FCN

FTI Consulting, Inc. - 10-Q Summary (Period Ended September 30, 2002)

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2002, and the nine-month period ended on that date. FTI Consulting, Inc. is a leading provider of turnaround, restructuring, bankruptcy, and related consulting services. The company operates as a single segment following the decision to sell its Applied Sciences practice group (reported as discontinued operations) and the acquisition of the Business Recovery Services (BRS) division of PricewaterhouseCoopers (PwC) in August 2002.

Key Financial Metrics

Note: Figures are in thousands of dollars. Net Income includes income from discontinued operations ($638k for Q3, $2,791k for YTD).

Material Changes vs. Prior Period

• Revenue Growth: Revenues from continuing operations increased 91.4% in Q3 2002 ($55.9M vs. $29.2M) and 45.6% for the nine-month period ($133.6M vs. $91.8M). Growth was driven by the acquisition of BRS (adding one month of revenue in Q3) and strong organic demand.
• Profitability: Net income from continuing operations rose significantly due to revenue growth and the cessation of goodwill amortization under new accounting standards (FAS 142). Operating margins improved as SG&A expenses declined as a percentage of revenue (23.7% in Q3 2002 vs. 28.8% in Q3 2001).
• Balance Sheet: Total assets increased from $159.1M to $447.0M, primarily due to the acquisition of BRS which added $238.7M in goodwill. Total liabilities increased to $246.2M, reflecting new debt financing ($119M) used to fund the BRS acquisition.
• Discontinued Operations: The Applied Sciences practice group is now classified as discontinued operations. Its results are excluded from continuing operations, with net income of $638k for Q3 2002.

Guidance, Outlook, and Risks

• Outlook: Management anticipates continued strong market demand for services throughout the remainder of 2002. The company expects an effective tax rate of approximately 40% for the full year.
• Capital Markets: On October 8, 2002, the company filed a registration statement to sell approximately 2.1 million shares of common stock. Proceeds are intended to repay a portion of the $74M term loan and the revolving credit facility.
• Debt Obligations: The company has a new credit facility with $138.9M outstanding debt. Covenants require that at least half of net proceeds from any equity offering and all proceeds from the sale of the Applied Sciences group be used to repay debt.
• Risks:
  • Goodwill Impairment: With $318.2M in goodwill (71.2% of total assets), the company is subject to annual impairment testing. Future market conditions could necessitate impairment charges.
  • Disposal of Applied Sciences: While the sale is considered probable, the ultimate amount realized may be less than the $28.6M carrying value.
  • Interest Rate Risk: A significant portion of the new debt is variable rate (LIBOR + margin), though $24.9M is hedged via interest rate swaps.

Investor Verification Checklist

• Verify the final purchase price allocation for the BRS acquisition, specifically the valuation of intangible assets, which was preliminary as of the filing date.
• Monitor the status of the proposed equity offering and its impact on debt reduction and share dilution.
• Track the progress of the Applied Sciences practice group sale and the final proceeds realized versus the $28.6M carrying value.
• Review future quarterly reports for any goodwill impairment charges resulting from the annual testing required under FAS 142.
• Assess the impact of variable interest rates on future interest expense given the $138.9M debt load.