FCN

FTI Consulting, Inc. - 2002 Annual Report (10-K) Summary

Business Context and Reporting Period

Company: FTI Consulting, Inc.
Reporting Period: Fiscal year ended December 31, 2002.
Business Overview: FTI is a leading U.S. provider of turnaround, restructuring, bankruptcy, and related consulting services. The company assists distressed companies, creditors, and stakeholders in maximizing recovery and managing financial crises. Services include corporate recovery, forensic accounting, trial support, and economic consulting.
Strategic Shifts: In July 2002, the company committed to selling its "Applied Sciences" practice group (reported as discontinued operations). In August 2002, FTI acquired the U.S. Business Recovery Services (BRS) division of PricewaterhouseCoopers LLP to significantly expand its turnaround and restructuring capabilities.

Key Financial Metrics (2002)

Material Changes vs. Prior Period

• Revenue Growth: Revenues from continuing operations increased 83.2% to $224.1 million, driven primarily by the August 2002 acquisition of BRS and organic growth in bankruptcy/restructuring practices.
• Profitability: Operating income more than doubled to $63.3 million. The company benefited from the cessation of goodwill amortization (effective Jan 1, 2002, under FAS 142) and improved operating leverage.
• Debt Levels: Long-term debt increased significantly to $97.8 million due to borrowings ($119.0 million) used to finance the BRS acquisition. This was partially offset by debt repayments of $49.3 million during the year.
• Discontinued Operations: The Applied Sciences practice group was classified as discontinued operations. In January 2003 (post-year-end), the LWG component was sold for $4.15 million, resulting in an after-tax loss of $891,000 recorded in 2002.

Guidance, Outlook, and Risks

Management Outlook:

• Management expects the effective tax rate to approximate 40.5% in 2003.
• The company anticipates spending approximately $10.0 million on property and equipment in 2003, including $4.0 million for BRS integration.
• FTI expects to repay all amounts under its credit facility by the end of 2003, utilizing cash flows from operations and proceeds from the sale of the remaining Applied Sciences assets.

• Integration Risk: Success depends on retaining key BRS professionals and successfully integrating operations. Loss of key partners could harm revenue.
• Debt Service: High leverage requires significant cash flow for debt service. The credit facility includes financial covenants and restricts dividend payments.
• Fee Nonpayment: Clients in financial distress may fail to pay fees. The company wrote off $5.9 million in uncollectible fees over the three years ended 2002.
• Market Dependency: Demand is correlated with corporate debt defaults and bankruptcy filings. A decline in these factors could reduce revenue.

• Stock Offering: In February 2003, the company completed a public offering of common stock raising $99.6 million, using half the proceeds to retire debt.
• Accounting Changes: Adoption of FAS 142 eliminated goodwill amortization expense. Adoption of FAS 145 will reclassify future debt extinguishment losses from "extraordinary items" to "other expenses."

Investor Verification Checklist

• BRS Integration: Verify the retention rate of the 49 BRS partners and the realization of projected synergies.
• Debt Reduction: Confirm the timeline and execution of debt repayment plans using proceeds from the SEA asset sale and operating cash flows.
• Discontinued Operations: Monitor the final sale price of the remaining SEA asset disposal group to ensure it meets the carrying value of $18.0 million.
• Bad Debt Exposure: Review the allowance for doubtful accounts given the high concentration of clients in financial distress.
• Goodwill Impairment: Assess the annual impairment testing of the $299.2 million goodwill balance, particularly given the high acquisition cost of BRS.