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FTI Consulting, Inc. - Q1 2004 10-Q Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended March 31, 2004. FTI Consulting, Inc. is a leading provider of forensic and litigation consulting, corporate finance/restructuring, and economic consulting services. During the fourth quarter of 2003, the company completed three strategic acquisitions (Lexecon, KPMG's dispute advisory services, and Ten Eyck Associates) and reorganized its operations into three distinct segments effective in the first quarter of 2004.

Key Financial Metrics

Note: Q1 2003 Net Income included $975,000 from discontinued operations. Q1 2004 had no discontinued operations.

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 8.8% to $110.2 million, driven primarily by the 2003 acquisitions. However, the Corporate Finance/Restructuring segment saw a 39.9% revenue decline due to decreased market demand and staff departures.
• Profitability Decline: Operating income dropped 36.4% to $20.9 million. Net income from continuing operations fell 37.6% to $11.5 million. This was caused by lower utilization rates (dropped from 93% to 80% company-wide), higher direct costs of revenue (56.1% of revenue vs. 45.9% prior year), and increased amortization of intangible assets.
• Cash Flow Reversal: Operating cash flow swung from a positive $19.1 million in Q1 2003 to a negative $20.2 million in Q1 2004. This was due to a significant increase in accounts receivable ($20.9 million usage), refunds of client retainers following staff departures, and timing of incentive compensation payments.
• Liquidity: Cash balances decreased by $2.9 million. The company borrowed $23.0 million under its revolving credit facility to fund working capital needs.

Outlook, Risks, and Management Commentary

• Staff Departures: Management highlighted the unanticipated departure of senior professionals in the Corporate Finance/Restructuring practice, some of whom formed a competing firm. This resulted in lost client engagements and refund requests, negatively impacting cash flow.
• Utilization Rates: Utilization rates declined across all segments. Management expects rates to improve in the remainder of 2004 as acquired businesses integrate, though they anticipate overall 2004 rates will be lower than 2003.
• Legal Proceedings: The company filed suit in February 2004 against former employees and their new venture for breach of duty and solicitation of clients/employees. Additionally, a preliminary injunction remains in place regarding a dispute with PricewaterhouseCoopers LLP over non-competition covenants.
• Capital Resources: The company maintains a $225 million credit facility ($100 million revolving, $125 million term loans). As of March 31, 2004, total liquidity (cash + available revolver) was approximately $77.9 million. Management believes this is sufficient for the next 12 months.
• Share Repurchases: The company repurchased 72,000 shares for $1.2 million in Q1 2004 under a $50 million program approved in October 2003.

Investor Verification Checklist

• Staff Retention: Verify if the departure of senior professionals in the Corporate Finance/Restructuring segment has stabilized and if client attrition has ceased.
• Utilization Recovery: Monitor upcoming quarterly reports for evidence of improving utilization rates in the newly acquired Lexecon and KPMG businesses.
• Cash Flow Trends: Watch for the reversal of negative operating cash flow as receivables are collected and the impact of retainer refunds diminishes.
• Legal Outcomes: Track the status of the litigation against former employees and the PricewaterhouseCoopers dispute, as these could result in financial penalties or operational restrictions.
• Debt Covenants: Confirm continued compliance with debt covenants (EBITDA ratios, net worth) given the decline in operating income.