FCN

FTI Consulting, Inc. 10-Q Summary: Period Ended September 30, 2005

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2005, and the nine-month period ended on that date. FTI Consulting, Inc. is a leading provider of forensic/litigation/technology, corporate finance/restructuring, and economic consulting services. The company operates primarily in the United States and manages its business through three reportable segments. The reporting period includes the impact of two significant acquisitions: Ringtail (February 2005) and Cambio Health Solutions (May 2005).

Key Financial Metrics

Note: Working Capital calculated as Current Assets ($271,980) minus Current Liabilities ($76,143).

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 27.5% ($28.8 million) for the quarter and 16.0% ($51.6 million) for the nine months compared to the prior year periods. Growth was driven by acquisitions (Ringtail and Cambio) and increased utilization of billable professionals.
• Profitability: Net income increased 2.3% for the quarter and 7.9% for the nine months. Operating margins remained relatively stable, with segment profits increasing across all three practices.
• Debt Restructuring: In August 2005, the company issued $200 million in 7.625% Senior Notes due 2013 and $150 million in 3.75% Convertible Senior Subordinated Notes due 2012. Proceeds were used to repay $142.5 million in term loans and fund share repurchases. Total long-term debt increased significantly from $83.75 million (Dec 2004) to $349.25 million (Sep 2005).
• Share Repurchases: The company repurchased and retired 5.6 million shares of common stock during the nine months ended September 30, 2005, for a total cost of approximately $133.1 million.
• Acquisitions: Goodwill increased by $65.9 million due to the acquisitions of Ringtail and Cambio, bringing total goodwill to $573.2 million.

Guidance, Outlook, and Risks

• Liquidity Outlook: Management believes cash on hand ($115.3 million) and available borrowing capacity ($91.4 million under the revolving credit facility) are sufficient to fund operations and capital needs for the next 12 months.
• Capital Expenditures: Anticipated capital expenditures for 2005 are estimated between $13.0 million and $15.0 million, primarily for IT equipment and facility expansions.
• Accounting Changes: The company plans to adopt FASB Statement No. 123(R) regarding share-based payments effective January 1, 2006, using the modified prospective method. This will result in recognizing compensation costs for stock options, which will impact future reported net income.
• Risks and Contingencies:
  • Legal Proceedings: The company is involved in ordinary course litigation. In May 2005, it paid $0.7 million to settle potential litigation regarding a 2003 divestiture. In June 2005, it filed suit against PricewaterhouseCoopers LLP regarding withheld funds and indemnification.
  • Market Risk: The company is exposed to interest rate risk (hedged via swaps) and equity price risk related to its convertible notes and accelerated share repurchase program.
  • Client Concentration: No single customer represents more than 10% of consolidated revenues.

Key Facts for Investor Verification

• Debt Covenants: Verify compliance with financial covenants in the senior secured credit facility and indentures, specifically the total indebtedness to EBITDA ratio and minimum net worth requirements.
• Acquisition Integration: Monitor the revenue contribution and profitability of the Ringtail and Cambio acquisitions to ensure they meet projected earnout targets and integration goals.
• Stock-Based Compensation Impact: Assess the potential reduction in net income upon the adoption of FAS 123(R) in 2006, as pro forma data indicates a significant expense recognition.
• Share Repurchase Program: Track the remaining authorized amount ($39.6 million) and the settlement of the accelerated share repurchase forward contract maturing in February 2006.
• Days Sales Outstanding (DSO): Note the increase in DSO by approximately 3 days since December 31, 2004, partly due to a specific matter in the economics practice where fees are deferred until matter completion.