FTI Consulting, Inc. - Q1 2003 Filing Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended March 31, 2003. FTI Consulting, Inc. is a leading provider of turnaround, restructuring, bankruptcy, and related consulting services. The reporting period reflects the full impact of the August 2002 acquisition of the Business Recovery Services (BRS) division from PricewaterhouseCoopers LLP. The company is also in the process of divesting its Applied Sciences practice group, which is reported as discontinued operations.
Key Financial Metrics
| Metric | Q1 2003 | Q1 2002 |
|---|---|---|
| Revenues (Continuing Ops) | $101.4 million | $37.9 million |
| Operating Income | $32.9 million | $9.4 million |
| Net Income | $19.4 million | $6.6 million |
| Diluted EPS | $0.72 | $0.31 |
| Cash from Operations | $19.1 million | ($1.6 million) |
| Cash and Equivalents (End of Period) | $75.5 million | $7.2 million |
| Total Debt | $40.9 million | $97.8 million (Jan 1, 2003) |
| Direct Cost of Revenue Margin | 45.9% | 49.3% |
Material Changes vs. Prior Period
- Revenue Growth: Revenues from continuing operations increased 167.4% year-over-year, driven primarily by the inclusion of BRS results and organic growth in forensic consulting and trial support.
- Profitability: Operating income more than tripled to $32.9 million. Gross margins improved as direct costs of revenue declined to 45.9% of total revenue from 49.3% in Q1 2002.
- Liquidity: Cash and cash equivalents surged from $9.9 million at year-end 2002 to $75.5 million in Q1 2003. This was fueled by a public offering of common stock generating $99.2 million in net proceeds and strong operating cash flow.
- Debt Reduction: The company repaid approximately $52 million of long-term debt during the quarter using proceeds from the stock offering and the sale of the LWG asset disposal group. Total debt outstanding dropped significantly from $97.8 million at the start of the year.
- Discontinued Operations: The company sold the LWG asset disposal group in January 2003 for $4.15 million. The remaining SEA asset disposal group is held for sale, with a carrying value of $19.9 million.
Guidance, Outlook, and Risks
- Outlook: Management expects the effective tax rate to remain approximately 40.5% for the remainder of the year. Capital expenditures for 2003 are projected at $10.0 million, largely for BRS integration.
- Divestiture: The sale of the remaining SEA asset disposal group is expected to be completed by the end of 2003. Proceeds are contractually required to be used to retire debt. Management notes it is reasonably possible the ultimate sale price may be less than the carrying value.
- Stock Split: The Board approved a three-for-two stock split, subject to shareholder approval at the May 21, 2003 annual meeting.
- Risks: Key risks include the potential for goodwill impairment charges, the financial condition of clients in bankruptcy affecting bad debt reserves, and the uncertainty of the final sale price for the SEA asset disposal group.
Investor Verification Checklist
- Discontinued Operations Valuation: Verify the likelihood of recovering the $19.9 million carrying value of the SEA asset disposal group versus potential write-downs.
- Goodwill Impairment: Monitor the $299.3 million in goodwill (60.5% of total assets) for future impairment testing, particularly given the subjective nature of fair value assessments.
- Debt Covenants: Confirm compliance with credit facility covenants regarding the application of proceeds from equity offerings and asset sales to debt repayment.
- Stock-Based Compensation: Review the pro forma impact of stock-based compensation (FAS 123), which reduced reported net income by $2.2 million in Q1 2003.
- Bad Debt Reserves: Assess the adequacy of allowances for doubtful accounts given the company's exposure to clients in financial distress and bankruptcy proceedings.