FCN

FTI Consulting, Inc. 10-Q Summary

Business Context and Reporting Period

This filing is a Quarterly Report (Form 10-Q) for FTI Consulting, Inc., covering the period ended September 30, 2004. FTI is a leading provider of forensic and litigation consulting, corporate finance/restructuring, and economic consulting services. The company reorganized its operations into three reportable segments in early 2004 following strategic acquisitions completed in late 2003 (Lexecon, KPMG dispute advisory services, and Ten Eyck Associates).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 24.9% for the quarter and 15.3% for the nine-month period compared to 2003. This growth was driven by acquisitions (Lexecon, KPMG, Ten Eyck), which boosted Forensic and Litigation Consulting revenues by 95.3% and Economic Consulting revenues by 679.6% for the quarter.
• Restructuring Decline: Conversely, Corporate Finance/Restructuring revenues decreased 30.9% for the quarter and 37.3% for the nine-month period due to reduced market demand and the departure of senior professionals in Q1 2004.
• Profitability Pressure: Despite revenue growth, Net Income decreased 27.9% for the quarter and 24.4% for the nine-month period. Operating income margins compressed due to lower utilization rates across segments and higher direct costs.
• Cash Flow: Net cash provided by operating activities dropped significantly to $30.2 million for the nine months ended Sep 30, 2004, compared to $85.5 million in the prior year. This was primarily due to increased working capital requirements, refunds of client retainers, and higher compensation costs.

Outlook, Risks, and Management Commentary

• Utilization Rates: Total utilization rates declined to 75% for the quarter and 78% for the nine-month period (down from 78% and 85% in 2003). Management attributes this to seasonal factors, the integration of acquired businesses with historically lower utilization, and the loss of high-utilization staff in the restructuring practice.
• Legal Proceedings:
  • PricewaterhouseCoopers (PwC): A lawsuit regarding non-competition covenants was settled in November 2004. FTI expects to record a pre-tax gain of approximately $1.0 million in Q4 2004.
  • Former Employees: FTI filed suit against former employees who formed a competing firm. The matter is set for arbitration in Q1 2005; the outcome is unpredictable.
• Contingencies: FTI expects to record a loss of approximately $3.2 million in Q4 2004 related to vacating leased office facilities in New York City as it consolidates into a new location.
• Capital Allocation: The company has an active share repurchase program. As of September 30, 2004, $36.6 million remained available under the program, which was extended through October 31, 2005.
• Liquidity: The company maintains a $100 million revolving credit facility with $90 million available. Management believes existing cash and credit facilities are sufficient to fund operations for the next 12 months.

Investor Verification Checklist

• Utilization Trends: Verify if utilization rates in the newly acquired segments (Lexecon, KPMG) stabilize in Q4 2004 as management anticipates.
• Restructuring Demand: Monitor the recovery of the Corporate Finance/Restructuring segment, which has seen significant revenue contraction.
• Q4 Non-Recurring Items: Confirm the recording of the $1.0 million PwC settlement gain and the $3.2 million lease loss in the Q4 2004 results.
• Goodwill Impairment: Given the high level of goodwill ($515.4 million) and staff departures, monitor future impairment testing results.
• Arbitration Outcome: Track the resolution of the arbitration against former employees regarding client solicitation and trade secrets.