.0% | 12.8% |
| Net Cash from Operations | N/A | N/A | $4,044 | $2,574 |
| Cash and Equivalents (End of Period) | $3,806 | $2,929 | $3,806 | $2,929 |
| Total Debt (Current + Long-term) | $46,350 | $1,930 | $46,350 | $1,930 |
| Goodwill | $46,634 | $5,141 | $46,634 | $5,141 |
Note: Debt figures reflect the balance sheet at September 30, 1998, which includes significant borrowings for acquisitions.
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 26.5% in Q3 and 32.9% for the nine months ended September 30, 1998, compared to the prior year. This growth was driven primarily by acquisitions rather than internal growth, which was only approximately 7% due to softness in the litigation marketplace.
- Profitability Decline: Despite revenue growth, Net Income decreased 60.7% in Q3 (from $973k to $382k) and 11.5% for the nine months (from $2.322M to $2.056M). Operating margins compressed significantly due to higher direct costs and selling, general, and administrative (SG&A) expenses associated with integrating new entities.
- Balance Sheet Expansion: Total assets grew from $29.2 million to $80.4 million, largely due to the recording of $41.5 million in new goodwill. Total liabilities increased from $7.1 million to $55.7 million, driven by a $26 million draw on the line of credit and new notes payable for acquisitions.
- Interest Expense: Interest expense surged from $76k in Q3 1997 to $423k in Q3 1998 due to acquisition financing.
Guidance, Outlook, Risks, and Unusual Items
- Acquisition Financing: The company borrowed $26 million on its line of credit in Q3 to fund the initial installments for KK&A, KCI, and SEA. The company expects existing cash and credit lines to meet near-term operating requirements.
- Listing Risk: Due to the acquisitions, the company no longer satisfies the net tangible assets requirement for the Nasdaq National Market System and faces potential delisting. Management is pursuing a transfer to the Nasdaq SmallCap Market or the American Stock Exchange.
- Market Conditions: Management noted "softness in the litigation marketplace" which contributed to lower-than-expected revenues from internal growth during the third quarter.
- Pro Forma Results: Pro forma net income for the nine months ended September 30, 1998, assuming acquisitions occurred at the beginning of the year, was $1.85 million, compared to actual net income of $2.06 million.
Investor Verification Checklist
- Delisting Status: Verify the current status of the company's stock listing and the outcome of the transfer application to Nasdaq SmallCap or the American Stock Exchange.
- Debt Covenants: Review the specific financial ratios and covenants required by the $27 million line of credit and the new notes payable to ensure compliance.
- Integration Costs: Assess the sustainability of the increased SG&A and direct costs as the acquired firms (KK&A, SEA, KCI) are fully integrated.
- Goodwill Amortization: Monitor the impact of the $41.5 million increase in goodwill, which is being amortized over 20 years, on future earnings.
- Litigation Market Recovery: Evaluate whether the "softness" in the litigation market mentioned by management has persisted or improved in subsequent periods.