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FTI Consulting, Inc. - 10-K Summary (Fiscal Year Ended Dec 31, 1998)

Business Context and Reporting Period

This Annual Report covers the fiscal year ended December 31, 1998, for FTI Consulting, Inc., a provider of forensic and strategic consulting services to corporations, law firms, banks, and insurance companies. The Company operates through three divisions: Litigation Services, Applied Sciences, and Expert Financial Services. The reporting period was defined by an aggressive acquisition strategy, with three major purchases completed in 1998 (Klick, Kent & Allen; Kahn Consulting; and S.E.A., Inc.) to expand geographic reach and service capabilities.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased 32.7% to $58.6 million. Excluding acquisitions, organic revenue growth was 6.9%. The Applied Sciences division grew 90.4% and Expert Financial Services grew 120.2%, driven almost entirely by acquisitions. Litigation Services revenues declined 5.2% due to market softness in Q2 and Q3, though Q4 showed a 14.4% improvement over Q3.
• Profitability: While operating income increased slightly to $5.7 million, Net Income decreased 22% to $2.6 million. This decline was primarily due to a significant increase in interest expense (from $170k to $1.48 million) associated with acquisition financing and a higher effective tax rate (43.2% vs 40.6%) due to non-deductible goodwill amortization.
• Balance Sheet: Total assets nearly tripled to $79.7 million, largely due to the recording of $45.2 million in goodwill (57% of total assets). Long-term debt increased from $1.0 million to $36.0 million to fund the $26.4 million in acquisition payments.

Guidance, Outlook, Risks, and Unusual Items

• Outlook: Management expects cash flows from operations to increase in 1999 as acquired businesses contribute fully. The Company believes it will comply with all financial covenants for its credit facilities and subordinated debentures throughout 1999.
• Financing: In March 1999, the Company renegotiated its credit facility (extending maturity to 2001) and issued $13 million in subordinated debentures (maturing 2004) to manage debt maturities. Dividends are prohibited without lender consent.
• Goodwill Risk: Unamortized goodwill of $45.2 million represents 176% of stockholders' equity. Management periodically reviews this for impairment; factors such as operating losses or loss of customers could trigger immediate charges against income.
• Legal Contingencies:
  • Pixel, Inc. Lawsuit: FTI and six employees are sued for alleged torts related to employee poaching. Pixel claims $7 million in damages. FTI believes it has meritorious defenses and has not estimated a loss range.
  • Titanium Claim: Related to the S.E.A. acquisition, a prior judgment against S.E.A. was reversed on appeal. Selling stockholders have agreed to indemnify FTI for any losses.
• Key Personnel Risk: The loss of key executives (Jack B. Dunn, IV or Stewart J. Kahn) without replacement within 90 days could constitute a default under the $13 million Investment and Loan Agreement.

Investor Verification Checklist

• Debt Service Capacity: Verify the Company's ability to service $10.65 million in debt maturing in 1999 and the $26 million variable-rate credit facility.
• Goodwill Impairment: Monitor future operating results of acquired entities (KK&A, KCI, S.E.A.) to assess the risk of goodwill write-downs given the high asset concentration.
• Organic Growth: Distinguish between acquisition-driven revenue growth and organic performance, particularly in the Litigation Services division which showed organic decline.
• Legal Exposure: Track the status of the Pixel, Inc. litigation to determine if the claimed $7 million damages could materialize.
• Interest Rate Sensitivity: Note that a 200 basis point increase in interest rates would reduce net income by approximately $296,000.