FTI Consulting, Inc. 10-Q Summary: Period Ended June 30, 2006
Business Context and Reporting Period
This report covers the quarterly period ended June 30, 2006. FTI Consulting, Inc. is a leading provider of problem-solving consulting and technology services, operating through four reportable segments: Corporate Finance/Restructuring, Forensic/Litigation, Economic Consulting, and Technology. The company manages its Technology practice as a separate segment beginning in January 2006.
Key Financial Metrics
| Metric (in thousands) | Six Months Ended June 30, 2006 | Six Months Ended June 30, 2005 |
|---|---|---|
| Revenues | $329,024 | $240,531 |
| Net Income | $24,954 | $26,864 |
| Operating Income | $56,087 | $51,194 |
| Operating Margin | 17.0% | 21.3% |
| Cash Flow from Operations | ($30,047) Used | $15,974 Provided |
| Cash and Equivalents (End of Period) | $37,582 | $23,103 |
| Long-Term Debt | $346,458 | $348,431 |
| Goodwill | $637,985 | $576,612 |
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 36.8% year-over-year for the six-month period, driven by acquisitions (Compass, Ringtail, Cambio) and a 26.6% increase in revenue-generating professionals.
- Profitability Decline: Despite revenue growth, Net Income decreased 7.1% to $24.95 million. This was primarily due to the adoption of FAS 123(R) (stock-based compensation expense), increased interest expense from new debt issuances in 2005, and higher operating costs.
- Cash Flow Deterioration: Operating cash flow swung from a $16.0 million inflow in 2005 to a $30.0 million outflow in 2006. This was caused by increased investment in professionals, higher incentive compensation payments, and a significant increase in accounts receivable (Days Sales Outstanding increased by ~9 days).
- Acquisitions: Completed the acquisition of Compass (Competition Policy Associates) in January 2006 for $73.4 million. Placed $9.0 million in escrow for the acquisition of International Risk Limited, which closed July 1, 2006.
Guidance, Outlook, and Risks
- Capital Needs: Management anticipates capital expenditures of $20.0 million to $24.0 million for 2006. Future cash needs include debt service, share repurchases, and potential earnout obligations.
- Liquidity: The company holds $37.6 million in cash and has $91.4 million available under its revolving credit facility (after letters of credit). Management believes this is sufficient for the next 12 months.
- Stock-Based Compensation: The adoption of FAS 123(R) significantly impacted reported earnings. If the old accounting standard (APB 25) had been used, net income for the six months ended June 30, 2006, would have been $4.2 million higher.
- Risks: Key risks include the retention of qualified professionals, conflicts of interest, utilization rates, and the impact of economic conditions on demand for restructuring and litigation services. The company also faces potential price protection payments related to stock issued in acquisitions if the stock price falls below specific thresholds.
Investor Verification Checklist
- Stock-Based Compensation Impact: Verify the magnitude of the non-cash expense related to FAS 123(R) adoption and its effect on future quarters.
- Accounts Receivable Quality: Review the increase in Days Sales Outstanding and the specific $11.6 million long-term receivable in the Economics practice to assess collection risk.
- Utilization Rates: Monitor the decline in utilization rates for Corporate Finance/Restructuring (77%) and Economic Consulting (81%) compared to the prior year.
- Debt Covenants: Confirm continued compliance with financial ratios under the senior secured credit facility, particularly given the increase in interest expense.
- Acquisition Integration: Assess the performance of the newly acquired Compass unit and the pending International Risk acquisition.