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FTI Consulting, Inc. 10-Q Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2003. FTI Consulting, Inc. is a multi-disciplined consulting firm specializing in turnaround, bankruptcy, litigation-related, and forensic accounting services. The reporting period includes the full impact of the August 2002 acquisition of PricewaterhouseCoopers' Business Recovery Services (BRS) division and the divestiture of the Applied Sciences practice group (LWG and SEA asset disposal groups), which are reported as discontinued operations.

Key Financial Metrics

Margins (Nine Months 2003): Operating margin was approximately 32.6%. Direct cost of revenues was 45.9% of total revenues. Selling, general, and administrative (SG&A) expenses were 21.2% of total revenues.

Material Changes vs. Prior Period

• Revenue Growth: Revenues from continuing operations increased 49.7% for the quarter and 109.3% for the nine-month period compared to 2002. This growth is primarily driven by the BRS acquisition. Organic growth was 11.3% in bankruptcy/restructuring and 20.5% in other practices for the quarter.
• Profitability: Net income from continuing operations rose significantly due to revenue growth and improved operating leverage. However, total net income for the nine months was impacted by a $6.97 million loss from the sale of discontinued operations (SEA asset disposal group).
• Debt Reduction: Long-term debt decreased substantially from $97.8 million at the start of 2003 to $20.9 million at September 30, 2003. This reduction was funded by proceeds from a February 2003 public stock offering ($99.2 million net) and the sale of discontinued operations.
• Utilization Rates: Utilization of billable professionals declined to 78% in Q3 2003 (from 85% in Q3 2002) due to decreased demand for bankruptcy and restructuring services.

Guidance, Outlook, and Risks

• Acquisition Activity: Management is actively pursuing strategic acquisitions. Subsequent to the period end, the company acquired Ten Eyck Associates ($12.8M cash + stock) and KPMG's dispute advisory practice ($89.1M cash). A pending $130M acquisition of Lexecon Inc. is expected to close in Q4 2003.
• Share Repurchase: In October 2003, the Board approved a $50 million share repurchase program.
• Liquidity: The company reported $133.4 million in cash and $98.7 million available under its revolving credit facility. Management believes liquidity is sufficient to fund operations, acquisitions, and debt service.
• Risks:
  • Demand Fluctuation: Decreased demand for bankruptcy and restructuring services in Q3 2003 led to lower utilization rates. Management is redeploying staff to forensic and transaction support areas.
  • Goodwill Impairment: Goodwill represents 56.4% of total assets ($298.3 million). Future impairment charges could occur if market conditions or strategies change.
  • Client Concentration: Revenue is heavily dependent on the bankruptcy and restructuring practice (approx. 70%).

Investor Verification Checklist

• Acquisition Integration: Verify the financial impact and integration progress of the BRS acquisition and the subsequent Q4 2003 acquisitions (Ten Eyck, KPMG, Lexecon).
• Utilization Trends: Monitor if the decline in utilization rates (78% in Q3) stabilizes or worsens as the company shifts focus away from bankruptcy services.
• Debt Covenants: Confirm compliance with bank credit facility covenants, particularly regarding the use of proceeds from equity offerings and asset sales for debt repayment.
• Discontinued Operations: Review the final tax implications and cash flows related to the sale of the SEA and LWG asset disposal groups.
• Goodwill Valuation: Assess the assumptions used in the annual goodwill impairment testing given the high proportion of goodwill to total assets.