SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[x] QUARTERLY REPORT PURSUANT TO THE SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ______ to _______
Commission file number: 001-14875
FTI CONSULTING, INC.
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(Exact Name of Registrant as Specified in its Charter)
Maryland 52-1261113
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(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
2021 Research Drive, Annapolis, Maryland 21401
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(Address of Principal Executive Offices) (Zip Code)
(410) 224-8770
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
- ------------------- -----------------------------------------
Common Stock, $.01 par value American Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Class Outstanding at May 7, 2001
- ------------------------ --------------------------
Common Stock, par value 11,292,624
$.01 per share
FTI CONSULTING, INC.
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INDEX
Page
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PART I FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited)
Consolidated Balance Sheets - December 31, 2000 and
March 31, 2001 3
Consolidated Statements of Income - Three months ended
March 31, 2000 and three months ended March 31, 2001,
Pro Forma Consolidated Statement of Income -Three months
ended March 31, 2000 5
Consolidated Statements of Cash Flows - Three months ended
March 31, 2000 and three months ended March 31, 2001 6
Notes to Unaudited Consolidated Financial Statements
-March 31, 2001 7
Item 2. Management's Discussion and Analysis of
Results of Operations and Financial Condition 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
PART II OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 2. Changes in Securities 16
Item 3. Defaults Upon Senior Securities 16
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 5. Other Information 16
Item 6. Exhibits and Reports on Form 8-K 16
SIGNATURES
2
Part I. Financial Information
FTI Consulting, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands of dollars, except per share and share amounts)
December 31, March 31,
2000 2001
----------------------------------------
(audited) (unaudited)
Assets
Current assets:
Cash and cash equivalents $ 3,235 $ 2,528
Accounts receivable, less allowance of $1,321 in 2000 and $1,289
in 2001 20,380 19,118
Unbilled receivables, less allowance of $797 in 2000 and $955 in 2001 11,952 15,604
Income taxes recoverable 1,317 -
Deferred income taxes 1,029 1,029
Prepaid expenses and other current assets 1,924 2,064
----------------------------------------
Total current assets 39,837 40,343
Property and equipment:
Furniture, equipment and software 20,977 21,178
Leasehold improvements 4,560 4,577
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25,537 25,755
Accumulated depreciation and amortization (12,382) (12,702)
----------------------------------------
13,155 13,053
Goodwill, net of accumulated amortization of $8,196 in 2000 and
$9,448 in 2001 91,971 91,326
Other assets 1,168 911
----------------------------------------
Total assets $146,131 $145,633
========================================
See accompanying notes.
3
FTI Consulting, Inc. and Subsidiaries
Consolidated Balance Sheets
(in thousands of dollars, except per share and share amounts)
December 31, March 31,
2000 2001
-----------------------------------------
(audited) (unaudited)
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 4,325 $ 2,473
Accrued compensation expense 10,339 7,981
Income taxes payable - 1,377
Deferred income taxes 500 500
Current portion of long-term debt 4,333 4,333
Other current liabilities 177 219
-----------------------------------------
Total current liabilities 19,674 16,883
Long-term debt, less current portion 56,167 54,083
Other long-term liabilities 600 1,345
Deferred income taxes 1,066 1,066
Commitments and contingent liabilities - -
Stockholders' equity:
Preferred stock, $.01 par value; 4,000,000 shares authorized, none
outstanding - -
Common stock, $.01 par value; 16,000,000 shares authorized;
10,567,447 and 10,625,814 shares issued and outstanding in 2000
and 2001, respectively 106 106
Additional paid-in capital 53,951 54,457
Retained earnings 14,567 18,400
Accumulated other comprehensive income (loss) - (707)
-----------------------------------------
Total stockholders' equity 68,624 72,256
-----------------------------------------
Total liabilities and stockholders' equity $146,131 $ 145,633
=========================================
See accompanying notes.
4
FTI Consulting, Inc. and Subsidiaries
Consolidated Statements of Income
(in thousands of dollars, except per share data)
Three months ended March 31,
2000 2000 2001
Actual Pro Forma/(1)/ Actual
----------- -------------- -----------
(unaudited) (unaudited) (unaudited)
Revenues $ 31,013 $ 33,452 $ 41,475
Direct cost of revenues 15,375 16,283 21,806
Selling, general and administrative expenses 8,914 9,063 10,307
Amortization of goodwill 1,016 1,233 1,252
----------- -------------- -----------
25,305 26,579 33,365
----------- -------------- -----------
Income from operations 5,708 6,873 8,110
Other income (expense):
Interest income 40 40 52
Interest expense (2,392) (2,973) (1,495)
----------- -------------- -----------
(2,352) (2,933) (1,443)
----------- -------------- -----------
Income before income taxes and extraordinary item 3,356 3,940 6,667
Income taxes 1,476 1,734 2,834
----------- -------------- -----------
Income before extraordinary item 1,880 2,206 3,833
Extraordinary loss on early extinguishment of debt,
net of income taxes of $660 869 869 -
----------- -------------- -----------
Net income $ 1,011 $ 1,337 $ 3,833
========== ============== ===========
Income before extraordinary item per common share, basic $ 0.32 $ 0.35 $ 0.36
========== ============== ===========
Earnings per common share, basic $ 0.17 $ 0.20 $ 0.36
========== ============== ===========
Income before extraordinary item per common share, diluted $ 0.29 $ 0.32 $ 0.32
========== ============== ===========
Earnings per common share, diluted $ 0.16 $ 0.19 $ 0.32
========== ============== ===========
(1) Pro forma assumes the acquisition of P&M occurred on January 1, 2000.
See Note 6.
See accompanying notes.
5
FTI Consulting, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in thousands of dollars)
Three months ended March 31,
2000 2001
----------------------------
(unaudited)
Operating activities
Net income $ 1,011 $ 3,833
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Extraordinary loss on early extinguishment
of debt, before income taxes 1,529 -
Amortization of goodwill 1,016 1,252
Depreciation and other amortization 632 914
Provision for doubtful accounts 455 126
Other 193 152
Changes in operating assets and liabilities:
Accounts receivable, billed and unbilled (6,235) (2,516)
Prepaid expenses and other current assets (364) (140)
Accounts payable and accrued expenses (438) (1,852)
Accrued compensation expense (243) (2,358)
Income taxes recoverable/payable 563 2,694
Other current liabilities 605 (10)
----------------------------
Net cash (used in) provided by operating activities (1,276) 2,095
Investing activities
Purchase of property and equipment (642) (815)
Proceeds from sale of property and equipment 47 -
Contingent payments to LWG (51) (90)
Acquisition of P&M, including acquisition costs (54,905) (516)
Change in other assets 219 202
----------------------------
Net cash used in investing activities (55,332) (1,219)
Financing activities
Issuance of common shares 8,402 506
Payments of long-term debt (43,503) (2,084)
Repurchase of detachable stock warrants (277) -
Payment of financing fees (3,406) (5)
Borrowings under long-term debt arrangements 92,733 -
Payments of other long-term liabilities (27) -
----------------------------
Net cash used in financing activities 53,922 (1,583)
----------------------------
Net decrease in cash and cash equivalents (2,686) (707)
Cash and cash equivalents at beginning of period 5,046 3,235
----------------------------
Cash and cash equivalents at end of period $ 2,360 $ 2,528
============================
See accompanying notes.
6
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2001
(dollars in tables expressed in thousands, except per share data)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and in accordance with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. For further information, refer to the
consolidated financial statements and notes thereto included in the Company's
annual report on Form 10-K for the year ended December 31, 2000.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the three month period ended March 31, 2001 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2001.
The pro forma information included in the Consolidated Statements of Income for
the three months ended March 31, 2000 is presented to give effect to the January
31, 2000 acquisition of Policano & Manzo, L.L.C. and related financing assuming
the transactions occurred on January 1, 2000 (see Note 6). The pro forma
information is not necessarily indicative of the operating results that would
have been achieved had the transactions actually occurred on January 1, 2000,
nor is it necessarily indicative of future operations.
2. Adoption of Recent Accounting Pronouncement - Derivative Financial
Instruments
As of January 1, 2001, the Company adopted Financial Accounting Standards Board
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities.
The Statement requires the Company to recognize all derivatives on the balance
sheet at fair value. Derivatives that are not hedges must be adjusted to fair
value through income. If the derivative is a hedge, depending on the nature of
the hedge, changes in the fair value of derivatives are either offset against
the change in fair value of assets, liabilities, or firm commitments through
earnings or recognized in comprehensive income until the hedged item is
recognized in earnings. The ineffective portion of a derivative's change in
fair value will be immediately recognized in earnings.
Upon adoption of the Statement on January 1, 2001, the Company maintained
interest rate swap agreements in the notional amounts of $32.5 million related
to outstanding term loans. The interest rate swaps effectively fix the rate of
interest on a portion of the Company's floating rate term loans, and are settled
as the related term notes mature. The adoption of Statement 133 on January 1,
2001 results in the cumulative effect of an accounting change of $328,000
charged to other comprehensive loss.
7
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2001 (continued)
(dollars in tables expressed in thousands, except per share data)
3. Stockholders' Equity
Accumulated
Additional Other
Common Paid-in Retained Comprehensive
Stock Capital Earnings Income (Loss) Total
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Balance at January 1, 2001 $ 106 $ 53,951 $ 14,567 $ - $ 68,624
Issuance of 54,267 shares of common stock
under Employee Stock Purchase Plan - 473 473
Exercise of options to purchase 4,100 shares
of common stock - 33 33
Comprehensive Income:
Cumulative effect on prior years of changing to a
different method of accounting for interest rate
swaps (Note 2) (348) (348)
Other comprehensive loss - change in fair value of
interest rate swaps (359) (359)
Net income for the three months
ended March 31, 2001 3,833 3,833
--------
Total comprehensive income 3,126
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Balance at March 31, 2001 $ 106 $ 54,457 $ 18,400 $ (707) $ 72,256
=======================================================
4. Income Taxes
The income tax provisions for interim periods in 2001 and 2000 are based on the
estimated effective tax rates applicable for the full years. The Company's
income tax provision of $2.8 million for the three-month period ended March 31,
2001 consists of federal and state income taxes. The effective income tax rate
in 2001 is expected to be approximately 42.5%. This rate is higher than the
statutory federal income tax rate of 34% due principally to state and local
taxes and the effects of non-deductible goodwill recorded in connection with
certain acquisitions.
8
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2001 (continued)
(dollars in tables expressed in thousands, except per share data)
5. Earnings Per Share
The following table summarizes the computations of basic and diluted earnings
per share:
Pro Forma
Three months Actual
ended Three months ended
March 31, March, 31
2000 2000 2001
-------------- ------------------------
Numerator used in basic and diluted earnings
per common share:
Income before extraordinary item $ 2,206 $ 1,880 $ 3,833
Extraordinary item, net of taxes 869 869 -
-------------- ---------- ------------
Net income $ 1,337 $ 1,011 $ 3,833
============== ========== ============
Denominator:
Denominator for basic earnings per common share
-- weighted average shares 6,385 5,854 10,622
Effect of dilutive securities:
Warrants 357 357 589
Employee stock options 189 189 799
-------------- ---------- ------------
546 546 1,388
-------------- ---------- ------------
Denominator for diluted earnings per common
share -- weighted average shares and effect of
dilutive securities 6,931 6,400 12,010
============== ========== ============
Income before extraordinary item per common
share, basic $ 0.35 $ 0.32 $ 0.36
Extraordinary loss per common share, basic (0.15) (0.15) -
-------------- ---------- ------------
Earnings per common share, basic $ 0.20 $ 0.17 $ 0.36
============== ========== ============
Income before extraordinary item per common
share, diluted $ 0.32 $ 0.29 $ 0.32
Extraordinary loss per common share, diluted (0.13) (0.13) -
-------------- ---------- ------------
Earnings per common share, diluted $ 0.19 $ 0.16 $ 0.32
============== ========== ============
9
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2001 (continued)
(dollars in tables expressed in thousands, except per share data)
6. Acquisition of Policano & Manzo, L.L.C.
Effective on January 31, 2000, the Company acquired the membership interests of
Policano & Manzo, L.L.C. ("P&M"). P&M, based in Saddlebrook, New Jersey, is a
leader in providing bankruptcy and turnaround consulting services to large
corporations, money center banks and secured lenders throughout the U.S. The
original purchase price totaled approximately $54.9 million, consisting of $48.3
million in cash, 815,000 shares of common stock valued at $5.5million and
acquisition related expenses of $1.1 million. In January 2001, the Company
recorded additional purchase price of $516,000 upon the resolution of certain
contingencies in the purchase agreement. The acquisition was accounted for using
the purchase method of accounting and approximately $52.7 million of goodwill
was recorded and is being amortized over its estimated useful life of 20 years.
The results of operations of P&M are included in the accompanying consolidated
statements of income commencing January 31, 2000 and in the accompanying
unaudited pro forma consolidated statement of income as if the acquisition was
made on January 1, 2000. The pro forma consolidated results of operations are
not necessarily indicative of the results that would have occurred had these
transactions been consummated as of the beginning of 2000 or of future
operations of the Company.
7. Segment Reporting
The Company is a multi-disciplined consulting firm with leading practices in the
areas of financial restructuring, litigation consulting and engineering and
scientific investigation, through three distinct operating segments. The
Financial Consulting division offers a range of financial consulting services,
such as forensic accounting, bankruptcy and restructuring analysis, expert
testimony, damage assessment, cost benefit analysis and business valuations.
The Litigation Consulting division provides advice and services in connection
with all phases of the litigation process. The Applied Sciences division offers
engineering and scientific consulting services, accident reconstruction, fire
investigation, equipment procurement and expert testimony regarding intellectual
property rights.
The Company evaluates performance and allocates resources based on operating
income before depreciation and amortization, corporate general and
administrative expenses and income taxes. The Company does not allocate assets
to its reportable segments as assets generally are not specifically attributable
to any particular segment. Accordingly, asset information by reportable segment
is not presented. The accounting policies used by the reportable segments are
the same as those used by the Company. There are no significant intercompany
sales or transfers.
The Company's reportable segments are business units that offer distinct
services. The segments are managed separately by division presidents who are
most familiar with the segment operations.
The following table sets forth unaudited pro forma information on the Company's
reportable segments (see Note 6):
10
FTI Consulting, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2001 (continued)
(dollars in tables expressed in thousands, except per share data)
7. Segment Reporting (continued)
Pro forma three months ended March 31, 2000
------------------------------------------------------
Financial Applied Litigation
Consulting Sciences Consulting Total
- -------------------------------------------------------------------------------------
Revenues $14,957 $9,984 $8,510 $33,451
Operating expenses 8,233 8,026 6,355 22,614
------- ------ ------ -------
Segment profit $ 6,724 $1,958 $2,155 $10,837
======= ====== ====== =======
The following table sets forth historical information on the Company's
reportable segments:
Three months ended March 31, 2000
------------------------------------------------------
Financial Applied Litigation
Consulting Sciences Consulting Total
- -------------------------------------------------------------------------------------
Revenues $12,519 $9,984 $8,510 $31,013
Operating expenses 7,180 8,026 6,355 21,561
------- ------ ------ -------
Segment profit $ 5,339 $1,958 $2,155 $ 9,452
======= ====== ====== =======
Three months ended March 31, 2001
------------------------------------------------------
Financial Applied Litigation
Consulting Sciences Consulting Total
- -------------------------------------------------------------------------------------
Revenues $24,213 $10,210 $7,052 $41,475
Operating expenses 14,522 8,468 6,094 29,084
------- ------- ------ -------
Segment profit $ 9,691 $ 1,742 $ 958 $12,391
======= ======= ====== =======
A RECONCILIATION OF SEGMENT PROFIT FOR ALL SEGMENTS TO INCOME BEFORE INCOME
TAXES AND EXTRAORDINARY ITEM IS AS FOLLOWS:
Three Months ended March 31,
Pro Forma Historical Historical
2000 2000 2001
- -------------------------------------------------------------------------------------
Operating Profit:
Total segment profit $10,837 $ 9,452 $12,391
Corporate general and administrative
expenses (2,095) (2,096) (2,115)
Depreciation and amortization (1,869) (1,648) (2,166)
Interest expense, net (2,933) (2,352) (1,443)
------- ------- -------
Income before income taxes and
extraordinary item $ 3,940 $ 3,356 $ 6,667
======= ======= =======
Substantially all of the revenue and assets of the Company's reportable segments
are attributed to or located in the United States. Additionally, the Company
does not have a single customer which represents ten percent or more of its
consolidated revenues.
11
FTI Consulting, Inc.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
FTI Consulting, Inc. (the "Company" or "FTI") is a multi-disciplined consulting
firm with leading practices in the areas of financial restructuring, litigation
support and engineering and scientific investigation. Our Financial Consulting
division, which accounted for 58% of our first quarter 2001 revenues and was our
most profitable division, offers a broad range of financial consulting services,
such as forensic accounting, bankruptcy and restructuring analysis, expert
testimony, damage assessment, cost benefit analysis and business valuations. Our
Litigation Consulting division, which accounted for 17% of our first quarter
2001 revenues, provides advice and services in connection with all phases of the
litigation process. Our Applied Sciences division, which accounted for 25% of
our first quarter 2001 revenues, offers forensic engineering and scientific
investigation services, accident reconstruction, fire investigation and expert
testimony regarding intellectual property rights.
Revenues generated by our business divisions consist primarily of fees for our
professional services. We charge our professionals' time at hourly rates, which
vary from professional to professional, based on the professional's position,
experience and expertise. We also directly bill our clients for services
provided by our independent consultants. We recognize revenues for the
production of our work product, including static graph boards, color copies and
digital video production and fees for use of our equipment and facilities. We
also pass through our out-of-pocket expenses, such as our cost of recruiting
subjects and participants for research surveys and mock trial activities and our
travel. We recognize revenues in the period when the service is provided.
Retainers received from clients are excluded from revenue and offset against
accounts receivable.
Our direct cost of revenues consists primarily of employee compensation and
related payroll benefits, the cost of outside consultants assigned to revenue-
generating activities and other related expenses billable to clients.
Selling, general and administrative expenses consist primarily of salaries and
benefits paid to office and corporate staff, as well as rent, marketing and
corporate overhead expenses. In the first quarter of 2001, selling, general and
administrative expenses accounted for about 24.9% of revenues. Our corporate
overhead costs, which are included in selling, general and administrative
expenses, represented about 5.1% of first quarter 2001 revenues.
We are organized into three distinct operating segments that contribute to the
overall performance of our company. As such, we evaluate segment performance and
allocate resources based on the operating income before depreciation and
amortization, corporate general and administrative expenses and income taxes for
each division. In the first quarter of 2001, our Financial Consulting division
accounted for 78.2% of our operating income, while our Litigation Consulting
division accounted for 7.7% and our Applied Sciences division accounted for
14.1%.
On March 31, 2001, we had about $91.3 million of unamortized goodwill, which we
are amortizing over 20 to 25 year periods. Annual goodwill amortization is
approximately $5.0 million. Approximately $14.5 million of our unamortized
goodwill is not deductible for tax purposes. Consequently, our effective tax
rate for 2001 is anticipated to be 40.5% before amortization of goodwill and
42.5% after amortization of goodwill.
Recent Acquisition
On February 4, 2000, we acquired Policano & Manzo, L.L.C. ("P&M") as further
described in Note 6 of "Notes to Consolidated Financial Statements." P&M,
based in Saddle Brook, New Jersey, specializes in providing financial
restructuring, advisory and forensic accounting services to the workout and
bankruptcy community. These services are provided on a nationwide basis to
financially distressed businesses, creditors, investors and other interested
parties. The purchase price totaled $54.9 million, consisting of $48.3 million
in cash, 815,000 shares of our common stock valued at $5.5 million and
acquisition-related expenses of $1.1 million.
12
Results of Operations
Three Months Ended March 31, 2001 and March 31, 2000
Revenues. Total revenues for the three months ended March 31, 2001 increased
33.9% to $41.5 million from $31.0 million for the three months ended March 31,
2000, or 23.9% based on pro forma revenues of $33.5 million for the first
quarter of 2000 including the P&M acquisition. Our Financial Consulting
division's revenues grew by 93.6% to $24.2 million from $12.5 million, or 61.3%
on a pro forma basis from $15.0 million including the P&M acquisition, as a
result of the continuing strong demand for our financial consulting services.
Our Litigation Consulting division's revenues decreased 16.5% to $7.1 million in
the first quarter of 2001 from $8.5 million in the first quarter of 2000
primarily as a result of an unusual number of trials that were deferred or
cancelled due to settlement or settlement discussions. Management continues to
monitor this business segment closely. The division has taken significant steps
to contain costs while developing the New York market and began to see improving
results toward the end of the quarter. Our Applied Sciences division experienced
2.0% revenue growth in the first quarter of 2001 to $10.2 million from $10.0
million in the first quarter of 2000.
Direct Cost of Revenues. Direct cost of revenues was 52.6% of our total revenues
in the first quarter of 2001 and 49.6% in the first quarter of 2000. The
reduction in gross margin in 2001 resulted primarily from decreased productivity
in the Litigation Consulting division, coupled with differences in sales mix in
the Applied Sciences division in the first quarter of 2001 from its unusually
profitable first quarter of 2000, and the unusually high gross margin in the
Financial Consulting division in the first quarter of 2000 due to the temporary
over-utilization of employees in that division to meet demand in the short term.
Since that time, the work force in that division has increased to address the
continuing demand at more realistic and sustainable utilization rates.
Selling, General and Administrative Expenses. These expenses were 24.9% of
total revenues in the first quarter of 2001, 28.7% in 2000 and 27.1% on a pro
forma basis in 2000. The decrease in 2001 was primarily attributable to the
growth of the Financial Consulting division, which has a lower ratio of selling,
general and administrative expenses to revenues than the Litigation Consulting
and Applied Sciences divisions.
Amortization of Goodwill. Amortization of goodwill in the first quarter of 2001
and 2000 remained approximately the same on a pro forma basis. We discuss
goodwill amortization further in "Future Assessment of Recoverability and
Impairment of Goodwill" below.
Other Income and Expenses. Interest expense consisted primarily of interest on
debt we incurred to purchase businesses over the past several years. Interest
expense decreased substantially in the first quarter of 2001 compared to 2000 as
we used the proceeds of our equity offering to repay $30.0 million of debt and
refinanced our remaining debt in late 2000.
Income Taxes. Our effective tax rate decreased to 42.5% in the first quarter of
2001 from 44.0% in 2000, principally from the reduced effect of non-
deductible goodwill amortization. Approximately $14.5 million of our unamortized
goodwill is not deductible for tax purposes. Consequently, our effective tax
rate for 2001 is anticipated to be 40.5% before amortization of goodwill and
42.5% after amortization of goodwill.
Extraordinary Item, net of Taxes. As a result of the write-off of unamortized
debt discount and deferred financing costs associated with the debt that we
refinanced on February 4, 2000, we had an $869,000 loss on early extinguishment
of debt, net of taxes, in the first quarter of 2000.
Future Assessment of Recoverability and Impairment of Goodwill
In connection with our various acquisitions, we recorded goodwill, which we are
amortizing on a straight-line basis over periods of 20 to 25 years. These are
the periods during which we estimate we will benefit from this goodwill. At
March 31, 2001, unamortized goodwill was $91.3 million, or 62.7% of our total
assets and 126.4% of our stockholders' equity. Goodwill arises when an acquirer
pays more for a business than the fair value of the tangible and separately
measurable intangible net assets. For financial reporting purposes, goodwill and
all other intangible assets are amortized over the estimated period benefited.
We have determined the period for amortizing goodwill based upon several
factors, the
13
most significant of which are the relative size, historical financial viability,
growth trends of the acquired companies and the relative lengths of time these
companies have been in existence.
Our management periodically reviews the carrying value and recoverability of our
unamortized goodwill. If the facts and circumstances suggest that the goodwill
may be impaired, we would adjust the carrying value of the goodwill. This would
result in an immediate charge against income during the period of the adjustment
and/or a shortening of the length of the remaining amortization period, which
would result in an increase in the amount of goodwill amortization during the
period of adjustment and each period thereafter until fully amortized. If we
adjust goodwill, we cannot assure you that we will not have to make further
adjustments for impairment and recoverability in future periods. The most
significant of the factors we will consider in determining whether goodwill is
impaired will be losses from operations; loss of customers; and industry
developments such as our inability to maintain market share, the development of
competitive products or services or imposition of additional regulatory
requirements.
Liquidity and Capital Resources
In the first quarter of 2001, we generated $2.1 million of cash flow from our
operations, compared to cash used in operations of $1.3 million in the first
quarter of 2000. We attribute this increase in cash flow primarily to two
factors: (1) the significant increase in net income this quarter compared to the
first quarter of 2000 (prior to the extraordinary item of $1.5 million before
taxes in 2000), plus depreciation, amortization and other non-cash charges; and
(2) net working capital increased by only $4.2 million in the first quarter of
2001 compared to an increase of $6.1 million in the first quarter of 2000.
During the first quarter of 2001, we spent $815,000 for additions to property
and equipment. We had no unusual material commitments for the acquisition of
property and equipment at March 31, 2001.
In the fourth quarter of 2000, we completed a public offering of 4.025 million
shares of common stock. We used the net proceeds and our other financial
resources to repay the $30.0 million senior subordinated notes that we issued on
February 4, 2000. In December 2000, we refinanced our $61.0 million term loan
and the $7.5 million revolving credit facility. Our new credit facility
consists of an amortizing term loan of $32.5 million, of which $31.4 million was
outstanding at March 31, 2001, and a $47.5 million revolving credit line, of
which $27.0 million was outstanding at March 31, 2001. The new credit facility
bears interest at LIBOR plus 2.25%, which will decline if our leverage ratio
improves.
The new credit facility is secured by all of our assets. Under this facility, we
are required to comply with various specified financial covenants related to our
operating performance at the end of each quarter, and the payment of dividends
is restricted. We believe we will be in compliance with all loan covenants
throughout 2001. In connection with the new credit facility, we obtained
interest rate protection, through interest rate swaps, on the $32.5 million term
loan.
The Company expects that available cash and credit facilities will be sufficient
to meet its normal operating requirements in the near term.
14
Effect of Recent Accounting Pronouncements
As of January 1, 2001, the Company adopted the Financial Accounting Standards
Board Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities. As a result of the adoption of Statement 133, the Company
recognizes derivative financial instruments in the consolidated financial
statements at fair value. The Company has entered into interest rate swap
transactions to hedge the floating interest rates on its long-term amortizing
term loans, totaling $31.4 million at March 31, 2001. The swap transactions
resulted in exchanging floating LIBOR rates for a fixed rate of 6.63% and 6.65%,
and expire in three years. The changes in the fair value of the swaps are
recorded in other comprehensive income, net of deferred taxes. The adoption of
Statement No.133, resulted in a cumulative effect of an accounting change of
$348,000, net of tax benefits of $257,000, as other accumulated comprehensive
income shown in the Statement of Stockholders' Equity in Note 3 to Notes to
Consolidated Financial Statements (unaudited). Because of the Company's minimal
use of derivatives, management does not anticipate that the adoption of the new
Statement will have a significant effect on the financial position or results of
operations of the Company.
Forward-Looking Statements
Some of the statements under "Management's Discussion and Analysis of Financial
Conditions and Results of Operations" and elsewhere in this Quarterly Report
contain forward-looking statements within the meaning of Section 21E of the
Securities Exchange Act of 1934. These statements involve known and unknown
risks, uncertainties and other factors that may cause our or our industry's
actual results, levels of activity, performance or achievements expressed or
implied by such forward-looking statements not to be fully achieved. These
forward-looking statements relate to future events or our future financial
performance. In some cases, you can identify forward-looking statements by
terminology such as "may," "will," "should," "expects," "plans," "intends,"
"anticipates," "believes," "estimates," "predicts," "potential" or "continue" or
the negative of such terms or other comparable terminology. These statements
are only predictions. Moreover, neither we nor any other person assumes
responsibility for the accuracy and completeness of such statements. We are
under no duty to update any of the forward-looking statements after the date of
this Quarterly Report to conform such statements to actual results and do not
intend to do so. Factors which may cause the actual results of operations in
future periods to differ materially from intended or expected results include,
but are not limited to (1) the loss of any key employees because the Company's
business involves the delivery of professional services and is labor-intensive;
(2) the availability and terms of additional capital or debt financing to fund
future acquisitions and for working capital purposes; (3) significant
competition for business opportunities and acquisition candidates; (4)
technological changes affecting our Litigation Consulting division; (5) the
risks of professional liability; (6) any factor that diminishes our professional
reputation; (7) fluctuations of revenue and operating income between quarters or
termination of client engagements; (8) the successful management of the growth
of our business; (9) the integration of P&M and of future acquisitions; and (10)
risks associated with quantitative and qualitative market risks such as
fluctuations in interest rates.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
At March 31, 2001, the Company had $58.4 million in long-term debt. As
discussed in Note 2 to the Consolidated Financial Statements (unaudited), $31.4
million of long-term debt was hedged with interest rate swaps, effectively
fixing the interest rate at 6.63% and 6.65%. This debt bears interest at
variable percentages above LIBOR, currently 2.25%, as determined by the credit
agreement.
Therefore, at March 31, 2001, the remaining $27.0 million of the Company's long-
term debt bears interest at variable rates. The Company's earnings and after-tax
cash flow are affected by changes in interest rates. Assuming the current level
of borrowings and assuming a hypothetical 200 basis point increase in interest
rates under the Company's long-term bank credit facility for one year, the
Company's annual interest expense would increase by approximately $540,000 and
net income would decrease by approximately $280,000.
In the event of an adverse change in interest rates, management would likely
take actions to further mitigate its exposure. However, due to the uncertainty
of the actions that would be taken and their possible effects, the analysis
assumes no such actions. Further, the analysis does not consider the effects of
the change in the level of overall economic activity that could exist in such an
environment.
15
Part II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company is not presently a party to any material litigation.
Item 2. Changes in Securities
The Company recently modified its bylaw provisions regarding stockholder
proposals presented to the Company otherwise than in compliance with Rule 14a-8
of Regulation 14A under the Securities Exchange Act of 1934, as amended.
Generally, such stockholder proposals must be presented by the stockholder to
the Company no earlier than 120 days and no later than 90 days before the
mailing date of the proxy materials for the previous year's annual meeting of
stockholders. The Company also modified its bylaw provisions to provide that
for a stockholder to request a special meeting of the Company's stockholders, in
addition to the other requirements set forth in the Company's bylaws, such
stockholder must be entitled to cast at least 50% of all votes entitled to be
cast at the meeting.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
None.
16
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FTI CONSULTING, INC.
Date: May 7, 2001 By /s/ Theodore I. Pincus
----------------------
THEODORE I. PINCUS
Executive Vice President, Chief Financial Officer
(principal financial and accounting officer) and
Secretary
17