FCN

FTI Consulting, Inc. - 10-Q Summary (Period Ended June 30, 1999)

Business Context and Reporting Period

This Form 10-Q covers the quarterly and six-month periods ended June 30, 1999, for FTI Consulting, Inc., a provider of forensic, strategic consulting, and claims management advisory services. The company operates through three segments: Litigation Services, Applied Sciences, and Expert Financial Services. The reporting period reflects the integration of three major acquisitions completed in 1998 (KK&A, S.E.A., and KCI) and significant debt restructuring activities undertaken in March 1999.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 58.8% year-over-year for the six-month period, driven primarily by acquisitions. Excluding acquisitions, organic revenue would have decreased 8.6%.
• Segment Performance:
  • Applied Sciences: Grew 119.8% (six months), largely due to the S.E.A. acquisition.
  • Expert Financial Services: Grew 296.0% (six months), entirely acquisition-driven.
  • Litigation Services: Declined 11.7% (six months) due to market softness, though showing recovery in the second quarter.
• Profitability: While operating income increased significantly, net income for the six-month period declined 20.6% compared to the prior year. This was caused by a substantial increase in interest expense ($1.8 million vs. $0.1 million) and a higher effective tax rate (47.2% vs. 40.7%) due to non-deductible goodwill amortization.
• Debt Restructuring: In March 1999, the company issued $13 million in subordinated debentures and renegotiated its $27 million credit facility to extend maturity to 2001. Seller notes were also restructured, deferring payments and adding conversion features.

Outlook, Risks, and Management Commentary

• Liquidity: Management expects cash flows from operations to increase in 1999. The company believes existing cash, operating cash flow, and new financing are sufficient to meet working capital needs and debt obligations maturing in 1999.
• Goodwill Risk: Unamortized goodwill totaled $44.9 million, representing 54.6% of total assets. Management warns of potential future impairment charges if acquired businesses underperform or if market conditions deteriorate.
• Tax Rate: The effective tax rate is expected to remain between 44% and 49% due to the non-deductibility of certain goodwill amortization.
• Year 2000 Compliance: The company is in Phase III of its Y2K compliance program, expecting completion by the third quarter of 1999. A new business and accounting system has been implemented to ensure compliance.
• Dividend Restriction: The new subordinated debentures prohibit the payment of dividends without lender consent.

Investor Verification Checklist

• Verify the sustainability of revenue growth in the Litigation Services segment, which declined organically despite overall company growth.
• Monitor the company's ability to service its increased debt load, particularly the $13 million in subordinated notes and the $27 million credit facility, given the high interest expense.
• Assess the risk of goodwill impairment, as goodwill constitutes over 50% of total assets.
• Confirm compliance with financial covenants related to operating performance and liquidity under the renegotiated credit facilities.
• Review the integration progress of the 1998 acquisitions (KK&A, S.E.A., KCI) to ensure projected synergies are realized.