FTI Consulting, Inc. - 10-Q Summary (Q1 1999)
Business Context and Reporting Period
This report covers the quarterly period ended March 31, 1999. FTI Consulting, Inc. is a provider of forensic, strategic consulting, and claims management advisory services. The company operates through three segments: Expert Financial Services, Applied Sciences, and Litigation Services. The period reflects the integration of three major acquisitions completed in 1998 (KK&A, S.E.A., and KCI) and significant refinancing activities undertaken in March 1999.
Key Financial Metrics
| Metric (in thousands) | Q1 1999 | Q1 1998 |
|---|---|---|
| Revenues | $20,000 | $14,109 |
| Net Income | $559 | $1,106 |
| Earnings Per Share (Diluted) | $0.12 | $0.22 |
| Operating Cash Flow | ($96) Used | ($554) Used |
| Total Debt (Current + Long-term) | $45,476 | $46,280 |
| Cash and Equivalents | $2,136 | $3,223 |
| Goodwill (Net) | $44,594 | $45,164 |
Margins: Direct cost of revenues was 52.2% of revenue in Q1 1999 (improved from 53.7% in Q1 1998). Selling, general, and administrative (SG&A) expenses were 38.8% of revenue in Q1 1999 (compared to 33.0% in Q1 1998, excluding goodwill amortization which was 33.2% vs 31.2%).
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 41.8% to $20.0 million. This growth was driven entirely by acquisitions; organic revenue would have decreased 22.2%.
- Segment Performance:
- Expert Financial Services: Revenue surged 320.3% to $5.1 million (acquisition-driven).
- Applied Sciences: Revenue grew 92.6% to $8.3 million (acquisition-driven).
- Litigation Services: Revenue declined 23.3% to $6.6 million due to market softness, though it showed sequential improvement from Q4 1998.
- Profitability: Net income decreased 49.5% to $559,000. This decline was primarily due to a significant increase in interest expense ($795,000 in Q1 1999 vs. $3,000 in Q1 1998) and a higher effective tax rate (45.0% vs. 40.7%).
- Debt Restructuring: In March 1999, the company renegotiated its $27 million credit facility (extending maturity to 2001) and issued $13 million in subordinated debentures to fund debt maturities and working capital.
Outlook, Risks, and Management Commentary
- Liquidity: Management expects cash flows from operations to increase in 1999. The company believes current cash and financing arrangements are sufficient to meet 1999 obligations.
- Goodwill Risk: Unamortized goodwill totaled $44.6 million, representing 55.2% of total assets and 162% of stockholders' equity. Management notes that if operations decline or customers are lost, goodwill impairment charges may be required.
- Year 2000 Compliance: The company is in Phase III (Test, Fix, Verify) of its Y2K compliance program, expecting completion by mid-1999. A new business and accounting system has been implemented and is vendor-certified.
- Forward-Looking Risks: Key risks include the loss of key employees, competition, revenue fluctuations, and the successful integration of recent acquisitions.
Investor Verification Checklist
- Verify the sustainability of revenue growth in the Litigation Services segment, which declined organically.
- Monitor the company's ability to service its increased debt load, specifically the new $13 million subordinated notes and the $27 million credit facility.
- Assess the risk of goodwill impairment given that goodwill exceeds total stockholders' equity.
- Confirm the timeline and cost of Year 2000 compliance completion.
- Review the impact of the higher effective tax rate (45-49% range) on future net income projections.