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FTI Consulting, Inc. 10-Q Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2003, for FTI Consulting, Inc., a multi-disciplined consulting firm specializing in turnaround, bankruptcy, and litigation-related services. The reporting period includes the full impact of the August 2002 acquisition of the Business Recovery Services (BRS) division of PricewaterhouseCoopers LLP. The company is in the process of divesting its Applied Sciences practice group, which is reported as discontinued operations.

Key Financial Metrics (Six Months Ended June 30, 2003)

Margins (Six Months 2003): Direct cost of revenues was 45.7% of total revenues (improved from 49.2% in 2002). Selling, general, and administrative expenses were 20.4% of revenues (improved from 25.2% in 2002). The effective tax rate was approximately 40.5%.

Material Changes vs. Prior Period

• Revenue Growth: Revenues from continuing operations increased 152.1% year-over-year, driven by the inclusion of BRS and organic growth across practice areas. Average bill rates increased to $347 per hour from $252 in the prior year.
• Profitability: Net income more than doubled to $31.6 million. This was achieved despite a $7.3 million loss from discontinued operations (primarily related to the pending sale of the SEA asset group).
• Liquidity and Debt: Cash and cash equivalents surged to $112.5 million from $9.9 million at year-end 2002. This was fueled by a $99.2 million public stock offering and strong operating cash flows. Total debt was reduced significantly from $97.8 million to $35.9 million through repayments funded by the stock offering and asset sales.
• Discontinued Operations: The company recorded a $7.0 million loss from the sale of discontinued operations in the second quarter, primarily due to a $6.8 million goodwill impairment charge related to the SEA asset disposal group.

Guidance, Outlook, and Risks

• Outlook: Management expects the effective tax rate to remain at approximately 40.5% for the remainder of the year. Capital expenditures for property and equipment are expected to be between $10.0 million and $12.0 million for 2003.
• Disposal of Applied Sciences: On August 11, 2003, the company entered a definitive agreement to sell the SEA practice group for $16.0 million. The transaction is expected to close by August 31, 2003. Proceeds will be used to repay debt. An additional $4.0 million loss (taxes and transaction costs) was recorded in Q2 2003 related to this sale.
• Risks: The company faces market risk regarding variable interest rates on debt, partially mitigated by interest rate swaps. Bad debt risk exists due to the nature of bankruptcy and distressed client engagements, though retainers help mitigate this. Goodwill impairment remains a risk if future cash flow estimates change.
• Unusual Items: The financial results include a $11.1 million income tax benefit from stock option exercises and the write-off of $513,000 in deferred financing fees due to early debt extinguishment.

Investor Verification Checklist

• Discontinued Operations Impact: Verify the final closing terms and tax implications of the SEA asset sale, as an additional $4.0 million loss was accrued based on estimated costs.
• Debt Covenants: Confirm that the proceeds from the SEA sale and future operations will satisfy the credit facility requirements regarding debt repayment.
• Goodwill Valuation: Monitor the $304.5 million goodwill balance, particularly the $224.2 million attributed to the BRS acquisition, for future impairment testing.
• Stock-Based Compensation: Review the pro forma net income impact ($26.7 million for six months) if the fair value method (FAS 123) were applied, compared to the reported net income of $31.6 million.
• Revenue Quality: Assess the collectability of unbilled receivables ($20.2 million) and accounts receivable ($37.9 million), noting the increased allowance for doubtful accounts.